Greetings. Welcome to Freshpet's First Quarter 2023 Earnings Call and Webcast. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. At this time, I'll now turn the conference over to Jeff Sonnek. Mr. Sonnek, you may now begin.

Thank you. Good morning, and welcome to Freshpet's first quarter 2023 earnings call and webcast. On today's call are Billy Cyr, Chief Executive Officer; and Todd Cunfer, Chief Financial Officer. Scott Morris, Chief Operating Officer will also be available for Q&A. Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to the company's annual report on Form 10-K filed with the SEC and the company's press release issued today for a detailed discussion of the risk that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note that, on today's call management will refer to certain non-GAAP financial measures such as EBITDA or 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, a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and limitations associated with such non-GAAP measures. Finally, the company has produced a presentation that contains many of the key metrics that will be discussed on this call. That presentation can be found on the company's investor website. Management's commentary will not specifically walk through the presentation on the call, but rather the summary of the results and guidance that we'll discuss today. Additionally, we'd ask that your questions remain focused on the performance of the business and the results in the quarter. Management will not discuss or speculate on other topics beyond what is being reported here today. With that, I'd now like to turn the call over to Billy Cyr, Chief Executive Officer. Billy?

Thank you, Jeff, and good morning, everyone. The message I would like you to take away from today's call is that we are making steady progress on the key drivers of costs and margins that we committed to deliver this year in the Fresh Future plan while still delivering strong growth that is in line with our long-term growth plan. This is due to strong operating performance by our teams in Bethlehem and Ennis and another indication that the investment that we made in the Freshpet Academy is paying dividends throughout the P&L. I will share a few highlights of our performance and a few thoughts on the outlook for the balance of the year, and then Todd will provide more detail on the quarter. The highlights are: First, strong net sales growth. We delivered 27% net sales growth in the first quarter. This was in line with the guidance we shared for the quarter and puts us on track to deliver our 2023 plan. Nielsen measured consumption was up 29% in the quarter, but the prior year quarter included some trade inventory refill, so our net sales growth was less than the consumption growth. The consumption growth was comprised of 14% volume growth and 15% price mix growth. We will be lapping significant trade inventory refill in the prior year for much of this year and won't get nearly as much benefit from pricing this year as we did last year, but our growth appears to be strong, particularly with our heaviest users. Second, adjusted EBITDA ahead of guidance. As we discussed in our last call, first-quarter adjusted EBITDA is expected to be weighed down by the heavy startup costs in Ennis and the startup of the Dallas DC. I'm very happy to say that both of those initiatives were completed successfully and on budget. But perhaps more importantly, our performance on quality and logistics was much better than we had planned, as strong performance on quality yielded improved gross margin and enabled higher fill rates that reduced logistics costs. Quality costs came in at 5.3% of net sales, down from 6.1% in the prior year quarter. And logistics costs came in at 9.3% of sales, down from 9.9% in the prior year, despite the startup costs associated with the Dallas DC. These are both key operational areas that our team has been focused on, and we are very encouraged by this progress, as well as the opportunities it provides for continued upside as we execute our margin improvement strategy. Third, more effective balance between commodities and pricing. Input costs as a percentage of net sales came in at 34.1%, which only reflects a partial impact from the February price increase. Looking ahead to Q2, we expect to further reduce our input costs as a percentage of net sales. For perspective, our Q1 performance is 180 basis points better than the 35.9% we experienced for the full year of 2022 and 200 basis points better than the 36.1% in Q1 of 2022. Many retailers did not reflect the higher pricing on shelf until late in the quarter, but so far, it appears that consumers are accepting the pricing well. Fourth, Ennis startup. The Ennis Kitchen is off to a good start, due in large part to the training and preparation of the incredible team that is supporting its build-out and commercialization. We are now shipping products off both the bag line and roll line and are capable of producing a wide range of SKUs on those lines. We're still ramping up production on the bag line, but once that is completed, there will be yet another critical achievement that will unlock significant logistics savings. We will be able to ship the vast majority of our product assortment out of the Dallas DC using locally produced products. Further, our assessment of the quality of the product produced in Ennis is that it is every bit as good as the product we produce in Bethlehem, and we are doing it with fewer people due to the significant automation that we have integrated into the facility's design. Fifth, strong customer support. Now that we have restored customer service to a high 90s fill rate, our customers have begun to invest heavily in incremental fridge placements. In Q1, we added 369 net new stores, upgraded 241 stores to larger fridges, and placed second or third chillers in 685 stores. And there are many more of those coming later this year. We are well on track toward our goal of having 1.7 million cubic feet of space at retail by the end of this year. And sixth, household penetration growth. Household penetration growth was 7% in the past 52 weeks, and buying rate growth was 28% based on numerator data. What is most encouraging is that our number of heavy and super heavy users grew 18% over that time period despite a 20% plus increase in pricing. We believe this reflects solid loyalty among our heaviest users or HIPPOs, high profit pet owning households and the impact of our 'flip the bowl' effort that is designed to increase the number of people who use Freshpet as the main meal. We now have 3.3 million HIPPOs in our franchise. Looking forward, I expect to see continued improvement in our operations as the year progresses. We have momentum, and while the intangible benefits of a more experienced and better-trained team are increasingly clear to us, we are excited to see them turn into tangible benefits and show up in our financial performance. With sizable opportunities to recover the efficiencies we lost over the last three years, our reinvigorated operations team is relentlessly focused on the biggest of those: quality, input costs, and logistics. Although each of these categories has its own timetable for realizing the benefits, we have the critical talent in place, and the progress is increasingly obvious to our team with every passing day. Additionally, the key elements of our marketing model are being fully deployed for the first time in several years. We have new advertising on the air at heavy media waves that resonate with consumers. Customers are placing new fridges at the strongest rate ever, and we have a large number of new products in distribution or scheduled to ship in the coming months. We are also updating our packaging graphics for the first time in several years, and the premarket testing has shown they elicit an extremely favorable response. Now, let me turn it over to Todd for the details on the Q1 results.

