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

Great. So good afternoon, everyone. I'm Eric Serotta from Morgan Stanley's Beverages and Household Products team, and I'm very pleased to welcome Freshpet to Morgan Stanley's Global Consumer and Retail Conference for the first time. Before we begin, please see the Morgan Stanley research website at www.morganstanley.com/researchdisclosures for important disclosures. And if you have any questions, you could reach out to your MS sales rep. So Freshpet reinvented the pet food category with a range of real foods and treats made from fresh meats, vegetables and fruit, sold in Freshpet-branded refrigerators and grocery mass and pet specialty stores. Joining us today, we have Freshpet's CEO, Billy Cyr; and CFO, Todd Cunfer. Thanks both for joining us.

So starting off, Freshpet's made tremendous progress since, call it, mid-2022 when you announced your operational improvement plan. Can you give us some perspective on big picture, what's changed in the company and the organization over the past 2, 2.5 years?

Yes. Let me take a shot at that, and Todd can add on to it. But I'd start with building organizational capability was ultimately, the insight or the conclusion we reached was we had gotten behind on talent, and we needed to add talent more aggressively. Todd was obviously part of that team that we brought in at that time, but we added talent in manufacturing and logistics, in quality. But I'd also say, unlike a lot of other businesses, our focus on building organizational capability went from top to bottom, and we made a very deliberate focus on building out our hourly production workforce. We raised the entry wage to attract higher-quality workforce. We created a training system and a pay progression system that incented people to stay with us to acquire new skills. And that's the fruit that we're yielding right now. In addition to all those organizational capability parts, we've gotten a much more stable external environment. That has helped all of us, but we obviously felt the benefit of that. Second thing is the organization has matured. And the third part of it is, I would just have to look at it and say, as a company, where we are focused and what the mission of the company has been very motivating. And when we were down and things weren't going right, people really pulled together and rallied and recognized that we need to get really focused, and we were very, very clear with the organization what we thought we needed to do to improve. The metrics are the same metrics we shared with everybody publicly. We need to improve quality. We need to improve logistics costs. We need to improve our input costs as a percentage of our sales. And if we could do those things, we would make tremendous progress, and that's come true, and that's worked out really well for us. So that's really -- it's an organizational capability story. It's a focused story. It's building out talent. All that has been a part of the process, and it feels really good to us. I don't know.

Yes. No, you've hit the highlights. Obviously, we've done a nice job. We were behind the curve on pricing. So we caught up in pricing. We got a little bit of a benefit this year from some deflation which is always a nice thing to have. So the input costs, as Billy mentioned, are back to where they should be. We really rebounded as we got stabilized manufacturing with our quality costs as a percent of sales came way down. So that was a huge benefit. And then we brought a new logistics team in who have just done an amazing job. We've taken several hundred basis points out of our logistics costs. So made great progress. We still feel like we have a long way to go. We've got a lot of opportunities to continue to grow both gross margin and EBITDA margin. So we're feeling really good right now.

I think it's important to point out what wasn't in our answer. What wasn't in our answer is that we have not had to worry about the top line. Unlike so many of our peers in the CPG industry worried about their top line, we've had such robust demand, such a well-proven system for generating demand that we're able to focus on getting the operations side to where it needed to be, knowing very well that we had a very solid top line and the ability to project the top line quite accurately.

Great. So Freshpet is now going on, what, 25 consecutive quarters of 25% or higher top line growth, which you've called kind of the sweet spot in terms of your growth rate. So I guess why is 25% the right number? What does that let you do from an organizational standpoint, from a capacity and capital utilization standpoint? What could -- why is that the right number?

Yes. We determined that we were actually growing kind of in the low to mid-30s for a while and it actually put too much strain on the organization. So our execution wasn't as good because we were just having to build so much capacity and work so hard to get that output. So from an execution and a margin impact, that was a negative. And then when you're growing at that rate, you've got to spend a lot more capital. You've got to continue just to build line after line after line. So we kind of determined and it's worked out that 25%, which obviously is still a tremendous growth rate, is the sweet spot for us where, again, we can execute it really, really well, now that we have a strong team in place. And from a cash flow and a capital perspective, it allows us to manage that very, very well. We're having a great year in cash flow this year. We're sitting on about $275 million of cash right now, which is great. We don't need to go back to the capital markets. And we feel very strongly we'll be free cash flow positive in '26. So that 25% growth versus a 30% or 35% allows us to do all those things.

