Freshpet, Inc.

Greetings and welcome to the Fresh Pet Inc. second quarter 2023 earnings 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 the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. Jeff Sonick, Investor Relations at ICR. Thank you. You may begin.

Thank you. Good morning, and welcome to Fresh Pets second quarter 2023 earnings call and webcast. On today's call are Billy Cyr, Chief Executive Officer, and Todd Cunfer, Chief Financial Officer. Scott Morris, Chief Operating Officer, will also be available with us 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 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 on 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. Rather, it's a summary of the results and guidance they will 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 the upcoming annual stockholders meeting or 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 the Fresh Pet business has real momentum on both the top line and the bottom line in both areas, growth and operating efficiency. we believe that we are still just scratching the surface of the enormous opportunity ahead of us and remain convinced that fresh pet food is the future of pet food. And we believe that Fresh Pet is very well positioned to lead the transition to fresh for many years to come. In Q2, we made significant progress on the adjusted EBITDA improvement that we committed to delivering this year, while simultaneously re-accelerating the household penetration and volume growth that supports both our near-term and long-term growth targets. The operational improvements are the result of the intense focus and organizational capability we have built in the areas of quality, logistics, and input costs, and in an improving operating environment. The reacceleration, parcel penetration, volume growth are the result of our unwavering focus on three foundational pillars that underpin our strategy. The strength of Fresh Pet proposition, the exceptional support of our customers, and our longstanding demonstrated marketing and innovation mastery. 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 and an update on our guidance for the year. The highlights are, first, strong net sales growth. We delivered 26% net sales growth in the second quarter and our 20th consecutive quarter with greater than 25% growth. This quarter's growth was in line with the guidance we shared for the quarter that called for mid-20s growth. and puts us on track to deliver our 2023 plan and our 2027 goal of $1.8 billion in net sales. What is most encouraging is that, unlike many other CPG companies, our volume consumption was strong and the growth is accelerating as the year-on-year benefits of higher pricing recede. Consumption volume growth in the quarter accelerated to 18%, up from 14% in Q1 and 12% in Q4 of 2022. Pricing and mix contributed a little more than 7% to our growth in the quarter. Second, household penetration growth. As we had anticipated, household penetration growth reaccelerated in the quarter once consumers digested the higher pricing that we have implemented over the past 18 months. The 52-week household penetration was up 10% versus a year ago, and the more near-term readings, such as the 13-week and 4-week measures, are up even higher, which foreshadows positive momentum for the annual growth rate. Encouragingly, the rate of growth amongst our heaviest users, Hippos, was higher yet, up 17% versus a year ago in the quarter on a trailing 52-week basis. Additionally, the buying rate for our franchise remains well ahead of our expectations and was up 19% versus a year ago. Third, adjusted EBITDA well ahead of guidance. This was a breakout quarter for our operations team. As we discussed in our last call, Second quarter adjusted EBITDA was expected to be in line with Q1 and weighed down by the heavy startup costs in Ennis and the startup of our Dallas DC. We greatly exceeded those expectations due to strong performance across every part of the P&L with the biggest improvement coming in logistics. Our logistics costs improved by 350 basis points versus the year ago and 130 basis points versus Q1, primarily due to strong fill rates and the successful utilization of our second DC. but we also had strong performance on input costs, quality costs, and SG&A. As a result of this strong performance and the continued improvement we are seeing, we are raising our adjusted EBITDA guidance for the year. Todd will provide more detail and the rationale for that, but you should take away that we are very encouraged by the improvements we've made in the efficiency of our operations and confident in our ability to drive further improvements. You should also take away that we are well on track to deliver the cost improvements embedded in our 2027 goals. Fourth, we proved that Fresh PEC could grow strongly even when priced at levels that reflect higher commodity costs. We have now taken price increases totaling a cumulative impact of approximately 27% over the past 18 months to reflect the higher input costs we have absorbed. Despite this higher pricing, volume growth continues to be strong and is accelerating. This demonstrates the strength of our brand and the fresh pet consumer proposition. Input cost as a percent of net sales came in at 34.4%, a 240 basis point improvement versus the year ago. This reflects the full impact of our February price increase and a more stable input cost environment. With these gains in hand, we are well on our way to achieving the necessary savings that underpin our 2027 goal. And we believe we have an opportunity to drive further operating improvements in areas such as production yield, cost savings initiatives, and some increasing scale benefits in purchasing. However, our goal is to make Fresh Pet accessible to the broadest range of consumers that we can. An improving cost environment will help us to avoid further price increases, while efficiency improvements will generally be used to restore our margins and generate higher returns on our invested capital. Fifth, the Ennis Kitchen startup continues to deliver. The Ennis Kitchen is now operating one bag line and one roll line on the 24-7 schedule, and the chicken processing operation is up and