Q3 2025 Freshpet Inc Earnings Call
Greetings, welcome to Freshpet, third quarter 2025 earnings call.
This time, all participants are now in listening-only mode.
The question-and-answer session will follow the formal presentation.
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Please note today's conference is being recorded.
At this time, I'll now turn the conference over to Rachel's Vice President of Investor Relations and Corporate Communications.
Thank you, Rachel. You may now begin.
Good morning and welcome to Freshpet's third quarter 2025 earnings call on webcast. On today's call, our Chief Executive Officer, Billy Sierra, and Interim Chief Financial Officer, Ivan Garcia, along with Chief Operating Officer, Nikki Batty, 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 strategies to accelerate growth, progress and opportunities, capital efficiencies, timing and impact of new technology, capital spending, adequacy of capacity, expectations to be free cash flow positive, 2025 guidance, and 2027 targets.
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 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'd like to turn the call over to Billy Cyr, Chief Executive Officer.
Thank you, Rachel, and good morning everyone. The message I would like you to take away from today's call is that we are quickly adjusting to the new economic reality and remain one of the best performing pet food businesses. We continue to outperform the U.S. dog food category, we are building market share across every channel, and we are winning a disproportionate share of new pet parents. We also continue to deliver strong operating performance, despite the slowdown in volume growth.
Further, we've maintained financial discipline and appropriately managed our capital spending to match our growth. And that, in combination with strong operating performance, has enabled us to achieve positive free cash flow in the third quarter and will enable us to become free cash flow positive for the full year, which is one year ahead of our original 2026 target.
Taking a step back, the deceleration in sales growth this year was unprecedented. We clearly started this year expecting to operate in a much different environment and have had to shift our strategy to address these challenging and dynamic times. While we can't control consumer sentiment, we can adapt our consumer proposition and make sure we are best positioned to.
Increased household penetration by winning both new and existing pet parents, while also improving our profitability and free cash flow generation.
We believe we are taking all of the necessary steps to stabilize and then re-accelerate our topline growth by continuing to focus on areas that are within our control to address the consumer environment. We have adjusted our media and go-to-market strategy to both reach and appeal to more households, while super serving our MVPs who account for 70% of our volume.
This includes starting to test new, digital touch points and expanding our focus and resources on e-commerce channels, including DTC.
The transition to this updated and improved commercial framework began earlier this year, but it is an evolution. So we will gradually increase the investment behind it. As we get increased evidence of its effectiveness,
We are also doubling down on our three key strategies designed to expand the appeal of Freshpet, particularly amongst our MVPs. Those strategies are: first, best food. We believe that Freshpet's highly differentiated product offers an enhanced experience for our consumers that we need to highlight in order to expand our franchise.
We launched a new media campaign at the end of August and early September, showing the lengths we go to produce the best food. At the end of October, we launched another new ad showcasing our ingredients. The new ads are much more focused on the benefits of fresh food than our previous creative, and early market data is encouraging.
Second strong value proposition. We are operating in an environment where economic uncertainty has led to less trade-up than in the past. To address this, we've now launched our new Complete Nutrition bag product in select retailers to help encourage trial, as well as multi-packs and bundles both online and in-store for the more value-focused consumer. We've also sharpened our price point on our 1-pound chicken roll, which we believe will help drive more trial and increase household penetration.
Third improved, accessibility we continue to make good progress on the visibility and the availability of fresh pet 1 of our greatest competitive advantages.
You may recall that we showed a rendering of a fridge Island back in February at the Kagney conference, which is a New Concept with a mix of both open air and closed door. Fridges, it is designed to change the way the consumer shops, the fresh pet food category, changing it from a search for a packaged. Good. In an aisle to grocery shopping for your pet.
We believe this is the next big unlock in our retail visibility and availability strategy, and it will create increased awareness of the brand and greater trial of our wide range of items.
Last month, we started testing new fridge islands. In the first 16 stores of a large mass retailer and we've included a picture. In our earnings presentation, it is still very early days but we believe this expansion demonstrates, how leading retailers view, fresh pet as the future of the dog food category, because of its enormous growth potential.
We've also further increased distribution in the large Club customer. We are in our first store in this retailer in April 1259 stores as of the end of September
The sales are still ramping up. However, we are very encouraged by the launch so far and the future potential.
In a rural lifestyle, retailer.
As we look to the next leg of distribution, we expect the majority of growth to come from stores where we have or can have second and third fridges or outside-of-aisle placements, like fridge islands, as well as the online channel.
We plan to leverage our retail strength, where we are the clear category growth driver. At the same time, we are really excited about our continued growth of e-commerce.
We had another strong quarter of growth in digital orders of 45%. We recognize we are significantly under-penetrated in the e-commerce channel, including DTC. We are keenly focused on increasing our presence to capture the online channel and online customers, and we plan for this to be a more meaningful part of the business as we head into 2026.
In total, we believe these strategies will enable us to react to our growth.
Each of these strategies Drive actions that we can control and leverage our unique capabilities and proposition
That will ensure that we will continue to outperform the category and drive the transition of the dog food business to fresh food, regardless of the macro environment.
Our efforts to adapt to the current environment are not limited to driving the top line. We also focus on driving operational efficiency through a variety of approaches.
First via our new technology.
The current demand environment means that our team has more available line time to lean in and test new technologies and formulations. We've been working on new bag technology since 2019 that is designed to produce significantly better products at a lower cost. It does this by increasing throughput, improving yields, and reducing the amount of product that requires secondary processing.
We expect this to result in increased bagged product margins and decrease the margin gap between bags and roll products.
Our goal is to deliver both meaningful product improvements and significantly improved economics. It can also unlock new innovation capabilities.
The First new production scale line that uses this new technology is now fully installed and in the final stages of commissioning we expect to produce saleable products on that line in Q4 and we are very excited by what we've seen so far.
Second, we are also taking a pragmatic approach to managing our capacity. It is not clear how long this period of consumer uncertainty will last. So we are using a variety of approaches to ensure that we have adequate capacity to meet our growing demand but also don't get too far ahead of ourselves on Capital spending and Staffing.
