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

So we're going to get started here. Good afternoon, everyone. I'm Eric Serotta from Morgan Stanley's beverages, Tobacco and Household Products team, and I'm very pleased to welcome Freshpet back to our Global Consumer and Retail Conference. Before we begin, please see Morgan Stanley research website at www.morganstanley.com/researchdisclosures for important disclosures. And if you have any questions, you can reach out to your Morgan Stanley sales rep. Freshpet reinvented pet food with a range of real foods and treats made from fresh meats, vegetables and fruit. sold in Freshpet branded refrigerators in grocery, mass, club and pet specialty stores. Joining us today, we have Freshpet's CEO, Billy Cyr. Thanks for joining us.

Great. Thank you. Glad to be here.

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

Yes. It really is an amazing amount of progress, and we're a much better company than we were a couple of years ago. I put it in 3 buckets. I put it in the personnel, I put it in the systems and I put it in the processes. Personnel, obviously, we've built out the team quite a bit in the last couple of years. Not all of it's obvious to the public, but we have a -- we brought on Nicki Baty, who's our Chief Operating Officer. She joined us about 1.5 years ago. We've -- which moved Scott Morris, our Co-Founder, into a more innovation-focused role. We brought on a new General Counsel, a new Head of Quality. Our Head of Manufacturing was elevated to the role that he's in. We've built out a much deeper marketing team with much more digitally savvy capabilities than we had before. Our finance team has been built out quite a bit. So we've got much deeper finance capability than we did before. So from a personnel perspective, we have really done a nice job of adding capabilities where we needed to add capabilities to fill holes and frankly, reflect the company that we've become. From a systems perspective, we've invested very heavily in a bunch of things that have made us more effective. We've built a data analytics team that has now done a phenomenal job of making us much more data-friendly, data-centric on our ability to read and react to the business performances that we've got. We've built out a whole ton of systems in our manufacturing operations that have made us much more effective, particularly focusing on overall equipment effectiveness. So we call it the Freshpet Performance Excellence program, which is designed to improve operating efficiencies. huge capability that we've spent 3 years on, built a team that can deliver that. And the last thing is the processes. We've done a lot to simplify the processes that we're working on and get more focused on the places where we can add capability. I will tell you, though, that at this point in time, we're taking a step back again and saying, okay, you're a $1 billion company. How many things you're doing that are still legacy of what you used to be that aren't necessarily relevant to where you're going and kind of trim down on some of the teams, committees, meetings, roles that you probably don't need any more or that can be done more efficiently. And so I'm expecting to see a catalyst -- that being a catalyst for increased organizational capability and efficiency going forward. It's a big chunk of work for us, but it's something that's needed when you go from $300 million to $1 billion in 5 years, kind of thing -- it's like building a house. We started with a cottage. We added an extra bedroom. We added a sun porch. We added a second kitchen and soon we had a mess. So...

