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

Let's get started. Thanks, everybody, for joining us this morning. I'm Ben Bienvenu. I cover the food and agri business sector here at Stephens. Today, we have Freshpet with us here. They're going to talk to us about their business, answer our questions. As you all know, Freshpet manufactures and sells high-quality pet food and pet treats that they make with fresh meat, vegetables, and fruits and they produce the food freshly at their own facilities. I'm thrilled to introduce from the company, William Cyr, CEO. This will be a fireside chat format. I'll leave the Q&A, but feel free to chime in. I'll offer opportunities to ask questions, and we can feed them into the discussion. Billy, thanks for being here.

It's a pleasure to be here.

So I think maybe if we started out at a higher level, there's been transformational growth taking place at Freshpet over the last several years. When you think about the opportunity to expand your footprint, expand the fridges that you have in stores and you think about the primary focuses that you have top of mind for you today, what's occupying your time? What's your rank-order list of your priorities? And how should we think about kind of the critical path from here?

Yes. It's a really good question to think about because for the last 3 years away, I think about it is all of us in the consumer-packaged goods space in all industries, we're going down the highways, nice smooth highway. Some of us are going at 40 miles an hour as we are with our growth and others who might have been going 5 or 10 miles an hour, but we're all going down this highway. And then we hit this bumpy part of the road, probably under construction or something. And if you're going 5 or 10 miles an hour, it shook your car up a little bit, but you didn't see -- it didn't see a big difference. But if you're going 40 miles an hour, you got to the other side of it and everything had shaken loose and you have to figure out how to put it all back together. And that's what we're doing right now is we're trying to figure out what are the things that we need to batten down and strengthen as a result of the high growth and the environment that we faced before. So as you think about it, we talked quite a bit about we need to get a logistics system that works at the scale that we are at today, and I'm spending a lot of time looking at and thinking about how we get a better logistic system. We hired our new VP logistics recently. We also are the pioneers in Freshpet food. Nobody else does what we do. And so at scale, you discover challenges or problems that you didn't see at lower volume. And so we have a variety of quality issues that you'd expect that if you were a perishable good like producer like meat, that you start finding that you have to deal with and address. And so I'm spending a lot of time trying to figure out how to reduce the amount of product that we dispose over the product that we have to send out for secondary processing. And those are sort of just like basic blocking and tackling, the kinds of things where you're just trying to get things to operate. At the same time, scale, we have a new facility we're opening in Texas, which is just a phenomenal facility, but we're trying to keep up with demand while we fix the basic things that you need to fix. And so for me, it all turns into this overall view of every day, I think about how much time do I spend on making sure we're going to be able to deliver and drive the growth? And how do I focus on getting the right cost and margin structure so we can deliver the reliable profitability and cash generation that we need to deliver to support the growth. And it's that balance that I do. In some days, it's more of one than the other. But every day, it's some sort of balance between those 2.

Yes. Okay. If we could talk a little bit about just consumer demand for your products, you guys -- you've taken price -- volumes have been really resilient. Can you talk a little bit about why you think that is? And as we're seeing retailers talk more recently about deteriorating consumer kind of your view on your product positioning and the resilience of your customer demand?

Well, first, if you're somebody who's feeding your pet Freshpet and you try to change from feeding Freshpet to feeding Kibble or can, good luck. Most dogs will reject that choice. They've gotten used to the good stuff and they don't want to go back. It's pretty simple and pretty straightforward. But if you take a step back and you look at the analytics and the category and see what's happening, I just looked at this data yesterday. It's pretty clear that what's happening is the super premium and premium pet foods are holding up really, really well. It's not a surprise. This isn't a question of how much can you afford because in the grand scheme of things, pet food isn't really that expensive as a way to feed a member of your family. You're spending depending on the size of your dog or how many dogs you have, a couple of bucks a day to feed your dog and that, for a member, your family, that's a relatively affordable thing to do. But it's a question how much you love your dog. And if you really love your dog and you were buying a premium or super premium pet food because you really love your dog, the price sensitivity isn't very significant. Now to be clear, there is. We did see price sensitivity, but not nearly what the price sensitivity would be amongst an audience that didn't have the same passion for their pet that our audience does. The other part of it is if you look down the brands that are mid-tier brands, people who are kind of above-private label, but not up in the super premium category. There's a lot of price sensitivity there, and there's a lot of pain that's being felt there. And some of that volume is migrating down into the lower end of the category. So I think of it as death in the middle. The premium brands are doing really well. The value brands are doing well. The stuff in the middle is really getting hurt pretty badly. And I think that's going to hold up. I mean we have another price increase we announced that will be in effect beginning in February. We expect there'll be a little bit of price sensitivity that goes with it. But we think on whole, it will help us bolster our margins and will also help the top line a little bit as well.

