Q1 2025 Freshpet Inc Earnings Call
Greetings, welcome to Freshpet's first quarter 2025 earnings call. At this time, all participants are not listening only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance.
Rachel: Conference is being recorded its now my pleasure to introduce Rachel <unk> Vice President Investor Relations. Thank you you may begin good morning, and welcome to fresh Pet's first quarter 2025 earnings call and webcast on today's call are Billy Cyr, Chief Executive Officer, and Todd <unk>, Our Chief Financial Officer, Scott Morris, President and COO.
Speaker Change: Founder will also be available for Q&A 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. These include statements related to our long term strategy and target prospects and plans for growth timing and adequacy of capacity potential impact of terrorists thinking.
Speaker Change: That's my expectations would be free cash flow positive in 2026, and 2025 guidance. Please refer to the earnings press release and our most recent filings with the SEC, including our 2024 interim report on Form 10-K, all available on our website for a discussion of factors that could cause actual results to differ materially from any forward looking statements made today.
Speaker Change: 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. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please.
Refer to todays press release for how management defined such non-GAAP measures why management believes that non-GAAP measures are useful are reconciliations of non-GAAP financial measures. The most comparable measures prepared in accordance with GAAP and limitations associated with such non-GAAP measures. Finally, the company has produced a presentation that contains many of the key metrics that will be just got on this call that presentation.
Speaker Change: Can be found on the company's Investor website, I mean, there's been some commentary will not specifically walk through the presentation on the call rather as a summary of the results and guidance. They will discuss today with that I'd like to turn the call over to Billy Cyr Chief Executive Officer.
Billy Cyr: Thank you Rachel and good morning, everyone. Since our last earnings call in February we have seen a significant shift in the macro environment that has impacted our growth the message I would like you to take away from this call is that despite the significant economic uncertainty facing consumers today number one fresh that has continued to.
Billy Cyr: Significantly outperformed the category amongst every age and income group and number two fresh that remains a structurally advantaged business with a long runway for growth in a category with meaningful long term tailwind.
Billy Cyr: As we have done over and over again throughout our company's history, we will be nimble and adjust to this new macro environment and we still expect to deliver outsized performance against the challenging backdrop.
Billy Cyr: It might not be the same magnitude of performance we've delivered over the past few years until there is greater economic certainty amongst the perspective consumers. We are targeting the joined the fresh pet franchise.
Billy Cyr: As many of you have realized over the years fresh paint is a very data driven company. So we've been digging into what has changed year to date assessing how that would impact our near term strategies and identifying ways. We can best address those changes.
Billy Cyr: Our analysis suggests that the slowdown in our sales growth came on very quickly as the macroeconomic climate changed a few months ago and is due in part to the fact that fresh pets consumer franchise spans all income and age groups, including consumers, who are most economically insecure or uncertain today fresh foods.
Billy Cyr: Consumer base is less defined by the income of our users and better defined by how some how much someone loves their dog.
Billy Cyr: For the last decade, fresh pet has been able to grow through all sorts of economic conditions, and we are still growing at an outsized rate versus other dog food and CPG brands. However, our model relies on an increasingly large number of consumers being in the position to reconsider their pet food and ultimately conclude their freshmen.
Billy Cyr: <unk> is a better way to feed their pet what we're seeing now is that consumer uncertainty makes them hesitant to get a new dog or replace a dog. They recently lost and it also makes them more hesitant to try more expensive pet food until they have greater clarity on their economic fortunes, we do not expect a short term change in consumer behavior to change.
Billy Cyr: The long term desire for pets or premium pet food as such this does not change our view of the size of the long term fresh pad opportunity.
Billy Cyr: Identifying issues and developing solutions to short term challenges is a core competency of our team. We are also very disciplined that is we will lean into our business model that focuses on advertising retail availability and visibility and product innovation to improve our near term prospects and will not chase short term activities.
Billy Cyr: That would undermine our business model.
Billy Cyr: To continue to drive growth. This year, we are adapting our plans to this economic backdrop to ensure we have the right proposition for consumers, who are contemplating a new dog food today.
Billy Cyr: One of the strengths of the fresh pet model is that we have the flexibility to target high potential consumers across the agent income spectrum.
Billy Cyr: So from a media standpoint, we are increasing our advertising investment and tailoring our media strategies to attract more higher income consumers via digital and social channels as well as linear television.
Billy Cyr: From a product standpoint, we will be launching a new entry price point bag product under the fresh pack complete nutrition label that is similar to the rolled product we launched two years ago amidst consumer concerns about inflation.
Billy Cyr: The complete nutrition role has driven trial with a lower price point and ultimately those households trade up within the portfolio and we believe the same will happen for the bag product.
Billy Cyr: We're also focusing on multi packs to give consumers a better value and help stock up as they potentially space out there shopping trips from.
Billy Cyr: From a channel standpoint, we've expanded our small DTC business nationally so that we can reach more consumers who place a high value on subscription service.
Billy Cyr: And we are making progress on getting fresh pet into more value oriented stores, including club outlets I'm pleased to share that we are now in our first Sam's club store and the early results are encouraging we are optimistic that this will lead to a greater expansion over time.
Billy Cyr: We're also taking the necessary steps to balance our capacity and organizational capability investments with anticipated demand. So that we can meet our longer term margin and cash generation targets. Even if we have lower levels of net sales we've already taken some actions against those goals and we will take more if the current economic climate persists.
Billy Cyr: To be clear, we continue to grow and add new users across all income and age groups and fresh pet represented outsized portion of the category household and net sales growth those new consumers. We are tracking are just not a big enough group to support a growth rate above 20% right. Now. It is also important to note that we do not see.
Billy Cyr: Consumers trading down or out of the out of fresh pad, we just aren't adding new consumers at the same rate, we've historically given the macro uncertainty.
Billy Cyr: Despite the shifting consumer sentiment there or demographics that continue to demonstrate resilience.
Billy Cyr: Our analysis shows that higher income consumers, particularly those who tend to buy online and via subscription are continuing to drive sales for more premium offerings and fresh pad is amongst those winning brands as our total E Commerce business was up 43% in the quarter.
Billy Cyr: Those consumers are the least economically sensitive consumers and they continue to get dogs and trade up their dog food and.
Billy Cyr: And low cost brands or private label are also winning as consumers who find relatively little differentiation between the various kibble brands are trading down to lower cost products when times are tight.
Billy Cyr: I believe the consumer dynamics I. Just described explains the trends all of you have been seeing in the weekly Nielsen data.
Billy Cyr: As we said last quarter, we would watch the growth trends very closely for any hint that our plan is not as effective as it has been in years past and then we have the tools and flexibility to drive incremental growth if it slows.
Billy Cyr: Year to date, we've seen the impact of the increasing macroeconomic pressure and have increased our advertising investment, but we believe it's also prudent to assume the cost to acquire new households will remain elevated for the time being.
Billy Cyr: As such we are going to plan as if the conditions. We saw in the first quarter continue for the balance of the year for 2025, we now expect net sales of 1.12 to 1.15 billion or approximately 15% to 18% growth year over year adjusted.
