Freshpet, Inc. (NASDAQ:FRPT) Q4 2022 Earnings Call Transcript

Freshpet, Inc. (NASDAQ:FRPT) Q4 2022 Earnings Call Transcript February 27, 2023

Operator: Greetings, and welcome to the Freshpet Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jeff Sonnek with ICR. Thank you. You may begin.

Jeff Sonnek: Thank you. Good morning, and welcome to Freshpet’s fourth quarter 2022 earnings call and webcast. On today’s call are Billy Cyr, Chief Executive Officer; and Todd Cunfer, Chief Financial Officer. Scott Morris, the company’s 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 and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today’s press release for how management defines such non-GAAP financial measures, a reconciliation of the non-GAAP financial measures to the most comparable prepared in accordance with GAAP, and limitations associated with such non-GAAP measures. Finally, as previously disclosed, during our second quarter, the company is no longer adding back plant start-up and launch expenses in this definition of adjusted EBITDA.

The company has provided those costs in the table at the end of the press release to assist in your analysis of the results under both methodologies. Additionally, 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 they will discuss today. Additionally, we’d ask that your questions remain focused on the performance of the business and the results in the quarter. Management will not discuss or speculate on other topics beyond what is being reported here today. With that, I’d now like to turn the call over to Billy Cyr, Chief Executive Officer.

Billy Cyr: Thank you, Jeff, and good morning, everyone. The message I would like you to take away from today’s call is that our house is getting back in order after the stumbles we had earlier in 2022. It is not perfect and it will take some time for us to get all the systems and processes, working the way we want them to. But the actions we have taken since our early September announcement of organizational changes and a renewed focus on our key costs are beginning to show their potential impact. A few of the highlights are, first, strong net sales growth. We delivered 43% growth in the fourth quarter. This is the strongest quarterly net sales growth since the company went public in 2014. We finished 2022 with 40% growth for the year, our sixth consecutive year of accelerating growth and also our strongest net sales growth since we went public 8 years ago.

Second, adjusted EBITDA ahead of guidance. We delivered $20.1 million for fiscal year ’22, well ahead of our guidance of greater than $15 million. This was due to a wide range of operational improvements in Q4, including better production that enabled higher revenues, improved costs in manufacturing and logistics and lower start-up costs in Ennis. Third, improved logistics performance. By the end of the quarter, we were consistently shipping customers with a fill rate in excess of 90%, and that benefit flowed through our P&L. Logistics costs dropping to 9.4% of net sales in Q4 from 12.2% in Q3. Our in-stock position is now at pre-pandemic levels for the first time and improving by the day. Our fill rates are the best we’ve had since 2019, and customers are noticing it and adding purchase at an aggressive pace.

Fourth, improved quality. The levels of secondary processing and disposals dropped considerably as we progressed through the quarter due to strong operational improvements that we believe are the result of the investment we have made in training and retention of our workforce via the Freshpet Academy. It typically takes a quarter for quality improvements to flow through to the bottom line. So we are quite pleased to see the rapid sequential improvement in Q4 where we realized a 24% drop in the rate of quality costs as a percent of net sales versus Q3, and the momentum has continued into Q1 of 2023 as well. Fifth, more effective balance between commodities and pricing. Input costs as a percent of net sales improved versus Q3 2022 due to the September price increase, coming in at 33.6% versus 34.7% in Q3, an average of 35.9% for the first 9 months.

Sixth, we have rebalanced our capacity expansion plan to drive better capital spending discipline and match our anticipated growth. As we indicated at CAGNY last week, we adjusted our capacity plan to reduce capital spending between 2022 and 2023 by $50 million, and we’ll still have adequate capacity to support our planned growth with some headroom. Seventh, the Ennis start-up is going very well. Our start-up expenses came in a bit lower than we had projected because the Ennis is going very well and is ahead of schedule. We are now producing virtually the entire range of roles and at volumes that are in excess of our previous projections. This allowed us to switch shipments to the State of California to come from the Dallas DC in mid-January ahead of our schedule.