Fortunately, our facilities are running very well now, and that has provided us with free capacity in conjunction with further operating improvements that we expect to deliver. We expect to have adequate capacity to support our growth for a while. We are a much more stable business than we were 3 or 4 years ago. And when you couple that with a new technology, it enables us to reduce our capital spending this year and next year.
We do not believe that this reduction in capex will limit our ability to grow over the next 2 to 3 years as we already have 1.5 billion dollars of installed capacity available to us if the growth rate accelerates and can add Staffing as needed.
Now, I'll provide some highlights from the third quarter.
Our third quarter, net sales were 288.88 million of 14% year-over-year, primarily driven by volume.
Adjusted gross margin in the third quarter was 46.0% compared to 46.5% in the prior year period and adjusted evidon. The third quarter was 54.6 Million up, approximately 11 million or 25% year-over-year.
From a category perspective, we continue to be the number one dog food brand in U.S. food with a 95% market share within the gently cooked fresh frozen branded dog food segment in Nielsen brick-and-mortar customers defined as X, AOC, plus pet.
We compete in the nearly 56 billion US pet food category per Nielson on the channel data for the 52 weeks. Ended, September 27th 2025 and within the nearly 38 billion US, dog, food and treat segment. We have increased, our market share to 3.9%,
For more retail perspective, competitive entrance has not slowed our expansion to date.
In fact, we believe that new competition will ultimately grow the category. As we have seen many times before in other categories, such as Greek yogurt and coffee.
Fresh pit products are now in, 29,745 stores, 24% of which have multiple fridges in the US.
Looking ahead, we expect this percentage to increase as we add more fridges to the highest philosophy stores.
We ended the third quarter with 38,778 fridges, or nearly 2.1 million cubic feet of retail space, with an average of 20.1 SKUs and distribution.
Only 68%.
From a household penetration and buy rate standpoint. We remain 1 of the only dog food companies that consistently grows. Both our household penetration as a September 28th was 14.8 million households up, 10% year-over-year and total Buy rate was 111 of 4% year-over-year,
Which are our super heavy and Ultra heavy users are continuing to grow faster with a total of 2.3 million of those households of 15% year-over-year.
VPS represented 70% of our sales in the latest 12 months, with an average buy rate of $490. We are still growing households across every age and income group and gaining market share. The dog food category is declining, but Freshpet continues to be a clear winner. We are seeing that we are attracting a large portion of new pet parents, which is very encouraging. Turning to capacity, we feel good about our manufacturing footprint today. Let's continue to be the most profitable fresh pet kitchen, which accounts for approximately 38% of sales volume. Our overall operating effectiveness, or OEE, our measure of operating efficiency, continues to improve, and the new technology line in Bethlehem is expected to produce saleable product later this quarter, as I mentioned a few minutes ago.
This will be our 16th line across the network, and we are very excited by its potential.
The technology to make fresh pet food is still very new, and we constantly try to push the limits and come up with ways to drive greater returns.
Next spring, we also plan to retrofit another bag line in our Betham kitchen with the light version of the new technology that could prove to deliver a meaningful portion of the same benefits of the full technology line, with minimal line downtime to install the new technology and minimal CapEx.
Our capital efficiency framework is centered around three key areas.
First, we are focused on getting more volume out of existing lines, primarily through OEE improvements.
Second, getting more out of existing sites, whether that be finding ways to add more lines on our campuses or network optimization.
And third, developing and implementing new technologies.
We've made tremendous progress with this framework and believe there is still a significant opportunity to create incremental shareholder value.
Now, turning to our outlook for the remainder of the year, we are currently tracking to the lower end of our previous, net sales and adjusted Eva dot guidance ranges. So we now expect, net sales, growth to be approximately 13% for the year and adjusted. Evida to be between 190 and 195 million. We are updating our capex, guidance to approximately 140 million, as we're able to shift more projects out. The silver lining of the slower than expected sales growth. This year, is it is now positioned us to achieve positive
Free cash flow was reported a year earlier than anticipated for a significant company milestone. Ivan, our interim CFO, will walk through more details of our 2025 guidance in a few minutes.
In regard to our fiscal 2027 targets, we remain confident in our ability to achieve 48% adjusted gross margin and 22% adjusted EBITDA margin in 2027. If our sales volume growth is at least low teens.
If we were to grow High single digits, we believe we can still achieve an adjusted debit on margin of approximately 20%.
In summary, we've taken actions in strategic areas to focus on what we can control, and make sure we continue to deliver category leading growth, despite the current category softness and competitive entrance.
Dog food has historically been one of the best, most recession-resistant categories, and we believe we are best positioned to capture the future growth of the category. We expect to continue to build market share, grow household penetration, and gain a disproportionate share of new pet parents to ultimately capture the lion's share of profit in the category.
Before I hand it to Ivan, I want to address the ongoing CFO search.
We have hired an independent executive Search firm, and we have a very long list of very exciting candidates. We hope to select the next CFO quickly, but we'll take our time to find the right person. In the interim, we are confident in Ivan and his team's capabilities and believe we can still deliver the necessary business results until we find a permanent successor.
Ivan has been with Freshpet for 11 years. Having joined the company shortly before it went public in 2014 from KPMG, he has been involved in every aspect of our financial operations since then, including leading accounting, financial planning, systems development, and our data analytics operations. A trusted member of our team, his move into the interim CFO role has been seamless. With that, I'll turn it over to Ivan to walk through more details of our financial results. Ivan.
Growth while also achieving positive free cash flow.
Now, let me provide more details on our financials and updated guidance.
third quarter, net sales were 288.8 million up, 14% year-over-year, volume contributed to 12.9% growth and we had positive price mix of 1.1%
primarily driven by mix.
We saw broad-based consumption growth across channels.
For Neilson measured dollars. We saw 10% growth in xaoc.
10% in total us pet retail, Plus
8% in the U.S., food, and 2% growth in pet specialty.
