Freshpet, Inc.

Greetings and welcome to Fresh Pet first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Jeff Sonick, Investor Relations at ICR. Thank you, sir. You may begin your presentation.

Hello and good afternoon, and welcome to Fresh Pet's first quarter 2022 earnings call and webcast. On today's call are Billy Sear, Chief Executive Officer, and Heather Pomerantz, 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 these federal securities laws. 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. Please refer to the company's annual report on Form 10-K filed with the SEC 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 that 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 this 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 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. The presentation can be found on the company's investor website. Management's commentary will not specifically walk through the presentation on the call, but rather it's a summary of the results and guidance that we'll discuss today. Now, I'd like to turn the call over to Billy Cyr, Chief Executive Officer.

Thank you, Jeff, and good afternoon, everyone. The message I would like you to take away from today's call is that our Q1 results are an early indicator of how much more resilient we are today than we were one year ago. The investments we made in our workforce and buffer capacity enabled us to overcome the challenges from Omicron, industry-wide supply chain disruptions, and our ERP conversions. and still deliver the strongest quarterly net sales growth rate since Fresh Pet went public in 2014. That resiliency will enable us to continue our rapid growth and fulfill our mission to change the way people nourish their pets forever. Our team is quite proud of what we accomplished and the results we delivered. We overcame supply shortages and construction delays to design, construct, install, and start up the incremental capacity that has enabled us to not only meet our rapidly growing demand, but to also fill the trade inventory hole that we dug over the past 18 months. We still have some pockets where our in-stocks are not where they need to be, particularly in pet specialty where we went through a distributor change. But overall, we have our best retail conditions in almost two years, and they keep getting better. We've also hired and trained the team members needed to produce enough fresh pet to fill those fridges in one of the tightest labor markets in decades, and we continue to generate incremental demand in the face of the most significant inflation in decades through outstanding marketing, innovation, and fridge placements. Looking ahead, we are also keenly aware that the operating environment remains extremely challenging. The planning and skills that it took to overcome the obstacles we faced in Q1 will be needed over and over again in the coming months and years if we are to sustain high rates of growth. To be successful, we will need to continue to plan conservatively and act aggressively, just as we've done so far this year. That is what we intend to do. It is in that vein that we have revisited our long-term capacity expansion plan. Since we established our plan about 15 months ago, quite a bit has changed. Some of the biggest changes have been, first, lead times. Lead times for construction and equipment have lengthened significantly, sometimes doubling and tripling. That puts a premium on planning and ordering ahead, but it also puts added strain on the balance sheet because we must start spending capital much further in advance of when capacity is able to begin production. On average, we are spending capital more than six months earlier than before to deliver the same capacity. Second, costs. The cost of construction and equipment has increased significantly. On average, construction materials and equipment costs are up more than 20% over the past year, particularly for those who use a large amount of stainless steel as we do. Third, operating know-how. We've learned quite a bit about how to design facilities to operate more efficiently over the past year, particularly since we've been operating kitchens, too, on a 24-7 schedule for a full year. Fourth, new technology. We've been experimenting with a variety of new production technologies over the past year, some that support existing products and some that enable new innovations. We are ready to scale up some of those technologies. And fifth, competition. The emergence of a large and growing segment of very high-end fresh and frozen pet foods has reinforced the strategic importance of ensuring that Fresh Pet always has the best products in the market while presenting consumers with an attractive value proposition. We are ready to scale up some additional products that we believe will expand our franchise, increase our buying rate, and enhance the Fresh Pet brand reputation. To address those changing dynamics, deliver the necessary capital efficiency to justify the investments we are making, and to keep up with the significant increase in demand, we established the following guiding principles. First, focus on building where our talent is based. To maximize utilization of our technical staff, we will focus our efforts on Bethlehem, Ennis, and Kitchen South, fully building out those sites. This will enable us to maximize the potential of each site with the most efficient use of our talent. This includes innovation, as we will house innovative new products in Bethlehem so that they are connected with our R&D staff. Second, locate and group technology and equipment in the most cost-effective manner. As a small company attempting to meet almost insatiable demand across our product portfolio, we had to pair a bag line and a roll line together each time we expanded. Now, we are adding capacity in