Freshpet, Inc.

2025 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, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Rachel Els, Vice President, Investor Relations. Thank you. You may begin.

Good morning, and welcome to Fresh Pet's first quarter 2025 earnings call and webcast. On today's call are Billy Cedar, Chief Executive Officer, and Todd Comfort, Chief Financial Officer. Scott Morris, President and Co-Founder, 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 Private Securities Litigation Reform Act of 1995. These include statements related to our long-term strategy and targets, prospects and plans for growth, timing and adequacy of capacity, potential impact of tariffs and consumer sentiment, expectations to be free cash flow positive in 2026, and 2025 guidance. Please refer to the earnings press release and our most recent finalings of the SEC, including our 2024 annual report on Form 10-K, all available on our website for a discussion of the factors that could cause actual results to differ materially from 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 measures are useful, a reconciliation of the non-GAAP financial measures, 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 is a summary of the results and guidance they will discuss today. With that, I'd like to turn my call over to Billy Sear, Chief Executive Officer.

Thank you, Rachel, and good morning, everyone. Since our last earnings call in February, we have seen a significant shift in the macro environment that has impacted our growth. The message I would like you to take away from this call is that despite the significant economic uncertainty facing consumers today, number one, Fresh Pet has continued to significantly outperform the category amongst every age and income group, and number two, Fresh Pet remains a structurally advantaged business with a long runway for growth and a category with meaningful long-term tailwinds. As we have done over and over again throughout our company's history, We will be nimble and adjust to this new macro environment, and we still expect to deliver outsized performance against a challenging backdrop. It just might not be the same magnitude of performance we've delivered over the past few years until there is greater economic certainty amongst the prospective consumers we are targeting to join the Fresh Pet franchise. As many of you have realized over the years, Fresh Pet is a very data-driven company, so we have been digging into what has changed year to date. assessing how that would impact our near-term strategies, and identifying ways we can best address those changes. Our analysis suggests that the slowdown in our sales growth came on very quickly as the macroeconomic climate changed a few months ago and is due, in part, to the fact that Fresh Pet's consumer franchise spans all income and age groups, including consumers who are most economically insecure or uncertain today. Fresh Pet's consumer base is less defined by the income of our users and better defined by how much someone loves their dog. For the last decade, Fresh Pet has been able to grow through all sorts of economic conditions, and we are still growing at an outsized rate versus other dog foods and CPG brands. However, our model relies on an increasingly large number of consumers being in the position to reconsider their pet food and ultimately conclude that Fresh Pet is a better way to feed their pet. What we are seeing now is that consumer uncertainty makes them hesitant to get a new dog or replace a dog they recently lost. And it also makes them more hesitant to try a more expensive pet food until they have greater clarity on their economic fortunes. We do not expect this short-term change in consumer behavior to change the long-term desire for pets or premium pet food. As such, this does not change our view of the size of the long-term fresh pet opportunity. Identifying issues and developing solutions to short-term challenges is a core competency of our team. We are also very disciplined. That is, we will lean into our business model that focuses on advertising, retail availability and visibility, and product innovation to improve our near-term prospects and will not chase short-term activities that would undermine our business model. To continue to drive growth this year, we are adapting our plans to this economic backdrop to ensure we have the right proposition for consumers who are contemplating a new dog food today. One of the strengths of the Fresh Pit model is that we have the flexibility to target high potential consumers across the age and income spectrum. So, from a media standpoint, we are increasing our advertising investment and tailoring our media strategies to attract more higher income consumers via digital social channels as well as linear TV. From a product standpoint, we will be launching a new entry price point bag product under the Fresh Pet Complete Nutrition label that is similar to the roll product we launched two years ago amidst consumer concerns about inflation. The Complete Nutrition roll has driven trial with a lower price point, and ultimately those households trade up within the portfolio. And we believe the same will happen for the bag product. We are also focusing on multi-packs to give consumers better value and help stock up as they potentially space out their shopping trips. From a channel standpoint, we have expanded our small DTC business nationally so that we can reach more consumers who place a high value on subscription service. And we are making progress on getting Fresh Pet into more value-oriented stores, including club outlets. I'm pleased to share that we are now in our first Sam's Club store, and the early results are encouraging. We are optimistic that this will lead to a greater expansion over time. We are also taking the necessary steps to balance our capacity and organizational capability investments with the anticipated demand so that we can meet our longer-term margin and cash generation targets, even if we have lower levels of net sales. We've already taken some actions against those goals and will take more if the current economic climate persists. To be clear, we continue to grow and add new users across all income and age groups, and Fresh Pet represents an outsized portion of the category household and net sales growth. Those new consumers we are attracting are just not a big enough group to support a growth rate above 20% right now. It is also important to note that we do not see consumers trading down or out of Fresh Pet. We just aren't adding new consumers at the same rate we've historically given the macro uncertainty. Despite the shift in consumer sentiment, there are demographics that continue to demonstrate resilience. Our analysis shows that higher-income consumers, particularly those who tend to buy online and via subscription, are continuing to drive sales for more premium offerings, and Fresh Pet is amongst those winning brands, as our total e-commerce business was up 43% in the quarter. Those consumers are the least economically sensitive consumers, and they continue to get dogs and trade up their dog food. And low-cost brands or private label are also winning, as consumers who find relatively little differentiation between the various kibble brands are trading down to lower cost products when times are tight. I believe the consumer dynamic I just described explains the trends all of you have been seeing in the weekly Nielsen data. As we said last quarter, we would watch the growth trends very closely for any hint that our plan is not as effective as it has been in years past, and that we have the tools and flexibility to drive incremental growth if it slows. Year to date, we've