All right, good morning. Morning, everybody, and welcome. I'm Peter Benedict with Baird. Really pleased to have the management team with Freshpet with us for our next presentation, Fireside Chat, with us today. CEO Billy Cyr, CFO Todd Cunfer, and the godfather of Freshpet in the United States himself, Scott Morris, who's co-founder and president. Scott, unfortunately, his voice is not with him today, so the discussion will just be with Billy and Todd.
It's purely eye candy.
Yeah, exactly. So Freshpet was founded in 2006, was the pioneer in bringing Freshpet food to pets in the United States. The IPO in 2014. Since then, stocks compounded at 20% or better CAGR. So it's been a big success. A billion-dollar brand at retail already. It's the dominant player in what is the most disruptive portion of pet food. So before we get into Q&A, I figure we're going to run a commercial here, which just underscores the importance of feeding your pet Freshpet.
He's driving and driving. The guy made a left, right, left into the river.
Yeah.
Yeah. He was following the GPS.
Daddy's home.
Yeah, you got that thing.
What's it look like? Yeah, I got that thing.
Good. Throw it in the fridge.
Wait, over here?
No, over here. Yeah, I'm over there.
OK, OK, OK.
We need a roadmap. Oh. What's this? You keep dog food in the fridge?
Oh.
It's not dog food.
That's Freshpet.
Real meat, real veggies for my boy, Junior.
No disrespect, but what are we doing here?
Anybody asked, we were at Grandma's.
Freshpet, it's not dog food, it's food food.
All right, well, if that doesn't get you to switch over, I'm not sure what will. So, guys, thanks again for being here. Billy, maybe you want to kick us off with some opening comments, and we'll get into Q&A.
Yeah, obviously, that's an homage to our New Jersey roots, so yeah, so I'm glad to be here. Obviously, it's been a really exciting and interesting ride for us, but overall, we're in the business of changing the way people nourish their pets, and we're well on that journey. I heard Peter just say that we're now the dominant player. Who'd ever thought this company? I don't know if Scott ever thought he'd hear that word "dominant" be used to describe the company that he created about 20 years ago, but we are now in that position where we've gained tremendous scale through incredibly rapid growth, and we're now well on the journey to making that profitable growth.
And so we've put a lot of focus in the last couple of years into getting ourselves in a position where we can match that incredibly strong top line with much, much more robust margins. We built a lot of organizational capability. And we're feeling very good about where we sit today. We're obviously in the quiet period, so it's hard for us to say a whole lot about the very near-term trends. But the long-term trends on this business are incredibly positive. And there's nothing that we see going forward that really gives us any pause about our long-term potential. People are getting more dogs. They're treating them better. And Freshpet is a key part of that. So we're very bullish on our long-term prospects.
Terrific. Todd, maybe one for you to kick us off. So I think in the past, sometimes you guys have issued a slide deck along with this conference. It's had your prior, your guidance, and some comments on that. There wasn't one this year. Just maybe address that. Was there a reason for that or something to think about?
Yeah, just as last year. Look, we're in the middle of my team's closing the books as we speak. So don't anticipate any surprises whatsoever. The POS came in exactly as we anticipated in Q4. We feel really good about how we're ending the year. We had a fabulous year. So no changes there. So all good.
Awesome. All right, good to hear. Let's start with really high-level kind of pet ownership. 60-70 million dog-owning households out there, depending on what estimate you want to use. That number spiked, obviously, during the pandemic, came back down as folks went back to work. There's some players in the industry that are talking about a return to dog household growth. Others are a little more hedging on that, not quite. What do you see from your seat?
First of all, I think that the dichotomy in the commentary you're getting reflects the fact that the data is not particularly reliable. There's an enormous amount of data out there, whether it's number of people who return pets to shelters, people who adopt pets in the shelters, dog licensing, and whatnot. And it's a really murky picture. It's hard to get a clear view. And the reality is it goes up and down. But the way we think about it is there's two key components. Component number one is, what is the long-term trend? Is there anything that we see that's in the near term that's having an impact on people's desire to get a pet and treat the pet well? And there's nothing that we see that would change that. People are basically replacing kids with dogs. So they're having kids later. They're having fewer kids.