Billy Cyr: EBITDA in the range of $190 million to $210 million and capital expenditures of approximately $225 million.
Billy Cyr: We believe this pragmatic approach will enable us to rightsize, our organization and capacity investments now so that we can deliver the cash and margin commitments. We've made if the environment improves we'll add those investments back if it gets worse, we'll take additional actions Todd will walk through more details of our updated 2025 guidance in a few minute.
Billy Cyr: Yes.
Billy Cyr: The obvious question is how this economic uncertainty impacts our long term net sales target of $1 $8 billion by 2027.
Billy Cyr: Given that this economic uncertainty arrived so quickly in Q1 and the drivers of the uncertainty for example, tariffs government downsizing and inflation have not settled it is hard to say how long the current trends will continue.
Billy Cyr: As such we are hesitant to update our long term target until we have greater clarity on the magnitude of the impact and the duration, particularly since the underlying category and brand tailwind have proven to be incredibly sustainable for such a long period of time and through so many economic challenges and.
Billy Cyr: And we believe that there will be pent up demand for dogs when the conditions do improve justice has happened during previous times of economic uncertainty.
Billy Cyr: As you might imagine we've done contingency planning so that we are prepared for a wide range of potential scenarios.
Billy Cyr: As we do this planning we are carefully balancing our long term goals with our nearer term need Devon to demonstrate continued strong performance on some of the most critical metrics such as margins and cash generation that we worked so hard to restore over the past two years.
Billy Cyr: In the end, we believe that fresh pet should number one be recognized as a best in class growth company with growth well in excess of most CPG companies, we expect to deliver a disproportionate share of category growth and build market share at a healthy rate number to sustain and expand our adjusted gross margin. So that we have adequate dry.
Billy Cyr: The powder to invest in both our growth and provide confidence that fresh pet is a structurally sound business with investable economics as part of this we will continue to develop and deploy our new production technologies and May in fact take advantage of any available production downtime to roll out new technologies that are capable of expanding our margins.
Billy Cyr: And improving quality more quickly once they are validated.
Billy Cyr: Three continue to capture the benefits of increasing scale across the P&L, even if we grow at a slower pace, we need to scale, our organizational investments. So that we can continue to capture scale benefits.
Billy Cyr: Number four deliver our commitment to be free cash flow positive in fiscal year 'twenty six if we grow slower we will slow our pace of capacity expansion to match our demand. This will enable us to demonstrate that fresh pack can self fund its growth ambitions if.
Billy Cyr: If we do this well we expect fresh pit will emerge stronger from the current period of uncertainty and with a large consumer franchise healthy margins strong cash generation and ample capacity to meet our long term growth needs.
Billy Cyr: Finally, while all the focus is on the top line and we continue to believe the topline is important we don't want anyone to lose sight of the tremendous progress. We've made on our operations. The strong performance. We had last year continued into Q1, and we believe we are operating better today than at any point in the last five years, our throughput you are up.
Billy Cyr: And this is making tremendous progress on gaining operating efficiencies our quality costs continued to be low and our logistics costs are well below our previous long term target.
Billy Cyr: This will serve us well as we continue to grow providing ample capacity to meet our expanding demand at very good margins and it will provide ample dry powder to ensure that we can invest in high return growth drivers.
Billy Cyr: Now I'd like to briefly provide some highlights from the first quarter.
Billy Cyr: First quarter net sales were $263 2 million up approximately 18% year over year, primarily driven by volume growth as we discussed in February we changed our pet specialty distribution partner in the first quarter, which ultimately impacted our growth by approximately one point.
Billy Cyr: We signed a new distribution agreement with a partner named pet food experts and feel confident about our route to market moving forward.
Billy Cyr: Adjusted gross margin in the first quarter was 45, 7% compared to 45, 3% in the prior year period adjusted.
Billy Cyr: Adjusted EBITDA in the first quarter was $35 5 million up approximately $5 million or 16% year over year.
Billy Cyr: We still have a very small share of a very large category and continue to expect sizable market share gains this year per Nielsen Omnichannel data for the 52 weeks ending 329 25, we compete in the $54 billion U S pet food category and we have only a three 5% market share within the 37.
Billy Cyr: Dollar U S dog food and treats segment.
Billy Cyr: And Nielsen brick and mortar customers defined as X Aoc plus pad, we are in 96% market share within the gently cooked fresh frozen branded dog food segment.
Billy Cyr: From a retail perspective, we are now in 28521 stores, 23% of which have multiple fridges in the U S and Canada. We ended the quarter with 37044 fridges were approximately $1 9 million cubic feet and have an average of 28 skus in distribution.
Billy Cyr: Our distribution in grocery is 78% ACB and an ex Aoc it is only 67%.
Billy Cyr: Retailer discussions are going well and we continue to expect 2025 to be a more normalized year in fridge expansions with a focus on second and third fridges. We remained very excited about the new store concepts, we presented at Cagny and will go into greater detail on that later this year or next year as customers begin to test or expand them.
Billy Cyr: Household penetration as of March 30th was $14 1 million households, up 13% year over year and total buy rate was $110 up 6% year over year.
Billy Cyr: <unk> accounted for $2 2 million of those households up 21% year over year and represented 69% of our sales in the last 12 months with an average buy rate of $498.
Billy Cyr: Moving to capacity or new bag line in kitchen, South started on time and on budget in March bringing us to a total of 15 lines across our manufacturing footprint. We have one additional bag line that is expected to commence production in the fourth quarter of this year in Bethlehem and it will be testing new production technology, we continue to find ways to drive.
Greater capital efficiency and have been also working on other new technologies that can be retrofitted to existing lines.
Billy Cyr: As a reminder, we commit to the incremental capacity from our new line about 18 to 24 months out we have ample capacity today to support our growth for this year and next year and have contingency plans on future expansion projects, if the macroeconomic environment worsens.
Billy Cyr: In summary, this is clearly not where we expect it to be when we rolled out a revised long term plan at Cagny, a little more than two months ago, but the consumer dynamic has changed very quickly. We believe we are taking the right steps to address the current environment, while not losing sight of our longer term goals. We hope you agree.
Billy Cyr: Now, let me turn it over to Todd to walk through the details of the first quarter results and our updated 2025 guidance Todd.
Todd: Thank you Billy and good morning, everyone. The first quarter results demonstrated growth across channels, but fell below our expectations, leading us to revise our outlook.
Todd: Now I will give you some more color on our financials and updated guidance for the year first quarter net sales were $263 $2 million up approximately 18% year over year volume contributed 14, 9% growth and we had positive price mix of two 7% primarily driven by mix.
Todd: We saw broad based consumption growth across channels.
Todd: For Nielsen measured dollars, we saw a 17% growth in X Aoc, 16% and total U S pet retail plus 16% in U S food and 7% growth in pet specialty the change in our pet specialty distributor impacted our net sales growth by about a point and was offered.
Todd: Set by Unmeasured channel growth of about a 0.1st quarter. Adjusted gross margin was 45, 7% compared to 45, 3% in the prior year period. This slight increase was driven by lower input costs and reduced quality cost.