Is there a thinking about potential recessionary backdrop in 2023? Is there a point at which you worry about demand elasticities or expect maybe change in behavior with your customers within your product portfolio?

I mean if the question is, do you worry? Yes, you worry every day because we just don't know, it's really hard for us to say at these new uncharted price points, what is the consumer going to do? Is there some point out there where you reach a point where the consumer says, "I just can't do it anymore." So we are very judicious. We do not want to take pricing willingly. We only want to take pricing when the cost justify it. But having said that, so far, what we've seen is price sensitivity that in the world of consumer-packaged goods would be considered very favorable. There's a pretty standard metric that people use that it's a price sensitivity of if your pricing goes up 1% what happens to your unit volume. And if you're below a 1.0% on that measure, your price sensitivity is considered favorable. So it adds to margins and it adds to net sales at the same time. And our price sensitivity is well below 1.0%. It's not 0%, but it's below 1.0%. And so we feel like we're in a good spot. We feel like taking pricing is constructive, but we do not want to take it to the point where we could see it hit a cliff and have some impact on the demand. It's just not constructive for us at this early stage of this long-term game we're in, which is trying to convert people to Freshpet food. We do not want to price people out of the category.

Yes. So I think, thinking about the product, it's clear that the product quality differentiates you relative to your competitors. But I think so too does your distribution model and the bridges that you have in stores, you've reached a large installed base of fridges. When you have that conversation with the retailer about adding additional fridges to the store, what is that discussion like? What are the pinch points? What are the things that you want to highlight to them?

Yes. I joined Freshpet 6 years ago. When I joined Freshpet, the question every retailer had was we would tell them you should put in more fridges and they'd say, "Yes, I'm not so sure that this is a good store -- that this Freshpet brand is appropriate for all their stores." And they also had an issue with, is there enough space in every one of their stores because the footprint of the store might be small, the category of pet food might be small. What's happened since then is that concern about Freshpet is not appropriate for all their stores. It's basically gone out the window. They're convinced by the velocity we have, the sales volume that we do, that Freshpet is appropriate in just about every one of their stores. And now the question becomes how many Freshpet fridges do they need to have in a store? And then the second part of that question is, can we supply it because the last thing in the world a retailer wants to do is put in a second fridge or a more prominently-located fridge and have us not supply it. So we had the CEO of one of the largest grocery retailers in the U.S. come and visit our facility that was under construction at the time last July or in July in Ennis, Texas to see from self whether we could supply them because they wanted to build their entire pet food category around Freshpet food because they thought they had a winning proposition in Fresh that they did not have in canned or dry because some chewy.com can meet the same need at the same price and deliver to the door. But in Fresh, they had a winning hand. And so the conversation is no longer is it appropriate for the store. The question is, how many do I need? And can you guys supply it? And then there's the executional side of that question of okay, how long will it take me to get you to get enough fridges, me to get the labor to reorient my pet food category to accommodate this pretty significant transformation of the category from being dry and can-centric to being Fresh-centric. And that's the conversation we're having in most cases.

Yes. Okay. I'll ask 1 more, and then I'll check in with the audience and see if folks want to chime in. When you look at your opportunity for growth, do you think it's more predicated on adding additional fridges or points of distribution? And how do you weight the 2 when you think about the opportunity?

