Freshpet, Inc. (FRPT) Earnings Call Transcript & Summary

All right. We're ready to get started with Freshpet. I want to thank everybody for coming in and also for people who are attending virtually. We're very pleased to have both Billy Cyr and Heather Pomerantz here with us to talk Freshpet. So Billy, maybe if we can get started just as a kind of high level for people who may not be familiar with the story, just give us a little bit of the history of Freshpet and what drew you to this business because it had been around for a while before you got here. If you could just start there.

Yes, be glad to. So I joined Freshpet about 5.5 years ago. And for me, joining Freshpet, I had a lot of other opportunities that I could have pursued. But ultimately, I saw in Freshpet the opportunity to change an industry, to change the way in which people feed their pets. And part of that is that this is an industry broadly, the pet food industry that has an enormous amount of tailwind behind it, meaning there's a big drive to the humanization of pets. You've heard that from lots of people for an awfully long time. There's also the human behavior change of looking for more fresh and natural foods. And Freshpet lives at the intersection of those two. And that was a really neat backdrop that made me very interested in this as a business. But we went one step further, which is Freshpet has a business model that -- I've been in the CPG space and mostly in the food space for the last 35 years, and I've never seen a business model that I thought was as robust as the Freshpet business model. The founders of Freshpet who started it back in 2005, 2006, Scott Morris, Cathal Walsh and a guy who's no longer with the company, but those guys saw an opportunity. They saw an opportunity to change the way people feed their pets because they've seen this idea for fresh pet food in Australia and thought that the American consumer might be ready for this. And so they pioneered the business. They learned an awful lot. They customized and tailored the proposition over basically the first decade. -- and got it to the place where the company, I think, had a business model that's incredibly robust with several really important characteristics. One, it starts with the product that the dogs like better. The product is incredibly good. The best anecdote I can give you is that when I first put Freshpet on the table in my kitchen and my then 17-year-old son opened the bag and put his nose in it, he said, "This smells better than dinner." My wife was not really excited by that comment, but the reality is when you compare kibble and can to Freshpet, it's hands down. Freshpet is the product your dog would prefer. So we start with a really good product that's also nutritionally very good and the consumer notices the difference. They see more energy, they see a brighter eyes, brighter coat, better skin, firmer stools. All those kinds of things that give them an indication that the pet is actually thriving with this. We get letter after letter, call after call, from people saying, "You gave me a puppy again. You took my 10-year-old dog and turned it into a puppy. You gave me 2 more years of life with my dog." And so we live for those kinds of comments, but that's part of essentially in the business model, that's the anchor that's the thing that makes it work. And that enables us to -- we do no discounting, no promotion because once you try the product, you stay with it. As a brand, we are very focused on attracting new users and we spend our money on advertising to bring them in because we know that once they try the product, they will stick with the product. So it creates a very strong, robust business model. We own our own fridges. We have over 25,000 fridges scattered throughout the U.S., U.K. and in Canada and continue to expand that. And that has become a very strong barrier to entry against others. But we're building out an innovation portfolio, a manufacturing footprint. We own our own manufacturing facilities, and we also have a partner who does the manufacturing for us. But the whole business model has so many touch points where it is superior to all other offerings and has built barriers to entry. And so our focus now is we launched a strategy called Feed the Growth back in 2017. And the idea was to get as many consumers into the franchise as quickly as we could because there's enormous benefits for being a first mover to having as many loyal households in the franchise as fast as we could. And then there's also significant benefits from scale. Scale in manufacturing, scale in distribution, scale in SG&A and all those benefits would accrue to us if we could achieve that scale. And so that's what we've been about. That's what we've been doing. We just finished our fifth consecutive year of accelerating growth, and we've guided to our sixth consecutive year of accelerating growth. So last year, we grew 33.5%. We've guided 35% growth this year. We had about $425 million in sales last year. We've guided to $1.25 billion in sales in 2025. We're building $2 billion in capacity. So we think the future is incredibly bright. And that's the -- that's why I get up every day and go to work and why I love doing what I do at Freshpet.