And then the reality is there's not a lot of reward for growing 35% or 40%. People want to know that you can consistently deliver a very strong growth rate at 25% and execute well against it. And frankly, that's where we think we can do it well.

Yes, makes sense. So stepping back and looking at the overall category, you have the COVID boom in pet adoptions. Normalization over the past few years. So how are you thinking about overall category growth over the next few years? And then I guess, what were learnings in terms of the category and your business in terms of macro sensitivity, whether it was trade downs, lower trade up, channel, package shifts over the past year, 1.5 years?

Yes. There's a lot of noise in this space. But I would take a long step back and say the fundamental drivers that make pet and interesting category have not changed. People have an increasing need and interest to have pets in their lives. And it's in part because they're having fewer children. They have fewer children. They have the children later. There's just fewer children out there and pets replace children in households almost on a one-to-one basis. And so those long-term trends towards not just having pets and having pets playing an important role in your life, but then treating the pet like one of your children, some people say that the pet is not just one of their children, it's their favorite child. My kids would assume that, that was true in our household. And so that's true, and that's created this demand for better and better quality pet foods. If you look at the noise that's out there, there's this noise about a pet boom in the beginning of the pandemic than a trough because there's no more pets to adopt, and then people went back to work, and they turned the pets back into the shelter. There's a lot of noise in there, and there's not any really good data. Lots of sources of data and you can kind of paint a picture of it all, but at the end of the day, the long-term trend seems to be true with little bit of wobbles along the way. And we feel like that's going to continue. And we feel like Freshpet is going to be a beneficiary of that. I would also point out that the places where you're seeing the most growth, the most robust brand growth, are Freshpet, Farmer's Dog and Hill's. They also happen to be the most expensive pet foods. So people who talk about there's this economic downturn and people are just not willing to spend the money on the pets they used to, the concern we hear about pets and the cost of pets is not about the food, it's about the vet care. It's about the high cost of diagnostics and testing and whatnot. It's not about the food they feed them every day. There, they want to feed them the very best quality food, and that's evidenced by what's growing in the market.

Good. So moving on, let's discuss Freshpet's competitive moat. Others have made a run at kind of the fresh frozen space and really don't have much to show for it but some empty freezers. So why has that been the case? How do you see your competitive moat evolving? And from looking at it through a retailer's lens, like you guys clearly drive a ton of value in terms of traffic, in terms of ring for a retailer. But in most CPG categories, retailers like to have more than one supplier, so they could play off against each other. So how do you see that evolving?

There are a lot of questions in there.

Yes.

I start with a competitive moat. Early on, Freshpet's competitive moat was the know-how, how to make fresh pet food. The idea of creating a product that could have a long enough shelf life without preservatives to go through a warehouse distribution system. Then as we built out a fridge network and built scale in it, it was the presence of the fridges that became, in essence, the barrier of the moat that was built around it. We would argue that those 2 are still there. But they've now been supplanted in importance by our manufacturing scale and expertise. We have improved the way in which we make fresh pet food. We've built enormous manufacturing scale around it. And so you start adding up all these things together, and you're creating an incredibly robust moat around it. But the way we're starting to think about it is, yes, we've been focused very hard on building out those competitive advantages of the moat, but that moat needs to surround a really nice castle. It's no good if inside the moat is this rundown castle. The castle needs to be good. We need to get good profitability, a strong consumer franchise, products that consumers love. And so we're really focused on as we build out that moat, make sure that the castle that it surrounds is a really attractive castle. On the part about the retailers, there's no doubt that retailers are inherently uncomfortable with a category where there is a single player. We try to make it so that that's not a problem by giving them stuff that meets their needs, giving them exclusive opportunities, if there are -- if there's exclusivity is appropriate for them. We try to make it so they make good margins. We don't try to squeeze their margins. We try to make it so it's an attractive category for them. But over time, there are going to be some retailers who are going to try to find a way to put others in business in this category. And as you said, most of that hasn't worked out very well. At the end of the day, we can't really change what they're going to do there. What we can do is just make us as an attractive proposition as possible. And so far, we are -- over 50% of the growth for the retailers we're the thing that insulates them against the e-commerce play that's going on, whether it's DTC or Chewy or Amazon. So we become a very attractive way to participate in the category in opposition to e-commerce and we give them great margins and great profitability. So as long as we keep doing that, I think that the retailers are going to support us.