Yes. So we think the model when I joined Freshpet in 2016 was very much driven by adding more stores with more fridges. And that's what you could pretty much predict the quarterly sales growth based on placement of fridges. We flip that model to being one that was entirely household-penetration driven. So the fridges exist as almost a utility to service the volume created by the advertising investment in household-penetration gains. And that model is the model that we're going to be on for the next several years because we're just going to make the franchise bigger and bigger, and retailers will respond by putting in enough fridges to service the business. But there are the amplifying effects for us of higher-visibility fridges. So end-cap fridges, larger fridges, second fridges, 3-fridge islands which a couple of retailers have started doing. And that does amplify the value of the advertising and make it easier to expand the franchise. And then the other piece it does is it allows us to expand the product portfolio so that we can include items that might not be for everybody but would be enough to entice somebody into the category. So for example, we launched a small dog product in 2018. It was phenomenally successful, probably the single best launch we've ever done. We're launching some new products this year that are going to extend our reach into audiences that are underserved today. We have a vegetarian pet food that we launched last year. We have product for those who home-cook for their dogs. So more fridges enables us to reach more consumers and make that advertising investment relevant to more users than it otherwise would. But the whole thing is built around advertising, expanding household penetration, the fridge network helps and amplifies it, but it is not the driver.

Yes. Okay. Anyone on the [indiscernible] Yes, go ahead.

What's your household penetration in your most mature markets relative to your overall household penetrations?

It's a good question because we haven't looked at the regional penetration, on household penetration we're looking at a national level. So it's hard to say. But what I can tell you is if you take a look at on our market share. So market share within a regional customer or within a specific market, the best markets are twice the national average. So theoretically, the household penetration might follow that same line, but this is not a regional business. This is a very well-developed national business that for the most part, is going to see -- it might be a bell curve of distribution or household penetration, but the whole thing is rising up at about the same rate everywhere.

You guys in public said that the precursor win plan, a competitor bridge, is a category that wasn't to support that. With the growth in the category, you see a edifice been in some stores and I've seen it looks like a product that you're just not sure if that's the retail [indiscernible].

Yes. So Walmart invested in fridges to support the launch of a competitive product last year, a little over a year ago. It was a product that they -- from Mars. It was a CESAR-branded role. But we haven't seen fridges go into stores from another manufacturer. What we've seen is Walmart trying to put a second player in the business. What I can tell you has happened there is it's been about a year. The product that they launched is not selling particularly well. We're out selling at 8 or 9:1. The product in those stores, the velocity on it is not sufficient to support the space that's taking up. And so Walmart has begun to plan a gram putting Freshpet products sort of overflow Freshpet into those fridges. So you find Freshpet fridges sitting next to a Walmart fridge, which is the same model fridge with a hetero card on it that looks strangely similar to ours. But it will have both the CESAR roles as well as Freshpet items planogrammed into it. We have not seen another manufacturer able to successfully place fridges into stores. It doesn't mean they won't. I don't want to be making you think that this is not going to happen. At some point, somebody will make it happen. The challenge isn't getting it to happen the first time. It's being able to do it broadly in enough classes of trade that can support the volume of manufacturing and a national-marketing model. This is a scale business. This is one where you have to get enough distribution, enough fridges, enough manufacturing, enough cold distribution to get to reasonable economics and you just can't do that at a very small scale. You have to have very, very broad scale.

Revisiting some comments you made on advertising. As the brand has grown and you say, it's a nationally recognized brand now. It's a brand that resonates with consumers. How is your advertising strategy changed? And what are you guys trying to target or solve for in that campaign?

Yes. It's interesting. Our advertising was very much right up the middle. Advertising campaign targeted at female heads of household from, call it, 25 to 54, 5 years ago. And then what we started to do was we added a younger audience. We started focusing in on younger millennials. And that changed the message a little bit, but the fundamental proposition was the same. Then we started doing some advertising that media buys that included men because men have pets in their household and men are the purchaser for pet food on enough occasions to justify and that makes a lot of sense. And now we're doing is we're continually pushing younger in the audience to try to get more and more young households. People think that means that you should do nothing but digital or social media and what we keep finding because we really don't care where we buy the media. We just care about its effectiveness. We are analytics-driven. Every single week, we measure the effectiveness of every single placement we did in the last week. And we're still finding is that broadcast media, even if it's connected TV, but broadcast media delivers better economics for us than digital and social at scale. Now we still do 70% broadcast, but we do 30% digital and social. But that combination has succeeded delivering for us improving returns on our advertising investment every single year for the last 5 years. We get a lower customer acquisition cost pretty consistently.