We are also ahead of schedule on the start-up of the bag line in Ennis and expect to be shipping a wide variety of SKUs from that line in Q2. We attribute this performance to the investment in training we made prior to start-up and also to the realignment of our engineering resources into a single group as part of the organization changes we made in September. We believe these improvements position us well for 2023. We are starting the year with well stocked fridges, healthy inventories and experienced and well-trained production staff, a robust line-up of new product innovations, strong customer commitments for incremental fridges, outstanding advertising on the air and pricing in the market that more closely matches our input costs. It will take some time for all those improvements to align and drive the resultant margin enhancement that we expect, but the early indicators are encouraging.

Our plan for 2023 is a logical extension of the updated fresh future 5-year long-term guidance we outlined last week at CAGNY. We continue to believe Freshpet is going to change the way people nurse their pets forever. And that will lead to more rapid increases in household penetration this year than we had last year. Buying rate will continue to grow at a strong rate, due in part to higher pricing and consumers continuing to increase the value and quantity of Freshpet items that they buy. That will support strong net sales growth, but at a more measured pace that will allow us to address the margin improvement initiatives that are underway. So with that context, we are initiating 2023 guidance that is in line with our updated long-term growth plan, which equates to revenue of approximately $750 million, which would result in growth of about 26%.

In setting that target, we are mindful that we are only getting 8.5 points of pricing growth this year versus the 15 points we got last year. We also consider that there is no more trade inventory refill needed and we are lapping a year that had significant trade inventory refill. While it is hard to put a precise number on the trade inventory refill that happened last year, is likely that it was somewhere in the range of $15 million to $20 million. Finally, we believe we are facing potential recessionary headwinds at a time when we have also taken another price increase. We expect that there will be some impact from that on our unit movement and growth rate. Counterbalancing those headwinds are the significant increases in new fridges, a strong investment in media and some of the best new products we’ve launched in a long time and we will do that in an environment where we are not capacity constrained.

We have more-than-enough installed capacity such that we can add staffing on about 90 days’ notice, if necessary, to meet higher demand. From an operations perspective, we are expecting to see continued improvement in all areas of our operation, but some of them will take a bit of time, and some of them will have transitions that add expense before we actually see the cost benefits. For example, we now have more demand than we could supply from the Bethlehem Kitchens and Kitchen South, but not enough to fill both of them in the new lines at Ennis. For perspective, the first two lines in Ennis is fully staffed, would add almost $250 million in capacity, while our guidance implies net sales will grow by about $155 million this year. In other words, while we are adjusting staffing to match the demand, we will be carrying the incremental overhead cost of the new Ennis Kitchen while we grow into our new capacity and achieve higher levels of net sales.

Further, we will be shipping bags of product from PA to the Dallas DC during Q1 and Q2 of this year that should support shipments in Texas and the West Coast until the bag line in Ennis is fully capable of producing the wide array of bags we sell. Those incremental shipping and handling costs are transitory, but will impact us until we have balanced roll and bag production in Ennis. You should also see steady progress on adjusted gross margin and adjusted EBITDA margin as we move through the year. And by the end of the year, you should expect to see the fruits of those efforts in the form of much improved capacity utilization and lower freight costs. Furthermore, when measured on an annual basis for the full year 2023, we expect our results will be significantly better than last year’s on several KPIs, including adjusted gross margin, freight as a percent of sales and adjusted EBITDA margin.

Todd will take you through the details. All these improvements are enabled by the increasing strength of our operations team and our renewed focus on improving margins. While we still expect to make one or two additions to our operations team, the team we have is operating at a much higher level, and our entire leadership team is relentlessly focused on the leading indicators of performance and have developed action plans to drive the improvements we’ve outlined in our 2027 goals. As previously indicated, we have implemented a 5% price increase, effective with the orders beginning on February 6th, ’23. At this time, we believe that the price that we’ve taken adequately covers the known input and energy cost inflation we have seen. We’ve locked pricing and inputs that account for greater than 75% of our costs so far, and we’ll continue to add to our supply agreements as the year goes along.

