Greetings, and welcome to Freshpet’s Second Quarter 2022 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeff Sonnek, Investor Relations at ICR. Thank you. You may begin.

Thank you. Good afternoon, and welcome to Freshpet’s Second Quarter 2022 Earnings Call and Webcast. On today’s call are Billy Cyr, Chief Executive Officer; and Heather Pomerantz, 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 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, 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 measures. A reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and limitations associated with such non-GAAP measures. Finally, the company has produced a presentation that contains many of the key metrics that will be discussed on this call. That presentation can be found on the company’s investor website. Management’s commentary will not specifically walk through the presentation on the call, but rather it’s a summary of the results and guidance that we’ll discuss today. With that, I’d now like to turn the call over to Billy Cyr, Chief Executive Officer.

Thank you, Jeff, and good afternoon, everyone. The message I would like you to take away from today’s call is that the dual challenges of inflation and economic slowdown, which have resulted in unwelcomed volatility in our results have not derailed our ability to deliver our long-term goals, including significant margin expansion. During this call, you will learn that, first, net sales are strong and growing in line with our expectations, price sensitivity is modest and also in line with our expectations and household penetration growth has accelerated and is more consistent with our long-term goals. In fact, our net sales growth is outpacing our long-term plan, which only requires a 28% compound annual growth rate to achieve our 2025 goal. Second, adjusted EBITDA was below expectations in the quarter due to media investment timing, inflation, logistics challenges and the quality issue we had in June. We have already taken the necessary actions to adjust for the critical issues, including announcing a third price increase. However, the cost of the quality issue and the new timing gap on inflation versus our pricing require us to lower our adjusted EBITDA guidance for the year to $48 million from $55 million. Third, we are updating our CapEx expectations to reflect our current best estimate of the actual timing we will experience with our various capacity addition and fridge expansion projects. Our initial estimates were very conservative and designed to give us significant flexibility. But now that we are more than halfway through the year, we have much greater visibility and expect that we will spend approximately $80 million less this year than the $400 million previously projected. The impact on our available capacity will be minimal and still leave ample room to grow at or above the rates we had projected. And…

Thank you, Billy, and good afternoon, everyone. We had strong net sales in the quarter, in line with our guidance, but the adjusted EBITDA was below our expectations. A meaningful portion of this shortfall was timing of marketing spend and will correct itself by year-end. Some of it was due to the cost of the quality issue we had in the quarter. Some of it was due to some logistics challenges we had in June and which we think we can overcome in the back half of the year. And some of it was due to incremental inflation that exceeded our plan and for which we are taking pricing. Let me take you through each element 1 piece at a time. Net sales were $146 million in the quarter, up 34.4% versus a year ago. Nielsen measured consumption in the quarter was up 41%. The difference between Nielsen measured growth rate and the net sales growth rate is the size of the trade inventory refill that occurred in the year ago period versus what we did this year. The consumption growth rate consisted of approximately 21% unit growth and 20 points of pricing growth. While we still only have about 4 months of data with full pricing in effect, this balance between pricing growth and unit growth is in line with our expectations and represents very modest price sensitivity compared to other CPG businesses. For perspective, our unit growth of 21% in the quarter can be compared to unit growth in Q4 of 19%, which was prior to the price increases and 28% in Q1 when we had strong distribution and advertising and the smaller of our 2 price increases was in effect. You should expect that we will always have price growth due to innovation and consumers moving into…

[Operator Instructions] Our first question comes from the line of Steph Wissink with Jefferies.

I would like to spend a little bit more time on the EBITDA revision for the year. And maybe Heather and Billy, if you could both talk about this, but how much of the burden occurred already in the second quarter versus what do you expect that timing mismatch to account for in the balance of the year? If I just look at that, I think it’s on Slide 8, that EBITDA bridge, just help us break down what’s already been resolved and what’s still to come? And then also related to the CapEx to settle along the same lines, how much of the deferral has already occurred versus how much is yet to come in terms of the overall revision.

Heather, do you want to take that?