Thank you, Billy, and good morning, everyone. As Billy said, we are off to a really good start this year. Let me break it down a bit further. Net sales came in at $167.5 million, up 27% versus the year ago. Our net pricing was up 14% versus the year ago in the quarter. That will drop to 8% in Q2 as we lap the large price increase we took in February of 2022. The growth was broad-based across channels, including our pet specialty business, which saw consumption growth rebound, increasing 19% in the quarter versus the prior year. Adjusted gross margin was 38.5% in Q1, slightly above the year ago, and above our base expectation. This improved performance was due to a variety of factors, including increased pricing, improvements in the cost of quality, and a strong startup in Ennis—all aspects of our operational improvement plan that our team is focused on. We expect these elements to continue to improve as we move forward and drive continued margin improvement. Now that we are shipping products from the bag line in Ennis, we are no longer capitalizing any startup costs on that line. So they will flow through the P&L in Q2 as we ramp up production. But that is putting us on a path to sustained growth, increased resilience, and margin expansion. Total adjusted SG&A was 36.7% of net sales, down from 38.7% in the year ago quarter. Consistent with our long-term trend of gaining scale in G&A, our SG&A costs excluding media and logistics were 11.9% of net sales versus 12.5% in the year ago period. We also gained 60 basis points of efficiency improvement in logistics costs versus a year ago, largely due to very high fill rates and partially offset by the startup costs related to our Dallas DC. We spent a healthy 15.5% of net sales in media in the quarter, and this was slightly below the 16.3% we spent in the year ago quarter. Adjusted EBITDA was $3 million in Q1, that is considerably better than the cadence we had initially provided and was primarily due to strong operating performance in COGS and logistics. Capital spending in the quarter came in slightly below the most recent expectations at $60 million, largely due to the sequencing of some sizable expenses in tenants related to completion of the first production building, the chicken processing facility, and the early stages of construction of Phase 2. There is no change in our outlook for capital spending this year, which we continue to project at $240 million. Our cash position is very strong. We greatly appreciate the support of our shareholders and other investors who participated in the convertible debt offering we completed in March. After the cost of the capped call option is factored in, we realized net proceeds of $325 million from that offering. In conjunction with our existing cash reserves, at the end of the quarter, we had $387 million in cash and short-term investments. We have invested the fund in a series of conservative interest-bearing instruments that will yield interest rates well above the 3% coupon cost of debt we issued. These funds are invested across several institutions with maturities of no greater than 120 days. For the remainder of the year, we expect interest income and interest expense to largely offset each other. We believe that we have adequate cash to fully fund our growth through 2024 and will be cash flow positive in 2026. We also believe that we will have access to traditional non-dilutive forms of capital to bridge the gap in 2025 if it occurs. In terms of the cadence of our business for the balance of 2023, we expect to continue the strong growth we demonstrated in Q1, but the net sales growth will increasingly be driven by volume growth versus pricing growth. At the beginning of Q1, our Nielsen-measured volume growth rate was around 12%. By the end of the quarter, it was up to around 16% and growing. We need that to continue to grow into the high teens and low 20s by the end of the year to continue to support our plan. We believe our marketing, distribution, and innovation programs will deliver that. Q2 and Q3 net sales should have mid-20s growth rates, while the Q4 growth rate will be relatively lower due to the sizable trade inventory refill in the prior period. We expect to see continuing improvement in our operating costs in Q2, particularly in logistics and quality, along with the full benefit of the February price increase. However, we will be absorbing the full operating costs of the Ennis bag lines in Q2 and to a lesser extent in the second half until that line achieves full production later this year. The net result is year-over-year gross margin headwind due to underutilized capacity, which we expect to cause our Q2 adjusted gross margin to come in slightly below the Q1 2023 performance of 38.5%. With respect to adjusted EBITDA, our expectation is that Q2 should be similar to that of Q1 on an absolute dollar basis with the difference in some additional SG&A investments in Q2 offset by the contribution of higher net sales. Looking at the combined quarters of the first half, we expect to be slightly ahead of where we initially projected we would be at the midpoint of the year and confident in our ability to deliver our commitments for the year based on our strong start and the sustained underlying performance we are seeing. So we are reaffirming our guidance for the year that calls for net sales of approximately $750 million and adjusted EBITDA of at least $50 million. In closing, we are very encouraged by the start of the year. The capability improvements that we announced back in September are driving solid and steady improvement in our operating performance. Further, we are seeing significant operational improvement in the investments we've made in the Freshpet Academy and the time and money we invested to train the Ennis team during the year prior to the startup of that facility. We are even more encouraged by the magnitude of the opportunities that remain ahead of us. We believe that we are on track to deliver the margin improvements required to deliver the long-term margin targets we announced as part of the Fresh Future plan. The Ennis Kitchen is up and operating on both lines, and that provides us with the capacity needed to support our long-term growth, adds resilience to our business, and provides significant opportunities for margin expansion. Further, the improvements we designed into that facility provide the opportunity for efficiency upside versus our long-term projection. In total, that leaves us feeling very bullish about our future. That concludes our overview. We will now be glad to take your questions. And as a reminder, please focus your questions on the quarter and the company's operations.

