Freshpet, Inc.

Greetings, and welcome to FreshPet's second quarter 2022 earnings call and webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeff Sonick, Investor Relations at ICR. Thank you. You may begin.

Thank you. Good afternoon and welcome to Fresh Pet's second quarter 2022 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 filed 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, 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 for 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. That 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 that we'll discuss today. With that, I'd now like to turn the call over to Billy Cyr, Chief Executive Officer.

Thank you, Jeff, and good afternoon, everyone. The message I would like you to take away from today's call is that the dual challenges of inflation and economic slowdown, which have resulted in unwelcome volatility in our results, have not derailed our ability to deliver our long-term goals, including significant margin expansion. During this call, you will learn that, first, net sales are strong, and growing in line with our expectations. Price sensitivity is modest and also in line with our expectations. And household penetration growth has accelerated and is more consistent with our long-term goals. In fact, our net sales growth is outpacing our long-term plan, which only requires a 28% compound annual growth rate to achieve our 2020-25 goal. Second, adjusted EBITDA was below expectations in the quarter due to media investment timing, inflation, logistics challenges, and the quality issue we had in June. We have already taken the necessary actions to adjust for the critical issues, including announcing a third price increase. However, the cost of the quality issue and the new timing gap on inflation versus our pricing require us to lower our adjusted EBITDA guidance for the year to $48 million from $55 million. Third, we are updating our CapEx expectations to reflect our current best estimate of the actual timing we will experience with our various capacity addition and fridge expansion projects. Our initial estimates were very conservative and designed to give us significant flexibility. But now that we are more than halfway through the year, we have much greater visibility and expect that we will spend approximately $80 million less this year than the $400 million previously projected. The impact on our available capacity will be minimal and still leave ample room to grow at or above the rates we have projected. And fourth, the underlying health of the business, both its growth potential and the underlying margin structure remain sound. Despite the litany of new obstacles and our own admitted missteps, we deeply believe that Fresh Pet remains one of the best growth opportunities in the CPG space, if not the broader consumer sector. We have consistently demonstrated an ability to grow the business at very strong rates. and have now done it at higher prices, proving the pricing power of the brand. Importantly, our growth is the result of very solid and sustainable consumer fundamentals, including strong increases in the size of our consumer franchise and steadily increasing buying rates. This combination is only made possible by strong satisfaction and high customer retention. Retailers are responding to that strong consumer interest and now realize that Fresh Pet is the future of pet food. so they are increasing their placements of Fresh Pet fridges and the number of stores with double and triple fridges is expected to grow dramatically in the next year. We already have more than 27,000 fridges in stores and retailer interest is growing, not shrinking. But the strength of our competitive moat goes beyond our retail presence as we are now building increasingly efficient manufacturing facilities that are unlike any others in the world. Our existing Fresh Pet kitchen in Bethlehem is operating at full capacity and producing strong cash flow, and we are about to open an even larger and more efficient facility in Ennis, Texas. We have consistently demonstrated an ability to capture the benefits of increasing scale in our G&A costs, and we aim to demonstrate our ability to deliver consistent gross margins as well, regardless of the operating environment. Finally, with a strong balance sheet in combination with the cash generation of the business and our credit agreement, we can support our long-term growth ambitions without the need for additional capital. There are very few businesses that can say all that. While the past two years have presented some very unusual and difficult challenges, we have worked diligently to ensure that Fresh Pet can achieve its potential and change the way people nourish their pets forever. For much of that time, we did not have enough capacity to meet demand. We outgrew our ERP system, and labor shortages plagued the business regularly. But we have solved those problems. Today, We have enough capacity to meet demand with more coming online soon. The stores are in much better shape with steady improvement in fill rates and better in stock conditions. We've implemented a new ERP system to enable greater efficiencies and our proactive Fresh Pet Academy approach to labor has turned a weakness into a strength. But it goes without saying that the backdrop we are facing today is very different than what we've experienced over the past several years. making it hard to see and appreciate those accomplishments and the potential of the business. We've replaced a pandemic with inflation, yet we've unfortunately kept the supply chain problems that came with the pandemic. And now we are facing a potential recession. We recognize the desire and need to stay aligned with, if not ahead of, the shifting macroeconomic forces. Rampant inflation and higher interest rates necessitate strengthening our focus on the cash generating capability of the business while simultaneously delivering the long-term 11 million household prize. While the recent challenges have caused inconsistency in our margin delivery performance, we are in a much stronger position today than we have been over the past two years with a more formidable organization that provides greater control and confidence in the long-term opportunity that Fresh Pet presents. The new capacity plan that we outlined in May provided some early hints of how we might make better use of our cash, including a realignment of where we build various increments of capacity, the use of leases for non-strategic assets, and a focus on more space-efficient technology. But the current environment requires that we go further. There are three areas in particular that we need to focus on, capital spending, startup expenses, and working capital. Each of these is the necessary use of cash to support our rapid growth, but we have significant opportunities to improve our capital efficiency and prove to investors that Fresh Pet can, at scale and as we scale, generate significant operating cash flow and ultimately free cash flow. Key to accomplishing that will be to continue strengthening our organizational capability and processes. For example, Our new ERP system is operating and supporting our day-to-day operations, but we are not getting full value for its expanded functionality. That has led to inventories that are larger than we