Great. And sort of staying on that retail topic, like, obviously, the broader pet category has really shifted online between Chewy, Amazon, a lot of consumers preferring a subscription or auto ship model. Your product by its nature, it needs to be refrigerated. It doesn't lend itself particularly well to DTC. So how do you see that impacting you guys, if you were looking out over kind of a 5- or 10-year period? And sort of how are you adapting? Or is it more of an attitude of people are still going to make some trips to the store and we're going to anchor that?

Yes. So I don't think there's an absolute answer either way. We're dabbling with some tests in DTC. We'll see if there's an opportunity for that for us. Obviously, we've seen the success of Farmer's Dog, and they have some great consumers, and they've built a very large franchise, so hats off to them. And we'll see if that works for us or not, where there's a couple of different business models we're looking at from that perspective. So we'll see how it plays out. But we are incredibly important to the brick-and-mortar retailers, and we're very proud of that and not just does it allow them to participate in the pet food category. But as Kroger being a great example, I mean, the data that they have on the consumer who comes into their store and buys our product not only buys more things in the pet aisle, but also buys -- some of their best consumers in the entire store, and they're buying lots of other high-value items around the perimeter. So look, we're going to -- we think we can clearly, win in brick-and-mortar. We're going to test DTC. Jury's out whether that's going to be a major, major play for us as well. If we can -- we think it's going to be big enough that we can make money off of it, we'll be happy to participate. But either way, we think we can continue to grow very, very nicely.

And I wouldn't forget the stuff in between, which is the retailer's own versions of delivery, curbside pickup, where we do a heck of a business, 10% of our sales today. Curbside pickup is a great business. And Instacart, we've done very well with Instacart. Any of you who have used the Walmart+ is a phenomenal service. But retailers have gotten very good at creating home delivery options of some sort that helps meet the need. But from our perspective, it means they're making use of all the infrastructure they put in place to very efficiently get our product from us, to their warehouse, to their store, to our fridge and then into the consumer's cart, car, or on the way to their home. And that's just another one of the many ways we can service that consumer.

Yes, I mean we're in 28,000 locations. We kind of think of those as 28,000 micro fulfillment centers that we can leverage potentially the infrastructures of Walmart, Target, Instacart. It's going to evolve and it's going to evolve quickly. And so we'll look at every opportunity to leverage other people's assets.

Great. So briefly, you guys both brought up Farmer's Dog as sort of a success story in the space. I guess who do you guys think Farmer's Dog is sourcing from? Do you guys look at them as a competitive threat to some of your higher-end consumers? Obviously, a much higher price point than what you guys are at. So what do you do to keep sort of the higher income or kind of trade up from Freshpet within the franchise?

Yes. First of all, right now, we don't believe that we're taking consumers from each other, at least not to a significant extent yet. And we think that what they're doing and the advertising money they're spending on establishing the importance of better quality of food. We think they're spending more than $200 million here in advertising, plus the money that we're spending in advertising is collectively creating an awareness for and an opportunity for higher quality pet food. And so we think that's serving each of our interests. And so that's working pretty well. Clearly, there will come a point somewhere out in the future, where, as we both mature, that we could end up running into each other, but it's not happening anytime soon. Would I like to have their consumers? Absolutely. But I'd also recognize that a bunch of those consumers are people who are buying a frozen product, sticking it in a big bunker freezer in their garage and holding it there and the consumer who's buying fresh has a very different mentality. If they're buying a perishable product, putting in the refrigerator and they include us as part of their fresh shopping trip. I go to the store once a week to buy my dairy, my deli, my produce department stuff, and we are part of that shopping trip as opposed to fill up your freezer or your bunker.

Great. And then shifting gears, wanted to talk a bit about the TAM and the households that you're in today and the opportunity. I think you're in something like 13 million households today. You refer to 5 of them as the HIPPOH's, the high-profit pet-owning households. I think I got that acronym right.

We like to sometimes say high-potential pet-owning households, but...

Oh, high potential.

High potential is all right.

Okay. Right. So in terms of the focus from here, is it more on the frequency and the buy rate of the 5 million? Is it expanding the -- is it kind of expanding the pie and converting the light users and heavy users? Maybe talk a bit about the strategy from a household perspective.

