Freshpet, Inc. (NASDAQ:FRPT) Q4 2023 Earnings Call Transcript

Freshpet, Inc. (NASDAQ:FRPT) Q4 2023 Earnings Call Transcript February 26, 2024

Freshpet, Inc. beats earnings expectations. Reported EPS is $0.31, expectations were $0.09. Freshpet, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to Freshpet’s Fourth Quarter and Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. At this time, I’ll now turn the conference over to Rachel Ulsh, Vice President of Investor Relations. Ms. Ulsh, you may now begin your presentation.

Rachel Ulsh: 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 Cyr, Chief Executive Officer, and Todd Cunfer, 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.

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 accuracies in 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. 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 the information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. 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, 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 Bill Cyr, Chief Executive Officer.

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 Freshpet has reached an inflection point on its journey towards becoming not only a sizable, 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 turned a 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. 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.

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. This strong growth is compared to a very strong quarter last year when we had significant trade inventory refill. 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% compared to 40.2% in the third quarter and 33% 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. 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 you’ve 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 of 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 US. 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 a desktop, 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 of net sales in 2024. The vast majority of our digital orders today are pickup or click and collect, which leverages our existing fridge network in retail. According to NielsenIQ, pickup is also the fastest-growing segment of online e-commerce in dog and cat food. 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 and 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 of 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. Within that is the $36 billion dog food category, which the majority of our business is today, and we have only a 3% market share, which leaves a vast runway for growth. At the same time, we have 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. 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 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 growth. Our high-profit pet-owning households or HIPPOHs 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. 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 main meal, we know that 40% of Freshpet 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 HIPPOHs. 37% of Freshpet users are HIPPOHs 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 at year-end. 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 is — 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. Turning to the more part of main and more, more profitable, we are enhancing margins through improved operating performance and leveraging scale and efficiency.

We believe increased business intensity and concentration will drive increased efficiency, and 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%, and adjusted EBITDA as a percent of net sales was 14.5% compared to 11.3% in the prior year period. Three key areas we have been most focused on have been input costs, logistics and quality. And we’ve improved all three this past year, with logistics now only 6.3% of net sales in the fourth quarter, down from 9.4% in the prior year period. 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 Ennis are operating today, and that site now accounts for 25% of our total system production, and as Phase 2 construction is on track for the start-up of the first roll line by the end of the third quarter of 2024. 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 are making good progress on that program in Bethlehem, and just started the plan in Ennis. 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 found a way to get an additional line or two in Kitchen South, and are also looking for ways to get more lines in Ennis. 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. As we head into 2024, we intend to manage the growth very closely, 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 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 increases our confidence in our ability to fund our growth with no need for additional equity and potentially not even needing any new debt. 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 2024. Todd?

Todd Cunfer: 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. Nielsen measured dollar growth was 28% versus prior year period with broad-based consumption growth across channels. We saw a 15% growth in pet specialty, 30% in xAOC, and over 100% growth in the unmeasured channels. 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 xAOC, and approximately 85% growth in the unmeasured channels.

Fourth quarter adjusted gross margin was 41.1%, up 810 basis points year-over-year. 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% 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. 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. We saw 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.

Media spend for the year was 11.1% of net sales, up slightly from 10.5% from 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. 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.

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 million 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. 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% is slightly below our long-term target of 25%. 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. 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 first half. We will have some start-up costs on the third line in Ennis in Q1, and additional start-up costs on the fourth line in Ennis 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 to grow in line with sales, and we will pull back as necessary to control sales growth. Lastly, we expect sequential quarterly improvement in adjusted EBITDA.

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 in 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. 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?

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Q&A Session

Operator: [Operator Instructions] Our first question today is coming from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.

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

Todd Cunfer: Are you talking about ’24?

Rupesh Parikh: Yes, correct. Yeah.

Todd Cunfer: 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 in commodities. Well, obviously, we’ll 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. 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, they’re kind of the 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, what’s really going to become lower input costs and improved quality are the main drivers.

Rupesh Parikh: 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 you expect to end by the end of the year?