need, less efficient use of freight, and higher accounts receivable balances. We've put in place a highly focused team designed to capture those benefits ASAP. Encouragingly, since the quarter ended, we have implemented a more timely billing process. which will dramatically reduce our accounts receivable by the end of this month. Additionally, we have focused on getting new capacity online as fast as possible, and that has come at a cost. That was necessary because we are so far behind on customer orders, but stores are in much better shape today thanks to our significant inventory improvements. As a result, we are finally in a position where we can be more prudent with our planned startup expenses. The same could be said for capital expenses. The intense focus on getting plants built and lines installed quickly often came at the expense of efficiency. We are adding an intense focus on adding capacity in the most efficient manner while maintaining our commitment to speed and quality. Those efforts will not compromise our ability to grow, but rather they will provide added focus on the cost of that growth, ensuring that we get full value for every dollar we spend and that we time our investments to maximize the impact they can have. As part of this renewed focus on capital efficiency, you will see us change how we report adjusted EBITDA. Beginning with Q3, we will no longer add back plant startup expenses for the new store marketing investment. That will provide greater clarity on our path toward generating positive net income as the business scales further following our planned capacity additions. We will provide updated guidance using this new definition at that time, and we'll also provide historical data that shows both approaches. This will create a seamless transition from the old measure to the new measure. To be clear, there are no new disclosures, and our transparency will remain intact. This is simply providing greater visibility on the cash usage and generation of the business to meet the shifting needs of the marketplace. While we fully realize that this approach will create much lumpier adjusted gross margin and EBITDA results, we also believe that it will allow us to demonstrate the emerging profitability of the business with greater clarity and more easily compare it to other high growth businesses. Looking ahead, we are keenly aware that our net sales are running well ahead of the pace needed to deliver our 2025 goal and that the price increases are driving up the buying rate, making that goal much easier to achieve. We intend to revise our long-term goals by year-end to capture the impacts of the price inflation, including any impact on our ability to attract new users, any loss of users due to higher pricing, and the full benefit of higher buying rates. We will also need to adjust for the updated methodology that Nielsen is using to determine household penetration. That new methodology is now in place, and it indicates that we have even more users than we previously reported. about 500,000 more users. The new method also indicates that we've been adding users over the past two years at a faster rate than Nielsen previously projected, adding an incremental 220,000 users over the past two years and with more balanced growth over time. I've included a comparison of the old and new data sources in the investor presentation so that you can see those changes. Before I turn the call over to Heather to discuss the Q2 results and our guidance for the year, I also want to make a comment on the planned startup of the Ennis facility and how we think Fresh Pet will perform in a recession. We are in the final countdown to liftoff in Ennis. We remain on track to start up our roll line there next month and produce saleable product by the end of the month. That will not turn into meaningful shipments until October, but it is very exciting to reach this milestone for such a pivotal project. We have begun sending the highly trained production staff back to Texas from Pennsylvania, and they are ready to go. All the roll line equipment is installed, and we are going through our startup checklist. Additionally, much of the equipment for the first bag line has already been installed, and we remain very confident that we will be able to start that line up in Q4. Once that startup happens, it will unlock significant potential for Fresh Pet. In addition to the significant increase in production capacity, it is designed to be our most cost efficient, most sustainable, highest quality facility with room to grow and support an even larger business. With the first phase of that facility open next year, we will have more than $1.1 billion in capacity available to us, enough to support almost double the volume we've guided to this year, thus ensuring our ability to continue our rapid growth next year and beyond. We've already spent the cash to create most of that capability, and we will finally be able to generate returns on those investments. Turning to the impact of a potential recession on the business, I think it is safe to say that pet food as a category and Fresh Pet as a brand should perform very well in a recession. History has shown that pet food is one of the most recession-resistant businesses as consumers are unlikely to stop eating their pet, and the number of dogs in households has grown consistently through each of the recessions of the past 20 years. While Fresh Pet was in its infancy during many of those recessions, Our track record of growth has been extremely consistent, doubling the business about every three years since its founding in 2006. Further, as we have studied the household penetration and buying rate data for fresh pet versus the entire pet food category during the recent period of rapid price increases, we've seen that the fresh pet user base has been more committed to maintaining the fresh pet habit than the pet food category overall. While this is not the same as weathering a recession, it does speak volumes about the overall loyalty of the Fresh Pet franchise, even under economic duress. That leaves us confident that we will be able to continue our rapid rate of growth, even if we experience a recession. There's also a positive side to a recession. We believe that a short and not very deep recession could better align supply and demand for the various ingredients and equipment we buy, lowering costs, shortening lead times, and improving availability of the materials we depend on. That could lead to greater capital efficiency and better margins. In summary, the underlying health of the business is strong, and we are more focused than ever on ensuring that the business will generate the margins, cash, and profitability that you would expect of a company that is leading and defining the future of pet food. We are navigating some difficult times with the rampant inflation that the entire industry is facing, but we are engaged, we are reacting, and we are improving. And once we find equilibrium with cost and price, we will deliver the gross margins that we know this business is capable of delivering. In combination with the leverage from scale that we get on our G&A costs, we believe we are on track to deliver our 25% adjusted EBITDA goal by 2025. Now let me turn it over to Heather to take you through the highlights of the quarter.

