Wait, from the nod from the group out back. I'm live. We good to go?
Yes.
Well, we're go? Okay. Got the green light.
All right.
Awesome. Awesome. Here's my intro. The archetype of the underdog is perhaps one of the most common archetypes used in successful dramas or adventures. Everyone, of course, wants to root for the Davids who take on the Goliaths. I bet all of you in this room are the same. Get ready because I have a modern-day David up next with a story of how this company is taking on Big Pet. I'm talking, of course, about Freshpet, and here to tell us about the underdog story is none other than the company's long-standing CEO, Billy Cyr, and newly minted CFO, Todd Cunfer. Gentlemen, thank you so much for joining us on this call.
Awesome. Thank you.
I think people in the room know the story, but it never hurts to start with just a quick intro of who you are, what you're doing, what you're doing different, and what gets you excited about the size of the prize that lies ahead.
Yeah. Freshpet has been around now for 17 years, and we're in the business of changing the way people nourish their pets forever. As you think about using Jason's analogy of the, you know, sort of the insurgents, I've been in the food business for 38 years, and over that time, I've seen a couple examples where something has come along that's radically different and changed a fundamental part of a category, and Freshpet is like some of those that have done that. In that canned dog food and dry dog food are the way people have been feeding their pets forever, and the new way is to feed them fresh. This is a basically about complete changing of the way consumers think about pet food, and it marries up with the way they think about the changing relationship with their pet.
You know, 20 years ago, 30 years ago, your dog was sleeping in the backyard in a dog house with a chain around its neck or chain link fence. Today, it's sleeping in your house and in your bedroom, and Freshpet reflects that value in the food that you feed the pet as opposed to kibble or can. That's what we're doing. We're a high-growth company, and we're on this path to changing the way people feed their pets.
Yeah. My wife will actually tell me to, like, move over to make room for the dog in the bed. Like, the dog trumps me. It's crazy how different life is today.
Yeah.
You see a very large addressable market out there. In fact, I think you recently upped the size that you see for the TAM from, like, 36 million households in 2019 to, I think, 42 million in 2022 is where you stand now. That's a lot.
Yeah.
How are you defining that? Like, when you say TAM, what does it mean, and what drove the increase over the last few years?
Yeah. I mean, there's a lot of ways you can look at the drivers of the increase. The way we arrive at the TAM is we have a. We look at people who, when exposed to the idea of Freshpet, they demonstrate an interest in the idea of fresh pet food. We ask them questions about purchase intent on that idea. We also look for people who we call healthy foodies, and healthy foodies are people who demonstrate a series of values and behaviors in relation to food and in relation to their pet. The combination of those and the combination of their purchase interest turns them into what we would consider our specific addressable market.
There is a broader addressable market, people who would just be interested in fresh food but are not necessarily the healthy foodies, and that's an even bigger opportunity. When you peel that back and you say, "What's driving that?" You know, it's a long-term trend. This isn't something that just happened in the last two years or three years. You know, the drive towards more pets and increasing relationship with your pet in the household has been going on since at least the year 2000, if not before that. The biggest drivers are, you know, you can look at it, a decline in the number of kids in the household, so having kids later, having fewer kids, and dogs are replacing kids, so that's a big driver. Frankly, all the health benefits you get from having a pet.
People don't think of it as health benefits, but increased socialization, increased, you know, relationship with your pet. People, we talk about mental health. People with pets demonstrate higher levels of mental health. All these kinds of things are all fundamental drivers for people feeling an important role of the pet in their, in their household. We think there's a very, very long runway for this, going out for a long time, and we see that in millennials and Gen Z, who have the highest propensity for buying Freshpet and also have a very high propensity for getting a dog.
Okay. This penetration of this TAM, you're expecting to drive substantial category growth. I think you're expecting, what, $6 billion in the next couple of years?
Yeah.
Where is it today, and what vaults it to $6 billion?