Due to the timing of our price increase being implemented six weeks into the start of the first quarter, we anticipate that we will have a small price cost mismatch. But on a relative basis to our experience last year, we see this as a much, much more manageable. Our advertising plan for the year is, like in most previous years, front-loaded. We have greater than 60% of the spending planned for the first half of the year and have been on air since the beginning of January. We expect this to reaccelerate our household penetration gains, taking them from the 16% we had in 2022 to the low to mid-20s by the end of 2023. We are expecting record support from our customers in 2023. At the end of 2022, we had about 1.5 million cubic feet of fridge space at retail, and we expect that to grow to more than 1.7 million cubic feet by the end of 2023.

That represents approximately 1,200 net new stores, the addition of 3,000 second and third fridges and fridge upgrades in approximately 1,000 stores. This is a terrific endorsement of Freshpet’s value to our retail partners. We believe this will amplify our advertising investment, providing added visibility that reinforces our brand’s distinctive offering. In total, we believe we have all the necessary building blocks in place to generate consistent long-term growth that is appropriately geared so that we can also achieve our margin improvement goals. We will be able to fully support this growth from our existing kitchens in Bethlehem, three lines in Kitchen South and the first two lines in Ennis with room to spare. As you heard at CAGNY, we have modified our capital spending plan to better match the rate of sales growth we are expecting and can reliably support.

We will continue construction and installation of the next two lines in Ennis so that they are ready to go in 2024 and 2025 when they are likely needed to support the next leg of our growth. Each step of the way, we are carefully assessing the latest view of demand against our available capacity so that we keep these two important variables align. This will help us control expenses while maximizing our opportunity to drive profitable sales growth. I want to be clear, however, that our long-term economics and the plan for 2023 assume that we will always have some amount of capacity in excess of our planned net sales because capacity comes on in chunks, its form specific, i.e., roles or bags and start-ups can be challenging. So we want to be sure that we don’t get caught without enough capacity as we did for the past 3 years.

Before I turn it over to Todd, I would like to share one additional thought. I am a big fan of identifying key metrics in our business that are leading indicators of performance. That is how we arrived at the intense focus we have on household penetration as the prime indicator of our net sales potential instead of store count in 2017. That has proven to be a very reliable indicator of our growth and upside potential, and it has also driven the right kinds of investment choices that have resulted in six consecutive years of accelerating growth. When it came to improving our operations, we struggled to find that critical leading indicator. There are still many that seems to be good indicators of parts of our operations but nothing that could be harbinger a broad based operations improvement.

But as I’ve seen our performance improve over the last 90 to 120 days, there seems to be one factor that underpinned our improving performance on a wide range of metrics, employee retention within our hourly workforce. There appears to be a strong correlation between the improving retention we have had amongst our hourly workforce and the improvements we are seeing in throughput, quality, fill rate and many more. Well, that should not be surprising. What is surprising is how quickly that impact can show up. It takes time to build the skills of our team but relatively little time for those improved skills to pay off once they are in place. As we saw team members climb the ladder of the Freshpet Academy, we have seen our operating performance improve in turn.

In this way, we believe that the investment we made in our talent and the Freshpet Academy is working. We are attracting more skilled team members, providing them with significant training opportunities and rewarding them with career and compensation gains. As a result, our retention has improved dramatically, and we’ve advanced a large number of our team members to higher levels within the Freshpet Academy. One year ago after more than 15 years of operation, we did not have any team members with the skills to be at Level 600, the highest level on our Freshpet Academy. One year later, we now have 14 team members at that level. Those highly skilled employees are capable of running virtually any piece of equipment in our operation and demonstrate a level of proficiency that has proven to result in higher quality, less waste and greater throughput.

In Ennis, we already have four team members who have reached Level 400 due to the head start we gave them with one year of training in Pennsylvania. That is clearly contributing to our fast start-up in Ennis. We are going to continue to focus on enhancing the skills and retention of our hourly workforce and expect to build upon the early gains we have realized since launching the Freshpet Academy. Those gains are very reassuring and gratifying because we strongly believe that focusing on the people part of pets, people, planet will pay dividends. And in this case, it appears that it is happening. It is also creating sustainable value for our employees, their families and the communities in which they live. These employees now have greater skills that will provide value for their entire career and are earning much higher pay with the added benefits of equity ownership.

