Freshpet, Inc. (FRPT) Earnings Call Transcript & Summary

Okay. Well, welcome. Welcome to the Freshpet Kitchens, everyone. Thank you very much for coming in the middle of a pandemic and crappy weather outside, but we really appreciate all of you being here. And we hope that it's worth your -- worth the journey that you've made to get here, to get to see us. I also hope for those of you who -- this is a second or third visit that you'll notice the significant advancements that we made because that's what we're trying to show you today. We're trying to demonstrate to you how we have advanced manufacturing at the Freshpet Kitchen in a way that will create some near-term and medium-term economic value, but will also create some long-term strategic advantages for us. For a long time, we talked about many other aspects of this business, and we've given you data galore, Bill Chappel always reminds me with. Where's Bill? We're getting started. There he is. We've showed you all kinds of things about the top line of this company and many of the ways in which we create revenue. What we want to show you is how we meet the demand that we create. And hopefully, you can see from that, that there's significant opportunity for us to have manufacturing as a core competency and strategic advantage and certainly feel good about where we're going. For those of you who don't know me, I am Appa's father or pet parent, I guess, is the right term. But if you haven't had a Zoom call with me in a while, you won't have recognized that photo. But if you have, you've seen that's my virtual background. That is Appa. She is the fourth Samoyed my wife and I had since we got married 34 years ago, and she lives here locally because that's where we live. What I would like to do is do some quick introductions for -- of a few people. Unfortunately, one of the most important people is not here today, and that is Steve Weise. Steve is the Executive Vice President in charge of our manufacturing operation and has been with us since 2015. We recently announced that his role will shift in anticipation of his retirement at the end of next year. Steve came in this morning, but wasn't feeling well, and I said, "Go home." So otherwise he would be here, but you should know, he is every bit involved and engaged in our business. Another person who is not here who is also very engaged with us, is Dick Kassar, who I think many of you know. Dick is serving as our Vice Chairman. He was our CFO prior to Heather becoming the CFO. But Dick is on his way to Hawaii for a wedding. And so he wishes he could be here, but he's obviously not available. One other person who's not here is the Plant Manager for the Freshpet Kitchens, Rafael Velez. Rafael had previously scheduled a family vacation, and so he's not here. Having said that, despite those folks being gone, I hope you'll take away, there's a tremendous amount of organizational depth that we've built in the organization here at Freshpet. I can't start a meeting without having our safe harbor statement. You've all seen these before. You know what they say. I'm going to give you a quick view of the agenda. So I'm going to outline for you a business update, and then also take you through the long-term vision for us as a company. Then we're going to turn it over to our manufacturing experts, and you'll get a sense for the depth of our team: Ricardo Moreno, who is our VP of Manufacturing; Michael Hieger, who is the SVP of Engineering; and Willie Everett, who is our Ennis site leader. And they will tell you about the things that we've done to build manufacturing expertise. And then Scott, whom I think all of you know, Co-Founder and COO, will take you through our Pets, People, Planet and the sustainability work that we've done in the broader area of ESG. Justin Joyner is also here, and Justin leads our ESG work now. He's the Director of Sustainability for us. And he's been with us for quite a long time, and he's really an expert in that area. And then I'll take you through the governance road map, and then we'll break and we will do the tours. And we have, I think, a pretty good tour lined up for you. So I want to start with a quick view though on -- since in the middle of COVID, I want you to feel safe being here. But I want to start with -- Tomas is here. There's Tomas. One of the actual very positive outcomes of the world of COVID is we realized after we hired nurses and athletic trainers to screen our people at the door that they actually were serving a much broader purpose than just the normal health screening. And so we now have Tomas on staff with us. He is actually an employee of St. Luke's, which is the big health care provider locally, but he is full time on staff here because we realized the significant benefit of having a health care person on staff to help avoid injuries, take care of the -- sort of the broader health than just COVID. This is -- he's now doing this as part of a broader program. We're putting in athletic trainers in manufacturing facilities, and it's a pilot program, but we are thrilled with it. An added benefit is Tomas is a native Spanish speaker, and we have a lot of native Spanish speakers who are employees here. So we're glad to have him here. And he is here not just during the day. He comes in various times, so he sees all of our employees all the time. So thank you, Tomas. I also want to turn it over to Steve Mondschein. The world of COVID has obviously impacted us significantly as the manufacturing facility. And I wanted Steve to just to tell you what we're doing here to keep people safe, so you know how we're keeping you safe but also what we've done to keep people safe. This will be a real quick review, but I want him to talk to you a little bit about it. He's charge of health and safety for us.