Billy Cyr: Yeah, Rupesh. The way to think about this is that we have to be mindful, not just of overall capacity, but we also would be mindful of capacity by form. And so in this case, what we’re really managing to is the Ennis Phase 2 first line is a roll line. So we’ll be tight on capacity until that line comes up on the roll segment of the business. 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 find us the capacity. Once that’s in place, we have a pretty good runway until sometime in ’25, when the — it will flip around and the tightness will come on the bag side 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.

Todd Cunfer: Yeah. So right now, we have about $1 billion of total capacity. But as Billy mentioned, there’s a little bit of a mismatch. We’ve got more in the bag on the bag side versus the rolls. And then obviously, we need to get well above $1 billion as we get into ’25. So it’s really the bag — the rolls right now, it’s causing us a little bit of an issue.

Rupesh Parikh: Great, thank you. I’ll pass it along.

Billy Cyr: Thanks, Rupesh.

Operator: Our next question is from the line of Brian Holland with D.A. Davidson. Please proceed with your questions.

Brian Holland: Thanks, good morning. Quickly on media. Number came in higher than I was projecting in Q4, 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 to an opportunity that you saw? Or just any logic behind 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, with what sort of time horizon can you pull back on that spend if needed?

Todd Cunfer: So I’ll start off and I’ll let Scott answer. So the media, we internally kind of planned that number for a while. We kind of hedged our bets a little bit. We weren’t sure where 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 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.

Scott Morris: But it’s unusual that we spend that much in Q4, that 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 and also in overall top line growth, especially in units and pounds. And then your — second part of your question was on how far out or 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.

Brian Holland: Thanks. And then just a follow-up on that. I guess the reason for the question is 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 what might be behind that? Is there a lag effect? Does it ultimately catch up to you? So you’re going to be at, I guess, north of or around about $100 million of media spend. I believe another big visible competitor in the space, 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 sort of crystallize whether we’re at — and you talked about 2023 being an inflection point for the business. And I’m wondering if it’s been an inflection point for this subsegment of fresh/frozen in food as sort of redefining premiums. So I’m just curious what you’ve seen or what you can speak to that end.

Scott Morris: Well, let me answer them, kind of the — in two sections. The first one, there has been, like I would say, a change in overall the 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. We’re not seeing consumers trade down. We’re seeing consumers come in very consistently. And you see that on the penetration growth, you see it on the growth around HIPPOHs, and we’re also seeing it in our media productivity. Like one of the first signs you start to see is 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 in this year, quite honestly.

I mean, I think we’re through the worst of those that impact over ’23, I think you’re going to see less than most of that over the course of ’24. The second part of your question is, are we 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 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 process foods. Now, whether they do it for themselves or not, that’s one thing. Now, will they do it for their kids and “their pets,” right?

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, you’re hearing us talk about turning this into more of a mainstream concept. So we 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 half — 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 kind of dog nuts in a way, now there’s multiple fridges in an aisle. And I think it starts to make a statement.

That’s us making a statement in retail. Our 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 it’s been happening for many, many years.

Operator: Thank you. Our next question is from the line of Ken Goldman with JPMorgan. Please proceed with your question.

Ken Goldman: Hi, good morning and thank you. 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, longer term of 2027? I think previously, you’d sort of guided to maybe $250 million a year in ’25 and ’26. I don’t know if you’ve officially kind of addressed or updated those numbers since maybe CAGNY of ’23, if I have — or if you have, I missed it. I’m just trying to get a better sense 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 the $210 million this year so.

Todd Cunfer: 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 the investment. I think right now, we have not given updates officially. I think the way I think of it is it’s going to be over the next several years. Somewhere in that $200 million to $240 million range per year. 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 million to $240 million is probably a pretty good estimate at this point.

Ken Goldman: All right. 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 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 building the brand over the long term and also not getting ahead of yourself on capacity — organizational capacity and your capacity to actually produce products. Is there kind of a minimum media 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?

Billy Cyr: Yeah, Ken, so we 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 meter 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 where we would drop below 9%. I don’t see that being the case. But that’s really the guidepost, it’s sort of the 9% to 11% range is sort of where we’re trading in.

Ken Goldman: Great. Thanks so much.

Operator: Our next question is from the line of Peter Benedict with Baird. Please proceed with your questions.

