Freshpet, Inc. (NASDAQ:FRPT) Q1 2024 Earnings Call Transcript

Freshpet, Inc. (NASDAQ:FRPT) Q1 2024 Earnings Call Transcript May 6, 2024

Freshpet, Inc. beats earnings expectations. Reported EPS is $0.3717, expectations were $-0.22. Freshpet, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to Freshpet’s First Quarter 2024 Earnings Call. [Operator Instructions] Please note this conference is being recorded. At this time, I’ll now turn the conference over to Rachel Ulsh, Vice President of Investor Relations. Rachel, you may now begin.

Rachel Ulsh: Thank you. Good morning, and welcome to Freshpet’s first quarter 2024 earnings call and webcast. On today’s call are Billy Cyr, Chief Executive Officer; and Todd Cunfer, Chief Financial Officer, Scott Morris, President and Chief Operating Officer, will also be available for Q&A. Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements related to our long-term strategy focused 2027 goals, pace in achieving these goals, prospects for growth in the new technologies and 2024 guidance. Words such as believes, could, estimate, expect, guidance, intend, may, project, will or similar conditional expressions are intended to identify forward-looking statements.

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, including those associated with such statements and inaccuracies and third-party data. Please refer to the company’s annual report on Form 10-K filed with the Securities and Exchange Commission and the company’s press release issued today for a detailed discussion of risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements made today. Please note 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 and 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, why management believes such non-GAAP measures are useful. A reconciliation of the non-GAAP financial measures to most comparable measures are 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, rather as a summary of the results and guidance they will discuss today. With that, I’d like to turn the call over to Billy Cyr, Chief Executive Officer.

Billy Cyr: Thank you, Rachel, and good morning, everyone. The message I would like you to take away from today’s call is that these strong quarterly results proved that some of the most critical financial metrics in our 2027 goals are achievable. Now we must prove to you that we can deliver them consistently over time. These results did not happen by accident. They were the result of a disciplined focus on the key drivers of profit improvement and the changes we have made as an organization and we are determined to continue those disciplined efforts until these results become a long-term trend. Further, these results demonstrated that with increased scale comes increased profitability, which was the basis of our Fresh future plan that we announced in early 2023.

It was then that we pivoted to a more balanced approach to growth and profitability versus our previous single-minded focus on growth alone. We were able to deliver these results because of the strength of the Freshpet business model and consumer proposition and strong improvement in the key fundamentals that drive our business. There are several important points I would like you to take away from these results. First, our growth model continues to deliver. We’ve successfully absorbed the most significant pricing we’ve ever faced, delivered strong volume-based growth in the quarter and return to the greater than 20% household penetration growth rate embedded in our long-term targets. Further, we added those households at a customer acquisition cost or CAC, that is comparable to the levels we experienced prior to the price increases of the last two years.

This demonstrates the strength of the Freshpet growth model, the power of our marketing and also provides the confidence that the model can continue to deliver the 25% net sales growth embedded in our fiscal year 2027 goals. Second, we have improved our operational effectiveness. We are now delivering significant year-on-year improvements in our quality, input and logistics costs, the costs that we’ve been intensely focusing on, and that has resulted in a step change in our adjusted gross margin and adjusted EBITDA margin. Our operational achievements stem from our efforts to build strong organizational capability at all levels, beginning with our Freshpet Academy that has strengthened our production workforce and also including some of the senior leaders we have hired in the past 1.5 years.

And while these operational improvements are significant, we believe we are just getting started and that our team is capable of delivering this type of operational excellence more consistently over time and potentially doing even better. Finally, we are demonstrating the capability and operating discipline needed to balance capacity and demand at such a high rate of growth. We’re adding capacity on budget and on time and at a pace that enables us to keep up with our high growth rate without carrying too much excess capacity. This enables us to deliver strong fill rates to our customers while simultaneously improving our margins and as a result of the rigor and discipline that we have put in place around our growth planning. This is the balancing act between growth and capital investment that we have described to you previously, and we are increasingly mastering it at a high rate of growth.

While we are pleased with the performance we delivered, we are not satisfied. We need to deliver this level of performance consistently over time. And once we’ve proven our ability to do that, we would consider revising our long-term targets. But right now, we are focused on maintaining momentum in each of the remaining three quarters of this year. As we have mentioned many times before, the manufacturing systems to make fresh pet food are still in their infancy. We are investing heavily in organizational capability and technology to make those systems more reliable, consistent and efficient and are making good progress on many aspects of the process. But we also know that we are still in the early days of the fresh pet food category and the opportunities for improvement are sizable.

We fully intend to realize those opportunities over time and have numerous initiatives underway to do that. Now let me walk through some of the highlights of the first quarter. We had strong momentum in the first quarter and made tremendous progress against our long-term plan and you can see that in our financial results. First, we started the year with very strong net sales growth, with first quarter net sales of $223.8 million, up 34% year-over-year, driven primarily by volume growth of 31% and 3% price/mix. Second, we saw a significant improvement in adjusted gross margin as well as adjusted EBITDA. First quarter adjusted gross margin was 45.3%, compared to 41.1% in the fourth quarter and 38.5% in the prior year period. First quarter adjusted EBITDA was $30.6 million, an increase of approximately $28 million year-over-year.