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

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

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

Yes. The slowdown had 2 primary drivers to it. We've now had almost a year to kind of reflect on the data. It was 2 parts. Part number one was people view getting a dog and trading up in their dog food to be more like a capital purchase than it is like buying a consumer packaged goods. In other words, they're committing to an ongoing stream of higher expenses. If the decision is to get a dog, it's, okay, I'm signing up for doggy day care, grooming, vet appointments, feeding the dog, somebody to watch the dog, whatever it ends up being. And so the decision to do that is heavily shaped by my perception of my ability to cover those expenses over a long period of time, much like when you sign a new lease or you decide to buy a new car and absorb car payments. And so it's not just, oh, can I afford this particular purchase at this moment in time, it's a longer-term commitment. And with the uncertainty that consumers had this year, they were pausing on that. They weren't as willing to replace a dog who passed away or to get that first dog. They paused. And we saw that in the consumer sentiment data. We saw that in the category data. That's not unlike what happened back in the Great Recession, where consumers suddenly were concerned about their ability to meet their obligations going forward. And as a result, they paused on getting a dog. It doesn't mean their desire went away. In fact, it's now this enormous amount of pent-up demand that at some point will be unleashed when the consumer has some confidence that they can meet their obligations going forward. That was the first part. The second part is consumers stop trading up. And this category has benefited for a very long period of time from about 3 to 5 points of trade-up or growth from trade-up that happen every year. So moving from lower cost kibble and can to higher-cost kibble and can to some form of DTC or fresh products like ours. The trade-up stopped this year, completely stopped. It wasn't trade down. We don't see a lot of evidence of anybody trading down. What we see is people just paused and said, am I really ready to absorb this higher cost of living? Or should I just take a pause and wait now. And so the trading up isn't happening at the rate it normally does. And if you think of the category has 3 to 5 points of trade-up in it, that's a meaningful part of our growth. That's a meaningful part of the Farmers Dog or Hill's. In fact, it's more than 3 to 5 points for us because we are the beneficiaries of that and all the lower-priced stuff is the contributors to that. And so that dual phenomenon of no trade-up and people pausing on getting dogs is really what hit us. The irony is the flip side is cats are growing like at a very rapid rate. We're seeing 5% or 6% growth in cats because they're viewed as lower maintenance, lower cost, less of a commitment. And it kind of matches up perfectly with I want a pet, but I'm not really sure I can afford it. I'm not sure if I'm going to have a job. I'm not sure if I can take care of it. Cat is a low-cost way to get into that space.

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

Yes. So let me start down on the P&L. Obviously, we have to control our organization size to live with the growth rate that we've got. But more importantly, in the gross margin, we -- as I said earlier, we have so much momentum and made so much progress on that side. Anything we can do that can help us accelerate the growth of our gross margin gives us the ammunition or the fuel that we can invest back in the business to drive growth. When it gets to the top line side of it, what we found is that we've had to adapt to the environment. The environment of today is one where value is very important. And so we've had to change our message to match that. We used to be focused on the relationship you have with your pet, and that's a very important part of the story. But we had to explain to people why Fresh is better, why Fresh justifies the price that we're charging for it so that you would feel like I was buying a good -- getting a good value when I bought the product. We had to change the media buying to reflect the fact that there are some consumers today who are in the market and willing to trade up or buy a higher-quality dog food. And there are some people who just -- that's not within reach. And so don't spend a lot of time talking to those folks, spend more time talking to the folks who have the money. The same thing is true about retail is when you think about where you're going to invest in terms of your energy and your fridges and whatnot is focusing on those places where the foot traffic is very high. Walmart, Costco, places like that where the foot traffic is gaining just because that's where the most value-conscious consumers go. All those are within our decision space. All those are within our control. And I actually, I should add to that innovation, do the right kind of innovation that meets the consumers' value needs in a very difficult environment, and we've done that. We've launched complete nutrition this year. We did some work on our pricing on our 1-pound chicken roll to just make sure it was priced in the right place. But we want to be in the place with the right places, the right products, the right prices to meet the consumers' needs. And we think that we've done that. We'll see.

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

Yes. First, all of our data, even in this difficult environment continues to show that the desire to treat your pet as a member of your family is an incredibly important part of contributor to your family and also to have the best food and the definition of the best food is evolving in the current environment to things that look more like Freshpet and away from things that look like kibble and can. Those long-term trends that have been driving our growth and driving this category have not abated. No matter what's happened from a macro perspective, it's just caused people to take a pause. But the long-term demand is still there for people to get dogs and treat them like a member of their family and feed them the highest quality food. When we think about the TAM today, we're increasingly focused on the, call it, 7.5 million people who we see having the potential to be the MVPs. Today, we're only in 2.3 million of those households. If you look at the broader market, the 33 million households that we talk about that are part of our addressable market, we're only in 14.9 million of those households today. We have a long runway there, but the real focus is going to be on those MVPs and driving that 2.3 million number up to 3 million, 4 million, 5 million households because we'll make sizable gains with that. And we don't see any reason to believe that the current environment has changed that long-term potential.