I think this is one of the things we're going to increasingly hear from us as we go through 2025 is that we're going to be increasingly focused on the heavier users. The 5 million HIPPOH's that you described account for 90% of our business today, so that other 8 million consumers where people are using us very occasionally and sometimes, it's a trade-off versus using a canned dog food as a mixer or topper versus just using Freshpet as the main meal item. Some number of that 8 million is going through the trial phase and ultimately could become a HIPPOH, but a significant number of them are just people for whom they're never going to be one of those HIPPOH's. And so we're going to increasingly focus on how do we create more of the people who fit in that heavier use base. How do we get better at the targeting of our marketing? How do we create products that are more relevant to that group of consumers? How do we create the retail visibility and availability of the right kinds of products [ we set on ]? Because the more efficiently we can go after those people, we think the bigger and better our franchise is, meaning more consumers, more loyal consumers and a more efficient way of attracting those consumers to the franchise.

Great. And then in terms of pricing, you guys have an everyday consistent pricing model. I don't want to call it EDLP, but no discounts or promotions, which is pretty unique across CPG, particularly in the grocery channel. So that model served you well, but there's always pressures from retailers, from competitors. So sort of, I guess, what's the -- how do you maintain that model going forward?

You maintain it by having the great growth rates that we have. So I mean what offsets that pressure is that we are growing so quickly and as Billy mentioned earlier, we actually -- we provide a very good margin for them as well. So as they look at their P&L, yes, they'd like to have some trade buckets, I'm sure. But when they look at overall and the growth that we're providing and the base core margin that we're providing, they're largely very happy with that. So we don't see us slowing down anytime soon. So as long as we have outsized growth, I think we'll be able to keep that pressure off.

This is one of -- we hired Nicki and one on Nicki's focus areas is how do we create a much more robust long-term strategy that links our interest and our retailers' interest beyond just we sell really well. We grow really well. But how do we make it so that we are both incented to build a very loyal consumer franchise who buys Freshpet in their store on a regular basis? We think that's a huge opportunity for us. And there's a lot of levers that we can pull and it's something I think that Nicki is going to bring to the party.

Great. And then, Todd, I think it's a good segue in talking about financials from some of your earlier comments. You're already running well ahead of the 2027 targets, 3 consecutive quarters of gross margins above 45%, EBITDA margin tracking ahead of plan. So I guess sitting here today, how do you frame kind of the drivers of the next leg of margin improvement from here? And of course, when are we going to hear some new targets.

Yes. So obviously, we're thrilled about the progress we've made. Our adjusted gross margin has gone from 36% 2 years ago. We've guided to 46% this year, so 10 points in 2 years. So we feel great about that. But it's almost all come from input costs, again, catching up with the pricing and having a little bit of deflation, the yields being better at the plants. That's all helped with that. And then a huge reduction in the quality cost where we kind of ran into some trouble in '21 and '22, and now we're back below 3%. The area that we have not really gotten any traction on is that fixed cost piece, the labor and overhead piece of the cost of goods sold. That is going to be the next driver of gross margin for us over the next few years. So that will grow at a slower pace than sales as we ramp up and as we get more efficient in our plants. It's not going to provide 10 points of growth like we've got in the last 2 years, but there's lots of room for improvement and margin expansion in that area. Plus there's a ton of other projects that we're working on throughout our supply chain to enhance margins. And then like the big wildcard, as you guys heard us talking about, a new technology that we'll be bringing on about a year from now, our seventh line in Bethlehem. Haven't baked it into any of our assumptions. We still don't know whether it's going to work at scale. If it does, over time, we could have some nice margin expansion if that new technology plays out the way we're hoping it is. Below the line, lots of opportunities in SG&A leverage mostly in G&A, which will -- we've hired a bunch of people. Billy mentioned earlier, we needed to. We fell behind. And so we will slow that hiring significantly over the next couple of years, and we'll get a tremendous amount of G&A leverage. That's pretty actually easy for us to go execute. And then regarding changing guidance, 2 years ago, almost to CAGNY, we said, "Look, $1.8 billion in 2027 is our target for sales." We're on track right now to hit that. And we had a 45% gross margin and 18% EBITDA margin. Good news is we guided to 46% this year, so we're already above the 45% that we talked about in '27. So we're obviously working very hard internally to decide, okay, what is possible. Do we want to change the '27 target? Do we want to come up with the new targets? We're kind of working through that internally. We're working with our Board. There's still no decision on how we want to think about that. But you can rest assured, if we do change any targets, it will be something that we are highly, highly confident that we can meet or exceed.