Our diluted earnings per share was $0.37 excluding a markup in the value of our equity investment, EPS was $0.17 per share. I’ve been looking forward to the day that I can say those words for a very long time, and I expect that to become a habit going forward. In addition to those financial highlights, we made progress on our retail availability and visibility as well. We placed 617 fridges in the first quarter, including new stores, upgrades and second/third fridges bringing us to a total of 34,812 fridges at retail for more than 1.7 million cubic feet of retail space. As of March 31, 2024, Freshpet could be found in 27,097 stores, 23% of which now have multiple fridges in the U.S. Fridge placements and store growth were supported by continued strong fill rates that ended the quarter in the high 90s again.

We have rallied the organization around our mainstream main meal, more profitable plans, what we refer to as main and more. We’re making the Freshpet brand more mainstream and getting people to use it as a main meal component and this creates intensity and concentration of the business that we believe will allow us to be more profitable. Focusing on the idea of mainstream, according to Nielsen omnichannel data, which includes e-commerce and direct-to-consumer, as of March 30, 2024, total U.S. pet food is a $53 billion category. We only have a 3% market share within the $37 billion dog food segment, which the majority of our business is today. leaving a vast runway for growth. Within the Fresh Frozen subcategory in measured channels, which continues to outperform the broader pet food category, Freshpet has a 96% market share.

The idea of the humanization of pets is becoming more and more mainstream, appealing to every income group and demographic, and it is our goal to make fresh food the standard way to feed our pets. Our household penetration at the end of the first quarter was 12.367 million households, up 24% year-over-year and growing. Our high-profit pet owning households or HPPOs for short, are growing even faster up 34% versus the prior year period. We remain on track to meet our target of 20 million households by 2027. Overall, retail availability continued to grow, with ACV of almost 65% and we continue to see upside in continued distribution gains going forward. We will continue to focus on increasing the percentage of stores with second and third fridges.

Turning to the concept of main meal. We use our advertising to educate consumers on the benefits of fresh food for their pets, and that is the key driver to convert more consumers to use Freshpet as a main meal. Today, 48% of Freshpet buyers use the product as the main component of their pet’s meal and there is a significant opportunity to increase this percentage even with our heavy users. 37% of Freshpet’s users are HIPPOs and they represented 89% of our sales in the first quarter by focusing on fresh, healthy food, offering a wide range of price points and expanding our recipes we believe consumers will naturally convert from using Freshpet as a topper to more of a main meal item, centering the plate around fresh. This concept of converting toppers into main meal users will, in turn, increase by rate two which was $96.84 at quarter end, up 5% versus a year ago.

Based on mega-channel data, we currently have an average of 18.9 SKUs per point of distribution, up from 16.4 SKUs one year ago. We plan to increase the number of SKUs available at each retailer by adding second and third fridges, which amplifies our marketing spend and drives visibility for the brand. While also allowing us to showcase a wider range of our portfolio. Turning to the more part of main and more, more profitable. As I mentioned earlier, we significantly improved margins this quarter, with solid operating performance, thanks to the work of our team, quality, yield, input costs and throughput all drove the overdelivery. Last quarter, I suggested that we had reached an inflection point and we’re turning a corner on profitability because we are now at a point where we can leverage our scale, increase business intensity and concentration.

We’re now seeing those benefits of scale play out, and they are driving increased profitability. First quarter adjusted gross margin increased 680 basis points year-over-year to 45.3% and adjusted EBITDA as a percent of net sales was 13.7% compared to 1.8% in the prior year period. Logistics has been a key area of focus for us, and it was only 6.4% of net sales in the first quarter, improving 290 basis points year-over-year and coming in below our long-term target of 7.5%. We are greatly encouraged by these results and believe there is a significant opportunity to drive further profit improvement going forward with our Ennis facility still ramping up production and our continued work on OEE to increase yield and throughput. That leads me to an update on our capacity.

We feel confident in our expansion and efficiency projects, which are all on budget. Ennis currently has three lines operating today, one roll line and two bag lines and this facility is producing approximately 25% of our total production volume. Our fourth line in Ennis is slightly ahead of schedule and expected to start up by the end of the third quarter. This additional line kicks off Phase 2 in Ennis and will alleviate some complexity of changeovers and SKU assortment since it will be our second roll line in this facility. We’ve continued to evolve our capacity expansion plans to drive greater capital efficiency. We’re intently focused on, first, maximizing the throughput of our existing lines by investing in an operational excellence program designed to increase our OEE.

We’ve seen steady progress on this, particularly in Bethlehem, where the program has been underway for more than a year. Second, maximizing the capacity of our three existing sites so that we can avoid the high cost of incremental infrastructure and overhead. For example, in Bethlehem, we are converting storage space to add a seventh line. In Kitchen South, we believe there is room to add one or two more lines in the existing building. And in Ennis, we are looking at ways to add more lines as well. Third, developing and implementing new technologies that generate more throughput per line and improve the yield and quality. We have developed one technology that has shown great promise and others are in earlier stages of development. It’s still too early to tell when these might impact our capacity or P&L.