So I’ll start with, of course, the -- on the EBITDA guide. So the reduction is approximately $7 million. The quality issue is $2.2 million. So of course, that already has already occurred in June. The balance of the change coming from the [missed maximum] inflation versus price about $1 million of that has incurred in the first half, with the expectation and the balance of that comes in the second half. Steph, can you just state one more time the CapEx question?

Yes. Just the revision lower in CapEx. I’m wondering how much of that has already occurred versus how much is yet to occur. So the CapEx for the quarter, did it come in below, meaning what’s left to be realized is also below? Or is all of the deferral in the revision of the year in the back half?

Got it. Yes. Yes. So a portion of -- about 1/4 of it occurred already in the first half and then the balance is reductions in the second half. The main driver of the second half shift is around the phasing of spend that we’ll have around the innovation kitchen. That’s the biggest driver of the shift in the second half.

Okay. So that innovation kitchen is now going to be a 2023 event?

Most of it. Yes, there’ll be a small spend in the second half, but the majority will be in 2023. That’s correct.

Our next question comes from the line of Peter Benedict with Robert W. Baird.

First question, just can you give us a sense of what we should expect plant start-up costs and the launch expenses could be for the full year? I think there were around $11 million in the first half. What should we think about for the full year? And maybe just a sense for what it should look like next year?

Sure. So Peter, the -- well, first of all, we’ll provide a very sharp clarity when we issued the revised view for Q3. But for now, the best assumption is that the second half is going to be largely in line with the first half. So you could sort of double it. What you have going on there is with the Ennis start-up you have increase in costs, as you would expect, as we ramp up to start up. But then, of course, then starting up, we stopped adding back largely in Q4. And so there’s sort of the increased costs offset by that cost would have come into the cost structure anyway. For next year, it’s -- we will have less start-up. I mean we have -- we have the last line in Phase 1 of Ennis starting up. At some point next year, again, we’ll provide a revised phasing of exactly when we plan to start that up. But that’s the main start-up for next year that you should expect. So a much less significant start-up impact given that Ennis is really fully operational. It’s just adding 1 last line next year.

Got it. Okay. That’s helpful. And then just I mean maybe -- I don’t know it can help us here. Like just how you’re thinking about kind of the EBITDA margin flow through, kind of incremental margins on sales growth using this new method and then maybe getting past some of the noise that’s out there right now in terms of just what’s going on with -- in the business. Is there a way to think about that? Or what does your model tell you in terms of the incrementals as we continue to kind of grow sales over the next several years?

Yes. So Peter, I mean, I think -- I mean, we said it in the prepared remarks that certainly, there will still be some lumpiness to this. So as we have years of a larger start-up like this year, just using -- let’s just use premiering in the first half, so $20 million as a proxy. It’s a big impact in plant startup. As you look at next year, you’re going to get a really nice pickup on the gross margin coming from -- and it’s being started up and running. And again, just to reinforce our most efficient and profitable facility. You’re going to get a really nice benefit next year. But then the following -- and that’ll flow through on the higher revenue. But then on the following year, we will be starting up things like the Innovation Kitchen, which will have, again, volatility that will come with that. We will, of course, provide as much visibility and foresight to that as we move through it, we’ll be extremely transparent as we always are. But it will be a little bit lumpier. The longer-term road map and flow-through doesn’t change. The expectations of Ennis as we bring on not only Phase 1, but Phase I and II with even greater efficiency continues to be a key driver in terms of the margin improvement, and then the continued benefits from the SG&A leverage benefits around both logistics and G&A leverage will continue and should continue to be a more consistent part of that flow through.

Okay. And then maybe if I could, just a follow-up kind of on price. And you kind of talked about how some of the cost pressures may be peaking here. We’ll see if that’s the case. But how do you think about price in an environment where, let’s say, the costs are starting to moderate and come down. Do you expect prices will hold in this category? I know -- or do you think you’re rolling back a bit? What’s -- how do you maybe think about that right now?

Scott, do you want to take that one?

