Freshpet Inc (FRPT) 2018 Q2 法說會逐字稿

Greetings, and welcome to the Freshpet Second Quarter 2018 Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to Katie Turner for opening remarks.

Thank you.

Good afternoon, and welcome to Freshpet's Second Quarter 2018 Earnings Conference Call and Webcast.

On today's call are: Billy Cyr, Chief Executive Officer; and Dick Kassar, Chief Financial Officer.

Scott Morris, Chief Operating Officer, will also be available for Q&A.

Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws.

These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements.

Please refer to the company's quarterly 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 the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

Finally, 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 a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP.

Now I'd like to turn the call over to Billy Cyr, Chief Executive Officer.

Thank you, Katie, and good afternoon, everyone.

To begin, I will provide an overview of our financial highlights and recent business performance, and then Dick will provide greater detail on our financial and our updated guidance for 2018.

Finally, Dick, Scott and I will be available to answer your questions.

We are very pleased with our Q2 results.

Recall, our Feed the Growth Plan is designed to accelerate Freshpet's rate of growth, enabling us to fulfill our mission of providing more pets with fresh, all-natural foods that enrich their lives and the relationships with their pet parents, and we are committed to doing so in ways that are good for our pets, for people and for our planet.

In the pursuit of that mission, we expect to deliver significant value to shareholders.

We will accomplish this by creating a virtuous cycle, where increased investment in advertising drives increasing scale that we can use to drive greater distribution, increased manufacturing utilization and efficiency, and better leverages our organizational capacity.

This will produce increased financial returns that we can use to drive further growth and long-term profitability, enabling us to serve more pets.

Our financial goal is to deliver $300 million in revenue as soon as 2020, with a 20-plus percent adjusted EBITDA margin.

One key to delivering those goals is to deliver an accelerating rate of growth in 2018.

Our second quarter results confirmed that we are on track to deliver this accelerated growth rate in 2018, and we are progressing towards our longer-term target.

Our increased investment in advertising, in conjunction with consistent distribution improvements and focused product innovation, have enabled us to cycle last year's strong growth and deliver an acceleration in Freshpet's consumption growth rate.

Fresh consumption in the quarter was up 27.8%, an acceleration from Q1's 25% and fiscal year '17's 21%.

The consumption growth was broad-based, with all classes of trade up more than 25% versus the category, including our pet specialty business, which was up more than 23% versus year-ago in the quarter.

Grocery was up more than 32%; mass consumption was up 25%.

All of our key product forms, rolls, roasted meals and Fresh From The Kitchen grew at greater than double-digit rates, with particularly strong growth on our roasted meals, driven by successful new products.

Our core fresh dog food business grew at the fastest rate, more than 30%, as we prioritized shelf space for dogs items ahead of cat items.

Further, velocity gains accounted for over 70% of our revenue growth.

Core dog household penetration also grew at the fastest rate in more than 3 years.

And, even in the face of significant store closures, we grew distribution across the Nielsen mega channel by 3.1 points of ACV or about 7.5%, with a total of 385 net new stores.

We now have 18,662 stores.

We also upgraded 215 stores to larger fridges in the quarter.

Net sales were up 23% versus a very strong quarter year-ago.

The gap between the consumption growth rate of 27.8% and the net sales growth rate of 23% is due to the discontinuation of the baked business, about 1 point; the timing of customer shipments around holidays, about 3 points; and a small difference in unmeasured channels.

Last year, some customers chose to accelerate orders into the last week of June to avoid the Fourth of July holiday.

With the holiday moved back to a Wednesday this year, fewer customers did that.

We foreshadowed this possibility when we provided our initial guidance for the year.

We are also off to a very strong, good start on Q3 and expect to see our strong growth rates continue.

Dick will provide an update on our guidance for the balance of the year.

We clearly have momentum on the top line.

While advertising is a primary driver of that growth, we are also benefiting from continued improvements in retail availability, smart and focused product innovation and outstanding customer and consumer service.

We believe those are strong and sustainable capabilities that will enable us to deliver our near and long-term growth goals.

Adjusted EBITDA in the quarter was $2.5 million.

While that result is below the year-ago, it is entirely due to the planned increase in marketing investment in the quarter and we will get a return for that later in the year.

We invested $3.8 million more in Q2 advertising than we did in the prior year period, and adjusted EBITDA was only down $700,000 versus that same period.

