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Presentation

Freshpet, Inc. misses on earnings expectations. Reported EPS is $0.04 EPS, expectations were $0.2482.

Operator: Greetings, and welcome to the Freshpet First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Rachel Ulsh, Vice President, Investor Relations and Corporate Communications. Thank you. You may begin.

Rachel Perkins-Ulsh: Good morning, and welcome to Freshpet’s First Quarter 2026 Earnings Call and Webcast. On today’s call are Billy Cyr, Chief Executive Officer; and John O’Connor, Chief Financial Officer. Nicki Baty, Chief Operating Officer, will also be available for Q&A. Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements related to our strategies to reaccelerate growth, progress and opportunities and capital efficiencies, timing and impact of new technology, capital spending, adequacy of capacity, expectations to be free cash flow positive, 2026 guidance and 2027 targets.

They involve risks and uncertainties that could cause actual results to differ materially from any forward-looking statements made today, including those associated with these statements and those discussed in our earnings press release and our most recent filings with the SEC, including our 2025 annual report on Form 10-K, which are all available on our website. Please note that on today’s call, management will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Please refer to today’s press release for how management defines such non-GAAP measures, why management believes such non-GAAP measures are useful, a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and limitations associated with such non-GAAP measures. Finally, the company has produced a presentation that contains many of the key metrics that will be discussed on this call. That presentation can be found on the company’s investor website. Management’s commentary will not specifically walk through the presentation on the call, rather, it is a summary of the results and guidance they will discuss today. With that, I’d like to turn the call over to Billy Cyr, Chief Executive Officer.

William Cyr: Thank you, Rachel, and good morning, everyone. The message I would like you to take away from today’s call is that we are off to a strong start to the year and are well positioned to continue to capture a very large share of the growing market for fresh pet food. This strong start and our success are built on manufacturing scale and expertise that deliver a broad lineup of exceptional products, our extensive fridge network across a wide array of channels that increasingly serves our rapidly growing e-commerce business and our first-mover advantage that has enabled us to build a large and diverse consumer franchise. We’ve built a business around a wide range of product forms, sizes, prices and channels and with a level of quality that no single competitor can match.

It is those strengths that position us to lead the transformation of the pet food category from kibble and can to fresh. Our first quarter net sales growth was ahead of our guidance range for the year, and we believe demonstrates our ability to successfully adapt our growth plans to the dynamic environment in which we are operating. Since last reporting earnings in February, however, the macro environment has been increasingly volatile. So while we are encouraged by the trends we see, we also want to remain prudent. Year-to-date, the consumer’s remained remarkably resilient, but we are keeping a watchful eye on potential shifts in consumer buying habits, particularly as it relates to their willingness to trade up and are balancing these risks against the strength we have seen to start the year.

As such, we are modestly increasing our sales guidance for 2026. As we look at the business holistically, the fundamentals remain firmly intact. We compete in the large category. We are making consistent share gains and are improving margins and new technologies are increasing our returns on capital. Together, this creates a compelling backdrop and a long runway for value creation. Against that backdrop, there are 3 core reasons we remain confident in our long-term growth opportunity. First, pet food is a very attractive category, with long-term tailwinds like the humanization of pets, treating our pets as valuable family members and younger generations are increasingly interested in feeding high-quality food to every member of their family, including their pets.

The phenomenon of feeding your children and pets better food is a generational shift, and that suggests we have a very long runway for growth. As a result, our total addressable market has grown to 36 million households versus the 16.1 million we have today, and we expect both the addressable market and our household penetration to keep growing. Second, consumers are increasingly choosing fresh and frozen over dry and canned food. So we have the winning proposition in a winning category. We’ve increased our market share to 4.2% in U.S. dog food and treats according to Nielsen omnichannel data and expect to capture a large portion of the future growth of the fresh/frozen category as it continues to become more mainstream. Third, we are focused on improving returns on capital investments as we progress from being a category disruptor to a high-growth, profitable scaled business.

Our operational effectiveness programs plus the new technologies we are developing are designed to improve returns. And to continue to drive capital efficiency, we intend to: one, get more out of existing lines, primarily through OEE improvements; two, get more out of existing sites, whether that be finding ways to optimize our network or add more lines to our existing campuses; and three, develop and implement new technologies. We are quite encouraged by the progress we are making on each piece of that plan. We have discussed over the last few quarters how we are shifting our commercial model by changing the media mix and message, making tactical pricing changes and evolving into an omnichannel distribution model. Our goal is to address the needs of a broad consumer base, and we want to give them the Freshpet products they want, how they want them, when they want them and where they want them.

We have built significant organization capability to accomplish that. And in conjunction with our network of more than 39,000 fridges that service fulfillment centers, we believe that Freshpet is uniquely positioned to serve the widest range of consumers seeking Freshpet food and the most diverse ways in which they buy. As we make these changes, there will be learnings along the way, but the key will be how we pivot to capture that opportunity. As you know, our marketing model is based on strong advertising driving household growth and more households helps drive further distribution growth. Our recent shift in both our advertising message and our media mix to support our omnichannel business appears to be working, and we are seeing some early signs of increasing media leverage.

Our fall campaigns continue to resonate with consumers, and we just launched a new campaign this week called “Kitchen Conversations.” Our new tagline of “Better Food for your better half” deepens our connection and relationship with our core audience and our ads showcase the difference that fresh products made. From a household penetration and buy rate standpoint, we continue to see household penetration growth in excess of all other super premium dog food brands, including DTC brands, and MVP growth continues to outpace total households. On a 12-month basis, as of March 29, 2026, household penetration was 16.1 million households, up 8% year-over-year, and total buy rate was approximately $114, up 6% year-over-year. MVPs, our super heavy and ultra heavy users are continuing to grow faster than overall households and now total 2.5 million households, up 13% year-over-year and have an average buy rate of $513.

