Greetings. Welcome to Freshpet's First Quarter 2024 Earnings Call. Please note this conference is being recorded.

Thank you. Good morning, and welcome to Freshpet's First Quarter 2024 Earnings Call and Webcast. On today's call are Billy Cyr, Chief Executive Officer; Todd Cunfer, Chief Financial Officer; and Scott Morris, President and Chief Operating Officer, will also be available for Q&A. Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements related to our long-term strategy, focus 2027 goals, pace in achieving these goals, prospects for growth, new technologies, and 2024 guidance. Words such as believe, could, estimate, expect, guidance, intend, may, project, will or similar conditional expressions are intended to identify forward-looking statements. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements, including those associated with such statements and inaccuracies and third-party data. Please refer to the company's annual report on Form 10-K filed with the Securities and Exchange Commission and the company's press release issued today for a detailed discussion of risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note on today's call, management will refer to certain non-GAAP financial measures, such as EBITDA and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Finally, the company has produced a presentation that contains many of the key metrics that will be discussed on this call. That presentation can be found on the company's investor website. Management's commentary will not specifically walk through the presentation on the call; rather it is a summary of the results and guidance they'll discuss today. With that, I'd like to turn the call over to Billy Cyr, Chief Executive Officer.

Thank you, Rachel, and good morning, everyone. The message I'd like you to take away from today's call is that these strong quarterly results prove that some of the most critical financial metrics in our 2027 goals are achievable. Now we must prove to you that we can deliver them consistently over time. These results did not happen by accident. They were the result of a disciplined focus on the key drivers of profit improvement and the changes we've made as an organization, and we're determined to continue those disciplined efforts until these results become a long-term trend. Further, these results demonstrated that with increased scale comes increased profitability, which was the basis of our Fresh Future plan that we announced in early 2023. It was then that we pivoted to a more balanced approach to growth and profitability versus our previous single-minded focus on growth alone. We were able to deliver these results because of the strength of the Freshpet business model and consumer proposition, and strong improvement in the key fundamentals that drive our business. There are several important points I'd like you to take away from these results: First, our growth model continues to deliver. We've successfully absorbed the most significant pricing we've ever faced, delivered strong volume-based growth in the quarter, and returned to the greater than 20% household penetration growth rate embedded in our long-term targets. Further, we added those households at a customer acquisition cost, or CAC, that is comparable to the levels we experienced prior to the price increases of the last two years. This demonstrates the strength of the Freshpet growth model, the power of our marketing, and also provides the confidence that the model can continue to deliver the 25% net sales growth embedded in our fiscal year 2027 goals. Second, we've improved our operational effectiveness. We're now delivering significant year-on-year improvements in our quality, input, and logistics costs, the costs that we've been intensely focusing on, and that has resulted in a step-change in our adjusted gross margin and adjusted EBITDA margin. Our operational achievements stem from our efforts to build strong organizational capability at all levels, beginning with our Freshpet Academy that has strengthened our production workforce and also including some of the senior leaders we've hired in the past 1.5 years. And while these operational improvements are significant, we believe we're just getting started and that our team is capable of delivering this type of operational excellence more consistently over time and potentially doing even better. Finally, we're demonstrating the capability and operating discipline needed to balance capacity and demand at such a high rate of growth. We're adding capacity on budget and on time and at a pace that enables us to keep up with our high growth rate without carrying too much excess capacity. This enables us to deliver strong fill rates to our customers while simultaneously improving our margins and is the result of the rigor and discipline that we've put in place around our growth planning. This is the balancing act between growth and capital investment that we've described to you previously, and we're increasingly mastering it at a high rate of growth. While we're pleased with the performance we delivered, we're not satisfied. We need to deliver this level of performance consistently over time. And once we've proven our ability to do that, we'd consider revising our long-term targets. But right now, we're focused on maintaining momentum in each of the remaining three quarters of this year. As we've mentioned many times before, the manufacturing systems to make fresh pet food are still in their infancy. We're investing heavily in organizational capability and technology to make those systems more reliable, consistent, and efficient and are making good progress on many aspects of the process. But we also know that we're still in the early days of the fresh pet food category and the opportunities for improvement are sizable. We fully intend to realize those opportunities over time and have numerous initiatives underway to do that. Now let me walk through some of the highlights of the first quarter. We had strong momentum in the first quarter and made tremendous progress against our long-term plan, and you can see that in our financial results. First, we started the year with very strong net sales growth, with first quarter net sales of $223.8 million, up 34% year-over-year, driven primarily by volume growth of 31% and 3% price/mix. Second, we saw significant improvement in adjusted gross margin as well as adjusted EBITDA. First quarter adjusted gross margin was 45.3% compared to 41.1% in the fourth quarter and 38.5% in the prior year period. First quarter adjusted EBITDA was $30.6 million, an increase of approximately $28 million year-over-year. Our diluted earnings per share was $0.37, excluding a markup in the value of our equity investment; EPS was $0.17 per share. I've been looking forward to the data that I could say those words for a very long time, and I expect that to become a habit going forward. In addition to those financial highlights, we made progress on our retail availability and visibility as well. We placed 617 fridges in the first quarter, including new stores, upgrades, and second/third fridges, bringing us to a total of 34,812 fridges at retail, or more than 1.7 million cubic feet of retail space. As of March 31, 2024, Freshpet could be found in 27,097 stores, 23% of which now have multiple fridges in the U.S. Fridge placements and store growth were supported by continued strong fill rates that ended the quarter in the high 90s again. We've rallied the organization around our Mainstream, Main Meal, More Profitable plans, what we refer to as Main & More. We're making the Freshpet brand more mainstream and getting people to use it as a main meal component, and this creates intensity and concentration of the business that we believe will allow us to be more profitable. Focusing on the idea of Mainstream, according to Nielsen Omnichannel data, which includes e-commerce and direct-to-consumer, as of March 30, 2024, total U.S. pet food is a $53 billion category. We only have a 3% market share within the $37 billion dog food segment, which the majority of our business is today, leaving a vast runway for growth. Within the fresh/frozen subcategory in measured channels, which continues to outperform the broader pet food category, Freshpet has a 96% market share. The idea of the humanization of pets is becoming more and more mainstream, appealing to every income group and demographic, and it is our goal to make fresh food the standard way to feed your pets. Our household penetration at the end of the first quarter was 12.367 million households, up 24% year-over-year and growing. Our high-profit pet-owning households, or HIPPOHs for short, are growing even faster, up 34% versus the prior year period. We remain on track to meet our target of 20 million households by 2027. Overall, retail availability continued to grow, with ACV of almost 65%, and we continue to see upside in continued distribution gains going forward. We'll continue to focus on increasing the percentage of stores with second and third fridges. Turning to the concept of Main Meal. We use our advertising to educate consumers on the benefits of fresh food for their pets, and that is the key driver to convert more consumers to use Freshpet as a main meal. Today, 48% of Freshpet buyers use the product as the main component of their pet's meal, and there is a significant opportunity to increase this percentage even with our heavy users. 