Freshpet, Inc. Price & Performance (FRPT)

Please refer to the company's annual report on Form 10 ks filed with the Securities and Exchange Commission and the company's press release issued today. For a detailed from those expressed or implied in our forward looking statements made today. Please note that on today's call, management will refer to non GAAP financial measures such as EBITDA and adjusted EBITDA among others. While the company believes these non GAAP financial measures provide useful information for investors, The presentation of this information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Please refer to today's press release for how management defines such non GAAP measures, 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 summary of the results and guidance they will discuss today.

With that, I would like turn the call over to Billy Cyr, Chief Executive Officer. Thank you, Rachel. Good morning, everyone.

The message I would like you to take away from today's call is that our full year 2024 results demonstrate that we can convert our strong growth into scale and leverage to drive significant increases in profitability. Fiscal twenty twenty four was a very good year for Freshpet Freshpet. Marked by strong top line growth, even better profitability improvement. The strong net sales growth was almost entirely driven by volume gains, which were the result of a combination of growth in household penetration, and buy rate. And is fueled by our media investment and retail expansion which results in a loyal consumer franchise as we do not participate in any trade promotions or discounting. The household penetration gains were our largest on record as we added approximately 2,000,000 households 800,000 of which super heavy and heavy users. We also added new distribution second and third fridges for a total of nearly 2,300 new fridges. Further, we demonstrate our ability to add capacity to support this growth on time and on budget. We threaded the needle on managing our capacity expansion and media spend to not get ahead of [indiscernible] We managed to maintain over 99% fill rates while adding capacity, and selling 27% more volume than last year.

This disciplined growth allowed us to focus on the operational improvements needed to drive profitability as well. As we're able to beat our longer term targets for input, quality and logistics costs, as well as adjusted gross margin. We added six fifty basis points of adjusted gross margin this year and more than 1,000 basis points of adjusted gross margin over the last two years, with the lowest logistics cost as a percent of sales ever, quality costs at their best level since 2018 and input costs as a percent of net sales We began to see progress in G and A leverage too. Adjusted SG and A excluding the media and logistics is about half of where it was in 2017 as a percent of net sales. And three forty basis points below what it was in 2020 despite sizable incentive comp this year. In 2024, we also achieved positive net income for the first time generating $0.94 per share of EPS. And generated $154,000,000 in operating cash flow Moreover, we have the ability to keep the growth going. As we'll hear later this morning during our CAGNY presentation, we believe Freshpet has a long runway of growth ahead and are very excited about the future.

We know Freshpet is a unique brand with a differentiated product offering and an insulated business model. We view the long term trends of the humanization of pets and a focus on natural fresher foods as tailwinds. Across the world, people are also waiting longer to have children. Or having fewer children and choosing to get a pet instead This bodes well for Freshpet Freshpet. Despite that, we still have a very small share of a very large category. Per Nielsen omnichannel data, for the fifty two weeks ended twelvetwenty eighttwenty four, we compete in the $54,000,000,000 U. S. Pet food category, and we have only a 3.4% market share within the $37,000,000,000 U. S. Dog Food and Treat segment. Nielsen Mega Channel, we have a 96% market share within the gently cooked Freshpet frozen branded dog food segment. Taken together, this performance and potential demonstrate that Freshpet has become a profitable growth company with a long runway for future growth and profitability improvements. The organization we have built delivered the kind of results that one would expect of such a unique and powerful brand and business model. And we believe that the opportunity for future growth and profit improvement is quite large.

Now I'd like to provide some highlights [indiscernible] and the full year. Had strong growth in the fourth quarter with net sales of $263,000,000 up 22% year over year driven primarily by volume growth. Recall we deliberately backloaded our media investment in fiscal year 'twenty four to live within our capacity constraints. And that resulted in a gradual reduction in our growth rate throughout the year. [indiscernible] we increased our advertising investment for the balance of the year with the largest increase coming in December. And we expect that will result in a gradual increase in our growth rate as we move through fiscal year twenty twenty five. It takes time for the advertising investment to generate new households. And for those new households to turn into meaningful Nielsen measured sales, but we are seeing the early signs that is beginning to happen as it has so many times in the past. Household penetration is growing, and our customer acquisition cost or CAC remains healthy. Adjusted gross margin in the fourth quarter was 48.1% compared to 41.1% in the prior year period. As Todd will explain later, this was a very strong performance even though it was helped by our efforts to build inventory in October and November so that we could take production lines down for upgrades at year end.

