Q3 2024 Freshpet Inc Earnings Call

Greetings and welcome to fresh Pet's third quarter 'twenty 'twenty four earnings call. At this time, all participants are done listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded its now my pleasure to introduce Jeff Sonic with ICR. Thank you you may begin. Thank you good morning, and welcome to fresh Pet's third quarter 2024 earnings call and webcast.

Jeff Sonic: On today's call are Billy Cyr, Chief Executive Officer, and Todd tougher Chief Financial Officer, Scott Morris, President and co founder will also be available for Q&A.

Jeff Sonic: Before we begin please remember that during the course of this call management may make forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

Jeff Sonic: These include statements related to our long term strategy 2027 goals and pace in achieving these goals prospects for growth timing of capacity expansion, new products and new technology in 2024 guidance words, such as anticipate believe could estimate expect guidance intend may.

Jeff Sonic: <unk> will offer similar conditional expressions are intended to identify forward looking statements. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward looking statements, including those associated with such statements.

Please refer to the company's annual report on Form 10-K filed with the SEC and the company's press release issued today for a detailed discussion of risks that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today. Please.

Please note that on today's call management will refer to certain non-GAAP financial measures, such as EBITDA and adjusted EBITDA among others. While the company believes these non-GAAP financial measures provide useful information for investors presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented.

Jeff Sonic: In accordance with GAAP.

Jeff Sonic: Please refer to today's press release for how management defines such non-GAAP measures.

Jeff Sonic: Why management believes such non-GAAP measures are useful are rare.

Jeff Sonic: Conciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and limitations associated with such non-GAAP measures.

Jeff Sonic: Finally, the company has produced a presentation that contains many of the key metrics will be discussed on this call. The presentation can be found on the company's investor website managements commentary will not specifically walk through the presentation on the call rather at the summary of the results and guidance they will discuss today.

Jeff Sonic: So with that I'd like to turn the call over to Billy Cyr, Chief Executive Officer Julie.

Billy Cyr: Thank you, Jeff and good morning, everyone for those of you who are wondering Jeff was gracious enough to fill in for our VP of Investor Relations Rachel while she is on maternity leave now to the business. The message I would like you to take away is that we are beginning to establish the kind of consistency and reliability in our manufacturing operations.

Jeff Sonic: We've been delivering on the topline for some time that has enabled us to rapidly increase our margins while simultaneously generating the kind of growth you've come to expect from us.

Jeff Sonic: As you know our objective this year was to continue our strong top line growth, but do it at a rate that would enable us to live within our capacity limits, while strengthening our operating performance and cash generation. The result would be category, leading growth outsized improvement in profitability and more effective cash management, we described that as.

Jeff Sonic: Disciplined growth, if we do that well consumers will win customers will win and our shareholders will win and that is what we are delivering in Q3, we delivered our 25th consecutive quarter of 25% year on year growth a significant expansion in our adjusted gross margin and adjusted EBITDA margin and sizeable opera.

<unk> cash flow in fact, this is the third quarter in a row, where our adjusted gross margin exceeded our 2027 target and our sixth consecutive quarter, where our logistics cost was better than our long term target and we generated more than $100 million in operating cash flow. So far this year.

Jeff Sonic: I suspect that many of you are now wondering if or when we are going to adjust our long term targets to reflect the early achievement of so many of our long term financial goals. While we are very encouraged by our progress. We don't want to get ahead of ourselves we want to see sustained improvement across the full year before we conclude that we can deliver more than what we.

Jeff Sonic: We have already committed we're also very mindful that we're operating in a dynamic environment and would like a bit more time to see where the current trends, particularly on inflation settle out. So this is something we are giving them a great deal of thought to and consultation with our board, but we aren't yet ready to update our long term targets.

Jeff Sonic: I would now like to call out a few key highlights from the quarter and then Todd will provide a bit more detail on the financial results and will update you on our thinking on guidance.

Jeff Sonic: First I'm very encouraged by the net sales growth we saw in the quarter, we grew 26% and virtually all of it was due to volume growth. This volume growth was driven by strong household penetration growth, particularly amongst our hippos overall household penetration growth was up 17%, despite lapping a sizable gain and households.

Jeff Sonic: In the year ago period, and the Hippo growth rate was 24% recall our media investment is more back loaded this year than it was last year. So you should expect that household penetration, which is a 52 week measure will lag our long term growth rate in the back half of this year due to the change in the media timing however, it should reaccelerate.

Jeff Sonic: Right in the first half of next year, we are getting the benefit this year second half media investment in the 52 week measure.

Jeff Sonic: We continue to believe that we are well on track to deliver our 2027 target of 20 million households, and are increasingly focusing our attention on the 5 billion hippos, who now represent approximately 90% of our revenues.

Jeff Sonic: Second our team did an outstanding job managing the balance between capacity and demand, allowing us to simultaneously drive strong growth rates and strong operating performance and recall that we chose to limit our first half media investment to a rate that was below our rate of sales growth. So that we could reliably meet demand.

Jeff Sonic: Well, our new roll line and S was up and operating at the end of Q3 that plan worked we were able to grow 26% in the quarter, but did it with a customer order fill rate up 99% for the quarter as Ive said before our strong fill rate is a very good indicator of overall operating performance for us and that was definitely true in <unk>.

Jeff Sonic: Q3, we were able to deliver this strong performance because of the reliability of our media model provided a very accurate forecast demand and our operations team generated strong throughput on our existing production lines and started up a new role line. One week early in essence, we were able to thread the needle I E generate stronger.

Jeff Sonic: Wrote without exceeding our capacity limits, while maintaining exceptional customer service, we expect to apply that same type of robust planning as we bring on new lines over the next few years carefully managing our media investment in capacity to ensure good customer service strong net sales growth and healthy margins.

Jeff Sonic: Third the production quality and logistics teams in the fresh pet kitchens continued to drive improved performance, including yield throughput and quality costs, while also delivering exceptional customer service at our lowest logistics cost as a percent of net sales ever on.

Jeff Sonic: On a year over year basis, the sum total of our input cost logistics and quality improved by 790 basis points and that contributed to a 630 basis point improvement in our adjusted gross margin we.