seen the impact of the increasing macroeconomic pressure and have increased our advertising investment. But we believe it's also prudent to assume the cost to acquire new households will remain elevated for the time being. As such, we are going to plan as if the conditions we saw in the first quarter continue for the balance of the year. For 2025, we now expect net sales of 1.12 to 1.15 billion, or approximately 15% to 18% growth year over year, adjusted EBITDA on the range of $190 to $210 million, and capital expenditures of approximately $225 million. We believe this pragmatic approach will enable us to right-size our organization and capacity investments now so that we can deliver the cash and margin commitments we have made. If the environment improves, we'll add those investments back. If it gets worse, we'll take additional actions. Todd will walk through more details of our updated 2025 guidance in a few minutes. The obvious question is how this economic uncertainty impacts our long-term net sales target of $1.8 billion by 2027. Given that this economic uncertainty arrives so quickly in Q1, and the drivers of the uncertainty, for example tariffs, government downsizing, and inflation, have not settled, it is hard to say how long the current trends will continue. As such, we are hesitant to update our long-term target until we have greater clarity on the magnitude of the impact and the duration, particularly since the underlying category and brand tailwinds have proven to be incredibly sustainable for such a long period of time and through so many economic challenges. And we believe that there will be pent-up demand for dogs when the conditions do improve, just as has happened during previous times of economic uncertainty. As you might imagine, we've done contingency planning so that we are prepared for a wide range of potential scenarios. As we do this planning, we are carefully balancing our long-term goals with our nearer-term need to demonstrate continued, strong performance on some of the most critical metrics, such as margins and cash generation, that we've worked so hard to restore over the past two years. In the end, we believe that Fresh Pet should, number one, be recognized as a best-in-class growth company with growth well in excess of most CPG companies. We expect to deliver a disproportionate share of category growth and build market share at a healthy rate. Number two, sustain and expand our adjusted gross margin so that we have adequate dry powder to invest in both our growth and provide confidence that Fresh Pet is a structurally sound business with investable economics. As part of this, we will continue to develop and deploy our new production technologies and may in fact take advantage of any available production downtime to roll out new technologies that are capable of expanding our margins and improving quality more quickly once they are validated. Number three, continue to capture the benefits of increasing scale across the P&L. Even if we grow at a slower pace, we need to scale our organizational investments so that we can continue to capture scale benefits. Number four, deliver our commitment to be free cash flow positive in fiscal year 26. If we grow slower, we will slow our pace of capacity expansion to match our demand. This will enable us to demonstrate that FreshPet can self-fund its growth ambitions. If we do this well, we expect FreshPet will emerge stronger from the current period of uncertainty and with a large consumer franchise, healthy margins, strong cash generation, and ample capacity to meet our long-term growth needs. Finally, while all the focus is on the top line, and we continue to believe the top line is important, we don't want anyone to lose sight of the tremendous progress we've made on our operations. The strong performance we had last year continued into Q1 and we believe we are operating better today than at any point in the last five years. Our throughputs are up and this is making tremendous progress on gaining operating efficiencies. Our quality costs continue to be low and our logistics costs are well below our previous long-term target. This will serve us well as we continue to grow, providing ample capacity to meet our expanding demand at very good margins. and it will provide ample dry powder to ensure that we can invest in high-return growth drivers. Now I'd like to briefly provide some highlights from the first quarter. First quarter net sales were $263.2 million, up approximately 18% year-over-year, primarily driven by volume growth. As we discussed in February, we changed our pet specialty distribution partner in the first quarter, which ultimately impacted our growth by approximately one point. We signed a new distribution agreement with a partner named Pet Food Experts and feel confident about our route to market moving forward. Adjusted gross margin in the first quarter was 45.7% compared to 45.3% in the prior year period. Adjusted EBITDA in the first quarter was $35.5 million, up approximately $5 million, or 16% year over year. We still have a very small share of a very large category and continue to expect sizable market share gains this year. Per Nielsen on-the-channel data, for the 52 weeks ending 3-29-25, we compete in the $54 billion U.S. pet food category, and we have only a 3.5% market share within the $37 billion U.S. dog food and treat segment. In Nielsen brick-and-mortar customers, defined as XAOC plus pet, we have a 96% market share within the gently cooked, fresh, frozen branded dog food segment. From a retail perspective, We are now in 28,521 stores, 23% of which have multiple fridges in the U.S. and Canada. We ended the quarter with 37,044 fridges for approximately 1.9 million cubic feet and have an average of 20.8 SKUs in distribution. Our distribution in grocery is 78% ACV, and in XAOC, it is only 67%. Retailer discussions are going well, and we continue to expect 2025 to be a more normalized year in fridge expansions, with a focus on second and third fridges. We remain very excited about the new store concepts we presented at Cagney, and we'll go into greater detail on that later this year or next year as customers begin to test or expand them. Household penetration as of March 30th was 14.1 million households, up 13% year over year, and total buy rate was $110,000. of 6% year over year. MVPs accounted for 2.2 million of those households, up 21% year over year, and represented 69% of our sales in the last 12 months with an average buy rate of $498. Moving to capacity, our new bag line in Kitchen South started on time and on budget in March, bringing us to a total of 15 lines across our manufacturing footprint. We have one additional bag line that is expected to commence production in the fourth quarter of this year in Bethlehem, and it will be testing new production technology. We continue to find ways to drive greater capital efficiency and have been also working on other new technologies that can be retrofitted to existing lines. As a reminder, we commit to the incremental capacity from a new line about 18 to 24 months out. We have ample capacity today to support our growth for this year and next year, and have contingency plans on future expansion projects if their macroeconomic environment worsens. In summary, this is clearly not where we expected to be when we rolled out a revised long-term plan at Cagney a little more than two months ago. But the consumer dynamic has changed very quickly. We believe we are taking the right steps to address the current environment while not losing sight of our longer-term goals. We hope you agree. Now let me turn it over to Todd to walk through the details of the first quarter results and our updated 2025 guidance. Todd?

