Freshpet Inc Aktie

Okay. Welcome back, everybody. Thanks for joining. I am thrilled to welcome Freshpet back to our conference. With us today from Freshpet are Chief Executive Officer, Billy Cyr; Chief Operating Officer, Nicki Baty; and Chief Financial Officer, John O'Connor.

Together, Billy, John and Nicki are going to run us through a presentation. And at the end, we should have some time for Q&A, which we intend to open it up to the audience, if there are audience questions. So with that, I will hand it over to Billy, and we'll get started.

Thank you, Steve.

Yes.

All right. Thank you. And for the benefit of those folks who are listening online, our presentation was just posted to the Investor Relations website, so you can see as we click along, go through this session.

As always, we have our safe harbor statement. Today on the stage with me, we have Nicki Baty, who is our COO, and her 2 cats, unfortunately, couldn't make it today, but that's Muffin and Oli. And the newest addition to the Freshpet family, John O'Connor, and that's his dog, Bryce, also Bryce could not be with us today. For those of you who have been around for a while, you recognize that dog is with me as my dog Appa. She's been in many of our presentations.

What we want to talk to you about today is why we think that Freshpet is building an advantaged position in the future pet food category. I want you to take away 4 key messages today. The first thing I want you to take away is that there is a generational transition that is happening in the pet food category. The baby boomers and Gen Xers are being replaced by millennials and Gen Z. And that transition changes the buying habits and the brand preferences and changes what this category is going to look like going forward.

The second message I'd like you to take away is that our investment in manufacturing scale and expertise is delivering a more appealing and diverse portfolio of products at low cost that insulate our business from the narrowly focused competitors. You're going to see how we are leveraging our investment in capital and manufacturing technology to create a strong diversified portfolio of differentiated products.

The third is that we're building a consumer franchise of increasingly main meal consumers. Nicki will take you through what that looks like, but we want to build a consumer franchise that is people who use Freshpet, not as a mixer or a topper, but as the main meal.

And the last thing I want you to take away is there's also a transition going on at retail, and that transition to retail is creating fresh delivery options on the backs of our customers and Walmart and Amazon and other retailers. And what that's done is it's turned our 39,000 fridge infrastructure into a competitive advantage that drives velocity and buy rate in those stores and in those fridges.

But I want to take a step back for a second and just remind you a little bit of what makes Freshpet such a unique company. We have been in business now for almost 20 years, and we are nourishing pets, people and the planet. We focus on the humanization of pets as a driving tailwind for this category, people's desire for -- increasing desire for fresh, wholesome all-natural foods and its increasing focus on wellness.

And the company that we're building is really focused on building and pioneering fresh food technology, creating the absolute best possible food -- we want to create products that are widely available and accessible, meaning accessible price points, and we want to lead the category growth, and we think we are doing that.

What's the opportunity for those who invest in our company? Well, first, the pet food category is a very large category, and we are growing market share in that category with lots of upside. The addressable market is a large addressable market and it has consistently grown over time, consistent with that generational transition that I talked about. And we're also increasingly focused on improving our returns on capital and have shown that we can actually deliver that, and you'll see that in our focus.

So let me talk a bit about the category. The category is about a $56 billion U.S. pet food category that we compete in. We have opportunities to go beyond that, but that is the core business that we focus on today. And within that, the segment that we are most focused is the $38 billion dog food and treats category. That's where the vast majority of our sales are.

We believe the segment that we're talking about, the segment that we're pioneering, which is the fresh and frozen category, which we believe is ultimately replacing kibble and can is about a $10 billion category opportunity. That's the market we are focused on. And what's interesting and encouraging is that this transition, this generational transition that I described from a population perspective is driving a former preference transition.

And so what you can see is between 2014 and where we are today, and the data here is from grocery stores. This is sort of the leading edge of the transition. But in grocery stores, fresh pet food has now surpassed canned dog food as we -- and become the second biggest part of the dog food category.

What's more interesting, though, is that the bulk of that share has come out of the dry dog food. The dry dog food has dropped from 73.3% down to 51.2% as the wet part or the fresh part has gone from 2.2% to 23.1%. So fresh is the future of this category, and this chart is the best way to see that.

When we talk about the addressable market, I described it for you is this addressable market that's driven by the generational transition, we measure it very regularly. And we showed you some data a couple of years ago that showed it was 27 million households, then it went up to 33 million. Now it's at 36 million. We firmly believe that as this generational transition happens, by that, I mean, boomers moving out of the category and millennials and Gen Z coming in, that we will see this TAM grow in line with that population transition, and that will create this future $10 billion category.

Of that -- of the TAM that I described, the 36 million households, though, Freshpet is currently only in 16 million of those households. Now we've been growing quite steadily over the years. You see we are in 4.8 million in 2018. We're into 16 million households today. And that growth has been pretty strong and pretty steady, but that does leave an awful lot of upside for us.

And many people mistakenly perceive Freshpet as a brand that is skewed as sort of a luxury item or to the high end of the market. The reality is that the consumers who buy Freshpet are buying -- who are middle-income consumers. We've become much more of a mainstream brand, and we expect that trend to continue over time. So the bulk of our users are middle-income consumers.

I will be very clear that in the current K economy that everybody talks about, the consumers on the high-income side are doing better than the people on the low-income side, but we have a very diversified portfolio of consumers, and this is what helps drive our growth.

This generational transition that I've talked about, you can see how the millennials and Gen Z are driving a growth rate that's double what we're getting out of the boomers and Gen X. And when you look at it from a category perspective, boomers and Gen X are actually declining as they kind of phase their way out of the category, and the category is seeing its strongest growth amongst younger users. But our growth exceeds what the category's growth is amongst those audiences.

The thing that's interesting and it's caused us to make a significant change in our strategy that Nicki will talk more about is these consumers are a little bit different than the consumers that existed 10 years ago. These consumers buy in more channels than one. It used to be the consumer would look for and buy a product in their preferred single location. And what we're seeing now is the consumer who can buy you in more than one way or in more than one place.

So think of that as they can buy you in a grocery store, they can buy you from Amazon. They can buy you from Instacart or they can buy you in a DTC format. The more channels of availability you have, the higher the buy rate is. And that's a core competency for us because we are the only fresh pet food brand that has this broad distribution availability advantage.

As we talk about moving from being a niche brand to being a mainstream brand, you can see that in the adoption that happens early on. 1 out of every 5 dog food buyers today is buying Freshpet, but Freshpet is the second most popular brand amongst the new Gen Z or millennial households. So in other words, if you get a dog and you get a new dog, you're millennial or Gen Z, we're the second choice brand amongst all the pet food brands that they might consider. That gives you a sense for where our future might lie.

That also gives us the confidence that we have a long runway of growth ahead of us. We're still in the early stages of the growth journey that we have. We're -- we think we're in the early majority part of the Rogers Diffusion of Innovation curve, and that tells us that there's a significant number of new households yet to be gained as this category becomes more of a mainstream category.

The thing that's interesting is as we've gone through this journey, when we focus on creating more and better products that meet the unique consumer needs, what you can see is the head start advantage that we have versus everybody else has allowed us to go from the most basic products that we had in 2006 and 2010 to the much more sophisticated and much more aesthetically appealing products, which also command higher price points that we offer today.

So every couple of years, we've launched another new platform that brings along higher and better quality products. The competitors that have come in after us, the products that they've launched today so far are competitive with the things that we launched between 2006 and 2010. We are well beyond that with the products that we have available today, and we intend to continue to lead that or create a greater advantage there.

You've heard us talk quite a bit, those of you who have been around the story about how we continue to invest in our manufacturing capability and expertise to deliver those superior products. And the latest innovation that we've just begun rolling out and commercializing is this new bag technology.

By that, we mean we have a different cooking technology that is available for the products we pack in our bags. And this delivers much simpler recipes, meaning cleaner label. It delivers better shapes, much more food appetizing shapes, brighter, more robust colors, a really rich, smoky aroma. The texture is incredibly good texture and the quality of the products, the visual quality and the consistency of the products is very high.

This new technology has been pioneered by us. We've been working on it for 7 years, and we are now in the process of scaling it up. It produces a meaningful difference, and it does it at a lower cost. So today, we have 3 Freshpet Kitchens, 16 production lines, and we have 3 different product forms.

And when I say 3 product forms, I'm talking about our rolls and then 2 different forms of bags, our mini meat balls that we call roasted meals and then our shredded product that we call Fresh from the Kitchen and products like our home style creations products. That gives us the highest quality, best products that are available in the category. It gives us robust and healthy shelf life, and it gives us the lowest cost. And we think that's the winning formula to be in this category.

That also has enabled to have a depth and breadth of our product lineup that covers a wide range of affordability, starting with more basic products and going to the ultra-premium products. Today, 81% of our product sales can be bought for less than $5 a day to feed your average 30-pound dog. So 41% of our sales is in products that cost less than $3 a day. We have about 40% of our sales in products that are $3 to $5 a day and 19% of our sales that are in $5 plus a day. That's a very low cost way to feed an important member of your family.

So I'm going to leave you with this, and then I'll pass it on to Nicki. But the company that we are building and we expect to deliver in the next several years is one that is built on fresh manufacturing technology and expertise and scale. So think of this as all the investment we've made in both people and equipment and technology, all of those things are defining the strength of our manufacturing footprint.

We have an unmatched fridge network, which is 30,000 stores and 39,000 fridges that are the underpinnings of our omnichannel business. We've built a brand with a very strong and healthy brand equity. We've invested very heavily in advertising, not promotion and discounting. The brand is built on strong advertising and continuous product innovation, the kinds of innovation that meet emerging consumer needs and the needs of the millennials and Gen Zs.

So that unique mix of assets and capabilities, we believe, gives us scale advantage that no competitor can replicate. So with that, I'm going to turn it over to Nicki, and she'll tell you how we're going to win in this $10 billion opportunity. There you go.

Thanks, Billy. So I'm excited to stand here today and talk to you a little bit about what is the next opportunity for our business. As Billy indicated, we've built some very, very strong foundations that we believe are going to be critical to taking us forward to that next evolution.

And for us, it starts with building a much stronger new main meal household franchise. So household penetration is the key KPI that we track today and will continue to track in the future. And you see from the chart the evolution of our business where we've grown our household penetration very fast.

As we've grown household penetration, we've also grown buy rate. That's average buy rate per year. But as we start to move into the next strategic phase of our development, we are very focused on new households coming into the brand that have the appetite to be main meal households. So we will be very closely monitoring penetration plus buy rate as we take the next -- or we plot the next path. We'll be looking much more at the faster growth that we will deliver for these households, and we call these households MVPs, most valuable pet parents.

So who are these MVPs and why are they important to us? Well, Billy talked a little bit about the number of households we have in the brand, 16 million. Well, we also have within the 16 million, 2.5 million of these MVP households. And these MVPs today are 71% of our total company revenue. They're very important for us despite being a smaller part of the audience.

And Billy also outlined that we have an opportunity ahead for the segment to be $10 billion. Well, we're very early on the path of building into this new addressable market. At 2.5 million households, we believe there is an opportunity for 10 million MVPs to be in the category, and that's really who we're going after.

And the importance of these households is they deliver a lot of lifetime value. So even when we look over the last 3 years, and bear in mind, that's not the full lifetime of these pet parents, but we've been tracking now for 3 years, and these MVPs have already delivered us a lifetime spend over the last 3 years of $2,500. So every new household we bring in that delivers this is obviously a very good return on investment for our media dollars.

So who is this MVP? Well, they're definitely across all income segments because a big part that defines an MVP is the attitude that they have and the prioritization that they put in to their pet. Their pet is the most special member of their family, and they would typically exclude other members of their family or prioritize their pet above others. Also, our MVP is very conscious about what they themselves eat and what they choose to buy in their own shopping basket. So they typically over-index on fresh, healthy non-processed food. And they're looking to make sure that their pet eats very much in the same way that they choose to eat and that it's a shared experience that they have.

So our focus is really going to be on attracting both new and retaining MVPs. And the 2 key strategies we'll be following to do this is stretching and expanding the real food leadership that we believe we have today, not just versus kibble and wet, but also versus any new entrants that come into the fresh and frozen space. But we will also be driving much more of that omnichannel access and demand generation model.

And as Billy said, more access equals more buy rate and more spend. So what does expanding our product leadership look like in real food today? Well, we've done a lot of sensory work. And a big part of our sensory work is showing us that our MVP and our consumer that's very interested in buying us is particularly interested in the aromas the textures and the visible difference that the product can bring.

And by visible difference, they're looking at not just how the experience is for them as they're feeding their pet, but they're also looking at what the experience is for their pet as they're eating. And that could mean anything from looking at the after effects from eating, so whether that's skin and coat quality, whether that's health benefits, more activity, better joint movement, everything that sits there in terms of visible difference that as a pet parent, they would notice.

And the latest studies for us show that 93% are seeing a visible difference on feeding Freshpet as the main meal. So this is an area that we're really going to be making sure that we double down on in the future.

So we've had a lot of questions really around the competitive market that we play in. Clearly, we are sitting in the nice sweet spot of the fastest-growing part of the category today. And as we've just outlined, there's $10 billion, we believe, of opportunity in this fresh and frozen segment. Now that's going to attract competition. And we've not been alone in this category now for a number of years, and new entrants will continue, we believe, to come into play.

So what we're showing really on this chart is how do we continue to grow our share overall within the dog food category, but how do we continue to stay one step ahead of all competition coming into play. So the chart on the left-hand side shows versus a large new entrant competitor coming into the Nielsen XAOC database. Since that launch, Freshpet has not only grown its velocity, but actually is 8x bigger than the next largest competitor that's currently in this segment.

On the right-hand side, we also show a different channel, which is a club retailer and how when a club retailer really starts to invest in fresh and really starts to invest in the category, this can raise all boats. So we've been a very large beneficiary of a club retailer's investment that they have decided to put in to this very attractive segment that's emerging really within the dog food category.

So since this club retailer started to invest in the business, they put in extra large fridges, and we were the beneficiary through extra holding capacity on 2 items. We were the beneficiary with an additional products being listed. And over the last 4 weeks, despite more competitive entries coming in, we've been able to grow our velocity by 45%.

So we feel very good about the competitive environment that we're operating in, knowing that it's not a zero-sum game. At the end of the day, there is a lot really to be going after in this segment as structurally more millennials, Gen Z starts to transition into this new way of feeding.

So moving into our plans really to grow our business through having better and stronger omnichannel access. We're sharing in this chart the opportunity, we believe, still for a lot of share growth and gains to be made across different channels.

As Freshpet, we started a large part of our business with grocery retail. This was the place where you did your own fresh food shop for your own family. And this was very akin to us then being able to launch successfully a fresh food -- dog food proposition a number of years ago. So we have a very strong share in this channel of grocery at 23%, and we believe that we've got incredible share gains to be made across mass, club, pet and pure play still to go.

And pure play, if you take a look at that number, has a very high buy rate as well. So if we are able to open up our fair share in a number of channels, it will also come with a very strong buy rate attached to it. And that's very much our focus. We believe we're uniquely positioned to play in all channels rather than one, and this will really unlock that MVP consumer.

So looking a little bit about how we're going to unlock that consumer. It starts really with the foundation that we've spent 2 decades in part building, which is the 39,000 fridges that we have nationally available. And again, I think we really benefited over the last 2 years from a number of retailers also deciding that they want to win online and opening up a fresh grocery network.

Big retail partners are really democratizing fresh delivery. The largest retail partner in the U.S. now has 1/3 of their orders being delivered within 30 minutes. That last mile speed is really going to be a differentiator. And we are able to take advantage of that through our national distribution that is enabling the most convenient delivery to be put through.

So our multiple chiller expansion will get us to a place where we're able to get holding capacity to support online and in-store sales, but it will also give us the broadest possible assortment to be available nationally. So to become a successful omnichannel business, we're very focused on Discovery. So this is also winning in store as well as winning online. And Discovery is really starting to evolve for us.

As we start to get a stronger share of market in a number of retailers, they're looking to us for a category vision and leadership. What does that mean? Well, they're looking really to bring the fresh perimeter into that center aisle and to really try and drive more traffic through. So we're having a number of conversations really about how do we help with that discovery and how do we help bring a halo to the overall category by featuring fresh in a different way.

Now that can be through new island units that sit within seasonal space. It can be through open-air end caps or it can be through multiple chiller expansion. But all of this is really helping us to get to the holding capacity we need and the discovery we need to start to really introduce MVPs to the brand.

So the other part of our focus has been building online capabilities. For the last 18 months, we've successfully delivered over 40% growth in our e-commerce sales each quarter. So that's been a very consistent pathway we're on. And as you can see, we definitely have an undertrade and under share position in this critical area.

Now why is pure-play and direct-to-consumer important? So pure play is online retailers. So in the U.S., that would be an Amazon and then Chewy. And then direct-to-consumer is another important part. Now as we started to learn and test into these spaces, we found a very incremental audience of new buyers.

So as we've expanded our offerings, certainly within Chewy and Amazon, 57% of our audience has been new to brand. And as we started up our direct-to-consumer business over the last year, over 70% is discovering us for the first time. And this comes with a very high annual buy rate. So the buy rate of $492 in pure play compares very well to the $112 that we have, which is an average Freshpet consumer.

And we're already up to in just a year, $1,800 per year of buy rate sitting with our direct-to-consumer audience. So as we continue to expand these channels, which today are a very small part of our business into a larger part of our business, we think there's a big opportunity ahead for us.

So as we move more into building out real food leadership and really differentiating our product proposition versus any of the competition, and we couple that with omnichannel access, it means a change to that media model that's been so critical to our growth in the past. So we will continue to very much be a media-driven growth model business. But what we are doing and have been doing really over the last 6 months or so is really pivoting our media model to be more digital first.

When we were more of a brick-and-mortar business, we were very focused on linear TV, traditional TV model. Now as we start to become much more available across multichannel, we're really switching that media model around, and we will be moving more and more of our money into social, into influencers and into sort of broader engagement digitally to attract those consumers.

We're also making sure that our message is very relevant to deliver that real food leadership. You'll see us feature more and more of our fantastic products, all that beautiful food flowing through the air. And you'll see us continue to double down on the relationship and the specialness of the relationship between pet and pet parent.

And then the final area is as we increasingly start to scale our business and spend more money on media, it's really important that we have the right tech stack and the right measurement tools to be able to deliver the strongest possible return on investment. So really, that's been a big focus for us, and we will continue to build out these areas.

So in a snapshot, this is a little bit of the explanation of how we are going to be delivering our omni-demand driving experiences. It starts with a large bulk of our money continuing to be in the form of streaming or linear TV, which is the first part where you can drive strong reach and awareness of the brand.

As Billy said, we still have a massive total addressable market of 36 million. This is the critical part that drives reach and frequency to that audience. As we start, however, to get more and more into the specific needs of MVPs, that's we're building consideration with influencers making sure that we have some presence with that engagement and there's more and more questions coming from vets and interest to understand more about fresh food and then ensuring that we show up well from a search and display from an interactive shopping experience.

So with that, I'm going to leave you with a latest clip of our advertising so that you can get a feel for how this is coming to life.

[Presentation]

With that, I'll turn it over to John.

Thank you, Nikki. So let's start with 2026 real quickly. So in May, we let everyone know we're off to a very strong start to the year, and that positioned us to increase our range for net sales growth to 8% to 11% and maintain our adjusted EBITDA guidance despite increased fuel costs across our distribution network.

So far this year, our Nielsen consumption growth remains strong through late May and a higher cost fuel environment remains. However, we are reiterating our 2026 guidance today, and we remain confident in our ability to achieve it. We also have longer-term targets out there for 2027, which were first released in 2023 and have been refined over the last few years.

In February, we indicated that we expected to exceed our prior target for adjusted gross margin of 48%. And we expect -- we're very proud of the improvement in gross margin we've had over the last several years, and we expect further gains to come in '26 and '27 through improvements in our yield, throughput and leveraging of fixed costs from revenue growth.

Our new technology that Billy described also has the ability to meaningfully improve our margin on some of our bagged products, which will also contribute to gross margin improvement in the future. Those gross margin improvements, in addition to leveraging of SG&A costs, lead us to be in a range of adjusted EBITDA of 20% to 22% in 2027. Where we land in that range is somewhat dependent on revenue growth. All else equal, if we grow in the teens, we'd expect to be towards the higher end of the range. And if we were to grow in the high single digits, we'd expect to be towards the lower end of the range.

In terms of capital allocation, we are very clear-eyed, as I think you can see in our capital allocation framework here at Freshpet. With the tremendous opportunity that both Nicki and Billy talked about to grow our share in this large category, investing internally in our business to drive revenue generation and revenue growth is far and away our #1 priority.

We make significant investments in media. We expect $150 million approximate investment in media in 2026 to drive awareness and conversion. We also invest in portfolio innovation and expansion, new recipes, new items to continue to grow our consumer appeal. And we invest in go-to-market -- new go-to-market capabilities to ensure that we can enhance the way that we reach, win and retain loyal MVPs in our Freshpet franchise.

We also invest significant sums in capital expenditures. First, to drive capacity expansion as we grow, also to grow our refrigerator network, our chiller network to continue to grow distribution as our presence and our assortment grow. We also invest CapEx in product technology innovation, and that leads to the outcomes that you've seen today in terms of the improvement in the product that we offer.

And we also invest in manufacturing productivity improvements to continue to drive down our cost to produce to position us to take as much share as possible in this category in the future. And to the extent we have been able to fund through internally generated cash, all of those high-return investment opportunities that I've described, we may look to return any excess capital to shareholders.

Now in May, we announced our first ever share repurchase authorization for $150 million, and we were in a position to do this in part because we recently started generating positive free cash flow. And we received nearly $100 million in cash proceeds from the sale of a business called Ollie in which we held a minority stake.

So we have come from a very strong financial position at this point in time. We're very happy to announce that authorization. And through late May, we have already purchased just under $40 million of our shares.

And in closing, we remain very excited about the generational transition to fresh pet food, which we believe will lead category growth for many years here. And we feel very strongly positioned through the investment in our own internal manufacturing networking capabilities and our large network of chillers, which position us to win with our MVPs and loyal fresh customers in the future. Thank you.

Okay. Great. Any closing remarks? No. No, you can...

No, you did a nice job.

So we have about 7 minutes or so left. If there are questions in the audience, I don't know if we have a mic, but you feel free to raise your hand.

Maybe we can just pick up a little bit just on the state of the broader category and demand conditions. So we've had some mixed signals from different players in terms of the resilience or lack thereof in the market. So what are you seeing in the overall category juxtaposed against the run rate of your own business? And how are you thinking about that in the context of the full year?

I'll take a shot at it, and I have Mickey add in. But first of all, you have to remember about on our business. Our business is one where the existing user base is very, very loyal. And so the reality is that when we talk about anything that's happening in the macro or anything that's happening about adoptions, it's about does it impact your ability to add new users to the franchise, but it's not like we're going to lose or trade down the existing users. So we start with a very strong loyal franchise.

The second part of the category story here is, remember, we're in a very large category, and we have a very small share today, and we're leading this generational transition. So while there may be some ups and downs as the economy goes along where it makes it easier or a little bit harder to bring in new users, the reality is the upside is so big over time, it will dwarf any of those little bits of ups and downs.

Where are we right now? Right now, we're feeling very good. I mean anybody who looks at the Nielsen sees our data and says that we're running in a quite strong place, and we feel very good about that. We're also very cautious like everybody else is about what's going on in the broader world. But so far, in the data we have, we're doing very well, and we feel very good about it. I don't know, is there anything I missed that you want to hit on?

Just the millennial and Gen Z. So the part that's weathering and holding up well within the category is millennial and Gen Z, and that's the part that we are also disproportionately winning in.

Yes. Okay. Great. I wanted to pick up on the journey from 2.5 million to 10 million MVPs. To what extent is that incremental recruitment? Is it recruiting 7.5 million new MVPs? Or is there a graduation of existing non-MVP users into the MVP universe?

Yes, it's a great question, Steve. So most of it is actually new MVPs, and that's really where our focus is. We do see a little bit of trade-up over time. If you start maybe mixed feeding and you realize that your dog is loving it and you're giving more and more, we see a little bit of that, but we don't naturally -- we let that naturally happen. We don't put strategies in place to try and drive that.

Really, our focus is to gain those new MVPs that are existing within the category or are new to the category where they've got their dog for the first time and they have the attitude to come in and become a main meal feeder.

Okay. I don't know if there are any questions out there. It's hard to see through this blinding light. Can we focus a little bit on the club channel because it's been a focus. As you say, there's been a lot of investment, mostly by Costco in terms of new fridges, larger fridges as well as the competitive launch.

As you think about those 2 piece parts as we move through the balance of the year, what is the runway for future fridge expansion relative to future competitive push?

I take that. Okay.

So we have -- we're still very underpenetrated, I would say, in terms of what could be a potential share of market within the club channel. We're obviously -- we're in the 2 largest club retailers. We're actually in all 3 club retailers in the U.S. But if I take the 2 largest ones, the very largest one, we -- clearly, there is still a big opportunity for expansion. We've just increased to 3 SKUs in there. The third SKU is not yet in full distribution. So that remains an opportunity ahead.

And also that club retailer is very underpenetrated in pet overall. So that club retailer has a very large share within grocery, a very small share within pet food. So it represents for them a big strategic focus. And they're clearly trying to drive growth overall through fresh from the investment that they've made. So we definitely still see runway within the largest club retailer.

And then the second largest club retailer, we haven't even annualized our sales there. So we are in the process of selling 2 SKUs in that second largest club retailer. We have agreement now to move forward with a third SKU in test. And clearly, we've only got one chiller in there today, and there's clearly scope and opportunity for us to expand to multiples in the future. So personally, I still see a large runway ahead for our club business.

Okay. I guess one of the things that the moat around your business has often been is the chillers that you own and you put in place. In the club channel, where there is -- especially in Costco more of an open fridge, does that change the calculus at all for you in terms of your competitive position?

Yes. I mean, obviously, once somebody else puts the fridge in, they have much more control of the space that goes there. But I think what's misunderstood about what's happening there is that every one of our customers is trying to win in the category. And their definition of winning isn't taking business out of us, it's growing their total category.

And so in the move that they've chosen to make, they've increased the amount of space that we've got, they increased the visibility that we've gotten. And so in the end, while we would prefer to maintain and manage the fridges on our own because we do a really good job of that. In this case, we got to win out of it.

Do I think other retailers are going to want to do the same thing? Most other retailers don't have the resources and capability that, that retailer does. And so I'd say it's unlikely. At the end of the day, we like owning the fridges for 2 reasons. One is it's the branding that we get in store. And the second is we do a really good job managing and servicing those fridges. And I think people often miss the fact that those fridges, if a fridge went down and it wasn't performing, one, you're not selling anything. But $1,000 worth of product goes bad. It's different than a can of coke getting warm. It's a very different dynamic.

And so for us, it's really important to do the maintenance and management of that fridge network, and we're really, really good at it. And so to us, we -- that is one of the most important things that we've built and capabilities we built, and we really don't want to take any risk in that part of the network. If the retailer can take it on as they have done with this club retailer, that's great, but we want to make sure there's a high quality and high integrity to the product.

Okay. Time for one more question. Another thing you've been really good at is improving the efficiency of the manufacturing process. And John, you alluded to the new bag technology at what point -- and it sounds like you're getting increasingly incrementally confident in that. At what point do you think you can credibly quantify the benefits of that specific technological leap?

Yes. I mean, look, it is still early on, right? And these processes take a while to scale up and make sure you've got it run over several cycles and you're measuring everything and anything that could go wrong, you've seen it happen, right? So there's always risky changes. But we're still early on. I'd say, in another few months, we might be able to more specifically quantify that, but we're learning every day still on this new process.

Okay. Right as we hit to -- we're very well done. Okay. Thank you, guys.

Thank you very much.

Thank you all for joining us.

Thank you.

Greetings, and welcome to the Freshpet First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Rachel Ulsh, Vice President, Investor Relations and Corporate Communications. Thank you. You may begin.

Good morning, and welcome to Freshpet's First Quarter 2026 Earnings Call and Webcast. On today's call are Billy Cyr, Chief Executive Officer; and John O'Connor, Chief Financial Officer. Nicki Baty, 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 strategies to reaccelerate growth, progress and opportunities and capital efficiencies, timing and impact of new technology, capital spending, adequacy of capacity, expectations to be free cash flow positive, 2026 guidance and 2027 targets.

They involve risks and uncertainties that could cause actual results to differ materially from any forward-looking statements made today, including those associated with these statements and those discussed in our earnings press release and our most recent filings with the SEC, including our 2025 annual report on Form 10-K, which are all available on our website.

Please note that on today's call, management will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Please refer to today's press release for how management defines such non-GAAP measures, why management believes such non-GAAP measures are useful, a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and limitations associated with such non-GAAP measures.

Finally, the company has produced a presentation that contains many of the key metrics that will be discussed on this call. That presentation can be found on the company's investor website. Management's commentary will not specifically walk through the presentation on the call, rather, it is a summary of the results and guidance they will discuss today.

With that, I'd like to turn the call over to Billy Cyr, Chief Executive Officer.

Thank you, Rachel, and good morning, everyone. The message I would like you to take away from today's call is that we are off to a strong start to the year and are well positioned to continue to capture a very large share of the growing market for fresh pet food.

This strong start and our success are built on manufacturing scale and expertise that deliver a broad lineup of exceptional products, our extensive fridge network across a wide array of channels that increasingly serves our rapidly growing e-commerce business and our first-mover advantage that has enabled us to build a large and diverse consumer franchise.

We've built a business around a wide range of product forms, sizes, prices and channels and with a level of quality that no single competitor can match. It is those strengths that position us to lead the transformation of the pet food category from kibble and can to fresh.

Our first quarter net sales growth was ahead of our guidance range for the year, and we believe demonstrates our ability to successfully adapt our growth plans to the dynamic environment in which we are operating. Since last reporting earnings in February, however, the macro environment has been increasingly volatile.

So while we are encouraged by the trends we see, we also want to remain prudent. Year-to-date, the consumer's remained remarkably resilient, but we are keeping a watchful eye on potential shifts in consumer buying habits, particularly as it relates to their willingness to trade up and are balancing these risks against the strength we have seen to start the year.

As such, we are modestly increasing our sales guidance for 2026. As we look at the business holistically, the fundamentals remain firmly intact. We compete in the large category. We are making consistent share gains and are improving margins and new technologies are increasing our returns on capital. Together, this creates a compelling backdrop and a long runway for value creation.

Against that backdrop, there are 3 core reasons we remain confident in our long-term growth opportunity. First, pet food is a very attractive category, with long-term tailwinds like the humanization of pets, treating our pets as valuable family members and younger generations are increasingly interested in feeding high-quality food to every member of their family, including their pets.

The phenomenon of feeding your children and pets better food is a generational shift, and that suggests we have a very long runway for growth. As a result, our total addressable market has grown to 36 million households versus the 16.1 million we have today, and we expect both the addressable market and our household penetration to keep growing.

Second, consumers are increasingly choosing fresh and frozen over dry and canned food. So we have the winning proposition in a winning category. We've increased our market share to 4.2% in U.S. dog food and treats according to Nielsen omnichannel data and expect to capture a large portion of the future growth of the fresh/frozen category as it continues to become more mainstream.

Third, we are focused on improving returns on capital investments as we progress from being a category disruptor to a high-growth, profitable scaled business. Our operational effectiveness programs plus the new technologies we are developing are designed to improve returns.

And to continue to drive capital efficiency, we intend to: one, get more out of existing lines, primarily through OEE improvements; two, get more out of existing sites, whether that be finding ways to optimize our network or add more lines to our existing campuses; and three, develop and implement new technologies.

We are quite encouraged by the progress we are making on each piece of that plan. We have discussed over the last few quarters how we are shifting our commercial model by changing the media mix and message, making tactical pricing changes and evolving into an omnichannel distribution model. Our goal is to address the needs of a broad consumer base, and we want to give them the Freshpet products they want, how they want them, when they want them and where they want them.

We have built significant organization capability to accomplish that. And in conjunction with our network of more than 39,000 fridges that service fulfillment centers, we believe that Freshpet is uniquely positioned to serve the widest range of consumers seeking Freshpet food and the most diverse ways in which they buy. As we make these changes, there will be learnings along the way, but the key will be how we pivot to capture that opportunity.

As you know, our marketing model is based on strong advertising driving household growth and more households helps drive further distribution growth. Our recent shift in both our advertising message and our media mix to support our omnichannel business appears to be working, and we are seeing some early signs of increasing media leverage. Our fall campaigns continue to resonate with consumers, and we just launched a new campaign this week called "Kitchen Conversations."

Our new tagline of "Better Food for your better half" deepens our connection and relationship with our core audience and our ads showcase the difference that fresh products made. From a household penetration and buy rate standpoint, we continue to see household penetration growth in excess of all other super premium dog food brands, including DTC brands, and MVP growth continues to outpace total households.

On a 12-month basis, as of March 29, 2026, household penetration was 16.1 million households, up 8% year-over-year, and total buy rate was approximately $114, up 6% year-over-year. MVPs, our super heavy and ultra heavy users are continuing to grow faster than overall households and now total 2.5 million households, up 13% year-over-year and have an average buy rate of $513.

Note that Numerator recently completed its annual panel reset in April. So there have been some revisions to the absolute numbers in the historical data, but the overall trends remain the same. Growth continues to be strongest amongst higher income households and millennials amongst club and online shoppers and amongst our heaviest users, Ultra buyers. We do not see any signs of trade down amongst our users.

From a retail standpoint, our objective is to improve accessibility and visibility for the omnichannel consumer. Our products are now in 30,435 stores and 25% of those stores in the U.S. and Canada have multiple fridges. You can see on the updated chart on Slide 13 of our investor presentation that we are adding fridges faster than new stores, and we expect that trend to continue.

We will still add new stores such as Tractor Supply's recently announced expansion to up to 700 stores by year-end, but have more opportunity to add more fridges in a variety of formats and configurations in the highest velocity stores we are already in so that we can serve more omnichannel consumers.

Our large retail footprint acts as micro fulfillment centers for omnichannel consumers and is a key piece of fulfilling digital orders. In the first quarter, digital orders grew 43% and accounted for 16.1% of our total business, up from 14.6% in the fourth quarter and 81% of those sales volume went through our extensive fridge network.

According to Nielsen omnichannel data, Freshpet was the fastest-growing brand over the 13 weeks ending March 28, 2026, demonstrating the power of our marketing model and the broad availability of Freshpet design to meet a wide range of consumers' buying preferences. Our scale advantages extend to our manufacturing as well. Because we own our manufacturing, we have the incentive and the ability to advance the technology for making Freshpet food.

We believe our new breakthrough technology enables an even stronger product proposition with both a better consumer experience and better unit economics. As we mentioned last quarter, the first bag line in Bethlehem, utilizing the new technology started up in January. That line continues to perform well, and our first lite version of the technology was successfully installed on another bag line in Bethlehem last month.

We are very encouraged by the potential to significantly improve quality, throughput and yield, but we want to run each of these lines for several months before we quantify the magnitude of the benefits. However, the results to date supported our decision to convert a bag line in Ennis to the lite version of the technology as well. That conversion is expected to be completed by late June or early July and will allow us to convert a larger portion of our existing product lineup to the new technology this year.

By the end of the year, we expect to have about 35% of our bag capacity using some version of the new technology. The capital for this expansion is modest and does not change our CapEx guidance for the year. In the coming months, we will decide whether to convert an additional bag line, i.e., a third line converted to the lite version of the new technology and also whether we will pull forward the installation of a completely new line using the full version of the technology.

That incremental line using the full version of the new technology would add significant capacity to our network sooner than we might need it, and that will factor in our decision-making. If we do move forward with either project, any capital spending for those projects would be above our original $150 million capital budget.

We believe the development of this technology demonstrates our technical mastery as a self-manufactured leader in fresh pet food. Maintaining control of our manufacturing also opens up opportunities to further advance the technology.