Jeff Sonic: We believe this is the result of the investment we've made in our hourly production workforce and their training I E. The fresh Pet Academy.

Jeff Sonic: <unk> had performance Excellence program, we began about two years ago, and a more stable external environment.

Jeff Sonic: Finally, our cost our customers continue to believe that fresh pet is the future of pet food and continue committing additional retail space to fresh pet.

Jeff Sonic: At the end of the quarter, we had 22% more total distribution points Tdp's due to the addition of more than 1000, new stores year to date more than 750 additional stores with second and third fridges year to date and a sizable increase in shelf space and retailer owned fridges.

Jeff Sonic: We continue to also see a strong connection between the increased retail visibility and the efficiency of our media investment as a retail presence amplifies. The media investment. This is visible in our customer acquisition costs, CAC, which continues to be in line with our long term targets and is helping us drive a strong return on our advertising.

Jeff Sonic: The investment.

Jeff Sonic: Now I'll provide an update on Kpis, we track for our main and more plans mainstream main meal more profitable plants.

Jeff Sonic: Focusing on the idea of mainstream fresh that is becoming increasingly mainstream but still has a long runway for growth. According to Nielsen on the channel data, which includes e-commerce and direct to consumer as of September 28, 2020 for total U S. Pet food is a $54 billion category.

Jeff Sonic: We only have a three 2% market share within the $37 billion dog food segment, which is the majority of our business today within the fresh frozen subcategory in measured channels fresh pet has a 96% market share.

Jeff Sonic: Fresh continues to outperform the broader pet food category and many retailers believe it is the future of pet food as a result, <unk> band, 66% ACB in Nielsen X Aoc and we continue to add distribution breadth and depth with second and third fridges.

Jeff Sonic: Our household penetration gains also demonstrate that we are well on our way to making fresh pet more mainstream as I mentioned earlier household penetration is on track to meet our target of 20 million households by 2027, but more importantly, the complexion of the households, underpinning our growth continues to improve.

Jeff Sonic: Hippos are growing 24% versus the prior year period, surpassing our broader household growth of 17%.

Jeff Sonic: We think the combination of retail support and our ability to drive household penetration is a clear indication that fresh pad is leading the way towards making fresh pet food and mainstream idea.

Jeff Sonic: Our Hippo penetrate penetration also extends to the main meal part of the strategy currently 39% of fresh pet users are hippos and they represented 90% of our sales in the third quarter.

Jeff Sonic: All of those users about 325000 or less than 3% of our total users by more than $1000 of fresh pad per year. This group grew 23% over the past year. They now represent approximately 27% of our business. We are increasingly focusing our attention on this audience and trying to create a much.

Jeff Sonic: Larger cohort of users who look like they do.

Jeff Sonic: Part of our strategy for making fresh pet into a more of a main meal item is to offer a range of items that meet the broadest range of consumer needs. This year, we've launched several new items to do that and they're doing very well in particular, our large Dod product while still in limited distribution has grown quite nicely and it becomes.

Jeff Sonic: A very successful item for us as it broadens the appeal of fresh pet into larger dogs. Similarly, our multi packs have done very well.

Jeff Sonic: Early next year, we'll be launching a product for seniors further broadening fresh pets appeal, adding second and third fridges enables greater distribution of our wider assortment based on total U S. Pet retail plus data from Nielsen. We currently have an average of 25 skus per point of distribution up from 18.0 <unk>.

Jeff Sonic: One year ago.

Jeff Sonic: Now to the more part of main in more more profitable we had another strong quarter of margin improvement adjusted gross margin improved 60 basis points versus the strong results. We posted in Q2 to 46, 5% and we ended the third quarter with an adjusted EBITDA margin of 17, 2%.

Jeff Sonic: As I mentioned earlier the margin improvement came in our key focus areas of quality input costs and logistics. It is becoming increasingly apparent that the improved organizational capability improved analytics systems and intense focus on those drivers of profit improvement are not only working but generating better results than we had expected and sooner than <unk>.

Jeff Sonic: We had anticipated we are very pleased with this progress but also believes there is significant upside that we can deliver over time.

Jeff Sonic: I would also like to give you an update on our efforts to expand our capacity as a reminder, we continue to focus our capacity expansion plans on three key drivers of improved capital efficiency. They are one maximizing the throughput of our existing lines to maximizing the capacity of our three existing sites and three.

Jeff Sonic: By developing and implementing new technologies that generate more throughput per line.

Jeff Sonic: We're making good progress against all three parts of that strategy in.

Jeff Sonic: In Q3, we achieved another milestone with the startup with a fourth line in N S. A roll line, giving us two bag lines and to roll lines at that site.

Jeff Sonic: At fourth line started off one week early under budget and ramped up faster than we had projected we have also largely completed the installation of the fifth line, which will be our third roll line and N S. Because it was more efficient to install to roll lines at the same time in the new space.

Jeff Sonic: That fifth line will be commissioned in Q4 and between those two new role lines will have enough rolls capacity to last well into 2026. Once we are fully staffed those lines.

Jeff Sonic: We are in the final stages of installing our next bag line and kitchen, South and expect that to start up in late Q1 of next year. We have also added staffing at kitchen, south on the existing lines. So we will have adequate bag capacity for the balance of 'twenty four and into 2025.

Jeff Sonic: And basketball him. The team is focused on increasing capacity utilization or OA on our existing lines are fresh pet performance Excellence program is driven sizable gains in throughput yield and quality. Since it was launched almost two years ago and we believe that investment has unlocked a sizable amount of free capacity. We believe there is.

Significant upside remaining and are increasing the resources, we devote to that effort and reapplying the program to N S.

Jeff Sonic: The best land team is also in the process of her might've remodeling, some dry storage space and kitchens two to accommodate a production line that uses a new technology for our bagged products that line is on track for startup in the second half of 2025.

Jeff Sonic: In summary, I think we're making good progress at proving that we can reliably deliver improved operating performance and strong growth simultaneously.

