Q4 2023 Freshpet Inc Earnings Call

Operator: Greetings. Welcome to Freshpet's fourth quarter and fiscal year 2023 earnings call. At this time, all participants are in listen-only mode.

Greetings and welcome to your first pet's fourth quarter and fiscal year 2023 earnings call.

At this time, all participants are in listen only mode.

Operator: The question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. At this time, I'll now turn the conference over to Rachel Osh, Vice President, Investor Relations. That's all.

And the answer session will follow the formal presentation.

If anyone today should require operator assistance during the conference. Please press star zero from your telephone keypad.

Please note this conference is being recorded.

At this time I'll now turn the conference over to Rachel <unk>, Vice President of Investor Relations.

Rachel Osh: You may now begin your presentation. Thank you. Good morning, and welcome to Freshpet's fourth quarter and fiscal year 2023 earnings call and webcast. On today's call are Billy Sear, Chief Executive Officer, and Todd Comfort, 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 Private Securities Litigation Reform Act of 1995. These include statements related to our long-term strategy, focus, 2027 goals, pace in achieving these goals, prospects for growth and new technologies, and 2024 guidance. Words such as believe, could, estimate, expect, guidance, intend, may, project, will, or similar conditional expressions are intended to identify forward-looking statements.

Rachel: You may now begin your presentation.

Thank you good morning, and welcome to fresh that fourth quarter and fiscal year 2023 earnings call and webcast on today's call are Billy Cyr, Chief Executive Officer, and Todd Comfort Chief Financial Officer, Scott Morris Chief Operating Officer will also be available for Q&A.

Rachel: Before we begin please remember that during the course of this call management may make forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995. These include statements related to our long term strategy focused 'twenty 'twenty Southern golf diesel achieving these calls prospects for growth in new technologies and 'twenty 'twenty four guidance word such as bill.

Rachel: Please put estimate.

Rachel: <unk> guidance intend may project, well or similar conditional expressions are intended to identify forward looking statements. 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, including those associated with such statements.

Rachel Osh: 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, including those associated with such statements and inaccuracies in third-party data. Please refer to the company's annual report on Form 10-K, followed by the Securities and Exchange Commission and the company's press release issued today for detailed discussions of the risks that could cause actual results to differ materially from those expressed or implied in a forward-looking statement made today. Please note on today's call, management will refer to certain non-GAAP financial measures, such as EBITDA and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Rachel: Accuracies and third party data please refer to the company's annual report on Form 10-K filed with the Securities and Exchange Commission and the company's press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.

Rachel: Please note on today's call management, or well refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA among others. While the company believes these non-GAAP financial measures provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Rachel Osh: Please refer to today's press release for how management defines such non-GAAP measures, why management believes such non-GAAP measures are useful, 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.

Rachel: Please refer to today's press release for how management to find such non-GAAP measures why management believes such non-GAAP measures are useful a reconciliation of the non-GAAP financial measures. The most comparable measures prepared in accordance with GAAP and limitations associated with that chunk out measures. Finally, the company has produced a presentation that contains many of the key metrics that will.

We discussed on this call that presentation can be found on the company's investor website managements commentary will not specifically walk through the presentation on the call rather it is a summary of the results and guidance. They will discuss today with that I would like to turn the call over to Billy Cyr Chief Executive Officer.

Billy Cyr: Rather, it is a summary of the results and guidance they will discuss today. With that, I would like to turn the call over to Billy Cyr, Chief Executive Officer. Thank you, Rachel, and good morning, everyone.

Billy Cyr: Thank you Rachel and good morning, everyone. The message I would like you to take away from today's call is that we believe fresh pet has reached an inflection point on its journey towards becoming not only a sizeable but profitable business in the emerging fresh frozen segment of the pet food market. We delivered the strong growth you've come to expect from us but also.

Billy Cyr: The message I would like you to take away from today's call is that we believe Freshpet has reached an inflection point on its journey towards becoming not only a sizable but profitable business in the emerging fresh and frozen segment of the pet food market. We delivered the strong growth you've come to expect from us but we also turned the corner on our profitability and are on our way towards delivering the kind of profitability and cash flow one would expect of a market leader. In 2023, we made significant progress on nearly all the metrics we set out to deliver, and if we continue to execute as we did in 2023, we will prove that with increased scale comes increased profitability and, in turn, shareholder value. Our Feed the Growth strategy, which we implemented in 2017, was driven by our dual beliefs that fresh pet food is a scale-driven business and that it was also important to maximize our first-mover advantage before competitors entered the fresh pet food market.

Billy Cyr: Turned the corner on our profitability and are on our way towards delivering the kind of profitability and cash flow one would expect with the market leader in.

Billy Cyr: 2023, we made significant progress on nearly all of the metrics, we set out to deliver and if we continue to execute as we did in 2023, we'll prove that with increased scale comes increased profitability and in turn shareholder value.

Billy Cyr: Our feed the growth strategy, which we implemented in 2017 was driven by our dual beliefs that fresh pet food is a scale driven business and that it was also important to maximize our first mover advantage before competitors entered the fresh pet food market.

Billy Cyr: Our transition to a fresh future plan last year reflected our belief that we are at the point where we have achieved sufficient scale and first mover advantage such that we can begin to pivot to delivering the profitability that should come with that scale. Our 2023 results show the initial indications of our ability to drive that profitability, and we believe there is a significant opportunity to drive further profit improvement going forward. Now, let me walk you through some highlights for the fourth quarter and full year.

Billy Cyr: Our transition to a fresh future plan last year reflected our belief that we were at the point, where we have achieved sufficient scale and first mover advantage such that we can begin to pivot to delivering the profitability that should come with that scale or 2023 result show. The initial indications are our ability to drive that profitability and we believe.

Billy Cyr: There is a significant opportunity to drive further profit improvement going forward.

Billy Cyr: Let me walk you through some highlights for the fourth quarter and full year.

Billy Cyr: First, we ended the year with very strong net sales growth and exceeded our expectations. The fourth quarter net sales of 215.4 million, up 30% year over year, were driven primarily by volume growth at 25% and 5% price mix. This strong growth is compared to a very strong quarter last year when we had significant trade inventory replenishment. The growth was supported by a strong advertising presence and household penetration gains that accelerated throughout the quarter. Second, we continue to see the strong operational improvements our Fresh Future plans were designed to drive, including sequential improvement in adjusted gross margin, logistics costs, and adjusted EBITDA. Fourth quarter adjusted gross margin was 41.1 percent, compared to 40.2 percent in the third quarter and 33 percent in the prior year period. Logistics costs came in at 6.3% of net sales, down from 9.4% in the prior year period and 6.8% in the third quarter.

Billy Cyr: First we ended the year with very strong net sales growth and exceeded our expectations with fourth quarter net sales of 215 4 million up 30% year over year, driven primarily by volume growth of 25% and 5% price mix the strong growth as compared to a very strong quarter last year when we had.

Billy Cyr: He can trade inventory, we felt the growth was supported by a strong advertising presence and household penetration gains that accelerated throughout the quarter.

Billy Cyr: Second we continue to see the strong operational improvements are fresh future plans were designed to drive including sequential improvement in adjusted gross margin logistics costs and adjusted EBITDA.

Billy Cyr: Fourth quarter adjusted gross margin was 41, 1% compared to 42% in the third quarter and 33% in the prior year period.

Billy Cyr: Logistics costs came in at six 3% of net sales down from nine 4% in the prior year period, and six 8% in the third quarter.

Billy Cyr: Fourth quarter adjusted EBITDA was $31.3 million, compared to $23.2 million in the third quarter, and up 67% year over year. Fiscal year 2023 was our sixth consecutive year with greater than 25% sales growth, with net sales of $766.9 million, up 29% year-over-year, on the high end of our targeted range and above our expectations. Full-year adjusted EBITDA was $66.6 million, more than three times what we delivered in the previous year. These financial results demonstrate real momentum, the potency of our plans, and the capability of our team. I'm incredibly proud of what we have been able to accomplish. In addition to those financial highlights, we delivered the significant increase in retail presence our retail partners sought as they became increasingly confident in our ability to supply them. Specifically, a record 5,251 fridge placements in 2023, including new stores, upgrades, and second or third fridges, bringing us to a total of 34,274 fridges at retail, or more than 1.7 million cubic feet of retail space. As of December 31, 2023, Freshpet could be found in 26,777 stores, more than 22% of which now have multiple fridges in the U.S.

Billy Cyr: Fourth quarter, adjusted EBITDA was $31 3 million compared to $23 2 million in the third quarter and up 67% year over year.

Billy Cyr: Fiscal year 2023 was our sixth consecutive year with greater than 25% sales growth with net sales of $766 $9 million up 29% year over year on the high end of our targeted range and above our expectations full.

Full year adjusted EBITDA was $66 6 million more than three times, what we delivered in the previous year.

Billy Cyr: These financial results demonstrate real momentum the potency of our plans and the capability of our team I'm incredibly proud of what we've been able to accomplish.

Billy Cyr: In addition to those financial highlights we delivered a significant increase retail presence our retail partner sought as they became increasingly confident in our ability to supply them, specifically a record of 5251 fridge placements in 2023, including new stores upgrades and second or third fridges.

Billy Cyr: It is bringing us to a total of 34274 fridges at retail or more than 1.7 million cubic feet of retail space.

Billy Cyr: As of December 31, 2023, fresh pack can be found in 26777 stores more than 22% of which now have multiple fridges in the U S East.

Billy Cyr: These fridge placements and store growth were supported by continued strong fill rates that ended the quarter in the high 90s. In addition to our strong retail business, we have also built a very strong digital business. Digital orders, which I previously referred to as e-commerce, we define as any time you order on a phone or desktop.

Billy Cyr: These fridge placements and store growth were supported by continued strong fill rates that ended the quarter in the high nineties and addition to our strong retail business. We've also built a very strong digital business digital orders, which I previously referred to as E. Commerce. We define is anytime you order on a phone or desktop. So this includes.

Billy Cyr: So this includes anything from buy online, pick up in store to Instacart, Chewy, and Amazon. In 2023, our digital sales increased 58% year over year, and at this point, we are projecting digital orders to be over $100 million in net sales in 2024. The vast majority of our digital orders today are pick-up or click-and-collect, which leverages our existing bridge network in retail. According to Nielsen IQ, pickup is also the fastest-growing segment of online e-commerce for dogs and cats. During our ICR conference presentation in January, you may recall hearing us talk about the mainstream, main meal, more profitable plans, which I'll simply refer to as Main & More. We're making the FreshPet brand more mainstream and getting people to use it as a main meal component, and this creates intensity and concentration in the business that we believe will allow us to be more profitable. Diving a little deeper into the idea of mainstream, according to Nielsen Omnichannel data, which includes e-commerce and direct-to-consumer, as of December 30, 2023, total pet food is a $52 billion category.

Billy Cyr: Anything from buy online pick up in store to instant card chewy and Amazon in 2023 our digital sales increased 58% year over year and at this point, we are projecting digital orders to be over $100 million of net sales in 2024.

Billy Cyr: Vast majority of our digital orders today are pick up or click and collect which leverages, our existing fridge network and retail accordingly.

Billy Cyr: According to Nielsen IQ pick up is also the fastest growing segment of online E Commerce and dog and Cat food.

Billy Cyr: During our ICR conference presentation in January you May recall hearing us talk about the mainstream main meal more profitable plans, which I will simply refer to as meaning more we're making the fresh paper and more mainstream and getting people to use it as a main meal component and this creates intensity and concentration of the business.

Billy Cyr: Is that we believe will allow us to be more profitable.

Billy Cyr: Diving, a little deeper into the idea of mainstream according to Nielsen Omnichannel data, which includes e-commerce and direct to consumer as at December 30th 2023, total pet food is a $52 billion category within that is the $36 billion dog food category, which the majority of our business.

Billy Cyr: Within that is the $36 billion dog food category, which is the majority of our business today, and we have only a 3% market share, which leaves a vast runway for growth. At the same time, we've created a new segment within pet food, Fresh Frozen Pet Food, that has gained scale and is growing quickly. Within the fresh frozen subcategory in measured channels, Freshpet has a 96% market share.

Billy Cyr: Is today, and we have only a 3% market share, which leaves a vast runway for growth at the same time, we've created a new segment within pet food fresh frozen pet food that has gained scale and it's growing quickly within the fresh frozen sub category in measured channels freshmen has a 96% mark.

Billy Cyr: Our goal is to make Fresh even more mainstream since our products appeal to a wide range of income groups, we have products for each stage of a pet's life, and we are growing our portfolio to better meet the needs of larger dogs. Our household penetration at year-end was 11.555 million households, up 19% year-over-year and accelerating towards our target of over 20% household penetration. High-profit pet-owning households, or HIPPOs for short, grew even faster, up 28% versus a year ago. Household penetration has grown fastest with younger Gen Z consumers, and we saw growth across all income groups.

Billy Cyr: Sure our goals to make fresh even more mainstream since our products appeal to a wide range of income groups. We have products for each stage of a pet's life and are growing our portfolio to better meet the needs of larger dogs.

Billy Cyr: Our household penetration at year end was 11.555 million households, up 19% year over year and accelerating towards our target of over 20% household penetration growth are.

Billy Cyr: Our high profit pet owning households, or hippos for short grew even faster up 28% versus year ago.

Billy Cyr: Household penetration has grown fastest with younger Gen Z consumers and we saw growth across all income groups. We are on pace to meet our target of 20 million households by 2027.

Billy Cyr: We are on pace to meet our target of 20 million households by 2027. Overall retail availability continued to grow with ACV at year end of 64%, and we see upside in continued distribution gains going forward. We will continue to focus on depth too, not just breadth, increasing the percentage of stores with second and third fridges I spoke about earlier. Focusing on the concept of the main meal, we know that 40% of fresh pet buyers use the product as the main component of their pet's meal, and there is a huge opportunity to significantly increase this percentage, even with our hippos.

Billy Cyr: Overall retail availability continued to grow with a C V at year end of 64% and we see upside in continued distribution gains going forward. We will continue to focus on depth to not just breath, increasing the percentage of stores with second and third fridges I spoke about earlier.

Billy Cyr: Focusing on the concept of main meal, we know that 40% of fresh pet buyers use the product is the main component of their pets meal and there was a huge opportunity to significantly increase this percentage, even with our hip Bose.

Billy Cyr: 37% of Freshpet users are hippos, and they represented 89% of our sales in 2023. We are using advertising to drive pet parents to feed Freshpet as the main meal item by focusing on healthy food, offering products at a variety of price points, and expanding specialized recipes. The concept of converting toppers into main meal users will increase buy rate, which was $95.86 a year at. Broadening availability of a wider range of our items can help drive more consumers to convert to using Freshpet as a main meal item. Adding second and third fridges enables us to do that, and this also drives increased visibility for the brand, amplifying the value of our advertising. Based on mega-channel data, we currently have an average of 18.2 SKUs per store, up from 15.8 SKUs one year ago.

Billy Cyr: 37% of fresh pet users are hippos and they represented 89% of our sales in 2023, we were using advertising to drive pet parents to feed fresh pet as the main meal item by focusing on healthy food offering products at a variety of price points and expanding specialized recipes.

Billy Cyr: The concept of converting koppers in domain male users will increase by rate, which was $95.86 a year end.

Billy Cyr: Broadening availability of a wider range of our items can help drive more consumers to convert to using fresh pet is a meal items, adding.