The thing that drives it more than anything else is gonna be a broadening of the household penetration. You know, we are, as a company, we finished last year with $595 million in net sales and a retail sales basis that's, you know, just a little under $1 billion. You add in the rest of the people who are around the edges. We obviously have a long way to go to get to $6 billion at some point out in the future. What we see happening is this is, you know, sort of one of those innovation adoption curves, is the rate of consumers joining the franchise, the rate of retailers getting heavily invested in fridges in stores.
All that is accelerating at a very, very rapid rate, and those are big drivers of the increasing adoption of the franchise. We think, though, that we've kinda crossed the tipping point during the pandemic, where that level of interest by the retailer, by the consumer, has gotten to the point where it's created a snowball effect, and it's just gonna keep rolling along. We wanna be the prime drivers and architects that we have to have adequate supply to meet the demand. We also have to have the good marketing that pulls people into the franchise. We have to have a broad assortment of products that's readily available at a variety of price points to pull them in in order to accomplish that. We won't get there with the retail availability that we have today. We won't get there with the product assortment we have today.
It's gonna take advances in each of those areas, but we'll ultimately get there.
I was at the Global Pet Expo last year. I wasn't able to make it this year. I was there like, three years before that. Three years ago, there were two refrigerator vendors, and then nothing, like crickets. Nobody wanted to go there. Last year, it was amazing. They were, like, two of the most popular booths out there. All these retailers wanted to get coolers. Those were specialty retailers. That event caters much more to specialty, clearly want to build this out. Where do we stand from the mass market, which is where a lot of this volume is?
Yeah.
Like, are you seeing these stores looking to really build out refrigerated sets in the aisle? How long does it take? Because like it's not often they go in and tear out their store.
No.
It's like rebuilds and like what's the pipeline and how long does it gonna go?
Yeah. I mean, we have a huge head start because of the time phenomena that you described for a retailer to decide to put fridges in a store, and also to develop the mastery of maintaining these fridges. These are not the same fridges that are in the back of the store. These are standalone units that require something different. Coke and Pepsi maintain their fridges, we maintain our fridges as well. The momentum is amazing. We really are focused now, not so much on net new stores, although that continues to come along at a healthy rate. What we're really focused on is stores that have high velocity, high foot traffic, and can accommodate a second or third fridge. The benefit we get from that is, in some retailers, where they're really focused on in-stock and retail availability, it increases their holding power.
For other retailers who are in-focused on broader availability of unique items, specialty items, it gives them the opportunity to carry a wider assortment of items. But either way, whichever path they're on, it increases the visibility of the brand. If you're running a lot of advertising and a consumer walks into a store, and now they see not just one fridge, they see two fridges, and they see a wide array of products, and it's well stocked, that amplifies the value of the advertising. We feel really good about that. We're gonna place almost 5,000 fridges this year. You know, when I joined Freshpet six years ago or six and a half years ago, a good year was like 1,500 fridges. 1,500 fridges was great, and it was all one fridge per store.
I mean, 5,000 fridges in a year is a huge number, but the vast majority of those are gonna be second and third fridges in high velocity stores, and that's really valuable to us.
No doubt. No doubt. Point-of-interruption has always been a great awareness driver and can use some interest. You've mentioned your models to pay for the fridges.
Mm-hmm.
I mentioned I'm seeing a lot of retailers pay for their own fridges. Why are you still paying for all the fridges? Like, if they wanna be there?
Yeah.
-if this is a strategic area, why are you-
Yeah.
carrying the burden of all this expense, not just for placement, but maintenance, et cetera?
Yeah. I would start with the premise on a lot of retailers are paying for... In pet specialty, they are used to doing that. They have the equipment, and Walmart is interested in doing that. Beyond those, you'll find it very rare that a retailer is willing to invest the money in the center of the store to put in a fridge. Occasionally, they'll do it, occasionally do some stores. From our perspective, we've invested an enormous amount of money over a long period of time to create this retail availability, and the last thing in the world I wanna do is hand that availability to a potential competitor. Why in the world would I wanna, in essence, enable somebody to become national overnight by allowing them to be inside of our fridges?