Every day, I hear stories from production team members about how our investment in their careers is enabling them to enhance the lives of their families through homeownership, paying for kids education, paying off debts and more. We are very proud to have created an ecosystem where their efforts and our training enables so many enhancements to their lives while simultaneously creating a recipe for sustainable shareholder value creation. Now let me turn it over to Todd for a more detailed look at our results. Todd has been with us since December 1st, but he has been vigorously working to get up to speed and has taken him very little time to do that. He has been a great addition to our team and is evidence that the Freshpet opportunity can attract first-rate talent.

And if you prefer this early morning earnings call over our late afternoon and evening marathons, you can thank Todd for that, too. Todd?

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Todd Cunfer: Thank you, Billy. And good morning, everyone. Let me start by telling you how excited I am to join the Freshpet team. I’ve been here for three months, and I’m even more convinced than ever that the growth opportunity is very real and that this will become one of the greatest growth stories in CPG We will truly transform pet food for the better and create an iconic brand that generates robust profits and has enduring value, but we clearly have some work in front of us to reach our full potential. I have been focused on a few critical priorities in my first 90 days, including the fresh future or long-term plan we presented last week at CAGNY. We believe that plan provides a solid road map to meaningful profitability beginning with solid margin gains in 2023.

I clearly believe that we can achieve the goals we have laid out and we are hard at work on the efforts needed to deliver them. As a new CFO, you always wonder what you will find when you walk in the door at your next opportunity. Fortunately, the Freshpet team gave me some strong results to report in my first call. As Billy indicated, we comfortably exceeded our guidance on both net sales and adjusted EBITDA. Let me break it down a bit further. Net sales came in at $165.5 million, up 43% versus a year ago. This was the result of Nielsen Mega Channel consumption growth of 33% versus a year ago. The completion of the trade inventory refill we have been working on for most of the past year and a favorable year-on-year comparison. By the end of the year, we believe that we have largely completed the trade inventory refill as our fill rates were consistently running in the mid-90s, and our in-stock conditions at retail were fairly healthy.

For FY ’22, we recorded 40% net sales growth with 37% Nielsen Mega Channel consumption growth and the balance coming from the trade inventory refill that we completed in the year. Price increases averaged 15% for the year and contributed to that growth, but did drive some amount of unit volume erosion. So the entire 15% was not additive to our growth rate. We finished the year with household penetration gains using numerator data of 16%. Regarding adjusted gross margin, we continued to experience significant plant start-up expenses in our Ennis Kitchen in the fourth quarter in the amount of $8 million, but this spend was a bit lighter than we had planned due to – due to a smoother start-up in Ennis. Adjusted gross margin was 33% for the quarter, but excluding these, the start-up expenses, our adjusted gross margin would have been 480 basis points better.

For the year, adjusted gross margin came in at 36%. Plant start-up expenses in the year were around $26 million and depressed adjusted gross margin by 440 basis points. Adjusted EBITDA was $18.8 million in Q4 and $20.1 million for the year. Q4’s results benefited from better-than-projected net sales, improvements in quality and logistics cost and lower media spend versus a year ago, which I’ll note was planned. We ended the year with meeting investments at 10.5% of net sales, which on a dollar basis, increased 36% versus a year ago, nearly matching our consumption growth. Logistics costs were 9.4% of net sales in the fourth quarter, down significantly from 12.2% in Q3, due to higher fill rates and efforts to unclog the supply chain. This improvement in logistics costs brought the total logistics as a percent of net sales for the year down to 10.7% from 11.2% in the year ago period, but well above the 8% we experienced in the years prior to the pandemic and remains a significant opportunity that we expect to begin to realize in 2023.

Capital spending for the year came in below the most recent expectations at $230 million, largely due to timing on some sizable expenses in Ennis related to completion of the first production building, the chicken processing facility and the early stages of the construction of Phase 2. This is also evidence of renewed cost discipline by our reorganized engineering team and better alignment across the organization on priorities. I want to be clear that this reduction in spending does not compromise our ability to grow at rapid rates. We have ample installed capacity for the 25% compound growth rate that we outlined in our 2027 fresh future plan. As Billy said, we feel we are well positioned heading into 2023, but we also know that we need to demonstrate marked improvement and profitability now that Ennis is operating.