Adjusted EBITDA in the fourth quarter was $52,600,000 approximately $21,000,000 year over year. For the year, we had net sales of $975,000,000 up 27% year over year in line with our guidance of approximately $975,000,000 Fiscal year 2024 adjusted gross margin was 46.5% up six fifty basis points year over year and full year adjusted EBITDA was $161,800,000 up 143% or $95,000,000 year over year. We are quite pleased that we are able to deliver our fiscal year 2027 adjusted gross margin target three years early and we are quite bullish that there is more opportunity for us there. Which I will touch on shortly. From a retail perspective, we added more than 1,300 new stores in 2024, bringing our total to 28,141 stores 22% of which have multiple fridges in The U. S. At year end, we had a total of 36,544 fridges, which approximately 1,900,000 cubic feet of retail space across our network. And an average of 20.5 SKUs and we have more room to grow. Our distribution and gross rate where we're the dog food market leader, was only 77% ACV at year end. And in ex AOC, it was only 66%. Conversations with retail customers are very encouraging.

And the shift in mindset about this category has been palpable. We continue to expect the bulk of our growth going forward to be from the addition of second and third fridges in the highest velocity stores rather than new stores. Our household penetration at year end was 13,500,000 households, up 17% year over year and in line with our projections driven by our media investment. We believe we are ahead of the pace needed to meet our $20,000,000 household goal by 2027. Our overall buy rate continues to grow as well. Up 6% year over year to $104.89 Please note that going forward, we'll be reporting our progress on a narrow arc and more important group of consumers than the hippos that we previously reported on. We will focus on a group that we call MVPs or most valuable pet parents. Who are our super heavy and ultra heavy users as this group represents our biggest opportunity for incremental usage. MVPs accounted for 2,100,000 of our households and represented 69% of our sales in in 2024. They spend $474 per year on Freshpet on average and are growing faster than our total households at 27% year over year. Sales are increasingly concentrated in our heaviest users, and there's a significant opportunity to increase this percentage grow our total business.

We will share more detail on this group Turning to an update on our capacity. We successfully started up our fifth and sixth, roll lines across our network in September and December and the next bag line in Kitchen South is expected to start up later in the first quarter twenty twenty five. [indiscernible] capacity expansion plans are constantly evolving we find ways to drive greater capital efficiency. As we've discussed previously, we are intensely focused on maximizing the throughput of our existing lines, maximizing the capacity of our three existing sites and developing and implementing new technologies that generate more throughput per line. When fully built out, we expect the three kitchens we have today to be able support up to $3,000,000,000 in sales, We commit to incremental capacity from a new line about eighteen to twenty four months out. So we are not committed to all $3,000,000,000 of capacity today and won't be for several years. Now for our outlook for fiscal year twenty twenty five. We expect net sales of approximately $1,180,000,000 to 1,210,000,000.00 or approximately 21% to 24% growth year over year. Adjusted EBITDA of at least $210,000,000 and capital expenditures of approximately $250,000,000 Todd will walk through more details of our 2025 guidance in a few minutes, but I wanted to address media in the fourth quarter of twenty twenty four was heavily weighted December.

And always takes time for the increasing household penetration to flow through to our Nielsen measured sales. We watch the growth trends very closely for any hint that our plan is not as effective as it has been in years past And we have the tools and flexibility to keep it on track. If it slows. As a reminder, we are also lapping increased from which we saw significant benefit. Increasing visibility and availability has always been a part of our growth model. Amplifying our advertising and reaching new consumers. The big gains in retail visibility come in spurs as they did last year. Over the next two years, we anticipate other significant new fridge placements that could provide similar visibility and availability benefits and help us achieve our long term net sales goals. However, those large additions will take some time to materialize. As you will hear later this morning, retailers are fully engaged we have new fridge placement options that have the potential to change the way consumers think about shopping for their pets. In fiscal year 'twenty five, we do expect a steady diet of the typical new store and second fridge placements and some tests or small scale implementations of some more impactful larger placements.