Thank you, Billy, and good afternoon, everyone. We had strong net sales in the quarter, in line with our guidance. but the adjusted EBITDA was below our expectations. A meaningful portion of this shortfall was timing of marketing spend and will correct itself by year end. Some of it was due to the cost of the quality issue we had in the quarter. Some of it was due to some logistics challenges we had in June and which we think we can overcome in the back half of the year. And some of it was due to incremental inflation that exceeded our plan and for which we are taking pricing. Let me take you through each element one piece at a time. Net sales were 146 million in the quarter, up 34.4% versus a year ago. Nielsen measured consumption in the quarter was up 41%. The difference between Nielsen measured growth rate and the net sales growth rate is the size of the trade inventory refills that occurred in the year ago period versus what we did this year. the consumption growth rate consisted of approximately 21% unit growth and 20 points of pricing growth. While we still only have about four months of data with full pricing in effect, this balance between pricing growth and unit growth is in line with our expectations and represents very modest price sensitivity compared to other CPG businesses. For perspective, our unit growth of 21% in the quarter can be compared to unit growth in Q4 of 19%, which was prior to the price increases, and 28% in Q1, when we had strong distribution in advertising and the smaller of our two price increases was in effect. You should expect that we will always have price growth due to innovation and consumers moving into our higher value items over time. So our total Nielsen measured sales growth should always be a few points higher than our unit growth. Driving the net sales growth was a return to household penetration gains closer to what we would expect over the long haul. Over the past 12 weeks, our household penetration has increased by 19% versus a year ago. As Billy indicated, Nielsen is now reporting that the size of our consumer franchise is larger than we had previously reported, and it is growing more quickly. Our consumer data and the feedback we get from retailers would support that. We did see both a downturn in retail foot traffic and household penetration gains in June when gas prices hit a national average of $5. But we are seeing a strong bounce back as gas prices are dropping again. That did have a modest impact on the net sales in Q2 as consumers seem to consolidate or defer trips in June. But our shipments in July have been strong, as have consumption and household penetration gains. It is also interesting to note that the seasonal consumption patterns we are seeing this year are in line with those we saw in the pre-pandemic era, with consumption going flat during the summer months due to established seasonal speeding patterns and then growth resuming in late August. We expect to see that again this year. This suggests that consumers have returned to more normalized pre-pandemic lifestyles. You can see this on the three-year stacked growth rate chart in the accompanying presentation which helps smooth the volatility of the last few years and compares our performance to the pre-pandemic period. That shows our growth rate by week when compared to 2019 is extremely consistent, reinforcing the strong and steady growth of the Fresh Pet business. We continue to get strong interest from retailers in placing additional Fresh Pet fridges. Our focus and the focus of many retailers has turned towards multi-fridge placement in the highest volume stores so that we can both expand the assortment and improve holding power. Many retailers have been waiting for us to increase our supply before they would place those fridges. That is now happening, but many retailers are running into either labor issues or budget issues that will prevent some of the more major renovations of their pet food section that are necessary to accommodate the significant increase in space that they are planning for FreshVet. That will push some of the bigger launches of multi-fridge sets into next year, so we will likely come in light on the number of upgrades and second, third fridges this year, but will over-deliver by quite a bit on the net new stores because those installations require less labor and can be managed within existing retailer budgets. Those deferred upgrades and second fridges will likely result in a very strong first half of the year next year. All of this has us feeling very bullish about our prospects at retail over the next 12 months or so. The adjusted EBITDA was 3.9 million in the quarter, below our expectations. Part of this shortfall was timing, with the marketing investment in the quarter coming in at almost 24 million. This spending was not incremental to the year, it simply reflected a timing adjustment. We made this investment to help sell through the 12% price increase that went into effect in mid-March, which is when consumers were most sensitive to the price increase. Based on the unit movement and household penetration gains that followed, we are pleased with the strategy and the limited price sensitivity that we encountered. Adjusted gross margin was 42.4% for the quarter, and was 42.1% for the year to date. This is up sequentially from the 41.9% we generated in Q1, but does not reflect the magnitude of the improvement we had expected our price increase to produce given our quality issue. However, when you exclude those costs, the adjusted gross margin would have been approximately 43.8% or about 140 basis points higher. The amount of affected products that got into the market and had to be retrieved was very small, but the cost of the product disposals related to the underlying production issue, some additional lab work and testing, and some supplemental processing was much bigger than anticipated. We experienced increased inflation in some input costs, mainly due to labor and energy, as well as transportation cost increases at our suppliers, and expect them to continue for the balance of the year. Further, our cost for diesel and natural gas is well in excess of the cost we estimated when we gave our initial guidance. And while diesel has moderated recently, it is still well above where it was when we set our budget at the beginning of this year. Our third price increase, which will be 2.6% and goes into effect in late September, is designed to protect our margins in the face of those higher costs. and we expect to end the year with much stronger margins and position ourselves with a much more balanced set of costs and pricing as we enter 2023. However, the timing of the increase will create another mismatch between our cost increases and our pricing in the third quarter. In simple terms, the cost increases we have seen since we set our budget are in the range of approximately $10 to $11 million, or about $15 million on an annualized basis. and our price increase will cover less than half of that this year, primarily because it won't be effective until the beginning of Q4. We promised you that we would plan more conservatively this year, and we did, but while we are absorbing some of the incremental costs, we cannot absorb all of them, so we are lowering our adjusted EBITDA guidance to reflect that mismatch. We are encouraged by some emerging cost trends that suggests that inflation in the materials that most impact us may be moderating. This may be the result of the economic slowdown we have been hearing about, and an early indication of the potential cost benefits we might get if we have a mild recession. Bought freight rates have declined over the past three months, and we have gotten a rate reduction that begins in the third quarter. Diesel costs have dropped significantly since peaking in mid-June. While many of our key ingredients and their key inputs continue to move up, the cost of our proteins has stabilized, and there is some suggestion that they might actually provide some relief next year versus the cost we are paying this year. The underlying cost of the materials used in construction and equipment, such as steel, nickel, zinc, and copper, have also dropped considerably. While none of these declines will help us in the short term, They are positive indications that much of the inflation that has plagued us for the past 18 months may have peaked, and that will enable us to restore our margins and complete our capacity projects with less pain. I think it is important to be cautious on this because it only takes one Gulf hurricane to drive up energy and diesel costs further or another outbreak of disease to impact the bird flock, offsetting the otherwise positive momentum we are seeing. But the underlying supply and demand characteristics are improving, so I am optimistic that we will finally be able to reap the margin benefits of our price increases, or at least narrow the gap. Our production performance in the quarter was strong, with increasing throughput during the quarter, which puts us in a much better position on retail availability. We achieved the highest number of total distribution points in our history during the quarter and have maintained them. As Billy indicated, labor has gone up from being an issue for us to being a real strength. We have successfully increased the talent of our recruits, invested in their training, and are now seeing significant reductions in turnover and much higher productivity. Logistics costs, including warehousing, diesel, and lane rates, drove approximately $2.4 million of incremental costs in the quarter. This was most pronounced in June, when diesel soared to $5.81, and we also incurred higher warehouse installs, including those needed to segregate the product affected by the quality issue and the cost of starting up our new warehouse in Dallas. Diesel prices and lane rates have dropped considerably since then, and we should return to more normal logistics costs in Q3. Additionally, our inability to start up our inventory allocation tool prevented us from filling trucks as we had intended. While our natural order fill rate continued to improve, our inability to fill trucks completely cost us about a million dollars. We expect to continue improving our fill rate and hope to have our inventory allocation tool turned on later this year, but we will get the bulk of the benefits as our fill rates continue to improve naturally. For perspective, our most recent week's fill rate was over 80% and growing. We are continuing to deliver the leverage benefits in SG&A that our plan requires. Year-to-date, our SG&A as a percent of net sales has dropped by 150 basis points, and we believe it will continue to improve as the year goes along. Capital spending in the quarter totaled $39 million. As Billy noted, we are expecting this year's total CapEx spending to be approximately $320 million instead of the $400 million we previously projected. The delay in the multi-fridge expansion, less maintenance CapEx, and both efficiencies and timing adjustments on our larger capacity projects will free up about $80 million in cash. We are also expecting the same delays to push back some of the CapEx previously planned for the next year, so we'll not increase next year's CapEx, but we'll instead push the spending back into 2024 or later. We can do this and still deliver our capacity and fridge expansion plan without the need for additional equity. Operating cash flow used in the first two quarters was $62.4 million, which was driven by inflated receivables and inventory levels, which were the result of delays in invoicing and some inventory reporting challenges in our new ERP system. And I'm pleased to say that we've worked through those issues since the second quarter end. We are also addressing the inventory issue, which was caused in part by the need to hold and test a large amount of product due to the quality issue and expect to see a significant improvement in Q3. That is offset in part by the startup of our second distribution center in Dallas. We drew $27 million on our borrowing facilities in the quarter. At the end of the quarter, we had gross availability of $272 million on our credit line, subject to various limits. Looking forward, we continue to believe we are on track for our net sales guidance for the year. Our net sales are up 38% to date. Q2 was our toughest year-on-year comparison, but we feel comfortable that we could achieve our net sales guidance for the year. We are also lowering our adjusted EBITDA guidance to account for the cost of the quality issue and the incremental inflation we are incurring prior to our increased pricing going into effect. Thus, we are lowering our adjusted EBITDA guidance to greater than 48 million from greater than 55 million. In closing, as you have undoubtedly heard from us and others, this is a turbulent time, but the infrastructure and organizational capability we have built and the underlying strength of the Fresh Pet brand have enabled us to continue our rapid growth and we are very optimistic about the future. While we continue to experience short-term hiccups, we learn from each of them, and they become less significant, and this makes us stronger as we pursue our long-term goals. We are motivated by our mission to change the way people nourish their pets forever, and we believe we are on track to delivering that goal. That concludes our overview. We will now be glad to take your questions.