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

Let me put the value. The language that we use is we talk about affordability, and we put it against the context of also convenience and superiority. We need the consumer to look at the basket of things that we deliver. They have to perceive the experience, the diet and the experience that Freshpet creates as being superior. They have to see us being convenient, meaning I can find it in the places that I want, shopping experience is a good one. And then within that context, it has to be an affordable product. And we are focused quite a bit on maintaining what we would consider to be a good price for our products without necessarily doing discounting or promotion because we think that drives bad behavior for our business and it certainly drives inefficiencies in our ability to supply our consumers on a reliable basis. We are always mindful, though, that we've got to be in the place where the consumer is willing to shop and have products at the right prices. We did this year, we launched the complete nutrition bag product, similar to what we did 2 years ago when we launched the complete nutrition roll. It is designed to be very specific and very targeted as an entry point price point item that will move the consumer up through the franchise over time. It's not intended to be a high-volume item. It's more of a gateway item for us. And then we've also did some price adjustments on our 1-pound chicken roll to get consumers to kind of ladder in similar to what we did a couple of years ago. And we saw a nice effect of consumers saying, it's worth considering or trying this, very small part of the total volume, but it moved consumers into the consumer franchise. And we will continually do that. But we're also looking for ways we can use formulation, changing formulations to get to more affordable products to get the right sizes to the right consumers that are most affordable. We're looking at some things that might give you some opportunities if you would just want to be a mixer or a topper that we can give you a mix or topper opportunity that's perfectly tailored for that experience.

And then complete nutrition bags are in, what, 2,000 or so stores?

Something like that, yes.

Is there a plan to take that wider.

We'll see how it goes. So far, it's largely a grocery item and it's serving its purpose in grocery. We'll see. The thing that's always tough that people have to recognize about our business is we own a fridge in a store. And you can't go and say, let's just add one more SKU, but outside of the fridge. It's got to displace something in the fridge that we have. And so it has to sell at a higher rate than the thing it's going to displace or be more incremental than the item that is displacing. And that's a pretty high bar in many retail outlets. If you go to a Walmart, for example, where we have a large fridge of our own and then we have 2 shelves in the Walmart-owned fridge, the reality is each of those items sells at an incredibly high rate, and you wouldn't want to put a complete nutrition bag in there unless you knew that it was going to sell at a much higher rate than the thing it was displacing. So the bar is pretty high in our context unless the retailer is going to put another fridge in, in which case, the door opens to a lot of other possibilities.

In terms of other growth areas in the past, you've spoken a lot more about a focus on second and third doors. You've -- what is it now, 30% of the stores?

24% of the stores have a second or third fridge in.

Yes. Talk about -- is that -- how much of a focus is that for -- obviously, you're not going to get 100% or fully close that 70%. Also talked about large dogs as an opportunity also talked about complete meals versus toppers. So I realize 3 very different initiatives that you've spoken about previously. And on top of that, you have the island fridges that you're testing. So of those, which are still focuses, which are we come back a year from now, which do you think is the most potential to kind of.

They're all sort of interconnected because expanding the fridge footprint is what enables all that innovation that you just described. And when we have conversations with our retailers, the conversation always starts with who is it that you're trying to appeal to? What is the size of the audience that's shopping in your stores? What items do we need to service that group of consumers? And do you have the right assortment today to meet that need? And is this your strategic objective is to broaden the appeal. And then we go through and identify which of the items in our lineup will meet that need. You have the shopper profile that you've got is if you're in an urban environment where there might be people with a lot of small dogs, okay, do you have the right assortment of our small dog fronts? We have a small dog, a small dog beef product. Do you have the right combination of those items? If you are a retailer who is -- services consumers who buy in large quantities, do you have products for large dogs? Do you have products in our 6-pound rolls? Do you have the 6-pound roll, do you also have the beef roll? Do you have the right-size items? And it really -- for us, innovation is designed to expand the appeal of the total franchise. It is not intended to just take up shelf space. Shelf space is incredibly important to us. It is finite, and we want to get maximum productivity and maximum number of households. So if it's smart for the retailer, add a second fridge and second and third fridges are a big part of our growth program, it comes with incremental SKUs. We also have a push to -- we work our innovation team to try to come up with items that would be so unique, so interesting that it tips a retailer from going, okay, I can -- I now see why I need a second fridge because I can't put that item in the first fridge. Call that fridge bait.