The price of that means that I've got to continue to fund the fridges going forward, but the number of fridges I'm funding going forward is small compared to the number that I've already got invested. The other piece of it is it frankly is, to the extent that we can control that environment, it gives us an in-store billboard, it gives us control of the planogram to get the right assortment, and the price for that is, you know, on average $200 per store per year to do maintenance. I mean, most people would kill to have the kind of visibility and shelf space that we've got. It's an incredible bargain for us from that perspective. I think our model going forward is gonna continue to be to own the fridges.
Do I expect an increasing number of very large sophisticated retailers to over time dabble in putting fridges in stores? Yeah, probably. Their problem is gonna be, what are they gonna put in it?
Yeah.
Is that thing gonna sell? Because so far, every time they've done that, the thing they put in there didn't sell.
Mm-hmm.
Just for perspective on the capital issue there is we spend $2 million-$250 million of capital each year. Most of that is to build out Ennis, our new facility, and some other production facilities as well. The fridges cost us $20 million-$30 million a year, it's about 10% of our capital. I'm not saying it's small, it's a meaningful number, but when you think about how capital-intensive our business is and will continue to be probably over the next few years, fridges is not really a meaningful part of that number.
We're gonna come back to capital intensity and cash flow...
You are.
because that's a really critical part of the story. I wanna make sure we've got our heads wrapped around properly the size of the prize. You mentioned competition coming in. I've honestly been disappointed that the competition hasn't worked better.
Mm-hmm.
Part of this is, A, there's room for competition. Like, this thing's gonna grow so much, more competition, sure, they'll get some market share, but they're going to increasingly normalize the category, and they're coming in at price points that all of a sudden create a perception of you as a much more affordable option. So to see them fail is kind of like, uh-oh. Like, what does this say? Is the category not as healthy? Is there not as much room for competitors as we expect? What's your view? Why are they not working?
Yeah. I mean, it first of all, to do fresh pet food requires that you do so many things well and you do them all well at the same time. Most of the people who are trying have well-established, well-developed capabilities that aren't necessarily the capabilities that it takes to be successful in fresh pet food. For example, manufacturing the products that we manufacture, it's hard. It's really hard. We can see that by looking at the quality of the executions from our competitors, from well-respected, you know, big CPG companies. If you sit there and look at their products and compare them to ours, they're not very good, and they don't have a very long shelf life, and they have a lot of products that are going over age.
Because they don't have the ability to get into a broad amount of distribution because they don't have fridges, now all of a sudden they have to market on a micro basis into specific stores. You don't get this broad marketing push capability that we have. You're now operating at subscale manufacturing, subscale distribution with products with a short shelf life, and that's a recipe for an economic disaster. I do believe, though, that the robust growth of this category is gonna encourage lots of innovation and lots of entrants. It happens every time you see something like this. I don't know who and who's gonna be most successful, but we expect that, and frankly, that's healthy. When we see innovations that we think make sense, we will race as fast as we can to match them or compete with them.
To the final part of what Jason's talking about is, we also believe that as this category gets mainstreamed, it's incumbent upon us to make it as broadly available at the right price points, right affordability, premium, not so premium, a wide range of stuff, so we end up bringing in the maximum number of consumers, so this does become the mainstream of the pet food category.
Let's talk about bringing in those consumers. You got targets out there for 2027.
Yep.
They're predicating you bringing in 11 million new households-
Yeah
... over, in the next five years. Last five years, you brought in $5.3.
Mm-hmm.
Effectively, you have to double your rate of customer acquisition.
Yep.
You're coming off of a quarter where you just revealed year to date, your penetration growth has slowed meaningfully. That makes me nervous. Should I be nervous?