Now I'll provide some highlights from the first quarter. First quarter net sales were $297.6 million, up 13.1% year-over-year, primarily driven by volume. Recall in Q1 of fiscal year '25, we had distributor disruption in the pet specialty channel. Lapping that disruption added 50 to 100 basis points to our growth rate in Q1 of this year. Adjusted gross margin in the first quarter was 46.9% compared to 45.7% in the prior year period. Adjusted EBITDA in the first quarter was $37.9 million, up $2.4 million year-over-year.

Now turning to our updated 2026 guidance. We are raising our net sales guidance range from 7% to 10% growth to 8% to 11% growth year-over-year and reiterating our adjusted EBITDA guidance of $205 million to $215 million. We are encouraged by recent sales trends and believe raising net sales guidance is prudent based on year-to-date trends.

However, we are balancing the dynamic environment we are operating in. So we are monitoring our costs closely, particularly on logistics, packaging and any additional ripple effects on input costs.

We continue to expect capital expenditures to be approximately $150 million this year, absent any incremental investments, and we expect to be free cash flow positive in 2026. John will walk through more details of our 2026 guidance in a few minutes.

With that, I'll turn it over to John to walk through more details of our financial results.

Thank you, Billy, and good morning, everyone. The first quarter results demonstrated our ability to deliver category-leading growth despite a challenged consumer environment.

Net sales in the quarter were $297.6 million, up 13.1% year-over-year. Volume contributed 14.6% growth, partially offset by unfavorable price/mix of 1.5%, which was primarily driven by gross to net items, which include an unfavorable prior year comp and current year items we do not expect to recur in the rest of the year.

We also saw the effect of targeted price reductions, some of which began last year, and we will begin to lap in Q4. We had broad-based consumption growth across channels. For Nielsen-measured dollars, we saw 13.5% growth in total U.S. Pet Retail Plus with Costco. First quarter adjusted gross margin was 46.9% compared to 45.7% in the prior year period. The 120 basis point increase was driven by improved leverage on planned expenses and lower input costs.

First quarter adjusted SG&A was 34.2% of net sales compared to 32.2% in the prior year period. This increase was primarily due to higher variable compensation in the quarter, increased media as a percentage of sales due to timing and increases in our logistics costs. Media spending was 15.8% of net sales in the quarter, up from 15.1% in the prior year period, mainly due to a planned shift in cadence of spend that brought more spending into the first quarter.

Logistics costs were 6.3% of net sales in the quarter compared to 5.8% a year ago. The increase was partly due to storm-related costs, including driver shortages as well as recent fuel cost increases, which we began to experience in March. First quarter net income was $48.5 million compared to a net loss of $12.7 million in the prior year period. The increase in net income was primarily due to the sale of our equity investment in Ollie, contributions from higher sales and lower nonrecurring SG&A charges, partially offset by the increase in income tax expense related to the gain on the Ollie sale.

First quarter adjusted EBITDA was $37.9 million compared to $35.5 million a year ago, an increase of approximately 7%. This growth was primarily driven by higher sales and gross profit, partially offset by higher adjusted SG&A expenses. Adjusted EBITDA margin was 12.7% in the first quarter compared to 13.5% in the prior year period. This decrease was primarily driven by the higher G&A, cadence of media investments and higher logistics costs in the quarter.

Operating cash flow in the quarter was $40.3 million, while capital spending was $27.6 million. We ended the quarter with cash on hand of $381.4 million, including $95.5 million in proceeds from the sale of Ollie and generated free cash flow of $12.7 million.

Now turning to guidance for 2026. As Billy mentioned earlier, we now expect net sales growth of 8% to 11% compared to 7% to 10% previously. We are pleased with our results for the quarter and are optimistic about growth opportunities for the year. However, we continue to balance the recent acceleration in our net sales growth against the volatile macro environment and its ability to affect the consumer.

Going back to last year, we have taken steps to position ourselves to continue expanding the fresh dog food category amid a slower consumer backdrop with improved entry price point offerings, and we'll continue to make balanced investments in both improved affordability for the consumer and profitability for Freshpet.

As a reminder, -- we have easier comps through May and then a tougher comp in Q3 from the significant expansion in a large club customer in the year ago, including pipeline fill. We continue to expect to grow market share as we benefit from a generational shift from dry and wet food to fresh. We continue to expect adjusted EBITDA in the range of $205 million to $215 million, an increase of 5% to 10% year-over-year.

Adjusted EBITDA dollars and margin should improve sequentially for the remainder of the year. Media as a percent of sales for the year is still expected to be roughly in line with 2025 at approximately 12.5% of net sales and will be front half weighted in dollars. We now expect elevated logistics costs for the remainder of the year given increased fuel costs.

As I said on the last earnings call, 2026 is not necessarily indicative of the underlying operating leverage in our model. We reset variable compensation this year and have made significant investments in omnichannel capabilities. Beyond 2026, we expect adjusted EBITDA growth to exceed net sales growth with an expectation of continued gross margin expansion and a more consistent variable compensation expense.

We anticipate adjusted gross margin to improve by approximately 50 to 100 basis points at the midpoint of our net sales range, primarily driven by plant leverage, partially offset by mix. Should our current revenue trends continue, it is possible we will need to add staffing in our manufacturing operations, although this is not currently contemplated in our guidance.

Within our guidance range for net sales, we expect to drive OEE improvements to deliver the volume growth embedded in the range. From an inflation standpoint, we are carefully watching for any changes. To address any higher input costs, we are evaluating opportunities to offset through product formulations and targeted pricing actions. Capital expenditures are projected to be approximately $150 million in 2026, excluding any significant incremental investments in fridge islands or expediting the rollout of our new technology.

These are 2 distinct investment decisions. Conversations with retailers about fridge island expansion are ongoing, and we expect to make a decision on whether to accelerate the new manufacturing technology in the middle of the year. While it's still early and we need to run the new lines for longer to demonstrate consistent efficiency gains, we are encouraged by the initial results.

Regarding our fiscal year 2027 targets, we are confident in our ability to deliver net sales growth well in excess of the U.S. dog food category growth, achieve at least 48% adjusted gross margin and deliver an adjusted EBITDA margin in the range of 20% to 22%. And we believe we have a variety of paths to achieve our 2027 margin targets.

Since joining in February, a key focus of mine has been assessing our capital allocation strategy given the strong and evolving nature of our financial position. Freshpet operates in a very attractive and growing category and has built strong competitive advantages that support durable market share gains and revenue growth. With this backdrop, investing internally in the business is far and away our highest priority for capital deployment.

These investments include expanding manufacturing capacity in a fast-growing space where we lead, developing novel production methods that enhance product quality, reduce cost to produce and improve returns on capital, new recipes that broaden our offerings and enhance our appeal to pet owners and enhancements to our commercial model to expand distribution, access new channels and reach consumers in a more targeted way.

As we pursue these investments, we desire to retain a high degree of financial flexibility to invest in new technologies, capabilities or accelerate our growth. To the extent we are able to cover all of these investment opportunities through internal cash generation, we would then evaluate the opportunity to improve our capital efficiency by returning cash to shareholders in a manner that does not compromise our ability to fund our long-term growth drivers.

To summarize, we are pleased with our first quarter results, but remain conscious of developments in the macro environment since we initially set our guidance for 2026. In light of this, we remain cautiously optimistic with our outlook for the remainder of the year. I firmly believe we have a long runway for growth, and we'll continue to build on our competitive advantages as the scaled leader in the fresh/frozen pet food category.

That concludes our overview. We will now be glad to answer your questions. As a reminder, we ask that you please focus your questions on the quarter, guidance and the company's operations. Operator?

[Operator Instructions] Our first question comes from the line of Peter Benedict with Baird.

First, just maybe talk a little bit more about the competitive environment and how your performance is trending in stores where you've seen some new competition enter the market and maybe how that's influencing your plans for innovation or new product rollout? That's my first question.

Yes. Yes, so as we look at the competition, obviously, we're seeing a wide range of people trying to compete with us in a variety of different channels. And I'll let others speak for their own performance. But what I can tell you is you should look at us and think about us as having a very broad lineup of products in a wide range of channels at a variety of price points -- and that breadth of our portfolio and the distribution we have has insulated us very, very well from all these new competitive entrants because the vast majority of these folks are competing in a very narrow product lineup and a very limited number of distribution points or different distribution channels.

And so as you look at our results, we're able to perform quite well because of the breadth and depth of our portfolio regardless of who these competitors are, what channels they might be in.

Okay. And then I guess one follow-up. You mentioned in the remarks some signs of media leverage on some of the new programs. Maybe you could expand on that. What exactly are you seeing on that front?

I'll let Nicki take that one.

So as you know, we very much focus on advertising as being a big strategic choice for our investment. We don't discount, so we don't have any investment going through in promotions. We've made some really big shifts with media, especially when you look at the results over the last 13 weeks where we've seen an acceleration versus the last 26. We've changed our messaging. So we put the new creative on air, and we've seen our CAC coming down, which has been great news.

We've seen improvements in our ROAS. So return on advertised spend has really gone up across a number of areas. And what we're particularly encouraged about is we're getting higher growth coming through from millennials and also MVPs. So we're seeing some really encouraging signs coming through from media. We elevated media spend in Q1 as we'd always intended to do, and we feel really good about the results that we're seeing as we now go through the year.

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

So maybe just first on taking the top line guidance of this year. Billy, it sounded like in your prepared remarks that that was informed by the better-than-expected performance in 1Q. So that's backwards-looking, looking forward, do we have any greater visibility on whether that's distribution or competitive dynamics as far as what you're going to see in fridges that you share or other fridge installations outside of your own that leaves you comfortable with the balance of the year relative to when you set your initial guidance? And then maybe within that, do we expect consumption and shipments to largely align over the balance of the year?

Yes. Brian, first of all, the decision to raise the guidance and what's embedded in the guidance is obviously informed not by just what we saw, as you indicated, but what we see going forward. As you know, we look at a wide range of factors. We look at everything from the Nielsen measured consumption to what we know our customers' plans are, what our read is on the broader macro environment.

And what I can tell you is that so far to date, we feel very good that the brand is performing well. We see that in Nielsen, we see that in the household panel data. To the extent that there are competitors out there, it's obviously not having any significant impact on the numbers that are showing up in Nielsen or showing up in our household panel data because we're still leading growth in the category in both those areas. So our guidance going forward on growth has been informed by that. We are, as you heard in the comments, a little bit cautious about the macro environment.

We look at everything from consumer sentiment to housing starts to unemployment to disposal or discretionary income. And as I think you've heard from a lot of other folks, we're all kind of watching and waiting to see where that might go. But so far, everything in our business looks like it's heading in the right direction, and that's what's informed our guidance.

And then maybe on gross margin, as we just think about the year going forward and maybe tied back to the top line here. I believe that initially no plans to add staffing in 2026. What level -- and I think there was some reference to potentially needing to add folks later in the year in the prepared remarks. So maybe just trying to understand at what level of volume growth do you feel like you would then have to bring on more staffing? Just trying to understand the leverage potential there on continued volume strength in excess of what you initially anticipated.

Brian, I forgot to answer the second part of your original question, and then I'll hand it to John to answer the margin question. But your question about shipment growth versus consumption growth, the only variable that's going to be different between the 2 is, as we've said before, we will lap a very significant launch into Sam's last year in Q3.

And so you would expect that there were more shipments there necessarily than there were consumption in Q3 of last year. So this year, you'd expect to get a little bit of a reversal of that. Outside of that, our business is very predictable and reliable, so consumption growth and the shipment growth should be fairly closely in line with each other. Let me turn it over to John to talk about the margin.

Sure. Thanks, Billy. Yes. So Brian, within the net sales guidance range that we gave, we believe we can deliver that without having to add staff. So what starts driving it higher is if we start meaningfully outperforming our guidance range as we go through the year and getting above the top end of the range, maybe we get a better consumer environment.

Those are the levels where we'd start looking at the staff needs to come on at some point in 2026. There is a point as we continue to grow, where we'll need staff for -- to deliver volumes in 2027. But really, the question is if and when in 2026 based on the revenue trends that we're seeing throughout the year, and it would need to be above the net sales guidance range that we gave today.

Our next question comes from the line of Rupesh Parikh with Oppenheimer & Company.

Just going back to the consumption acceleration you saw in Q1. Just curious what you believe are some of the key factors that drove that improvement? And then as you look at the underlying pet category just overall, what you guys are seeing there?

I'll take the first part, and Nicki will take the second part. But as you saw in the data that we published, we saw a resumption in household penetration growth and the buy rate growth. Buy rate has been a bigger contributor to our growth of late than it has been historically, and that's in part due to our focus on the MVPs.

But it's really -- it's been strong fundamentals, the things that we've been building this business on for a long time, which is great advertising is engaging the right consumers. It's increasing household penetration, and it's increasing household penetration amongst those consumers who are -- have the propensity to buy the highest amount of product.

And so that's driving the buy rate. So we feel very good that it's really fundamentally driven. It's not any unique demographic or customer or channel. It's broad-based across the board.

So I'll turn to Nicki to talk about the category.

Great. Thanks, Billy. So I think the category is still a little bit pressured, especially when we look at dog food. It's broadly flat in terms of household penetration. At the moment, we're not really seeing a significant turn either way. We are seeing more going through online than in-store. So that's still really a faster-growing part of the category. And there's definitely a trend for more going through to what I call affordable retailers.

So whether that's club or also the likes of some of the mass grocers are doing particularly well in that area. Now generationally, we are seeing boomers coming out of the category. We're seeing the fastest-growing part being millennials and Gen Z. And then within income groups, we are seeing sort of lower income, particularly pressurized as well.

As Billy said, I think why we're feeling pretty good about where our results are coming in at is our growth has been very broad-based. We're growing in every income group, and we're growing with every demographic. But we're particularly winning, especially with millennials and Gen Z, and we're growing at a fast rate with both middle income and higher income as well.

Our next question comes from the line of Robert Moskow with TD Cowen.

A couple of questions. John, I think you said that you still see a path to the 20% to 22% EBITDA margin target for 2027. But you've also talked about these extra staffing costs that you'll have to take on to handle extra volume and I guess, also cost for the new tech. So I just want to make sure that, that's still the case that you can take on those extra costs and still get to the 20% kind of the low end of that range because it does require a lot of leverage in '27.

Yes. Thanks, Rob. So yes, I think one of the points to also make, right, is that in the past, when we've made some staffing increases, we were a much smaller company, right? And we're much larger today. So each incremental line staffing that we bring in is much less consequential to our overall gross margin, right? And so we do believe, right, that we can bring on additional staffing, deliver volume growth in 2027 and get leverage on that staffing.

In terms of the new technology, the costs that it would take to bring on would be capital costs. And those would be depreciated, which for the margin targets that we're talking about is adjusted gross margin, which excludes depreciation, right? So there would be overall cash costs and depreciation that would come with that, but the 20% to 22% is excluding the depreciation.

We would, of course, have to staff those lines. But again, we'd only be doing that if we saw the need to deliver more volume into a strong demand backdrop. So it's a good question, Rob, but we do believe that we can get the leverage on the additional expenses or costs required to deliver additional volume in 2027.

Okay. Can I ask a follow-up? First quarter, you have a big club customer that expanded the size of their fridges. And I think you got the full benefit of that expansion. But I believe in second quarter, they'll introduce a private label version into those fridges. Is any of the beat in first quarter from that dynamic? And would you expect still growth with that customer, but some deceleration in 2Q?

Nicki will take that one.

Thanks, Rob. So look, our club business is performing well, and it's more than one customer, as you can see. We obviously made a big expansion last year into a second club customer, too. The one thing I'd say with our club business is we have more than one item with our club retailers. We have a handful of items that appeal to -- with different formats that appeal to different consumers that are sitting in there.

With one particular club customer, we did actually expand our portfolio. We brought in an additional item, which you may have seen, which was our beef roll. And that's delivered a lot of incremental sales that we really saw coming through in Q1, and we anticipate as that distribution has continued to expand, we will continue through the rest of the year.

And also another club customer, we've clearly seen the expansion of a much larger fridge network. That's definitely raised the opportunity for more items to have more holding capacity in that club retailer. Clearly, we've seen the benefit being the largest player within that. But we haven't seen any meaningful impact really coming through as yet or significant impact coming through from any competition that's listed.

We believe that's due to the increased visibility and the holding capacity that we can continue to bring through. So for us, we're very focused on making sure that we have a breadth of portfolio at the right price points and that we are accessing across all club channels where the shopper is looking to go. And we believe that, that will support sustainable growth for the future.

Our next question comes from the line of Tom Palmer with JPMorgan.

In the prepared remarks, you noted the possibility of expediting the rollout of the new manufacturing technology and had kind of a comment that it could result in capacity outpacing sales. Could you maybe discuss the decision-making process here? Are the potential margin benefits, for instance, so significant that it might justify kind of having this excess capacity or maybe there's something else?

Yes, Tom. It's -- there's a variety of factors that are going to be involved in that decision. In part, as you indicated, is if you bring on extra capacity, you will have, in essence, incremental costs. But I'd also make sure you think about the technology development and the validation process here. The longer we run the technology, the more we learn, the more certain we can be that the next line that we put in is going to be the best possible line, and it's going to have all the right unit operations in it.

So to your question of what are the factors that we're looking at, it's obviously going to start with, is it delivering on the yield throughput and quality advantages that we think it will. And so far, we're very encouraged by what we see. The next question will be, are those gains big enough to justify pulling forward capacity just on that basis alone because we do believe there's also another level of benefit, which will come from higher return on invested capital where these new lines, if they have higher throughput, will put us in a position where the cost to add incremental capacity is lower than what it has been historically.

And so we'll put that into the equation as well. But I would also say that one of the big factors is going to be how confident are we that we know exactly what this line needs to look like because every single line we've installed, we have found that there's something we can improve on the next line. And the longer we run it, the more we'll learn about what that will be so we get it right. So I would just put it under the heading of there's a variety of factors that we're going to consider, but all of them seem to be very positive. It's just when do you want to make that choice.

Understood. I also wanted to maybe ask on the cost environment and how you kind of see that evolving as this year plays out. For the first quarter, there was the call out for logistics. I think it was both weather challenges and then later in the quarter, higher fuel. As we think about the remainder of the year, should we look at the level of kind of logistics margin as indicative of what the rest of the year will look like because you had that weather piece? And then are there other inflationary call-outs we should be thinking about that might either flow through kind of that SG&A side or COGS?

Let me take a shot at that, and I'll ask Nicki or John if they have anything to add to it. But you properly characterized the first quarter. There were 2 things that impacted logistics. One of them was the weather events that occurred in January and early February. And the second was the fuel cost that happened in basically beginning in March.

The fuel cost, at least at this point, looks like it's going to continue on, and it will have an impact, and that's going to be embedded in our financials. I don't expect to see another one of the weather events, although the weather event created a driver shortage event. And so obviously, you're vulnerable to driver shortages.

But the fuel cost is embedded and it's embedded in our thought process for the guidance we've given going forward. If there's a material change in the cost of fuel, that obviously will have an impact, whether it's positive or negative on how we think about the balance of the year. On the bulk of our cost structure, we are not completely locked, but we're largely locked on the bulk of our cost structure for the year.

And so if there is going to be an impact from sort of the trickle effect of higher energy costs on our ingredient suppliers or the inbound transportation and whatnot, that will flow through, but it could flow through later in the year. It may not be as significant. We just have to see where that's going to flow. I don't know, Nicki or John have any thoughts to add on that, John?

Yes. Tom, I think you appropriately characterized it, right? When you look at the total logistics cost as a percent of sales in the first quarter, that's about the level we're expecting it to continue at for the rest of the year, but based on fuel costs, right, for the remainder of the year, as Billy said.

Our next question comes from the line of Steve Powers with Deutsche Bank.

I actually wanted to ask around the economics of the omnichannel strategy and maybe focus in on e-commerce, just given the strength of the digital orders that you've been seeing and the growing percentage of sales that it represents. Is there a way to help us understand the unit economics in that area and whether the mix shift impacts the margin mix at all materially for the better or for the worse, either on the gross margin line or as it relates to SG&A? Just help us a little bit understand the puts and takes of that growing digital channel and if it has an impact on the P&L.

Yes, we'll let Nicki take that one.

Thanks, Steve. So omnichannel, we're doing a lot of work at the moment. We've built out our capabilities. I think that's the first thing I would say in omnichannel. It does require a little bit of different capabilities for us to build out in the G&A line overall.

Our omnichannel is very focused on super serving our MVPs, and our MVPs are much more valuable to us. So the first thing I'd say is as we grow our business and grow our business in MVPs, this is a more long-term profitable way for us to be growing. So the MVP buy rate is obviously much higher. And we do believe we're going to get better returns from a CAC standpoint with each MVP that we bring in from a lifetime value perspective.

Now in the short term, we will see a little bit of channel shift coming through. So the first thing I'd say with omnichannel is we've been underpenetrated a little bit in club. So you will see a slight dilutionary impact coming through in that part of the business. But regarding your specific question on e-commerce, I think the great thing about our omnichannel strategy is it's really based on a local fulfillment model, which is to be serving the business through the 39,000 fridge networks that we currently have. So that fridge network and the way that we serve our omnichannel customer, 82% of our online sales are going through that fridge network.

Now that's already installed capacity. So we actually anticipate the ROIC from our fridges is going to be improving over time as we continue to drive omnichannel sales. And in terms of the economic profile, given it's in our current retail structure, we don't anticipate a significant shift coming through in that area. We may have a slight change in the economics of D2C coming through, but we still anticipate that will be a relatively small part of our business.

Yes. And if I could add to that, right? So Nicki mentioned the margin in club as we see that shift, right? We had strong growth in club in Q1, but we had also strong delivery of gross margin improvement as well. So as we grow the volume, we are seeing our ability to drive greater and greater efficiency in our cost structure and manufacturing.

Got it. Okay. Appreciate it. And the second question is a little bit more tactical. Billy, you called out the distribution wins, both in terms of more stores and more fridges per store. Can you guys just update us on sort of your distribution gain outlook for the year today versus where the year started? And just maybe remind us on what was originally embedded in guidance and if there's anything that's been achieved so far that would be incremental to that original outlook?

Yes, I'll have Nicki handle that.

Okay, Steve. So I think the main piece of news on distribution was what was announced on someone else's earnings call last week. So the retail lifestyle distribution, we will have coming through the back end of the year. We're still working through phasing of the incremental stores. In that retail lifestyle, we have 250 stores distributed by the end of the first half. And then we anticipate that by the end of the year, we will have around 700, but that will have to be carefully phased as we go through the year.

So that's the main distribution gain in terms of retail. As we also look at, we anticipate that our online growth will continue as we go through the year. And we're nicely on track based on our budgeted goals for the number of multiple fridges that we will be securing. So that's really embedded through in guidance. Billy, is there anything else you'd like to add to that?

No, I think that's good.

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

Just want to start on -- maybe just making sure I've got all the moving parts on pricing. I realize the macro environment is pretty dynamic, but you've made some tactical pricing changes. We see that flow through the numbers. You've talked about that running through kind of the balance of the year. But you've also then flagged some incremental cost pressures and potentially reevaluating maybe taking, I think you said some more pricing.

Would those offset each other? Would you undo what you did? Is it partly just a function of differentiating it by SKU that you've got the breadth of the portfolio, the comment you mentioned some of the ability to do that? Or how should we think about all those moving parts?

Yes. Michael, let me take a shot at that, and Nicki or John might have something to add. But I would just start with, we're very comfortable with the pricing that we have in the market today. We feel like it's made us very competitive. It's delivering the household penetration growth we'd like. And at the same time, we're expanding our gross margin. So we feel good about where we are.

The comments that we made about pricing and the inflationary environment going forward is more perspective. We're just telling you that if, for example, there is some increase in the cost that is a more sustained increase in costs over time that we are willing to take pricing as we have in the past. we would be glad to take the right pricing. But we also will work on efforts to improve productivity, formulation changes and whatnot because we want to do everything we can to make this category as affordable as we can to make it -- to let it grow as big as it can be.

So we will drive as much affordability as we can into the category. But from a fundamental perspective is we are committed to expanding our margins over time. And if there is inflation that would require us to take pricing, we are willing to take pricing. I don't know if you guys want to have anything to add to that?

Okay. No, that's helpful. And I just want to follow up on a bit of the manufacturing you've characterized the scale and expertise as an advantage. And I think we're seeing that as much as ever. If you've got the lower cost and higher quality position, how long would you estimate it could take somebody else to replicate that?

It's obviously a very difficult question to answer. All I can tell you is it took us a long time to figure out what we figured out in a long time and a lot of money to build the scale that we've built, and we're very committed to continuing that. So we are investing heavily in R&D and in new technologies. We're not standing still. Our expectation is that if somebody could figure out what we're doing today, spend a lot of money in a couple of years trying to catch up by the time they catch up, we'll be on the next generation of technology, and we'll be further ahead again.

So our focus here is that we always want to be the brand that is leading the category in terms of driving the technology advancements that give us highest volume and lower cost. I also want to point out that if you think about our product lineup, -- we have a variety of different product forms. And the innovation that we've been focused on right now is on our bags and technology advancements on our bags, and we made huge gains there.

But we have other product forms that we can continue to invest in and develop new technologies to make them even better as well. So I just -- I don't know how long it's going to take somebody to catch us. They'd have to spend a lot of time and a lot of money. That's what we did. But by the time they get to where we are today, we expect to be further ahead and on the next generation.

Our next question comes from the line of Eric Serotta with Morgan Stanley.

First, in terms of the lite version of the new technology, now that you're further along in the testing and validation phase and it looks like you're going to be -- or you said that you plan to roll that out to more lines. Can you help us dimensionalize the order of magnitude of savings versus your existing lines? I know you've spoken before about, well, it's less than sort of the full fat version from scratch, but any help dimensionalizing that would be helpful.

And should we think of any benefits from that as just in terms of phasing, more benefiting '27 than '26. And then a follow-up on the questions around the large club retailer.

As you speak to them and look at their store base and where they have the double-wide fridges, what's your sense as to how much more expansion for refrigerated fresh space is still to come at that retailer as they add it to more stores, sort of leaving aside the question of what the mix will be between your product and their private label and potentially others?

Eric, I'll take the first part of that question, and I'll have Nicki take the second part. But as we said on the call, we don't want to give anybody any specific numbers on what the improvements are that we're going to see on this technology until we get further into the year, and we've had a chance to run it for an extended period of time. But you should take from the fact that we made the decision to install a second light line as a confirmation that this is a good technology and it's delivering on our expectations or exceeding.

The metrics that we're focused on are input costs, which is really a measure of yield through the throughput that we get and the quality that we get. And what I can tell you so far is that we're seeing all those benefits, and we're at this point, just trying to dimensionalize how big are those benefits. And because the capital cost in these light lines is relatively small and also the time to disruption, meaning the time that we have to take a line down to retrofit it is also very brief.

It's a very attractive technology investment for us. In terms of its impact this year, because it's only going to be impacting a portion of the line and we have to convert meaning a portion of our product lineup, and we have to convert parts of the lineup over time, it will have an impact in this year. It will be skewed towards the back half, and it will be relatively modest because we have to ramp our way into it.

It's much more of a 2027 event. And in 2027, you should expect to see some benefits from it. Remember, what we said on the call was the technology, we should be, by the end of this year, have about 35% of our bag volume could be produced on lines that will have this technology. And we feel like that's going to be -- would contribute meaningfully in 2027. But again, it's a little bit too early because every one of these lines is a ramp-up, and you don't really want to lock in and say this is going to be until you've tested under a lot of different circumstances over an extended period of time. Nicki, on the club question.

Thanks, Billy. So regarding club, those wide double fridges that are in at the moment are in 416 club stores. So that's around 70% of the estate. What it's done is it's opened up both a lot of holding capacity, but also an opportunity for incremental products, both from us and from others to be listed in those fridges.

Those fridges are not planogrammed. So I think the key piece is that no matter which club store you're going into, the range may look a little bit different in there. We would never expect to only have Freshpet in those fridges. And we believe that this Fresh as a segment is still a very big growing segment within the category, and there will be more competition coming in. But we do believe those fridges has opened up a lot of opportunity for Freshpet to put more product assortment in. And we're seeing very encouraging signs by having the highest level of distribution of any fresh product in there today.

And just to follow up on that, Nicki, of the 30% of stores that don't have the double-wide fridges, are those stores that will potentially -- some of those that they're still rolling out to? Or do you think the customers kind of tapped out the store base that the double wide fridges would be appropriate to, given the demographics of the consumer at the store or the store footprint or things like that?

I think that's a decision for the retailer to make. We don't see any space constraints today beyond expanding those double-wide fridges, but clearly, that's not really within our control.

Our next question comes from the line of Matt Smith with Stifel.

A follow-up question on the omnichannel growth. You referenced 82% of orders fulfilled through the fridge network. In the past, there's been some constraint on fridge space and out of stocks. Where does that stand today? Is there still a capacity constraint on omnichannel growth from availability of product?

Does that improve as fridges expand? And are you seeing greater incremental fridge interest from retailers as they look to participate in more omnichannel growth with more capacity on the floor?

I'll let Nicki take that.

Thanks. I think we're seeing a lot of interest in moving more to multiple fridges, which might be the standard fridges, but also concepts like fridge island or open-air fridges, which is obviously what you're seeing in club retail at the moment. Many of our conversations with retailers are all about maximizing holding capacity so that they can compete very effectively with online sales, but also having the right assortment in.

The big bit of research that we've done shows that the biggest unlock for that MVP shopper is actually access. An MVP shopper is buying across multiple channels. They want to buy online and they want to buy in-store and they buy very frequently. So as we continue to partner with retailers, they're looking for help in how they unlock that MVP access, and they're also wanting to compete very much with local fast delivery versus maybe some pure-play retailers.

So we believe we will continue to steadily expand multiples, but we also believe there'll be more opportunity in the future for different fridge configurations, whether it's open air or items.

Our next question comes from the line of Marc Torrente with Wells Fargo.

Last quarter, you talked to the expected bridge on underlying SG&A, which was limiting some of the sales and gross margin flow-through to EBITDA this year. Has anything changed on those underlying assumptions? And any color on the cadence of those items through the year, particularly on media spend?

I'll have John take that.

Marc, no change to what we outlined last quarter and no change also to the cadence of media. So we expect to be front half weighted. You saw some growth in the media as a percent of sales in the quarter year-over-year, which was planned. And we'd expect that media intensity to be stepping down as a percent of sales as we go through the year.

In terms of other G&A, excluding logistics and media, we'd expect that to be generally flat on a sequential basis as we go through the year. There will be some comps that will drive differential growth rates, but overall flat sequentially as we go through the year.

Okay. I appreciate that. And then I guess just building on that a little more, part of the SG&A step-up is investment behind omnichannel, and this is going to be a growth channel over time. So just trying to get a sense of how much of the SG&A step-up is, I guess, onetime versus more going in nature.

Yes. So there's kind of 2 elements of it that are onetime, right? I'll remind you of the step-up in variable comp expense, which we said was about 1/3 of the increase in dollars on the year. The remainder is capability investments, and there will be ongoing capability investments over time, but not to the scale that we saw this year.

And a lot of it, Nicki has outlined in terms of driving the things we're doing from an omnichannel perspective that we weren't before. Those are investments we needed to make in '25 that are carrying into '26. And so that's really just a big step-up. And so there were 3 items that we said were roughly equal in size, driving growth in dollars year-over-year, media, in dollars, variable comp expense and then the investments in our capabilities being the other one.

Our next question comes from the line of Jon Andersen with William Blair.

Two quick ones. On the technology, the new tech, you've talked a lot about quality and cost. I'm wondering if there is an element here around product range, innovation, differentiation that this tech can also enable, if you could speak to that?

And then second, Billy, you mentioned product forms earlier. I wanted to ask a broader question about forms in super premium and ultra-premium pet food. Are you seeing any changes by customers or within any of your channels where customers may be leaning into kibble, kibble plus, fresh/frozen? Anything on that front or does kind of the fresh refrigerated remain the gold standard?

Jon. I'll take the first one, and I'll have Nicki take the second one. One of the beauties of this new technology is its ability to produce a wider range of product forms, all within the context of our bags. But think of that as different shapes. It could include different proteins that we can't currently produce with today. And what it'll allow us to do is also give higher quality inclusions.

So some of our products you might have noticed, we have very nice cranberries and carrots and whatnot, and we can get better looking and a more diverse supply of inclusions that go into the products. And so you should expect that a big part of the payback for the incremental investments in these new technology will come from a wider range of product innovation that will be both more appealing, but also higher quality than what you can get from some of the competitors going forward.

So we spent a lot of time focusing on the economic benefits or the efficiency gains of input cost, throughput, yield, quality, whatnot, but innovation is going to be a big driver going forward. But that's not going to be a big driver until we have more lines installed because we have to have enough capacity to support those new items. I'll let Nicki take the second part of the question.

Thanks, Billy. We are seeing some more shelf-stable products coming in that might have some claims of being sort of fresh, i.e., they can be refrigerated after being purchased. We're not seeing very much traction coming through certainly when we look at the Nielsen data on any of those products. We're definitely seeing a little bit more growth coming through in higher interest in functional foods and ingredients that might deliver functional benefits.

We think that, that continues to be an opportunity more for Freshpet to explore. And then clearly, we see a lot of frozen entrants, which is a little bit of an easier barrier to entry to cross to get frozen products out there. But unless they're supported with very heavy brand investment, so advertising investment, also, it's a little bit hard for them to get traction, especially when they're head-to-head with a fresh product at retail. So that's really pretty much the gist of what we're seeing in the competitive landscape.

Ladies and gentlemen, our final question this morning comes from the line of Yasmine Deswandhy with Bank of America.

I just wanted to dig in a little bit more on your -- on the omnichannel unit economics. In your prepared remarks, you talked about adding new stores like Tractor Supply, where you recently announced expansion to up to 700 stores by year-end. The shopper there is a little bit different than some of the other retailers that you're in. So if you can maybe talk about your go-to-market strategy there, whether the approach will be different, product lineup, marketing, messaging and if it will impact mix at all for this year?

Nicki, you'll take that one.

Yes. So we've had the benefit of doing a long test with Tractor Supply. So we've really learned on what part of the portfolio is going to work for their specific shopper. As you may expect, we've got some larger pack and larger dog SKUs that have gone into that range.

We also have put our Vital pet specialty range into Tractor Supply, combined with some of our top-selling home style creations lines as well. So the mix of products that we have has been performing very well, which is why we've had the green light to expand really through the year. In terms of margin positioning, there's nothing in that, that would be particularly either accretive or detrimental on the P&L. So broadly the same as where we stand today. And in media, very much supported with the same master brand advertising that we do overall.

Okay. That's helpful. And then the 35% of that capacity using new tech by end of year, where does that number stand today? And as you continue to install new technology, will you be able to ramp at that same pace? Or as you manage through capital cost and margin impact, will it be kind of slower than the pace that you're doing it this year, faster? Or yes, any change there?

Yes. I would tell you, it's a very low number right now as a percentage of our total capacity because as you heard, we started up the full version of technology in January, but it's a relatively small throughput line and is producing relatively limited SKUs. The lite version that we started up has only recently started up, and we're still in the ramp-up phase, but what we've seen so far is very encouraging.

But between the 2, it's a relatively small percentage of our total volume. When we add on the third line and we get further out on the operating competency or expertise level, that's where you get to that 35%. The big question for us is going to be as we add these new lines, it will come in a little bit in fits and starts. It won't be a uniform pace, and it will in part be driven by the capacity needs that we have because at some point, we'll have converted all the products that are relevant to be converted to this.

And then the question will be when do you need more capacity? Because as we add capacity, it's likely that we'll have to make a decision about which technology we use to add the capacity, and that will be really driven by when that capacity is needed and what product forms is needed to produce. So it's not going to be any -- it's not going to be linear. It's going to be more episodically driven than it is going to be something you can lay down on a straight line.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for any final comments.

