Freshpet, Inc.

Greetings. Welcome to Fresh Pet's fourth quarter and fiscal year 2023 earnings call. At this time, all participants are in listen-only mode. The 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, I'll now turn the conference over to Rachel Osh, Vice President of Investor Relations. Ms. Osh, you may now begin your presentations.

Thank you. Good morning, and welcome to FreshBet's fourth quarter and fiscal year 2023 earnings call and webcast. On today's call are Billy Thier, Chief Executive Officer, and Todd Comfort, 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 Private Securities Litigation Reform Act of 1995. These include statements related to our long-term strategy, focus, 2027 goals, case in achieving these goals, prospects for growth and new technologies, and 2024 guidance. Words such as believe, could, estimate, expect, guidance, intend, may, project, will, or similar conditional expressions are intended to identify forward-looking statements. 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, including those associated with such statements and inaccuracies in third-party data. Please refer to the company's annual report on Form 10-K, filed with the Securities and Exchange Commission 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 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, why 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 commentary will not specifically walk through the presentation on the call. Rather, it is a summary of the results and guidance they will discuss today. With that, I would like to turn the call over to Billy Cyr, Chief Executive Officer.

Thank you, Rachel, and good morning, everyone. The message I would like you to take away from today's call is that we believe Fresh Pet has reached an inflection point on its journey towards becoming not only a sizable but profitable business in the emerging fresh frozen segment of the pet food market. We delivered the strong growth you've come to expect from us, but also turned a corner on our profitability and are on our way towards delivering the kind of profitability and cash flow one would expect of a market leader. In 2023, we made significant progress on nearly all the metrics we set out to deliver. And if we continue to execute as we did in 2023, we will prove that with increased scale comes increased profitability and, in turn, shareholder value. Our Feed the Growth strategy, which we implemented in 2017, was driven by our dual beliefs that fresh pet food is a scale-driven business and that it was also important to maximize our first mover advantage before competitors entered the fresh pet food market. Our transition to a fresh future plan last year reflected our belief that we were at the point where we have achieved sufficient scale and first mover advantage such that we can begin to pivot to delivering the profitability that should come with that scale. Our 2023 results show the initial indications of our ability to drive that profitability, and we believe there is a significant opportunity to drive further profit improvement going forward. Now let me walk you through some highlights for the fourth quarter and full year. First, we ended the year with very strong net sales growth and exceeded our expectations with fourth quarter net sales of 215.4 million, up 30% year over year, driven primarily by volume growth of 25% and 5% price mix. This strong growth is compared to a very strong quarter last year when we had significant trade inventory refills. The growth was supported by a strong advertising presence and household penetration gains that accelerated throughout the quarter. Second, we continue to see the strong operational improvements our fresh future plans were designed to drive, including sequential improvement in adjusted gross margin, logistics costs, and adjusted EBITDA. Fourth quarter adjusted gross margin was 41.1% compared to 40.2% in the third quarter and 33% in the prior year period. Logistics costs came in at 6.3% in net sales, down from 9.4% in the prior year period and 6.8% in the third quarter. Fourth quarter adjusted EBITDA was 31.3 million compared to 23.2 million in the third quarter and up 67% year over year. Fiscal year 2023 was our sixth consecutive year with greater than 25% sales growth, with net sales of $766.9 million up 29% year over year, on the high end of our targeted range and above our expectations. Full year adjusted EBITDA was $66.6 million, more than three times what we delivered in the previous year. These financial results demonstrate real momentum, the potency of our plans, and the capability of our team. I'm incredibly proud of what we have been able to accomplish. In addition to those financial highlights, we delivered the significant increase in retail presence our retail partners sought as they became increasingly confident in our ability to supply them. Specifically, a record 5,251 fridge placements in 2023, including new stores, upgrades, and second or third fridges, bringing us to a total of 34,274 fridges at retail for more than 1.7 million cubic feet of retail space. As of December 31, 2023, FreshPak could be found in 26,777 stores, more than 22% of which now have multiple fridges in the U.S. These fridge placements and store growth were supported by continued strong fill rates that ended the quarter in the high 90s. In addition to our strong retail business, we have also built a very strong digital business. Digital orders, which I previously referred to as e-commerce, We define as any time you order on a phone or desktop, so this includes anything from buy online, pick up in store, to Instacart, Chewy, and Amazon. In 2023, our digital sales increased 58% year over year, and at this point, we are projecting digital orders to be over $100 million in net sales in 2024. The vast majority of our digital orders today are pick up or click and collect, which leverages our existing bridge network in retail. According to Nielsen IQ, pickup is also the fastest growing segment of online e-commerce and dog and cat food. During our ICR conference presentation in January, you may recall hearing us talk about the mainstream, main meal, more profitable plans, which I'll simply refer to as main and more. We're making the Fresh Pit brand more mainstream and getting people to use it as a main meal component. And this creates intensity and concentration of the business, that we believe will allow us to be more profitable. Diving a little deeper into the idea of mainstream, according to Nielsen Omnichannel