Billy Cyr: So I think the main — the main way to think about that is that we want to be as available to how — as available as possible to however consumers want to buy our products. And when you make it easier and you make it kind of less friction, you’re going to increase overall penetration, but you’re also going to increase everyday usage. So as we add basically more and more sales around digital, what we’re seeing is that we’re just making it easy to shop how consumers are shopping. And we’re kind of following what we — the biggest piece of that is definitely when people are ordering whether fresh and fresh/frozen food from their local stores, when they’re making those orders and buying overall, like for their grocery trip, we’re getting included in that.
And as that opens up and more consumers are shopping that way, that’s really the opportunity for us. So it basically makes it a little bit more convenient for consumers to basically shop around for us. So I think it’s both on the — this goes back to we’re helping the mainstream and it also turns it into more of a main meal. I think digital piece is a real opportunity.
Operator: Thank you. Our next question is from the line of Jim Salera with Stephens. Please proceed with your question.
Jim Salera: Hi, good morning guys. Thanks for getting us in. Maybe to start off, a combo question for Billy and Scott. In the presentation, you guys highlighted, I think it’s 22% of stores have second or third fridges. Do you have a sense for how big that percentage could get to as you continue to ramp the second and third fridge offerings? And then I think, Billy, in your script, you mentioned SKU count was up to around 18% from 16% a year ago. Can you give us some detail on what those two incremental SKUs typically are and maybe what you think that SKU number could be, again, as you continue to increase the second and third fridges?
Scott Morris: Every year, when we look at this, we feel like there is a greater and greater opportunity to have second fridges, and quite honestly, most stores. So we were talking earlier, we’re an average of 64% ACV or 72%, I’ll pick on grocery for a second, 72% in grocery ACV. And I think I mentioned that we have 2,000 double fridges in grocery. There’s no reason why we couldn’t be into the 80s, in grocery, 85%, maybe 90% ACV in total. And over some period of time, there is no reason why we couldn’t have second fridges in most stores because you look — and what the way we think about this is, this is a new category or a new segment. And every — if you look at dry or wet, it’s basically in every single store and then it has a fair amount of space.
I mean, you typically — even a tight wet section is 8 or 12 feet. So why wouldn’t there be that in fresh over time? So that’s kind of like our longer-term vision. Exactly how it plays out and when, I mean, we have lots of projections and lots of ideas around it. And we do believe that we will get there over time. But I want to go back to that’s a great opportunity. The single biggest opportunity that we have is using our media to educate people, creating awareness, driving penetration, driving more consumer. And I think I mentioned a number earlier, but same-store sales growth is always in the mid to high teens and that’s tremendous. And it definitely can touch into the 20s. So that’s really where the core of our growth comes from. And when you add those second coolers, it creates that visibility, it creates additional holding power, and it does create additional SKUs. We don’t want to over SKU.
We want to make sure we have the right SKUs to basically have, I guess, a portfolio of products that consumers really appreciate. So we don’t want to over SKU. So I would see even in the double fridges, I would see no more than kind of 25 SKUs in the average store to make sure we have enough holding power.
Jim Salera: Okay. Great. And then, Todd, if I could sneak in a question for you. On the margin front, you guys have made a ton of progress, did a really good job this year. But if we think about 2027, kind of 18% EBITDA margin target compared to the implied margin for 2024 at the midpoint I think is 11%, still a lot of wood to chop between those two numbers. As we think about the annual cadence of getting to that 18% goal, when should we expect to see margins inflect more significantly compared to where we are now?
Todd Cunfer: Yeah. I mean, look, if you just do the math, we need another 10 points. So about 5 in gross margin and 5 below based on the guidance we’ve given, we’ll get at least 100 up top and then 100 or so below the line as well. So we’re going to pick up a couple of 100 basis points and getting double digits for the first time, which is exciting for us. Don’t — look, I’m not smart enough, to be honest, to know exactly what that cadence is going to be. If we pick up 200 basis points or so over the next several years, we’ll get there. And as I’ve kind of said before, if we’re at 18% or a 45% in 2027 from a gross margin or an EBITDA margin line, obviously it’ll be a little bit disappointing because I do think there’s upside.
Not that we’re promising more than that at this point, but I think there is potential upside to those numbers. But if we can pick up a couple of hundred basis points or 2% to 2.50% every year of EBITDA margin, we hit that target. And there’s the potential — if some of the efficiency work that we’re doing pays off, we can do a little bit better.
Jim Salera: Great. Thanks guys. I’ll hop back in queue.
Operator: Our next question comes from the line of John Lawrence with Benchmark Company. Please proceed with your question.
John Lawrence: Great. Good morning, guys. Thanks for squeezing me in. Just quickly, we talk about retailer growth at mass and grocery. Can you speak to — at this point, as you continue to market to those retail partners, what continues to be their objection? I mean, obviously, you proved the model out, it works, a lot of same-store sales. What would be — would be old facilities? Does — when Walmart expands and build new units, are you part of that? Or what determines whether they go or not go?