37% of Freshpet's users are HIPPOHs, and they represented 89% of our sales in the first quarter. By focusing on fresh, healthy food, offering a wide range of price points, and expanding our recipes, we believe consumers will naturally convert from using Freshpet as a topper to more of a main meal item, centering the plate around fresh. This concept of converting toppers into main meal users will, in turn, increase buy-rate too, which was $96.84 at quarter end, up 5% versus a year ago. Based on MegaChannel data, we currently have an average of 18.9 SKUs per point of distribution, up from 16.4 SKUs one year ago. We plan to increase the number of SKUs available at each retailer by adding second and third fridges, which amplifies our marketing spend and drives visibility for the brand while also allowing us to showcase a wider range of our portfolio. Turning to the more part of Main & More, More Profitable. As I mentioned earlier, we significantly improved margins this quarter, with solid operating performance, thanks to the work of our team. Quality, yield, input costs, and throughput all drove the over-delivery. Last quarter, I suggested that we had reached an inflection point and we're turning a corner on profitability because we're now at a point where we can leverage our scale, increase business intensity and concentration. We're now seeing those benefits of scale play out, and they're driving increased profitability. First quarter adjusted gross margin increased 680 basis points year-over-year to 45.3%, and adjusted EBITDA as a percent of net sales was 13.7%, compared to 1.8% in the prior year period. Logistics has been a key area of focus for us, and it was only 6.4% of net sales in the first quarter, improving 290 basis points year-over-year and coming in below our long-term target of 7.5%. We're greatly encouraged by these results and believe there is a significant opportunity to drive further profit improvement going forward, with our Ennis facility still ramping up production and our continued work on OEE to increase yield and throughput. That leads me to an update on our capacity. We feel confident in our expansion and efficiency projects, which are all on budget. Ennis currently has three lines operating today, one roll line and two bag lines, and this facility is producing approximately 25% of our total production volume. Our fourth line in Ennis is slightly ahead of schedule and is expected to start up by the end of the third quarter. This additional line kicks off Phase 2 in Ennis and will alleviate some complexity of changeovers and SKU assortment since it will be our second roll line in this facility. We've continued to evolve our capacity expansion plans to drive greater capital efficiency. We're intently focused on: First, maximizing the throughput of our existing lines by investing in an operational excellence program designed to increase our OEE. We've seen steady progress on this, particularly in Bethlehem, where the program has been underway for more than a year. Second, maximizing the capacity of our three existing sites so that we can avoid the high cost of incremental infrastructure and overhead. For example, in Bethlehem, we're converting storage space to add a seventh line; in Kitchens South, we believe there is room to add one or two more lines in the existing building; and, in Ennis, we're looking at ways to add more lines as well. Third, developing and implementing new technologies that generate more throughput per line and improve yield and quality. We've developed one technology that has shown great promise, and others are in earlier stages of development. It's still too early to tell when these might impact our capacity or P&L, but we believe these technology investments are important because our need for capacity will only grow as time progresses, and we continue to believe that our manufacturing expertise will be a key strategic advantage over the long haul. Scott, who successfully pioneered the development of our existing products and processes, is leading our efforts to develop and commercialize these potentially breakthrough technologies. As I said earlier, our first quarter results demonstrate that scale leads to improved profitability. Todd will walk through our updated guidance, but I'd like to provide an update of our results versus our long-term targets. We're clearly ahead of the pace required to deliver our original 2027 goals, which gives us increased confidence in our ability to either meet or exceed those goals, but we need to show we can deliver these results consistently. Albeit encouraging, it is still early in the year, and we want to be measured in our forecast for the balance of the year. We knew the first quarter sales were going to be strong because of our sizable media investment in Q4 of 2023 and the momentum that generated, and the 34% first-quarter net sales growth still exceeded our own forecast. We plan to carefully manage our top line growth for the remainder of the year so that we do not get ahead of our installed capacity or organizational capability. We believe our model works very well at approximately 25% growth, generating the right balance of growth, capital investment, and cash generation. Adjusted gross margin of 45.3% in the first quarter was above our 2027 target of 45%, giving us even more reason to believe we can deliver our long-term goals. We're able to deliver this despite the fact that Ennis is still subscale and in startup mode, and we've not implemented any of the new technologies we're working on yet. Further, our Freshpet Operational Excellence program is still in the early innings, and we believe there is lots of upside as we implement that program. But as I mentioned earlier, we want to demonstrate consistent performance at this level before we commit to anything beyond that. Adjusted EBITDA margin of 13.7% in the first quarter is tracking ahead of plan to achieve our goal of 18% adjusted EBITDA margin in 2027. As you know, we tend to front-load our media investment. Q1 media investment, as a percent of net sales was more than 300 basis points higher than it will average for the year, so when you adjust for that media spending cadence, Q1's adjusted EBITDA margin was closer to 17%, very close to our 2027 goal. We believe that if we can consistently deliver the adjusted gross margin we delivered in Q1, that we can deliver the remaining building blocks of our adjusted EBITDA margin target of 18% through effectively leveraging the added scale that comes with our growth. Operating cash generation of $5.4 million was ahead of our plan, further increasing our confidence we can self-fund our growth with no need for additional equity and potentially not even needing any new debt. In summary, we're off to a fast start this year. We've more work to do to prove to our shareholders that we can maintain or exceed this level of performance, but we're confident in our ability to execute based on what we know today and what is within our control. Now let me turn it over to Todd to walk you through the details of the Q1 results and our updated guidance. Todd?