Billy Cyr: Adding second and third fridges enables us to do that and this is also drives increased visibility for the brand amplifying the value of our advertising.

Billy Cyr: Based on Mega Channel data. We currently have an average of 18.2 skus per store up from 15.8 skews one year ago.

Billy Cyr: Turning to the more profitable part of Maine and more, we are enhancing margins through improved operating performance and leveraging scale and efficiency. We believe increased business intensity and concentration will drive increased efficiency. We are seeing that play out in our margins already; fourth-quarter adjusted gross margin was up 810 basis points year-over-year to 41.1 percent, and adjusted EBITDA as a percent of net sales was 14.5 percent compared to 11.3 percent in the prior year period. The three key areas we've been most focused on have been input costs, logistics, and quality. And we've improved all three this past year. However, logistics now accounts for only 6.3% of net sales in the fourth quarter, down from 9.4% in the prior year period.

Billy Cyr: Turning to the more part of main in more more profitable we are enhancing margins through improved operating performance and leveraging scale and efficiency.

Billy Cyr: We believe increased business intensity and concentration will drive increased efficiency and we're seeing that play out in our margins already.

Billy Cyr: Fourth quarter adjusted gross margin was up 810 basis points year over year to 41, 1% and adjusted EBITDA as a percent of net sales was 14, 5% compared to 11, 3% in the prior year period.

Billy Cyr: Three key areas, we've been most focused on had been input costs logistics and quality.

And we've improved all three this past year, while logistics now only six 3% of net sales in the fourth quarter down from nine 4% in the prior year period.

Billy Cyr: In total, we improved those three areas by 390 basis points in Q4 and 560 basis points for the full year. Focusing on capacity, we feel good about where we are today. December was an all-time production record across the system, despite the loss of time for holidays, driving very strong fill rates in the high 90s today, and January production topped the December record. All three lines in the first phase of NS are operating today, and that site now accounts for 25% of our total system production. NS Phase 2 construction is on track for the startup of the first rolling line by the end of the third quarter of 2024.

Billy Cyr: In total we improve those three areas by 390 basis points in Q4, and 560 basis points for the full year.

Billy Cyr: Focusing on capacity, we feel good about where we are today December was an all time production record across the system. Despite the loss of time for holidays, driving very strong fill rates and the high Ninety's today and January production topped the December record all three lines in the first phase of N. S are operating today and that's right now accounts for <unk>.

95% of our total system production.

Billy Cyr: And as phase two construction is on track for the startup of the first roll line by the end of the third quarter of 2024.

Billy Cyr: We've continued to evolve our capacity expansion plans to drive greater capital efficiency. We are very focused on, first, maximizing the output of our existing lines by investing in an operational excellence program designed to increase throughput. We were making good progress on that program in Bethlehem and just started the planning phase. Second, maximizing the capacity of our three existing sites so that we can avoid the high cost of incremental infrastructure and overhead. This means finding ways to get more lines into each of the three sites. We've already announced plans to add a seventh line in Bethlehem. We believe we've found a way to get an additional line or two in Kitchen South and are also looking for ways to get more lines in Anna.

Billy Cyr: We've continued to evolve our capacity expansion plans to drive greater capital efficiency. We are very focused on first maximizing the output of our existing lines by investing in an operational excellence program designed to increase throughput we were making good progress on that program in Bethlehem and just started the planning N S.

Billy Cyr: Second maximizing the capacity of our three existing sites. So that we can avoid the high cost of incremental infrastructure and overhead.

Billy Cyr: Means finding ways to get more lines into each of the three sites, we have already announced plans to add a seven flying in Bethlehem. We believe we found a way to get an additional line or two in kitchen, South and we're also looking for ways to get more lines and N S.

Billy Cyr: Third, developing new technologies that generate more throughput per line and per square foot of space. We've been working on this for some time and are making good progress, but are not ready to share any details at this time. Overall, 2023 put us ahead of the pace needed to deliver our 2027 goals and gave us increased confidence in our ability to either meet or exceed those goals. The strong 29% net sales growth in the year was ahead of what we had projected.

Billy Cyr: Third developing new technologies that generate more throughput per line and per square foot of space. We've been working on this for some time and are making good progress, but are not ready to share any details at this time.

Billy Cyr: Overall 20 twenty-three put us ahead of the pace needed to deliver our 2027 goals and gave us increased confidence in our ability to either meet or exceed those goals. The strong 29% net sales growth in the year was ahead of what we had projected as we head into 2024, we intend to manage the growth very closely.

Billy Cyr: As we head into 2024, we intend to manage the growth very closely so that we do not get ahead of capacity or organizational capability. Our model works very well at 25% net sales growth over time, generating the right balance of cash generation and capital spending to deliver our financial targets. We do not want to get too far ahead of ourselves and upset that balance.

Billy Cyr: So that we do not get ahead of capacity or organization capability. Our model works very well at 25% net sales growth over time generating the right balance of cash generation and capital spending to deliver our financial targets, we do not want to get too far ahead of ourselves and upset that balance we.

Billy Cyr: We recovered 400 basis points of adjusted gross margin during the year ahead of both our target and the pace needed to hit our 2027 target of a 45% adjusted gross margin and we ended the fourth quarter, we didn't even higher adjusted gross margin at 41, 1%, giving us even more encouragement about our ability to deliver our long term goal.

Billy Cyr: We recovered 400 basis points of adjusted gross margin during the year, ahead of both our target and the pace needed to hit our 2027 target of a 45% adjusted gross margin. And we ended the fourth quarter with an even higher adjusted gross margin, at 41.1%, giving us even more encouragement about our ability to deliver our long-term goal. We are well ahead of our long-term logistics target of 7.5% of net sales, delivering the target three years early and ending the year at a rate well below the target. It is clear that we have an opportunity to further improve in logistics and will likely set a new, lower target in the future. Operating cash flow of $76 million was also ahead of our plan and increased our confidence and our ability to fund our growth with no need for additional equity and potentially not even needing any new debt.

We're well ahead of our long term logistics target of seven 5% of net sales delivering the target three years early and ending the year at a rate well below the target it.

Billy Cyr: It is clear that that we have an opportunity to further improve and logistics will likely set a new lower target in the future.

Billy Cyr: Operating cash flow of $76 million was also ahead of our plan and increases our confidence and our ability to fund our growth with no need for additional equity and potentially not even needing any new debt.

Billy Cyr: In summary, we had a very good year and we believe we are on the cusp of profitability with greater scale and efficiency due to increased business intensity and concentration and disciplined capital management now let me turn it over to Todd to walk through the details of the Q4 results and our guidance for 2020 for Todd.

Todd: In summary, we had a very good year, and we believe we are on the cusp of profitability with greater scale and efficiency due to increased business intensity and concentration and disciplined capital management. Now, let me turn it over to Todd to walk through the details of the Q4 results and our guidance for 2021.

Todd: Thank you Billy and good morning, everyone as Billy mentioned, we had an excellent fourth quarter and a very strong year now I will give you some more color on our financials and guidance for the year.

Todd: Fourth quarter net sales were $215 4 million up 30% year over year Nielsen measured dollar growth was 28% versus prior year period with broad based consumption growth across channels, we saw 15% growth in pet specialty.

Todd: Thank you, Billy, and good morning, everyone. As Billy mentioned, we had an excellent fourth quarter and a very strong year. Now, I'll give you some more color on our financials and guidance for the year. Fourth quarter net sales were $215.4 million, up 30% year-over-year.

Todd: 30% in X Aoc and over 100% growth in the unmeasured channels.

Todd: Fiscal 2023, net sales were $766 9 million up 29% year over year Nielsen measured dollar growth was 27% versus prior year again with broad based consumption growth across all channels with 18% growth in pet specialty 29% in X Aoc.

Todd: Nielsen measured dollar growth was 28% versus the prior year period, with broad-based consumption growth across channels. We saw 15% growth in pet specialty, 30% in XAOC, and over 100% growth in the unmeasured channel. Fiscal 2023 net sales were $766.9 million, up 29% year-over-year. Nielsen-measured dollar growth was 27% versus the prior year, again with broad-based consumption growth across all channels, with 18% growth in PET specialty, 29% in XAOC, and approximately 85% growth in the unmeasured channel. The fourth quarter adjusted gross margin was 41.1%, up 810 basis points year-over-year.

Todd: And approximately 85% growth in the unmeasured channels.

Todd: Fourth quarter adjusted gross margin was 41, 1% up 810 basis points year over year. This was driven by leverage on cost as well as improvements across our key focus areas, including quality costs.

Todd: Fiscal 2023, adjusted gross margin was up 400 basis points year over year to 40.0% driven by progress on our operational improvement plan.

Todd: Fourth quarter adjusted SG&A was 26, 6% of net sales compared to 22, 4% in the prior year period, we spent $6 3% of net sales on media in the quarter up approximately $10 million from Q4 last year to help us get off to a fast start in 2024.

Todd: This was driven by leverage on plant costs, as well as improvements across our key focus areas, including quality costs. Fiscal 2023 Adjusted Gross Margin was up 400 basis points year-over-year to 40.0 percent, driven by progress on our Operational Improvement Plan. Fourth quarter adjusted SG&A was 26.6% of net sales compared to 22.4% in the prior year period.

Todd: We saw continued improvement in logistics costs down to six 3% of net sales a decrease of 310 basis points compared to the prior year period.

Todd: We spent 6.3% of net sales on meaty in the quarter, up approximately $10 million from Q4 last year to help us get off to a fast start in 2024. We saw a continued improvement in logistics costs, down to 6.3% of net sales, a decrease of 310 basis points compared to the prior year period. Fiscal 2023 adjusted SG&A was 31.3% of net sales, down from 32.9% in the prior year period.

Todd: Fiscal 2023, adjusted SG&A was 31, 3% of net sales down from 32, 9% in the prior year period.

Todd: Media spend for the year was 11, 1% of net sales up slightly from 10, 5% in the prior year.

Todd: Logistics costs were down to seven 5% of net sales a 320 basis point improvement over the prior year.

Todd: Fourth quarter, adjusted EBITDA was $31.3 million or 14, 5% of net sales compared to $18 7 million or 11, 3% of net sales in the prior year period. This improvement exceeded our expectations and guidance and was driven by better than expected net sales and strong operating performance.

Todd: Media spend for the year was 11.1% of net sales, up slightly from 10.5% in the prior year. Logistics costs were down to 7.5% of net sales, a 320 basis point improvement over the prior year. Fourth quarter adjusted EBITDA was $31.3 million, or 14.5% of net sales compared to $18.7 million, or 11.3% of net sales in the prior year period.

Todd: <unk> and cost of goods sold and logistics.

Todd: Fiscal 2023.

Todd: EBITDA more than tripled year over year to $66 $6 million or eight 7% of net sales.

Todd: Capital spending for fiscal 2023 was $239 1 million in line with our expectations.

Operating cash flow was 76 million and we had cash on hand up $297 million at the end of the year. We continue to believe that we have adequate cash to fully fund our growth through 2024, and we will be free cash flow positive. In 2026. We also believe that we will what we will have access to.

Todd: This improvement exceeded our expectations and guidance and was driven by better than expected net sales and strong operating performance and cost of goods sold and logistics. Fiscal 2023 adjusted EBITDA more than tripled year-over-year to $66.6 million, or 8.7% of net sales. Capital spending for fiscal 2023 was $239.1 million, in line with our expectations. Operating cash flow was $76 million, and we had cash on hand of $297 million at the end of the year.

Todd: Traditional non dilutive forms of capital to bridge a gap in 2025, if it occurs.

Todd: Now turning to guidance for 2024, we expect net sales of at least $950 million driven by volume and adjusted EBITDA to be in the range of $100 million to $110 million we.

Todd: We expect capital expenditures of approximately $210 million to support the installation of capacity to meet demand in 2025, further fridge placements and ordinary maintenance.

Todd: We continue to believe that we have adequate cash to fully fund our growth through 2024, and we will be free cash flow positive in 2026. We also believe that we will have access to traditional non-dilutive forms of capital to bridge a gap in 2025 if it occurs. Now turning to guidance for 2024, we expect net sales of at least $950 million, driven by volume, and adjusted EBITDA to be in the range of $100 to $110 million. We expect capital expenditures of approximately $210 million to support the installation of capacity to meet demand in 2025, further fridge placements, and ordinary maintenance.

Todd: It is important to understand that our growth rate directly impacts the capital we need to spend to build capacity.

Todd: We are closely managing our cash balance being very disciplined in our media spend and carefully managing sales growth, while expanding capacity and increasing profitability.

Todd: We exceeded our we exceeded our expectations for 2023, which is why the net sales growth rate of at least 24% is slightly below our long term target of 25%. We do not want to get ahead of the capacity build that we're putting in place.

Todd: In terms of cadence, we expect the fast start to the year based on strong momentum from 'twenty to 'twenty, three with Q1 being the highest percentage of net sales growth rate year over year.

Todd: It is important to understand that our growth rate directly impacts the capital we need to spend to build capacity. We are closely managing our cash balance, being very disciplined in our media spend, and carefully managing sales growth while expanding capacity and increasing profitability. We exceeded our expectations for 2023, which is why the net sales growth rate of at least 24 percent is slightly below our long-term target of 25 percent. However, we do not want to get ahead of the capacity build that we are putting in place. In terms of cadence, we expect a fast start to the year based on strong momentum from 2023, with Q1 being the highest percentage net sales growth rate year-over-year. We expect to see sequentially lower net sales growth rates as we progress throughout the year as we manage our growth to deliver the right balance between growth and capital investment, as we talked about earlier.

Todd: We expect to see sequentially lower net sales growth rates as we progress throughout the year as we manage our growth to deliver the right balance between growth and capital investment as we talked about earlier.

Todd: This should not be construed to imply that the business is slowing quite the opposite we are rigorously managing the timing and pace of our advertising investments to regulate the growth. So that we can live within our capacity plans and carefully manage the cash required to build capacity.

Todd: We want to deliver as close to our long term target of 25% net sales growth over time, so that we don't get too far ahead of our capacity expansion we.

Todd: We expected adjusted gross margin expansion of at least 100 basis points and the absolute gross margin percentage to be slightly higher in the second half of the year versus first half.

Todd: This should not be construed to imply that the business is slowing; quite the opposite. We are rigorously managing the timing and pace of our advertising investments to regulate the growth so that we can live within our capacity plans and carefully manage the cash required to build capacity. We want to deliver as close to our long-term target of 25% net sales growth over time so that we don't get too far ahead of our capacity expansion. We expect an adjusted gross margin expansion of at least 100 basis points and the absolute gross margin percentage to be slightly higher in the second half of the year versus the first half. We will have some start-up costs on the third line in NS in Q1 and additional start-up costs on the fourth line in NS in Q4. At this point, we have about 70% of our commodity costs locked in for the year and currently expect modest deflation in 2024. We anticipate media spending to grow in line with sales, and we will pull back as necessary to control sales. Lastly, we expect sequential quarterly improvement in adjusted EBITDA.

Todd: You'll have some startup costs on the third line in earnest in Q1 and additional startup costs in the fourth line in earnest in Q4.

Todd: At this point, we have about 70% of our commodity costs locked in for the year and currently expect modest deflation in 2024.

Todd: We anticipate immediate to grow in line with sales and we will pull back as necessary to control sales growth.

Todd: Lastly, we expect sequential quarterly improvement.

Todd: Adjusted EBITDA.