All right. Good morning, everybody. Welcome. So I just wanted to kind of go through some of the things that we have done to keep both our team members safe here and also any visitors like you, you are today for us. So first thing, if you have noticed, we do require masks. And we go by the CDC guidelines, has followed them very closely for the COVID guidelines that they put out. So at this point, we are requiring masks of everybody, even if they are vaccinated. So that's why you are required to wear a mask today. As you saw when you came in this morning, we have health screening for anybody that's coming into the facilities. They ask questions. They take your temperature and those types of things. If you noticed, we also have scanning devices for the times when we don't have a health screener here. So we have 24/7 coverage of health screening of anybody coming into the facility. Mandatory negative test or vaccination. Prior to all of this, you guys have experienced that coming in. Ventilation. When this first started, we really took a hard look at our ventilation within our facilities. And we upgraded our filtration in our area. So our production areas are already hypofiltration. There's hypofilters in our production areas. So we looked at our office areas and upgraded those areas from a -- if you've heard or are familiar with ASHRAE guidelines, we went from a MERV 8 filter up to a MERV 13 filter, which is the highest we're able to do with our systems without doing a whole redesign of our system. So our filtration here and the amount of [indiscernible] that we get are well above any type of ASHRAE guidelines that are put out regarding any type of ventilation. Sanitizing. We have daily sanitizing. Our team members throughout the facility every day and sanitize high-touch areas. And then we also, on a biweekly basis, we bring in an outside firm to come in and do cleanings of all of our office areas and all of the high-touch areas as well, just as an added measure of protection. And then as you noticed, we do follow social distancing as much as we can. Outside, we've added some picnic table, some tents, some things like that to keep our team members safe. And when they're taking breaks, give them some extra areas, so they're able to social distance while they're taking breaks. So just again, a quick overview. If you do have any questions throughout the day or anything like that, I'll be available. Tomas will be available to answer any of your questions. So I'll turn it back over to Billy. Thank you.

Thanks, Steve. All right. So I'm going to jump right into it. We're going to do the business update part first, just so we get the questions out of the way, and then we'll turn into the longer-term vision. Since we just did our earnings announcement 2 weeks ago, there's not a whole lot of new development. So what I want to talk about is basically the answers to the questions that we've gotten from some of you as well as others in the period after the earnings. And so we just want to talk you through that. All these slides, by the way, will be available, posted on our website as soon as the session is completed today. These are the 4 questions that we've heard most commonly from folks: What happened to the Nielsen's in July? When will Freshpet's consumption growth reaccelerate? Are the Freshpet capacity expansion plans on track? And when will the margins, both adjusted gross margin and adjusted EBITDA margin, recover? So we're going to try to address those as quickly as we can, so we can move on to the broader topic that you came all traveled here to see. So I'll start with what happened in the Nielsen's in the month of July. The -- we have a third-party warehouse we use. It's the largest third-party warehouse company -- cold-storage company in the country. And like many other people, they had significant labor issues at the beginning of July and into the middle of July that prevented them from getting our product that we are producing shipped. And what the chart on the left shows you is in the green line is what our shipments out of that facility were on a rolling 30-day basis over the last -- for this year with the yellow line being last year. And you can see, there was a fairly sizable drop that happened in the month of July. It was not a production issue. That was -- we were producing plenty. We were shipping it over there, and it was sitting in tractor trailers unloaded -- not unloaded into the warehouse, and they're having a hard time keeping up. We've now addressed that with the third-party provider. They're having lots of labor issues like other people are. But we think that it's now resolved, at least for the time being. As you can see, that line goes back up fairly steeply. And we're having -- we're off to a really good start in the month of August. But that did impact -- as you see on the chart on the right, that shows TDPs, which I view as the best proxy for our out of stocks that's publicly available. And that data through 7/17 -- unfortunately, we'll get the next 4 weeks of data, weekly data, we'll get that next week. But you can see, we peaked at the beginning of July, and then it went down. And we're -- I guarantee you when we see the data for the last 2 weeks of July, it will also be down. Because when you don't ship well, it takes a while until it shows up in retail, and it kind of trickles down to retail. But we are comfortable based on the uptick that we're seeing in August that