Right around the top of the hour, we'll jump right in. Our pleasure today to have Freshpet CEO Billy Cyr and CFO Todd Cunfer. Thanks so much for joining us. You've got a great kind of disruptive growth story. Maybe start just talking a little bit about some of the top-line drivers we've seen in the scanner data, at least, which is a fairly full picture, some acceleration in your growth. And so maybe just start by describing some of what's driving that and how you're thinking about the top-line momentum.
Yeah, I mean, we're feeling really good about the top line right now, and it looks a little bit different than a lot of other people in the CPG space and even including in the pet space. But, you know, the thing that we're seeing is the model that has worked for us for the last 10 years still works. It had a little bit of bumpiness with all the inflation that we had over the last, call it, two years, where we had to take significant price increases. So we saw some little bits of impacts of that and then supply challenges. But the model is back to what it always was, which is 80% of our growth is driven by advertising, and we are now back on the air with really compelling advertising at very good weight, and that's driving the growth.
And that's then amplified by the in-store visibility and availability of the Freshpet-owned fridges. And so we've now got record numbers of fridges being placed, so the consumer sees our ads, they walk in the store, they see the incredibly large fridges lit with fully stocked with our items, and that helps amplify the value of the advertising. And then the third part of it is that we're doing real smart innovation. We usually start innovation small, and it builds from there, but we've got some really nice new products this year that are adding on to the appeal of the brand. So now you see the advertising, you walk in, you see this brightly lit fridge, and it's more likely that you're gonna find an item in the fridge that is relevant to your experience or your pet's life.
So that model's worked for us for the last 10 years. It continues to work, and we're seeing it just kind of chug along. It's just doing what it always has done.
You've got price tailwinds that are beginning to fade a little bit, and so you've really got accelerating volume growth-
Right
that's driving it. Would you point to some of the fridges as one of the bigger pieces of that, or how much visibility do you have on some of the components of that?
Yeah, I mean, we always think it's 80% driven by the advertising. So we can measure, you know, advertising impressions turning into an initial purchase, household penetration gains. That's the big driver. But there is an added amplification value of all the fridges that we're seeing. And there sort of was this pent-up demand over the last couple of years where we couldn't supply, you know, enough product to fill the fridges, so retailers kind of held back on adding the fridges, and now that dam has burst, and we're now seeing those fridges in stores, and so we're getting that amplification value. Is that what's driving it? I mean, just put it in this perspective, our volume growth in Q4 was about 12%.
It was 14% in Q1, it was 18% in Q2, and, you know, if you look at the Nielsen, the Nielsen's today would show you we're growing in the, call it, 18-20 range on the volume perspective, and that doesn't include the unmeasured business. The unmeasured business for us is now largely Costco, which would be additive to that, because our Costco business is doing so well. So at the end of the day, we're probably talking about volume growth now that's in the low 20s at this point. And it's just the model. The model works, it continues to work.
Can you talk a little bit about your core consumer and a little bit of a profile of who that is, but then also maybe talk about how their purchasing behavior evolves over time?
You know, we've gotten a lot of questions in the meetings about, you know, who our consumer is, because there was concern with all the, you know, the student loan repayments beginning and, you know, the risks on inflation and consumers in a recession and whatnot. The reality is, our consumer looks more like the average consumer. It's about $80,000 a year in household income. But what distinguishes our user from the others is how much they love their pets. The more you love your pets, the more likely you are to buy Freshpet.
So we have a fairly significant number of our consumers who might have lower income, be like $40,000-$50,000 a year, but the only creature in the world that they're responsible for, because they're a 25-year-old male or a 60-year-old single woman, is their dog. So they're willing to spend that discretionary income they have on that pet. But the core user for us is somebody who really highly values the pet. It is not just, you know, this important creature, it's a member of their family. In my household, we say it's not just one of our children, it's our favorite child. So, you know, at the end of the day, that's the way they treat this. And this is food, and you feed your pet the best possible food that you can have.