Further, delivering $2.5 million in Q2 is consistent with our financial plan for the year.

We also improved our structural profitability, that is adjusted gross margin and G&A absorption in the quarter.

Our long-term plan calls for improving the structural profitability by more than 900 basis points versus where we ended 2016.

We have 700 basis points coming from the increased absorption in G&A and the balance coming from scale benefits in manufacturing that help improve adjusted gross margin.

In Q2, we improved G&A by 200 basis points versus year-ago, as we continue to grow into our organizational structure and adjusted gross margin bounced back from Q1.

It was up 50 basis points versus year-ago and 110 basis points versus Q1 to 51.2%.

The adjusted gross margin in the quarter reflects some healthy improvement in throughput and yield that are representative of the continual progress we expect to make.

Those gains are partially offset by some onetime issues and by some industry-wide issues, such as commodity and freight inflation.

The most significant temporary item is the increased staffing associated with a 7-day operation.

We have now absorbed the peak amount of new staffing behind our plan to convert to a 7-day operation.

We are encouraged by the progress we have made on adjusted gross margin.

But the results going forward will continue to be a bit lumpy as we grow into the added staffing.

In closing, I believe our second quarter results validate that our Feed the Growth Plan is working in its second year and can cycle the strong growth we generated last year.

Our founders built an incredibly robust business model that is unique in both its strategic merit and the consumer benefit it delivers.

The results we are seeing increase our confidence that Freshpet has the ability to become a very sizable brand in the attractive pet food industry and fulfill its mission of delivering fresh, all-natural foods to pets that enrich their lives and strengthen their relationship with their pet parents and doing that in ways that are good for pets, people and the planet.

Before I turn this over to Dick, I would like to let you know that we will be announcing the details of our capacity expansion plans later this week.

The rapid growth of the Freshpet brand will require that we bring new capacity online in mid- to late 2020.

On Wednesday, we will outline how we plan to accomplish that by further extending our manufacturing expertise advantage with the Freshpet Kitchens 2.0.

At that time, we will share the timing, costs and benefits associated with that project.

I will now turn it over to Dick to discuss our results in more detail.

Thank you, Billy, and good afternoon, everyone.

As Billy indicated, net sales in the quarter were $47.6 million, up 23% versus the year-ago period.

I would like to remind you that we adopted new revenue recognition standards this year, so the net sales in the prior year quarter 2 were $38.7 million under the new standards.

Excluding the discontinued baked items, the Fresh net sales were up 24% in the quarter.

As we told you at the beginning of the year, we believe that quarter 2 would be our toughest year-on-year comparison because of the movement of the holidays and due to the significant ramp up in consumption in the year-ago period.

Though we are encouraged by the strong net sales results in the quarter and even more encouraged by the accelerating consumption growth.

As a result, we are raising our net sales guidance for the year to greater than $190 million or plus-25% versus year ago, and plus-26% on our core Fresh business.

We expect the consumption trends across all classes of trade to remain strong throughout the balance of the year and to benefit from the increased penetration that our advertising investment is delivering.

We expect that the shipment trends will closely mirror the consumption trends over time, with the only meaningful variation period-to-period coming from temporary or seasonal changes in trade, inventory and ordering patterns around holidays.

Adjusted gross profit for the quarter was 51.2%, up 50 basis points from the year-ago period and up 110 basis points from quarter 1, despite absorbing approximately 80 basis points of labor cost versus year-ago behind our 7-day production transition.

Without these costs, our adjusted gross margin would've been approximately 52%.

Further, we absorbed 140 basis points of a higher commodity cost versus year-ago.

Adjusted SG&A in the quarter was $25 million or 52.5% of net sales.

That includes $4.3 million increase in selling and marketing expense in the quarter.

As Billy indicated, our media spending accounted for a bulk of that increase.

Excluding the selling and marketing expenses, we made good progress on G&A with a 200 basis point improvement in G&A versus the year-ago.

This puts us on track towards the 900 basis points of fixed cost pick-up we expect to achieve by 2020.

Adjusted EBITDA in the quarter was $2.5 million, down $700,000 from the year-ago period, driven entirely by the $4.3 million increase in marketing investment.

As in the past, our EBITDA for the year will be weighted towards the back half of the year due to our significantly heavier media spending in the first half of the year, and the resulting net sales we expect to accelerate in the second half of the year.

