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spk05: Your 2020 earnings call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Jeff Sonick, and public investigations with ICR may begin.
spk04: Thank you, good afternoon, and welcome to Fresh Pets' fourth quarter 2021 earnings call and webcast. On today's call are Billy Cyr, Chief Executive Officer, and Heather Pomerantz, Chief Financial Officer. Scott Morris, 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 federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to the company's annual report on Form 10-K with the SEC and the company's press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. 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 today's press release on how management defines such non-GAAP measures, a reconciliation of the non-GAAP financial measures to 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 discussed on this call. The presentation can be found on the company's investor website. Management's commentary will not specifically walk through the presentation on the call, but rather it's a summary of the results and guidance they will discuss today. Now I'd like to turn the call over to Billy Sear, Chief Executive Officer.
spk06: Thank you, Jeff, and good afternoon, everyone. I'm speaking with you from Bethlehem, Pennsylvania, the home of the Fresh Pet Kitchens, and Scott and Heather are in our offices in Secaucus, New Jersey. We will do our best to not trip over each other on the call, and as always, please excuse any barking in the background and any other technical issues we might encounter. It is hard to believe that one year ago, we gathered with many of you at NASDAQ in New York City to outline our five-year strategic plan and what a year it was. I'm so proud of our team's resilience through these trying times. Fortunately, Fresh Pet was able to navigate the shifting environment while still making significant progress against our long-term strategic goals. In fact, the last year, despite its numerous challenges, has seen an acceleration of our business progress towards our 2025 goals. As such, we're going to update those long-term goals to both reflect the fast start we had in 2020 and also to include the impact of some of our most recent learnings. But first, I want to go back to where I started our Investor Day presentation one year ago. In that presentation, I asserted that Fresh Pet had the potential to join the pantheon of iconic brands that changed the world, brands that changed things we do every day and reflected significant changes in society's values and priorities. Brands that leverage technology to make the previously impossible possible or more broadly available. Brands like Nike, Starbucks, Gatorade, Netflix, and Apple. That may have seemed like a lofty ambition then, and to be clear, it remains a very lofty ambition today. But Fresh Pet is on that path and accelerating. Fresh Pet is changing the way people feed their pets. That change reflects the fundamental shift in how society views both pets and food. Our pets are no longer creatures who sleep in dog houses and backyards. They are the favorite child who sleeps in our beds. And our food needs to be fresh and natural, not dehydrated and preserved. Those fundamental changes in society's values and priorities are here to stay. And Fresh Pet will lead the transition to fresh and natural food for our pets. Like those other iconic brands that changed the world, Fresh Pet is growing quickly from our infancy through our juvenile and prepubescent years towards the teenage years and then to adulthood. In many ways, Fresh Pet is like an 11-year-old boy who wears size 15 sneakers. He's growing really fast, and everyone expects him to be big. But along with that explosive growth, there can be some awkwardness. Our challenge is to do everything we can to achieve our enormous growth potential while insulating ourselves from some of the bumps along the way. In pursuit of that goal, I think it is worthwhile to highlight a few of the critical achievements we had last year that demonstrate both our capability and the foundation that we are building to achieve even greater goals. Number one, we accelerated our growth for the fourth consecutive year. posting 30% net sales growth for full year 2020 and ended the year with 38% consumption growth in Q4. Number two, we increased our adjusted EBITDA growth rate for the third consecutive year, growing adjusted EBITDA by 61%. Third, we increased household penetration by 24%, reaching almost 4 million users for the first time and increased the buying rate by 7% at the same time. Number four, Despite the retail challenges presented by COVID, we added 1,146 net new stores and, more importantly, installed double fridges in another 1,640 stores and upgraded 795 stores. Five, we doubled our installed production capacity and broke ground on a project that will result in a tripling of our capacity by the end of next year. Those capacity additions included completing the construction and startup of Kitchens 2.0, adding more than $200 million in new capacity with significant increases in automation, and breaking ground on Kitchens 3.0 in Ennis, Texas. We also opened Kitchen South in conjunction with a long-term partner. And sixth, we increased our organization headcount from 450 to just under 600, including the hiring and onboarding of three important new leaders, Heather, our CFO, Tembi Macaba, our SVP of HR, and Ricardo Moreno, our new VP of manufacturing. In each case, we were able to attract first-rate talent because of the power of the Fresh Pet proposition and the opportunity to change the way people feed their pets. We got all this done while sheltering in place, working remotely, and devoting significant energy to protecting the safety of our team. I'm incredibly proud of the number of people who stepped up and played critical leadership roles for our company when the situation required it. They demonstrated the qualities that should give all of us confidence that we can overcome almost any obstacle and achieve great things. Like that rapidly growing teenager I mentioned earlier, there were some awkward moments too. We struggle to keep up with demand and end the year with nearly empty fridges in many stores. That means that we are spending the first quarter of 2021 digging out of a trade inventory hole we dug rather than putting our foot on the gas to grow faster. The good news is that we are making great progress against that. Since January 1st, our manufacturing output has grown, and it is now averaging 26% more per day than during Q4 2021.
spk03: and it is accelerating.