Great. Thank you, everyone, for your time and attention today. I'll end today with a quote that I think is particularly appropriate for the challenging times we're operating in today. This is from an unknown. "The best therapist has fur and four legs." To which I would respond, "Pay them with Freshpet and give them treats as a co-pay." Thank you very much.

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

Greetings. Welcome to Freshpet's Fourth Quarter Full Year 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to Rachel Ulsh, Vice President, Investor Relations and Corporate Communications. Thank you. You may begin.

Good morning, and welcome to Freshpet's Fourth Quarter and Full Year 2025 Earnings Call and Webcast. On today's call are Billy Cyr, Chief Executive Officer; and John O’Connor, Chief Financial Officer. Nicki Baty, Chief Operating Officer, will also be available for Q&A.

Before we begin, please remember that during the course of the 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 strategies to reaccelerate growth, progress and opportunities and capital efficiencies, timing and impact of new technology, capital spending, adequacy of capacity, expectations to be free cash flow positive, 2026 guidance and 2027 targets.

They involve risks and uncertainties that could cause actual results to differ materially from any forward-looking statements made today, including those associated with these statements and those discussed in our earnings press release and our most recent filings with the SEC, including our 2024 annual report on Form 10-K, which are all available on our website.

Please note that on today's call, management will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Please refer to today's press release for how management defines such non-GAAP measures, why management believes such non-GAAP measures are useful, a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and limitations associated with such non-GAAP measures.

Finally, the company has produced a presentation that contains many of the key metrics that will be discussed on this call. That presentation can be found on the company's investor website. Management's commentary will not specifically walk through the presentation on the call. Rather, it is a summary of the results and guidance they will discuss today.

With that, I would like to turn the call over to Billy Cyr, Chief Executive Officer.

Thank you, Rachel, and good morning, everyone. The message I would like you to take away from today's call is that the challenges we faced in 2025 taught us quite a bit about our strengths and weaknesses and have made us a much stronger company for 2026 and beyond.

We learned that after more than a decade of strong, reliable and predictable growth, the pet food category and the Freshpet growth algorithm are not immune to swings in consumer sentiment. Category growth last year slowed dramatically and our net sales growth rate dropped from 27% in fiscal year '24 to 13 % in fiscal year '25. While the 13% growth we delivered in fiscal year '25 would excite most companies, it was not the kind of growth we had become accustomed to nor what we expected when we started the year.

This dramatic change in sentiment forced us to reevaluate every aspect of our model and adapt to the new environment. We changed our messaging and media buying strategy. We increased our focus on creating value at the entry point, and we demonstrated flexibility and control over our capacity expansion plans. In the end, I am very proud of the agility that our team showed in the face of a dramatic change in the macroeconomic market.

The benefits of that agility were demonstrated in our results. Our growth was more than 10 points better than the category, we've built significant market share, and we exceeded the $1 billion net sales target we set in 2020. We also expanded distribution in a very large club customer and began testing another new class of trade, rural lifestyle retail. At the same time, we protected and even expanded our margins and achieved positive free cash flow, and we withstood the onslaught of new competitive entries with little discernible impact on our business.

More importantly, we've built a really strong foundation for fiscal year '26 and beyond. Our new messaging and related media plans are showing early signs of generating the household penetration growth we expect. Our efforts to expand our e-commerce business continued to gain traction with digital growing nearly 40% last year, and it is now up to 14% of our goal business.

We have installed and started off the biggest breakthrough in manufacturing technology in our history. We began testing fridge islands in a major retailer, one of our biggest breakthroughs in retail visibility and availability ever. In each case, we believe we are in the very early stages of a major new driver of growth and profitability.

In total, we believe we are very well positioned to continue to capture a very large share of the growing market for fresh pet food. Our data suggests that despite the macroeconomic headwinds we experienced last year and continue to see today, the total addressable market for Freshpet continues to grow and is now up to 36 million households compared to the 33 million households we announced at CAGNY last year.

These figures reflect consumers' ongoing interest in treating their pets as valuable family members, and the growth is driven in part by the ongoing generational transition to younger consumers for whom pets and high-quality food are of greater interest than previous generations. We believe this suggests that fresh pet food is the future of the pet food category and that Freshpet has a very long runway for growth.

And the results of the past year strongly suggest that we have the ability to maintain a very high share of this market despite the determined efforts of many new competitors. the competitive moat we've built enables us to deliver a wide range of noticeably better products at lower costs in more locations and in a variety of channels versus competition. And we continue to invest in new manufacturing technologies that we believe will extend our competitive advantages even further.

Plus, we are leveraging our extensive fridge network, digital marketing efforts and strong brand equity to create an omnichannel business that will be difficult for other fresh food marketers to match. We firmly believe we have a unique and compelling advantage in not only manufacturing, but also quality and product appeal, and it can be enhanced through marketing.

Last quarter, we talked about our improved commercial framework that focuses on consumers who have the potential and ability to become very heavy users. We expected the increase in digital and streaming as part of our media mix to drive increased trial and usage by Millennials and Gen Z, who have the highest propensity to become MVPs, and it has. We continue to outperform the category and peers on household acquisition across income brackets and generations and see Millennials and Gen Z as our fastest-growing generations.

Further, we are disproportionately gaining share despite heightened competition, particularly in retail. In 2026, we are rebalancing our media mix to be more diversified and digital forward, helping to build out our omnichannel presence. We are evolving our marketing plans to super serve MVPs that now make up 71% of our net sales, designing our marketing plans to deliver against this critical MVP consumer while ensuring our media reaches our entire TAM.

The current campaign showcases the products and the ingredients more than in the past and has been effective so far in driving new households. In addition to our current campaign, we are leaning more heavily on trusted voices to build relevance and credibility with our MVPs. And this spring, we're introducing a new campaign that deepens our connection with our core audience. We believe we have a strong value proposition with our product portfolio today, and we are continuously working on ways to drive more perceived value for our consumers.

We have affordable innovation with multipacks and bundles of both rolls and bags now available in select retailers and expect those to gain traction and more distribution in 2026, particularly in the club channel. We also have our complete nutrition line that has a bag item and a roll item at an attractive entry price point, which will continue to gain distribution as well. Further, we have an exciting pipeline of innovation and renovation slated for this year that we will share more on as it hits the market.

From a distribution standpoint, 2025 was our best year in over a decade for new store growth, largely driven by our club expansion. In 2026, we're focused on having a stronger omnichannel presence and we are building capabilities around that. In Q4, e-commerce as a percent of sales was 14.6%. And for the full year, it was up to 14%, as I mentioned earlier. The digital channel will be an important growth driver for us moving forward but we are also still focused on expanding multiple fridges in the highest velocity stores.

The rural lifestyle retailer test we referenced last quarter has now confirmed the expansion to 250 stores in the first half of the year, and we've expanded the fridge island test in a mass retailer from 16 to 28 stores today. Additionally, we are testing open air bunker fridges and full-size open-air end caps as we reimagine how consumers shop for their pets. We expect continued experimentation with these new fridge configurations seeking the optimal combination of visibility, shopability, holding power and space efficiency.

We are also building a stronger product proposition by leveraging our breakthrough technology to deliver both meaningful product improvements and significantly improved economics. I am pleased to report that our first line using the new production technology is up and running and producing product that we began shipping to customers last month. The products produced in that new line are exceptional, and the early indications are that the new line should deliver significant quality, throughput and yield benefits.

We want to run the line for several months before we quantify the magnitude of the benefits, but we are encouraged so far. The first retrofit of an existing bag line in Bethlehem with a lite version of this new technology is slated for the second quarter, and we plan to use it to both renovate and innovate our product portfolio. We believe that the conversion of our existing lines to the lite version of the new technology will require minimal downtime and modest CapEx.

Investing in manufacturing capability and technologies can not only extend our competitive moat, but also offers us the opportunity to produce the highest-quality products at the best possible cost and demonstrate the technical mastery of our team.

Now I'll provide some highlights from the fourth quarter and year. Fourth quarter net sales were $285.2 million, up 8.6% year-over-year, primarily driven by volume. Adjusted gross margin in the fourth quarter was 48.4% compared to 48.1% in the prior year period. Adjusted EBITDA in the fourth quarter was $61.2 million, up approximately $8.5 million or 16% year-over-year.

For the year, net sales were up 13% year-over-year, in line with our guidance of approximately 13% growth. Full year 2025 adjusted gross margin was 46.7%, up 20 basis points year-over-year despite the slowdown in volume growth. And full year adjusted EBITDA was $195.7 million, up 21% or approximately $34 million year-over-year.

From a category perspective, we are the leading dog food brand in U.S. food and maintain a sizable market share within the gently cooked fresh/frozen branded dog food segment in yields and brick-and-mortar customers, defined as xAOC plus pet. We compete in the $56 billion U.S. pet food category per Nielsen omnichannel data for the 52 weeks ended 12/27/2025. And within the nearly $38 billion U.S. dog food and treats segment, we have increased our market share to 4.0%.

As I mentioned a few moments ago, 2025 was our best year in over a decade for new store expansion, demonstrating that our fridge expansion has not been hindered by heightened competition entering brick-and-mortar stores. From a retail standpoint, our products are now in 30,235 stores, 24% of which have multiple fridges in the U.S. and Canada. As we add additional fridges to the highest velocity stores to service more omnichannel customers, this percentage should increase over time.

We ended the fourth quarter with 39,347 fridges or nearly 2.1 million cubic feet of retail space with an average of 19.1 SKUs in distribution. Our percent ACV growth rate was at 80% at quarter end, and xAOC, we were up to 72%. From a household penetration and buy rate standpoint, we've seen some green shoots recently. On a 12-month basis, as of December 31, 2025, household penetration was 15.2 million households, up 10% year-over-year, and total buy rate was approximately $115, up 4% year-over-year.

MVPs, our super heavy and ultra-heavy users, are continuing to grow faster than overall households and now total 2.4 million households, up 11% year-over-year, and have an average buy rate of $506. Our fastest-growing buyer group is our ultra buyers, who make up nearly 500,000 households and spend over $1,100 a year on Freshpet. Overall, we're not seeing trade down, and we are not seeing loyal customers buying us less often. We are continuing to win with new dog households, the next-generation dog owners, Millennials and Gen Z, and believe our omnichannel strategy will drive further growth with these cohorts.

Turning to capacity. We have 16 lines across our network today that can support over $1.5 billion in sales when fully staffed. This figure excludes additional throughput or yields that could come from the new technology we've developed for our bag lines. After we run both the full version and the lite version for an extended period of time, we will update the market on what our full capacity potential is within the current footprint.

Our capital efficiency framework underpins the work we've been doing to advance the manufacturing process for Freshpet food and what we believe is a significant competitive advantage. To continue to drive capital efficiency, we aim to, one, get more out of existing lines, primarily through OEE improvements; two, get more out of existing sites, whether that be finding ways to optimize our network or add more lines on our campuses; and three, develop and implement new technologies.

Now turning to 2026 guidance. We expect net sales growth to be between 7% and 10% for the year and adjusted EBITDA to be between $205 million to $215 million. We expect capital expenditures to be approximately $150 million this year, absent any incremental investment to accelerate our manufacturing technology or capitalize on a distribution breakthrough in fridge islands. At our current planned level of capital expenditures, we expect to be free cash flow positive in 2026.

If we do decide to retrofit more than just one bag line with the new technology, and we have a large rollout of fridge island units, we may choose to increase CapEx by anywhere between $20 million to $50 million so that we can capture those benefits sooner. John will walk through more details of our 2026 guidance in a few minutes.

In regard to our fiscal year 2027 targets, we remain confident in our ability to deliver net sales growth well in excess of the U.S. dog food category growth and, thus, grow market share. Depending on the macroeconomic conditions and the health of the dog food category, that growth could be in the high single digits or low double digits. We believe we can achieve at least 48% adjusted gross margin under a variety of growth scenarios and have updated our adjusted EBITDA margin target to a range of 20% to 22%.

We believe we have a variety of paths to achieve those margins, including higher net sales growth rates, further improvement in gross margins, media efficiency and effectiveness and further SG&A efficiencies. For example, if our net sales growth is in high single digits, we believe we can still achieve an adjusted EBITDA margin of approximately 20% in 2027. If we exceed the high end of our guidance and deliver growth in the mid-teens, we believe we can achieve a 22% adjusted EBITDA margin in 2027.

As we announced earlier this month via press release, we are thrilled to welcome John O'Connor as our new Chief Financial Officer and Ana Lopez as SVP Supply Chain. We continue to build out the leadership team that can support our mission and fuel our next phase of growth. John brings deep financial leadership in animal health expertise, having spent much of his career at Zoetis and previously served as Chief Financial Officer of Thrive Pet Healthcare, a leading veterinary services platform.

Ana Lopez, our new SVP Supply Chain, brings extensive experience across both superior and manufacturing and joins us from Unilever.

I'd like to thank Ivan Garcia for the incredible job he did as interim CFO over the past several months. We did not miss a beat during his tenure and he has made the CFO transition seamless. We are grateful for his continued assistance as John gets up to speed on the business.

Lastly, as some of you may recall, we made an equity investment 6 years ago and a follow-on investment a few years later in a strategically related business for a total of $33.4 million. For competitive reasons, we never disclosed the company we had invested in. We can now tell you that the investment was in Ollie, the DTC dog food brand. We invested so that we could learn more about the DTC business and maintain some level of optionality if we wanted to enter that space.

We learned quite a bit from that ownership position that is helping us develop our omnichannel approach to the Freshpet business. And it was also a successful investment from a financial perspective. Ollie was recently sold, and we received proceeds of approximately $95.5 million in January, plus the potential for a small amount of additional consideration subject to ordinary post-closing conditions. So we got a good financial return in addition to the strategic benefits of observing the development of the DTC dog food space from the inside.

With John now onboard and getting up to speed, we are evaluating our capital allocation strategy. I am pleased that we are operating from a position of strength, especially now that we are free cash flow positive and with a strong balance sheet and plan to share an update on the strategy in the coming months. That update will take into account the opportunities we have to accelerate our growth and improve margins through various investments and our desire to continue to improve our cash efficiency and deliver strong returns to investors.

With that, I'll turn it over to John to walk through more details of our financial results.

Thank you, Billy, and good morning, everyone. The fourth quarter results demonstrated our ability to deliver category-leading growth while also achieving positive free cash flow. Net sales in the quarter were $285.2 million, up 8.6% year-over-year. Volume contributed 9.7% growth, partially offset by unfavorable price/mix of 1.1%, which was primarily driven by modest pricing actions in the current year designed to deliver value at the entry point and bring in new users and favorable pricing items in the prior year period.

We had broad-based consumption growth across channels. For Nielsen-measured dollars, we saw a 9.4% growth in total U.S. pet retail plus with Costco, 8.5% in total U.S. pet retail plus, 9% growth in xAOC, 5.8% in U.S. food and 1% growth in pet specialty. As we said on the last earnings call, the initial pipeline fill of a club customer helped boost our third quarter shipments and impacted the fourth quarter by about 1 point.

Fiscal 2025 net sales were $1.102 billion, up 13% year-over-year. Volume contributed 12% growth and we had favorable price/mix of 1%. Fourth quarter adjusted gross margin was 48.4% compared to 48.1% in the prior year period. The 30 basis point increase was driven by reduced quality costs, partially offset by higher input costs.

Fiscal year 2025 adjusted gross margin was 46.7%, an increase of 20 basis points compared to the prior year. Fourth quarter adjusted SG&A was 27.0% of net sales compared to 28.0% in the prior year period. This decrease was primarily due to lower variable compensation, partially offset by increased media as a percentage of net sales. Media spending was 10% of net sales in the quarter, up from 8.9% of net sales in the prior year period. Logistics costs were flat in the quarter at 6.2% of net sales.

Fiscal year 2025 adjusted SG&A was 29.0% of net sales compared to 29.9% in the prior year period. Media as a percent of net sales was 12.7% compared to 11.4% in the prior year, while logistics improved 20 basis points year-over-year to 5.8% of net sales.

Fourth quarter net income was $33.8 million compared to $18.1 million in the prior year period. The increase in net income was primarily due to the contribution from higher sales, an increase in gross profit and lower SG&A expenses, partially offset by the deferred income tax expense in the current year period.

Fiscal year 2025 net income was $139.1 million compared to $46.9 million in the prior year period. The significant increase in net income was primarily due to the deferred income tax benefit resulting from the release of a $68.4 million valuation allowance in the current year, higher sales and was partially offset by higher SG&A.

Fourth quarter adjusted EBITDA was $61.2 million compared to $52.6 million in the prior year period, an increase of 16%. This improvement was primarily driven by higher sales and gross profit, partially offset by higher adjusted SG&A expenses.

Fiscal year 2025 adjusted EBITDA was $195.7 million or 17.8% of net sales compared to $161.8 million or 16.6% of net sales in the prior year period.

Capital spending for 2025 was $148.2 million, while operating cash flow was $160.6 million. We ended the year with cash on hand of $278 million and were free cash flow positive. As Billy mentioned, subsequent to the quarter end, we received $95.5 million in proceeds from the sale of Ollie, bringing our cash balance to approximately $400 million today.

Now turning to guidance for 2026. As Billy mentioned earlier, we expect net sales growth of 7% to 10% compared to 2025 with the midpoint of this range in line with the growth we delivered in Q4. We believe this is a prudent place to start our guidance after a challenging year.

As for the cadence of the growth in 2026, it is important to remember that the base year included some disruption in Q1 from the change in our pet distributor and that we had unusually strong growth in Q3, primarily from the significant expansion in a large club customer, including pipeline fill. That will make the Q1 comp a bit easier and the Q3 comp more challenging.

This guidance for the year assumes that there is no material change in the macroeconomic environment compared to where we exited 2025 and does not include any significant fridge island expansion. We continue to expect our growth to be in excess of the U.S. dog food category and, in turn, grow market share.

Given year-to-date trends, we are optimistic about our ability to deliver these plans. Our current Nielsen growth rate and the recent household penetration and buying rate data we have seen support growth at this level or higher. Further, our advertising and media plans have begun to demonstrate traction in the market, and we are increasingly confident that the plan is working. But we acknowledge the fact that it is still early, and there have been storm-related impacts to the recent Nielsen numbers, which create noise.

To meet or exceed the high end of our guidance from a category perspective, we would likely need to see stronger dog food category growth and/or a resurgence in trade-up behaviors. In terms of the factors that are within our control, we would need to see an outperformance of our omnichannel efforts or rapid expansion of island fridges and greater impact from our advertising.

We expect adjusted EBITDA in the range of $205 million to $215 million, an increase of 5% to 10% year-over-year. Media as a percent of net sales for the year is expected to be roughly in line with 2025 and will be front-half weighted in dollars and as a percent of sales with the first quarter expected to be our largest quarter of media spend.

With the turn of the calendar, we have reset expectations for incentive compensation to target levels, which will compare unfavorably to 2025 when lower variable compensation expense helped cushion margins from the lower sales growth than we expected at the start of the year. With this factor at play, to have adjusted EBITDA growth outpace sales growth in 2026, we need to overdeliver on sales volume.

Beyond 2026, however, we expect adjusted EBITDA growth to exceed net sales growth with an expectation of a more consistent variable compensation expense. We anticipate adjusted gross margin to improve by approximately 50 to 100 basis points at the midpoint of our net sales range, primarily driven by plant leverage, partially offset by mix. We do not intend to add staffing in 2026 based on our guidance but rather utilize our existing staffing and use further OEE improvements to deliver more volume.

From an inflation standpoint, we are optimizing our formulations and have taken pricing on specific SKUs to address some higher input costs. Capital expenditures are currently projected to be approximately $150 million in 2026. And as mentioned earlier, this figure excludes any significant incremental investments in fridge islands or expediting the rollout of our new technology.

If we were to take those actions, we would likely make that decision sometime in the middle of the year, and they would be supported by strong results from our test in the case of fridge islands and demonstration of consistent and meaningful efficiency gains in the case of the manufacturing technology expansion. As I said earlier, I believe our outlook is prudent coming off a challenging year and in the midst of a still uncertain consumer backdrop.

While I just completed my second week here, I'm incredibly excited to join Freshpet at such an important moment in its growth story and look forward to meeting many of you over the weeks and months ahead. I believe the company has a long runway for growth from an already solid leadership position, supported by a strong foundation and a compelling long-term opportunity to capture sales and profit growth in the fresh/frozen dog food category.

That concludes our overview. We will now be glad to answer your questions. As a reminder, we ask that you please focus your questions on the quarter, guidance and the company's operations.

Operator?

[Operator Instructions] Our first question is from Peter Benedict with Baird.

John, welcome. I guess maybe just help us understand a little bit more the implied uptick in the EBITDA margins as you look out to '27. Maybe if you can help us size maybe the incentive comp impact on '26. Obviously, that's something that's weighing on this year. But just the other factors that give you the confidence that these margins can be 20% plus in '27. That's my first question.

Peter, just a notice for you and for everybody else. All of us are in remote locations this morning because of the storm. So if we sound a little disjointed, please bear with us. And if we have technical difficulties, please bear with us as well.

It's a great question, Peter. I'm going to just frame it up briefly, but then I'm going to turn it over to John to give you some thoughts on it. But I would just say, as I said on the call, we see multiple pathways to getting towards our 2027 EBITDA margin target. As I said, there's an opportunity here to deliver more on gross margin, to deliver more on net sales and also within the G&A structure. But I think John can give you a more fulsome answer than that.

Sure. Thanks, Billy. And thanks for the question, Peter. I'll focus first on SG&A from '26 to '25, and I'll put it into really kind of three main buckets in terms of the growth in dollars year-over-year. Roughly 1/3 is coming from that compensation item. If you look at where we guided the year initially for 2025 versus where we ended, we fell well short of our goals and, as a result, had very, very limited incentive compensation paid out in 2025. So that is a meaningful portion of SG&A growth '25 to '26.

Roughly another 1/3 is coming from the build-out of our omnichannel capabilities to evolve how we reach our customers. So we are evolving the model in how we go to market and there are some investment required to do that. And then roughly 1/3 of the growth is coming in media in terms of dollars, which we have said will stay in similar terms of percentage of sales year-over-year. In terms of '27, at this stage, we still have a fairly wide range to the outcome.

And importantly, because of two of those items that I mentioned earlier in '25 to '26, that path of margins, '25 to '26, is not necessarily indicative of the underlying operating leverage in our model, right? The incentive comp impact is more onetime in nature. And while we're always going to be looking to make sure we have the necessary capabilities to continue growing our category leadership, we don't foresee the degree of additions that we have from '25 to '26 going from '26 to '27.

As Billy said, we believe we have meaningful upside on adjusted gross margin through volume, OEE and new technology, which is why we updated that adjusted gross margin guidance to be greater than 48% now. And the final driver will be what our net sales growth looks like for the next 2 years and the degree of leverage we can gain over our cost structure.

All right. Great. That's super helpful. And I think it leads me to the next question actually just around the omnichannel stuff. I'm just curious, kind of maybe you guys could expand on what you learned from owning Ollie or for being involved with Ollie for all those years and how that's being deployed, I guess, in your own custom meals business, your own kind of DTC business. Maybe just expand a little bit more on that. It sounds like '26 is going to be a big year for kind of how you're going to start to push on that. So any further color there would be helpful.

Yes. Peter, it was really good to have a front row seat to watch how that segment of the market was unfolding. It's also nice that it turned out to deliver a very good financial return for us. But as we watched it, one of the things that became clear to us was that the best return for us was going to be focusing on building out what I would call an omnichannel business.

And by that, I mean a place where we can leverage our brand equity, the brand investment that we're making in the existing channels to cover a wider range of channels. And then we could also leverage the manufacturing footprint that we have, which has significant scale and volume across the existing products and the existing channels and to cover a wider range of channels.

And it's our belief that the combination of the custom meals business that we've built and are incubating at this point as well as the broad retail network that we have with lots and lots of fridges puts us in a position where we're uniquely positioned to meet the consumer wherever they want to buy and however they want to buy. So we will be able to provide you with the Freshpet quality products in whatever way in which you want to purchase them.

And we feel pretty good about that position. And frankly, we want to invest in that. I'm going to ask Nicki to talk just for a second about what that means from an organizational capability perspective and how we're investing the media dollars to match that. But to us, that's a huge opportunity and a fairly significant shift for us. Nicki?

Thanks, Billy. Peter, yes, as Billy said, we are very focused on omnichannel, and we see DTC as just one part of that. When we talk about omnichannel, we are still very much talking about it from a retailer standpoint with click and collect, a segment that's last-mile delivery, a segment that's also pure-play e-commerce and then a final segment that really is our DTC business.

As you know, we went to national on our DTC business really around a year ago, and we've had some great learnings from it. Over 74% of our households are actually coming in, in incrementally to Freshpet. They've never bought Freshpet but before in a retail environment. And I think that's just a key indicator that omni for us drives better brand awareness. And we did have a gap in our brand awareness purely being in a retail environment.

So as we think a little bit about capabilities for building, they're in both the marketing teams and the sales team. So on the marketing side, it will be moving more to what we call digital forward in our media. So that will include everything from how we approach streaming, retail media and social. And then on the sales side, it's really building capabilities not just to service our direct-to-consumer, but also really to set pure play in other areas, too.

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

Maybe just to start on rank ordering, if you would, the drivers for consumption growth in 2026. As you just sort of spoke in great detail about DTC is obviously an increasing catalyst here. You've got distribution as well. You also have the increased focus on value proposition, which seems to be, at least from what we can see in the track data, sort of the initial impetus for the stabilizing in unit consumption growth. So just sort of thinking about as we bring this together in the aggregate, how you would rank order the consumption drivers in '26.

Brian, let me frame it, and then I'll ask Nicki to fill in some of the building blocks. But from a broad perspective, what we're seeing is that the volume growth is going to come, as it always has, from highly effective advertising in a good environment. We obviously want to get increased visibility. We wanted the right product innovation program. But advertising will always remain our #1 driver of our growth. And if we are operating with highly effective advertising in a better backdrop, then we obviously would expect to see some acceleration beyond that.

There are elements that are within that, such as the omnichannel piece we just talked about, some channel-specific stuff that I'll ask Nicki to walk you through. But suffice it to say that the model is going to be evolving. It's still the same model, but it's evolving. And you're going to see an increasing percentage of the growth that's going to be coming from our omnichannel or the e-commerce portion of the omnichannel business. Nicki?

Thanks, Billy. Yes. So maybe I'll start there and build on that. On the distribution side, we've obviously got a full year distribution coming through within the club channel. And we also believe we've got continued growth coming from clubs. So that's built into our plans. We will continue to grow new stores. So we had a record year of new stores last year, and we're still anticipating that there is more new store development to come through this year.

And then also within distribution, outside of the e-commerce component of omni, where we have significant headroom to grow, we also have multiples and new retail visibility opportunities, for example, the island. So that falls under that distribution bracket. Media, Billy has already touched on. And then the third component I would suggest is what I would call affordability. And we have sharpened our plan in affordability, and we do anticipate a little bit more coming through from how we've shored up a entry level price point within our portfolio. And that's both in terms of innovation, but also in terms of some price elasticity work that we did.

Appreciate the color. And then maybe just looking backwards just a bit. 4Q household penetration vis-a-vis my model came in above, CAC came in below. So that's an encouraging development relative to the prior few quarters. Just curious, you talked about, in your prepared remarks, the extent to which maybe hitting the high end or above, whatever would be dependent a bit on the category, maybe the effectiveness of some of the media.

But we are, to be sure, in 4Q seeing some of this come together. So just curious maybe to get your perspective on the landscape, whether it be competitive or category dynamics, consumer dynamics. Are we seeing any drivers here that we think would be sustainable as we start to look forward in 2026 and beyond, that we've seen the bottom in this category, and we're starting to see behaviors if not back to the levels they were, at least starting to normalize?

Yes, Brian. We are seeing some very, very early indications that the category trend as well as our trends have started to improve. It depends whether you're looking at household penetration, whether you're looking at our MVPs, whether you're looking at the category when it actually inflected, but it has begun to move up in the right direction. We are cautious, though, because there's been a lot of noise over the last several weeks with all the storm impacts that we've seen.

But even in Q4, we saw some hints that it was moving in the right direction. And we've heard from some of our competitors and some of the retailers that they've observed some of the same phenomenon. How long it's going to sustain, we're not quite sure. That's why we want to provide a very conservative guide for the year based on what we did deliver in Q4 and what we feel very confident about. But there's clearly some opportunity for some upside if those trends continue.

Our next question is from Steve Powers with Deutsche Bank.

Welcome aboard, John. I guess, can we talk a little bit more about what you've learned so far from the fridge island expansion efforts and what you're looking to understand as you move from the 28 stores? And also, Billy, you talked about some of the other concepts that you're testing, including the open-air end caps and the bunker style coolers. So is that part of the fridge Island initiative? Or is that kind of incremental testing? Maybe just a little bit more clarity there would be helpful.

Billy, would you let me to take this one?

Yes.

Great. So we're still very much in test phase with the fridge islands. We're learning a lot. It's early days and we've taken a thoughtful approach. Clearly, there's more capital that's required for these island units, but they do deliver us 2.5x capacity versus a single fridge. So that's a really big move forward.

So we're now at 28 island units. And what it's allowing us is a broader assortment, which is ultimately bringing in new households into the brand. So just by getting that capacity up, we get more assortment in. But we're also getting more holding capacity, and the holding capacity is really important for us for omnichannel, especially to serve click and collect as well. So we're finding we're staying in stock much better and able to service that consumer coming through, too.

So that's outside of the significant beacon it's providing with a better location in the store and driving that awareness overall. So we're very encouraged, I think that's probably the best way to put it, with the fridge island at the moment. And what our plan is, is obviously to just continue to work with retailers that are looking to experiment in this way and then make sure we really pick the right store locations in order to get the best return.

But even outside of fridge island, we still have a very significant opportunity with multiple fridge expansion. We're only at 25% of all stores have more than 1 chiller. So we will continue to lean in and put more multiples in, experiment with end cap, open airs and also bunking units. So very much looking to tailor our approach for different retailers.

Okay. Very helpful. And then, Nicki, I don't know if you'll take this one as well. But you talked about the affordability initiatives, sharpening entry-level price points, et cetera. I guess related to that, number one, do we have more to go on that front? Or do you feel like you've made the intervention necessary at this point?

And either way, as you think about the full year '26, is the expectation that volume growth exceeds sales growth because of those affordability investments? Or will revenue growth management and mix, et cetera, allow sales to keep pace or even exceed volume growth? How are you thinking about that?

Yes, that's a great question. I think I'd start by saying we did do a big step back. It was a very challenging macro environment for us really around Q2 last year, and we stepped back look at what we could control and what we could sharpen in terms of our execution for both the back end and into '26. I think to start with, for us, it's really about winning more also with the retailers that are winning in the marketplace. So you saw us really focus and expand out some of our club channel offerings. And clearly, within mass, we've made some key moves.

We do not anticipate a significant shift in mix or investment coming in this area. I think we've done what we needed to do really within the portfolio, and that's paying back as we store through the back end of last year and into this year. And we did a lot of work modeling price elasticity. So the small movements we made were really data-driven and well executed. So in summary, I believe as we look through this year, we've made the steps we think are right in the current macro environment. But we do reserve the right, obviously, to regroup and review that if things adjust and change as we go through the year.

Our next question is from Tom Palmer with JPMorgan.

I wanted to ask just on the drivers of the gross margin expansion this year and how that might evolve as we think about the 48% plus target for 2027. One call-out for '26, for instance, was increasing sales growth without really increasing headcount. So I guess, to what extent is that a continued driver as you think about 2027? And what other items such as the new technology might be kind of key drivers as we think about not just '26 but beyond?

Let me take a shot at that, and then John might want to add something to that. I would start with this is one of the areas that we're most bullish on. The reality is that our manufacturing team has done an exceptional job over the last several years. It started when we rebuilt organizational capability through the Freshpet Academy. It's included our Freshpet Performance Excellence Program that has been driving up OEEs. And that's really the biggest driver. But in addition to that, you saw we've continued to make good improvement on our quality costs and our input costs.

From this point going forward, so particularly in '26, the biggest driver is going to be as you called out. It's going to be getting more volume from the same number of people. We can do that because we have the installed asset base, and we can do that because the team that we've got is demonstrating every week and every month that they're running the lines more efficiently than they have in the past. And we expect that to continue on for many years. We don't believe this is a one-and-done kind of program. There's a long runway for growth.

There will be points along the way where as we grow, we will have to add staffing. But incremental staffing, a shift on a line or something like that, is increasingly a small share of our total overall staffing. So it will be less disruptive to our margin progress. But I do expect in 2027, we'll have to add staffing, but it will be against a larger net sales base. Within that, we also expect to continue to improve yields on our lines even if we don't have the new technology.

And then as you highlighted, the new technology is the big wildcard. If we decide to accelerate the expansion of that new technology, which is one of the options we talked about, making that decision sometime in the middle of the year, that would have a meaningful impact in '27, not in '26, but in '27 where we would start seeing much broader use of that technology and the related throughput and yield benefits as well as quality benefits we get from that. I don't know if I missed anything. John, is there anything you want to add to that?

Yes, sure. I think you covered most of it, Billy. I think there's maybe just on a smaller scale, as we continue to look to be efficiently managing our input costs, we are always optimizing our formulations to manage that margin. And then while we did focus on the last question on kind of pricing items to drive value at the entry point, we are in other places actually taking price on some of our products and helping to expand margins there.

Right. I do want to follow up just on that new technology rollout. You noted the potential for $20 million to $50 million higher CapEx both from the potential higher accelerated fridge rollout and then the faster deployment of that new technology. Just any framing of, one, is it just the two rollouts in the $150 million CapEx number? And two, how much does a new line with the technology actually cost? So if we do start to see the acceleration, we get an idea of kind of how incrementally each one might be.

Yes, I'll take a shot at that. So the base CapEx budget for this year includes the line that's already started up, but most of that CapEx was in last year. And it also includes the conversion of the first line that we're doing, which is here in Bethlehem. If we expand the CapEx, it would include additional conversions. And as we said on the prepared comments, the cost of those conversions is a modest cost. Think of that in the single millions of dollars, not in double-digit millions of dollars per line depending on the configuration, what line we're converting, how much space there is, those kinds of things.

If we're going to install another one of the new full up lines, like the line we've installed here in Pennsylvania, it's a little bit harder to describe that because it would in essence be replacing another line of a traditional technology line. And so think of this as it is a more expensive line than a traditional technology line but it has significantly higher throughput. And so the cost per dollar of production is actually very competitive or very attractive for us.

If we were to do that and we were to install one of the new technology lines, we would incur some of the CapEx this year. A much bigger portion of the CapEx would come in 2027 for that line, and you wouldn't be starting up that line until sometime at the end of '27 or in '28.

Our next question is from Robert Moskow with TD Cowen.

Welcome, John. Really a question for Billy and Nicki. I didn't hear much in the presentation today about the journey to shift consumers from using Freshpet as a topper to more as a main meal. And I'm just wondering, is that still a major objective of the marketing plan? Or have you kind of evolved the marketing plan to, through the variety of offerings that you have, make it more that something you can use more frequently for meals or in other ways? So just wondering where you are in that journey.

Yes, Rob, I'll have Nicki address this and our focus on the MVP consumer.

Thanks, Billy. Thanks, Rob. So it's still very much core to our marketing efforts and plans. MVP is 71% now of our total sales, so by far, the biggest area that, I call it, we need to super serve. So in order to really be able to get these households in, this is what's also in part fronted our renewed focus on omnichannel. And one of the key elements, I think, to bring in those MVPs into the brand is shifting our media mix from being more digital forward.

And this is really driving brand awareness through streaming, through social and then through retail media. And then making sure from an online standpoint, we can actually sell and serve those consumers where they best want to buy. So our efforts are still very much around super serving that audience. But when we look at our total media spend, we will continue to make sure that we first invest the TAM, which is those 36 million households we've got. And then we will drive better reach and frequency.