Note that Numerator recently completed its annual panel reset in April. So there have been some revisions to the absolute numbers in the historical data, but the overall trends remain the same. Growth continues to be strongest amongst higher income households and millennials amongst club and online shoppers and amongst our heaviest users, Ultra buyers. We do not see any signs of trade down amongst our users. From a retail standpoint, our objective is to improve accessibility and visibility for the omnichannel consumer. Our products are now in 30,435 stores and 25% of those stores in the U.S. and Canada have multiple fridges. You can see on the updated chart on Slide 13 of our investor presentation that we are adding fridges faster than new stores, and we expect that trend to continue.

We will still add new stores such as Tractor Supply’s recently announced expansion to up to 700 stores by year-end, but have more opportunity to add more fridges in a variety of formats and configurations in the highest velocity stores we are already in so that we can serve more omnichannel consumers. Our large retail footprint acts as micro fulfillment centers for omnichannel consumers and is a key piece of fulfilling digital orders. In the first quarter, digital orders grew 43% and accounted for 16.1% of our total business, up from 14.6% in the fourth quarter and 81% of those sales volume went through our extensive fridge network. According to Nielsen omnichannel data, Freshpet was the fastest-growing brand over the 13 weeks ending March 28, 2026, demonstrating the power of our marketing model and the broad availability of Freshpet design to meet a wide range of consumers’ buying preferences.

Our scale advantages extend to our manufacturing as well. Because we own our manufacturing, we have the incentive and the ability to advance the technology for making Freshpet food. We believe our new breakthrough technology enables an even stronger product proposition with both a better consumer experience and better unit economics. As we mentioned last quarter, the first bag line in Bethlehem, utilizing the new technology started up in January. That line continues to perform well, and our first lite version of the technology was successfully installed on another bag line in Bethlehem last month. We are very encouraged by the potential to significantly improve quality, throughput and yield, but we want to run each of these lines for several months before we quantify the magnitude of the benefits.

However, the results to date supported our decision to convert a bag line in Ennis to the lite version of the technology as well. That conversion is expected to be completed by late June or early July and will allow us to convert a larger portion of our existing product lineup to the new technology this year. By the end of the year, we expect to have about 35% of our bag capacity using some version of the new technology. The capital for this expansion is modest and does not change our CapEx guidance for the year. In the coming months, we will decide whether to convert an additional bag line, i.e., a third line converted to the lite version of the new technology and also whether we will pull forward the installation of a completely new line using the full version of the technology.

That incremental line using the full version of the new technology would add significant capacity to our network sooner than we might need it, and that will factor in our decision-making. If we do move forward with either project, any capital spending for those projects would be above our original $150 million capital budget. We believe the development of this technology demonstrates our technical mastery as a self-manufactured leader in fresh pet food. Maintaining control of our manufacturing also opens up opportunities to further advance the technology. Now I’ll provide some highlights from the first quarter. First quarter net sales were $297.6 million, up 13.1% year-over-year, primarily driven by volume. Recall in Q1 of fiscal year ’25, we had distributor disruption in the pet specialty channel.

Lapping that disruption added 50 to 100 basis points to our growth rate in Q1 of this year. Adjusted gross margin in the first quarter was 46.9% compared to 45.7% in the prior year period. Adjusted EBITDA in the first quarter was $37.9 million, up $2.4 million year-over-year. Now turning to our updated 2026 guidance. We are raising our net sales guidance range from 7% to 10% growth to 8% to 11% growth year-over-year and reiterating our adjusted EBITDA guidance of $205 million to $215 million. We are encouraged by recent sales trends and believe raising net sales guidance is prudent based on year-to-date trends. However, we are balancing the dynamic environment we are operating in. So we are monitoring our costs closely, particularly on logistics, packaging and any additional ripple effects on input costs.

We continue to expect capital expenditures to be approximately $150 million this year, absent any incremental investments, and we expect to be free cash flow positive in 2026. John will walk through more details of our 2026 guidance in a few minutes. With that, I’ll turn it over to John to walk through more details of our financial results.

John O?Connor: Thank you, Billy, and good morning, everyone. The first quarter results demonstrated our ability to deliver category-leading growth despite a challenged consumer environment. Net sales in the quarter were $297.6 million, up 13.1% year-over-year. Volume contributed 14.6% growth, partially offset by unfavorable price/mix of 1.5%, which was primarily driven by gross to net items, which include an unfavorable prior year comp and current year items we do not expect to recur in the rest of the year. We also saw the effect of targeted price reductions, some of which began last year, and we will begin to lap in Q4. We had broad-based consumption growth across channels. For Nielsen-measured dollars, we saw 13.5% growth in total U.S. Pet Retail Plus with Costco.

First quarter adjusted gross margin was 46.9% compared to 45.7% in the prior year period. The 120 basis point increase was driven by improved leverage on planned expenses and lower input costs. First quarter adjusted SG&A was 34.2% of net sales compared to 32.2% in the prior year period. This increase was primarily due to higher variable compensation in the quarter, increased media as a percentage of sales due to timing and increases in our logistics costs. Media spending was 15.8% of net sales in the quarter, up from 15.1% in the prior year period, mainly due to a planned shift in cadence of spend that brought more spending into the first quarter. Logistics costs were 6.3% of net sales in the quarter compared to 5.8% a year ago. The increase was partly due to storm-related costs, including driver shortages as well as recent fuel cost increases, which we began to experience in March.

First quarter net income was $48.5 million compared to a net loss of $12.7 million in the prior year period. The increase in net income was primarily due to the sale of our equity investment in Ollie, contributions from higher sales and lower nonrecurring SG&A charges, partially offset by the increase in income tax expense related to the gain on the Ollie sale. First quarter adjusted EBITDA was $37.9 million compared to $35.5 million a year ago, an increase of approximately 7%. This growth was primarily driven by higher sales and gross profit, partially offset by higher adjusted SG&A expenses. Adjusted EBITDA margin was 12.7% in the first quarter compared to 13.5% in the prior year period. This decrease was primarily driven by the higher G&A, cadence of media investments and higher logistics costs in the quarter.