spk06: Other than the week of winter storm or LENA, our production has outpaced consumption each week since January 1st, enabling us to steadily refill the trade inventory hole. It will take until mid to late April to refill the deficit, but our capability is growing quickly, and we are confident we have built sustainable capabilities that can support the near-term and long-term goals we have set for ourselves. To help manage consumer expectations around the empty fridges, Scott, as the co-founder and COO, has been posting letters to our consumers on social media, explaining the reasons for the empty fridges and outlining our efforts to refill them. The support we have gotten from consumers has been largely positive, not only for the efforts we are undertaking, but also for the transparency with which we are updating them, and also the value we have been placing on employee safety in the face of COVID that has resulted in some of the out of stocks. He even told people that we are hiring, but we are only hiring people who are willing to do the work. They would be paid and treated well, including stock grants and the same benefits he has. He provided them with a link to our hiring website. Consumers loved it, particularly the part about how we treat our employees. Consumers who have seen the social media posts are even more attracted to Fresh Pet than ever before because they realize we share their values. And this experience also highlights how our team moves quickly and innovatively to solve our most pressing challenges. The improvement in our supply position that began in January is due to exceptional work by our HR team at filling vacancies and recruiting incremental staffing to backfill behind employees who are out for testing or quarantine related to COVID. As we previously discussed, you will see some of the cost of this added labor in our adjusted gross margin early in 2021, but we believe that it is necessary to provide our consumers and customers with the pet food they need. Since we gave you a preview of our 2020 results earlier this year when we presented at the ICR conference, I will leave it to Heather to provide the final details on Q4 and the year. I will instead focus my comments on where we're going in 2021 and our longer-term goals. We've taken some time to analyze your 2020 results and all the consumer data we gathered during the year. In total, it presented a very encouraging picture of the long-term opportunity for Fresh Pet. When we met one year ago, we shared our plan to convert 5 million more households to Fresh Pet by the end of 2025, getting to 8 million households in total. As ambitious as that sounded a year ago, we are well ahead of schedule. In fact, we're almost one year ahead of the pace we needed to deliver 8 million households. What's more, we did that despite pulling back on our advertising investment, spending only about 10% of sales instead of our target of 12%, and significant out of stocks that made it hard for consumers to find our products at times. If we simply continue to grow household penetration at the rate we have for the past two years, or 24%, for the next four years, we would exceed about $50 per consumer and invested in media at our traditional 11% to 12%.
spk03: 12% of net sales rate, we believe we would also greatly exceed our 8 million household goal.
spk06: This and other analyses proved to us that we could achieve a far higher share of the greater than 20 million household total addressable market, or TAM, that we'd outlined and do it at a faster clip. Further, while we have not rerun the study to determine if the TAM has grown, we believe it is highly likely that the TAM is larger today than it was when we ran the study more than a year ago. The number of millennials and Gen Z who have entered the household formation stage of life and acquired a dog is growing quickly, and they are our best prospects for future fresh pet users. We saw that powerful dynamic play out in 2020. We also shared some compelling buying rate cohort data at the January ICR conference that demonstrated how our underlying buying rate grows over multiple years and ultimately reaches more than four times the year one purchase rate. That data was like the Rosetta Stone for us, unlocking an understanding of our long-term potential in a way that we had not been able to do before. The combination of that household penetration growth and buying rate data convinced us that the market demand for Fresh Pet over a foreseeable timeframe was much bigger and could be realized much faster than our initial 2025 goals suggested. The only limiter to our ability to achieve that opportunity would be our ability to build capacity fast enough to satisfy demand. Given that, we spent much of the year working on ways to accelerate our capacity expansion. We did the following. First, we proved that we could construct and start up Kitchens 2.0 successfully. even under the severe limitations imposed by COVID. Second, Kitchens 2.0 also proved that we could create and operate higher throughput lines with more automation that drive better margins. That demonstration of our technical capability is an important proof point for us, and the higher capacity of those lines is very encouraging. Third, we started up operations with a long-term partner at KitchenSouth. initially installing one of our lines in a dedicated facility that they operate and ultimately expanding that to a two-shift operation capable of producing about $50 million per year. We have since expanded that relationship by committing to install a second line. By the end of 2021, we will have $100 million of capacity operating at that partner and have proven the strength and durability of that partnership and are ready to expand it further to enable more rapid capacity expansion. Fourth, We broke ground on our biggest project yet, and it's phase one. We built and trained an entirely new team capable of designing that facility in conjunction with our kitchens experts in Bethlehem and some long-term engineering partners and are on track to open that facility next year, initially bringing on at least $400 million in capacity and the ability to add a second phase that could add at least $500 million more. Fifth, we installed and are operating a smaller scale line that supports meaningful product innovation, such as home sale creation meals. And sixth, we significantly advanced some new manufacturing technology that has the potential to produce more fresh pet and less space, potentially lowering our future capital costs and increasing the capacity of some of our existing facilities. To be clear, we are not ready to deploy that technology yet. but we are working to qualify it for NS Phase 2 and for a future project at Kitchen South that I will discuss in a minute. Even with all that capacity installed or under construction, we think we will need even more to satisfy the demand for Fresh Pet. We think the long-term opportunity for Fresh Pet is well north of $2 billion and that we will achieve more than our original goal of $1 billion in 2025. So... Today, we are announcing that we are raising our long-term goal from $1 billion in net sales in 2025 to $1.25 billion in 2025 and simultaneously increasing our household penetration target from 8 million households to at least 11 million households by 2025. Due to the rapid increase in new buyers we are anticipating, we are holding the anticipated buying rate at about $162 per household per year. We are also holding our adjusted EBITDA margin target at 25%, planning on investing the incremental G&A savings from added scale and incremental capability for growth, including international staffing and more R&D, plus some modest margin dilution from having increased production through our partner at KitchenSouth. Our updated long-term plan would deliver a CAGR through 2025 of 31% in net sales, 23% in household penetration, and 7% in buying rate, all in line with our 2020 actual performance, which we achieved with less marketing investment, significant out of stocks, and broad-scale disruptions at retail. Basically, what we are saying is that we think that we have the tools and capability to repeat the performance we had in 2020 for the next four years. To deliver that, we will need more capacity sooner, so we are taking the following actions to accomplish that. First, accelerating existing projects. These include starting up our second line of Kitchen South in Q3 of this year, rather than Q4. And secondly, pulling forward the startup of our Ennis facility by one quarter, targeting to open in Q2 of 2022 instead of . Leveraging the capabilities of our partner to increase capacity faster.