So we will put more dollars, I guess, per MVP household in to what I would call the digital part of our spend. So it hasn't changed from what we talked about last year. I think so we just got better where to spend those dollars and how to focus on attracting those MVPs.

And then the last thing I would say perhaps to put a bar around it is our expansion in club and what I would call value packs and bulk packs is also really helping to serve those MVPs better. We rolled out a number of value pack items last year and we've expanded into club. We do see club and online, online because of that retention, that subscription service and club because of the nature of the pack, is really helping us to better improve our offering to MVPs.

Rob, I would also encourage you to think about the discussion that we've had in the call so far in both the prepared remarks and in the questions about omnichannel as being highly synergistic with the focus on MVPs. In essence, to meet the needs of the MVPs, we've got to be available and effectively marketed in a wider range of channels. And so when we talk about omnichannel, it's sort of a distribution and availability component of an MVP strategy.

Our next question is from Michael Lavery with Piper Sandler.

Welcome, John, as well. Just wanted to understand the multi-packs a little bit better and maybe get a sense of how the consumer interacts with that, if you have found it to be incremental. You seem to have an already loyal consumer. I assume it's obviously at a more favorable price point. I guess, how do you know you're not just maybe giving a subsidy through that? Or how does it interact with the rest of the portfolio?

Nicki, you want to take that one?

Yes, sure. I'd say we're pretty early days on multi-packs at the moment. So a relatively sort of focused distribution, especially when we're in the double chillers, so multiple chillers and also in island units. So far, we've seen there's a certain kind of household that wants to buy those packs, and that's different for those that want to come in very frequently into store.

One of the challenges, I think, we have historically has been fresh food requires very, very frequent shopping trips. So by putting a product into a multi-pack, which is very convenient both in an online format and also with club format, it's making sure that they're getting enough of their food in a more convenient way rather than multi trips per week. So, so far, we're seeing a different household target coming through those multipacks, but we'll continue to experiment and see how it works and make sure it maximizes incrementality.

The other thing I would say is the discount level for a multipack is very, very low. So this is not something also that we're driving aggressively in terms of pricing.

Okay. That's helpful. And just a question back on consumer. Your upper kind of middle end consumer would seem to be the very one that could most benefit from some of the tax law changes and maybe not as much a function of elevated refunds this year as much as withholding changes that have an ongoing benefit. Is this something you think could maybe help drive some improvement in trends over the course of the year? And even if so, is it something that is yet another kind of piece of your conservatism that you wouldn't be capturing in the guidance but that you would keep an eye on?

Yes, Michael. I will tell you there's a variety of things that we think can influence the macro market. The larger tax refunds is certainly going to help the lower withholdings in [ part ] of the change in salt deductions. All that is going to help. And we think there are other drivers that are helping. If you take a look at the consumer sentiment data, it was not good last year. We hit a real low in April and May, kind of bounced back and it dropped down again, very low in November.

But we've now seen a couple of months in a row where it's starting to tick up. And one of the things that I would attribute that to is the consumer is remarkably resilient. They digest the bad news. They look for the good news, and then they move on. It takes time. And there's a little bit of pain that we all endure when you're going through that process. But the consumer, I think, is remarkably resilient over time. And we're hopeful that, that means good things for the pet food category and certainly for Freshpet.

Our next question is from Rupesh Parikh with Oppenheimer & Company.

So just going back to the competitive backdrop, just curious if there's anything surprising that you've seen from some of your competitor entries, whether positive or negative, just given the increased focus on the fresh category.

Yes. First of all, it's not a surprise that we've had as many competitors enter the market at many different channels. We think it's helping the total category. The increased attention of retailers, media investment, all that is -- rising tide is going to lift all the boats, and we feel very good about that.

We also believe that as you take a look at it, it's also validating that the business that we spent almost 2 decades now building and the things that we've chosen to invest in are the most important and most meaningful. The quality of our products, the strength of the brand that we've built, the manufacturing distribution scale, all of those have done a very nice job of insulating our business from fairly significant investments by a wide range of competitors with a very diverse array of offerings.

At the end, we feel really good about the product proposition that we have, the brand proposition we have and the capabilities that we've built. But we're not standing still either. We're looking for ways to add on to that. So we talked about building out omnichannel. We've talked about new technologies and manufacturing. We are leaning in, in a very big way to make sure that as this segment becomes a larger and larger share of the category, which I think everybody now believes it will be, that we will have a very large share of that expanding category.

Our next question is from Jon Andersen with William Blair.

Welcome, John. I wanted to ask on the 2027 kind of EBITDA version targets. Billy, you talked about kind of reiterating what you've said before, 20% upper single-digit growth rate. And you kind of resume mid-teen growth closer to 20%, 22%. Is the benefit of the technology that you've been talking about today, production technology, is that included in those targets? And if so, to what degree?

Yes. I'll take a shot at that, and then John might have something to add. I would start with the reality is that unless we accelerate the manufacturing investment on the new technology, it will still have a relatively modest impact in 2027. The one line that we've installed in Pennsylvania is a relatively small-scale line. So it will produce good product but not a significant percentage of our total volume. And the line that we're converting this year is, again, going to produce a good amount of product. But against the backdrop of the total number of lines that we have, it's still a relatively small share.

If we do pull forward the investment to accelerate the technology, it could help us get there. But our building blocks haven't assumed that. Our building blocks have assumed that we would get there through good old-fashioned OEE improvements, through yield improvements, through G&A efficiency, net sales growth that would be at a higher level. And that could just give us another lever to pull that might get us there, but it's not necessarily necessary.

That's helpful. And then the 7% to 10% sales growth for 2026, is that what we'd expect from a consumption perspective as well? Are there any kind of puts and takes that we need to think about there where consumption might deviate from that one way or the other?

And then with respect to the cadence, I think, John mentioned, to what extent should we be thinking about the maybe overdelivery on that guide in Q1 due to the easy comp and maybe underdelivery in Q3 due to the more difficult comp?

Yes. Let me take a shot at that. So starting with the difference between consumption and net sales, Consumption is now measuring just about every part of our business. It doesn't provide a complete measure of our DTC business or of some of the e-commerce businesses that we do. but it's a relatively small share of the total pie that it doesn't measure. So the two should trend fairly close together. There shouldn't be any significantly meaningful difference between what's measured in consumption and what we report in net sales outside of our own internal DTC business.

In terms of the cadence, I think you called it out right. We said in the call Q1 is a little bit softer comp just because of the disruption we had a year ago. And Q3 is a tougher comp. Beyond that, it's really going to come down to how effective is our advertising and what is the consumer environment. And that will dictate the pace of the year. But we feel very good about the trends that we're seeing so far, and we feel really good about the building blocks that we've put in place between the advertising program, the product initiatives and the retailer support that we're getting.

Our next question is from Peter Galbo with Bank of America.

Billy, John, Nicki, maybe if I could just actually follow up on the last question. I know we talked a lot about cadence of sales for the year. But maybe you could help us a little bit, just the cadence of EBITDA delivery for '26. It sounds like with the higher sales in Q1, but then you have some increased media investment spend, so maybe anything you can do to help us with detail there, please?

Sure, Peter, yes. So looking at the year, I would expect to kind of index below our kind of implied margins in the guidance in the first quarter and then be building through the year as we soften the amount of media spend, right, because that's going to be more front loaded in the beginning of the year and also as we continue to gain leverage through growing sales throughout the year.

Okay. Got it. That's helpful. And Billy, we spent a lot of time talking about the gross margin improvement and some of the benefits that could potentially unlock from the technology side. I guess, just what I haven't heard today at all is any kind of color on raw material inputs. The protein complex has kind of been all over the map in the last 12 months and kind of where chicken has gone, where beef has gone. So maybe you can just remind us where you stand on raw material costs and the curve there and maybe locks for the year?

Yes. I'll comment on this, and Nicki might want to add to it. But overall, as we mentioned in the past, we lock our chicken pricing or at least the bulk of our chicken pricing in the fourth quarter. And we did and it came in at prices that were in line with where we were a year ago. The big issue for everyone is beef continues to be higher cost. We are taking some actions to try to address the higher beef costs. But at the end of the day, that's the one commodity cost that's really a challenge for us in this year. And as we mentioned in the comments,earlier, we've taken the pricing. We've done some formulation work. All of that is intended to address those costs. Nicki, is there anything you want to add? No?

No. That's great.

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

Great. Thank you, everybody, for bearing with us through the middle of this blizzard. I want to leave you with a thought from the Canadian, Fran Lebowitz. And it is, if you are a dog and your owners suggest that you wear a sweater, suggest that he wear a tail. To which I would add, or you could just feed your dog Freshpet and all will be forgiven.

Thank you very much for your time.

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

So we're going to get started here. Good afternoon, everyone. I'm Eric Serotta from Morgan Stanley's Beverages Tobacco and Household products team. And I'm very pleased to welcome Freshpet back to our Global Consumer and Retail Conference.

Before we begin, please see Morgan Stanley research website at www.morganstanley.com/researchdisclosures for important disclosures. And if you have any questions, you can reach out to your Morgan Stanley sales rep. Freshpet reinvented pet food with a range of real foods and treats made from fresh meats, vegetables and fruit. Sold in Freshpet branded refrigerators and grocery, mass, club and pet specialty stores. Joining us today, we have Freshpet's CEO, Billy Cyr. Thanks for joining us.

Great. Thank you. Glad to be here.

Great. So to start off, look, Freshpet has made tremendous progress over the past 3-plus years in terms of building out the manufacturing network, scaling the the business. Now you're guiding to positive free cash flow for this year, a year ahead of schedule. If you take a step back today, can you give us some perspective as to where the organization is and the key capabilities today versus a few years ago?

Yes. It really is an amazing amount of progress and we're a much better company than we were a couple of years ago. I put it in 3 buckets. I would put it in the personnel, I put it in the systems and I put it in the processes. Personnel, obviously, we built out the team quite a bit in the last couple of years. Not all of it's obvious to the public, but we have a -- we brought on Nicki Badi, who is our Chief Operating Officer. She joined us about 1.5 years ago. We've -- which moved Scott Morris, our Co-Founder, into a more innovation-focused role. We brought on a new General Counsel, a new Head of Quality, our Head of Manufacturing was elevated to the role that he's in.

We've built out a much deeper marketing team with much more digitally savvy capabilities than we had before. Our finance team has been built out quite a bit. So we've got a much deeper finance capability than we did before. So from a personnel perspective, we have really done a nice job of adding capabilities where we needed to add capabilities to fill holes and frankly reflect the company that we've become. From a systems perspective, we've invested very heavily in a bunch of things that have made us more effective.

We've built a data analytics team that has now done a phenomenal job of making us much more data-friendly, data-centric on our ability to read and react to the business performances that we've got. We built out a whole ton of systems in our manufacturing operations that have made us much more effective, particularly focusing on overall equipment effectiveness. So what we call the Freshpet Performance Excellence program, which is designed to improve operating efficiencies. Huge capability that we've spent 3 years on, built a team that can deliver that. And the last thing is the processes. We've done a lot to simplify the processes that we're working on and get more focused on the places where we can add capability. I will tell you, though, that at this point in time, we're taking a step back again and saying, okay, you're $1 billion company. How many things are you doing? There's still legacy of what you used to be that aren't necessarily relevant to where you're going? And it kind of trimmed down on some of the teams, committees, meetings, rules that you probably don't need any more or that can be done more efficiently. And so I'm expecting to see a catalyst that being a catalyst, for increased organizational capability and efficiency going forward. It's a big chunk of work for us, but it's something that it's needed when you go from $300 million to $1 billion in 5 years. kind of thing. It's like building a house. We started with a cottage, we added an extra bedroom. We added a sunporc. We added a second kitchen and soon we had a mess.

Do you expect that to show up those opportunities as you get after them to show up on in terms of better SG&A leverage or is fuel for further reinvestment to the top line?

I would start with on the OE part of the work, the operational efficiency I described. That's a well-established program, and that's driving our gross margin. and we expect to continue to invest there and expect to see continued improvement there. I expect us to see over time, continued gains in our G&A leverage so that we can invest back in the business to continue the growth, but the near-term piece, you're going to see the biggest impact from is the work that we've done to drive operational efficiency and will continue to do to drive operational efficiency and the way that will contribute to our gross margin. We've made a lot of progress, but we got a lot of room ahead of us.

So shifting to big picture, pet food category, dog category, no secret slowed this year. Your growth has slowed with it. Can you unpack the drivers of this year's slowdown and sort of the implications for how you're looking at growth in 2026 and then over the next few years?

Yes. The slowdown had 2 primary drivers to it. We've now had almost a year that will kind of reflect on the data. It was 2 parts. Part number 1 was people view getting a dog and trading up in their dog food to be more like a capital purchase than it is like buying a consumer packaged goods. In other words, they're committing to an ongoing stream of higher expenses. If the decision is to get a dog, it's okay, I'm signing up for doggy day care grooming, vet appointments, feeding the dog, somebody to watch the dog, whatever it ends up being. And so the decision to do that is heavily shaped by my perception of my ability to cover those expenses over a long period of time, much like when you sign a new lease or you decide to buy a new car and absorb car payments.

And so it's not just, oh, can I forward this particular purchase at this moment in time. It's a longer-term commitment. And with the uncertainty that consumers had this year, they were pausing on that. They weren't as willing to replace a dog who passed away or to get that first dog. They paused. And we saw that in the consumer sentiment data. We saw that in the category data. That's not unlike what happened back in the -- Great Recession, where consumers suddenly were concerned about their ability to meet their obligations going forward. And as a result, they pause on getting dog. It doesn't mean their desire went away. In fact, it's now there's an enormous amount of pent-up demand that at some point will be unleashed when the consumer has some confidence that they can meet their obligations going forward. That was the first part.

The second part is consumers stop trading up. And this category has benefited for a very long period of time from about 3 to 5 points of trade up or growth from trade-up that happen every year. So moving from lower cost, giving a to higher cost cabling can to some form of DTC or fresh products like ours. The trade-up stopped this year, completely stopped. It wasn't trade down. We don't see a lot of evidence of anybody trading down. What we see is people just paused and said, am I really ready to absorb this higher cost of living or say just take a pause and wait now. And so the trading up isn't happening at the rate it normally does. And if you think of the category has 3 to 5 points of trade up in it, that's a meaningful part of our growth. That's a meaningful part of the Farmers dog or Hills.

In fact, it's more than 3 to 5 points for us because we are the beneficiaries of that and all the lower-priced stuff is the contributors to that. And so that dual phenomenon of no trade up and people pausing on getting dogs is really what hit us. The iron is the flip side is cats are growing like at a very rapid rate. We're seeing 5% or 6% growth in cats, because they're viewed as lower maintenance, lower cost, less of a commitment. And it kind of marry matches up perfectly with I want a pet, but I'm not really sure I can afford it. I'm not sure if I'm going to have a job. I'm not sure if I can take care of it. cat a low-cost way to get into that space.

Against that backdrop, we've heard a lot of CPG companies today talking about controlling the controllables, can you give us some perspective of the levers that you have within your control and what actions you've taken so far?

Yes. So let me start down on the P&L. Obviously, we have to control our organization size to live with the growth rate that we've got. But more importantly, in the gross margin, we -- as I said earlier, we have so much momentum and made so much progress on that side. anything we can do that can help us accelerate the growth of our gross margin gives us the ammunition or the fuel that we can invest back in the business to drive growth. When it gets to the top line side of it, what we found is that we've had to adapt to the environment. The environment of today is 1 where value is very important. And so we've had to change our message to match that.

We used to be focused on the relationship you have with your pet, and that's a very important part of the story. But we had to explain to people why fresh is better, why fresh justifies the price that we're charging for it. so that you would feel like I was buying a good -- getting a good value when I bought the product. We had to change the media buying to reflect the fact that there are some consumers today who are in the market and willing to trade up or buy a higher-quality dog food and there's some people who just -- that's not within reach. And so I don't spend a lot of time talking to those folks spend more time talking to the folks who have the money. The same thing is true about retail is when you think about where you're going to invest in terms of your energy and your fridges and whatnot, is focusing on those places where the foot traffic is very high, Walmart, Costco, places like that, where the foot traffic is gaining just because that's where the most value conscious consumers go. All those are within our decision space. All those are within our control.

And actually, I should add to that innovation. Do the right kind of innovation that meets the consumers' value needs in a very difficult environment. And we've done that. We've launched complete nutrition this year. We did some work on our pricing on our 1 pound chicken roll to just make sure it was priced in the right place. But we want to be in the place with the right places, the right products, the right prices to meet the consumers' needs, and we think that we've done that, we'll see.

Great. And then taking a step back longer term, how do you frame the TAM for Freshpet. You're in something like 15 million households. I know earlier in the story, you would talk about much more about the doors that you were in 2.3 million MVPs that are 70% of your sales. So how do you think of the TAM? How do you address the unpenetrated or underpenetrated households and grow the MVPs faster?

Yes. First, all of our data, even in this difficult environment, continues to show that the desire to treat your pet as a member of your family as an incredibly important part contributor to your family and also to have the best food and the definition of the best food is evolving in the current environment to things that look more like Freshpet and away from things that look like kibble and can. Those long-term trends that have been driving our growth and driving this category have not abated, no matter what's happened from a macro perspective, it just caused people to take a pause. But the long-term demand is still there for people to get dogs and treat them like a member of their family and feed them the highest quality food. When we think about the TAM today, we're increasingly focused on the, call it, 7.5 million people who we see having the potential to the MVPs.

Today, we're only in 2.3 million of those households, if you look at the broader market, the 33 million households that we talk about that are part of our addressable market, we're only in 14.9 million of those households today. We have a long runway there. But the real focus is going to be on those MVPs and driving that $2.3 million number up to 3 million, 4 million, 5 million households because we'll make sizable gains with that. And we don't see any reason to believe that the current environment has changed that long potential.

Great. And then how do you think about price points and affordability, big theme here today, among other companies providing value to the consumer like as you said, your products cost more than kibble and can. But at the same time, you're significantly less per day than a farmer's dog or an all-year or super premium DTC. So how are you thinking about value here maybe expand a bit upon what you did with complete nutrition, where you see it going and how you're thinking in terms of price pack architecture and other levers.

Let me put the value. The language that we use is we talk about affordability, and we put it against the context of also convenience and superiority. We need the consumer to look at the basket of things that we deliver they have to perceive the experience, the diet and the experience that Fresh back creates is being superior. They have to see us being convenient, meaning I can find it in the places that I want, shopping experience is a good one. And then within that context, it has to be an affordable product. And we are focused quite a bit on maintaining what we would consider to be a good price for our products without necessarily doing discounting or promotion because we think that drives bad behavior for our business and it certainly drives inefficiencies and our ability to supply our consumers on a reliable basis.

We are always mindful though that we've got to be in the place where the consumer is willing to shop and have products at the right prices. We did this year, we launched the complete Nutrition bag product, similar to what we did 2 years ago when we launched the complete Nutrition role it is designed to be very specific and very targeted as an entry point price point item that will move the consumer up through the franchise over time. It's not intended to be a high-volume item. It's more of a gateway item for us. And then we've also did some price adjustments on our 1 pound chicken roll to get consumers to kind of ladder in similar to what we did a couple of years ago, and we saw a nice effect of consumers saying it's worth considering or trying this, very small part of the total volume, but it moves consumers into the consumer franchise and we will continually do that.

But we're also looking for ways we can use formulation, changing formulations to get to more affordable products. to get the right sizes to the right consumers that are most affordable. We're looking at some things that might give you some opportunities if you just want to be a mixture of topper that we can give you a mix or top opportunity that's perfectly tailored for that experience. And then complete nutrition bags are in what, 2,000 or so stores something like that, yes. Is there a plan to take that wider. We'll see how it goes. So far, it's largely a grocery item and it's serving its purpose in grocery. We'll see. The thing that's always tough that people have to recognize about our business is we own a fridge in a store. And you can't go and say, let's just add 1 more SKU, but outside of the fridge. It's got to displace something in the fridge that we have. And so it has to sell at a higher rate than the thing it's going to displace or be more incremental than an item that it's displacing. And that's a pretty high bar in many retail outlets. If you go to Walmart, for example, where we have a large bridge of our own and then we have 2 shelves in the Walmart fridge, the reality is each of those items sells at an incredibly high rate.

And you wouldn't want to put a complete nutrition bag in there unless you knew that it was going to sell at a much higher rate than the thing it was displacing. So the bar is pretty high in our context, unless the retailer is going to put another fridge in, in which case the door opens to a lot of other possibilities. In terms of other growth areas in the past, you've spoken a lot more about a focus on second and third doors. You've what is it now, 30% of the stores 24% of the stores have a second or third for gene.

Yes. Talk about is that -- how much of a focus is that for -- obviously, you're not going to get 100% or fully close that also talked about large dogs as an opportunity. Also talked about complete meals versus toppers. So I realize 3 very different initiatives that you've spoken about previously. And on top of that, you have the island fridges that you're testing. Of those, which are still focuses, which are -- would come back a year from now, which do you think is the most potential to kind of...

They're all sort of interconnected because expanding the fridge footprint is what enables all that innovation that you just described. And when we have conversations with our retailers, the conversation always starts with, who is it that you're trying to appeal to, what is the size of the audience that's shopping in your stores? What items do we need to service that group of consumers? And do you have the right assortment today to meet that need? And is this your strategic objective is to broaden the appeal. And then we go through and identify which of the items in our lineup, we'll meet that need.

You have the shopper profile that you've got is if you're in an urban environment where there might be people with a lot of small dogs, okay, do you have the right assortment of our small dog fronts. We have a small dog, we small-log beef product. Do you have the right combination of those items. If you are a retailer who is services consumers who buy in large quantities, do you have products for large dogs, do you have products in our 6-pound rolls, do you have the 6 on rolls, you also have the beef role? Do you have the right size items. And it really -- for us, innovation is designed to expand the appeal of the total franchise it is not intended to just take up shelf space.

Shelf space is incredibly important to us. It is finite, and we want to get maximum productivity, a maximum number of households. So if it's smart for the retailer at a second fridge and second and third fridges are a big part of our growth program, it comes with incremental SKUs. We also have a push to. We work our innovation team to try to come up with items that would be so unique, so interesting that it hits a retailer from going, okay, I can now see why I need a second fridge because I can't put that item in the first bridge call that fridge bat.

Got it. So shifting gears to the competitive environment. Look, it's always been a competitive category. A few CPG categories are not competitive. Certainly a lot of noise and news this year in terms of the mills, Blue Buffalo into refrigerated. So looking at the scanner data, they got distribution really quickly. The sales and the velocities seem to be topping out. Now it's a couple of weeks of data, so 6, 8 weeks of data. So I don't want to draw too much of a conclusion. But I guess, what are you seeing in the market in terms of your business from the competitor launch in fresh? And then longer term, if you zoom out, how do you think about your competitive moat these days. It used to be -- you used to talk a lot in terms of the fridge network as being the moat, but I imagine that's evolved a little bit.

Yes, it has. First of all, we expected this day to come for a long time. Frankly, it came later than we expected. We expected to see a large number of people wake up and realize that fresh was the future of the pet food category. So we spent the better part of the last decade thinking through every move we've made in terms of how well will this protect us when others decide to enter this space. And if you look at some of the choices that we've made, we focus on building an incredibly loyal consumer franchise.

And by that, I mean, we built a franchise not based on price. We built a franchise that was based on the quality of the product the advertising that we ran and the brand equity that we were able to build. We built a franchise was built on a diverse array of products, meaning products meet a wide range of needs and get the scale that allowed us to enable that. So that was part of what we invested in. We built a broad retail footprint that allows us to service a wide range of customers as many places as we can and have the velocity in each of those stores. so that it justifies the space that we're holding. We decided to invest in manufacturing technology and capability to enable scale, which lowers the cost in both manufacturing and distribution, but also the expertise that allows us to produce higher-quality products with a long enough shelf life that could survive a refrigerated distribution system and produce a high-quality experience for the consumer, and then more recently invested in manufacturing technology that we're quite proud of that allows us to get to the lowest possible cost on the highest quality product that's out there in the bag world or will be out there in the bag world.

And so where we sit there and look at the choices that we made, we feel really good. If you look at the success that the people have come up against us have had at the retail environment so far nothing has come up that looks like it's a significant threat to the position that we've built. But as you said, it's very early. So we'll have to see how things unfold. But nothing has surprised us, and we feel very good about the investments we've made, the position that we put ourselves in. But we're going to be vigilant. We do not want to sit on our hands and wait for things. We're going to kind of keep leaning in to the advantages that we've had. But the advantage that we've got today and the things that we continue to invest in and build going forward, I believe, put us in a very, very attractive position relative to all the other people trying to enter this space.

And it's going to be a combination of the brand we built, the franchise, the consumer franchise we have. The fridge system, and it's not just the number of fridges, it's the mastery of maintaining the fridge network. The manufacturing scale we have and the manufacturing technology that we're pioneering. All that together is going to provide an enormous insulation for our business.

Great. And then I want to come back to the technology in a moment, but first, let's talk about gross margins and your 48% target for 2027. So leaving the technology the new technology aside for a moment. So what are the drivers of gross margin expansion from here? I know you talked about the operational efficiency I assume that a lot of that comes through plant costs, throughput, quality, input, other drivers. So help us unpack that.

Yes. So 3 years ago, a couple of important things happened in our business. One is -- we brought in some outside consultants, folks -- many people know Millican. Milican as a flooring company, but Millican also has a consulting arm because they're so good at operational efficiency brought them in and jump started an operational efficiency program for our team that we call Freshpet Perform Excellence and focused on overall equipment effectiveness, OEE. And we've made enormous progress on that. So when I look going forward from this point where the margins are where they are -- the gross margins are where they are going forward, that will be the single biggest driver for the next year or 2 of our gross margin performance is the progress that we've made the momentum we've had, the demonstrated performance that I can see every day in our operations gives us a high degree of confidence in the gross margin targets that we've set. I feel really good about it, and I watch it, I see it every day. That's an important part of it.

We've also, in that 3-year ago window, we set focus on input cost, quality and logistics as drivers of improvement. And we exceeded our expectations. Our logistics cost peaked at 1.5% of sales. They're down to 5.5 kind of percent of sales. We've built a really strong team in logistics. They've done an amazingly good job. We have a really sophisticated logistics system that we're building out. We feel very good about that. Our quality costs peaked at over 6% of sales. They're down around 2% of sales today. The upside there is probably not particularly high, but the team that we built and the technologies we've invested in and the organizational capability that we've built in that organization, is really remarkable and there's still improvement opportunities there.

The last is input cost. Input costs is oftentimes perceived as just buying and formulation, negotiating. In our case, the biggest driver is yield improvement. We bring in 100 pounds of ingredients and some number of pounds are left on the production floor and don't go out on product bag or role. As we drive our yields up, it lowers our input costs. And we've made tremendous progress there as part of our OEU program, and that's -- and I expect to see continued improvement there, particularly with the new technology. So if you put it together, Three years ago, we focused on OEE, and we focus on input cost, logistics and quality made huge progress.

To that, I add the last piece, which is what you refer to as the technology. The technology is -- I mean, we've been working on it for 7 years. we've got it. We feel really good about what we've done. We'll be able to start shipping that product next month. And when we do, I think people will be impressed by the quality of the product. and we'll be in a position where our bag products will be by far the best bag products you can buy and at the lowest cost. It's a really remarkable achievement.

Yes. So maybe you could talk a little bit about some of the milestones on the new technology. You said you'd have a commercially scalable -- commercially salable product. this quarter, you just said, what was it next month or next quarter, you'll be selling it. So I guess what are the validation points from here to like do we push forward with this? And given that the full version of the technology is for new lines, like when would you potentially make the go forward with it. And sort of I know a lot in here, but a similar question in terms of the light and the retrofitting, what are the milestones? And like quickly could you move if this is actually working.

You can put anything you want on that question because this is 1 of my favorite topics. So think of it as we've now been in the commissioning phase on the new technology for about 9 weeks. And we have not seen anything that has limited our confidence or enthusiasm for it. In fact, we're more bullish today than we were 9 weeks ago because we've overcome the usual startup hurdles that you would encounter. And the product that's coming off the line is just remarkable.

So we will start shipping product next month. We were producing now a product that we would consider saleable or will be considered salable once all the final testing is done. So we feel very good about the startup progress. To your question about what are the milestones. So I think the 4 milestones that we have to get ourselves through to we say, got it, done, ready to expand. Number 1 is, what is the quality of the product coming offline. We expect this to be a higher-quality product than what we are able to produce in our existing lines. I will tell you our confidence that it's very high because we're seeing that already. We're already producing product on the line that we look at and go, this is really good. Second is, is its innovation capability, what we thought, meaning its ability to produce different products than what our current systems can produce that are incredibly appealing to consumers.

I can tell you with confidence that we've already checked that box, too. We started producing items on that line that we don't produce anywhere else, and they look really, really good. And we've demonstrated the ability to do an even wider range than what we've already tested. Those are 2 boxes I say, yes, got it done, know it. The next 2 that are going to take time. One is, can you drive the yields up because the economics on this are driven by demonstrating improved yields.

We're pretty confident that, that's going to happen. We're already seeing some of that come through in the operations. But it's really hard to prove that when you're starting up and shutting down as you're doing validations just because you lose stuff at the start and the finish of every run or if a piece of equipment isn't doing what you want, you deliberately stop, you find out that you have to throw more stuff away. So it's hard to get really good data on yields. But when we've done long runs as part of this qualifying we're seeing yield improvement.

The question is going to be under operating circumstances that you normally would do for long periods of time, like weeks and months, do you get that benefit and then the second part is going to be -- the other part of this is going to be on the throughput. A big part of the economics is going to be to get the throughput gains that you're expecting, more pounds of finished product per hour, per labor hour per day and we are proving that we have the potential to do that, but that's another 1 that you have to run the line for some amount of time.

I would expect that we'll be in a better position to make that assessment in a couple of months because we'll have a couple of months of operations under our belt and we'll be able to decide are we ready to commit to that for a future line. Full stop. The light version of technology, we continue to do pilot runs on it, very bullish. The technology seems to be demonstrating what we think it will do in the pilot runs. The first full-scale line isn't going to operate until the second quarter of this year. But the beauty of that is once it does, we can then retrofit lines more quickly. We have the potential to retrofit a second line this year, and we could do more lines next year or in this year, I mean '26 more lines in -- everything we see from those validating runs is that it's going to deliver what we wanted to deliver. But again, we need to see it in operation to confirm it. But we've been working on this for 7 years, like we think we figured something out. It's pretty cool.

Yes. Next 1 to turn to capital capacity and capital spending. You talked about installed capacity of -- to support a $1.5 billion business. Your guidance for this year is like $1.1 billion, but you're continuing to invest for growth. So how are you thinking about sort of the cadence and magnitude of further capital investment from here? And can you also said that you give guidance for next year, but you've talked about broad ranges for CapEx, but so that doesn't include the potential faster rollout of the technology or broader rollout of the island fridges.

So what kind of order of magnitude for next year, could we expect if either of the incremental capacity, if either of those bear out, which good problem to have, right?

So first of all, we said on the third quarter earnings call that our CapEx next year would be roughly in line with what we're spending this year. with the caveat being if we had a more rapid expansion of fridge island that could in and if we had a decision to accelerate the new production technology, that could be incremental, frankly, either of those as a winning scenario 1 drives significant net revenue gains. The other 1 drives significant operating improvement.

So I kind of look at it and go, yes, we'd spend more capital, but we'd all be very happy about it. The capital that we are expecting to spend. A lot of people are asking me this question, why are you still spending about the same rate if you have enough capacity today to meet the demand. The way to think about our business is, as you add capacity, it takes about 90 days to add staffing if you've got a line. It takes about a year to add a line, if you need to add a line to an existing building. if you need to add a building, it takes about 2 years to do the building and then put the line in. If you want to build a new site, it takes 3 years.

So the money that we're going to be spending in is designed, in this case, to finish off a building in Texas that we need at the end of 2017 or the beginning of '28 and then in '27, we'll be spending. We'll start spending money on a building in Ennis, the expansion of the building in Ennis, that we'll need for '29 and '30. So it's just the natural cadence as we flow through. So good news is next year, we think with the installed capacity, the operating efficiency improvements that we've got, we might be able to meet next year's demand without adding staffing. In '27, we'll add staffing to keep up with the demand in '28 will bring on probably 2 new lines in the building finishing off that we're doing in NS today. And in '29 and beyond, we'll put another -- will have another building on the site ready to go. Got it.

Turning to e-com. Freshpet under-index is here about 14% of your sales through e-com, the category, depending on the source you're looking at is upwards of 30%, 30%, 35%, something like that's

We think its 35% to 40%.

35% to 40%. and your business today is largely retail click and collect, some third-party apps like Instacart. You talked on the third quarter call about e-com being more of a focus next year. How should we think about where you're focusing your e-com efforts between sort of the existing click and collect Amazon and Walmart expanding into fresh grocery in a much bigger way and then your DTC business that you stood up in the past year.

We're going where our shoppers are going. So as our shoppers are indicating a preference for where they want to buy our product, we're trying to build the easiest path to purchase the the marketing tools that pull them along that path to purchase and delivering a really good execution against whatever that outlet is. As you said, we grew 45% on our e-commerce business, our digital ordering business in Q3. And I see that continuing to grow at an outsized rate. the number of new opportunities for the consumer to buy our product continues to expand.

This year, we added DTC. We're now seeing with Walmart and Amazon doing the same-day delivery on fresh groceries. That opens up a whole another range of possibilities for us, that we're really excited about, and we think that can help us a bit, but that doesn't mean you don't have room in Chewy or in the existing Amazon Fresh business that we're doing. It doesn't mean that our cart business or our curbside pickup business is slowing down at all. In fact, we're seeing very strong growth on all of those.

In part, that's because of the way we're choosing to invest our money, reaching after the most important consumers, the consumers have the highest likelihood of buying our brand and many of them tend to be very digitally savvy consumers for whom that's the way they want to discover a brand. That's the way they want to shop for a brand. That's the way they want to have the product delivered to them. And so we're going where our consumer is going and putting resources and expertise to get that.

So in terms of consumer discovery of the brand, like you guys have always been very good in terms of customer acquisition costs, marketing efficiencies. Where do you see that trending over time as a you further scale the business and the channels start to starts to change.

Yes. It's going to be interesting because there's another -- I put a C in your list. The C would be as we increasingly skew our business towards the MVPs, they might cost more to get, but they're worth a lot more. And so you'll see your CAC go up, but the value of the lifetime value of our customers is going up quite a bit. As we watch it, clearly, this is not -- the results that we've seen this year on the customer acquisition cost have not been what we had originally expected or what we want. It's still an investable number. It's just not the quality of the number that we've historically seen.

We'd expect to see that improve as we sharpen our message and do a much better job on the media delivery that media in the places where consumers who have money, who are interested in considering an upgrade to their dog food. Placing the media in those outlets. If we do that well, we'd expect to see some efficiency improvements. We'd also expect to see an increasing skew towards those MVPs, which will go the other way on the customer acquisition cost but drive up the lifetime value. So it's going to be a mix of the 2. But at the end of the day, we're very focused and we watch this every week. We look at what are the returns we're getting are we getting the right kind of consumers in the franchise and if we are keep doubling down on the things that are working.

And do you have changed -- you have evolved or flex the marketing budget and change the message I think a couple of times over the past year or so including what was it new campaign you launched around, was it the baseball playoffs or -- so it over, right?

December, October. I love that you think in terms of baseball.

So as you -- as you look back -- are you seeing improved returns over. On the new campaign as the message working?

I would say it's not hurting. It's way too early to tell if it's working the way we want it to. Our best indicator, the thing we focus on the most is our household penetration data. We have data through November 2 at this point. The ads have been on air since September and October. I'd say it's too early to reach a conclusion on that. I'm encouraged by the premarket testing. I'm not seeing anything that discourages me, but we learned this year is to don't get too optimistic too quickly.