Operating cash flow in the quarter was $40.3 million, while capital spending was $27.6 million. We ended the quarter with cash on hand of $381.4 million, including $95.5 million in proceeds from the sale of Ollie and generated free cash flow of $12.7 million. Now turning to guidance for 2026. As Billy mentioned earlier, we now expect net sales growth of 8% to 11% compared to 7% to 10% previously. We are pleased with our results for the quarter and are optimistic about growth opportunities for the year. However, we continue to balance the recent acceleration in our net sales growth against the volatile macro environment and its ability to affect the consumer. Going back to last year, we have taken steps to position ourselves to continue expanding the fresh dog food category amid a slower consumer backdrop with improved entry price point offerings, and we’ll continue to make balanced investments in both improved affordability for the consumer and profitability for Freshpet.

As a reminder, — we have easier comps through May and then a tougher comp in Q3 from the significant expansion in a large club customer in the year ago, including pipeline fill. We continue to expect to grow market share as we benefit from a generational shift from dry and wet food to fresh. We continue to expect adjusted EBITDA in the range of $205 million to $215 million, an increase of 5% to 10% year-over-year. Adjusted EBITDA dollars and margin should improve sequentially for the remainder of the year. Media as a percent of sales for the year is still expected to be roughly in line with 2025 at approximately 12.5% of net sales and will be front half weighted in dollars. We now expect elevated logistics costs for the remainder of the year given increased fuel costs.

As I said on the last earnings call, 2026 is not necessarily indicative of the underlying operating leverage in our model. We reset variable compensation this year and have made significant investments in omnichannel capabilities. Beyond 2026, we expect adjusted EBITDA growth to exceed net sales growth with an expectation of continued gross margin expansion and a more consistent variable compensation expense. We anticipate adjusted gross margin to improve by approximately 50 to 100 basis points at the midpoint of our net sales range, primarily driven by plant leverage, partially offset by mix. Should our current revenue trends continue, it is possible we will need to add staffing in our manufacturing operations, although this is not currently contemplated in our guidance.

Within our guidance range for net sales, we expect to drive OEE improvements to deliver the volume growth embedded in the range. From an inflation standpoint, we are carefully watching for any changes. To address any higher input costs, we are evaluating opportunities to offset through product formulations and targeted pricing actions. Capital expenditures are projected to be approximately $150 million in 2026, excluding any significant incremental investments in fridge islands or expediting the rollout of our new technology. These are 2 distinct investment decisions. Conversations with retailers about fridge island expansion are ongoing, and we expect to make a decision on whether to accelerate the new manufacturing technology in the middle of the year.

While it’s still early and we need to run the new lines for longer to demonstrate consistent efficiency gains, we are encouraged by the initial results. Regarding our fiscal year 2027 targets, we are confident in our ability to deliver net sales growth well in excess of the U.S. dog food category growth, achieve at least 48% adjusted gross margin and deliver an adjusted EBITDA margin in the range of 20% to 22%. And we believe we have a variety of paths to achieve our 2027 margin targets. Since joining in February, a key focus of mine has been assessing our capital allocation strategy given the strong and evolving nature of our financial position. Freshpet operates in a very attractive and growing category and has built strong competitive advantages that support durable market share gains and revenue growth.

With this backdrop, investing internally in the business is far and away our highest priority for capital deployment. These investments include expanding manufacturing capacity in a fast-growing space where we lead, developing novel production methods that enhance product quality, reduce cost to produce and improve returns on capital, new recipes that broaden our offerings and enhance our appeal to pet owners and enhancements to our commercial model to expand distribution, access new channels and reach consumers in a more targeted way. As we pursue these investments, we desire to retain a high degree of financial flexibility to invest in new technologies, capabilities or accelerate our growth. To the extent we are able to cover all of these investment opportunities through internal cash generation, we would then evaluate the opportunity to improve our capital efficiency by returning cash to shareholders in a manner that does not compromise our ability to fund our long-term growth drivers.

To summarize, we are pleased with our first quarter results, but remain conscious of developments in the macro environment since we initially set our guidance for 2026. In light of this, we remain cautiously optimistic with our outlook for the remainder of the year. I firmly believe we have a long runway for growth, and we’ll continue to build on our competitive advantages as the scaled leader in the fresh/frozen pet food category. That concludes our overview. We will now be glad to answer your questions. As a reminder, we ask that you please focus your questions on the quarter, guidance and the company’s operations. Operator?

Operator: [Operator Instructions] Our first question comes from the line of Peter Benedict with Baird.

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Peter Benedict: First, just maybe talk a little bit more about the competitive environment and how your performance is trending in stores where you’ve seen some new competition enter the market and maybe how that’s influencing your plans for innovation or new product rollout? That’s my first question.

William Cyr: Yes. Yes, so as we look at the competition, obviously, we’re seeing a wide range of people trying to compete with us in a variety of different channels. And I’ll let others speak for their own performance. But what I can tell you is you should look at us and think about us as having a very broad lineup of products in a wide range of channels at a variety of price points — and that breadth of our portfolio and the distribution we have has insulated us very, very well from all these new competitive entrants because the vast majority of these folks are competing in a very narrow product lineup and a very limited number of distribution points or different distribution channels. And so as you look at our results, we’re able to perform quite well because of the breadth and depth of our portfolio regardless of who these competitors are, what channels they might be in.

Peter Benedict: Okay. And then I guess one follow-up. You mentioned in the remarks some signs of media leverage on some of the new programs. Maybe you could expand on that. What exactly are you seeing on that front?

William Cyr: I’ll let Nicki take that one.

Nicola Baty: So as you know, we very much focus on advertising as being a big strategic choice for our investment. We don’t discount, so we don’t have any investment going through in promotions. We’ve made some really big shifts with media, especially when you look at the results over the last 13 weeks where we’ve seen an acceleration versus the last 26. We’ve changed our messaging. So we put the new creative on air, and we’ve seen our CAC coming down, which has been great news. We’ve seen improvements in our ROAS. So return on advertised spend has really gone up across a number of areas. And what we’re particularly encouraged about is we’re getting higher growth coming through from millennials and also MVPs. So we’re seeing some really encouraging signs coming through from media. We elevated media spend in Q1 as we’d always intended to do, and we feel really good about the results that we’re seeing as we now go through the year.