Operator? Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press star 2 if you would 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. In the interest of time, if you could please limit yourself to one question and one follow-up so we may get to everybody's questions in the queue. Our first question comes from the line of Steph Wissink with Jefferies. Please proceed with your question.

Thank you. Good afternoon, everyone. I would like to spend a little bit more time on the EBITDA revision for the year. And maybe Heather and Billy, if you could both talk about this, but how much of the burden occurred already in the second quarter? versus what do you expect that timing mismatch to account for in the balance of the year? If I just look at, I think it's on slide eight, that EBITDA bridge, just help us break down what's already been resolved and what's still to come. And then also related to the CapEx, along the same lines, how much of the deferral has already occurred versus how much is yet to come in terms of the overall revision? Thank you.

Heather, do you want to take that?

No. So I'll start with, of course, on the EBITDA guide. So the reduction is approximately $7 million. The quality issue is $2.2 million. So, of course, that has already occurred in June. The balance of the change coming from the mismatch of inflation versus price, about a million of that has occurred in the first half with the expectation the balance of that comes in the second half.

You want to take the CapEx part two?

Steph, can you just say it one more time, the CapEx question? Yeah, just the revision lower in CapEx. I'm wondering how much of that has already occurred versus how much is yet to occur. So the CapEx for the quarter, did it come in below, meaning what's left to be realized is also below, or is all of the deferral in the revision of the year in the back half? Got it, yes.

Yeah, so a portion of about a quarter of it occurred already in the first half step, and then the balance is reductions in the second half. The main driver of the second half shift is around the phasing of spend that we'll have around the innovation kitchen. That's the biggest driver of the shift of the second half.

Okay, so that innovation kitchen is now going to be a 2023 event?

Most of this, yeah, there'll be a small spend in the second half, but the majority will be in 2023. That's correct.

Okay. Thank you very much.

Thanks, Deb.

Our next question comes from the line of Peter Benedict with Robert W. Baird. Please proceed with your question.

Oh, hey, guys. First question, just can you give us a sense of what we should expect plant startup costs and the launch expenses to be? for the full year, I think they were around $11 million in the first half. What should we think about for the full year and maybe just a sense for what it should look like next year?

Sure. So, Peter, first of all, we'll provide very sharp clarity when we issue the revised view for Q3. But for now, the best assumption is that the second half is going to be largely in line with the first half. So you could sort of double it You know what you have going on there is with the Enid startup You have increasing costs as you would expect as we ramp up to start up but then of course then starting up we stop adding back and you know largely in q4 and so there's sort of the increased cost offset by That cost would have come into the cost structure anyway for next year it's you know, we will we will have a Less startups. I mean, we have RM, we have the last line in phase one of Ennis starting up at some point next year. Again, we'll provide a revised phasing of exactly when we plan to start that up, but that's the main startup for next year that you should expect. So a much less significant startup impact given that Ennis is really fully operational. It's just adding one last line next year.

Got it. Okay. That's helpful. And then just, I mean, maybe Heather, I don't, if you can help us here, like just how you're thinking about kind of the EBITDA margin flow through kind of incremental margins on sales growth, you know, using this new method and then maybe getting past some of the, you know, the noise that's out there right now in terms of just what's going on in the business. Is there a way to think about that or what does your model tell you in terms of the incrementals as we continue to kind of grow sales over the next several years? Thank you.

Yeah, so Peter, I mean, I think we said it in the prepared remarks, but certainly there will still be some lumpiness to this. So as we have years of a larger startup like this year, you know, just using, let's just use $10 million in the first half, so $20 million as a proxy, it's a big impact in plant startups. As you look at next year, you're going to get a really nice pickup on the gross margin coming from, and it's being started up and running, and again, just to reinforce our most efficient and profitable facility, you're going to get a really nice benefit next year, and that'll flow through on the higher revenue, but then on the following year, we'll be starting up things like the Innovation Kitchen, which will have, again, volatility that will come with that. Of course, we don't provide as much visibility and foresight to that as we move through it. We'll be extremely transparent, as we always are, but it'll be a little bit lumpier. The longer-term roadmap and flow-through doesn't change. The expectations of Ennis, as we bring on not only phase one, but phase two and three, with even greater efficiency continues to be a key driver in terms of the margin improvement. And then the continued benefits from the SG&A leverage benefits around both logistics and G&A leverage will continue and should continue to be a more consistent part of that flow-through.