Disciplined growth as a result of our strengthened organizational capability improved analytics systems and intense focus that has enabled us to generate outsized gains in productivity and profitability. We are increasingly confident that we can sustain this type of performance and deliver the levels of shareholder returns that we believe the proprietary fresh.

Jeff Sonic: <unk> business model is capable of generating now let me turn it over to Todd to walk through the details of the Q3 results and our updated guidance Todd.

Todd Tougher: Thank you Billy and good morning, everyone as Billy mentioned, we're very pleased with the third quarter results, particularly our ability to deliver on our profit improvement.

Jeff Sonic: Now I will give you some more color on our financials and updated guidance for the year.

Third quarter net sales were $253 $4 million up 26% year over year Nielsen measured dollar growth was 23% versus the prior year period with broad based consumption growth across channels, we saw a 24% growth in X Aoc, 22% in U S food <unk>.

7% growth in pet specialty and over 70% growth in the Unmeasured channel.

Jeff Sonic: Third quarter adjusted gross margin was 46, 5% up 630 basis points year over year.

Jeff Sonic: This was driven by improvements in input cost yield throughput and quality cost specifically input costs as a percent of net sales improved 450 basis points versus year ago, due to better yields and lower commodity costs and quality of cost improved by 220 basis points versus year ago.

Jeff Sonic: We did have a timing benefit in our quality costs that will reverse in Q4, but it was a strong quarter Nonetheless.

Third quarter adjusted SG&A was 29, 3% of net sales compared to 28, 6% in the prior year period.

Jeff Sonic: We spent 10, 8% of net sales on media in the quarter up from nine 5% of net sales in the prior year period total media investment was up 43% year over year.

Jeff Sonic: Recall, our media plan was less front loaded this year than in years past. So that we can manage our growth to live within our capacity limits as a result, our media investment in the back half of 2024 will grow significantly faster than our sales will grow and that will position us for a faster start in 2025.

Jeff Sonic: Logistics costs continued to improve and were five 6% of net sales in the second quarter, a decrease of 120 basis points compared to the prior year period.

Jeff Sonic: Majority of the improvement was due to strategic actions, we have taken to increase fill rates reduced miles driven by increasing the number of states served by our second distribution center and negotiations with various carriers with the remainder being more macro driven with more favorable lane rates and lower diesel costs.

Jeff Sonic: Other SG&A, which was 13% of net sales increased 60 basis points driven by higher incentive compensation.

Third quarter, adjusted EBITDA was $43 $5 million or 17, 2% of net sales compared to $23 2 million or 11, 6% of net sales in the prior year period.

Jeff Sonic: This improvement was primarily driven by higher gross margin as well as well as improved logistics cost, partially offset by higher media investment and incentive comp.

Jeff Sonic: Capital spending in the third quarter was $34 million.

This was lower than expected due to the timing of projects and payments, we expect a much higher rate of spending in the fourth quarter. However, we are lowering the estimate of capital spending this year due to the timing of projects. We now expect capex this year to be approximately $180 million versus the previous guidance of $200 million.

Operating cash flow in the third quarter was $56 $1 million and we had cash on hand of $274 $6 million at the end of the quarter. We continued to believe that we have adequate cash to fully fund our growth through 2025, and we will be free cash flow positive in 2026 are strong.

Proven and adjusted EBITDA. This year also makes it unlikely we will need any additional capital.

Jeff Sonic: We generated $11 $9 million and net income in the third quarter, bringing our year to date net income to $28 8 million.

Jeff Sonic: Now turning to guidance for 2024, we are updating our outlook to reflect our outperformance in the third quarter as well as our conviction in our ability to execute in the final quarter of the year.

Jeff Sonic: We are raising our net sales guidance from at least $965 million to approximately $975 million or growth of around 27%.

We are able to do this because of the significant improvements in our operating efficiency and the strong start up of the new roll line and N. S. Collectively these efforts will allow us to sell a bit more this year than we had originally projected and still maintain strong customer service. We are also keeping in mind the capacity.

Jeff Sonic: Needed to support next year's growth and do not want to get too far ahead of our original plans.

As far as cadence, we continue to expect net sales to have sequentially lower percentage growth in the fourth quarter of 2024 as the lower first half media spending will result in slower growth in the second half something that we deliberately did to manage our growth to live within our capacity limits in our business. The first half media investment really dictates the demand.

We will have in the second half of the year in the second half media investment will drive the demand we experienced in the first half of next year.

Jeff Sonic: For this reason our second half media investment will be significantly larger than the investment we made in the previous year. We are expecting second half 2020 for media investment to be more than 50% larger than than in the comparable prior year period.

For adjusted EBITDA, we are raising guidance from at least $140 million to at least $155 million to reflect the over delivery in Q3.

We now expect the gross adjusted gross margin to expand by approximately 600 basis points for the full year compared to 500 basis points previously.

Capital expenditures are now projected to be approximately $180 million compared to approximately $200 million previously to support the installation of capacity to meet demand in 2025. The reduction is due to the timing of certain expansion projects. Some of that reduction will push spending into 2025.

Jeff Sonic: Five.

Jeff Sonic: In summary, the third quarter results have continued to build our confidence in our ability to deliver our long term financial goals. We are operating more effectively and more efficiently and you can see that up and down the P&L and in the way we show up to our customers and consumers. We believe that is the result of our investment.

<unk> capacity and organizational capabilities as they are now delivering the scale benefits. We believe are possible in the fresh cut business model.

Jeff Sonic: That concludes our overview, we will now be glad to answer your questions operator.

Speaker Change: If he would like to ask a question. Please press star one on your telephone keypad.

Speaker Change: Tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, we ask that you. Please limit to one question.

Speaker Change: Our first question is from Mark Astrachan.

Chen with Stifel. Please proceed.

Mark Astrachan: Yes, thanks, and good morning, everybody.

Mark Astrachan: Obviously really really good results here.

In the quarter and the guide, but maybe taking a bit of a different tack I wanted to ask about.

Mark Astrachan: Expansion of the business from a top line standpoint, and some of the less focused areas. So I've seen some things about looking at expanding the U S. D to C business beyond attached it looks like there could be some.

Incremental news potentially at some point there so maybe talk a bit about kind of effort in that space. What do you see the opportunity path to success kind of what you've learned so far.

