U.S. Markets closed

Edited Transcript of FRPT earnings conference call or presentation 25-Feb-20 1:00pm GMT

Q4 2019 Freshpet Inc Earnings Call

Secaucus Mar 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Freshpet Inc earnings conference call or presentation Tuesday, February 25, 2020 at 1:00:00pm GMT

TEXT version of Transcript


Corporate Participants


* Gerardo Perez-Camargo

Freshpet, Inc. - VP of Research & Development

* Heather Pomerantz

Freshpet, Inc. - EVP of Finance

* Ivan Garcia

Freshpet, Inc. - VP of Finance

* Jake Trainor

Freshpet, Inc. - Director of Marketing & Head of E-commerce

* John Speranza

Freshpet, Inc. - VP of Marketing

* Justin Joyner

Freshpet, Inc. - Business Development Manager

* Lisa Barrette

Freshpet, Inc. - VP of Business Development

* Michael Hieger

Freshpet, Inc. - SVP of Manufacturing Operations

* Richard A. Kassar

Freshpet, Inc. - CFO

* Scott James Morris

Freshpet, Inc. - Co-Founder, President & COO

* Stephen L. Weise

Freshpet, Inc. - EVP of Manufacturing & Supply Chain

* William B. Cyr

Freshpet, Inc. - CEO & Director


Conference Call Participants


* Rupesh Dhinoj Parikh

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* Katie M. Turner





William B. Cyr, Freshpet, Inc. - CEO & Director [1]


Those folks over there, could you guys grab a seat, please? Ivan, could you go tell him we want to get started. All right. Uh-oh, we hear battling dogs. Is that Steve's or Gala's dog over there making all the noise? It's not Shiloh. No. All right. Well, thank you. Thanks, everyone, for coming this morning. We appreciate you taking the time to come and hear a little bit more about Freshpet. I want to cover the material that we're going to cover today. There's 2 pieces. One is the earnings for 2019, the final earnings that we released. I'm going to give you a really, really quick run through on those in a minute. And then we're going to flip over and go into the Investor Day presentation that we'd like you all to hear about.

I will give you a little bit of a warning in advance. The warning in advance is that we're going to go very deep on Freshpet today. And part of the reason we're going really deep is because we have an incredibly passionate group of people who are really expert in their area. And as a result, it's very hard to constrain them. But the reality is there's a lot of really good stuff that they want to share.

The second reason that we're going to go very deep is because, as a company, we're keenly aware that our stock trades at a very, very high multiple. And that high multiple is justified by 3 reasons. Number one, investors believe that the long-term opportunity for Freshpet is enormous. Second, you believe in our ability to execute against that long-term plan. And three, the competitive moats that are built around this business are very significant. Those are what supports the stock price multiple that we have today.

Our hope is that by the end of today's session, that you feel like the opportunity is as big as we think it is or bigger, that you are very comfortable with the capability of the organization to execute against that plan, and that you see that the competitive moats that we've built get only stronger as we scale this business.

So let me start with the housekeeping part. I will -- the earnings slides that I have today, I'm only going to cover a few of the earnings slides. The entire deck is available on our website, so you can see all the details that we normally provide you. So household penetration, store growth and whatnot. We have released much of the information that's in this deck previously. So back in -- at ICR in January and at our CAGNY presentation last week, we covered some of this information, but I do want to highlight it. We will do questions about this at the end of the entire day. Of course, we have our usual safe harbor statement. It's a 2-pager now.

So our fourth quarter came in with growth of 27%. So we ended up with slightly ahead of where we set the guidance for the year. So $65.8 million in net sales in the fourth quarter, and the EBITDA -- adjusted EBITDA in the quarter was $13.2 million, up 43% versus a year ago. So this message of an accelerating rate of bottom line growth on top of a very strong top line growth is very consistent.

The -- for the year, our guidance had been to have net sales in excess of $244 million. We came in at $245.9 million, up 27% for the year. And the adjusted EBITDA, our guidance had been to be up 29% versus the year -- or up 44%, up over $29 million at $29.2 is where we came in, it's up 44% versus the year ago. So again, a bottom line that's growing at a faster rate than the top line.

I'm going to skip past all the consumption data because this has been shared, it's been fairly public. But the most impressive part is our 2-year stack continues to grow, and we're up 64% on a 2-year stacked basis, it's pretty incredible. There we go. It doesn't matter what channel we're in, we're growing very quickly. The rate of growth on ACV is very strong. The penetration growth, which we shared last week at the CAGNY presentation, is incredibly strong. The buying rate remains at a very high level, only diluted by the strong penetration growth. We released the store growth back at ICR, and it was a very impressive performance for the year.

Adjusted gross margin has historically been the place where we've had our biggest issues. I would describe our gross margin as stable, not making the progress that we had wanted to make. I think at this moment is where I wanted Shiloh to come running across the stage and everybody can ooh and ah about the puppy. But the reality is that we had a few hiccups that occurred along the way. But over the grand scheme of things, the fourth quarter adjusted gross margin is about stable at where we were for the year -- throughout the year. And for the year, we ended up at 49.4%. There is a little bit of a mix effect that is occurring in here, and we're going to spend, for the first time, some time in today's presentation talking about the impact that mix has on both the capacity that we need as well as on the margins that we produce. It's good from a bottom line perspective in terms of total dollars, but it doesn't make the percentage margin look good.

We continue to make significant gains on the SG&A leverage that we've been talking about since 2017. Where in the fourth quarter, you can see we picked up a few more points of progress on SG&A leverage, excluding media, and for the year, we made a very significant gain, 290 basis points of SG&A leverage towards the 700 basis points that we had talked about. This remains a significant opportunity for us going forward. We have just really started scratching the surface of SG&A leverage. And Heather will talk more about that later on.

So at this point, we feel like we are well on path towards the goals that we laid out in 2017. And in fact, you will see that we think we are ahead of the revenue target that we laid out of $300 million. Because to get to that revenue target, we'd actually have to slow our rate of growth from the 27% we've done in the last 2 years to 22%.