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

Yes, it has. First of all, we expected this day to come for a long time. Frankly, it came later than we expected. We expected to see a large number of people wake up and realize that Fresh was the future of the pet food category. So we spent the better part of the last decade thinking through every move we've made in terms of how well will this protect us when others decide to enter this space. And if you look at some of the choices that we've made, we focus on building an incredibly loyal consumer franchise. And by that, I mean, we built a franchise not based on price. We built a franchise that was based on the quality of the product, the advertising that we ran and the brand equity that we were able to build. We built a franchise that was built on a diverse array of products, meaning products that meet a wide range of needs and get the scale that allowed us to enable that. So that was part of what we invested in. We built a broad retail footprint that allows us to service a wide range of customers as many places as we can and have the velocity in each of those stores so that it justifies the space that we're holding. We decided to invest in manufacturing technology and capability to enable scale, which lowers the cost in both manufacturing and distribution, but also the expertise that allows us to produce higher-quality products with a long enough shelf life that could survive a refrigerated distribution system and produce a high-quality experience for the consumer. And then more recently, invested in manufacturing technology that we're quite proud of that allows us to get to the lowest possible cost on the highest quality product that's out there in the bag world or will be out there in the bag world. And so when we sit there and look at the choices that we made, we feel really good. If you look at the success that the people have come up against us have had at the retail environment, so far, nothing has come up that looks like it's a significant threat to the position that we've built. But as you said, it's very early. So we'll have to see how things unfold. But nothing has surprised us, and we feel very good about the investments we've made, the position that we put ourselves in. But we're going to be vigilant. We do not want to sit on our hands and wait for things. We're going to kind of keep leaning into the advantages that we've had. But the advantages that we've got today and the things that we're continuing to invest in and build going forward, I believe, put us in a very, very attractive position relative to all the other people trying to enter the space. And it's going to be a combination of the brand we built, the franchise, the consumer franchise we have, the refridge system, and it's not just the number of fridges, it's the mastery of maintaining the fridge network. The manufacturing scale we have and the manufacturing technology that we're pioneering. All that together is going to provide an enormous insulation for our business.

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

Yes. So 3 years ago, a couple of important things happened in our business. One is, we brought in some outside consultants, folks -- many people know Millican. They know Millican as a flooring company, but Millican also as a consulting arm because they're so good at operational efficiency brought them in and jump started an operational efficiency program for our team that we call Freshpet Performance Excellence, and focused on overall equipment effectiveness, OEE. And we've made enormous progress on that. So when I look going forward from this point where the margins are where they are, the gross margins are where they are going forward, that will be the single biggest driver for the next year or 2 of our gross margin performance is the progress that we've made, the momentum we've had, the demonstrated performance that I can see every day in our operations gives us a high degree of confidence in the gross margin targets that we've set. I feel really good about it, and I watch it, I see it every day. That's an important part of it. We've also, in that 3-year ago window, we set focus on input cost, quality and logistics as drivers of improvement. And we exceeded our expectations. Our logistics cost peaked at 11.5% of sales, they're down to 5.5 kind of percent of sales. We've built a really strong team in logistics. They've done an amazingly good job. We have a really sophisticated logistics system that we're building out. We feel very good about that. Our quality costs peaked at over 6% of sales. They're down around 2% of sales today. The upside there is probably not particularly high, but the team that we built and the technologies we've invested in and the organizational capability that we've built in that organization, is really remarkable and there's still improvement opportunities there. The last is input cost. Input costs is oftentimes perceived as just buying and formulation, negotiating. In our case, the biggest driver is yield improvement. We bring in 100 pounds of ingredients and some number of pounds are left on the production floor and don't go out in a finished product bag or role. As we drive our yields up, it lowers our input costs. And we've made tremendous progress there as part of our OEU program, and that's -- and I expect to see continued improvement there, particularly with the new technology. So if you put it together, 3 years ago, we focused on OEE, and we focus on input cost, logistics and quality made huge progress. To that, I add the last piece, which is what you refer to as the technology. The technology is, I mean, we've been working on it for 7 years. We've got it. We feel really good about what we've done. We'll be able to start shipping that product next month. And when we do, I think people will be impressed by the quality of the product, and we'll be in a position where our bag products will be by far the best bag products you can buy and at the lowest cost. It's a really remarkable achievement.