Thank you, Billy, and good morning, everyone. As Billy mentioned, we had an excellent first quarter. Now I'll give you some more color on our financials and updated guidance for the year. First quarter net sales were $223.8 million, up 34% year-over-year. Nielsen measured dollar growth was 26% versus the prior year period, with broad-based consumption growth across channels. We saw 28% growth in XAOC, 25% in U.S. food, 13% growth in pet specialty, and over 100% growth in the unmeasured channels. First quarter adjusted gross margin was 45.3%, up 680 basis points year-over-year. This was driven by improvements in input costs, quality, yield, and throughput. Specifically, input costs as a percent of net sales improved 390 basis points, reflecting a small amount of pricing from last year's price increase, improving yields in our manufacturing operation, and lower commodity costs. Quality costs improved by 240 basis points, and plant costs improved by 60 basis points, both driven by strong operating performance across all three manufacturing sites. Within plant costs, we were able to build much needed inventory, which contributed about 100 basis points in the quarter. First quarter adjusted SG&A was 31.7% of net sales compared to 36.7% in the prior year period. We spent 14.3% of net sales on media in the quarter, down from 15.5% of net sales in the prior year period. Total media investment was up 23% year-over-year, in line with our plan to have our media spending a bit less front-loaded this year. Logistics costs continued to improve and were 6.4% of net sales in the first quarter, a decrease of 290 basis points compared to the prior year period. We believe that about one-third of this improvement was due to market conditions such as lane rates and diesel costs, and the remainder was due to deliberate actions we took to increase fill rates, reduce miles, and other efficiency-focused efforts. In fact, our logistics costs in the quarter were $1.3 million lower than in the year ago period despite shipping 31% more pounds of finished product. First quarter adjusted EBITDA was $30.6 million, or 13.7% of net sales, compared to $3 million, or 1.8% of net sales in the prior year period. This sharp increase was driven by better-than-expected net sales and improvement across input, quality, logistics, and plant costs. Capital spending for the first quarter was $46.5 million, in line with our expectations. Operating cash flow was $5.4 million, and we had cash on hand of $258 million at the end of the quarter. We continue to believe that we have adequate cash to fully fund our growth through 2024, and we'll be free cash flow positive in 2026. We also believe that we'll have access to traditional non-dilutive forms of capital to bridge a gap in 2025, if it occurs. Now turning to guidance for 2024. We're maintaining our net sales guidance of at least $950 million until we've greater confidence that we'll have adequate rolls capacity to meet a higher level of demand later this year. This will also allow us to manage our growth to deliver the right balance between growth and capital investment. As we've said, we're carefully managing our growth to live within our capacity plans. If we do find that our production performance from existing lines and facilities exceeds our plan, we'd be comfortable letting the growth drift a bit higher this year. However, we also need to be mindful that we need to have adequate capacity to meet demand for next year as we exit the year. So, we're managing this closely, and we will not commit to a higher level of growth until we're sure that we can supply it reliably, both this year and next year, even if that means our growth rate later in the year is below our long-term rate of 25%. And we can reaccelerate as capacity becomes available. In terms of cadence, we still expect the first quarter to have the highest percent net sales growth year-over-year and expect sequentially lower percent growth throughout the remainder of the year. We may pull back media to control growth in line with the long-term algorithm. Not because demand is slowing; we’re just managing the pace of growth as we expand capacity. We're raising our adjusted EBITDA outlook from our previous guidance of $100 million to $110 million, to now at least $120 million to reflect the over-delivery in Q1. While our performance to date has been very encouraging, we will not commit to a higher level of profitability for the balance of the year until we've proven that we can repeat Q1's performance reliably. As such, our revised guidance adds the Q1 over-delivery to our target for the year but has not changed our expectations for the remaining quarters yet. We now expect adjusted gross margin to expand by at least 300 basis points for the full year, compared to 100 basis points previously, and expect commodity deflation in 2024. Capital expenditures will be approximately $210 million to support the installation of capacity to meet demand in 2025, consistent with our previous guidance. In summary, we're encouraged by the first quarter results; however, it is still early and given the potential for the environment to change as we progress throughout the year, and the unforeseen issues that arise from time to time, especially for high-growth businesses, we're going to be prudent in our forecasting. We said last quarter that we're at an inflection point and believe we've turned the corner on profitability. We've gained scale and are beginning to see the benefits of that. Like Billy mentioned, there is more upside longer term as we continue to work on operational efficiencies and bring more capacity online across our facilities, especially in Ennis. For now, though, we feel comfortable maintaining our long-term targets of 45% adjusted gross margin and 18% adjusted EBITDA margin because we want to prove we can consistently deliver on our profitability metrics over time before we commit to new targets. Finally, this step change in our profitability adds to our confidence that we'll be able to fulfill our mission of elevating the way we feed our pets with fresh food that nourishes all. We're building Freshpet into an iconic market-leading brand that is redefining what pet food is and that we believe is better for pets, people, and the planet. That concludes our overview. We will now be glad to answer your questions. As a reminder, we ask that you please focus your questions on the quarter, guidance, and the company's operations. Operator?