We are reiterating our guidance of greater than $20 million of adjusted EBITDA for the year, as we expect to see continued strength in net sales in the back half of the year, less impact from the increased media investment and improved gross margins from more effective capacity utilization and continuing improvements in yield and throughput.

We are not raising our adjusted EBITDA guidance, though, despite the increased net sales expectations, as we remain committed to investing for growth and also [much of] some higher costs, particularly commodities and freight.

We paid back $2 million of debt in the quarter, so we have $4 million drawn on our revolver at the end of the quarter.

We ended the quarter with $1.1 million in cash.

We continue to expect to produce positive annual cash flow from operations and end the year debt-free, excluding the impact of any capacity expansion efforts we might undertake later in the year.

To reiterate, we are very encouraged by our progress so far this year, particularly with the strong net sales growth and thus have taken our net sales guidance up to greater than $190 million and remain on track to achieve our annual adjusted EBITDA guidance.

We are also confident in our ability to deliver our long-term financial goals.

We have proven the ability to accelerate our growth and to capture the scale benefits in our structural profitability.

In the back half of the year, we will demonstrate our ability to take some of that added scale to the bottom line.

That concludes our overview.

We will now be glad to take your questions.

Operator?

(Operator Instructions) Our first question comes from the line of Robert Moskow from Crédit Suisse.

I guess, 2 questions.

One is, I guess it's kind of harsh to reconcile the 900 basis points of margin expansion with what's going to be a -- there's going to be a big capacity expansion plan coming at the same time.

Can you remind me, are you going to have to hire a lot of people for that capacity expansion as well?

And why are -- how can you do those 2 things at once through 2020?

So Rob, the way we will do all the planning for the capacity expansion is all those costs will be capitalized until we begin production from the new facility and have saleable product coming out of the facility.

So the costs that you would see would almost entirely end up capitalized.

Okay, so that includes labor?

Or is the labor separate?

No.

The labor associated with those personnel, they wouldn't be hired until mid- to late 2020.

And all costs associated with that labor, which is part of our capital project, while they're training and getting -- and testing production will be part of our capital plan.

Rob, also, when we outline the plan on Wednesday, you'll see how we plan to handle the operation of that facility, which will make it a little bit easier and clearer to understand how the hiring will unfold.

But suffice it to say that if there is any impact in 2020 from the expansion of the capacity, it will be relatively modest on the financials in 2020.

Okay, well, I hate keep harping on this, but like, when you get to 2021, I guess that doesn't mean that there is a step backward, is there?

Just for the labor expense [is 20%?]

We don't expect so.

And again, when you see the operating plan that we are going to lay out on Wednesday, you'll understand why that is.

Okay.

That's very helpful.

And maybe just on the top line, which was very good and better than what we thought, can you give us a little more color as to maybe household penetration rates, some more evidence that you are seeing, maybe new -- is it new users coming to the franchise?

Is it existing users expanding their use of the franchise?

Do you have any more color on what's driving that, the velocity in particular?

Yes, we've got a lot of color on that and I hate to just keep saying it this way, but when we talk on Wednesday, we'll also give you a lot more detail on it.

But the headline on it is, household penetration is up about 20% year-on-year and we are also seeing expansion in the buying rate at the same time.

And the people that we are bringing into the franchise look a lot like the same people we brought into this franchise last year, so it tells us that there is a pool of high-quality prospects for this business that we continue to recruit.

And there are more that look like those that can be part of our future.

But at this point, it's exactly what we've seen and we've been talking about, expanding the penetration and at the same time we're expanding the buying rate.

Our next question comes from the line of Bill Chappell with SunTrust.

Just one clarification, Billy.

On the holiday shift, so did that actually occur?

Or was that really not as big of an impact in the quarter?

There was no impact on the front end.

We had worried that there will be impacts both on the front and the back end.

We worried that Easter would have a problem.

There was no problem related to Easter.

But what we saw at the 4th of July, we ship all -- the vast majority of our shipments are LTL and last year, because the holiday fell on a Tuesday, a lot of people opted to pull the orders into the previous week, rather than having them ship out on the Monday and sit around.

And so this year, because the holiday moved back a day, we saw a reduction in those shipments in the last week of the quarter when compared to the year-ago.

I think they fell the way they should fall this year, and last year they just happened to be a little bit larger than you would've expected.

