Q2 2025 Freshpet Inc Earnings Call
Greetings, and welcome to the Freshpet second quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Rachel Olsh, Vice President of Investor Relations for Freshpet. Thank you. You may begin.
Good morning and welcome to Freshpet's second quarter 2025 earnings call and webcast. On today's call are Billy Cyr, Chief Executive Officer, and Todd Cunfer, Chief Financial Officer. Nikki Bainy, Chief Operating Officer, 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 prospects and plans for growth, efficiencies of our operations, timing and impact of new technology, capital spending, adequacy of capacity, expectations to be free cash flow positive in 2026, and our outlook for 2025 and the long term. They involve risks and uncertainties that could cause actual results to differ materially from any forward-looking statements made today, including those associated with these statements and those discussed in our earnings press release and in our most recent filings with the SEC, including our 2024 annual report on Form 10-K, which are all available on our website. Please note that on today's call, management...
Or refer to certain non-GAAP financial measures such as EBITDA and adjusted EVAA, 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 today's press release for how management defines the non-GAAP measures, why management believes such non-GAAP measures are useful, and a reconciliation of the non-GAAP financial measures to the most comparable GAAP measures.
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 discussed on this call. That presentation can be.
The company's investor website management commentary will not specifically walk through the presentation on the call. Rather, it is a summary of the results and guidance. They will discuss that today. I'd like to turn the call over to Billy Cyr, Chief Executive Officer.
Thank you, Rachel, and good morning, everyone. The message I would like you to take away from today's call is that, against a backdrop of subdued dog food category demand, Freshpet's growth continues to significantly outperform the category. We are driving the operational improvements and capital efficiencies necessary to deliver our long-term margin and free cash flow targets, even if the current economic constraints persist.
The dog food category has faced a sizable headwind for the first time in years.
We've seen economic uncertainty, resulting in consumers hesitating to trade up their dog food, deferring well visits to the vet, declining medical treatments for their pets, and deferring getting a new dog or replacing a recently deceased dog. Return-to-office mandates and the high cost of housing have not helped either. This has resulted in declining growth rates for most leading pet food brands, including the leading DTC brands. The effect has been most pronounced amongst dogs as opposed to cats, as cats are typically lower maintenance and lower cost, making them a relatively attractive pet to have in times like these. The current environment is challenging our ability to grow at the same rates as the past several years. To adapt to that, we've modified our plans and put in place what we believe are the necessary drivers to re-accelerate our net sales growth, which I'll review in a few minutes. And we've seen some early encouraging signs.
We're also increasing the intensity of our focus on the things that we can control so that, no matter how long it takes for the economic climate to improve, we can still deliver strong financial results. We've made tremendous progress in our operations and are quite bullish about our long-term prospects for the potential, margins, profits, and cash generation of the business. Our focus on operating improvements has driven a healthy improvement in our adjusted gross margin. But more importantly, those efforts in combination with new technology.
We have developed a strategy that will enable us to significantly reduce our capex while still expanding our manufacturing capacity to meet our long-term demand. As a result, today we are lowering our capex estimates for 2025 and 2026 by a total of at least $100 million.
While the operational progress we've made has touched virtually every aspect of our operations, some of the most significant achievements are.
1, and this has become our most profitable plan.
This happens sooner than we get planned and is the result of strong leadership at that site. And a testament to the vision and thoughtfulness that went into the design of that kitchen. It is evident that we've been able to convert our operating experience into continual improvements that will ideally put us, well, ahead of any potential competitor in our Mastery of fresh pet food manufacturing.
Furthermore, this is expected to provide more than 50% of our production volume within the next few years. Its productivity advantages will have a greater and greater impact on the company's total profits over time.
Second, the development of new production technologies. We have previously indicated that we've created a new way to make our bag products and expect the startup of our first new production scale line with that new technology in Q4 of this year. If it works as we expect it to, we believe it will deliver a higher quality product at a lower cost through increased yields and throughput. It has the potential to significantly narrow the gap between the margin.
Since we make on our roles and on our bags, and this technology could potentially be the basis for new bag lines going forward.
Additionally, we've recently developed a light version of the same technology that can deliver many, but not all, of the same benefits and could be retrofitted to our existing lines at relatively low cost with minimal disruption.
We plan to test the light version on 1 of our existing bag lines in the first half of 2026, and it could be reapplied to several of our other bag Lines by the end of 2027, if successful.
The pilot test runs at this technology indicate that it will work and would enable us to deliver more capacity per line from our already installed production base.
And number 3, the ability to reduce capital spending by a combined total of at least $100 million in 2025 and 2026. We've made exceptional progress at improving our throughputs, yields, and operating effectiveness. This is enabling us to get more output from the existing lines and staffing, leading to lower quality costs and improving margins. In combination with our new technologies, we now believe that we can defer at least $100 million in capacity from 2025 to 2026 and still meet the demand we expect to generate for the foreseeable future. This reduction in CapEx will have a direct impact on our cash flow and make the business much less capital intensive for the next few years. To be clear, some of this reduction is the result of slowing demand we've seen so far this year, but the remainder of...
The reduction is due to the improved operating efficiencies and new technologies we expect to implement over the next two years.
Maximum competition.
With a strong footing, we are in a very good position to drive the growth of fresh pads. As you know, this has been a particularly challenging year on the top line—something that has typically not been an issue for us.