spk03: Our partner has a deep engineering bench and has proven to be an effective partner over the past year.
spk06: So we are developing plans to add the third line at Kitchen South that will enable some new product innovation and add significant capacity. Additionally, we've initiated discussions with them about adding another building with the capability to produce another $300 million of product and are targeting to have that ready by the beginning of 2023. ...of the production capacity of the NS production lines to reflect the learnings we are getting in Kitchens 2.0 and some further upsizing of the equipment. Both phases of the NS project will... ...with some selective increases in the capacity of some pieces of equipment... In total, this will allow us to increase the anticipated capacity of the first three lines in NS Phase 1 from $300 million that we had previously outlined to $400 million, and the four lines in Phase 2 from $400 million to $500 million. In total, we are building the capacity to deliver almost $2 billion in net sales by 2025, with some of it coming online sooner than previously planned to meet the accelerated near-term growth rate. To accomplish this goal, while being mindful of balance sheet leverage, we may seek to raise equity as part of our financing plans. We filed a preliminary prospective supplement today regarding a potential equity raise. The goal of this raise is to ensure that, along with our recent credit facility amendment, which increases our available debt to $350 million, our balance sheet does not become our limiter. We are mindful of the total amount of capacity we are planning So our plan does not call for us committing to the second phase of Ennis until early 2023. That phase is planned to deliver $500 million of capacity at a cost of about $200 million. Finally, let me turn my comments to 2021. In line with the long-term plan and the incremental manufacturing capacity we have available to us, our plan for 2021 calls for another increase in our growth rate. going from 2020's 30% growth to 35% growth in 2021, which results in net sales guidance of greater than $430 million. The growth rate will be a bit backloaded due to the delay in our advertising investment in Q1 and the time we need to rebuild trade inventories. But once those are in place, we will be investing heavily to drive growth. with U.S. advertising returning to 12% of net sales for the year and includes slightly more of the U.S. media in the back half versus the first half. This cadence is unusual for us, but it is necessary with the trade inventory hole we are trying to fill first. That spending pattern will also create significant momentum for the business at the end of the year, and that is in part why we are pulling the Ennis project forward and adding a third line at Kitchen South. That will ensure that we have adequate capacity as we enter 2022. We believe that many of our leading customers will be matching that growth and investment with incremental stores and second fridges, both later this year and early in 2022. However, both we and our customers will delay some new fridge installations until we can guarantee that we can supply them reliably. Thus, our near-term store additions will be reduced, but the longer-term store additions and upgrades will be very robust. In total, we expect to add greater than 1,000 net new stores, upgrade greater than 500 stores, and add second or third fridges in greater than 550 stores this year and significantly more next year. We believe the incremental advertising investment and the modest overhang from new capacity will cause the adjusted EBITDA margin to dip temporarily this year before resuming its upward trend in 2022. Underpinning that margin acceleration are two primary drivers, continued improvement in G&A, which we believe will improve by approximately 220 basis points in 2021, and a resurgence in adjusted gross margin as we work through 2021. We believe we will end the fourth quarter of 2021 at a rate higher than we achieved for full year 2020. We have a solid portfolio of new products we are launching this year. We are adding a beef version to our wildly successful small dog product, launching our flagship fresh from the kitchen product in the UK, and launching a test of a plant-based product in limited distribution in the United States. In total, I believe we have a compelling plan for 2021, and are very well positioned to continue accelerating the growth of Fresh Pet. Our team has demonstrated incredible capability during some of the most challenging circumstances. We are inspired by our mission to change the way people nourish their pets and greatly appreciate all the support we have gotten from consumers, customers, and shareholders while we manage our way through those challenging circumstances. Equally important, we appreciate the support of our team, many of whom worked long hours with short staffing or remotely to deliver for our consumers. In particular, I cannot say enough good things about the leaders within our team who took on the responsibility for keeping our team safe. They inspired confidence, demonstrated supreme professionalism, and navigated uncertain waters with the vision, determination, and flexibility needed to get us through the storm we all faced. All of us owe them a debt of gratitude. Thank you. Now, let me turn it over to Heather to provide more detail on our 2020 results and our guidance for 2021.