it is coming back as we've now got the shipments going out the door. There's about a 2- to 3-week lag from when the shipments fall off to when you start seeing an impact in retail. So that's why the Nielsen's looked a little bit soft in the month of July and into the very beginning of August. I also want to remind you, and this is a chart that I've shown with a little bit more detail, and this answers the second question about when will our consumption growth reaccelerate. We've been saying for quite some time that this year is going to be like a bow tie, where we were going to have a big gap versus a year ago early in the year. It was going to narrow. Right now, this week is probably the narrowest it will be for the entire year, and then the gap will get bigger. And the reason it's going to get bigger as it goes on is because, last year, we went basically dead flat, as you can see on the yellow line. That Nielsen number didn't deviate by more than like $50,000 a week against a $10 million base for the balance of the year with the exception of being the weeks of Thanksgiving and Christmas. We went flat because we ran out of capacity last year. This year, we aren't running out of capacity, and we have advertising support on the year until the end of the year. So we expect to follow that green line up, and that's where the data is showing. It's going up in this direction. And the way you get to -- with the consumption numbers we've got, the way you get to the guidance that we gave you is based on the idea that we expect to average 25 points of Nielsen ahead of a year ago for the second half of the year. It will be 15 points at the beginning of the second half. We'll end the year at somewhere in the mid-30s. Average would be 25. The shipments though will be different because, last year, we undershipped consumption by 9 points. And this year, we're refilling trade inventory. We'll overship by about 10 points. So 25% consumption growth will turn into 44% net sales growth. That's how we arrived at our guidance and why we raised our guidance is because we're very comfortable that this is what is happening. Next question was, are the capacity plans on track? The chart on the left shows, and you'll see when you go down on the floor today, we are producing very, very well. We actually had a record production week last week. You can see that as the yellow line and the uptick on it compared to the year ago. And that's before we add another line of production. That comes on -- next on September 6 at Kitchen South, incremental production coming online. So we feel very good about our ability to supply the demand that we have this year. The chart on the right is one you've seen before. I would just tell you, we checked off all the boxes that we have come up to so far, and we're on track to complete all the projects that we had, with the most imminent one being that Kitchen South Line 2 starting up on September 6. And we had a review of that project yesterday, and we feel very comfortable that it's going to get going. And we'll start up with a 2-shift operation, which will help us meet all of our needs. At this point, August production is over 50% up versus a year ago. And if you actually look at last week, it was over 60% ahead the same week a year ago. So we're doing very well on production. These are all the projects we talked about. Everything is moving along the way we wanted to. You'll hear more from Willie about how we're doing at Ennis in a little bit. But you should also know that Kitchen South building 2, the design work is underway. We're selecting what kind of lines those are going to be. That process is underway. And we've also begun doing the planning for Ennis Phase 2. We don't have to commit to that for a little while, but we're doing the planning that goes with it. You can see in gray the new technology that we're talking about. We are actually going to be implementing that first round of that technology at Line 3 in Kitchen South, which starts up between Christmas and New Year of this year. And we'll get a chance to see whether that works because that could be the next generation of our manufacturing expertise. So when will the margins recover? We obviously took a step back on margins, in part due to our own temporary operating inefficiencies and also in response to some inflation. I want you to think about it this way, and I'll give you a little -- a few more metrics around it, but we are taking a price increase effective on 11/29, orders effective 11/29. So it will be shipments sometime in December. And so it will have a de minimis impact on this year. But that price increase is expected to fully offset ingredient, packing materials, labor and freight inflation on a dollar basis. We also are expecting incremental efficiencies will neutralize any inflation on a margin basis over time. It won't be instantaneous, but it will happen over time. We are doing the new ERP system launch. It's planned for November. That will eliminate the 200 basis points of temporary freight inefficiencies when fully implemented. So you should think of that as being done and operating well by the end of this year. Our labor strategy, which we announced on our earnings call and we've been rolling out to our production team here, will reduce the temporary operating inefficiencies. Basically, we think we're going to have a much stabler and more -- and stronger workforce. And that, we think, will drive operating