Yes. Hi, Peter. So we’ve been trying to -- as we’ve done pricing, we’ve been trying to be really thoughtful as to how this is all going to land eventually. And it’s one of the reasons that it’s put us behind in a couple of quarters where we’ve been 30 or 60 days, a little bit slower to take some pricing action. Because when this is all said and done, and it’s leveled out, we want to end up in a really good place. What we anticipate is many others in the category in just dry and wet food, we’ll use significant amounts of promotion dollars to adjust prices, both kind of in the near term and in the mid and longer term. We don’t do any promotion as you know. So we really don’t want to -- we want to be very careful of how our approach to the pricing where we end up in making sure that we create a portfolio of products that has really, really wide appeal to 11 million plus consumers. And that’s kind of how we’ve been thinking about it.

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

Billy, Scott, I guess, I know you are waist deep at least in the analytics and the customer. And I think -- the concern I hear or see most is not your existing consumer base trading down because they’re highly loyal and obviously they don’t want to change what their dog is eating. But it’s that new consumer trading up and the worry that, that will -- the pace will slow with the higher prices than just that you’re at the super premium as we go into a potential recession. So I guess are you seeing anything from that new consumer slowing down, except for the small little spikes where you’ve seen some unevenness? Or do you think you can hold up really well and -- you talked about growing through past recessions, but you’re obviously a much smaller base at that point. So just trying to -- any color or any fact you have to back that would be great.

Yes, Bill, this is a topic we’ve been spending a lot of time thinking about and watching the data very closely. We included in the presentation today a few slides that give you a little bit -- a bit of a glimpse of what we’re seeing. We did see a little bit of a slowdown in June when gasoline hit $5, as Heather said in the prepared remarks. But since then, we’ve seen it bounce back up. The number that we saw in the last 12 weeks, the household penetration gains have been up 19% versus a year ago. When we look at it across a variety of demographics, we look at it, small dog households, large dog households, both up, we look at it by generation. We’ve seen virtually all the generations are moving up. The millennials, actually, we’re moving up the most. We’re getting the most traction in that group, and we look at across income groups. And across income groups, we are not seeing any significant differences in their willingness to buy Freshpet or join the Freshpet franchise. There were little bits and dips in June. I don’t want to gloss over that June was a little bit lumpier than we would like, but it came right back in July. So we’re feeling pretty good about the ability to attract new users to the franchise because the proposition is pretty darn attractive. But that’s what our data is saying so far, and it’s in line with where we’d expect to be or would hope to be.

Okay. And then just kind of a minor question. I guess I’m a little surprised that diesel prices kind of impacted you intra-quarter. I thought you had done some diesel hedges or maybe just educate me on what is hedged and what is not hedged?

We don’t hedge any diesel, but we do have some hedges on natural gas for a portion of our production facility. But even those will roll off by the end of November, so we’re going to face that challenge at the end of the year. But we don’t hedge -- we currently don’t hedge any of our diesel exposure. And that’s certainly something as we get a little bit larger in scale in our distribution that we ought to consider, but so far we have not.

Our next question comes from the line of Anoori Naughton with JP Morgan.

Thanks for the question. A quick clarification and apologies if you said this on the call, but how does your new household penetration target or your metric of $4.9 million compared versus the first quarter of this year? And then my question is, what does the shape of the trajectory look like for Freshpet to get that back on track with its longer-term household penetration goal of 11 million households? I believe the additional plan when you set it out was closer to 7.6% in ‘23, which is still sizable 50% jump from where you are today. So I guess the cost of the question is, will Freshpet need to spend more than 12% on ad spending for the next couple of years to catch up, so to speak.