Looking outside the U S. In particular Europe also it seems like there's some effort there around accelerating.

Mark Astrachan: Accelerating our refocusing of that business.

Starting stocks and focus there so maybe talk a bit about those awkward. Thank you.

Yeah, Mark this is Billy I'll take the second part of your question Scott I'll take the first part of your question I recall at the beginning of this year, we said to folks that we felt really good about the European business and a business model that was there, but we didn't feel very good about the reliability of the supply chain. So we endeavored to work.

Jeff Sonic: On ways to create a more reliable.

Reliable supply chain Europe before we make any decision about investing any further in that market. Those tests are underway, we feel very good about the progress, we're making but there is no conclusion, yet no definitive plan to do anything more than what we're already doing today, we liked the consumer dynamics. There we think the fresh cut business has.

<unk> long term potential there, but we want to make sure we get it right when we actually do it. So at this point, we're still in the testing and validation phase, particularly on the supply chain side of it turning to Scott tell you a little bit about the DTC side of things Hey, Mark.

Speaker Change: So look the way, we think about E Commerce, I think you know it pretty.

Jeff Sonic: Pretty well, but basically the majority of what we consider e-commerce as click and collect for US it's about it's like around 60% of our total and the vast majority of what we're seeing is about 87% is coming from our French network.

So that's really where the majority of it is now we are always doing a lot of we know there's a lot of opportunity for us to open up and make sure that we're giving people other opportunities to purchase from us in different ways. So we're always continuing to test we have opened up our D to C. Just a little bit.

<unk> tested a little bit of expansion understand how it's working but right. Now this is something that I think it's in a test and learn phase of test and learn mode.

Jeff Sonic: What Billy was talking about as you know in Europe, especially we have all these places where we're kind of planting seeds and understanding how those models work. How we're we're invested in the returns that we get getting on them, but right. Now. These are very small pieces of our business at this point and what we're doing is as we learned enough and we feel confident those are places that we.

Jeff Sonic: We invest in and see if we can drive well above our kind of standard growth rate of call it around 25%.

Our next question is from Ken Goldman with Jpmorgan. Please proceed.

Ken Goldman: Hi, good morning, and thank you.

I wanted to ask on gross margin.

You know the commentary is now being focused on consistent performance. After the obviously excellent improvement in that gross margin rate.

Ken Goldman: Do we think of the comment about consistent performance, which I think some people might interpret sort of as I say it'll be kind of flattish from here in light of the prior comments that you are looking at new technology to help with throughput and efficiency, maybe you have that new technology coming in later next year. It sounds like so just kind of wanted to balance those comments I'm going to kind of get a general sense of how.

Ken Goldman: Do you see the gross margin path ahead. Thank you.

Ken Goldman: Hey, Ken it's Todd So look we're obviously thrilled with the performance this year hitting year to date, almost 46% and that's kind of thing that's our guide for the year. So we think we will have another.

Ken Goldman: Solid quarter in Q4 clearly.

Ken Goldman: We do not anticipate that's V and we're obviously ahead of our long term target of 45. So that's fantastic that we're three years ahead of schedule, but we still think we have tons and tons of opportunities what that path exactly looks like over the next couple of years I think we'll talk more at year end will be a cagny. So we can.

Ken Goldman: We can kind of explain that and little more.

Ken Goldman: It's a little bit more depth, but obviously as we talk about all the time, there's three areas of focus here, where we think each of each of them still has upside one is getting more efficiency out of the lines that we have we made great progress, particularly in Bethlehem, what we got a lot more work.

Ken Goldman: And it's to go and when we've seen some some positive signs in the last couple of months and N S and feel good about the future there it's getting more capacity out of all the facilities that we have so we're going to get we're going to use every square inch to make sure. We have the right capital efficiency. There and then as you mentioned new technique.

Ken Goldman: <unk> you don't belong should come up at the end of next year. So it's going to be early days and we won't know exactly kind of where we are towards the end of next year we're optimistic.

Ken Goldman: We think we have something that could be very very interesting, but that's going to take a couple of years to play out. So in summary look we're going to hit around 46% for the year, which again is terrific. We're.

Ken Goldman: We're not stopping there we think where there is significant more upside to come.

Speaker Change: Thank you and then for a follow up you know thinking about next year I realize it's too early for specific numbers you have talked a little bit about the cadence just in terms of how you expect the second half of 2000, and Forbes media to kind of influence the first half of 'twenty five and I'm just trying to get a sense are there any other kind of tailwind heads.

Ken Goldman: Wins, we should be thinking about right now you did talk about inflation, a little bit or at least mentioned the word wanted to get a little bit of color. There. If you could at this time any kind of insight that you're ready to provide them I'm sure would be appreciated.

Speaker Change: Yeah, So look.

Speaker Change: We're still early days for 25 planning everything we're seeing right now in the commodity bucket again, it's still too early but I'll just I'll just say, it's looking kind of flattish right now so.

Jeff Sonic:

Jeff Sonic: As you know, we kind of lock in a lot of our commodities kind of in the December time period, particularly our proteins. So we're getting closer to that period. We're obviously talking with people every week on that again, it feels kind of flattish, but that could change a lot in the next month or two so.

No other big updates, but we're not seeing any surprises right now.

Speaker Change: Our next question is from where our piece parts with Oppenheimer and company. Please proceed.

Good morning, Thanks for taking my question. So maybe two macro questions for me. So just wanted to get your latest thoughts on the tech category, where you're seeing from on the adoption side and then you know you.

Jeff Sonic: Your business continues to be tremendous momentum. So I'm just curious if you're seeing any shifts in consumer behavior.

Speaker Change: Hey, Ritesh Scott so.

Jeff Sonic: On the pet category.

Jeff Sonic: Basically what we're seeing is looking in traditional brick and mortar is is not doing as well from a growth standpoint as they have historically, there's definitely a little bit of softness there, but it's in the kind of couple of points down versus prior periods et cetera, but remember there was a ton of expansion for for a while.

We are seeing a lot of that growth is definitely some more and more of it's coming from online. So if you look at kind of any type of Omnichannel piece youre seeing like still a couple of points of growth.

