Nobody else does what we do. And so, there’s more variability in it than you would normally see in a much more well-established business. But we’re getting better and better at it. We’re managing it better and better. The top line part of this is the part that, as you know, has been much, much more stable over a long period of time. We’re able to predict that really well. In this case, the top line is being driven by our ability to supply it reliably. I’m going to go back to the comment I made earlier. We believe having a very good fill rate, is a very strong indicator of operational performance. Ad we do not want to get ourselves in a position, where we don’t have a high fill rate, because that’ll indicate that we’re having some other issues.
So, we’re going to plan the growth to live within the capacity and deliver that strong fill rate.
Operator: Thank you. Our next question is from the line of Bill Chappell with Truist. Please proceed with your question.
Bill Chappell: Good morning. Thank you.
Bill Chappell: Just had a…
Billy Cyr: Good morning.
Bill Chappell: First kind of question or maybe a little more color on the roll capacity issues that you might run into later this year. Maybe – any sense of just, I’m just trying to understand, as we’re this early in the year, it seems, and roll production is fairly straightforward. I’m just trying to understand, one, have you seen a surge in kind of rolls versus bags as new customers have come in? Kind of what’s the difference there? And then two, do you see there being some other issue? I’m just trying to understand why roll capacity would be tough to do that, or if you’re just trying to be conservative, let’s move to the back half of the year, just in case?
Todd Cunfer: Bill, I think as we’ve said since the beginning, we knew that this is a little bit of a game of leapfrog – you bring up a line it gives you a big surge in the capacity for that particular product form, and you do fine, and then you have to think about bringing up the next line, which might be on bags. In this case, the one we’ll bring up now is rolls. But after that, there will be bag line. And we haven’t spaced out just right, or we believe it’s just about right. But you’re dependent upon bringing that line up at the rate you want on the timing that you want. That means construction has to be complete. You have to do all the line commissioning qualification, then you have to go through a ramp-up curve on the line.
And we are at the point now where our growth has been very robust on both rolls and bags. So, we’re dependent upon the next roll line coming online, and we just don’t want to get ahead of ourselves. There’s always some variability in the start-up of the line, and we just don’t want to get too far ahead of ourselves. The growth has been good on rolls. And we are at the point now where the operational improvements we’ve made in Bethlehem are helping us build inventory on rolls – as the consumption of rolls continues to grow in Q2 and Q3. We can supply it from the existing facilities in existing line, but we need that line to come on in Ennis. Otherwise, we will get in a position where we’ll start short shipping of rolls, or at a minimum drawing down our inventory and our fill rates will drop.
So – it’s what it was planned. It’s built in the plan all along, it’s the way we’ve been thinking about it.
Scott Morris: And I would say, like you mentioned – I think in the beginning of question, you mentioned an issue. There is no issue. We just want to make sure we stay within a band that we are comfortable with. And as Billy said, we’re running actually slightly ahead from the standpoint of bringing capacity online.
Bill Chappell: Got it. Okay. I’ll follow up later on that. So – just on the second cooler initiative, I mean, certainly, I understand and got more than enough metrics showing how as you add a second cooler, you drive velocity. But – at some point, do you need more SKUs? Do you need more forms, or different products to fill those coolers to really keep the velocity going? Or are you fine with kind of the core four or five SKUs that you have in both coolers just to drive forward?
Scott Morris: Actually, Bill that is actually a really good question, and something we have been doing a ton of work around and you’re going to see over the next 12 to 18 months. You’ll tend to see us basically looking through the portfolio and actually bringing down. We’ve actually been on a downward path on bringing down complexity and the number of SKUs we have across the portfolio. Okay? So you’ll see simplification and you’ll see products that are more suited to our kind of future state manufacturing. I want to say future state, it’s like within the next 12 months. It will be literally optimized portfolio, to make sure it works incredibly well within our overall manufacturing network while balancing out the demand that we need from a consumer standpoint.
So, we’re really trying to optimize the entire portfolio to maximize our consumer demand and maximize on profitability. And that – there’s a huge piece of work that we’re – I was talking a little bit earlier about leaning forward and thinking forward on what we need to do with the company. That’s exactly the work that we’re embarking upon. Now all that being said, I will say we are having incredible success as we’re going into second coolers. And one of the things we’re doing in second coolers we are spreading out on some core SKUs to make sure that we have holding capacity, through the weekend. Because the reality is in stores with high velocity, we are still seeing some out of stocks, and there’s definitely potential for us to build out on some of the core SKUs. We are seeing core SKUs basis – SKUs that have been around for 15 years, continue to grow at kind of mid-teens rates.
That’s like really good stuff. On the other piece of it, we are definitely seeing, kind of the more specialized parts of the portfolio, some of the little more feature-oriented benefit-oriented and actually most humanized. And most expensive products have leading growth rates. So, we’re kind of seeing it across. And while we don’t need many more, we need to optimize what we have. And again, that will go to the work that we’re embarking upon.