Todd: Overall, we are proud of our 2023 results and believe we are in a strong position to deliver on our guidance with our with our momentum so far in 2024 with the actions we've taken and continued strong demand for our products, we remain confident in our ability to deliver on our fresh future plan.

Todd: In 2027 goals.

Todd: We believe that when we look back a year or two from now it will be apparent that 'twenty. Two 'twenty three was truly unintellectual point or fresh pet and the fresh frozen category and that fresh pet will be honest way to having a leading share in that segment and delivering the kinds of profits one would expect from the market leader in emerge.

Todd: Overall, we are proud of our 2023 results and believe we are in a strong position to deliver on our guidance with our momentum so far in 2024. With the actions we've taken and continued strong demand for our products, we remain confident in our ability to deliver on our fresh future plan and 2027 goals. We believe that when we look back a year or two from now, it will be apparent that 2023 was truly an inflection point for Freshpet and the Fresh Frozen category, and that Freshpet will be on its way to having a leading share in that segment and delivering the kinds of profits one would expect from the market leader in an emerging, high-growth market. That concludes our overview.

Todd: <unk> high growth market.

Todd: That concludes our overview, we will now be glad to answer your questions. As a reminder, we ask that you. Please focus your questions on the quarter the guidance and the company's operations operator.

Speaker Change: Thank you.

Speaker Change: At this time will now be conducting today's question and answer session.

Speaker Change: If you'd like to ask a question today. Please press star one from your telephone keypad, a confirmation tone will indicate your line is in the question queue.

You May press star two if he like to withdraw your question from the queue.

Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Operator: We will now be glad to answer your questions. As a reminder, we ask that you please focus your questions on the quarter, the guidance, and the company's operations.

Speaker Change: One moment please poll for questions.

Speaker Change: Our first question today is coming from Atlanta for Apache Perique with Oppenheimer. Please proceed with your questions.

Operator: Thank you. At this time, we'll now be conducting today's question and answer session. If you'd like to ask a question today, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to withdraw your question from the queue.

Apache Perique: Good morning, Thanks for taking my question and also congrats on a strong quarter. So maybe just to start out just just on the gross margin line you know a very strong performance in Q4, I mean, it sounds like you guys are guiding for at least 100 basis point improvement. This year. So have you thought if you can just walk through the puts and takes that you see on the gross margin line for the year.

Rupesh Parikh: For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Our first question today is coming from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question. Good morning.

Speaker Change: Are you talking about 24, yeah, that's correct yep.

Speaker Change: Yeah.

Speaker Change: So as I mentioned in the opening remarks, we are going to see a little bit of deflation. That's our expectation right now on commodities, whilst we will have some inflation on our labor and overhead, but we were fortunate enough to lock in a fair amount of our commodities.

Todd: Thanks for taking my question. Also, congrats on a strong quarter. So maybe to start out, just on the gross margin line, you know, very strong performance in Q4. And it sounds like you guys are guiding for at least 100 basis points of improvement this year. So maybe, Todd, if you could just walk through the puts and takes that you see on the gross margin line for the year. Are you talking about 24?

Speaker Change: Really nice rates right now so we will see a reduction.

Speaker Change: Our input costs, we anticipate quality cost, which we've made great progress on in 'twenty. Three we will continue to see some improvements in 'twenty four.

Speaker Change: The fixed cost of labor and overhead because were still building out a couple of new lines and as we're going to see any progress.

Todd: Yes, correct. Yep. Yeah. So, as I mentioned in the opening remarks, we are going to see a little bit of deflation. That's our expectation right now for commodities. Well, we will have some inflation on our labor and overhead, but we're fortunate enough to lock in a fair amount of our commodities at really nice rates right now.

Speaker Change: And for 'twenty, there, that's probably more of a 'twenty five 'twenty six what's really going to become lower input costs and improved quality of the main drivers.

Speaker Change: Great. Thank you and then maybe just one follow up question. So it sounds like you guys are going to manage to your longer term algorithm for the top line is there a way to help frame what your capacity is today and where do you expect to end by the end of the year.

Speaker Change: Yeah refresh the way to think about this is that we we have to be mindful not just of overall capacity, but we also have to be mindful of capacity by form and so in this case, what we're really managing to is the N. S. Phase III first line is a roll line. So it will be tight on capacity until that line.

Todd: So we will see a reduction in our input costs. We anticipate quality costs, which we've made great progress on in 23. We will continue to see some improvements in 24. The kind of fixed cost labor and overhead, because we're still building out a couple of new lines in Ennis, we're not going to see any progress for 24 there. That's probably more of a 25, 26.

Speaker Change: It comes out on the road segment of the business, we're doing really well on the bank side and so we're really kind of guide ourselves. So we don't end up short shipping anything on the roll side prior to that line coming up and being able to find as a capacity. Once that's in place we have a pretty good runway until sometime in 'twenty five when the it'll flip around in the tightness will come off.

Billy Cyr: What's really going to happen is that lower input costs and improved quality will be the main drivers. Great, thank you. Then maybe just one follow-up question. So it sounds like you guys are going to manage your longer term algorithm for the top line. Is there a way to help frame what your capacity is today and where you expect it to end by the end of the year? Yeah, Rupesh, the way to think about this is that we have to be mindful not just of overall capacity, but we also have to be mindful of capacity by form. And so in this case, what we're really managing is that the NS phase two first line is a roll line, so we'll be tight on capacity until that line comes up in the roll segment of the business.

Speaker Change: On the bag side, and we're working very diligently to make sure that we have enough capacity to drive to to accommodate the growth that we got but we are literally managing ourselves between each of these projects will then bags roles in bags. So we can sustain the growth rate that we've got but we don't want to get too far ahead of ourselves right.

Speaker Change: Right now we have about $1 billion of total capacity, but as Billy mentioned, there's a little bit of a mismatch we got more in the back on the bag side versus the Rolls and then obviously, we need to get well above $1 billion as we get into 'twenty five so it's really it's really the back as it rolls right now, it's causing us a little bit of an issue.

Billy Cyr: We're doing really well on the bag side, and so we're really trying to guide ourselves so we don't end up short shipping anything on the roll side prior to that line coming up and being able to provide us with the capacity. Once that's in place, we have a pretty good runway until sometime in 25 when it'll flip around, and the tightness will come on the bag side.

Speaker Change: Great. Thank you I'll pass it along.

Speaker Change: Thanks Kash.

Speaker Change: Our next questions are from the line of Brian Holland with D. A Davidson. Please proceed with your question.

Brian Holland: Yeah. Thanks, good morning.

Brian Holland: Quickly on media.

Brian Holland: Number came in higher than I was projecting in Q4.

Billy Cyr: And we're working very diligently to make sure that we have enough capacity to drive to accommodate the growth that we've got. But we're literally managing ourselves between each of these projects, rolls and bags, rolls and bags, so we can sustain the growth rate that we've got, but we don't want to get too far ahead of ourselves. Yeah.

Brian Holland: So I'm, assuming that maybe it was a little bit higher than what you had communicated and maybe planned for prior to the quarter. So just curious if there's anything there that you can speak to with respect and opportunity that you saw or just any logic behind it to the extent that you you increase that number in Q4 and then also.

Speaker Change: Just want to understand.

Billy Cyr: So right now, we've got a billion dollars of total capacity, but as Billy mentioned, there's a little bit of a mismatch. We've got more on the bag side versus the rolls. And then obviously, we need to get well above a billion dollars as we get into 25. So it's really the rolls right now that's causing us a little bit of an issue. Great, thank you; I'll pass it along.

Speaker Change: The variability of the media spend as we look out to fiscal 'twenty four Ah you know with what sort of time horizon can you pull back on that spend as needed.

Speaker Change: So I'll start off and I'll, let Scott answer so the media, we internally kind of planned that number for a while you know we hedged our bets a little bit we weren't sure where all the costs would come for the year. So we kind of kept some back some dry powder back, but as we saw the gross margins and the sales rep.

Brian Holland: Thanks for patching. Our next questions are from the line of Brian Holland with D.A. Davidson. Please proceed with your question. Thanks. Good morning.

Brian Holland: Quickly on media, the number came in higher than I was projecting for Q4, so I'm assuming that maybe it was a little bit higher than what you had communicated and maybe planned for, you know, prior to the quarter. So just curious if there's anything there that you can speak to with respect to an opportunity that you saw or just any logic behind it to the extent that you increased that number in Q4. And then also just want to understand the variability of the media spend as we look out to fiscal 24, you know, with what sort of time horizon can you pull back on that spend as needed? So I'll start off, and I'll let Scott answer.

Scott: Really do it very very well in Q4, we kind of released all of that money. So internally, we plan better mouth, but externally, we hedged our bets a little bit.

Scott: But it is unusual that we spend.

Scott: That much in Q4, but this is a year, where we actually had capacity. So we ended up spending a little bit more in Q4 than we have historically that gave us good momentum into Q1, we're seeing that come through both in consumer penetration.

Scott: And also an overall top line growth, especially from units in pounds.

Scott Morris: So the media, we internally kind of planned that number for a while. You know, we kind of hedged our bets a little bit. We weren't sure, you know, where all the costs would come from for the year.

Scott: And then your second part of your question was on how how far out or how do how can we manage media. We can make I would say small adjustments within 30 days, we can make more significant changes and modifications kind of 90 days out is typically how we think about it.

Scott Morris: So we kind of, you know, kept some back, some dry powder back. But as we saw the gross margins and the sales really do very, very well in Q4, we kind of released all that money. So internally, we planned that amount, but externally, we hedged our bets a little bit. But it's unusual that we spend that much in Q4, and this is a year where we actually had capacity, so we ended up spending a little bit more in Q4 than we have historically. That gave us good momentum into Q1.

Speaker Change: Thanks, and then just a follow up on that.

Speaker Change: The reason for the question is you know a lot of people asking about your ability to sort of run counter to the trends in premium pet food that we've been seeing for for quite a while now.

Speaker Change: And you know what might be behind that is there a lag effect as it ultimately catch up to you. So you know you're going to be at I guess north of or around about $100 million of media spend I believe you know another big visible competitor in the space.

Scott Morris: We're seeing that come through both in consumer penetration and also in overall top-line growth, especially in units and pounds. And then the second part of your question was about how far out or how we can manage media. We can make, I would say, small adjustments within 30 days. We can make more significant changes and modifications kind of 90 days out. That is typically how we, Thanks. And then just to follow up on that, I guess the reason for the question is, you know, a lot of people asking about your ability to sort of run counter to the trends in premium pet food that we've been seeing for quite a while now. And, you know, what might be behind that? Is there a lag effect? Does it ultimately catch up to you?

Speaker Change: Fresh frozen space are spending roughly the same if not more.

Speaker Change: Just curious if there's anything anecdotal that you are seeing or any data points you could you can refer to that Mike.

Speaker Change: Might sort of crystallized, whether we're at you talked about 2023 being an inflection point for the business and I'm wondering if it's been an inflection point for this sub segment of fresh frozen food is for sort of redefining our premium. So I'm just curious what you've seen or what you can speak to that end.

Speaker Change: Yes.

Speaker Change: Well, let me, let me answer that kind of it in two sections. The first one there.

Scott Morris: So, you know, you're going to be at, I guess, north of or around about 100 million in media spend. I believe there is another big, visible competitor in the space. And the fresh frozen space is spending roughly the same, if not more. And I'm just curious if there's anything anecdotal that you are seeing or any data points you can refer to that might, might sort of crystallize whether we're at, you talked about 2023 being an inflection point for the business, and I'm wondering if it's been an inflection point for this sub-segment of fresh frozen food as for sort of redefining premium. So I' Well, I will answer in two sections.

There has been like I would say.

Speaker Change: A change in overall the category, we have not seen we have not seen any impact like others have seen impact in the category with consumers changing their buying behavior. It's been it's been really extraordinary we're not seeing consumers trade down we're seeing consumers come in very consistently.

Speaker Change: And you see that on the penetration growth you see it on the growth of our hippos.

Speaker Change: And we're also seeing it in our media productivity like you're at the one of the first signs you start to see us slowing penetration and your media not be as productive. So we're not seeing any of those changes that I think has affected the rest of the category and I don't anticipate them, having any significant impact and in this year quite honestly I mean I think.

Scott Morris: The first one, there has been, like I would say, a change in the overall category. We have not seen any impact, like others have seen impact in the category with consumers changing their buying behavior. It's been really extraordinary.

Scott Morris: We're not seeing consumers trade down. We're seeing consumers come in very consistently, and you see that in the penetration growth. You see it in the growth around hippos.

Speaker Change: We're through the worst of those that impact over the over 23, I think youre going to see less and less of that over the course of 'twenty for the second part of your question is.

Scott Morris: And we're also seeing it in our media productivity. One of the first signs you start to see is slowing penetration and your media not being as productive. So we're not seeing any of those changes that I think have affected the rest of the category. And I don't anticipate them having any significant impact this year, quite honestly.

Speaker Change: Are we at an inflection point from a consumer standpoint.

Speaker Change: And I. This is one of these things where we're moving we're moving something that's been set.

Speaker Change: Category, that's been set for many many years around dry and wet food and what people believe in the forms they feed and how they think about it and what we've tried to tap into for a decade is that people know that they should be eating a fresher healthier and less processed diet I mean, you hear more and more about processed foods now.

Scott Morris: I mean, I think we're through the worst of that impact. Over 23, I think you're going to see less and less of that over the course of. The second part of your question is, are we at an inflection point from a consumer standpoint? And this is one of these things where we're moving something that's been set, a category that's been set for many, many years around dry and wet food and what people believe and the forms they take and how they think about it. And what we've tried to tap into for a decade is that people know that they should be eating a fresher, healthier, and less processed diet. I mean, you hear more and more about processed food. Now, whether they do it for themselves or not, that's one thing. Now, will they do it for their kids and, quote, unquote, their pets, right?

Speaker Change: Whether they do it for themselves or not that's one thing now will they do it for their kids and their pets right.

Speaker Change: And we are seeing people become more and more aware of that and be willing to make the change and everything that we're doing from a strategic standpoint, youre hearing us talk about turning this into more of a mainstream concept. So we've talked about Rogers diffusion of innovation curve over time, and how we think about pressing through that we're starting to get into the early majority of them.

Speaker Change: Still kind of half not even halfway through that early majority group.

Speaker Change: So we do believe that there is a change going on in pet food.

Scott Morris: And we are seeing people become more and more aware of that and willing to make the change. And everything that we're doing from a strategic standpoint, you're hearing us talk about turning this into more of a mainstream concept. So we've talked about Rogers' Diffusion Innovation Curve over time and how we think about pressing through that. We're starting to get into that early majority, but we're still kind of not even halfway through that early majority group. So we do believe that there is a change going on in pet food. We do look at where when we used to be, the small fridge at the end of the aisle was for kind of the people that were like really, really kind of dogs, you know, nuts in a way.

Speaker Change: We do look at where when we used to be the small fridge at the end of the aisle was for kind of the people that we're like really really kind of dog not sent away now there's multiple fridges in an aisle and I think it starts to make a statement.

Speaker Change: That starts to make a statement at retail or availability being more broad it makes a statement and I think the way we're talking about it to the consumer from our advertising and communications makes a statement that this is a mainstream idea. So we do believe it's an inflection point and that's been happening for many many years.

Speaker Change: Yeah.

Speaker Change: Thank you.