improvements during the first half of 2022. The final point I just want to remind you is when we start shipping from Ennis in the second quarter of next year, we will have start-up costs and be subscale in 2022 and the first half of 2023. So there might be a little bit of margin erosion that comes from being subscale, but we're very convinced that you'll see later on that the underlying technology, underlying operating efficiencies are very robust. So this is sort of a graphical representation of what I just told you, but you can see how we're applying the core capabilities that we're going to talk about today, innovation, taking care of our people, sanitation, speed and automation, and how those will collectively impact our business over the near term and over the long term, and where there's some [ healths ] and where there's some perks, and we'll go through this in a little bit more detail later on. We are on track to deliver our long-term goals on -- from a margin perspective. What you can see is we're absorbing some of those near-term pains on operating inefficiencies and growing into capacity. But the offsets that we've got and the things that we're taking will get us to the place where we said we would be in -- at $1.25 billion in capacity. We'll have that at 25% adjusted EBITDA margin, largely driven by SG&A improvements, but we will have the gross margin back to where it had been. And at 2 billion in capacity, we think it will have a significant advancement in the gross margin. So I'll shift gears and move from where we are in the current quarter, where we are in the year to kind of map out a little bit of the long-term vision so you can see how the manufacturing fits and where we're going. Those of you who were at our Investor Day at NASDAQ back in February of 2020, kind of interesting time, we have been in New York. If we all know what was coming next, I don't know that we were going to New York. But we told you in that presentation that we think that Freshpet has a chance to be one of those brands that changes the world. And we described what that means is that the brands that change the world are brands that change things we do every day. Mark, do you want -- there's a spot right here? There we go. Change things we do every day. They reflect significant changes in societies, values and priorities and a leveraged technology makes a previously impossible possible or more broadly available. And so what we talked to you about how those brands do that. Our mission is -- fits within that is we're trying to awaken a world to a better way to nourish our pets. In essence, it's reflecting many of those changes that we see in society and the way people think about their pets. And it's not a surprise. We introduced you to this concept at NASDAQ, Zooeyia, which is, in essence, the health benefits that humans derive from their interactions with pets. So early in life, you learn about -- you can acquire immune benefits from your interaction with the dander of your cat or the saliva of your dog. Later in life, you get psychosocial development where you learn how to treat an animal and you expect the animal to treat you well. It catalyzes social interactions. You go out for a walk with your dog. And when you go out for a walk with your dog, you meet people. It encourages you to get exercise because you want the dog to get exercise. And also when things aren't going well, it gives you support for coping and recovery. And so we think that those -- that synergy between humans and pets is going to continue to drive long-term growth and adoption of pets because humans will recognize the benefits. And we see that. A lot of talk has been made about dog ownership and what happened with dogs during COVID. The American Pet Products Association now has their results out on what the pet population looks like, and what you can see is dog ownership is growing. The dog -- household population with dogs is now 69 million households have a dog. 50.4 -- 54% of households have a dog. And we think that bodes well for us, and that's up considerably from 2018. It's about 5% a year in penetration growth for dogs with -- households with dogs. Millennials are the largest share of the dog food market today. The last time we presented this data, they were actually 34% to now 33%. The reason they dropped down a little bit was not because they declined. They actually have more dogs. It's because the millennials or the Gen Zs behind them became a bigger share of the pet population. The attributes that they're looking for -- millennials are looking for in their pet foods are basically what Freshpet is: high-quality ingredients, non-GMO, locally sourced ingredients, all kinds of things that they're looking for that tell you they're looking for a higher-quality experience for their pet. Not a surprise. We think the share of millennial households with a pet, though, will plateau within a few years, while Gen Z will be on the rapid rise for the next decade. The simplest way to think about this is if I'm a Gen Zer and there's -- think of Gen Z as a population cohort being 18 years of age, 18-year range, only 6 of those 18 years have already reached the age of 18. There's another 12 years to come. Between the age of 18 and the age of 24, 50% of those Gen Zers will get a dog in that 6 years. So by the time they get to 24, roughly 50% of them will have a dog. And so we have 12 more years coming of Gen Zers getting dogs. And that's a huge