Bill Chappell: Thank you, Scott.
Operator: Our next question is from the line of Bryan Spillane with Bank of America. Please proceed with your question.
Bryan Spillane: Hi, thanks, operator. Good morning, everyone. I just had a follow-up on the questions around free cash flow and cash. So maybe, Todd, you were – cash from operations positive this quarter. And it looks like a lot of it is just the profitability – but can you talk a little bit about the path to free cash flow, how much of it will be, just the increase in profits versus sourcing from working capital, or I guess, over time CapEx. But just trying to get an understanding of other things we should watch in terms of monitoring free cash flow other than CapEx and profits?
Todd Cunfer: Yes. So look, we’re trying to manage – we’re still growing obviously at an extraordinary rate. And so, we will have to continue to spend a fairly heavy amount of CapEx to build out capacity over the next few years. We’re trying to manage that in the kind of the 200 to 225 zone. We’ve done a nice job of doing that. And we’re off to a good start this year. So I feel very comfortable that we can manage within that range most. Almost all of where we’re going to get to positive free cash flow, to your question, will come from profitability. So as the business expands, as the margins expand the amount of EBITDA that we’re going to throw off, is obviously going to increase fairly substantially over the next couple of years, if we’re able to execute our plan.
So nothing dramatic in working capital. We’ll obviously try to manage that as closely as we can, but it really is just the profitability, and the scale and the growth of this business that will drive all the vast majority of the operating cash flow.
Bryan Spillane: All right. Cool. That’s super simple. I can follow that. And then the second question just around the convert. Can you remind us just given the share price, just the mechanics, I think we’re bumping up close in terms of it, being convertible. But just – could you just remind us all of just the mechanics and what should be watching for in terms of the share price?
Todd Cunfer: Yes. I mean, look, it’s obviously a five-year convert. We cannot force that conversion on our end for until year three. So nothing to do from our side. We’re at a point where someone actually could force they could convert the bondholders could force us to convert, but because of the optionality value of it, no one has any rationale to do it, they could trade out the bond and take a profit, but they would leave money on the table if they would force to convert. So that’s highly, highly unlikely. There will be no dilution from a GAAP perspective until we get net income well over $100 million. And then just don’t forget, we have from an economic perspective, we have the CAP call that we put on that protects us economically to about to $120 a share.
After that, it will become somewhat dilutive economically. But obviously, we’re thrilled that we’re going to – look like we might be at the $120 today, if the price stays where it is, but we’re sitting tight from our perspective for two more years until we kind of, kind of decide at that point whether we want to force the conversion or not.
Bryan Spillane: All right. Thanks Todd. And just maybe if I could sneak one last one in. Just are we – do we have a comfortable level of cash on the balance sheet, just given how fast the business is growing, CapEx needs, just kind of your feeling of comfort level based with the cash you have on the balance sheet now?
Todd Cunfer: Yes. I feel really good. Obviously, we’ve got plenty of cash for this year. I think there’s a very good chance – we have a good chance of having enough cash for next year. And then obviously, we think we’re going to be free cash flow positive in ’26. And look, based on the amount of EBITDA we’re driving right now, if we do need a small amount of capital in ’25 or ’26, clearly, we have enough profitability to borrow that pretty effectively.
Bryan Spillane: Okay. Great. Thanks, guys.
Operator: Thank you. Our next question is from the line of Robert Moskow with TD Cowen. Please proceed with your question.
Robert Moskow: Hi, thanks for the question. I think I’ve asked this question in a different way last quarter, but I’m going to try to do it this way this time. Do you have any data on what progress you’re making on shifting your mix to main meal versus toppers? You said 48%, does that demonstrate any progress? And then, if you fast forward like a few years from now, what does success look like? Does it have to be significantly higher to 2027 goals, or – to what extent does it matter? Thanks.
Scott Morris: So hi Rob, so let me start with the way – here’s what we’re seeing in the business, right? So from a penetration standpoint, we’re very consistent on the penetration growth that we’re consistently seeing. And the people that we’re building the most, with that are outpacing are basically those super heavy, heavy or the people that we refer to as the Hippos, right? So that means that that naturally basically pushing buy rate. That group is really the one who pushes the buy rate forward. So, the way we have basically planned the majority of this is, it’s going to be a penetration focus – but we want to make sure that the – that within that penetration piece, we’re getting a lot of those super heavy and heavy households.
They’re coming in and pushing the buy rate forward. We definitely have some expansion in buy rate. We’re consistently seeing that. And then we have so many data points now that are starting to show where people are not just buying ones, they’re buying twos and now they’re starting to buy six packs, like we’re looking at like where people are buying bulk packs of our products. And I think that clearly speaks to this ideology of this is not a topper. This is something that is a main meal for my dog. This is a replacement – so you got the super heavy, heavy staff, you’ve got everything that we’re doing around selling multipacks, and you’re going to see more and more of these multipacks come out there. And we feel like that answers, like that demonstrates to consumers.