Speaker Change: Our next question is from the line of Ken Goldman with Jpmorgan. Please proceed with your question.

Scott Morris: Now there are multiple fridges in an aisle, and I think that starts to make a statement. That makes a statement at retail, our availability being more broad. It makes a statement, and I think the way we're talking about it to the consumer in our advertising and communications makes a statement that this is a mainstream idea. So we do believe it's an inflection point, and it has been happening for many, many years. Thank you. Our next question is from the line of Ken Goldman with J.P. Morgan. Hi, good morning, and thank you.

Kenneth B. Goldman: Hi, good morning, and thank you.

Kenneth B. Goldman: Wanted to get a little bit better sense of how to think of capacity or sorry, a capex between now.

Kenneth B. Goldman: Now and sort of your target year, I guess longer term of 2027, I think previously you'd sort of guided to maybe $250 million a year in 'twenty five and 26 I don't know if you've officially kind of addressed or updated those numbers since maybe cagny of 'twenty three if I have or if you have I missed it I'm just trying to get a better sense you know as you kind of.

Kenneth B. Goldman: I just wanted to get a little bit better sense of how to think of capacity, or sorry, CapEx, between now and sort of your target year, I guess, the longer term of 2027. I think previously you'd sort of be guided to maybe $250 million a year in 2025 and 2026. I don't know if you've officially kind of addressed or updated those numbers since maybe CAGNY of 2023. If I have, or if you haven't, I missed it. I'm just trying to get a better sense, you know, as you kind of think of the rollout of certain plants and demand and some efficiencies you've created, whether those are kind of rough numbers to factor in in light of, you know, the 210 this year or so.

Kenneth B. Goldman: Think of the rollout of certain plants and demand and some efficiencies you've created whether those are kind of rough numbers to factor in in light of the 210 this year. So.

Kenneth B. Goldman: Yeah.

Kenneth B. Goldman: So the numbers continue to be fluid look we try to we try to optimize consistently how we're spending and the timing of it all and where we're putting up.

The investment.

Kenneth B. Goldman: Right now we have not given updates officially I think the way to think of think of it as it's going to be over the next several years somewhere in that 200 to 240 range per year.

Kenneth B. Goldman: Still too early to talk about what exactly what the 25 number is we're still making some final decisions there, but I think that 200 to 240 is probably a pretty good estimate at this point.

Speaker Change: Alright. Thank you for that and then just a follow up I think it was Brian's question on media spend forgive me if it wasn't but.

Kenneth B. Goldman: Yeah, so the numbers continue to be fluid. Look, we try to optimize consistently how we're spending and the timing of it all and where we're putting it. I think right now, we have not given updates officially. I think the way to think of it is that it's going to be, over the next several years, somewhere in that 200 to 240 range per year. It's still too early to talk about exactly what the 25 number is. We're still making some final decisions there, but I think that 200 to 240 is probably a pretty good estimate at this point. All right, thank you for that. And then just to follow up, I think it was Brian's question on media spend.

Speaker Change: I wanted to get a better sense of the maximum flexibility you had this year right in sort of that balance you have between the desire to building the brand over the long term.

Speaker Change: And also not getting ahead of yourself on capacity.

Speaker Change: Organizational capacity and your capacity to actually produce product there kind of a minimum median number you'd want to spend for the year in terms of dollars or is that not really the right way to think about it.

Speaker Change: Yeah, Ken So we've typically guided to increasing our media in line with sales our long term target is to be ultimately at 9% of sales. So as we see situations, where our growth is running a little hot and we need to manage within capacity we would need.

Scott Morris: Forgive me if it wasn't, but... You know, I wanted to get a better sense of the maximum flexibility you had this year, right? And sort of that balance you have between the desire to build the brand over the long term and also not getting ahead of yourself on capacity, organizational capacity, and your capacity to actually produce the product. Is there kind of a minimum number of media you'd want to spend for the year in terms of dollars? Or is that not really the right way to think about it?

Speaker Change: Peter ourselves back heading towards that 9% to see how quickly we can get to that 9% level I don't foresee a circumstance in this year or next year, we would drop below 9% I don't I don't see that being the case, but that's the that's really the guidepost as sort of the 9% to 11% range is sort of where we're trading.

Speaker Change: Yeah.

Speaker Change: Great. Thanks, so much.

Speaker Change: Our next questions are from the line of Peter Benedict with Baird. Please proceed with your questions.

Scott Morris: So we've typically guided to increasing our media in line with sales. Our long-term target is to be ultimately at 9% of sales. So as we see situations where our growth is running a little hot, and we need to manage within capacity, we will meter ourselves back towards that 9% to see how quickly we can get to that 9% level. I don't foresee a circumstance in this year or next year where we would drop below 9%. I don't see that being the case, but that's really the guidepost: the 9% to 11% range is sort of where we're trading. Great, thanks so much.

Peter Benedict: Alright, guys. Thanks, taking the question maybe.

Peter Benedict: Maybe Scott back to you on the consumer behavior. Now you said you hadn't seen much change at all but maybe peel it back a little bit within your portfolio of products that you have maybe how consumers are responding to the innovation to the additional skus that you guys alluded to.

Per store, just kind of curious on that and how you can I know you know pricing.

Peter Benedict: Next year's growth is going to be mainly volume, but how do you think about pricing and more about mix.

Scott: As you think about 2024, that's my first question.

Peter Benedict: Our next questions are from the line of Peter Benedict with Baird. Please use your questions. All right, guys, thanks for taking the question. Maybe, Scott, I'll back to you on consumer behavior. Now, you said you hadn't seen much change at all, but maybe tilt back a little bit within your portfolio of products that you have, maybe how consumers are responding to the innovation, to the additional SKUs that you guys alluded to per store. Just kind of curious about that and how you guys know pricing. Next year's growth is going to be mainly volume, but how do you think about pricing and more about NICs as you think about 20 That's my first question.

Scott: Yeah, So Peter.

It has been a very interesting period in the industry, where I think more people have quoted impacts around changes in the portfolio and people trading down people moving to some private label products and there has been a little bit of a <unk>.

Scott: Shift in the category overall, we really have not seen that at all we haven't seen any significant significant effect in our business whatsoever around that so I I mean, I know that it's been very topical, but I would say everything that we've kind of set out and planned.

Scott Morris: Yeah. So, Peter, it has been a very interesting period in the industry where, I think, more people have quoted impacts around, you know, changes in their portfolio and people trading down, people moving to some private label products, and there has been a little bit of a shift in the category overall. But we really have not seen that at all.

Scott: We are amazingly in line and consistent with our plans and how the overall model is performing.

Scott: We just haven't we just have not seen those mix changes on the new product front.

We have products on both ends of the spectrum from it from a new product standpoint, and what I mean by that is we have things on the highest end of our kind of cost of feed per day, and some things that are more cost effective to feed per day, both of them are performing and growing quite well.

Scott Morris: We haven't seen any significant effect in our business whatsoever around that. So I mean, I know that it's been very topical, but I would say everything that we've kind of set out and planned is amazingly in line and consistent with our plans and how the overall model is performing. We just have not seen those mixed changes.

Scott: Some of them are performing better in different formats than others like in mass, we're seeing a little bit more growth on some of the more cost effective products and again that are margin neutral for us internally.

Scott Morris: On the new product front, we have products on both ends of the spectrum from the new product standpoint. And what I mean by that is we have things on the highest end of our kind of cost-to-feed-per-day range and some things that are more cost-effective. Both of them are performing and growing quite well.

Scott: What we're also seeing good growth on some of the products are on the very high end. So I think it's super encouraging that that's the what we're seeing and that's dynamic and the behavior that we're seeing from consumers at this point.

Speaker Change: No for sure that's good color and then just.

Speaker Change: A question on the broader category.

Scott Morris: Some of them are performing better in different formats than others. For example, in mass, we're seeing a little bit more growth on some of the more cost-effective products, and again, that are margin-neutral for us internally, but we're also seeing good growth on some of the products that are on the very high end. So I think it's super encouraging that that's what we're seeing and that it's dynamic in the behavior that we're seeing. Now, for sure, that's good color.

Speaker Change: Guys are 96% of the measured category, but.

Speaker Change: Maybe give us a sense of where you guys think the broader fresh frozen category may be.

Speaker Change: Today.

Speaker Change: Growth.

Speaker Change: You would expect out of that kind of other category over the next few years and just the competitive dynamics theres a lot of folks that have been coming in.

Speaker Change: Then they start to cycle out we've seen various levels of success.

Speaker Change: So just kind of curious your broader view.

Speaker Change: The category. Thank you.

Speaker Change: Look I think that.

Scott Morris: This is a question about the broader category. I mean, you guys are 96% of the measured category, but maybe you could give us a sense of where you guys think the broader fresh frozen category may be today. What kind of growth you would expect out of that category over the next few years and just the competitive dynamic. There are a lot of folks that have been coming in, and then they start to cycle out. We've seen various levels of success. So just kind of curious about your broader view of the category.

Speaker Change: We set out to do this a longtime ago over well over a decade ago, we set out to really build fresh pet food.

Speaker Change: I think that there have been a lot of people that are kind of coming in behind us.

Speaker Change: We're very fortunate in the way we've constructed our business to still have around 96% of the total fresh frozen it's sold in brick and mortar. Obviously, we know that theres a nice piece of direct to consumer business is a very very different model and a different offering and I think they've done a really nice job building those pieces, but it has not inhibited our ability to grow and we.

Scott Morris: Look, I think that we set out to do this a long time ago, well over a decade ago. We set out to really build Fresh Pet Food. I think that there have been a lot of people that are kind of coming in behind us. I think we're very fortunate in the way we've constructed our business to still have around 96% of the total fresh frozen that's sold in brick and mortar. Obviously, we know that there's a nice piece of direct-to-consumer business, but it's a very, very different model and a different offering.

Speaker Change: Think that when we look at our model and how it's constructed and where the opportunity is we continue to think that we've talked about a tam of 43 million households, we're currently at.

Speaker Change: Almost.

Speaker Change: 11, $711 8 million household we know that there is a long long way to go and a lot of opportunity. That's on the penetration piece on the buy rate I think as we've covered before we think theres an opportunity to literally over a long period of time over probably double our buy rate and that's over a long period of time within 2020.

Scott Morris: And I think they've done a really nice job building those pieces, but it has not inhibited our ability to grow. And we think that when we look at our model and how it's constructed and where the opportunity is, we continue to think that we talked about a TAM of 43 million households. We're currently at almost 11.7, 11.8 million households. But we know that there is a long, long way to go and a lot of opportunity. That's on the penetration piece.

Speaker Change: Seven I think we have $127 kind of Bahrain is the one we had penciled in.

Speaker Change: So that's kind of been our plan today were at 96, and we're going towards like that 127 type number I think what you're starting to see as we talked a lot about these the super heavy heavy though these simple consumers that are coming into our business and that's been our focus we think there is the opportunity to really continue to improve by rate overtime. So I think both of them both.

Scott Morris: On the buy rate, I think, as we've covered before, we think there's an opportunity to, literally, over a long period of time, probably double our buy rate. And that's over a long period of time. Within 2027, I think we have $127 kind of buy rate is the one we have penciled in. So that's kind of been our plan. Today we're at 96, and we're going towards that 127-type number.

Speaker Change: He says on both fronts I think there's a lot of opportunity. The category is changing it's been a fascinating time in it I think it'll be really interesting next couple of years to see how it plays out.

Speaker Change: Okay.

Speaker Change: Thanks, so much.

Speaker Change: Our next question is from the line of Mark Astrachan with Stifel. Please proceed with your questions.

Scott Morris: I think what you're starting to see is we talked a lot about these super heavy heavies or these hippo consumers that are coming into our business. And that's been our focus. We think there's the opportunity to really continue to improve buy rates over time. So I think on both pieces, on both fronts, I think there's a lot of opportunity. The category is changing. It's been a fascinating time, and I think it'll be a really interesting next couple of years to see how it plays out. Thanks so much.

Mark Stiefel Astrachan: Hey, good morning, guys football as well.

Mark Stiefel Astrachan: I guess firstly on on hit though grows it's exceeded household penetration now I get the last couple of years, especially.

In 'twenty three if my maths right nearly 30% versus overall household penetration gifts under 20.

Mark Stiefel Astrachan: I guess, if you could talk about the lifecycle and conversion of those hit both consumers from first consumption of the category or brand into a hippo and kind of how do you think about the opportunity of those that are casually using today can you accelerate that adoption do you need to bring in more consumers to the category.

Mark Stiefel Astrachan: Our next question is from the line of Mark Astrachan with Stiefel. Please proceed with your question. Hey, good morning, guys. Hope all's well.

Scott Morris: I guess, firstly, on hippo growth, it's exceeded household penetration now, I guess, the last couple of years, especially in 23, if my math's right, nearly 30% versus overall household penetration, just under 20. I guess when we talk about the life cycle and conversion of those HIPPO consumers from their first consumption of the category or from the brand into a HIPPO, and kind of how do you think about the opportunity for those that are casually using today? Can you accelerate that adoption? Do you need to bring in more consumers to the category? What do you see around those that really become HIPPOs and those that drop off?

Mark Stiefel Astrachan: So what do you see around those it really becomes it goes and does that drop off that's the first question.

Yeah. So it's a it's a thank you for thank you for that question. If you look at our total increased consumers last year. It was about 1.8 million households that we added on the hippos. We grew that grew by not over 900000, so when you're growing your best consumer by you know like a cigna.

Mark Stiefel Astrachan: Second amount you know 30, you quoted a number of 29 or 30% versus prior year, so great grocery there, but it's becoming.

Scott Morris: That's the first question. Yeah, so it's a thank you for asking that question. If you look at our total increased consumers last year, it was about 1.8 million households that we had, on the hippos, we grew that group by not over 900,000. So when you're growing your best consumer by, you know, like a significant amount, you know, 30, you quoted the number 29 or 30% versus the prior year, so a great growth rate there. But it's becoming a huge piece of the developing business. And I think, Mark, literally, just by getting our fundamentals correct, being in stock consistently, which we've had trouble with over the last couple years, but we do not anymore. Being in stock consistently and having incredible quality, great consumer experiences, continue to bring innovation to the category, broader availability, and also being available from kind of an online or e-commerce type perspective where people can literally go out on their phone or computer and order us, making it easier and more accessible for consumers. Those are all ways to really make it easier and facilitate hippos.

Mark Stiefel Astrachan: Huge piece of the developing business and I think literally mark just by getting our fundamentals correct being in stock consistently which we've had trouble over the last couple of years, but we do not anymore being in stock consistently and having incredible quality of great consumer experiences continue to bring innovation to the category broader availability.

Mark Stiefel Astrachan: And also being available from an in kind of in the online or E. Commerce type perspective, where people can literally go out on their phone or computer in order us, making it easier and more accessible for consumers. Those are all ways to really make it easier and facilitate hippos now we see them come from two parts. One of them is some of those groups of consumers that literally come in and.

Mark Stiefel Astrachan: They immediately become a hit those within three to six months and then they've just changed and that's their dog food. The other group that we see come in and become hit those are people that use it as a topper and mix and mix more than mix more and more in literally start moving down the dry and after fresh and it's a different mindset because those people are replacing <unk>.

Mark Stiefel Astrachan: <unk> with what was a wet behavior in the category, where a lot of people that use wet food don't feed exclusively they mixing on top a dry well with fresh you can use it as your core and main meal. So we see the hippos coming from two different groups.