opportunity for Freshpet over the long haul. And if you consider that there's about 4 million Gen Zers who're entering adulthood each year for the next decade, and they're all having fewer kids, and dogs are replacing their kid. So this is a huge opportunity for us. Gen Z is a growing segment of the pet market, as we all know. You can see the percentage of them that got a dog since the COVID began. And what percentage of the pet-owning population, they're at 15% today. You should expect that Gen Z will be -- peak out somewhere in the mid-30s and maybe the high 30s as a percentage of dog-owning population by the time they are fully mature. They're choosing Freshpet even more than the previous generations. This is the data we gathered over the last year that talks about their likelihood to try Freshpet, and they are double what you would see from the baby boomer generation or from Gen X. So their predisposition for a product like Freshpet is very strong. You've also seen, as we described, Freshpet's prime prospects, they're 30% of dog households, and it's growing. And they are basically -- have the values of the next generation. We have not updated the size of the addressable market from the 20 million we last gave you at the beginning of 2020. But we believe based on all the demographics that we expect this to continue to grow. So on that basis, we think that Freshpet is a brand that will change the world. We've got this model that you've all seen before, which is our feed-the-growth model, where we're creating scale and leverage through our accelerated growth rate. And the one thing that I don't think people fully appreciated when we first launched this in 2017 and refreshed in 2020 was we view this as a productivity loop where you go around each time. But unlike the lapse on a track at a car race, where you go to the same speed every lap, this thing actually picks up speed as you go. Each time you go around, you get a higher degree of velocity. Because what you did in the previous lap provides momentum, scale, leverage that you can capture and drive much higher rate of growth. So we've demonstrated accelerating growth rate for each year for the last 4 years. And we certainly believe that we can continue to do that. It also creates a very interesting marketing model that provides strong household unit economics. It's very simple. We invest in media. Media converts to a household that is a Freshpet household at a very consistent rate over a long period of time. That converts into loyal users at a very consistent rate over a long period of time, and that creates what we would basically think of as an annuity. And this is sort of a simple way to create the -- measure the lifetime value of that investment. It cost us about $50 to acquire a household. It's been a little higher than that, but it's been lower than that. It's been on a general downward trend over time. In fact, in 2020, it was significantly below that, but we think that might have been a little bit of an anomaly. But it cost us about $50 to acquire a household. And if you use the current buying rate data of an average buying rate of $130, so that's today, it's not number in the future, what you can see is that the average consumer will be spending $130 a year. Our average pet is -- our dog is 4 years old. They live to 10 to 13. So you have 8 years left. That gives you about $1,040 worth of purchases -- lifetime purchases from that investment of $50. And the contribution of 40%, we end up with $416 of contribution if you subtract out the marketing investment of $50 and the fridge investment. And this is where I divided their purchases against the lifetime value or cost of a fridge. So their $1,000 is a share of what fridges would have as revenue over their -- over that 8-year life. It's about $20. Their fair share of the cost of fridge is about $20. So that $50 investment we've made has turned into over $400 or 6x return. And what's even more interesting is that when that dog finally passes away, there's a very high likelihood you'll get a second dog or a third dog or whatever number you're on. And over 90% of those dogs will consume Freshpet. They'll start on Freshpet. So this annuity has a life beyond the current dog, beyond the 8 years that I've described. Our goals that we've talked about before, getting to 11 million households at the 23% CAGR from where we were at the end of 2019 or 2020 and then also the buying rate going up to $162. We've seen lately that it has skewed a little bit more towards buying rate in the last 2 quarters because of our out-of-stock issues. You should expect that the penetration gains will start again when we get the in-stocks and the advertising going, but still growing at 19% penetration rate is nothing to sneeze at. We talked about our goal of $1.25 billion and 25% adjusted EBITDA margin, and those remain unchanged. All that then serves to create this model that we've talked about, a 4 to 5 business model that provides strong competitive insulation. With every one of those boxes get scale, this added scale creates greater insulation for us. It is very clear to us that we will get competition. In fact, many of you probably are aware that we have a new competitor arriving right about now. A new competitor is coming. A single retailer, very limited product assortment and a premium-priced product showing up in a very small number of stores, but we are having a competitor show up. We've now seen it. But