Todd: Please note that the fourth quarter gross margin had a onetime manufacturing benefit of 150 basis points that we gave back in the first quarter as we had indicated when we reported the fourth quarter and full year results.
Todd: First quarter adjusted SG&A was 32, 2% of net sales compared to 31, 7% in the prior year period.
Todd: This increase was primarily due to increased media as a percent of net sales, partially offset by reduced logistics as a percentage of net sales. Please.
Todd: Please note we had a number of nonrecurring charges in the quarter, including accounts receivable write off in connection with the liquidation of one of our pet specialty distributors and accrual for legal obligations related to the ongoing litigation with Philips and termination costs due to our business change.
Todd: In our international go to market strategy. We spent 15, 1% of net sales an immediate in the quarter up from 14, 3% of net sales in the prior year period.
Todd: <unk> costs were five 8% of net sales in the quarter compared to six 4% in the prior year period.
Todd: First quarter, adjusted EBITDA was $35 5 million compared to $30 6 million in the prior year period. The improvement was primarily driven by higher gross profit, partially offset by higher it just adjusted SG&A expenses.
Todd: <unk> spending for the first quarter was $26 $5 million.
Todd: Operating cash flow was $4 8 million in the first quarter and we had cash on hand of $243 $7 million at the end of the quarter, we still expect to be free cash flow positive in 2026, and believe we have the ability to self fund our growth going forward.
Todd: Now turning to guidance for 2025, we now expect net sales of approximately $1.12 billion to $1.15 billion or approximately 15% to 18% growth year over year.
Todd: Compared to our previous guidance, approximately 1.18 to $1 billion to $1 billion or approximately 21% to 24% growth year over year.
Billy Cyr: As Billy mentioned, we are now assuming the conditions, we saw in the first quarter continue for the balance of the year.
Billy Cyr: In terms of cadence, we expect a sequential increase in net sales per quarter.
Billy Cyr: We are lapping tougher comparisons in the first half plan to invest more heavily in media in the second quarter to drive household penetration growth.
Billy Cyr: We will be launching more value oriented offerings in the second half and expect to moderately modestly increased distribution throughout the remainder of the year.
We now expect adjusted EBITDA in the range of $190 million to $210 million compared to at least $210 million previously.
Billy Cyr: Given the lower rate of that sales growth for cadence, we expect adjusted EBITDA to be back half weighted with sequential adjusted EBITDA dollar and margin improvement throughout the rest of the year.
Billy Cyr: Media as a percent of sales is expected to be greater than 2024.
Billy Cyr: We anticipate modest adjusted gross margin expansion year over year, driven by operational improvements and do not anticipate any material inflation with pricing actions and.
Billy Cyr: In regards to tariffs we are monitoring the announcements closely and have contingency plans in place if we need to make any changes to our supply chain.
Billy Cyr: As a reminder, only 5% of our U S. Cogs come from imported raw materials, and we do not have any U S sales imported as finished goods. So the impact to our P&L should be minimal.
Billy Cyr: We are still assessing the potential sales impact of any retaliatory tariffs as we do export pet food from the U S to Canada and the U K.
Capital expenditures are now projected to be approximately $225 million this year compared to approximately $250 million previously.
Billy Cyr: The majority of the spend is on the installation of new capacity to support our growth in the out years, we do expect to experience some impact from tariffs, particularly related to the increased cost of steel for new construction and new equipment.
Billy Cyr: Our estimate of that impact is included in the updated capital spending projection.
Billy Cyr: In summer in summary, we are highly focused on continuing to drive top line growth and profitability improvements. Despite the current economic uncertainty.
Billy Cyr: And we believe we have taken the appropriate steps to be nimble and address the challenges based on what we know today.
Billy Cyr: We remain very optimistic about the long term potential for fresh pet and believe this will ultimately be viewed as another short term headwinds that we must overcome as we have overcome previous headwinds on our path to building an advantaged business in an attractive category.
Billy Cyr: That concludes our overview, we will now be glad to answer your questions. As a reminder, we ask that you. Please focus your questions on the quarter guidance and the company's operations operator.
Billy Cyr: Thank you if you would like to ask a question. Please press star one on your telephone keypad.
Billy Cyr: Should 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. Please ask one question and one follow up question one moment, while we poll for questions.
Operator: Our first question is from Ken Goldman with Jpmorgan. Please proceed.
Billy Cyr: Yeah.
Speaker Change: Thank you.
Speaker Change: I wanted to start by asking about the updated guidance range just.
Speaker Change: Just in light of recent scanner data.
Speaker Change: And then also in light of some economists anticipating that.
Speaker Change: The economy itself kind of slipped a little bit ahead from here was there any thought of assuming that the macro worsened ahead. It seems and correct me if I'm wrong that you're assuming that the situation kind of stays constant I'm. Just curious if theres enough downside risk kind of baked in you know just given some of the lack of visibility ahead.
Speaker Change: Yes can we.
Speaker Change: We obviously looked at a wide range of scenarios.
Speaker Change: <unk> really focused on where is our business and what is it performing at right now and we believe based on what we're seeing in the consumption data and what we know about our marketing plans for the back half of the year and the new customer distribution gains that we'll have in the back half of the year, we feel like we're in the right spot, but as we said in the commentary the assumption that we built here.
Speaker Change: Was that the consumer environment that we had in the first quarter will continue for the balance of the year.
Speaker Change: If it gets materially worse, obviously that would have some impact and we would take some actions based on that if it gets better obviously that would be would be good news for us, but we look at it on balance we feel like we're in a fairly stable place right now and we're projecting that moving forward.
Speaker Change: Alright. Thank you for that and then just on price mix I was a little higher than some observers, including us anticipated I assume it's mostly mix, but just curious what your guidance assumes for the rest of the year on this line.
Speaker Change: Sure I mean, most of it was mix for example, our homestyle creations a sub brand is doing very very well right now which is one example of what's helping US there. We also had some favorable.
Speaker Change: Gross to net.
Speaker Change: Retailer returns markdowns things of that nature, which helped the pricing piece. There was no actual list price changes. Obviously there is no intention to do that whatsoever. This was this was probably the high end for the year, we actually had some favorable pricing price mix in the back nine months of last year. So it will be.
Speaker Change: A little bit harder lap. So I think we'll have a little bit of favorability, but not to the extent that we had in Q1.
Speaker Change: Okay. Thanks, so much.
Speaker Change: Our next question is from Peter Benedict with Baird. Please proceed.
Peter Benedict: Hi, guys. Good morning, Thanks for taking the question first of all I was just curious, what's what's kind of most incremental across the.
Speaker Change: Value products, the marketing the channel strategies that you outlined.
Speaker Change: For this year, just kind of relative to what you were thinking.
Speaker Change: Back on the last call, what's what's kind of the most meaningful or impactful change there.
Speaker Change: Hey, Peter Scott, So I think that.
Speaker Change: What we're doing right now is where I think the way to think about it is we're taking everything we've been planning for a very long period of time and accelerating it forward.