Our pricing has caught up to our costs, and we have stabilized operations in both production and the supply chain. Turning to our guidance for 2023. You will notice a change in the form of our guidance versus previous years. This reflects our renewed focus on improving margins as the most critical driver of success in 2023. Our goal is to exceed the adjusted EBITDA target, and we will prioritize margin expansion over incremental net sales. This does not reflect any less confidence in our ability to drive net sales in a year’s path but rather our intention to drive margins as our most important priority this year. We believe our net sales growth rate is very robust, and we fully intend to deliver it. As such, we are guiding to approximately $750 million in net sales for 2023, up 26% versus a year ago.

The net sales growth during the year will likely be less than the Nielsen measured consumption growth as we progress through the year because we have completed the trade inventory refill and we’ll be lapping trade inventory refill in the year ago period. In terms of cadence, you should expect that Q1 2023 net sales will be comparable to Q4 2022 because we completed the trade inventory refill in Q4. However, the heavy marketing investment and new fridge placements will drive the underlying household penetration and consumption, which should both grow significantly from Q4 of 2022, but the absence of trade inventory refill in Q1 2023 will likely result in Q1 net sales similar to our Q4 2022. For the year, we expect to see a strong and steady build of consumption throughout the first half of the year, some flattening in the summer behind traditionally slower summer consumption patterns and then growth again in the fall.

We expect that the cadence of our sequential net sales growth will mirror those trends. It is also important to remember that we will get the benefit of the 5% price increase with shipments in mid to late February but will also lap the larger February 2022 price increase of 12.5% and the smaller September 2022 price increase of 2.7%. Over the year, we expect pricing to average around 8.5% versus a year ago, which compares to the 15 points of pricing that we implemented last year. Our adjusted EBITDA is expected to be at least $50 million, an improvement of $30 million versus 2022. A meaningful part of that improvement will come from reduced start-up expenses. That improvement will be partially offset by the higher operating cost of having a large new facility that will not be operating at scale yet and some transitory expenses as we ramp up the Dallas D.C. We will also have higher operating expenses for our ERP system now that we can no longer capitalize the initial investment in the technology.

In terms of the cadence of the adjusted EBITDA, it will be back loaded again this year as we will incur significant plant start-up expenses, heavier marketing expense and transitory logistics costs in both Q1 and Q2 and lower volumes against higher fixed overhead now that we have Ennis online and need to grow into its scale. As you consider those moving parts, Q1 adjusted EBITDA will be modestly negative due to these expenses and will be the low point for the year. Q2 will experience similar transitory logistics and start-up costs along with elevated marketing investments, so there will only be modest improvement in Q2. As we move out further in the year, we expect sequential improvement due to increasing scale, the elimination of start-up and transitory expenses and growing into our marketing investment.

For context, we expect to generate only modest adjusted EBITDA in the first half of the year. From an adjusted gross margin perspective, our guidance implies a greater than 200 basis point increase for the full year 2023. Logistics costs, despite the transitory expenses, will improve by at least 100 basis points now that our fill rates are up, and we will have the Dallas DC operating. Advertising will grow at a rate slightly greater than net sales growth and support restored growth in household penetration. The remaining part of SG&A will grow slightly less than net sales growth as the previously mentioned higher ERP costs and lapping below-target bonus accruals will be a headwind to corporate expenses in FY ’23. Our capital spending plan for 2023 is around $240 million and for 2024 is around $210 million.

This will support the installation of enough capacity to meet $1.1 billion in demand in 2024 and put us on track for enough capacity to meet up to $1.4 billion in demand in 2025. You will note that the combination of a 2022 and ’23 capital spending is $50 million less than we projected in November. This is largely due to the timing of the Ennis Phase 2 capacity and a decision to split that project into two pieces to allow us to ramp up utilization of the first phase of Ennis and also provide more time to qualify new manufacturing technologies that could be significantly more efficient than our current technology. We believe we have adequate resources to fully fund this plan from our balance sheet, line of credit and from cash generated by operations.