Thank you. Our first question comes from Michael Lavery with Piper Sandler. Please go ahead with your questions.

Thank you. Good morning.

Good morning.

Just wondering if you could unpack the guidance a little bit. You've got a full year top line guide consistent with the first quarter. But you have a pricing level or pricing benefit that will moderate over the course of the year. Can you just point to some of what you expect on the volume side in terms of driving that acceleration and what kind of visibility you might have there?

Yes, I'll give it a try. As mentioned in our prepared comments, we are witnessing a shift towards prioritizing volume growth over pricing. We started Q1 with a volume growth of 12% and ended the quarter at 16%, with continued growth observed since then. By the year's end, we anticipate that volume growth will be the primary contributor to our net sales growth, as pricing is expected to account for around 5% in the last quarter. Therefore, you will see a continuous emphasis on volume, and we have already noticed this trend.

And is that helped by the step up in advertising or the distribution gains or just all the above? Or I mean, what's the real key factor there in terms of what accelerates the volume side?

Yes. Let me just give you my comment; Scott will probably add some color to it. But as we said, the reality is, we're now back in business doing business the way we want to. So we've got full fridges, high fill rates, we've got a broad assortment of products, advertising on the air at heavy weights, new advertising, better packaging, a lot more stores, and a lot more upgraded stores. So the growth is coming from and will continue to come from our business model, our marketing model working the way we want it to work.

Yes. I think Billy hit on most of the points, but I would say the overall model is intact. It's continuing to perform, and we've got penetration growth. The most interesting aspect, we talked about it at ICR. We introduced this idea of like these super heavy, heavies or HIPPOs that Billy mentioned in the script. We see really strong growth from that group. We really, really like that. Those are our core, core consumers. Their buy rate is up substantially. The number of fridges that we'll place this year will be extraordinary. It will be an all-time record for the company, the number of fridges in total that we place this year, which gives us the platform to continue to expand our portfolio and appeal to a larger group of consumers. So it just feels like every single thing is hitting on all cylinders, and then you couple all of that platform with great advertising that continues to drive record traffic to our website, which we know converts to the store locator, which we know converts to eventual people coming into the brand. And it really is all working together, and I think we're in a really fortunate position.

Okay, that's great. Just a quick follow-up on the ad spend. Is the second quarter spending level similar to the first? How does that play out as far as the trajectory over the course of the year?

Yes. Q2 will be at a similar level to Q1 and will be fairly heavily weighted to the front half of the year. I don't know if we've actually split it out that way, but a little bit over 60% of the advertising will be in the first half year, 65% or so?

Yes, heavy spend in the first two quarters; actually, Q2 is projected to be up slightly over Q1 and then it tails down in the second half of the year. But unlike last year, where we spent very little in Q4, our expectation is, we will spend at a reasonable amount in Q4 as well.

Okay, great. Thanks so much.

Thank you.

Our next question is from the line of Bryan Spillane with Bank of America. Please proceed with your question.

Hey, thanks, operator. Good morning, guys. Just two quick ones for me. One, just a clarification on the guidance slide, adjusted EBITDA 2Q. You're talking that you're expecting to be similar to 1Q in absolute dollars, not year-on-year growth?

Correct.

Okay. Billy and Scott, could you provide an overview? There have been concerns regarding household and consumer spending under pressure. Now that you're starting to recover, could you share your insights on consumer behavior? Are heavier users engaging with the product more? Are there any challenges in attracting new households? How is the overall macro environment influencing your growth expectations as you introduce more products to the market?

Hey, Bryan. We discuss this frequently and examine it closely every few weeks. We have extensive data that provides deep insights into the dynamics at play. There has been considerable market discussion regarding consumer concerns about the economy and inflation. However, we have remained somewhat insulated from those issues. While we've noticed some of our less frequent consumers moving away, we've concentrated our efforts since the beginning of the year to ensure that our core consumers, particularly the heavy and committed users, continue to engage with our brand. Overall, the category has seen a lot of discussion, but we feel fortunate to have faced minimal impact. We are optimistic about our trajectory this year and believe we are attracting the right consumers. Interest in our brand and the value we're offering remains strong. We are also committed to maintaining affordability and accessibility across our entire portfolio, and we continue to work on that front.

Thank you.

Thank you. The next question is coming from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.

Good morning, and thanks for taking my question. So, I was just curious as we look at your gross margins, just I think last quarter you guys indicated that you expect gross margins to be up more than 200 basis points. Curious if you saw the same expectations for the year?