Dogs become the pet of choice in the households. That trend has been going on for 20 years. Everything we see suggests that that trend will continue. The first piece of it is basically that there's the long-term trend towards increasing pet adoptions. The second part of it is we think about it as where do we sit within that. Our household penetration today is against the number, whether it's 60 million or 70 million; it doesn't really matter. We're only in 13.5 million households. Only five million of those households are using us to any significant degree. The upside for us still remains incredibly large. It really doesn't matter whether the number is 60, 65, 70, 75, anywhere along that continuum. We still have an enormous untapped opportunity.
Got it. Yeah. And so, I mean, investors have always had a pretty positive view of the pet sector in general. I remember pre-pandemic, it was always like, hey, this is a steady mid-single-digit growth category. Maybe you have 1% pet population growth and then kind of 4% kind of spend per pet. There was a little of that was inflation. A little of that was humanization, those types of things. Let's talk about that kind of spend per pet and those trends. What are you guys seeing around pricing and inflation? And then following up on that, let's talk about the humanization trend and how that plays into your brand.
Yeah, so the longer-term picture here is that pricing, we did a lot of price increases. Took 27% pricing over 18 months. We and the rest of the industry did that. It's now come back to a much more normalized rate. We're not seeing any significant price increases. So all the buying rate gains that we and everybody else got from prices now have settled down. And now you've got to earn it based on consumers who are increasingly buying your product or buying higher value products. Our long-term macro trend on that is, if we looked at pre-pandemic, pre all the inflation, we were growing 2% or 3% a year in buying rate just based on consumers migrating up through the portfolio. And then we'd have household penetration gains on top of that.
We'd expect on a going-forward basis for us to have more of an increase in consumers moving up through the increasing incidence of using our product, so buying rate gains that would be maybe mid-single digits as we increasingly focus on those consumers who use us as the main meal component. For the rest of the industry, we've seen a little bit of a return to promotional spending, but it's not a heavy promotional spending category, so pricing remains relatively stable in the category, so for most of the rest of the category, they're now much more dependent on their ability to command their fair share or their market share, and for some people, that's going to be some household penetration gains, and for some, it's going to be buying rate, but they're fighting it out with what we would consider undifferentiated products.
Yeah, so from an inflation standpoint, after a couple of years, obviously, of a lot of inflation, last year we actually had a little bit of deflation. We continue to anticipate it'll be flattish as we go into 2025. I assume that's probably relatively the same for the rest of the category, so we are not making any assumptions that we will be pricing anytime soon, and I don't anticipate you'll see pricing in the market.
Yeah. That makes sense. After all these years of inflation, I mean, consumers have always placed a lot of emphasis on value, but it does feel like maybe that emphasis is even stronger now, maybe more durable, because consumers have to just think so much more about how far their dollar is going to go. I'm curious what you're seeing in terms of consumer behavior within your assortment that may speak to that desire for more value.
I mean, just start with the overall fastest-growing brands in the pet food category are The Farmer's Dog and Freshpet, and those are among the highest-priced brands, so it does tell you that the consumer has an increasing desire for higher quality, more premium-priced products. Within our lineup, what we're seeing is we see a little bit of migration between the various items and the forms, but the overall dynamic that we're seeing more than anything else is people moving up into larger sizes, and that's really for value. That's the desire to get the lowest price per pound as opposed to buying less, and I think that's very consistent with what you'd expect to see in a staples category. When you know you have to buy a category, you have to buy a product in the category, you look for the most efficient way to buy it.
You go to the most efficient retail outlet. So in our case, it's the Walmarts or the club stores. And you look for the most efficient package size. And that's the dynamic we're seeing. So strongest growth is in the most efficient retailers and the best, most price-oriented retailers. And then also they're moving into larger package sizes. And that's really the biggest dynamic that we're seeing.