Yes. In the time we have left, I want to turn it back to you and ask somebody have asked some of the other companies, what do you think the most misunderstood or underappreciated aspect of the Freshpet story is?

Yes. I think there's a reframing that had to happen in the past year. I'd start with at the top, we are in a very attractive category with a large and growing TAM. And I think people might have questioned that in this year. But if you really look at the attitudinal data, the behavioral data that we're seeing nothing discourages us from believing that's the case and that this year is a blip. It's an economic blip that we're seeing, but there's a very large and growing TAM. That's a #1 most import thing.

Second is, we are the winning proposition in this space. We are growing households now faster than everybody else is. We're growing market share faster than everybody else in the space. So while the category itself is depressed, we're outperforming the category by a very large margin on a market share basis, on a household penetration basis on the ability to attract new users. We're attracting them at a disproportionate rate to what our market share is. So we're the winning proposition. So when this category gets a little bit of a tailwind again, we are the winning proposition in a winning category.

And the third part is we are continually driving towards improved returns on invested capital. We got the message loud and clear a couple of years ago, we need to really focus on that. We are focused on that, the technology I described, the operating effectiveness program I described, all are designed to return significant improvements in invested capital, and as a result of that, we became free cash flow positive this year. And I can't say enough about what an achievement is. We spent $1.3 billion in capital over 10 years. We've built a fortress. We built a heck of a business that is incredibly well insulated, and it's now generating the kinds of returns that people would expect to see.

Great. Well, with that, we're out of time. Billy, thanks so much for joining us again and for your perspective.

Thank you. Good seeing you.

Hi. I'm Tom Palmer, Equity Research Analyst at JPMorgan covering the food space. Joining us today is Billy Cyr, CEO of Freshpet. Freshpet manufactures and sells fresh, refrigerated pet food. The company has a network of 3 plants to produce product and has over 38,000 company-owned refrigerators at retailers around the country.

Billy has been CEO of Freshpet since 2016. Company's trailing 12-month sales are approaching $1.1 billion, and the company is guiding for approximately 13% sales growth this year.

Billy, Freshpet has built an impressive network of 3 manufacturing facilities. I think the growing pains that Freshpet faced over the past decade plus could maybe help inform your competitive moats today when it comes to both the quality of your product and your margin structure. So maybe we could go over that, just the challenges that you faced and how much progress you've made up to this point?

Yes. We've -- obviously, we've invested quite a bit. And for a relatively young organization, the magnitude of the investments is enormous, and the complexity that, that brings is enormous. I did a review for our folks. And if you look at from 2017 to the present, we spent over $1.3 billion in capital. And that's a pretty big number.

But we're now to the point where all that spending, all that organizational capability that we put in place is generating the benefits that we expected it to generate. So think of this as we now have, as you described, an enormous competitive moat. It's not just the amount of money that we spent, it's the technology that we put in place, the scale that, that creates, the breadth of the lineup that we've been able to build and enable. It's also the margins that it's now starting to deliver. It's been tough getting here. Those who've been with us for a while know that we had some stumbles along the way, but we've gotten to the point where all that investment that we've made is finally yielding the fruit.

So we announced in our earnings call a week ago that we're finally free cash flow positive. We will be free cash flow positive this year on a going-forward basis. Those NOLs that we've accumulated forever now can actually be counted as real assets because we're consistently profitable enough that we'll get to use them. We're finally growing into that sort of the size 15 sneakers that we had as a 12-year-old couple of years ago. We are now that 18-year-old who fits in the body that we've built, and we feel pretty good about it.

Right. I think when we look at the current environment, there has been a slowdown in terms of pet food demand. You've obviously experienced some of that slowdown as well. What are the key changes that you've seen in the pet food industry and dog food specifically over the past couple of years? And to what extent do you view this as maybe more of a secular shift? Or is this really kind of more of a cyclical case? And when it might pass?

We really don't see any of the long-term drivers changing. The long-term drivers of people want to have pets, they provide important social benefits, important health benefits. They are just valuable members of our family. And the desire to treat the pet as a member of your family, there's nothing in any of the attitudinal data that we gather, anything in the behavioral data we observe that says that people feel any less strongly today about the need and the desire to get a dog than they did a couple of years ago. In fact, it's getting greater because the younger generations are more predisposed to getting a pet, and they're more predisposed to getting a pet and treating it like a member of their family. So nothing has changed in that.

But we're clearly in a short-term hiccup. And we've seen two specific observable phenomenon. One is consumers' willingness to trade up their pet food is not what it used to be for -- now, what it was several years ago or over the last several years. Historically, roughly 3 to 5 points of growth have come from people trading up. And what that meant is companies like us and brands like ours benefited disproportionately. So it wasn't just 3 to 5 points on our growth rate. It was 10 or 12 points of our growth rate. And people who are low- and mid-tier brands lost. The category premiumized, they were not beneficiaries because it's migrating upward. That stalled this year, it completely stalled.

And so it's hitting people like us. The Farmer's Dog, according to credit card data we've seen, their growth dropped from 43% in Q3 last year to 16% in Q3 this year. So it's not unique to us. It's a phenomenon that's occurring. But we don't think that it's going to stop. We think that the reality is the consumers will -- when they feel confident, they feel economically secure, they will return to the same behaviors that they had before, and we'll see this move up.

The second behavior that we are seeing is that people are pausing in getting the replacement dog or getting the new dog for the first time. And the natural cycle is that a 65-year-old or 7-year old, their dog would pass away. And they say, "You know what, I'm really not ready to make another 15-year commitment to a dog. I want to go on cruises, I want to visit the grandkids." So they don't get the dog, and they get replaced by a 24-year-old who's getting their first dog. Well, the 65-year-old is doing what they said they would do, but the 24-year-old doesn't feel economically confident enough to do it. And so we're seeing that cycle is not working the way it used to. It will. People don't -- the desire to get a dog doesn't go away, it just becomes pent-up demand.

You noted in your response, the competitive environment a little bit, right, in terms of maybe new entrants over the last several years that you've seen. How do you view Freshpet as being positioned with that environment? And to what extent might it, I guess, color your view of your addressable market?

Yes. I mean, first of all, it validates the addressable market. I mean, it's not a surprise that all these people decided to enter the category because we've believed for a long time and now everybody else has finally realized that what we thought was going to happen is happening. So we're frankly grateful for them for validating the category. We're also grateful to them for the amount of money that they're going to spend to create awareness and visibility of the category, and that will only help us.

But I think it would be naive to think that we just woke up and realized we're going to get competition at some point. I've been with the company for 9 years, and from the day I got here, I've been thinking about at some point, we will be big enough that people will pay attention and we want to compete with us. And we can't wake up on that day and decide what our defense plan is. We need to build the franchise in a way that protects us from somebody coming in and taking our business.

And what does that mean? One is we had to build the consumer franchise the right way, highly loyal consumer franchise who's not buying you based on price, they're buying you because the product is a better product. Secondly, we have to have better products. We had to know that we were investing in and developing a broad array of products that were going to be better products than what people could produce. And we think we've got better products today.

Third is we had to build scale that created a cost advantage. It's kind of interesting, nobody has been able to come in and really undercut us on price because we have, over time, invested the time and energy to build a cost structure that we believe puts us in a very good position to broaden the appeal of the category, but also insulate us from people who might undercut us on price.

And the last piece is, think about it as the technology that we've invested in and that we're developing puts us in a position where by the time people finally race to get into the category, we're on to the next generation, whether that's fridges in store because the fridges we put in today are dramatically better than the ones we did before, or the manufacturing technology that we've created, which we think by the time we have a real bag competitor in the market, we'll be on to the next generation, which is higher quality at a lower cost and much more capital efficient. We feel very good about the position we've built, and we'll see what happens with the competition.

Historically, one way you've helped to drive growth is through your marketing. And we've seen maybe an evolution this year in terms of both marketing message and the medium on which you focus, right, shifting from maybe a little more television towards more digital. Maybe an update on kind of what you've seen that it's working and maybe areas that you're still targeting some incremental improvements?

Yes, I would break it into a couple of buckets. The first bucket is we got to get the message right. The message that was right a year ago is not the message that's right today. And the message that we had a year ago was much more about you and your relationship with a pet. And if you -- I felt strongly about my dog, if you didn't think my dog deserved to be treated well, well, frankly, I was going to kick you out. And that was a very strong emotional relationship.

But in an environment where consumers are economically constrained, we know that they are much more focused on make sure that I know I'm getting full value for every dollar I spend. And so the product points of differentiation need to be made clear. We have new advertising on air today that is designed to bring that out. It's been on the air since late August and early September, another version went on the air in October. We feel very good about the message. It's compelling. We'll see if it delivers the results we expect. But that's a very important part of the story.

The second part is we need to be much more focused on the people who are in the market now, here and now. So tailoring the media buying to much more match the people who have the economic means to either trade up or to get a new dog. And that looks like going after the people, the potential MVPs that we've talked about, most valuable pet parents. And so we've skewed from less of the linear or broadcast television and more into digital or social.

But at the same time, I want to be very clear, we still view our -- us as having a very broad net at the top of the funnel, bringing in as many people as we can. It's just as we move them through the funnel, we will super serve the people who have the potential to be the heaviest users and try to bring them into becoming loyal users of the brand. So the media buying has changed, it's skewing more towards that down the funnel activity, but it doesn't mean we have less presence. I mean, our media spend at the top of the funnel is bigger this year than it was last year.

I wanted to get your thoughts on price points. You noted the price advantage relative to some competing products. To what extent do you view price points and maybe the possibility of some more tactical actions as a way to drive volume? And what I mean by this is you've rolled out 1 pound rolls or new ones. You have multipacks, you have the new Complete Nutrition line. So you are taking some action, but at the same time, you traditionally have not really used more traditional promotional activity as a tool. So maybe an update on kind of how you think through that pricing dynamic?

We really don't want to make this category into a price category, and there's a lot of reasons why that's bad for this category. One is people adopt their pet food and they choose the pet food. They really don't want to switch, so why encourage them to switch? The second thing is in a perishable products business, you really can't build inventory. And so you do not want to create spikes and valleys in your production. So we are going to work really hard to maintain everyday value pricing that we deliver to our consumers every day and our retailers deliver.

But because we have a broad product lineup that appeals to a wide range of economic groups, dog sizes and whatnot, if we find ourselves in a situation where we have a need to bring consumers in and get them their first exposure, we have, over time, gotten a little sharper on the price point on the 1 pound roll. The 1 pound roll is the most common entry point item. It is the lowest total dollar outlay, it's the most affordable product. And so we, from time to time, sharpen the price point in that, but it doesn't have a material effect on the total products profitability of the total lineup because it's a very small amount of our volume, but it becomes that gateway that people can come in.

And so we have launched other products that were designed to be in that sort of available price point range, an entry point price point. But at the end of the day, almost every time we bring one of those folks in, they migrate up into the platform into larger sizes, more specialized items or even more expensive items.

In the third quarter, when you reported last week, you noted e-commerce reached 14% of sales and grew 45% year-over-year. You have a relatively early-stage D2C offering. And I think much of your e-commerce sales today are fulfilled out of stores often via pickup. How do you see the channel evolving in coming years? Is there opportunity for expanded distribution with retailers perhaps using more of a warehouse distribution?

Yes. So we think e-commerce is a big opportunity for us. We're well underdeveloped versus the category. We're at 14%. As you said, the category is 36% to 37% is done via some form of e-commerce. I don't think we'll match the category because some dynamics that are present with a shelf-stable, bulky product like a dry dog food that makes it -- so you want to have it delivered to your house in some way -- that you may not with a smaller perishable product, but we can certainly be much bigger than we are.

But we're playing all the hands, and the number of hands that we can play expands every year. Today, we have a DTC business. We didn't have that a year ago. That's been around for about 11 months at this point. We're really excited by what Amazon is doing and Walmart+ are doing to create same-day grocery delivery. In essence, if you want all the things that you can get from a DTC offering, excluding the personalization, you might be able to get that from Walmart+ or from Amazon. So it will be the item you want delivered to your house, delivered on the same day, very fresh, high-quality delivery.

At the same time, some people are buying curbside, some people are buying via Instacart. And all those are growing for us. All of them are growing quite nicely. And so we have to play in every one of those segments. And we will. And we'll let the consumer decide how they want to buy, recognizing someone might want personalization over here and they'll do DTC subscription. Other people might want just the best fresh pet food, but they want it at the best value, and they're going to go to Costco, they're going to go to Walmart, they're going to go one of their favorite value-oriented retailers.

One last one on channels. The veterinary channel is one where Freshpet has been underpenetrated, I think, relative to some others. I appreciate maybe refrigerators, vets are not a significant opportunity. But I do wonder if there's a different path to getting more support from vets and more referrals?

Yes, it's going to be tough road. Let's be really clear, our competitors have invested very heavily in that space for a very long period of time. So for us, the first and foremost is we want to get ourselves in a position where the vet is not an obstacle to the consumer adopting fresh pet food. And so that requires us to do the right kinds of clinical studies, to publish those studies, to show up at the vet conferences and make sure they have basic awareness and understanding of the virtues and the benefits of fresh pet food.

Fortunately, as more and more people enter this space, it does provide a sense of validation. It makes a more relevant conversation. I'm going to give you the example is forever and ever and ever, Hill's talked about only science-based nutrition and whatnot. Well, they just entered the fresh base with the acquisition they made in Australia. I think that validates that fresh is a form that people were really concerned about the science and what nutrition can really feel good about. And we'll see the same thing from other competitors over time.

So our job is to get the vet from being an objection to being at least a neutral and let our marketing and word of mouth be the driver. Over a long period of time, we do need to invest in and have started investing in the studies that would prove it. And we call it an evidence-based culture where we can provide further and further evidence of the life-enhancing quality of a fresh diet. Good news is, others are doing the same thing.

We're starting to see more competitors on shelf. It does not seem to be coming at your expense. This past quarter -- and maybe you want to run through it -- you noted expanded presence at several key club and mass retailers, including island fridges. So maybe one, just an update on kind of some of those initiatives? And two, what are you hearing from your retail partners about the fresh pet food category broadly? Are they looking to both expand your presence and explore others?

I mean, if you're a retailer today and you want to be in the pet food space, which most of them do, you quickly realize that your best way to compete for that sort of place-based shopping occasion or one where the stores uses the replenishment center is going to be by having a bigger presence in fresh. That's where the category growth is coming from. We are by far the biggest driver of category growth. And it's a driver of foot traffic into your stores. So somebody comes in to buy fresh pet food buys a variety of other things in whatever store you're in.

So if you're a retailer, you decide to make this bet. And Walmart's decision to put Freshpet islands in the 17 stores they're in now kind of is a validation. They're building -- they literally are building a pet center, and this is the centerpiece of the pet center. We think it will work. We'll let the results speak for themselves as time goes by. But that's not unlike the decisions that other retailers are making, which is, okay, if we want to be in pet food, this is the way to play in pet food. And so we're going to invest in increasingly large amount of space.

But they won't make it exclusive to us. I mean, they're putting in Blue Buffalo fridges. They've got our fridge islands. They're trying to get private label guys in there. They're trying to get other manufacturers in the space. Ultimately, we feel good about the offerings that we have that will be the preferred offerings. But at the end of the day, we expect to see more brands in that space.

You provided very helpful margin outlooks for a variety of cost items, maybe to a level some others we wish did. Over the past couple of years, the margin expansion has really been aided by -- at least your disclosures, lower ingredients, logistics and then quality, which I think is largely shrink. Going forward, it would appear that maybe some of the targeted margin expansion shifts a bit and it is more related to operating leverage.

You've expressed confidence in 48% gross margin, even if sales are high single digits versus maybe mid-teens expectation a year ago. And I guess your SG&A leverage, a little bit more variable, but still see opportunity. Maybe an update on kind of the key drivers as we think about both that incremental gross margin expansion and what we should look for on SG&A?

Yes, we're incredibly proud of what we've accomplished over the last several years on logistics, quality and input costs, which is yield for us. But we're equally excited about what opportunities we have going forward. We think of it purely in our manufacturing sense as conversion costs.

We made some pretty big investment decisions over the last several years that are designed to get higher operating efficiencies. One of them was we invested in our labor and talent, and that has paid dividends over and over and over again, and it's allowing us to drive up utilization, throughput yield and whatnot. And we think the opportunities for that going forward remain enormous. And that's going to probably be the single biggest driver of margin expansion is the operating effectiveness that's created by our team.

We've also invested in technology. You've heard us -- we've been investing in the new production technology for 7 years now. We had the first production scale line of this new bag technology that is in its start-up phase. And we're very excited. I literally look at the lines and look at the line on a kind of a couple of times a week basis. And what it's doing and what it can produce is really remarkable, but the efficiency of it is amazing. And I kind of look at it and go, that's a long-term strategic decision that we made that's going to drive efficiency, and that will help us get gains going forward.

And then the other part of it is the G&A side. We have historically -- and it varies from year to year, as you indicated. We have historically added G&A at about half the rate of sales growth. We think we can continue to that. We have to be smart. We have to invest in technology. We have to upgrade our systems. We have to be smart about how our organization evolves, but we think we can do that and get the leverage that we need to get. And combined, that gets us to the margins that we've been talking about.

You noted the new line technology. How scalable is that solution across your facilities?

So you have to think of the technology as having two parts. There's the new technology in its entirety, the full-fledged version of it, which, in order to implement it, you have to start with a new line because its layout, its utilities, its configuration, it's completely different. So it cannot be retrofitted to the existing lines readily. So as we have increased demand and are putting in new bag lines, you can expect that, that's an option that we would use to put the new bag line in. So a little bit more capital, but a whole lot more throughput. And so it's a much better return for us.

The really cool thing that our team did is after we got that technology vetted and we started doing all the engineering work to put in the first line, we tasked them with figuring out how to do a light version of it that could retrofit existing lines so we could go back into our supply network. And they came up with a version of it. It doesn't have all the same benefits. It's got most of the same benefits, but not all the same benefits but a dramatically lower capital cost and with significantly less disruption to our system.

So we're piloting or we're going to start up the first production scale version of the light technology in the second quarter of '26. If it works, we can go back through all of our lines, with the exception of maybe one or two, and reapply it. Now it's not going to happen overnight because you can't take lines all out of commission at once, and you don't -- may not want to do all of them. But think of it as by the end of '27, we could have a meaningful part our lineup is using the new technology as well, full-in version and the retrofit version. And that would be a huge improvement in our quality of input cost of throughput, and it would help us further defer CapEx spending.

Just on the CapEx question, I guess. The -- if sales growth does persist at maybe a lower rate than you once anticipated, what are the main changes we should be thinking about both from a CapEx standpoint? And I don't know if there are P&L implications as well to be thinking about?

So from a CapEx perspective -- and we've been pretty agile. We came into the year thinking we'll spend $250 million in CapEx, and we're now projecting $140 million. So we cut $110 million of CapEx out of the plan by basically pushing projects back because we didn't think we need them as immediately.

We still -- if you're still growing at the rate that we're growing, you still need incremental capacity, and there are long lead times on that. So we will have CapEx next year. We said on the earnings call, CapEx next year would be about the same as this year, with the wildcards being if the fridge islands that we talked about pan out, then you can expect to see that we might spend a little bit more on fridge islands. And if the new technology works really well, we might spend a little bit more to pull forward some of those lines.

But outside of that, I think it is the same. And the reason for that is, right now, we're working on the increments of capacity that we'll need beginning in '28. We have enough capacity to get us through '26 and '27. We're thinking about what we need in '28, and that's what we'd be spending money on in 2026.

From a P&L perspective, we have enough capacity to produce $1.5 billion in sales today. And the key is staffing. We just have to manage the staffing so that it comes on when we need it. Frankly, I've gotten to the point where I like pushing the efficiencies of the lines and making them work a little bit harder to drive efficiency before you add the next increment of staff. And so far, that's worked well for us.

When we think about the $1.5 billion in capacity, are there areas you have -- I know historically, there have been call-outs where maybe bagged versus rolled, there's been some -- different flex. Any constraints today or one of the two that you might see constraints on sooner?

So the next line that we need to put in is a roll line. That's -- it's under construction now. We also have some specialty products. We have these chicken bites that we sell. We also have Homestyle Creations, which is a more premium item in our lineup. That's made on a similar but not identical line, has a couple of pieces to it that are different. And that was the most capacity-constrained thing. That actually is the one that is unconstrained this year, and as a result, it's growing quite nicely. But for the most part, a rising tide lifts all boats. And so we add increments of capacity in roughly the proper proportion on a sort of continual basis.

Okay. The -- last one on CapEx. Sorry to...

We're used to it.

Last week, you discussed the starting point. You just noted it again for '26 of $140 million. What are the main projects just embedded in that outlook, any breakdown of the spending? I know there's a maintenance component, a fridge component? Lines?

Think of it is there's routine maintenance that we have to do. And as we get an expanding footprint, there's obviously more maintenance. And also, the kitchens in Bethlehem are getting a little bit older, so they'll need more maintenance.

I'd also highlight that included in what we would consider sort of that maintenance CapEx is upgrades to older technology. So if anybody had been in our Kitchens 1.0 5 years ago and walked in today, they would be amazed at how many fewer people are on the production floor because we found ways to automate previously manual systems. And we put that under our maintenance bucket, but it's really upgrades. We have fridges. We spent $20 million to $30 million a year on fridge expansion.

So the big chunk, the big hitter is capacity expansion. And when you think about next year, when we built Ennis, we designed the facility to be built in 3 phases. So Phase 1 was 3 production lines. And all the infrastructure for the site, wastewater treatment facility, energy, central utilities building, loading docks, cold storage, locker rooms, all that.

Then we put on second phase. When we built the second phase, it was designed to house 4 lines. But we didn't know what technology we wanted to put on the third and the fourth line. So we built the shell, finished off half of it and put 2 lines in and started them up. But right now, we're now making decisions about what the technology is going to be. So we've got to go into the second half of that shell and put in drains and floors and ceilings and wiring and all that other stuff.

So when people say, what are you spending on? Well, to get that capacity we need in '28, we have to finish off that second part of that building with all the infrastructure it needs so that we can lay lines in there and put the lines in basically at the end of '26 and into '27 so they're ready to start in '28. And that's a big part of the capital spending. Beyond that, we don't need to build new buildings for quite some time.

Okay. Concurrent with the earnings announcement last week, there was a second press release. And it did disclose the planned sale of some of your holdings in Freshpet. Perhaps you could just give an update on maybe what drove the release?

Yes. First of all, everybody should know, I have no interest in selling stock at the current price. The reality is that I own stock options that were granted to me in September of 2016 that expire in September of 2026 and I have to exercise them. And with them, because the stock price was really low, comes a fairly significant amount of tax and exercise price.

And the unusual part that required me to create the plan was that the stock is not just held by me, it's held by my wife and my kids and -- in trust for my kids. And the stock that's held in trust for my kids, lucky, my kids, but I own the tax liability for the trust. And so when I sell shares, I can't just sell to cover. I have to sell more shares in my holdings to pay their taxes, and that required a 10b5-1 plan to be put in place so the options wouldn't expire on exercise. That's really the driver of it.

SEC rules don't allow me to disclose what the specific plan of it is, but everybody should know, I'm not happy with the current price. I don't think it's a price to sell. My intention is not to be less invested in the company, but I do have to pay taxes for my kids and on my holdings.

Thanks for that update. You're guiding for approximately 13% sales growth in 2025. I think guidance implies more of a high single-digit rate to close out the year, although that does include some degree of shipment timing headwind. So I guess as we're rolling into 2026, what are the key items that you're watching to help determine expectations?

Yes. We look at this extremely closely. We're watching the Nielsen, just like everybody else is, on Monday mornings. So we see the Nielsen and we understand where they are. But we also look at the household penetration. That's probably the single best indicator, not just for us, but for everybody else. And we look at household penetration, we look at it by demographic. And we also look at the sum of household penetration plus buying rate. Because as the penetration gains go up, sometimes the buying rate gains go down and vice versa.

If you look at the most recent data that we showed over the last 52-week period, the household penetration plus buying rate growth was about 15%. Coincidentally, over the last 52 weeks, so Q4 of last year, first 3 quarters of this year, our growth is about that -- in that range. So it's a pretty reliable predictor of where the net sales are going to come in.

So we're looking at that on a 52-week basis, on a 13-week basis and really trying to triangulate where we're going to come out. Right now, we're feeling like it's looking like the world has gotten a little bit more stable, but it's very volatile. The consumer sentiment that came out on Friday was not encouraging, and we know this category is very sensitive to consumer sentiment. But our hope is that the consumers who are most sensitive to this dynamic have taken the actions they're going to take. But we'll see going forward. But that's -- those are the metrics we look at the most.

We obviously pay attention to what retailers are going to do because that amplifies our growth quite a bit. We look at what returns we're getting from our advertising investments, so the customer acquisition cost. But all at the end of the day has to turn into household penetration and buying rate gains. And all of us can look at the data and see what we see. But our phenomenon is no different than everybody else's. We're just in that higher number. We're doing better than everybody else.

This year does seem to be a bit bigger of a fridge rollout year than maybe we've seen in a few years. To what extent should we think about, one, do those fridges maybe ramp in terms of productivity versus when they're initially rolled out, and that could be a driver next year? And then two, to what extent you can kind of maintain that rate of growth in terms of new fridges?

Yes. We think about new fridges as -- they add to the franchise to the extent that they bring in net new households. So one of the things we talked about with Costco when we rolled out Costco was Costco is high volume, high foot traffic. But it means nothing if it's not net new households. And we think that about 2/3 of the households who bought us in Costco were net new to the franchise.

We -- it's too early on Sam's to see whether that net incremental distribution, which is great, and it's doing very, very well. We're very happy with how it's doing. But if it's net new users -- or how -- to what degree it's net new users. They have distinctive assortment. They have distinctive SKUs. They -- but they sit in the parking lot of Walmart in many cases. And so we'll have to see how many of those users are distinctly new. We're now in 10 lifestyle retailers. It's Tractor Supply in a test. Our bet is that the shopper who shops there is very distinctive and very net incremental.

So over time, as we think about the plan and the rollouts that happened this year, we love it. It increases the visibility and availability of the brand, but we're really focused on does it bring in net new users, and some do that more than others. And so as I look at next year, depending on how the Tractor Supply thing goes, depending on how the Walmart fridge islands go, those could be big drivers and net new households for the brand. But I'd expect next year to be like this year, a good year. Whether it's a great year or not remains to be seen.

One area that maybe you've highlighted in the past as a greater opportunity, I think one, smaller dogs tend to have higher penetration than large dogs. And then two, you've tried maybe some new SKUs that have different types of attributes associated with them. Maybe an update on kind of both of those initiatives and to what extent -- now is a good time to be pushing those, versus waiting for a more robust demand environment?

Yes. I mean you have to remember, at any given time, there are people who have money and people who are looking to enhance the lifestyle of their dog. And so yes, there are some times that are better than others. But if you have a large dog and you have money, you might be considering Freshpet. And launching a large dog product like we've done has helped. And that's been -- that's a big, nice next step for us.

We clearly would like to see our franchise move from being a smaller or medium-sized dog franchise to having more large dogs. But it's not like we have to jump from having 20-pound dogs to having 100-pound dogs. We need to get the 20 pounds to turn to 30-pound dogs, turn it to 40-pound dogs, turn it to 50-pound dogs and kind of let the curve slide to the right as we increase the size of the franchise and bring in more and more users.

Over time, history would show that as you get broader and broader acceptance and adoption of this kind of a new habit eventually becomes the norm for the people across sizes, income spectrums, breeds of dogs. It keeps moving in that direction. It just takes time. And so we just want to continually encourage it and nurture it, see how it develops.

I guess the other side of pet food -- and look, trends have held in a little bit better here -- would be on the cat food side. And -- I think we -- there's, I guess, a couple of questions here. One is, do you view the Freshpet brand as being able to bridge from dog into cat? And secondarily, do you think there's the same captive demand for fresh pet food on the cat food side that we've clearly seen on the dog food side?

Yes. I mean, we have cat food today. It's a very small part of our business. And for a long time, it was because we just didn't have capacity to chase it. And those are -- that day is gone. We certainly have the capacity to chase it today.

We think it's a big opportunity. The question is the right way to pursue it. We have had an R&D team working on it for a while. We do not want to enter the cat food space just to say that we're there. It has to be a product that is demonstrably better than what the alternatives are. And there needs to be a marketing system and marketing model that works for it. It has to -- cat food aisle separate from dog food aisle. The characteristics of the product, cats eat with their tongues, dogs eat with their jaws and their teeth. You have to have the right product in the right place with the right packaging format. Most cat food is single-serve formats, we're in a bulk size format.

So you have to think through all those pieces and then how does it fit with our system. You should know that we're working on it. We've been working on it for years, but we won't do something until we're sure we've got something that's a winning proposition. Can the Freshpet brand name go there? Absolutely, Freshpet brand name can go there. And we think that, that's a very viable proposition for us.

And just on the manufacturing side, I guess you noted the different form factors. How hard is that to introduce?

It depends on what the product is that you want to come up with because there are some things where you just have to change the back end. So the packaging that it goes into, but all the front end stays the same. And there are some things where you have to completely change the whole process. So until we've locked on what it is we want to do, it's hard to say.

But the one thing that is the virtue of our business as we've created scale is we can have 4 dedicated lines. So we can afford to have a line -- the Kitchens 1.0 in Bethlehem is the original technology, it's small scale, slower speed lines. If one of those ended up being dedicated to making cat food, it would be a great use for a relatively low utilization piece of equipment. I'm not saying it will be, but I'm using it as an example of the options you have when you're at our scale, as you can decide to dedicate assets to a specific line.

And that's what we do today. I mean, I described before, the Homestyle Creations product that we have, which is very distinct characteristics, the chicken bites, very distant characteristics. There is a line that is dedicated to making those at Kitchens South.

I wanted to ask on the input cost side. We have heard from a lot of food companies about heightened protein inflation this year. I think you -- I know you're buying a little bit differently, but also you contract annually, and we're getting to the point where that contract will roll over soon.

Yes.

Any update on kind of how to think about the pricing environment as we move into next year in terms of what you're seeing and maybe how that differentiates between protein types?

Yes. So we have done our contracting. Normally, it's a little later. This year, we got it done. The beef is no surprise. Beef is a lot more expensive, significantly more expensive. And so we're going to have to do some things related to that to manage that cost. Chicken prices are modestly down year-on-year for us. That's encouraging since we buy so much chicken. There are other things that we're buying that are up a little bit, and we have a little bit of tariff exposure on like vegetables from Eastern Europe and whatnot.

On average, we don't see significant enough inflation that would merit us taking any broad scale price increases. We may look at something related to the beef products in particular, but nothing that's across the board that may be necessary. So we're pretty encouraged by the position that we're sitting in today that we can basically go and market without having to change the vast majority of our prices.

Okay. And then just another one on, I guess, thinking through forward decisions. You noted the SG&A growing at half the rate of sales as kind of a longer-term target. As we think about next year, how much might it make sense or not to lean into advertising?

Yes. So this is an ongoing source of discussion. We believe that advertising is the primary driver of our growth. And so we always want to lean in where we can lean in, but we don't want to do it recklessly. And so the floor that I would set is it can't have any negative impact on our ability to expand our margins.

So think of it as if we decide to lean into spending more money on advertising, we have to know that we have some sort of an offset somewhere else. That doesn't mean -- and I'm not telling you we won't because, frankly, the way we're performing from an operations perspective gives us degrees of freedom that we feel really good about. But I also don't want us to invest in incremental marketing support if we don't get a good payback.

One of the lessons that we've learned in our kind of analysis of the market of late is we know we need to get to those margins that the industry says, you know what, these are the kinds of margins a high-quality, consumer branded product with a well-inflated moat should be making, and don't go below those. If you can invest to get growth above those, that's a good idea. But don't invest and take those down because that, in essence, erodes the value of the consumer franchise. And so from our perspective, we're going to look at each of those sort of as a guidepost for how we make those investment decisions.

Okay. You did have a recent CFO departure. Maybe just any update on kind of the qualities that you're looking for as you think about a future partner?

Yes. Obviously, losing Todd was not something that we wanted to have happen. He was a fabulous partner. We feel really good about what he did for us. And he was not just a talented guy, but from a cultural fit perspective, he did many good things for us. But we don't fault him for the decision he made. It's closer to home, it gave him the opportunity to work at a big company in the place where he wants to live. So that made all the sense in the world.

As we think about this, we're in a very different place today than we were when we hired Todd 3 years ago. Three years ago, we had an organization that didn't have the bench strength that we have today. And so we needed somebody who had mastery in a wide variety of areas. Three years ago, we were a company that wasn't positive free cash flow, wasn't generating cash. Probably didn't need to think about how you do a whole lot of capital allocation besides investing in capital. Had to do a little thinking about debt financing, which we did do, and he did a nice job on that for us.

But we -- as we think about it, the unique characteristics of this business, one is we need somebody who's familiar with and comfortable with growth. If you're not familiar and comfortable with growth, you will struggle in this environment. It's a very dynamic place.

Secondly, ideally, we'd like to have some experience with manufacturing. A lot of high-growth companies unfortunately are not self-manufactured. And so you could have the high-growth experience, but you have no manufacturing experience. Or you've had to have it in a previous experience. But manufacturing brings a level of complexity that is not something you inherently have. You have to sort of have it lived and experienced at least some element of that.

The third thing as we think about it is we think about you as not just a CFO, we think of you as a member of a team. And we look for the qualities that's going to make somebody a really valuable member of the team. One of the things that Todd had going for him was he was a natural skeptic, which was good. We needed natural skeptic. He was also a guy who wanted everything to be simple. Don't get me complicated. We have people who can make things really complicated. We need somebody who when they put them inside of our team, brings the qualities that amplify the value of everybody else rather than being redundant with what everybody else is.

And so that's what we're looking at. I'm encouraged to say we've got a very robust field we've assembled. We're in the early stages of that process. We're just reaching out and having the conversations with the field that we've assembled. We want to move quickly, but there's not the urgency to move. Ivan Garcia, who is the interim CFO, has been with us for 11 years. He's a fabulous talent. He's doing a great job. The team that works for him is doing a great job. So we're not in a hurry, but we're moving with urgency.

This might be the last question, but you're now free cash flow positive, and you expect to remain so. What are your priorities as you generate this free cash flow?

Yes. So we're obviously spending a lot of time thinking about that. And we've got some decisions to make. We obviously have the convertible debt offering that we did a couple of years ago that's out there. We can't call that until March of '26. Not saying that we will call it, but I'm just saying that certainly is an opportunity that if we want to do that, we have that possibility.

We obviously have no other debt on the -- so we can invest capital to support our growth. We do not want to get over-levered. We're not interested in being over-levered. We think that we're at the point of maturity that we should be able to fund our own growth and do it within a reasonable amount of leverage on the balance sheet. But we're not averse to looking at any that can help us accelerate our conversion of the category to fresh pet food, whatever that looks like.

We spend a fair amount of time these days thinking about technologies that might make a difference for us. And where those could accelerate what we're doing, whether it be nutrition technologies or anything else like that, we're interested in that kind of stuff. But right now, the big focus is now that we're kind of getting to being free cash flow positive, figure out what you're going to do from the balance sheet perspective going forward, lay out a clear plan, and we expect to do that sometime next year.

Thanks for joining us today. Very insightful.

Thank you. Thank you very much.

Greetings. Welcome to Freshpet's Third Quarter 2025 Earnings Call. [Operator Instructions] Please note today's conference is being recorded. At this time, I'll now turn the conference over to Rachel Ulsh, Vice President, Investor Relations and Corporate Communications. Thank you, Rachel. You may now begin.