Maybe just to stay at a high level for a few minutes and just thinking about fresh pet food as subsegment, I guess, of the pet food category -- or we were joking last night, should we call it human grade. There's more competitors. We touched a little bit on this on the earnings call. Petco has expanded with just food for dogs. We've seen The Farmer's Dog just other fresh or fresh frozen sort of entrants come in and begin to have maybe a louder voice, increased distribution. Can you talk a little bit about just the landscape, like is it additive to the category to the subsegment, -- just how you think that sort of impacts not just Freshpet, but just the whole subsegment?

Yes. So first of all, it's an enormous amount of innovation, whether it's the DTC business, whether it's just food for dogs and their unique offering, whether it's what we do, and there's a lot of other sort of incubating start-ups along the way. And we think that's a validation that the time is here and the space is here. It's an enormous piece of validation. The second thing is my experience in 35-plus years in the CPG space is that when this happens, you should expect that kind of innovation, it's a natural outgrowth of our success and the growth that we're seeing. You should also expect that some of those are not going to make it, and some are going to fall by the wayside as time goes by. That's a normal natural thing. Our goal is to, whenever this world is sort of reshaped and we believe that the world will reshape with the category or the pet food category, having a very, very large share of it being fresh pet food, that we will be the leading purveyor and we'd love to have a very, very high share of that. And if you look across the landscape of CPG brands and in particular, food and beverage brands, people who have pioneered categories, if they've executed really well, held on to that leadership share for an incredibly long period of time. But what we also know is that the presence of those other competitors coming along has made the pioneering companies better, made you -- forced you to innovate more, forced you to be really sharp on your costs, whatever needs to be done to meet whatever the threat is, that the challenge is, we are paranoid beyond belief. We watch all of them. We look for whatever they do. We try to be competitive with them. But right now, I would believe that 1 plus 1 is going to equal 3. We see that. When the DTC guys run advertising, we see a pickup in our business, so there's a real benefit for that. I'm sure they see the same thing, too. When we run our advertising, they get some benefit. So I think in the end, I think it's a good thing. But over the long haul, you should expect anybody can do almost anything at small scale and high cost. The question is can you turn that into a real business that's sustainable and do something at large scale and at good cost that turns it into a viable sustainable business. And that's what we're doing, and that's what we've perfected over the last 16 years. And I'd expect us to be the company or the brand that ultimately dominates the space long term.

And I guess it kind of leads into does it make -- is the energy and the investment that's being made now within fresh, does it make the addressable market may be bigger than what you were -- what you've talked about previously?

It certainly could because one is the amount of awareness that they create with all their advertising investment, certainly makes people rethink, what have I been feeding my dog. So you suddenly see The Farmer's Dog ad and you go, "I've been feeding kibble and can, maybe I should look at something else". And that opens their eyes. I mean we only have awareness of somewhere between 45% and 50%. So we have a long way to go in the world of awareness, and their investment does that. And then to the extent that they do innovation that either we figure out what works and mimic it or we kind of leapfrog it. It opens up the market to a lot more consumers. It makes it a much more appealing. So I certainly think that's the case. I do think that the addressable market is bigger. In my first 19 years in my career at P&G, and they did all kinds of exhaustive studies and they almost always found that when a second entrant came into a newly established category that what the second entrant brought to the party enlarged the total pie considerably, but the guy who is the biggest ended up capturing the lion's share of the profits.

Yes, it's funny. We always think about it in terms of like energy drinks, right?

Yes.

They're still adding energy drink brands. The category is growing. The established players get better.

It's -- what I talk a lot about is like the sports drinks. Gatorade pioneered the category in 1963. By 1992, Coke was launching Powerade. And here it is the most -- the biggest marketer in the world, the best distribution system in the world, Gatorade still has a 75% share of the category. Powerade is in the teens. And they brought everything they could, but the category is enormous. Enormous.

Maybe just to stick with the category and thinking about, is there an opportunity to participate in different temperature states? So whether it's frozen or maybe shelf-stable, Tetra Pak -- can you sort of have the same positioning, but in different temperature states over time?