Thank you, Billy, and good morning, everyone. The first quarter results demonstrated growth across channels, but fell below our expectations, leading us to revise our outlook. Now I'll give you some more color on our financials and updated guidance for the year. First quarter net sales were $263.2 million, up approximately 18% year over year. Volume contributed 14.9% growth, and we had positive price mix of 2.7%, primarily driven by mix. We saw broad-based consumption growth across channels. For Nielsen measured dollars, we saw 17% growth in XAOC, 16% in total U.S. pet retail plus, 16% in U.S. food, and 7% growth in pet specialty. The change in our pet specialty distributor impacted our net sales growth by about a point, and was offset by unmeasured channel growth of about a point. First quarter adjusted gross margin was 45.7% compared to 45.3% in the prior year period. This slight increase was driven by lower input cost and reduced quality cost. Please note that the fourth quarter gross margin had a one-time manufacturing benefit of 150 basis points that we gave back in the first quarter as we had indicated when we reported the fourth quarter and full-year results. First quarter adjusted SG&A was 32.2% of net sales compared to 31.7% in the prior year period. This increase was primarily due to increased media as a percent of net sales, partially offset by reduced logistics as a percentage of net sales. Please note we had a number of non-recurring charges in the quarter, including an accounts receivable write-off in connection with the liquidation of one of our pet specialty distributors, an accrual for legal obligations related to the ongoing litigation with Phillips, and termination costs due to a business change in our international go-to-market strategy. We spent 15.1% of net sales on media in the quarter, up from 14.3% of net sales in the prior year period. Logistics costs were 5.8% of net sales in the quarter, compared to 6.4% in the prior year period. First quarter adjusted EBITDA was $35.5 million compared to $30.6 million in the prior year period. The improvement was primarily driven by higher growth profit partially offset by higher adjusted SG&A expenses. Capital spending for the first quarter was $26.5 million. Operating cash flow was $4.8 million in the first quarter and we had cash on hand of $243.7 million at the end of the quarter. We still expect to be free cash flow positive in 2026 and believe we have the ability to self-fund our growth going forward. Now turning to guidance for 2025. We now expect net sales of approximately $1.12 to $1.15 billion, or approximately 15% to 18% growth year over year. Compared to our previous guidance, approximately $1.18 to $1.21 billion, or approximately 21% to 24% growth year over year. As Billy mentioned, we are now assuming the conditions we saw in the first quarter continue for the balance of the year. In terms of cadence, we expect a sequential increase in net sales per quarter. We are lapping tougher comparisons in the first half, plan to invest more heavily in media in the second quarter to drive household penetration growth, will be launching more value-oriented offerings in the second half, and expect to modestly increase distribution throughout the remainder of the year. We now expect adjusted EBITDA in the range of $190 to $210 million compared to at least $210 million previously, given the lower rate of net sales growth. For cadence, we expect adjusted EBITDA to be back half-weighted with sequential adjusted EBITDA dollar and margin improvement throughout the rest of the year. Media as a percent of sales is expected to be greater than 2024. We anticipate modest adjusted gross margin expansion year-over-year driven by operational improvements and do not anticipate any material inflation or pricing actions. In regards to tariffs, we are monitoring the announcements closely and have contingency plans in place if we need to make any changes to our supply chain. As a reminder, only 5% of our U.S. COGS come from imported raw materials, and we do not have any U.S. sales imported as finished goods, so the impact to our P&L should be minimal. We are still assessing the potential sales impact of any retaliatory tariffs as we do export pet food from the U.S. to Canada and the U.K. Capital expenditures are now projected to be approximately $225 million this year compared to approximately $250 million previously. The majority of the spend is on the installation of new capacity to support our growth in the out years. We do expect to experience some impact from tariffs particularly related to the increased cost of steel for new construction and new equipment. Our estimate of that impact is included in the updated capital spending projection. In summary, we are highly focused on continuing to drive top-line growth and profitability improvements despite the current economic uncertainty, and we believe we have taken the appropriate steps to be nimble and address the challenges based on what we know today. We remain very optimistic about the long-term potential for Fresh Pet and believe this will ultimately be viewed as another short-term headwind that we must overcome, as we have overcome previous headwinds on our path to building an advantaged business in an attractive category. That concludes our overview. We will now be glad to answer your questions. As a reminder, we ask that you please focus your questions on the quarter, guidance, and the company's operations. Operator?

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please ask one question and one follow-up question. One moment while we poll for questions. Our first question is from Ken Goldman with JP Morgan. Please proceed.

Thank you. I wanted to start by asking about the updated guidance range. You know, just in light of recent scanner data, you know, and also in light of some economists anticipating that the economy itself kind of slumps a little bit ahead from here. Was there any thought of assuming that the macro worsened ahead? It seems, and correct me if I'm wrong, that you're assuming that the situation kind of stays constant. I'm just curious if there's enough downside risk kind of baked in, you know, just given some of the lack of visibility ahead.

Yeah, Ken. We obviously looked at a wide range of scenarios. We really focused on where is our business and what is it performing at right now? And we believe based on what we're seeing in the consumption data and what we know about our marketing plans for the back half of the year and the new customer distribution gains that we'll have in the back half of the year, we feel like we're in the right spot. But as we said in the commentary, the assumption that we built here was that the consumer environment that we had in the first quarter would continue for the balance of the year. If it gets materially worse, obviously that would have some impact, and we would take some actions based on that. If it gets better, obviously that would be good news for us. But we look at it on balance. We feel like we're in a fairly stable place right now, and we're projecting that moving forward.

All right. Thank you for that. And then just on price mix, it was a little higher than some observers, including us, anticipated. I assume it's mostly mixed, but just curious what your guidance assumes for the rest of the year on this line.

Sure. I mean, most of it was mixed. For example, our home style creations sub-brand is doing very, very well right now, which is one example of what's helping us there. We also had some favorable gross to net, you know, retailer returns, markdowns, things of that nature, which helped the pricing piece. There was no actual list price changes, obviously. There's no intention to do that whatsoever. This was probably the high end for the year. We actually had some favorable price mix in the back nine months of last year, so it'll be a little bit harder lap. So I think we'll have a little bit of favorability, but not to the extent that we had in Q1. Okay.

Thanks so much.

Our next question is from Peter Benedict with Baird. Please proceed.

Hi, guys. Good morning. Thanks for taking the question. First of all, I was just curious what's kind of most incremental across the – You know, the value products, the marketing, the channel strategies that you outlined for this year, just kind of relative to what you were thinking back on the last call. What's kind of the most meaningful or impactful change there?