Yes. First of all, we provided a comparison in the deck of the June data from the old method to the new method. So you can see the difference. I don’t have the new method for the period at the end of Q1. So it’s hard to say. But in total, it’s like 186,000 more users in the new method and the old method. And the rate of gain over the last couple of years has been 200,000 more than what the old method would have shown. What was most intriguing about the way in which the data has come out, and we’ve also seen a similar piece of data from Numerator. So it kind of validates it -- is that our rate of growth has been more in households has been more consistent over the last 2 years than what they had previously projected. And it gets to your second part of your question is, what do we need to do to get to that 11 million households? The answer is we need to get household penetration growth going back up into the mid-20s, which is where we’ve been in the past. And the last 12 weeks were up 19%, and that includes a little bit of a dip that occurred in June. So I’m expecting as we go further towards the end of the year, you’re going to see that number continue to go up and will move into the 20s. Numerator, which provides similar data with a larger panel is already showing us moving into the low 20s with their more recent data. So I’m feeling pretty good about we’re moving back up into the 20% plus growth rate, and we need to stay there. We need to get into the mid-20s and stay there.

One other thing to just take into consideration is as the business gets bigger, obviously, this is a simple math that you can do. But the 12%, it starts to be -- the dollars start to be tremendous, and it allows us to basically drive more and more consumers in. If we can keep our CAC in a similar range, we should be able to achieve that 11 million number fairly easily.

Understood. And just to clarify though, you’ve accelerated some of your ad spending into the second quarter. So presumably, there would be very little incremental spending as move into the back half. So I guess I’m just trying to square how we’ll see your household penetration start to accelerate from here if you’re going to be spending less incremental dollars between move through the back half.

Yes, it’s -- always remember the comparison, too. The year ago was pretty soft in this area.

Yes. We have a very healthy Q3 advertising wise. And then as Billy was mentioning, we have -- we typically have a very fairly soft Q4 in advertising. Look, the big thing is there is a tremendous amount of disruption in the marketplace with whether it’s gas prices, fear of recession that I think the fear was may be as bad as the actual recession itself. We can see consumers stabilizing in their behavior and their traffic into stores. And it looks like this next period, our prices are now stable, consumers are kind of calmed down, and we’re going to see them go back into stores with fuller fridges than we’ve ever had, and we anticipate making some progress in this quarter.

Our next question comes from the line of Brian Holland with Cowen and Company.

So if I could ask first about maintaining the net sales guidance. Given prior year track volume compares get tougher in the second half, Pet Specialty appears to be a drag. I appreciate that part of that is comp driven. But I’m just curious how we get comfortable because it would seem that 1 or both of track volume will need to sequentially get better from here, assuming price stake why you get another little bump there in the fourth quarter. But that and/or Pet Specialties got to get better. So can you help us understand the volume path over the balance of the year and next?

Yes. So the way I think about it is we’re going to be in this summer horizontal period until probably the end of August. And then because of the media investment we made, because of the better in-stock conditions, because of the purge placements that we’ve done, I’d expect to see it start ramping up on the consumption as you went through the fourth quarter. Remember that last year, again, I hate to go back and talk about lapping them last year. But last year, we had a disastrous July because of the warehouse issue that our third-party warehouse -- we fortunately survived this year’s July and had a very strong July. And then on top of that, if you recall in the fourth quarter last year, we had the spare parts issue that impacted our ability to ship in the end of November, December. And so while we need to see good consumption numbers and expect to see strong consumption numbers, between now and the end of the year. There are some anomalies in the year ago that kind of give you a sense that the growth rate on a net sales basis as well as on a consumption basis where you’re able to deliver the guidance. And frankly, it should give us a little bit of room.

And then just as a follow-on to that, obviously, trade inventory, I think it was maybe like a 700 bps headwind or whatever it was in the quarter, forgive me them not looking at that site at this moment. But I’m curious if you can help remind us what that looks like in the second half of the year what you’re lapping as far as impact there? And then also on the elasticity side, I appreciate the data that you gave us, but you’ve also called out some nice distribution growth in the first half. So I’m wondering how you discern between kind of unit growth that’s sort of apples-to-apples and what the distribution benefit is? Because if you had some distribution benefit in the first half, it was -- the logic would be you might have to keep that up to make the math look the same, but maybe you can walk us through that.