Our media model has driven strong and predictable growth for a very long time. The performance we saw earlier this year caused many to question it or if we had saturated our TAM.
Our data suggests that neither is true.
We are growing across all channels, income groups, and generations. The sales growth is just not as robust as we would like it to be today.
We believe our growth rate versus a year ago has now stabilized, and we are encouraged by some green shoots. However, given that we have not seen a greater increase in our year-over-year net sales growth, we believe it's prudent to adjust our net sales guidance for the year.
Our updated guidance assumes the macroeconomic environment stays relatively the same and that we execute our plans, focusing on areas that are in our control. The three key areas we are most concentrated on are:
First, in marketing, we've updated our advertising on air that better explains the difference that fresh fruit can make and planned a launch. Another media campaign is scheduled for later this month that we believe will help drive greater household penetration.
We have also shifted marketing dollars to other channels like digital, social, and connected TV, where we've been underdeveloped previously, and we can be more targeted with MVPs.
Second distribution expansion.
We are working on greater visibility and value channels such as club and mass, expanding our small DTC business called Freshpet Custom Meals, as well as several other opportunities.
Digital orders, which we previously referred to as e-commerce, continue to have outsized growth and were up 40% in the second quarter. Digital now accounts for 13% of our sales.
Our revised topline guidance also incorporates a much greater level of certainty on our expansion within the club channel. Specifically, as of last week, we've expanded our test in a leading club retailer and are now in 125 stores. We are optimistic that we will be in more stores later this year.
Other customers have also committed to adding second fridges and have expressed interest in testing some of the island fridges. We previously shared sometime later this year or early next year.
Third value-focused products. We are launching a new Complete Nutrition bag product and rolling out new multipacks and bundles of rolls and bags, both online and in-store later this year. These will be available in select retailers.
Now, I'd like to briefly provide some highlights from the second quarter.
Second quarter net sales were $264.7 million, up 12.5% year-over-year, primarily driven by volume growth. This was slightly lower than our expectations, as shipment growth, like consumption growth, was impacted by a small shift in orders from the end of June to early July.
Adjusted gross margin in the second quarter was 46.9%, compared to 45.9% in the prior year period.
Adjusted EBITDA for the second quarter was $444.4 million, up approximately $9 million or 26% year-over-year.
From a category perspective, we continue to be the number one dog food brand in the U.S. food market, with a 95% market share within the gently cooked, fresh-frozen, branded food dog segment in Nielsen brick-and-mortar customers defined as X, AOC plus pet.
We compete in the $54 billion U.S. pet food category for Nielsen Omni Channel data for the 52 weeks ended 6/28/25, and we have only a 3.6% market share within the $37 billion U.S. dog food and treat segment.
From a retail standpoint, our products are now in 29,141 stores, 24% of which have multiple fridges in the U.S. We expect that percentage to continue to grow as we focus on adding second and third fridges in the highest velocity stores.
We ended the second quarter with 37,985 fridges, or more than 2 million cubic feet of retail space.
With an average of 20.8 SKUs in distribution.
Our percent ATV in grocery, where the dog food market leader was 79% at quarter end, and an xaoc, only 68%.
Discussions with retail customers continue to be very positive as they recognize the growth in the category has been, and we believe will continue to be, led by fresh pet food.
Household penetration as of June 29th was 14.4 million households, up 11% year-over-year, and total buy rate was $110, representing a 6% increase year-over-year. Our heaviest users, whom we refer to as MVPs, are growing even faster, totaling 2.2 million of those households, which is up 18% year-over-year.
12 months with an average buy rate of 501.
Turning to capacity.
As I mentioned earlier, we are expanding capacity to keep up with demand and are able to push out capital expenditures because of the progress we've made operationally. Our operating efficiencies, particularly in NS, are well ahead of our glide path, and that frees up significant capacity with no incremental capital.
We currently have 15 lines across our manufacturing footprint, with an additional bag line expected to commence production in the fourth quarter this year. As I said earlier, this new bag line will be the first time we are testing our new technology at scale, not just at a pilot plant level. But we are very encouraged by its potential.
Now, turning to our Outlook.
For fiscal year 2025, we now expect net sales growth of 13% to 16% year-over-year.
We are reiterating our adjusted EBITDA guidance of $190 million to $210 million and now expect capital expenditures of approximately $175 million. Todd will walk through more details of our 2025 guidance in a few minutes.
In regard to our long-term outlook, today we are removing the $1.8 billion net sales target and the related 20 million household target in fiscal year 2027.
The sizeable reduction in the category growth rate and new pet additions have made it increasingly difficult to maintain our previously projected rate of growth, so we believe it is prudent to remove those targets to be clear. We do expect to grow at a rate well in excess of the category, thus increasing our market share. We have a large and growing TAM and believe it will provide many years of sustained growth.
Additionally, our strong operating performance has given us increased confidence in our ability to deliver our 408% adjusted gross margin and 22% adjusted EBIT on March and targets in 2027, even without the benefits of the added scale, as long as our sales volume growth remains at least in the teens.
As a reminder, the new production technology was excluded from the long-term margin targets, which allows even more upside to margins if it works.
In summary, we believe we have an incredible opportunity to improve the lives of pets everywhere through the power of fresh natural food, and we've not lost sight of that mission. We are taking actions to adapt to the current macro environment, and our scale manages make us better positioned now than ever to address those challenges. We have a healthy balance sheet, solid operating performance, ample capacity, and we are a stronger organization than we were a few years ago. We've always been resilient and nimble.