Hey, Peter, Scott. So I think that what we're doing right now is where I think the way to think about it is we're taking everything we've been planning for a very long period of time and accelerating it forward. So if you look at what we're doing from an affordability standpoint, we're moving that even faster forward as we mainstream the brand. We're changing the marketing mix where we're looking at media and also the targeting and also the creative.

I think those are the things that we're focused on the most that we're accelerating forward to kind of improve the speed of the business. Got it. Okay.

Now that makes sense. And then maybe just talk about what gives you confidence in the future for effectiveness of the media spend? You know, you talked about, like Billy may reference the higher CAC, obviously, that's in place right now. Can you maybe frame where that is relative to the historical ranges? And then given some of the new media strategies you have on tap, just what gives you the confidence and their ability to kind of maybe get the CAC back to historical levels at some point? Thank you.

So there are two major things specific to media that I think that are really important. One of them is And again, this is work that we started at the end of last year. This is around creative. We know that when we modify the creative just slightly and we focus a little bit differently on the messaging, we expand the opportunity and expand the group of consumers that we can bring into the brand. So we know that that's a fact. We're working on that creative. It's in development and we'll have it out in the next few months. So we feel really good about that piece. The second piece is that we're focusing a little bit more targeted on how we're executing the media. We're actually basically focusing more and more on that MVP or that HIPPO group. We're seeing really good growth from that group, really extraordinary growth. And that growth not only helps with household penetration, it also helps with buy rate. So we've been able to demonstrate that. So those are, I think, the two biggest single pieces. The other thing you're going to start seeing more and more on is as we're being more and more productive with everything we're doing from an e-com standpoint and also direct-to-consumer standpoint. So e-com, just to be clear, is like the Walmart.com. We're seeing great productivity in using all of those tools. We're seeing really fast growth when we look at overall e-commerce and also direct-to-consumer. We're starting to spend a little bit more into those areas, and we're seeing great acceleration. The nice thing about that, the buy rate is significantly better even than the MVPs.

Got it. All right. Thanks so much. Good luck. Thanks, Peter.

Our next question is from Bill Chappell with Truist Securities. Please proceed.

Thanks. Good morning. Morning. I just wanted to talk a little bit about, you know, kind of your thoughts on your particular market. I mean, I know you in the past, you've talked about kind of how the you've the hippos growth has slowed down and you've talked today about how kind of the lower income is, you know, all part of the target market. I mean, just how you see the market progressing going forward. Is it just the overall market is slowed in general, or do you think some of your kind of low hanging fruit, you know, is passed, passed by. And, and so it's a little bit tougher to get that kind of 20% plus growth for the next couple of years.

Yeah, there's a lot to unpack in there. Let me just start with when we look at the data, we see that Fresh Pet today is outperforming the category by, call it plus or minus, about 10 points amongst every one of the income groups or age groups. So it speaks to the strength of the Fresh Pet proposition and its long-term value. We also, when we look at the data, we don't see any change in consumers' interest or desire to have a pet or to increasingly feed their pet higher quality pet food. What we're seeing is in this near term is we're really focused in on the uncertainty that consumers are seeing. The uncertainty is if you don't know what's going to be right down the road for you, either from a job perspective, where you're going to be living and whatnot, all those things have put a little bit of a pause on the consumer's interest in trading up in their pet food or maybe getting a dog to replace a dog that might have passed away. It's most pronounced amongst the consumers who are most economically insecure. We've seen that in the data, the low-income part of our Franchise is certainly feeling that. But it's across income groups and it's across age groups. But over the long haul, the data strongly suggests that the consumer desire for pets and for higher quality pet food has not waned. So we just need to gut our way through a tough economic environment for some period of time. We don't know how long it is, but we don't see any change in the long-term potential based on everything we're seeing today.

Okay. And then just a follow-up. You talked a lot about changes or a pulsing of advertising, but I know you've been reluctant to ever do any real trade promotions or discounting and stuff like that. Would that comment the realm of possibilities as we move through the year if things continue to get worse, or you really just want to focus on turning up, turning down advertising to attract new consumers?

Hey, Bill. So I think Billy mentioned it in his prepared remarks, and I think we really want to reinforce this. We've never done any discounting. As you know, we've never done any discounting. We don't do any couponing. We feel like the correct model for this business is basically to stay really focused on the exact strategy that we've had for a very long time. Now, that being said, as mentioned, we want to modify the creative. We want to change the targeting. The other thing that we started to touch on and we've been working on for quite a while is this area of affordability, where we want to take a handful of very, very targeted SKUs, create great opening price points, not only on some rolls, but also on some bags. In addition, you're seeing some multi-packs that create real great value perception. In addition, we want to make sure we're available at certain retailers that are really value focused, right? So you start thinking about like where we are, whether it's Walmart, whether it's like a Costco like we're at and other opportunities. All of those really create a bigger opportunity for us to be seen as more affordable and accessible. So that's the way we're thinking about kind of executing this strategy. There won't be any couponing, there won't be any discounting, but we want to make sure that we have some really good opening price point products and SKUs to make sure we bring people into fresh Once they're into the portfolio, many of those have actually become MVPs over time. We did this, I don't know if you remember, a couple of years ago, we came out with a product called Complete Nutrition. We came up with a role. We sharpened our one pound price point. We were able to do this while continuing to maintain margin growth, gross margin growth over time. And it worked incredibly well. We saw new consumers come into the business. We'll be executing the same type of strategy in the back of this year.

And we will continue to lean into media. It's an incredibly important part of our growth strategy. We're up 24% in Q1. We will have a similar amount of spend, about $40 million in Q2. So that's well over 30% growth in the quarter. So we will lean into that versus any kind of trade down.

Got it. Thanks so much. Thanks, Tom.

Our next question is from Brian Holland with DA Davidson. Please proceed.

Yeah, thanks. Good morning.

So I guess, Bill, I think in the last response, Scott maybe got to what I was going to lean into. But just was curious how that Complete Nutrition line has performed since its 23 launch. How generally aware are consumers of the value here that Fresh Pet offers? And if not, how much of that is part of the revised media strategy?