spk00: Thank you, Billy, and good afternoon, everyone. As we disclosed previously, net sales for Q4 of 2020 were $84.5 million, up 29% versus a year ago. Actual Nielsen megachannel consumption was up 38%, so we drew down trade inventory again in Q4. Our final results were also constrained by a large snowstorm in mid-December that cost us a few days of production and shipping with very few days left in the year to catch up. As a result, we believe that trade inventories were $15 million below where we would expect them to be under normal circumstances at the end of the quarter. As Billy indicated, we began refilling those in January and expect to have largely refilled the trade inventory by the end of April. One of the most exciting and encouraging aspects of our growth in Q4 was the continued resurgence of the pet specialty channel. Behind some smart moves by our team and our customers and some overall tailwinds for that channel, our Nielsen Big Box pet specialty consumption was up 42% in Q4, leading all channels. And it was still accelerating at the end of the quarter. In Q1 of 2021 to date, it is up greater than 55%, despite some significant out of stock. We are encouraged by that progress and bullish on their prospects for 2021. Final net sales for 2020 were $318.8 million, up 30% versus a year ago, our fourth consecutive year of accelerating growth. This is a major accomplishment for our organization, and we intend to extend this momentum into 2021 by posting another increase in our growth rate. We think of this as walking before you run and running before you sprint. Each year, we increase our capability to drive incremental demand and also build incremental supply. Adjusted EBITDA for Q4 was $12.9 million, down 2% versus the year ago. Recall, we had fourth quarter media this year, first time, and that was one of the contributors to the flat adjusted EBITDA. Media investment in the quarter was approximately $5 million versus approximately $2 million in the year-ago quarter. The other major challenge was gross margin. Due to significant losses in production caused by short staffing related to COVID testing and quarantine and higher beef prices in the quarter, our adjusted gross margin was 45.8%, in line with expectations that we set at ICR. Adjusted gross margin for the year came in at 48.3%, also in line with the expectations we set at ICR. we will begin to see some of the benefits of the higher speed, more automated production of our Kitchens 2.0 facility towards the end of 2021, as I will outline in a few minutes. We continue to deliver G&A improvements in the quarter, with 130 basis points of adjusted SG&A reductions after excluding media investments in the quarter. For the year, we delivered 220 basis points of improvement, 2020 also represents a broader accomplishment against our long-term plans. Looking back at the introduction of our Feed the Growth plan in 2016, we committed to deliver 700 basis points of adjusted SG&A, excluding media, improvement by 2020. As our results show, we exceeded that, delivering 780 basis points over the four-year period. This execution demonstrates that our 2025 plan to deliver 1,000 basis points of SG&A savings excluding media is very achievable. We know how to do it and have the discipline to execute against it. And there is still lots of room for leverage in our current cost structure. Our final adjusted EBITDA for 2020 was $46.9 million, up 61% versus a year ago. This is in line with the guidance we provided in May and slightly ahead of the updated guidance we shared at ICR. Our net cash flow from operations was $8.1 million in Q4, and for the year, we produced $21.2 million. Turning to the revised long-term goals, Billy outlined the increase in the net sales goal to $1.25 billion in 2025 and the rationale for it. So I won't go into that here other than to say that that target is based on our assessment of the U.S.-based dog food opportunity. We remain very committed to developing and nurturing a meaningful cat food business and expanding our international footprint, but have not assumed disproportionate growth in either area in our new goal. In our 2025 plan, we are holding the adjusted EBITDA margin target at the 25% we previously committed because we believe that by the time we get there, we will be investing in a European organization and incremental R&D to support a broader business platform. We see significant growth opportunities in both areas and want the flexibility to invest organizational resources to deliver those opportunities. We also plan to increase capacity by leveraging the technical team and resources of our partner at Kitchen South. We see this as a critical enabler of growth. However, this will have a margin implication in the near term. The CapEx plan supporting our growth ambition is outlined in the investor deck we published today. The key projects it includes are, one, we are pulling forward the startup of Ennis, and that will cost an incremental $20 million. It will start one quarter earlier in Q2 of 2022. Two, we are adding on-site chicken processing to the Ennis project to improve both the quality and cost of our primary ingredients. We will build and own the building, but it will be equipped and operated by a third-party chicken processor, delivering fresh chicken to our facility without any extra transportation costs and within hours of processing. Fresher chicken will deliver higher quality at lower cost for us. Third, the kitchen self-expansion project will come in two phases. In the first phase, we will enhance the plans we had for one additional line and build out that space to include a total of two additional lines. These lines will add net sales capacity of approximately 150 million. In the second phase, we are adding another 300 million of net sales capacity in a relationship similar to the relationship we have in the first phase, i.e., they build their own building and we own the equipment. they will operate the building with a dedicated team. We estimate that project to cost approximately $100 million and be ready to produce in 2023. Taking this updated framework around capacity and the capital expenditures that will support it, I want to impress upon you that we are focused on driving positive free cash flow over the long term. Our business has been generating positive operating cash flow for the last several years as we've achieved scale in the business. Importantly, we are also on the cusp of generating free cash flow, excluding the incremental capacity investments we've laid out today. However, given the amazing growth opportunity that we are presented with, we will be more heavily investing in the next two years, and as a result, we expect our free cash flow generation will be temporarily constrained until we reach 2023. At that point, we see free cash flow becoming positive and then building from there as we move out towards our 2025 milestone of reaching 11 million households. Turning to our guidance for 2021, we plan to accelerate our growth again this year. With significant amounts of new capacity now online, we intend to increase our advertising investment to a more normalized approximately 12% of net sales. up from approximately 10% in 2020 to drive accelerated growth. We expect to deliver more than $430 million in net sales in 2021, up 35% versus a year ago. The growth will be strongest in quarters one, three, and four as we refill the trade inventory hole in Q1 and we get the full benefit of the added capacity and incremental marketing investment in the back half of the year. Q2 is up against some strong comps where we refilled the trade