No.
Like, what's driven this?
You know, it's funny, because the metric that we reported on the earnings call that Jason picked up on really quickly was a 52-week metric, so it's the rate of household growth over the last 52 weeks. Remember, over that 52 weeks, we took three price increases and had the impact of four price increases. For us to have expected that the household penetration rate would growth would have held steady in the face of 27% higher pricing, not likely. What's really interesting is this sort of this, you know, our model is so predictable and so reliable, and there seems to be this almost a constant out there, that the sum of the household penetration growth plus the buying rate equals something like 28 points, 29 points, or 30 points.
It just happens that over the last year where we had all this pricing, we got 20-some odd points of it on buying rate and then only seven points in that 52-week period on household penetration. As you fast-forward for the next year, we're gonna get a lot less on buying rate because we don't have the pricing. The pricing is now in our rearview mirror. There's still some of it. In, you know, the first quarter, there was about 14 points of pricing. Second quarter, there would be about 8 points of pricing. What we expect to see and what we're already seeing in the shorter term data, the 4-week data or the 13-week data, is that inflection where the household penetration rate is growing, going up back to the constant of 28 points, 29 points, or 30 points, sum of the two.
It's just a matter of what's the blend between the two.
Okay. Okay, and what's driving the inflection? What's your view?
Media.
Media?
Media works so well for us. It's just unbelievable. Consumers digest the pricing. They get used to it, and we put on the media. It works incredibly well. Your comment is, you've got to double the rate at which you grow. Ty keeps reminding me what our media spending is gonna be out in the future, and it's double what the media spending was in the past. If you hold it at constant as a percent of net sales, or even if you start skimming a little of it out, but you're growing net sales in the 25% range, you end up with a fairly significant amount of media, and the media conversion to initial purchase is remarkably consistent over time.
Your repeat rates are great.
Really good.
Getting trials is really critical.
You know what the most amazing is? The data. We just saw some really interesting data. The conversion from an initial purchase to somebody who becomes a heavy or super heavy user has not gone backwards in the face of the higher pricing. We looked at people who entered the franchise in the first quarter of 2022, right before the price increases, and 26% of them in the following nine months became super heavy users.
Hmm.
Heavy and super heavy users. The previous period, if you looked at the period going one year back, it was 25%, it was even more skewed to super heavy users. Even in the face of pricing, consumers' willingness to convert into super heavy users was not dented. In fact, it was slightly accelerated.
Most of these users are using your product as a topper or mix-in, as is evident by the buy rate, right? The buy rate would be like a tenth of total-
The number of people, but the volume, you know, 34% of our consumers are accounting for 85% of our business. Those consumers are buying $233 a year.
Okay, I think I did the math at one point. It's well over $1,000 a year if it's your primary food source, right?
Yeah, well, it depends on the size of your dog.
Okay.
Because our franchise skews.
Yeah
... to smaller dogs.
Okay.
On a 30 pound dog, yeah, you're gonna be pushing, if we fed this as the main meal, you're talking $750 a year. Our franchise today skews towards the smaller dogs, and that's part of the equation. There's still another piece where there are other calories that those dogs are consuming, and we need to get those calories.
We, by the way, are a super heavy user.
I like that.
I've got three dogs.
We appreciate that.
... They eat Freshpet every day. I live in a freaking zoo.
We can send a truck to your house.
Yeah, yeah. Okay. The other product that's used as a topper or mix-in is wet can. Wet can has had massive availability issues.
Oh, without a doubt.
... over the last two years, right? The capacity
Price increases.
Yeah. Well, yeah. When you take, when you've got like 40% product availability on shelf, sure.
Well, plus all the refrigerated cans.
Yeah, yeah.
Right.
We've got, I forget how much capacity a ton, but you have $5 billion worth of capacity coming in, and a lot of it's coming on wet. The cynic could say you benefited in the last couple of years because the substitute product for Freshpet, which is wet can, was not available. As availability comes back to market, this is clearly gonna be a headwind for your growth.