data, which includes e-commerce and direct-to-consumer, as of December 30, 2023, total pet food is a $52 billion category. Within that is the $36 billion dog food category, which the majority of our business is today, and we have only a 3% market share, which leaves a vast runway for growth. At the same time, we've created a new segment within pet food, fresh frozen pet food, that has gained scale and is growing quickly. Within the fresh frozen subcategory in measured channels, Fresh Pet has a 96% market share. Our goal is to make fresh even more mainstream since our products appeal to a wide range of income groups. We have products for each stage of a pet's life and are growing our portfolio to better meet the needs of larger dogs. Our household penetration year-end was 11.555 million households, up 19% year-over-year and accelerating towards our target of over 20% household penetration growth. Our high-profit pet-owning households, or HIPPOs for short, grew even faster, up 28% versus a year ago. Household penetration has grown fastest with younger Gen Z consumers, and we saw growth across all income groups. are on pace to meet our target of 20 million households by 2027. overall retail availability continued to grow with acv at year end of 64 and we see upside in continued distribution gains going forward we will continue to focus on depth too not just breadth increasing the percentage of stores with second and third fridges i spoke about earlier focusing on the concept of main meal We know that 40% of Fresh Pet buyers use the product as the main component of their pet's meal, and there is a huge opportunity to significantly increase this percentage, even with our hippos. 37% of Fresh Pet users are hippos, and they represented 89% of our sales in 2023. We are using advertising to drive pet parents to feed Fresh Pet as the main meal item by focusing on healthy food, offering products at a variety of price points, and expanding specialized recipes. The concept of converting coppers into main meal users will increase buy rate, which was $95.86 a year end. Broadening availability of a wider range of our items can help drive more consumers to convert to using Fresh Pet as a main meal item. Adding second and third fridges enables us to do that, and this also drives increased visibility for the brand, amplifying the value of our advertising. Based on megachannel data, we currently have an average of 18.2 SKUs per store, up from 15.8 SKUs one year ago. Turning to the more part of Maine and more, more profitable, we are enhancing margins through improved operating performance and leveraging scale and efficiency. We believe increased business intensity and concentration will drive increased efficiency, and we are seeing that play out in our margins already. Fourth quarter adjusted gross margin was up 810 basis points year over year to 41.1%. And adjusted EBITDA as a percent of net sales was 14.5% compared to 11.3% in the prior year period. Three key areas we've been most focused on have been input costs, logistics, and quality. And we've improved all three this past year. Logistics now only 6.3% of net sales in the fourth quarter. down from 9.4% in the prior year period. In total, we improved those three areas by 390 basis points in Q4 and 560 basis points for the full year. Focusing on capacity, we feel good about where we are today. December was an all-time production record across the system, despite the loss of time for holidays, driving very strong fill rates in the high 90s today. And January production topped the December record. All three lines in the first phase of NS are operating today, and that site now accounts for 25% of our total system production. NS phase two construction is on track for the startup of the first roll line by the end of the third quarter of 2024. We've continued to evolve our capacity expansion plans to drive greater capital efficiency. We are very focused on, first, maximizing the output of our existing lines by investing in an operational excellence program designed to increase throughput. We were making good progress on that program in Bethlehem and just started the plan in Ennis. Second, maximizing the capacity of our three existing sites so that we can avoid the high cost of incremental infrastructure and overhead. This means finding ways to get more lines into each of the three sites. We've already announced plans to add a seventh line in Bethlehem. We believe we've found a way to get an additional line or two in Kitchen South and are also looking for ways to get more lines in Ennis. Third, developing new technologies that generate more throughput per line and per square foot of space. We've been working on this for some time and are making good progress, but are not ready to share any details at this time. Overall, 2023 put us ahead of the pace needed to deliver our 2027 goals and gave us increased confidence in our ability to either meet or exceed those goals. The strong 29% net sales growth in the year was ahead of what we had projected, As we head into 2024, we intend to manage the growth very closely so that we do not get ahead of capacity or organization capability. Our model works very well at 25% net sales growth over time, generating the right balance of cash generation and capital spending to deliver our financial targets. We do not want to get too far ahead of ourselves and upset that balance. We recovered 400 basis points of adjusted gross margin during the year. ahead of both our target and the pace needed to hit our 2027 target of a 45% adjusted gross margin. And we ended the fourth quarter with an even higher adjusted gross margin at 41.1%, giving us even more encouragement about our ability to deliver our long-term goal. We are well ahead of our long-term logistics target of 7.5% in net sales, delivering the target three years early and ending the year at a rate well below the target It is clear that we have an opportunity to further improve in logistics and will likely set a new, lower target in the future. Operating cash flow of 76 million was also ahead of our plan and increases our confidence in our ability to fund our growth with no need for additional equity and potentially not even needing any new debt. In summary, we had a very good year and we believe we are on the cusp of profitability with greater scale and efficiency due to increased business intensity and concentration and disciplined capital management. Now let me turn it over to Todd to walk through the details of the Q4 results and our guidance for 2024.