larger chunks and can establish buildings and operations that specialize in either bags or rolls. That delivers labor efficiency, better management of maintenance and spare parts, and greater operating expertise. Third, limit fresh pit capital investment to assets of greatest strategic value. While we will continue to selectively build and own some of our buildings, our new plan makes greater use of our partners' capital to construct and own buildings while we focus our capital on equipment and technology. And fourth, enable innovation. Our capital plan must ensure that we never fall behind on product performance versus any relevant competitor. We believe we are the best in class product today, and we intend to keep it that way through a commitment to long-term innovation. Applying those principles, we are making some changes to our long-term capital plan. The key changes are, first, splitting NS Phase 2 into a Phase 2 and a Phase 3. The new NS Phase 2 will be dedicated to roll lines, and we will be pulling forward the beginning of construction as well. In fact, we've already begun the site preparation work for that expansion and expect a new Phase 2 to open in Q4 of 2023. Phase 3 will largely focus on bag lines and will be slated to open a year later in Q4 of 2024. Second, focusing Kitchen South on bags. We will be adding incremental bag lines to the existing building and eliminating the need to add a new building that would house roll lines. We will ultimately house five bag lines at Kitchen South, some of them using new technology with higher throughput and greater packaging flexibility. And third, adding an innovation scale of facility in Bethlehem. We are establishing a new 100,000 square foot facility about one-half mile from our existing campus in a leased building that we will equip with the production lines capable of producing some of our new, innovative products. In total, this revised plan will deliver capacity to make approximately $2.9 billion of Fresh Pet products, up about $500 million, or 20% from our previous plan. We'll also add new product technologies capable of producing new, preferred products that will provide unique benefits to new consumer audiences. and the plan will deliver greater operating efficiency than the previous plan. The company investor presentation provides more detail on the projects and the returns we will get from these investments. Put simply, each of these projects will pay back quickly once they are operational and fully utilized, just as the Bethlehem campus is generating significant free cash flow on a four-wall basis now that it is fully utilized. We believe this is both an aggressive and prudent plan, it is very clear that the future of pet food is in higher quality foods like fresh pet. Various industry estimates have pegged the size of the category at $4 to $6 billion as soon as 2025, and we outlined a 25% increase in the size of the total addressable market, or TAM, to 25 million households at the ICR conference in January. We fully intend to capture as much of that market potential as possible. We are the category leader. We have a huge head start. and we have sizable competitive advantages. To maintain that lead, we must always have adequate capacity, and we must always have the best products. Our plan is designed to ensure we always do. So what does this capacity expansion mean for our existing 2025 targets? We are off to a fast start in 2022, and our current growth trajectory is well in excess of the rate we would need to hit our 2025 goal. But with all the uncertainty in the macro environment, we think it is more prudent to maintain our targets while we navigate through this fluid macro environment. That said, we have great confidence in the path forward to build and serve a much larger consumer audience. Simply put, this is a timing exercise. Given the incremental challenges in sourcing and construction, we need to start sooner to ensure that our operational capabilities and capacity keep pace with long-term demand. For investors, We believe this capacity plan is best thought of as both an option for accelerated growth and insulation against further challenges in construction or equipment sourcing. We're also building in some flexibility. While there are long lead times for construction and equipment, we have preserved the ability to scale back portions of the plan at various stages along the way to ensure that our capital spend is always optimized and capacity is in lockstep with our latest estimate of demand. Further, We are also mindful that the world we are operating in has an unusually large amount of economic uncertainty in it. Given that and the aggressive competitive posture we are taking, we will balance the capacity expansion plan with a conservative balance sheet that is designed to insulate our growth plan from the typical volatility of both a high-growth company and the capital markets. We intend to operate with low leverage until the business is generating strong cash flow capable of funding our capital expansion plans from operations. We believe the plan we are laying out today is the right one and will allow us to reach our long-term goals in the most efficient way possible, solving for the current environment and leveraging our growing set of capabilities. Our founders bet on the future of higher-quality pet food back in 2006 with the creation of Fresh Pet, and we asked our investors to do that when the company went public in 2014 and again in 2017 when we launched Feed the Growth. We believe our long-term results have shown that those were wise investments. We believe the plan we are laying out today will enable us to build on those results and deliver the future of pet food and a very bright future for fresh pet. I will now turn it over to Heather to provide a summary of our Q1 2022 results.