Net believe the long term trends remain robust. And while the pet food category trends are not where we would like them to be, the start of 2025, Freshpet and other Freshpet frozen brands including DTC brands continue to significantly outperform the category and we do not foresee that changing And one can't escape the fact that Freshpet has been a remarkably reliable [indiscernible] Our Nielsen measured sales Volume growth and household penetration gains have performed well over a very long period of time and through a wide variety of situations, including price increases, media timing changes competitive entries, macroeconomic pressures and widespread out of stocks. And that and the size and total addressable market is why we are confident that we are on track for the $1,800,000,000 in net sales in fiscal year 'twenty seven. Today, we are also raising our 2027 margin targets conjunction with our CAGNY presentation later this morning. That we can exceed our previous long term targets for adjusted gross margin and adjusted EBITDA margin. For adjusted gross margin, we now expect a 48% margin by fiscal year twenty twenty seven versus 45% previously and for adjusted EBITDA margin we now expect a 22% margin by fiscal year twenty twenty seven versus 18% previously.

We've made great progress on scaling the business and our current plans to drive greater efficiencies give us confidence in our ability to to deliver these new goals. We believe we have established a robust pace of growth enables us to capitalize on the once in generation pet food transition from Kibble and Can Freshpet Food, and simultaneously deliver the profits that make that an attractive venture. Longer term, believe the Freshpet can continue to grow net sales at a very strong rate and that there is still additional room for margin improvement. Beyond fiscal year twenty twenty seven, it would not surprise us if Freshpet delivered an adjusted EBITDA margin in the mid-20s It won't happen overnight. But the opportunities for profit improvement from added scale new technologies and operating efficiencies are sizable the TAM continues to grow nicely. We believe Freshpet has the potential to have a very high market share in an attractive category with a well insulated position and structurally attractive economics. In summary, 2024 was a terrific year and one we're very proud of as an organization. We are constantly striving to be better raising the bar for ourselves. Both financially for our investors and with our products for our consumers.

We aim to have the right balance of growth capital investment, and cash generation. And we are increasingly confident that we will be free cash flow positive by 2026. Intend to self fund our growth efforts going forward. Now let me turn it over to Todd to walk you through the details of the fourth quarter and full year 2024 results and our 2025 guidance. Todd, Thank you, Billy, and good morning, everyone. As Billy mentioned, we are very happy with our 2024 results and our ability to manage growth while driving profit improvement. Now I'll give you some more color on our financials and updated guidance for the year. Fourth quarter net sales were $262,700,000 up 22% year over year. Saw broad based consumption growth across channels. For Nielsen measured dollars, we saw 23% growth in AOC 22% in total U. S. Pet Retail Plus, 20% in U. S. Food and 10% growth in Pet Specialty. The unmeasured channel contributed approximately two points of growth. Our growth was partially offset by a small trade inventory reduction. Fiscal 2024 net sales were $975,000,000 up 27% year over year. Fourth quarter adjusted gross margin was 48.1 This increase was driven by lower input cost, reduced quality cost and improved leverage on planned expenses.

Please note that the fourth quarter gross margin had a one time menu 50 basis points. We strategically built excess inventory at year end in order to take down several lines in the network for a few weeks to upgrade equipment and improve operating efficiency. Inventory will return to normal levels in the first quarter of twenty twenty five which will result in a 150 basis point negative impact to gross margin for the first quarter. Fiscal year 2024 adjusted gross margin was 46.5% an increase of six fifty basis points compared to the prior year. Fourth quarter adjusted SG and A was 28% of net sales compared to 26.6% in the prior year period. We spent 8.9% of net sales on media in the quarter, up from 6.3% of net sales in the prior year period. As the media spend was more evenly spread throughout the year versus the prior year, The biggest portion of the Q4 increase came in December. Logistics costs were 6.2% of net sales in the fourth quarter flat compared to the prior year period. Fiscal year twenty twenty four adjusted SG and A was 29.9% of net sales compared to 31.3% in the prior year period.