As a reminder, the third quarter benefited by about a point of growth from a slight shift in timing of orders from the end of June to early July which we shared on the Q2 call.
We also expanded into most of our major club retailers' stores in the third quarter, and initial pipeline shipments helped boost our shipments' growth from last year.
When you net all of that out, we believe that consumption growth in the quarter was approximately 12%.
Third quarter adjusted gross margin was 46% compared to 46.5% in the prior year period.
The 50 basis, point decrease was driven by reduced leverage on plan expenses. Partially offset by lower input costs.
That the leveraging of plan costs are a result of ending the quarter with lower inventory.
Third quarter adjusted SG&A was 27.1% of net sales compared to 29.3% in the prior year period.
This decrease was primarily due to a lower variable compensation approval, partially offset by increased media as a percentage of net sales.
We spent 11.2% of net sales on media, up from 10.8% of net sales in the prior year period.
Logistics costs were 5.5% of net sales in the quarter compared to 5.6% in the prior year period.
This continues to be a great strength of ours and something that we’re very proud of.
In the third quarter, net income was $101.7 million compared to 11.9%. The significant increase in net income was primarily due to the deferred income tax benefit resulting from the release of a $77.9 million valuation allowance in the current period, higher sales, and decreased SG&A expense. This was partially offset by a decrease in gross profit as a percentage of net sales.
The release of the $77.9 million valuation allowance is being taken. Now, because we have demonstrated consistent profitability over a meaningful period of time as a result, our accumulated NOLs are now believed to have meaningful value. So they must flow through the P&L and end up on our balance sheet as an asset.
We view this as another milestone in our progress towards becoming a highly profitable company.
Third quarter adjusted EBITDA was $54.6 million compared to $43.5 million in the prior year period.
This improvement was primarily driven by higher gross profit, partially offset by higher adjusted SG&A expenses.
Capital spending for the third quarter was $35.2 million, while operating cash flow was $66.8 million. Additionally, we had cash on hand of $274.6 million at the end of the quarter.
As Billy mentioned, we achieved positive free cash flow in the third quarter and now expect to be free cash flow positive for the full year.
We intend to utilize our balance sheet to support our growth going forward with no need to raise outside capital.
now, turning to guidance for 2025,
As Billy said earlier.
We are tracking to the lower end of the guidance ranges we provided last quarter. So we now expect net sales growth of approximately 13% compared to our previous guidance of 13% to 16% growth year-over-year.
We now expect adjusted ibida in the range of 190 to 195 million compared to the previous guidance of 190 to 210 million.
We can continue to expect adjusted e dollars and margin to improve in the fourth quarter, compared to the third quarter.
Media as a percent of sales, for the year is expected to be greater than 2024. However, the fourth quarter will be the lowest total dollars set and has a percent of net sales in line with our past practices.
We now anticipate adjusted. Gross margins to be flat. Year-over-year based on Lower plant, leverage related to our inventory levels, which caused the time and impact to our p&l.
We have been able to successfully, tighten our inventory without seeing any impact to fill rates.
Back on vegetables, Source from Europe and mitigating them where we can.
Capital expenditures are now projected to be approximately 140 million this year compared to our guidance, last quarter of approximately 175 million and original guidance, earlier this year of 250 million.
We have included some impact from tariffs in the updated capex projection.
The majority of our capex spend is focused on the installation of new capacity to support demand in the out years, and the implementation of our new technology. But as Billy mentions, we are seeing greater Capital efficiencies in our existing facilities.
While it is too early to provide guidance for next year, we do expect that ordinary capex for new capacity, fridges, and maintenance will be in line with this year's spending. However, if our new production technology demonstrates the potential we are expecting, and we have the opportunity to accelerate either conversions of existing lines or the installation of new lines using that technology, we would certainly consider those opportunities.
We believe the new technology could generate sizable economic benefits, improve our competitive position, and elevate the quality we can deliver to consumers. Similarly, if we have a breakthrough in the new distribution, particularly if it's a sizable expansion of the island fridges, we would also fund that initiative due to the significant growth it could deliver. In either case, they would not impact our ability to deliver positive free cash flow in 2026, but our capex spending could be higher than in 2025.
In summary, despite a challenging year, we are proud to have delivered another quarter of fast-growing class CPG growth and demonstrated our cost discipline to deliver even stronger adjusted IBA, margin expansion, and become free cash flow positive.
We believe Freshpet has a long runway for growth and is well positioned to capture the sales growth and profit growth of the high-growth fresh frozen dog food category.
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 guidance and the company's operations.
Operator.
Thank you. We'll now be conducting a question-and-answer session.
If you would like to ask questions this time, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue.
You may press star 2. If you'd like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
1 moment, please. When we pull for our first question, thank you.
Our first question comes from the line of Peter Benedict with Beard. Please receive your questions.
Hey, good morning, guys. Thanks for taking the question. So, my first is around kind of the new Production Technologies. Um, curious kind of maybe the timeline on when you would would make a decision, um, on accelerating that. Uh, those implementations I guess next year, um, maybe give us a little sense of maybe how this light version uh, coming in the spring Compares with maybe the full version and and Billy as you if you roll this new technology out, uh, you talked about improved quality, what does it mean for pricing? I mean, at these lower levels of sales, do you
Intend to kind of turn that into a more aggressive pricing structure, uh, in order to kind of re-accelerate the top line and take more share or how do you think about um, reinvesting those, those potential benefits. Thank you.
Great great. Thanks Peter. Um, let me just start with um, we're very excited by this new technology. Uh, as you heard in this in the uh, recorded comments. The reality is we've been working on this for a long time and what we see is the upside potential on it is enormous. Um, we're still really early in the qualification of the first line. And so, it's really hard for us to say exactly how long we'll watch that till we make a decision on on expanding. It depends on, you know, how reliable the line is, uh, how much of a benefit we get, uh, the performance of the products in the market. So I don't want to get on the record.
Record with any comment about when we would make that decision, because it's really going to be dependent upon the operating performance and the quality of the products that we produce.
