Freshpet, Inc.

Greetings. Welcome to Fresh Pet's first quarter 2023 earnings call and webcast. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, we'll now turn the conference over to Jeff Sonick. Mr. Sonick, you may now begin.

Thank you. Good morning and welcome to Fresh Pet's first quarter 2023 earnings call and webcast. On today's call are Billy Cyr, Chief Executive Officer, and Todd Confer, 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 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 or 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. That 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. Additionally, we'd ask that your questions remain focused on the performance of the business and the results in the quarter. Management will not discuss or speculate on other topics beyond what is being reported here today. With that, I'd now like to turn the call over to Billy Cyr, Chief Executive Officer. Billy?

Thank you, Jeff, and good morning, everyone. The message I would like you to take away from today's call is that we are making the steady progress on the key drivers of costs and margins that we committed to deliver this year in the Fresh Future Plan, while still delivering strong growth that is in line with our long-term growth plan. This is due to strong operating performance by our teams in Bethlehem and Ennis, and another indication that the investment that we made in the Fresh Pet Academy is paying dividends throughout the P&L. I will share a few highlights of our performance and a few thoughts on the outlook for the balance of the year, and then Todd will provide more detail on the quarter. The highlights are, first, strong net sales growth. We delivered 27% net sales growth in the first quarter. This was in line with the guidance we shared for the quarter and puts us on track to deliver our 2023 plan. Nielsen measured consumption was up 29% in the quarter, but the year-ago quarter included some trade inventory refill, so our net sales growth was less than the consumption growth. The consumption growth was comprised of 14% volume growth and 15% price mix growth. We will be lapping significant trade inventory refill in the year ago through much of this year. We won't get nearly as much benefit from pricing this year as we did last year, but our growth appears to be strong, particularly with our heaviest users. Second, adjusted EBITDA ahead of guidance. As we discussed in our last call, first quarter adjusted EBITDA is expected to be weighed down by the heavy startup costs in NS and the startup of our Dallas, D.C., I'm very happy to say that both of those initiatives were completed successfully and on budget. But perhaps more importantly, our performance on quality and logistics were much better than we had planned, as strong performance on quality yielded improved gross margin and enabled higher fill rates that reduced logistics costs. Quality costs came in at 5.3% in net sales, down from 6.1% in the year-ago quarter. And logistics costs came in at 9.3% of sales, down from 9.9% in the year ago, despite the startup costs associated with the Dallas DC. These are both key operational areas that our team has been focused on, and we are very encouraged by this progress, as well as the opportunities it provides for continued upside as we execute our margin improvement strategy. Third, more effective balance between commodities and pricing. Input cost as a percent in net sales came in at 34.1%, which only reflects a partial impact from the February price increase. Looking ahead to Q2, we expect to reduce our input costs as a percent in net sales further. For perspective, our Q1 performance is 180 basis points better than the 35.9% we experienced for the full year of 2022 and 200 basis points better than the 36.1% in the Q1 of 2022. Many retailers did not reflect the higher pricing on shelf until late in the quarter, but so far it appears that consumers are accepting the pricing well. Fourth, NS Startup. The NS kitchen is off to a good start due in large part to the training and preparation of the incredible team that is supporting its build out and commercialization. We are now shipping product off both the bag line and roll line and are capable of producing a wide range of SKUs on those lines. We are still ramping up production on the bag line, but Once that is completed, there will be yet another critical achievement that will unlock significant logistics savings. We will be able to ship the vast majority of our product assortment out of the Dallas, D.C. using locally produced product. Further, our assessment of the quality of the product produced in Ennis is that it is every bit as good as the product we produce in Bethlehem, and we are doing it with fewer people due to the significant automation that we have integrated into the facility's design.