inventory hole last year and our delayed start to marketing this year will push more of the growth to the back half of the year. We will continue to make investments in our international business to support the momentum we have generated there behind the advertising we invested in last year. Those businesses, Canada and the UK, are now growing very quickly but off a very small base. That growth has stimulated strong interest from our customers in expanding the distribution of Fresh Pet to more stores, exactly what we had hoped to accomplish. As we have said many times, it is a multi-year cycle of investing in advertising to drive velocity that results in incremental distribution and enables us to invest more in advertising. The result is a very solid foundation of support with customers and loyal consumers. and a rapidly growing consumer franchise and retail footprint. That is our model and it is working. We expect adjusted gross margin to be flat on a full year basis versus 2020, starting lower due to the added staffing costs and improving throughout the year as we gain volume to absorb those costs. We are expecting modest increases in commodities, largely beef, early in the year and generally flat costs overall. Our chicken price has been locked for the year and it is flat versus the year ago. We expect continued improvement in SG&A excluding media, delivering another greater than 200 basis points on our path to our target of 1,000 basis points by 2025. As part of our operational improvement plan and to support the scale of the business, we will be doing an ERP upgrade currently targeted for October 1st, 2021. We do expect some trade inflation this year, and that is included in our guidance. We are forecasting adjusted EBITDA for the year to be greater than $61 million, with the adjusted EBITDA margin dipping a bit this year due to the increased investment in advertising to drive a higher growth rate and the freight inflation. Also, in 2021, we expect to produce continued positive net cash from operations. In summary, our guidance for 2021 is for net sales greater than 430 million, up 35% versus a year ago, and adjusted EBITDA greater than 61 million, up 30% versus a year ago. While our liquidity is strong, we have amended and expanded our credit agreement to include a delayed draw term loan of up to $300 million and a $50 million revolver. As discussed, we will also explore one or more equity raises depending on market conditions and other factors so that we can fund our accelerated growth plan and not stress the balance sheet. We have heard from many of our largest and longest-tenured shareholders that they believe the long-term opportunity for Fresh Pet is too big to allow any potential short-term issues to create risk, so they prefer we maintain low leverage. Our plan does that with a target of approximately two times leverage and not more than three and a half times. We believe we are very well insulated from the occasional market risk or hiccup along the way and are well positioned to pursue the fresh pet opportunity to its fullest. In 2021, we anticipate spending approximately $380 million in capital. In closing, we are incredibly excited by the opportunity in front of us. If anything, 2020 has shown the strength and resilience of our team under very challenging circumstances and, in its own strange way, galvanized our organization to deliver even greater results as we look to our revised 2025 plan. We believe we have a winning consumer proposition and the tools to deliver it to consumers. We have a deep pipeline of innovation being ready for the market. The strength of our marketing team and programs has never been better, and our customers recognize the opportunity that Fresh Pet presents. We believe that is the recipe for significant success, and we are ready to achieve it. That concludes our overview. We will now be glad to take your questions. Operator?
spk05: At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Please be aware that this call will end at 5.30 p.m. Eastern time, and therefore we can only limit each participant to only one question and one follow-up question. Thank you. One moment, please, or I'll be pulled for questions. And our first question is from Ryan Spillane with Bank of America Merrill Lynch. Please proceed with your question.
spk06: Ryan Spillane Hey, thank you, Operator, and good afternoon, everyone. So just I guess a high-level question, Billy, that we've gotten a few times, you know, kind of really since ICR is just, you know, just stepping back now that you've, you know, you've raised the long-term, you know, projection. How much of this sort of acceleration would you attribute to COVID? You know, meaning has COVID sort of pulled forward some sales? And I guess how do you have confidence that it's not just kind of a pull forward versus, you know, an acceleration and expansion of the trends you were expecting a year ago? Yeah, that's a good question, Brian. 2020 was a mix of some, obviously some helps, And some hurts. The things that I would put in the helps would be obviously people spending a lot more time with their dog and caring for, paying attention to the various needs of their dog. We had some lower cost media. But we had some significant hurts that occurred in the year that I think tamped that down and probably fully offset it. So the capacity limits that we had in the year were significant. The retail disruption, the inability to get bridges in earlier in the year rather than later, having to push back our advertising. And so we had to net it all out. And we netted it all out. Our conclusion was that 2020 might have been a pull forward, not just in the year, but of an underlying trend that was very, very strong and it's going to continue for a long time. We think, like many people have described 2020 as It didn't create new trends. It took the trends that already existed and just made them happen faster. But when we saw that, we realized that the upside was even bigger for us. And, you know, you'll see in the presentation investor deck that we put out, we did the modeling several different ways to confirm for us that this wasn't just a temporary phenomenon. There really was a long-term underlying trend here, and that's what got us ahead of where we thought we'd be. So that's why we're raising the guidance. Okay, great. Thanks, Billy. And then maybe just one follow-up quick one. The $430 million or better of revenue for this year, and maybe I missed this in the presentation, but you have the capacity in place today to deliver that, or is that dependent on more production capacity coming online during the year? All the equipment to deliver that is installed. It's the staffing, and we have a chart in the investor deck that maps out by quarter the staffing additions that we are making that enable us to deliver that. So you'll see quarter by quarter what the capabilities are. So, you know, we had a good start this year. You'll see we produced very, very well in January. If we get rid of the darn snowstorms that keep slowing things down, we're doing incredibly well. but we have a step up in capacity from staffing perspective that happens in March. We have another one that happens in the second quarter. So as you go along throughout the year, there's staffing additions, but the equipment's all there that'll get us to where we need to be. There is equipment coming online, to be very fair. There is another line coming on at Kitchen South in the second half of the year, but that's really designed to cover a very high run rate in the fourth quarter of the year. All right, terrific. Thanks, Billy.