this isn't the first time we've had a competitor. If you remember, back in 2016, the Australians who pioneered this category came to this country with a product lineup that was much broader than what we're going to see in the first incarnation from our new competitor. They had a variety of different product forms under the Farmer's Market name, and it was sold in HEB stores in Texas. They had a fridge program. They had a broad product lineup. It was a pretty extensive program. Four years later, we were outselling them 7:1, and they left. They then came back after talking to virtually every retailer in America. And in talking to all the retailers, they finally got PetSmart to take them. They were in 700 stores with a rebranded proposition under the Billy + Margot brand name, and they were in those stores for about a year. And at the end of the year, we were outselling them 6:1, and they exited and we bought the fridges. And once we bought the fridges, we saw another 35% increase in our net sales. So I'm not here to tell you that if we get competition, we will deliver 7:1 or 6:1 result. What I can tell you is we've seen this movie before. We know how it plays out, and we know how to be successful in that environment. Because in the end, we are accumulating -- what you'll see today is we've demonstrated product technology mastery. We have broad-scale distribution, scale and manufacturing distribution, broad awareness and expanded lineup and loyal users. And the whole program, we think, creates a very large consumer franchise that we think is [ first ]. So today is all about showing you how brands change the world. And in this case, we've told you about how we've -- how Freshpet changes the things you do every day: feeding dogs. We've told you about how Freshpet reflects the humanization of pets, changing society values and pets. What you're going to see today is how we've leveraged technology to make the previously impossible possible and more broadly available. So you're going to see the Freshpet Kitchen is magic. And the simplest way to think about it is we start very clean. You have to start very clean if you want to create a fresh product with an extended shelf life. We then add fresh, frozen and dry ingredients. We mix in significant cooking expertise, and there's a lot of art to that. We package it just right, a lot of our -- in the packaging that we do and how we -- what the packaging looks like and how it works. It becomes delicious and nutritious, and you get a happy, healthy dog. And we do that all in a way that's good for pets, people and the planet. That's, in essence, what you're sitting here in this building, what you'll see today and what this is all about. By the end of today, we hope that you'll understand how we deliver outstanding nutrition that delights pets through our mastery of the cooking process. It's not as straightforward and as simple as you might think. We deliver consistently outstanding quality through the increased use of automation, and that's a big step change versus the Kitchens 1 that you'll also see. We use best-in-class sanitation and product protection practices to deliver outstanding quality without the use of artificial preservatives, and how -- you'll see how we can continue to improve those practices, particularly when we get to Ennis. You'll see how we're using higher-speed equipment to increase throughput that enables us to keep costs down and reduce labor intensity. You'll learn how we are continually seeking ways to make Freshpet more environmentally sustainable. You'll see how we're investing in R&D to increase our mastery, driving further improvements in quality, cost, reliability and workplace safety. And you'll see how we're investing in and care for the people who work here every day. And if we do all that well, what you'll see is that the manufacturing technology that we practice here can drive margin improvement. What this chart shows you is how we have several different things going on that shape the margins over time. So the 4 mix that we have -- the 4 mix, as we've talked about many times, is increasingly moving towards bags from rolls, and there's a margin impact with that over time. The facility mix, stuff that we pack and produce versus what's packed by our partner at Kitchen South, there's obviously a margin difference when you account for the margin of our partner. But then you look at the technology and the technology advancements that we've made and that Ricardo and Michael will show you today, as the technology -- more and more of our facilities are operating against the later and later generations of technology, what you'll find is that those provide the offset to any headwinds we might have from a form mix or a facility mix and allow us to get to our margin targets and potentially beyond. So I want to turn it over now to Ricardo Moreno, who is our VP of Manufacturing. Ricardo joined us last December. He's got a long history in the food business. He came to us. Interestingly, he grew up -- his life he grew up in Venezuela, but he came here to go to school, Lehigh University, for his Master's Degree. And now he finds himself back living in Bethlehem. We're thrilled to have him join our team and provide the focus and intensity on manufacturing. And so that's what he's been doing. And he's going to talk to you about the journey that we're on and what some of the results are that we've achieved. So [ out for the new ], here we are.