Okay, and then maybe if I could, just to follow up kind of on price, and you kind of talked about how some of the costs pressures may be peaking here we'll see if that's the case um but how do you think about price in an environment where let's say the costs are starting to moderate and come down do you you expect prices will hold will hold in this category i know it's or do you think you're rolling back a bit whoops how do you how do you maybe think about that right now god you want to take that one yeah hey peter

So we've been trying to, as we've done pricing, we've been trying to be really thoughtful as to how this is all going to land eventually. And it's one of the reasons that it's put us behind in a couple of quarters where we've been 30 or 60 days a little bit slower to take some pricing action. Because when this is all said and done and it's leveled out, we want to end up in a really good place. What we anticipate is many others in the category, in just dry and wet food, will use significant amounts of promotion dollars to adjust prices both kind of in the near term and in the mid and longer term. We don't do any promotion, as you know. So we really don't want to – we want to be very careful how our approach to the pricing, where we end up, and making sure that we create a portfolio of products that has really, really wide appeal to 11 million-plus consumers. And that's kind of how we've been thinking about it. Okay, that makes sense. Thanks so much, guys.

Thanks, Peter.

Our next question comes from the line of Bill Chappell with Truist. Please proceed with your question.

Thanks. Good afternoon.

Hey, Bill. Hey, Bill.

Hey, Billy, Scott, I guess I know you are waist-deep, at least in the analytics and the customer, and I think the concern – I hear or see most is not your existing consumer base trading down because they're highly loyal and obviously they don't want to change what their dog is eating. But it's that new consumer trading up and the worry that the pace will slow with the higher prices than just that you're at the super premium as we go into a potential recession. So I guess, are you seeing anything from that new consumer slowing down except for the small little spikes where you've seen some unevenness? Or do you think you can hold up fairly well? And you talked about growing through past recessions, but you're obviously a much smaller base at that point. So just trying to, any color, any factoids you have to back that would be great.

Yeah, Bill, this is a topic we've been spending a lot of time thinking about and watching the data very closely. We included in the presentation today A few slides that give you a little bit of a glimpse of what we're seeing. We did see a little bit of a slowdown in June when gasoline hit five bucks, as Heather said, in the prepared remarks. But since then, we've seen it bounce back up. The number that we saw is in the last 12 weeks, the household penetration gains have been up 19% versus a year ago. When we look at it across a variety of demographics, we looked at small dog households, large dog households, both up. We looked at it by generation. We've seen virtually all the generations are moving up. The millennials actually were moving up the most. We're getting the most traction in that group. And we looked at across income groups. And across income groups, we are not seeing any significant differences in their willingness to buy Fresh Pet or join the Fresh Pet franchise. There were little bits and dips in June. I don't want to gloss over that. June was a little bit lumpier than we would like, but it came right back in July. So we're feeling pretty good about the ability to attract new users to the franchise because the proposition is pretty darn attractive. But that's what our data is saying so far. And, you know, it's in line with what we'd expect to be or would hope to be.

Okay. Thanks. And then just kind of a minor question. I guess I'm a little surprised that diesel prices kind of impacted you inch or quarter. I thought you had done some diesel hedges or, you know, maybe just Educate me on what is hedged and what is not hedged.

Thanks. We don't hedge any diesel, but we do have some hedges on natural gas for a portion of our production facility. But even those will roll off by the end of November. So we're going to face that challenge at the end of the year. But we currently don't hedge any of our diesel exposure. And that's certainly something as we get a little bit larger in scale in our distribution that we ought to consider. But so far, we have not. Okay, great, thanks.

Our next question comes from the line of Nori Naughton with JP Morgan. Please proceed with your question.

Hi, good afternoon. Thanks for the question. A quick clarification, and apologies if you said this on the call, but how does your new household penetration target or your metric of 4.9 million compare versus the first quarter of this year? And then my question is, what does the shape of the trajectory look like for FreshPet to get that back on track with its longer-term household penetration goal of 11 million households? I believe the initial plan when you set it out was closer to 7.6 in 23, which is still a sizable 50% jump from where you are today. So I guess the crux of the question is, will FreshPet need to spend more than 12% on ad spending for the next couple of years to catch up, so to speak? Thank you.

Yeah. First of all, we provided a comparison in the deck of the June data from the old method to the new method. So you can see the difference. I don't have the new method for the period at the end of Q1, so it's hard to say. But in total, it's like 486,000 more users in the new method than in the old method. And the rate of gain over the last couple of years has been 200,000 more than what the old method would have shown. What was most intriguing about the way in which the data has come out, and we've also seen a similar piece of data from Numerator, so it kind of validates it, is that our rate of growth in households has been more consistent over the last two years than what they had previously projected. And it gets to your second part of your question, is what do we need to do to get to that 11 million households? The answer is we need to get household penetration growth going back up into the mid-20s, which is where we've been in the past. And, you know, the last 12 weeks are up 19%, and that includes a little bit of a dip that occurred in June. So I'm expecting that as we go further towards the end of the year, you're going to see that number continue to go up, and we'll move into the 20s. Numerator, which provides similar data with a larger panel, is already showing us moving into the low 20s. with their more recent data. So I'm feeling pretty good about we're moving back up into the 20% plus growth range, and we need to stay there. We need to get into the mid-20s and stay there.

Right. Go ahead. Thank you.

One other thing to just take into consideration is as the business gets bigger, obviously, you know, this is as simple math as you can do, but the 12%, it starts to be, the dollars start to be tremendous. And it allows us to basically drive more and more consumers in. If we can keep our CAC in a similar range, we should be able to achieve that 11 million number fairly easily.

Understood. Thank you. And just to clarify, though, You've accelerated some of your ad spending into the second quarter, so presumably there would be very little incremental spending as we move into the back half. So I guess I'm just trying to square how we'll see your household penetration start to accelerate from here if you're going to be spending less incremental dollars as we move through the back half.

Yeah, it's hard to remember the comparison, too. The year ago was pretty soft in this area.