spk05: Thank you. Thanks, Brian. And our next question is from Peter Benedict with Bayard. Please proceed with your question.
spk04: Hi, guys. Thanks. I'll ask two just right out of the gate here. So the first one, just Billy had mentioned the $50 customer acquisition cost that a longer-term plan assumes you hold that. Just talk maybe a little bit about the puts and takes to that number, what you see that could either bring that down over time or just how you think about that. And then the second would be around the pet specialty cost. channel, the resurgence that you're kind of talking about there. I think Heather, you mentioned smart moves by some of your partners. Just curious what you think is going on there and why the pet specialty space might be, channel might be relevant again, I guess, for lack of a better term. Thanks.
spk06: Let me make one comment on the customer acquisition cost. Scott, give you more color on that as well as on the pet specialty channel. The $50 was a sort of a long-term trend. We've operated at a level well below that, so it's almost going back to Brian's comment just a question a minute ago. The customer acquisition cost in 2020 was significantly lower than that, and our modeling going forward does not assume that. It only shows that if you stayed at $50, which is the number that we've delivered in the past, that we still greatly exceed our goal. So it's part of the long-term trend. But Scott can give you more commentary on what causes that to get better or worse, and also talk about pet specialty.
spk04: Hey, Peter. Yeah, so as Billy mentioned, we've seen a pretty wide range on our acquisition costs. This year, we continue to pull back, and it was kind of one of those exceptional years where the media well exceeded what we anticipated. The biggest factors that we see over time kind of plussing and minusing are consumer acquisition costs. really center around how much innovation and how much fridge visibility do we have out there. So when we have good innovation that's really appealing to consumers, and we also have fridges that are either highly visible, incremental distribution, they become kind of multipliers or force multipliers in a way and actually drive our consumer acquisition costs significantly down. What we have budgeted over time is to – we have been budgeting, seeing acquisition costs actually going up, and we've seen it for multiple years now actually decreasing. And we think some of that is this idea of as we get bigger and we have more visibility, people are more familiar with the idea of fresh pet food, it's actually become easier for us – to acquire consumers. Also, people are thinking differently about nutrition, and it's really translating into the pet universe now. So that's a big factor on what happens with our acquisition costs. From a pet specialty standpoint, Both the major big box tech guys have really made nice progress in general on their overall business, and they had kind of weighed in with us. They've put our fridges in higher profile locations, edited second fridges and even third fridges in certain locations, and we've also had some nice innovation there. So I think it's just a compounding effect of some consumer trends in COVID. I think they've done a nice job with their businesses, placement and kind of incremental fridges being added in those channels. Okay, great. Thank you very much. Thanks, Peter. Our next question is about the postponement of second fridge doors and doors in general this year. So I'm just trying to understand, is that because you're taking a step back and rethinking kind of the whole capacity expansion and so there's a little bit of a pause? and it just changes the cadence? Is it near-term issues with snow and stuff like that? Does that imply that there's slower growth until they're up and running? Just trying to understand the decision behind that.
spk06: So from a decision perspective, the decision is just we have to be able to supply the fridges that are out there.
spk03: And customers, as you might imagine, have been seeing us short shipping for quite And so it's not prudent for us to be putting incremental fridges in stores if they can't be stocked.
spk06: The long-term interest in second and third fridges is incredibly high, and the gains that we're getting from them are incredibly strong. So the demand for them is very, very strong. We have no doubt that there will be significant interest in it. We just need to make sure that when we put them out there that they can be well stocked. And frankly, our customers have the same concern, too. They don't want us to put in something that they can't reallocate the space to. uh in the fridge to something else when we can't supply so we need to get the supply up but by the end of april we should be in pretty good shape on on our shipments and at that point you can start seeing people doing more normalized activity but they're going to want to be comfortable that it's working
spk04: Yeah, let me build on that real quickly. So just when we put in second fridges, just to be clear on it, we're seeing, so if we're already growing at, call it 30%, we pick up anywhere between 20 and 40 incremental growth points on that second fridge. So the return continues to be strong for us and the retailer. It's also continuing into the second year, so we're seeing really good progress there. One of the things that we've become not only us slowing down a little bit on some second fridges earlier in the year, but there's several retailers that are pushing some of their major changes towards the back of the year or not doing as much in-store this year due to kind of the end of this year. But we do not want to kind of, you know, weigh into that. I guess on that same note as a follow-up, 30% growth in 2020 is great and obviously very impressive. Any gauge now looking back to the full year of how much was left on the table in terms of had you not had capacity constraints, what that growth could have been, especially as we're looking to 2021 where you should be at full capacity for most of the year, that 35% growth doesn't seem that aggressive. if you left five, six points on the table last year. So any color on that would be great. Thanks.