That hypothesis assumes that the people that you're talking about and the consumption you're talking about is that last 13% of our volume where it's used in that fashion. When we're talking about the other, the 34% of our people account for 85% of our business who are using us as the main meal, can is not the alternative. The alternative there is dry. Our price relationship versus dry is not changing much. It's relatively the same.
Yeah.
I look at that and go, "Yep, we might have a little bit of can availability affecting that last.
15% of the business or something like that. That's a small part of the total franchise.
Okay. media spend, where is it today, in terms of absolute quantum dollars?
Yeah, we're gonna spend probably $80 million-$85 million this year. We spent $62 last year. It's gonna be front half loaded. Almost two-thirds of it'll occur in the first half of the year. We spent about $26 million in Q1, a little bit more in Q2, and then it will trail off. Most importantly, we will spend a decent chunk in Q4. We were largely off air this past year in Q4, and I think that kind of hurt some of our business trends a little bit. You don't wanna be dark for that long, but we will be on air for most of Q4 as well. As Billy pointed out, it continues to return nicely. It's a really important part of our model, and we'll continue to lean in.
We just put some new advertising on, which is fabulous, and so we're very bullish on it.
Todd, that's a huge spend for a single brand in a single market. Like, why would it double? Aren't you at a point where you're gonna get massive diminishing returns?
We, we track it very closely. Do I think that's part of our margin gain over the next five years is it will become a smaller percentage net sales over time. It's been, you know, 11%, 12%. We'll get that probably down to 9-ish.
Yeah
... over the next five years, but it'll still be very healthy. You know, if you do that math on where our projection of $1.8 billion, we're gonna spend about $160 million in media, in 4 years. To your point, it's one brand in one country. It's a very healthy spend that we're, you know, super pumped about. We think it's gonna really generate some nice returns for us.
Okay. You took us to margins, so let's stay on margins.
Ooh.
Margins have been the sore spot. We've seen what this business could do. I mean.
Yeah
it's sort of ironic. When you were running small-scale business out of an old dairy plant that had been retrofitted, you were able to generate high forties gross margins.
Yeah.
We scale with things that are supposed to be taking you down the cost curve. Your margins went down with it. They went the wrong way. Now we've gone from high 40s to high 20s, at least with D&A included.
Yeah
... massive degradation. Unpack it for us and give us the path forward. Like, why haven't these new state-of-the-art facilities you brought on, why haven't they brought us down a cost curve? Why hasn't pricing been enough to offset inflation as it has been for other CPG businesses? Why should we have confidence that you can get back to where you were before? A lot there.
There's a lot there. First of all, to your point, we've been there before, when I say we're gonna be at 45% or above, you know, by end of 2027, it's not a crazy number. We were at 48, 49 a couple of years ago, one could say that's a conservative number. You know, obviously, trying to build out two facilities in the middle of pandemic with lots of labor issues, it was incredibly challenging. Let's put it down into its components. Just the startup cost, the unabsorbed overhead of these new facilities, last year cost us about 400 basis points. That's a huge hit for us.
The quality issues, again, labor issues, just trying to run so quickly, case fill rates, have cost us, you know, 300 basis points or 400 basis points over the last two years. We think we'll get at least 200 basis points of that back, and we've had two quarters in a row where that's gotten better. You mentioned the commodities. We had a huge commodity mismatch over the last couple of years. Commodity prices were, the inflation was very high. We were behind the curve on pricing. That cost us a couple of 100 basis points.
We're gonna get a good chunk of that back. You already saw it happen in Q1, where we got a nice chunk of that back as inflation has moderated, and we got about 12%, from a shipment perspective, 12% pricing on mid-single digits inflation in Q1. That really helped us. Below the line, not in our definition of gross margin, but logistics went up several hundred basis points over the last couple of years as well. Some of that is macro diesel cost and lane rates and all that kind of stuff. We're seeing those macro issues come back. At the same time, internally, our case fill rates have gone from 60s and 70s to now mid to upper 90s.