So the first thing I did when I arrived at Freshpet is I got rid of the dry dog food entry that had been created before I got there. We created a product called Bake. And my argument was, we had, at that point, 35% awareness against the best product you could possibly make. And so at this 35% awareness, where we're spending money trying to tell people to buy what was, in essence, a commoditized category of dry dog food. From where I sit, our ability to create a preferred product and distribute it through our fridge network is where we're going to get the most horsepower. And frankly, keeping up with that. has been a huge challenge. So spending time, energy and resources going outside of that is probably not the most efficient use of our resources. At some future date, would some of that make sense? Maybe. But I got to tell you, fresh almost always wins in food -- I've been in the food business a long time. Fresh beats frozen. Fresh beats shelf-stable. In almost every category, if you can deliver it efficiently and reliably on a consistent basis. So I'd expect for us to try to drive a truck through that position for as long as we can.

Heather, there's been a lot of focus on just balancing supply and demand, certainly in the investor world, it's been a big focus of yours. Can you talk a little bit about where we stand today in terms of that balancing supply-demand and some of the key things we should watch as we go through this year and the next?

Yes. We're at an inflection point actually because we've been up until now basically chasing our tail, no pun intended. All about supply and expanding capacity and keeping up. And so when we -- last year, our growth was fully dictated by the ability to keep up with capacity, and it was all supply driven. We were -- a big part of our growth last year was obviously increasing trade stocks with customers and again, getting back to a state where we could then invest behind demand growth. So as we've come into this year, it started -- we started investing heavily in Q4 of last year knowing where we were headed with capacity. We've now entered a year where it's all about demand. It's -- capacity is not our limiter anymore. We are in a healthy position with trade stocks with customers and fridges are largely filled. We're monitoring it. We're not all the way to bright, but from a ability to now put foot on the pedal in terms of driving demand, that's what it's all about. And you can see that coming through in the consumption growth that has taken off as we've entered this year.

And I think on the earnings call, you talked a bit about like having some buffer, like so going into this year not expecting that you were going to sell everything that you could make. So could you just talk a little bit about how that works?

Yes. Yes. So what we've done is we've -- when you look at our guidance, we've got capacity that affords us a buffer of approximately 15%. And not to be confused with building any sort of safety stock or excess inventory, it's actually around having the labor and overheads cost structure, staffed capacity in place to support a larger business by 15%. And so we're absorbing that in the gross margin. When you look at a large piece of the, I'll call it, current state of gross margin is impacted by this investment, we shared that it was between $13 million and $17 million, and that's worth depending on which end of the spectrum, around 230 basis points. So a big investment that we're making. It allows for 2 things really. It allows for absorbing operational inefficiency that might come via some of the unexpected headwinds. So for example, in the month of January, when Omicron was at its peak, and we were having labor impacts we were able to choice fully shut down one line in our plant in Bethlehem and kind of reallocate the remaining labor to effectively continue production without wasting potentially trying to run with not enough labor and creating waste in the system. We were able to do that because we had the buffer capacity at no impact to supporting customers and demand. It also, though, allows for the upside. So as we are investing behind advertising now, and really driving the demand generation, we can supply at a higher level along the way.

And then maybe for both Billy and Heather, I think on the last call, you also talked a little bit about just longer term, just rethinking or taking another look at what your capacity expansion might look like maybe approaching it a little bit differently than you have till now. So maybe if you could just give a little bit more color on it?