And our scale today gives us the flexibility to lean into certain areas such as marketing, new technology, and innovation to develop solutions to consumer uncertainty today, while also expanding our competitive moat.
Now, let me turn it over to Todd to walk through the details of the second quarter results and our updated guidance. Todd.
Thank you, Billy, and good morning everyone. The second quarter results demonstrated strong operational effectiveness and profitability improvement. However, we're slightly below our expectations on sales. Now, I'll give you some more color on our financials and updated guidance.
Second quarter net sales were $264.7 million, up 12.5% year-over-year. Volume contributed 10.8% growth, and we had a positive price mix of 1.7%, primarily driven by mix.
We saw broad-based consumption growth across channels for Nielsen-measured dollars. We saw 13% growth in X AOC.
13% and total U.S. pet retail, Plus.
12% in the U.S. food market and 6% growth in pet specialty.
Consumption growth in the quarter was approximately 14%. However, we saw a slight shift in the timing of orders from the end of June to early July that impacted net sales growth by about a point.
Second quarter adjusted gross margin was 46.9% compared to 45.9% in the prior year period. The 100 basis point increase was driven by lower input costs as a result of higher yields and leverage from our NS Chicken Processing facility.
And reduced quality costs.
partially offset by reduced leverage on plan expenses.
Second quarter adjusted SG&A was 30.1% of net sales compared to 31.0% in the prior year period.
This decrease was primarily due to lower variable compensation, partially offset by increased media as a percentage of net sales.
We spent 15% of net sales on media in the quarter, up from 12.2% of net sales in the prior year period.
Second quarter adjusted EBITDA was $44.4 million, compared to $35.1 million in the prior year period. This improvement was primarily driven by higher gross profit, partially offset by higher adjusted SG&A expenses.
Capital spending for the second quarter was $33.4 million, while operating cash flow was $33.9 million.
And we had cash on hand of $243.7 million at the end of the quarter.
We are confident in our ability to be free cash flow positive in 2026.
And in 10 to utilize our balance sheet to support our growth going forward.
Now, turning to guidance for 2025.
As Billy said earlier, we now expect net sales growth of 13% to 16% compared to our previous guidance of 15% to 18% growth year-over-year.
We are assuming the macro environment and consumer uncertainty stays relatively the same, and have adapted our strategy to re-accelerate growth.
In terms of cadence, we expect this sequential increase in net sales per quarter.
We invested more heavily in media in the second quarter to drive household penetration growth in the second half.
We will be launching a new marketing campaign later this month.
Adding more value-oriented offerings in the fall, we expect to increase distribution throughout the remainder of the year, including our expanded test in the club channel.
We continue to expect adjusted EBITDA in the range of $190 million to $210 million.
For Cadence, we expected just Deepa to be back, half weighted with sequential adjustments. EBA dollar and margin improvement throughout the rest of the year.
Media, as a percent of sales, is expected to be greater than in 2024. However, we are monitoring the spend closely and will pull back if we are not seeing the returns.
We still anticipate modest adjusted gross margin expansion year-over-year, driven by operational improvements.
And do not anticipate any material inflation or pricing actions.
In regards to tariffs, we are currently seeing a small impact on vegetables sourced from Europe and spare parts, and mitigating them where we can.
Capital expenditures are now projected to be approximately $175 million this year, compared to our guidance last quarter of approximately $225 million and our original estimate of $250 million.
Some impact from tariffs, particularly on the cost of steel, for new construction and new equipment is included in the updated capex projection.
The majority of our CapEx spend is focused on the installation of new capacity to support demand in the out years. However, we are seeing greater capital efficiencies that are allowing us to reduce our spend both this year and next year.
We anticipate 2026 capex will be the same or less than what we are spending in fiscal year 2025, which gives us even more confidence in our ability to be free cash flow positive in 2026.
Based on today's guidance for 2025, it is evident that our ability to hit our 2027 net sales target is unlikely. Therefore, we believe it's prudent to formally remove the $1.8 billion target.
We believe we will have industry-leading growth. If we are able to maintain net sales growth in the teens on an annualized basis, we are confident in our ability to manage costs, operate effectively, and still achieve our long-term margin targets of 48% gross margin and 22% adjusted EBITDA margin.
In summary, while this year is not where we planned from a top-line perspective, we are aggressively managing costs and are very pleased with our performance on the bottom line.
By focusing on the areas of the business we can control, we are seeing operational efficiencies continuing to drive margin expansion and reduce capital requirements as we further build capacity.
We are also further strengthening our competitive position via new, more efficient production technologies, expanded distribution, and operating expertise that is delivering greater consumer experiences at lower operating costs.
We are building a stronger, more profitable business and believe we have a significant runway for growth.
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.
Thank you.
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To allow for as many questions as possible, we ask that you each keep to one question and one follow-up. Thank you.
Our first question comes from the line of Peter Benedict with Beard. Please proceed with your question.
Oh, hey guys. Uh, good morning, thanks for taking the question. Um, so on curious on the path to to 22% um, in in 2027, it sounds like from a top line perspective, you kind of preempted that question, which is I guess if the 13 to 16% that you're going to do this year in Topline growth, if you do that, that's still sufficient to support 22%. Um, my question is, um, are there? Uh, can you help us with maybe the sgna buckets, Todd? Like what, what underlying what underlies that 22% within your Opex? Um and is there any kind of a timing step up maybe with the new technologies that would make um the path there. Uh, maybe have your own 27 versus 26, just conceptually not looking for specific guidance, but uh, that's my question. Thank you.