While we believe these technology investments are important because our need for capacity will only grow as time progresses, and we continue to believe that our manufacturing expertise will be a key strategic advantage over the long haul. Scott, who successfully pioneered the development of our existing products and processes is leading our efforts to develop and commercialize these potentially breakthrough technologies. As I said earlier, our first quarter results demonstrate that scale leads to improved profitability. Todd will walk through our updated guidance, but I’d like to provide an update of our results versus our long-term targets. We are clearly ahead of the pace required to deliver our original 2027 goals, which gives us increased confidence in our ability to either meet or exceed those goals, but we need to show we can deliver these results consistently.

Albeit encouraging, it is still early in the year, and we want to be measured in our forecast for the balance of the year. We knew the first quarter sales were going to be strong because of our sizable media investment in Q4 of 2023 and the momentum that generated and the 34% first quarter net sales growth still exceeded our own forecast. We plan to carefully manage our top line growth for the remainder of the year so that we do not get ahead of our installed capacity or organizational capability. We believe our model works very well at approximately 25% growth, generating the right balance of growth, capital investment and cash generation. Adjusted gross margin of 45.3% in the first quarter was above our 2027 target of 45%, giving us even more reason to believe we can deliver our long-term goals.

We’re able to deliver this despite the fact that Ennis is still subscale and in startup mode and we have not implemented any of the new technologies we are working on yet. Further, our Freshpet Operational Excellence program is still in the early innings and we believe there is lots of upside as we implement that program. But as I mentioned earlier, we want to demonstrate consistent performance at this level before we commit to anything beyond that. Adjusted EBITDA margin of 13.7% in the first quarter is tracking ahead of plan to achieve our goal of 18% adjusted EBITDA margin in 2027. As you know, we tend to front-load our media investment. Q1 media investment as a percent of net sales was more than 300 basis points higher than it will average for the year.

So when you adjust for that media spending cadence, Q1’s adjusted EBITDA margin was closer to 17% very close to our 2027 goal. We believe that if we can consistently deliver the adjusted gross margin we delivered in Q1 that we can deliver the remaining building blocks of our adjusted EBITDA margin target of 18% through effectively leveraging the added scale that comes with our growth. Operating cash generation of $5.4 million was ahead of our plan, further increasing our confidence we can self-fund our growth. With no need for additional equity and potentially not even needing any new debt. In summary, we are off to a fast start this year. We have more work to do to prove to our shareholders that we can maintain or exceed this level of performance but we are confident in our ability to execute based on what we know today and what is within our control.

Now let me turn it over to Todd to walk you through the details of the Q1 results and our updated guidance. Todd?

Todd Cunfer: Thank you, Billy, and good morning, everyone. As Billy mentioned, we had an excellent first quarter. Now I’ll give you some more color on our financials and updated guidance for the year. First quarter net sales were $223.8 million, up 34% year-over-year. Nielsen measured dollar growth was 26% versus prior year period with broad-based consumption growth across channels. We saw 28% growth in xAOC, 25% in U.S. food, 13% growth in pet specialty and over 100% growth in the unmeasured channels. First quarter adjusted gross margin was 45.3%, up 680 basis points year-over-year. This was driven by improvements in input cost, quality, yield and throughput. Specifically, input costs as a percent of net sales improved 390 basis points, reflecting a small amount of pricing from last year’s price increase, improving yields in our manufacturing operation and lower commodity costs.

Quality costs improved by 240 basis points and plant costs improved by 60 basis points, both driven by strong operating performance across all three manufacturing sites. Within plant costs, we were able to build much needed inventory, which contributed about 100 basis points in the quarter. First quarter adjusted SG&A was 31.7% of net sales compared to 36.7% in the prior year period. We spent 14.3% of net sales on media in the quarter, down from 15.5% of net sales in the prior year period. Total media investment was up 23% year-over-year, in line with our plan to have our media spending a bit less front-loaded this year. Logistics costs continued to improve and were 6.4% of net sales in the first quarter, a decrease of 290 basis points compared to the prior year period.

We believe that about one-third of this improvement was due to market conditions, such as lane rates and diesel costs, and the remainder was due to deliberate actions we took to increase fill rates, reduce miles and other efficiency focused efforts. In fact, our logistics costs in the quarter were $1.3 million lower than in the year ago period despite shipping 31% more pounds of finished product. First quarter adjusted EBITDA was $30.6 million or 13.7% of net sales, compared to $3 million or 1.8% of net sales in the prior year period. This sharp increase was driven by better-than-expected net sales and improvement across input, quality, logistics and plant costs. Capital spending for the first quarter was $46.5 million, in line with our expectations.

Operating cash flow was $5.4 million, and we had cash on hand of $258 million at the end of the quarter. We continue to believe that we have adequate cash to fully fund our growth through 2024, and we will be free cash flow positive in 2026. We also believe that we will have access to traditional nondilutive forms of capital to bridge a gap in 2025 if it occurs. Now turning to guidance for 2024. We are maintaining our net sales guidance of at least $950 million until we have greater confidence that we will have adequate rolls capacity to meet a higher level of demand later this year. This will also allow us to manage our growth to deliver the right balance between growth and capital investment. As we have said, we are carefully managing our growth to live within our capacity plans, if we do find that our production performance from existing lines and facilities exceeds our plan, we would be comfortable letting the growth drift a bit higher this year.