Sure. Yes. So the current projects that just as a reminder, the current projects that are underway in terms of capacity expansion or the completion of Ennis -- the first phase of Ennis, which will kick off at the beginning of Q3 this year with the rolls line. And then subsequently, we're putting in 2 bags lines. And those are technology that mirrors what we put in plant 2 in Bethlehem. We're also finishing the project that we have going on at Kitchens South, our partner, our manufacturing partner. We have -- we put in a higher-speed line. We put in, in Q4 of 2021. And we're commissioning an additional higher speed line currently, which is actually testing out some new technology that we've -- that's an innovative technology that provides for even a higher throughput and acceleration of how we produce the bags products. So that's all underway. Those projects are in really good shape given the macro environment in terms of equipment lead times and some of the other constraints. We're in good shape for those start-ups. But we've also taken a moment now in light of that environment to think about the strategy beyond that. We've got is Ennis, a lot of space at Ennis for expansion. We've, to date, always talked about that being an expansion of 4 more lines, largely similar to what we have in Ennis phase 1. But we're now taking a moment to really reflect on what's possible there. And leveraging some of the insights from this process technology that we're testing out at Kitchens South that could allow for more capital efficiency and further expansion. But the other thing we're taking a moment to reflect on is how we might be a little bit more strategic about how we add lines and where we add lines and to provide for more expertise. When we add increments of capacity now, it used to be we're adding sort of if you look at plant 2, we added 1 rolls line and 1 bags line in the space that allowed for 2 more lines. And that was appropriate at the time for how much growth was happening in the business. Now when we have 40-plus percent growth on the size of the business that we have, we need larger increments of capacity expansion. And so we now have an opportunity to take a step back and potentially put rolls lines together in the space that provides more operating efficiency, not only from the operators that are running the lines, but also things like maintenance, et cetera. So -- we're taking a reflection. We're not ready to share those plans yet, but those are some of the things we're thinking about.

And that will be something you'll be able to talk about later this year or like?

Yes.

Yes, probably more like midyear.

Midyear?

Yes.

Okay. And then maybe just to think about or flip over to just in market and fridges, Billy, can you maybe talk a little bit about -- given the supply constraints, how that has -- has at all affected the pace of expansion? Maybe start with that first.

Yes. Obviously, we had to slow the pace of expansion. Both we wanted to and retailers had a -- said, "If you can't fill the existing fridges, why would I put another fridge in?" And so if you look at our ACV distribution, it kind of went flat over the last, call it, 1.5 years. But customers now recognize, we've been telling them very transparently about the capacity we're adding. They're seeing it in the fill rates, they're seeing it in the fridges. So they're now ready to reengage and adding stores. But I think it's also important to note that adding stores used to be a very big driver of opportunity for us or a growth for us. But we're to the point now where new stores really don't add as much of the value. And the reason for that is if you're a consumer today and you want to go buy Freshpet we are -- odds are we're in, maybe you're not in the first choice store or your grocery store. But we're in your Walmart or you're in Target or you're at PetSmart or you're in Petco, you're in one of those places. And so we aren't really reaching a whole lot of new consumers by putting in more fridges. There's a chance we get into some number of people's first choice location, but the reality is you can buy Freshpet somewhere. What a bigger opportunity for us is where we put in larger fridges, second fridges or in some cases, 3 fridges or end cap fridges because that has benefit beyond just the number of people reaches. It also gives us the opportunity to create this sort of billboard amplifying value of the advertising. So somebody who sees our ads, now goes in the store, you can't miss those 2 side-by-side lighted fridges. It sort of says, "Oh, this is real, and there's something going on here that I might not be participating in yet. I ought to take a look." And then the next thing it does is most retailers, when they put in a bigger fridge or a second fridge, don't use it to increase the holding stock. What they do is they use it to expand the lineup so they'll carry more items. And the best example I use is many retailers today do not carry our puppy roll. So the basic puppy roll you feed a dog for the first year of their life -- because it's velocity, it's a relatively small volume item compared to the rest of the lineup. But its velocity doesn't justify displacing one of the other main meal items that we've got. And so the reality is a lot of retailers are taking their puppy roll out and only put it in if they put a second fridge in. Well, so that's an audience that we're not servicing without having that second fridge. So puppy rolls become that example. Our cat food is another example, like that. A cat food just doesn't turn enough velocity, so a lot of times, it's not in the first bridge, it will be in the second fridge. Treats is the same thing. So I would -- the point is, for us, the biggest value creator is going to come with advertising driving the business, fridges amplifying it and the assortment broadening through innovation and then the ability of retailers to carry a broader range of innovation because that makes the brand much more accessible to a lot more people.