Media as a percent of net net sales was 11.4% compared to 11.1% in the prior year while logistics improved 150 basis points year over year, to 6%. Fourth quarter adjusted EBITDA was $52,600,000 or 20% of net sales compared to $31,300,000 or 14.5% of net sales in the prior year period. This improvement was primarily driven by higher gross margin, partially offset by higher SG and A expenses. Fiscal year 2024 adjusted EBITDA was $161,800,000 or 16.6% of net sales compared to $66,600,000 or 8.7% of net sales in the prior year period. As a result, we now believe that we can significantly exceed the original 18% target for fiscal year twenty seven.

Apple Capital spending for 2024 was $187,100,000 dollars operating cash flow was $154,300,000 for the year a year over year improvement of $78,300,000 and we had cash on hand of $268,600,000 at the end of the year. As Billy mentioned, we believe that we have adequate cash to self fund our growth moving forward and we will be free cash flow positive in 2026. Separately, we will be changing the way we approach Freshpet specialty channel. As you know, that channel has struggled quite a bit over the past few years and our market share is underdeveloped in that channel. We continue to believe it represents a sizable opportunity but we need to change our route to market and invest in some new approaches [indiscernible] enable those customers to succeed. In conjunction with that move, we intend to change our distribution partner in that channel and we are currently in the process of assessing the non recurring effects that may arise from exiting our relationship with previous distribution partner. Now turning to guidance in 2025. We expect net sales of approximately $1,180,000,000 to $1,210,000,000 or approximately 21% to 24% growth year over year. In terms of cadence, we expect the growth rate to be slightly higher in the second half of twenty twenty five we reaccelerate the household penetration growth that we constrained last year to to live within our capacity limits.

We are aware that this growth rate is below the 25% rate we previously outlined as the pace of growth we would average through fiscal year twenty twenty seven. As you know, we are well ahead of that growth rate through fiscal year twenty twenty four, so it is not necessary for us to grow 25% for the next few years to deliver a $1,800,000,000 net sales target for FY '27. We believe the market opportunity is there to maintain a higher growth rate and our market raising our fiscal year twenty twenty seven net sales target and maintaining a 25 growth rate would require us to commit to bring on more capacity sooner. This would compromise our ability to be free cash flow positive in fiscal year twenty twenty six and caused us to commit to more lines using the existing technology when we believe we are on the verge of break breakthrough new technology, technology that could could potentially deliver significantly better margins quality and capital efficiency. So we are guiding to 21% to 24% net sales '25 and this guidance leaves us solidly on track to deliver our long term target of $1,800,000,000 in fiscal year twenty twenty seven.

For adjusted EBITDA, we expect at least $210,000,000 We anticipate modest adjusted gross margin expansion year over year driven by operational improvements and do not anticipate any material inflation or pricing actions. As I mentioned a few moments ago, we expect adjusted gross margin in the first quarter twenty twenty five to be negatively impacted by approximately 150 basis points as inventory returns to normal levels. Capital expenditures are projected to be $250,000,000 this year to a shift in timing of projects from '24 to 25. The majority of the spend is on the installation of new capacity to support our growth. In summary, we are very pleased with our 2024 results as they demonstrate disciplined growth and we made significant profitability improvements. We are very encouraged by the progress we have made and are now comfortable enough with the stability of the operations to raise our 2027 margin targets. That concludes our overview. Now I'll turn it back to Billy for some closing remarks. Thanks, Todd. As a reminder, we are presenting at the CAGNY Conference later this morning at 8AM Eastern Time so we will not be hosting a Q and A session after the call this quarter.

We look forward to speaking with many of you in the coming days and weeks. I'll leave you with this quote from an unknown author paraphrasing a song from the police. Every snack you make every meal you bake, every bite you take, I'll be watching you. To that, I would add, Feed Your Dog Freshpet. And your guilt will disappear. Thank you very much.