Greetings. Welcome to Freshpet Inc. Fourth Quarter and Fiscal Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Jeff Sonnek, Investor Relations with ICR. You may begin.

Thank you. Good afternoon. And welcome to Freshpet’s fourth quarter 2020 earnings call and webcast. On today’s call are Billy Cyr, Chief Executive Officer; and Heather Pomerantz, Chief Financial Officer. Scott Morris, 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 federal securities laws. These statements are based on management’s current expectations, and beliefs and involve risks, and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to the company’s annual report on Form 10-K filed with the SEC and the company’s press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. 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 on how management defines such non GAAP measures. 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. The presentation can be found on the company’s Investor website. Management’s commentary will not specifically walk through the presentation on the call, but rather it’s a summary of the results and guidance they will discuss today. Now, I’d like to turn the call over to Billy Cyr, Chief Executive Officer.

Thank you, Jeff, and good afternoon, everyone. I am speaking with you from Bethlehem, Pennsylvania, the home of the Freshpet Kitchens; and Scott; and Heather are in our offices in Secaucus, New Jersey. We will do our best to not trip over each other on the call and as always please excuse any barking in the background and any other technical issues we might encounter. It is hard to believe that one year ago we gathered with many of you at NASDAQ in New York City to outline our five year strategic plan and what a year it was. I am so proud of our team’s resilience through these trying times. Fortunately, Freshpet was able to navigate the shifting environment, while still making significant progress against our long term strategic goals. In fact, the last year, despite its numerous challenges, has seen an acceleration of our business progress towards our 2025 goals. As such, we are going to update those long-term goals to both reflect the fast start we had in 2020 and also to include the impact of some of our most recent learnings. But first I want to go back to where I started on Investor Day presentation one year ago. In that presentation, I asserted that Freshpet had the potential to join the pantheon of iconic brands that changed the world, brands that change things we do every day and reflected significant changes in society’s values, and priorities, brands that leverage technology to make the previously impossible possible or broadly available, brands like Nike, Starbucks, Gatorade, Netflix and Apple. That may have seemed like a lofty ambition then, and to be clear, it remains a very lofty ambition today, but Freshpet is on that path, and accelerating. Freshpet is changing the way people feed their pets. That…

Thank you, Billy, and good afternoon, everyone. As we discussed previously, net sales for Q4 of 2020 were $84.5 million, up 29% versus a year ago. Actual Nielsen Mega-Channel consumption was up 38%, so we drew down trade inventory again in Q4. Our final results were also constrained by in large snowstorm in mid-December that cost us a few days of production and shipping with very few days left in the year to catch up. As a result, we believe that trade inventories were $15 million below where we would expect them to be under normal circumstances at the end of the quarter. As Billy indicated, we began refilling those in January and expect to have largely refilled the trade inventory by the end of April. One of the most exciting and encouraging aspects of our growth in Q4 was the continued resurgence of the pet specialty channel, behind some smart moves by our teams and our customers and some overall tailwinds for that channel. Our Nielsen Big-Box Pet Specialty consumption was up 42% in Q4 leading all channels and it was still accelerating at the end of the quarter. In Q1 of 2021 to-date, it is up greater than 55%, despite some significant out of stock. We are encouraged by that progress and bullish on their prospects for 2021. Final net sales for 2020 were $318.8 million, up 30% versus year ago, our fourth consecutive year of accelerating growth. This is a major accomplishment for our organization and we intend to extend this momentum into 2021 by posting another year -- another increase in our growth rate. We think of this as walking before you run and running before you sprint. Each year, we increase our capability to drive incremental demand and also filled incremental supply. Adjusted EBITDA for…

[Operator Instructions] And our first question is from Bryan Spillane with Bank of America Merrill Lynch. Please proceed with your question.

Hey. Thank you, Operator, and good afternoon, everyone. So, just, I guess, high level question, Billy, that we have gotten a few times kind of really since ICR, just stepping back now that you have raised the long-term projection. How do you -- how much of the sort of the acceleration would you attribute to COVID? Meaning the COVID sort of pulled forward some sales, and I guess, how do you have confidence that it’s not just kind of a pull forward versus an acceleration and expansion of the trends you were expecting a year ago?