Speaker Change: You look at what we're doing from an affordability standpoint, we're moving that even faster forward. It remains from the brand were changing the marketing mix, where we're looking at media and also the targeting and also the creative I think those are the things that we're focused on the most that we're accelerating forward.
Speaker Change: Kind of improve the speed of the business.
Speaker Change: Got it Okay now that makes sense and then maybe could you just talk about what gives you confidence in the future of effectiveness of the media spend you talked about a gourmet referenced the higher Tac obviously.
Speaker Change: Thats in place right now can you maybe frame where that is relative to historical ranges and then <unk>.
Speaker Change: Given some of the new media strategies you have on <unk>.
Speaker Change: On tap.
Speaker Change: What gives you the confidence in their ability to kind of maybe get the cash back to historical levels at some point. Thank you.
Speaker Change: So there are two major things specific to media that I think that a really important one of them is and again. This is work that we started at the end of last year. This is around creative we know that when we modified the creative.
Speaker Change: Just slightly and we focus a little bit differently on the messaging, we expand the opportunity to expand the group of consumers that we can bring into the brand.
Speaker Change: So we know that Thats, a fact, we're working on that creative it's in development and we'll have it out in the next few months. So we feel really good about that piece. The second piece is that we're focusing a little bit more targeted on how we're executing the media, we're actually like basically focusing more and more on the MVP or that Hippo group, where.
Speaker Change: Seeing really good growth from that group really extraordinary growth and that growth not only helps with household penetration. It also helps with buy rate.
Speaker Change: So we've been able to demonstrate that so this is I think the two biggest single pieces. The other thing youre going to start seeing more and more on is as we are being more and more productive with everything we're doing from an E. Com standpoint, and also direct to consumer standpoint, So E com just to be clear, it's like the Walmart Dot com, we're seeing great productivity and using all of those tools.
Speaker Change: We're seeing really fast growth from when we look at overall E Commerce and also direct to consumer were spent for any spend a little bit more into those areas and we're seeing great acceleration and the nice thing about that the buy rate is significantly better even than the mvps.
Speaker Change: Got it alright, thanks, so much good luck.
Peter: Thanks Peter.
Speaker Change: Our next question is from.
Speaker Change: Bill Chappell with <unk> Securities. Please proceed.
Speaker Change: Thanks, Good morning.
Speaker Change: Good morning.
Speaker Change: Just wanted to talk a little bit about kind of your.
Tom: I'll ask Tom.
Tom: To counter market I mean, I know you in the past you've talked about kind of how the.
Tom: The hippos growth has slowed down and you talked today about how kind of the the lower income is all part of the target market.
Tom: How you see the market progressing going forward is it just the overall market has slowed in general or do you think some of your kind of low hanging fruit.
Tom: It has passed the test by them and so it's a little bit tougher to get that kind of 20% plus growth for the next couple of years.
Tom: Yes, there's a lot of time pack in there let me just start with when we looked at the data we see that fresh pet today is outperforming the category by call it plus or minus about 10 points amongst every one of the income groups or age groups. So it speaks to the strength of the fresh that proposition and its long term value.
Tom: We also when we look at the data we don't see any change in consumers' interest or desire to have a pad or two increasingly feed their pets are higher quality pet food. What we're seeing is in this near term as we were really focusing on the uncertainty that consumers are seeing the uncertainty is if you don't know what's going to be right down the road for you.
Tom: Either from a job perspective, where you're going to be living and whatnot. All those things have put a little bit of a pause on the consumer's interest in trading up in their pet food or maybe getting a dog to replace a dog that might have passed away. It's most pronounced amongst the consumers who are most economically insecure we've seen that in the date of the low income part of our franchise is certainly feeling that.
Tom: But it's across it's across income groups and it's across age groups, but over the long haul the data strongly suggest that the consumer desire for Patterson for higher quality pet food has not waned. So we just need to get our way through a tough.
Tom: Tough economic environment for some period of time, we don't know how long it is but we don't see any change in the long term potential based on everything we're seeing today.
Tom: Okay, and then just a follow up.
Speaker Change: You talked a lot about kind of changes are pulsing of advertising, but I know you.
Tom: <unk> been reluctant to ever do any real.
Tom: These promotions or discounting and stuff like that with that comment.
Tom: In the realm of possibilities as we move through the year, if things continue to get worse or are you really just want to focus on on turning up turning down advertising to attract new consumers.
Bill: Hey, Bill so.
Bill: I think Billy mentioned it in his prepared remarks, and I think we really want to reinforce this we've never done any discounting as you know we've never done any discounting we don't do any couponing, we feel like the correct model for this business is basically to stay really focused on the exact strategy that we've had for a very long time now that being said as mentioned we went to modify the creative we want to change the target.
Bill: The other thing that we started touch on and we've been working on for quite a while as this area of affordability, where we wanted to take a handful of very very targeted skus create great opening price points not only on some rules, but also on some bags. In addition, youre seeing some multi packs that create real great value perception. In addition, we want to make sure were available.
Bill: Will at certain retailers that are really value focused alright. So you start thinking about like where we are whether it's walmart whether it's like a costco like right and other opportunities all of those really create a bigger opportunity for us to be seen as more affordable and accessible. So that's the way we're thinking about kind of executing the strat.
Bill: There won't be any couponing, there won't be any discounting, but we want to make sure that we have some really good opening price point products and skus to make sure we bring people into fresh once they are into the into the portfolio. Many of those have actually become mvp's over time. We did this I don't if you remember a couple of years ago, we came out with a product called <unk>.
Bill: Complete nutrition, we came up with a role we sharpened our one pound price point, we're able to do this while continuing to maintain margin growth gross margin growth over time and it worked incredibly well we saw new consumers come into the business, we'll be executing the same type of strategy in the back of this year.
Bill: And we will continue to lean in some media that's an incredibly important part of our growth strategy, which were up 24% in Q1, we will have a similar amount of spend about $40 million in Q2, so thats well over 30% growth in the quarter.
Bill: So we will lean into that versus any kind of trade down.
Speaker Change: Got it thanks, so much.
Tom: Thanks, Tom.
Speaker Change: Our next question is from Brian Holland with D. A Davidson. Please proceed.
Brian Holland: Yes, good morning.
Bill: This is bill.
Brian Holland: As it gets.
Speaker Change: Last response, Scott, maybe got to what I was going to lean into but just curious how that complete nutrition line has performed so it's 23 launch.
Brian Holland: How generally aware our consumers of the value here that fresh pad offers and if not how.
Brian Holland: Much of that is part of the revised media strategy.
Brian Holland: So let me let me take them separately, so on the media piece just to really.
Brian Holland: To be really as simple as about as possible. We're clear about it so on the media piece Theres two pieces one of them is the creative piece and every time, we've entered a new campaign with slightly different messaging, we've been able to unlock a new tranche of consumers. We know we can do that and we've done enough research, where we know that there is another big tranche of consumers that will basically.