Yep. No, that makes sense. We're hearing that from others as well. So pet food in general, $54 billion roughly category in terms of spend in the U.S. Dog food's about 70% of that, $37 billion. Talk about how that maybe breaks down that traditional dry kibble versus wet versus some of these newer fresh and frozen categories.
Yeah. You want to take that or you want?
Yep. You take it.
I mean, the reality is that the category is dominated by the dry kibble, and that's, frankly, where we source most of our volume is from the kibble business. The canned business, we put out a chart about last summer, I guess, that we showed that if we continue on our trajectory, Freshpet will, or the fresh category will surpass the canned category in terms of total market size and become the second largest form in the category. We expect that trend to continue over the long term where people are going to ultimately get to the place where fresh is a very strong, very legitimate form or alternative in the pet food category. Frankly, we source most of our volume from the kibble business. There's a little bit of the people who use the can as a mixer or topper, and we replace that in those occasions.
but we're really going for the main meal, which is a lot of the kibble business.
I mean, we are 3% of that category that you mentioned from dog food. Our competitors in the frozen space probably add another 3% or 4%. So you look at total fresh frozen, you're probably talking 6%-7% of the total category and growing very, very fast. And we think that over time will be a significant share.
Yeah. Let's talk about the fresh frozen competitors a little bit. I kind of have the view that, yes, they're competitors. But I kind of also feel like you guys and those folks are kind of rowing in the same direction. You're basically getting people off of kibble into these better-for-you foods. And as you grow that category base, then you can battle for which brand they use. I mean, how do you view these guys? Do you view them as competitors?
Do you view them as they're helping in some way? [Crosstalk] Sorry, Scott.
No. I'll try it if he wants to, he can chime in. I mean, frankly, we view it just as you described. We view it as right now, the amount of money that, for example, The Farmer's Dog is spending, we view it as contributing to this overall awareness that there's a better way to feed your pet than kibble and can. And the combination of their advertising and our advertising investment, we think, is really doing a nice job building category. And we don't view ourselves as bumping into each other, at least not at this point. We view us as very complementary to each other in building this segment. And frankly, it's what you'd expect to see at this stage of the category development where old, mature ways of doing things are kind of slipping into the rearview mirror.
And there's a lot of innovation that's happening and people trying to figure out what's going to be the winning model. I think that we feel very good that fresh is a winning model. We feel like we've got a really good position on fresh. And there's a lot of people duking it out for the frozen side, whether it's DTC or at retail. Right now, Farmer's Dog looks like they've created a pretty strong position on the DTC side. There are a bunch more players on the retail side in frozen. But we think overall we're helping build a category.
Yeah. No, I think that makes sense. Sticking with the competitive stuff, let's just think just within fresh or the refrigerated side of this. I mean, you guys have several competitive advantages. I think it probably started out with the fridge placements. But it feels like now it's moving more towards almost scale and manufacturing sophistication and capabilities. Talk about the competitive moat as to why. I mean, Freshpet's got 96%, I think, of the tracked fresh business in the United States. It won't always be that high.
You want to take that one.
Maybe talk about that and who's come in. You've had competitors try to come in and take share. And they've been unsuccessful so far.
Yeah. I mean, you're right in characterizing. Early on, I think it was the idea and the know-how that was the advantage. Then it became fridges. And everybody was really fixated on the fridges. And then over time, we've added other capabilities that kind of strengthen this moat. We believe today that all of them are competitive advantages. And all of them are part of that moat. And it makes it so that somebody who competes with us has to do all those things. But at the end of the day, now the most powerful piece is the manufacturing scale, expertise, and the leverage that we can create out of that. It is not easy to make fresh pet food. We've figured it out. We keep advancing the technology for making fresh pet food to make it higher quality, more consistent, at a lower cost, more capital efficient.
We think that that becomes an enormous advantage for us and a barrier to entry. As you said, scale. I mean, the things that we can do today that we're just under $1 billion in net sales that we can do at scale that we couldn't do five years ago are pretty remarkable. Our goal is to take advantage of those. Customers will do things for us. Suppliers will do things for us. We are able to fund internally things that we wouldn't have been able to fund before that give us significant competitive advantages. We intend to build that and exploit that as much as we can.