However, we do expect to refinance our line of credit this year to better match our expected growth in capital spending. In closing, we are very bullish about the prospects for Freshpet. We have significant momentum on both the top line and in our operations. We have adequate capacity to support strong growth. Our customers are making significant investments of shelf space to support the growing demand, and our marketing and innovation programs are hitting on all cylinders. Our operations teams are performing well and with a renewed focus on delivering excellence in quality, logistics and manufacturing efficiency. We are aware of the challenging economic backdrop and will constantly monitor any impact the changing conditions it may have on our business in order to position ourselves for the best long-term return for our investors.

In short, I am glad that I’m here, and I think we have a very bright future. That concludes our overview. We will now be glad to take your questions. And as a reminder, please focus your questions on the quarter and the company’s operations. Operator?

Q – Peter Benedict: Hi. Good morning, guys. Thank you for taking the question €“ our questions. My first one, Bill, you had mentioned some recession unit impact that’s kind of baked into your view for this year. I’m just wondering maybe you could expand on that, talk a little bit about your view on the macro and how you think that – or at least if you’re seeing any of that yet or what you’re seeing now and how you expect that to play out this year? That’s my first question.

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Q&A Session

Billy Cyr: I’ll just give you a top line on it, and Scott could probably provide a little bit more compounding on it. But we have – we’re watching the economy. We’re not seeing anything specific yet, but you can’t be in a spot where you look at the macroeconomic factors that we’re seeing, whether it’s consumers starting to pull back on and trade down in a variety of other categories, not necessarily in our category and think that it’s going to be smooth sailing for the balance of the year. So we wanted to be appropriately cautious. We don’t have a specific number that I’m going to give you that would tell you, here’s what we’re worried about, which is – it’s more of a generalized concern. I don’t know, Scott, do you want to add that?

Scott Morris: Yes. I mean, look, Peter, I think what we’re seeing is pet foods up a lot. It’s more than many categories. I think consumers have to get a little bit more comfortable with that new bar that is at. The good news is the entire category has moved up. I think that some people have – there’s been a little bit of trading around and moving back and forth. But it looks like what we’re seeing that we really like that’s an early, early indicator is we consistently seeing tons move up versus a year ago. And that provides kind of really good clarity. The piece that underneath all that, kind of underpinning it is these HIPPOs that we started introducing at ICR and I think it was talked about also at CAGNY, we’re seeing those super heavy, heavy or those HIPPOs continue to build and grow, and that’s going to be the core of our consumer base.

And those people – their pet is their child and they really don’t want to cut back on nutrition. And so I don’t think we have any perfect clarity on it, but we just want to be kind of prudent and thoughtful about what we’re going to see over the course of the year with gaining consumers. We – all the early signs look encouraging, but we also want to be kind of providing kind of guidance and thoughts for everybody that we don’t have perfect clarity on it.

Peter Benedict: Well, no, that makes sense. Thank you for that. And then I guess, maybe for Todd, just curious if you can help us out with DNA here in the business. I mean, you’ve recast kind of the CapEx spend. I think this year, you’re about $35 million DNA, a little less than 6% of sales. Just curious if you can give us a benchmark for ’23. And then maybe as we think about it longer term, where it kind of settles out in your 5 year plan, that would be helpful. Thank you.

Todd Cunfer: Yes. So I’d say for ’23, we’ll be in the low $40 million. We don’t have a precise number. It depends really the timing of some – one of these – some of the equipment gets installed, so that number is going to move around. Quite honestly, I don’t have a ’27 number for DNA. We’ll work on that over time. But at this point, I do not have a number 5 years out.

Peter Benedict: Okay, all right. Thank you very much. Good luck.

Todd Cunfer: Thanks.

Operator: Thank you. Our next question comes from the line of Anoori Naughton with JPMorgan. Please proceed with your question.

Anoori Naughton: Hi, good morning.

Billy Cyr: Morning.

Anoori Naughton: Morning. Billy, you have Scott have long talked about the strong relation between media spending and sales growth. And then this year, you again are setting close to 12% of sales for 26% sales growth. But over time, for that percentage to fall and sales to continue to grow at a similar clip. The period, if you’ve seen a changed lately in that historical relationship that helped to inform the media leverage you are expecting again over time. Or any additional color on how you got comfortable with that 9% longer-term target? Thank you.