Operator: Our next question comes from the line of Brian Holland with D.A. Davidson.

Brian Holland: So maybe just first on taking the top line guidance of this year. Billy, it sounded like in your prepared remarks that that was informed by the better-than-expected performance in 1Q. So that’s backwards-looking, looking forward, do we have any greater visibility on whether that’s distribution or competitive dynamics as far as what you’re going to see in fridges that you share or other fridge installations outside of your own that leaves you comfortable with the balance of the year relative to when you set your initial guidance? And then maybe within that, do we expect consumption and shipments to largely align over the balance of the year?

William Cyr: Yes. Brian, first of all, the decision to raise the guidance and what’s embedded in the guidance is obviously informed not by just what we saw, as you indicated, but what we see going forward. As you know, we look at a wide range of factors. We look at everything from the Nielsen measured consumption to what we know our customers’ plans are, what our read is on the broader macro environment. And what I can tell you is that so far to date, we feel very good that the brand is performing well. We see that in Nielsen, we see that in the household panel data. To the extent that there are competitors out there, it’s obviously not having any significant impact on the numbers that are showing up in Nielsen or showing up in our household panel data because we’re still leading growth in the category in both those areas.

So our guidance going forward on growth has been informed by that. We are, as you heard in the comments, a little bit cautious about the macro environment. We look at everything from consumer sentiment to housing starts to unemployment to disposal or discretionary income. And as I think you’ve heard from a lot of other folks, we’re all kind of watching and waiting to see where that might go. But so far, everything in our business looks like it’s heading in the right direction, and that’s what’s informed our guidance.

Brian Holland: And then maybe on gross margin, as we just think about the year going forward and maybe tied back to the top line here. I believe that initially no plans to add staffing in 2026. What level — and I think there was some reference to potentially needing to add folks later in the year in the prepared remarks. So maybe just trying to understand at what level of volume growth do you feel like you would then have to bring on more staffing? Just trying to understand the leverage potential there on continued volume strength in excess of what you initially anticipated.

William Cyr: Brian, I forgot to answer the second part of your original question, and then I’ll hand it to John to answer the margin question. But your question about shipment growth versus consumption growth, the only variable that’s going to be different between the 2 is, as we’ve said before, we will lap a very significant launch into Sam’s last year in Q3. And so you would expect that there were more shipments there necessarily than there were consumption in Q3 of last year. So this year, you’d expect to get a little bit of a reversal of that. Outside of that, our business is very predictable and reliable, so consumption growth and the shipment growth should be fairly closely in line with each other. Let me turn it over to John to talk about the margin.

John O?Connor: Sure. Thanks, Billy. Yes. So Brian, within the net sales guidance range that we gave, we believe we can deliver that without having to add staff. So what starts driving it higher is if we start meaningfully outperforming our guidance range as we go through the year and getting above the top end of the range, maybe we get a better consumer environment. Those are the levels where we’d start looking at the staff needs to come on at some point in 2026. There is a point as we continue to grow, where we’ll need staff for — to deliver volumes in 2027. But really, the question is if and when in 2026 based on the revenue trends that we’re seeing throughout the year, and it would need to be above the net sales guidance range that we gave today.

Operator: Our next question comes from the line of Rupesh Parikh with Oppenheimer & Company.

Rupesh Parikh: Just going back to the consumption acceleration you saw in Q1. Just curious what you believe are some of the key factors that drove that improvement? And then as you look at the underlying pet category just overall, what you guys are seeing there?

William Cyr: I’ll take the first part, and Nicki will take the second part. But as you saw in the data that we published, we saw a resumption in household penetration growth and the buy rate growth. Buy rate has been a bigger contributor to our growth of late than it has been historically, and that’s in part due to our focus on the MVPs. But it’s really — it’s been strong fundamentals, the things that we’ve been building this business on for a long time, which is great advertising is engaging the right consumers. It’s increasing household penetration, and it’s increasing household penetration amongst those consumers who are — have the propensity to buy the highest amount of product. And so that’s driving the buy rate. So we feel very good that it’s really fundamentally driven. It’s not any unique demographic or customer or channel. It’s broad-based across the board. So I’ll turn to Nicki to talk about the category.

Nicola Baty: Great. Thanks, Billy. So I think the category is still a little bit pressured, especially when we look at dog food. It’s broadly flat in terms of household penetration. At the moment, we’re not really seeing a significant turn either way. We are seeing more going through online than in-store. So that’s still really a faster-growing part of the category. And there’s definitely a trend for more going through to what I call affordable retailers. So whether that’s club or also the likes of some of the mass grocers are doing particularly well in that area. Now generationally, we are seeing boomers coming out of the category. We’re seeing the fastest-growing part being millennials and Gen Z. And then within income groups, we are seeing sort of lower income, particularly pressurized as well.

As Billy said, I think why we’re feeling pretty good about where our results are coming in at is our growth has been very broad-based. We’re growing in every income group, and we’re growing with every demographic. But we’re particularly winning, especially with millennials and Gen Z, and we’re growing at a fast rate with both middle income and higher income as well.

Operator: Our next question comes from the line of Robert Moskow with TD Cowen.

Robert Moskow: A couple of questions. John, I think you said that you still see a path to the 20% to 22% EBITDA margin target for 2027. But you’ve also talked about these extra staffing costs that you’ll have to take on to handle extra volume and I guess, also cost for the new tech. So I just want to make sure that, that’s still the case that you can take on those extra costs and still get to the 20% kind of the low end of that range because it does require a lot of leverage in ’27.