We do call them HIPPOs. We have a, you know, high profit pet-owning household, and those are people who line up attitudinally with our existing users. They're in the super premium pet food category. They highly value the food that they serve to their family members. They are also very interested in the care and nurturing of their pet, and as a result, they buy really good food for their pet. Those are our target audience, and right now, we're in 10.4 million households. Three point three million of those account for 87% of our business. We think the addressable market of HIPPOs is 27 million households, so we're only 10.4, on our way to 27.
There's 42 million households that, if you kind of expand the universe out a little further, that is also available to us. So, you know, we think the opportunity is pretty big, and we've got a pretty loyal following.
Then just maybe elaborate a little bit on how the behavior evolves. I know there's-
Yeah
a bit of a gateway maybe for some people using the Freshpet food as a topping, and just kind of how that can progress.
I think the gateway thing is a drug reference, I think. But the reality is that the typical consumer, the most likely purchase for a consumer who becomes aware of Freshpet, sees our ad, searches for us online, goes to our store locator on our website. Ultimately, they end up showing up at a Freshpet Fridge, and they'll the most likely item they'll buy is a 1 lb chicken roll. It is the lowest total dollar outlay you can make, you know, so it's a small size, and it's in a roll, which is more efficient than our bags. You'll buy that item. And then over the next 13 purchases, you know, you'll try it. 70% of the people will repeat. Those people who repeat will, over time, increase the amount and frequency with which they use it.
So they might mix and top, and then ultimately become a main meal user. But they'll also try other items in the lineup. They might go from chicken to beef, they might move from a roll to a bag. But after about 13 purchase occasions, they pretty much settle in on what is their long-term habit, and that long-term habit is usually a significant multiple of the purchases they might have made in the first year. So two or three times the volume that they do in the first year will be done in the second or third year.
And then just, excuse me, switching to a little bit of the, excuse me, margin color. You've got your new Ennis, Texas facility. Can you just give us an update on how that's progressing and what some of the key margin implications are for that plan?
Yeah. So it's, it's going very well. We have two lines up and running, one bag line, one roll line. There ultimately will be 10 lines at the Ennis facility. We are not even anywhere close to being at scale. We, we think once we get two of each of the lines up and running, and it will be much more efficient at the Ennis facility. We'll have less and less changeovers, just having one line of each form today. We also have a chicken processing facility on the campus right there that we're now utilizing. It's going great. We have terrific product coming from that. Again, once we get the scale of at least four lines up in Ennis, that will be a cost savings for us as well.
So we're early days, we've got a long way to go, but we're very pleased with the way that Ennis facility is running so far.
I know you've given guidance and some specifics as the quarters progress, but maybe just as a reminder, at least some of the progression near term, there's some startup costs, there's costs that can be capitalized, that become expenses once the line-
Yeah
switches on. Can you just maybe give a sense of how that plays out over the rest of the year?
Yeah. The gross margin's a little bit lumpy, just because of the way each time a line comes on, we don't expense those costs until we actually start producing saleable product. So, we just brought the bag line on a few months ago, so all that P&L impact starts to come into effect. And as we build into and scale that line and have more revenue coming from that line, the margin structure will get better. And then we'll repeat that when the next line comes on. So we will add the third line from a saleable product probably in January of 2024, is our best guess at this point, and then we'll have the fourth line, which is a roll line, coming in probably at the end of Q3 of next year.
Just as far as some of the production runs you touched on, you know, extended runs. Ennis is built differently than the legacy lines back in Bethlehem, Pennsylvania. What are some of the opportunities for longer production runs and some of the savings that could drive?
Yeah. Ultimately, as I said, we'll have 10 lines in Bethlehem, on the Ennis facility. We have six lines currently in Bethlehem, and we'll ultimately have five lines in our Kitchen South facility. So you think about it, ultimately will have 21 lines available. So as we scale the business, we'll be able to run very specific products on individual lines and get ultimate efficiency. So we'll have lines that will produce probably only a handful of items versus lines today, where we're constantly having to do changeovers. So the scale and the efficiency is yet to come, but we're pretty excited about it.