Yes. I’m probably going to get lost in some of your questions there. But the best way to neutralize, Brian, what you’re talking about is velocity, measuring the velocity on the business. And the velocity on the businesses continue to do quite nicely even though we’ve been in this period where we had $5 gas and whatnot. So I don’t know if you’ve seen that. We didn’t include it in the deck this time. We have done in the past, but velocity in the business of dollars per point of distribution have been fairly healthy. So I think, yes, we’ve gotten distribution where we have more distribution coming in the back half of the year, and we’re going to have velocity gains behind the advertising. So I think that all gets us to where we want to get to. I don’t know if that addresses the question or not though.

No, no, that’s helpful and exactly what I was getting at. I was trying to be confusing, but you got it. Trade inventory was the other one there. Just help us understand what...

Yes, there was trade inventory. There’s fairly significant amount of trade inventory refill in the year ago. It was kind of odd. It was more skewed to the fourth quarter than the third quarter. But even in the end of the fourth quarter we had some drawdown when we had our supply problem. So it’s going to be lumpy throughout the back half of the year. So we do need to have consumption in excess of our net sales growth to compensate for it. So there’s going to have to be some over delivery, but it’s not exactly clear how big that number is going to be because the trade inventory needs to grow year-on-year as well as we get more distribution and a bigger business, the customers hold 3 weeks of inventory and 3 weeks inventory is a bigger number on the 35% larger business than it was a year ago. So there will be some trade inventory build that happens this year as well.

Our next question comes from the line of Rupesh Parikh with Oppenheimer.

So I just wanted to go back to operating cash flow. So year-to-date you guys burned a little over $60 million. It looks like mainly due to AR and inventory. I just want to get a sense of how you’re thinking about this cash burn by the end of the year on the -- at the OCF level?

Sure. So I think the first thing is the receivables. So it’s significantly inflated or driven by the growing pains from our new ERP system. Basically, our inability to invoice on time has obviously caused delays in terms of our cash collection. We now, as you mentioned already on the call, we now have a solution in place that basically allows us to invoice real time with shipments as we had done previously. And so as we collect what was past due and are invoicing our clients, we expect to be back to our normal DSO run rate of about 25 days based on our customer payment terms. So that’s the first piece. The other piece on working capital. On the finished goods inventory side, that is sitting on a day that is largely in line with our objectives to be at around 4 to 5 weeks of inventory on hand, and we’ve needed to build inventory to improve customer service. But we did have -- we are sitting on inflated raw materials and packaging inventory. In Q2, that was about $5 million worth of an impact. And that also is attributable to ERP [indiscernible], where we needed to hold on to some incremental inventory to ensure that from a planning perspective we have what we need as we work through. Again, we have a very dedicated team in place now to finish up some of the needed post implementation solutions, but this should really turn around. And what you will see in working capital movement from here on will be driven by the growth in the business and not by the ERP impact.

Okay, great. And then maybe just 1 additional question. Just on the guide. I’m just curious what you guys see now is a bigger risk for the guide for the remainder of the year.

We think we’ve -- Rupesh, I think we’ve captured -- we went through and looked at all of the inflation elements because that’s the thing that caught us. I mean we’re absorbing in our guidance, some of the conservatism that we built in at the beginning of the year, we absorbed it. We can’t, as Heather said, absorb all of it. We think we’ve identified and captured all the inflation that we’re going to get. But there are a few things like diesel and like natural gas that we don’t have hedge positions. And if those things ran wild, that could be -- those could be remaining risks for us. Not enormous, but they could be risks for us. The flipside is the same thing that we’ve had and we keep trying to prevent is any supply interruptions, whether it’s upstream for us or it’s our ability to produce and supply to our customers. And I would include in that, we need a timely startup of our Ennis facility. We feel very good about where we are, we’re ready to start it up. But we need that roll line to come on to produce the product to deliver our net sales for the year. So I don’t want to make it sound like we don’t think there are any risks because there are, and we have to go out and manage them, but they would come on the supply. Not on the demand side, it would come on the supply side, and it would come on inflation. Scott or Heather, I don’t know if you see it any differently.