Right. As the category -- as fresh expands, as it grows, it gets bigger and maybe there's more options available at retail, is there going to be a change in like the shelf sets or the merchandising like where it is in the store? I was noticing -- I walked into Petco, the one on 86th Street. And when you walk in, it's at the end of the boulevard, right? Like it is -- literally you are standing at the front of the store, and you can see the Freshpet fridge and all the other fresh assortments they have like all the way at the back. And so -- can you just -- like how is that going to change, you think, in terms of the way retailers merchandise and shelve the category?

So I think it starts with the retailer has to make a strategic decision about what role pet food plays for them in their store. And so in the case of pet specialty retailer, they have lots of other things they want to sell you before you get to the thing you came for. And so it makes a lot of sense for us to be back, brightly lit, pulling you into the store. When you get to the grocery store and use -- or a Walmart or a Target, they each think about the role of the category, pet food as a category. And then within that, what is the role of Freshpet. One of the best examples is that in 2015, Target wanted to really up their focus on pets. Pet they viewed as a growth opportunity, a place they could distinguish themselves. So they put Freshpet fridges on the end caps in every one of their stores. As a way to create a beacon that told the shoppers that were walking down that main aisle, yes, we're in the pet food business, and we have really good pet food. And it was supposed to be for 1 year. 6 years later, we're still on the end cap in every one of their stores, and now testing double fridges. And it's because what it did is it accomplished -- it made pet an important segment for them. And the pet shopper is incredibly valuable than the rest of the store for them. Kroger is testing -- and not testing, they're expanding. They have 3 fridge islands, where literally it's 3 Freshpet fridges. And on the fourth side, they put some of their dog toys and treats and stuff like that, that they want to merchandise. But they're creating pet centers in some stores, which is a multi-aisle section that says we're serious about pet. We think this is a big opportunity. They put it on the end where you can see this pet island, and it draws people into the set. And those shoppers, not only are they really good for the category with the volume sells well, that's good for the category because they buy lots of other stuff in the category. Kroger who's got some of the best card data in the country will tell you that those shoppers are uniquely valuable for all the other very important categories that they could buy other fresh product categories that they're trying to draw consumers into the store. So Freshpet becomes a strategic player, not just an important player in the pet food category. And I suspect we're going to see more and more of that kind of thinking from the bricks-and-mortar retailers who are increasingly realizing that they win in fresh. And if they can do things with fresh, not just fresh pet food but fresh around the perimeter, how do they make that work for them? Freshpet comes a key part of that.

And then are the fridges on -- dumb question, but are the fridge on wheels? Like, if you needed to move them from one place to another or change the configuration in some way, how easy is it to actually do that?

It's not easy. They're not on wheels. They can be moved. And we -- one of the things that people don't appreciate about our business model is how expert we are at installing fridges and then servicing them. When you have 25,000 of them and the inventory of spare parts, and we have a team that does nothing but manage our fridge network. So 99.7% of them are up and operating every day, that core competency of ours is incredible. And I just -- an interesting little side note on that, which is if a Coke fridge goes down, nothing goes bad because the can of Coke doesn't go bad. If a Freshpet fridge goes down, $1,000 worth of food can go bad. So being really good at servicing the fridges is a core competency of ours. But if a retailer says, "I'm remodeling a store and I need to change the configuration, I want to redo this," it's easy to have our guys come in and move it or have their people move it. The harder part is there's generally no wiring in the middle of the store, and we do the wiring. We bring in the people to do the wiring and wire the fridges. And so -- and hence, a core competency of ours is getting electricity to where they need it.

I guess as we start thinking about product innovation, you touched on it a little bit earlier. But now with capacity constraints kind of easing and you can kind of get back to focusing on the innovation. Can you just talk a little bit about like where you're headed in terms of product innovation, where the opportunities are potentially?