There's also scale in marketing. We're going to spend well over $100 million this year. If you're trying to launch a new fresh brand, even within an existing larger kibble brand out there trying to move into fresh, just the ability to communicate what you're doing, first of all, getting that shelf space that Billy mentioned, being able to produce a product, but then to be able to communicate that it's out there, the fact that we're going to spend over $100 million this year, it's a huge advantage at this point.
Yeah. First mover advantages have turned into now these scale advantages. Yeah, I mean, it's impressive because so many companies have tried to come in. To this point, it's basically your game. Let's talk about the retailers because you have a bunch of customers. You have, obviously, the consumers that are buying it. But you also have the retailers that have had to kind of underwrite or help endorse kind of this category and help you guys get it growing. Maybe talk about what you offer, brick and mortar retail, with your product and how large your fridge base is and what you see as the future there.
I mean, the reality is that for our customers, they're all seeing. I mean, the one thing about the pet food category is that a significant portion of it has moved to e-commerce. And so if you're a brick and mortar retailer and you want to win in the pet food market, you need to have a proposition that you are advantaged on. And a fresh proposition where you can become part of that fresh shopping trip and you have a cost advantage in servicing that consumer, that's a big win for you. And so our retailers understand that. They also understand that the people who want that, who come into their stores to buy fresh pet, are among the most valuable shoppers they can have in their store because they're going to buy all the other stuff in the perishable department, the produce, the dairy, the deli.
They're going to go to the meat department, and that's a really good shopper, so for them now, it's not just what we do in the pet food category. It's what we do for them and for the store as a whole and make them a very viable competitor in the pet food market, then when you look within the pet food category, you take a look at it and you say, we deliver best-in-class velocity for the space that we take up. We deliver best-in-class margins, and we, frankly, do an incredibly good job of managing and servicing those fridges so it makes it capital-free to get started in this business, and we maintain those fridges impeccably, and so at the end of the day, this is a very turnkey business for the retailer to compete in a very attractive segment and bring in very attractive consumers.
So today, our focus, though, is we're in, call it, 28,000-plus stores. We have over 34,000 fridges that are out there. And while there are more stores to get, more white space to get, and we will get that at a very steady clip going forward, the reality is the biggest gains for us are going to now increasingly come from getting second and third fridges in the highest velocity retailers. And we've got many examples of that. 22% of our stores today have a second or second and third fridge in them. And we'd expect to see that number grow over time. So second fridges in Walmarts and Targets and whatnot would be things that we would look forward to in the future.
Yeah. Yeah. I mean, look, I think Walmart being your single largest customer, that's not unique for a product company. Costco's been rolling your fridges out. I think you're almost at all the Costcos now. I mean, that's the ultimate endorsement of something that's gone effectively mainstream. What's the potential in terms of the 22% multi-fridge penetration? Do you see that? Can that get to 50%? Or where do you think you can take that?
It's hard to say. I mean, you have to think about what the time horizon is and also what the retail universe looks like. But there's no reason to believe it shouldn't go up considerably over time. But it comes in chunks. The reality is that retailers that we're talking about who can have a meaningful impact on this make these decisions sort of episodically. It's not some long gradual continuum. You get a big chunk of a big retailer all at once. And then it goes quiet for a while. Then you get another big chunk of another big retailer. And they have this game of sort of leapfrog where somebody gets ahead and is building share and winning on our business. And then the next guy decides they need to catch up or get ahead. And they take the next bet.
So two years ago, Albertsons made a very big bet on Freshpet. We got a lot of fridges, a lot of second fridges. There's retailers who are going to come along behind that. We're very confident that it will happen. It just takes time.
Yep. E-commerce is about a third of pet food right now. And it's very small for you, I guess, a couple% of your sales. But y'all are doing great even without that. Maybe talk about your positioning within e-commerce, how you harness it, how you benefit from it, and where you think the opportunity is.