The model that we laid out in 2017 is working. The Feed the Growth Program that talked about this virtuous cycle of investing in media, where we made significant increases in our media investment to drive velocity, to increase our distribution, to get leverage in manufacturing and in our SG&A and then reinvest that back in the business. That fundamental model has worked for us and has got us to where we are today.

I won't bore you with the rest of the stuff that you can all find on our website and in our 10-K that was filed this morning, and as well as our earnings press release. So that's the part I want to cover related to the earnings.

If you could pull up the next presentation, and before we do that, we do want to take a moment to do one acknowledgment. All of you probably saw that in December, we announced that as effective October 1 this year, Dick Kassar, our CFO, will become our Vice Chairman; and Heather Pomerantz, whom we hired as EVP of Finance, will become our CFO. And so this final -- 2019 is the final full fiscal year that Dick will be signing off on the financials, and this will probably be his last Investor Day. So we thought it would be appropriate for all of us to have a chance to recognize Dick briefly.

So Scott, take it away.


Unidentified Company Representative, [2]


I'm actually going to ask Cathal Walsh, who is one of the other founders, who doesn't get to -- kind of get into -- in front of you guys quite as much, but I wanted to ask him to come up. So Cathal actually works with us in Europe. If you guys don't know him, he is a force of nature. And I mean that in every aspect of the word, and he's been an incredible partner. And the reality is we wouldn't be standing here today if he didn't contribute along the way. But we do want to recognize Dick for all his contributions.

So Dick and I have actually worked together for 18 years, which is pretty amazing, across 2 different companies. And when you work with someone that long, you get to know that person really well. And when there are challenges and difficult and tough times, you really, really get to find out what someone's made of, and they don't make people any better than Dick. And I've worked with him for the 18 years, and we look forward to working together for many, many more years. He will obviously be involved in Freshpet. And who knows what else in the future he'll be involved in and pursuing. But along the way, quite honestly, Cathal and myself created many, many challenges and sometimes some difficult situations for Dick potentially. And Dick was always there to be supportive and helpful, and he'd always kind of help clean up a little bit for us. So we thought maybe it was appropriate to have a one of a kind, golden pooper scooper.

And as you can see -- you may not be able to see in the back, but it does say "place large pile here." So once again, Dick -- I mean the contributions that he's given -- made to the organization, unquestionably we really wouldn't be here today if Dick wasn't a part of the organization for as long as he has been. And again, he will play a critical role going forward and be involved with the organization. And we really, really look forward to working with him further and his counsel and his wisdom and his partnership, and his friendship most importantly. So thank you again, Dick.

So now we have the second part, the part that most of you came here for today, the Investor Day. And as they always do, they gave us yet another version of the forward-looking statements, safe harbor piece. And we have a choice here where you can all hear me read that line-by-line or we can all stand and look at -- what happened to the picture here? What happened to the slide? There's supposed to be a picture there. Ma'am, can you figure out where that -- there we go. Or you can sit there and look at a picture of my dog. I prefer this. So this is who I work for. Her name is Appa. She is a 15-month-old Samoyed. And she's the fourth Samoyed that my wife and I have had since we got married 32 years ago.

And any of you heard us talk at CAGNY last week will know, I described this as my wife and I got our first dog as a surrogate for children. We then had -- when we had kids, they were the companions for our kids. And then now that our kids have left the nest, they've been -- Appa is a replacement for our kids. When I went home and told my wife that that's the way I had introduced her. My wife said, "You forgot something." I was thinking "Oh, no, wedding, anniversary, what did I forget?" And she pointed out no, that Appa is more than that. She's also the surrogate for the grandchildren that our millennial children haven't given us yet. So that's the role she plays.

So when I took -- when I joined Freshpet 3.5 years ago, I told many of you that I joined Freshpet because I saw this as an opportunity to help change an industry. That the model that Cathal, Scott started and the rest of the team that's sitting here had developed and refined over the years, I thought it had the potential to change the industry. And some of you would've been justified if you were a little skeptical, because at the time we had $130 million in revenue in a $30 billion category. How do you change an industry when you're that small in that big an industry? And what I'd hoped that you would feel today is that you'd see that we have that potential. We're on that path. We have that trajectory, the momentum that we've built over the last couple of years certainly makes that a distinct possibility. But I want to raise our sights even higher than that and talk a little bit more about how there are brands that change the world. And that's something that we aspire to turn Freshpet into, a brand that changes the world.

And before you discount that, remember you might have discounted our thought that we could change the industry a couple of years ago. But we look out over the horizon. As you think about brands that change the world, they really have 3 common characteristics. The first is that they change something very fundamental about life, something that you do every single day, whether it's eating or sleeping or how you entertain yourself or how you get to and from work. But these are things that absolutely change the fabric of your life. The second thing that they do is they reflect a change in society's values and priorities. So in a world that may have gone towards mass and industrialized sameness, it brings customization and personalization. In a world that is time pressured and fatigued, it brings energy or relaxation. Those are the kinds of things that really can change life.

The third thing they do is they bring a technology or a collection of technologies that may have been present, but not assembled in the order in which they are assembled, to make something that was previously not possible, possible, or at least more broadly and readily available. And so obviously, the high-water mark or the high bar for that is Apple. Apple's changed the way that we create, think, the way that we connect. So from the mouse that meant that you no longer had to type into your computer a computer instructions, to just point and click, to the ability to download a song, any song you wanted at a reasonable price and just one song, and put thousands of your own personal music on a single device that you could then take with you anywhere, Apple has changed the way we entertain ourselves. And the iPhone has changed the way we connect and access information.

Netflix. In a world where entertainment was given to us by networks and people like HBO, when they want it and what they wanted to give us, Netflix completely changed the world to a world where we get high-quality entertainment when we want it and where we want it.

Amazon hit the trifecta of giving you incredible range of variety or selection at the best possible price and with convenience, and completely changed the way the world shops.