The long long term algorithm that ive always used for the categories Youre seeing kind of 2% to 4% overall pet category growth you might not see it within six months or a year, but that's typically what you see typically and that's what we're seeing right now we're seeing around like a 3% growth. If you look at everything.

Jeff Sonic: Like Omnichannel from a from an adoption standpoint.

Look these things kind of go up and down in waves, we think from everything we're seeing it come back in.

Jeff Sonic: At a more consistent pace.

Jeff Sonic: There is definitely some trends that are starting to develop around dog size again, they again, they come and go we're starting to see a little bit more towards smaller and medium sized dogs again again, it's just slightly where youre seeing more and more of those dogs kind of adopted and in consumers' homes a bit more.

Jeff Sonic: Good thing for US if you look at where we typically over index, it's typically with people with smaller and.

Jeff Sonic: Medium sized dogs, we don't do quite as well with large dogs, although we're making a lot of progress with our large new large dog product.

Continuing to kind of come out of the gate and do really really well.

Jeff Sonic: Yeah.

Speaker Change: Our next question is from Robert Moskow with TV Cowen. Please proceed.

Jeff Sonic: Yeah.

Hi, Congrats again.

Robert Moskow: A couple of questions.

Robert Moskow: I think the the the target for sales is like you know close to 2 billion. It was less than that but for 2027 and after evaluating you know revising your long term guide.

Robert Moskow: Or are you evaluating like introducing another time series like beyond 2027 is that part of that.

Jeff Sonic: The the.

Jeff Sonic: The decision, making that you're doing.

And would that also entail a spending to expand your footprint.

Jeff Sonic: Beyond you know beyond N S N behind beyond what you have in Pennsylvania, and then a follow up please.

Speaker Change: Yeah, Rob we haven't made a decision on what we'll look at for updating guidance. If we do that sometime next year.

Speaker Change: There's everything has got to be taken a look at the one of the things that we do spend a lot of time thinking about is capacity planning, which is embedded in how we think about the long term guidance and also part of your question, but I would remind you that within our existing footprint of the three sites that we have today, we have capacity to get us to the $2 billion in <unk>.

Speaker Change: Net sales our guidance for $1 8 billion, but you need to have a run rate. That's ahead of that when you get there we can get well north of $2 billion by <unk> with.

Jeff Sonic: With the existing footprint, so any decision on expanding the footprint beyond where we are would influence periods that would go well beyond 2027.

Jeff Sonic: Need any capacity beyond that footprint until probably 29 or 30, depending on how our new technology plays out what our efficiencies do and whatnot. So at this point Theres really no conclusion or decision, where we've got all the variables will look at all of them will make the right decision based on the best inputs and the best visibility that we have.

Speaker Change: Our next question is from Brian Holland with D. A Davidson. Please proceed.

Jeff Sonic: Yeah.

Brian Holland: Thanks, Good morning, I believe guidance implies 24% net sales growth against the relative media spend of 9% in the back half of 'twenty four I, obviously realize that's a bit of a condensed window.

Brian Holland: As opposed to looking at it more annualized but just curious whether that dynamic is indicative at all of how you see 25 shaping up at this point, particularly on the media side.

Speaker Change: Yeah, Brian I would characterize it as the media in the back half of the year would indicate the momentum in the household penetration gains we get as we head into the first half of next year. So looking at the spending in the back half and the growth rate in the back half you're sort of looking at two things that are are not timeline the growth rate in the back half of this.

Speaker Change: Year is related to the spending we had in the first half of this year the spending in the second half of this year is what will drive the growth rate in the first half of next year.

Jeff Sonic: So we do know that as we get the significant media spending that we're making in the back half of this year relative to what we've done in previous years, we expect that to be the thing that starts driving the household penetration growth back up again, and you'll start seeing that in the first half of next year and then that obviously will turn into volume growth that begins in the first half of next year and continue through the back half of the year.

Speaker Change: Our next question is from Bryan Spillane with Bank of America. Please proceed.

Bryan Spillane: Thanks, operator, good morning, everyone.

Bryan Spillane: Given the I guess some of the comments and things you've teased out in terms of updating long term targets and objectives I guess bigger bigger question I was thinking about is.

Jeff Sonic: It's very rare in consumer packaged goods for a category to develop and gain substantially.

Jeff Sonic: Shelf space with really just one player in the category.

Jeff Sonic:

Retailers tend to like multiple options multiple price points and if we think about.

Fresh as a sub segment of the total pet food category, just how does that factor into your thinking about.

Jeff Sonic: Expansion of gaining share of fresh gaining share of the pet food category really turned that happened with what is effectively at least in Britain brick and mortar retail effectively.

Jeff Sonic: Like one horse in the race.

Speaker Change: Yeah. Brian. This is the thing that we've been spending a lot of time thinking about since we launched feed the growth in 2017, which is the reality is that this is a very scale driven business and there are enormous advantages to somebody who built scale in it whether that's in manufacturing whether that fridge placements at retail, whether it's distribution and logistics that go with.

Jeff Sonic: And our goal was to get ourselves in a position, where we had an enormous head start and a significant scale advantage against somebody who came behind us clearly anybody else income can you can enter this category, we have seen that from Mars and from general Mills, and we'd expect to see others come along as well whether they'd be able to compete effectively.

Jeff Sonic: Against what we've built is remains to be seen but in terms of if you look back over time.

Jeff Sonic: Your observation is a fairly good one but the reality is the category creator of the Guy who creates the category. If they do a really good job, which is what we're shooting to do ends up with a lion's share of the market share whether you think about Gatorade, a 75 share where do you think about you know a keurig Green mountain any of these guys have really created a big.

Jeff Sonic: Category they own the lion's share of the category and the bulk of the profits if not more than 100% of the category profit and so that's really where we expect ourselves to go we do expect that competition at some point question is how good debate.

Speaker Change: Our next question is from Jon Andersen with William Blair. Please proceed.

Jon Andersen: Hey, good morning, everybody and congrats on the quarter.