We do at this point. Look, really pleased about Q1. Obviously, it came in a bit higher than our original projections. A little bit of that was timing. We built a little more inventory in Q1 that got capitalized for the quarter; that probably will come back in the second quarter. Look, it's really early. We're off to a great start. And so, it's just too hard to call the remainder of the year. So, really no change in the expectations at this point, but we're really pleased. And this is still ramping up; we haven't started chicken processing there in that facility yet. So we still got a little bit of wild card going on, but feeling really good about the start of the year, Rupesh.

Great. And then maybe just one follow-up question. I know you launched a fresh food subscription with Petco. Just curious how that launch is going at this juncture? I know it's early, just curious if it's already in stores and how that's progressing.

Yes, it’s currently available in around 300 stores, so it's still in the early stages. We've received very high visibility and positive feedback so far. We are very optimistic about its potential and will begin supporting it in the next couple of weeks once we stabilize the supply chain for that product. At that stage, we will have a better understanding of consumer interest and the potential size of the business over time.

Great. Thank you.

Our next question is from the line of Bill Chappell with Truist Securities. Please proceed with your question.

Thanks. Good morning.

Good morning.

From a pricing perspective, I know you're effectively implementing these price increases, but could you discuss your current position regarding price differences compared to competitors? How do you anticipate the category will behave in terms of pricing as costs decrease or stabilize in the latter half of the year, especially if we enter a more promotional landscape? I recognize that your product is distinct from the competition, but there are still pricing factors to consider between the two.

Yes, Bill. We've been closely monitoring this, and it’s easy to see that in certain situations there could be increased spending and promotional support. However, we haven't observed any significant increase in that area yet. In fact, it has been slightly below traditional and historical levels. I believe some of that will return, but it hasn't significantly impacted our business as you mentioned. This category tends to attract rational players, and they understand the profitability involved. I expect behavior to remain rational from everyone involved, including retailers, who will ultimately influence whether it increases or decreases. At this moment, it's challenging to predict what might happen later this year, but I haven't seen any irrational behavior in our category historically.

But the price gaps with competition are where you want them to be right now?

Yes, we are pleased with our current position and are closely monitoring the situation. The most significant observation is that our volumes continue to grow consistently. When comparing with previous periods from the start of the year to now, we've experienced solid volume growth. In terms of weights, especially given the fluctuations with currency, our focus on increasing pounds and units indicates that we are performing well in this environment. We've noticed that as we return to advertising in Q4, there has been minimal advertising activity, yet our volumes keep progressing into the first quarter, which is an excellent outcome. It appears that the market is responding positively, with acceptable price gaps, and consumers are continuing to engage with our brand and spend significantly.

Got it. Billy, I understand that penetration and markets aren't the same. A few years ago, it was believed you had a low single-digit market share nationally, but around 10% in certain West Coast Albertsons. Now, you're indicating household penetration is nearing 7%. I'm curious, as capacity expands, what do you anticipate for household penetration and market share moving forward? Are we looking at double digits this year or next? Are there any obstacles, or strategies to enhance this, like increasing the number of fridges per door? Any insights would be appreciated. Thanks.

Yes. It's one of the issues that we watch very closely. Obviously, with all the rapid price increases that have gone into the market, what you've seen is, the occasional user or the person who uses us as more of an indulgence or an extra as opposed to the person who uses us as the main meal has been a little bit less willing to bring on a new habit or continue a habit that might have yielded discretionary. The flip side of that is, 87% of our business is the HIPPOs or the people who view us as a regular main meal have been growing at a very, very healthy rate. I actually did a little exercise to look at. If all consumers are digesting basically four price increases in 18 months, if you have to lean hard on the heaviest users, the people who recognize the benefits, whose dogs won't want to change, can you get from here to where you want to get to on the backs of those consumers, and the answer is yes. You can get there. But over the longer haul, we do want to get back to where we're bringing in the new users at a much more aggressive rate than the 7% we reported in the first quarter. We just think it takes longer for them to adapt to the new pricing that’s in the market. They just don't go through as many purchase cycles when you're not a heavy user, and it takes a couple of purchase cycles for them to adapt. So, by the end of this year, I'd like to see that number in the double digits. And frankly, by sometime next year, I like to see the number being in the 20% range.

Thank you.

The next question is from the line of Peter Benedict with Baird. Please proceed with your question.

Sorry about that. Good morning everyone. For the first question, regarding the pet specialty channel, do you think the improvement was mainly due to better stock availability? Were there any specific actions taken by the companies in that channel that contributed to the increased sales velocity?

Yes, our in-stocks were particularly bad even through the very end of Q4 in pet specialty. So just the return of full fridges, I think is a really, really big piece of it. Secondarily, we are seeing nice expansion in fridges, pet specialty through the course of this year. That will be a help. It's not really kind of shown in the numbers at this point, but that will be a continued help over the course of the year. Yes, I think those are the two aspects, Peter, in making sure that the products and the portfolio is well represented—not only being in stock but also really being as sharp as we can on pricing.

Got it. Understood. And then maybe just two quick ones for Todd. Just curious on commodity input costs. Can you get us up to speed on that, chicken beef, just kind of where you stand, what you've got locked in, remind us on that? And then, just the D&A line, taking a look at that kind of annualized the first quarter that gets you to high 50s for the year. Is that what we should be expecting from D&A this year? Thanks you.