Sure as we've talked about as long as we're in kind of the mid teens growth over the next couple of years. We feel very good about the 48% in the 22 um the 48% look. We're going to be close to 47 this year. Um so we probably have a little bit you know some of these Technologies kick in the way we think they're going to kick in over the next 2 years. There's likely some upsides to that 48% number 1. Number 2 is
That sales growth in the teams will allow us to get significant GNA leverage. So we feel terrific about that. Uh, we probably have a little bit more to go on Logistics and then media, uh, will probably kind of stick with sales over the next couple of years. We'll, we'll see how it plays out. There could be a little upside in margin on on media, but it's probably going to likely grow with sales, but I think the big upsides is leverage both um up in gross margin and leveraging GNA is how we feel. We can get to the 22% with confidence. Hey Peter, I just want to amplify 2 points in their 1 is the operating performance. We're having is so strong. It's what is driving that confidence in the 48%. The second piece is is we said in the prepared remarks, the tech benefits from the new production, technology are not factored into that Target. And that's the basis for uh, Todd's confidence in our ability to exceed the 48%. If those Technologies work out,
Right, that's helpful. Thanks guys.
Thank you. Our next question.
Yeah, thanks. Good morning. So, just to clarify, the expectation is that...
You know, you've removed the net sales target. Um, but
You're you're sticking with the the gross margin and IBA margin targets predicated on as it sounds like I guess low to mid team growth. So is that generally where you're, you know, directionally guiding the market towards or how you expect to be judged through this this cycle through 27?
Yeah, I mean, not specifically. Um, what what we're saying is to hit the 4, hit the 22%, EBA margin probably requires us to be in that in that range that you just described if we're, if we would slow down to 10% or lower. Getting that 22%, uh, would be, would be very challenging just because of the lack of DNA leverage. So look, are we confident that we can be in that kind of range over the next few years? Uh, look, we we think we can be in double digit growth. The question is, uh, just with the uncertainty right now or are we going to be closer to 10 or are we going to be closer to 20? Uh, so we're not giving specific guidance over the next few years. We'll probably come back at some point in time and do that, but the assumption is, if we
Can hit that low to mid-teens number. The 22% is very achievable.
Okay, thanks. And then maybe just kind of asking about the dynamics between household penetration and buy rate. Um, you know,
I think the implied, uh, media per household looks not quite as bad as feared, but the buy rate did slow a bit.
So it it seems like you are acknowledging some some pressures with with trying to track new households. And, and that seems to be weighing on the, you know, the trend in household penetration, but I'll buy rates
Nutrition was due, was slowing at the rate. It has so...
So maybe just comment on what exactly you're seeing there. I mean, is this a byproduct of the more vulnerable consumer within your household penetration? You know, that maybe is switching with elevated promotion in the category. What are you seeing that's weighing on the buy rate right now?
So first of all, the Buy rate is right now. For the reason you cited is running above a, the growth rate is a little bit of what our long-term sustaining growth rate is on the Buy rate in part, because of the, the growth in household penetration is not what it used to be. So mathematically, it works out that way. Um, clearly there is an impact of consumers, not being willing to trade up as much as they have in the past and that that implies not just moving from their dry, dog food to a product like fresh pet. But also implies moving within our platform from more of the, you know, lower cost items in our lineup to the higher cost items. Now we say that and I just want to be clear. There's a lot of different consumers and a lot of different Behavior out there. 1 of our fastest growing parts of our lineup right now is our Homestyle Creations which is our most expensive product in our lineup. And so there are some really nice green shoots that we're seeing when you find consumers who are looking to make a change or trade up in their products.
It's just how many of them are out there.
Thank you. Our next question comes from the line of Bill Chappell with True Securities. Please proceed with your question.
Thanks, good morning.
Good morning. Hey, just a, you know, a question or a thought on these household penetration now is 11%
and I don't know if the current environment changes, your thought of where that can be in terms of
I understand you saying consumers aren't trading up like they used to be, but is there a point of maybe we're starting to tap out the number of consumers that...
I will buy the high-end or super high-end, super premium dog food. So I'm just trying to understand, does that change your thoughts? Do you think there's anything else going on with the slowdown? You know, household penetration seems to be kind of the key metric, and I just didn't know if it changed your ceiling outlook for it.
Okay. Well, this is Nikki um our household penetration. We've done a lot of work recently on what we believe our time, our total addressable Market can be for the future and within that we've also looked at where our brand positioning is and how strong we believe our proposition is to grow into that time. So when we take a step back and look at it, we've got around 14, 14 and a half million house.
At the moment, we still believe we've got tremendous Runway to around a mid-30s total addressable Market.
Um, goal. And then within that, we've done a lot of work on these MVPs, these most valuable pet parents that we're really going after. And we're still very early, I would say, in our journey to grabbing those consumers that are very interested in our brands. So we've got some goals out there whereby we believe over time we can go from just over 2 million MVPs to around 7 million MVPs that have a very high level of interest in a fresh, less processed, healthy, strong, premium brand proposition.
I think the other point maybe to build on is that our MVPs are actually already in the category. So, the other piece of work we've also looked at is that within those MVPs, we've actually got 90% that are already in the category today. By going after more MVPs, we become a little bit less dependent on that category growth rate for the future.