running, providing large quantities of chicken to our operations as planned. We are also producing the full range of SKUs that were planned for the Ennis facility. These demonstrate the thoughtful execution of our operating team, and we remain very optimistic about future gains we can realize as we ramp up to full efficiency to support our long-term growth. We are in the early stages of planning to start up the second bag line in Ennis and expect to be producing on that line in Q1 of next year, which means that we will begin hiring the staff and then commissioning that line in the second half of this year. Finally, construction on phase two is well underway and the steel frame of the building has gone up. The first line in phase two is expected to begin production late in Q3 of next year, which is when we anticipate that we will need that capacity to support our growth. Sixth, record levels of customer support. During Q2, we saw several major customers begin the implementation of very large-scale fridge placement efforts, including the largest single project in our history, where we began a two-month effort to place more than 2,300 fridges at a single customer in late June. Many of those fridges were upgrades, second or third fridges, but that program demonstrates their interest and commitment and capturing very large shares of the growing fresh pet food category. In the quarter, we placed a total of 1,385 new fridges, with 313 of them being net new stores and the balance upgrades second and third fridges in existing outlets. For the year, we continue to expect to install more than 5,000 new fridges, which will similarly be heavily skewed to stores where we are placing second and third fridges. By the end of the year, we expect to have more than 1.7 million cubic feet of refrigerated space at retail. Seventh, continue to strengthen our board. In the past three months, we've made some excellent additions to our board. In May, we announced the appointment of Dave Beeger, the former chief supply chain officer for ConAgra and Campbell Soup, to our board. Dave brings highly relevant perishable food operations expertise to our business. Two weeks ago, we announced that Dave West has joined our board. Dave is the former CEO of Big Heart Pet, which is now part of JM Smucker. And prior to that, he was the CEO and CFO of Hershey. And most recently, he was the vice chairman of Simply Good Foods. Dave brings deep pet industry expertise, strong financial acumen, and an appreciation for the unique challenges of high growth businesses. Dave will join our audit committee. Finally, we announced that Walt George was selected as our new board chair. Walt is replacing Charlie North, who just retired in accordance with the mandatory retirement policy we put in place as part of our five-year governance transformation plan that we announced in 2020. Charlie championed that plan despite the knowledge that it would compel him to retire this year. We are incredibly grateful to Charlie for his vision and support over so many years. He shepherded Fresh Pet from a company with $5 million in sales to one with a projected $750 million in sales this year, and even personally guaranteed the debt of the company at a perilous moment early in its life. Walt will step into the chairman's seat seamlessly. He's been on the board since the company went public in 2014 and has deep knowledge of both the company and the pet industry. Walt began his career in operations at Frito-Lay, but more importantly, he was a key executive at Hill's Science Diet during its rapid growth from $185 million in net sales to $1.5 billion. That gives him unique insight into the challenges of building a large pet food brand and creating a supply network capable of supporting that growth. Ulf is also deeply committed to advancing the health of companion animals as he serves as an officer on the board of the Morris Animal Foundation, which is one of the largest nonprofit organizations worldwide funding scientific studies to advance the health and well-being of companion animals. These board changes punctuate a multi-year effort to strengthen our company and better prepare us to pursue our mission to change the way people feed their pets forever. These changes also demonstrate our commitment to evolving our board to meet our changing needs in parallel with a five-year governance transformation plan that we initiated in 2020. That plan and the board evolution are built on a philosophy that our board's governance practices and counsel they provide to our leadership team should match the increasing scale and complexity of our business and be capable of addressing the emerging challenges we will encounter in the years ahead. Our efforts to strengthen our human capital have touched every part of our organization. Two years ago, we announced our investment in the Fresh Pet Academy, which has stabilized and strengthened our production workforce, dramatically reducing turnover and building critical skills that have delivered the results we are sharing today. Last September, we announced several impactful changes to our management team and have filled numerous roles since then, including a new CFO, a new EVP of manufacturing and supply chain, a new head of logistics, a new CIO, a new VP of manufacturing, and numerous other important roles. Each of these was needed to both strengthen our team and support our rapid growth. Looking forward, I expect that our efforts will deliver continued improvement in our operations and increasingly strong volume and household penetration-based growth. Our team is very focused on the goals we set for this year and is delivering the kind of performance you should expect from us. We believe that the strength and team we have built everywhere from our production floor to our finance team, to our logistics team, to our marketing and sales team and more is only scratching the surface of what is possible. We are very focused on delivering the 2027 goals we laid out earlier this year in our fresh future plan and doing it as quickly as we can. We are building momentum and our results to date show that we are on track to deliver those goals. Now let me turn it over to Todd for the details on the Q2 results. Todd.