Scott Morris: Now we see them come from two parts. One of them is that there are groups of consumers that literally come in, and they immediately become hippos within three to six. They've just changed, and that's their dog's food. The other group that we see come in and become hippos are people that use it as a topping and mix and mix more and mix more and mix more and literally start moving down the dry and up the fresh.

Mark Stiefel Astrachan: And I and I believe that explaining it to people's seating that thought and just having our fundamentals correct is what will kind of help that overtime.

Speaker Change: Got it that's all.

Scott Morris: And it's a different mindset because those people are replacing fresh with what was a wet behavior in the category, where a lot of people that use wet food don't feed it exclusively; they mix it on top of dry. Well, with fresh, you can use it as your core and main meal. So we see the hippos coming from two different groups. And I believe that explaining it to people, seeding the thought, and just having our fundamentals correct is what will kind of help that over time. Got it. That's helpful. I'm going back to, I think it was Ken's question, Todd, for you, I guess the surprise in the CapEx guide is sort of remaining the same, and maybe it's the leading question, but you talk a lot about maximizing output of existing lines, adding capacity to existing sites, you know, the Bethlehem example. I don't think one was previously planned a few years ago, and now you have a new line, you And I guess maybe the answer is that you're going to have more output than you originally expected, or is it less costly? I mean, I guess, print that for me, please. Yeah, Mark, this is Billy.

Speaker Change: And then.

Speaker Change: Going back to I think it was Ken's question Todd for you I guess I'm surprised.

Speaker Change: The capex guidance sort of remaining the same and maybe.

Speaker Change: Sort of the leading question, but you talked a lot about maximizing output of existing lines.

Todd: Adding capacity at existing sites and in Bethlehem example, I don't think one was previously plan a few years ago and now you have a new line you're also developing.

Todd: New more efficient technologies. So all of that being said why are you still when you came on Capex and I guess, maybe the answer is is that you're going to have more output than you originally expected or is it less costly I mean, I guess sort of bridge that for me. Please.

Todd: Yeah, Mark this is Billy so first of all Thursday, a little bit of a timing difference here. So the capital spending that we're doing between $25 26, and 27 really has impact on the sales levels that will have in 'twenty six 'twenty seven and 28, so theres a little bit of a timing lag here second.

Todd: Is the technology that we alluded to we are very bullish on it but we have not assumed any benefit from that in our long term plan. So we have the spending there for it but we don't necessarily have the guarantee that we're going to get the higher level of throughput and efficiency, we get if we do it as gravy to us its an improvement in the economics.

Billy Cyr: So first of all, there's a little bit of a timing difference here. So the capital spending that we're doing between 25, 26, and 27 really has an impact on the sales levels that we'll have in 26, 27, and 28. So there's a little bit of a timing lag here.

Billy Cyr: Second is the technology that we alluded to. We are very bullish on it, but we have not assumed any benefit from that in our long-term plan. So we have the spending there for it, but we don't necessarily have the guarantee that we're going to get the higher level of throughput and efficiency that we want. If we do, it's gravy to us.

Todd: And the same could be said of the improved operating effectiveness, we're very bullish on the work that's been done.

Todd: If we do get the benefits that we're talking about then we are going to be we're going to have enough capacity to ramp the growth better or push more capex out but at the same time, we just did not want to make the assumption that those benefits we're gonna come through if they do that.

Billy Cyr: It's an improvement in economics, and the same could be said of the improved operating effectiveness. We're very bullish on the work that's been done, and if we do get the benefits that we're talking about, then we're going to have enough capacity to ramp up the growth better or push more CapEx out. But at the same time, we just did not want to make the assumption that those benefits were going to come through. If they do, that's a net benefit to us. We're just being very cautious about planning capacity going forward. Got it.

Todd: Net benefit to us, we're just being very cautious about planning capacity going forward.

Speaker Change: Got it that's helpful. Thank you.

Speaker Change: Right.

Speaker Change: Our next question is from the line of Jon Andersen with William Blair. Please proceed with your questions.

Jon Andersen: Hey, good morning, everybody. Thanks, a quick question on the sales outlook for 2020 for.

Jon Andersen: We talked about 24% growth largely volume driven.

Mark Stiefel Astrachan: That's helpful. Thank you. Our next question is from the line of Jon Andersen with William Blair. Hey, good morning, everybody.

Jon Andersen: How should we how should we think about the mix a couple of different ways. You you haven't really reference your expectations for.

Jon Andersen: Thanks. Quick question on the sales outlook for 2024, talk about 24% growth, largely volume driven. How should we think about the mix? There are a couple of different ways.

Jon Andersen: Fridge placement growth.

Jon Andersen: Or or store growth at.

Jon Andersen: At least if you did I apologize if I missed it if you could talk a little bit about your expectations there for distribution growth through additional fridge placements and then.

Scott Morris: You haven't really referenced your expectations for www.freshpetinc.com. And from a channel perspective, you know, non-measured grew substantially faster than measured in 23. Is that a, is that a dynamic that you would expect to persist in 2024 as well? And why?

Jon Andersen: From a channel perspective, you know Don measured grew substantially faster than measured in 'twenty three is that.

Is that a dynamic that you would expect to persist in 2024 as well in N y.

Jon Andersen: Yeah.

Scott Morris: Yeah, let me touch on this. I'm sure Billy might add to it, but I look at this a lot. And I think it's interesting. And I'll try and be brief, but just from a perspective standpoint.

Speaker Change: Yeah, Let me, let me touch on this I'm sure Billy might add to it but I I look at this a lot and I think it's interesting and I'll try and be brief but just from a perspective standpoint. So today, let me talk about grocery for a second first so in grocery where 72% ACB and we are by far the number one brand all of the other.

Scott Morris: So today, let me talk about grocery for a second first. So in grocery, we're 72% ACV, and we're by far the number one brand. All the other number one brands are in the 90s from an ACV standpoint, right? And that's typically in four feet.

Speaker Change: Number one brands or in the nineties from an ECB standpoint right.

Speaker Change: And that's typically in four feet so across grocery we have 2000 coolers too.

Scott Morris: So across grocery stores, we have 2,000 coolers. 2,000 double coolers, 2,000 stores with double double. So you start thinking about that as like, there's an upside to ACV, but think about the upside to the double cooler standard. Especially because we are the leading brand and, right, in total dollar sales, the leading brand in grocery, and we only have four feet in most stores. I mean, that's a pretty extraordinary opportunity sitting in front of us. And when we do add that, that gives us the opportunity to add a wider variety of SKUs, and have an increased presence in ILE, so it's pretty amazing. Now, let's switch to mass for a second.

Speaker Change: 2000, double coolers 2000 stores with double coolers.

Speaker Change: So you start thinking about that it's like there is upside in ACB, but thinking about the oh, sorry on the double cooler standpoint, especially because we are the leading brand and total right. In total dollar sales were leading brand in grocery and we only have four feet in most stores.

Speaker Change: I mean, that's pretty extraordinary opportunity sitting in front of us and when we do add that so that gives us opportunity to add a wider variety of skus have increased presence in Ireland.

Speaker Change: So it's pretty amazing now switch to mass for a second in total mass we have 200 double coolers, that's that's across Walmart and target. So the opportunity there is pretty amazing too. So we have a we have around 80% distribution in mass.

Scott Morris: In total, we have 200 double coolers; that's across Walmart and Target. So the opportunity there is pretty amazing, too. So we have around 80% distribution in mass. But we have very few double coolers.

Speaker Change: But we have very few double coolers. So we think that the opportunity is not only on the ACB side, but on the double cooler side that gives us broader visibility and I own. It gives us more tdp's more a variety of products and the other thing is importantly in a lot of these stores more holding power because over the course of a weekend, especially on some of our key skus.

Scott Morris: So we think that the opportunity is not only on the ACV side, but on the double cooler side, that gives us broader visibility in the aisle, it gives us more TDPs, more variety of products. And the other thing is, importantly, in a lot of these stores, more holding power. Because over the course of a weekend, especially on some of our key SKUs, they're constantly out of stock.

Speaker Change: They're constantly out of stock.

Scott Morris: And if we can add a second fridge, it allows us to have more holding power on some of those, you know, add all that with developing online, which we touched on a few minutes ago, Canada being years behind, the UK opportunity, et cetera, it's, you know, it's pretty, we feel terrific about the opportunity from an ACB standpoint. Now, all that being said, the majority of our model is driven by same-store sales. We typically see high teens and up to the low 20s in same-store sales growth with existing stores. So that's the core of it. It's driven by advertising, but there's so much upside from an ACB and growth from a, you talked about doing the, Hey, Jon, just one other thing on the unmeasured versus measured. We are expecting to have unmeasured growth that would add about three points to our growth in 2020; in 2024, I call it at least three points.

Speaker Change: And if we can add a second fridge. It allows us to have more holding power on some of them. So.

Speaker Change: At all of that with developing online, which we touched on a few minutes ago, Canada being years behind the.

Speaker Change: The U K opportunity et cetera.

It's pretty we feel terrific about the opportunity from an ACB in fact, now all that being said.

Speaker Change: The majority of our model is driven by same store sales, we typically see high teens to low 20% same store sales growth.

Speaker Change: With it with like existing stores existing coolers. So that's the core of it is driven by the advertising.

Speaker Change: But there's so much upside from an ACB in our growth from a cooler standpoint.

Speaker Change: Yeah.

Speaker Change: But you talked about.

Speaker Change: John just one other thing on the unmeasured versus measured we are expecting to have unmeasured growth that would add about three points to our growth in 2020, and 2020 to work I call. It at least three points. It was heavier than that in the fourth quarter. As you as you can obviously see where in an awful lot of Costco is at this point we will.

Scott Morris: It was heavier than that in the fourth quarter, as you can obviously see, we're in an awful lot of Costcos at this point. We'll continue to see the benefit of that, particularly in the first half. It won't be quite as strong in the second half of the year as we lapped the performance we had in the second half of 23. Okay, great, that's helpful. I'll leave it there. The next question is from the line of Brian Spillane with Bank of America. Hey, good morning, guys. Good morning.

Speaker Change: To see the benefit of that particularly in the first half it won't be quite as strong in the second half of the year as we lap the performance we had in the second half of 'twenty three.

John: Okay, Great. That's helpful I'll leave it there thanks.

John: The next question is from the line of Bryan Spillane with Bank of America. Please proceed with your question.

Bryan Spillane: Hey, good morning, guys.

Bryan Spillane: Good morning.

Brian Spillane: Hey, so I just thought I wanted to follow up on one quick point. I think you just mentioned it in response to the last question in terms of, you know, just out of stock on key SKUs. Can you just update us now on sort of where you stand on in-stock levels on a regular basis? And I guess what I'm really trying to drive at is are out-of-stocks still impacting sales growth, right? Meaning are you still leaving some on the table because you're out-of-stock at key periods on key SKUs? Yeah, Brian, if there are out-of-stocks at retail, it's a function of the high velocity in that store and the store's inability to keep the fridge stocked at an adequate level.

Bryan Spillane: Hey, So I just wanted to follow up on one quick point I think you just mentioned it in response to the last question in terms of of.

Bryan Spillane: Just out of stocks on key Skus can you just update us now on.

Bryan Spillane: Sort of where you stand on in stock levels on a regular basis and I guess, what I'm really trying to drive at is or out of stocks.

Bryan Spillane: Still impacting sales growth right, meaning are you still leaving some on the table because you're out of stock of key periods, our key skus.

Speaker Change: Yeah, Brian.

If there are out of stocks at retail it's a function of the high velocity in that store in the stores and ability to keep the stock the fridge stocked at an adequate level, our actual shipments to our customers. We've been running in the 90, 899% fill rates very consistently since the beginning of this year actually even in Alaska.

Billy Cyr: Our actual shipments to our customers, we've been running in the 98, 99 percent fill rates very consistently since the beginning of this year, actually even in the last part of the fourth quarter of last year. And so there's not an issue with our shipments or supplying to our customers. It's really a matter of how well the stores execute on replenishing the fridges. Thank you. Our next question is from the line of Bill Chappell with Truist Securities. Thanks. Good morning. Thanks for taking my question. Billy Scott, just kind of asking in a different, different way.

Speaker Change: The back part of the fourth quarter of last year, and so there's not an issue with all our shipments are supplying to the customers. It's really a matter of how well the stores execute on the replenishment of the fridges.

Speaker Change: Thank you.

Speaker Change: Our next question is from the line of Bill Chapell with tour Securities. Please proceed with your question.

William B. Cyr Freshpet Inc: Thanks, Good morning, Thanks for taking my question.

William B. Cyr Freshpet Inc: Uh huh.

William B. Cyr Freshpet Inc: Billy Scott just kind of a <unk>.

William B. Cyr Freshpet Inc: Asking a different different way why is it capex going to be greater over the next year or two I mean, I guess going back to the original IPO.

William B. Cyr Freshpet Inc: Why isn't CapEx going to be greater over the next year or two? I mean, I guess going back to the original IPO, you know, the thought was, hey, we were going to build out Bethlehem, and then we're going to add one in the Midwest, and then maybe we'll add another facility on the West Coast as more and more demand gets there. You just talked about this year being an inflection point, how you're kind of going mainstream, how you could be 40 million households even before we get to the UK and Canada. Why aren't we talking about another facility or something on the West Coast or stepping things up? And I understand things have been more conservative in the existing, but if we're now at an inflection point, why aren't we talking about the future? Bill, it's a good question.

William B. Cyr Freshpet Inc: The thought was hey, we're going to build out.

William B. Cyr Freshpet Inc: And then we're going to add one in the Midwest and then maybe we will add another facility on the West coast.

William B. Cyr Freshpet Inc: As more and more demand gets there and you just talked about this year being an inflection point how are you.

William B. Cyr Freshpet Inc: Kind of going mainstream.

William B. Cyr Freshpet Inc: It could be 40 million households, even before we get to U K and Canada.

Speaker Change: Why are we talking about another facility or something on the west coast or stepping things up and I understand things and you've been more conservative on the existing but if we're now at an inflection point why aren't we talking about the future.

Speaker Change: Bill It's a good question first of all we as we described in our prepared comments.

Billy Cyr: First of all, as we described in the prepared comments, the three things that we're doing to maximize the throughput on our existing footprint. So first, on the existing lines, drive up the OEs. The second part is, on each of our sites, find ways to get more lines in them so we avoid having to construct all the infrastructure. Think of that as wastewater treatment facilities, central utilities, loading docks and whatnot.

William B. Cyr Freshpet Inc: There are three things that we're doing to maximize the throughput on our existing footprint. So first is on the existing lines drive up the Oes. This.

William B. Cyr Freshpet Inc: The second part is on each of our site find ways to get more lines in them. So we avoid having to construct all the infrastructure I think of that as wastewater treatment facilities central utilities loading docks and whatnot and the third part is investing in new technologies, our assessment based on what we know today is that.

Billy Cyr: And the third part is investing in new technologies. Our assessment based on what we know today is that the infrastructure that we've got within the normal technologies we have planned can allow us to meet our growth goals all the way out until almost 2029 at this point, if we maintain our growth at, call it, the 25% rate. The question then could be, why wouldn't you want to go faster?

William B. Cyr Freshpet Inc: That infrastructure that we've got within the normal technologies, we have planned can allow us to meet our growth goals all the way out until almost 2029 at this point, if we maintain our growth at call it the 25% rate.