Brian Holland: Were you able to track that work is going on as we speak then we're also modifying the media targeting right, we're actually working where we're getting more and more targeted and some of the media a lot of it's very broad, but a lot of it's getting more and more targeted and that is helping us press into some of the e-commerce and direct to consumer pieces too.
Brian Holland: On the affordability piece.
Brian Holland: It's interesting the if you look specifically at complete nutrition and you look at what happened with the one pound role. It wasn't there is still a sizable piece of the business.
Brian Holland: Both kind of in the single digits and total pieces of business, but they really opened up a whole new group of consumers. So like when we put when we did the one pound last time, we did the complete nutrition last time.
Brian Holland: We literally saw pop over the next kind of two quarters of groups of consumers coming back into the business. It worked incredibly well, we'll execute a very very similar strategy over the course of this year. So it won't be incredibly sizeable, but it's enough for people to come in and see it in.
Brian Holland: In the business and we just need to get them started and fresh pet food, that's really what we need to do because once people are in the business. They typically are very very happy with the results and the experience. They also recognize that it's not as expensive as they may be perceived it to be.
Brian Holland: That coupled with value packs, we feel really good that that's going to help significantly during the next it could be 12, 18, 24 36 months whatever is going on from an economic standpoint. So.
Brian Holland: So we like where we're going with that we're going to deploy the same strategy and feel confident around it.
Brian Holland: And then just.
Brian Holland: Forgive me.
Brian Holland: Hopped on the call a bit late so ability touched on this in his prepared remarks, I apologize for being repetitive but.
Brian Holland: Obviously, the media spend in December 2004 didn't have its desired effect mindful.
Brian Holland: Evolving consumer backdrop et cetera.
Brian Holland: You are talking about it.
Brian Holland: Even more obviously theres more targeted media spend within that.
Speaker Change: Just within the last three to six months are there any green shoots.
Brian Holland: 'twenty two.
Brian Holland: Yes.
Brian Holland: It is here.
Brian Holland: Responding to us.
Brian Holland: Yes.
Brian Holland: And I think there.
Speaker Change: Thank you are onto it Brian and that's exactly what we're doing we're finding the places that are most productive and we're starting to migrate dollars into those areas. It doesn't happen overnight, but we are pushing dollars into areas, where we see better and better productivity from the media.
Brian Holland: I think that one of the things that I think we've always prided ourselves on is the amount of analytics that we do around the media around the spending how we keep track of it.
Brian Holland: Where we see the performance, we're continuing to move migrate those dollars and the places we're migrating those dollars to the ROE as is or the CAC. However, you want to look at the numbers are quite strong. We're really I think we're incredibly enthusiastic about that well. We don't know is you can't do a like a complete kind of exit stage left you can't move.
Brian Holland: All of it to one very very quickly. So you just start pushing into it and moving and migrating dollars over time and you see where you can continue to get such great returns.
Brian Holland: But that's the exploration that the team is doing I will say hats off to the marketing team both on the creative piece and the targeting piece. There is plenty of work to do but they're they've done a really nice job identifying the opportunities.
Speaker Change: Our next question is from <unk> Parikh with Oppenheimer <unk> Company. Please proceed.
Speaker Change: Good morning, and thanks for taking my question. So I just I guess I just wanted to go back to what you guys are seeing in the channel. So from an inventory perspective, how would you how would you characterize the health of inventory and then do you see any risk of inventory Destocking as you go forward.
Speaker Change: Yeah.
Speaker Change: So we think the inventory across most of the channels is in good shape. The pet specialty channel, obviously had some issues because of the distributor.
Speaker Change: Challenge that we had in February dragging into March so we saw out of stocks in some portions of the pet specialty channel those have been largely corrected at this point when you get into the broader channels of grocery mass club and whatnot, our shipments to the customers are very strong with very high fill rates so any.
Speaker Change: Issues that you see at retail are really a function of how well that retailer executes. So if that retailer does a really good job of pulling the product through their warehouses and out of the backroom and into the fridge and rotating the stock in the French and they should be in really good shape.
Speaker Change: If they have troubles with either their operations or their labor, then obviously youll see less good than what we see when we look across the board as we see very good conditions in those retailers who are the best operators.
Speaker Change: So in terms of your part of the question about Destocking.
Speaker Change: We did see a little destocking early in the quarter, but by the end of the quarter, we feel like it was fairly well balanced and we don't have.
Speaker Change: In the world of fresh products, there's not a lot of inventory thats capped.
Speaker Change: There's a little bit, but not a huge amount. So we don't expect that there would be any significant effects from destocking, but one never knows but so far we haven't seen anything significant we are shipping very close to consumption. So no destocking issues right now.
Speaker Change: And <unk> you remember the days of $250 per store per week for.
Speaker Change: Within our fridge today, our average is around $1000 a store week. So it's the same day code, we have a more efficient supply chain.
Speaker Change: There should not be really any any changes and we are seeing we are seeing continued where we're hitting records versus prior periods.
Speaker Change: Great and then maybe just my follow up question. If you look at the various channels.
Speaker Change: You were where you saw maybe a bigger slowdown the expected or are you seeing any shifts or maybe more of the value channels in a bigger fashion versus recent quarters.
Speaker Change: Yes, I mean first of all remember pet specialty in the first quarter was particularly soft because of the distributor challenge that we face. So you should start with that it's now getting back on its feet. When you look across retail I think like everyone else the value oriented channels are winning whether that would be club or the mass merchants they seem to be winning the most and that's <unk>.
Speaker Change: Function of the foot traffic that they're generating.
Speaker Change: As opposed to necessarily what we are what the demand that we're creating and being available there with the right products helps us really kind of tackle this affordability opportunity as we mainstream the business right. We get into this early majority of consumers. There is going to be some consumers that are kind of a little bit more occasional when we're at.
Speaker Change: The right channels, where people were value oriented having that as part of our overall solution works really well for the business.
Speaker Change: Great. Thank you I'll pass it along.
Speaker Change: Our next question is from Robert Moscow with TV Cowen. Please proceed.
Robert Moscow: Hi, Thank you for the question.
Speaker Change: I wanted to know Todd.
Speaker Change: What does the contingency plan kind of look like if things do slow a little bit here, let's say growth is at the low end of the range or even a little bit below that.
Speaker Change: Given the long timeline or I think you said.
Speaker Change: 18 to 24.
Speaker Change: <unk>.
Speaker Change: Time carried before.
Speaker Change: Planning new production lines does that mean that all of these production lines that were in play in the plan still have to get executed in 2026, let's say or do you have flexibility to kind of slow those expansions.
Speaker Change: And then and then the next question from there is what does that mean for free cash flow what does it mean for EBITDA margins in our situation.
Speaker Change: Yes, I mean look obviously this is a scale business. So the faster our business is growing it definitely helps from a margin perspective, both from gross margin from a G&A perspective, so that it's always a good thing if we're growing faster than a little bit slower. So that is a little bit of a headwind when things slow down.
Speaker Change: Having said that.
Speaker Change: We don't sit around.
Speaker Change: And just let it happen. So we are addressing these issues as much as we as we possibly can so from a from a from a capital perspective, you heard us.