Two quick two parter on distribution in the presentation that shows a 9% increase in cubic feet, but 22% increase in TD piece, just wondering how you kind of square the two and I think there was a comment in the prepared remarks around absorbing some shelf space from retailers.

Jon Andersen: <unk> fridges, if you could talk a little bit about that dynamic and then the second part is.

Speaker Change: 22% now.

Jeff Sonic: Your locations have second fridges, how would you expect that to develop over time based on your conversations with retailers and where is the white space for second and third fridges in terms of channel. Thanks.

Speaker Change: Hey, John Scott. So, yes. So we look we've tried to move over time really start thinking about the space that we're picking up from a cubic foot standpoint, the reality is that.

One fridges interesting, but we like the reality is for US the second and third fridges is really where the greatest opportunities lie for us. So we're continuing to see a lot of second and third fridges being added not only were they added this year, we think theres going to be a lot added over the course of the next couple of years as retailers are looking around the category and if you look at most retailers they looked up.

Speaker Change: And down the category and Theyre going what's going on across these brands and what's rolling off.

Speaker Change: Going on across these segments and then recognizing that fresh is really where the growth is coming from and as they do that they go Wow I have one fridge do I need a second and potentially a third and we even have some conversations with a few people maybe you can afford them and that's a little bit premature, but we see consistent growth coming from fridge expansion.

Speaker Change: The what we are starting to see is there are a couple of retailers and I would say literally just literally a handful that are kind of tinkering and trying a couple of different frisch layouts and formats with some of their own models and some of their own fridges. The only one who has really substantial number of their own fridges as Walmart. They had made an investment in that investment.

Speaker Change: It was originally intended to help blue and honestly I believe you know Cesar rollout and in addition to some of their private label products.

Speaker Change: And what's happened over time is they've made that investment was I think a really interesting decision for them.

It is a heavy lift not only from a capital standpoint, but from a maintenance standpoint, and those products, where we didn't play out to what I think anyone had imagined on any side of the fence I think Walmart was somewhat disappointing with it and now it's starting to happen is we're actually going into many of those fridges, you'll start to see our products into some of those fridges.

Speaker Change: And now we'll have a substantial share of that fridge and our products are performing incredibly well like we are pleasantly pleasantly surprised at being able to put the set of new products into those fridges and see the performance that they're they're delivering.

Speaker Change: And they continue to kind of grow on a consistent basis. So we love that we were really behind in space at Walmart and we love that we're able to now kind of grab that additional space.

Speaker Change: And in those fridges and see that happen other than Walmart as I was touching on a minute ago. There really isn't anyone that has any kind of scale around owning their own fridges and I think most retailers have gotten really comfortable with.

Speaker Change: We're bringing something that's incredibly value added very unique incredibly well managed and I can get into like why it's well managed but they don't have to touch a thing we can repair fridge broken fridge within hours not days and weeks that you'll have many times and it's because we've built this into another one of these kind of assets and capabilities.

Speaker Change: As the organization, so hats off to the French team.

We have less than 1% of fridges down all the time and we have you know we have 33000 fridges out there its a small group that does great work for us. So we think this is an asset that we're developing for the future and a benefit that we're bringing to retailers and most of them arent.

Speaker Change: Anticipating buying their own fridges.

Speaker Change: Our next question is from Peter Benedict with Baird. Please proceed.

Hey, good morning, guys. Thanks for taking my question.

Peter Benedict: Wondering if you could talk a little bit about.

The hiring of.

Speaker Change: Mickey as you as Chief operating officer.

Speaker Change: Couple of months ago.

Speaker Change: Just kind of curious what she's bringing.

What are maybe initial observations arent issues somewhat restricted in what you can do initially, but just kind of help us understand what you think turned back can be on the.

Speaker Change: And as you guys look to continue to grow over the next few years.

Speaker Change: Yeah. Thanks.

Speaker Change: Thanks Peter.

Speaker Change: Thrilled to have Nikki join us.

Speaker Change: She is bringing a fresh set of eyes to our business in a different set of capabilities than some of our management has or our team has collectively and so that's been a real breath of fresh air as you alluded to she does have some limitations in what she what she can do until may of next year and those limitations restrict tolerability.

Speaker Change: Two we're only in the grocery drug mass club channels until then so will be a little bit.

Jeff Sonic:

Jeff Sonic: A little bit of limited in the total impact that she can have until that time, but between now and then she is digging into our existing business, bringing fresh eyes to it and we think that's going to be purely additive and adds to our bench strength, we have really big ambitions as a company we want to be a much bigger player in the pet category and getting a talent that as of Nicky's calibers are huge.

Win for Us and we think frankly it gives us the ability to project further a much bigger business, probably a much more expansive business than we have today.

Jeff Sonic: Yeah.

Our next question is from Tom Palmer with Citi. Please proceed.

Tom Palmer: Good morning, and thanks for the question.

Just wanted to ask one on some timing items you kind of noted this year. You noted this quarter that there was a timing benefit for quality cost in the third quarter. This is expected to reverse just any quantification in detail on what drove that and then secondarily in the first quarter of this year you'd noted around 100 basis points of operating leverage.

Jeff Sonic: On the gross margin line has that kind of fully reversed at this point. Thanks.

Yes, it's Todd so I'm on the quality issue we.

Jeff Sonic: We had a fantastic quarter disposals were super low, which really helped we did see experience some higher quality costs in September.

Jeff Sonic: The secondary processing piece of the quality component that did not flow through the P&L in September it will it did flow through the P&L in October that was about a 50 basis point benefit in Q3 that we'll see in Q4. So that number is still will be will be higher the quality cost number in Q4, but we still.

Jeff Sonic: Feel very very good about where we are for the year regarding the 100 basis points benefit we saw in Q1 as we built inventory we've seen only a very small portion of that reverse.

Jeff Sonic: Some of it's still a little bit of a wildcard we might see a little bit of it reverse in Q4, but I'm not anticipating much of it.

Jeff Sonic: So most of that inventory benefit will hold its really just a derivative of how fast we're growing and our need to build inventory to supply the business.

Our next question is from Michael Lavery with Piper Sandler. Please proceed.

Jeff Sonic: Okay.