William B. Cyr Freshpet Inc: And then could be why wouldn't you want to go faster in our comment on that has been we have found we execute very well at around the 25% growth rate level, meaning engineering staffing organizational capability design construct and startup facilities the ability to hire and train people and if we were to push ahead and grow at an even faster rate.

Billy Cyr: And our comment on that has been, we have found we execute very well at around the 25% growth rate level, meaning engineering, staffing, organizational capability, design, construct, and startup facilities, the ability to hire and train people. And if we were to push ahead and grow at an even faster rate, we think we might get ourselves in a little bit of executional trouble. And so we prefer to stay at that rate. And so if we stay at that rate, our existing footprint will meet our needs, we believe, until about 2029, at which point we would need to look at another site if we haven't had some other technological change or any other form of intervention. Got it, and I guess kind of related, does that kind of put international business somewhat on the back burner for the foreseeable future because I know you feel like there's still opportunity in Canada and the UK and Yeah, Bill, I should have put an asterisk behind that.

William B. Cyr Freshpet Inc: We think we might get ourselves in a little bit of execution trouble and so we prefer to stay at that rate and so if we stay at that rate or existing footprint will meet our needs. We believe until about the 2029 at which point, we would need to look at another site. If some if we haven't had another some other technology change or at any other form of intervention.

William B. Cyr Freshpet Inc: Yeah.

Speaker Change: Got it and I guess kind of related does that kind of put.

Speaker Change: National.

Speaker Change: Yeah somewhat on the back burner for the foreseeable future because I know you feel like Theres still opportunity in Canada, and the U K and in other places in Europe, but you're going to be capacity constrained just to meet your existing need in the U S.

So is that kind of.

Speaker Change: The the way I should be looking at it or.

Speaker Change: Would there be some additional capex if you saw the <unk>.

Speaker Change: International starting to tip.

Speaker Change: Yeah, Phil I Should've put an asterisk behind that all of that was very focused on the north American business.

Billy Cyr: All that was very focused on the North American business. We've concluded over the last couple of years that our European business is very robust and it's a very good opportunity, but supplying the business from the U.S. was not the most reliable. It wasn't really a cost issue.

Speaker Change: We've concluded over the last couple of years that our European business is a very robust and it's a very good opportunity, but supplying the business from the U S was not the most reliable it wasn't really a cost issue its more of a reliability issue. So we are are in development on alternatives that would give us a more reliable sources of supply coming out of Europe.

Billy Cyr: It was more of a reliability issue. So we are in the process of developing alternatives that would give us a more reliable source of supply coming out of Europe. But we have been very clear that if we were to do that, it would not be a greenfield operation on our own part. We would find a partner to do that with.

Speaker Change: But we have been very clear that if we were to do that it would not be a greenfield operation on our own part we would find a partner to do that with and so we don't want to get any further than saying that but suffice it to say if we go down that path it would be.

Billy Cyr: And so we don't want to get any further than saying that, but suffice it to say, if we were to go down that path, it would be much, much lighter on the capital than what we are doing to build out greenfield operations in the U.S. Got it. Thanks for the call. Our next question is from the line of Michael Lavery with Piper Sandler. Thank you. Good morning.

Speaker Change: Much much lighter on the capital than what we are doing to build a greenfield operations in the U S.

Speaker Change: Got it thanks for the color.

Speaker Change: No.

Speaker Change: Our next question is from the line of Michael elaborate with Piper Sandler. Please proceed with your question.

Michael Lavery: Morning. You've touched on some of the ways you're looking at better technology for efficiency and adding, you know, stuffing lines anywhere you can in the place that you have. But Can you give us a sense of how much opportunity there could be from longer run times and just having a way to reduce changeovers? Is that something that could also have an impact, and if so, how achievable or how within reach could that be?

Michael Lavery: Thank you and good morning.

Michael Lavery: Good morning.

Michael Lavery: You've touched on some of the ways, you're looking at better technology for efficiency and adding.

Michael Lavery: Stuffing lines anywhere you can and in the place that you have but can.

Michael Lavery: Can you give us a sense of how much opportunity there could be from.

Michael Lavery: Longer run times, and just having a way to reduce changeovers is that something that could also have an impact and if so how how achievable or how how you know within reach could that be.

Billy Cyr: Yeah, Michael, it's a really interesting point because we started up the second bag line in NS in the fourth quarter of last year, and it's now running at a pretty good rate. And we're starting to see some of the benefits that you're describing, because now that we don't have to produce the entire product lineup of bags on a single line, which forces you to do lots and lots of changeovers, that second line is much, much more productive. We're expecting to see a similar benefit when we start up the second rolling line in NS. And we already get that benefit in Pennsylvania because we have six lines in Pennsylvania, and we use them very judiciously. The high-speed lines run long and deep runs, and the smaller lines run lots of changeovers.

Michael Lavery: Yeah.

Michael Lavery: Michael It's a it's a really interesting point because we started up in N S. The second bag line in the fourth quarter of last year and its now running it up are not full time, but its running at a pretty good rate and we're starting to see some of the benefit that youre, describing because now that we don't have to produce the entire pool.

Michael Lavery: [noise] lineup of bags on a single line, which forces you do lots and lots of changeovers that second line is much much more productive we're expecting to see a similar benefit when we start up the second roles line in N S and we already get that benefit in Pennsylvania, because we have six mines in Pennsylvania, and we use them very judiciously the high speed lines.

Michael Lavery: <unk> long and deep runs in the smaller lines run lots of changeovers and so our belief is that as we build out the N. A site and we get enough lines that we can be especially more and more specialized we think we're going to see a very significant benefit from that it is not modeled into our forecast going forward.

Billy Cyr: And so our belief is that as we build out the NS site and we get enough lines that we can be more and more specialized, we think we're going to see a very significant benefit from that. It is not modeled into our forecast going forward, but we are already seeing early indications of that based on the startup of the second bag line in NS. Yeah, Michael, just to follow up on that, today we have 12 lines in operation, six in Bethlehem, three in NS, and three in our Kitchen South facility. Fast forward a couple of years, and we'll have over 20 lines.

Speaker Change: But we are already seeing early indications of that based on the startup of the second bag line in N. S. Yes, Michael just to follow up on that today, we have 12 lines in operation six in Bethlehem, three and <unk>, III and our kitchen South facility.

Michael Lavery: Fast forward a couple of years, we will have over 20 lines. So the billings point you can imagine there'll be certain lines that will be just dedicated to just one or two skus literally and then the efficiency that we will get off of that we believe there's a there's a tremendous amount of upside and we're constantly.

Michael Lavery: So to Billy's point, you can imagine there'll be certain lines that will be dedicated to just one or two SKUs for literacy. And then the efficiency that we will get off of that, we believe there's a tremendous amount of upside. And we're constantly looking at the SKU mix to make sure that we're optimizing the portfolio as well to not put undue burden on our facilities. But we're seeing some early signs of the benefits of having that extra capacity. And we think there's more to come. And that is a benefit that you said you haven't modeled in terms of how you've given any of your targets or as going forward? No, not yet. Not yet.

Michael Lavery: Looking at the SKU mix to make sure they are optimizing.

Michael Lavery: The portfolio as well to not put undue burden on our facilities, but we're seeing some early signs of the benefits of having that extra capacity and.

Michael Lavery: And we think theres more to come.

Michael Lavery: And that is a benefit that you said you havent modeled in.

Michael Lavery: Or how you've given any of your targets or or as just going forward not yet not yet.

Scott Morris: And then just to follow up on the complete nutrition launch, can you just give us a sense of how that's going? And is it playing the role that you had hoped and expected? And, you know, just an update on kind of how that's progressing. Yeah, it's actually done a little bit better than we anticipated. So something we put in place last year to make the portfolio a little bit more accessible, a little bit more affordable to consumers. We wanted to react to what was going on in the market. And again, I want to say that that is margin neutral for us. But we were able to do some work around formulation in order to provide a great product that we're incredibly proud of. In fact, I fed my dog that last night, and he did quite well.

Michael Lavery: And then just to follow up on the complete nutrition launch can you just give us a sense of how that's going and is it playing a role that you had hoped and expected.

Michael Lavery: Just an update on kind of how that's progressing.

Speaker Change: Yeah, it's actually done a little bit better than we anticipated actually.

Speaker Change: So it's something we put in last year to make the portfolio a little bit more accessible more affordable to consumers. We wanted to react to what was going on in the market and again I want I want to say that that is margin neutral for us.

Speaker Change: But we were able to do some work on formulation in order to provide a great product that we're incredibly proud of and in fact I said in my dog Vet last night.

Speaker Change: And and it's done quite well it's didn't exactly what it was designed to do bring in new consumers into the into the franchise, we're seeing a nice.

Scott Morris: It's done exactly what it was designed to do, bring in new consumers into the franchise. We're seeing nice sales on it, and we've also been able to see a really nice amount of new consumers coming in, and we know that they're trying that product. So it's done what we designed it to do, and it's performing well.

Speaker Change: Nice sales on it and we're seeing we've also been able to see really nice amount of new consumers coming in and we know that theyre trying that product. So it's done what we designed it to do and it's performing well.

Scott Morris: To the point where we're even, you know, we'll continue to consider is there anything else around the portfolio we might do on that over time. But actually, to the last question that was asked, we are, as we're adding things, we are decreasing our number of SKUs over the next 12 to 18 months. We're actually going to bring down the end of our tail and clean it up so we can be more efficient in our production. Okay, great. Thanks so much.

Speaker Change: To the point, where we're even we will continue to consider or is there anything else around the portfolio, we might do on that over time, but actually to the last question that was asked.

Speaker Change: We are as we're adding things we are decreasing our number of skus over the kind of the next 12 to 18 months, we're actually going to bring down the end of our tail and clean it up so we can be more efficient in our production.

Speaker Change: Okay, great. Thanks, so much.

Robert Moskow: Thank you. Our next question is from the line of Robert Moskow with TD Cowen.

Speaker Change: Thank you. Our next question is from the line of Robert Moskow with TD Cowen. Please proceed with your questions.

Billy Cyr: Thanks for the question. Two quick things. You mentioned that your buy rate is now at $96 a year, and you're bumping up against your household penetration target. You're at 19, and the target is 20.

Robert Moskow: Hi, Thanks for the question.

Robert Moskow: Two quick things.

You mentioned that your buy rate is now at $96, a year and you're bumping up against your household penetration target.

Robert Moskow: We're at 19 and the targets 'twenty.

Billy Cyr: And I think you've answered this in different ways, but doesn't that really mean that the buying rate this year will have to increase pretty substantially, assuming, if 20 is the number, is this the year where the buying rate really needs to increase? And do you have a number internally as to where it needs to go? And then a quick follow-up. Yeah, we've always said, Rob, that sort of the long-term algorithm here is that you have penetration rate growth rates in the 20, 21, 22 range, and then the buy rate be up in the call it 5, 6% range, and that collectively gets you the growth rate. So you're right, we do need to see that grow. Going back to Scott's comments earlier, a big part of that is from the increase in the number of HIPOs because they obviously pulled the whole portfolio up.

Speaker Change: You've answered this in different ways, but.

Speaker Change: Doesn't that really mean that the buying rate. This year, we will have to increase pretty substantially assuming if 20 is the number.

Speaker Change: Is this the year, where buying rate really needs to increase and do you have like a number internally as to where it needs to go and then a quick follow up.

Speaker Change: Yeah.

Speaker Change: We've always said, Rob that sort of the long term algorithm here is that you have penetration.

Speaker Change: Rates in the 2021 'twenty two.

Speaker Change: And then by rate be up in the call. It five 6% range that comfortably get to the growth rate. So you're right, we do need to see that grow.

Speaker Change: Yeah.

Speaker Change: <unk> comments earlier, a big part of that is from the increase in number of hippos, because obviously pulled the whole portfolio up there obviously, a smaller share of the total business, but they do pull the portfolio and so as we increase the number of hippos. The buy rate will go up in addition to the consumers who are in the franchise, but youre right, we do need to see the buy rate growing into call. It mid single.

Billy Cyr: They're obviously a smaller share of the total business, but they do pull the portfolio up. And so, as we increase the number of HIPOs, the buy rate will go up in addition to the consumers who are in the franchise. But you're right, we do need to see the buy rate growing in the call it mid-single-digit. Okay. And then the follow-up is, I didn't hear any mention of repeat data today. I'm sure it looks great, but this is a year where there were a lot of trials.

Speaker Change: Digit range.

Okay and then the follow up is I didn't hear any mention of repeat data today I'm sure it looks great but.

Speaker Change: This is a year, where there was a lot of trial I E. Your advertising a lot.

Billy Cyr: You were advertising a lot. One of your competitors was advertising a lot. What data do you look at internally to make sure that the people who are trying this for the first time are repeating it at the rate that you would hope that they would? Yeah.

Speaker Change: Are your competitors was advertising a lot.

Speaker Change: What data do you look at internally to make sure that the people who are trying this for the first time.

Speaker Change: Our repeating it at the rate that you would hope that they would.

Billy Cyr: Rob, part of the reason we haven't talked a lot about it lately is that there was a data source change on that, and it's kind of confusing to look at the two different data sources. Suffice it to say, in either data source, the repeat rates are continuing to be strong and growing. It's just there's a different metric, and we just need to get ourselves comfortable that the new metric that's available to us is consistent and predictable. But no matter which source we're looking at, we're seeing that the repeat rates are in line with where they've been in the past, maybe a smidge higher. And if they weren't strong, you wouldn't see the HIPPOs growing like they are.

Speaker Change: Yeah, Rob part of the reason that we haven't talked a lot about lately was there has been a data source change on that and it's kind of confusing to look at the two different data sources suffice it to say in either data source. The repeat rates are continuing to be strong and growing its just theres a different metric and we just need to get ourselves comfortable that the.

Speaker Change: New metric that's available to us as is consistent and predictable.

Speaker Change: But we are in no matter, which source. We're looking at we're seeing that the fee rates are in line with where they've been in the past maybe a smidge higher.

Speaker Change: And if it was if they werent strong you would definitely see that you wouldn't see the Hippo is growing like they are.

Kunil Gajarwa: Thanks, Ted. Thank you. Thank you. Our next question is from the line of Kunil Gajarwa with Jeffreys. Hey guys, good morning. Lots of conversation about managing growth to that 25% number. You could maybe just talk about how you do that practically.

Speaker Change: Makes sense. Thank you.

Speaker Change: Okay.

Speaker Change: Thank you. Our next question is from the line of Camille Kujawa with Jefferies. Please proceed with your question.

Camille Kujawa: Hey, guys good morning.

Camille Kujawa: Lots of conversation on managing growth to that 25% number can you maybe just talk about how you do that practically obviously one thing that I've been asked a few times is around media spend.

Billy Cyr: Obviously, one thing that has been asked a few times is around media spend, but how do you do that in practical terms, given where it seems like demand seems like demand is, is it how are you dealing with your retailers, what the commitments are, just generally sort of the nuts and bolts of pulling that managing that, By far the single biggest driver of our growth rate and the thing that we have to do to manage the growth rate is to control the media spend. And so we're looking out across the year, but literally looking at it on a month-by-month basis and quarter-by-quarter basis, because we know that when we spend money like we did in the fourth quarter, while we saw some benefit of that in the fourth quarter, particularly on household penetration growth, the real impact of that is felt in the first quarter this year, because there's sort of a acquire a consumer and let the consumer start down the purchase journey that they go through.