So let me take them separately. So on the media piece, just to be really as simple about it as possible or clear about it. So on the media piece, there's two pieces. One of them is the creative piece. And every time we've entered a new campaign with slightly different messaging, we've been able to unlock a new tranche of consumers. We know we can do that, and we've done enough research where we know that there's another big tranche of consumers that we'll basically be able to attract. That work is going on as we speak. Then we're also modifying the media targeting. We're actually working where we're getting more and more targeted in some of the media. A lot of it's very broad, but a lot of it's getting more and more targeted, and that's helping us press into some of the e-commerce and direct-to-consumer pieces, too. On the affordability piece, it's You know, it's interesting. If you look specifically at Complete Nutrition and you look at what happened with the one-pound roll, they're still sizable pieces of business. They're both kind of in the single digits in total pieces of business, but they really opened up a whole new group of consumers. So like when we did the one-pound last time, we did the Complete Nutrition last time, we literally saw a pop over the next kind of two quarters of growth of consumers coming back into the business. It worked incredibly well. We'll execute a very, very similar strategy over the course of this year. So it won't be incredibly sizable, but it's enough for people to come in and see it in the business. And we just need to get them started in fresh pet food. That's really what we need to do. Because once people are in the business, they typically are very, very happy with the results and the experience. They also recognize that it's not as expensive as they maybe perceived it to be. That, coupled with value packs, we feel really good that that's going to help significantly during the next, it could be 12, 18, 24, 36 months, whatever's going on from an economic standpoint. So we like where we're going with that. We're going to deploy the same strategy and feel confident around it.

And then just on the media, forgive me, I hopped on the call a bit late, so if Billy touched on this in his prepared remarks, I apologize for being repetitive. But obviously the media spend in December of 24 didn't have its desired effect, mindful of all the consumer backdrop, et cetera. But you're talking about increasing the media spend even more. Obviously, there's more targeted media spend within that. I'm just curious within the last three to six months, are there any brain shoots to point to to say, hey, if we're targeted here, this is the consumer that's responding to it?

Yes, and I think you're right. I think you're onto it, Brian. That's exactly what we're doing. We're finding the places that are most productive, and we're starting to migrate dollars into those areas. It doesn't happen overnight, but we are pushing dollars into areas where we see better and better productivity from the media. I think that one of the things that I think we've always prided ourselves on is the amount of analytics that we do around the media, around the spending, how we keep track of it, where we see the performance. We're continuing to migrate those dollars. And the places we're migrating those dollars to, the ROASs or the CAC, however we want to look at the numbers, are quite strong. We are really, you know, I think we're incredibly enthusiastic about that. What we don't know is you can't do like a complete kind of exit stage left. You can't move all of it to one very, very quickly. So you just start pushing into it and moving and migrating dollars over time, and you see where you can continue to get such great returns. But that's the exploration that the team is doing. I will say hats off to the marketing team, both on the creative piece and the targeting piece. There's plenty of work to do, but they've done a really nice job identifying the opportunities.

Our next question is from Rupesh Park with Oppenheimer and Company. Please proceed.

Good morning, and thanks for taking my question. So I guess I just want to go back to what you guys are seeing in the channel. So from an inventory perspective, how would you characterize the health of inventory? And then do you see any risk of inventory destocking as you go forward?

Yeah. So we think the inventory across most of the channels is in good shape. The pet specialty channel obviously had some issues because of the distributor issues. challenge that we had in February dragging into March. So we saw out-of-stocks in some portions of the pet specialty channel. Those have been largely corrected at this point. When you get into the broader channels of grocery, mass, club, and whatnot, our shipments to the customers are very strong with very high fill rates. So any issues that you see at retail are really a function of how well that retailer executes. So if that retailer does a really good job of pulling the product through their warehouses and out of the back room and into the fridge and rotating the stock in the fridge, they should be in really good shape. If they have troubles with either their operations or their labor, then obviously you'll see less good. And what we see when we look across the board is we see very good conditions in those retailers who are the best operators. So in terms of your part of the question about destocking, We did see a little destocking early in the quarter, but by the end of the quarter, we feel like it was fairly well balanced. And we don't have, you know, in the world of fresh products, there's not a lot of inventory that's kept. You know, there's a little bit, but not a huge amount. So we don't expect that there would be any significant effect from destocking. But, you know, one never knows. But so far, we haven't seen anything significant.

We are shipping very close to consumption. So no destocking issues right now.

And Rupesh, you remember the days of $250 per store per week within a fridge. Today, our average is around $1,000 a store a week. So it's the same day code. We have a more efficient supply chain. There should not be really any changes. And we are seeing continued where we're hitting records versus prior periods.

Great. And maybe just my follow-up question. As you look at the various channels, anywhere where you saw maybe a bigger slowdown than expected, are you seeing any shifts to maybe more of the value channels in a bigger fashion versus recent quarters?

Yeah. I mean, first of all, remember pet specialty in the first quarter was particularly soft because of the distributor challenge that we faced. So you should start with that. It's now getting back on its feet. When you look across retail, I think like everyone else, the value-oriented channels are winning, whether that would be club or the mass merchants. they seem to be winning the most. And that's this function of the foot traffic that they're generating as opposed to necessarily what demand that we're creating.

And being available there with the right products helps us really kind of tackle this affordability opportunity. As we mainstream the business, right, we get into this early majority of consumers, there's going to be some consumers that are kind of a little bit more occasional. When we're at the right channels, where people are value-oriented, having that as part of our overall solution works really well for the business.

Great. Thank you, Apostle.

Our next question is from Robert Moscow with TD Cowen.

Please proceed.

Hi. Thank you for the question. I wanted to know, Todd, what does the contingency plan kind of look like if things do slow a little bit here? Let's say growth is you know, at the low end of the range or even a little bit below that. Given the long timeline, or I think you said an 18 to 24-month time period for planning new production lines, does that mean that all these production lines that were in the plan still have to get executed in 2026, let's say, or... Do you have flexibility to kind of slow those expansions? And then the next question from there is, what does that mean for free cash flow? What does it mean for EBITDA margins in a situation like that?