Good morning, and welcome to Freshpet's Third Quarter 2025 Earnings Call and Webcast. On today's call are Billy Cyr, Chief Executive Officer; and Ivan Garcia, Interim Chief Financial Officer. Nicki Baty, 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 strategy to accelerate growth, progress and opportunities and capital efficiencies having an impact of new technology, capital spending, adequacy of capacity, expectations to be free cash flow positive, 2025 guidance and 2027 targets. They involve risks and uncertainties that could cause actual results to differ materially from any forward-looking statements made today, including those associated with these statements and those discussed in our earnings press release and most recent filings with the SEC, including our 2024 annual report on Form 10-K, which are all available on our website.

Please note that on today's call, management will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for how management defines such non-GAAP measures, why management believes such non-GAAP measures are useful, a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and limitations associated with those such non-GAAP measures.

Finally, the company has produced a presentation that contains many of the key metrics that will be discussed on this call. That presentation can be found on the company's investor website. Management's commentary will not specifically walk through the presentation on the call, rather, it is a summary of the results and guidance they will discuss today.

With that, I'd like to turn the call over to Billy Cyr, Chief Executive Officer.

Thank you, Rachel, and good morning, everyone. The message I would like you to take away from today's call is that we are quickly adjusting to the new economic reality and remain one of the best-performing pet food businesses. We continue to outperform the U.S. dog food category. We are building market share across every channel, and we are winning a disproportionate share of new pet parents. We also continue to deliver strong operating performance despite the slowdown in volume growth. Further, we have maintained financial discipline and appropriately manage our capital spending to match our growth and that, in combination with strong operating performance, has enabled us to achieve positive free cash flow in the third quarter and will enable us to become free cash flow positive for the full year, which is 1 year ahead of our original 2026 target.

Taking a step back, the deceleration in sales growth this year was unprecedented. We clearly started this year expecting to operate in a much different environment and have had to shift our strategy to address these challenging and dynamic times. While we can't control consumer sentiment, we can adapt our consumer proposition and make sure we are best positioned to increase household penetration by winning both new and existing pet parents while also improving our profitability and free cash flow generation. We believe we are taking all of the necessary steps to stabilize and then reaccelerate our top line growth by continuing to focus on areas that are within our control.

To address the consumer environment, we have adjusted our media and go-to-market strategy to both reach and appeal to more households while super-serving our MVPs, who account for 70% of our volume. This includes starting to test new digital touch points and expanding our focus and resources on e-commerce channels, including DTC. The transition to this updated and improved commercial framework began earlier this year, but it is an evolution, so we will gradually increase the investment behind it as we get increased evidence of its effectiveness.

We are also doubling down on our 3 key strategies designed to expand the appeal of Freshpet, particularly amongst our MVPs. Those strategies are: first, best food. We believe that Freshpet's highly differentiated product offers an enhanced experience for our consumers that we need to highlight in order to expand our franchise. We launched a new media campaign at the end of August and early September, showing the lengths we go to produce the best food. And at the end of October, launched another new ad showcasing our ingredients. The new ads are much more focused on the benefits of fresh food than our previous creative and early in-market data is encouraging. Second, strong value proposition. We are operating in an environment where economic uncertainty has led to less trade up than in the past. To address this, we have now launched our new complete nutrition bag product in select retailers to help encourage trial as well as new multi packs and bundles, both online and in-store for the more value-focused consumer. We have also sharpened our price point on our 1-pound chicken roll, which we believe will help drive more trial and increase household penetration. Third, improved accessibility. We continue to make good progress on the visibility and the availability of Freshpet, 1 of our greatest competitive advantages. You may recall that we showed a rendering of a fridge island back in February at the CAGNY conference, which is a new concept with a mix of both open air and closed door fridges.

It is designed to change the way the consumer shops the fresh pet food category, changing it from a search for a packaged good in an aisle to grocery shopping for your pet. We believe this is the next big unlock in our retail visibility and availability strategy and will create increased awareness of the brand and greater trial of our wide range of items.

Last month, we started testing new fridge islands in the first 16 stores of a large mass retailer, and we've included a picture in our earnings presentation. It is still very early days, but we believe this expansion demonstrates how leading retailers view Freshpet as the future of the dog food category because of its enormous growth potential.

We've also further increased distribution in a large club customer. We are in our first store in this retailer in April, 125 stores at the end of July and are now in 590 stores as of the end of September. The sales are still ramping up. However, we are very encouraged by the launch so far and the future potential. At another club retailer, we've also expanded our range to have a third SKU in select stores and have also just started a small test in a rural lifestyle retailer. As we look to the next leg of distribution, we expect the majority of growth to come from stores where we have or can have second and third fridges or outside of aisle placements like fridge islands as well as the online channel. We plan to leverage our retail strength where we are the clear category growth driver, and, at the same time, we are really excited about our continued growth of e-commerce.

We had another strong quarter of growth in digital orders, up 45%, and we recognize we are significantly underpenetrated in the e-commerce channel, including DTC. We are keenly focused on increasing our presence to capture the omnichannel and online customers and plan for this to be a more meaningful part of the business as we head into 2026.

In total, we believe these strategies will enable us to reaccelerate our growth. Each of these strategies drive actions that we can control and leverage our unique capabilities and proposition. That will ensure that we will continue to outperform the category and drive the transition of the dog food business to fresh food regardless of the macro environment.

Our efforts to adapt to the current environment are not limited to driving the top line. We are also focused on driving operational efficiency through a variety of approaches. First, via our new technology. The current demand environment means that our team has more available line time to lean in and test new technologies and formulations. We have been working on new bag technology since 2019 that is designed to produce significantly better products at a lower cost. It does this by increasing throughput, improving yields and reducing the amount of product that requires secondary processing. We expect this to result in increased bagged product margins and decrease the margin gap between bags and roll products. Our goal is to deliver both meaningful product improvements and significantly improved economics. It can also unlock new innovation capabilities.

The first new production scale line that uses this new technology is now fully installed and in the final stages of commissioning. We expect to produce saleable products on that line in Q4, and we are very excited by what we have seen so far.

Second, we are also taking a pragmatic approach to managing our capacity. It is not clear how long this period of consumer uncertainty will last so we are using a variety of approaches to ensure that we have adequate capacity to meet our growing demand, but also don't get too far ahead of ourselves on capital spending and staffing. Fortunately, our facilities are running very well now, and that has provided us with free capacity.

In conjunction with further operating improvements that we expect to deliver, we expect to have adequate capacity to support our growth for a while. We are a much more stable business than we were 3 or 4 years ago. And when you couple that with a new technology, it enables us to reduce our capital spending this year and next year. We do not believe that this reduction in CapEx will limit our ability to grow over the next 2 to 3 years as we already have $1.5 billion of installed capacity available to us if the growth reaccelerates and can add staffing as needed.

Now I'll provide some highlights from the third quarter. Our third quarter net sales were $288.8 million, up 14% year-over-year, primarily driven by volume. Adjusted gross margin in the third quarter was 46.0% compared to 46.5% in the prior year period, and adjusted EBITDA in the third quarter was $54.6 million, up approximately $11 million or 25% year-over-year.

From a category perspective, we continue to be the #1 dog food brand in U.S. food with a 95% market share within the gently cooked fresh frozen branded dog food segment in Nielsen brick-and-mortar customers, defined as xAOC plus pet. We compete in the nearly $56 billion U.S. pet food category per Nielsen omnichannel data for the 52 weeks ended September 27, 2025, and within the nearly $38 billion U.S. dog food and treats segment, we have increased our market share to 3.9%. From a retail perspective, competitive entrants have not slowed our expansion to date. In fact, we believe that new competition will ultimately grow the category as we have seen many times before in other categories, such as Greek yogurt and coffee. Freshpet products are now in 29,745 stores, 24% of which have multiple fridges in the U.S. Looking ahead, we expect this percentage to increase as we add more fridges to the highest velocity stores.

We ended the third quarter with 38,778 fridges or nearly 2.1 million cubic feet of retail space with an average of 20.1 SKUs in distribution. Our percent ACV in grocery where were the dog food market leader was 79% at quarter end and ex-AOC only 68%. From a household penetration and buy rate standpoint, we remain 1 of the only dog food companies that consistently grows both. Our household penetration as of September 28 was 14.8 million households, up 10% year-over-year and total buy rate was $111, up 4% year-over-year. MVPs, which are our super heavy and ultra-heavy users are continuing to grow faster with a total of 2.3 million of those households up 15% year-over-year. represented 70% of our sales in the latest 12 months with an average buy rate of $490. We are still growing households across every age and income group and gaining market share. The dog food category is declining, but fresh head continues to be a clear winner. We are seeing that we are attracting a large portion of new pet parents, which is very encouraging. Turning to capacity. We feel good about our manufacturing footprint today. and this continues to be the most profitable Freshpet kitchen and accounts for approximately 38% of sales volume.

Our overall operating effectiveness, or OEE, our measure of operating efficiency, continues to improve and the new technology line in Bethlehem is expected to produce saleable product later this quarter, as I mentioned a few minutes ago. This will be our 16th line across the network, and we are very excited by its potential.

The technology to make fresh pet food is still very nascent, and we constantly try to push the limits and come up with ways to drive greater returns. Next spring, we also plan to retrofit another bag line in our Bethlehem kitchen with the light version of the new technology that could prove to deliver a meaningful portion of the same benefits of the full technology line with minimal line downtime to install the new technology and minimal CapEx.

Our capital efficiency framework is centered around 3 key areas: first, getting more volume out of existing lines primarily through OE improvements; second, getting more out of existing sites where -- whether that be finding ways to add more lines on our campuses or network optimization; and third, developing and implementing new technologies. We've made tremendous progress with this framework and believe there is still a significant opportunity to create incremental shareholder value.

Now turning to our outlook for the remainder of the year. We are currently tracking to the lower end of our previous net sales and adjusted EBITDA guidance ranges so we now expect net sales growth to be approximately 13% for the year and adjusted EBITDA to be between $190 million and $195 million. We are updating our CapEx guidance to approximately $140 million as we were able to shift more projects out. The silver lining of the slower-than-expected sales growth this year is it has now positioned us to achieve positive free cash flow a year earlier than anticipated, a significant company milestone. Ivan, our interim CFO, will walk through more details of our 2025 guidance in a few minutes.

In regard to our fiscal 2027 targets, we remain confident in our ability to achieve 48% adjusted gross margin and 22% adjusted EBITDA margin in 2027 if our sales volume growth is at least low teens. If we were to grow high single digits, we believe we can still achieve an adjusted EBITDA margin of approximately 20%.

In summary, we have taken actions in strategic areas to focus on what we can control and make sure we continue to deliver category-leading growth despite the current category softness and competitive entrants. Dog food has historically been 1 of the best, most recession-resistant categories, and we believe we are best positioned to capture the future growth of the category. We expect to continue to build market share, grow household penetration and win a disproportionate share of new pet parents to ultimately capture the lion's share of profit in the [ Category 2 ].

Before I hand it to Ivan, I want to address the ongoing CFO search. We've hired an independent executive search firm, and we have a very long list of very exciting candidates. We hope to select the next CFO quickly, but we'll take our time to find the right person. In the interim, we are confident in Ivan and his team's capabilities and believe we can still deliver the necessary business results until we find a permanent successor. Ivan has been with Freshpet for 11 years, having joined the company shortly before the company went public in 2014 from KPMG. He has been involved in every aspect of our financial operations since then, including leading accounting, financial planning, systems development and our data analytics operation. Ivan is a trusted member of our team, and his move into the interim CFO role has been seamless.

With that, I'll turn it over to Ivan to walk through more details of our financial results. Ivan?

Thanks, Billy, and good morning, everyone. The highlight of the third quarter results is that we demonstrated our ability to deliver category-leading growth while also achieving positive free cash flow. Now let me provide more details on our financials and updated guidance. Third quarter net sales were $288.8 million, up 14% year-over-year. Volume contributed to 12.9% growth, and we had positive price/mix of 1.1%, primarily driven by mix. We saw broad-based consumption growth across channels. For Nielsen-measured dollars, we saw 10% growth in xAOC, 10% in total U.S. pet retail plus, 8% in U.S. food and 2% growth in pet specialty. As a reminder, the third quarter benefited by about 1 point of growth from a slight shift in timing of orders from the end of June to early July, which we shared on the Q2 call.

We also expanded into most of our major club retailer stores in the third quarter and initial pipeline shipments helped boost our shippings growth versus last year. When you net all of that out, we believe that consumption growth in the quarter was approximately 12%. Third quarter adjusted gross margin was 46% compared to 46.5% in the prior year period. The 50-basis-point decrease was driven by reduced leverage on plant expenses, partially offset by lower input costs. The deleveraging of plant costs are a result of ending the quarter with lower inventory.

Third quarter adjusted SG&A was 27.1% of net sales compared to 29.3% in the prior year period. This decrease was primarily due to a lower variable compensation accrual, partially offset by increased media as a percentage of net sales. We spent 11.2% of net sales on media in the quarter, up from 10.8% of net sales in the prior year period. Logistics costs were 5.5% of net sales in the quarter compared to 5.6% in the prior year period. This continues to be a great strength of ours and something that we're very proud of. Third quarter net income was $101.7 million compared to $11.9 million in the prior year period. The significant increase in net income was primarily due to the deferred income tax benefit resulting from the release of a $77.9 million valuation allowance in the current period, higher sales and decreased SG&A expense and was partially offset by a decrease in gross profit as a percentage of net sales. The release of the $77.9 million valuation allowance is being taken now because we have demonstrated consistent profitability over a meaningful period of time. As a result, our accumulated NOLs are now believed to have meaningful value. So they must flow through the P&L and end up on our balance sheet as an asset.

We view this as another milestone in our progress towards becoming a highly profitable company.

Third quarter adjusted EBITDA was $54.6 million compared to $43.5 million in the prior year period. This improvement was primarily driven by higher gross profit, partially offset by higher adjusted SG&A expenses.

Capital spending for the third quarter was $35.2 million, while operating cash flow was $66.8 million, and we had cash on hand of $274.6 million at the end of the quarter. As Billy mentioned, we achieved positive free cash flow in the third quarter and now expect to be free cash flow positive for the full year. We intend to utilize our balance sheet to support our growth going forward with no need to raise outside capital.

Now turning to guidance for 2025. As Billy said earlier, we are tracking to the lower end of guidance ranges we provided last quarter. So we now expect net sales growth of approximately 13% compared to our previous guidance of 13% to 16% growth year-over-year. We now expect adjusted EBITDA in the range of $190 million to $195 million, compared to the previous guidance of $190 million to $210 million. We continue to expect adjusted EBITDA dollars and margin to improve in the fourth quarter compared to the third quarter.

Media as a percent of sales for the year is expected to be greater than 2024. However, the fourth quarter will be the lowest total dollar spent and as a percent of net sales, in line with our past practices. We now anticipate adjusted gross margin to be flat year-over-year based on lower plant leverage related to our inventory levels, which caused a timing impact to our P&L. We have been able to successfully tighten our inventory without seeing any impact to fill rates. In regards to tariffs, we are currently seeing a small impact on vegetables sourced from Europe and mitigating them where we can. Capital expenditures are now projected to be approximately $140 million this year compared to our guidance last quarter of approximately $175 million and original guidance earlier this year of $250 million. We have included some impact from tariffs and updated CapEx projection. The majority of our CapEx spend is focused on the installation of new capacity to support demand in the out years and the implementation of our new technology. But as Billy mentioned, we are seeing greater capital efficiencies in our existing facilities.

While it is too early to provide guidance for next year, we do expect that ordinary CapEx for new capacity, fridges and maintenance will be in line with this year's spending. However, if our new production technology demonstrates the potential we are expecting and we have the opportunity to accelerate either conversions of existing lines or the installation of new lines using that technology, we would certainly consider those opportunities. We believe that new technology could generate sizable economic benefits, improve our competitive position and elevate the quality we can deliver to consumers. Similarly, if we have a breakthrough in the new distribution, particularly if it's a sizable expansion of the Island fridges, we would also fund that initiative due to the significant growth it could deliver. In either case, they would not impact our ability to deliver positive free cash flow in 2026, but our CapEx spending could be higher than 2025.

In summary, despite a challenging year, we are proud to have delivered another quarter of best-in-class CPG growth and demonstrate our cost discipline to deliver even stronger adjusted EBITDA margin expansion and become free cash flow positive. We believe Freshpet has a long runway for growth and is well positioned to capture the sales growth and profit growth of the high-growth fresh, frozen dog food category. That concludes our overview. We will now be glad to answer your questions. As a reminder, we ask that you please focus your questions on the quarter, guidance and the company's operations.

Operator?

[Operator Instructions] Our first question comes from the line of Peter Benedict with Baird.

So my first is around kind of the new production technologies. Curious kind of maybe the time line on when you would make a decision on accelerating that -- those implementations, I guess, next year? Maybe give us a little sense of maybe how this light version coming in the spring compares with maybe the full version. And Billy, as you -- if you roll this new technology out, you talked about improved quality. What does it mean for pricing? I mean, at these lower levels of sales, do you intend to kind of turn that into a more aggressive pricing structure in order to kind of reaccelerate the top line and take more share? Or how do you think about reinvesting those potential benefits?

Great. Great. Thanks, Peter. Let me just start with, we're very excited by this new technology. As you heard in the recorded comments, the reality is we've been working on this for a long time. And what we see is the upside potential on it is enormous. We're still really early in the qualification of the first line. And so it's really hard for us to say exactly how long we'll watch that until we make a decision on expanding. It depends on how reliable the line is, how much of a benefit we get, the performance of the products in the market. So I don't want to get on the record with any comment about when we would make that decision because it's really going to be dependent upon the operating performance and the quality of the products we produce.

The second line, the first conversion of an existing line, the light version that we talked about, we'll start up in the second quarter of this year. And in terms of what's different about it, what makes it any different in the original technology, think of it as it has many of the same attributes just not to the same degree. So there is a throughput benefit, but it may not be as significant. There's a yield benefit, but it may not be as significant. There could be some quality benefits and may not be quite as significant. But what is significant is that it can be -- those lines can be converted much more quickly at a much lower capital cost.

And so we'll be watching as we start up that line comparing the performance of that line against the initial line that we're putting in, that's starting up now. And having to make a decision about is less capital, done more quickly on existing lines, a better idea than installing a new line that gives you all the benefits. And we really won't know that until we get the line up and running. So think of it as sometime in the back half of next year, we'll be able to make that assessment about whether or not that makes sense for us to accelerate the expansion of those lines. So in the end, I think it's a great place to be. We have 2 very promising technologies that are very, very different and that can make a big difference.

On the second part of your question, which is about how we deal with the quality improvements and also potentially pricing. It's also too early for us to commit on whether or not we would do anything related to pricing. Our focus right now is to demonstrate the quality benefits of the product. Obviously, we have a strong interest in improving the margins on our banks because they're below our roles, but it will be in a nice place when you can actually look at significant margin pickup and the opportunity to choose where you invest that, whether it goes to the bottom line or whether that goes into making -- sharpening our price point.

I suspect that over time, you'll see a little bit of both. But for the most part, we are very determined to drive the margins up on our bag business, and that's one of the real benefits of this technology.

That's helpful, Bill. And then I guess my follow-up question would be around the competitive dynamics in the space. You alluded to the the recent entry, said it has not affected your kind of retail placement plans at this point, but maybe just any early learnings in terms of pricing, positioning? Just anything you would say about how you're seeing new competition, both at retail, but then also in some of the frozen areas, which are tangential and coming more online?

Yes. Let me frame it at the -- I'll give you some top line thoughts, and I'm going to hand it to Nicki to talk to you about what we're seeing with our retailers in their actions. But obviously, there's been an unusually large amount of activity in the space this year. We view that as a validation that the fresh category is a big long-term potential. Retailers have seen that. Retailers are recognizing that. And so that is a good validator for us, and it kind of gives us a sense that the investments that we've made, the position we've carved out is a really attractive one. So far, from a top line perspective, we haven't seen much impact on our business, certainly not from the executions that have happened to retail. Most of the things that have happened in retail to date have been relatively small and not very significant in their total size. It's just still a little too early to talk about what happened -- what's happening with the Blue Buffalo launch. It's only been out there for a couple of weeks.

The 1 thing I would notice is we have seen a little bit of price discounting done by them already, which is something that we're not surprised by. That's sort of their calling card. That's the way they do business. Our approach so far has been to stick to the game plan that we've executed over the long haul, and we'll continue to stick to that game plan, but we also are very determined that we won't lose consumers on a price or value basis. But that's how I see the competitive environment.

I'm turning to Nicki, and she can talk a little bit more about how our customers are reacting to it.

Thanks, Billy, and thanks also, Peter. So despite the increasing competition coming into the category at the moment, we've been really pleased with, I think, a number of the metrics that we would use to just assess our retailer engagement. As Billy said in the upfront comments, we've grown our cubic feet by 12% this year. We've had 13% improvement in distribution as well and also been making some good ground either in some new retailers where we've been testing, some other ones where we've had some full national rollout with, certainly in the club area. And then a strong signal, I think, from one of the largest retailers are really starting to get behind and improved visibility for fresh and have us leading the way with some New Island unit. So despite that competitive backdrop, I think we've actually had 1 of our best years in terms of fridge placements and support from retailers.

I think where that's going is, for us, a very strong endorsement. The fresh frozen segment is very much here to stay. And the only area that's leading growth. And to touch on the velocity point that Billy made, it's very early days. The competitive set at retail level is certainly relatively small in terms of velocities that they're seeing per store per week. We've been seeing, again, very strong velocities in those stores. The new players are coming in, too. So we've certainly seen no impact. but we are watching very closely.

The key data set we'll be using in the coming months is much more about panel data to just make sure that there's no switching certainly with our occasional households or any loss of retention. So we'll keep a really close eye on it, and we've got some strong plans to make sure that, that doesn't happen.

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

Maybe sticking along the lines of the distribution dynamic at retail. Obviously, the fridge island test, maybe a little more context if you could about the conversations with that customer, kind of how long that's been progressing, the logic behind the magnitude of that expansion just on a per store basis? And maybe what you're looking for, what they're looking forward to help determine what would be a successful test and maybe timing for a subsequent expansion on that?

Great. Thanks, Brian. I'll take this one. So look, as you're no doubt aware, this retailer doesn't make decisions overnight, and there's a lot of discipline that goes into making sure the operational effectiveness runs smoothly for something like these island units. The capacity of each of the island units is around 2.5x an individual chiller. So these island units allow not just fantastic retail visibility and brand visibility to lead the category, but they also allow more assortment and a breadth of assortment to be coming into each store. So what that's done, and I think as you know already, with this retailer, we typically don't have perhaps as many SKUs as we do to compete with some of the great retailers. So it's allowed us to actually launch some of our innovation in the more affordable price bracket. So that would include things like the multipacks, the entry-level bag, a number of items really that can bring in new households through.

So as of this week, we installed 16 of these island units. We have another burst coming of Island units as well. And there's some criteria that we're working with with Walmart on to really be able to set exactly what the sales velocity needs to be for future rollout.

Now 1 caveat, I would say, is making sure that the islands perform to our mutual criteria because these are also a bigger capital investment is important. And then there will be likely somewhere in the region of a 4-month lead time before we were able to execute at scale as well.

Appreciate the color. And then, Billy, appreciating it's November 3, and you typically start to provide a little more color around how '26 is shaping up in early January. Can you give a sense about some of the building blocks here, right? Because obviously, we're in a very dynamic environment, but relative to maybe this time a year ago, you've got a better handle on what's happening with the consumer or at least we've been in this dynamic for longer now.

You also have some of these distribution moving pieces here that are coming together. So really interested in 2 parts. One, just thinking about the building blocks for '26 on the top line at this juncture? And also how that informs your media spend? Obviously, you've talked about a lot of plans in place, but how do you think about the magnitude of the investment you want to put behind media when there are clearly fewer incremental pet parents to go after in this environment?

Yes. I'll give you a couple of thoughts on that. So first of all, as you know, we'll give our guidance when we get to the end of February. And in an environment is dynamic as this, I'm frankly very grateful to have a couple of extra months an opportunity to observe what's happening. Recall the world looked very different last year on the same day than it end up looking back when we got to the end of February and then it changed even further. As you know, we are very, very focused on trying to drive up household penetration, particularly looking at MVPs. So we're watching that data very, very carefully and seeing what the trends are, what direction it's going. And that will be a big driver of how we determine what our expectations are for revenue for next year.

We're still going to be very much a media-driven business. We are very focused on using media driver business, but we're not going to be irrational about it. We're going to make sure that the media that we're spending is getting us a decent return. As Nicki has commented, we've done quite a bit to drive the efficiency of our media plan and we need to make sure that we're really focusing on those things that are as most efficient as possible and give us the highest likelihood of a return. And so that's a big part of the planning process that we're in right now.

And then the last part is, obviously, what are retailers going to be doing? And how does that influence the visibility and availability of the brand? As you know, we are not of the school that thinks that we are just creating demand via white space. We think it's really visibility, meaning amplifying the advertising and availability, meaning having a wider range of items available, but having good visibility on what that's going to look like will inform us quite a bit. As we mentioned previously, the island fridges is a big step change. It's probably not going to have much of an impact in the first half of next year. There's a chance to get some impact in the second half of next year, but there are also a bunch of other retailers who are looking at doing some fairly sizable things, either new retailers, as we mentioned in the call, there's a rural lifestyle retailer who is now in test. We also have quite a bit of new distribution coming with existing customers in the forms of second and third fridges.

So we'll put all those things together, and I'll give you what our view is. But I think it's way too early to say right now. It's just going to be built on the same building blocks we've talked about in the past.

The next question is from the line of Tom Palmer with JPMorgan.

Thanks for the question. Maybe kicking off, I just wanted to ask on the CapEx next year, $140 million as kind of a starting point. What projects is most of this going to? I guess the commentary on the $1.5 billion in production capacity would seem like you've got a couple of years before you really run into constraints at least. And so just kind of wondering, are there -- is it because there are certain products that are facing constraints even if, from a dollar standpoint, you're fine? Any color.

Yes. I'll frame this, and then I'm going to hand it to Ivan. But always start with the understanding that we are a growing business. Even though we're not growing at the rate we are growing before, we are a growing business. And adding capacity takes time. So we'll be investing in '26 for capacity that we won't need until probably '27 or '28. And you're right in your assumption that there is some form specific elements to this, so bags are different than roles, our home style creations and our chicken bites require different technology, different capacity. And don't forget that we have the new technology that we can always pull forward, which is what we were talking about before, but the new technology -- investing in new technology is something we can do. But let me turn it to Ivan, and he can characterize for you sort of how you think about that $140 million being spent next year and the optionality that he described in his comments.

Yes. Thanks, Billy. Tom, so another thing to also keep in mind with our CapEx spend is we currently have $1.5 billion of capacity in front of us currently on the business. So any spend that we're doing is for the out years. When we look at the $140 million, that is -- that includes our current spend, what we're currently looking at as far as the projects. And we're also looking at wrapping up some of the technology that we are currently going to go live with next year.

That being said, there is we have any new distribution, such as the island chillers that we want to lean into, we're willing and able to go ahead and make those investments, and that will be above and beyond the $140 million. Also, if we want to lean into technology, if we start to see that play out, we're also willing and able to go ahead and lean into that. And that will also be up up and beyond $140 million.

Understood. On the EBITDA margin longer term, you gave some helpful color on kind of different levels you could hit at different growth rates. Just when we're bridging the high single-digit potential growth to that 20% EBITDA margin you noted, the 2% difference, where would we mainly see that? Is the gross margin target kind of holding at multiple levels and it's more about SG&A leverage or perhaps a bit different?

Yes, that's a great question. That's obviously something that we're currently looking at. And as you noted, high single digits, we're looking at 20%, low teens, we're looking at 22%. So let's just break apart the P&L for a second. On the gross margin level, we feel very confident that we will be able to hit our 48% at both high single digits and low teens. There might even be potential for us to be a little bit above that 48%, and that's excluding any new technology. I want to make sure everyone appreciates that. And then from there, it's just the leverage that you would get flowing through your SG&A. We currently believe that at single digits, we'd be at 20% and then double digits we would be at 22% at that point at scale. But we continue to be very confident with our ability to hit both the adjusted EBITDA as well as our gross margin.

Next questions come from the line of Rupesh Parikh with Oppenheimer.

So I just want to go to the -- I guess, to the Q4 implied sales guidance. It does imply a moderation versus even maybe the 12% consumption you saw in Q3. So just curious the drivers there and maybe it also embeds conservatism. So yes, just curious on the drivers there.

Yes, Rupesh, we're frankly just reflecting what we're seeing in the market today, the -- what we're seeing in the consumption data that's coming through. We also have to be mindful that we've seen years past where retailers move up or down their inventory at the year-end around the holidays, so we want to be cautious about that. And also just recognizing that we have a new competitive set, and we want to be mindful that there are things that could change in the dynamics in the coming months. But at this point, we're looking at the Nielsen every week, just like everybody else is. We feel good about the trends that we're seeing in delivering the guidance we talked about. And hopefully, that continues.

Great. And then maybe my follow-up question, just on gross margins. So I know this year, there's pretty minimal gross margin expansion. But as you look towards getting to that 48%, what are the bigger buckets we should be thinking about?

Yes. Good question, Rupesh. So as we look at the gross margin for this quarter, I want to really maybe peel back the -- I mean, just 1 layer and look at the drivers that we're seeing during this quarter. So when we look at input costs, we're very happy with the progress we've made throughout the year. We continue to make a slight progress on yield every quarter. When we look at quality, we continue to be in the low 2% throughout the year and more importantly, we're having a lot of consistency with our quality, which is going to be very important as we look at gaining leverage on gross margin in the coming years.

And then you have plant cost. So our conversion cost this quarter was actually really good. We were happy with that conversion cost. What occurred during the quarter was a timing issue between our inventory and Q2 versus Q3, we want to head and decrease our inventory. That was a hurt of 130 basis points, which we should get back in Q4. That's what we're expecting in Q4 to have a gross margin handle of 47%. And that's where we believe we are currently. We're a 47% gross margin company. So as we look at getting to 48%, we'll continue to leverage our plant costs. That's the main lever that we have in front of us currently.

Yes. Let me just add to that. One of the things that we're very focused on is getting ourselves in a position where we have the right amount of inventory, very healthy inventory to deliver great customer service, good in-stock conditions, not have surplus inventory because that obviously doesn't serve us well, but we believe we're now in a position where we have the staffing that can carry us through next year. And to Ivan's point about conversion costs, that's the single biggest driver of our margin improvement. We'll be getting better leverage on the conversion cost, and it's base leverage on the staffing, and that comes because we're driving the ROE. The team that we've got, the training, the stability in our manufacturing operations has delivered the capability they get more volume out of existing staffing. And that's a critical driver for us of building margin.

Our next question comes from the line of Robert Moskow with TD Cowen.

Billy, on Slide 17, you mentioned $1.5 billion of installed capacity today that is not fully staffed. And then in terms of priorities for next year, retrofitting existing bag lines with light versions. I guess 2 questions. The $1.5 billion, how quickly can you fully staff that much capacity? And then secondly, what's the -- is there a way to quantify what the benefit of this light version is? Like what does it provide to you from a gross margin perspective?

Yes. So on the timing question, typically, if we have the line installed in an existing building, adding staffing can be done on, call it, 90- to 120-day kind of timetable, you won't want to do 2 or 3 lines at the same time that way because you would be diluting the talent that you have at that site. But if we had an increase in demand and we had a line that had available capacity, meaning it was running only half time or it's a partial schedule, then we could add staffing in, call it, 90, 120 days. And so we feel very comfortable about our ability to do that. The labor market is supported. Our training and development teams are in a good position to do that.

In terms of the value of this -- the new technology and how that might impact the capacity, that's 1 of the most important questions we want to get answered as we go through the testing and qualification phase Every one of the test runs we do, we're tinkering with what the throughput rates will be. We're tinkering with the amount of time we can run the line continuously between stopping it and doing maintenance and cleaning out. And all those variables will have a big impact on what the total increase in capacity will end up being. It's too early for me to commit to it. But when you think about the margin gain, what we've described is, if we execute this new technology, the gap between our bags and our roles could close considerably. It won't get all the way back to where our roles are, but it will get pretty close once it's fully expanded across our entire lineup across all of our lines. So it's not something to happen '26 or '27, but by the time you get into '28, you could start seeing the gap between bags and rolls closed considerably.

Next question is from the line of Angeline Go with Deutsche Bank.

This is Angeline on for Steve. A quick question on how would you approach trade promotions going forward given that [indiscernible] is promoting heavily?

Yes. Let me frame this, and then I'll turn it to Nicki. But first of all, welcome to the call. It's nice to meet you. I would just tell you, our position has been that we believe when you're in the perishable products business that trade promotion, which just creates spikes in demand, short-term stocking up and then troughs that follow behind it, it's not a very efficient way to run the business. And so we are going to avoid that practice as much as we possibly can. It's also good for the long-term profitability. And it also means that our advertising model is the primary driver of bringing consumers in the franchise. So people who buy the product for the first time at full price. So that's the overall philosophy. I'll turn it to Nicki and she can just comment on how we're thinking about it in the context of having new competitors in the market.

Thanks. Nice to meet you, Angeline. So we've done a lot of work really reviewing those category dynamics in terms of promotions, price elasticity on our portfolio and also deeply assessing the media ROI. We come out in a place where we still believe what's right for our brand is media is the critical driver overall for growth. Trade promotions, as Billy indicated, don't seem to be doing anything other than driving what we would call occasional households into the brand. And as it stands, we're here to build long-term brand equity and also to build a loyal franchise of consumers in Freshpet.

We haven't seen any strong results really in the competitive environment of brand succeeding with promotions in the dog food category. So our focus right now is very much to make sure that our media delivers both long-term equity and near-term ROI. And that's really the model that we're using. You will see us investing less in areas like linear TV where we've seen a little bit of diminishing returns with the current consumer sentiment. But you're also going to see us investing more in digital touch points that drive that direct conversion, in particular, through e-commerce, which we believe is a very big opportunity for growth for Freshpet in the future.

The next question comes from the line of Michael Lavery with Piper Sandler.

Just want to touch on -- you announced a CFO transition in the quarter. And in the time that -- from when Todd was there until just now, there's been significant improvement, obviously, in a lot of different ways, most notably the margin momentum. But it was always our sense that he changed some of the sort of discipline and institutional things that could last beyond him quite well. So can you maybe just touch a little bit on some of how that comes to life and what to expect kind of being sticky from some of the changes or momentum that was in place these last few years? And maybe then what you're looking for and who's next in terms of kind of taking it from there?

Yes. I'll take a shot at this. I'll ask Ivan to chime in, in a minute with what he's observed as change because he's been here for a very long time. He's got a long view on it. But obviously, we love having Todd here. He added an enormous amount of value. He was a healthy skeptic on anything that the most optimistic members of our organization viewed as slam dunks and it was a healthy balance that it created in our organization. Also brought a lot of practical discipline and he had a relentless desire to keep things simple. And I think that, that's a calling card of his, and I think that's something that's been embraced as part of our organization.

When I look forward, obviously, as I said in the scripted remarks, the reality is that this is viewed as a very attractive position, being the CFO at Freshpet. We have very robust amount of interest in the position. I am highly confident we're going to be able to attract really high-quality talent for this position. What's really going to be important for us, though, is in sort of the root of your comment is how this person fits in with the team. We need somebody who is going to be complementary to what the team's skills are. And the skills that we have today are dramatically different than the skills that we had a couple of years ago when we hired Todd. We are much deeper. We have a much stronger capability across our broad leadership team within our finance team and the requirements for the person stepping into this job are going to be probably much more strategic, much more conceptual leadership because we've built a lot of the technical capability inside the organization today.

And so we're looking for somebody who can play at that level. But I'd turn it to Ivan just to give you any observations he has about what he observed in the pre-Todd days to Todd days and what he hopes to carry forward.