To the question about competition in the stores, sounds like not an imminent material threat. But when you look across your competitive set of those that make comparable high-quality products that your customer might either switch to or back from, what do you -- who do you see is that competitive audience?

It's not a single competitor. In the last couple of years, there have been some nice innovations. The DTC brands, so Ollie, Nom Nom, Farmer's Dog have created a lot of awareness of higher-quality pet food and have skimmed off a relatively small number of households, but very high-buying rate households into the market. I don't know if that's hurt us because the data we have suggests that when they're spending their brains out on advertising, it just britlifts all the fresh food, and we seem to get a benefit from that. There's another brand called JustFoodforDogs, which is owned by Catterton, which is done in sort of a commissary style in Petco stores is an exclusively Petco and Chewy. And from what we can tell from the data, it's selling quite well. It hasn't hurt our sales, but what we can see is that it has created an awareness and the kind of a sense that there is better, higher quality pet food out there. On average, we think their products sell at about twice the cost of fee there it's what ours are, but it's, again, creating the sense that there's better pet food out there. When you look at the rest of the traditional pet-food players, whether it's the canned or dry dog food manufacturers, all of them would love to have a piece of this space, but our analysis would suggest that it's hard for any one of them with their existing assets to compete in this fresh base because the business model is so different. Whether it's the manufacturing technology that needs to be employed, which is completely different. The refrigerated distribution, the ownership and maintenance of the fridges, all those elements are different enough that it would likely take any one of those existing competitors to have at least one, if not 2 partners to help them, somebody who can manage the fridge network, somebody who can do the manufacturing, somebody who could do the distribution to make it work, and that's not easy to orchestrate. It's pretty tough. Not that it can't be done, but it means that everybody makes lower margins in doing it.

Yes. What about on -- okay go ahead.

Just going to ask, you made several positive announcements on the last quarterly call, management changes and slowing down your CapEx spend, et cetera. It sounds like your gross margins are compressed for a whole list of reasons that you mentioned on the call, including plant startups. Can you just walk us through the production projects that are underway that are depressing your margins and where you are in sort of fixing those and getting margins back?

Yes. Let me describe the -- I'll talk about the specific part of the construction part, but then I'll cover the broader part of your question, which is what's depressing the margins. But the construction project that has the single biggest impact is we would have done plant start-up add back in the past. We've changed it so we don't add those costs back and that's the Ennis, Texas facility. That is an enormous facility. It's a state-of-the-art facility. We started construction on in August 2020. It is now in a position where we started running the roll line in that facility, the bag line will start up in the first quarter of next year. The first -- and those are the first 2 of 3 lines in Phase 1. So there's a lot of costs that are all start-up costs that will continue to be start-up costs as we start up each of the successive lines in that facility, but that facility when it's operating and operating at scale will be our most efficient facility. There are several structural elements that are designed in that facility and make it the most efficient but it needs to be at scale. It won't be -- it will be a margin drag, while it is building scale, it will become margin accretive when we get it to scale.

And the scale is the 3 lines?

It's the 3 lines operating with full staffing. Because the things that drive the scale benefits was when we get to scale, you're obviously spreading the fixed cost of that facility across the full base of volume. We also have a chicken-processing facility that we put on site, which we've never done before. We won't operate it. It will be operated by a chicken processor, but it will give us lower cost, fresher chicken on a regular basis. So that will be there. But again, it needs to be operating at scale for that to work. And then it also enables some scale benefits for us in logistics. In other words, we'll be providing product to a DC in Dallas that will shorten the mileage or product goes when it's shipped, but we have to be producing both bags and rolls across the full product portfolio for that to work. That's one of the depressors of the margins. The other 2 that...