Yes. I'll give you a couple of things. First of all, going back to when I talked about the broad business model, first mover with the winning product proposition and building that to scale quickly as you can is critically important. But you also have to recognize you never want to lose on the product. You never want to get to the point where somebody has a better mousetrap, where what we are scaling is suddenly obsolete. And so we do an enormous amount of investment in innovation. And part of this redoing and reconfiguring what our capital plan is, is design to accommodate some of the innovation that we have and the ability to scale up some innovation that may not necessarily be consistent with our existing manufacturing operations. So you should expect to see added innovation capability that comes. We have a pilot plant now. We're now moving into larger scale manufacturing assets that could accomplish far more. The way we think about it is we're really touching a relatively small share of what the dog population could be. For example, only in 2018 did we launch a small dog offering. And that thing has gone through the roof and it's done well. We've launched a beef version of it. We created a roll version of it. We currently don't have a specific offering for large dogs and we're working on that because if you have a 100 pound dog, the space that's going to take up in your refrigerator and the cost to feed your dog Freshpet is probably going to be pretty sizable. And if you lived in a Manhattan apartment, you may not be able to accommodate that. You're probably going to accommodate the dog, but you're certainly not going to accommodate the food. And so we're working on versions of our products that can address that audience. Another audience that we recently did some innovation against and we're really getting a lot of traction on is the people who home cook for their dogs. About 15% of calories consumed by dogs in America are not accounted for by commercially produced pet food. And so you think about that, that's bigger than we are. And we created home-style creations, which is patties and cups and whatnot that are all designed. We have a product that's in a bag that's basically Thanksgiving dinner in a bag, that really has all the esthetics of home cooking without all the headache and hassle of it. We're also looking at -- we have a first vegetarian pet food, our Spring & Sprout brand that we launched to meet the needs of the Gen Z audience. So I just took you through, you think about it, size of dogs, small dog and large dog, took you through home cooking as an example now forms in terms of people who want a vegetarian dog food. There are so many different vectors that we can play on. And we have one of our founders, Scott Morris, lives for product innovation and he never stops thinking. So there's a million different directions we can go. So we have to do this delicate balance of scale as fast as you can, but keep your eye on what might come next. And that's a delicate balance.

In terms of the like formulating for big or small dogs, just how much of it is just calorie density, I guess? Just thinking -- because sometimes like kibble has a lot of -- it's calorie dense. So a little bit goes a long way. Is that a big part of just getting the formulations right? Is it just -- is it caloric density and nutrition density?

Caloric density enables the distribution the affordability and whatnot. But there are nutritional needs that vary depending on the size of the dog. So our small dog has a different nutritional profile than we might put in the large dog product. But clearly, it's a breakthrough for us on a large dog product, is going to be finding a way to create a higher level of caloric density. You just couldn't fit enough product in your fridge. It's expensive to ship and deliver that. So we're going to have to find a way to deliver a higher level of caloric density without compromising the taste appeal of the product for the dog.

Right. Right. Right. Okay. Maybe talk a little bit about inflation? And probably getting tired of talking about inflation. But Heather, maybe if you could just talk a little bit about where some of the pressure points are this year, how you're managing through and planning around inflation, and maybe if you can touch on -- I mean it's been wild swings in commodities even in the course of this week. So just in a volatile market or environment, just how that might affect them.

If you asked me last week, I probably would have said that we're in a decent shape. So I'll touch on kind of what we're thinking about from a fuel perspective. But from a commodities perspective, our input cost, ingredients and packaging, the biggest is chicken. The biggest input that we use and also in terms of percent of cost structure. And we price that annually in December and that covers the majority of our chicken needs. So that was done. There is meaningful inflation in that contract, as you would expect. Nothing like what you would have seen on the spot market, but still meaningful inflation. And that was contemplated in the design of our price increase -- of our cumulative price increase that we now have in market. Things like beef are -- we have sort of contracted for 6 months now, it used to be quarterly. So there is obviously some potential risk in the back half. And so we do have fixed contracts on a lot of our input costs, but there is certainly aspects of the cost basket that could face further inflationary pressure. When we build our plans, we didn't anticipate any deflation in sort of the back half. So we've built an assumption that there's a level of inflation. That's what we've priced for. And we price as best that we knew at the time have things move some things not material enough that we're contemplating a new price increase immediately, but there is some variability there. With fuel, we have -- transportation is managed with a third party. We have a contract, there's a fuel surcharge. So we are facing the same pressure that anyone would face in terms of fuel right now. We're looking at what that means and how we would cover that. And so we're not opposed to considering further pricing. It's not something that we're planning for right now, but we've always been comfortable utilizing pricing as a tool to offset inflation, and we would do that if we had to again.