Yeah, we have a very healthy Q3 advertising-wise. And then, as Billy was mentioning, we typically have a fairly soft Q4 in advertising. Look, the big thing is there is a tremendous amount of disruption in the marketplace, whether it's gas prices, fear of recession. I think the fear was maybe as bad as the actual recession itself. We can see consumers stabilizing in their behavior and their traffic into stores. And it looks like this next period, our prices are now stable. Consumers are kind of calmed down, and we're going to see them go back into stores with fuller fridges than we've ever had. And we anticipate making some progress in this quarter.

Great. Thank you.

Our next question comes from the line of, excuse me, Brian Holland with Cowan & Company. Please proceed with your question.

Yeah, thanks. I have that effect on people. Good afternoon, everyone. So if I could ask first about maintaining the net sales guidance, you know, given prior year track volume compares get tougher in the second half, pet specialty appears to be a drag. I appreciate that part of that is comp driven, but I'm just curious how we get comfortable because it would seem that one and or two or both of, you know, track volume will need to sequentially get better from here, assuming price dates, you get another little bump there in the fourth quarter, but that and, you know, or pet specialties got to get better. So can you help us understand the volume path over the balance of the year?

Yeah. So the way I think about it is we're going to be in this, you know, summer, you know, horizontal period until probably the end of August. And then because of the media investment we made, because of the better in-stock conditions, because of the bridge placements that we've done, I'd expect to see us start ramping up on the consumption as we went through the fourth quarter. Remember that last year, again, I hate to go back and talk about lapping last year, but last year we had a disastrous July because of the warehouse issue, our third-party warehouse. We unfortunately survived this year's July and had a very strong July. And then on top of that, if you recall in the fourth quarter last year, we had the spare parts issue that impacted our ability to ship in the end of November and December. And so while we need to see good consumption numbers, and I expect to see strong consumption numbers between now and the end of the year, there are some anomalies in the year ago that kind of give you a sense that the growth rate on a net sales basis as well as on a consumption basis will be able to deliver the guidance. And frankly, it should give us a little bit of room.

And then just as a follow-on to that, you know, obviously trade inventory, I think it was maybe like a 700-bit headwind or whatever it was in the quarter. Forgive me if I'm not looking at the size at this moment. But I'm curious if you can help remind us what that looks like in the second half of the year, what you're lapping as far as impact there. And then also, on the elasticity side, You know, I appreciate the data that you gave us, but you've also called out, you know, some nice, you know, distribution growth in the first half. So I'm wondering how you discern or how you discern between, you know, kind of unit growth that's sort of apple to apple and, you know, what the distribution benefit is. Because if you had some distribution benefit in the first half, the logic would be you might have to keep that up to make the math look the same, but maybe you can walk us through that. Thank you.

Yeah, I'm probably going to get lost in some of your questions there. But the best way to neutralize, Brian, what you're talking about is velocity, measuring the velocity on the business. And the velocity on the business has continued to do quite nicely, even though we've been in this period where we had $5 gas and whatnot. So I don't know if you've seen that. We didn't include it in the deck this time. We have done in the past. But velocity on the business, dollars per point of distribution have been been fairly healthy. So I think, yes, we've gotten distribution, but we have more distribution coming in the back half of the year, and we're going to have velocity gains behind the advertising. So I think that all gets us to where we want to get to. I don't know if that addresses the question or not, though.

No, that's helpful. And exactly what I was getting at. I was trying to be confusing, but you got it. Trade inventory was the other one there. Just help us understand what

Yeah, there was trade inventory. There's fairly significant amount of trade inventory refill in the year ago. It was kind of odd. It was more skewed to the fourth quarter than the third quarter. But even in the end of the fourth quarter, we had some drawdown when we had our supply problems. So it's going to be lumpy throughout the back half of the year. So we do need to have consumption in excess of our net sales growth to compensate for it. So there's going to have to be some over delivery, but it's not exactly clear how big that number is going to be because, you know, the trade inventory needs to grow year and year as well. As we get more distribution and a bigger business, the customers hold three weeks of inventory and three weeks inventory is a bigger number on a 35% larger business than it was a year ago. So there will be some trade inventory build that happens this year as well.

Appreciate it. Thank you. Yep. Our next question comes from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.

Good afternoon. Thanks for taking my question. So I just wanted to go back to operating cash flow. So year-to-date, you guys burned a little over $60 million. It looks like mainly due to AR and inventory. I just want to get a sense of how you're thinking about this cash burn by the end of the year at the OCF level.

Sure. So I think the first thing is the receivables. So it's significantly inflated all driven by the growing pains from our new ERP system. Basically, our inability to invoice on time has obviously caused delays in terms of our cash collection. We now, as you mentioned already on the call, we now have a solution in place that that basically allows us to invoice real time with shipments as we had done previously. And so as we collect what was past due and are invoicing on time, we expect to be back to our normal DSO run rate of about 25 days based on our customer payment terms. So that's the first piece. The other piece on working capital, on the finished goods inventory side, That is sitting on a day that is largely in line with our objectives to be at around four to five weeks of inventory on hand. And we needed to build inventory to improve customer service. But we are sitting on inflated raw materials and packaging inventory. In Q2, that was about $5 million worth of an impact. And that also is attributable to ERP growing pains. where we've needed to hold on to some incremental inventory to ensure that, you know, from a planning perspective, we have what we need as we work through. Again, we have a very dedicated team in place now to finish up some of the needed post-implementation solutions, but this should really turn around. And what you will see in working capital movement from here on will be driven by the growth in the business and not by the ERP impact.

Okay, great. And then maybe just one additional question. Just on the guide, I'm just curious what you guys see now as a bigger risk for the guide for the remainder of the year.