Yeah. I mean, look, obviously, this is a scale business. So the faster our business is growing, it definitely helps from a margin perspective, both from gross margin, from a G&A perspective. So that – it's always a good thing if we're growing – faster than a little bit slower. So that is a little bit of a headwind when things slow down. Having said that, we don't sit around and just let it happen. So we are addressing these issues as much as we possibly can. So from a capital perspective, you heard us um we took we took the the guidance for the year from 250 down to 225 million dollars so we are shifting some things out not dramatic at this point because we're going to wait and see to see how long this lasts but we absolutely have flexibility to move the capital expenditures to the right and then separately from an ongoing cost perspective we have some we have brought new lines on both in q4 and a bag line in our kitchen south facility in Q1, and we can monitor and control how many of those lines are staffed. So we can reduce the cost as much as humanly possible to make sure we can continue to have strong gross margins. And as you heard us say, we still expect modest gross margin expansion for the year, which was the same guidance we came coming into the year. So as you look into free cash flow, we still feel very good that we'll be able to manage being free cash flow positive in 26. We think we'll still have great EBITDA margin and dollar expansion as we go into next year. And we can, again, if this thing continues to slow, we can't get back over 20% in the next year, we will be able to continue to push out capital to the right. We do have now 15 lines up and running. That gives us a ton of capacity as we bring new shifts on, and our OEEs continue to expand. So we have well over $1.5 billion of capacity that's already sitting in place. Again, if things slow down, we can move that capex to the right, and that will assist, obviously, in being free cash flow positive.

Okay, and then just a follow-up. On the media spend, I guess I was hoping you'd just put a finer point on it. Is media spending dollars going up versus your original plan, or is it really just the same media dollar plan and you're going to use it in a more targeted fashion?

Yeah, it is going up a little bit. So we have added some dollars. But as Scott said, we're also continuing to not major shifts in our strategy, but we are moving some things to be more targeted, moving a little bit more to e-comm, new creative coming out in the second half of the year. But yes, there will be a slight increase in the number of dollars. Okay. Thank you.

Our next question is from John Anderson with William Blair. Please proceed.

Hey, good morning, everybody. Thanks for the question. I wanted to ask about distribution. You've mentioned it's going to be a kind of a normal kind of steady year in terms of new distribution. I noticed that the store count was up about 5% in the first quarter, but your TDPs were up 15%. So is that, could you talk a little bit about kind of your expectations for store count and cubic feet growth on a full year basis? And can you maintain kind of TDP growth running, you know, at 2 or 3x that and kind of the dynamic that's playing out there as you get, you know, significantly more TDP growth than store count growth? Thanks.

Yeah, I'll start off. So I think I'm going to start off and Billy's going to. So, John, we actually had a good quarter from a fridge ad standpoint. We're on track to add another 100,000. We think of it as 100,000 cubic feet for the year is the way we think about it. So we're on track to add the 100,000 cubic feet. That's in both some new, there's a fair amount of new. I mean, you know, every year we're continuing to be impressed that there's more new out there and really good substantial opportunities around the new. But the biggest piece is not only the seconds, but then also we previewed this at Cagney, but these kind of like bigger kind of islands, which I think are really important because they demonstrate where everyone's thinking is on where this category is going. And I think it's really, really clear for not only retailers but also consumers, this is a big, big piece of the future of the category. And they're putting more and more fridges in. You're going to see we have some islands in different places, or we have three fridge units. You're going to start seeing bigger and bigger executions around that. I think this year is going to be more in the testing of those, and then next year is going to be more rollout around those. But I think that's really, really encouraging. And then as we do that, we're actually modifying the portfolio to make sure that we have the right products that are much more kind of appropriate for different channels in those fridges. And so we're really targeting consumers that are a little bit more kind of specific to the channels that they're shopping in.

Yeah, just I would add one piece to it, which is the big step up in TDPs occurred last fall when Walmart put us in some of the second fridges that they own. We took two shelves of those fridges and there was a huge step up in TDPs. Obviously, anytime Walmart does anything, it can have a huge impact in the TDPs where it doesn't materially change the number of stores that we're in. So in this case, if Walmart does something, you could see another big step up in TDPs, but you're really dependent on that.

Okay, thanks. And a follow up. Obviously, you've talked a lot more in the last couple of years, and even more recently about the focus on MVP, you know, hippos, and now MVPs. I'm just curious, is you, those cohorts grow more rapidly than, say, you know, the total in terms of households. Are those, is that growth coming from, you know, an MVP or a hippo entering the franchise new, or is more of those ads coming from a non-MVP or non-hippo kind of evolving into one by increasing their buy rate? And the reason I ask is I'm just trying to get an understanding of the dynamic of how a consumer kind of enters that cohort and what the implications are perhaps for your composition of household penetration versus buy rates. contributions to sales growth going forward. Thanks.

Hey John. So, uh, I think it was in, uh, I think it was at ICR in 23, we started talking about hippos and, uh, we started kind of moving towards targeting those. And that meant not only the creative, but also some of the targeting and then also some of the products that were even in the products in the portfolio that we're doing. Um, so we're continuing to refine that. We tightened up hippos just to MVP. There's just one more group lower. Those people represent a significant buy rate, right? We've shared it before. They represent about 70% of the business, $470 a year buy rate for those consumers. And to your question, we get most of those people are new to the franchise. There are some that migrate, that buy more and more every year. But the majority of those MVPs and hippos are people that are finally discovering and understanding that they should change their pet's diet to a fresher, less processed, healthier, more natural food. They come in, believe it or not, they start sometimes in the one-pound rolls or some of those more affordable products I mentioned earlier, and then they migrate into where they're all of a sudden spending more and more. And we're seeing great growth there. And when we see growth there, we feel really good because not only will it give us household growth, but it also gives us, obviously, the annual buy rate will move. And if I can take a step back on this, we want everybody because over time, lots and lots of consumers are going to move to this. But if you can have the core of your business built up people that are very, very dedicated to buying you day in and day out, spend a lot of money with you, that's a stronger company and a stronger brand and a stronger portfolio product. The thing I love also is from an e-comm standpoint, what we're seeing is even higher buy rate. We're seeing like up into the seven, eight and even thousand dollar kind of a year buy rate from those consumers. So as we move more money into those areas, We think that's going to help push the whole overall buy rate. We're starting to see that. You can see it in the numbers now. We'll also be attracting more and more of these hippos. And the magical word in this, and it's a real great category for it, is subscription. When people sign up for subscription, whether it's on e-com, a la the Walmart.coms, or whether it's on a direct-to-consumer program, that's really significant for us. And those are the people that, again, we want to build our business and company around. Thank you.