Nike. Before Nike, you may not remember -- those of you who are as old as I am would remember, that before Nike, it was Chuck Taylor basketball shoes and Tretorn tennis shoes, and they were used for virtually every form of athletics. Nike came along with the waffle tread and changed the way in which we exercise. So in a world that had become increasingly sedentary and was looking for fitness, Nike began to change the way that we do fitness and the way that we compete. Now all the way up to and including the Vaporfly, which has had all this controversy about whether it actually makes you even better than you should be.

In a world that was time starved and looking for energy, Red Bull came along. Whether it was to start your day, give you a jump-start in the middle of your day or keep you going at a party late at night, Red Bull redefined how it is that we extend our days and create energy in our lives.

Again, you may not remember what life was like before Gatorade existed. But before Gatorade existed, if you were an athlete in a high school sport on the sidelines, you had water or believe it or not, carbonated soft drinks. Gatorade completely changed the way we rehydrate and made athletic beverages a whole new category, and changed the way in which America rehydrates and created science that supports that.

Keurig and Starbucks have changed the way in which we wake up and get energy in the morning and refresh ourselves later in the day. You think about it, until they came along, the world of coffee was this world of sameness. It had to come from the pot. It had to be in this standard package. And they redefined it to craftsmanship, personalization, customization and quality at a level well beyond what had existed before. And now people stand in lines to get Starbucks at the morning, in the middle of the afternoon when they need refreshment.

And while those may appear to be very high-water marks, high bars, that's what we aspire to with Freshpet. Because we aspire to change the way the world nourishes its pets. And you may sit there and say exactly how does that really meet that standard. But if you're one of the 63 million dogs that exist in the United States today, and your parents and your grandparents and your great grandparents and all the generations before that, all they ever had every single day was dry dusty kibble or mystery meat in a can, and you get Freshpet, and you get the nourishment, the nutrition, the taste. Your life is pretty much a step change in difference similar to the step change that I described, whether it was Gatorade or Starbucks or Nike versus what preexisted.

You think about what does exist today. The pet food industry is a $30 billion industry, and it's stuck in the 1950s. Kibble was last created in 1956. And that kind of made sense if you think about what life was like in the 1950s. In fact, if you had a dog in the 1950s, it probably looked something like this, where it had a chain around its neck and it slept in a doghouse in the backyard. That's a far cry from the world that we see today, where dogs are now part of your family. And they're now just sleeping, not in a doghouse, in your house, in your bedroom or in your bed. It's a completely different world than we had before. People have come to recognize the role that pets can play in our lives at a level that's way beyond what we envisioned when kibble was created, or even further back when cans were created.

In fact, there's even a science around it. A couple of years ago, the term zooeyia was created, to define the health benefits that humans get from having a pet in their life. So going back early in your life, when you start life it helps with your immune system, whether it's the saliva or the dander of the pet, having a pet in your household improves the immune system as it develops for children. It includes the opportunity for psychosocial development. How do you treat a pet? How should a pet treat you? How do you nurture a pet? These are skills that kids can learn, especially in era where they may not have siblings. You go on beyond that into catalyzing social interactions.

When you take a dog out, as all of you saw with Shiloh here, a dog is a magnet for people, and it teaches you how to have social interactions and encourages more social interactions, encourages you to get out and exercise. So if you were destined to sit on your couch or in front of your computer and your dog wants to go for a walk or play ball, it gets you out and gets you active and vigorous. Or if you want -- needed coping -- some form of coping or recovery from some trauma in your life, the pet was there to help you. That's zooeyia, and that's a role that pets play in our lives.

That kind of -- when you think about the food though that we're feeding. The world that we've gone from is a world that looks like this, canned foods that have moved and we've moved into fresh foods. Think about the food industry of the 1950s, they believed you could can or dehydrate anything, add artificial flavors, colors and preservatives and sprinkle vitamins on the top and tell us that it was tasty and nutritious. That's what we call tasty, nutritious today, the thing on the right. And if you think about the dried and processed foods that we had in the 50s and 60s. And what we're looking for now today is much more -- less processed, much fresher foods.

So Freshpet, our mission as a company, is to awaken the world to a better way of feeding pets. We have a completely different ideology for what pet food should look like.

Think about the last major innovation, it came 50 years before Freshpet was created. 1956, kibble was created. In 2006, Scott and Cathal created Freshpet. What a change, what a difference. That may be a more dramatic difference than going from Chuck Taylors and Tretorn tennis sneakers to the waffle Nike, or from what predated the iPhone as a flip phone. This kind of transformation is a significant transformation of what was possible. Or even bigger difference is the can of dog food created in 1922 versus our Fresh from the Kitchen product created in 2015.

The market is recognizing this significant change and rewarding Freshpet with significant growth and accelerating growth. Our growth was 14% in 2016, it went up to 18% in 2017. Last 2 years, we've been growing at 27% a year. And we're adding households quickly. In fact, it's an accelerating rate of household penetration growth. We've gone up 25% in just total household penetration in the last year and 30% when you look at just our main meal core dog items. But the reality is, the opportunity is much bigger than just where the 3 million households we're in today. 63 million households in America, we're only in 3 million of them. The opportunity is significantly bigger than that.

If you think about the way in which significant new innovations are diffused throughout a population, and lots of academics have studied this issue. One model that's come out, and many of you have probably studied it or seen it, is Roger's Diffusion of Innovation model. And it basically defines people as whether they are innovators, early adopters, the early majority, the late majority or laggards. And different people in different categories will adopt new ideas and new technologies at different rates. But eventually, the growth curve follows this very similar pattern whether we're talking about the adoption of the telephone or television or dishwashers or iPhones or the internet, the rate at which people adopt them looks very, very similar.

So the obvious question for us is, where is Freshpet on that curve? And what you can see is we believe Freshpet is in the very early innings of this. Down in the lower left, where it says 12% of prime prospects are using core dog products. And you look at where the total market potential is up in the upper right, just defined the way we see the data today, the potential is a $2 billion market. And the reality is that market potential is still growing, and it's growing very quickly. If we reassessed it again today versus when we did it in late 2019, we'd expect to see the number bigger.