When will the third one you think be...

That's volume-dependent. So we have the equipment. It's ready to go. It is not installed. The second line is installed. The third line is not, and we're going to watch demand. We basically have to make the call on that about 6 months before we need to go because that's what it will take to get it finally installed and then the staffing hired. We have hired the staffing for the first 2 lines for 24/7 production and that is fully baked in our economics today. We also have broken ground on the second phase of that facility. So what we call Phase 2. Phase 2 will ultimately be split into 2 phases. The first phase will include 2 roll lines, which is what we need to keep up with the demand. And that's targeted to open in early '24. The second part of Phase 2 will be delayed until we know what exactly technology and product form it needs to include but it has room for 2 more lines in that second phase -- in the second part of Phase 2. So there's no start-up expenses for that, but there's CapEx going on for that. We also have a line at Kitchen South, which is a facility operated by a partner but is owned -- the equipment is owned by us, and it's dedicated to our production. There are 3 lines there. We're only operating with 2 crews right now. We move them between the 3 lines depending on the products that we need, and we have the ability to staff that up as we need to as demand grows. The broader question on the margins, one of the biggest hits on margins is the thing I alluded to before, which is when you're producing a fresh product, with a relatively short shelf life compared to dry or canned dog food. You have to work -- worry about bacterial contamination. And so we spent a ton of time managing that, and we also disposed more product than we'd like to dispose. And so we've been putting a lot of effort into finding ways to reduce the amount of the disposals in the secondary processing. And we describe that as a $20 million opportunity at the current scale. It's not all going to come at once. It's going to take time. It's also going to be the result of just better operating but also some investments in new technology. We as the pioneers in this category, have an obligation to develop the technology. And every time we do, we solve a problem, we improve our economics. We also put a barrier between us and somebody coming behind us, figuring out how to do what we're doing is not easy. If you can't get to the shelf life we have, it's going to be really hard to get started in this business. We think that's why we haven't seen a bag-product competitor that was a fresh competitor is because it's really, really hard. And we're working on ways to make it so that we have an even bigger technology advantage there. If we solve those 2 things, we get the plant started up and we deal with the quality that helps the gross margins very significantly and helps restore them. The third bucket was pricing, just pricing for the commodities. Getting ahead of that. We got behind it for a variety of reasons, but we're now, I think, caught up. We have priced 30% of our commodities for next year and lock the pricing on them within about a month from now. We'll have locked the chicken pricing for next year, and that's about 40% of our commodity costs. So we'll go from 30% to 70% pretty fast. And so far, everything we see would suggest that the chicken pricing that we assumed when we did our -- announced our price increase for February is going to be in the range that we thought. So it does not look like it's going to become unfavorable.

When you think about the expansion you've done over the last several years, obviously, the external environment has been not favorable. It's been to replete with challenges. I think if you had the benefit of hindsight, and look back to what you guys did. Are there things that you would do differently? And how does that influence kind of how you think about decisions you might make in the future?

Yes. I think the thing that's the toughest part, and there's definitely things we would do differently. And I always think about it as finding the inflection points. And when you hit the inflection points, you identify when the world has changed and changed fast enough to reflect the change. We nailed the first one, which was at the -- in the April-May window behind the pandemic when the stores have been ransacked, it was a mess. We turned around or refocused on getting the consumer reengaged, getting the stores fixed up and when we really did time that one well. But after that, we probably missed a bunch of inflection points where we kept thinking that the labor situation would settle down and we'd be able to catch up to the demand. And thus, we had advertising we committed to, and then we had products out of stocks while the advertising was on air, and it just didn't work out as well. We had assumptions about when capacity in lines would start up in the rate that they would start up that we were -- just didn't hit because of all the supply chain problems, labor problems that you had during that era. I'd say that if you roll it back, you would have been more cautious. You would have been, okay, don't invest for the growth until you know you have the supply underneath us. But it always appeared like, yes, we have it coming. We have it coming. So we're being much more cautious today. That's why we carried buffer capacity this year. That's why as we look at next year, where we feel comfortable leaning in as soon as we know that the lines in Ennis are up and producing the product that we want because then we feel like we have the capability to meet the demand. I will say, though, the one thing that is, I think our team takes a lot of pride in is we did, I think, one of the best -- camped with one of the best solutions to the labor problem that I've seen from other companies because a year ago, we had the same labor problems everybody else has. And today, labor is not an issue for us. We invested in what we call a Freshpet Academy. We raised the bar for the caliber of talent we are recruiting, knowing we pay more for them. But ultimately, the higher pay would result in higher throughput, better quality, less product issues. And what we've seen is all that is coming true. And our turnover has been cut in half. It's actually down to about 1/3 of what it was a year ago. The average tenure of our employees is up, the average skill level is up pretty dramatically. And so that was a hard swallow. I mean we literally looked at it and said, this is a big bet. Do we really want to bet on completely changing our labor strategy and it required change in compensation, investment in training and everything, and it worked out incredibly well. We are very happy with how that turned out.