Our next question comes from the line of Mark Astrachan with Stifel.

I wanted to ask about volumes. So they seem a little bit slower than at least I would have thought, inclusive of more ad spend that you said earlier in the second quarter. And if we take a look at just the scanner data of the 2-year volume CAGR has sequentially decelerated. I think each period since, call it, late March, early April. So I guess I’m curious how that has stacked up versus your expectations. You touched on elasticity on the prepared remarks, but I don’t think updated the actual elasticity. So if you could perhaps talk to that? And then how do you think about it if not potentially getting worse with the incremental pricing that you talked about today?

Yes. We expected, I think, as we said in the prepared remarks, we expect to go flat during the summer because it looks like 2019, and that’s why we provided the 3-year stack. So you could see from 2017 to 2019, we saw very consistently in the summer, consumption goes flat, whether it’s people on vacation, dogs eating less. But you went flat and then you came back up again late August into early September. And we’d expect to see that continue. We did see in June, we saw some softness, so said it about $5 gas, but we frankly also saw come back in July and saw very, very strong shipments in July. We saw household penetration bouncing back up. So we feel pretty good about the trajectory of the balance of the year. I mean, we’re all in uncharted waters, and we don’t know whether there’s a recession. We don’t know if there’s -- if the next price increase is going to be something that is the straw that breaks the camel’s back. But the data we included in the deck and data that we have beyond that shows that pricing is pretty stable at this point. The sensitivity we have is about where it’s going to be which is what you’d expect. After about 4 or 5 months, you’d expect to get to a fairly stable place. And so we think we know what it looks like, and we think we know what the trends look like going forward. And our shipments and order rates match up pretty well with the projections and the guidance that we’re giving.

Okay. And maybe just sticking with that, thinking about just broader strokes on affordability. So with the new price increase, I think you’ll be up something, call it, high teens versus where you were 12 months ago, I guess that’s roughly consistent with what we’re seeing across the pet food, dog/cat category. But to earlier points about potential for increased promotions coming out of this period of heightened inflation or potentially deflation at some point. You don’t promote, you’re not going to do that. But if others are doing it and they promote back half of it, then how do you think about the relative affordability for the product going forward at that point.

Scott, do you want to take that?

Yes. So Mark, so one of the things that we were really conscious about, and I touched on this a tiny bit with Peter, but not didn’t get into the details. When we -- even this last price increase and all along, we made sure that we had a handful of items that were still as affordable for everyone as possible. And we were really conscious about that. We did it in a couple of different sizes and a couple of different product forms. So no matter where the dust settles, those products will be available to people and they have seen modest price increases, but they have not bear the brunt. They’re not carrying the biggest amount of the price increases. So anyway, I think we tried to be mindful of that. We put those in place. It will be in our 6-pound chicken roll or some of our 1, 1.5 pound sizes. We’ve tried to make sure that they continue to remain accessible and affordable.

Our next question comes from the line of Robert Moskow with Credit Suisse.

I guess I cover a lot of food companies, and I don’t recall hearing any of them talk about a slowdown in consumption from $5 gas, except for maybe Impulse. So can you be a little more specific as to what type of products within your portfolio felt that impact? Are there some items that are more discretionary in your portfolio. That would make more sense to me than saying that people look at the price of gas and then reduce their -- the volume of consumption for their pets.

Yes. Rob, it’s -- what we saw was foot traffic down and what people were doing was consolidating trips. And so what we were seeing was people were shopped less frequently, and they move to our bigger sizes. And so it was -- I think it was a temporary phenomenon because if you look -- if we look at our business in July, it bounced back. In fact, it looks like it’s filling a hole that might have been created in June. And I can’t put my finger on exactly how that happened or why that happened. But we look at the data on trip frequency and the size of the units that they’re buying. It clearly suggests that people who are consolidating trips and buying larger sizes when they made the trips, but there was a little drawdown of pantry inventory that happened, and they’re making up for it in July. Again, I don’t know the psychology that works behind it, but that’s what the data shows.