We start off that line and comparing the performance of that line against the initial line that we're putting in that's starting up now. And having to make a decision about is less Capital done more quickly on existing lines, a better idea than installing a new line that gives you all the benefits. And we really won't know that until we get the line up and running. So think of it as sometime in the back half of next year, we'll be able to make that assessment about whether or not that makes sense for us to accelerate the expansion of those lines. So, in the end I think it the the it's a great place to be. We have 2 very promising technologies that are very, very different and that can make, um, a big difference on the second part of your question, which is about how are we uh, deal with the quality improvements and also potentially pricing. Um, it's also too early for us to commit on whether or not we would do anything related to pricing our Focus right now is to demonstrate the quality benefits of the product. Obviously, we have a strong interest in improving the margins on our banks, because they're below our role,
Goals, but it's not, we'll be in a nice place when you can actually look at, you know, significant margin pickup in the opportunity to choose where you invest that, whether it goes to the bottom line, or whether that goes into making, you know, sharpening our price point. I suspect that over time you'll see a little bit of both um but for the most part we are very determined to drive the margins up on on our bag business and that's 1 of the real benefits of this technology.
No that that that's helpful. Thanks, Billy. And then I guess my follow-up question would be around the competitive Dynamics in the space. You alluded to the, uh, the recent entry. Uh, said it has not affected your kind of retail placement plans at this point, but maybe just any early learnings in terms of pricing positioning, um, just any anything you would say about, uh, how you're seeing a new competition both both at retail. But then also in some of the Frozen areas um, which are tangential uh, and coming more online. Thank you.
Yeah, let me frame it at the, I'll give you some Topline thoughts. I'm going to hand it to Nikki to talk to you about what we're seeing with our retailers and their, their actions. Um, but obviously there's been an unusually large amount of activity in the space this year. We view that as validation, that the fresh, uh, category is, uh, a big long-term potential retailers have seen that retailers are recognizing that. And so, that is, um, a good validator for us. And it kind of gives us a sense that the Investments that we've made the position, we've carved out is a really attractive 1. Um, so far, you know, from a top line perspective, we haven't seen much impact, um, on our business certainly not from the, the executions that have happened to retail. Most of the things that have happened to retail to date, have been relatively small and not very significant in their total size. It's just still a little too early to talk about what happened, what's happening with the Blue Buffalo launch. It's only been out there for a couple of weeks. Um, the 1 thing I would notice is we have seen a little bit of price discounting done by them already.
Um, which, you know, is something that we're not surprised by that's sort of their calling card, that's the way they do business. Um, our approach so far has been to stick to the game plan that we've executed over the Long Haul, and we'll continue to stick to that game plan. Um, but we also are very determined that we won't lose, uh, consumers, uh, on price or value basis. Um, but that's, that's how I see the competitive environment. I'm trying to Nikki and she can talk a little bit more about how our customers are reacting to it. Thanks, Billy and mate. Thanks for Peter. So, despite the um, increase in competition coming into the category at the moment, we've been really pleased with. I think a number of the metrics that we would use to just assess our retailer engagement. Um, as, as Billy said in the, The Upfront comments, we've grown our cubic feet by 12% this year, we've had 13% Improvement in distribution as well, um, and also been making some good ground either in some new retailers, um, where we've been testing some other ones where we've had some for National roles.
Roll out um with certainly in the the club area and then a strong signal. I think from from 1 of the largest retailers that really starting to get behind improved visibility for for fresh and have us leading the way with some new island units. So, despite that competitive backdrop, I think we've we've actually had 1 of our best years. Um, in terms of fridge, placements and support from retailers. I think where that's going is for us a very strong endorsement that the fresh Frozen seg.
But we are watching very closely. Um, the key data set we'll be using in the coming months is much more of our panel data to just make sure that there's no switching. Um, certainly with our occasional households or any loss of retention, so we'll keep a really close eye on it and we've got some some strong plans to make sure that that doesn't happen.
Great. Thanks very much, guys. Good luck.
Thank you.
The next question is from the line of Brian Holland with da Davidson please. Just use your question.
Thanks. Good morning. Um, maybe sticking along the lines of the, uh, distribution dynamic at retail. Obviously, the fridge island test—maybe a little more context if you could about the conversations with that customer and how long.
That's been progressing, um, the the logic behind the magnitude of that expansion just, you know, on a per store basis and maybe what you're looking for, what they're looking for to help determine. Um, what would be a successful test and and maybe
Timing for a subsequent expansion on that.
Great, thanks. Brian. I I'll take this 1. So, it look. Um, it it as you, you're no doubt aware. This retailer doesn't make decisions overnight. And there's a lot of discipline that goes into making sure that the operational effectiveness runs smoothly for something like these Island units. Um, the capacity of each of the island units is around 2.5 times, an individual Chiller. So, these islands units, allow not just fantastic retail visibility and brand visibility to the the category, but they also allow more assortment and a breadth of Assortment to be coming into each each store.
So what that's done and and I think as you, you know, already um with this retailer, we we typically don't have perhaps as many skus as we do to compete with some of the grocery retailers. So it's allowed us to actually launch some of our innovation in the more affordable, price bracket, so that would include things like the multi packs, the entry-level bag. Um, a number of items really that can bring in new households through. So, as of this week, uh, we installed 16 of these Island units. Um, we have, um, another burst, um, Coming of Ireland units as well. And there's some criteria that we're working with um, with Walmart, on to really be able to set exactly what the sales velocity needs to be.
the future roll out now, 1 caveat, I would say is
making sure that the islands perform um to our mutual criteria because these are also a bigger, capital investment is important and then there will be likely somewhere in the region of a of a 4-month lead time before they're able to execute um at scale as well.
Thanks, thank you. Appreciate the color and then Billy appreciating you, it's November 3rd, and you need to quickly start to provide a little more, um,
Color around.
26 is shaping up, um, in early January
um,
some of the building blocks here, right? Because I obviously
in a very Dynamic environment.
