Freshpet, Inc.

over to Tracy Osh, Vice President of Investor Relations. Thank you. You may begin.

Tracy Osh, Vice President of Investor Relations, Thank you. Good morning, and welcome to Fresh Pet's second quarter 2024 earnings call and webcast. On today's call are Billy Sears, Chief Executive Officer, and Todd Comfort, Chief Financial Officer. Scott Morris, President and Chief Operating Officer, will also be available for Q&A. Before we begin, please remember that during the course of this call, management will 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, 2027 goals and pace in achieving these goals, prospects for growth, timing of Fresh Back Kitchen's expansion and new technology, and 2024 guidance. Words such as anticipate, 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. Please refer to the company's annual report on Form 10-K with the Securities and Exchange Commission and the company's press release issued today for detailed discussions of risks that could cause actual results to differ materially from those expressed or filed 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 why management believes such non-GAAP financial 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 a summary of the results and guidance they will discuss today. With that, I'd like to turn the call over to Billy Sear, 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 are on track to deliver the disciplined growth we committed to achieve this year. As you know, we aspire to deliver category-leading growth with outsized improvement in profitability. But as we've learned over the past few years, carefully managing our growth to about 25% enables us to drive operating improvements and manage cash more effectively, making Fresh Pet an even more attractive business. That is our definition of disciplined growth. And if we do that well, consumers will win, customers will win, and our shareholders will win. Our second quarter results demonstrate the strong progress we are making towards delivering that disciplined growth. We delivered our 24th consecutive quarter of net sales growth over 25% and did it within our existing capacity limits so we maintained exceptional customer service and strong fill rates. That enabled us to operate very efficiently and effectively, so we expanded our adjusted gross margin and an adjusted EBITDA margin. The bulk of the operating improvements came in our key focus areas of input costs, quality, and logistics, totaling 770 basis points of operating improvements. Those operating results, specifically adjusted gross margin, input, quality, and logistics costs, exceed some of the key elements of our 2027 goals as a result we are in an even stronger position to achieve or exceed our full set of 2027 targets as well as raise our guidance for this year we still need to prove that we can achieve these results consistently before we adjust our long-term targets however another quarter of strong performance has made us even more optimistic these results were driven by broad-based strength on the key business fundamentals first Our growth in the second quarter was entirely driven by volume growth. There was no impact from pricing or mix this quarter. Further, we have been seeing a steady trend towards consumers buying larger pack sizes, which slightly reduces the price per pound, but improves the efficiency of our production lines and our distribution systems. This consumer behavior is a positive indication that value-seeking consumers move up to larger sizes of fresh pet rather than reducing the size or amount they buy. Second, from a household penetration perspective, our growth rate is where we need it to be to hit our 2027 target of 20 million households. We are growing households in the low to mid-20s and increasing the buying rate in the low single digits. That combination results in mid-20s growth rates, which is our targeted level. More encouragingly, our heaviest users are growing even faster than the total user base. Third, our media plan is also delivering the way we had hoped. It is driving strong household penetration gains in line with our long-term model and at a healthy customer acquisition cost that is comparable to the cost we had prior to the price increases we took over the past two years. Additionally, by balancing our media investment more evenly across the year, we have been able to deliver strong growth while living within our capacity limits. Fourth, consumers continue to believe that Fresh Pet represents a good value. The desire for value is being expressed as quality for the price, not just price. We believe consumers find value in a truly differentiated product. That is why it appears that much of the category growth is now coming from the fresh frozen segment where Fresh Pet is a leader. Further, our growth is fastest among our heaviest users, another strong indicator of the differentiated value that Fresh Pet represents, even in an environment where consumers are looking for ways to stretch their dollars. Finally, taking a step back, our growth continues to be supported by the long-term trend towards the humanization of pets. The pandemic created a pet adoption bubble, but we are now back on the same long-term pet population growth trends we have seen for more than a decade. And our volume growth comes from expanding household penetration, which is the model that has worked for us since we first launched our Feed the Growth strategy in 2017. Now I'd like to provide some highlights of the second quarter. We have strong momentum and made great progress against our long term plan, and you can see that in our financial results. Second quarter net sales were 235.3 million, up 28% year over year, all of it being volume driven, as I said earlier. Second quarter adjusted gross margin was 45.9% above our long term target for the second consecutive quarter, compared to 39.8% in the prior year period. Second quarter adjusted EBITDA was $35.1 million, an increase of approximately $26 million year over year. From a retail perspective, we are having a solid year of retail availability growth. Store count growth is in line with our long-term rates. More importantly, some of our larger customers are engaging with us on potential plans to add second and third fridges and high-velocity stores. That is where we expect to see the bulk of our growth. You will see that in TDP growth exceeding ACV growth as we go forward. Specifically, we placed 790 fridges in the second quarter, including new stores, upgrades, and second-slash-third fridges, bringing us to a total of 35,602 fridges at retail for more than 1.8 million cubic feet of retail space. As of June 30, 2024, Fresh Pet could be found in 27,497 stores. 