Our first question comes from Ken Goldman with JPMorgan.

In speaking with investors this morning, I think there's a general feeling, you guys have addressed this a little bit that your outlook maybe remains conservative. And I understand there's still uncertainty about production capacity toward the end of the year. But just going beyond that, in addition to those capacity questions, I guess, is it reasonable to think that, there is still a little bit of prudence as well, in your top and bottom line guidance outside that? Well, I'm just trying to think of areas where you might be a little more circumspect. Just looking forward than what maybe current conditions might indicate?

Thank you for the question, Ken. I'll address the revenue aspect, and then Todd will discuss the profit side. We are very pleased with our Q1 performance, which has confirmed our volume-based growth. Our household penetration growth has returned to our desired levels, showing consistent strong performance. It's also clear that our media efforts are fueling this growth; our strong media presence in Q4 effectively contributed to our Q1 growth. However, we must remain cautious about balancing demand, capacity, and the cash needed to support that capacity. We're working to strike that delicate balance. While we hear about the macroeconomic challenges others face, we're not seeing those issues in our operational environment. We are experiencing strong household penetration growth among various income groups and good demand across different trade classes, which gives us confidence moving forward. Our concern is really based on capacity available this year and capacity next year. And if we get too far ahead of ourselves, our fill rates go down and we start needing to pull forward more capacity addition. The counter to all that and the anecdote to that for us, is if we continue to see very strong operating performance, meaning throughput on our existing lines, it will give us license to lean in a little bit more than what we're already doing. But we're really going to be focused on managing the growth to fit within that very tight band that we've outlined because that's where we operate best. Now, Todd can give you a little bit of view on the bottom line.

Yes, the primary factor affecting EBITDA is the gross margin. We had an impressive first quarter with a margin slightly above 45%, and we've projected at least 43% for the year. However, there are concerns that may lower this figure moving forward. Firstly, as mentioned earlier, we increased our inventory, especially for rolls, in the first quarter, which contributed about 100 basis points to fixed cost leverage. This effect won’t occur again later in the year and is expected to reverse, potentially creating challenges for gross margin. Additionally, we had an excellent quality quarter, but it's uncertain whether we can maintain a quality rate below 3%, so we are adopting a more cautious outlook in that regard. We do have our annual wage increase in the plants coming in June. Not a huge impact, but it will put a little pressure on gross margins. And then there's the fourth line in Ennis will be starting up in the third quarter. We've done a much better job of bringing up lines, not as big of an impact on the P&L as in the previous years. But there will be an increase in fixed cost on the balance sheet at the end of Q3 going into Q4. So, feel great about the start. We do have some pressures, but if some things go our way, obviously we can do a bit better.

That's helpful. And then a quick follow-up. As we think about modeling the upcoming quarter, 2Q, are there any particular factors we should consider, either positive or negative? I'm just thinking about areas like the timing of media spending, bridge placements, and I guess the timing of that inventory unwind you mentioned?

Yes, we expect a sequential increase in revenue in Q2, though it's not significant. There will be a strong media spend this quarter, and while we are addressing a couple of factors that might affect this, we typically maintain a substantial spend in the second quarter. We might reduce some of the inventory in Q2, but it's likely to happen more in Q3. That's still uncertain, but it will eventually decrease later in the year. Those are the key points, and logistics remain favorable for us.

The next question comes from the line of Mark Astrachan with Stifel.

I guess maybe a big picture question. If you look at this, the expanded scanner data that we now get, Freshpet's driving, I don't know, 50% of the dog food category growth year-to-date, 60% since March. It certainly seems like the category acceptances has increased amongst consumers. I guess, how do you think about that, as it relates to discussions with retailers regarding expanding existing fridges, adding second and third fridges, going into some of those places where you're under-penetrated in retailers where you don't exist like Sam's? And just maybe talk big picture about kind of how you're approaching that today, versus where you were 12 or 18 months ago, particularly as you come out of that period of capacity constraints?

Hey, Mark. So, look, I feel like this is the work we've been doing for a very, very long period of time. We're really confident we're offering a superior product, and I think it's increasingly recognized not only by consumers, but I think just generally the marketplace. We're seeing retailers kind of just really reassess what's going on in the category and be more and more comfortable with adding more fridges deeper into their distribution. So, I think what we'll start to see is we'll continue to see second and third fridges added over time.