However, we also need to be mindful that we need to have adequate capacity to meet demand for next year as we exit the year. So we are managing this closely, and we will not commit to a higher level of growth, until we are sure that we can supply it reliably, both this year and next year. Even if that means our growth rate later in the year is below our long-term rate of 25%. And we can reaccelerate as capacity becomes available. In terms of cadence, we still expect the first quarter to have the highest percent net sales growth year-over-year and expect sequentially lower percent growth throughout the remainder of the year. We may pull back media to control growth, in line with the long-term algorithm. Not because demand is slowing, we are just managing the pace of growth as we expand capacity.

We are raising our adjusted EBITDA outlook from our previous guidance of $100 million to $110 million to now at least $120 million to reflect the over delivery in Q1. While our performance to date has been very encouraging, we will not commit to a higher level of profitability for the balance of the year and so we have proven that we can repeat Q1’s performance reliably. As such, our revised guidance adds the Q1 over delivery to our target for the year but has not changed our expectations for the remaining quarters yet. We now expect adjusted gross margin to expand by at least 300 basis points for the full year, compared to 100 basis points previously and expect commodity deflation in 2024. Capital expenditures will be approximately $210 million to support the installation of capacity to meet demand in 2025, consistent with our previous guidance.

In summary, we are encouraged by the first quarter results. However, it is still early and given the potential for the environment to change as we progress throughout the year and the unforeseen issues that arise from time to time, especially for high-growth businesses, we are going to be prudent in our forecasting. We said last quarter that we are at an inflection point and believe we have turned the corner on profitability. We have gained scale and are beginning to see the benefits of that. Like Billy mentioned, there is more upside longer term as we continue to work on operational efficiencies and bring more capacity online across our facilities, especially in Ennis. For now, though, we feel comfortable maintaining our long-term targets of 45% adjusted gross margin and 18% adjusted EBITDA margin because we once approved, we can consistently deliver on our profitability metrics over time before we commit to new targets.

Finally, this step change in our profitability adds to our confidence that we will be able to fulfill our mission of elevating the way we feed our pets with fresh food that nourishes all. We are building Freshpet into an iconic market-leading brand that is redefining what pet food is and that we believe is better for pets, people and the planet. That concludes our overview. We will now be glad to answer your questions. As a reminder, we ask that you please focus your questions on the quarter, guidance and the company’s operations. Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Ken Goldman with JPMorgan. Please proceed with your question.

Ken Goldman: Hi, good morning. Thank you.

Billy Cyr: Good morning.

Ken Goldman: Yes, thank you. Good morning. In speaking with investors this morning, I think there’s a general feeling, you guys have addressed this a little bit, that your outlook, maybe remains conservative. And I understand, there’s still uncertainty about production capacity toward the end of the year. But just going beyond that, in addition to those capacity questions, I guess, is it reasonable to think that, there is still a little bit of prudence as well, in your top and bottom line guidance outside that? I’m just trying to think of areas where you might be a little more circumspect. Just looking forward than what maybe current conditions might indicate?

Billy Cyr: Yes, thanks. Thanks for the question, Ken. I’ll take the top line part of that, and then Todd will give you our view on the bottom line part of that. But as you know, we are very thrilled with the Q1 performance. And it was a real good confidence confirming point that said – our volume-based growth is back, and we have our household penetration growth, is back to where we want them to be. I mean, demonstrated consistent strong performance on that level. And it’s also proving that the media is driving our growth. We have really strong Q4 media that drove the growth in Q1. But as you acknowledge, the reality is that we have to be very mindful of the balance between demand, capacity, and the cash that it takes, to deliver the capacity.

And we’re trying to find that fine line. We’re not particularly concerned based on what we see about the macro market, although we’re hearing everybody else’s reports on it. We’re not seeing it in the environment we’re operating in. We’re seeing the strong household penetration growth, across a variety of income groups. We’re seeing very good pull across a variety of classes of trade. So, we feel very good about that. Our concern is really based on capacity available this year, and capacity next year. And if we get too far ahead of ourselves, our fill rates go down, and we start needing to pull forward more capacity addition. The counter to all that and the antidote to that for us, is if we continue to see very strong operating performance, meaning throughput on our existing lines.

It’ll give us license to lean in a little bit more than what we’re already doing. But we’re really going to be focused on managing the growth, to fit within that very tight band that we’ve outlined, because that’s where we operate best. Todd can give you a little bit of view on the bottom line.

Todd Cunfer: Yes, I mean, obviously the big variable from an EBITDA perspective, is the gross margin line. So obviously terrific Q1, a little bit over 45%. We’ve given guidance of at least 43%. So kind of – what are some of the issues that could bring that down for the rest of the year? So first and foremost is, as we had in the opening remarks, we built much needed inventory, particularly on rolls in Q1. That helped us by about 100 basis points from a fixed cost leverage perspective. That will not repeat later in the year, and in fact will likely unwind. So that will put a little bit of a headwind on gross margin for the remainder of the year. We had a great quality quarter. As that can move around. So we’re being a little cautious on, can we continue to be at that less than 3% rate on quality?