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

You can put anything you want on that question because this is 1 of my favorite topics. So think of it as we've now been in the commissioning phase on the new technology for about 9 weeks. And we have not seen anything that has limited our confidence or enthusiasm for it. In fact, we're more bullish today than we were 9 weeks ago because we've overcome the usual startup hurdles that you would encounter. And the product that's coming off the line is just remarkable. So we will start shipping product next month. We were producing now a product that we would consider saleable or will be considered salable once all the final testing is done. So we feel very good about the startup progress. To your question about what are the milestones. So I think the 4 milestones that we have to get ourselves through to we say, got it, done, ready to expand. Number 1 is, what is the quality of the product coming offline. We expect this to be a higher-quality product than what we are able to produce in our existing lines. I will tell you our confidence that it's very high because we're seeing that already. We're already producing product on the line that we look at and go, this is really good. Second is, is its innovation capability, what we thought, meaning its ability to produce different products than what our current systems can produce that are incredibly appealing to consumers. I can tell you with confidence that we've already checked that box, too. We started producing items on that line that we don't produce anywhere else, and they look really, really good. And we've demonstrated the ability to do an even wider range than what we've already tested. Those are 2 boxes I say, yes, got it done, know it. The next 2 that are going to take time. One is, can you drive the yields up because the economics on this are driven by demonstrating improved yields. We're pretty confident that, that's going to happen. We're already seeing some of that come through in the operations. But it's really hard to prove that when you're starting up and shutting down as you're doing validations just because you lose stuff at the start and the finish of every run or if a piece of equipment isn't doing what you want, you deliberately stop, you find out that you have to throw more stuff away. So it's hard to get really good data on yields. But when we've done long runs as part of this qualifying, we're seeing yield improvement. The question is going to be under operating circumstances that you normally would do for long periods of time, like weeks and months, do you get that benefit. And then the second part is going to be -- the other part of this is going to be on the throughput. A big part of the economics is going to be to get the throughput gains that you're expecting, more pounds of finished product per hour, per labor hour per day and we are proving that we have the potential to do that, but that's another 1 that you have to run the line for some amount of time. I would expect that we'll be in a better position to make that assessment in a couple of months because we'll have a couple of months of operations under our belt, and we'll be able to decide are we ready to commit to that for a future line. Full stop. The light version of technology, we continue to do pilot runs on it, very bullish. The technology seems to be demonstrating what we think it will do in the pilot runs. The first full-scale line isn't going to operate until the second quarter of this year. But the beauty of that is once it does, we can then retrofit lines more quickly. We have the potential to retrofit a second line this year, and we could do more lines next year or in this year, I mean '26 more lines in '27. Everything we see from those validating runs is that it's going to deliver what we wanted to deliver. But again, we need to see it in operation to confirm it. But we've been working on this for 7 years, like we think we figured something out. It's pretty cool.

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

So first of all, we said on the third quarter earnings call that our CapEx next year would be roughly in line with what we're spending this year with the caveat being if we had a more rapid expansion of fridge islands that could be incremental. And if we had a decision to accelerate the new production technology, that could be incremental, frankly, either of those as a winning scenario, 1 drives significant net revenue gains. The other 1 drives significant operating improvement. So I kind of look at it and go, yes, we'd spend more capital, but we'd all be very happy about it. The capital that we are expecting to spend, a lot of people are asking me this question, why are you still spending about the same rate if you have enough capacity today to meet the demand? The way to think about our business is, as you add capacity, it takes about 90 days to add staffing if you've got a line. It takes about a year to add a line, if you need to add a line to an existing building. If you need to add a building, it takes about 2 years to do the building and then put the line in. If you want to build a new site, it takes 3 years. So the money that we're going to be spending in '26 is designed, in this case, to finish off a building in Texas that we need at the end of '27 or the beginning of '28. And then in '27, we'll be spending -- we'll start spending money on a building in Ennis, the expansion of the building in Ennis, that we'll need for '29 and '30. So it's just the natural cadence as we flow through. So good news is next year, we think with the installed capacity, the operating efficiency improvements that we've got, we might be able to meet next year's demand without adding staffing. In '27, we'll add staffing to keep up with the demand. In '28, we'll bring on probably 2 new lines in the building finishing off that we're doing in NS today. And in '29 and beyond, we'll put another -- we'll have another building on the Ennis site ready to go.