Yes. So steady as it goes on commodities. So we're locked in around 80%, no big swing. So we're still kind of seeing mid to upper single-digit inflation, so much better than we've seen in the last couple of years. So that's positive. That will allow us with the pricing we have in place to get some margin expansion there. So no big swings in commodities, and I think we're in pretty good shape. From a D&A perspective, yes, in total, around 60%, both up the gross margin and down below, and that should be closer to the run rate for the year.

Great. Thanks very much.

Thank you. Our next question is from the line of Jason English with Goldman Sachs. Please proceed with your questions.

Hi. good morning, folks. Thanks for sorting me in. A couple of questions. First, I guess, Bill, coming back to your new user comments. The penetration data you shared 26% last year and rolling 52 through April 3, having now dropped to 7% suggests really sharp deceleration, perhaps even outright declines, and the math will actually would suggest outright declines year-to-date over the last three months. What's driven such a sharp decel there? Why the step back? And how do we put it with the volume, which actually looks fine?

Yes, it's a good question. First of all, you have to remember the number on the household penetration is a net number. So if you end up with some number of consumers who are your sort of discretionary purchasers, not purchasing or purchasing less frequently. You can see that number go down regardless of whether you've added new users. And so, I think what my comments were intended to say is that bringing in new users, we're still bringing in new users, but there are some number of people out there for whom this was not a critical purchase; it was more of a discretionary purchase. Those are the folks who are not continuing or not continuing at the same rate that we had seen before. The flip side is, the people who have been buying us as the main meal became even more committed than before. The most encouraging part to me was not only did they absorb the price increases, they increased the buying rate beyond what the pricing would be. So, in our data, we're showing a 41% increase in the dollars that we're getting from the super heavy users. And so, that's encouraging. It says the people who've decided that we're the main meal are continuing to buy and buy at a heavier rate. I think over the long haul though, we do need to get it to the point where we're bringing people into the front end of the funnel at a more rapid rate. I think four price increases in 18 months shook out some of the people who are more discretionary buyers, and now we're focusing on bringing in the new people who are going to move along that purchase curve and become super heavy users in the future.

So Billy, is it right that year-to-date the last few months, you're losing as many consumers as you're bringing in?

I don't think that's right, but I'll have to look at the data on that. I don't think that's—

There's been some moderate growth.

Okay, that's helpful. Everything you're discussing regarding increased retail presence, more advertising, improved on-shelf availability, and better packaging sounds promising. However, despite your efforts, why aren't we seeing more acceleration in the second quarter? Your guidance suggests that, even though we are no longer dealing with that shipping headwind, things may not significantly improve.

Do you mean why the growth rate in Q2 is not a stronger growth rate than Q1?

Yes, that's right. Exactly. Given the investment, given the acceleration in volume, given that we no longer have a two-point drag on cycling the prior year shipments?

Yes. I mean, we haven't given you a specific number; we said sort of in the mid-20s. We'll see where it ends up shaking out when it's all said and done. We like the trends we're seeing, we feel good about the trends that we're seeing, but we want to see it all play through.

And there is—obviously, there is some pricing that kind of wanes off in Q2. And as Billy said earlier, the volumes are coming in really, really nicely. So in total, we feel good about the way it's rolling up. But obviously, we've all gotten a bit of a benefit from pricing. The good news is, our volumes are still really, really strong.

I mean, Jason, the only thing to consider with fridges is, when a fridge goes in, it takes literally six months for it to have significant impact. So even the fridges that we're putting in now that you can kind of start banking on those for the back half of the year where they really start contributing and adding significant incremental dollars to the business.

Makes sense. All right. Thank you.

Thanks.

The next question is from the line of Mark Astrachan with Stifel. Please proceed with your question.

Good morning everyone. To follow up on the previous questions, advertising spend is increasing and we expect this trend to continue, especially into the fourth quarter. I am interested in your thoughts on the current return compared to historical levels. The correlation between advertising spend and sales growth has always been strong. Is it still as strong currently? Any insights you can provide would be appreciated.

Yes. I think Billy highlighted this idea as well. What we're observing is that during economic changes, some businesses unfortunately do not survive. There’s a segment of consumers that falls into this category, including some from Freshpet who are transitioning away. This shift is reflected in the overall numbers, as we're losing some occasional, less-engaged buyers. As we progress, we’ll start to focus more on our core consumer base and revert back to the model we've successfully used for the past decade, where our advertising investment aligns with measurable productivity and customer acquisition costs. We're currently in a transitional phase, eliminating some of those less committed consumers who may have benefited from temporary economic supports. As for the return metrics, we are seeing unprecedented engagement with our TV advertising and a significant number of individuals accessing the store locator. Historically, we’ve noted that this leads to an influx of new customers, though the departure of less committed consumers makes it difficult to quantify the exact returns right now. Nevertheless, we believe that our long-standing historical trends remain intact, and as we move through this phase, we expect to achieve similar returns on our advertising expenditures, leading to an increase in new consumers.

Got it. And from a consumer standpoint and those that have left, can you get them back? Or is it about going after new kind of non-Freshpet households today? And I suppose you're not going in after the lost households that have just come in and out, does that then reduce the longer-term opportunity?

