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

All right. Good morning, everybody, and welcome. I'm Peter Benedict with Baird. Really pleased to have the management team with Freshpet with us for our next presentation fireside chat. With us today, CEO, Billy Cyr; CFO, Todd Cunfer, and the godfather of Freshpet in the United States himself, Scott Morris, who's Co-Founder and President. Scott unfortunately, his voice is not with him today. So discussion will just be with Billy and Todd.

He's really eye candy.

Yes, exactly. So Freshpet was founded in 2006. It was the pioneer in bringing Freshpet food to pets in the United States. The IPO in 2014, since then, stock's compounded at 20% or better CAGR. So it's been a big success. $1 billion brand at retail already. It's the dominant player in what is the most disruptive portion of pet food. So before we get into Q&A, I figure we're going to run a commercial here, which just underscores the importance of feeding your pet, Freshpet. . [Presentation]

All right. Well, if that doesn't get you to switch over, I'm not sure what will. So guys, thanks again for being here. Billy, maybe you want to kick us off with some opening comments and we'll get into Q&A.

Yes. Obviously, that's homage to our New Jersey roots. So yes, so I was glad to be here. Obviously, it's been a really exciting and interesting ride for us. But overall, we're in the business of changing the way people nurse their pets and we're well on that journey. I heard Peter just say that we're now the dominant player, who ever thought this company -- I don't know Scott ever thought he'd hear that word dominant be used to describe the company that he created about 20 years ago. But we are now in that position where we've gained tremendous scale through incredibly rapid growth, and we're now well on the journey to making that profitable growth. And so we put a lot of focus in the last couple of years into getting ourselves in a position where we can match that incredibly strong top line with much, much more robust margins. We built a lot of organizational capability. And we're feeling very good about where we sit today. We're obviously in the quiet period. So it's hard for us to say a whole lot about the very near-term trends, but the long-term trends on this business are incredibly positive, and there's nothing that we see going forward that really gives us any pause about our long-term potential. People are getting more dogs. They're treating them better, and Freshpet is a key part of that. So we're very bullish on our long-term prospects.

Terrific. Todd, maybe one for you to kick this off. So I think in the past, sometimes you guys have issued a slide deck along with this conference. It's had your prior year guidance and some comments on that. There wasn't one this year. Just maybe address that? Was there a reason for that? Or anything to think about.

Just as last year, look, we're in the middle of my teams closing the books as we speak. So don't anticipate any surprises whatsoever. The POS came in exactly as we anticipated in Q4. We feel really good about how we're ending the year. We had a fabulous year, so no changes there. So all good.

Awesome. All right. Good to hear. Let's start with really high level kind of pet ownership, 60 million to 70 million dog owning households out there depending on what estimate you want to use. That number spiked obviously, during the pandemic. It came back down as folks went back to work. There are some players in the industry that are talking about return to dog household growth. Others are a little more hedging on that, not quite. What do you see from your seat?

Well, first of all, I think that the dichotomy and the commentary you're getting reflects the fact that the data is not particularly reliable. There's an enormous amount of data out there, whether it's a number of people who return pets to shelters, people who adopt pets in the shelters, dog licensing and whatnot. And it's a really murky picture. It's hard to get a clear view. And the reality is it goes up and down. But the way we think about it is there's two key components. Component number 1 is what is the long-term trend? Is there anything that we see that's in the near term that's having an impact on people's desire to get a pet and treat the pet well. And there's nothing that we see that would change that. The people are basically replacing kids with dogs. So they're having kids later, they're having fewer kids and dogs become the pet of choice in the households. And that trend has been going on for 20 years. And everything we see suggests that, that trend will continue. So that's -- the first piece of it is basically that there's the long-term trend towards increasing pet adoptions. And the second part of it is we think about it is where do we sit within that. Our household penetration today is against the number, whether it's 60 million or 70 million, it doesn't really matter. We're only in 13.5 million households, and only 5 million of those households are using us to any significant degree. And so the upside for us still remains incredibly large. So it really doesn't matter whether the number 60 million, 65 million, 70 million, 75 million anywhere along that continuum, we still have an enormous untapped opportunity.

Got it. And so mean investors have always had a pretty positive view of the pet sector in general. Remember pre-pandemic, it was always like, hey, this is a steady mid-single-digit growth category, maybe of 1% pet population growth and then kind of 4% kind of spend per pet. There was a little of that was inflation, a little of that was humanization, those types of things. Let's talk about that kind of spend per pet and those trends, what are you guys seeing around pricing and inflation. And then following up on that, let's talk about the humanization trend and how that plays into your brand?