Our next question is from Michael Laverty with Piper Sandler. Please proceed.

Thank you. Good morning. Just kind of dovetailing off of that, the MVP consumer profile is, of course, great, and it's where you should focus, especially if you can bring those in new. But if I'm getting the math at all right, then the buy rate on the other 85, I think, or so percent of households is, could sometimes be very low. You've touched on how some of the approaches to just get them started, and I suppose it's not ever completely clear whether somebody, when they're first in, is the MVP ready to go or not. But what can you do to get buy rate up on the majority of your consumers? It seems like an absolute dollar increase wouldn't have to be too significant to kind of move the needle. Is there an insight there you have of why they do or don't or can't or won't step up their buy rate? Is there a way to move the needle there? I get that the MVPs are hugely important, but how do you think about everybody else?

Yeah, so again, I would say this focus on the hippos and the MVPs is really, really important from now and into the future. I think that it is potentially a fool's errand to start trying to move a group of consumers that buy you very episodically during a slightly kind of challenging or uncertain economic times. And that's where you get pulled into basically the coupon discounting and promotion game. And if you look at what's going on in the category – It's amazing the amount of discounting with several brands that we interact very, very highly with is really, really, I mean, it's significant. It's at some like almost historic levels. So I don't think we really want to necessarily focus on that game. I think when things kind of cool off and calm down, then people will naturally kind of return. Those kind of episodic users will naturally return to our businesses. But if we can have 70% or 80% of our business on MVPs and hippos, that's really, I think, the best place and the best way to build our strategy.

That makes sense. That's helpful. And just maybe if you could touch on Sam's a little bit more. You mentioned you're in the first club store there. Is that just a test? Is it the beginning of more that are set to go? How do we think about how that unfolds?

So, you know, you probably heard me over time, probably over the amount of time you've known me. I think I said everyone is coming. It's just a question of when. And I think this is one more illustration where, look, we were able to get into a test. We're excited about it. That test is going well. There's other tests that are going well. I think over time you're going to see like almost all retailers in the U.S. have a bunch of fresh pet fridges. And I think not just one, but multiples. And I think that we're, you know, again, it's kind of this whole category trend that we've started and pushed. And I think that over time, I think you're going to see us everywhere. I can't tell you when, but I do, I am confident that there's only one direction that Fresh Pit's going.

Okay, thanks so much.

Our next question is from Steve Powers with Deutsche Bank. Please proceed.

Great, thanks. So I actually wanted to drill in a bit into your DTC expansion, which is something you'd previewed at Cagney. I guess a couple questions around that. First, I guess, is it your assessment that that subscription service channel has held up better over the past few months? And just what's the latest on how you see subscription demand interacting with consumption nutritional channels and customers, number one. And then secondly, in terms of your own initiatives there, how impactful is that likely to be in fiscal 25? Is that more of a test and build or have you done the testing and really are more fully jumping in at this point?

Well, I like to always think about it is when you start from zero, you can have very, very, very fast growth. The reality is though it's It's small, but it's really incredibly encouraging that we can have, I would say, we're not going to get into the exact details, but that CAC that we're having and then the retention that we're seeing so far is really encouraging. So that's on the D2C piece. I think the bigger opportunity is the stuff that we've been talking about for a few years, and it's everything around e-com, which is the click and collect piece, where you can go to any one of our retailers, you can pick it up, You can get it delivered to your home. And I think retailers are getting smarter and savvier around that piece of the business. That's a tremendous opportunity. And the nice thing is it leverages our fridge network. So in reality, we've got 37,000 micro-fulfillment centers across the U.S. that we can get fresh food to someone's home very, very quickly. 27,000 stores, 37,000, 36,000 fridges. that we can, you know, that we can pull from across the U.S. from an incredibly efficient supply chain and deliver to consumers. So I think that's how we'd like to, you know, continue to see that build out. So direct-to-consumer is small. It's held up very, very well. Performance is really strong. We're seeing a lot of, we're seeing a lot, we're very encouraged about the results there at this point. Okay, great.

And then just a real quick follow-up on your Sam's comment. realizing that it's small. I mean, is anything embedded in the outlook for SAMs? Or, you know, to the extent that that scales faster, would that be incremental?

We gave you a range on the outlook. And so, clearly, if SAMs does more and does well, that would be towards the high end of the range. And if it doesn't do much, it would be towards the low end of the range.

Got it. Okay. Thank you very much. Appreciate it.

Our next question is from Camille Garawala with Jeffries. Please proceed.

Hey, everybody. Good morning. I guess a question on leverage and deleverage. When I see sort of the sales outlook coming down by $54 million, $55 million, but EBITDA coming down, obviously, far less than that. While marketing is continuing to go up, can you maybe just talk through some of the pieces in there on how to sort of, you're managing sort of not to have as much deleverage as one might guess.