Peter Benedict: Hi, guys. Thanks for taking the question. Maybe, Scott, back to you on the 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 on that and how pricing — next year’s growth is going to be mainly volume. But how do you think about pricing and more about mix as you think about 2024? That’s my first question.

Scott Morris: 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 shift in the category overall. We really have not seen that at all. 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, it’s — we are amazingly in line and consistent with our plans and how the overall model is performing. We just have not seen those mix changes. On the new product front, we have products on both end of the spectrum from a 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, and some things that are more cost effective to feed per day, both of them are performing and growing quite well. 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. And — 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’s dynamic and the behavior that we’re seeing from consumers at this point.

Peter Benedict: No, for sure. That’s good color. And then just a question on the broader category. I mean, you guys are 96% of the measured category. But maybe 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 — of the category over the next few years? And just the competitive dynamics, there’s 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 your broad view of the category. Thank you.

Todd Cunfer: Look, I think that we set out to do this a long time ago over — well over a decade ago, we set out to really build Freshpet 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. It’s 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 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 million, 11.8 million households. 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 there’s 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 2027, I think we had $127 kind of buy rate, it’s the one we have penciled in. So that’s kind of been our plan. Today, we’re at $96, and we’re going towards like that $127 type number. I think what you’re starting to see is we talked a lot about the super heavy heavies or the HIPPOH consumers that are coming into our business, and that’s been our focus. We think there is the opportunity to really continue to improve buyer rate 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 will be a really interesting next couple of years to see how it plays out.

Peter Benedict: Thanks so much.

Operator: The next question is from the line of Mark Astrachan with Stifel. Please proceed with your question.

Mark Astrachan: Hey, good morning, guys. Hope all is well. I guess, firstly, on HIPPOH growth. It’s exceeded household penetration now, I guess, the last couple of years, especially in ’23, if my math is right, nearly 30% versus overall household penetration just under 20%. I guess, maybe talk about the life cycle and conversion of those HIPPOH consumers from first consumption of the category or from the brand into a HIPPOH, 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? Sort of what do you see around those that really become HIPPOHs and those that drop off? That’s the first question.

Scott Morris: Yeah. So it’s — thank you for — thanks for that question. If you look at our total increase of consumers last year, it was about 1.8 million households that we added. On the HIPPOHs, we grew that group by not over 900,000. So when you’re growing your best consumer by like a significant amount, you quoted the number of 29% or 30% versus prior year, so great growth rate there. But it’s becoming a 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, great consumer experiences, continuing to bring innovation in the category, broader availability and also being available from — on a kind of an online or e-commerce type perspective, where people can literally go 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 HIPPOHs. Now, we see them come from two parts.

One of them is some — there’s groups of consumers that literally come in and they immediately become HIPPOHs within three to six months. They’ve just changed and that’s their dog food. The other group that we see come in and become HIPPOHs are people that use it as a topper and mix, and mix more, and mix more, and mix more, and literally start moving down the dry and up the fresh. 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 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 that, the HIPPOHs 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.

Mark Astrachan: Got it. That’s helpful. And then — going back to, I think it was Ken’s question, Todd, for yield. I guess, I was surprised at the CapEx guidance sort of remaining the same and maybe it’s sort of the leading mix of the question. But you talked a lot about maximizing the output of existing lines, adding capacity to the existing site, the Bethlehem example, I don’t think one was previously planned a few years ago, and now you have a new line. You’re also developing new, more efficient technologies. So all of that being said, why are you still spending the same on CapEx? 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, kind of bridge that for me, please?

Billy Cyr: Yeah, Mark, this is Billy. 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, ’27 really has 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. 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 we get. If we do, it’s gravy to us. It’s improvement in the 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 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 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.

Mark Astrachan: Got it. That’s helpful. Thank you.

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

Jon Andersen: Hey, good morning, everybody. Thanks. Quick question on the sales outlook for 2024. We talked about 24% growth, largely volume-driven. Should we — how should we think about the mix a couple of different ways? You haven’t really referenced your expectations for fridge placement growth or store growth, 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 from a channel perspective, non-measured grew substantially faster than measured in ’23. Is that a dynamic that you would expect to persist in 2024 as well, and why?