Camille Kujawa: How do you do that in practical terms, given where it seems like demand. It seems like demand is is it how are you dealing with your retailers what the commitments are.

Camille Kujawa: Just generally sort of nuts and bolts of pulling that managing that vigor.

Camille Kujawa: By far the single biggest driver of our growth rate and the thing that we have to do to manage the growth rate is to control the media spend and so we're looking out across the year, but literally looking at it on a month by month basis than quarter by quarter basis, because we know that when we spend money like we did in the fourth quarter, while we saw some benefit.

Camille Kujawa: In the fourth quarter, particularly on household penetration growth the real impact of that is felt in the first quarter of this year, because they are sort of acquire a consumer and the consumer start down the purchase journey that they go through so as we think about trying to manage our capacity for example, before our roles line in S gets up the new roles line in phase II.

Billy Cyr: So if we think about trying to manage our capacity, for example, before our rolls line in NS gets up, the new rolls line in phase two, we have to really manage the media spending that we're going to have in Q1, Q2, and Q3 in order to make sure that we don't get ourselves in a position to do short shipping. And we literally look at it on a monthly basis and on a quarterly basis. That's really the biggest driver.

Camille Kujawa: We have to really manage the media spending that we're going to have in Q1, two and three in order to make sure that we don't get ourselves in a position to do short shipping and we literally look at it on a on a monthly basis and on a quarterly basis. That's really the biggest driver we don't really regulate what we do with our customers.

Billy Cyr: We don't really regulate what we do with our customers because those plans take a long time to put in place on both their part and ours. And so what we'd really rather do is manage the demand with our media investors. Okay.

Camille Kujawa: Because those plans take a long time to put in place on both their part in our part and so we'd really rather do is manage the demand with our media investments.

Billy Cyr: Thank you. Thank you. Our next question is from the line of Tom Palmer with Citi. Good morning.

Speaker Change: Okay got it thank you.

Speaker Change: Thank you. Our next question is from the line of Tom Palmer with Citi. Please proceed with your question.

Tom Palmer: Thanks for the question. I wanted to ask about the logistics side, because it's been running lower than your long-term outlook assumes. I know last quarter you mentioned favorability, but as we roll into 2024, I guess how do we think about this progressing, and is 2024 kind of embedded in guidance more of a reversion to kind of the long-term target? No, well, you know, year over year, we will have a decline in, you know, the cost structure of our logistics. So, you know, we're benefiting, obviously, from less miles. Opening that second DC in Texas is paying huge benefits.

Tom Palmer: Good morning, Thanks for the question.

Tom Palmer: Wanted to ask on the logistics side, it's been running lower than your long term outlook assumes I know last quarter, you mentioned favorability, but as we roll into 2024.

Tom Palmer: I guess, how do we think about this progressing.

Tom Palmer: And is 2024 kind of embedded in guidance more of a reversion to kind of long term target.

Tom Palmer: No well year over year, we will have a decline in the cost structure of our logistics. So we're benefiting obviously from less miles opening that second DC and in Texas is paying huge benefits are Billy mentioned, our fill rates our trucks are full.

Todd: Billy mentioned our fill rates; our trucks are full, which obviously makes us more efficient as well. I mean, everyone's benefiting, obviously, from lower diesel and lower lane rates, and that's always a wild card as to what that looks like in the future. But with steady, you know, steady market rates, we think there's still some favorability to go. So, you know, will there be some inflationary impacts down the road? I'm sure those rates will move around a little bit. But at this point, long term, the seven and a half percent, we're very, very confident that we can do better than that going forward. Okay, thank you. I just wanted to follow up on Boeing and growth. And so, I guess, maybe asking in a bit of a different way, right?

Tom Palmer: <unk>, which obviously makes us more efficient as well.

Tom Palmer: Everyone's benefiting obviously from lower diesel and lower lane rates and that's always a wildcard of what that looks like in the future, but with a steady steady market rates, we think theres still some favorability to go. So you know will there be some inflationary impacts down the road I'm sure I'm sure those rates will move around a little bit but.

Tom Palmer: At this point long term the seven 5%, we're very very confident that we can do better than that going forward.

Speaker Change: Okay. Thank you.

Speaker Change: And then just wanted to follow up on volume growth.

Speaker Change: Maybe.

You asked me a bit of a different way right you are ramping capacity.

Billy Cyr: You are ramping up capacities as the year progresses, so I would assume the absolute level of sales increases sequentially over the course of the year. But is there a point, just given capacity rolling on, that we might see a bigger step up, just from a sequential standpoint, in one quarter versus another? But I mean capacity, so we've guided our capacity to match up with what the normal sales patterns are, and the, if I understand the question correctly, the real focus here is that we're managing our roles' capacity so that our business grows quite evenly across the whole portfolio. And so as you think about the cadence for the year, I think the cadence is a very normal cadence. It's just the one difference this year is that we're going to start hot; we're going to start very hot in the first quarter because of the media we spent in the fourth quarter, and we have to cool that down a little bit as the year unfolds to live within the capacity limit we have on that role line. I think that's the question you're asking, sort of the cadence.

Speaker Change: So I would assume the absolute level of sales increases sequentially over the course of the year is there a point just given capacity rolling on that we might see a bigger step up just from a sequential standpoint in one quarter versus another.

Speaker Change: And that's capacity.

Speaker Change: I mean, the capacity so we've guided our capacity to match up with what the normal sales patterns are and if I understand the question correctly. The real focus here is that we're managing our rolls capacity our business grows quite evenly across the whole portfolio.

And so and as you think about the cadence for the year I think the cadence is a very normal cadence. It's just the one difference. This year is with that we're going to start hot but we're gonna start very hot in the first quarter because of the media. We spent in the fourth quarter and we have to pull that down a little bit as the year unfolds to live within the <unk>.

Speaker Change: Capacity limit we have one that rolls line I think that's the question you're asking sort of the cadence is that where you're going.

Billy Cyr: Is that where you're going? Yes, yes. Thank you. That's helpful.

Speaker Change: Yes, yes. Thank you that's helpful.

Connor Rattigan: Yes, sequentially, every quarter, the dollar amount, the way we see it right now, will be higher. The growth rates will differ. We believe right now, just based on capacity, the growth rates will slow as the quarters go on. But sequentially, the absolute dollars will increase. All right, thank you. The next question is from the line of Connor Rattigan with Consumer Edge Research. Hey guys, good morning. Thanks for the questions.

Speaker Change: Yes sequentially every quarter the dollar amount the way we see it right now it will be higher the growth rates will defer and do we believe right now just based on capacity or the growth rates will slow.

The quarters go on but sequentially the actual absolute dollars will increase.

Speaker Change: Okay.

Speaker Change: Okay. Thank you.

Speaker Change: Okay.

Speaker Change: The next question is from the line of Conor Ryan with consumer Edge Research. Please proceed with your questions.

Conor Ryan: Hey, guys. Good morning, Thanks for the question.

Billy Cyr: Yep. So you mentioned wanting to increase household penetration, convert users to HIPPOs, and then convert toppers to main meal users. So I guess just stepping back and thinking about consumer LTV, could you maybe help us just understand where you see the greatest opportunity? So I know you'd love to say all of the above, but I guess if you were forced to pick or rank where you see the greatest opportunity, what would you rather see?

Conor Ryan: Yep.

Conor Ryan: So you mentioned wanting to increase household penetration convert users to hit those and then convert toppers to main male users. So I guess, just stepping back and thinking about consumer LTV could you maybe help us just understand where you see the greatest opportunity. So I know you'd love to say all of the above but I guess, if you were forced to pick or rank.

Conor Ryan: When you see the greatest opportunity.

Billy Cyr: Would it be adding a commercial user, converting a user to a HIPPO, or converting a topper to a main meal user? Yeah, Connor, so the way I think about this is that when you're in the early innings of developing a category, as we believe we still are, then you're really going to be focused on adding households, adding as many households as you can, and that's really the focus of the bulk of our media. As you get further into it, you will turn and focus your time and attention on increasing the buying rate within those households, and that is naturally happening based on the product assortments that we've got, the presence of second fridges and whatnot, but the biggest driver for us right now is to get as many households into the fresh business, and then over time, we'll migrate that more toward the buying rate. Today, at the early stages of this category's development, we believe household penetration still is the number one most important driver. I got it.

Conor Ryan: Would you rather see would it be a adding an incremental user converting a user to a hippo or converting a topic to a millennial user.

Conor Ryan: Yeah, Conor so the way I think about this is that when you are in the early innings of developing a category as we believe we still are then you're really is going to be focused on adding households, as may adding as many households, as you can and that's really the focus of the bulk of our media.

Conor Ryan: As you get further into it you will turn and focus your time and attention on increasing the buying rate within those households.

Conor Ryan: And that is naturally happening based on the product Assortments that we've got the presence of second fridges and whatnot.

Conor Ryan: But the biggest driver for US right now is to get as many households into the into the fresh business and then over time will migrate more towards buying rate today at the early stages of this category development. We believe household penetration is still is the number one most important driver.

Billy Cyr: Makes sense. And then I wanted to touch on the commentary on digital orders as well. So, Billy, I think you noted and expected about $100 million in 2024 sales online. So, I'm not sure if I missed it, but did you quantify the current size of your digital sales? And also, too, I'm just wondering, I guess, right, is the expectation that the continued growth in digital orders is just representative of adding incremental consumers who are, I guess, digital-only consumers, or is there some cannibalization or, I guess, migration from brick-and-mortar to online? Thanks.

Speaker Change: Got it makes sense and then I will.

Speaker Change: Want to touch on the commentary on digital orders as well. So I think you've noted and expected about $100 million in 2024 sales online. So I'm not sure if I missed it but did you quantify the current size of your of your digital sales and also to I'm, just wondering I guess right.

Speaker Change: Patients that the continued growth in digital orders is just representative of adding incremental consumers, who are I guess digital only consumers or is there some cannibalization or I guess migration from brick and mortar to online. Thanks.

Billy Cyr: So, I think the main way to think about that is that we want to be as available as possible to whatever consumers want to buy our products. And when you make it easier, and you make it kind of less friction, you're going to increase overall penetration, but you're also going to increase everyday usage. So as we add basically more and more sales around digital, what we're seeing is that we're just making it easy to shop how consumers shop. And we're kind of following what we're, the biggest piece of that is definitely when people are ordering fresh and fresh frozen food from their local stores. When they're making those orders and buying overall for their grocery trip, we're getting included in that.

Speaker Change: So I think the main the main way to think about that is that.

Speaker Change: We want to be as available to how as available as possible to however, consumers want to want to buy our products and when you make it easier and you make it kind of less friction.

Youre going to increase overall penetration, but you're also going to increase everyday usage. So as we add.

Speaker Change: Basically more and more sales around digital what we're seeing is that we're just making it easy to shop, how consumers are shopping and we're kind of following what were.

The biggest piece of that is definitely.

Speaker Change: When people are ordering with a fresh and fresh frozen food from their local stores.

Speaker Change: When they were making those orders and buying overall like for their <unk>.

Speaker Change: Grocery trip, we're getting included in that and as that opens up and more consumers are shopping that way, that's really the opportunity for us so.

Billy Cyr: And as that opens up and more consumers are shopping that way, that's really the opportunity for us. So it basically makes it a little bit more convenient for consumers to basically shop around for us. So I think it's both on the, this goes back to we're helping the mainstream, and it also turns it into more of a main meal. I think the digital piece is a real opportunity. www.freshpetinc.com, Thank you.

Speaker Change: So it basically makes it a little bit more convenient.

Speaker Change: For consumers to basically shop around for us so.

Speaker Change: It's both on the it just goes back to we're helping to mainstream and it also turns it into more of a main meal I think digital pieces of real opportunity.

Jim Salaro: Our next question is from the line of Jim Salaro with Stevens. Please proceed with your question. Hi, good morning, guys.

Speaker Change: Thank you.

Speaker Change: Our next question is from the line of Jim Solera with Stephens. Please proceed with your question.

Jim Solera: Hi, Good morning, guys. Thanks for fitting us in.

Scott Morris: Thanks for putting us in. Maybe we could start off a combo question for Billy and Scott? In the presentation you guys highlighted, I think 22% of stores have second or third fridges. Do you have a sense for how big that percentage could get to as you continue to ramp up the second and third fridge offerings? And then I think, Billy, in your script, you mentioned the skew count was up to around 18 from 16 a year ago. Could you give us some detail on what those two incremental skews typically are and maybe what you think that skew number could be again, as you continue to increase the second and third fridges? You know, it's... It's every year.

Jim Solera: Maybe to start off.

Jim Solera: Combo question for billions Scott in the presentation you guys highlighted I think it's 22% of stores have second or third fridges.

Jim Solera: You have a sense for how big that percentage could get to as you continue to ramp the second and third fridge offerings and then I think bill in your script, you mentioned SKU count was up to around 18 from 16 year ago could you give us some detail on what those two incremental skus typically are and maybe what you think.

Jim Solera: That SKU number could be again as you continue to increase the second and third fridges.

Jim Solera: Yeah.

Jim Solera: <unk>.

Jim Solera: It every year.

Scott Morris: When we look at this, we feel like there is a greater and greater opportunity to have second fridges, and, quite honestly, most... So we were talking earlier, you know, we're an average of 64% ACV or 72% in grocery. I'll pick on grocery for a second. 72% in grocery, you know, ACV. And I think I mentioned that we have 2,000 double fridges and groceries. There's no reason why we couldn't be into the 80s.

Jim Solera: When we look at this we feel like there is a greater and greater opportunity to have second fridges and quite honestly most stores.

Jim Solera: So we were talking earlier.

Jim Solera: There were an average of 64% ACB or 72% an uptick on grocery for a second and 72% in grocery.

Jim Solera: ACB.

Jim Solera: And I think I mentioned that we have 2000 double fridges in grocery you know.

Jim Solera: There's there's no reason why we couldnt be into the Eighty's and grocery 85, maybe 90%.

Scott Morris: In grocery, 85, maybe 90% ACV in total. And over some period of time, there is no reason why we couldn't have second fridges in most stores. Because the way we think about this is, this is a new category or a new sector. And if you look at dry or wet, it's basically in every single store, and then it has a fair amount of space. I mean, typically, even a tight wet section is 8 or 12 feet long, so why wouldn't there be that in fresh water over time?

<unk> in total and over some period of time. There is no reason why we couldnt have second fridges in most stores because you look at the way. We think about this is this is a new category or a new segment and every if you look at dry dry or wet it's basically in every single store and then did it has a fair amount.

Jim Solera: A space I mean, you're typically even a tight with section eight or 12 feet.

Jim Solera: So why wouldn't there be that in fresh over time, so that's kind of like our longer term vision exactly how it plays out and when I mean, we have lots of projections and lots of ideas around it and and we but we do believe that we will get there over time, but I want to go back to that's what create opportunity the single biggest opportunity that we have.

Scott Morris: So that's kind of like our longer-term vision, exactly how it plays out and when. I mean, we have lots of projections and lots of ideas around it, and we do believe that we will get there over time. But I want to go back to saying that it's a great opportunity.

Scott Morris: The single biggest opportunity that we have is using our media to educate people, create awareness, drive penetration, and drive more consumers in. And I think I mentioned a number earlier, but same-store sales growth is always in the mid- to high-tier. And that's tremendous, and it definitely can touch into the 20s. So, that's really where the core of our growth comes from. And when you add those second coolers, it creates that visibility, it creates additional holding power, and it does create additional SKUs.