Okay. And then maybe one more follow-up. You said that you increased your media spend in order to sell through price increases. Is that for the benefit of the trade like do you increase the media spending to help the trade with this price increase? Or is it for the consumer? Because like I don’t know why -- I’m not sure who is helping it sell through to.

It’s to make sure that as you’re seeing your prices rise that you’re making sure that you’re keeping your growth rate intact, right? And 1 of the things that we looked at when we look at growth rate is we’re looking at units, we’re looking at pounds, et cetera, because dollars are a little bit hard to kind of get a handle around right now. And we’ve been able to see units stay in the high teens, even in same-store sales, high teens into the early 20s and similar with volume. So if you look at it that way, through this period of taking a net 17% price increase, we’ve been able to keep our overall kind of velocity growth strong. And actually, I mean, I look at it and I go, that’s pretty encouraging, especially with what we saw in the category. If you look at units across the category, everyone’s kind of high-fiving across the type-2 category, celebrating that they’re having growth. But if you remove the price increase growth that they have in place, units are -- look pretty bad or volume looks pretty bad for the majority of the category. So I think that we’ve come out of this in pretty good shape.

Okay. I don’t know if you’re making me more optimistic or less by saying that the pet food category is getting hurt, but -- okay, Scott. But here’s the follow-up. Like you’re raising pricing in the back half, so why is this just a pull forward in media? Would you have to do it again in the back half?

It’s literally we call -- we literally call it [indiscernible] price increase, it’s 2.7%. And is what we’re seeing in the back of the year. It’s literally rounding if we’re at $5.79, we’re going to $5.99 on items. I’m just using that as an example. So it’s gap very much.

One of the lessons that I’ve taken away from this experience is that we would -- we did one modest price increase than one enormous price increase and then another modest one. And the consumer could digest more smaller price increases rather than the size of the second price increase, which was pretty big because that creates sticker shock and could cause the consumer to reconsider or reevaluate, do I really need this. And as opposed to more frequent, but smaller. And for the next one, I don’t think a lot of people are going to add an eyelash app, but they certainly noticed the second one.

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

Yes. Thanks for the question. First question is, Billy, I think you referred to providing an update at some point in the future with respect to addressable households and the -- I guess, the underlying algorithm of household penetration and buy rate. Were you referring to that as being just kind of a mechanical exercise given the change in approach or methodology by Nielsen or something more fundamental based on price changes, a different kind of consumer behavior or both?

It’s somewhere in between. I don’t think we’re going to go back and revisit the addressable market, at least we haven’t committed to doing that yet, but we are looking at the driver. So for example, as Scott mentioned earlier, what is the customer acquisition cost with our current pricing in the market? Does that change in any appreciable way? What does the buying rate look like once consumers are digesting the pricing we’ve got? And just reconstruct the model that gets us from where we are to the 11 million households and the $1.25 billion in net sales because as I think I said when I framed it up, I framed it up and saying, we know we’re running at a rate that’s well in excess of what you need to get to the target. And the question now is, with the higher pricing and the higher buying rate, what is the composition of that going to look like? Do you make any changes because the CAC is higher or lower, the buying rate is higher or lower, the households are easier or harder to get. And that’s the algorithm we need to put together, and we wanted to see the pricing stabilize before we made that decision.

Okay. So no change to your level of confidence in the $1.25 billion or the 25% EBITDA margin. It’s just kind of maybe the algorithm underneath that is what you’re saying?

Yes. That’s probably the right way to think about it, Jon.

Okay. And then I guess, just a follow-up. I just have a broad question on direct-to-consumer. You didn’t really mentioned at least in the prepared comments, e-commerce growth this quarter. If you could give us an update on that? And then are you -- do you have broader plans for a direct-to-consumer offering? When might we hear about that? If so, I just want to get your perspective on that from a competitive standpoint, too.