Bill, you mentioned a smaller competing products selling on chewy.com, how portable do you think your offering is to e-commerce? How big is that opportunity?

Yes. I've always been a little bit of a skeptic about how much the consumer is willing to buy fresh products via e-commerce for delivery to their home. I mean the reality is, at the same time, e-commerce was exploding. Farmers' markets were also exploding. Consumers like to shop for their own fresh stuff, they enjoy the shopping adventure. They don't want to buy their toilet paper that way, but they like to buy their meat, their dairy, the deli and stuff where there's an experiential part of that visit. There's a feeling of quality that when they bring it home. I think, frankly, if you look at the high watermark in the U.K. where Ocado exists and Ocado's got a phenomenally reliable, customer-friendly system, it still only accounts for a relatively small share of the grocery purchases in that country. So I think there's a ceiling on fresh e-commerce. Does it mean it's not important? Absolutely not. We are focused on creating a winning proposition in every class of trade where we operate. We are on chewy.com. We have something coming that you'll see in a little bit in some time next year. That is another way in which we're thinking about doing Fresh with home delivery that I think makes a lot of sense. But I think over the long haul, Fresh is designed to win in bricks and mortar. It's where the economics are advantageous for the retailer, advantageous for the consumer, and it's where the best quality product is delivered. It's interesting. I heard the CEO of McDonald's talk. And he was talking about how much of their business is done via DoorDash and everything else. And that means people are eating cold french fries, and McDonald's french fries are incredibly good. And I asked him, I said, like, "doesn't it bother you that the typical consumer is getting a suboptimal exchange?" Well they value the convenience. Yes, there are people who value the convenience, but at some point, people want good french fries. And I think that, that's the reality, so.

Yes. Fair enough. You alluded to this on the CapEx side of things, the reduction you guys have made. When you look at, I think this $100 million reduction in CapEx, how much of that is actual cost savings versus maybe conservatism and better matching kind of demand in?

Yes. I wouldn't put any of it in either of those buckets. I think there's bucket -- the third bucket is the big investment that we have pushed out is the one related to our Innovation Kitchen that we are building. It's -- we, today, operate a very small subscale facility in the Lehigh Valley of Pennsylvania. It's not in our Freshpet Kitchens. It's in a third-party location where we lease some space, and it produces our very innovative, but relatively low volume items like Homestyle creations and our Spring & Sprout product. And our hope had been to be able to scale those up by building another kitchen in the leased facility with a lot more scalable equipment. We figured out a way to take those same products and move them to Kitchen South on lines that we already have paid for and already installed. It requires us to do a little bit more CapEx on those lines, but dramatically less than if we were to outfit a whole new kitchen in Bethlehem. And it also requires that we move some of the volume that was going to be in Kitchen South into our existing Bethlehem facility or into our Ennis facility. But we figured out how to do all that and it allowed us to avoid a significant amount of CapEx. It doesn't mean that project is going to go away. It means that project is pushed down the road until we have a real compelling need for the capacity. But that's the biggest driver. The second driver was splitting that Ennis Phase 2 into 2 parts. We're going to build the shell, and we're going to outfit the space, meaning drains and wiring and utilities, whatnot for the first 2 lines, we're not going to outfit the second half of it. And the reason for that is we don't know what technology we want to put in there. We've had some technology breakthroughs recently in our pilot plant that would suggest there's a much more efficient way to make Freshpet for our bag products than the way we're doing it today, and we want time to validate that technology before we commit to what that space is going to look like, not finishing out that space as a fairly significant amount of money, but that just pushes it out a year.