John O?Connor: Yes. Thanks, Rob. So yes, I think one of the points to also make, right, is that in the past, when we’ve made some staffing increases, we were a much smaller company, right? And we’re much larger today. So each incremental line staffing that we bring in is much less consequential to our overall gross margin, right? And so we do believe, right, that we can bring on additional staffing, deliver volume growth in 2027 and get leverage on that staffing. In terms of the new technology, the costs that it would take to bring on would be capital costs. And those would be depreciated, which for the margin targets that we’re talking about is adjusted gross margin, which excludes depreciation, right? So there would be overall cash costs and depreciation that would come with that, but the 20% to 22% is excluding the depreciation.

We would, of course, have to staff those lines. But again, we’d only be doing that if we saw the need to deliver more volume into a strong demand backdrop. So it’s a good question, Rob, but we do believe that we can get the leverage on the additional expenses or costs required to deliver additional volume in 2027.

Robert Moskow: Okay. Can I ask a follow-up? First quarter, you have a big club customer that expanded the size of their fridges. And I think you got the full benefit of that expansion. But I believe in second quarter, they’ll introduce a private label version into those fridges. Is any of the beat in first quarter from that dynamic? And would you expect still growth with that customer, but some deceleration in 2Q?

William Cyr: Nicki will take that one.

Nicola Baty: Thanks, Rob. So look, our club business is performing well, and it’s more than one customer, as you can see. We obviously made a big expansion last year into a second club customer, too. The one thing I’d say with our club business is we have more than one item with our club retailers. We have a handful of items that appeal to — with different formats that appeal to different consumers that are sitting in there. With one particular club customer, we did actually expand our portfolio. We brought in an additional item, which you may have seen, which was our beef roll. And that’s delivered a lot of incremental sales that we really saw coming through in Q1, and we anticipate as that distribution has continued to expand, we will continue through the rest of the year.

And also another club customer, we’ve clearly seen the expansion of a much larger fridge network. That’s definitely raised the opportunity for more items to have more holding capacity in that club retailer. Clearly, we’ve seen the benefit being the largest player within that. But we haven’t seen any meaningful impact really coming through as yet or significant impact coming through from any competition that’s listed. We believe that’s due to the increased visibility and the holding capacity that we can continue to bring through. So for us, we’re very focused on making sure that we have a breadth of portfolio at the right price points and that we are accessing across all club channels where the shopper is looking to go. And we believe that, that will support sustainable growth for the future.

Operator: Our next question comes from the line of Tom Palmer with JPMorgan.

Thomas Palmer: In the prepared remarks, you noted the possibility of expediting the rollout of the new manufacturing technology and had kind of a comment that it could result in capacity outpacing sales. Could you maybe discuss the decision-making process here? Are the potential margin benefits, for instance, so significant that it might justify kind of having this excess capacity or maybe there’s something else?

William Cyr: Yes, Tom. It’s — there’s a variety of factors that are going to be involved in that decision. In part, as you indicated, is if you bring on extra capacity, you will have, in essence, incremental costs. But I’d also make sure you think about the technology development and the validation process here. The longer we run the technology, the more we learn, the more certain we can be that the next line that we put in is going to be the best possible line, and it’s going to have all the right unit operations in it. So to your question of what are the factors that we’re looking at, it’s obviously going to start with, is it delivering on the yield throughput and quality advantages that we think it will. And so far, we’re very encouraged by what we see.

The next question will be, are those gains big enough to justify pulling forward capacity just on that basis alone because we do believe there’s also another level of benefit, which will come from higher return on invested capital where these new lines, if they have higher throughput, will put us in a position where the cost to add incremental capacity is lower than what it has been historically. And so we’ll put that into the equation as well. But I would also say that one of the big factors is going to be how confident are we that we know exactly what this line needs to look like because every single line we’ve installed, we have found that there’s something we can improve on the next line. And the longer we run it, the more we’ll learn about what that will be so we get it right.

So I would just put it under the heading of there’s a variety of factors that we’re going to consider, but all of them seem to be very positive. It’s just when do you want to make that choice.

Thomas Palmer: Understood. I also wanted to maybe ask on the cost environment and how you kind of see that evolving as this year plays out. For the first quarter, there was the call out for logistics. I think it was both weather challenges and then later in the quarter, higher fuel. As we think about the remainder of the year, should we look at the level of kind of logistics margin as indicative of what the rest of the year will look like because you had that weather piece? And then are there other inflationary call-outs we should be thinking about that might either flow through kind of that SG&A side or COGS?

William Cyr: Let me take a shot at that, and I’ll ask Nicki or John if they have anything to add to it. But you properly characterized the first quarter. There were 2 things that impacted logistics. One of them was the weather events that occurred in January and early February. And the second was the fuel cost that happened in basically beginning in March. The fuel cost, at least at this point, looks like it’s going to continue on, and it will have an impact, and that’s going to be embedded in our financials. I don’t expect to see another one of the weather events, although the weather event created a driver shortage event. And so obviously, you’re vulnerable to driver shortages. But the fuel cost is embedded and it’s embedded in our thought process for the guidance we’ve given going forward.

If there’s a material change in the cost of fuel, that obviously will have an impact, whether it’s positive or negative on how we think about the balance of the year. On the bulk of our cost structure, we are not completely locked, but we’re largely locked on the bulk of our cost structure for the year. And so if there is going to be an impact from sort of the trickle effect of higher energy costs on our ingredient suppliers or the inbound transportation and whatnot, that will flow through, but it could flow through later in the year. It may not be as significant. We just have to see where that’s going to flow. I don’t know, Nicki or John have any thoughts to add on that, John?

John O?Connor: Yes. Tom, I think you appropriately characterized it, right? When you look at the total logistics cost as a percent of sales in the first quarter, that’s about the level we’re expecting it to continue at for the rest of the year, but based on fuel costs, right, for the remainder of the year, as Billy said.

Operator: Our next question comes from the line of Steve Powers with Deutsche Bank.

Stephen Robert Powers: I actually wanted to ask around the economics of the omnichannel strategy and maybe focus in on e-commerce, just given the strength of the digital orders that you’ve been seeing and the growing percentage of sales that it represents. Is there a way to help us understand the unit economics in that area and whether the mix shift impacts the margin mix at all materially for the better or for the worse, either on the gross margin line or as it relates to SG&A? Just help us a little bit understand the puts and takes of that growing digital channel and if it has an impact on the P&L.