What's even more interesting is there's this point along the curve that all the academics observed, which is called takeoff. And takeoff is what happens when people other than us, other than those of us who are providing this new technology, but operating in their own best interest, their own economic self-interest, take actions that would accelerate our rate of growth. We may have been seeing that already. So retailers in the fourth quarter of 2019 began putting us in more stores at a more rapid rate. Not because our sales team was more persuasive than they had ever been before, although Eddie may think we have been, but the reality is, it became obvious to them that there was a bigger opportunity here than they had previously realized. And so in the fourth quarter, they started putting fridges in more stores and bigger fridges because it was in their economic self-interest.

We found household penetration growth accelerated well beyond what the level of advertising investment we made would have predicted. We start picking up word of mouth in ways that accelerate our rate of growth. And so we believe Freshpet is that point on that curve, where it's about to hit the takeoff that would accelerate our growth and head towards the market potential. As a result, our plan that we are talking -- beginning to talk about today for the first time, is Freshpet's 5 by 2025 Feed the Growth Plan. And what that means is that we want to add 5 million more households to the Freshpet franchise between now and 2025. We have 3 million as of the end of 2019, we want to go to 8 million households by the end of 2025.

We are very, very mission driven. We are focused here on trying to get more people to feed Freshpet more of their time. Our goal is measured in households. That's what we're shooting for. We want to get more people feeding more Freshpet. But if we achieve that objective, we get more people feeding Freshpet on a regular basis, we will end up delivering $1 billion in revenue in 2025. That's our goal is 5 million new households, $1 billion in revenue.

To do that, we've updated the strategic plan that I outlined first in 2017. And the strategic plan has 3 changes versus the virtuous cycle we talked about before. The first change is in the top, where we are entirely focused on advertising as the driver of household penetration gains. We are now adding innovation. And the reason we're adding innovation is because we see very significant success at extending the consumer franchise, the household franchise for Freshpet behind some significant new product innovation such as our small dog or Fresh From the Kitchen, and you will see more of that today. But it's also because our retail franchise is now big enough. Meaning we have big enough fridges and double fridges in some stores that can accommodate the expanded consumer -- expanded product lineup that supports an expanded consumer franchise.

So they work hand in glove. And that's the second point down at the bottom. We're describing it as not just adding distribution or expanding visibility and availability. And by that we mean, wherever we are, we want to be very easy to find, very noticeable. Bigger fridges, second fridges, end-aisle fridges or even beyond that, if we go online, we want to be very noticeable online and available. We want to be available any way and anywhere the consumers choose to buy Freshpet food. So our definition is visibility and availability, not just distribution.

The third change is the box down in the lower left in about the 7 o'clock position, it says expanding capacity. In order to keep up with the rapid rate of growth, we will need to add capacity and add it very quickly. And we'll talk a lot more today about how we plan to do it. But it is a much more integrated and expansive program than we last talked to you about when we had an Investor Day about 18 months ago.

So what should be your key takeaways today? I'd ask you to think of 3 things: number one is our total addressable market has nearly tripled since we outlined it at the end of 2016, and it is still growing. Secondly, Freshpet is going to invest in organizational capacity -- capability, production capacity, innovation and marketing support to seize the opportunity ahead of us. The way we think about it is we invest in capability before capacity, capacity before demand, but we need to invest in every single piece of that. And the third part is that we have a winning business model with a wide competitive moat, significant first-mover advantage, and that will deliver meaningful shareholder returns. So those are the 3 takeaways I want you think of, as you come away from the session today.

Our specific goals for 2025, 5 million more households. Again, we're very driven by the mission. The mission of changing the way people feed their pets. And to measure for that, you measure how many people are feeding their pets a Freshpet. That will deliver $1 billion in net sales and still growing at a great -- greater than 20%. And I hope you come away convinced that that is an achievable goal and a 25% -- approximately 25% adjusted EBITDA margin.

Between now and 2025, the path that we will follow will have some variability in it, but we'd expect to have 20% -- 20-plus percent net sales growth every year between now and 2025. Our adjusted EBITDA will grow every year in excess of our net sales growth rate, but it will vary by -- in the years, depending on the capacity available and the opportunities we have. So for example, we may choose to make an investment outside of the U.S., which would depress the rate of growth a little bit, but would be planting seeds for -- down the road.

Third is we will continue to invest in advertising as a prime driver of our household penetration gains, invested at 12% of net sales in U.S. advertising with incremental investments that will occur outside the U.S. Continued leverage in SG&A, that will be the single biggest driver of our adjusted EBITDA margin improvement. We expect to see significant efficiency gains in our manufacturing, and those efficiency gains in manufacturing will offset some dilution that we get from mix. And Heather will talk to you a lot more about the impact that mix has on our business.

And the last part is significant but phased capital investment to support the capacity expansion. We know we will need a lot more capacity, but we will do it in ways that we think are strategically smart and phased to match the rate of growth of the business.

In today's session, we're going to cover each of the topics that are essential to that, starting with how big can Freshpet get and how will we do it. We'll then talk about how we'll meet the demand. Then Heather will come up here and talk to you about the strategic and financial benefits of the scale -- increasing scale we'll create. And we want to talk -- then we also want to talk about how we'll take care of pets, people and the planet while we grow. Environmental and sustainability and ESG is a big part, and it's embedded in our business model today. And finally, we're going to talk to you about what -- how our investors will be rewarded for the growth that we're going to create.

So then at this point, I'm going to turn it over to Scott. All of you know Scott. Scott is, obviously, the President and Chief Operating Officer of Freshpet and also co-Founder of Freshpet along with Cathal. He's also the pet parent to these lovely creatures. But you all know, Scott is one of the most innovative people I've ever worked with in my career. I oftentimes refer to him as the Steve Jobs of pet food, given the analogy I gave you of Apple at the beginning, but incredibly talented executive. And he is the prime architect of the business model that we've got today and the innovation that we bring, and he's going to take you through how big we're going to get and how we will get there.

So turn it over to you, Scott.