Yes. Okay. You mentioned labor challenges having eased substantially. How different are the labor situations between, say, Bethlehem and Ennis and how do you manage around kind of differences or discrepancies by geography?

Yes. It's interesting. So in the Lehigh Valley of Pennsylvania, that market has become a warehouse mac up for the Northeast. There are more warehouses than you can shake a stick at. The local governments or local citizens are pissed off beyond belief at the number of corn fields that are turning into large 1 million square foot warehouses, trucks on the road, low-value jobs, the whole 9 yards. So they are really pissed off. But it also means that the labor pool in the Lehigh Valley for $18 an hour labor that works -- warehouse jobs and Amazon, Walmart warehouse is way overfished. And that's why we made the deliberate move to move up into much more skilled labor because it was a significantly underfished market and one where if we got those people, we could retain them for a long time. The phenomenon where we are in is Texas is different in that in the local market, it's not overfished in any part. It's not like there's a warehouse market that's overfished or manufacturing market. And the local government there is really, really good at working with the industry to find a way to train people to have the skills that are needed for the industries they're in. So I would say the market in Texas is a little bit easier than it is in Pennsylvania. It results in a slightly different localized wage scale there versus what we have in Pennsylvania. But everything else is the same, meaning all the other benefits we offer employees, the values that we have, the systems that we use are all the same. So there's a slightly different wage market, but everything else works the same.

You touched on raw materials. Can you talk about your outlook, maybe by bucket of your major inputs, if you look into 2023, the level of visibility that you have into the trajectory of those costs? And then maybe also like the phasing, when should we start to see it in your results of potential improvement?

Yes. We have pretty good visibility on most of the costs at this point. There are some things that will -- that price on a quarterly or biannual basis. We price our chicken annually, and we're in the final negotiations on that right now. And those of you who are familiar with the chicken market, will be aware that the pricing in chicken has gotten soft, and so there are some advantages. We don't buy the same cuts of chicken that you might see priced on the regular exchanges. But nevertheless, the market has gotten a little soft, and so we're seeing some pricing relief there and anticipating pricing relief there. Having said that, there's still significant inflation in many other baskets of our costs. Those of you who are familiar with egg, we buy a lot of egg. Egg prices are through the roof. We buy a lot of turkey. Turkey prices are through the roof. There's -- we buy oats, prices have gone down, but there's a variety of other commodity elements that either have a labor component where labor rates have gone up, whether they have a natural gas, oil complex, diesel kind of component. Those costs are up. So the basket of costs is up enough that it's justified as taking the price increase, but it's not uniform. In the past year, it's been fairly much everything went up, some went up a lot, others just went up. Now we have some things going down and other things still going up fairly significantly. We expect to be locked on about 70% of our commodities though within a month. And at this point, everything looks like it's in line with what we thought it would be. It will flow through our P&L as improvements once that last price increase is in effect, but that also matches some of the inflation we've got. So think of it as you're going to get it fully in Q2, partially in Q1.

I've got 1 more before I do. I'll see if there are any other questions in the audience.

What metric do you use to track in stock at your customers?

The public metric that we use would be TDPs as reported by Nielsen, total distribution points reported by Nielsen. So the latest week, we're at 949 across the mega channel, which is the highest we've ever been by a lot.

What does that number mean?