Great. And then customer acquisition costs over time have been pretty stable and very reasonable compared to a lot of CPG companies. So how do you see that evolving as you kind of further expand the customer base and the penetration base? Does the marginal cost of acquiring new customers get higher as you get sort of deeper into the potential TAM? Or do you actually see some efficiencies and greater leverage out of the assets and spend that you already have out there?

I don't want to tell people that we're going to defy gravity because the reality is everybody who gets farther out in their TAM, higher and higher media budgets ultimately experiences some level of inefficiency or reduction in efficiency as they get out further on the curve. And so we are not going to defy gravity. But I would say, though, that we have 1 advantage that most people don't have and that has, I think, helped us avoid the loss of efficiency and that advantage is our retail visibility with our fridges. There are very few people who have, in essence, 35,000 4-foot wide, 7-foot tall lighted displays that highlight their product distinctivity in a store. So if you see the advertising that we run and you walk into the store and if you walk in a store and there's a small fridge in the middle of aisle, the likelihood of seeing that ad converting to a purchase is probably pretty low. But if you walk into the same store and instead of a small fridge in the aisle, it's got a large fridge on the end cap or it's got 2 fridges next to each other, the likelihood of it converting is pretty high because now there's an amplification of the advertising message at retail. And it's in essence like a freestanding display that you're seeing there. It's there every week, every year for a long time. And so we think as we continue to expand our retail footprint, that is offsetting some amount of any inefficiency that we'll see in the media as you scale. That's certainly what we believe we've seen to date. How long that will last and how much retail visibility does it take to offset any media inefficiency? Can't tell you. But so far, it's worked for us the last 10 years, and I'd expect it's going to continue to work for at least several more years.

And you mentioned sort of the second fridges. Can you talk a bit about the opportunity to sort of drive additional space or second and third fridges with your existing customers? What do you typically see in terms of returns or sales lifts on that incremental investment? And are retailers receptive to the numbers because the numbers are compelling?

Yes. So one of the things is we want to both be leaning into and encouraging retailers to put in the second fridges when it makes sense for either holding power or for assortment. But we also don't want to be space hogs. Because the worst thing in the world for us is to get to the spot where we are overspaced for the velocity that we have and the retailer no longer feels as good about the story we've got. So we have to maintain that balance between having the right amount of space, the right amount of visibility and keeping it so that we constantly have the best-in-class velocity in the category, really good margins. The important part is to understand what the retailer strategy is, what they're trying to accomplish. How important is pet to them? What role does pet play in their store? What will this Freshpet play in their category? And then figuring out the strategy that works for them. So there are some people, like Todd made reference to Kroger, who put in 3-fridge islands and they completely reinvented the pet department because they viewed the pet as a member of the family. And if they're feeding the family, they wanted to feed the pet too and this became a way that they could pull people into the pet aisle and make it clear that they had really good, high-quality distinctive pet foods. There are other people for whom pet is not as critical or strategic to them, but they don't want to lose those sales. So they'll treat it very differently. There are some retailers who are looking at holding power because they'll have limited SKUs, but they want to make sure that the consumer knows they can find that item every single time they walk in a store. And there's other retailers who want to have variety because they're known for having distinctive or unique items. Our job is to figure out what works for the retailer and give them the right assortment of items and the right number of fridges that accomplishes their strategic objective and at the same time, helps enhance our business. And so far, we've been able to do that pretty well pretty consistently over time.

Great. Another one for you, Todd. So Freshpet, as you mentioned, made a lot of progress over the past 12 to 18 months in terms of free cash flow. You've said you're on track to be free cash flow positive in 2026. You don't need to raise capital in the meantime. So could you just help us bridge or discuss the drivers and help us bridge from sort of your current run rate to positive free cash flow?

Yes. I mean it's a pretty simple analysis. It's called EBITDA growth. And so maintaining the top line at a healthy clip and continuing to expand margins. So when that happens, operating cash flow grows very, very quickly. And when that operating cash flow grows as quickly as it is and it's able to be larger than our annual CapEx spend. Now there's going to be -- the CapEx is not linear. The CapEx tends to be chunky. So we had a very -- we'll have a very low -- a lower spend this year, below $200 million. We guided to $180 million because of some timing of some projects. '25 and '26 will be heavier CapEx years, but it comes down to that EBITDA growth. And so it has ramped up very, very quickly. We're still very, very bullish on how that's going to grow over the next couple of years. And if it plays out the way we believe it will, we will be free cash flow pretty quickly.