Scott James Morris, Freshpet, Inc. - Co-Founder, President & COO [3]


Thanks. I think the only similarity with me and Steve Jobs is our first name starts with an S and that's where it ends. But anyway, thank you so much, Billy. Thank you, guys, for being here. I know this is -- thank you for being here early. I know it's a long day. Hopefully, we'll kind of run through a lot of really helpful and interesting information over the course of the next couple of hours. We'll try and keep it light hearted. If not, you let me know, raise your hand if you want me to move slides faster, and I will do that.

The other thing is, I know there's a burning question you all have, yes, everyone gets one of these shirts later today. Most important. I do want to thank our team. They -- everyone worked incredibly hard, not only on this but also just kind of getting ready for this, really developing a 5-year plan. I mean it's not -- you only get to do it every 5 years. So the reality is most of the time, you're hopefully working on the business and making sure the business is moving forward. So we've been kind of on an intense period with lots going on. So thank you guys, great work. Thank you guys for believing in us and coming along the way and participating with the progress the company has made over the years. So again, thank you all so much. And thank you to NASDAQ and our partners at ICR, who have been great helps too.

Okay. So this is some of my pets. This is actually Piper when she was a puppy. And I have another cat, but she didn't make this photo, ran off, which you could probably understand. And I call Piper my party girl because she is always up for a good time.

All right. So let's start with the pet food category. If you kind of take a look at the category, it's -- you hear a lot about it. It's a $30 billion category. This past year, it grew at about a 7% growth rate. But typically, you'll see like a 3% to 4% CAGR over time. It's driven by some really kind of strong fundamental trends, and these are really important. One of them is there's been significant pet population growth and also expansion in the households with pets over the past 3, 5, 7 years. So that's been really kind of good fundamental. The other thing is this whole idea of premiumization. So people are buying kind of better and more expensive pet foods typically over time. So that's a great kind of opportunity for the category, and that's been one of the driving forces. So the reality is there's more focus on nutrition overall, with the way pet parents are thinking about it, and I'll talk about that on the next slide, but the reality is the wind's at our back. So it's -- that's really nice because there's a lot of categories that have contraction going on.

Now I talk about this as 85 years of pet food in 1 minute. If you kind of think about pet food -- and Billy touched on this, but in the 1940s, there really wasn't pet food for the most part, it was -- pets basically ate what we ate, right? They were just basically nourished by what were the scraps or kind of whatever like someone was feeding them. And then commercialized pet food came in, in the '50s, Billy talked about 1956 was when extrusion came up. In the '80s and '90s was what I call the birth of super premium, which was kind of the step-up in the category, scientifically designed foods. And over time, that changed this idea of ultra-premium. In ultra-premium, the core concept in ultra-premium was, it was more meat-based and there were better ingredients. And there were a lot of brands that did incredibly well. We believe over time, and this is based on how we eat and how we think about nutrition, is pet food will continue to change. And over time, it's really moving more and more to kind of simple, good food. So we believe that's really where the category is going.

Now I would like to tell you that we were brilliant when we laid out our plan in 2006. I think we did a great job, but we are really fortunate with how we see the category developing. The other piece of the category I talked about is like premiumization, Billy touched about the relationship people have with their pets. I want to play a brief video because I know that it's better to see a little bit of a video than hearing just me talk. So we'll play a brief video that will give you a little bit of a feeling of the relationship people have with their pets today.


So pets are part of all of our lives, and they really inspire us to do great work, and that's really kind of -- really the foundation of the organization when we started it. So the amazing thing is that pets are literally replacing kids today. As millennials tend to put off having children, there is incredible growth in the pet population. There's actually 22 million more dogs and 28 million fewer kids over the past several years, which is an amazing statistic. So instead of having babies, we're replacing them with fur babies, right? So that is really kind of another kind of amazing statistic on the category. But it also is really telling about the relationship that people are having with their pets and how they think about them in their lives. And I think that video helps illustrate that.

So I think we've may -- I don't know if many of you have seen this. There is amazing research out there today that literally shows that people with pets live longer, healthier lives. It isn't our research. This research has been done by many, many people. And there's so many reasons for that. Some of it's because they make us exercise, some of it's the bonds. Billy talked about even the microbiome that pets bring into our lives, but literally, pets actually help us live longer, healthy lives, which is amazing. And that, again, kind of inspires us to be pet owners, and we hope all of you guys will be pet owners, too.

So Freshpet lives at that intersection of 2 powerful, powerful trends, the idea of humanization of pets, which we've really highlighted and this idea of fresh, wholesome and simpler natural foods that we're all aspiring to eat in our own diets. And we're really trying to tap into that. I talked about how people think about pets and the intersection of this trend. And again, I wish I was as smart as we look today, being perfectly positioned to kind of where the puck is going to. But we feel like we're in an ideal position.

Now I want to go backwards a little bit and share with you -- there's a couple of reasons I'm going to share a couple of things here. If you go all the way back to 2006, '7, '8, '9, '10, it's been an incredible trajectory for us. And all along the way, we built a bigger and broader organization and brought more capabilities into the organization. And it's really been kind of, the fundamental thing is, we've added more and more consumers every single year. So from the outside, the reality is that success like this is great. It's kind of this line that just kind of goes up. The reality is, success does not work that way. There are many twists and turns and there are curves. But what happens is, every time there's a loop, we learn something, and we have learned a lot. And there's been definitely different phases all along the way, and it's been great learning for the organization.

That learning and that being part of our organization helps us to be successful into the future. Billy kind of touched on some of it, but we have -- we have been -- the majority of the management team has been in organizations that are multiple billions of dollars. I like to say that I worked my way all the way down to 0 at Freshpet. So we've seen all these different growth stages in different companies that we've participated in. And we know what a large multibillion-dollar corporation looks like. And that's really how we're building and thinking about it. But the learning has come along the way.