William Cyr: Yes, we’ll let Nicki take that one.

Nicola Baty: Thanks, Steve. So omnichannel, we’re doing a lot of work at the moment. We’ve built out our capabilities. I think that’s the first thing I would say in omnichannel. It does require a little bit of different capabilities for us to build out in the G&A line overall. Our omnichannel is very focused on super serving our MVPs, and our MVPs are much more valuable to us. So the first thing I’d say is as we grow our business and grow our business in MVPs, this is a more long-term profitable way for us to be growing. So the MVP buy rate is obviously much higher. And we do believe we’re going to get better returns from a CAC standpoint with each MVP that we bring in from a lifetime value perspective. Now in the short term, we will see a little bit of channel shift coming through.

So the first thing I’d say with omnichannel is we’ve been underpenetrated a little bit in club. So you will see a slight dilutionary impact coming through in that part of the business. But regarding your specific question on e-commerce, I think the great thing about our omnichannel strategy is it’s really based on a local fulfillment model, which is to be serving the business through the 39,000 fridge networks that we currently have. So that fridge network and the way that we serve our omnichannel customer, 82% of our online sales are going through that fridge network. Now that’s already installed capacity. So we actually anticipate the ROIC from our fridges is going to be improving over time as we continue to drive omnichannel sales. And in terms of the economic profile, given it’s in our current retail structure, we don’t anticipate a significant shift coming through in that area.

We may have a slight change in the economics of D2C coming through, but we still anticipate that will be a relatively small part of our business.

John O?Connor: Yes. And if I could add to that, right? So Nicki mentioned the margin in club as we see that shift, right? We had strong growth in club in Q1, but we had also strong delivery of gross margin improvement as well. So as we grow the volume, we are seeing our ability to drive greater and greater efficiency in our cost structure and manufacturing.

Stephen Robert Powers: Got it. Okay. Appreciate it. And the second question is a little bit more tactical. Billy, you called out the distribution wins, both in terms of more stores and more fridges per store. Can you guys just update us on sort of your distribution gain outlook for the year today versus where the year started? And just maybe remind us on what was originally embedded in guidance and if there’s anything that’s been achieved so far that would be incremental to that original outlook?

William Cyr: Yes, I’ll have Nicki handle that.

Nicola Baty: Okay, Steve. So I think the main piece of news on distribution was what was announced on someone else’s earnings call last week. So the retail lifestyle distribution, we will have coming through the back end of the year. We’re still working through phasing of the incremental stores. In that retail lifestyle, we have 250 stores distributed by the end of the first half. And then we anticipate that by the end of the year, we will have around 700, but that will have to be carefully phased as we go through the year. So that’s the main distribution gain in terms of retail. As we also look at, we anticipate that our online growth will continue as we go through the year. And we’re nicely on track based on our budgeted goals for the number of multiple fridges that we will be securing. So that’s really embedded through in guidance. Billy, is there anything else you’d like to add to that?

Stephen Robert Powers: No, I think that’s good.

Operator: Our next question comes from the line of Michael Lavery with Piper Sandler.

Michael Lavery: Just want to start on — maybe just making sure I’ve got all the moving parts on pricing. I realize the macro environment is pretty dynamic, but you’ve made some tactical pricing changes. We see that flow through the numbers. You’ve talked about that running through kind of the balance of the year. But you’ve also then flagged some incremental cost pressures and potentially reevaluating maybe taking, I think you said some more pricing. Would those offset each other? Would you undo what you did? Is it partly just a function of differentiating it by SKU that you’ve got the breadth of the portfolio, the comment you mentioned some of the ability to do that? Or how should we think about all those moving parts?

William Cyr: Yes. Michael, let me take a shot at that, and Nicki or John might have something to add. But I would just start with, we’re very comfortable with the pricing that we have in the market today. We feel like it’s made us very competitive. It’s delivering the household penetration growth we’d like. And at the same time, we’re expanding our gross margin. So we feel good about where we are. The comments that we made about pricing and the inflationary environment going forward is more perspective. We’re just telling you that if, for example, there is some increase in the cost that is a more sustained increase in costs over time that we are willing to take pricing as we have in the past. we would be glad to take the right pricing.

But we also will work on efforts to improve productivity, formulation changes and whatnot because we want to do everything we can to make this category as affordable as we can to make it — to let it grow as big as it can be. So we will drive as much affordability as we can into the category. But from a fundamental perspective is we are committed to expanding our margins over time. And if there is inflation that would require us to take pricing, we are willing to take pricing. I don’t know if you guys want to have anything to add to that?

Michael Lavery: Okay. No, that’s helpful. And I just want to follow up on a bit of the manufacturing you’ve characterized the scale and expertise as an advantage. And I think we’re seeing that as much as ever. If you’ve got the lower cost and higher quality position, how long would you estimate it could take somebody else to replicate that?

William Cyr: It’s obviously a very difficult question to answer. All I can tell you is it took us a long time to figure out what we figured out in a long time and a lot of money to build the scale that we’ve built, and we’re very committed to continuing that. So we are investing heavily in R&D and in new technologies. We’re not standing still. Our expectation is that if somebody could figure out what we’re doing today, spend a lot of money in a couple of years trying to catch up by the time they catch up, we’ll be on the next generation of technology, and we’ll be further ahead again. So our focus here is that we always want to be the brand that is leading the category in terms of driving the technology advancements that give us highest volume and lower cost.

I also want to point out that if you think about our product lineup, — we have a variety of different product forms. And the innovation that we’ve been focused on right now is on our bags and technology advancements on our bags, and we made huge gains there. But we have other product forms that we can continue to invest in and develop new technologies to make them even better as well. So I just — I don’t know how long it’s going to take somebody to catch us. They’d have to spend a lot of time and a lot of money. That’s what we did. But by the time they get to where we are today, we expect to be further ahead and on the next generation.