22% of which now have multiple fridges in the U.S. Fill rates continue to be strong, and we're in the high 90s throughout the quarter, supporting fridge placement and store growth. Now I'll provide an update on KPIs we track for our mainstream, main meal, more profitable plans, what we refer to as main and more. Focusing on the idea of mainstream, Fresh Pet is becoming increasingly mainstream, but still has a long runway for growth. According to Nielsen omnichannel data, which includes e-commerce and direct-to-consumer, as of June 29, 2024, total U.S. pet food is a $53 billion category. We only have a 3% market share within the $36 billion dog food segment, which is the majority of our business today. Within the fresh frozen subcategory in measured channels, fresh pet has a 96% market share. Fresh continues to outperform the broader pet food category, and many retailers believe it is the future of pet food. As a result, Fresh Pet is now in 66% ACV in Nielsen XAOC, and we continue to add distribution breadth and depth with second and third fridges. Our household penetration gains also demonstrate that we are well on our way to making Fresh Pet more mainstream. Household penetration at the end of the second quarter was 12.8 million households, up 25% year over year, and on track to meet our target of 20 million households by 2027. Our high profit pet owning households, or hippos for short, are growing even faster, up 31% versus the prior year period. In short, the humanization of pets is a mainstream idea, and now it is our job to make fresh food the standard way to feed your pets. Turning to the main meal part of the strategy, fresh pet sales are increasingly concentrated in our heaviest users, hippos, Currently, 37% of Fresh Pet users are Hippos, and they represented 89% of our sales in the second quarter. Even more encouraging, about 300,000 of our users, or less than 3% of our total users, buy more than $1,000 of Fresh Pet per year, and this group grew 47% over the past year. They now represent about 27% of our business. There is a significant opportunity to increase this percentage and grow our total business. The key driver to convert more consumers to use Fresh Pet as the main part of their pet's meal is advertising. We need to educate consumers on the benefits of fresh food for their pets. Multipacks and larger pack sizes can also help reinforce the idea that our product can be your pet's main meal and will in turn help increase buy rate, which was approximately $100 at quarter end of 3.3% versus the prior year period. Adding unique value added SKUs helps do that. Based on total US pet retail plus data from Nielsen, we currently have an average of 18.4 SKUs per point of distribution, up from 16.1 SKUs one year ago. Since we have a finite amount of space in our fridge, as we increase the number of second and third fridges, we can increase the number of SKUs, amplifying our visibility and marketing impact, widening our product assortment, and broadening the appeal of our brand. Now to the more part of Maine and more, more profitable. We had another strong quarter of margin improvement. Adjusted gross margin improved 60 basis points versus the strong results we posted in Q1 to 45.9%, and we ended the second quarter with an adjusted EBITDA margin of 14.9%. The key items that drove this improvement were, first, quality. Our team continues to execute well. We still have lots of opportunity for further improvement, But our team has been able to reduce both the number of issues we have to manage and also the size of any issues. Second, input costs and yield. We've returned to our historic level of input costs as a percent of net sales through a combination of price increases, commodity cost management, and meaningful improvements in our production yields. Further, we believe there's an opportunity to continue to improve efficiency in this area through formulation work, supplier diversification, operating improvements, and new technologies. Third, logistics. We are clearly benefiting from some macro factors on freight, including lower lane rates and fuel costs. But our 99% fill rate in the quarter, the expansion of the service area for our Dallas DC behind increased production in NS, and new tools we put in place to more effectively bid our lanes and improve our customer service are the primary drivers of the improved performance. Turning to an update on our capacity, we have a disciplined approach to managing capacity and continue to execute on our expansion plans, while also improving throughput and yields on existing lines. In Ennis, the fourth line is still on track to start up by the end of Q3 2024. We began commissioning the line in July and feel good about the test run so far. In Bethlehem, the team is focused on increasing capacity utilization, or OEE, and our seventh line in that campus will test new technology and its expected startup in the second half of 2025. In Kitchen South, we continue to evaluate ways to add more lines and or shifts. We continue to evolve our capacity expansion plans to drive greater capital efficiency. As we've discussed previously, we are intensely focused on, one, maximizing the throughput of our existing lines, two, maximizing the capacity of our three existing sites, and three, developing and implementing new technologies that generate more throughput per line. While we've come a long way since our first facility in Quakertown, PA, the manufacturing systems to make fresh pet food are still not where we'd like them to be. We've invested and will continue to invest heavily in both technology and talent to make our production more stable, reliable, and efficient. We've made tremendous progress, but still believe the opportunities for improvement are sizable. In summary, I think we are making good progress at delivering the disciplined growth we promised at the beginning of this year. We are highly focused on managing the business to live within our capacity and believe this has led to the progress we've made on our profitability. We believe our model works very well at approximately 25% growth, generating 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. I'm incredibly proud of the progress we have made and the results we have delivered, especially since NS is still subscale and we have some exciting new technologies under development that could meaningfully enhance the economics of our bags business. Now we need to continue to execute at a high level and keep raising the bar. Before I turn it over to Todd, I want to point out that the press release announcing our earnings today has a dateline of Bedminster, New Jersey, instead of our previous home in Secaucus. We've outgrown our corporate offices in Secaucus and have moved into a temporary office space in Bedminster, New Jersey, while our new purpose-built leased corporate office is under construction right down the road in Bedminster. We expect to move into the new office in the first half of next year. Our new location in Bedminster will allow us to attract and retain the top marketing and finance talent we need while making it much easier for our team members to go back and forth to our technical base in Bethlehem, Pennsylvania, enabling much closer collaboration and planning. Our new office will embody our pets, people, planet mantra, and we look forward to sharing it with you when it opens next year. Now, let me turn it over to Todd to walk through the details of the Q2 results and our updated guidance. Todd?