Yeah. That’s a good question Bryan. 2020 was a mix of some -- obviously some helps and some hurts. The things that I would put in the helps would be obviously people spending a lot more time with their dog and caring for paying attention to the various needs of their dog. We had some lower cost media. But we had some significant hurts that occurred in the year that I think came down and probably fully offset it. So the capacity limits that we had in the year were significant, the retail disruption, the inability to get fridges in our earlier in the year rather than later having to push back our advertising. And so we had to net it all out and we netted it all out our conclusion was that 2020 might have been pulled forward not just in the year but in an underlying trend that was very, very strong and it is going to continue for a long time. We think, like many people have described 2020 it didn’t create new trends, it took the trends that already existed and just made them happen faster, but when we look -- when we saw that we realized the upside was even bigger for us. You will see in the presentation in the investor deck that we put out, we did the modeling several different ways to confirm for us that this wasn’t just a temporary phenomenon, that really was a long-term underlying trend here and that’s what got us ahead of where we thought we would be. So that’s why we are raising the guidance.

Hey. Great. Thanks Billy. And then just maybe just one follow-up quick one, the $430 million or better of revenue for this year and maybe I missed this in the presentation, but you have the capacity in place today to deliver that or is that dependent on more production capacity coming online during the year?

All the equipment to deliver that is installed, it’s the staffing and we have a chart in the investor deck that maps out by quarter, the staffing additions that we are making that enable us to deliver that. So you will see quarter-by-quarter what their capabilities are. So we had a good start this year you will see we produced very, very well in January. If we get rid of the darn snowstorm that keep slowing things down we are doing incredibly well. But we have a step-up in capacity from staffing perspective, it happens in March. We have another one that happens in the second quarter. So as you go along throughout the year there is staffing addition, but the equipment’s all there that will get us to where we need to be. There is equipment coming online to be very fair. There is another line coming on at Kitchens South in the second half of the year but that’s a really designed to cover our very high run rate in the second half -- in the fourth quarter of the year.

All right. Terrific. Thanks Billy.

Thank you. Thanks Bryan.

And our next question is from Peter Benedict with Baird. Please proceed with your question.

Hi, guys. Thanks. I will ask two just rather quick here. So, the first one just Billy you had mentioned the $50 customer acquisition cost that the longer-term plan soon as you hold back. Just talk maybe a little bit about the puts and takes to that number? What you see that could either bring that down over time or just how do you think about that? And then second would be around the pet specialty channel, the resurgence that you are kind of talking about there. I think you mentioned smart moves by some of your partners, just curious what you think is going on there and why the pet specialty space might be -- a channel might be relevant again I guess for a better term? Thanks.

Yeah. Let me make one comment on the customer acquisition cost and well, Scott, give you more color on that as well as on the pet specialty channel. The $50 is a -- was a sort of a long-term trend. We have operated at a level well below that. So it’s almost going back to Bryan’s comments just a question a minute ago, the customer acquisition cost in 2020 was significantly lower than that and our modeling going forward does not assume that, it only shows that if you stayed at $50 which is a number that we have delivered in the past that we still greatly exceeded our goal. So it’s part of the long-term trend. But Scott can give you more commentary on what causes that to get better or worse and then I will also talk about pet specialty.

Hey, Peter. Yeah. So, as Billy mentioned, we have seen a pretty wide range on our acquisition cost. This year we continue to pull back and it was kind of the one of those exceptional years where the media well exceeded what we anticipated. The biggest factors that we see over time kind of plussing and minusing our consumer acquisition cost really center around on how much innovation and how much fridge visibility do we have out there. So when we have good innovation that’s really appealing to consumers and we also have fridges that are either highly visible, incremental distribution, they become kind of multipliers or force multipliers in a way and actually drive our consumer acquisition cost significantly down. What we have budgeted over time is to -- we have been budgeting seeing acquisition cost actually going up and we have seen it for multiple years now actually decreasing. And we think some of that is this idea of as we get bigger and we have more visibility people are more similar with the idea of Freshpet food, it’s actually become easier for us to acquire consumers, also they are -- very people are thinking differently about nutrition and it’s really translating into the pet universe now. So that’s a big factor on what happens with our acquisition cost. From a pet specialty standpoint, the both the major pet big box pet guys have really made nice progress in general on their overall business and they have kind of waiting with us. They put our fridges in higher profile locations added second fridges and even third fridges in certain locations and we have also had some nice innovation there. So I think it just the compounding effect of some consumer trends in COVID. I think they have done nice job with their businesses and we have had nice placement and kind of incremental fridges being added in those channels.