Got it. That's helpful. And then maybe another question just on capacity. So, you haven't formally updated kind of where we're going beyond this year. You've talked, obviously, about the efficiency programs and existing facilities and those added to Ennis ramping. You also talked about all these added lines. I guess any way to frame, just how much incremental capacity all of this stuff together collectively can be as we sit here today?

Yes, Mark. The board's situation is somewhat complex due to capacity increases from our existing lines as we enhance throughput and add more lines within our current facilities. Additionally, we're incorporating the new technologies we've discussed. We prefer for people to see us as carefully managing capacity additions to align with our projected net sales growth. We have become quite skilled at forecasting our volume and net sales over extended periods and subsequently developing a capital spending plan and an operational improvement plan to support that. We're really guided by getting to fill rates that are very high fill rate because what we've seen over time is, if we've a high fill rate, that's a really good indicator that we've a lot of good performance on the operations side, whether it's the quality part or the freight cost. But getting a high fill rate becomes a very good marker for operational effectiveness, or operational performance. So, I'd look at the net sales line and say that we'll build capacity to adequately supply that over an extended period of time. And if there's variations in the growth rate, we'll find a way to match it, but we'd really like to manage the growth rate to live within our long-term guidance.

Our next question is from the line of Peter Benedict with Baird.

Yes. My first is just on, there was a comment around kind of adding organizational capacity to support the growth. Maybe talk about your views on that, both short-term and longer-term, just as you think about kind of cadence growth of the business, and what's going on just from an organizational capacity, where are you focused?

Yes. I mean, obviously, we've added quite a bit of talent in the last 18 months. We added a Head of Manufacturing. We added a Head of Quality. We added a General Counsel. We added Rachel and her role in Investor Relations. And I think it's fair to say that if we're a company that's guided to $950 million in sales this year, and will be $1.8 billion in 2027, there will be fairly sizable increases in the overall organizational capability. But we've filled in many of the most critical top roles. That doesn't mean we won't add any other top roles as we kind of expand the footprint of the company, and develop high-level sophistication in several of the areas. And it's something we're always doing. We're always looking for what's next and just like we plan the capacity out over a longer period of time, we're now planning the organizational capability. If there's one learning that we've had over the last couple of years, is that during the pandemic, we probably got a little bit behind in building organizational capability, and we're not going to let that happen again.

No, that makes sense. Todd, as you consider the 18% target for 2027 and the gross margin approaching 45%, do you believe there is more potential for gross margin growth if that comes to fruition? I'm trying to understand your thoughts on the potential opportunities within the operating margin profile for the business in the long term.

Yes, sure. So obviously, we're not in a position right now to change our guidance. But where the upside could come from? Clearly, the biggest piece is gross margin. So we're ahead of schedule. We think we've a lot of projects and a lot of room to grow over the next few years. So, we're going to shoot to try to beat the 45% at some point. But obviously, we're not changing that right now. The other piece, obviously, is logistics, which is below our definition of adjusted gross margin. We're already 100 basis points below that long-term target that we called out in CAGNY last year. So that's the other piece. But gross margin is the biggest component.

Our next questions are from the line of Rupesh Parikh with Oppenheimer.

So just going back to the unmeasured channels, so greater than 100% growth in consumption this quarter. How do you guys feel about the sustainability there? And then just curious what you're seeing in the online channel?

So, Rupesh, how are you? There is a significant opportunity to increase accessibility to our business and brand, particularly in unmeasured channels, especially through e-commerce. We have discussed opportunities in club and mass markets. There is tremendous potential and a long path ahead for us to enhance accessibility, ensuring that wherever consumers prefer to buy our products, we are as accessible as possible. We are optimistic about the opportunities in the coming years. The unmeasured channels are outpacing growth, and we began addressing this over a year ago. We believe we have several more years to capitalize on this opportunity. Additionally, there are other growth strategies that we will continue to explore and develop, and we will discuss those more in the future.

Great. And then, maybe just one follow-up question. So to the extent that we continue seeing EBITDA upside, are there opportunities to pull forward investments into this fiscal year?

Yes, we are always evaluating that. There are some opportunities available. It's not as much from a traditional marketing perspective, but we are currently looking at projects aimed at improving gross margin. While we're not discussing significant amounts, there are several initiatives that Scott is leading to enhance gross margins over the next couple of years. We would like to invest a little now through 2025 to expedite as many of those projects as possible.

We've actively identified a whole bunch of work that's hoping to create a more, longer-term annuities and margin expansion over time. So, there's actually even two areas that we're working around.

I'd add to that that we're also thinking about that from an organizational capability perspective, too. If there's places where we see an opportunity where increased organizational capability can accelerate our margin improvement, we'll make that investment as well.

We feel incredibly fortunate as a company and organization. The work that the team has done is extraordinary, and every single area of the organization is performing exceptionally well. This leads us to consider how we can think as far ahead as possible in every area and leverage our leadership position while being as thoughtful about our business as we can.

Our next question is from the line of Brian Holland with D.A. Davidson.

If I consider the comments regarding the throughput initiatives we are working on, and as we become more flexible with our existing manufacturing base and adding lines, are there any implications or effects on capital expenditures as we plan for the next few years? Additionally, I haven't heard any updates on the timing of the change in free cash flow inflection. If the throughput initiatives are successful and we can increase our capacity within the current network while improving our EBITDA margins, can we achieve positive free cash flow in fiscal '25?