Michael Lavery: Thank you good morning.

Michael Lavery: Can you just touch on a little bit more now that you've got the fourth line how much.

More significant is your flexibility there and have you been able to.

Michael Lavery: Those are a little bit more extended runs.

Jeff Sonic: You know with like maybe one.

I got one roll line that each could do kind of the.

Jeff Sonic: The power Skus and then the other that could do you know the rest of the portfolio.

Is that something you've you've been able to test yet or get working on how does that look.

Jeff Sonic: Yeah Michael.

We've said all along getting to bank lines and to roll lines up and going was going to be a big unlock for us and that we'll be able to have one line specialize in very high velocity high volume Skus and have all the complexity be taken by the other line. So when we started up that that roll line in September we saw that benefit that obviously didn't show up in there.

Jeff Sonic: This quarter because those that goes off that production will impact Q4, but we started seeing some sizable improvements, particularly on a roll side of the business on the back side of the business, we've been getting some of the benefit of that but we're still scaling that business.

Jeff Sonic: I'm trying to work out the Kinks as you get the site up and going but without a doubt having two of each to bank lines to roll lines has enabled us to get the longer runs on one of the lines more efficiency on those lines and have all the complexity be borne on the other line the site and N is so just to be very clear well always be I'd say running a little bit.

Jeff Sonic: Behind where we are in Bethlehem purely because we're constantly starting up new lines versus the more mature site in Bethlehem, where we've been operating for a long time, it's very stable environment and then as we started up a line in September we have another line starting up in the in December.

Jeff Sonic: The third roll line starts up in December and we have construction going on there. So there's a nonstop process of expansion that makes it a little bit harder to get to the level of performance you get into more stable operation like bathroom, but over the long haul and it looks like it's going to deliver the efficiency advantages that we had hoped for when we designed and built the facility.

Jeff Sonic: It just will take a little bit of time till we get there.

Speaker Change: Our next question is from Jim Celerity with Stephens Inc. Please proceed.

Jim Celerity: Hi, guys. Good morning, Thanks for taking my question.

Jim Celerity: Two part question for me.

Jim Celerity: I was talking to them about the conversion from shoppers to main meals, helping drive the buy rate I just wanted to drill down on that and see if you could offer some color on what drives that conversion into kind of a main real buyer.

Jeff Sonic: If you were able to sign.

Size up the percentage of your current buyers that are using the product as toppers. Just so we can kind of frame up how much conversion opportunity there as we move forward.

Jeff Sonic: Hey, Jim so.

So look I think that a lot of times adoption takes different paths right. So we know that people some people come in and they start they become a heavy user almost immediately.

Jeff Sonic: And they kind of go down that path. We do know that there are a lot of users in fact, it's a very big chunk of people that we considered toppers because they are doing some type of mixing behavior. It's a pretty standard behavior in pet food, where people were taking dry food and mixing in a wet food.

Jeff Sonic: What our goal is and what we're doing over time is we're trying to make sure that we're communicating and messaging to people that this is your main meal and I think thats why youre, starting to see more and more growth in that Hippo area. So if you see we talked about basically our penetration growth as this number our hippo growth is 24%. So if we can.

Jeff Sonic: Those hippos and get everyone in that mindset to use us as a main meal.

Jeff Sonic: And not a topper and get them to understand that this is the center of your play just like your food your meal.

Jeff Sonic: To your place should be fresh real food and that's what we're delivering to consumers and bringing to them.

And what you're seeing is that's in the way and our advertising and the way we communicate that's in everything we're showing we're always showing field full bowls of fresh, but we're not showing bowls of people mixing food. So we're demonstrating that in all the imagery that we're doing everything that were kind of the way, we're communicating consumer from an emotional standpoint.

Jeff Sonic: And who they're all who they are and what they're all about and how they think about their dog's food and then the next thing that we're doing you'll see more and more recently until we touched on it in the script is more and more packs that are multi packs of variety packs, where there's just multiple skus and a Pac youre also seeing more and more large sizes from us the biggest people that it mixes a large dog or what.

Jeff Sonic: Are we just come out with a large bag of a large dog food tends to be doing really really well like we're thrilled with the results from that so that's kind of like that's what we're seeing and this is going to take some time because what we're doing is trying to encourage that behavior change the core of our business again is the $5 million high profit or the hippos Super heavy heavy.

Jeff Sonic: <unk> group, we love those guys, they're at 90% of our business, that's where we're focusing on and that's what we want to cultivate and that's the behavior, we want to encourage.

Speaker Change: Our next question is from Camille Karl I Love with Jefferies. Please proceed.

Speaker Change: Hey, guys good morning.

Speaker Change: Just starting just very quick one confirming that the Capex change was just entirely timing and pushed into 'twenty five and not.

Speaker Change: Maybe something that youre doing differently or decision you've made on capacity.

Speaker Change: And then maybe a bigger question, which is on the marketing and the effectiveness of marketing you alluded to it a little bit at the beginning but.

Speaker Change: There's many different sort of pieces of calculus, how much to spend whether it's capacity capacity of specific forms.

Speaker Change: But also now you're pushing a $1 billion in revenue. So how do you think about advertising in the context of advertising and marketing in the context of the size that you now are.

Speaker Change: Beyond just turns that capacity and stuff what you brought up.

Speaker Change: Yes, I'll take the first part of the Capex is almost all timing so that will push into 2025.

Speaker Change: That was quick [laughter] look to the effectiveness of the marketing like this is the I think this is the key question.

Speaker Change: We are we try and stay on top of like sometimes on a weekly basis. We're looking at this.

Speaker Change: And the thing that is look it's very unusual someone brought up very unusual for a packaged goods business in order to kind of maintain a leadership role for a really long period of time I think it's incredibly unusual for a package goods company to have the same level of productivity on their advertising marketing effectiveness as they had for almost the past 10 years.

Speaker Change: I mean I.

Speaker Change: Don't think I'm like exaggerating too much where I say for literally for a decade, we have had very similar CAC and and the thing I'll go to CAC for a second acquisition cost because I think it's a good indicator of we're continuing to keep the message fresh we're continuing to find new channels to communicate the CAC stayed within a very very tight band.