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

We think its 35% to 40%.

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

We're going where our shoppers are going. So as our shoppers are indicating a preference for where they want to buy our product, we're trying to build the easiest path to purchase for them, the marketing tools that pull them along that path to purchase and delivering a really good execution against whatever that outlet is. As you said, we grew 45% on our e-commerce business, our digital ordering business in Q3. And I see that continuing to grow at an outsized rate. The number of new opportunities for the consumer to buy our product continues to expand. This year, we added DTC. We're now seeing with Walmart and Amazon doing the same-day delivery on fresh groceries. That opens up a whole another range of possibilities for us, that we're really excited about, and we think that can help us a bit. But that doesn't mean you don't have room in Chewy or in the existing Amazon Fresh business that we're doing. It doesn't mean that our Instacart business or our curbside pickup business is slowing down at all. In fact, we're seeing very strong growth on all of those. In part, that's because of the way we're choosing to invest our money, reaching after the most important consumers, the consumers have the highest likelihood of buying our brand and many of them tend to be very digitally savvy consumers for whom that's the way they want to discover a brand. That's the way they want to shop for a brand. That's the way they want to have the product delivered to them. And so we're going where our consumer is going and putting resources and expertise to get that.

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

Yes. It's going to be interesting because there's another -- I put a C in your list. The C would be as we increasingly skew our business towards the MVPs, they might cost more to get, but they're worth a lot more. And so you'll see your CAC go up, but the value -- the lifetime value of our customers is going up quite a bit. As we watch it, clearly, this is not -- the results that we've seen this year on the customer acquisition cost have not been what we had originally expected or what we want. It's still an investable number. It's just not the quality of the number that we've historically seen. We'd expect to see that improve as we sharpen our message and do a much better job on the media delivery that media in the places where consumers who have money, who are interested in considering an upgrade to their dog food. Placing the media in those outlets. If we do that well, we'd expect to see some efficiency improvements. We'd also expect to see an increasing skew towards those MVPs, which will go the other way on the customer acquisition cost but drive up the lifetime value. So it's going to be a mix of the 2. But at the end of the day, we're very focused and we watch this every week. We look at what are the returns we're getting, are we getting the right kind of consumers in the franchise and if we are keep doubling down on the things that are working.

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

So in September, October, right?

September, October.

I love that you think in terms of baseball. So...

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

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

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

Yes. I think there's a reframing that had to happen in the past year. I'd start with -- at the top, we are in a very attractive category with a large and growing TAM. And I think people might have questioned that in this year. But if you really look at the attitudinal data, the behavioral data that we're seeing, nothing discourages us from believing that's the case and that this year is a blip. It's an economic blip that we're seeing, but there's a very large and growing TAM. That's a #1 most import thing. Second is, we are the winning proposition in this space. We are growing households now faster than everybody else is. We're growing market share faster than everybody else in the space. So while the category itself is depressed, we're outperforming the category by a very large margin on a market share basis, on a household penetration basis on the ability to attract new users. We're attracting them at a disproportionate rate to what our market share is. So we're the winning proposition. So when this category gets a little bit of a tailwind again, we are the winning proposition in a winning category. And the third part is we are continually driving towards improved returns on invested capital. We got the message loud and clear a couple of years ago, we need to really focus on that. We are focused on that, the new technology I described, the operating effectiveness program that I described, all are designed to return significant improvements in invested capital, and as a result of that, we became free cash flow positive this year. And I can't say enough about what an achievement is. We spent $1.3 billion in capital over 10 years. We've built a fortress. We built a heck of a business that is incredibly well insulated, and it's now generating the kinds of returns that people would expect to see.

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

Thank you. Good seeing you.