So look, everything that we're doing on that front is obviously starting to pay some huge dividends. And, my goal and the organization's goal is to push out those CapEx investments to the right as far as possible with obviously still maintaining enough capacity to grow the business around 25% rate. So, I think the organization is doing a really, really good job around that. Getting free cash flow positive in '25 would be challenging. We still feel great about '26. I'd say, obviously the operating cash flow has improved dramatically in the last 12 to 18 months. We're sitting on a fair amount of cash right now. As every day goes by, I feel more and more secure that we'll not have to go out and raise additional funds. We may have to, a little bit of a bridge term loan, or something or revolver. But that cash flow position, that liquidity position continues to improve. So, everything that we're going on from a throughput yield is not only improving margins but increasing free cash flow. But we continue to feel great about the forecast in that area that we put out.

Appreciate the color, Todd. And then just kind of stepping back and appreciate the appropriately conservative management of your guidance, both near and longer term. But, we talk about the inflection that we're seeing this morning and the earnings power of this model. But obviously, this is a culmination of, at least the past five quarters kind of building to this. So when you talk about sort of wanting to be careful here and watching kind of quarter-by-quarter, what particularly keeps you up at night right now with respect to like kind of what you see in Q1 and some sort of anxiety about, hey, we're not sure whether we can sustain this, because clearly we've some points on the board now of sustained progress to this point.

Yes. I mean, Brian, I think you've to start with the fact that the, especially on the gross margin and the EBITDA margin, it was a very significant step-up from the trajectory that we had built, as you pointed out, over the last five quarters. And so what we want to be is appropriately conservative to say that, maybe not all of that will stick in the subsequent three quarters of this year. We hope it does and we're trying to plan to make that happen. But the reality is it was a very big step up, and we just don't want to plan on everything happening right every quarter until we've demonstrated that over a much longer period of time. This is a new business. This is a completely new technology. Nobody else does what we do. And so, there's more variability in it than you'd normally see in a much more well-established business. But we're getting better and better at it. We're managing it better and better. The top line part of this is the part that, as you know, has been much, much more stable over a long period of time. We're able to predict that really well. In this case, the top line is being driven by our ability to supply it reliably. I'm going to go back to the comment I made earlier, we believe having a very good fill rate is a very strong indicator of operational performance. And we do not want to get ourselves in a position where we don't have a high fill rate because that will indicate that we're having some other issues. So, we're going to plan the growth to live within the capacity and deliver that strong fill rate.

Our next question is from the line of Bill Chappell with Truist.

Could you provide some insight on the roll capacity challenges that might arise later this year? As we are still early in the year and roll production typically seems manageable, I’m curious to know if you've experienced an increase in rolls compared to bags with the influx of new customers. What’s the distinction between the two? Additionally, do you foresee any other potential issues? I’m trying to understand why roll capacity might present difficulties or if you're simply taking a cautious approach by suggesting we look towards the latter half of the year just to be safe.

Bill, I think as we've said since the beginning, we knew that this is a little bit of a game of leapfrog. You bring up a line it gives you a big surge in the capacity for that particular product form, and you do fine, and then you've to think about bringing up the next line, which might be on bags. In this case, the one we'll bring up now is rolls. But after that, there will be bag lines. And we haven't spaced out just right, or we believe it's just about right. But you're dependent upon bringing that line up at the rate you want on the timing that you want. That means construction has to be complete. You've to do all the line commissioning qualification; then you've to go through a ramp-up curve on the line. And we're at the point now where our growth has been very robust on both rolls and bags. So, we're dependent upon the next roll line coming online, and we just don't want to get ahead of ourselves. There's always some variability in the start-up of the line, and we just don't want to get too far ahead of ourselves. The growth has been good on rolls. We have reached a stage where the operational enhancements we made in Bethlehem are allowing us to increase our inventory of rolls. As the demand for rolls continues to rise in the second and third quarters, we can meet this demand from our current facilities and line. However, we need the new line in Ennis to be operational. If not, we risk short shipping rolls or, at the very least, reducing our inventory, which would lead to lower fill rates.

It was part of the plan all along, and that's how we've been approaching it.

Got it. Okay. I'll follow up later on that. Regarding the second cooler initiative, I understand that you have sufficient metrics demonstrating how adding a second cooler increases velocity. However, is there a point where you need additional SKUs or different products to fill those coolers in order to maintain that velocity? Or are you comfortable using just the core 4 or 5 SKUs in both coolers to keep pushing forward?

Actually, Bill, that is actually a really good question and something we've been doing a ton of work around, and you're going to see over the next 12 to 18 months. You'll tend to see us basically looking through the portfolio and actually bringing down. We've actually been on a downward path on bringing down complexity and the number of SKUs we've across the portfolio, okay? So you'll see simplification and you'll see products that are more suited to our kind of future state manufacturing. I want to say future state, it's like within the next 12 months. It will be literally optimized portfolio to make sure it works incredibly well within our overall manufacturing network while balancing out the demand that we need from a consumer standpoint. We are focused on optimizing our entire portfolio to enhance consumer demand and improve profitability. This involves significant work, which I mentioned earlier when discussing our forward-thinking approach for the company. We are actively engaged in this effort. That said, I want to highlight that we are experiencing remarkable success as we introduce our second coolers. One of the initiatives we're implementing in second coolers is to diversify some core SKUs to ensure we have sufficient inventory over the weekend. In high-velocity stores, we're still experiencing stock shortages, and there’s definitely an opportunity for us to expand on some of the core SKUs. We're observing that these long-standing SKUs, some of which have been in the market for 15 years, continue to grow at mid-teens rates, which is very positive. Additionally, we are witnessing significant growth in the more specialized segments of our portfolio, particularly those with unique features and higher price points. So, we are seeing growth across the board. While we don't need many new SKUs, it's crucial for us to optimize the ones we currently have, and this will align with the efforts we are pursuing.