And we're in a much better position with our retailers today than we were last year when we had to delay the pricing just because we were short shipping.

Right. Right. Right. Yes. Yes. And I guess, Billy, can -- with regards to price elasticity in pet food in general, and maybe just you've been in this business -- you've been in CPG for a long time, just, A, your perspective on just how the consumer maybe can absorb -- pet food consumer can absorb, but maybe just more broadly, your perspective on just what's -- what do you think happens with the consumer in inflation?

Yes, it's tough. First of all, we don't have a lot of history with pricing. We've done significant price increases, but very selectively in the past. And so what we've seen from those has been that we've been really good at picking the items where we had some leverage or had some room. We weren't crossing key deciles or anything like that. So we saw limited price density. What we're seeing today is so completely different that it's almost impossible to predict. Pet products in general have tended to be less price sensitive, not a surprise. These are very important creatures to you, and you tend to be willing to spend whatever it takes to make them happy. And so we expect that the price sensitivity in pet products and pet food, in particular, would be less than what you'd see across the CPG universe. But I would caution that we haven't seen the kind of inflation we're seeing today where the consumer will drive up to the store, having spent $5 a gallon on gas and finding out their basket of goods is going to cost $120 instead of $100, they're not making choices just within their pet food, like which brand. They're making choices across the entire store. And one of the things I've been talking about lately is some work was done, I'm guessing it was like 20 years ago, on -- most people think that what the consumer does is this very rational, logical thing of the trade down from the most premium to less expensive all the way down, sort of everybody slides down a little bit. But some work was done about 20 years ago that described what I would call the scrimp, splurge effect. Everybody has a different value set. Everybody is willing to -- I always joke, Heather is willing to spend $5 every day at Starbucks. There are some people who think that's splurging and that they would rather make their coffee at home. And everybody has a different way in which they think about every product and category they buy. And in some categories, they're willing to splurge because this is important to them. In other categories, they will like squeeze every nickel out of their purchase. And so the question you have to ask yourself is, are you selling a product that is in a splurge category or in a scrimp category for the consumer. And I think what we've heard over time is pet food tends to be more of a splurge category, especially the more premium end. Because the people who are buying in the premium end have already told you by their behavior that this is really important to me, I'm willing to -- there's almost no expense that I'm not willing to spend to make this creature very -- that's so important to me, happy. It's also why you see that in a significant inflationary environment, the people that get squeezed are the guys in the middle. Because the people at the top don't see a lot of price sensitivity. The people down in the bottom, there's nowhere else to go except for maybe leave the category, but they're picking up people coming down from the middle because they're not splurgers. There's some number of people in there who are scrimpers. And so you see some movement down into the sort of the low end of the category. So the guys in the middle are the guys without strong brands who thus are in the middle, those are the people who tend to get hurt the most. And so from -- again, long-winded way of saying, what I'm seeing in the market so far from the data I've seen is the super-premium brands who've taken pricing earlier than we did, we were late on our pricing, seem to be doing better than the people who are in the middle. And the people in the bottom might do okay, but you're going to see a lot more lack of price sensitivity or more resilience at the higher end than you're going to see at the lower end.

Right. And that's just the stronger brand, the product proposition, less willing to scrimp there. But...