One of the things that's taught us in success is that there are some things that were really kind of like these major foundational kind of causes and ideology that we have with the business. We learned a ton. And we really felt like we knew that we could build a company that not only could transform the pet food category, but had the ability to create better lives for people, better lives for pets and really be, kind of have a triple bottom line. So not only focus on profits, but also focus on the economic and societal things. And we'll talk about this idea of pets, people and planet. It's really been built into exactly what the organization has been about really since the very beginning. I know it's been a very, very hot topic for many people today. And you're probably going, well, why am I talking about it? Why is everyone talking about sustainability? Why is everyone talking about this idea of this passion around having a mission-driven organization?

The reality is, it's incredibly important. It's incredibly important to all of us. It drives us, it drives our consumers to really be passionate about our company, and also it's just the right thing to do. I think we can all agree that government is not going to solve our problems, we're going to have to rely on individuals like ourselves and organization. So we want to help contribute to the world much more than just deliver profits. So we believe in a healthier, happier world where pets, people and planet all thrive together. Justin will take us through pets, people and planet later, so I won't go on about that, and he'll do a wonderful job explaining each one of those aspects and the different things that we're doing in those areas.

The next thing I do want to share is values. So long ago, when we first started the organization, when someone would start in the organization, I'd go and spend time with them. Cathal or myself, or Dick, we'd spend time with that individual. And we'd work with them and we'd really be kind of around them all the time. We're actually now growing to a point where we can't spend as much time with each individual that starts in the organization. So it's incredibly important to have principles, mission and actually our values laid out so it's super clear. So literally, when we ask our team to evaluate ourselves -- so Billy and I get evaluated by the rest of the team -- we ask people to evaluate those on these aspects. That's in our 360 feedback, or our full-circle feedback.

When we're interviewing people, we're starting to ask those questions and figure out how those people can contribute to the different values, and do they believe in them? When we interviewed Heather, there were specific questions that we were asking. Would she fit in our organization? Would she help us achieve the mission? And I only pick on her because she is the most recent person who joined the team. So I will play you a little bit of a video of what we feel like we've created as a team and an organization. And it's -- hopefully, it's going to kind of all tie together in just a minute.


So we really feel like we have built a family, and I think this is what differentiates us from so many organizations out there. There's still 2 of the founders in the organization. There are many, many people that have been with us for many, many years. In fact, this lady in this photo, she was -- Cathal and I met her in a coffee bar. She's still with the organization. This is our groundbreaking recently. We met her in a coffee bar, and she asked, "well, this sounds great, what's my first job? And we said, you need to go find an office because we don't have an office right now. This gentleman, Willy, he was literally our second employee. And I'm not kidding, this man lifted literally probably 1 million pounds of ingredients, before we had the equipment to do it, to make our products.

So these people are still involved in the organization. And they are kind of the core. They're absolutely kind of the core, they're the backbone, and we've asked each one of them to be really part of how this organization continues to grow. Because they knew how it was built, they knew what's made us successful, and they can share those learnings. It's not me kind of spending time with each individual, it's now over 30 people that are sharing that time and can help us grow. So it's the tribal knowledge that we have. It's the expanded team, and we believe that's our platform for success.

So in the very, very beginning, we all wore many, many hats. And you can see, we kind of did some juggling. This was actually my response to Billy challenging me that my balance board was not like a really professional balance board. So I figured I'd juggle while I did it. All right. So all right. So the reality is, if you think about these phases of the organization, so think about these different functions and the different phases, we've kind of been through these generally 3 different phases. The first several years, we were trying to figure out what was Freshpet. It was literally the birth of the organization. And you can see Scott Morris, Michael, Michael, Scott Morris, Cathal, Dick, Cathal, Steve -- Steve here. So literally, there's a handful of names that we kind of just splattered all around. We kind of all did everything. We were on that -- we were juggling. We were on that balance board.

But you can see and you'll meet Lisa in a few minutes, you'll meet Ivan in a few minutes, you'll see Steve in a couple of minutes, you'll see -- let's see, those are Board members primarily, but we've add -- continue to add people into each phase of the organization. And then once we had kind of started to establish what the business model looked like, then we added a whole another set of people. I don't know if you guys caught this, but the original kind of systems, literally we were using Excel. Then Steve was our kind of in charge of our systems and literally kind of doing it. And now we literally have people that are helping us to establish what the systems are for the organization and help us grow forward. So we've added capability in every step of the way, but we kind of have the center of that tree, that core, that founding group of 30 that are still with the organization that we think gives us a platform to grow into the future.

All right. So I'm going to transition for that, and actually, I'm going to talk about the Freshpet consumers. All right. So we are -- like we've done a ton of work over the years around this, and we've done a significant amount of work over the last 12 to 18 months to kind of understand our consumers, understand what the opportunities and the needs are. One of the first things that you'll see is that we have a very interesting makeup. You can see kind of the makeup of the dogs, but you also see that the majority of the dogs in our company are -- tend to be smaller dogs that feed our food and the other thing that's really interesting is that we actually tend to have younger dogs, which is pretty interesting -- pretty interesting fact. We believe that once someone starts on typically any food, but especially our food, they typically be -- are in for a very, very long period of time. So this is an encouraging factor, that we have so many dogs that are young that are in our franchise.

The other thing that's really interesting and a great fact is if you think about the population of dogs today and the owners, you look at millennials. But then one of the most important things is, if you look at our index on millennials, actually at 124 index, we haven't even honestly done a brilliant job marketing to millennials. We're actually going to start doing more of that, and John is going to talk to you about a couple of things in the marketing that we're doing that will help us to attract millennials. We believe millennials will be an incredible part of our core. And then also Zs, we over-index with that group, too. So those are -- that's another very positive aspect.

And one of the things we get asked very often is -- so this is interesting information, but how do people act once they've come into the franchise, and they're buying our products? So we've actually done some work, and this is kind of on Nielsen panel data. And what we have found is that people -- and this has been repeated time and time again, that when people buy our product, from when they start to when they most recent purchases, and we took a large group in this, they continue to increase the amount of dollars that they're spending on Freshpet. That's a really, really positive sign. And that's really kind of supports the idea. We always talk about our repeat rate. So this helps to support that fact.