We have a new team managing our logistics process, and they're bidding out lanes really effectively and doing a lot of smart things. We're already seeing significant reductions in logistics, and we still got, you know, a ways to go here, and I think it's gonna happen pretty quickly.
Okay. On the commodity side, any line of sight to absolute deflation?
you know, I think in certain pieces, there's some deflation out there in total. again, really early to tell. Kinda mid-single digits this year and we're fixed for about 80% of our commodities. as we go into next year, it's early, but If I had to pick right now some pluses and minus, it's probably gonna be low single digit, would be my guess right now. I don't see deflation. It could, because we tend to buy all our chicken at one time of the year in December. That's a, that's a big time, depending on where chicken prices and turkey is at that, at that point in time.
We've seen eggs come back significantly. That should be very deflationary as we go into 2024. There'll always be some offsets. You know, maybe we'll catch a break, and we'll see deflation across the board, but it's probably gonna be flat to slightly up is my best guess right now.
Chicken and turkey prices soared. They've come crashing down. Tyson's not having a great belly right now. You got hit on the way up. Why aren't you benefiting on the way down? Yeah, you got some better history.
Yeah. I guess the way to think about it is we did get hit on the way up. Remember, we didn't go up as much as the publicly reported chicken prices are, whether you're talking about chicken wings, chicken breast, you know, and whatnot. We didn't go up nearly as much as them, so we're not going down as much as they are. One of the things that we're seeing in the market right now is that all the chicken processors, they're still seeing their costs, labor and some of their input costs, the grain and the feed, are still up on an elevated level, and that has a significant impact on us.
We believe there's an opportunity to trace back on chicken a little bit from where we are, but we don't think we're going back to the world that we had before because their labor costs are still up, and they're still gonna have some feed costs. We don't think we're gonna go back there. I do think there's some things Todd mentioned, you know, turkey. Turkey has been clobbered by the avian flu.
Right.
That will trace back. Eggs, same thing. avian flu wiped out eggs. We're priced out for eggs for this year because we had to get supply. We head into next year, you'd expect to see some egg improvement. Will the egg improvement be offset by, you know, some cost increase in something else, corrugate or plastic or whatever it is? Maybe. Overall, the picture is much more favorable. Because from our perspective, We wanna get to a stable pricing environment with the consumer because our model works really well. If we're having to take pricing, it's disruptive. We'll do it, and we will take pricing to protect the margin, but we'd rather have the, you know, the commodities ups and downs net out to, you're in a pretty good place.
Okay. I'm gonna come back to Ennis in a minute, but let's stick on price for a second. Let's imagine, let's fast-forward, you've got some commodity relief. You know that when you get trial, your repeat rates are great. Is there a time and place where you start to lean in with a bit more of a high-low pricing strategy?
You know, people ask that a lot, there's two really big fundamental reasons why a high-low strategy doesn't work particularly well in our business. One of them is because the reality is the amount of consumption you're gonna get is kind of fixed. I mean, the dog eats the same amount every day. People don't change their dog food. If you go to a high-low strategy, all you're doing is forcing the consumer to buy the fixed quantity at a lower price at some point in time. You know, people don't readily switch their dog food just because the other dog food is a little bit cheaper. They make a decision about the health of their dog and what the values are they have for the dog. That's not gonna change.
The second thing is doing merchandising when you have a fixed amount of shelf space that has to be restocked once a day is a little bit pointless because you'll just basically blow out the out-of-stocks.
Mm-hmm.