Okay. Great. Thank you very much.

Thanks Peter.

Our next question is from Bill Chappell with Truist Securities. Please proceed with your question

Thanks. Good afternoon.

Hey, there.

Hey. Can you -- just understanding kind of the postponement of second fridges doors and doors is general this year. So I am just trying to understand is that because you are taking a step back and rethinking kind of the whole capacity expansion and so there is a little bit of a pause and it just changes the cadence, is it near-term issues with snow? I am just trying to understand does that imply that there is slower growth until they are up and running, just trying to understand the decision behind that?

Bill, from a decision perspective, the decisions is just we have to be able to supply the fridges that are out there and customers as you might imagine have been seeing short shipping for quite some time and so it’s not prudent for us to be putting incremental fridges in stores if they can’t be stocked. The long-term interest in second and third fridges is incredibly high and the gains that we are getting from them are incredibly strong. So the demand for them is very, very strong. We have no doubt that there will be significant interest in it. We just need to make sure that when we put them out there that they can be well-stocked in fact their customers have the same concern too. They don’t want us to put us, put in something that they can’t reallocate the space in the fridge to something else when we can’t supply. So we need to get the supply up. But by the end of April, we should be in pretty good shape on our shipments and at that point you can start seeing people doing more normalized activity, but they are want to be comfortable that it’s working.

Got it.

Hey, Bill. Let me…

Yeah.

Let me fill the number quickly. So just when we put in second fridges, just to be clear on it, we are seeing, so we are already growing at call it 30%. We pick up anywhere between 20% and 40% incremental growth points on that second fridge. So the return continues to be strong both for us and the retailer. It’s also continuing into the second year. So we are seeing a really good progress there. One of the things that we become not only us slowing down a little bit of some second fridges earlier in the year, but there are several retailers that are pushing some of their major changes towards the back of the year, are not doing as much in store this year due to kind of the entire, what’s going on in the marketplace. Now that could change. We actually got some very positive surprises late in the back of last year, but we don’t -- do not want to kind of weigh into that.

Got it. And I guess on that same note as a follow up, the 30% growth in 2020 is great, obviously very impressive. Any gauge now looking back for the full year of how much was left on the table in terms of. Had you not had capacity constraints? What that growth could have been, especially as we are looking to 2021, where you should be at full capacity for most of the year. That 35% growth doesn’t seem that aggressive, if you less 5 points, 6 points on the table last year. So any color around it would be great? Thanks.

Yeah. It’s always hard to Bill to decide how much you really lost. I would say we recorded was at the end of the year, the trade inventories were down by $15 million versus where we thought they would be against the base of sales, that’s somewhere around 3 points or 4 points. So you could say pretty confident there would have been 3 point s or 4 points for that. Now how much you want, because a consumer walking in the store couldn’t find it and they had to buy something else or a new consumer who came to your fridge based on haven’t seen your ads and showed up and there is nothing in the fridge or not the item they wanted. We really didn’t do any modeling to figure out what that could be. But if you are telling us that having 35% growth is sandbagged, it’s a little bit conservative. I would tell you we are very mindful of the fact that we need to run it, as Heather said, walk before you run, run before you sprint, we want to kind of kind of amp up the growth as we go along and make sure we can supply it.

Yeah.

And one other factor…

Sure.

One other factor on that too Bill is that, the entire year we kept canceling more and more and more media in addition to us not having our product. So if he had spent the media plus all the factors in place, we are encouraged that we could be seeing some pretty significant growth rates.

Got it. Thanks so much.

Thanks Bill.

And our next question is from Brian Holland with D.A. Davidson. Please proceed with your question.