Thanks. No, I appreciate the call and then to have 1 question on the variable cam uh commentary. Was it just a lower recruit uh this quarter? And and I'm assuming for the uh, remainder of the year or was there a reversal? Just trying to understand, you know, did that have a where things get numbers is kind of your
Internal expectations. Yeah, no, no, no reversal. Uh, we're actually, you know, we had a super strong year last year and obviously had a very high incentive comp pay out. We are trending lower this year, so it's just a year-over-year. Delta. No reversal.
Perfect, thanks so much.
Thanks.
Thank you. Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.
I was hoping you could just go, maybe a little bit deeper on back, half plans to drive demand and and and what will be different from what we've seen year to date. I guess. Um, you know within that maybe drill a little bit into how big a role. Um, the push on value will play. Uh, and then any any also any thoughts around competition? Both indirect, and direct, I think um, Blue Buffalo is of coming to launches top of mind, for many investors, to the extent that that's impacted, your plans, that would be helpful to understand as well.
Yeah, thanks Steve. Um uh, I'll start and then Nikki will fill in some um more thoughts. But uh first of all is we think about the back half the big drivers are going to be the drivers that we've historically leaned on pretty heavily, which is advertising. But with a different message, we actually have a different message on air today and we have a new campaign coming and they can give you a little bit more color on what that's all about. The second is expanded distribution. You heard in the prepared remarks, we've expanded, uh, significantly the club store tests that we've been describing in the past. Uh we're now in 125 of those stores and we feel good about what's coming behind that. So that's in. That's factored into our expectations for the balance of the year. The third part is the product Innovation that we described last quarter, the Complete Nutrition product that is uh, a bag version of the role we launched a year ago. That is not yet in any of our numbers. It's going to show up in roughly September October, so it's not going to have a big impact this year and we don't expect you to have a big
Impact overall, it's really a driver of household penetration. It's an easier way to enter the franchise and that's scheduled to roll out in September October, but it's not a big contributor to the actual net sales this year. The bigger pieces will be the advertising and the retail availability expansions. I don't know, Nikki, you want to add to that? Great. Hi, Steve. Um, the, the bit of color I would bring is that we've just got testing results back for the new creative campaign, and we feel really good about where that's coming in. At, at the moment, you will see us start to tell the next layer of the fresh pet story. Um, much more going after our health credentials and we think we're right on Trend at the moment. It definitely with less processed food, being a key Focus for humans. And we feel that this is really a rich space for us especially in kind of more of a clean label environment too. So I think you'll see that coming through the back end of the year. The other part I would say on retail disability is retail engagement is extremely strong. We're already ahead of
of our targets.
In terms of both new stores, new fridges, and also multiples, when we look at this stage in the year with commitments that are strong for the back end of the year, and then in terms of product innovation, Billy obviously mentioned the new value entry-level bag, but we also will push heavier into multi-pack and also what we call virtual bundles, which will offer that little bit of a discount and a saving, especially for those heavier consumers.
Okay, that's very helpful and then Nikki just, you know, on the um the second half media efforts is the focus there on continued MVP expansion or is the goal to widen the net, go broader and build the funnel for future MVP development.
What's the balance there? Yeah.
Yeah, that's that's a great question Steve. So
We will at a very early stage, still, with the brand development and a big head room for brand awareness, so you will absolutely see us drive that brand awareness to the maximum number of households. So that will be really going after General dog population in the main. But what you will see coming is move from fresh pet, is you will see an, a heavier upwey in areas. Like social digital and other channels that will allow us more of a targeted approach to our story. So you're going to see a balance coming through. Um, we've tested all of our new creative, both with MVPs but also General dog population and we feel good about where the results are coming out.
All right, appreciate it. Thanks to you all.
Thank you. Our next question comes from line of Robert, Moscow, with TD. Callum, please proceed with your question.
And I think a lot of your consumers already use it in conjunction with kibble so I maybe I'm in too much in the weeds but but how are you uh thinking about that balance?
Great. Um, no. I think it's a really fair question as it stands. So, look, I think that we've got a lot of MVPs that will absolutely be looking for mixing as their key behavior. So whether that is kibble and fresh food or whether that's with wet food, mixing is very much part of the behavior. We want to make sure that there's a strong understanding of the health benefits that really come from feeding fresh, whether you choose to feed it as a mixer or whether you choose to feed it as a main meal. And I think for us, we've got.
big Runway and Headroom, to be able to, to, to grow in both mixer behavior and also main meal behavior, and really drive also that buy rate and new household penetration. So it it, you'll see you've seen a little bit coming through online but you'll see some different creative and more um and and creative that will appeal to those different MVP subsets as we go through the back half of the year.
Okay, thanks. Appreciate it.
Thank you. Our next question comes from the line of Michael Li with Piper Sandler. Please proceed with your question.
Thank you. Good morning.
Morning.
Just wanted to come back to the competitive Dynamics and maybe just understand how you think about the the impact of something like, blue, Buffalo's, push. They've been clear. They plan to do a good bit of spending themselves. It it is it your expectation that that that can drive faster category growth that that that it would sort of you know maybe leave you unchanged. Could it drive even better momentum for you do you think more competition you know splits the same Pi so it's a more conservative. Just how do you think about? You know, what that impact on your outlook is and how how investors should be thinking about it?