So a little more conservative there. We do have our annual wage increase in the plant coming in June. Not a huge impact, but we’ll put a little pressure on gross margins. And then there’s the fourth line, and Ennis will be starting up in the third quarter. We’ve done a much better job of bringing up lines, not as big of an impact on the P&L as in the previous years. But there will be, an increase in fixed costs on the balance sheet at the end of Q3, going into Q4. So feel great about the start. We do have some pressures, but, if some things go our way, obviously we can do a bit better.

Ken Goldman: Thank you for that. That’s helpful. And then a quick follow-up. As we think about modeling the upcoming quarter 2Q, are there any particular factors we should consider, either positive or negative? And I’m just thinking about areas like the timing of media spending, bridge placements, and I guess the timing of that inventory unwind you mentioned? Thank you.

Todd Cunfer: Yes, obviously a sequential build in revenue, not a huge one, but – we will have sequential build in revenue in the Q2. A fairly strong media spend for the quarter. We’re still working through a couple of things that could change a little bit, but we’ll have a fair amount of spend as we always do in the second quarter. I don’t, we may unwind some of the inventory in Q2. More of it might be in Q3. That is still a variable, but it will unwind, later in the year. But those are the big areas, and logistics, continue to be favorable for us.

Operator: Thank you. The next question is coming from the line of Mark Astrachan with Stifel. Please proceed with your question.

Mark Astrachan: Hi, thanks. Good morning, everyone. I guess maybe a big picture question. If you look at this, the expanded scanner data that we now get, Freshpet’s driving, I don’t know, 50% of the dog food category growth year-to-date 60% since March. It certainly seems like the category acceptance has increased amongst consumers. I guess, how do you think about that, as it relates to discussions with retailers regarding expanding existing fridges, adding second and third fridges, going into some of those places where you’re under-penetrated in retailers where you don’t exist, like Sam’s? And just maybe talk big picture about kind of how you’re approaching that today, versus where you were 12 or 18 months ago, particularly as you come out of that period of capacity constraints? Thanks.

Todd Cunfer: Hi, Mark. So, look, I feel like this is the work we’ve been doing for a very, very long period of time. We’re really confident we’re offering a superior product, and I think it’s increasingly recognized not only by consumers, but I think just generally the marketplace. We’re seeing retailers, kind of just, really kind of reassess what’s going on in the category, And be more and more comfortable, with adding more fridges deeper into their distribution. So, I think what we’ll start to see is we’ll continue to see second and third fridges added over time.

Mark Astrachan: Got it. That’s helpful. And then maybe another question just on capacity. So, you haven’t formally updated kind of where we’re going beyond this year. You’ve talked, obviously, about the efficiency programs and existing facilities and those added to Ennis ramping. You also talked about all these added lines. I guess any way to frame, just how much incremental capacity all of this stuff together collectively, can be as we sit here today?

Billy Cyr: Yes, Mark. It is a little bit of a complex board, because there is capacity additions that come from our existing lines as we get the higher throughput, additional lines in the existing facilities. And then obviously, the new technologies that we’ve talked about. I think what we would prefer to do, is just have people think about us as tightly managing the capacity additions to be consistent with the net sales growth that we’re projecting. We’ve gotten really good and really tight, at projecting our volume and net sales out over extended periods of time. And then, building a capital spending plan and an operational improvement plan that, is able to supply that. We’re really guided by getting to fill rates that are very high fill rates, because what we’ve seen over time is, if we have a high fill rate, that’s a really good indicator that we have a lot of good performance on the operation side, whether it’s the quality part, whether it’s the freight cost.

But getting a high fill rate, becomes a very good marker for operational effectiveness, or operational performance. So I would look at the net sales line and say that we’ll build capacity to adequately supply that over an extended period of time. If there’s variations in the growth rate, we’ll find a way to match it, but we’d really like to manage the growth rate to live within our long-term guidance.

Mark Astrachan: Got it. All right. Well, thanks, everyone.

Billy Cyr: Thank you.

Operator: Our next question is from the line of Peter Benedict with Baird. Please proceed with your questions.

Peter Benedict: Yes, good morning, guys. Thanks for taking the question. My first is just on, there was a comment around kind of adding organizational capacity to support the growth. Maybe talk about your views on that, both short-term and longer-term, just as you think about kind of the cadence growth of the business, and what’s going on just from an organizational capacity, where are you focused?

Billy Cyr: Yes I mean, obviously, we’ve added quite a bit of talent in the last 18 months. We added a Head of Manufacturing. We added a Head of Quality. We added a General Counsel. We added Rachel and her role in Investor Relations. And I think it’s fair to say that, if we’re a company that’s guided to $950 million in sales this year, and will be $1.8 billion in 2027, there will be fairly sizable increases in the overall organizational capability. But we’ve filled in many of the most critical top roles. That doesn’t mean we won’t add any other top roles, as we kind of expand the footprint of the company, and develop higher-level sophistication in several of the areas. And it’s something we’re always doing. We’re always looking for what’s next.