Yeah. So, I mean, obviously the guidance before was at least $210 million. So it wasn't a specific range. And obviously, you know, we always try to put a plan at the start of the year that, you know, we are, we believe is conservative and, you know, we can meet or exceed. Obviously some things in the marketplace have changed. But if you take the midpoint of our guidance right now, both from a top and bottom line, it assumes about 100 basis points of EBITDA margin expansion. So we're doing, you know, the best we possibly can right now to make, to ensure we have both gross margin expansion and we have EBITDA margin expansion. And, you know, commodities, again, are basically flat for the year. We're not going to get all the leverage, unfortunately, from the labor and overhead fixed cost scale that we envisioned at the beginning of the year. But we are managing that as closely as possible by pulling back on how many lines we have staffed at any one time. So we do have the ability to do that. Again, we'd rather the growth be higher. That would allow us to leverage that fixed overhead even more. but we are being very proactive to manage how many of our lines are running at one time. And the good news right now is the plants are running exceptionally well. We're thrilled with the performance in all three of our locations, especially Annis now, which is really starting to perform very, very nicely. Still a long way to go, but they've shown some significant improvement as we've gotten to the start of 2025. So we are going to manage the cost as closely as we can. As we talked about earlier, we will be spending more as percent of sales on media. That will be more than offset by some G&A leverage. We'll control that as tightly as we can. But we feel good about the updated guidance that we've given.

Okay, got it. And then a question on competition. And I guess maybe with two sub-questions on it, I guess the first is, as the category slows down, Um, are you, are you worried about increased activity and, and things like that? But then also, um, there's what we can see and what we can't see in terms of what we can see, you know, how are you feeling about, uh, others in the fresh frozen world, like a farmer's dog, but then also what we, what we can't, um, on a, just with the DTC, just food for dogs, these sorts of things. What are you seeing in terms of the evolution there?

So, you know, it is interesting because for quite a while, I'd say on and off last year, we kept looking for promotional activity. We kept like watching it, watching it. And there were some periods of it, but there wasn't a ton. And I think what's happened is a lot of the category, you know, competitors in the category have started to kind of look around and go, oh, wow, we got to do something here. And look, they pull the levers that they have. And I think that there is More discounting than that we have historically seen, especially on a few brands that we do interact with. It's just the reality. The other good news, though, is that typically doesn't stay, keep on going forever. It's just, there's an end point to it. There's a leveling off and an end point, and I think we're there. You can't have much more on some of these brands without kind of destroying the brand and also the margins. So I think we're kind of, that's where that is. The stuff that we, you know, necessarily don't quote-unquote see, call it, you know, other direct-to-consumer competitors, I think there's a couple things. One of them is, it is, this is early, you know, we share the numbers. This is early on in the development of fresh and frozen food. We're still, what's sold at retail, we're still 96%. I think we have that in the deck. So we're still the vast majority. We have good momentum. On the pieces that we don't see, you know, on the pieces we don't see, we think there's pretty darn good growth going on. And I think that just encourages us to believe that consumers are interested in moving in this direction. And we think we really have tremendous solutions for those consumers, depending on what kind of products they want and how they want to buy it. And I think that's kind of underlies some of what we're talking about earlier with this move into e-comm, this move into direct-to-consumer. Those are going to be important pieces of how we build the business out over time. And then also getting into some new retailers, new and different retailers, and having even more dominant kind of visual and display in some of the retailers we're already in.

And just back to the promotional question, I mean, fortunately, this is a category that historically does not have a high level of promotional activity. It's increased, that is for sure. There's more activity. The discounting of when they do promote has gone up a bit. The brands that are doing it the most, it's really not working for them. They continue to perform very, very poorly. And if you look at the overall data, the incrementality for the category when they promote is very, very low. So it's not working for our competitors. As we spoke about earlier, we have no intention of doing it ourselves. We don't think it's a fantastic, it's a very reactive strategy that does not work terribly well in this category. And so we don't think it's having much of an impact on our business.

I would add one other point to this, which is it's not the main part of our business, but they're in that small bucket of people who use us very infrequently. a number of those folks are switching between us and canned dog food as sort of a mixer-topper on a very occasional basis. And as the tariffs roll through the canned dog food business, the cost of canned dog food is going to go up pretty considerably. So, you know, we don't know when those prices will go up and, you know, what the consumer's specific reaction will be, but it certainly is a small tailwind against sort of the tail of our volume base.

Got it. Thank you.

Our last question is from Tom Palmer with Citigroup. Please proceed.

Morning, and thanks for the questions. Look, I appreciate the economic environment has changed pretty abruptly here, and in the slide deck, though, there was the reiteration of the sales and margin targets for 2027. I know a lot can still change. I guess I was wondering how contingent those margin targets are to attaining that sales level, or if there are kind of other levers to maybe hit those margin targets, even if sales do not kind of re-accelerate to the level that might be implied by those targets. Thank you.

Yeah, look, as I said earlier, obviously, this is a scale business, and when we have faster growth than not, it definitely is a tailwind and makes hitting those margin targets easier. Having said that, we do have some wiggle room in those targets from a margin perspective that we set out at Cagney back in February. We have a lot of tools, whether it's new technology or the plant continuing to operate extremely efficiently, that we feel very good about the gross margin target. And we will manage EBITDA margins appropriately. If the growth is not there, we will manage how many people you know, we hire in our business and we'll slow that down a little bit. So we do have some tools to manage some of the margin and costs that we have out there. But, you know, we still feel very good about the margins that we set out. And then over the next several quarters, we'll come back and say, look, do we feel good about the $1.8 billion? We're not going to come off of it this soon. Obviously, if we continue to be in this environment for an extended period of time, we'll have to address the $1.8 in 2027. But for right now, we're not going to come off of that. But we do have levers from a margin perspective to allow us to hit those targets even without the 1.8.

And I don't want people to lose sight of the incredibly strong operating performance we have, which gives us the cushion that Todd's talking about. If we continue to have the incredibly strong operating performance, And if demand is slower, it might give us an opportunity to roll out new technologies more quickly, which would help even further with the operating margin performance. So we feel like if there's softness on the top line, there could be strength on the operating margin or the gross margin and deliver against the margin targets, regardless of what the net sales are. Obviously, we have to see how it goes, but we're feeling pretty bullish about the performance so far.

Great. Thank you. I'll leave it at that. Thanks again. Thank you.

We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks.

Great. Thank you everyone for your attention and your interest. I'll leave you with this thought. It's from Nora Ephron. When your children are teenagers, it's important to have a dog so that someone in the house is happy to see you. To which I would add, reward that dog with fresh pet and your dog will forget about the teenagers too. Thank you very much.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.