Speaker Change: We took we took the guidance for the year from 250 down to $225 million. So harsh shifting some things out not dramatic at this point because we're in a wait and see to see how long. This lasts but we absolutely have flexibility to move the capital expenditures to the right and then separately from an ongoing.
Speaker Change: <unk> cost perspective.
We have some we have brought new lines on both in Q4 and a bag line in our kitchen South facility in Q1, and we can monitor and control how many of those lines are staffed so we can reduce the cost as much as humanly possible to make sure. We can continue to have strong gross.
Speaker Change: Margins and as you've heard US say, we still expect modest gross margin expansion for the year, which is which was the same guidance we came coming into the year. So as you look into free cash flow.
Speaker Change: We still feel very good that we'll be able to manage being free cash flow positive in 2006, we think we'll still have great EBITDA margin and dollar expansion as we go into next year.
Speaker Change: And we can again if this thing continues to slow we can't get back over 20% into next year, we will be able to continue to push out capital to the right. We do have now 15 lines up and running that gives us a ton of capacity as we bring new shifts.
Speaker Change: <unk> and our OE is continuing to expand so we have well over $1 $5 billion of capacity that's already sitting in place again, if things slow down we can we can move that capex to the right.
Speaker Change: And that will assist obviously and being free cash flow positive.
Speaker Change: Okay, and then just a follow up on the media spend.
Speaker Change: I'm I was hoping you could just put a finer point on it is media spending dollars going up versus your original plan or is it is it really just the same media dollars plan and you're going to use it in a more targeted fashion.
Speaker Change: Yes. It is it is going up a little bit. So we have we have added some dollars.
Speaker Change: But as Scott said, we're also continuing to not major shifts in our strategy, but we are moving some things to be more targeted moving a little bit more to E com.
Speaker Change: New creative coming out in the second half of the year, but yes, there will be a slight increase in the number of dollars.
Speaker Change: Okay. Thank you.
Speaker Change: Our next question is from Jon Andersen with William Blair. Please proceed.
Hey, good morning, everybody. Thanks for the question.
Speaker Change: Sure.
Speaker Change: I wanted to ask about distribution.
Speaker Change: You've mentioned, it's going to be a kind of a normal kind of steady year in terms of new distribution I noticed that.
Speaker Change: Can you give the store count was up about 5% in the first quarter.
Speaker Change: But your <unk> were up 15, so is that.
Speaker Change: Could you talk a little bit about kind of your expectations for store count cubic feet growth on a full year basis.
Speaker Change: And can you maintain kind of TDP growth running.
Speaker Change: Two or three ex that.
Speaker Change: Kind of the dynamic that's playing out there as you get.
Speaker Change: Significantly more PDP growth and store count growth. Thanks.
Speaker Change: Yeah, I'll start off so I think I'm going to start up and Billy is going to so John.
Speaker Change: We actually had a good quarter from a fridge adds standpoint, we're on track to add another 100000, we think of it as a 100000 cubic feet for the year. So the way we think about it.
Speaker Change: So we're on track to add 100000.
Speaker Change: Cubic feet.
Speaker Change: That's in both some new there's a fair amount of new I mean.
Speaker Change: Every year, we're continuing to be impressed that there is more new out there and really good substantial opportunities around the new.
Speaker Change: But the biggest piece is not only the second but then also we previewed this a cagny, but these kind of like bigger kind of islands, which I think are really important because they demonstrate where everyone's thinking is on where this category is growing and I think it's really really clear for not only retailers, but also consumers. This is a big big piece of the future of the cat.
Speaker Change: Laurie.
Speaker Change: And they are putting more and more fridges and youre going to see we have some islands in different places that we have three fridge units youre going to start seeing bigger and bigger executions around that.
Speaker Change: This year is going to be more in the testing of those and then next year is going to be more rollout around those but.
Speaker Change: I think thats really really encouraging and then as we do that we're actually modifying the portfolio to make sure that we have the right products that are much more kind of appropriate for different channels in those fridges. So.
Speaker Change: So we're really targeting consumers that are a little bit more kind of specific to the channels of their shopping.
Speaker Change: Yes, just.
Speaker Change: I would add one piece to it which is the big step up in Tdp's occurred last fall when Walmart put us in some of the second fridges that they own we took two shelves of the of those fridges and there was a huge step up in <unk>.
Speaker Change: Obviously anytime Walmart does anything it can have a huge impact in the tdp's, where it doesn't materially change the number of stores that were in so in this case, it's Walmart does something you could see another big step up in <unk>, but you are really dependent on that.
Speaker Change: Okay, Thanks, and a follow up.
Speaker Change: Obviously, you've talked a lot more in the last couple of years and even more recently about the focus on the MVP Hippos N.
Speaker Change: N V piece.
Speaker Change: Just curious as you.
Speaker Change: You.
Speaker Change: Those cohorts grow more rapidly than say the total in terms of households.
Speaker Change: Are those is that growth coming from an MVP or a hippo.
Speaker Change: Entering the franchise new or is it is it is more of the more of those ads coming from.
Speaker Change: Now on MVP or non hippo kind of evolving into one by increasing their buy rate and the reason I ask is I'm just trying to get an understanding for the dynamic of how consumer kind of.
Speaker Change: Enters that that cohort and what the implications are perhaps for.
Speaker Change: Your composition of household penetration versus buy rate.
Speaker Change: Contributions to sales growth going forward. Thanks.
Speaker Change: Hey, John So I think it was in.
Speaker Change: I think it was at ICR in 'twenty three we started talking about hippos, and we started kind of moving towards targeting those and that meant not only accretive but also some of the targeting and then also some of the products that were even in the products in the portfolio that we're doing.
Speaker Change: So we're continuing to refine that we tightened up hippos just to MVP. There's just one more on group lower those people represent significant binary right. We've shared it before they represent about 70% of the business $470 a year buy rate for those consumers and to your question.
Speaker Change: We get most of those people are new to the franchise. There are some that migrate that by more and more every year, but the majority of those mvps and hit those are people that are finally, discovering and understanding that they should change their pet's diet to a fresher less processed healthier more natural food.
Speaker Change: They come in I believe it or not they start sometimes into one pound rolls or some of those more affordable products I mentioned earlier and then they migrate into where they're all of a sudden spending more and more and we're seeing great growth there and when we see growth. There we feel really good because not only will it gives us household growth, but it also gives us obviously the bi annual buy rate will move.
Speaker Change: And if I.
Speaker Change: If I take a step back on this we want everybody because overtime lots and lots of consumers are going to move to this but if you can have the core of your business built up people that are very very dedicated to buying you day in and day out and spend a lot of money with you that as a stronger company and a stronger brand and a stronger portfolio of products. The thing I loved also is.
Speaker Change: From an E com standpoint, what we're seeing is even higher buy rate, we're seeing like up into the seven eight and even $1000 kind of a year of buy rate from those consumers. So as we moved more money into those areas. We think that's going to help push the whole overall buy rate.