All right. Thank you, Billy. All right. So the piece of the manufacturing vision that I'm here to talk to you about is I have the privilege to show you the journey that we've experienced, the press that has gone through. So it's exciting for me to put this in front of everyone. So you can see here how we've evolved in our manufacturing journey. We started in Quakertown in a little corner of this facility, then we purchased Kitchens 1 next door, install a first couple of lines, expanded that Kitchens 1 for the next couple of lines. Last year, we opened Kitchens 2 here where we're sitting. And we also opened up Kitchen South. Next year, we're going to be starting off Kitchens 3 and Ennis, which Willie is going to be talking about. And then we're in the process of designing Kitchen South. So there's a lot of pride behind where we've come from to where we are and very exciting to see where we're going towards. Throughout the whole journey, we've enabled innovation. So you can see on the left, we started with our rolls. We introduced bags. We created Fresh from the Kitchen. We created Small Dogs. And you see towards the right Homestyle Creations with patties, our multi-protein Homestyle Creation and more to come. So all throughout this journey, we've enabled and continue to enable innovation. We've also increased speed, right, and throughput. So you can see that when we were in Quakertown, we were putting out about 18 rolls per minute. Here in Kitchens 2, we're putting out 32 rolls per minute. In bags, we started with a very modest 6 bags per minute, where we're hitting up to 50 bags per minute here in Kitchens 2. And when you think about it, we used to put -- every 10 seconds, we put 1 bag out. Whereas here, every 1.2 seconds, we're putting a bag out. So big, big step-up in speed. But not only speed, we've also increased efficiency, right? It's not only faster processes but more efficient processes. So you can see here for rolls and for bags, the improvement on the labor efficiency depicted as pounds per team member per hour. So not only faster processes, but more efficient too, all enabled through technology and automation, which you will see. We've also enhanced our team member experience throughout this whole journey, right? So from expanded benefits with free meals for our team members, gym membership. We've introduced behavioral safety. We have launched our Freshpet Academy, which provides progression opportunities for all of our team members. We've introduced TWI training program. And then most recently, we are increasing our compensation and revamping our Freshpet Academy with an accelerated strategy to progress our people through the whole steps of the Freshpet Academy. So we keep our people as the core of our business. We continue to invest in our people to enhance their experience in Freshpet. We have also expanded employment. So you can see, 2015, about 200 people, and we're projecting to be about 1,500 by 2025. Where we sit right now, right there in 2021, that yellow bar, which is Bethlehem, we have about 633 people who are active team members on this campus in Bethlehem today. So we continue to enhance employment throughout our journey. And you can see at the top, some of the key milestones to get to that level of employment. We have also improved sustainability of all of our facilities in this journey. So we match all of our electric energy usage with renewable energy certificates from wind energy in Bethlehem. We are a landfill-free campus in Bethlehem. We have installed a combined heat and power, or CHP, highly efficient system here in our facilities. We -- most recently, last year, we installed and commissioned our wastewater treatment plant and also a rainwater recapture system for irrigation. We're using low-carbon concrete in the construction of our Ennis facility. And we will have an on-site solar generation -- energy generation system in our Ennis facility. And we're not done, right? We continue to evolve in our -- all of our environmentally sustainable programs in Freshpet. So each step of the way, we have enhanced our manufacturing expertise, right? Whether it's in our cooking processes, our mastery of our cooking processes, whether it's in our innovation with new products through technology, automation, introducing speed, introducing more environmentally sustainable programs, whether it is improving our best-in-class sanitation processes and ultimately also enhancing our team member experience, each one of those milestones, each one of those steps that we've taken, we've touched several of those buckets. And ultimately, we're building a $2 billion worth of net sales capacity business. So you can see on the left, the -- basically a time line based on milestones. And then on the right, year-by-year. So by 2025, we are projecting to be -- to have $2 billion worth of sales capacity. And then we're also doing a well-balanced blend of bags and roll lines. As you can see here, by 2025, we're projecting to have 13 bag lines and 8 roll lines across all of the sites. And if you see through the matrix, you'll see that we will have at least 2 of each 1 of the lines in each site -- on each site, which provides business flexibility, business continuity. So it's a well-balanced blend of lines. And then the exciting pieces that we're not done, right? We have significant opportunities still to improve on in all of the different buckets, right, whether it's on the automation -- in the automation bucket with automated-guided vehicles, even higher speed packing lines, improved and enhanced CIP, or clean-in-place systems for sanitation, technology-enhanced training processes for our team members, recapture -- energy recapture applications in our sustainability bucket and new products, new forms, new packaging. So the cool stuff is not only that we know that opportunities are there and we acknowledge them, but we're exploring a bunch of them already. So it's been an exciting journey up until now, and there's a lot of excitement on what's to come. All right. So now I'm going to introduce Michael Hieger. So if anyone deserves credit for this journey that I've put in front of you from the very inception of Freshpet, all the way to what you will see today here in Kitchens -- you'll see in Kitchens 1, you'll see in Kitchens 2, so if anyone deserves credit for that evolution, that progression, that technology introduction and ultimately that operational improvement, it's Michael. So he's been the architect, the designer and ultimately the lead for all of this Petland campus that you will see today in the tour. So Michael will touch specifically on Kitchens 2 and some of the key highlights on how we've added tremendous value with our Kitchens 2.