Speaker Change: What that demonstrates is the model is overall intact and it also I think most importantly demonstrates the Tam potential which I think is the other thing that people get really concerned about usually when you get deeper into your Tam. Your CAC starts to go up significantly we haven't seen that so it gives us incredible confidence in.

Speaker Change: What we're doing.

Speaker Change: Now back to like what we're doing for a second. So this is one of these areas where there is a lot of magic that's created from the team and the people associated and we work with in order to keep the marketing kind of going and its first the creative the creative tests incredibly well and then in market performance is honestly, it's extraordinary Todd loves when I use that.

Speaker Change: Work.

Speaker Change: Next the the way, we have where we place. It we've started off like very very kind of large broad market advertising and then we've taken it into more and more different types of vehicles.

Speaker Change: Vehicles, and mediums and different targets and even as we've kind of moved into different targets, all our men and sports Youre seeing is more and more on sports.

Speaker Change: <unk> been able to stay as productive and we also know what we're doing not now, but we know what we're doing six months and even a year from now as the plans like fold out so what I mean by that is we will test things that are six months plus out and have them ready to go for us to continue to execute on the on the across the marketing model.

Speaker Change: Will that we use.

Speaker Change: Hopefully that's helpful.

Speaker Change: We can spend we can spend a lot of time on that one.

Speaker Change: Our next question is from Mark Suarez with Wells Fargo. Please proceed.

Mark Suarez: Hey, good morning, and thank you for the question just on the consumer you continue to see strong buy rate gains you had also called out a shift to larger pack sizes last quarter I guess any updated color on what youre seeing out there how do you expect a mixture of all near term both in terms of consume.

Speaker Change: <unk> behaviour, and how that flows through the model.

Speaker Change: Hey, Mark So you know.

Speaker Change: It's interesting it's been one of these periods, where there is a little bit of a tale of two cities quite honestly we.

Speaker Change: We talked about overall growth of the category has really moderated a bit kind of flattened out around that 3% level.

Speaker Change: Definitely there are two ends of the spectrum that seem to be doing well one of them is the what's on what's considered almost ultra premium in the category and we'll put ourselves in that bucket for a second I don't think we'd like to think of ourselves that way, but we're in the higher end of the category and then there's a handful of products and more in the value area that that are still doing pretty well and actually growing.

Speaker Change: The middle is getting squeezed a little bit and it tends to have to do a little bit with with peoples income levels, but it is a conscious choice that people are deciding on what food they want to buy.

Speaker Change: On the ultra premium and there's people like us there's other direct to consumer brands that are very fairly expensive, but people are seeing the value and what we are bringing to the market and willing to spend the extra money on it because of the product that we bring in and the value that they see from it on.

Speaker Change: On the other and maybe people that arent quite as involved with their pet they're they may be a little bit of a crunch from inflation. They haven't seen salaries go up as much and theyre, making some different buying decisions.

Speaker Change: Not really our consumer group.

Speaker Change: Not really who we're focused on and that's not really the group where after but we are watching this play out for the category. It's been an interesting period.

Speaker Change: I think it's starting to kind of flatten out and moderate a bit I think people are getting a little bit more I think salaries have overall kind of grown a bit I think people are getting more comfortable with pricing is in general across the market and I think that we're in a really fortunate position as we've tapped into a need and an interest in the market from a consumer group the.

Speaker Change: It seems to be really really large and growing as they understand the difference differentiation of the products that we're putting out there.

Speaker Change: Okay.

Speaker Change: Our final question is from John Lawrence with the Benchmark Company. Please proceed.

John Lawrence: Great. Thanks, Congrats guys.

Speaker Change:

John Lawrence: Can you talk a little bit about.

John Lawrence: The retailers you mentioned, the second and third fridges.

John Lawrence: We've talked about it over time that the cycle times and the review periods at these retailers when they do their performance reviews, how long does it sometimes takes 12 to 18 months to get these plant of grams and <unk>.

John Lawrence: Bridges.

John Lawrence: Added to the mix.

John Lawrence: Hey, John Yeah, you know it really in some cases it can be a very very long cadence with certain retailers that are in kind of certain mindsets and certain investment.

John Lawrence: Our ideologies and you know it.

Speaker Change: And a great example, and you and I have probably chatted about this at one point, if someone's doing a massive remodel and <unk>.

Speaker Change: 26, they're not going to probably do a big touch in a category and twenty-five but look I mean, there's you know there's there's 70 retailers that we work with so it spans the gamut there are times, where we could have be having discussions now or in kind of Q1 that can have real impact in 2025, and we have seen that.

Speaker Change: That very often.

Speaker Change: I think the good news for US is that we are having great conversations now about things that will happen in 'twenty five and if they don't happen in 'twenty five some of them will happen in 'twenty six and we feel like we're well positioned to start going into next year with additional fridge expansion space expansion et cetera, as the retailers assessed the category. The one thing I will put the paid advertisement in here.

Speaker Change: The distribution is terrific. The media is what is the vast majority of the driver it's over 70% of the driver for our growth and that's the growth algorithm and then what that media does is it drives new consumers hopefully theyre hippos that come into the business and then we do see really really strong same store.

Speaker Change: <unk> growth over time.

Speaker Change: <unk> seeing double digit same store sales growth.

Speaker Change: So that puts us in a really good position and then on top of that then we will add innovation and will add some additional space and that's really what gets us gets us to the rest of the there the growth rate that we're always looking for.

Speaker Change: We have reached the end of our question and answer session I would like to turn the conference back over to Mr. Sayer for closing comments.

Speaker Change: Thank you everyone on this day before election day I'm reminded of a quote from will Rogers I Love a dog he does nothing for political reasons.

Speaker Change: So reward that dog with some fresh Pat your dog's infection will make you forget all those campaigns that in fundraising tax you've been drowning in thank you very much.

Speaker Change: Thank you. This will conclude today's conference you may disconnect at this time and thank you for your participation.

Speaker Change: Yeah.

Speaker Change: Sure.

Speaker Change: [music].

Speaker Change: Yes.

Speaker Change: [music].

Speaker Change: Yes.