Got it.

So there is no incremental benefit as we move into the third quarter?

It means that we -- on a year-on-year comparison, it means that we started out strongly in July.

That is normal consumption, just a normal pattern.

We are seeing consumption and shipments match each other very nicely in the middle of the year.

Got it.

And then as we look at the back half in terms of marketing spend, remind me or help me understand kind of how it works.

Do you -- have you started the process of kind of stair-stepping it down?

Or are we still in the -- you pulse it for July and then you're off now for 2 or 3 months, and then pulse it again in October type thing.

Just trying to understand how the expense is going to work out.

And also, what's your expectations now are for kind of the drop-off or deceleration of the sales, if any?

So we've actually been off for about 6 weeks now, off TV, and we've had low levels of digital.

It was planned during this period.

We've historically seen not as great a response in the summer period.

So we've kind of straddled those periods, and gotten better return towards the front of the year.

We do have TV coming back in the end of August and into September.

And then we'll have a digital and some mix of TV on in October and November and that's -- some of that's still like TVD, but we will have advertising at a much lower level.

But the nice thing is, since we've been off, we've actually seen kind of a very steady pace, a flattening of growth but a study versus prior periods.

And really nice growth rates versus prior year and we also have even seen a handful of like weekly records, even being out of the media period.

So we are pretty happy about that.

So just a follow-up.

So is your raising the guidance for the full year on the revenue side just due to year-to-date?

Or I believe that hey, maybe we are not going to see the drop-off that we thought in the back half?

So the reason is the guidance reflects the -- we are ahead of where we thought we would be and a little bit of more bullishness on the back half, but more of it is reflecting the fact that we are as far ahead as we are on the first half.

Our next question comes from the line of Brian Holland from Consumer Edge Research.

First question, I guess just to sort of confirm, it sounds like what I'm hearing from you but just to be clear.

Top line guidance, raised.

EBITDA guidance, held.

Can you sort of distinguish within that EBITDA guidance that you're maintaining, how much of that is -- just Q2 played out exactly in line with plan and you anticipate that continuing?

You talk about freight, et cetera.

And how much of that is any decision to reinvest potentially upside that you saw in the first half, supported by the increased revenue guide and reinvesting that?

If indeed you are reinvesting, maybe just specifically areas of focus that we should be thinking about, whether that's more behind media in the back half, et cetera?

So we aren't going to go into a whole lot of detail on decomposing that, Brian.

What I can tell you is that we -- what we told folks at the beginning of the year is our advertising split within the first half and second half would be 70%/30%.

We expect to see that play out.

We also have other elements that are in the marketing spend mix.

We did -- have seen the commodities, higher cost of commodities.

We've been talking about it as -- on the year, the commodity cost increase is about $3 million.

And so that's playing into our decision on the EBITDA guidance.

I'd also tell you that the discussion about freight, what we are seeing on the freight side is it's on inbound freight for us, because that's largely stuff that comes at full truckload, or close to full truckload quantities.

On the outbound, we are not seeing inflation, but we are losing the savings.

We had been expecting that we would see freight go down because of our increasing scale and what's happening is our increasing scale is offsetting higher freight rates.

So when you kind of decompose it all, it's going to be skewed towards the commodity side, but there'll be other factors involved as well.

Okay.

And then -- so, I guess, I think Rob asked this question earlier, and it sounds like from your response that your data is coming in a little bit stronger than even what I'm seeing from my end.

So maybe this answers the question, but I guess if I was going to pick nits based on the data that I can see, it would -- the more household penetration growth, the better, because as you mentioned, sales per household keep going up, which implies you're getting folks to continue to show increasing loyalty to the brand, increased engagement.

I'm just curious to what extent household penetration growth, thus far, is in line with your expectations?

Is it better?

Is it in line?

Just kind of curious if you could sort of frame how that's coming along, as obviously, that media spend is primarily trained on bringing new households in.

Yes, as we showed you before, there's a pretty strong match between our core dog household penetration growth and the media spend.

And that has continued as we outlined it in June and it contains now.

And we will be able to update you on that when we share more detail on Wednesday.

But I would say that we are getting a little bit of an added benefit, because some of the new product that we launched this year are doing particularly well and that has helped the household penetration as well.

So the media, I think, is performing exactly as we thought and we are getting an added bonus from better-than-expected performance on the new products that we launched this year.