Yes, Michael, I think you touched on something that's really important that Todd was able to drive, and that was culture, right? And culture permeates. And the great thing about culture is that when someone leaves that culture stays behind. And there's a few things that he definitely brought healthy optimism, as Billy noted, practicality. And also, when we look at planning, the thing that we always ensure is that there's various paths to get into the goal. And that's something that we continue to have when we look at our long-term guidance for 2027. There's more than 1 path there. And when we'll see where it all ends up, we continue to feel very confident that we'll be able to deliver on the goals that's Todd assisted us in building out. And Todd if you're listening, Hello. I love you.

That's all really helpful. And just a follow-up on 4Q. You pointed out that you're basically guiding that implied 4Q momentum right at around what it's selling through. But you've also got some of the new advertising. You've got a new competitive launch that's switching into fresh. You've got the bag -- the complete nutrition bag launch. Are your assumptions that all of those are sort of a push? Or would you say you expect a lift or a risk or I guess how would you unpack some of those pieces and what to keep an eye on from our side in terms of how things might unfold for the rest of the year?

Yes. Let me just balance it out and just tell you, obviously, the level of precision we had in this business 1.5 years ago doesn't exist today given the environment that we're operating in. But you described many of the things that I would characterize as sort of the initiatives that are going to drive growth and then some of the things that are headwinds to work against. Obviously, the new advertising is a big help. We've seen it on air. We are very optimistic about the performance it's going to drive the retailer engagement and the actions the retailers are taking is helping us. The expansion that we described in the club channel is obviously helping us quite a bit. The complete nutrition product is helping us quite a bit. We have to put all that against the backdrop of the consumer sentiment remains weak. The consumer sentiment for October was in line with where it was in April and May, which is not a healthy place to be. The category is still in a tough place. So that's a fairly sizable headwind that we have to address.

We believe that we are outperforming the category by a significant margin, call it, in the range of 10 points, and it's something we'd expect to be able to sustain, but it's just the category is having a tough time right now. In addition to that, there's the uncertainty created by the expanded number of competitors that we have. And again, so far, so good. We feel pretty good about the position that we're in and the relative outperformance that we have. But we're also going to be very mindful that things are still going to come down the pipe, and we'll have to see how we play against those.

So you balance them all out and kind of say, okay, what's in the market and what we're seeing in Nielsen today, it looks like is what we're going to see for the balance of the quarter. And that's sort of the way we're thinking about it.

The next question comes from the line of Peter Galbo with Bank of America.

Not to harp on the Q4 implied guidance, but I do have an additional question there. Look, I think if we're reading the math right, right, the implied actual dollars of revenue in Q4 is probably flat to down versus Q3. And I know you don't want to give guidance on '26 today, but maybe we could just pressure test the logic of, if we run out kind of the current environment into the front half of next year, before Island fridges coming in the back half, it just -- to me, it seems like there's a possibility that sequentially things kind of stay the same, at least through the first half, which I think would imply what you've seen in the past, some kind of flattish revenue quarters, at least sequentially. So again, I know you don't want to give an official '26, but maybe we can just kind of think about that logic as we think about the first half of next year? And any thoughts there?

Yes. Yes. Let me just recharacterize what we believe is happening sequentially, and you can then project it forward as you see fit. But remember that the Q3 number we described, we had 1 point help of stuff that carried over from Q2 into Q3. And another point of help that came from the Sam's pipeline fill that happened in the quarter. So you're seeing this Q3 was probably a little bit bigger than it normally would be. When you go to Q4, while it hasn't happened every year, Q3 to Q4 has been probably the small sequential gain we have historically. There have been some years where it's basically been flat Q3 to Q4. Part of that is the way the trade manages inventory. Part of that is it's our lowest advertising spend quarter. There's a whole lot of reasons for that to happen. So I wouldn't take a relatively flat sequential Q3 to Q4 to mean anything about what the trend will be going into Q1 because we've seen stuff like that before and Q1 then bounces back and is a fairly significant increase.

On top of that, the other part of it is, I would say that the biggest anomaly for us was Q2 of this year. Q2 obviously gave up some volume to Q3 and that shift that we saw, the Q2 was relatively flat compared to Q1, and that was the real anomaly. And that really matched up with all the concern around tariffs, all the change in the consumer sentiment was so dramatic.

As you project going forward, I would expect that next year would have a more normal cadence that the market has adapted to this environment. And so you see sequential cadence that look more like it has historically rather than what it looked like in 2024 -- 2025. But under any set of circumstances, you should recognize we will be building market share. We will be outpacing the category. And so no matter what the sentiment is, no matter what's going on, we will be outperforming the category sequentially as well as on a year-on-year basis. So that's sort of how we're seeing it.

Okay. And Ivan, maybe just a more technical one. Just the NOL tax benefit in the quarter, I mean, is there a changed assumption in the tax status now? Should we be actually modeling cash taxes going forward? Just anything on that, please?

Yes. And maybe I'll take a little bit of a step back and explain that entry a little bit more. It's not that common of an entry actually. So it's something that throughout our time here, our goal has always been to be a highly profitable company. And on that journey, every now and then, you hit certain milestones, and this is definitely 1 of the big milestones that we are hitting. What this is saying is all those NOLs that we incurred since the start of Freshpet, they have a tax benefit associated with it. Unfortunately, the auditors, the accountants don't allow you to take that benefit to your P&L until you're able to prove that you will be able to utilize them. And this is the first quarter where we've been able to utilize or to prove to our accountants that we will actually be able to utilize the NOLs. So we now have an asset -- a significant asset on our books. And we also see the offset of going through the P&L. That's a onetime benefit that's flowing through.

And yes, going back to your specific comment, we will now start to see a tax expense flow through our P&L in the coming quarters. That being said, we will not be a taxpayer. We will actually offset that with the asset that we have on the books. But it's something that we're really proud of. For all the Freshpet team members that are listening in please be very proud of this. This is a huge thing that we're all really excited about.

Yes. And just comment on when you think we would become a cash tax payer.

Yes, that's a good point. Right now, we're looking at depend on the growth algorithm, but around 2028 is when we think we'll start to be a tax payer -- cash tax payer.

Ivan, just if I could sneak 1 in. Like what's the estimated book tax rate just versus cash, but just the book tax rate we should put in the model going forward?

Yes, we're still -- I mean, we're still looking into that, but we're going to -- just the normal corporate tax rate and then the [indiscernible] tax rate on top of that. but we'll keep on shopping the pencil on that. But once again, in the short term, we will not be paying cash that we'll be utilizing NOLs against that.

Our last and final question will be from the line of Jon Andersen with William Blair.

I'll put 2 in here and then listen. Billy, you mentioned in the prepared comments that you expect the online business to have a more material impact in 2026 you've been underpenetrated historically. I assume that, that's not -- you're underpenetrated with respect to kind of your clicks and bricks part of that strategy, fulfillment from your fridges is strong, but more on the DTC side. Can you talk about some of the actions that you might take on that front, what to expect, how impactful that could be? And then second, just in light of all the discussion around competition lately, if you could just remind us where you are in terms of your moat? I think when I think about early days of Freshpet, it was about the fridge footprint. It seems like it's perhaps the manufacturing scale and maybe even now the technology that you're considering implementing that represent maybe the bigger parts of your moat, but I think it would be helpful if you have some thoughts on that as well.

Yes. So I'll take the second part first, and then I'll turn it to Nicki to answer the first part about the e-commerce DTC part. Your characterization of the moats is fairly accurate. It the most evolve and develop over time. As you recall, when we launched feeder growth in 2017, it was because we believe that fresh was inherently a scale-driven business. And we also had a first mover, and we wanted to maximize the benefit of both the first mover and also get scale before others entered the market.

We've now gotten to the point where we've delivered on those, the advantages we've got, the head start we've got, the scale that we've created are delivering sizable advantages. In 2019, we made the decision to start investing in technology and manufacturing because we believe the manufacturing technology in the space was very premature or immature. And so we start investing. And that's sort of a long-term thinking that we brought to this business. And today, we're now about to realize the benefit of that long-term thinking and that investment that we've made where it's not only going to be the manufacturing scale, it's going to be the manufacturing technology and the quality and the margins that, that produces, there will be a big advantage.

Along the way, we've been building a brand, a brand that stands for the virtues and benefits of this category. We've been broadening our product lineup. So now we have product assortments that need a wider range of needs than any of the people who come into the category after us. We've gotten the retail visibility and availability from the number of stores and the fridges we had, and we continue to invest in that by changing the way in which people shop this category with the fridge islands. So you should think about us as continually investing in those things that will create an even bigger and more sizable moat. And frankly, it struggles that everybody's had in competing with us would suggest that those investments have served us very, very well.

So at this point, I think you should expect that we're probably working on some stuff behind the scenes that you aren't aware of yet that are going to build that moat further. But we're right now going to focus on driving the moats that we have created, the technology, manufacturing scale, the brand equity, the product assortment and driving it maximum leverage from those. So let me turn it to Nicki to talk about the e-commerce side of this.

Great. Thanks, Billy, and on -- So e-commerce, as you rightly pointed out, is a big opportunity for us here at Freshpet. It's only 14% share of our business. And we've had another quarter. This quarter was 45% growth. The previous 2 quarters around 40% growth. So it's also becoming a really important part of our growth algorithm going forward, too. The category is over 30% e-commerce penetration. And we know when we dig into our consumer that it is a preferred place to shop as well. And also very important for that millennial and Gen Z consumer that were a bit underpenetrated in.

So this year, we've spent a lot of time building out our capabilities and focus to really start to win in e-commerce, and you'll see more of that as we go into next year too. The fridge network, yes, you rightly point out that's the biggest part of our e-commerce business, service through Click & Collect and also last-mile delivery. But we also think that there is an opportunity, obviously, for pure play. You've seen the news on Amazon Fresh and Chewy clearly is opportunity space for us to drive into. But our D2C business is also going to be an important part of the mix.

I would say that D2C for us won't be a primary channel that we will drive. But it absolutely plays a role in terms of incremental households to the brand. So we stood up a small D2C business earlier this year. We're seeing some really encouraging green shoots coming through. 70% of our households are incremental, first time trying the Freshpet brand, with very, very high buy rates, typically more than double what our current MVP buy rate is we're seeing coming through in that area.

So all the metrics are looking like it has got some good headroom to be part of our growth for the future.

At this time, we have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for closing comments.

Great. Thank you, everyone. Thank you for your interest. Let me leave you with this thought. It's from an unknown author. Without my dog, my wallet will be full, my house will be clean, but my heart would be empty. To that, I would add, fill your dog's stomach with Freshpet every day and your heart will be forever full. Thank you very much for your interest.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.

Perfect. Okay, everybody. Thanks for hanging in there on Day 3. We're excited to welcome back Freshpet with us today. And again, with us are CEO, Billy Cyr; and Chief Financial Officer, Todd Cunfer, Thanks so much for joining.

Glad to be, appreciate it.

Maybe we start off with, as we've heard over the past couple of days, right, if there's been maybe 1 constant this year, it's been the constant of change. So maybe in that context, I think maybe it would be good to open it up by just letting you share sort of what's changed for Freshpet since our fireside chat here, basically this time a year ago?

Great. First, thank you very much for hosting us. We really appreciate it. We think this is a great event. Let me start with talking about what hasn't changed because there's been a lot that's changed, but it helps to anchor yourself on the things that have not changed. First, our belief in, and I think, frankly, broadly, the industry, retailers and whatnot, belief in the long-term potential of fresh pet food has never been stronger. Everything in the data that we've seen, everything we've seen from competitors, from retailers and whatnot, would suggest that the category that we pioneered 20 years ago, we kind of accelerated growth 10 years ago, is still looking like it's going to be a very large part of the pet food market. Today, we're a $1 billion company. We think there's about $3 billion in retail sales that are accounted for by this sort of higher quality fresh and frozen product, mostly us and the Farmer's Dog. General Mills put out a number, they said it could be a $10 billion market in a decade. We wouldn't dispute that number. We think that's certainly in the ballpark of possibilities. And so that hasn't changed. The market, the potential here is enormous.

The second thing that hasn't changed is that we, as a company, have been very, very successful at building out what I would consider a very strong business and competitive moat. So think of that as we've been investing for a long period of time in building out manufacturing capability, fridge availability at retail, building a brand equity, doing product innovation, adding households and that hasn't changed. That continues to go incredibly well.

What has changed and what's happened in the near term is, frankly, the consumer sentiment that we all have seen and we've talked about over the last couple of days, the consumer sentiment has had what I would describe as a temporary impact on the growth rate for both us and for the category of dog food. We think it's a temporary effect, but it's there. It's very real. It's consumer sentiment. It's measured by the University of Michigan in the second quarter was the worst consumer sentiment on record. And it had an impact on people's willingness to adopt a dog or, in our case, trade up their dog food. And so we look at that and say, it's not a surprise that we saw that the growth slowed down. It was a surprise to us as sentiment got as bad as it was. So we were badly off in our projections for where the year was going to go. Sentiment decelerated rather quickly. But with the weak consumer sentiment, it's not a surprise that we have the situation we do.

The good news is that this is a very sticky category. In other words, our existing user base remains very, very strong. You're not losing users. We're just not adding new users at the rate that we would be expecting to. And then the last thing that I would highlight is that what's missed a lot in the story because the story is a lot about the growth of the company and the growth of our industry and the transformation, but the operational improvements that we've made over the last year or 2 years is pretty stunning. We've now gotten from a 3% EBITDA margin 3 years ago to we're projected about an 18% EBITDA margin this year. Our gross margins are running in the range of 48% is what we're projecting will be. And that performance has been pretty remarkable, testament to some really hard work that our team has done.

So I look at it and I say a lot has changed, many things for the good, but there is one big overarching issue, which is the growth. We think it's a short-term phenomenon. We think we will get out of this at some point. But overall, we feel very good about the long-term potential of this business.

It's great context. So thank you for that and a good way to kick it off. The dog food category has evolved quite a bit over the years and continues to do so even as we sit here today. I guess what are your expectations for what the dog food category looking ahead? And have you seen periods similar to this sort of current period before?

Yes. It's a really good question. The dog food category, if you take a long view, people are replacing kids with dogs, and it's been going on that way for a very long time. And so we don't...

I should be so lucky.

Yes. My kids are very jealous because we -- our dog is, they think it's our -- not just another member of the family, but it is our favorite child. So dogs are replacing kids. And we don't see that trend slowing down anytime soon at all. There are periods, if you look over a long period of time where there's been accelerations in people getting dogs and the way they treat their dogs and there's been periods where it's decelerated largely because of macroeconomic factors. So the Great Recession in 2007 to 2009, you saw the dog population basically go flat for a period of time. And by 2011, 2012, the population was above the trend line.

So it's -- we'd expect this from a category perspective that it does have fits and starts, but the tailwinds are there for the long haul. When you look at our business in particular, we're not that old that we had much of a history back in 2007, 2008, but I think a lot of people will forget, in the summer of '22, when we had $5 gas and 9.1% inflation in June of 2022, consumer sentiment was pretty bad. It was actually, at that point, the lowest consumer sentiment on record, only to be beaten by the sentiment we had this year in the second quarter. And we saw our household penetration growth rates and our volume growth rates drop to about where they are today.

So we've seen this. Five quarters later, we had come up and out of that, and our household penetration gains were back in the high teens, and our volume growth is back in the mid-20s. So we've been there. We've seen it. We know that it can be corrected over time and it does take time. But the thing, the really specific behavior that we're seeing that I think is really important to stand is, people who are coming into the category for the first time are selecting Freshpet disproportionate to what our share is. So we are attracting more new users than our share would justify, which is a really good sign of long-term health.

The thing that's not happening is the people who are already in the category are not trading up at the rate that they have historically. And the dog food category has historically had 3 to 5 points of growth every year that came from premiumization, people moving from lower-cost products to higher-cost products. We were probably a disproportionate share of those 3 to 5 points. And so it had an outsized impact on our volume when consumers stopped doing that trade up in this environment. Eventually that will return.

When you're treating your dog as if it's your child, you will eventually choose the very best option, and that's what we're expecting.

Demographics works in your favor on this.

Without a doubt.

Just with -- it's time.

Yes.

Recently reiterated your long-term margin targets of 48% gross margin, 22% adjusted EBITDA margin in '27. Despite having removed your '27 net sales target, what gives you confidence in your ability to hit your long-term margin targets and be free cash flow positive?

Sure. So as Billy mentioned, we made significant progress over the last couple of years. We're approaching 47% adjusted gross margin this year. So we feel great about 48% by the end of '27. In fact, there's probably a little bit of upside to that number. The 22% EBITDA margin, again, we've forecasted about 18% this year. We do need some fairly steady sales growth, around 15% over the next couple of years to have enough G&A leverage to get to that 22%. So that's what I've been communicating to investors is, if we can grow in that range, we feel great about the 22%. If we're below that, we'll still get to 20%, 21%, we're probably not getting all the way to 22%. The one -- regarding free cash flow, the one side benefit from our business slowing down is it's going to make us free cash flow positive sooner and bigger.

We've been able to push out a significant amount of CapEx this year and next year. And look, if the business doesn't come back into the strong double digits the next few quarters, we will continue to push out more CapEx. We have $1.5 billion of installed capacity today. It's not fully staffed where we have installed capacity of $1.5 billion. And we've guided to about $1.1 billion or so this year. So we have plenty of capacity. And so we will actually be pretty close to being free cash flow positive this year and certainly next year, we will.

Great. Thank you. Closer in, can you talk about your expectations for top line growth this year? And what key drivers of that expected growth are?

Yes. What we've been talking about is that we, as a company, take a lot of pride in being nimble. There are some things we can control and some things we can't control. The macro environment we can control, but the things that we can control, we combine that with our ability to be fairly nimble is we need to adapt to this environment. One of the first things that we need to do is get our message right. For the consumers who are interested in possibly making a trade up and also focusing the message on the attributes that are most important to them to understand value.

We've had phenomenal success with our advertising over the last several years, but the message was very much about you and your relationship with your dog. So you might remember, we had Meghan Trainor talking about being a dog mom. We then had a piece of advertising recently, which had a Sopranos feel to it, which said basically, "If my dog isn't as important to you as it is to me, you're going to end up in my trunk." And that message was really helpful and important. But in the environment we're in today, we've needed to get a message out there that talks a little bit more about the virtues and values of fresh food because you're trying to get somebody to trade up from a kibble or can, they need to understand that they're getting something more for that. And then we need to target that advertising against the consumer who is in the market or at least potentially in the market to trade up their food.

We've all talked about low- and middle-income consumers are really constrained today. Higher-income consumers are a little bit more willing to make that trade up. And that -- certainly that's part of the equation.

Then also putting our products in the channels where that is -- where they are accessible. We have broad distribution today, but there's still a couple of outliers. One of the outliers for us is the -- has been the club channel with Sam's. We're now in 125 Sam's, and that's gone well. We have expectations that will go beyond that, but we'll wait and see how that unfolds. And we have other new distribution coming largely in the form of second and third fridges that expand our presence, particularly in the channels that are winning channels today, places where people are shopping. And then the third part is, we've just launched a product we called Complete Nutrition. It's an entry price point bag where basically, it's designed to get somebody to enter into the category. And we did a roll version of this 2 years ago, and it succeeded at bringing new consumers in.

So to your question about where we think the volume is going to come from, those are the drivers. We watch the Nielsen every week like everybody else does, and we're watching to see where it goes. We're still comfortable with where we are at this point, but we're very much dependent upon consumer sentiment and the implementation of our new advertising message. I do have the ad queued up. I think it's a good place to show it just to show you the difference in the message that we've got. This literally just broke this week. So let me hit this and see if you can see it. Do I have to hit it again? Maybe I do. I guess not.

[Presentation]

Apparently, a lot of people saw that ad this week because it's on the U.S. Open. So a lot of folks here watching the U.S. Open. But anyway, that's the message that we want to convey, which is there is a better way to feed your pet and healthy fresh food is the way to go.

Great. And you touched on this a little bit, but can you describe what's different this year about sort of your media spend versus in previous years? And are you learning a bit more this year than in the past, on how you've refined your strategy around media and how it's played out so far?

Yes, quite a bit. The media landscape is ever changing. We have historically spent bulk of our media dollars have been in sort of the broadcast media because we're still a young brand that's trying to fill the funnel, and we still believe that spending the bulk of our dollars trying to fill the funnel of potential new users is the right place for us to be. But we also want to spend that money in a way that goes after the highest potential prospects. Those people who are in the market or have the values and interest in food and pets the way that our existing consumers do, we call them MVPs. So there's this broad funnel with the bulk of our media spending at the top. But as you go down the funnel, there's more and more targeting that happens that's designed to bring these MVPs. People spend about $500 a year with us to move those people down the funnel and into the brand.

And so we're increasingly targeting the messaging to that audience, and we're also building a higher share of our media is moving into digital and social from the broadcast just so that we can pull people down through that funnel. We're very data-driven on our advertising and media spend. We've just hired some new folks. We just hired somebody, a new head of our Digital Media Advertising Planning Team. Guy came out of Estée Lauder. We're quite thrilled to get this guy, but he's revisiting the entire plan to help us figure out where do you get the best efficiency? How do you reach your audience, the prime prospects best? How do you pull them down through the funnel? And we're feeling like when we look at the metrics, the metrics need to turn, they need to move to a lower cost of acquisition of a customer, but we feel like we're heading in the right direction, especially with the right message.

Right. Over time, household penetration and growth have proven to be important indicators of brand health. What are you seeing for household penetration in buy rate in terms of growth for -- buy rate growth for the Freshpet brand of late? And which of those metrics, I guess, are you most focused on?

Yes. I mean household penetration is by far the most important metric. When you're a young brand, you want to continue to add household penetration. But we are also very mindful that we want to bring in the consumers who are of the highest value, and that will show up in the buy rate, but household penetration is where our focus has been. And we're particularly looking at that within that at the MVPs, the people that we bring in who are going to be the highest potential spenders. We're today still adding households. We're adding them across all income groups, all age groups, all demographics. So we're adding them at a higher rate than everybody else in the category. We're also bringing in new users at a higher rate than others in the category. It's just not at the levels we were a year ago.

We're seeing household penetration gains in the, call it, high single digits overall and in the mid-single -- mid-double digits on our MVPs. The buy rate gains continue to be in the 5% and 6% range overall, which, if you put all that together, gives you a relatively attractive picture compared to most CPG companies today. It's just not where we want it to be, but it's still a healthy overall picture. And if we can manage the capacity, as Todd referred to, and the overhead structure, it's still in a very attractive place for us to be.

I know at CAGNY earlier this year, you spoke about shifting to focusing more on what you refer to as the MVPs, or most valuable pet parents. Can you talk a bit more about the strategic shift you've made there? What drove it? And how you feel it's played out thus far?

Yes. The ultimate goal for us is we believe the best franchise for us to have is consumers who are feeding Freshpet as the main meal every day. And that's what we want to get to. Because if we have a franchise that is a bunch of people who are occasional users or might use this as a mixer or topper, they really haven't bought into the full Freshpet story. And so our goal is to build the biggest franchise we can, but we want it to be an incredibly high-quality franchise. And that's really what the MVPs are. These are people who have committed themselves to feeding their pet in a different way. They're spending $500 a year. And in order to accomplish that, what we need to do is think about the message that we deliver. So the advertising message needs to be really queued in on who they are and what their values are and their relationship with their pet. The media targeting needs to find those people because there are 32 million of those people out there today. There are 32 million households that are in our prime prospect group, but we need to find those people and deliver that. And then we need to make sure that the consumer experience, when they buy the product, they experience the product, they notice or see the benefits that they would expect to get from the product. That is a big, big focus for us.

In the end, we will always have some number of occasional users. We'll have -- always have some people who feed Freshpet for their dog's birthday or for Christmas or whatnot. But the franchise we want to build is that loyal base of consumers who buy us every single day as a regimen purchase.

As with any growing segment in our industry, we've seen competition in fresh dog food has recently been heating up. Obviously, later this year, there have been other announced launches into the fresh space as well. Maybe you can talk a bit more about how you think Freshpet compares in light of the increased competition coming to market? Are you losing any shelf space or new fridge placements? And how do you foresee that dynamic playing out over the next couple of years?

Yes. Yes. So first of all, we've been preparing for this moment for the last 10 years. We had very lofty goals a long time ago that we would build a business that would ultimately be so attractive that people would no longer view us as this niche item. They'd view this as the future of pet food. But when we got there, we want to know that we had built as many competitive advantages so that when the day came that people did enter that those advantages would be available to us. We didn't want to get to this day and then say, "Oh, what's the defense plan or what do you do to respond to it?" We wanted to be ready. And we feel like we've made a bunch of really good choices along the way. We've built what we think is the best retail availability and visibility. We have 38,000 fridges. We have a very broad array of products that need a wide range of needs. We spent a very large amount of money building a consumer brand equity, but perhaps the most important barrier that we built and the competitive advantage that we've built over time has been our manufacturing. Manufacturing fresh pet food is not easy and certainly not to the quality that we get. It is very, very difficult to do that.

And so we have spent a ton of time building our mastery, building scale against that mastery and then developing new technologies that are designed to better insulate our business and deliver a better consumer experience at the end. And so as the new competitors arrive, there will be people who are going to buy fridges and put them in store or access fridges that people like Walmart own, probably not to the extent that we have, the 38,000 fridges, people will get some number of stores. They won't have as broad a lineup to reach as many consumers as we can reach with as many specific tailored products. But at the end of the day, it's going to be tough for somebody to compete with the manufacturing expertise we have that delivers the best quality at the lowest possible cost. But we'll see. We'll see what happens as the market unfolds and see how that all plays out.

We do believe that the arrival of new competition is really good for the category. We've been saying for the last several years that the Farmer's Dog and the $200-plus million a year they're spending in advertising has actually been very helpful to us. We think that it has raised people's visibility that kibble and can may not be the best way to feed your dog, there's something better out there. In 2017, when we launched our plan that we called Feed the Growth, we spent a grand total of $13 million in advertising. It was doubled in the year ago -- year before, and it was the sum total amount of money being spent to drive the fresh and frozen category. I believe based on the data we've seen, in 2026, there'll be somewhere between $350 million and $450 million spent in advertising to tell people that there's a better way to feed your pet than kibble and can. And that can only be good for the segment that we are the market leader in and the segment that we expect to command a very large share of over a very long period of time. So we welcome the competition. We take it seriously, but we're ready for it.

Yes. And as General Mills, as Billy mentioned, it earlier, they think the category is going to go from $3 billion to $10 billion. So there's $7 billion, if you believe that number, which I think is a reasonable assumption, there's $7 billion of growth over the next decade. So there's going to be a lot of competitors trying to get that $7 billion. We strongly feel we are best positioned to get the biggest chunk of that. Will we have the same market share we have today? Probably not, but we have a lot of upside because this subcategory will continue to grow substantially.

Thanks for that. You've been teasing some new technology that you've been testing over the last year or so. Maybe you can share a bit more about what sort of differentiates this technology, what consequences it could have on your product? And maybe when you'd be able to sort of know for sure that it truly sort of works?

Yes. So we're very excited about it. It's the seventh line in our Bethlehem facility is a new technology for the bags. As most of you who've followed the story know, our bag margins are significantly less than our roll margins, kind of high single digits lower than our roll margins. So the goal is to get back closer to parity. This technology, if it works the way we think it's going to work, will bridge that gap significantly. The -- I won't go into the details of the technology, but it's higher throughputs, it's higher yield, it's lower quality costs. And also a nice added benefit is, it gives us more flexibility on new products and to drive further innovation over the next several years.

So this line is being commissioned as we speak. We anticipate we'll start running real product off of it probably around November. I'm sure it will take a little while for us to get comfortable with the product coming out of there, but we're really excited about it. And if it works, all future bag lines will be utilizing this technology.

Subsequently, what I'm equally excited about is, at the same time, we've come up with a, we call it the light version of this technology, which allows us to retrofit many of our existing bag lines with forms of this technology. It doesn't get you all the way there, but we get about 2/3 of the margin improvement by able to retrofit, to some extent, our existing bag lines. We will test that live and probably go live with it about April, May of next year in 1 of our lines in Bethlehem as well. And again, if it works the way we think it's going to work, we will build that out over the next couple of years. So that is not in the 48% adjusted gross margin guidance we've given for '27. That's why I do believe there is upside. We'll get some of that benefit, if it works, in '27, but it's more of a '28, '29 benefit where we'll really see the upside in margin.

I think it's also important to put in context that half of our business today is in bags, and it's the fastest-growing segment of our business today. And all the competitive entries that we've seen out there, nobody else has been able to do bags. We've seen competitors do rolls. We've seen competitors do stews. We've seen people do a lot of frozen stuff. But to do a bag product, a fresh bag product, it is the most difficult, most complicated product for us to make. And by the time somebody probably figures out how to make what we're making, we'll be producing to this new standard, which has higher quality, lower cost, better opportunities for innovation. And so to the comment that I made earlier about being prepared for this moment, we started investing in this next-generation technology in late 2018 to figure out how you would do it. We wanted to be ready the day that the competitor showed up. We would be in a position where we could take the next leap forward in the manufacturing expertise and the quality of the product that we produce so that it will be hard for somebody to chase us and certainly hard for somebody to undercut us on the cost, and we think we're going to accomplish that.

That's really helpful. You significantly reduced CapEx this year, as you talked about. Now looking for CapEx of about $175 million versus your initial outlook for $250 million at the start of the year. Can you remind us the breakdown of maintenance versus fridges versus capacity expansion? And what are your expectations for next year? And is that level sustainable?

Sure. So we spent about $20 million-ish on maintenance capital every year. We spend $20 million to $25 million on fridges each year and the rest of it is for capacity expansion. So in a typical year, where we're spending $200 million to $250 million [ of investment ], 80% or so of that spend is going to capacity. Now with the business slowing down a bit, we are able to push out to the right that capacity expansion. And it's -- we're going to do it this year. We're certainly going to do it next year as well. And again, we're going to follow the tape. And if we start to accelerate, then we will start to up the CapEx in the out years.

If we're at a new normal slower pace, high single digits, low double digits, that amount of capital will be lower for an extended period of time. But as I said earlier, we will be close to free cash flow positive this year. We certainly will be free cash flow positive in the subsequent years after that.

Maybe in our final moments, you've been meeting with investors for the last 1.5 days or so, and obviously, oftentimes before that, but maybe over the last few days, what's the sort of the common theme that you've been hearing from investors that -- or themes that are developing, the key questions that you're getting, how have you responded to them? And is there something or some area that you feel like folks are necessarily missing or maybe not putting the proper amount of focus on as you see it as we're thinking about this equity over time?

Yes. I would highlight to, and Todd can add to these, but the first one is, I think that the -- anybody who is confusing today's slowdown that we've seen this year with the diminishment of the long-term opportunity is missing the boat. The reality is this is a short-term temporary phenomenon. All the data that we have suggests that the long-term opportunity remains there. It's very clear that consumer sentiment that we've seen this year has had a negative impact on our growth rate, but it doesn't change what the long-term opportunity is. And so anybody who is looking at valuing us, I recognize that it's not an easy thing to do to say at what point will it grow faster, and how do I project that? But you shouldn't assume that the current rate of growth is the rate of growth that we're going to have in the years going forward because we are fully intending to realize that opportunity that's ahead of us.

The second thing I would talk about is, people try -- they're trying to figure out with not just General Mills, but we have Mars with Royal Canin, we have The Farmer's Dog, we have a whole host of people who are trying to enter this space. And it is going to be a very dynamic environment. It's going to be very interesting. As I said, we're well prepared for it. But I think there's a very good corollary, and there's probably a wide range of corollaries that people can think about. But the way -- one of the things that I recall is, we feel like we're doing to the pet food category what Chobani did to the yogurt category. Around 2005, they entered with Greek Yogurt. Somebody who was outside the category, was an insurgent, came into the business and basically said, "I have a way to make a different and better product." And there were some well-entrenched competitors then. There was Yoplait, there was Danone and whatnot, and they paused, and they waited a long time before they responded to it. And by the time they responded to it, it was too late. The Chobani had built an enormous brand franchise, a lot of manufacturing capability, a lot of manufacturing expertise and it became very difficult for the incumbents to keep up with them.

We aspire to do that same thing to this category. We think we've built the moat to do it. We think we've built the expertise to do it. And we think this is going to be a very durable long-term franchise in this space. The next year or 2 will be the test to see whether what we've done, we've made the right bets, but we feel pretty good about the bets that we've made.

Yes. I would say the other thing that with the slowdown of the business, which has been so much of the focus, what's been lost is our plants are running exceptionally well. Ennis, which was our lowest margin facility last year, this year is our highest margin facility. We've made tremendous strides in the last 6 to 9 months. And I get a lot of questions, a lot of concerns about, "Hey, the business is only growing slightly, are your margins going to start to deteriorate?" And no, they won't. If we're still growing, we can maintain the margin structure that we have. It will make it a little bit more difficult to grow the margins to where we want to grow them. But as I said earlier, we were anticipating about 18% EBITDA margin. Even if our business would slow significantly, we can certainly maintain that margin structure. And obviously, our intention is to get above 20%.

Great. Well, I will say, after a couple of days of hearing a lot of packaged food stories, it's fun, always good to talk about one where there's clearly a pretty significant growth track ahead of you, and it's never a linear straight line. So we appreciate you coming here and talking us through sort of the closer in aspects and then making sure we understand the forest for the trees. So thank you both for being here. We're going to cut it here and go over to the breakout. Please join me in thanking Billy and Todd for being here.

Thank you, Andrew.

Greetings, and welcome to the Freshpet Second Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rachel Ulsh, Vice President, Investor Relations for Freshpet. Thank you. You may begin.

Good morning, and welcome to Freshpet's Second Quarter 2025 Earnings Call and Webcast. On today's call are Billy Cyr, Chief Executive Officer; and Todd Cunfer, Chief Financial Officer. Nicky Baty, 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 prospects and plans for growth, efficiencies of Edit's operations, timing and impact of new technology, capital spending, adequacy of capacity, expectations to be free cash flow positive in 2026 and our outlook for 2025 and long term. They involve risks and uncertainties that could cause actual results to differ materially from any forward-looking statements made today, including those associated with these statements and those discussed in our earnings press release and in our most recent filings with the SEC, including our 2024 Annual Report on Form 10-K, which are all available on our website. Please note that on today's call, management will refer to certain non-GAAP financial measures, such as EBITDA and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Please refer to today's press release for how management defines such non-GAAP measures, why management believes such non-GAAP measures are useful A reconciliation of the non-GAAP financial measures to the most comparable measures compared in accordance with GAAP and limitations associated with such non-GAAP measures.

Finally, the company has produced a presentation that contains many of the key metrics that will be discussed on this call. That presentation can be found on the company's investor website. Management's commentary will not specifically walk through the presentation on the call, rather as a summary of the results and guidance they will 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 would like you to take away from today's call is that against the backdrop of subdued dog food category demand Freshpet's growth continues to significantly outperform the category, and we are driving the operational improvements in capital efficiencies necessary to deliver our long-term margin and free cash flow target even if the current economic constraints persist.

Freshpet is a growth company, and we expect to continually deliver outsized growth. We are also a very nimble company, one that has a long track record of adapting to changing environments. Looking back over the past 6-plus months, it is now apparent that the dog food category has faced a sizable headwind for the first time in years. We have seen economic uncertainty, result in consumers hesitating to trade up their dog food, defer well visits to the vet decline medical treatments for their pets and defer getting a new dog or replacing a recently deceased dog, return to office mandates and the high cost of housing has not helped either.

This has resulted in declining growth rates for most leading pet food brands, including the leading DTC brands. The effect has been most pronounced amongst dogs as opposed to cats as cancer typically lower maintenance and lower cost making them a relatively attractive pet to have in times like these. The current environment has challenged our ability to grow at the same rates as the past several years. To adapt to that, we have modified our plans and put in place what we believe are the necessary drivers to reaccelerate our net sales growth, which I'll review in a few minutes, and we've seen some early encouraging signs. We're also increasing the intensity of our focus on the things that we can control, so that no matter how long it takes for the economic climate to improve, we can still deliver strong financial results.