But you know, relative to maybe this time of year ago, you've got a better handle on what's happening with the consumer or at least you know, we've been in this Dynamic for for longer now. Um, you also have
Yeah, some of these distribution moving pieces here that are that are coming together. Uh, so so really interested in 2
Parts. 1, just thinking about the building blocks for 26 on the top line at this juncture, and also how that informs your media spend, obviously. Um, you you've talked about a lot of plans in place. Uh, but but how do you, how do you think about the magnitude of the investment, you want to put behind media, when there are clearly fewer incremental pet parents to go after in this environment?
Yeah. Um,
Um and that'll be a big driver of how we determine what our our expectations are for revenue. For next year, we're still going to be very much immediate driven business. We are very focused on using media driver business, but we're not going to be irrational about it. We're going to make sure that the media that we're spending is getting us a decent return. Uh, as Nikki has commented, we've gone quite a bit to drive the efficiency of our media plan, and we need to make sure that we're really focusing on those things that are as most efficient as possible and give us the highest likelyhood of a return. And so that's a big part of of the planning process that we're in right now. And then the last part is obviously what are retailers going to be doing and how does that influence the visibility and availability of the brand? As you know we we are not of the school that thinks that we are you know just creating demand via white space. We think it's really visibility, meaning amplifying the advertising and availability, meaning having a wider range of items available. But having good visibility on what that's going to look like will inform us quite a bit. As we mentioned.
Previously, the island fridges is a big step change. It's probably not going to have much of an impact in the first half of next year. There's a chance, we could have some impact in the second half of next year, but there are also a bunch of other retailers, who are looking at doing some fairly sizable, things, either new retailers as we mentioned in the call, there's a, you know, a rural lifestyle retailer who's now in task. We also have quite a bit of new distribution coming with existing customers in the form of the second and third fridges. So we'll put all those things together and we'll give you what our view.
Is, but I think it's way too early to say right now, it's just going to be built on the same building blocks. We talked about in the past.
Thank you. The next question is from the line of Tom Palmer with JP Morgan. Please assist you with your questions.
Good morning and and thanks for the question. Um, maybe kicking off. I I just wanted to ask on the capex next year 140 million as kind of a starting point.
What projects is most of this going to? I guess the the commentary on the billion 5 in in production capacity.
Would would seem like you've got a couple years before you really run into constraints at least. And and so just kind of wondering are there, is it? Because there are certain products that that are facing constraints even if from a dollar standpoint you're fine uh any color thank you.
Yeah, I I'll I'll frame this and then I'm going to hand it to Ivan um but always start with the understanding that we are a growing business. Uh even though we're not growing at the rate we are growing, before we are growing business and adding capacity takes time. So we'll be investing in 26 for capacity that we won't need until probably 27 or 28. And you're right in your assumption that there is some form specific elements to this. So bags are different than roles are Homestyle creations and our, um, uh, chicken bites, require different technology or different capacity. And then don't forget that we have, um, the new technology that we can always.
Forward, which is what we were talking about before. But the new technology—uh, investing in new technology is something we can do. But let me turn it to Ivan, and he can characterize for you sort of how you think about that $140 million being spent next year and the optionality that he described in his comments.
Yeah, thanks Billy. Uh, Tom. So another thing to also keep in mind uh with our capex spend is we currently have 1.5 billion dollars of capacity, um, in in front of us, uh, currently on the business. So um, any that we're doing is for is for the out years. When we look at the 140 million, uh, that is uh, that includes our, our current spend what we're currently looking at, as far as the projects. And we're also looking at wrapping up some of the technology that that we are currently, um, uh, going to go live with next year that being said there. If, um, we have any new distribution such as the island, chillers that we want to lean into, we're willing and able to uh to go ahead and make those Investments and that will be above and beyond with the 140. Also, if you want to lean into technology if we start to see that play out, we're also willing and able to go ahead and lean into that and that will also be above and beyond the 140 million dollars.
Understood, thank you for that.
Different levels. You could hit at different growth rates. Just when we're bridging the high single-digit potential growth to that 20% EBIT down margin you noted.
The, the 2% difference, where would we mainly see that? Um, is, is the gross margin Target. Kind of holding at at multiple levels and it's more about sgna leverage or, or perhaps a bit different. Thank you.
22%. So let's just break apart. The, the p&l for a second on the gross margin level. We feel very confident that we will be able to hit our 48% at both, uh, High single digits and, uh, low teens. There might even be potential for us to be a little bit above that, uh, 48%. And that's excluding any new technology. I want to make sure everyone appreciates that and then from there, it's, it's just the leverage that you would get flowing through your sgna. Uh, we currently believe that at at single digits we'd be at 20% and then, uh, double digits would be at 22%, um, at that point just scale but we, we we continue to be very confident with with our ability to hit both the uh, adjusted EA as well as our gross margin.
Okay, thank you.
Thank you.
Our next question is coming from the line of rupees per week with up and IR. Please receive with your questions.
Good morning and thanks for taking my question. So I just wanted to go to the I guess to the Q4 implied sales guidance, it does imply a moderation versus even maybe the 12% consumption, you saw on Q3. So just curious that driver is there and, you know, maybe maybe it also invests conservatism. So, yeah, just curious on the drivers there.
Uh, yeah repair. Um, we're frankly, just you know, reflecting what we're seeing in the market today. The, you know what, we're seeing in the consumption data, uh, that's coming through. We also have to be mindful that, you know, we've seen, uh, years past where retailers move up or down their inventory at the year, end around the holidays. So we want to be cautious about that. Um, and also just recognizing that we have a new
Set, and we want to be mindful that there are things that could change in the dynamics in the coming months. But at this point, you know, we're looking at the Nielsens every week just like everybody else is. Um, we feel good about the trends that we're seeing in delivering the guidance we talked about, and, you know, hopefully that continues.
Great and then maybe my follow-up question, just just on Gross margins. Uh so I know this year, there's pretty minimal gross margin expansion but as you look towards getting to that 48%, what are the bigger buckets? We should be thinking about.