You know, if all of a sudden our six-pound chicken rolls were at a discounted price, the consumer would walk in the store, and they wouldn't be able to keep it on the shelf because there's only so much shelf space that's available. It really doesn't work for us. We'd much rather keep the model where we get very high capacity utilization from very steady demand that is driven by advertising that brings in a predictable number of consumers who feed the same amount every day, who buy the same amount every week or two weeks or whatever it is. That ultimately delivers the highest value for the consumer and for our shareholders.
Okay. I promise I was gonna come back to Ennis. We'll come back to Ennis now. Another key driver of not just unlocking or fueling the growth with capacity, but bringing you back down the cost curve, right?
Yeah.
Getting margins back. Where do we stand on Ennis, in terms of progress of the build-out, the start-up, where are we at in terms of capacity utilization, overhead absorption, and what do the next couple of quarters look like on that journey?
Second line at Ennis just came online last month. It's the bag lines. We have a roll line that went live at the end of last year. The first bag line just came on last month. There will be ultimately 10 lines in that total facility, and we're building that out in phases, plus a chicken processing facility of someone that's running for us right on that property. Look, we're incredibly bullish on Ennis. We think it's gonna be a huge step forward for us, not just from a capacity standpoint, but ultimately, we'll get some margin benefit as well from lower wage rates, less labor because there's more technology there, and just the scale of the facility, plus the chicken processing.
As we've said before, we haven't baked any of those assumptions into our model. We've assumed Ennis basically has the same margins as Pennsylvania does, okay? We're being very conservative in that assumption. It's gonna be a little bit clunky. As these lines come on, there's unabsorbed costs that hit every 2 quarters. Everything was flowing really nicely in Q1, Q2. As that second line comes on, all those fixed costs of that second line start to hit our P&L, and we're still not nearly at any kinda high level of capacity on that bag line. You got some unabsorbed costs, not huge, but there's some unabsorbed costs that hit in Q2. That will subside as we get into the second half of the year.
When we bring on the third line in, and it's probably Q1 or Q2 of next year, we'll have that same phenomena where there's a little bit of fixed costs, unabsorbed costs hit us. As you get bigger and bigger and bigger, every time you bring a line on, the math is less impactful because it's just, it's off a much larger base. Look, we got a long way to go, but we're really, really excited about the facility.
We're gonna be living with stranded costs for a few years. We're not gonna see the clean profitability of that business for a while.
Correct.
Your Pennsylvania margins aren't good. Like on relative to history, relative to where you want, like relative to anything, relative to your larger targets. Why would we be planning for this very expensive facility to be operating with comparably poor margins?
I mean, when I say it'll have the same margins, we're assuming Bethlehem's margins over the next few years will get back to where it was.
Okay.
-or very close to where it was. We're gonna see that pricing and commodity mismatch that's starting to go away.
Yeah.
Okay? That will
Largely go away by next year. The quality issues that we've been facing in Bethlehem, they're starting to get better. We're assuming they're gonna get much better over the next 2 years. I'm assuming when I say it's not gonna be any better than Ennis, it's not gonna be any better than Bethlehem, it won't be any better than where Bethlehem will be in a few years and where it has been.
I wanna point out that I think that the single biggest hurt for us on the margins is that an underlying root cause was labor instability. The reality is, during the pandemic, growing at our rate, that we are growing in a manufacturing facility that was very labor dependent because that facility is not particularly automated, what you ended up with is quality problems, which turned into disposals and secondary processing. You ended up with throughputs that weren't what you wanted. We made a major intervention to try to improve against our labor stability back in August of 2021. I can't tell you the difference that that has made. Our retention of our labor has been dramatically better.
We're now back down to a place where the vast majority of our people are been here over a year, and that they have also advanced up our learning curve because we've invested in their training. That's what's really driving the improvements in the quality and the throughput and the yields that we're getting in Bethlehem. You may not have seen them yet enough in the P&L. What I can tell you is we see it on a daily basis in when we look at our metrics, and there's some noise because of all the stuff at Ennis that kind of obscures it, so you're bringing in all the Ennis stuff. If we just look at what's going on in Bethlehem, and now that we have labor stability and we've got the training coming up, we're very encouraged by the trends that we're seeing.