Operator: Our next question comes from the line of Eric Serotta with Morgan Stanley.

Eric Serotta: First, in terms of the lite version of the new technology, now that you’re further along in the testing and validation phase and it looks like you’re going to be — or you said that you plan to roll that out to more lines. Can you help us dimensionalize the order of magnitude of savings versus your existing lines? I know you’ve spoken before about, well, it’s less than sort of the full fat version from scratch, but any help dimensionalizing that would be helpful. And should we think of any benefits from that as just in terms of phasing, more benefiting ’27 than ’26. And then a follow-up on the questions around the large club retailer. As you speak to them and look at their store base and where they have the double-wide fridges, what’s your sense as to how much more expansion for refrigerated fresh space is still to come at that retailer as they add it to more stores, sort of leaving aside the question of what the mix will be between your product and their private label and potentially others?

William Cyr: Eric, I’ll take the first part of that question, and I’ll have Nicki take the second part. But as we said on the call, we don’t want to give anybody any specific numbers on what the improvements are that we’re going to see on this technology until we get further into the year, and we’ve had a chance to run it for an extended period of time. But you should take from the fact that we made the decision to install a second light line as a confirmation that this is a good technology and it’s delivering on our expectations or exceeding. The metrics that we’re focused on are input costs, which is really a measure of yield through the throughput that we get and the quality that we get. And what I can tell you so far is that we’re seeing all those benefits, and we’re at this point, just trying to dimensionalize how big are those benefits.

And because the capital cost in these light lines is relatively small and also the time to disruption, meaning the time that we have to take a line down to retrofit it is also very brief. It’s a very attractive technology investment for us. In terms of its impact this year, because it’s only going to be impacting a portion of the line and we have to convert meaning a portion of our product lineup, and we have to convert parts of the lineup over time, it will have an impact in this year. It will be skewed towards the back half, and it will be relatively modest because we have to ramp our way into it. It’s much more of a 2027 event. And in 2027, you should expect to see some benefits from it. Remember, what we said on the call was the technology, we should be, by the end of this year, have about 35% of our bag volume could be produced on lines that will have this technology.

And we feel like that’s going to be — would contribute meaningfully in 2027. But again, it’s a little bit too early because every one of these lines is a ramp-up, and you don’t really want to lock in and say this is going to be until you’ve tested under a lot of different circumstances over an extended period of time. Nicki, on the club question.

Nicola Baty: Thanks, Billy. So regarding club, those wide double fridges that are in at the moment are in 416 club stores. So that’s around 70% of the estate. What it’s done is it’s opened up both a lot of holding capacity, but also an opportunity for incremental products, both from us and from others to be listed in those fridges. Those fridges are not planogrammed. So I think the key piece is that no matter which club store you’re going into, the range may look a little bit different in there. We would never expect to only have Freshpet in those fridges. And we believe that this Fresh as a segment is still a very big growing segment within the category, and there will be more competition coming in. But we do believe those fridges has opened up a lot of opportunity for Freshpet to put more product assortment in. And we’re seeing very encouraging signs by having the highest level of distribution of any fresh product in there today.

Eric Serotta: And just to follow up on that, Nicki, of the 30% of stores that don’t have the double-wide fridges, are those stores that will potentially — some of those that they’re still rolling out to? Or do you think the customers kind of tapped out the store base that the double wide fridges would be appropriate to, given the demographics of the consumer at the store or the store footprint or things like that?

Nicola Baty: I think that’s a decision for the retailer to make. We don’t see any space constraints today beyond expanding those double-wide fridges, but clearly, that’s not really within our control.

Operator: Our next question comes from the line of Matt Smith with Stifel.

Matthew Smith: A follow-up question on the omnichannel growth. You referenced 82% of orders fulfilled through the fridge network. In the past, there’s been some constraint on fridge space and out of stocks. Where does that stand today? Is there still a capacity constraint on omnichannel growth from availability of product? Does that improve as fridges expand? And are you seeing greater incremental fridge interest from retailers as they look to participate in more omnichannel growth with more capacity on the floor?

William Cyr: I’ll let Nicki take that.

Nicola Baty: Thanks. I think we’re seeing a lot of interest in moving more to multiple fridges, which might be the standard fridges, but also concepts like fridge island or open-air fridges, which is obviously what you’re seeing in club retail at the moment. Many of our conversations with retailers are all about maximizing holding capacity so that they can compete very effectively with online sales, but also having the right assortment in. The big bit of research that we’ve done shows that the biggest unlock for that MVP shopper is actually access. An MVP shopper is buying across multiple channels. They want to buy online and they want to buy in-store and they buy very frequently. So as we continue to partner with retailers, they’re looking for help in how they unlock that MVP access, and they’re also wanting to compete very much with local fast delivery versus maybe some pure-play retailers.

So we believe we will continue to steadily expand multiples, but we also believe there’ll be more opportunity in the future for different fridge configurations, whether it’s open air or items.

Operator: Our next question comes from the line of Marc Torrente with Wells Fargo.

Marc Torrente: Last quarter, you talked to the expected bridge on underlying SG&A, which was limiting some of the sales and gross margin flow-through to EBITDA this year. Has anything changed on those underlying assumptions? And any color on the cadence of those items through the year, particularly on media spend?

William Cyr: I’ll have John take that.

John O?Connor: Marc, no change to what we outlined last quarter and no change also to the cadence of media. So we expect to be front half weighted. You saw some growth in the media as a percent of sales in the quarter year-over-year, which was planned. And we’d expect that media intensity to be stepping down as a percent of sales as we go through the year. In terms of other G&A, excluding logistics and media, we’d expect that to be generally flat on a sequential basis as we go through the year. There will be some comps that will drive differential growth rates, but overall flat sequentially as we go through the year.

Marc Torrente: Okay. I appreciate that. And then I guess just building on that a little more, part of the SG&A step-up is investment behind omnichannel, and this is going to be a growth channel over time. So just trying to get a sense of how much of the SG&A step-up is, I guess, onetime versus more going in nature.