And just like we plan the capacity out over a longer period of time, we’re now planning the organizational capability. If there’s one learning that we’ve had over the last couple of years, is that during the pandemic, we probably got a little bit behind in building organizational capability, and we’re not going to let that happen again.

Peter Benedict: No, that makes sense. Thanks for that, Billy. And then just maybe, Todd, just as you think about the 18% target in 2027, the gross margin number already kind of getting to that 45%. As you think about upside to that, do you think that is more opportunity in gross margin if that were to potentially come through? I’m just trying to think about how or understand how you’re thinking about, some of the upside opportunities within the operating margin profile for the business longer term? Thank you.

Todd Cunfer: Yes, sure. So obviously, we’re not in a position right now to change our guidance. But where the upside could come from, clearly the biggest piece is gross margin. So, we’re ahead of schedule. We think we have a lot of projects and a lot of room to grow the next few years. So, we’re going to shoot, to try to beat the 45% at some point. But obviously, we’re not changing that right now. The other piece, obviously, is logistics, which is below our definition of just a gross margin. We’re already 100 basis points below that long-term target that, we called out in CAGNY last year. So that’s the other piece. But gross margin is the biggest component.

Peter Benedict: Great. Thanks so much. Good luck.

Todd Cunfer: Thanks.

Operator: Our next questions are from the line of Rupesh Parikh with Oppenheimer. Please proceed with your questions.

Rupesh Parikh: Good morning, and thanks for taking my question. So just going back to the unmeasured channel, so greater than 100% growth in consumption this quarter. How do you guys feel about the sustainability there? And then just curious what you’re seeing in the online channel?

Todd Cunfer: So, Rupesh, how you doing? So look, we have so much opportunity to expand accessibility to this business and this brand. And it’s not, it’s in all the unmeasured channel. It’s especially through e-commerce. We talk about club. We talk about, opportunities in mass. There is such tremendous opportunity and a long, long runway in front of us to continue, to kind of expand accessibility and make sure that we, wherever consumers want to buy our products, we’re – as accessible as we possibly can be. So, we feel terrific about the runway there for the next several years. If you look at them, they’re outpacing growth. Those unmeasured channels have been outpacing growth. We started talking about it over a year ago. We think, we have several years where we have that opportunity. And then, there’s several other growth levers that, we have behind that we’ll continue to kind of press out and expand to. We’ll talk about those, I think, more into the future.

Rupesh Parikh: Great. And then, maybe just one follow-up question. So to the extent that we continue seeing EBITDA upside, are there opportunities to pull forward investments into this fiscal year?

Billy Cyr: Yes, we’re actually, I mean, we’re always assessing that. There are some opportunities. It’s probably not as much traditionally from marketing perspective, but there are some project work from a gross margin improvement that we’re looking at right now that, we’re not talking huge amounts here, but like I said earlier, there’s a number of projects that Scott’s leading many of them to try to improve gross margin over the next couple of years. And we’d like to spend a little bit of money now into ’25 to try to fast forward as many of those as possible.

Scott Morris: We’ve actively identified a whole bunch of work that’s hoping to create a more, longer term annuities and margin expansion over time. So, there’s actually even two areas that we’re working around.

Billy Cyr: I would add to that that we’re also thinking about that from an organizational capability perspective, too. If there’s places where we see an opportunity, where increased organizational capability can accelerate our margin improvement, we’ll make that investment as well.

Scott Morris: It really, we feel incredibly fortunate as a company and organization. And look, the work that teams done is extraordinary. Like, every single area of the organization is performing incredibly well. And what that leads us to, is how do we think as far forward as we possibly can in every single area, and kind of leverage the leadership position that we have and be as thoughtful about our business as possible.

Rupesh Parikh: Great, thank you. I’ll pass it along.

Operator: Our next question is from the line of Brian Holland with D.A. Davidson. Please proceed with your question.

Brian Holland: Yes, thanks. Good morning. Just if I triangulate the commentary about, some of the throughput initiatives that we’re working through, and as we get increasingly flexible with how we think about the existing manufacturing base and adding lines, et cetera. Are there any implications for that or ramifications that flow through to CapEx as we think about the next few years? And maybe with that, I haven’t heard any commentary about the change in the free cash flow inflection timing. But, if the throughput initiatives are coming through, if we can add existing, if we can add more capacity within the existing network, and we have this EBITDA margin upside. Can we get free cash flow positive in fiscal ’25?

Todd Cunfer: Look, everything that we’re doing on that front, is obviously starting to pay some huge dividends. And, my goal and the organization’s goal is to push out those CapEx investments to the right as far as possible, with obviously still maintaining enough capacity to grow the business around 25% rate. So, I think the organization is, doing a really, really good job around that. Getting free cash flow positive in ’25 would be challenging. We still feel great about ’26. I would say, obviously the operating cash flow has improved dramatically in the last 12 to 18 months. We’re sitting on a fair amount of cash right now. As every day goes by, I feel more and more secure that we will not have to go out and raise additional funds.

We may have to, a little bit of a bridge term loan, or something or revolver. But that cash flow position, that liquidity position continues to improve. So everything that we’re going on from a throughput and yield, is not only improving margins, but increasing free cash flow. But we, continue to feel great about the forecast in that area that we put out.