So we’ve continued to see really nice growth. It’s actually -- what we consider e-commerce, which is any place someone can sit down in a computer and order our product. Some of that’s directly delivered and some of that’s click and collect. It’s actually paid, I believe, 45 and 46 in the deck, Jon, and I know we provide a ton of materials to go through. But -- so that continues to grow. It’s -- there’s a couple of retailers that are doing like a really, really great job with this. And we’re continuing to invest with them and work with them. And over time, we recognize that from a DTC standpoint, we don’t believe that going direct to consumer is the right path for us, but we do believe that modifying our product portfolio and working with our existing partners is the right path. And we feel like we’ve come up with kind of a new and differentiated model that will be really helpful to kind of break into that piece of the market. And I think whether it’s later this year or Q1, we’ll be introducing some kind of a new product line in order to do that.

Our next question comes from the line of Ben Bienvenu with Stephens.

Jim Salera on for Ben. I wanted to circle back to the CapEx guidance reduction. If we look at pushing the investment in the innovation center more into 2023, just given the overall inflation in building materials and things that go into setting up a new facility, does that $80 million add that into the CapEx, I would assume that if you shifted some of that goes into the new year, but it looks like the CapEx cadence outside of this year is still the same $300 million, $200 million, $100 million [indiscernible].

So with that innovation center, it literally is we were we can’t get as much done as we would like to from a timing perspective. We actually think that can work to our advantage. So I think we touched on whether it’s stainless steel, building materials, et cetera, standard deals, the amount of [strength] that we use in our equipment is pretty extraordinary. So as we look at planning that out, we may have to put deposits down at the similar timing, but we anticipate that as the markets on some of those commodities, stainless steel, for example, or some of the other building materials cools off a little bit, we think there may be advantage in that innovation center and we’re hoping that there’s additional savings through that, too.

So to be clear, that’s in the $80 million. Is the assumption that some of those like core commodities come down?

In that -- $80 million is the timing and a little bit of an efficiency. As we said, we had a conservative set of assumptions. As we get further along, we get more realistic assumptions on both timing and the actual cost, and we pushed some of the projects back. It’s also -- you have to know that some of this is a cascading effect where one project leads to the next project. And so what you’re seeing is we showed you CapEx going out through 2025, but there’s some stuff that is just kind of cascading will fall back into ‘26 in that case. So the $80 million is a total reduction in the horizon we’re showing you. Some of it is efficiency, some of it is timing, but some of it is pushed out into the latter years.

Got it. So also, I think it seems like a waterfall back out past ‘20. So the 2026 could contain some of that incremental spend of like, I think, the 100-ish that you talked about before?

But I think importantly -- but importantly. The capital spending that we have planned out in this revision gives us plenty of head space to grow and meet the objectives that we have.

And then just real quick on -- I know we got a lot of questions on the ad spending. But just given that there was such firm ad support in the first half of the year. If the economy continues to deteriorate into the back half of the year, would you guys feel okay turning some of the ad spending back on to support volumes? Or would that be something that you’re more focused on margins in the back half of the year and so you’d rather take the volume hit and wait until the first quarter of next year starts to pick back up.

I think that we’re very committed to making sure we continue delivering on the top line and we feel very good about the plan that we’ve got. There’s also lead times on media commitments that would make it hard to do that in an efficient manner. So we’re pretty committed to delivering the net sales line, we said, but also delivering the EBITDA that we’ve committed to. So I don’t want people to get the sense that we would erode the profitability because we want -- we do know, as we said in the call, we’re very focused on generating cash and cash efficiency as we grow. And so we wanted to make sure we’re very mindful of the investments we make and when we make them.

There are no further questions in the queue. I’d like to hand the call back over to Mr. Cyr for closing remarks.

Great. Well, thank you very much for your interest and your attention. I’d like to close with a statement in honor of Olivia Newton-John, who passed away earlier today. She said, "The only wait I left from my dogs to which I would add if she fed them Freshpet, they would be lean and the lift easier." Rest in Peace. Thank you very much.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.