Uh yeah Michael. Um we we obviously uh think that this is the first. It's a proof point that this is a very attractive. High growth long-term potential category. We're attracting lots of people not just the Blue Buffalo entry but there are others who have decided to enter this space in various ways. And it's just validation that this is the future of pet food. The second piece is history will show that uh over time category creators like us, if you execute, well, 10 10 to end up with the lion share of the category, uh,
That they've created. And uh, but what also happens is when, you know, well, entrenched competitors, uh, in the space decide that they want to enter this segment and they do. So with a lot of investment, it tends to drive the total category size and everybody who's in that space wins. Um, so we frankly think just as we've said, previously related to the farmer's dog, we think, when the farmer's dog advertises it helps us. It helps create this perception that there's a better way to feed your pet, then just feeding with kibble and can. And we think that to the extent that General Mills spends a lot of time and money. Uh, telling people that there's, you know, a better way to feed your pet, that's good. If they decide to use it as a Topper message, that doesn't hurt. It helps create awareness for the category creates validation for the category in the end though the category or the segment that we're in the fresh segment we'll get bigger. And then at the end of the day you know we feel very good about the competitive position that we're in. We have, you know, significant scale both at retail as well. As in operations, we're able to deliver a broad.
Product lineup. We have a very well-entrenched consumer base, so we feel very good about the position we're in. And frankly, we're looking forward to the benefit of the increased awareness in the category.
That that's really helpful and we've touched on Advertising a decent amount already, but 1 more follow up on that is, can you just maybe give a sense of what Insight drove the change? Or you know, what was the starting point of of is looking for an evolution in the message? Or or you know, how did you decide to
To make a bit of a pivot there.
Yeah, I I'll take this 1 Billy. So
in terms of what, we've
Found is we've done a terrific job.
A big opportunity from certainly a number of our MVPs asking questions around. Hey, you are really healthy. Um, the ingredients that you're using are Absolutely Fresh, they have some really strong health benefits. Why are you not talking more really about these areas? So, for us, it's not an either, or it really is sort of continuing, if you prioritize your dog as a favored memory, your family. It's building out from that message, and it's layering in those new health credentials. And this is why we we feel good really about that new advertising Direction, it will still have that fresh pet tone that fresh pet humor. Um, that many have come to love and expect from us, but it's really going to start to bring in why we think we're special why we think we're unique, um, and why we think we are the best way to to feed your dog.
Okay, very helpful, thanks.
Thank you. Our next question comes from the line of Camel Garala with Jeffrey. Please proceed with your question.
And then on the expansion into Club, you know, I guess you went from test to 125. Is that incorporated in your guidance, to go from 145 or 125 to full National? Or is it the sort of thing that it sort of keeps building from here and more of it, you know, happens in '26?
Uh, KL. Yeah, the pet specialy distributor issue has been worked out. Um, it created a lot of disruption in q1. Um, but we pretty much got it all cleaned up by the end of q1. There's still some Pockets where they're not as effective as the as we had been previously. But there's other places where they're very, very strong. So on balance, we feel pretty good about what our situation is. In the pet specialty distribution Channel and didn't have any material impact on the quarter in terms of the club piece. Obviously, we're very encouraged by the progress there and the expansion to the 125 stores that we're in our guidance, for the balance of the Year assumes. Uh, what we believe is the plan, uh, obviously we won't communicate what our customers specific plan is, but what we believe the plan is, is embedded in what the, in the guidance that we provided. But I would say that the results that we've seen so far in the stores that we're in and recognize that, we've only been in, we were in the first store, back since April. This the remainder of the stores is only been the last 2 or so weeks. So it's hard to get any long-term data on those stores. But the first store,
Has done so. Well, it's made us very bullish and I frankly think our customers pretty bullish as well. So that's that's embedded into our thinking. In the guidance, we've provided
Got it. Um, I guess that's why it, um, the guidance also was for sequential improvement. Um, on IBA, I guess you've lowered your topline sort of a few times over the course of the year, but that has stayed the same. Is it?
Was that always sort of going to be the plan that the sufficiency was here and you just weren't sure if it was going to come through or at what rate it would come through that if if sales was higher there'd be more leverage or um was there an extra push? Did you find something new that helped maintain that ebita level even though the sales figure will be a little bit lower?
Look, we are optimistic, uh, from a margin perspective this year. But the plants just are just over kind of delivering even our optimistic expectations as as we mentioned in the call. And this is now gone from being our least profitable, uh, facility to our most profitable facility in the first half. We never dreamed that would happen so quickly. So, we're we're thrilled about the progress there. The quality costs, uh, 2% in the quarter are much lower than, you know, even our most optimistic assumptions. So the things are just we're operating really, really? Well, it's a shame. We actually we don't have, we don't have more volume going through the plants right now, because we be delivering even more Superior gross margin and ibaad dollars.
But the operations, um, is the really positive side of the story this year. And once we get the top line, I'm a little bit more, you'll see more drop to the bottom line.
Got it. Thank you.
Thank you.
Thank you. Our next question comes from the line of repair with Oppenheimer and Company. Please proceed with your question.
Good morning, and thanks for taking my question. I guess just going back to the consumer, I’m just curious what you're seeing within different income brackets. As you look at your portfolio, are you seeing any shifts within your portfolio?