Brian Holland: Appreciate the color, Todd. And then just kind of stepping back and appreciate the, you know, appropriately conservative, management of your guidance, both near and longer term. But, we talk about the inflection that we’re seeing this morning and the earnings power of this model. But obviously this is a culmination of, at least the past five quarters kind of building to this. So when you talk about sort of wanting to be careful here and, watching kind of quarter-by-quarter, what particularly keeps you up at night right now, with respect to like kind of what you see in Q1 and some sort of anxiety about, hi, we’re not sure whether we can sustain this, because clearly we have, some points on the board now of sustained progress to this point. So I just want to make sure I understand what you were particularly focused on that would create some variability in the models, we look over the next 12 months and certainly beyond?

Todd Cunfer: Yes, I mean, Brian, I think you have to start with – you have to start with the fact that the, especially on the gross margin and the EBITDA margin, it was a very significant step up from the trajectory that we had built, as you pointed out, over the last five quarters. And so what we want to be is appropriately conservative to say that, maybe not all of that will stick in the subsequent three quarters of this year. We hope it does and we’re trying to plan to make that happen. But the reality is it was a very big step up and we just don’t want to plan on everything happening right every quarter until we’ve demonstrated that over a much longer period of time. This is a new business. This is a completely new technology.

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.

And it really answers any questions that we have, around how this is not a topper, it is a main meal.

Robert Moskow: Okay. Scott that explains the marketing. But like I guess my question is, quantifiably, does it – does that number have to go higher to hit your 2027 goals? Or could you get there without it going higher?

Todd Cunfer: Rob, we look at this pretty closely because, ultimately, if you’re going to drive 25% growth in a simplistic form, a portion of it is going to come from penetration, a portion of it is going to come from buy rate. And the way we think the model works, is low 20% growth on the penetration. That gets us to our 20 million households. And you have to have, call it, low to mid-single digits growth in the buy rate, in order for that to work. So the sum of those two should be 25%, 26% kind of number. And the mix is not particularly important. Obviously, you want to have some of both, but we wanted really to be led by household penetration being in the low to mid-20s. That’s the range that we’re looking for. So, the direct answer to your question is you do need to see buying rate continue to grow, but it needs to grow at a low to mid-single digits.

Robert Moskow: Makes sense. Thank you

Operator: Our next question is from the line of Michael Lavery with Piper Sandler. Please proceed with your question.

Michael Lavery: Thank you. Good morning. I just wanted to come back to some of the new technologies you’ve touched on, and I understand that they’re in process and you probably don’t want to be too specific. But can you just help us understand, is it more – would it be retrofitting equipment or replacing it? Or is it like a software upgrade that can increase speeds? Or maybe just some way to have it in our heads the right way. And then a little bit of a sense of the magnitude of cost. And is that already contemplated in things like potentially, I don’t know if the timing could be as soon as this year, but would it be in this year’s CapEx? How do we think about just where it fits from a magnitude and timing of cost piece of that as well?

Scott Morris: So Michael, I’ll handle the first part and either Todd and/or Billy can touch on the second part from a capital standpoint. So – the very first thing that we’re doing and the single biggest focus is, to optimize the current manufacturing footprint that we have and the lines that we have. And there is a lot of opportunity there, and we – within the results that we’re showing in this quarter and that we have planned over the next 12 to 18 months. You’ll continue to see really nice progress in that area. Secondarily, there are small retrofits to existing lines that we have, and we’ve done enough work on where we know that they can be increased productivity, and throughput levels on those lines. And then third, there is a next generation of technology that we’ve touched on.

We are 100% confident it is going to work. It’s just a question of when. And we – and I’ll turn it over to Todd from a capital standpoint. But we’re basically going to work this out over the next kind of periods of time here in the not distant future, where we’ll look at what’s happening on the throughput – we’re getting and then the new technologies. And we will layer these things in – at the appropriate levels, but we have budgeted this very, very conservatively too.

Todd Cunfer: So from a CapEx perspective, this new technology, as you know, will be the seventh line that we have on the Bethlehem campus. We believe it will be ready to start producing product sometime in the first half of 2025. It absolutely – we’re spending money on it now. It’s absolutely part of the $210 million capital guidance we’ve given the year. A big chunk of the, spend on this new technology will be this year. There will be some in next year as well, but a good chunk of it is this year. As we look forward, and if it proves to be successful, we will use this technology on new lines in places like Ennis, as we build out bad capacity. And then potentially, depending on how big of a margin improvement, we have with us do technology. We will look at potentially retrofitting existing lines as well, but that’s kind of TBD.

Billy Cyr: Yes. I just want to amplify that we view manufacturing, as a core competency for us and a significant competitive advantage. And so, both Scott and Todd referenced a significant investment in the new technology. But as Scott indicated, there are other pieces, too, that are less significant than the seventh line in Bethlehem that we are implementing as we go along. The ultimate goal of all of this, though, is to end up in a situation, where we’re delivering a significant improvement in the return on invested capital for our shareholders. And we’re also delivering improvements in the quality that the consumer gets. And we think if we do those things well, it will be very, very difficult for somebody to match our execution and our capability.