Yes, I believe that on a global scale, we presented two important points at ICR. One is that we have observed a consistent trend over the past five to six years where the total addressable market for Freshpet food has notably continued to grow. I don't see anything that has altered this trajectory. There may be some short-term disruptions, which I mentioned earlier, but overall, I don't think there has been any significant change in this trend, and it will keep expanding over time. That's my perspective, Mark.

Mark, I would just add to that is I think that what we're seeing is, as people are increasingly recognizing Freshpet as their main meal item, we are seeing the buying rate become an increasing driver of the growth. It's not what we model. That's not what we built out. But at some point, that will be a critical driver of growth of the business as people recognize it. We're just happening to see it in an environment where those who are committed to the brand have become very, very committed. And those people for whom it was a more discretionary purchase, they're less committed.

Yes. I'm sorry, I meant to mention that we talked about the HIPPOs during the ICR. We've referred to this group a few times on the call, as that's where we are seeing not only an increase in households but also in the buy rate. The strategy we implemented at the beginning of the year appears to be working well.

Got it. Thank you.

Our next question is from the line of Cody Ross with UBS. Please proceed with your questions.

Good morning. Thank you for taking my question. I just want to dig in a little bit on the EBITDA because it came in about $5 million to $6 million better than your guidance here. I think you mentioned that gross margin is supposed to sequentially decel a little bit here. Can you just unpack that for us and just explain to us what those drivers are? And then how you expect the cadence through the back half of the trend? And then I have a follow-up. Thank you.

Yes. So I mean, let me break down Q1 first. So just like kind of direct input cost, pricing versus commodities is actually improved by about 200 basis points. So we've talked about how we've fallen behind the last couple of years with inflation; we're starting to get a nice chunk of that back. So that's great news. Quality costs were favorable about 80 basis points. We're seeing continued progress there. And then as we gave everybody a heads up on, hey, look, we are bringing on some new lines in Ennis. There is going to be an absorption issue through the first half of the year, particularly, and we saw that by about 250 basis points to 260 basis points in Q1. That will actually get a little bit higher in Q2 as we bring full cost of that second Ennis line in place. Everything else, we feel good about. It's really that incremental absorption that's going to kind of hurt us in Q2. As we build into, as we grow into the volumes of Ennis in the second half of the year, as we've been saying, our volume has been trending up nicely. As we build into that volume in the second half of the year, we'll start to leverage that facility a little bit more, and we'll be lapping all those costs of last year. So again, a slight headwind versus Q1 for Q2, and then we expect it to be much stronger in the second half.

That's helpful. Thanks. And then I just have a follow-up here. You've had some new entrants in the category, and you took two rounds of price over the last year. Can you just discuss the trial trends and if you're seeing any change in repeat purchase behavior? Thank you.

Yes, there have been a tremendous amount of people that have entered, and we track that very, very closely. And maybe I'll touch on that first. So a year and a few months ago, we talked about us having 96.4% of what was out there in fresh and frozen pet food. And today, we're at 96%. So basically, if you think about it over the course of a year and a few months, we've lost four-tenths. So I think that, that's probably the most illustrative way to think about. There have been a ton of entrants. They haven't really grown in size, and we have maintained basically our share of the offering. So—and I think the performance of almost all of them has been really, I would say—I mean, it's early, early, but I think they're very kind of subpar what would make retailers very excited about it, at least from what I can tell. So I think that's probably the most important aspect of it. So when we look at trial and we look at repeat, and I think it's illustrated in some of the stuff that we just were talking about with the HIPPOs where we're getting—I mean, our buy rate is the thing that's like, been extraordinary and really driving the business. It's driving it more than almost ever before. And I think that, that naturally demonstrates the dedication that consumers have to the products once they try it. And we have not made it particularly easy for people over the past. More recently, it's been much better. But up until literally the past like 60, 90 days, we have not made it particularly easy for people to get the products they want and the varieties they want all the time. We still have plenty of work to do in that area. There are still some pockets across the U.S. where we definitely have opportunities to make sure fridges are fuller and better represent our full offering.

Thank you.

Our next question is from the line of Jon Andersen with William Blair. Please proceed with your questions.

Hi. Good morning. I have two quick questions. Could you discuss the timeline for the new fridge placements expected throughout the year? I noticed that your net new stores increased by 7% in the first quarter, but I would appreciate more details on the timeline. Additionally, what are your expectations for media spending as a percentage of sales for the entire year? Thank you.

I'll touch on the fridges real quick and then Todd can hit on the media percent of sales. So really the way the year is laying out is Q2 and Q3 will be our biggest ads for fridges. And it's not just new placements. We'll actually end up with almost double the number of second and third fridges this year than we actually have in new placements. And I think the important thing to note is, a second and third fridge in a high-velocity outlet is worth the same as a new fridge for the most part. So it's—I think that hopefully dimensionalizes like the impact that new fridges can have. And again, the second and third fridges are a critical component to us continuing to build out like what we're building out for Freshpet food.

And from a media perspective, we'll spend close to 11% of net sales this year. And first half, second half—first half, somewhere in the 60% to 65% of that spend will occur. And as I mentioned earlier on the call, the big change in the back half is we will spend a lot more in Q4 than we did this past year.

Thank you.

The next question is from the line of Ken Goldman with JPMorgan. Please proceed with your question.