(Operator Instructions) Our next question comes from the line of Mark Astrachan from Stifel.

So I guess, just starting on the 70%/30% ad spend, so the timing and expectations are still the same.

I guess, maybe this question is for Scott.

So it seems like the correlation between spend and sales is pretty amazingly consistent and visible.

Why not spend more, given the response?

I mean, obviously, I assume this is something that you're debating internally.

But I'm just curious why not pedal-to-the-metal kind of thing?

And I guess I'll let you answer the question.

So yes, it is a -- I think for people that have been around this business, I think we've come to really see how consistent the results have been.

I think for people outside when they see them, I think they're typically pretty impressed with the correlation of the spend and the response.

I think that it's up to us to -- we obviously want to grow quite quickly and we're seeing -- we love the numbers that we are seeing, but we want to grow at a pace that the organization is comfortable with and that we can make sure we can keep quality in place, we can keep expansion in place.

There is a lot of work that we're doing and we want to make sure that we don't get ahead of ourselves, because the number one thing is to deliver a really strong consistent product day in and day out to consumers.

So I think that's the focus.

In addition, there is obviously, financial metrics that we've committed to and we are focused on for this fiscal year.

And we want to make sure that we are continuing to deliver on those and keep the ship steady as she goes.

Got it.

Okay.

And then on the velocity comment or even just increased usage.

I guess, sort of like a double question.

So how do you think about your ultimate penetration or the ultimate penetration for Freshpet food compared to other dog, cat food categories of dried products?

And I guess, in thinking about the first part on the velocity, who are the incremental consumers as you do your work?

Is it that people were previously mixing dry food in here, and now they are switching to more of your product?

Is it that you are bringing more consumers in?

And then sort of related to that, back to that other question, which is what is the ultimate penetration of your specific category within the broader pet food market?

So today, we are still below a 2, from a penetration standpoint.

The way -- it's interesting, you kind of look at the data, you do the math and the metrics around it and we have and in -- like, just kind of doing the hard numbers from the traditional consumer metrics and it looks like you can get -- like, there is many times opportunity to increase it.

But I think what we are doing and I think it's starting to play out really well for us is we are kind of changing the categories.

You almost can't tell how high is high, quite honestly.

We believe that as you continue to develop that and really get more and more people to look at it, you start to really define what good is and what great and healthy and the best food in the industry is.

And we think that we are becoming more of that beacon.

So I mean, quantitatively, yes, there's multiple times in penetration, really confident in that.

But I think longer term, I think this is a defining moment in the category and I think that it's kind of almost a question mark on like, what does it look like 5 years from now, or 10 years from now?

And could fresh pet food would be a 20-share of a category?

And it seems logical that it could be.

I know it's a little ambiguous, right?

I know -- we got out the best crystal ball we have.

But again, we feel confident in it, but I don't think there is a really super clear answer.

Everything we have, we've shared that in the past, the things that we've had, the data that we've shared showed -- demonstrates really strong potential, but I think it's potentially even beyond that.

Yes, that's helpful.

I mean, it certainly does seem like there's more people coming into the category, but what do I know?

Just lastly, maybe Billy, a question for you.

I'm curious, so how have the discussions evolved with the retailers since you started?

Freshpet seems to be, obviously, it's still small from a penetration standpoint but accounting for a bigger percentage of category growth, particularly as sales trends accelerate.

So I guess I'm just curious, one, sort of broader strokes; and two, within the retailers that you are not fully penetrated, which is a lot of them, how are those discussions evolving to more fully penetrate where you are?

I going to give you a top line overview and Scott might be able to provide a little bit more color on it.

But as you can imagine, most retailers are struggling for growth right now and so when you walk in and you can show a retailer that you are in their same-store sales metrics, delivering numbers that are north of 20% growth on average, and some are better than that, obviously, you obviously get people's attention.

And versus where we were 2 years ago, we now not only have a strong growth rate, but we also are able to do that with more significant scale.

And when you think about strategically, as these retailers try to figure out how they're going to compete long term, particularly with e-commerce, fresh is an area that many of them are focused.

So our conversations have gotten to the point to where they are much more engaged and interested.

They still face many of the same obstacles that prevent them from putting us in every one of their stores.

But I think what you can -- what we're seeing and what you can see is those who have figured it out and are on sort of the leading edge and understand what the potential is, are jumping in with both feet.