Again, part the pandemic ending, but part the intervention that we made to stabilize our workforce, and it's made a huge difference.
Any questions from the audience? We've got about three minutes left, so we're running up against the clock here soon. Okay. We've talked capital intensity. Todd, coming back to you. Put together some plans out to 2027 at CAGNY.
Yep.
You showed us where you want your revenue to be, where you want your EBITDA margins to be. Implicitly, we can calculate EBITDA, and what your CapEx burn is gonna remain at, I mean, beyond that. It doesn't look great. Like this bridges to free cash flow. Let's see, if $20 million CapEx. Net, it's like, in working capital. Okay, I get $74 million of free cash flow is my calculation on, like, your implicit EBITDA, assuming working capital as a growing company continues to kind of burn out. I've got interest expenses, assuming no tax, but you're still burning off your NOL. I get to $74 million of free cash flow at a healthy run rate profitability level. It's just so small. It's so small.
Is that really the right level or is it, is there conservatism on margins? Is there conservatism on your assumed CapEx? Like why can't this business be generating more cash at that point?
Look, we're being conservative, right? We wanna throw out targets that we can meet for certainty and exceed. We believe there is some margin conservatism in those numbers. We're obviously we're working on some technologies that will reduce the amount of capital that we need to employ when we're growing this fast. Still TBD on that. We're very encouraged, but we're not ready to announce that or we're not ready for prime time on that. That's another facet of how free cash flow can increase over time. Look, when you're growing at the rate that we're growing at, and if you're growing 25% out in, you know, 2026 and 2027, you're adding $300 million of revenue a year to this business.
That does cost, you know, that does require a fair amount of capital. That's, that's probably 2 lines-3 lines every year. I got an incremental lines I gotta put in a facility. The reality is we're not gonna grow 25% forever. I think we can grow 25% for a long, long time. Once that, once that growth rate starts to be in slow down to the high single digits, I don't have to put $200 million of capital in year, each year, and maybe it's $75 million instead, you're gonna generate a lot more free cash flow. It's technologies, it's margins, being a little bit conservative. It's a business that will at some point in time won't require as much incremental capital.
All those, all those will help free cash flow in the out years. I think it's also important to think what are you getting for that capital spend? I don't think people have fully appreciated the strategic value or the strategic advantage that manufacturing assets give us. A lot of food businesses or even beverage businesses grow up off of a co-pack model where the capital spend is on the shoulders of somebody else, but that also means they can be easily duplicated or replicated. Part of what makes Freshpet such a good long-term opportunity is the fact that it's really hard to do many aspects of it. Manufacturing is probably the hardest thing to do, and so we're investing in what we think is probably the single biggest strategic barrier to entry that we can have.
The existing assets have to generate cash, though. you know, as you're spending to put new assets in place, the existing assets have to produce cash, and we believe that they are. You just sort of right at this point, they're getting obscured by the massive investments we're making to build out the future capacity.
Yep. Yeah, I think, what's happened in the competitive playing field in the last 24 months has offered real proof points.
Yeah. I mean, it's just hard to do what we do. It's really hard. Also, I mean, if you're somebody who wants to enter this space, you have to master something you've never done before, and then you have to deal with fridges and stores, and then you have to figure out how to manufacture it, and then you have to manufacture it at scale and create efficiency in it, in a technology you've never done before. It's hard, and the hardest part of that is the manufacturing part because it's new technology, it's scale, it's cost, it's time. It's, it's not easy.
Yeah. Yeah, no doubt. Gentlemen, we're out of time. Thank you so much for spending time with us.
Thank you.
We really appreciate it.
Thank you, Jason. All right. Thank you.
Yeah, thank you. Great to see you.
Great to see you too. Good luck with the rest of the day