Yeah, uh, good question, real fast. So as we look at the gross margin for this quarter, I I want to really uh maybe peel back the onion, just 1 layer and look at the drivers that that we're seeing during this quarter. So when we look at the input costs, we're very happy with the progress we've made throughout the year. We continue to make it slight progress on yield every quarter. When we look at quality, we continue to be in the low 2% throughout the year and more importantly we're we're having a lot of consistency with our quality which is going to be very important as we look at uh gaining leverage uh on gross margin in the coming years and then you have Plan cost. So um our conversion costs, this quarter was actually really good. We were happy with that conversion cost, uh, what occurred during the quarter. So it was a timing issue between our inventory and Q2 versus Q3, we went ahead and decrease our inventory that was uh, that was a hurt of 130 basis points, which we should get back in Q4. Um, that's what we're expecting in Q4 to have a gross margin, a handle of 47%.
And that's who we believe we are. Uh, currently we're a 47, gross margin company. So, uh, as we look at getting to 48%, we we we will continue to leverage our plan costs. That's the the main lever that we have in front of us. Currently. Yeah, let me just add to that. 1 of the things that we're very focused on is getting ourselves in a position where we have the right amount of inventory, very healthy, inventory to deliver, great customer service. Good in stock conditions not have Surplus, uh, inventory because that obviously doesn't serve us. Well, but we believe we're now in a position where we have the Staffing that can carry us through next year. And to Ivans point about conversion costs, that's the single biggest driver of of our um margin Improvement will be getting better, leverage on the conversion costs and it's on faces, leverage on the Staffing and that comes because we're driving up early, the team, we've got the training the stability in. Our manufacturing operations has delivered the capability to get more volume out of existing Staffing. And that's a critical driver for us of building margin.
Great. Thank you.
All right, next question comes from the line of Robert Moscow. With TD Cowen, please receive with your questions.
Hi, thanks. Um, hey, Billy, uh, you know, on, on slide, uh, 17, you, you mentioned, 1 and a half billion dollars of installed capacity today, that is not fully staffed.
And then in terms of priorities for next year.
retrofitting uh existing bag lines with light versions.
um,
I I guess 2 questions, you know, the 1 and a half billion. How how quickly can you fully staff that much capacity and then and then secondly. What's the is there a way to quantify what the benefit of these of this lite version is like what what does it provide to you from a a gross margin perspective? Thanks.
Typically if we have these line installed in an existing building, um adding Staffing can be done on, call it 90 to 120 day kind of timetable. You wouldn't want to do 2 or 3 lines at the same time that way because you would be diluting the talent that you have at that site. But if we had an increase in demand and we had a line that had available capacity, meaning it was running only half timer. It's uh, partial schedule, then we could add Staffing in? Call it, 90 120 days and so we feel very comfortable about our ability to do that, the labor market supported, our training and development teams are in good position to do that.
In terms of the value of this of the new technology and how that might impact the capacity, that's 1 of the most important questions we want to get answered as we go through the testing and qualification phase. Um, every 1 of the test runs we do, we're tinkering with what the throughput rates will be. We're tinkering with the the amount of time we can run the line continuously between, uh, stopping it and doing maintenance and clean out. Uh, and all those variables will have a big impact on what the total increase in capacity will end up being. Uh, it's too early to for me to commit to it. But when you think about the margin game, what we've described is, if we execute this new technology, the gap between our bags and our roles could close considerably, it won't get all the way back to where our roles are but it'll get pretty close. Uh once it's fully expanded across our entire line of across all of our lines. So it's not something you have in 26 or 27 but by the time you get into 28, you could start seeing the gap between the bags and rolls closed.
Considerably.
Okay, thank you.
Yep.
The next question is from the line of Angelina. Go with Deutsche Bank, please receive your questions.
Hi, good morning. This is Angeline on for Steve. Um, quick question on, how would you approach? Trade promotions going forward. Given that buff um is promoting heavily.
Yeah, let me frame this and then I'll turn it to Nikki but um, first of all, welcome to the call. Um, it's nice to meet you. Um, I would just tell you our position has been that we believe when you're in the perishable products business that trade promotion which just creates spikes in demand, you know, short-term stocking up and then floss that followed behind. It is not a very efficient way to run the business. And so we are going to avoid that practice as much as we possibly can. Uh, it's also good for the long-term profitability. And it ALS means that our advertising model is the primary driver bringing consumers in the franchise. So people who buy the product for the first time at full price. So that's the overall philosophy. I'll turn it to Nikki and she can just comment on how we're thinking about it in the context of having new competitors in the market.
Thanks nice to meet you. Angeline. So we've done a lot of work. Really reviewing both category, Dynamics, in terms of promotions uh price elasticities on our portfolio and also deeply assessing. The media Roi we we come out in a place where we still believe what's, right? For our brand is Media. Um is the critical driver overall for growth um trade promotions as as Billy indicated don't seem to be doing anything other than driving. What we would call a occasional household, um, into the brands. And as it stands, we're here to build long-term brand equity and also to build a loyal franchise, um, of consumers in fresh pet. We haven't seen any strong results, really in the competitive environment of Brands succeeding with promotions in the dog food category. So our Focus right now is very much to make sure that our media delivers both long-term equity and near-term Roi. Um, and that's really the model that we're
Using, um, you will see us investing less in areas like linear TV, where we've seen a little bit of diminishing returns with the current consumer sentiment, but you're also going to see it investing more in digital touch points that drive that direct conversion in particular through e-commerce, which we believe is a very big opportunity for growth for fresh pear in the future.
Great. Thank you, y'all.
The next question comes from the line of Michael Lavery with Piper Sandler. Please receive your question.
Thank you. Good morning.
The changes or momentum that that was was in place these last few years and maybe then what you're looking for and who's next, in terms of kind of taking it from there.