John O?Connor: Yes. So there’s kind of 2 elements of it that are onetime, right? I’ll remind you of the step-up in variable comp expense, which we said was about 1/3 of the increase in dollars on the year. The remainder is capability investments, and there will be ongoing capability investments over time, but not to the scale that we saw this year. And a lot of it, Nicki has outlined in terms of driving the things we’re doing from an omnichannel perspective that we weren’t before. Those are investments we needed to make in ’25 that are carrying into ’26. And so that’s really just a big step-up. And so there were 3 items that we said were roughly equal in size, driving growth in dollars year-over-year, media, in dollars, variable comp expense and then the investments in our capabilities being the other one.

Operator: Our next question comes from the line of Jon Andersen with William Blair.

Jon Andersen: Two quick ones. On the technology, the new tech, you’ve talked a lot about quality and cost. I’m wondering if there is an element here around product range, innovation, differentiation that this tech can also enable, if you could speak to that? And then second, Billy, you mentioned product forms earlier. I wanted to ask a broader question about forms in super premium and ultra-premium pet food. Are you seeing any changes by customers or within any of your channels where customers may be leaning into kibble, kibble plus, fresh/frozen? Anything on that front or does kind of the fresh refrigerated remain the gold standard?

William Cyr: Jon. I’ll take the first one, and I’ll have Nicki take the second one. One of the beauties of this new technology is its ability to produce a wider range of product forms, all within the context of our bags. But think of that as different shapes. It could include different proteins that we can’t currently produce with today. And what it’ll allow us to do is also give higher quality inclusions. So some of our products you might have noticed, we have very nice cranberries and carrots and whatnot, and we can get better looking and a more diverse supply of inclusions that go into the products. And so you should expect that a big part of the payback for the incremental investments in these new technology will come from a wider range of product innovation that will be both more appealing, but also higher quality than what you can get from some of the competitors going forward.

So we spent a lot of time focusing on the economic benefits or the efficiency gains of input cost, throughput, yield, quality, whatnot, but innovation is going to be a big driver going forward. But that’s not going to be a big driver until we have more lines installed because we have to have enough capacity to support those new items. I’ll let Nicki take the second part of the question.

Nicola Baty: Thanks, Billy. We are seeing some more shelf-stable products coming in that might have some claims of being sort of fresh, i.e., they can be refrigerated after being purchased. We’re not seeing very much traction coming through certainly when we look at the Nielsen data on any of those products. We’re definitely seeing a little bit more growth coming through in higher interest in functional foods and ingredients that might deliver functional benefits. We think that, that continues to be an opportunity more for Freshpet to explore. And then clearly, we see a lot of frozen entrants, which is a little bit of an easier barrier to entry to cross to get frozen products out there. But unless they’re supported with very heavy brand investment, so advertising investment, also, it’s a little bit hard for them to get traction, especially when they’re head-to-head with a fresh product at retail.

So that’s really pretty much the gist of what we’re seeing in the competitive landscape.

Operator: Ladies and gentlemen, our final question this morning comes from the line of Yasmine Deswandhy with Bank of America.

Yasmine Deswandhy: I just wanted to dig in a little bit more on your — on the omnichannel unit economics. In your prepared remarks, you talked about adding new stores like Tractor Supply, where you recently announced expansion to up to 700 stores by year-end. The shopper there is a little bit different than some of the other retailers that you’re in. So if you can maybe talk about your go-to-market strategy there, whether the approach will be different, product lineup, marketing, messaging and if it will impact mix at all for this year?

William Cyr: Nicki, you’ll take that one.

Nicola Baty: Yes. So we’ve had the benefit of doing a long test with Tractor Supply. So we’ve really learned on what part of the portfolio is going to work for their specific shopper. As you may expect, we’ve got some larger pack and larger dog SKUs that have gone into that range. We also have put our Vital pet specialty range into Tractor Supply, combined with some of our top-selling home style creations lines as well. So the mix of products that we have has been performing very well, which is why we’ve had the green light to expand really through the year. In terms of margin positioning, there’s nothing in that, that would be particularly either accretive or detrimental on the P&L. So broadly the same as where we stand today. And in media, very much supported with the same master brand advertising that we do overall.

Yasmine Deswandhy: Okay. That’s helpful. And then the 35% of that capacity using new tech by end of year, where does that number stand today? And as you continue to install new technology, will you be able to ramp at that same pace? Or as you manage through capital cost and margin impact, will it be kind of slower than the pace that you’re doing it this year, faster? Or yes, any change there?

William Cyr: Yes. I would tell you, it’s a very low number right now as a percentage of our total capacity because as you heard, we started up the full version of technology in January, but it’s a relatively small throughput line and is producing relatively limited SKUs. The lite version that we started up has only recently started up, and we’re still in the ramp-up phase, but what we’ve seen so far is very encouraging. But between the 2, it’s a relatively small percentage of our total volume. When we add on the third line and we get further out on the operating competency or expertise level, that’s where you get to that 35%. The big question for us is going to be as we add these new lines, it will come in a little bit in fits and starts.

It won’t be a uniform pace, and it will in part be driven by the capacity needs that we have because at some point, we’ll have converted all the products that are relevant to be converted to this. And then the question will be when do you need more capacity? Because as we add capacity, it’s likely that we’ll have to make a decision about which technology we use to add the capacity, and that will be really driven by when that capacity is needed and what product forms is needed to produce. So it’s not going to be any — it’s not going to be linear. It’s going to be more episodically driven than it is going to be something you can lay down on a straight line.

Operator: Ladies and gentlemen, that concludes our question-and-answer session. I’ll turn the floor back to management for any final comments.

William Cyr: Great. Thank you, everyone, for your time and attention today. I’ll end today with a quote that I think is particularly appropriate for the challenging times we’re operating in today. This is from an unknown. “The best therapist has fur and four legs.” To which I would respond, “Pay them with Freshpet and give them treats as a co-pay.” Thank you very much.

Operator: Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.

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