Jim Solera: <unk> is using our media to educate people, creating awareness driving penetration driving more consumers in and I think Ive mentioned, a number earlier, but same store sales growth is always in the mid to high teens.

Jim Solera: And that's tremendous and it can definitely can touch into the twenty's.

Jim Solera: So that's really where the core of our growth comes from.

Jim Solera: And when you add a second coolers it creates that visibility it creates additional holding power and it does create additional skus, we don't want to over SKU, we want to make sure. We have the right skus to basically have a I guess a portfolio of products that consumers really appreciate.

Scott Morris: We don't want to over-SKU. We want to make sure we have the right SKUs to basically, you know, have a portfolio of products that consumers really appreciate. So we don't want to over-skew.

Scott Morris: So I would see, even in the double fridges, I would see no more than kind of 25 skews in the average store to make sure we have enough holding power. Okay, great. And then, Todd, if I could sneak in a question for you.

Jim Solera: I Wanna over SKU, So we I would see even in the double fridges I would see no more than kind of 25 skus in the average store.

Jim Solera: To make sure we have enough holding power.

Speaker Change: Okay, Great and then Todd if I could sneak in a question for you.

Scott Morris: On the margin front, you guys have made a ton of progress, you know, done a really good job this year. But if we think about 2027's kind of 18%, even a margin target compared to the implied margin for 2024 at the midpoint, I think is 11. Still a lot of wood to chop between those two numbers.

Speaker Change: On the margin front you guys have made a ton of progress you know did a really good job. This year, but if we think about 2020 sevens kind of 18% EBITDA margin target compared to the implied margin for 2024 at the midpoint I think is 11 still a lot of wood to chop between those two numbers as we think about the annual cadence.

Todd: As we think about the annual cadence of getting to that 18% goal, when should we expect to see margins inflect more significantly compared to where we are now? Yeah, I mean, look. If you just do the math, you know, we need another 10 points. So about 5 in gross margin and 5 below, based on the guidance we've given, we'll get at least 100 up top and then, you know, 100 or so below the line as well. So we're going to pick up a couple hundred basis points and get in double digits for the first time, which is exciting for us. Don't, look, I'm not smart enough to be honest enough to know exactly what that cadence is going to be.

Speaker Change: Of getting to that 18% goal when should we expect to see margins inflect more significantly compared to where we are now.

Speaker Change: Yeah, I mean look like.

Speaker Change: If you just do the math.

Speaker Change: We need another 10 points so about five in gross margin and five below the base based on the guidance, we've given we'll get at least 100 off top.

Speaker Change: And then 100 or so below the line as well so we're going to pick up a couple hundred basis points and get in double digits.

Speaker Change: For the first time, which which is exciting for us.

Don't look I'm, not smart enough to be honest to know exactly what that cadence.

Todd: If we pick up 200 basis points or so over the next several years, we'll get there. And as I've just kind of said, you know, I've... If we're at 18% or at 45% in 2027 from a gross margin or an EBITDA margin line, I'll actually be a little bit disappointed because I do think there's upside, not that we're promising more than that at this point, but I think there's potential upside to those numbers. But if we can pick up a couple hundred basis points or, you know, two to 250 every year of EBITDA margin, Great. Thanks, guys. I'll hop back in the queue.

Speaker Change: Going to be we pick up 200 basis points or so over the next several years, we'll get there.

Speaker Change: And as I've just said.

Speaker Change: I've said before if we're at 18% or 45% in 2027 from a gross margin or an EBITDA margin line arguably be a little bit disappointed because I do think there's upside and that's what we're promising more than that at this point, but.

Speaker Change: I think there is potential upside to those numbers, but if we can pick up a couple of hundred basis points.

Speaker Change: You know two to $2 50 every year of <unk>.

Speaker Change: EBITDA margin, we hit that target and there's the potential if we have.

Speaker Change: Some of the efficiency work that we're doing pace pays off.

Speaker Change: We can do a little bit better.

Speaker Change: Great. Thanks, guys I'll hop back in the queue.

Billy Cyr: Our next questions come from the line of Jon Lawrence with Benchmark Company. Please proceed with your questions. Great. Good morning, guys. Thanks for squeezing me in.

Speaker Change: Our next questions come from the line of John Lawrence with Benchmark Company. Let's proceed with your question.

John Lawrence: Great. Good morning, guys. Thanks for squeezing me in.

Jon Andersen: Just quickly, we talk about retailer growth at mass and grocery. Can you speak to, at this point, as you continue to market to those retail partners, what continues to be their objection? I mean, obviously, you proved the model out.

John Lawrence: Just just quickly we talk about retailer growth in mass and grocery.

John Lawrence: Can you speak to at this point as you continue to market to those retail partners.

John Lawrence: What continues to be their objection I mean, obviously you prove the model out it works a lot of same store sales what would be would be old facilities when Walmart.

Scott Morris: It works by the same store sales. What would be the old facilities? When Walmart expands and builds new units, are you part of that? Or what determines whether they go or not go?

John Lawrence: Expands and build new units are you part of that or what determines whether they go or not go.

Scott Morris: Jon, yeah, thank you for the question on that too. You know, it's interesting because I talk to the sales team, I meet with retailers very often, I talk to the sales team a lot, and when you're rejected for a long, long period of time, in 2006, 2008, 2010, and then the amount of love we get today, it all makes it worthwhile. And I'm being serious, and I would say the partnerships that we're building, how we're constructing this segment, how we're working with our retailers in order to make sure that this is an important category for them, but also a productive category for them, I think it's really, really appreciated, and I actually get that feedback pretty often. So I would say that there are very few objections, and I think it's just everyone has So when do they set, you know, when do they do a major category reset? We're not like pulling an item in or a couple of items in and out, you know, that's easy; you just slide it off the shelf. There's a lot involved in putting a fridge in, and you know, in one store, it's not that complicated.

John Lawrence: John Thank you for the question on that too.

John Lawrence: It's interesting because I talked to the sales team I meet with retailers very often I talk to the sales team a lot and when.

Speaker Change: When you are rejected for a long long period of time in 2006, 2008, 2010, and then the amount of love we get today. It all makes it worthwhile.

Speaker Change: And and I'm being serious and.

Speaker Change: I would say the partnerships that we're building how we're constructing this segment, how we're working with our retailers in order to make sure that this is a.

Speaker Change: Important category for them, but also a productive category for them I think is really really appreciate it and I actually get that feedback pretty often.

Speaker Change: So I would say that Theres very few objections and I think it's just everyone has a different pace, they're going at it so when do they set when do they do a major category reset we're not like pulling in item in or a couple of items in and out that's easy you just write it off the shelf, there's a lot involved in putting a fridge in and.

Speaker Change: And one store, it's not that complicated in hundreds or thousands of stores and it gets really complicated. So they typically want to do it when they're doing major category changes resets.

Scott Morris: In hundreds or thousands of stores, it gets really complicated, so they typically want to do it when they're doing major category changes or resets because if we're going in, other things have to go, and they just want to do those things gradually. There are times when, you know, you've seen it, where they're literally moving around a whole store, and what they don't want to do is drop a fridge in, drop an electrical line in, and then six months or a year later, go ahead and move around the whole store and have to do the same thing. So I think it's just the, you know, it's just a nice steady stream and a good ca We really don't hear objections for the most part. I mean, we've heard them for a very long time, but there are very, very few today.

Speaker Change: Because if we're going in other things have to go and they just wanted to do those things gradually there are times when you've seen it where they're literally moving around a whole store and what they don't want to do is drop a fridge and drop in electrical line in and then.

Speaker Change: For a year later go ahead move around the store and have to do the same thing again.

Speaker Change: I think it's just the it's just a nice steady stream and a good cadence that we're continuing to rollout with retailers.

Speaker Change: We really don't hear we really don't hear objections for the most part I mean, we heard them for a very long time, but there's very very few today.

Jon Andersen: Great. Thanks, guys. Good luck.

Speaker Change: Great. Thanks, guys. Good luck.

Mark Stiefel Astrachan: Thank you. Our final question is from the line of Mark Torrenti with Wells Fargo. Hey, good morning.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: Our final question is from the line of Marc <unk> with Wells Fargo. Please proceed with your questions.

Scott Morris: Thank you for the question. Just real quick, building on the media discussion, maybe talk about some of the media efficiencies and effectiveness, what's working best here, and the strategy plan throughout the year. And then you saw good operating cash flow progress in 23. How are you thinking about this growth through 24 leverage levels and progress towards the longer term free cash flow targets? Thanks.

Marc: Hey, good morning. Thank you for the question just real quick building on the Media's discussion maybe talk about some of the media efficiencies and effectiveness whats working best here.

Marc: <unk> strategy plan throughout the year and then you saw good operating cash flow progress in.

Marc: In 2003, how are you thinking about this growth through 'twenty, four leverage levels and progress towards the longer term free cash flow targets. Thanks.

Scott Morris: So, you know, it's really, it is interesting, and we've cycled through lots and lots of different media that we do. And the thing that we consistently find to be the most effective and productive is a lot of, I will call it, mass media, but we obviously try and do a lot of targeting to different consumer groups. So, literally, probably about 18 to 24 months ago, we started expanding our consumer target because into kind of a male demographic and also a younger male demographic. And what you probably started to see is you start to see us show up on football, for example. We had not done it in the past because not only was it expensive, but B, it was not the original target we were focused on, which was, kind of, women for the most part.

Marc: So.

Speaker Change: It's really it is interesting.

Speaker Change: We've cycled through.

Speaker Change: Lots and lots of different media that we do and the thing that we consistently find to be the most effective and productive.

Speaker Change: Is it a lot of I will call it mass media, but we obviously do a trying to a lot of targeting to different consumer groups. So.

Speaker Change: Literally probably about 18 to 24 months ago, we started expanding our consumer target because in.

Speaker Change: <unk> kind of a male demographic and also a younger demographic and what you're starting to see probably as you start to see a show up on football for example, we had not done it in the past because it not only a was it expensive or be it was not the original target. We were focused on which was kind of was women for the most part now again women watchful obviously, but.

Scott Morris: Now again, women watch football, obviously, but we continue to expand, and what we did when we expanded into football, we were able to see really good productivity, and we were reaching new types of consumers and different consumer groups. I got a text message the other day from someone that said, "hey, I saw one of your commercials." We were on, we were on a golf game, some, some, some type of golf game. And they said, oh, I hadn't seen this commercial. The commercial has been running for eight months, and they hadn't seen it, but it was new to them, which means that we're continually hitting some of these new people.

Speaker Change: We continue to expand and what we did when we expanded into football we're able to see really good productivity.

Speaker Change: And we are reaching new types of consumers and different consumer groups.

Speaker Change: Got it literally I got a.

Speaker Change: Text message of the day from some of them and said Hey, I saw one of your commercials, we were on we run a golf.

Speaker Change: Some type of golf.

Speaker Change: And they said Oh I haven't seen this commercial the commercial has been running for eight months.

Speaker Change: <unk> seen it but it was new to that which means that we're continually hitting some of these new people. So we use a lot of mass TV been our number one most productive piece, we have an incredible partnership with.

Scott Morris: So, we use a lot of mass TV. It's been our number one most productive piece. We have an incredible partnership internally, but also an external team that does our media buying, and we hold a very, very high standard. And I would say the level of analytics that we do behind it is second to none in CPG, quite honestly. We do also work with OTT and connected TV.

Speaker Change: Internally, but also an external team that does our media buying and we hold a very very high standard and I would say the level of analytics that we do behind it is second to no one in CPG quite honestly.

Speaker Change: We do also work with OTT and connected TV. We also do a lot in digital we're expanding more and more we do definitely social we're expanding into social and youre going to see us do more and more P. R. Over the next kind of 12 to 18 months too. So we are definitely pushing into those areas and our goal is to be.

Scott Morris: We also do a lot in digital. We're expanding more and more. We definitely do social.

Scott Morris: We're expanding into social, and you're going to see us do more and more PR over the next kind of 12 to 18 months, too. So, we're definitely pushing into those areas, and our goal is to be anywhere between 6 to 12 months ahead in what we're going to be executing. And what I mean by that is, literally, at the end of this year, I know the types of media and how we're going to test it, the messages we're going to be delivering. And we want to test it before we get there so we know we're able to deliver on the productivity that the organization needs to continue to grow.

Speaker Change: Anywhere between six to 12 months forward and what we're gonna be executing and what I mean by that is literally at the end of this year I know the types of media and how we're going to test it the messages, we're going to be delivering.

Speaker Change: And we want to test it before we get there. So we know we're being we're able to deliver on our productivity that the organization needs to continue to grow so we try and be like really really kind of thoughtful and very very professional and planned out around our around what we're doing from a media and media investment and spending standpoint.

Scott Morris: So we try and be like really, really kind of thoughtful and very, very professional and planned out around what we're doing from a media and media investment and spending perspective. Yeah, from a cash flow perspective, look, we are beyond thrilled about how strong our operating cash flow was in 2023, obviously $76 million. Obviously, some of that was the EBITDA fee, but also getting the working capital back in line. We had some issues in 2022 when we went live with the ERP, so we had a little bit higher working capital than we would normally have, and we got that benefit back in 23. That was kind of a one-time gain.

Speaker Change: Yeah from a cash flow perspective look we were we are beyond thrilled about how strong operating cash flow was 22023 up to $76 million.

Speaker Change: Obviously some of that was the EBITDA beat but also working capital back in line. We had some issues in 2022, when we went live with the ERP, we had a little bit higher working capital than we would normally have and we got that benefit back in 2003 that was kind of a onetime gain there I think from an operating cash flow going into this year probably around.

Todd: I think from an operating cash flow going into this year, probably around $90 million because, again, we're not going to have that benefit from working capital. And as I said, we're going to spend about $210 million on CapEx. That implies the cash balance of almost $300 million we have at the end of the year will be around $180 million-ish, which is where we'll end cash for the year. So it puts us in a great position for 2025 and beyond.

Speaker Change: $90 million, because again, we're not going to have that benefit from working capital and as I said, we're going to spend about $210 million in capex.

Speaker Change: Slide the cash balance of almost $300 million that we have ended the year will be around 180 ish is where we'll end.

Speaker Change: Cash for the year, so it puts us in a great position for 25 and beyond.

Billy Cyr: Thank you. At this time, we've reached the end of the question and answer session, and I'll now turn the call over to Billy Cyr for closing remarks. Great, everyone. Thank you very much for your interest. I'll leave you with this thought. This is from Helen Thompson. A well-trained dog will make no attempt to share your lunch. It will just make you feel so guilty that you cannot enjoy it. To which I would add, feed your dog Freshpet, and all your guilt will disappear as fast as the Freshpet.

Thank you.

Speaker Change: At this time, we've reached the end of the question and answer session now I'll turn the call over to Billy Cyr for closing remarks.

Billy Cyr: Great everyone. Thank you very much for your interest I'll leave you with this thought is from Helen Thompson for well trained dog will make no attempt to share your lunch, you'll just make you feel so guilty that you cannot enjoy it to which I would add feed your dog fresh pack and all your guilt will disappear as fast as the fresh pad.

Operator: Thank you very much. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Speaker Change: Thank you very much.

Speaker Change: This concludes today's conference you may disconnect your lines at this time and thank you for your participation and have a wonderful day.

Speaker Change: Yeah.