Michael Lavery: Okay. That’s great color. And just a quick follow-up on the commodity color. You had, I think, about almost a 400 basis point benefit there. Anything in particular driving that? And I think the chicken processing plant in Ennis – not only is going to get more favorable as volumes build, but I think pricing that’s a little bit more stable. So would it be right, to think chicken isn’t a big swing factor there? Or is that favorable as well?

Scott Morris: Yes. So obviously, as we talked about on the call back in February, we do have some deflation. We’re about 75% covered now. So obviously, we’ve got risk and opportunity for about quarter of our input costs at this point, but we feel very good about where we are from an input cost perspective. You mentioned chicken processing. It’s going really, really well. I mean, it was a headwind last year as we were – as we brought it up as there just was not enough volume going through that facility by design, as Ennis grows in volume over time. But with Ennis being close to 25% of our capacity this year. It’s starting to – the economics of that are improving greatly this year, and they will continue to improve over the next couple of years.

We obviously yield Billy in his comments. As mentioned, what a fantastic start to the year we’ve had in yield. All the OEE projects we have, particularly in Bethlehem also in Ennis have been tremendous. Our Kitchen South facility is operating really, really well right now. We’re – we could not be more pleased with what’s going on there. And then we obviously had some a little bit of pricing in Q1 that has benefited. That’s the last piece of that that does not persist for the remainder of the year. But those are the components of it.

Michael Lavery: Okay. Great. Thanks so much.

Operator: Thank you. Our final question for today comes from the line of Jon Andersen with William Blair. Please proceed with your question.

Jon Andersen: Hi, good morning. Thanks for the question. Mine is on – I have a two part on media. I think you mentioned in the prepared remarks that media was about 14% of sales in the quarter. Can you remind us what your kind of plan for the year is, and talk a little bit about the cadence there? And then I think I also heard maybe Billy mentioned that the customer acquisition costs, have improved of late. Could you discuss a little bit how volatile that CAC figure is has been in the past, and perhaps why you think you’re seeing current improvement? Thanks.

Billy Cyr: Yes, I’ll start off, and I’ll let Scott talk about the CAC. Yes, about 14% of net sales this year grew about 23%, 24% year-over-year. That percent of net is down year-over-year. So, we are starting to get a little bit of leverage in the P&L from media. Our expectation is it will grow relatively with sales for the full year. So last year it was around 11%. We think it will be approximately 11%, or slightly less this year as we’ve talked about, volume is too strong. We will potentially look at pulling back a little bit of media spend to pull things off a bit, and we continue to monitor that very, very closely. From a cadence perspective, we will spend fairly heavily in Q2. But from first half, second half, it will be a little bit more balanced than we normally have. So more in the first half, but less as a percentage of than we’ve historically had. I’ll let Scott talk about the CAC.

Scott Morris: Yes. I’ll start by saying, when we plan this out over many years, we did not anticipate that we would be able to keep CAC as stable as it has been. It’s been really – it’s been pretty amazing to be able to like years and years in, to have a similar CAC level. Typically, the deeper you get into your TAM, our total addressable market, typically the higher your CAC go up. Now it’s — to even start talking about CAC from a packaged goods organization, a little bit unusual. But we do think about it that way and track it that way. So, we’re getting further and further into our theoretical TAM, which we watch and continues to expand a little bit every year also. We see our CAC being incredibly stable. The only time we really saw volatility in our CAC.

It’s been very range-bound. The only time we really push towards the top, top of the range and stay there for a bit was during like kind of the unwinding of COVID, and along with the really significant price increases that we’ve put through. It took a while for that to settle consumers to get comfortable. And then, for the CAC to return kind of into those normal levels. Now one piece on that that I think is helpful. When we look at not only the communication and the advertising, the performance is extraordinary on the creative. But the other piece is on the media planning piece, there’s incredible work that goes into that and we continue to press into some new areas. And some people – I have people come and go, oh, I saw one of your ads for the first time, you were on golf, or you are on some type of sports.

We continue to kind of press into these new areas. And we’re actually seeing in some of them better performance than, we have in existing areas, which leads us to believe that as we continue to expand into these new media channels and using some of these new techniques. And even technologies that we have a really nice runway ahead of us, to continue to keep CAC within that range.

Billy Cyr: And let me just add to that, John, is one of the things that we’ve seen is, as we have grown the visibility of our retail presence, meaning second fridges, larger fridges, end cap fridges and whatnot, it does help with the efficiency of the media, meaning advertising that you’re spending against a business that has a very high level of retail visibility, is much more efficient than if we were spending the media against small fridges in the middle of the aisle. And so, the significant improvement in second and third fridges and end caps and fridge islands and some retailers, is helping maintain that CAC at a very, very effective or efficient level.

Jon Andersen: Great. Thank you.

Operator: Thank you. At this time, I’ll turn the floor back to further remarks from management.

Billy Cyr: Great. Thank you. I’ll leave you with one thought. This is from an unknown author. But if you want the best seat in the house, you’ll have to move the dog. To which I would add, all you have to do is make a move for the fridge where Freshpet is kept and the dog will gladly vacate the seat. Thank you very much for your interest.

Operator: This will conclude today’s conference. You may now disconnect your lines at this time. We thank you for your participation.