Thank you, Ricardo. Welcome to Kitchens 2.0. Today, we're going to kind of quickly go through some of the improvements that we've done from Kitchens 1.0, which you'll see on your tour later today and the improvements that you've seen over here in 2.0. And it's been quite a journey to get here. We bought this property back in 2015. We started the engineering and design work back in 2017. In June of 2019, we finally broke ground on the facility for construction. And then September of 2020, we went through commissioning to get the line started up and start getting product going down the lines. And while we were doing that design process, we really kept 4 things in front of us we were wanting to achieve. We wanted to increase our team member safety. We wanted to increase our product quality. We wanted to increase our efficiencies and throughput. And then we also wanted to make sure that we remain nice to the environment and increasing our sustainability. And we did that in a lot of different ways. We use automation to increase our team member safety by designing and building and installing a frozen block separating system. Those systems are in place that you'll see on your tour later today. And our team members don't have to go through some of the backbreaking and painful tests they have to do over at Kitchens 1 to get those frozen blocks apart, so it's a good use of some automation. We've also used automation in our dry-catching process. Over in Kitchens 1, you'll see it's a lot of manual wane, and it's a lot of moving of fixed on bags around. We've put an automated system in here at Kitchens 2.0 and don't have to go through those steps anymore, again, enhancing our team member experience. We also use automation to change the way we handle our inclusions on the roasted meal line. Over in Kitchens 1.0, we do a lot of manual mixing of inclusions and manual moving of those inclusions around. And over here in Kitchens 2.0, we're going to solve an automated system to fully automate all of that and take a lot of that -- those tasks away from the team members out on the floor. And to increase product quality, we again used automation to install in-line leak detectors. What those do, they are testing each of the cases and the pouches of product going down the line to ensure that we have the highest product quality in those pouches, ensure we don't have any leaks in those pouches. That's on the roasted meal line. On the chub line, we increased our chilling capacity, so we could run our chub machine faster. And it's worked out for us very, very well. And we also want to make sure that we were thinking about throughput capacities. And so we ended up installing double ovens on the roasted meal line here, and it really has worked out well for us. It's increased our capacity and it's working out well. And also, of course, it's to put in a high-speed pouch line, and you'll see that on the part of your tour today as well. And we want to make sure that we were taking care of the environment. So we are capturing the rainwater that falls on to the building here and in some of the parking lot areas. And we're then using that to irrigate the landscape and the lawns around the facility as well. We put LED lighting throughout the building. All of this lighting here as well that on the production floor, all LED lighting. We also installed a wastewater treatment plant, and we'll talk a little bit more about that in just a minute. And I think we're going through an update. It's trying to restart. Let's try take a few minutes to -- just to come back to life. Keep going or wait for it? Forward. Anybody need a 5-minute restroom break? They're out around the corner. Coffee's in the next room.

We're just going to take a 3-minute break for those on the webcast. If you can just hang with us. We're going to be back. [ Break ] Okay. We're back. Michael, can you continue please? Thank you.

All right. We can blame Microsoft for that, and we will make sure that we just stay with that update next time we get together. Anyway, back to our conversation and our presentation here. That's a job update. They can hear us. Anyway back to the slide here. This slide is pretty straightforward and simple. Essentially, what we have done, we have doubled our capacity -- excuse me, doubled our throughput here on the roasted meals line. And we'd essentially kept the staffing the same we have on 1 line over in Kitchens 1.0. And so it's been very nice just from a gross margin standpoint. Some of the environmental impacts and sustainability things that we have worked on here at Kitchens 2.0. We are purchasing wind power for renewable energy. We talked about the LED lighting throughout the facility. And from a waste perspective, we are a manufacturing facility. We do produce waste. We just want to be really smart in what we do with it. All of our cardboard and plastics, we recycle all of that. Our organic waste, and that may be a product that hits the floor, maybe product that's left over at the end of a run, we end up sending that to anaerobic digester, and they process it and eventually turn that into fuel for electricity. And then our inorganic waste goes to a waste-to-energy facility. And again, it's used for fuel for electricity. So we are a landfill-free site here in both Kitchens 1 and Kitchens 2. And then we also installed a wastewater treatment facility, got that up and running over the last year. And what that essentially is doing is separating the solids from a wastewater. We can then take those solids and give those to anaerobic digester. Again, they turn that into fuel for electricity. And getting the solids out of the wastewater reduces our surcharges to the municipality sewer and puts less of a load on their system as well. We're also working with a vendor, and we're very close to getting something going with them to be able to turn that waste stream into -- directly into biofuel for those solids. And if that is the case, it would be a nice cost reduction for us as well. So that's some of the upgrades that we've done here in Kitchens 2.0. Are there any questions on anything?