The next one that's really interesting and telling, and actually helps create an opportunity for us is, you actually can look at this, you'll see that are -- the dogs that are the smaller dogs that we have many, many of, that's -- we become the primary meal for many of those, and even in this 10 to 24 pound category, the place that we don't do as well as people use us more and more of a topper, is in the over 50-pound group. This creates an opportunity for -- or what are the types of products that we can come with that can help meet the demand of that group. So you hear Lisa and Gerardo talk to us later on about innovation. That will be something that's on our list over the next several years. And there's some really kind of great opportunities that we've identified and some things that we feel that we can -- we're able to conquer.

Years ago, we only had rolls, and people told us we were inconvenient. And then we came with bags. And then people said, it looks good, I like the food, but I want it to look even more like human food, more like the food I eat. And that's one of the more recent products that we'll come with. Lisa will share a picture of that product called Homestyle in a little while.

So the next thing that you'll see is our penetration and loyalty cycle. And this is what makes the machine work. This is critical. So when people come in, they buy our food because they believe it's healthier upfront. When they use it, they actually see incredible palatability -- so -- industry-leading palatability. We've actually shared over time some charts that demonstrate like what the palate is of our products versus the competitors'. So this is kind of an average. We have industry-leading palates. So palatability is when you take our food and a competitive food, put it in front of a dog, what does the dog consume? It consume 80% of our food versus the competitor food. So that's the first thing that people notice. Looks good, smells good. I put it in front of the dog, the dog loves it. So that's the first positive experience.

The next thing, after a few weeks of feeding it, people see a visible difference in their dog's health. Who -- think about that. If you brought home spinach for your kids and you fed them the spinach, and they were going, this tastes great. And a few weeks later, their skin and coat looked great and then they have more energy, what would you think? You'd feel like a pretty good mom and dad, right? Perfect. So that gets us to this next piece, which is satisfaction. 97% of the consumers who feed our product feel incredibly satisfied. Now that is a little bit of a self-fulfilling prophecy, but that again is an industry-leading statistic. If you take all the products that are out there and take the user base, that product satisfaction level is really, really strong.

The next piece is the 70% repeat rate, right, which is really, really strong. Now I know what all of you are thinking. You're going -- well, what happened to the other 30%? Well, you know what? I've got that on the next slide. So these are the reasons why the 30% don't repeat, right? And I think we maybe have touched on this over time. Hopefully, it's kind of interesting information but it's, out of stock -- look at these -- out of stock, not available near me or goes bad too quickly. This one -- remember, the small dog piece? If you have a 5 or 7-pound Chihuahua, it's hard to get through a lot of food in a week. So people are struggling with that. Isn't that an opportunity for us? Clearly, an innovation opportunity for us over time. So out of stock, not available near me. The sales team is working on that from a visibility availability standpoint.

Goes bad too quickly? They prefer dry dog food. There's a perception that my dog likes the crunch, and that's fine. There's a lot of people that will always feel that way. Has to be purchased too often. Honestly, it's fresh food. We are in the fresh food purchase cycle, whether you're purchasing it for yourself or for your pet. So we're in that cycle. The dog didn't like, there's going to be some people that didn't like it. And then there's a group that does feel it's too expensive. The reality is we're not going to appeal to everybody. We're not going to be perfect for everyone. So there's a group that we may not be able to get. But everything demonstrates to us that there are opportunities for us to continue to come with innovation over time and address some of these consumer challenges.

So the last one, too expensive. If you take a look at pricing, we've shared this chart, I actually adjusted it from CAGNY. I added a couple of other items in here. If you think about what it costs to feed Freshpet on -- this is a for a medium-sized dog. If you -- what it costs per day to feed Freshpet. We have products that go from $1.60 a day all the way to $3.30 a day. But if you want to feed some of the stuff that's 4, 5, 6 pounds -- $7 a day obviously, there's plenty of other products in the category. I think this is a fair representation of a range of our products. We're trying to hit all price points, be as widely available to as many people as possible. We are not going to be the cheapest product out there, I can guarantee you. But I can also guarantee you we're coming with a different level of quality then what's out there in traditional pet foods.

So the next question you're probably asking is, why haven't everyone tried Freshpet? So there's a group of aware and then there's unaware. The unaware people, John later is going to talk to you about the marketing piece, he's got some work to do. And he's doing an incredible job, but this is the group that John will be targeting, this unaware group. Of the group that is aware, what are their problems? What are their concerns? 31%, the biggest group: I don't know, I just don't know enough about, I kind of heard of it, but I really don't know what it is. Over time, we can educate a lot of those people. The form, there may be some people that we won't have the right form, dog satisfaction or they're happy with their current. There's another group that's price/value, it's too expensive for me. So over time, we've got to make sure that people feel that they're getting a great value for the product. So again, there's tons of opportunity within this group that is aware of us that hasn't tried us.

And then finally, when we start looking at this and we think forward and we think about what our consumers are going to be like into the future, we know this is just kind of the math of it. If you look at pure research and you think about how the population is going to shift, more and more people are going to be like of the pet-owning population in 2025, there are going to be more millennials and more Gen Zs. The good news is we're in a good position because we're already over-indexed with that group. So we think it's another piece that will be helpful and wind at our back.

So I want to read you this next piece, it's really interesting. How are the future consumers going to sound? What is it going to be like? And this is a little long, but I want to read this. And the numbers in parentheses are the index of these people like over-indexed versus the average. I cherish my dog. I'll go above and beyond for him. I'm willing to make personal sacrifices to make my dog happy, double what the average is, 202, and I'll go overboard in what I do for him. I feel how I dog -- how I eat is how my dog should eat. I buy the best quality food for me, 245 index, amazing, and for my dog too, 221. I'm concerned about the safety of food and what my dog is eating too. I make a point to use fresh food as much as possible. And I read the labels, it should have a short list of ingredients I can pronounce and recognize. I want to feed my dogs less processed, fresh, real human quality food. We feel like we're really kind of positioned in the right place, how people are going to be thinking about this in the future. And I didn't touch on it, but there's the environmental sustainable piece on the bottom too, which is really important for those people.