We think we've, Rupesh, I think we've captured, you know, we, you know, went through and looked at all the inflation elements because that's the thing that caught us. I mean, we're absorbing in the, you know, our guidance, some of the, you know, conservatism that we built in at the beginning of the year. We've, you know, we absorbed it. We can't, as Heather said, absorb all of it. We think we've identified and captured all the inflation that we're going to get. But, you know, there are a few things like diesel and like natural gas that we don't have hedge positions. And, you know, if those things ran wild, those could be remaining risks for us. Not enormous, but they could be risks for us. The flip side is the same thing we've had and we keep trying to prevent is any supply interruptions, whether it's upstream for us or it's our ability to produce and supply to our customers. um and i would include in that we need a timely startup of our ns facility we feel very good about where we are we're ready to start it up but we need that role line to come on to produce the product to deliver our net sales for the year so i don't want to make it sound like we don't think there are any risks because there are and we have to go out and manage them but they would come on the supply not on the demand side it would come on the supply side and it would come on inflation and scott or heather i don't know if you see it any differently

I don't. I think you've covered it, Billy.

Okay, great. Thank you for all the color.

Our next question comes from the line of Mark Esherkin with Spiegel. Please proceed with your question.

Yeah. Hey. Thanks, everyone. Afternoon. I wanted to ask about volumes. So they seem a little bit slower than at least I would have thought. inclusive of more ad spend that you said earlier in the second quarter. And if we take a look at just the scanner data, the two-year volume tagger has sequentially decelerated, I think, each period since, call it late March, early April. So I guess I'm curious how that has stacked up versus your expectations. You touched on elasticity on the prepared remarks, but I don't think updated the actual elasticity. So if you could perhaps talk to that. And then How do you think about it not potentially getting worse with the incremental pricing that you talked about today?

Yeah, you know, we expected, I think, as we said in the prepared remarks, we expect to go flat during the summer because it looks like 2019. And that's why we provided a three-year stack. So you could see, you know, from 2017 to 2019, we saw very consistently in the summer consumption goes flat, whether it's people on vacation, dogs eating less. But you went flat and then you came back up again late August into early September. And we'd expect to see that continue. We did see in June, we saw some softness with about $5 gas. But we frankly also saw, you know, come back in July and saw very, very strong shipments. In July, we saw household penetration bouncing back up. So we feel pretty good about the trajectory to the balance of the year. I mean, we're all in uncharted waters, and we don't know whether there's a recession. We don't know if the Latinx price increase is going to be something that is the straw that breaks the camel's back. But the data we included in the deck and data that we have beyond that shows that pricing is pretty stable at this point. The sensitivity we have is about where it's going to be, which is what you'd expect. After about four or five months, you'd expect to get to a fairly stable place. And so we think we know what it looks like, and we think we know what the trends look like going forward. And our shipments and order rates match up pretty well with the projections and the guidance that we're giving.

Okay. And maybe just sticking with that, thinking about just broader strokes on affordability. So with the new price increase, I think you'll be up something, call it high teens versus where you were 12 months ago. I guess that's roughly consistent with what we're seeing across the pet food dog cat category. But to earlier points about potential for increased promotions coming out of this period of heightened inflation or potentially deflation at some point, you don't promote, you're not going to do that. But if others are doing it and they promote back half of it, then how do you think about the relative affordability for the product going forward at that point?

You want to take that?

Yeah. Hey, so Mark, so one of the things that we were really conscious about, and I touched on this a tiny bit with Peter, but didn't get into the details, When we even this last price increase and all along, we made sure that we had a handful of items that were still as affordable for everyone as possible. And we were really conscious about that. We did it in a couple of different sizes and a couple of different product forms. So no matter where the dust settles, those products will be available to people. And they have seen modest price increases, but they have not bared the brunt. They're not carrying the biggest amount of the price increases. So anyways, I think we try to be mindful of that. We put those in place. It'll be in our six pound chicken roll or some of our one, one and a half pound sizes. We've tried to make sure that they continue to remain accessible and affordable. Okay, thank you.

Our next question comes from the line of Robert Masco with Credit Suisse. Please proceed with your question.

Hi, thanks. I guess I cover a lot of food companies, and I don't recall hearing any of them talk about a slowdown in consumption from $5 gas, except for maybe impulse. So can you be a little more specific as to what type of products within your portfolio felt that impact? Are there some items that are more discretionary in your portfolio? That would make more sense to me than saying that, you know, people look at the price of gas and then reduce their volume of consumption for their pets.

Yeah. Rob, what we saw was foot traffic down and what people were doing was consolidating trips. And so what we were seeing was people were shop less frequently and they moved to our bigger sizes. And so I think it was a temporary phenomenon because if we look at our business in July, it bounced back. In fact, it looks like it's filling a hole that might have been created in June. And I can't put my finger on exactly how that happened or why that happened. But when we look at the data on trip frequency and the size of the units that they're buying, it clearly suggests that people were consolidating trips and buying larger sizes when they made the trips. but there was a little drawdown of pantry inventory that happened, and they're making up for it in July. Again, I don't know the psychology that works behind it, but that's what the data shows.

Okay, and then maybe one more follow-up. You said that you increased your media spend in order to sell through price increases. Is that for the benefit of the trade? Do you increase the media spending to help the trades? with this price increase or is it for the consumer? Because like, I don't know why, I'm not sure who it's helping itself through to.

It's to make sure that as you're seeing your prices rise, that you're making sure that you're keeping your growth rate intact, right? And one of the things that we looked at when we look at growth rate is we're looking at units, we're looking at pounds, et cetera, because dollars are a little bit hard to kind of get a handle around right now. And we've been able to see units stay in the high teens, even in same-store sales, high teens into the early 20s and similar with volume. So if you look at it that way, through this period of taking a net 17% price increase, we've been able to keep our overall kind of velocity growth strong. And actually, I mean, I look at it and I go, that's pretty encouraging, especially with what we saw in the category. If you look at units across the category, everyone's kind of high-fiving across the category, celebrating that they're having growth. But if you remove the price increase growth that they have in place, units look pretty bad, or volume looks pretty bad for the majority of the category. But I think that we've come out of this in pretty good shape.

Okay. I don't know if you're You're making me more optimistic or less by saying that the pet food category is getting hurt, but okay, Scott. But here's the follow-up. You're raising pricing again in the back half, so why is this just a pull forward in media? Wouldn't you have to do it again in the back half?

We literally called it a nip-and-tuck price increase. It's 2.7%. is what we're seeing in the back of the year. It's literally rounding. If we're at $579, we're going to $599 on items. I'm just using that as an example. So it's very, very modest.