Yes. I mean, I would just say the best thing before all this inflation happened, our highest price per pound item was our Fresh From the Kitchen. It was also our fastest-growing part of our business. And Marketing 101 tells you when your highest priced item is the fastest growing, that means there's room on top. It means the consumer is willing to pay more for better. And so I'd suggest that we are going to be less price-sensitive. Having said that, our guidance for this year assumes some price sensitivity. We wanted to be very cautious on this. So we assume that there would be a difference between our unit movement growth and our net sales growth and that we would have some price sensitivity.

We're not quite out of time, but I just want to make sure if there's anybody in the audience that wants to ask a question. One in the back?

You mentioned you have 25,000 fridges, could you talk about the life cycle of the fridge, when you would need to replace it, and per annum, how many new fridges you expect to have? And would that replace some of the 25,000 you have? And then you also talked about adding new lines. Could you just give an overall 3- to 5-year thought on CapEx or use of cash for investing back in the business?

So -- yes, the fridges have, on average, a 9-year life. And they pretty much -- I mean, hold to that, that's -- we depreciate over 9 years. So we're sort of very comfortable with that life. We do replace fridges sometimes in advance of that life due to the customer wanting to upgrade. It could be an upgrade for a size or an upgrade for a technology, if they have an older fridge. Sometimes for service, but it's largely more for upgrades in terms of replacements in advance. I'll just make -- since you're asking sort of about the investment side of it, payback on fridges, we pay for that CapEx, including the installation that Billy was talking about. And the payback is very fast, it's within like half a year that we pay back now on average based on velocities -- on average velocities. In terms of lines, our current CapEx plans, we've been adding a line per quarter actually. And when you look to the end of 2022, we're effectively doing that. And we -- from a funding perspective, are fully funded for the capital projects that I talked about, all the projects that are in process. And we'll spend about $300 million on those projects this year. And we are funding that through -- we have a credit agreement in place, which we've touched on earlier this year, we mentioned. We're making an amendment to that just to accommodate some of the covenants, but again, fully funded for those projects. For the plan that we talked about that is in the works that we're still thinking about because that is being reshaped and rethought where -- when we share that plan, we'll then share any changes in funding based on that.

Explain that payback on the Bethlehem campus.

Yes. The other thing that could be interesting in our earnings we shared, for the first time actually, because we now have the Bethlehem campus at scale. We have 6 lines on the Bethlehem campus, 4 lines in 1 facility, which is 100,000 square foot, 2 additional lines, which went into a second facility, which is 140,000 square feet larger because there's also a lot more -- a lot of our office space is there as well. But the campus after we have pricing fully in is just under $550 million in revenue. And we were able to showcase based on the fixed cost structure that's in place there, it actually has a gross margin that's over 50%, adjusted gross margin, I should say. And we -- and that compares to sort of the, I'll call it, the network margin that we exited 2021 with at 44.5%. So meaningfully profitable across the portfolio, right? We've got sort of 50% in bags and rolls and there is a margin difference between the 2. And then from a -- what we did was we showed what the cash flow generation is from that campus before we make a media investment. And it's $145 million in cash generation from that facility. If you apply the media investment at the level that we plan to invest that, which is 12%, you're still generating over $80 million, $85 million. And so what we -- what this shows, actually, if you take the investment to build the campus, it's just around $160 million. You're paying back that campus in 2 years' time. So we show after the media investment. So we wanted to show that because what often gets misconstrued is, can this business be profitable? What is the ultimate sort of endgame of this business from a profitability perspective and because we're growing so fast and scaling fast, we're having to invest way ahead along the way. So when we ramp up capacity. When we look at our margins this year, one of the big investments we're making is the start-up of Ennis. We're also making investment in this buffer capacity. Again, to -- when you're an accelerated growth, those are the things to choices. We're trying to be as explicit as possible, but it's important to know that the underlying profitability of the business is there.

All right. Maybe just one last question would be -- no, we're out of time actually. All right. Billy, Heather, I want to thank you very much for spending time with us.

Thank you, Bryan.

And -- again, good luck.

Great..

Thank you.

Thank you. Thanks, Bryan.

Thanks, Bryan.

Thank you.