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

I wanted to follow up on the questions regarding free cash flow and cash. Todd, it seems that cash from operations was positive this quarter, primarily driven by profitability. Can you discuss the path to free cash flow and indicate how much of it will come from increased profits compared to working capital or future capital expenditures? I'm trying to understand any additional factors we should monitor concerning free cash flow beyond capital expenditures and profits.

Yes. We are continuing to grow at an impressive rate, which means we will need to invest significantly in capital expenditures to expand our capacity over the next few years. We aim to keep this spending around the 200 to 225 range, and we have managed this well so far. I'm optimistic that we can maintain this range. Almost all of our anticipated positive free cash flow will come from profitability. As our business grows and our margins improve, we expect our EBITDA to increase significantly over the next couple of years if we successfully execute our plan. There are no major concerns regarding working capital; we will manage it as best as we can, but ultimately, the profit growth and scale of the business will largely determine our operating cash flow.

All right. That's very straightforward, and I understand. For my second question regarding the convertible option, could you remind us about the mechanics given the current share price? I believe we are approaching the point where it becomes convertible. What should we be monitoring concerning the share price?

Yes, this is a 5-year convertible bond. We can only force the conversion starting in year 3, so there’s nothing to be done from our end at the moment. Although bondholders could choose to convert, the optionality means there’s no incentive for them to do so; they could sell the bonds for a profit instead. This makes forced conversion very unlikely. There won’t be any dilution from a GAAP perspective until our net income exceeds $100 million. Additionally, we have a CAP call in place that protects us economically up to about $120 per share. After that, some dilution could occur. We’re pleased that we might reach the $120 mark today, but we plan to hold off for another two years before deciding whether to force the conversion.

All right, Todd. If I could ask one last question, do we have a comfortable level of cash on the balance sheet considering the rapid growth of the business and our capital expenditure needs? What is your comfort level regarding the cash we currently have on the balance sheet?

Yes, I feel optimistic. We have sufficient cash for this year and a strong likelihood of having enough for next year as well. We anticipate being free cash flow positive in 2026. Based on our current EBITDA, if we require a small amount of capital in 2025 or 2026, we have adequate profitability to borrow effectively.

Our final question for today comes from the line of Robert Moskow with TD Cowen.

I previously asked this question differently last quarter, but I want to approach it this way this time. Do you have any data on your progress in shifting your mix to main meals versus toppers? You mentioned 48%; does that indicate any progress? Looking ahead a few years, what does success look like? Will it need to be significantly higher to meet your 2027 goals, and how important is that?

So, hey Rob, let me start with what we're observing in the business. From a penetration standpoint, we're consistently seeing growth. The group that is outpacing others is primarily the super-heavy and heavy users, which we refer to as HIPPOHs. This group is the main driver of increased buy rates. Our strategy focuses on penetration, ensuring that we attract more of these super-heavy and heavy households to push the buy rate forward. We're definitely seeing expansion in buy rates consistently. And then we've so many data points now that are starting to show where people are not just buying ones, they're buying 2s, and now they're starting to buy 6 packs, like we're looking at like where people are buying bulk packs of our products. And I think that clearly speaks to this ideology of this is not a topper. This is something that is a main meal for my dog. This is a replacement. So, you got the super heavy, heavy staff, you've got everything that we're doing around selling multipacks, and you're going to see more and more of these multipacks come out there. And we feel like that answers, like that demonstrates to consumers. And it really answers any questions that we've around how this is not a topper, it is a main meal.

Rob, we look at this pretty closely because, ultimately, if you're going to drive 25% growth in a simplistic form, a portion of it is going to come from penetration, a portion of it is going to come from buy rate. And the way we think the model works is low 20% growth on the penetration. That gets us to our 20 million households. And you've to have, call it, low to mid-single digits growth in the buy rate in order for that to work. So the sum of those two should be 25%, 26% kind of number. And the mix is not particularly important. Obviously, you want to have some of both, but we wanted really to be led by household penetration being in the low to mid-20s. That's the range that we're looking for. So the direct answer to your question is you do need to see buying rate continue to grow, but it needs to grow at a low to mid-single digits.

Our next question is from the line of Michael Lavery with Piper Sandler.

I wanted to revisit some of the new technologies you've mentioned, recognizing that they are still in development and you may not want to be overly specific. Can you clarify whether this involves retrofitting existing equipment, replacing it, or if it's more akin to a software upgrade that enhances speeds? Additionally, could you provide some insight into the cost involved? Is this expense already factored into this year's capital expenditures, or is the timing uncertain? I'd like to understand how we should view the scale and timing of these costs.

So, Michael, I'll take the first part, and either Todd or Billy will address the second part regarding capital. The primary focus is to optimize our current manufacturing footprint and the lines we have. There is significant opportunity in this area, and you will see meaningful progress reflected in this quarter's results and our plans over the next 12 to 18 months. Additionally, we are making small retrofits to existing lines, which we've researched enough to know will enhance productivity and throughput. Lastly, we have a next generation of technology that we've mentioned, and we are completely confident it will be successful; it's just a matter of timing.