I would point out that one of the most important things that we need to do is make maximum utilization of the existing infrastructure. We now have 3 campuses that have a large amount of fixed costs built into them, loading docks, labs, wastewater treatment facilities, central utilities and whatnot. The more lines that we can get -- lines are cheap, buildings are expensive. And so the more lines that we can get in the footprint we have, the more likely we are to generate the significant free cash flow that we think this business should generate.

And is that -- kind of lines per building or lines per site, is that the main driver of capital efficiency from your existing investments? Or are there other ...

It's lines per site but it's also how efficient each one of those lines is. So throughput. So we made -- we brought a consultant in 2 years ago into Bethlehem to break down the processes and improve throughput. It's paid very large dividends so far, and there's more room to grow. We will kick that off in a meaningful way in Ennis once that facility starts to stabilize and has a bigger base of business. But yes, we are trying to push all capital to as far right as possible and delay it and by being more efficient with the lines that we have. And then, look, we have enough capacity in the footprint that we have, we haven't built it all out yet, for well over $2 billion worth of sales. So it's probably -- we'll probably need another site by 2030. And our goal is to, again, keep pushing that to the right. And once we get to that point where we need another site, we're going to look at a bunch of different options that potentially are more capital efficient. We could go build another Ennis. It's expensive. It might be the right thing to do, but it will be very, very expensive to go build another Ennis at a new site because you got to build all that infrastructure. We're very open to partnering with someone. We haven't gone there yet, but we have a lot of people who are interested in doing business with us, whether it's a chicken processor or someone else who might have a site available and maybe they can build a facility for us next to their chicken processing plant. Just 1 example. So we're going to look at all alternatives. Even if there's a small margin hit there, if it's much more capital friendly, we'll take a very strong look at something like that.

Great. And just to clarify, in terms of a $2 billion run rate with the existing footprint, that's sort of the existing building footprint and you'd still be adding lines to that?

Yes, correct. Yes. And it's well over $2 billion.

Well over $2 billion. Yes.

Great. Well, a high-class problem to have when we get there. So then could you talk a bit about innovation and sort of extension opportunities from here? You have obviously a focused portfolio. But there's opportunities out there, whether it's large dogs being bigger in treats, like what do you see as sort of the highest return areas?

Yes. First, I'd start with -- think about it as we don't want to create SKU variety for the sake of variety. It needs to meet a unique need that our current lineup doesn't meet. But then you also have to step back and remember that the population of dogs, of about 90 million dogs in the U.S., and they're eating pet food as their entire diet. So think of that as 90 million, if you equate that to the human population of, call it, 335 million, but it's the entire food supply. Everything they're eating. Now we're talking about the entire food supply they're eating. And right now, the vast majority of it out there is all the same stuff, kibble or can. It's not very diverse and whatnot. One of the beauties of our system is that we can create different product forms. So we have a shredded product, we have a little meatball product. We have rolls. We have a lot of form variety that we can create that allows us to create tailored alternatives for pets that aren't possible with the other product forms that are out there. And then what are some of the unique circumstances? So for example, this year, we're launching, or '25, we're launching a product for seniors, senior dogs. They have very distinct nutritional requirements and also things that they can eat. And so we've created a product for seniors. We have a separate product that's called chicken bites. It's larger chicken bites. It's more of kind of like a snacking product but it's a very distinctly different form than what you would be used to. Our large dog product is in broader distribution now than it was a year ago, and it's doing very well where it is, but it takes up a lot of space in the fridge. So you have to be really careful about where you choose to add it. But I would look at each of those things and say each of them is a very distinct product. It meets a very distinct need, brings in a new user. In most cases, we'll tell the retailer, "You really shouldn't take these items in your primary fridge. You should put them in a second fridge because they're not going to outsell the things in the first fridge but they're really incremental to your business. So put a second fridge in and it'll be incremental to you in the second fridge." And that seems to be working.

And sort of the -- can you talk a bit a bit more about sort of a trade-off with large dogs, like that takes more space. From a consumer standpoint, it obviously costs more to feed a big dog, and you guys are a higher-priced product. So talk a bit about kind of how you see that opportunity and the trade-offs there?