One of the lessons that I've taken away from this experience is that we did one modest price increase, then one enormous price increase, and then another modest one. And the consumer could digest more smaller price increases rather than the size of the second price increase, which was pretty big, because that creates sticker shock and could cause the consumer to reconsider or reevaluate, do I really need this, as opposed to more frequent but smaller. And for the next one, I don't think a whole lot of people are going to bat an eyelash at, but they certainly noticed the second one. Okay. Thank you.

Our next question comes from the line of John Anderson with William Blair. Please proceed with your question.

Yeah. Hi. Thanks for the question. The first question is, Billy, I think you referred to providing an update at some point in the future with respect to addressable households and the, I guess, the underlying algorithm of household penetration and buy rate. Were you... Referring to that as being just kind of a mechanical exercise given the change in approach or methodology by Nielsen or something more fundamental based on price changes, a different kind of consumer behavior or both?

It's somewhere in between. I don't think we're going to go back and revisit the addressable market. At least we haven't committed to doing that yet. But we are looking at the driver. So, for example, Scott mentioned earlier, what is the customer acquisition cost with our current pricing in the market? Does that change in any appreciable way? What does the buying rate look like once consumers are digesting the pricing we've got? And just reconstruct the model that gets us from where we are to the 11 million households and the $1.25 billion in net sales. Because as I think I said when I framed it up, I framed it up as saying we know we're running at a rate that's well in excess of what you need to get to the target. And the question now is with the higher pricing and the higher buying rate, what is the composition of that going to look like? You know, do you make any changes because the CAC is higher or lower, the buying rate is higher or lower, the households are easier or harder to get? And that's the algorithm we need to put together. And we wanted to see the pricing stabilize before we made that decision.

Okay, so no change to your level of confidence in the $1.25 billion or the 25% EBITDA margin. It's just kind of maybe the algorithm underneath that is what you're saying.

Yeah, that's probably the right way to think about it, John.

Okay. And then I guess just follow up. I just have a broad question on direct-to-consumer. You didn't really mention, at least in the prepared comments, e-commerce. growth this quarter to give us an update on that. And then are you, do you have broader plans for a direct to consumer offering? Uh, when might we, you know, hear about that? If so, just want to get your perspective on that from a competitive standpoint too. Thanks.

Yeah. Um, so we, we've continued to see really nice growth. It's actually, uh, an E what we consider e-commerce, which is any place someone can sit down on a computer and order our product. Some of that's directly delivered and some of that's click and collect. It's actually page, I believe, 45 and 46 in the deck, John, and I know we provide a ton of materials to go through. So that continues to grow. There's a couple of retailers that are doing a really, really great job with this, and we're continuing to invest with them and work with them. Over time, we recognize that from a DTC standpoint, we don't believe that going direct to consumer is the right path for us, but we do believe that modifying our product portfolio and working with our existing partners is the right path. We feel like we've come up with a new and differentiated model that will be really helpful to break into that piece of the market. And I think whether it's later this year or Q1, we'll be introducing some kind of a new product line in order to do that. Great. Thanks a lot.

Our next question comes from the line of Ben Bienvenu with Stevens. Please proceed with your question.

Hey, guys. Jim Solera on for Ben. I wanted to circle back to the CapEx guidance reduction. If we look at pushing the investment in the Innovation Center more into 2023, given the overall inflation in building materials and things that go into setting up a new facility, does that $80 million add that into the CapEx or something? Because I would assume that if you shifted, some of that goes into the new year, but it looks like the CapEx cadence outside of this year is still the same 300, 200, 100 moving forward.

So with that innovation center, it literally is we can't get as much done as we would like to from a timing perspective. We actually think that can work to our advantage. So I think we touched on whether it's stainless steel, building materials, et cetera, the amount of stainless steel we use in our equipment is pretty extraordinary. So as we look at planning that out, we may have to put deposits down at the similar timing, but we anticipate that as the markets on some of those commodities, stainless steel, for example, or some of the other building materials, cools off a little bit, we think there may be advantage in that innovation center, and we're hoping that there's additional savings through that, too.

So, to be clear, that's in the $80 million is the assumption that some of those, like, core commodities come down?

So in that 80 million is a timing and a little bit of an efficiency. As we said, we had a conservative set of assumptions. As we get further along, we get more realistic assumptions on both timing and the actual cost, and we push some of the projects back. It's also you have to know that some of this is a cascading effect where one project leads to the next project. And so what you're seeing is we showed you CapEx going out through 2025. but there's some stuff that is just kind of cascading and will fall back into 26 in that case. So, you know, the $80 million is a total reduction in the horizon we're showing you. Some of it is efficiency, some of it is timing, but some of it is pushed out into the latter years.

Got it.

But also I think it's like a waterfall back out past 2020. Yeah. So the 2026 could contain some of that incremental spend above, you know, I think, you know, the hundred-ish million that you've talked about before.

Yeah, I had a hard time.

But I think importantly, but importantly, the capital spending that we have planned out in this revision gives us plenty of headspace to grow and meet the objectives that we have.

And then just real quick on, I know we've got a lot of questions on the ad spending. But just given that there was such firm ad support in the first half of the year, if the economy continues to deteriorate into the back half of the year, would you guys feel okay turning some of the ad spending back on to support volumes, or would that be something that you're more focused on margins in the back half of the year, and so you'd rather take the volume hit and wait until the first quarter of next year starts to pick back up?

I think that, you know, we're very committed to making sure we continue delivering on the top line, and we feel very good about the plan that we've got. There's also lead times on media commitments that, you know, would make it hard to do that in an efficient manner. So we're, you know, we're pretty committed to delivering the net sales line we said, but also delivering the epidemic that we've committed to. So I don't want people to get the sense that we would um erode the profitability because we want we do know as we said in the call we're very focused on on generating cash and cash efficiency as we grow and so we want to make sure we're very mindful of the investments we make and when we make them there are no further questions in the queue i'd like to hand the call back over to mr seer for closing remarks great well thank you very much for your interest and your attention I'd like to close with a statement in honor of Olivia Newton-John, who passed away earlier today. She said, the only weights I lift are my dogs, to which I would add, if she fed them Fresh Pet, they would be lean and the lift easier. Rest in peace. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.