And when you give your five-year targets that capture some of your thinking of a little further down the road, does it reflect-
Yeah
some of those benefits?
It doesn't. So we try to be pretty conservative in the assumptions that we gave. We wanted to make sure we could obtain the gross margins that we laid out and hopefully beat them. So what we've assumed is the Ennis facility will be at par with our Bethlehem facility, and clearly, we think there's a lot of upside to that.
And you touched on the chicken processing, the on-site partner facility there. Can you drill into that a little bit more? And, you know, we've seen chicken costs come down. Is that a potential benefit for 2024? How do we think about just that piece of the input cost equation?
Yeah, there is a potential. We will see a little bit of benefit, but it's a little bit too early to tell. We tend to price most of that chicken around December first of every year. But just as a heads-up, the chicken pricing that you will see in your store has been a lot more volatile. It went up a lot more, it came down a lot more. We never saw that big, huge increase. The chicken we buy is a little bit more stable, so we're optimistic. We'll see a little bit of a tailwind this year, but nothing significant.
Just back to the consumer for a minute. You touched on how you're not seeing you know downtrading or, or, or really, your consumer is quite sticky. Have you seen any you know what's the latest on just attracting new households? Have you seen that impacted by just inflation or, you know, pressure on the consumer, and how does that look from your seat?
Yeah, it's interesting. So we took four price increases in two years. The net total of that, cumulative total of that, is 27% price increase. And those price increases were a 2.7% price increase last September to 5% price increases. So one of them was in February this year, the other one was in November of 2021. And then we did a 12% price increase in February of 2022. And if you look at our household panel data, and we watch it very closely, the 2.7% and the 2.5% price increases, consumer just went right through them. We are continually adding new households. It really didn't have any impact on our growth.
The 12% price increase that we took in February 2022, we saw a significant slowdown in the rate at which we were able to add new consumers, because it was a little bit of sticker shock. Consumer walked in and saw an item that used to be $20 is now gonna cost $23 or something like that. And so it really did slow down our rate of customer acquisition. But then when you lap that and you get to where we are now, so that's more than a year ago in our rearview mirror, as we look at it, we've now seen a re-acceleration of the household penetration.
It'll take time till it shows up in our 52-week household penetration numbers, but when we look at the 13-week and the 4-week, we see a very rapid increase that has happened since, call it, the April-May window of this year, and it's now running those periods, or on a shorter term basis, are running in the roughly 18, 19, 20% year-on-year increases in household penetration. Our long-term model calls for us having, call it, slightly over 20% household penetration gains on a yearly basis, and call it 5, 6, or 7 points of buying rate gains, meaning consumers moving into more expensive products or using us more frequently. And that model combined gives us, call it, 25, 26% growth, our long-term algorithm. So we think we're on track to getting back to the 20%+ household penetration growth.
It's just gonna have to let the clock run a little bit longer until we get the 12% price increase impact out of our rearview mirror.
That top-line build would assume negligible pricing in an ordinary year. Is that the right way to go about it?
We're assuming no pricing.
Yeah.
If there's pricing, obviously, that would be additive. What's interesting is the pricing that we've seen over the last few years, it's driven up the buying rate. The buying rate has grown, you know, in the twenties kind of range, as opposed to our normal 6% or 7% year-on-year growth. So, we capture the benefit of that in buying rate, but we don't expect that going forward. If we do, we get it, it's great, but...
Can you give a sense of timing for, y ou touched on the third and fourth lines for Ennis. What about the next six? How long of a project is it, and what kind of capital cost does that take? You know, maybe just give a sense of how you think about the balance sheet and the liquidity relative-
Yeah
to that build-out.