Yeah. Um, I'll take a shot at this. I'll ask Ivan to chime in in a minute with what he's observed as changed because he's been here for a very long time and he's got a Long View on it. Um, but obviously you know, we loved having Todd here, he added an enormous amount of value. Um, he was a healthy skeptic on anything that you know, the most optimistic members of our organization viewed as slam dunks, and it was a healthy balance that it created in our organization. Also brought a lot of practical discipline and he had a Relentless desire to keep things simple. Um, and I think that that's, that's a, a calling card of his and I think that's something that's been embraced as part of our organization when I look forward. Um, obviously, as I said in the, in the scripted remarks, the reality is that this is this is viewed as a very attractive position, the being the CFO at Fresh pet, we have uh very robust amount of interest in the position. Uh I am highly confident, we're going to be able to attract really high quality Talent.
Uh for this position. What's really going to be important for us though is in sort of at the root of your, your comment is how that how this person uh, fits in with the team. We need somebody who is going to be complimentary to what the team's skills are and the skills that we have today are dramatically different than the skills that we had a couple years ago.
We hired Todd. Um, we are much deeper, we have uh, much stronger capability across our broad leadership team within our finance team and, uh, the requirements for the person stepping into this job are going to be probably much more strategic, um, much more, um, uh, conceptual leadership because we've built a lot of the technical capability inside the organization today, and so we're looking for somebody who can play at that level, um, but I turn it to Ivan. Just give you any observation. He has about, you know, what? He observed in the pre-ta days Todd days and what he hopes to carry forward. Yeah, no. Thank you. Um, Michael, I think you touched on something, that that's really important, that, that Todd was able to drive and that was culture, right? And and culture permeates. And the great thing about culture is that when someone leaves, um, that culture stays behind and, and there's a few things that that he definitely brought healthy optimism as as as Billy, uh, noted to practicality. And also, when, when we look at planning, uh, the the
The thing that that we also that we always ensure is that there's various paths to get into the goal um and and that's something that we continue to have when when we look at our long-term uh, guidance for 2027 there, there's more than 1 path there and and when we we'll see where it all ends up, but we continue to feel very confident that we'll be able to deliver on on the goals that that's how to assisted us and and and building out.
And part of your listening. Hello, I love you. That's all. That's all really helpful. And, and just to follow up on Q4, um, you pointed out that you're basically guiding that, uh, you know, implied Q4 key momentum at right at around what it's selling through. But you've also got some of the new advertising. You've got a new competitive launch, uh, that's pushing into Fresh. You've got the bag, the Complete Nutrition bag launch.
Are all of your assumptions that all of those are sort of a push, or would you say you expect a lift or a risk? Or I guess, how would you unpack some of those pieces and what to keep an eye on from our side in terms of how things might unfold for the rest of the year?
Yeah, let let me just balance it out and just tell you I obviously they're level of precision we had in this business a year and a half ago. It doesn't exist today given the environment that we're operating in. But you describe many of the things that I would characterize, as sort of the the initiatives that are going to drive growth and then some of the things that are headwinds that we have to work against obviously, the new advertising is a big help. We've seen it on. Are we? We are very optimistic about the performance. It's going to drive the retailer engagement and the actions the retailers are taking is helping us the expansion that we described in the club channel. It's obviously helping us quite a bit but Complete Nutrition product is helping us quite a bit. We have to put all that against the backdrop of the consumer sentiment remains weak uh the consumer sentiment for oh
People that, you know, things are still going to come down the pike and we'll have to see how we play against those. So, if you bounce them all out and, you know, kind of say okay, what's in the market and what we're seeing in the meals, today it looks like is what we're going to see for the balance of the quarter. And that's sort of the way we're thinking about it.
Okay, thanks a lot. I'll pass it on.
Yep.
The next questions come from the line of Peter Galvo with Bank of America. Please just see a few questions.
Hey, Billy, good morning. Um, not to not to harp on on the Q4 uh, implied guys. But if I do have a, an additional question there, um, look, I I, I think if, if we're reading the math, right, right. The implied actual dollars of Revenue in Q4, is probably flat to down versus Q3. And, I know you don't want to give guidance on on 26 today, but, but maybe we could just pressure test the logic of, you know, if, if we run out kind of the current environment into the front half of next year,
You know, before Island fridges come in in the back half it, it just to me, it seems like there's a possibility, that sequentially things kind of stay the same at least through the first half, um, which I think would imply. You know what you've seen in the past, some, some kind of flattish Revenue Quarters, at least, at least sequentially. So,
I I again, I know you don't want to give an official 26, but maybe we can just kind of think about that logic as we think about the first half of next year and any thoughts there? Thanks very much. Yeah, yeah. Let let me, let me just recharacterize, what we believe is, happening sequentially. And, you know, you can then project it forward as you see fit. But, uh, remember the the Q3 number. We described we had 1 point of help of stuff that carried over from Q2 into Q3. And another point of help that came from the Sams, um, pipeline that happened in the quarter. So you're seeing is Q3, was probably a little bit bigger than it normally would be when you go to Q4, well, it hasn't happened every year, Q3 to Q4 has been, you know, probably the smallest sequential game. We have historically. There have been some years where it's basically been flat Q3 to Q4 part of that, is the way the trade manages, their inventory. Part of that is it's our lowest advertising spend quarter. There's a whole lot of reasons for that to happen. So I wouldn't take a relatively flat sequential
Q3 to Q4 to mean anything about what the trend will be going into q1. Cuz we've seen stuff like that before and q1 then bounces back and is a fairly significant increase on on top of that. Um, the other part of it is I would say that the the biggest anomaly for us was Q2 of this year, Q2 obviously gave up some volume of the Q3 and that shift that we saw, but Q2 was relatively flat compared to q1, and that was the real anomaly and that really matched up with all the concern around.
Tariffs. All the the you know, uh, changing the consumer sentiment was so dramatic. As you project going forward, I would expect that next year would have a more normal Cadence that the market has adapted to this environment. And so you'd see sequential Cadence that look more like it has historically rather than what it looked like in 2024 or 2025. Um but under any set of circumstances you should recognize we will be building market share, we will be outpacing the category and you know so no matter what the sentiment is, no matter what's going on, we will be outperforming the category so sequentially as well as uh on a year-on-year basis so that that's sort of how we're seeing it.