Yeah. Thanks. Good evening. Do we continue to assume media will be 12% of sales through 2025 and just if I could throw on top of that, given the increased flexibility by added capacity, could that go higher?

As we have always said, we -- when we have capacity we want to fill it. The plan that we have laid out gives us the ability to always be. Once we get this next incremental capacity in to be aligned or so ahead of where the demand is, so we don’t get ourselves caught where we are short on supply, but we do plan to spend a 12% of sales between now and 2025. So the real question will be, does it over deliver the returns that would then have us using more of the capacity, and that’s why we are building the incremental capacity to stay ahead of it. So we don’t have that supply problem.

Okay. Fair enough. And then you have got a share of this segment of the pet food category and one that has to be increasingly difficult for the larger players to ignore. So as you guide out to 2025, and made plans that capacity accordingly.

Yeah.

To what extent have you factored in the evolution of the competitive landscape?

It’s -- obviously it’s a factor. I have seen lots of studies done on what happens when a category creator ends up with a challenger. Obviously, a lot depends on who the challenger is and what the approach is that they take. Do they come in with a knock off at the price? Do they come in with a more premium product? Do they come in with a price driven product? But typically what happens is when a second player enters the market, it significantly expands the rate of growth and the size of the market. And so while your share of the market might go down, the size of the opportunity that you have is actually quite large. And so, while we fully anticipated at some point we will have a competitor, it’s only natural and so that’s we should expect. Our expectation is that it will make the category more competitive, not necessarily our business opportunity smaller.

I appreciate the color. Best of luck.

Yeah.

And our next question is from Mark Astrachan with Stifel. Please proceed with your question.

Thanks, and good afternoon, everyone. I wanted to ask maybe a different way on the new store adds. I guess I was a little bit surprised that you are talking only 1,000 stores or so. And I wanted to ask kind of specifically about, how the discussions are going on with some of those retailers like Wal-mart, Kroger or Costco, where you are under store relative to where you could be and where you are in places like Target. So how has the out of stock situation manifested itself with some of those? How do you think about the out of stock effect broadly, obviously some of your retailers have also put stickers on doors to say hey there are alternative products elsewhere. Maybe just enlighten us a bit on some of those discussions with the legacy retailers and I could just add a sort of related point to that. What are your expectations embedded for non-traditional retail meaning like 2E or Amazon within the base?

Scott, do you want to take that?

Yeah. So, Mark, no one likes to be in a situation where that we can’t supply as much as not only consumers but also our customers want. It obviously frustrates the customers. But I think if they are looking across the entire store especially episodically over the past year. It’s been incredibly challenging times. And I think that people have been fairly understanding, most of them have been very, very understanding and really, really good partners. And I think some of that comes from the equity that we have built in working with them, and being as transparent as possible for the past 10 years, 15 years and even 20 years in some cases, people that we have worked with throughout our careers. But look, I think, the other thing is, people really, really appreciate and love the growth. They love the margins that we are continuing to deliver to the category. But I do think they have expectations of us making sure that were getting them back in a better in-stock positions, so they can deliver to their consumers, our consumers and their consumers quickly. We have kind of laid out plans. We have had many, many meetings, many, many top the talks with them kind of walking through exactly what we are doing. They are -- they again are really sharing force, because they love the proposition on how we have build this business and what our long-term vision is and where we can grow and where we can go overtime. And I really think overall they are behind us. I think that there is some near term pain and everyone sharing that, but they recognize, it is a quarters worth of pain, it’s not a years’ worth of pain.

That’s helpful. And then just on the non-retailers, the Internet e-commerce piece, how you are thinking…

Yeah.

…about that…

Yeah.

…in your guidance?

Sure. And I think, there is actually a page in the deck that talked about e-comm. It’s actually page 12, I believe…

Yeah.

Page 12 and although we have had a lot of success with what we have done from an e-comm perspective, we understand really, really well, how to invest, how to grow, what the productivity is versus our traditional advertising. We are actually getting better returns on the e-comm advertising than the traditional advertising. That encourages us to spend more in that area. So we will be spending more and we will have significant incremental partners that will be adding from an e-commerce standpoint over this next year.