Total distribution points is the -- is if you take percent ACV, so what percentage of all commodity volume, times the average number of SKUs in distribution in the store in a week, you multiply the 2, you get to the number. And so think of us as being in, call it, 60.4%, 60.5% ACV and having an average of like 15.7 items per store in that week, not in the last month or whether in that week, and that gets you to the 949 that we are today. And that's the best we've ever been by quite a bit, probably 100 points better than we've ever been. We also have our own internal data, which we don't share publicly, but we literally have people audit the stores every week. And we assess good fridges versus bad fridges. Good fridges are more than 75% full. Bad fridges are less than 50% full, sort of neutrals between 50% and 75%. Today, our rates are very good. Our rates are probably the best that they've ever been, but they're still not perfect. We still have room to go. And it's -- that really gets at there are specific items that are still short. Things that are at the tail end of the volume curve, but we haven't fully replenished every one of them.

If I look at my experience, we used to stuck up on toilet paper during pandemic. We're still -- I still stuck up on 3 bags short because...

You're not sure. It's going to be there.

A lot of issues, and I put them too in freezer. Is that what you're seeing and maybe at some point, people stopped?

We saw that about a year ago, we had -- we were having difficult time attracting new users because people like you were going in the minute they saw it, they bought everything in the store, and there was none left for the new user. That porting behavior stopped on broadly about 6 months ago for us. If yours is a specific item, so for example, one of our items that's in shorter supply often is the salmon. If the salmon item, if that's what the only thing your dog will eat because they have an allergy to chicken or something. And so that's what you're going to buy. We still see it on specific smaller volume items, but broadly across the line, if your dog is -- would accept any of our variety of items only, that hoarding behavior ended about 6 months ago because our in-stock conditions got to be good enough. People thought it was there reliably.

So it sounds like you solve the current supply-demand, at least today?

Yes. I'd say, yes. The only caveat to that is we can only solve so much of it. And if the retailer is having problems in their supply chain, either the labor at the store or the labor in their warehouse, which still exists, there are still problems in that, that we can have everything right, but you'll still see out-of-stocks randomly in stores, and we've heard that. We continue to hear that.

The mom-and-pops.

And it's not just a mom-and-pop, some of the better operators still have some labor shortages that just haven't solved for. The good operators always have the stuff in stock. The bad operators, they're going to be a little bit spottier. I don't want you to take away from this that it's perfect, though. We still think there's room for improvement, but it is a far cry from where we were before. And the other thing I think about is, a year ago, if we had a big bad snowstorm or some weather event of some sort or another that shut things down, we would see a pocket of air go through our demand curve in the Nielsen consumption because fridges would be out for a week. There's now enough product in the supply chain between our warehouse, our customer warehouses, the backroom and in the store that we can withstand short-term hiccups. Not a month-long hiccup, but a snowstorm that runs across the country and wipes things out for 3 days, yes, we can survive that easily.

Have you seen a big shift from rolls to bags over...

No. In fact, it went slightly the other way towards rolls because rolls are more economical, and we also were better in stock on rolls. The long-term trend is towards bags, but recent trend is towards the rolls.

How much products in that back room there for factors [indiscernible] 2 friges [indiscernible]?

So the -- in the grocery store, they put our product in the dairy back room. So we'll be in wherever they have eggs and yogurt and everything else. In the pet specialty stores, we have a second fridge that we give them, which we put in the back of the store. Not every pet specialty has a second fridge in the back, some just live out of the fridge in the store because they don't have a backroom. But in the grocery store, we live out of the dairy cooler.

When we're talking about Freshpet a year from now, what are the things that you think we're still talking about the same as today? What's different?

Well, first of all, I hope that we're looking back and going, wow, that Ennis thing has been a huge change for us. It enabled growth. It enabled improvement in margins and it enabled quality improvements that we wanted to see. So I think that's probably the single biggest thing. The second thing is, we are not capacity-constrained at this point. I mean, we're still catching up on some items, but we have operating enough capacity so I want the conversation to be more about demand, about how are we doing in generating demand. For the last 3 years, you could kind of dial in what our sales were going to be based on how much capacity we have. That's going to be an irrelevant part of the conversation. We have enough capacity. In fact, we probably have more capacity than we need, and we have to figure out how fast do we want to grow to use it. So it's a luxury we haven't had since 2019.

Okay. Bill. Great. Thanks for your time.

Thank you. It's a pleasure to be here.