So the good news is, we did a very successful convertible debt offering in March. We have plenty of cash for this year and next year. We feel we'll be free cash flow positive in 2026. So in 2025, FY 2025, we may need to raise a little bit of debt to get us through until FY 2026, but we feel really good about the capital situation where we are. Look, if we're growing at a 25% rate that Billy just articulated, we're gonna spend a fair amount of capital. So we're gonna probably spend between $200 million and $250 million of capital for the foreseeable future.
We're gonna do it in the most smart, cost-effective way we possibly can, and we're not gonna get too far ahead and spend too far ahead of the curve here and be very cognizant of managing that capital and that cash flow very, very carefully. But, we're gonna spend a fair amount if we're growing this quickly. Ultimately, sometime out in the future, we won't be growing at 25%, and we'll be able to generate a lot more free cash flow. But we're in a pretty good position right now. Look, we are looking at ways to make the existing lines we have a lot more efficient through a lot of OpEx projects that we have in place right now. We're looking at some new technologies that we're pretty excited about.
If they work, they will be much more capital friendly. So there's a lot of things going on to maximize that ROIC, but we're in a pretty good position right now.
I would just add to that. If we have a, w e're in a position today, which we haven't been in in quite some time, where we can exercise the capital discipline that we think is necessary for this business, where we have to commit about 18 months out to an incremental line if we need an incremental line. So we're not fully committed to the 2027 capital plan today. What we're committed to is the capacity that we need for the next 18 months, and 18 months out, we can put a line in a building that we've already either got under construction or already have available to us. There does come a point where we have to do another increment of construction, but it's significantly less expensive than the initial upfront that we did in Ennis to put in all the infrastructure on that site.
But we're basically, at this point, looking at our demand plan 18-24 months out at any given point in time, and making a decision about which capital project do you spend next? Is it in Ennis? Is it in Kitchen South? You know, what do you need? When do you need it? So if the growth slows, we're not overcommitted. If the growth accelerates, we might pull back on the marketing spending, just to live within the capacity that we've got. But we're working in a very disciplined way to manage the cash and the capacity in a very disciplined fashion.
Yeah. And just, coming back to innovation, you mentioned earlier, you've talked about a new launch you expect, around, you know, kind of end later this year, close to-
This month.
Maybe the end of the year. Oh, is it this month? Okay.
This month.
Can you elaborate on that a little bit and how it is, I think, meant to attract a little bit more value-conscious consumer?
Yeah, so we recognizing that consumers really need, going back to what I said before, a good entry point into the franchise. What we wanna do is have something that is very approachable to the consumer, so once they try it, then they can move through the rest of the lineup, but we don't wanna have to take pricing on our entire lineup in order to create an entry point. So we've launched a product that we call Freshpet Complete Nutrition. It is a roll product. It comes in a size that is a modest total outlay, but it has slightly lower protein content, slightly higher, oats and brown rice content, so it allows us to get to a little bit more affordable price.
Still a very good margin, but it becomes the invitation for somebody to enter the franchise, try the Freshpet, try a variety of other products in the lineup, and ultimately, we think that'll help us attract the users that we need to hit our long-term goals. That starts shipping this month.
Then, can you just talk about, you've got a partnership with Chewy that's got a personalized and online component to it. Can you give us an update on how that's progressing and how that works?
Yeah. I think what you're referring to is the partnership we're doing with Petco on custom meals. But we do have a partnership with Chewy as well, where we sell and they distribute our product through their distribution system. It's a small part of our business. But the other piece, the Petco part, is a product we call Freshpet Custom Meals, and it's where you go on a website. It's you can get to it from our website into the Petco website, give us all the information about your dog, the age of your dog, the size of your dog, any dietary restrictions, your dog's name. And what it does is, it then dispatches to a local store near where you live, the information. The product is picked, labels put on the box, that this is Muffy's food.