Thank you.

And our next question is from Jon Andersen with William Blair. Please proceed with your question.

Hey. Good afternoon, everybody.

Good afternoon.

A couple of quick ones, one, just related to the out of stock situation, how do you think, what has been the feedback from your customers? Billy you talked about empty fridges. Do you think there are longer term ramifications from that? Have you seen users maybe kind of fall out of the franchise that will be hard to bring back? Just some thoughts on that based on the interactions you have had with customers? And then the second question is just around your kind of view of the new product lineup for 2021 in characterizing it, may be relative to some of the innovations that you have done over the past couple of years? Thanks.

Yeah. I will let Scott take those.

Yeah. Let me talk about the innovation piece first. So we are -- it’s interesting because a lot of people would say, oh, you are growing at 20%, 25%, 30%, 40% growth, why you are bothering to innovate? Well, as Billy has commented earlier, we believe at some point people will want to be coming into this category and we want to have the absolute best products than anyone could possibly imagine and basically cutting the territory, cutting the kind of ahead of the swash to the jungle and coming up with the absolute best products out there. That being said, innovation is not just something that’s kind of like fun side project. We have been able to demonstrate year-after-year that the innovation typically sticks very well, the vast majority of innovation, over 80% of our innovation sticks around multiple, multiple years out. It’s a significant contributor to not only improving our advertising, but also our overall sales growth and the size of our business over time. So we do believe innovation is the core of it. And then we have kind of -- we want to improve our current products. We want to innovate meaning coming out with like varieties and flavors and may be some incremental benefits on some of our existing technology. But we are also working to truly reinvent and come out with like next level of category change in technology like you will see there is a new plant based meals we are coming out with, some of its positioning work that we are doing where we have the most sustainable pet food that’s out there and our Nature’s Fresh brand and some of the things we are doing in the Home Stop brand. So innovation is really critical in core and it delivers. On…

Thank you. Good luck.

Our next question is from Ken Goldman with J.P. Morgan. Please proceed with your question. Ken Goldman, your line is unmute, if you have a question. Ken Goldman, we can hear you. You may proceed.

Hi. Can you hear me now?

Yeah.

Yeah. Yes. We can.

Yeah. We can hear you now.

Okay. You actually got a long story, not yet though. Hey, guys. So you are almost two-thirds of the way through the first quarter. The street’s modeling a little over $90 million in sales and about $10 million in EBITDA, how close are those to kind of what your expectations are for the quarter, if you can give us a little bit of a ballpark there?

So, obviously, we don’t like giving out quarterly guidance, but what we said in the narrative is that, if you think about the cadence for the year, Q1 should be a strong quarter, because even though we are delaying the advertising startup, we are feeling -- refilling that trade inventory whole. So you can expect it will be a stronger quarter. Q2 is up against a very tough year ago, because that’s when we were refilling the trade inventory and we have a delayed start of the advertising this year so we will be delayed in building consumption. So it will be our softest quarter and then Q3 and Q4 will be very, very strong because of the advertising investment that we are making starting in Q2 but really paying dividends in Q3 and Q4. So we are not giving quarterly guidance, I can just tell you that we are expecting at least from the topline perspective to be off to a good start. In terms of the bottomline there is a little bit of a delay in the advertising investment but there’s also a higher costs that we are going to be carrying, because we are, brought in incremental staffing to make sure that we could produce what we needed to produce. We don’t find ourselves in a position where because of people being out for testing or quarantine or issues that we are having snowstorms that we can’t meet the demand. So we do have extra staffing that we are carrying.

I have another one, so I will let it go. Thank you.

All right. Thanks Ken.

Okay.

And we have reached the end of the question-and-answer session, and I will turn -- now I will turn the call over to CEO, Billy Cyr, for closing remarks.

Thank you, everyone. Sorry, we had to cut you short today. Unfortunately, as you can imagine with all the things we have going on, it has been a very hectic day. But I did want to close with one thought for you, Lou Saban, the football coach said, no matter how little money and how few possessions you own, having a dog makes you rich, to which I would add, feed your dog Freshpet and you can call it even. Thank you very much for your interest and attention. We appreciate it.

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