First of all, you have to remember that it's really not a bimodal thing. Our franchise does skew towards smaller dogs and smaller dogs tend to eat Freshpet exclusively versus a larger dog or a smaller part of the diet. But make it up. If our average dog size in our franchise is 25 pounds, we don't need to suddenly have a whole lot of 100-pound dogs. We'd like to have the average go up to 30 or 35 pounds by bringing in some 50-pound dogs to the mix. My dog happens to weigh 55 pounds, loves for Freshpet, but bringing in more of those kinds of dogs helps us. And so the ways to do that, or the problems you have to solve are obviously the cost. There's going to be some costs. But as we talked earlier, Farmer's Dog proves that there's people out there willing to pay the cost because their product is roughly double the cost of ours on a cost-per-feed basis. The second thing is the convenience. How often do I have to shop for it and how much space do I need to store this product in my house? Well, our large dog product's a little bit more nutrient dense, takes up a little less space than our traditional product. So we help with that. It's not a huge help, but it does make some -- it does help a little bit. Rolls can help with that because rolls are more efficient. But there's a variety of things that you can knock down and knock down these barriers. And each time you knock down a barrier, you may inch yourself a little bit to the right in terms of the average dog size you have in the lineup. I'd love to have all of the 100-pound dogs, the households have 200-pound dogs, but we don't need that to be successful. We just need to keep adding some more of the medium and some of the larger-sized dogs to kind of raise the total franchise.

Great. And then how are you thinking in terms of Europe, international? Clearly, lot of pets there too, but also a risk and investment required and a whole lot of opportunity and white space left here in the U.S. So how are you thinking about that opportunity with sort of what weighs into the considerations and sort of what's, I guess, the time line for making that kind of decision of we're going to make a bigger push internationally?

Well, first of all, I think our actions to date would demonstrate that we have patience. We've been in the U.K. now for over 7 years, almost 8 years, and we've been very patiently validating do we have the consumer proposition right? Do we have the pricing right? Do we have the right lineup? Does the marketing model work? Does the fridge model work? We think we've validated every one of those pieces, what we haven't been able to make work yet is the reliability of supply. Supply has been shipped from the U.S. to the U.K. And while under good circumstances, it can work and it can be affordable and meet the needs, the problem is it's not reliable. Product gets stuck in ports, has the wrong paperwork and you have advertising going on in the air and you have no product on the shelf and it's a mess. So until we solve that problem, we really aren't going to put a big push there. Now we've been doing a lot of work on that. We like the model where we don't invest in the capital, we find partners to do the work and then create a source of supply. So it's not a capital risk for us. And you can expect to see us do more of that. But we're going to be very patient. I go back to where I started. We aren't going to put our foot on the gas until we're really sure that everything is going to work.

Great. Then in our last few minutes here. Obviously, Freshpet's been an incredibly successful story. I guess I want to just sort of turn it over to you and for you to talk about sort of the priorities as we look out over the next 2 to 3 years and what you see as the biggest kind of needle movers to get where you're targeting?

I would highlight and Todd can add to this, but I would start with the last 2 years have been about getting our house in order. Building organizational capability, fixing the gross margin and the building blocks of doing that and getting it to the point where we add investment-grade returns for the capital that we're investing and now finding ways in which we can build more capital efficient growth into our business. But as we now look forward, we're almost $1 billion in sales going from $1 billion to $2 billion, there's a bunch of things to change. One is you're operating at a larger scale, does everything work the way it did before at scale? So we've got to validate that. The second thing is there's things that are possible at scale that weren't possible before. For example, 5 years ago, we basically bought whatever ingredients people would sell. Now we can have much more influence and control on what kind of ingredients we buy, the quality of the cost, partnerships. We do chicken processing on site now in Texas. And there's a lot more of those opportunities. We're a much bigger customer for the fridge manufacturers. We have a lot more influence on the design of fridges and what technology goes on to those fridges. There's a lot of those opportunities that we didn't have before. Frankly, these are things that Scott's spending a lot of time on is trying to reinvent at scale a lot of the systems and processes that we use, and that's a huge opportunity. And then the third part is getting tighter and tighter focused on the heaviest users and building out a consumer franchise that's not just interested in the brand, but it's people who are diehard loyal users on a main meal basis. And if we can create a very big franchise like that, we think we have a big winner.

Great. Well, with that, we're right up against 3:00 p.m. here. Thank you so much, Billy, Todd, for joining us and for your perspective.

Thank you.

Thank you. Great to seeing you.

Thank you.