Speaker Change: We're starting to see that you can see it in the numbers now we'll also be attracting more and more of these hippos and the magic word in this and it's a real great category for the subscription rate when people sign up for subscription whether it's an E com all of the Walmart dot coms or whether it's on a direct to consumer programs, that's really significant for us and those are the people that are.
Speaker Change: Again, we want to build our business and company around.
Speaker Change: Thank you.
Speaker Change: Our next question is from Mike collaborating with Piper Sandler. Please proceed.
Speaker Change: Great.
Speaker Change: Thank you and good morning.
Speaker Change: Yes.
Speaker Change: Kind of Dovetailing off of that.
Speaker Change: The MVP consumer profile is of course, great and that's where you should focus, especially if you could bring those isn't new.
Speaker Change: But if.
Speaker Change: I'm getting the math of it all right then.
Speaker Change: The buy rate on the other.
Speaker Change: 85, I think or so percent of households.
Speaker Change: Sometimes being very low you've touched on how.
Speaker Change: Some of the approaches to just get them started and I ask because it's not completely clear whether somebody.
Speaker Change: First in <unk>.
Speaker Change: <unk> P ready.
Speaker Change: We're ready to go or not but.
Speaker Change: What can you do to get buy right up on that.
Speaker Change: The majority of your consumers it seems like an absolute dollar increase wouldn't have to be too significant to kind of move the needle.
Speaker Change: Sure.
Speaker Change: Is there any insight there you have of Hawaii.
Speaker Change: They do or don't or can't or won't.
Speaker Change: Step up their buy rate is there a way to move the needle there I get that the Mvpds are hugely important book, but how do you think about everybody else.
Speaker Change: Yeah. So so again I would say this focus on the hippos in the Mvps is really really important for now and into the future.
Speaker Change: I think that it is potentially a fool's errand to start trying to move a group of consumers that buy your very episodically during a slightly kind of challenging are uncertain economic times.
Speaker Change: And that's that's where you get pulled into basically the coupon discounting and promotion game and if you look at what's going on in the category.
Speaker Change: It's amazing the amount of discounting with several brands that we interact very very highly with us really really I mean, it's significant it's at some like almost historic levels.
So I don't think we really want to necessarily focus on that game I think once some I think when things kind of cool off and come down.
Speaker Change: Then people will naturally kind of return those kind of episodic users will naturally return to our business, but if we can have 70% or 80% of our business on MVP and hippos.
Speaker Change: That's really I think the best place in the best way to build our strategy.
Speaker Change: No that makes sense that's helpful.
Speaker Change: And just maybe if you could touch on Sam's a little bit more you mentioned you're in the club store there.
Speaker Change: Is that just the test as it is the beginning of more that are set to go how do we think about how that unfolds.
Speaker Change: So you probably heard me over time.
Speaker Change: Over the amount of time, you've known me I think I've said, everyone is coming it's just a question of when.
Speaker Change: And I think this is one more illustration, where look we were able to get into a test. We're excited about it that test is going well. There's other tests that are going well I think over time, you're going to see like almost all retailers in the U S have a bunch of fresh pet fridges.
Speaker Change: And I think not just not just one but multiples and I think that we're again, it's kind of this whole category trend that we've started.
Speaker Change: And pushed and I think that overtime, I think youre going to see us everywhere I can't tell you when but.
Speaker Change: I do I am confident that Theres only one direction that fresh pit has gone.
Speaker Change: Okay. Thanks, so much.
Speaker Change: Yes.
Speaker Change: Our next question is from Steve powers with Deutsche Bank. Please proceed.
Steve Powers: Great. Thanks.
Speaker Change: I actually wanted to drill in a bit.
Speaker Change: And to your DTC expansion, which is something you previewed at Cagny just a couple of questions around that first I guess is your assessment of that subscription service channel what has held up better over the past few months.
Speaker Change: What's the latest on how you see subscription demand interacting with consumption in traditional channels and customers number one.
And then secondly.
Speaker Change: In terms of your own initiatives there.
Speaker Change: Impactful is that likely to be in fiscal 'twenty five is that more of a custom build or have you done the testing and really are are more fully jumping in at this point.
Speaker Change: Well when I like to always think about it is when you start from zero you can have very very very fast growth. The reality is though.
Speaker Change: It's very it's small, but it's really it's incredibly encouraging that we can have I would say, we're not going to get into the exact details, but the CAC that we're having.
Speaker Change: And then the retention that we're seeing so far is really encouraging so that's on the DTC piece I think the bigger opportunity is the stuff that we've been talking about for a few years and it's everything around E com, which is the click and collect piece.
Speaker Change: <unk>.
Speaker Change: Where you can go to any one of our retailers.
Speaker Change: Our retailers you can pick it up you can get it delivered to your home and I think retailers are getting smarter and savvy or around that piece of the business.
Speaker Change: That's a tremendous opportunity and the nice thing is it leverages our fridge network. So in reality, we've got 37000 micro fulfillment centers across the U S that we can get fresh food to someone's home very very quickly.
Speaker Change: 27000 stores 37000 36000 fridges.
Speaker Change: That we can that we can pull from across the U S from an incredibly efficient supply chain and deliver to consumers. So I think that's how we'd like to continue to see that that build out so direct to consumer small with held up very very well performance is really strong and we're seeing a lot of.
Speaker Change: We're seeing a lot we're very encouraged about the results there at this point.
Speaker Change: Okay, Great and then just a real quick follow up on the on your sense comment realizing that it's small I mean.
Speaker Change: Is there anything embedded in the outlook for Sam's.
Speaker Change: Or at least something that scales faster without the incremental.
Speaker Change: And we gave you a range on the outlook and so clearly a Sam's does more and does well that would be towards the high end of the range and if it doesn't do much it would be towards the low end of the range got it. Okay. Thank you very much I appreciate it.
Speaker Change: Our next question is from Camille.
Speaker Change: Carla with Jefferies. Please proceed.
Speaker Change: Hey, everybody good morning, I guess a quick.
Speaker Change: On leverage and deleverage when I see sort of the.
Speaker Change: Our sales outlook coming down by $64 $55 million, but EBITDA coming down obviously far less than that.
Speaker Change: While marketing is continuing to go up can you maybe just talk through some of the pieces in there on how to sort of you are managing.
Speaker Change: Youre managing sort of not to have as much de leverages, what my when my guess.
Speaker Change: Yes, so obviously the guidance before was at least $210 million.
Speaker Change: So it wasn't a specific range.
Speaker Change: Please try to put a plan at the start of the year.
Speaker Change: We are we believe is conservative and we can meet or exceed obviously some things in the marketplace have changed.
Speaker Change: If you take the if you take the mid point of our guidance right now both from a top and bottom line. It assumes about 100 basis points of EBITDA margin expansion. So we're doing the best we possibly can right now to make to ensure we have both gross margin expansion and we have EBITDA margin expansion.
Speaker Change: <unk> and <unk>.
Speaker Change: Commodities again are basically flat for the year, we're not going to get all of the leverage Unfortunately from the labor and overhead fixed cost scale that we envisioned at the beginning of the year, but we are managing that as closely as possible by pulling back on how many lines. We have staffed at any one time.