spk06: Yeah, it's always hard, Bill, to decide how much you really lost. I'd say what we quoted was at the end of the year, the trade inventories were down by 15 million versus where we thought they'd be. And against the base of sales, that's somewhere around three or four points. So you could say pretty confident there would have been three or four points more uh for that now how much you lost because a consumer walked in the store couldn't find it and they had to buy something else or a new consumer who came to your fridge uh based on having seen your ads and showed up and there's nothing in the fridge or not not the item they wanted we really didn't do any modeling to figure out what that could be um but you know if you're if you're telling us that having 35 percent growth is is sandbagging or it's a What I tell you is we're very mindful of the fact that we need to run, as Heather said, walk before you run, run before you sprint. We want to kind of amp up the growth as we go along and make sure we can supply it.
spk04: One other factor on that too, Bill, is that the entire year we kept canceling more and more and more media. in addition to us not having enough product. So if we had spent the media plus all those factors in place, we're encouraged that we could be seeing some pretty significant growth rates. Got it. Thanks so much. Thanks, Bill.
spk05: And our next question is from Brian Allen with DA Davidson. Please proceed with your question.
spk01: Yeah, thanks. Good evening. Do we continue to assume media will be 12% of sales through 2025? And just if I could throw on top of that, given the increased flexibility by added capacity, could that go higher?
spk06: As we've always said, when we have capacity, we want to fill it. The plan that we've laid out gives us the ability to always be, once we get this next increment of capacity in, to be a line or so ahead of where the demand is so we don't get ourselves caught where we are short on supply. But we do plan to expand at 12% of sales between now and 2025. So the real question will be, does it over-deliver the returns? Because it over-delivers the returns, that would then have us using more of the capacity, and that's why we're building the incremental capacity to stay ahead of it so we don't have that supply problem.
spk01: Okay, fair enough. And then you've got a lordly share of this segment of the pet food category, and one that has to be increasingly difficult for the larger players to ignore so as you guide out to 2025 and make plans that capacity accordingly to what extent have you factored in the evolution of the competitive landscape you know it's uh obviously it's a factor um i've seen uh lots of studies done on what happens when a category creator
spk06: ends up with a challenger. Obviously, the lot depends on who the challenger is and what the approach is that they take. Do they come in with a knockoff product at the same price? Do they come in with a more premium product? Do they come in with a price-driven product? But typically what happens is when a second player enters the market, it significantly expands the rate of growth and the size of the market. And so while your share of the market might go down, the size of the opportunity that you have is actually quite large. And so while we fully anticipate at some point we will have a competitor, it's only natural and it's what we should expect. Our expectation is it will make the category more competitive, not necessarily our business opportunity smaller.
spk02: Appreciate the comment. Best of luck.
spk05: Yeah. And our next question is from Mark Ashton with Stiefel. Please proceed with your question.
spk04: Thanks, and afternoon, everyone. I wanted to ask maybe a different way on the new store ad. So I guess I was a little surprised that you're talking only 1,000 stores or so, and I wanted to ask kind of specifically about how the discussions are going with some of those retailers like Walmart or Kroger or Costco where you're under a store relative to where you could be and where you are, places like Target. So how has the out-of-stock situation changed? uh manifested itself with some of those you know how do you think about the satisfaction you know broadly obviously some of your uh retailers have also put stickers on doors to say hey there are alternative products elsewhere you know is it maybe just enlighten us a bit on some of those discussions um with the legacy retailers and if I could just you know add a sort of related point to that what are your expectations in bed for non-traditional retail you know meaning like chewy or or Amazon within the base Kyle, you want to take that? Yeah. So Mark, you know, no one likes to be in a situation where that we can't supply as much as not only consumers, but also our customers want. It obviously frustrates the customers, but I think if they're looking across the entire store, especially episodically over the past year, it's been incredibly challenging times. I think that people have been fairly understanding. Most of them have been very, very understanding and really, really good partners. And I think some of that comes from the equity that we've built in working with them and being as transparent as possible for the past, you know, 10, 15, and even 20 years in some cases, people that we work with, you know, throughout our careers. But, you know, look, I think the other thing is people really, really appreciate and love the growth. They love the margins that we're continuing to deliver to the category, but I do think they have expectations of us making sure that we're getting them back in a better in-stock position so they can deliver to their consumers, our consumers and their consumers, quickly. We've kind of laid out plans. We've had many, many meetings, many, many top-to-tops with them, kind of walking through exactly what we're doing. They, again, are really cheering for us because they love the proposition and how we've built this business and what our long-term vision is and where we can grow and where we can go over time. And I really think overall they're behind us. I think that there's some near-term pain, and everyone's sharing that, but they recognize it is a quarter's worth of pain. It's not a year's worth of pain. That's helpful. And then just on the non-retailers, the internet, e-commerce piece, how are you thinking about that? Yeah, sure. And I think there's actually a page in the deck that talks about e-com. It's actually page 12, I believe. Yeah, page 12. And although we've had a lot of success with what we've done from an e-com perspective, we understand really, really well how to invest, how to grow, what the productivity is versus our traditional advertising. We're actually getting better returns on it. the e-commerce advertising than the traditional advertising, that encourages us to spend more in that area. So we will be spending more, and we will have significant incremental partners that we'll be adding from an e-commerce standpoint over this next year.