Okay, thanks for that, Billy know. That's, that's very helpful. Um, and and Ivan maybe just a a um, exciting more technical 1, just the the LOL caps uh, benefit in the quarter. I mean, is there a
A change consumption in the tax status now, should we be definitely modeling? You know, cash taxes, going forward, just just anything on on that, please. Thanks very much. Yeah, and maybe I'll take a little bit of a step step back and explain, uh, that entry a little bit more. It's not that common of an entry actually. Um, so something that, um, throughout our time here, our goal has always been to be a highly profitable company and on that Journey, every now and then you've hit certain milestones. And this is definitely 1 of the big Milestones that we are heading. Um, what this is saying is all those nols that we incurred, uh, since the, the start of
Crushed that they have a tax benefit associated with it, unfortunately. Uh, the orders, the accountants don't allow you to, uh, to take that benefit to your p&l until you're able to prove that you will be able to utilize them. And this is the first quarter where we've been able to utilize, uh, or to prove to our uh, accountants that we will actually be able to utilize
That being said, we will not be a taxpayer. We will actually offset that with with the asset that we have on the books. Um, but it's something that we're really proud of for all the fresh pet team members that are listening in. Uh, please be very proud of this. This is, this is a huge thing that that we're all really excited about. Yeah, just comment on when you think we would become a cash taxpayer. Yeah, no. Uh, it's a good point. Uh right now we're looking at depend on the growth algorithm but uh around 2028 is uh when we're, we think we'll start to be a taxpayer cash taxpayer.
Hey hey. I've been just about if I could sneak 1 in like what's the estimated book tax rate? Just for book versus cash but but just the book tax rate we should put in the model going forward.
Yeah, we're still I mean we're still looking at into that but we're going to we just the normal corporate tax rate and then the New Jersey tax rate on top of that. Um, but we'll keep on sharpening the pencil on that. But once again, uh, in the short term, we will not be paying cash and we'll be utilizing the nols against that.
Thanks very much.
Thank you, our last and final question will be from the line of John Anderson, with William Blair, please just use your questions.
Hey, good morning. Thanks for the questions. I'll put 2 in here and then listen.
Bill, you mentioned in the prepared comments that you expect uh the online business to have a more material impact in 2026, you've been under penetrated historically. Um, I assume that you know, that's not you're not under penetrated with respect to kind of your clicks and Bricks uh part of that that strategy fulfillment from your fridge is a strong. But more on the DTC side, can you talk about uh some of the actions that you might take on that front? What to expect, how impactful that could be. And then second just in light of all the discussion around competition lately, if you could just remind us, you know, where you are, in terms of, uh, your your remote. You know, I think when, you know, I think about early days of fresh pet, it was about the fridge footprint. Uh, it it, it seems like, you know, it's it's perhaps, you know, the manufacturing scale and and maybe even you don't have the technology that you're considering implementing that that represent maybe the bigger parts of your mode, but I think it'd be helpful if you have some thoughts on that as well. Thanks.
Yeah, so I'll take the second part first, and then I'll turn it to Nikki to answer the first part about the e-commerce DTC part. Um, uh, your characterization of the modes is is fairly accurate. Um, I I think the most evolved and developed over time. As you recall, you know, we launched feed the growth in 2017, it was because we believed that fresh was inherently a scale driven business and we also had a first mover and we wanted to maximize the benefit of both the first move.
Uber and also get scale before others entered the market. Um, we've now gotten to the point where we've delivered on those. The advantages, we've got the Head Start. We've got the scale that we've created our delivering sizable advantages in 2019, you made the decision to start investing in Technology and Manufacturing because we believe that manufacturing technology in the space was very, uh, uh, premature or immature. And so we started investing and that, that sort of a long-term thinking that we brought to this business. And today, we're now about to realize the benefits of that long-term thinking and that investment that we've made where it's not only going to be the manufacturing scale, it's going to be the manufacturing technology and the quality in the margins that that produces, that will be a big Advantage along the way, we've been building a brand a brand that stands for the virtues and benefits of this category, we've been broadening our product lineup. So now we have product assortments that meet a wider range of needs than any of the people who come into the category after us. Uh, we've gotten the retail visibility and availability from the number of stores. And the fridges we had and we can
Continue to invest in that by changing the way in which people shop this category with the fridge islands. So, you should think about us as continually investing in those things that will create an even bigger and more sizable moat. Frankly, the struggles that everybody's having competing with us would suggest that those investments have served us very, very well. Um, so at this point, I think you should expect that we're probably working on some stuff behind the scenes that you aren't aware of yet that are going to build that moat further. But right now, we're going to focus on driving the most that we have.
For that Millennial and gen Z consumer that were a bit under penetrated in. So this year we've spent a lot of time building out our capabilities, um, and focus to really start to win in in e-commerce and you'll see more of that as we go into next year, too. The fridge Network? Yes, you rightly point out. That's the biggest part of our e-commerce business service, through click, and collect, and also last mile delivery, but we also think that there is an opportunity obviously with pure play. Um, you've seen the, the news on Amazon Fresh and chewy clearly is, is opportunity. Space for us to drive into, but our d2c business, um, is also going to be an important part of the mix. Um, I would say that d2c for us won't won't be a primary channel of of, uh, that we will drive but it absolutely plays a role in terms of incremental households to the brand. So we stood up a small d2c business earlier this year, we're seeing some really encouraging green shoots coming through um 70%
Um, of our households are incremental, uh, first time, trying the fresh pet brand, um, with very, very high buy rates. Um, typically more than double what our current MVP by rate is, um, we're seeing coming through in that area. So all the metrics are looking. Like it has got some um, good head room to to be part of our growth for the future.
Thank you.
Thanks John.
Thank you. At this time, we have reached the end of our question and answer session. I'd like to turn the floor back over to management for closing comments.
Great. Uh, thank you everyone. Thank you for your interest. Let me leave you with this thought. It's from an unknown author without my dog. My wallet would be full. My house would be clean, but my heart would be empty to that. I would add fill your dog's stomach with fresh pet, every day and your heart will be forever full. Thank you very much for your interest.
Thank you, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.