Hyper. Um, in terms of what we're seeing really across income groups, I think, as Billy sort of highlighted first up, we're still growing across all income groups and we're all growing across all demographics, as well and all channels within that. So I think we're feeling good overall that the fresh prep proposition is working for all in terms of where we are seeing, um, higher returns certainly within MVPs. It's really coming through that higher income bracket. So we are a little bit disproportionate with MVPs into higher income, um, overall, which is again, probably, what you would expect to see in the current consumer environment too, and then when we sort of, take a little bit of a, a step back. And we think about, um, where things are going a bit more in the future, I think, as we start to increase the growth rate and then beps coming through, I do.
I think that we will start to see a little bit more of a trend into higher income. Um, I believe that we will see an expansion, in particular within Millennials and Gen X, which is already where we are strong. And then within the portfolio, as Billy mentioned, Homestyle Creations is performing extraordinarily well at the moment. We've also launched new innovation earlier this year in the Homestyle Creations chicken bites, which has far exceeded our expectations. So we see, um, this part of the portfolio being a big opportunity for future innovation, um, over the coming years as well.
Thank you. Our next question comes from the line of Peter Galba with Bank of America. Please proceed with your question.
Hey guys. Good morning. Thanks for taking the questions. Um, Todd, maybe just just to kind of clean up 1. Uh, I think you said it was about a point of shipment that that shifted from Q2 to Q3. So we should see that point obviously come back or or outpace scanner, um, I guess in the upcoming quarter and then the second 1, just to clarify the capex, the 100 million, that's kind of lowered over the next couple of years. I, I know you said a part of it was lower Demand versus the efficiency, but maybe you could just split out kind of how much of it is. Is the demand needs versus what you've actually done. You know, better.
Yeah, so, in your first part Peter um, you know, total consumption was actually uh with measured and unmeasured was about 14% for the quarter, and obviously with 12 and a half percent, net sales growth. Um, we did ship behind consumption, we solved that shift that 3 to 4 million dollars go as of June into July. So we had a very, we had, we had a nice July performance from a net sales growth. So we felt very confident that that shift did occur. We we've seen it, um, come through in the July results so that that's very positive. Um, you know, the quarter, probably, you know, just the the POS tends, it's stable, which is great, but it's, it's not increasing and we're a little frustrated, it's it's not popping up a little bit sooner. So net sales.
Growth is probably going to be Sim, similar slightly above kind of what we just put up for for Q2. Um, regarding your capex question. It's it's difficult to say exactly. Um, but how much of that 100 million was growth versus, uh, you know, the efficiency, the, the big push out the, the big savings, um, in that 100 million over the next couple of years, is the delay in, in Phase 3 of NS, which is a big tick, I Big Ticket item. Um, so obviously some of it is the slowdown in growth. But when you look about the, when you look about, uh, look at the oee efficiencies that we've made over the last year, uh, they are substantial. When you look at, uh, the ability in the new technology, both the new line that we're having in Bethlehem, which we're very confident about for, plus the light version that we mentioned that we can put on several lines.
And we've run tests on that. We're very confident that that will add increments incremental, capacity, and there's other things that we can do within our 4 Walls, that will increase capacity. There's different, you know, other uh areas that we're focused on which are going to drive incremental cap incremental capacity with very little to no Capital um expenditures. So when you're looking we're looking right now with the capacity that we
We have installed not staff but install, we have about 1.5 billion dollars worth of uh capacity. So that gives us tremendous confidence uh, that we can lower the amount of capex over the next couple of years. And again, the the big push is is Phase 3 and then it's, we can delay again, some of that's clearly The Slowdown of the business but we would not be able to delay that Capital if we didn't have the efficiency gains that we're seeing. Right now, as I mentioned earlier, and as is just made a huge turnaround and the Improvement in yields yields the Improvement in oee that team is just working, really, really well together. And that gives us confidence to push Capital out. So that's that's the Big Driver. Yeah, Peter. I just want to amplify, you know. It's a it's a little bit wonky, but we are really fixated on yields and throughputs in our manufacturing operations and both the new technologies that we're working on and the existing, you know, OE efforts, the overall equipment effect.
Effectiveness, uh, efforts are focused on driving those and the results that we've seen have been really remarkable. I'd say we're about a year ahead where we thought we'd be on the oee and the Technologies are icing on the cake on top of that. And those things are just, it's, it's basically free money for us is, you know, you get more production per hour of Labor and you get more, uh, output per dollar of ingredients you put in at the beginning. It's pretty darn remarkable return for us. And so, we're going to continue to invest in those kinds of programs, and it reduces the capital.
At the end of the day, and that's a really big win for us.
Okay, very helpful. Thanks guys.
Thank you. Our next question comes from the line of Jim solar Solera with Steven zinc. Please proceed with your question.
Billy, it's morning. Thanks for taking our question.
Kind of the overall economic malaise, you're seeing a little bit of drag on, you know, return from return to office and housing costs increasing. And, you know, those seem like trends that are probably a little bit more durable than, you know, the economic waxing and waning. So just any comments on do we see maybe a peak number of dogs per household? Postco? You have any sense for for kind of where that might progress moving forward and and maybe to see overall number of of dogs per household is kind of at a slower growth trajectory and just how you think about, you know, that presents any kind of persistent challenges. Yeah. Moving forward. As you can imagine Jim, we we spent a lot of time, looking at this. There's been a theory out there that there was a huge, pull forward on dog, adoptions in the pandemic, and we're just eating back into that, pull forward. And there's a legitimacy to that argument, but I'd also say that, I think we're now 5 years in to the to that period. And I think we're pretty much at the end of that tail. Um, there's another Dynamic and you
Your reference to the housing, uh, piece in the return to office. Uh, it's all that has a generational element to it as well. 1 of the things that we are seeing in the data is you naturally expect that the high income Baby Boomers who are now, you know, later in life, have a dog that might pass away and they're less likely to replace that dog because they want to spend time with the grandkids. They want to go on a cruise. They are whatever and dogs, uh, you know, limit their abilities to do that and that's the natural pattern. It's happened forever.