Hi. Good morning. Obviously, the—and we talked—you guys talked about this a little bit. There's some great numbers in terms of buy rates and overall shipment trends. I did want to come back a little bit to the questions on household penetration, though, especially for the non-HIPPO users only, because I just wasn't quite sure what the plan of attack was from your perspective. And again, you're focused on the HIPPOs this year. I get it. You can't be everywhere all at once. But is the plan just to sort of for now kind of advertise and hope that the shock, I guess, of higher pricing phases? Are there other things you can do? Can you introduce smaller packages? Can you do more targeted ads, I guess? I mean just trying to get an idea of sort of what the strategy is and kind of what the path ahead is for what we should expect for household numbers over the rest of the year.

Yes. So Ken, I mean, I'll touch on a couple of things that we probably hit on, but I will expand on a few different comments. So look, we—at ICR, we did mention this idea of like we want to focus on HIPPOs. And one of the things that we've done in that area is, when we think about the advertising that we're putting on air, we're now at a point where we're comfortable, and we're willing to basically be more aggressive and I think more direct in what we're trying to communicate. And that will—that has been demonstrated to attract and bring in the HIPPOs into the brand. We kind of set that out at ICR. We knew that the advertising was going to change. And you're seeing our advertising kind of take a course, whether—you've seen some of the things we had on earlier in the year, the skies where we're talking about dry pet food, you're seeing what we're doing now. We're picking consumers that are really, really dedicated to their pet. And we think that's really a core piece of not only this year but long-term strategy to focus on these HIPPOs. I do think that when the category gets—when all this pricing—and it's not even pet food pricing; it's pricing of my grocery bill. When people finally get more comfortable and digest the overall pricing with their grocery bill—and they will. I mean it's been shown over the past 50 years that when these things go through, eventually, people get more comfortable where the pricing is, and they return to more normalized behavior. I think we're going to get a lot more of those consumers that are a little concerned about where the economy is. I think we'll start to see some of them flow back into the brand. And again, they're not as valuable. They're just not as valuable. But what we're doing in the meantime, and I do think this could be 12 to 18 months before we get to this normalization, is we're getting as sharp as we possibly can on every aspect of the base model, which is the advertising, the products that we offer, the price points that we have on especially key entry sizes. And we're also launching a couple of products that are kind of more—a little bit more value-oriented and a little bit, we're calling them limited ingredient products. We are starting to offer those products up, including one of the things that we'll start offering up in the next kind of six to 12 months is basically bulk packs. And in those bulk packs, we think it will dramatically change buying behavior. If you look at the top 13 items in wet pet food, they are not single items; they are bulk packs. And we think it's time for Freshpet to start introducing our product portfolio, expanding out where we give someone the ability to buy not one or two at a time, but now buying four, six or eight at a time. We've been able to test this. We were able to demonstrate that there's been success in doing that, and we will start offering those on a broader basis across the country over the next year. So that's definitely a piece of what we're doing over time. But look, the other thing is just get back to the fundamentals on what we're doing, which is the advertising works, the portfolio works, the new products that we've always brought, the innovation we brought works. And if we're doing that well with these other pieces, we feel really great about the business plan.

Great. That's helpful. And then a quick follow-up, if I can. You mentioned that, again, the first quarter was ahead of your expectations. I think most of it was organic. But you mentioned there was a little bit of a benefit from timing, some inventory capitalization. Is there any way to quantify that and think about how much of that reverses in 2Q?

Yes. We had about $1 million benefit approximately from that. We also had about $1 million benefit from some miscellaneous sales and marketing spending, non-media expenses that we believe will happen in Q2. So those are the biggest pieces.

Thanks so much.

Thanks.

Thank you. Our next question is from the line of Corey Grady with Jefferies. Please proceed with your question.

Hi. Good morning. And thanks for taking my question. I wanted to follow-up on your comments on fridge placements for the year. Can you just remind us of your decision process to add a second or third fridge? And what the volume step-up benefit you see from the new fridge? And if you can, what portion of your stores are current, second or third fridge candidates? Thanks.

Okay. So this is a probably a multipart question and answer. I'm going to try and address it at a fairly high level, and then we can definitely talk in more detail like when we get to the one-on-one calls. So when we look at a retailer, there is definitely a threshold for different stores that we would put a second or a third fridge in. And typically, what we do is, we'll start off with the top 20% of—and every retailer, there are different—like retailers that have different volumes. But what we'll take is the highest volume retailers with the highest percent of velocity. So we'll take the top 20% of stores, and those are typically the first candidates for a second fridge. And then what we've seen over time is, as those progress, retailers are interested in taking the next 20% or 30% of their fridges and putting second and sometimes even a third in the first 20. So we're starting to continue to see that progression. And really what is the most important aspect to it is, if we look at dollars per store per week, and we've consistently seen increases in dollars per store per week over time, that is the core aspect. So if we're seeing those consistent dollars per store, that's going to open up the entire network to more and more second and third fridges. Hopefully, that's giving you a little bit of a feel for it. And I would say today, we have the opportunity for about half of our network to have either a second or a third fridge, it's applicable. And then what we tend to end up having to wait on is when there's these reset cycles where retailers are willing to touch the aisle in a pretty big way because the take-out four feet of something and put in a second fridge is a—second or third fridge can be pretty significant. So I think that's probably a very broad way to think about it. And year after year, we can continue to see same-store sales increases, and that's the dollars per store per week, and that really continues to open up more and more of the network. So the more we can do from an advertising standpoint, grow penetration, buy rate, etc. I think the more opportunity we'll have over time for second and third fridges.