spk05: Thank you. Our next question is from John Anderson with William Blair. Please proceed with your question.
spk04: Hey, good afternoon, everybody. A couple of quick ones. One, you know, just related to the out-of-stock situation, how do you think, what has been the feedback from your customers? You know, Billy, you talked about, you know, empty fridges. Do you think there are longer-term ramifications from that? Have you seen users maybe kind of fall out of the franchise? It'll be hard to bring back. Just some thoughts on that based on the interactions you've had with customers. And then the second question is just around your kind of view of the new product lineup for 2021 and characterizing it maybe relative to some of the innovation that you've done over the past couple of years. Thanks. Yeah, I'll let Scott take those. Yeah, let me talk about the innovation piece first. So we're – You know, it's interesting because a lot of people would say, oh, you're growing at 20%, 25%, 30%, 40% growth. Why are you bothering to innovate? Well, as someone brought up earlier, We believe that at some point people will want to be coming into this category, and we want to have the absolute best product that anyone could possibly imagine and be basically cutting the territory, you know, cutting kind of the head of the swath through the jungle and coming up with the absolute best product out there. Now, that being said, innovation is not just something that's kind of like a fun side project. We've been able to demonstrate year after year that the innovation that Typically sticks very well. The vast majority of our innovation, over 80% of our innovation sticks around multiple, multiple years out. It's a significant contributor to not only improving our advertising but also our overall sales growth and the size of our business over time. So we do believe innovation is the core of it. And then we want to improve our current products. We want to innovate, meaning coming out with varieties and flavors and maybe some incremental benefits with some of our existing technology. But we're also working to truly reinvent and come out with, like, next-level category-changing technology. Like, you'll see there's a new plant-based meals we're coming out with. Some of it's positioning work that we're doing where we'll have the most sustainable pet food that's out there in our Nature's Fresh brand and some of the things we're doing in our Homestyle brand. So innovation is really critical and core, and it delivers. On the out-of-stock piece, you know, it's interesting. It's unfortunate but interesting. Over the past 10 years, There have been times where we have had challenges on our business and it's been, sometimes it's been you know, challenges on making rolls or challenges on making bags or packaging supplier, whatever it may be. And the one thing that we have seen is the consumers in this business has been unbelievably resilient. Do I wish we wouldn't be having Addison off 100%? Literally, like, there is no way to tell you how much my heart bleeds every time I see a consumer frustrated. But if you look through those consumer comments, and I've looked through thousands, literally thousands of the consumer comments, on the notes that I posted, the vast majority of them are cheering for us, waiting for us to come back in stock, looking for us. We're doing everything we can to help them and make it easier for them and get products out there as fast as we possibly can with no expense spared. So is it going to be a blip? Yeah, I'm sure it's going to be a blip, and it's unfortunate. But I do think over time we have by far the best proposition of anything in pet food. Consumers will come back to our franchise, and we'll continue to just move forward on our growth trajectory. Thank you. Good luck.
spk05: Our next question is from Ken Goldman with JP Morgan. Please proceed with your question. Ken Goldman, your line is unmuted if you have a question. Can you hear me now? Yeah, we can.
spk02: Long story, not mute, though. Hey, guys, so you're almost two-thirds of the way through the first quarter. The street's modeling a little over $90 million in sales and about $10 million in EBITDA. How close are those to kind of what your expectations are for the quarter? If you can give us a little bit of a ballpark there.
spk06: So obviously we don't like giving out quarterly guidance, but what we said in the narrative is that if you think about the cadence for the year, Q1 should be a strong quarter because even though we're delaying the advertising start-up, we are refilling the trade inventory whole. So you can expect to be a stronger quarter. Q2 is up against a very tough year ago because that's when we were refilling the trade inventory, and we have a delayed start in the advertising this year, so we'll be delayed in building consumption. So it'll be our softest quarter, and then Q3 and Q4 will be very, very strong because of the advertising investments that we're making starting in Q2, but really paying dividends in Q3 and Q4. So without giving quarterly guidance, I can just tell you that we're expecting at least from the top line perspective to be off to a good start. In terms of the bottom line, there is a little bit of a delay in the advertising investment, but there's also a higher cost that we're going to be carrying because we are brought in incremental staffing to make sure that we could produce what we needed to produce. We don't want to find ourselves in a position where because of people being out for testing or quarantine or issues that we're having with snowstorms that we can't meet the demand. So we do have extra staffing that we're carrying.
spk02: I know we're running long, so I'll let it go. Thank you.
spk05: All right. Thanks, Ken. And we have reached the end of the question and answer session, and I will now turn the call over to CEO Billy Sear for closing remarks.
spk06: Thank you, everyone. I'm sorry we had to cut you short today. Unfortunately, as you can imagine, with all the things we have going on, it has been a very hectic day. But I did want to close with one thought for you. Lou Saban, the football coach, said, no matter how little money and how few possessions you own, having a dog makes you rich, to which I would add, feed your dog fresh pet and you can call it even. Thank you very much for your interest and attention. We appreciate it.
spk05: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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