Freshpet, Inc. Q3 FY2024 earnings call

• Disciplined growth: Focused on consistent manufacturing operations, top-line growth at a manageable pace to strengthen operating performance and cash generation.
• Net sales growth: 26% growth in Q3, driven by volume growth with household penetration up 17% (HIPPOH growth 24%).
• Capacity management: Managed balance between capacity and demand, achieving 99% customer order fill rate. New roll line in Ennis started up one week early.
• Margin improvement: Adjusted gross margin improved 630 basis points due to improvements in input costs, yield, throughput, and quality cost. Adjusted EBITDA margin was 17.2%.
• Product launches: Launched several new items, including Large Dog product (growing nicely in limited distribution) and multi-packs, with a senior product to launch early next year.
• Capacity expansion: Made progress with startup of fourth line in Ennis, ongoing installation of fifth line, and plans for new bag line in Kitchen South and production line in Bethlehem.

Third quarter net sales were $253.4 million, up 26% year-over-year. Nielsen measured dollar growth was 23%. Adjusted gross margin was 46.5%, up 630 basis points year-over-year. Adjusted EBITDA margin was 17.2%. Household penetration growth was 17% overall, with HIPPOH growth at 24%. Revenues from HIPPOHs, who represent ~90% of revenues, grew 24%. Net sales contribution from different segments: HIPPOHs are a key segment with significant revenue contribution, and new products like Large Dog and multi-packs are contributing to growth.

• Net sales: Raised guidance from at least $965 million to approximately $975 million, ~27% growth.
• Adjusted EBITDA: Raised guidance from at least $140 million to at least $155 million.
• Adjusted gross margin: Expected to expand by approximately 600 basis points for the full year.
• CapEx: Revised to approximately $180 million from previous $200 million, due to timing of projects with some spending pushed into 2025.

• Risks associated with forward-looking statements, including uncertainties that could cause actual results to differ materially.
• Market dynamics risks, such as changes in consumer behavior, inflation, and competition.
• Supply chain risks, particularly in maintaining reliable supply chains, especially in international markets like Europe.
• Execution risks related to capacity expansion and new product launches.

Q: Mark Astrachan asked about efforts in US D2C business expansion and European business.

A: Billy Cyr mentioned European business is in testing and validation phase for supply chain reliability. Scott Morris talked about D2C being in test and learn phase with small pieces of the business.

Q: Ken Goldman asked about gross margin path ahead.

A: Todd Cunfer said they're thrilled with 46.5% gross margin, see significant upside with opportunities in line efficiency, capacity utilization, and new technologies.

Q: Rupesh Parikh asked about pet category trends and consumer behavior shifts.

A: Scott Morris said traditional brick-and-mortar growth is soft, but omnichannel and online growth is strong, with pet adoption trends showing small and medium-sized dogs gaining traction.

Q: Robert Moskow asked about evaluating long-term guides and expanding footprint.

A: Billy Cyr said they'll evaluate all variables and make decisions based on inputs and visibility, with existing footprint able to get well north of $2 billion.

Q: Brian Holland asked about media spend dynamics and 2025 shaping.

A: Billy Cyr said back half 2024 media spend drives 2025 growth, with household penetration growth expected in first half of 2025.

Q: Bryan Spillane asked about fresh pet food category and competition.

A: Billy Cyr said category creator can own lion's share of the market, expecting competition but believing Freshpet can maintain lead.

Q: Jon Andersen asked about distribution dynamics and second/third fridges.

A: Scott Morris talked about second and third fridges driving distribution, Walmart's fridge situation, and fridge management efficiency.

Q: Peter Benedict asked about Chief Operating Officer Nicki's impact.

A: Billy Cyr said Nicki brings fresh eyes and capabilities, with limited impact until May 2025 but adding to bench strength.

Q: Thomas Palmer asked about quality cost timing and operating leverage.

A: Todd Cunfer said Q3 had quality cost timing benefit reversing in Q4, and most inventory benefit from Q1 will hold.

Q: Michael Lavery asked about Ennis facility flexibility.

A: Billy Cyr said Ennis facility with two bag and two roll lines enables longer runs and efficiency, though it takes time to reach Bethlehem's performance level.

Q: Jim Salera asked about conversion from toppers to main meals.

A: Todd Cunfer said they're working to communicate Freshpet as main meal, focusing on HIPPOHs, with advertising and product launches encouraging behavior change.

Q: Kaumil Gajrawala asked about marketing effectiveness and CapEx timing.

A: Billy Cyr talked about marketing effectiveness with strong creative and in-market performance, CapEx mostly timing-related pushed into 2025.

Q: Marc Torrente asked about consumer behavior and mix evolution.

A: Billy Cyr said category has moderated growth, with ultra-premium and value ends doing well, and Freshpet in the ultra-premium end seeing growth.

Q: John Lawrence asked about retailer review periods for fridges.

A: Billy Cyr said it varies by retailer, but they're well-positioned for fridge expansion in 2025 and beyond with strong media and distribution driving growth.