That's really helpful. Thank you. And then I know this has been asked a few different ways, but just to follow up on household penetration. Just from the 7% growth you saw this quarter, I mean, is that in line with your expectations to get up to 20% plus by year-end? And then, I mean, do you expect household penetration to be more back half weighted? And should we think about that as kind of making up for pricing benefits rolling off? Thanks.

Yes. I think the way we had planned it was we thought we would see a little bit higher overall penetration. Like again, when we talk at ICR in January, we started focusing. We want to focus on these HIPPOs, these higher-value consumers. And we started to deliver on that. I think that we anticipated slightly higher overall penetration. And I think what's over-delivered is the HIPPOs and also the buy rate has really like, honestly, over-delivered from what we kind of had really budgeted and planned. But I think what's happened is, we've seen—and it's amazing. And we're—like if you look at where the category is, it's just amazing what the category is doing and what we're doing. The category looks like kind of—it's a little like some brands, I think, would be very upset with where they are. And I think what's happened is, you have people that deload pantries a little bit, and that stretches a little bit. You have some consumers that aren't getting some economic stimulus, and that changes the dynamics of when they're buying a number of consumers. So I think once we kind of go through this cycle, we're going to return to kind of a much more normalized growth in penetration. I think it would be towards the back of the year that we'd see kind of more normalized overall penetration. And if we could hang on and make progress on the HIPPOs like we're doing, it could be something that expands our overall revenues.

Thank you.

Our next question comes from the line of Jim Salera with Stephens. Please proceed with your question.

Hi, guys. Good morning. Thanks for squeezing me in. Just wanted to ask, as you're looking at the retailers that are adding these second and third fridges, is that an incremental buyer? Just a high-frequency user, that now that there's more availability they're increasing their buy rate? Or does the second or third fridge bring in a new incremental buyer that may be the fridge is busy and they usually don't go there; there's more opportunity you see incremental buyers?

Yes. So there's probably two major aspects to the second fridges. In some retailers, it literally gives us enough holding power where we can actually get through a weekend. So literally, on like some of our highest volume items like our six-pound roll, for example, which are some of our most loyal users buy, they'll come in on Saturday afternoon, and it's sold out. And unfortunately, fridges don't get stocked as well as we would like. So it gives them some additional holding power in some cases. So you get a buy rate pickup from that aspect. The second thing that we've been able to do and really demonstrate over time is as we add a second fridge, it allows us to add certain items in. And we think about items differently than, I think, certain CPG companies. It's our fridge. We want to make sure the space is as productive as possible. We're not trying to just kind of get a few inches from somebody else. So what we've been able to do is, as we expand the portfolio of products and offerings, we find products that appeal to a slightly different consumer group or a broader consumer group. So it does help to expand penetration within that individual store. And I think all of those details, which many retailers have extraordinary shopper card data on. And when they see some of those aspects, that's what's encouraging them. In addition to the overall kind of high-level holistic data, when they look at some of those details around the individual impact in the aisle, the buy rate, driving new consumers in, the frequency that it drives for the category, etc., that is some of the final deciding factor for them to put in the second and third fridges.

Okay. Great. And if I can maybe sneak in one last follow-up on that. As you add in a retailer that has a second or third fridge, does that provide kind of the shield around the pet aisle that makes it harder for a competitor to get products in there? We talk about the competitive landscape. I mean, if you have a third fridge, does that mean that there's no availability for them or significantly less availability? Or does the pet aisle as a whole just expand?

Yes, I think that it helps expand the competitive advantage, but by no means does it limit anyone else from coming in and putting either their own fridge or the retailer putting a fridge in. It's—Billy mentioned it periodically. But five years ago, we came up with a strategy, and part of that core strategy was we want to change the way consumers think about pet food. We want them to think about fresh first or flipping the bowl sometimes referred to. And we want retailers to think as fresh first as they're building out their aisle. And I think what's starting to happen is, they recognize that fresh food has all the benefits of— that they see in other areas of the store in pet food now, and it's a really meaningful piece of their category. And I think they're building out. And there have been a few retailers that have added some of their own fridges out there. So I think it's great for us, and I think it's encouraged some retailers to see what else they want to do to build up the segment.

Great. I'll pass on. Thanks, guys.

Thank you.

Thank you. At this time, we've reached the end of our question-and-answer session. And now I'll turn the floor back to Mr. Cyr for closing remarks.

Great. Thank you very much, everyone. I always like to end with a quote. The source of this quote is unknown, but it is very apt. The quote is, it's no coincidence that man's best friend cannot talk. To which I reply, reward them for their silence and feed them Freshpet.

And I'll actually build on that. There are four pets in the dogs and the Freshpet family that I want to recognize: Rocky, which was one of the dogs in our advertising; Angus; Macy Gray; and Pinocchio, who was one of the dogs that—of our Head of R&D, and it helped us develop many products along the way.

Great. Thank you very much, everyone.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.