I will now hand it over to Todd to discuss our capital plans. We will address this over the next few periods, assessing our throughput and incorporating new technologies. We will implement these at the right times, and we've also budgeted very conservatively for this. From a capital expenditure perspective, this new technology will be the seventh line at our Bethlehem campus. We expect it to begin production in the first half of 2025. We are currently investing in it as part of the $210 million capital guidance we have provided for the year. A significant portion of the spending on this new technology will occur this year, with some remaining costs in the following year. Looking ahead, if this technology proves successful, we plan to implement it on new lines in locations like Ennis as we expand our bag capacity. Depending on the margin improvements we achieve with this technology, we may also consider retrofitting existing lines, but that is still to be determined.

Yes. I just want to amplify that we view manufacturing as a core competency for us and a significant competitive advantage. And so, both Scott and Todd referenced a significant investment in the new technology. But as Scott indicated, there are other pieces, too, that are less significant than the seventh line in Bethlehem that we're implementing as we go along. The ultimate goal of all of this, though, is to end up in a situation where we're delivering a significant improvement in the return on invested capital for our shareholders. And we're also delivering improvements in the quality that the consumer gets. And we think, if we do those things well, it will be very, very difficult for somebody to match our execution and our capability.

That's great insight. I have a quick follow-up regarding the commodity aspects. You mentioned almost a 400 basis point benefit. What factors are contributing to that? Additionally, the chicken processing plant in Ennis is expected to improve as production increases, and its pricing seems to be more stable. Should we consider that chicken is not a major variable in this scenario, or is it also contributing positively?

Yes. As we mentioned in February, we are experiencing some deflation and are currently about 75% covered. This means we have risks and opportunities related to approximately one-quarter of our input costs, but we are confident in our position regarding input costs. You referenced chicken processing, which is performing quite well. Last year, it was challenging as we were increasing production and there wasn’t enough volume at the facility. However, with Ennis now accounting for nearly 25% of our capacity this year, we are seeing significant improvements in the economics, which should continue to enhance over the next few years. Billy has noted the exceptional start we've had this year in yield, thanks to our OEE projects in Bethlehem and Ennis. Our Kitchens South facility is also running exceptionally well, and we are very pleased with the progress there. Additionally, we experienced some pricing benefits in the first quarter, although that will not carry through for the rest of the year. These are the key components of our current situation.

Our final question for today comes from the line of Jon Andersen with William Blair.

I have a two-part question about media. You mentioned in the prepared remarks that media accounted for about 14% of sales in the quarter. Can you remind us of your plan for the year and discuss the cadence for that? I also think I heard Billy mention that customer acquisition costs have improved recently. Could you talk about how volatile that CAC figure has been in the past and what you think is driving the current improvement?

Yes, I'll start off, and I'll let Scott talk about the CAC. Yes, about 14% of net sales this year grew about 23%, 24% year-over-year. That percent of net is down year-over-year. So, we're starting to get a little bit of leverage in the P&L from media. Our expectation is it will grow relatively with sales for the full year. So that last year, it was around 11%. We think it will be approximately 11% or slightly less this year as we've talked about, volume is too strong. We'll potentially look at pulling back a little bit of media spend to pull things off a bit, and we continue to monitor that very, very closely. From a cadence perspective, we'll spend fairly heavily in Q2. But from first half, second half, it will be a little bit more balanced than we normally have. So more in the first half, but less as a percent of than we've historically had.

Yes, I'll begin by saying that when we planned this out over many years, we did not expect to maintain such a stable customer acquisition cost. It has been truly remarkable to see the CAC remain consistent over the years. Generally, as you delve deeper into your total addressable market, your CAC tends to increase. It's a bit unusual to discuss CAC from a packaged goods perspective. We consider our progress and track our theoretical total addressable market, which continues to expand each year. Our customer acquisition cost has remained stable. The only time we experienced fluctuations in our CAC was during the unwinding of COVID and the significant price increases we implemented, which took time for consumers to adjust to before our CAC returned to normal levels. On a positive note, we have seen extraordinary performance in our advertising creative and significant effort in media planning. We are exploring new areas, and we've received feedback from people who have seen our ads in places like golf or sports for the first time. This expansion into new media channels and techniques has shown better performance in some cases than our existing areas, indicating that we have a promising path ahead to maintain our CAC within this range.

And let me just add to that, Jon, is one of the things that we've seen is, as we've grown the visibility of our retail presence, meaning second fridges, larger fridges, end cap fridges, and whatnot, it does help with the efficiency of the media, meaning advertising that you're spending against a business that has a very high level of retail visibility is much more efficient than if we were spending the media against small fridges in the middle of the aisle. And so, the significant improvement in second and third fridges and end caps and fridge islands and some retailers is helping maintain that CAC at a very, very effective or efficient level.

Thank you. At this time, I'll turn the floor back to further remarks from management.

Great. Thank you. I'll leave you with one thought. This is from an unknown author. But if you want the best seat in the house, you'll have to move the dog. To which I'd add, all you have to do is make a move for the fridge where Freshpet is kept, and the dog will gladly vacate the seat. Thank you very much for your interest.

This will conclude today's conference. You may now disconnect your lines at this time. We thank you for your participation.