Speaker Change: So we do have the ability to do that it's against that we'd rather the growth be higher than I would.
Speaker Change: Allow us to leverage that fixed overhead even more.
Speaker Change: But we are being very proactive too.
Speaker Change: To manage how many of our lines are running at one time and the good news right. Now is the plants are running exceptionally well we're thrilled with the performance at all three of our locations, especially analysts now which is really starting to perform very very nicely. So long way to go but they've shown some significant improvement is.
Speaker Change: We've got into the startup of 2025, so we are going to manage the cost as closely as we can.
Speaker Change: As we talked about earlier, we will be spending more as a percentage of sales on media that will be more than offset by some G&A leverage will control that as tightly as we can.
Speaker Change: But we feel good about the updated guidance that we've given.
Speaker Change: Okay got it and then a question on competition.
Speaker Change: Maybe with two sub questions on I guess, the first is <unk>.
Speaker Change: As the category slows.
Speaker Change: Are you worried about increased activity and things like that but then also.
Speaker Change: What we can see what we can see in terms of what we can see.
Speaker Change: How are you feeling about.
Speaker Change: There is in the fresh frozen world like a farmer stock, but then also what we what we can't.
Speaker Change: Just with the DTC just refer dogs. These sorts of things what are you seeing in terms of the evolution there.
Speaker Change: So there.
Speaker Change: It is interesting because for quite a while I'd say on and off last year, we kept looking for promotional activity, we kept like watching it watching it and then there were some periods of it but there wasn't a ton and I think what's happened is a lot of the category competitors in the category.
Speaker Change: Has started to kind of look around and go Oh Wow, we got to do something here and look they pull the levers that they have and I think that there is more discounting than we have historically seen especially on a few brands that we do interact with it's just the reality.
Speaker Change: The good news, though is that typically doesn't stay keep ongoing forever.
Speaker Change: There is an endpoint to it there's 11, often an endpoint and I think we're there you can have much more on.
Speaker Change: Some of these brands.
Speaker Change: Without destroying the brand and also the margins, but so I think we're kind of that's where that is.
Speaker Change: The stuff that we necessarily don't quite see call it.
Speaker Change: Other direct to consumer competitors.
Speaker Change: I think there's a couple of things.
Speaker Change: One of them is it is this is early.
Speaker Change: Sure. The numbers. This is early on in the development of fresh and frozen food. We're still what's sold at retail were still 96% I think we have that in the deck.
Speaker Change: So we are still the vast majority we have good momentum on the pieces that we don't see on the piece that we don't see we think there is pretty darn good growth going on and I think that just encourages us to believe that consumers are interested in moving in this direction and we think we really have tremendous solutions for those consumers depending on what kind of.
Speaker Change: Products, they want and how they want to buy it and I think thats kind of underlies some of the some of what we're talking about earlier with this move into E. Comm. This moving direct to consumer those are going to be important pieces.
How we build the business out overtime, and then also getting into some new retailers.
Speaker Change: On new and different retailers, and having even more dominant kind of visual and display and some of the retailers were already in.
Speaker Change: And just back to the promotional question I mean, Fortunately. This is this is a category historically.
Speaker Change: It does not have a high level of promotional activity.
Speaker Change: It's increased edits for sure people or there is more activity the discounting.
Speaker Change: When they do promote has gone up a bit.
Speaker Change: The brands that are doing it the most it's really not working for them to continue to.
Speaker Change: Performed very very poorly and if you look at the overall data the incrementals for the category when they promote is very very low.
Speaker Change: So it's not working for our competitors.
Speaker Change: As we spoke about earlier, we have no intention tension of doing it ourselves. We don't think it's a fantastic. It's a very reactive strategy that does not work terribly wellness category and so we don't think it's having much of an impact on our business.
Speaker Change: One other point to this which is it's not the main part of our business, but they're in that small bucket of people who use us very infrequently.
Speaker Change: Number of those folks are switching between us and can dog food as sort of I'll make sure topper on an occasional bait on very occasional basis and as the tariffs rolled through the can dog food business. The cost of Cantor food is going to go up pretty considerably.
Speaker Change: So we don't know when those prices will go up and what the consumer specific reaction will be but it certainly is up a small tailwind against the sort of the tail of our of our volume base.
Speaker Change: Got it thank you.
Speaker Change: Our last question is from Tom Palmer with Citigroup. Please proceed.
Speaker Change: Good morning, and thanks for the questions.
Speaker Change: Okay I appreciate the economic environment has changed pretty improperly here.
Speaker Change: In the slide deck, though there was a reiteration of the sales and margin targets for 2027.
Speaker Change: I know a lot can still change I guess I was I was wondering how contingent those margin targets are maintaining that sales level or if there are kind of other level levers.
Speaker Change: Maybe hit those margin targets, even if sales do not kind of reaccelerate to the level that might be implied by those targets. Thank you.
Speaker Change: Yes look as I said earlier, obviously this is a scale business and when we have faster growth than not it definitely is a tailwind and makes hitting those margin targets easier having said that.
Speaker Change: We do have some wiggle room in those targets from a margin perspective that we set out at Cagny back in February.
Speaker Change: We have a lot of tools, whether it's new technology or the plant continues to operate extremely efficiently that we feel very good about the gross margin target and we will manage EBIT margins appropriately we will hire.
Speaker Change: If the growth is not there we will manage how many people we hire in our business and we will slow that down a little bit. So we do have some tools.
Speaker Change: To manage some of the margin and cost that we have out there, but we still we still feel very good about the margins that we set out and then over the next several quarters will come back and say look we feel good about the $1 $8 billion, we're not going to come off of it. This soon obviously, if we continue to be in this environment for an extended period of time.
Speaker Change: <unk> will have to address the one eight.
Speaker Change: In 2027, right now, we're not going to come off of that but we do have levers from a margin perspective to allow us to hit those targets, even without the $1 eight and I don't want people to lose sight of the incredibly strong operating performance, we have which gives us.
Speaker Change: Cushing that Todd is talking about if we continue to have incredibly strong operating performance and if demand is slower it might give us an opportunity to rollout new technologies more quickly, which should help even further with the operating margin performance. So we feel like the.
Speaker Change: If there's softness on the top line there could be strength on the operating margin or the gross margin and deliver against the margin targets regardless of what the net sales are obviously, we have to see how it goes but we're feeling pretty bullish about the performance so far.
Speaker Change: Great. Thank you I'll leave it at that thanks again.
Speaker Change: Thank you.
Speaker Change: We have reached the end of our question and answer session I would like to turn the conference back over to management for closing remarks.
Speaker Change: Great. Thank you everyone for your attention and your interest I will leave you with this thought is from Nora ephron when your children or teenagers. It's important to have a dog. So there's somewhere in the house is happy to see you to which I would add reward that dog with fresh Pat in your dog will forget about the teenagers too. Thank you very much.
Speaker Change: Thank you. This does conclude today's conference you may disconnect at this time and thank you for your participation.
Speaker Change: Oh.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].