We've made tremendous progress in our operations and are quite bullish about our long-term prospects for the potential margins, profit and cash generation of the business. Our focus on operating improvements has driven the healthy improvement in our adjusted gross margin. But more importantly, those efforts, in combination with new technologies we have developed will enable us to significantly reduce our CapEx and while still expanding our manufacturing capacity to meet our long-term demand.

As a result, today, we are lowering our CapEx estimates for 2025 and 2026 by a total of at least $100 million. While the operational progress we've made has touched virtually every aspect of our operations, some of the most significant achievements are: one, NS has become our most profitable plan. This happened sooner than we had planned and is the result of strong leadership at that site and a testament to the vision and thoughtfulness that went into the design of that kitchen. It is evidence that we've been able to convert our operating experience into continual improvements that will ideally put us well ahead of any potential competitor in our mastery of Freshpet food manufacturing.

Further, because Ennis is expected to provide more than 50% of our production volume within the next 2 years, its productivity advantages will have a greater and greater impact on the company's total profits over time; second, development of new production technologies. We have previously indicated that we have created a new way to make our bag products and expect to start up our first new production scale line with that new technology in Q4 of this year. If it works as we expected to, we believe it will deliver a higher quality product at lower cost through increased yields and throughput.

It is the potential to significantly narrow the gap between the margins we make on our roles and on our bags and this technology could potentially be the basis for new bag lines going forward. Additionally, we've recently developed a light version of the same technology that can deliver many, but not all, of the same benefits and could be retrofitted to our existing lines at relatively low cost with minimal disruption. We plan to test the light version on 1 of our existing bag lines in the first half of 2026 and it could be reapplied to several of our other bag lines by the end of 2027, if successful. The pilot test runs in this technology indicate that it will work and would enable us to deliver more capacity per line from our already installed production base. And number three, ability to reduce capital spending by a combined total of at least $100 million in 2025, 2026, we've made exceptional progress at improving our throughputs, yields and operating effectiveness and that is enabling us to get more output from the existing lines and staffing, leading to lower quality costs and improving margins.

In combination with our new technologies, we now believe that we can defer at least $100 million in CapEx from 2025, 2026 and still meet the demand we expect to generate for the foreseeable future. This reduction in CapEx will have a direct impact on our cash flow to make the business much less capital intensive for the next few years. To be clear, some of this reduction is the result of slowing demand we've seen so far this year, but the remainder of the reduction is due to the improved operating efficiencies and new technologies we expect to implement over the next 2 years.

We are very proud of our team for its ability to adapt to the current environment and still deliver such exceptionally strong performance, which provides the foundation for even greater financial and strategic advantages. We pioneered this category and fully intend to maintain our advantages as the category grows, matures and attracts new competition. With this strong footing, we are in a very good position to drive the growth of Freshpet.

As you know, this has been a particularly challenging year on the top line, something that has typically not been an issue for us. Our media model has driven strong and predictable growth for a very long time and the performance we saw earlier this year caused many to question it or if we had saturated our TAM.

Our data suggests that neither is true, i.e., our media model is, in fact, still working, and we still have a large and untapped TAM. We are growing across all channels, income groups and generations. The sales growth is just not as robust as we would like it to be today. We believe our growth rate versus a year ago has now stabilized, and we are encouraged by some green shoots. However, given that we have not seen a greater increase in our year-over-year net sales growth yet, we believe it's prudent to adjust our net sales guidance for the year.

Our updated guidance assumes the macroeconomic environment stays relatively the same and that we execute our plans, focusing on areas that are in our control. The 3 key areas we are most concentrated on are: first, marketing. We've updated advertising on air that better explains the difference that fresh food can make and planning to launch another media campaign later this month that we believe will help drive greater household penetration. We have also shifted marketing dollars to other channels like digital, social, and Connected TV, where we've been underdeveloped previously, and we can be more targeted with MVPs.

Second, distribution expansion. We are working on greater visibility in value channels, such as club and mass, expanding our small DTC business called Freshpet Custom meals as well as several other opportunities. Digital orders, which we previously referred to as e-commerce, continue to have outsized growth and were up 40% in the second quarter.

Digital now accounts for 13% of our sales. Our revised top line guidance also incorporates a much greater level of certainty on our expansion within the club channel specifically. As of last week, we've expanded our test in a leading club retailer and are now in 125 stores and we are optimistic we will be in more stores later this year. Other customers have also committed to adding second fridges and have expressed interest in testing some of the island fridges we previously shared sometime later this year or early next year.

Third, value-focused products. We are launching a new complete nutrition bag product and rolling out new multipacks and bundles of roles in bags, both online and in store later this year. These will be available in select retailers. Now I'd like to briefly provide some highlights from the second quarter. Second quarter net sales were $264.7 million up 12.5% year-over-year primarily driven by volume growth, consumption growth due to a small shift in orders from the end of June to early July. Adjusted gross margin in the second quarter was 46.9% compared to 45.9% in the prior year period.

Adjusted EBITDA in the second quarter was $44.4 million, up approximately $9 million or 26% year-over-year. From a category perspective, we continue to be the #1 dog food brand in U.S. food with a 95% market share within the gently [indiscernible] fresh, frozen branded food dog segment in Nielsen brick-and-mortar customers, defined as XAOC plus PET. We compete in the $54 billion U.S. pet food category for Nielsen omnichannel data for the 52 weeks ended 6, 28, 25 and we have only a 3.6% market share within the $37 billion U.S. dog food and treats segment.

From a retail standpoint, our products are now in 29,141 stores 24% of which have multiple fridges in the U.S., and we expect that percentage to continue to grow as we focus on adding second and third fridges in the highest velocity stores. We ended the second quarter with 37,985 fridges or more than 2 million cubic feet of retail space with an average of 20.8 SKUs in distribution. Our percent ACV in grocery, where we're the dog food market leader was 79% at quarter end and in xAOC, only 68%.

Discussions with retail customers continue to be very positive as they recognize the growth in the category has been and we believe will continue to be led by Freshpet food. Household penetration as of June 29 was 14.4 million households, up 11% year-over-year and total buy rate was $110, up 6% year-over-year.

Our heaviest users, where we refer to as MVPs are growing even faster and totaled 2.2 million of those households, up 18% year-over-year. MVPs represented 70% of our sales in the latest 12 months with an average buy rate of $501.

Turning to capacity. As I mentioned earlier, we are expanding capacity to keep up with demand and are able to push out capital expenditures because of the progress we've made operationally. Our operating efficiencies, particularly in NS, are well ahead of our glide path and that frees up significant capacity with no incremental capital. We currently have 15 lines across our manufacturing footprint with an additional bag line expected to commence production in the fourth quarter this year.

As I said earlier, this new bag line will be the first time we are testing our new technology at scale, not just at a pilot plant level, but we are very encouraged by its potential.

Now turning to our outlook. For fiscal year 2025, we now expect net sales growth of 13% to 16% year-over-year. We are reiterating our adjusted EBITDA guidance of $190 million to $210 million and now expect capital expenditures of approximately $175 million. Todd will walk through more details of our 2025 guidance in a few minutes. In regard to our long-term outlook, today, we are removing the $1.8 billion net sales target and the related $20 million household target in fiscal year 2027. The sizable reduction in the category growth rate and new pet additions have made it increasingly difficult to maintain our previously projected rate of growth, so we believe it is prudent to remove those targets.

To be clear, we do expect to grow at a rate well in excess of the category, thus increasing our market share. We have a large and growing TAM and believe it will provide many years of sustained growth. Additionally, our strong operating performance has given us increased confidence in our ability to deliver our 48% adjusted gross margin and 22% adjusted EBITDA margin targets in 2027 and even without the benefits of the added scale as long as our sales volume growth remains at least in the teens.

As a reminder, the new production technology was excluded from the long-term margin targets, which allows even more upside to margins if it works. In summary, we believe we have an incredible opportunity to improve the lives of pets everywhere through the power of fresh, natural food, and we've not lost sight of that mission. We are taking actions to adapt to the current macro environment and our scale advantages make us better positioned now than ever to address those challenges. We have a healthy balance sheet, solid operating performance, ample capacity, and we are a stronger organization than we were a few years ago. We've always been resilient and nimble and our scale today gives us the flexibility to lean into certain areas such as marketing, new technology and innovation to develop solutions to consumer uncertainty today while also expanding our competitive moat.

Now let me turn it over to Todd to walk through the details of the second quarter results and our updated guidance.

Todd?

Thank you, Billy, and good morning, everyone. The second quarter results demonstrated strong operational effectiveness and profitability improvement, but were slightly below our expectations on sales. Now I'll give you some more color on our financials and updated guidance. Second quarter net sales were $264.7 million, up 12.5% year-over-year.

Volume contributed 10.8% growth and we had positive price/mix of 1.7%, primarily driven by mix. We saw a broad-based consumption growth across channels. For Nielsen-measured dollars, we saw a 13% growth in AOC, 13% in total U.S. pet retail plus, 12% in U.S. food and 6% growth in pet specialty. Consumption growth in the quarter was approximately 14% and However, we saw a slight shift in timing of orders from the end of June to early July that impacted net sales growth by about 1 point. Second quarter adjusted gross margin was 46.9% compared to 45.9% in the prior year period. The 100 basis point increase was driven by lower input costs as a result of higher yields and leverage from our [indiscernible] Chicken processing facility and reduced quality costs, partially offset by reduced leverage on plan expenses.

Second quarter adjusted SG&A was 30.1% of net sales compared to 31.0% in the prior year period. This decrease was primarily due to lower variable compensation accrual partially offset by increased media as a percentage of net sales. We spent 15% of net sales on media in the quarter, up from 12.2% of net sales in the prior year period.

Logistics costs were 5.7% of net sales in the quarter compared to 5.8% in the prior year period. Second quarter adjusted EBITDA was $44.4 million compared to $35.1 million in the prior year period. This improvement was primarily driven by higher gross profit partially offset by higher adjusted SG&A expenses.

Capital spending for the second quarter was $33.4 million, while operating cash flow was $33.9 million and we had cash on hand of $243.7 million at the end of the quarter. We are confident in our ability to be free cash flow positive in 2026 and intend to utilize our balance sheet to support our growth going forward.

Now turning to guidance for 2025. As Billy said earlier, we now expect net sales growth of 13% to 16% compared to our previous guidance of 15% to 18% growth year-over-year. We are assuming the macro environment and consumer uncertainty stays relatively the same and have adapted our strategy to reaccelerate growth.

In terms of cadence, we expect a sequential increase in net sales per quarter. We invested more heavily in media in the second quarter to drive household penetration growth in the second half, we will be launching a new marketing campaign later this month, adding more value-oriented offerings in the fall and expect to increase distribution throughout the remainder of the year, including our expanded test in the club channel.

We continue to expect adjusted EBITDA in the range of $190 million to $210 million. For cadence, we expect adjusted EBITDA to be back half weighted with sequential adjusted EBITDA dollar and margin improvement throughout the rest of the year. Media as a percent of sales is expected to be greater than 2024, and However, we are monitoring the spend closely and will pull back if we are not seeing the returns. We still anticipate modest adjusted gross margin expansion year-over-year driven by operational improvements and do not anticipate any material inflation or pricing actions.

In regards to tariffs, we are currently seeing a small impact on vegetables sourced from Europe and spare parts and mitigating them where we can. Capital expenditures are now projected to be approximately $175 million this year compared to our guidance last quarter of approximately $225 million and an original estimate of $250 million. Some impact from tariffs, particularly on the cost of steel for new construction and new equipment is included in the updated CapEx projection.

The majority of our CapEx spend is focused on the installation of new capacity to support demand in the out years, but we are seeing greater capital efficiencies that are allowing us to reduce our spend both this year and next year. We anticipate 2026 CapEx will be the same or less than what we are spending in fiscal year '25, which gives us even more confidence in our ability to be free cash flow positive in 2026. Based on today's guidance for 2025, it is evident that our ability to hit our 2027 net sales target is unlikely, so we believe it's prudent to formally remove the $1.8 billion target.

We believe we will have industry-leading growth, and if we are able to maintain net sales growth in the teens on an annualized basis, we are confident in our ability to manage costs operate effectively and still achieve our long-term margin targets of 48% adjusted gross margin and 22% adjusted EBITDA margin.

In summary, while this year is not where we plan from a top line perspective, we are aggressively managing costs and are very pleased with our performance on the bottom line. By focusing on the areas of the business we can control, we are seeing operational efficiencies continuing to drive margin expansion and reduce capital requirements as we further build capacity. We are also further strengthening our competitive position via new, more efficient production technologies expanded distribution and operating expertise that is delivering greater consumer experiences at lower operating costs. We are building a stronger, more profitable business and believe we have a significant runway for growth.

That concludes our overview. We will now be glad to answer your questions. And as a reminder, we ask that you please focus your questions on the quarter guidance and the company's operations. Operator?

[Operator Instructions] Our first question comes from the line of Peter Benedict with Baird.

So curious on the path to 22% in 2027. It sounds like from a top line perspective, you kind of preempted that question, which is I guess, if the 13% to 16% that you're going to do this year in top line growth, if you do that, that's still sufficient to support 22%.

My question is, are there -- can you help us with maybe the SG&A buckets, Todd, like what underlies that 22% within your OpEx? And is there any kind of a timing step up maybe with the new technologies that would make the path there may be heavier in '27 versus '26, just conceptually not looking for specific guidance, but -- that's my question.

Sure. As we've talked about, as long as we're in kind of the mid-teens growth over the next couple of years, we feel very good about the 48% and the 22%. The 48% -- look, we're going to be close to 47% this year. So we probably have a little -- some of these technologies kick in the way we think they're going to kick in over the next 2 years.

There's likely some upside to that 48%, number one. Number 2 is that sales growth in the teens will allow us to get significant G&A leverage. So we feel terrific about that. We probably have a little bit more to go on logistics. And then media will probably kind of stick with sales over the next couple of years. We'll see how it plays out. There could be a little upside in margin on media, but it's probably going to likely grow with sales. But I think the big upside is leverage both up in gross margin and leverage in G&A is how we feel we can get to 22% with confidence.

Peter, I just want to amplify 2 points in there. One is the operating performance we're having is so strong. It's what is driving that confidence in the 48%. The second piece is, as we said in the prepared remarks, the tech benefits from the new production technology are not factored into that target. And that's the basis for Todd's confidence in our ability to exceed the 48% if those technologies work out.

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

So maybe just a clarifying point here. Is the expectation that you've removed the net sales target, but you're sticking with the gross margin and EBITDA margin targets, predicated on, it sounds like, I guess, low to mid-teen growth. So generally, where is your directionally guiding the market towards or how you expect to be judged through this cycle through '27.

Yes. I mean, not specifically. What we're saying is to hit the 22% EBITDA margin probably requires us to be in that range that you just described. If we're -- if we would slow down to 10% or lower, getting that 22% would be very challenging just because of the lack of G&A leverage.

So look, are we confident that we can be in that kind of range over the next few years? Look, we think we can be in double-digit growth. The question is just with the uncertainty right now, are we going to be closer to 10? Are we going to be closer to 20. So we're not giving specific guidance over the next few years. We'll probably come back at some point in time and do that. But the assumption is if we can hit that low to mid-teens number, the 22% is very achievable.

Okay. And then maybe just kind of asking about the dynamics between household penetration and buy rate. I think the implied media per household looks not quite as bad as feared, but the buy rate did slow a bit. So it seems like you are acknowledging some pressures with trying to attract new households and that seems to be weighing on the trend in household penetration. But on buy rate I guess I would have assumed that the buy rate would do better if the household penetration was slowing at the rate of [indiscernible].

So maybe just comment on what exactly you're seeing there. Is this -- is this a byproduct of the more vulnerable consumer within your household penetration that may be switching with elevated promotion in the category. What are you seeing that's weighing on the buy rate right now?

So first of all, the buy rate is right now for the reason you cited is running above -- the growth rate is a little bit above what our long-term sustaining growth rate is on the buy rate in part because of the growth in household penetration is not what it used to be.

So mathematically, it works out that way. Clearly, there is an impact of consumers not being willing to trade up. As much as they have in the past. And that implies not just moving from their dry dog food to a product like Freshpet but also it implies moving within our platform from more of the lower cost items that are lined up to the higher cost items. Now we say that, I just want to be clear, there's a lot of different consumers and a lot of different behavior out there.

One of our fastest-growing parts of our lineup right now is our home style creations, which is our most expensive product in our lineup. And so there are some really nice green shoots that we're seeing when you find consumers who are looking to make a change or trade up in their products, it's just how many of them are that are out there.

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

Just a question or a thought on this household penetration now is 11%. And I don't know if the current environment changes your thought of where that can be in terms of -- I understand you're saying consumers aren't trading up like they used to be, but is there a point of maybe we're starting to tap out the number of consumers that will buy the high end or super high-end super premium dog food.

So I'm just trying to understand, does that change your thought -- do you think there's anything else going on with the slowdown? Household penetration seems to be kind of the key metric and just didn't know if you changed your ceiling outlook for it?

This is Nicky. Our household penetration, we've done a lot of work recently on what we believe our TAM, our total addressable market can be for the future. And within that, we've also looked to where our brand positioning is and how strong we believe our proposition is to grow into that TAM.

So when we take a step back and look at it, we've got around 14 million, 14.5 million households at the moment, we still believe we've got tremendous runway to around a mid-30s total addressable market -- within that, we've done a lot of work on these MVPs, these most valuable pet parents that we're really going after. And we're still very nascent, I would say, in our journey to grabbing those consumers that are very interested in our brands [indiscernible] time, we can go from just over 2 million MVPs to around 7 million MVPs that have a very high level of interest in a fresh, less process healthy, strong premium brand proposition. I think the other point maybe to build on is our MVPs are actually already in the category.

So the other piece of work we've also looked at is -- within those MVPs, we've actually got 90% already in the category today. So by going after more MVPs, we become a little bit less dependent on that category growth rate for the future.

I appreciate the color. And then, Todd, 1 question on the variable commentary. Was it just a lower accrual this quarter, and I assume for the remainder of the year? Or was there a reversal? Just trying to understand, did that have where things get versus kind of your internal expectations?

Yes. No reversal. We're -- we had a super strong year last year and obviously had a very high incentive comp payout. We are trending lower this year. So it's just a year-over-year delta. No reversal.

Our next question comes from the line of Steve Powers with Deutsche Bank.

I was hoping you could just go maybe a little bit deeper on back half plans to drive demand and what will be different from what we've seen year-to-date. I guess within that, maybe drill a little bit into how big a role the push on value will play. And then also any thoughts around competition, both indirect and direct. I think Blue Buffalos upcoming launch is top of mind for many investors. To the extent that, that's impacted your plans, that would be helpful to understand as well.

Yes. Thanks, Steve. I'll start, and then Nicki will fill in some more thoughts. But First of all, as we think about the back half, the big drivers are going to be the drivers that we've historically leaned on pretty heavily, which is advertising, but with a different message we actually have a different message on air today, and we have a new campaign coming in than can give you a little bit more color on what that's all about.

The second is expanded distribution. You heard in the prepared remarks, we've expanded significantly the club store test that we've been describing in the past. We're now in 125 of those stores and we feel good about what's coming behind that.

So that's factored into our expectations for the balance of the year. The third part is the product innovation that we described last quarter. The complete nutrition product that is a bag version of the role we launched a year ago. That is not yet in any of our numbers. It's going to show up in roughly September, October. So it's not going to have a big impact this year. And we don't expect to have a big impact overall. It's really a driver of household penetration. It's an easier way to enter the franchise, and that's scheduled to roll out in September, October, but it's not a big contributor to the actual net sales this year.

The bigger pieces will be the advertising and the retail availability expansions. I don't know, Nicki, do you want to add to that?

Great. Steve, the bit of color I would bring is that we've just got testing results for the new creative campaign, and we feel really good about where that's coming in at the moment. You will see us start to tell the next layer of the Freshpet story, much more going after our health credentials, and we think we're right on trend at the moment. It's definitely with less processed food being a key focus for humans, and we feel that this is really a rich space for us. especially in kind of more of a clean label environment, too.

So I think you'll see that coming through the back end of the year. The other part I would say on retail visibility is retail engagement is extremely strong. We're already ahead of our targets in terms of both new store, new fridges and also multiples when we look at this stage in the year with commitments that are strong for the back end of the year. And then in terms of that product innovation, Billy obviously mentioned the new value entry-level bag. But we also will push heavier into multipack and also what we call virtual bundles, which will offer that a little bit of a discount and a saving, especially for those heavier consumers.

Okay. That's very helpful. And then Nicky, just on the second half media efforts, is the focus there on continued MVP expansion? Or is the goal to widen the net go broader and build the funnel for future MVP development?

What's the balance there?

Yes, that's a great question, Steve. So I think that we will still, from a media standpoint, we will, at a very early stage, still with the brand development and a big headroom for brand awareness. So you will absolutely see us drive that brand awareness to the maximum number of households. So that will be really going after general dog population in the main. But what you will see coming is new from Freshpet is you will see a heavier upweight in areas like social, digital and other channels that will allow us more of a targeted approach to our story.

So you're going to see a balance coming through. We've tested all of our new creative, both with MVPs, but also general dog population, and we feel good about where the results are coming out.

Our next question comes from the line of Robert Moskow with TD Cowen.

I was wondering if you could talk a little more about the nature of the new advertising. I thought I saw some things online already from Freshpet that seem to draw a big distinction between fresh dog food and kibble and saying that Kibble is overly processed and fresh is therefore better. To what extent is that part of the messaging and then like do you foresee any confusion with consumers? Because I think your competitor will be actively marketing fresh in conjunction with kibble and I think a lot of your consumers already use it in conjunction with kibble.

So maybe I'm in too much in the weeds, but how are you thinking about that balance?

Great. I think it's a really fair question as it's stands. So look, I think that we've got a lot of MVPs that will absolutely be looking for mixing as the key behavior. So whether that is a kibble and fresh food, whether that's with wet food, mixing is very much part of the behavior. We want to make sure that there's a strong understanding of the health benefits that really come from feeding fresh whether you choose to feed it as a mixer or whether you choose to feed it as a main mill. And I think for us, we saw big runway and headroom to be able to grow in both mix of behavior and also main mill behavior and really drive also that buy rate and new household penetration. So you'll see -- you've seen a little bit coming through online, but you'll see some different creative and more -- and creative that will appeal to those different MVP subsets as we go through the back half of the year.

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

[indiscernible] Faster category growth that it would sort of maybe leave you unchanged? Could it drive even better momentum for you? Do you think more competition splits the same pie or it's more conservative? Just how do you think about what that impact on your outlook is? And how investors should be thinking about it?

Yes, Michael. We obviously think that this is the -- first, it's a proof point that this is a very attractive high-growth long-term potential category. We're attracting lots of people, not just the Blue Buffalo entry, but there are others who have decided to enter this space in various ways. And it's just validation that this is the future of pet food. The second piece is history will show that over time, category creators like us, if you execute well, tend to end up with the lion's share of the category that they've created. And -- but what also happens is when well-entrenched competitors in the space, decide that they want to enter this segment and they do so with a lot of investment. It tends to drive the total category size and everybody who's in that space wins.

So we frankly think just as we've said previously, related to the farmers dog, we think when the farmers dog advertises, it helps us it helps create this perception that there's a better way to feature pet than just feeding with kibble and can we think that to the extent that General Mills spends a lot of time and money telling people that there's a better way to feature pet, that's good. If they decide to use it as a topper message, that doesn't hurt. It helps create awareness for the category. It creates validation for the category. In the end though, the category or the segment that we're in, the fresh segment, will get bigger. And then at the end of the day, we feel very good about the competitive position that we're in. We have significant scale, both at retail as well as in operations. We're able to deliver a broad product lineup. We have a very well entrenched consumer base. So we feel very good about the position we're in. And frankly, we're looking forward to the benefit of the increased awareness in the category.

That's really helpful. And we've touched on the advertising a decent amount already, but 1 more follow-up on that is, can you just maybe give a sense of what insight drove the change or what was the starting point of looking for an evolution in the message? Or how did you decide to make a bit of a pivot there?

Yes, I'll take this one, Billy. So in terms of what we've learned really about the brand is, we've done a terrific job at Freshpet in really establishing in our advertising, and I'm sure many of you have seen it for the last couple of years, that very strong bond you have between yourself and your dog. And that comes through very powerfully.

You were going to make no compromises in your life. You're going to take your dog on holiday with you, you're going to do everything and your don't going to be the primary member of your household. But when we really take a little bit of a step back, we felt that we're now ready to tell that next stage in our Freshpet story, and there was a big opportunity from certainly a number of our MVPs asking questions around, hey, you are really healthy. The ingredients that you're using are absolutely fresh. They have some really strong health benefits, why you're not talking more really about these areas.

So -- for us, it's not an either/or. It really is sort of continuing if you prioritize your dog as a favored memory of your family, it's building out from that message, and it's layering in those new health credentials. And -- this is why we feel good really about that new advertising direction. It will still have that Freshpet tone, that fresh pet humor that many have come to love and expect from us. But it's really going to start to bring in why we think we're special, why we think we're unique and why we think we are the best way to feed your dog.

Our next question comes from the line of Kaumil Gajrawala with Jefferies.

I guess a couple of questions on retail. First is last quarter, there was some issues with the distributor getting into pet specialty. Just curious where you are with that process, does it sort of all resolved now? And then on the expansion into Club, I guess you went from test to 125 is incorporated in your guidance to go from 125 to full national? Or is it the sort of thing that it sort of keeps building from here and more of it happens in '26.

Kaumil, yes, the pet specialty distributor issue has been worked out. It created a lot of disruption in but we pretty much got it all cleaned up by the end of Q1. There's still some pockets where they're not as effective as we had been previously, but there's other places where they're very, very strong.

So on balance, we feel pretty good about what our situation is in the pet specialty distribution channel and didn't have any material impact on the quarter. In terms of the club piece, obviously, we're very encouraged by the progress there and the expansion to the 125 stores that we're in. our guidance for the balance of the year assumes what we believe is the plan. Obviously, we won't communicate what our customer-specific plan is, but what we believe the plan is, is embedded in what -- in the guidance that we provided. But I would say that the results that we've seen so far in the stores that we're in and recognize that we've only been in -- we were in the first store back since April. The remainder of the stores is only in the last 2 or so weeks. So it's hard to get any long-term data on those stores, but the first store has done so well, it's made us very bullish, and I frankly think our customers pretty bullish as well. So that's embedded into our thinking in the guidance we've provided.

Got it. I guess that's why the guidance also is for sequential improvement. On EBITDA, I guess you've lowered your top line sort of a few times over the course of the year, EBITDA has stayed the same. Is it -- was that always sort of going to be the plan that this efficiency was here, and you just weren't sure if it was going to come through or at what rate it would come through that if sales were higher than would be more leverage? Or -- was there an extra push? Did you find something new that helped maintain that EBITDA level even though the sales figure will be a little bit lower?

Look, we are optimistic from a margin perspective this year, but the plants just are just over kind of delivering even our optimistic expectations. As we mentioned in the call and this has now gone from being our least profitable facility to our most profitable facility in the first half. We never dreamed that would happen so quickly. So we're thrilled about the progress there. The quality costs 2% in the quarter are much lower than even our most optimistic assumptions.

So the things are just we're operating really, really well. It's a shame actually, we don't have more volume going through the plants right now because we'll be delivering even more superior gross margin and EBITDA dollars. But the operations is a really positive side of the story this year. And once we get the top line, humming a little bit more, you'll see more drop to the bottom line.

Our next question comes from the line of Rupesh Parikh with Oppenheimer & Company.

I guess just going back to the consumer. Just curious what you're seeing within different income practice. And then as you look at your portfolio, are you seeing any shifts within your portfolio?

Rupesh, in terms of what we're seeing really across income groups I think as Billy sort of highlighted first half, we're still growing across all income groups. And we're also growing across all demographics as well and all channels within that. So I think we're feeling good overall that the Freshpet proposition is working for all -- in terms of where we are seeing higher returns, certainly within MVPs, it's really coming through that higher income bracket. So we are a little bit disproportionate with MVPs into higher income overall, which is, again, probably what you would expect to see in the current consumer environment, too. And then when we sort of take a little bit of a step back and we think about where things are going a bit more in the future. I think as we start to increase the growth rate of NBP is coming through, I do think that we will start to see a little bit more of a trend into higher income and I think that we will see an expansion in particular within millennials and Gen X, which is already where we are strong. And then within the portfolio, as he mentioned Homestyle creations is performing extraordinarily well at the moment. We've also launched new innovation earlier this year in the home stock creation chicken bites, which has far exceeded our expect coming years as well.

Our next question comes from the line of Peter Galbo with Bank of America.

Hence, that shifted from Q2 to Q3. So we should see that point -- then the second one, just to clarify, the CapEx ex the $100 million that's kind of lower over the next couple of years? I know you said a part of it was lower demand versus the efficiency, but maybe you could just out kind of how much of it is the demand piece versus what you've actually done better?

Yes. So on your first part, Peter, total consumption was actually with measured and unmeasured was about 14% for the quarter and obviously with 12.5% net sales growth. We did shift behind consumption. We saw that shift, that $3 million to $4 million go out of June into July. So we had a very -- we had a nice July performance from net sales growth.

So we felt very confident that, that shift did occur. We've seen it come through in the July results. So that's very positive. The quarter probably just the POS tends -- it's stable, which is great, but it's not increasing, and we're a little frustrated, it's not popping up a little bit sooner. So net sales growth is probably going to be similar or slightly above kind of what we just put up for Q2. Regarding your CapEx question, it's difficult to say exactly. But how much of that $100 million was growth versus the efficiency. The big push out -- the big savings in that $100 million over the next couple of years is the delay in Phase II of penis, which is a big ticket item.

So Obviously, some of it is the slowdown in growth. But when you look at -- when you look about -- look at the OEE efficiencies that we've made over the last year, they are substantial. When you look at the ability in the new technology, both the new line that we're having in Bethlehem, which we're very confident about, plus the light version that we mentioned that we can put on several lines, and we've run tests on that, we're very confident that, that will add incremental capacity. And there's other things that we can do within our 4 walls that will increase capacity. There's different other areas that we're focused on which are going to drive incremental capacity with very little to no capital expenditures.

So when you're looking -- we're looking right now with the capacity that we have installed, not staff, but install, we have about $1.5 billion worth of capacity. So that gives us tremendous confidence that we can lower the amount of CapEx over the next couple of years. And again, the big push is Phase III NAS, we can delay. Again, some of that's clearly the slowdown of the business, but we would not be able to delay [indiscernible]

As I mentioned earlier, and it suggest made a huge turnaround. That team is just working really, really well together and that gives us confidence to push capital out. So that's the big driver.

Yes. Peter, I just want to amplify it's a little bit wonky, but we are really fixated on yields and throughput in our manufacturing operations. and both the new technologies that we're working on and the existing OE efforts, overall equipment effectiveness efforts are focused on driving those. And the results that we've seen have been really remarkable. I'd say we're about a year ahead where we thought -- and those things are just -- it's basically free money for us is you get more production per hour of labor you get more output per dollar of ingredients we put in at the beginning.

It's pretty darn remarkable return for us. And so we're going to continue to invest in those kinds of programs, and it reduces the CapEx at the end of the day, and that's a really big win for us.

Our next question comes from the line of Jim Salera with Stephens Inc.

I wanted to dig into something that you said at the beginning of your prepared remarks, which is just in addition to kind of the overall economic malaise you're seeing a little bit of a drag on -- from return to office and housing costs increasing. And those seem like trends that are probably a little bit more durable than the economic waxing and waning -- so just any comments on -- do we see maybe a peak number of dogs per household post-COVID? Do you have any sense for kind of where that might progress moving forward and maybe just the overall number of dogs per household is kind of a slower growth trajectory -- just how you think about that presents any kind of persistent challenges.

Yes, moving forward -- as you can imagine, Jim, we spent a lot of time looking at this. There's been a theory out there there was a huge pull forward on dog adoptions in the pandemic, and we're just eating back into that pull forward. And there's legitimacy to that argument -- but I'd also say that I think we're now 5 years in to that period, and I think we're pretty much at the end of that tail. There's another dynamic in your reference to the housing piece and the return to office.

It's all -- that has a generational element to it as well. One of the things that we are seeing in the data is you'd naturally expect that the high-income baby boomers who are now later in life have a dog that might pass away and they're less likely to replace that dog because they want to spend time with the grandkids, they want to go [indiscernible] want to cruise whatever, and dogs limit their abilities to do that. And that's a natural pattern. It's happened forever. But what's often -- what's usually been there to counteract and replace it is the younger generations would be in that household formation stage where they would be getting a pet.

And that's the part that's not happening. It's not happening at the rate that it should because people are not worried, I believe the dog at home, my landlord won't let me get a dog. I can't afford a house -- so those pieces are there, and they're present and they're impacting the ability of the younger generations to get the pet that they would get. It's not a huge part of our volume dynamic, but it is a piece of the puzzle.

But those markets, as you point out, are very cyclical. And that over time, you'd expect that those things would return to a more normalized growth rate because the reality is the desire to get a dog doesn't change. People still have the desire to get it and they will get it to get the dog at some point. It just may not be this year or next year. Our focus is on the things that we can control. And what we can control is we have the most compelling advertising message, which is what Nicki described, getting really focused on the benefits of fresh getting the right availability, the right product assortment, right innovation and delivering the products at the right cost. And as long as we do that, we feel very good that as Todd said, we'll outperform the category.

We will outperform the category by quite a bit, and this will become a very big segment of the market. We just can't change the housing market and the return to work. policies. Those things will take time and it will naturally occur. But when those [indiscernible]

Great. And then maybe point out that it [indiscernible]

You also mentioned some of those dynamics maybe favor cat ownership versus dog ownership in some scenarios.

We are very interested in the cat food market because as you point out, it is growing. It's right now, market is up in mid-single digits. And it's for the reasons that we cited and you reiterated in your comment. We do have a small cat food business. It's going to take some time. Cats have a very different way of eating the dogs do. Dogs have big jaws, they like to chew, Cats tend to eat with their tongue, they lack food. And so it has very different requirements. There are very different requirements for the product on a cat food. And you also have to have fridges in the right places and you have the right messaging, it's going to happen this year.

Our next question comes from the line of Marc Torrente with Wells Fargo.

I guess just building on the last reply, maybe more philosophically, how are you prioritizing top line growth at this point? Are current trends leading you and continuing to pace or scale out.

Yes. I would start with our -- we're clearly focused on the U.S.-based dog food business is our #1 priority, first because it's where we have the greatest strength. And secondly, because we think the opportunity there is still enormous. We're still a very small share of a very large pie. It doesn't mean that we aren't looking at and continuing to do some development work in cat food, as I just mentioned. We're going to invest when we get good returns. And when we don't get great returns, we won't invest. We're in a very good position from a margins perspective, from a cash generation perspective from a capacity perspective, organizational capability.

So we have lots of choices about it. We don't want to chase growth at all costs, but we are a growth company, we need to deliver growth. And so we're going to do that.

Standpoint is, I think, very significant overall for us with of the Pet category going through online. We have an incredibly low share in this space, and it's something that we are looking at where our part -- building out digital from a marketing standpoint is, I think, very significant overall for us with 35% of the pet category going through online. We have an incredibly low share in this space. And it's something that we are looking at where our partnership is and then also looking at how we can leverage. We've got 28,000 fridge network, which are like micro fulfillment centers really across the U.S. And we're seeing some very good returns with last-mile delivery partners like Instacart and others as well as very strong growth with our Click and Collect business. So expect to see more from us in this space as well as we start to go through next year.

Ladies and gentlemen, that concludes our time for questions. I'll turn the floor back to Mr. Cyr for any final comments.

Great. Thank you, everyone, and thank you for your interest. I want to end with a thought for you. This quote is from an unknown source. quote, "If your dog is fat, you're not getting enough exercise, to which I would add, a Freshpet meal will get any dog off the couch and give them the energy to help you work off unwanted pounds. Thank you very much for your interest.

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