Scott Morris: John, yeah, thank you for the question on that, too. It’s interesting because I talk to the sales team. I meet with retailers very often, I talk to the sales team a lot. And when you’re rejected for a long, long period of time, in 2006, 2008, 2010, and then the amount of love we get today, it all makes it worthwhile. And I’m being serious. And I would say the partnerships that we’re building, how we’re constructing this segment, how we’re working with our retailers in order to make sure that this is a important category for them, but also a productive category for them, I think, is really, really appreciated. And I actually get that feedback pretty often. So I would say that there’s very few objections. And I think it’s just — everyone has a different pace they’re going at it.
So when do they set — when do they do a major category reset? We’re not like pulling an item in or a couple of items in and out. That’s easy. You just fly it off shelf. There’s a lot involved in putting a fridge in. And in one store, it’s not that complicated. In hundreds or thousands of stores, it gets really complicated. So they typically want to do it when they’re doing major category changes resets because if we’re going in, other things have to go, and they just want to do those things gradually. There are times when you’ve seen it, where they’re literally moving around the whole store. And what they don’t want to do is drop a fridge and drop an electrical line in and then six months or a year later, go ahead and move around the store and have to do the same thing again.
So I think it’s just a nice steady stream and a good cadence that we’re continuing to roll out with retailers. I — we really don’t hear objections for the most part. I mean, we heard them for a very long time, but there’s very, very few today.
John Lawrence: Great. Thanks guys. Good luck.
Billy Cyr: Thank you.
Operator: Thank you. Our final question is from the line of Marc Torrente with Wells Fargo. Please proceed with your question.
Marc Torrente: Hey, good morning. Thank you for the question. Just real quick. Building on the media discussion, maybe talk about some of the media efficiencies and effectiveness, what’s working best here and strategy plan throughout the year? And then you saw good operating cash flow progress in ’23. How are you thinking about this growth through ’24 leverage levels and progress towards the longer-term free cash flow targets? Thanks
Scott Morris: So it’s really — it is interesting. And we’ve cycled through lots and lots of different media that we do. And the thing that we consistently find to be the most effective and productive is a lot of — I won’t call it mass media, but we obviously do and try and do a lot of targeting to different consumer groups. So literally, probably about 18 to 24 months ago, we started expanding our conservative target because into kind of a male demographic and also a younger male demographic. And what you started to see probably is you start to see a show up on football, for example. We had not done it in the past because it not only, a, was it expensive, but b, it was not the original target we were focused on, which was kind of was women for the most part.
Now again, women watch football, obviously. But we continue to expand. And what we did, when we expanded into football, we were able to see really good productivity, and we are reaching new types of consumers and different consumer groups. I got a — literally, I got a text message the other day from someone said, “Hey, I saw one of your commercials”, we were on a golf — some type of golf. And they said, “Oh, I had seen this commercial.” The commercial has been running for eight months, and they hadn’t seen it, but it was new to them, which means that we’re continually hitting some of these new people. So we use a lot of mass TV, it’s been our number one most productive piece. We have an incredible partnership with the — internally, but also an external team that does our media buying.
And we hold a very, very high standard. And I would say the level of analytics that we do behind it is second to no one in CPG, quite honestly. We do also work with OTT and connected TV. We also do a lot in digital. We’re expanding more and more. We do definitely social. We’re expanding into social. And you’re going to see us do more and more PR over the next kind of 12 to 18 months, too. So we’re definitely pushing into those areas. And our goal is to be anywhere between 6 to 12 months forward in what we’re going to be executing. And what I mean by that is, literally, at the end of this year, I know the types of media and how we’re going to test it, the messages we’re going to be delivering, and we want to test it before we get there, so we know we’re being — we’re able to deliver on the productivity that the organization needs to continue to grow.
So we try and be, like, really, really kind of thoughtful and very, very professional and planned out around what we’re doing from a media and media investment and spending standpoint.
Todd Cunfer: Yeah. From a cash flow perspective, look, we are beyond thrilled about how strong operating cash flow was in 2023 up to $76 million. Obviously, some of that was the EBITDA, but also the working capital back in line. We had some issues in 2022 when we went live with ERP. We had a little bit higher working capital than we would normally have, we got that benefit back in ’23, that was kind of a onetime gain there. I think from an operating cash flow going into this year, probably around $90 million because again, we’re not going to have that benefit from working capital. And as I said, we’re going to spend about $210 million in CapEx. That implies the cash balance of almost $300 million we have, end of the year will be around $180-ish million is where we’ll end cash for the year. So it puts us in a great position for ’25 and beyond.
Operator: Thank you. At this time, we’ve reached the end of the question-and-answer session. I now turn the call over to Bill Cyr for closing remarks.
Billy Cyr: Great. Everyone, thank you very much for your interest. I’ll leave you with this thought. This is from Helen Thompson. A well-trained dog will make no attempt to share your lunch. It will just make you feel so guilty that you cannot enjoy it. To which I would add, feed your dog Freshpet, and all your guilt will disappear as fast as the Freshpet. Thank you very much.
Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