Feed one cup a day, you know, twice a day, or once, one cup a meal twice a day, and then it is delivered via DoorDash or whatever Petco uses as their delivery at your pre-selected time. So if you scheduled for Tuesdays at three o'clock, it'll be delivered to your house at Tuesdays at three o'clock, and it's a subscription program. So it, it's our effort to meet the need that some people have for a subscription delivery of fresh product, without all the cumbersome costs of refrigerated, you know, containers and ice and all that other stuff that you have to do if you went through UPS or FedEx. So it's delivered locally, and it's at a scheduled delivery time, so you can be there to receive it or make sure somebody's there to receive it.
That's additive, obviously, to anything we see in the scanner data. You mentioned Costco as an unmeasured channel.
Yep.
This would be part of that as well?
Well, it'll go through the Petco data. If you buy the pet specialty data, it would be in the Petco data.
It's in there. Okay.
It would be in the Petco data.
Then just on the fridges, can you give a update on how adding new ones has been progressing? Maybe also talk a little bit about how that gives you a competitive advantage.
Yeah. So this has been a really big year for us on new fridge placements. We committed to putting in 5,000 new fridges this year. That will end up with our total existing footprint, plus those. We'll have 1.7 million cubic feet of space at retail by the end of this year, and we're very bullish that we're gonna hit that and probably exceed it by some. And the reality is that I described it as the dam broke. During 2021 and 2022, we couldn't keep the fridges full. Retailers obviously weren't gonna put in more fridges when they couldn't fill the ones they had. So now that dam broke, and we're putting out fridges, and so 5,000 fridges going out this year. We think of the fridges as helping us on both visibility and availability.
The visibility part is, if you see an ad, you walk in a store, if there's two very large, brightly lit fridges, it amplifies the value of the advertising tremendously, and we can actually see that in our returns on the advertising investment. The availability part is, if we have two fridges, you know, you can get a much wider assortment of products available. The story I like to tell about that is, I went into the local Wegmans near our Freshpet Kitchens in Bethlehem one day. I had, m y dog was a puppy at the time, and I went to buy the puppy roll, and on the tag, it said, "Discontinued." I'm like, "Discontinued?
Why is this discontinued?" So I called the sales guy who's in charge of Wegmans and said, "I'm standing in the aisle, so why is this discontinued?" He said, "Bad news. It doesn't sell fast enough to hold that spot in that fridge, so I had to discontinue it." Well, I can't fault you for your logic, so I said, "Okay, well, I'll go buy it at the local Giant." He said, "Bad news. I discontinued it there, too." The reality is, the puppy business is relatively small. You know, the small dogs, they don't live a lot, and it's a short part of their life. You don't get a puppy roll in a fridge unless we have a second fridge in there. So if we wanted the puppy business, you pretty much have to get that second fridge.
Not universally true; some people put it in the first fridge, but in a lot of cases, that's the case. And that's the kind of dynamic where having second fridges, or third fridges in the case of some retailers, can really be additive to the franchise. It helps us attract new users. And so that's going extremely well. I will caution that this year was where the dam broke. Next year will not be as big. We... I don't know yet. We're in the conversations with retailers, but it'd be hard to top what we're doing this year. What we're doing this year is quite heroic, and it does speak also volumes to the capability of our organization. It's not really thought of very, a whole lot, but the ability to place over 5,000 fridges, think of that.
You know, that's, you know, the number of fridges that we have to place every day. That means buy, ship, install, wire, the whole nine yards, get them stocked and whatnot. It's a pretty heroic undertaking, and while we do that while managing a network of over 30,000 fridges. So it's a pretty big testament to the executional capability of our team.
Just for those new to the story, it costs us a little over $4,000, again, to buy the fridge, ship the fridge, install the fridge at a retailer. We also maintain it, which is a big deal because the retailers are not in the business of doing this. The fridges last about 10 years, and we get the payback on that fridge typically within six months. So it's a fantastic investment for us. And it's our fridge, we can only put Freshpet products in those fridges.
That's great. Well, great update, excellent story. Fun to see it evolve, and thanks so much for your time here today.