So the next piece is, so how does Freshpet grow? So it's actually a really, really kind of simple model. I've shared with you a little bit about the consumer and how they come in, how they participate in our franchise. The first piece is the advertising. We've got to let more and more people know. And that's where you'll see us making some of the biggest investments, where we have made investments and more investments over time.

The next piece is going to be availability and visibility. We need to have more places where people can go buy Freshpet. We're going to talk a lot about this idea of availability and visibility in some of the next sections.

Finally, innovation, there are plenty of products not just to innovate to take up more shelf space. That's the normal CPG game. We are innovating to solve problems here, very specific problems and opportunities that we see within fresh pet food. That will be the focus of our innovation. Then we want to make sure that there's great product satisfaction and even stronger repeat rates than we've had in the past. So this is really how people come into the franchise.

In this next section, John Speranza will be taking us through that. Do you have -- are you mic'd? Okay. Great. So John will be taking us through the marketing section. And I want to introduce John. John came to us, he was in the last group that I showed you. So there were like 3 waves of people. John's in the last group. John has basically -- he's classically trained in CPG. He is a brilliant marketer, and this is from an organization that I pride ourselves on the marketing and how we think about going to market. He's a great, great marketer, but he's also a great entrepreneur, and he thinks like that, and he's a great part of the Freshpet family.

So John, if you'd come and take us through the marketing section.


John Speranza, Freshpet, Inc. - VP of Marketing [4]


Thanks, Scott. Hi, everybody. As Scott mentioned, my name is John Speranza. I'm the Vice President of Marketing. These are my 4-legged children. And what's funny, I was putting this slide together, and I looked at the picture, and I was shocked at how it's captured the individual personality of each of our pets. Angus is down below. Angus is from New York City and is a rescue and has a little bit of that New York swagger, basically looking at the camera saying, "what are you looking at? What do you want from me?" Rosie is -- could spend the entire day basically just hugging and snuggling. And she didn't waste any time taking this opportunity to kind of catch a kiss. And then lastly, it's Whitey. Whitey is the last addition or latest addition into the Speranza household. A rescue cat and pure delight in tormenting both of the dogs.

And as you see here, already plotting on, about to kind of jump on unsuspecting Angus. So those are my children. I will say this, they're all rescues. And when we brought them into our household, they were not in great shape. And they've -- fortunately, for them, they've been fed nothing but Freshpet. And we've seen firsthand the transformation, not only just from an overall health, but also a total well-being. And so this position for me and kind of heading up our marketing and advertising is a lot more than just a job. It's kind of like a personal mission to make sure that more and more pet parents get to experience the impact that we've seen personally within our household. And that's what I'm going to take you through today. It's going to be a lot more around the -- how are we leveraging marketing and advertising to generate demand.

So as you saw, we need 5 million households by 2025. And that translates into a marketing objective of fueling awareness, penetration and loyalty. And we do that by awakening pet parents to take a fresh look at pet food. And in our articulation, we challenge ourselves on 3 main things -- we challenge ourselves a lot more than that. But one -- from a communication standpoint, be super, super distinct and be different than the rest of the pack that's out there, be simple and clear in who we are, why we do what we do and the foods and fresh recipes that we make. And lastly, when we bring our value prop to life, making sure that we're winning not only the heads, but the hearts of pet parents.

And this consumer-first orientation, we're very considerate in how consumers consume media. And when do they want to hear from a brand? And how do they want to hear from a brand? Just because we have access to talk to them doesn't necessarily mean we should be talking to them all the time. And so we're really choiceful in the tactics we use. We use broad-reaching video and a whole suite of digital tactics, everything from, as you see here, paid social, search, display, native and a variety of others that are outlined here.

When we do engage with pet parents, what do we want to say? And these are 2 -- this is our kind of bringing our value prop to life. And we've got 2 main anchor campaigns. The first on the right side is Letters. And this is much more of a heart-first consumer testimonial expression where we are showcasing real letters from real pet parents who have seen, very similar to my own experience, seen the transformative effect of feeding Freshpet to their pet.

On the left is our second campaign, umbrella, and that's called Awakening. And Awakening uses humor to really share some kind of challenging news to pet parents. And we do this through user-generated content and dog videos that shows reactions when they learn what perhaps some nasties that might be lurking in their dry kibble that they're being fed today.

All of this is supported underneath with an always-on digital and social campaign. And we break that into different pillars. The first is around kind of celebrating pets and love at first bite moments, we call it. The second is around the benefits of fresh. And this is a little bit more of a functional expression that talks about the clear eyes and great coats, et cetera, from feeding Freshpet.

Philanthropic and charitable initiatives. Justin is going to take you through, and you're going to hear a lot more about that, but we put that under Tails of Good. And then lastly is really simple telegraphic, and you saw the video when Billy was presenting of what are -- what is inside our food and really just celebrating the transparency and the simpleness that's around Freshpet.

So to kind of give you a little glimpse as to what pet parents will actually see on any of their devices, we put together a very quick video that will showcase some of what I just took you through today. So if we could just play the video?


Great. And so our media model has been very reliable in delivering growth in sales and in consumer household penetration. And so these bars represent when we support our brand, and the green line represents our same-store sales at our leading retailers. So we've stripped out all the distribution growth that Eddie and his team have continued to garner each quarter. And as you see, when we support our brand, our sales grow; when we go dark, our sales growth flattens. And so we've been leaning more and more into supporting the brand, up 71% since 2017, and all the while continuing to look at what's working, what's not working and do more of what's working, and that has enabled us to get -- decrease our consumer acquisition cost by 31%. And now our media model pays back within the calendar year.

And as referenced, we see a very strong correlation between household penetration, which is the lower dark green line, as you see here; and our cumulative media spend, which is the orange line above it. And so again, this is another data point that continues to fuel our thesis around the media model. And so looking ahead, we'll continue to leverage and continue to do what's been very effective for us, broad reaching, you saw over 70% in the unaware pie chart that Scott shared, broad-reaching awareness tactics, all the while continuing to apply these additionull