So that means they're upgrading their fridges, so this year we have already upgraded about 700 fridges, from smaller to larger ones.

There are some retailers out there where there's conversations out going on about adding a second fridge, and there are many retailers where we are completing the distribution.

So we were in 50%, 60%, 70% of the stores, and going to 80%, 90% of their stores.

So I think those conversations are getting much more getting much more positive.

But you have to remember the backdrop that most retailers are operating in, it's a very challenging backdrop and particularly for them to continue to make investments in the stores.

And so we do operate in that environment, but I think what you can see is our growth and distribution is incredibly consistent, incredibly steady.

When measured at stores, it looks kind of lumpy.

But when you measure it as ACV, we were going ACV at 7% a year pretty consistently now for 4, 5 years.

And I expect to see that continue over the long haul and I'd also expect to see some retailers get in, in such a big way that we see them leading and transforming the category.

I know Scott might have some more color on that.

Billy did a great job answering that, but to build a little bit more on it, to over-answer the question maybe a little bit, like, as Billy mentioned, we've got growth.

We've got a really strong category of leading margins.

We've got incredible traffic that we bring in and frequency that we bring in.

We are kind of the milk and eggs of the pet aisle.

We consistently bring in new consumers and have been able to demonstrate that from retailers.

We are starting demonstrate the real scale in the category.

There are retailers that we have a 10%, 11%, 12%, 13%, 14% share of dry and wet dog food in the stores we are in.

So that's really playing out.

And then finally, we're able to bring the best of the perimeter into the center of the store.

And I think when retailers look at that and recognize what we bring, I think that Freshpet really is becoming more of a solution to help them continue to grow their category into the future.

So I think they do look at it -- I feel like the conversations have continued to change, as now we have been able to kind of surpass the growth rates we've had historically.

But also, that we been able to do it at a level where we are starting to be like real in size for many of the retailers in the stores that we currently participate in.

So I think it's going to play out really well for us over time.

I think we are being looked at as a favored partner.

Our next question comes from the line of Jon Andersen from William Blair.

Most of my questions have been answered.

Just a couple, and I'll leave you to answer.

One, could you talk a little bit more about the buy rate among existing Freshpet households?

How much running room you have there to increase the buy rate, the kind of the trends you've seen historically?

And what your expectations are going forward?

And then second, if you could comment broadly on -- I know there's been a lot of focus internally on improving the retail conditions in the fridges and your level of progress there and kind of comfort level with where things are today and how much more opportunity there may be?

So from a buy rate perspective, we have -- we actually just recently re-did a study that we had done a couple of years ago and we have consistently seen people in their second and third year in the franchise actually continue to spend more and more over time.

Typically, what we see is they come in and as they kind of -- very light-level mixing behavior and then it becomes a more habitual mixing behavior, then it becomes even more of the bowl.

And then a lot of people do transition over time to being a 100% user in -- for Freshpet.

So we are a -- we love that data.

There is just -- there is nothing that tells you kind of the health of a franchise and a product line more than that component.

And then secondarily on the retail conditions, we have done a lot of different work around improving retail conditions.

We had probably another 5 to 7 tests out there this year.

We definitely made some progress in a few areas.

I would say they are definitely not at the standard that we would like and kind of hold our brand, our product and our company to.

So we're continuing to work on that and it's in -- we're in active discussions again, looking at next year and what we can do.

One of the things that does help retail conditions is the overall improvement in the fridge network in the fleet that we are putting out there.

We are putting best-in-class fridges out there in situations where fridges that are not up to our standards, those are some of the renovation work that we've shared or the upgrade work that we shared in the past.

And we are putting better and better fridges in that are easier to merchandise, have greater visibility, easier to clean, better to take care of, easier to stock, et cetera.

So those 2 things coupled together will continue to kind of improve our overall retail presence over time.

Ladies and gentlemen, we have reached the end of the question-and-answer session.

And I would like to turn the call back to management for closing remarks.

Great.

Thank you very much for your questions, your interest.

We obviously very feel good about what we delivered this quarter and we are looking forward to the balance of the year.

Obviously, we referenced in the call that we will have more to say later this week about the Freshpet Kitchens 2.0 and provide a little bit more color and detail on the business performance to date and where we think the potential of this business is.

So we look forward to sharing that information with folks on Wednesday.

But thank you for your time.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.