Yeah. So Scott, without his voice, should hopefully be chiming in. But he's not. So I'll take a shot at it. Look, he and his team have been testing and learning a lot of different ideas. Part of it, obviously, is just click and collect is a very large piece of our business. Some of the other vendors out there who can supply, deliver to someone's home out of grocery store and the Instacarts of the world, the Uber Eats of the world are big, big opportunities for us to leverage these 34,000 fridges that are out there. But look, DTC is very interesting for us. We got to figure out how to do it in a smart way. We think we can participate in DTC. Is it going to be 30% of our business? No. I don't think it's ever going to be that big.
But can it be 10% of our business over time? It absolutely can. And so we're working on a lot of projects right now to see what makes most sense. And we're finding out some very interesting things right now.
Got it. Anything to call out about either the income demographic profile or anything else about the new customers that are coming into the franchise now, maybe relative to three, four, five years ago?
Yeah. I would just say the consumer demographic looks very similar, a little bit more higher income. We're seeing that the current economic environment has advantaged those who are above $125,000 in income. But when you think about attitudes, values, and beliefs, those things are still very consistent. And it goes back to the comment I made earlier, which is we're still very early in that journey. There's still a lot of headroom above us. So it's not like we're now scratching for marginal consumers. There's a ton of consumers who look a lot like our existing users who just are either unaware, didn't have a dog, or weren't in the category, didn't have a need to consider a new pet food, and are now reconsidering and considering Freshpet. So there's a lot of headroom for us.
Got it. My assumption would be that pet parents in Europe and abroad love their pets as well. What's the opportunity internationally? You guys have been there for a while. You recently made a new hire. Just let's talk a little bit about the international opportunity and why that after that.
Yeah. We've been in primarily the UK for several years now, kind of testing and learning what's going on there. I mean, the model works. The one issue we've had, obviously, is the supply chain. So we've been shipping the product over from the US, which you can actually do it. But it's not reliable. So stuff will get stuck in a port. And all of a sudden, we've got empty fridges in the UK. And that's a big problem. So we've been working to find a partner in Europe where we could get some supply. And we're in early innings on that. We've been testing that. So I think more to come on it. I mean, first, we are a small organization. And so we got to pick our spots of where we're going to invest, both from economically and then just from a personnel perspective.
So if Europe becomes a big idea where we think we can do something meaningful, we'll go do it. But the opportunity in the US, just even on dog food right now, is enormous. So that's where we're going to put the vast majority of our resources. There's obviously an opportunity in the US for cat at some point in time. We'll take a look at that, the DTC, which we just talked about. But Europe is on the horizon. But we'll do it in a smart way.
I think one of the things to look at is, and we've talked in various ways about where we are choosing to invest in organizational capability as Todd described. Scott's got a team of folks who are working on what is it we do in the world of e-commerce? How do we compete with that space?
He's also got a team of people who are working on how do we move upstream into the supply chain of chicken to get better quality, better cost, more advantage there. Also got a team that's working on process improvements. How do we manufacture Freshpet in a more economically advantaged way that produces a higher quality product more consistently, more reliably, more capital efficient? We've invested as an organization in data analytics capability under Todd to help us become more efficient, make better decisions, and we haven't spent a lot of time to date on cat food or international because we've had such robust opportunities in those areas, and frankly, we have to digest. You keep adding all these capabilities. You have to digest them in a measured way. Our engineering team has grown tremendously because they've been adding manufacturing capacity and doing technology innovation.
We have to digest that little piece at a time, and the biggest lesson that we've learned in the last couple of years is pace yourself. Set the aggressive targets, pace yourself, build the capability that can match the expectations that you've set with the market, and we think we've done that really well, and we'll continue to do that and expand the footprint of things that we do, but in a very measured way.
Billy, Todd, thanks for your comments. Scott, thanks for looking good. We will wrap it there. The team's around for a couple more breakout sessions over the balance of the day. So thanks very much.
Thank you.
Thank you.
Thanks, Peter.