But what's often, what's usually been there to counteract that and replace? It is, the younger Generations would be in that household formation stage where they would be getting a pet.
And that's the part. That's not happening, it's not happening at the rate that it should, because people are now worried, I believe the dog at home. My landlord won't let me get a dog, uh, I can't afford a house. So those pieces are there and they're present, and they're impacting, the ability of the younger generations to get the pet, uh, that they would get. It's not a huge part of our volume, uh, Dynamic. But it is a piece of the puzzle, but those markets, as you point out, are very cyclical, and that over time, you'd expect that those things were would return to a more normalized growth rate because the reality is the desire to get a dog, doesn't change, people still have the desire to get it, and they will get it at the, get the dog at some point. It just may not be this year or next year. Um, our focus is on the things that we can control and what we can control is we have the most compelling advertising message, which is what Nikki described getting, really focused on the benefits of fresh. Getting the right, availability the right product, assortment right, Innovation and delivering the products at the right cost. And as long as we do that, we feel very good that
As Todd said, we'll outperform the category. We will outperform the category by quite a bit, and this will become a very big segment of the market. We just can't change the housing market in the return to work policies. Those things will take take time and it will naturally occur. But when those things uh return to a more normalized path will be there and we'll be winning.
Right? And then maybe just point out that thread a little bit more. You also mentioned some of those Dynamics maybe favor cat ownership versus dog ownership in some scenarios. I know
cat food is much smaller piece of your business. Is there any potential we could see on the Innovation side? Maybe some more pivot towards expanding the cat offering and you can just offer any thoughts. I don't know if that would require any substantial change to equipment or how you run the lines or anything you need to do some thoughts or be helpful.
Yeah. I mean, Jim, we, we are obviously are very interested in the cat food market, because, as you point out, it is growing. It's right now, while the dog food market is down in the kind of low single digits. The, the cat food market is up in mid single digits, and, and it's for the reasons that we cited and you reiterated in your comment. Um, we do have a small cat food business, we'd like to have a bigger cat food business, it's going to take some time. Cats, have a very different way of eating, the dogs, do dogs, you know, have big Jaws, they like, to chew cats, you know, tend to eat with their tongue and they lap food. And so it has very different requirements. They're very different requirements for the product, uh, on a cat food. And you also have to have, you know, fridges in the right places and you have the right messaging, we're working on it, we have an interest in that area, but it's not something that's going to happen this year.
I appreciate all the plus back. Thank you.
Thank you. Our next question comes from the line of Mark tenday with Wells Fargo. Please proceed with your question.
Literally focused on the us-based, dog, food businesses, our a number 1 priority first because it's where we have the greatest strengths and secondly, because we think the opportunity there is still enormous. We're still a very small share, very, very large pie. It doesn't mean that we aren't looking at and continuing to do some development work in cat food. As I just mentioned, our business in Canada is 1 of those that we've been looking at our UK business. We're trying to figure out exactly what the right investment profile is for each of those areas, but we are us-based dog, food business and that's where you're going to see the bulk of our investment going forward. In terms of managing the Top Line, um, you know, we're going to invest when we get good returns and when we don't get great returns, we won't invest. Uh, we're in a very good position from a margins perspective, from a cash generation perspective from a capacity perspective organizational capability. So we have lots of choices frankly a lot more choices than we had a few years ago. We just need to be judicious about it. We don't want to chase growth at all costs but we are a growth company. We need to deliver growth and so
We're going to do that.
I would say the opportunity, the opportunity in the digital world is enormous. We're growing, you know, very nicely around 40%. It's only about 13% of our net sales today, for the category, it's probably around the mid-30s and I'll let Nikki talk about some of the things. Some of the things we're doing, and the team machine team that she is building. But there's an enormous opportunity on the digital side.
Thanks, Todd. I think that that's 1 of the if I had to say, 3, Focus areas that, that, that I would have, as I start to look at kind of where our biggest growth opportunities are, um, Ecom in particular, and then building out digital from a marketing standpoint. Is I think very significant overall for us with 35% of the pet category going through online. We have an incredibly low share in this space. Um, and it's something that we are looking at where our partnership partnership is. Um, and then also looking at how we can leverage, we've got 28,000 fridge Network, which are like micro fulfillment centers, really across the US.
Um, and we're seeing some very good returns with last mile delivery Partners like instacart and others, as well as a very strong growth with our click and collect business. So expect to see more from us in this space, as well as we start to go through next year.
Thank you, ladies and gentlemen. That concludes our time for questions. I'll turn the floor back to Mr. For any final comments.
Great. Thank you, everyone, and thank you for your interest. I want to end with a thought for you. Uh, this is a quote, is from an unknown source. Quote is, if your dog is fat, you're not getting enough exercise to, which I would add a fresh pet meal. Will get any dog off the couch and give them the energy to help you work off unwanted pounds. Thank you very much for your interest.
Thank you. This concludes.
Time. Thank you for your participation.