Yes. So the longer-term picture here is that pricing, we did a lot of price increases, to 27% pricing over 18 months. We and the rest of the industry did that. It's now come back to a much more normalized rate. We're not seeing any significant price increases. So all the buying rate gains that we and everybody else got from prices now settled down. And now you've got to earn it based on consumers who are increasingly buying your product or buying higher-value products. Our long-term macro trend on that is if we looked at pre-pandemic, pre-all the inflation, we are growing 2% or 3% a year in buying rate just based on consumers migrating up through the portfolio. And then we have household penetration gains on top of that. . We'd expect on a going-forward basis for us to have more of an increase in consumers moving up through the increasing incidence of using our product. So buying rate gains that would be maybe mid-single digits as we increasingly focus on those consumers who use us as the main meal component. For the rest of the industry, we've seen a little bit of a return to promotional spending, but it's not a heavy promotional spending category. So pricing remains relatively stable in the category. So for most of the rest of the category, they're now much more dependent on their ability to command their fair share or their market share. And for some people, that's going to be some household penetration gains and for some, it's been buying rate, but it's -- they're fighting it out with what we would consider on differentiated products.

Yes. So from an inflation standpoint, after a couple of years, obviously, you have a lot of inflation last year. We actually had a little bit of deflation. We continue to anticipate it will be flattish as we go into '25. I assume that's probably relatively the same for the rest of the category. So we are not making any assumptions that we will be pricing anytime soon. And I don't anticipate you'll see pricing in the market.

Yes. That makes sense. After all these years of inflation, I mean, consumers have always placed a lot of emphasis on value, but it does feel like that maybe that emphasis is even stronger now, maybe more durable because consumers have to just think so much more about how far their dollar is going to go. And so I'm curious what you're seeing in terms of consumer behavior within your assortment that may speak to that desire for more value.

Let me just start with the overall fastest-growing brands in the pet food category are Farmer's Dog and Freshpet and those are amongst the highest priced brands. So it does tell you that the consumer has an increasing desire for higher quality, more premium-priced products. Within our lineup, what we're seeing is we see a little bit of migration between the various items in the forms, but the overall dynamic that we're seeing more than anything else is people moving up into larger sizes. And that's really for value. That's the desire to get the lowest price per pound as opposed to buying less I think that's very consistent with what you'd expect to see in a staples category. When you know you have to buy a category, you have to buy a product in the category, you look for the most efficient way to buy. You go to the most efficient retail outlet. So in our case, it's the Walmarts or the club stores. and you look for the most efficient package size, and that's the dynamic we're seeing. So strongest growth is in the most efficient retailers and the best most price-oriented retailers and then also they're moving into larger package sizes. That's really the biggest dynamic that we're seeing.

Yes. No, that makes sense. We're hearing that from others as well. So pet food, in general, $54 billion roughly category in terms of spend in the U.S., dog food about 70% of that $37 billion. Talk about how that maybe breaks down that traditional dry kibble versus wet versus some of these newer fresh and frozen categories.

Yes. You want to take that or you want...

Yes, take that.

I mean the reality is that the category is dominated by the dry kibble, and that's frankly where we source most of our volume is from the kibble business. The can business, we put out a chart about last summer, I guess, that we showed that if we continue on our trajectory, Freshpet will or the fresh category will surpass the canned category in terms of total market size and become the second largest form in the category. And so -- and we expect that trend to continue over the long term, where people are going to ultimately get to the place where fresh is a very strong, very legitimate form or alternative in the pet food category. And frankly, we source most of our volume from the kibble business. There's a little bit of the people who use the can as a mixture of topper and we replaced that in those occasions, but we're really going for the main meal, which is a lot of the kibble business.

So I mean we are 3% of that category that you mentioned from dog food. Our competitors in the frozen space probably added another 3% or 4%. So you look at total fresh-frozen, you're probably talking 6%, 7% of the total category. And growing very fast. And we think that, over time, will be a significant share.

Yes. Let's talk about the fresh frozen competitors a little bit. I kind of have a view that, yes, they're competitors, but I kind of also feel like you guys and those folks are kind of rowing in the same direction. You basically getting people off of kibble into these better-for-you foods. And as you grow that category base, then you can battle for which brand they use. I mean, how do you view these guys? Do you view them as competitors? Do you view them as they're helping in some way? Sorry, Scott.

No. I'll try. If he wants, so he can chime in. I mean, frankly, we view it just as you described. We view it as right now the amount of money that, for example, Farmer's Dog is spending. We view it as contributing to this overall awareness that there's a better way to feature pet than kibble and can. And the combination of their advertising and our advertising investment, we think, is really doing a nice job building category. And we don't view ourselves as bumping into each other, at least not at this point. We view us as very complementary to each other in building this segment. And frankly, it's what you expect to see at this stage of the category development where old mature ways of doing things are kind of slipping into the rearview mirror and there's a lot of innovation that's happening and people trying to figure out what's going to be the winning model I think that we feel very good that fresh is a winning model. We feel like we've got a really good position on fresh. And there's a lot of people duking it out for the frozen side, whether it's DTC or at retail. Right now, Farmers Dog looks like they've created a pretty strong position on the DTC side. There are a bunch more players on the retail side in frozen. But we think overall, we're helping build the category.