Greetings and welcome to the Freshpet Fourth Quarter and Fiscal Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Jeff Sonnek with ICR. Thank you, Jeff. You may begin.

Thank you. Good afternoon and welcome to Freshpet's fourth quarter 2021 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 for 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. That 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 the summary of the results and guidance that we'll discuss today. Now, I would like to turn the call over to Billy Cyr, Chief Executive Officer.

Thank you, Jeff. And good afternoon, everyone. The message I would like you to take away from today's call is that we finally have the capacity needed to support our significant growth potential and build upon the momentum that we've created through five consecutive years of accelerating revenue growth. We fully intend to take advantage of that capacity. But we've also learned some hard yet valuable lessons over the past two years. Those lessons are the foundation for the conservative planning that we've undertaken, which we believe is required in this complex and challenging environment. Over the past two years, we've navigated everything from the COVID crisis, to labor shortages, to supply chain issues and inflation. Our operations wobbled numerous times along the way. We are keenly aware of the impact those have had on our many stakeholders, most notably our customers and consumers. We learned that in order to deliver a long-term sustainable growth Freshpet is capable of, we need to do a better job preparing for and insulating ourselves from those issues. The environment we are operating in today still has many of the issues we have faced over the past two years, albeit some are less impactful, like COVID and others are more impactful like inflation. But the more important change is how well we prepared for those issues, and plan for new and unknown challenges. We finally have more than enough capacity and have more coming online. We have stabilized, trained and developed our workforce and we've completed our ERP conversion. Further, we've strengthened our marketing programs, increased our innovation, installed more and larger fridges and built a broader and deeper management team. We have a rare opportunity to change the way people feed their pets forever and build a truly great company. To do that…

Thank you, Billy, and good afternoon, everyone. Let me begin with a quick summary of 2021. As we announced in January, we delivered 425.5 million of net sales in 2021, an increase of 33.5% versus 2020 and our fifth consecutive year of accelerating growth. In Q4, our net sales grew 37.1% to 115.9 million. Adjusted gross margin for the year was 44.5%, a decline of 380 basis points. In Q4, our adjusted gross margin was 41.7%, a decline of 410 basis points. Those reductions were largely due to inflation and temporary operating inefficiencies we incurred as we rapidly scaled the business with outdated systems in a turbulent environment. Those issues coupled with higher freight costs due to inflation and our temporary inefficiencies flowed through to the bottom-line and resulted in adjusted EBITDA for the year of 43 million, a reduction of 8.5% versus the prior year. Adjusted EBITDA for Q4 was 9.7 million, a decrease of 25% versus year ago, that decrease was due to the same factors plus a higher marketing investment in the quarter than in the prior year, which was 11.9% of sales up 620 basis points from the year ago. We are not happy with those results and know we can do much better. We have taken the necessary actions to remedy the problems, but they will take time to flow through our P&L. The actions we have taken are, first, increased pricing, we announced two price increases that in total will increase our pricing by 17.2% when fully in effect. The first price increase went into effect at the end of November and the second price increase went into effect today. The impact in fiscal 2022 will be approximately 15%. Those price increases were designed to cover the margin impact of inflation in our input…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from a Anoori Naughton with JPMorgan. Please proceed with your question.

Thank you for giving us some of the details into the risks considered in your guidance. But what gives you confidence that the 575 is conservative enough it encompass all of the one-time type events that have challenged you and others in the industry lately? And then, what do you see is the potential upside drivers near outlook as well?

Yes. Let me just talk about the risk profile. And then, Scott might just give a commentary on where the upside part of it is. But unlike most companies where demand is really the big question for them. Our big issue over the last two years has not been, in fact over the last many years has not been the absence of demand. It's in the absence of supply. And so our entire risk mitigation approach has been focused on how do we get ourselves enough supply that we can let the demand rise to where it needs to be. And as I said in the in the comments, we're already running at the rate that would support the 575. So we feel very good about the underlying growth rate here. Our big challenge is, are we going to have enough capacity. And that's what we've laid out as a plan that we have significantly more capacity than the 575 would require. I think the proof in the pudding was in January, where we were able to take down a line still keep up with the demand and not take a trade inventory holds. So we feel very good that we're managing the right element of risk here. The element of risk is not the demand side, the element of risk is on the supply side. Scott, you want to comment on the demand drivers and the upside.

Yes, certainly. So I totally agree with Billy. I mean, I think what he's getting into is for the past two years, we really have not been in a situation where we've been able to supply customers or consumers that the product and the product specifically that they're looking for and we're finally, finally in the last like month or two starting to see those inventories come back. We're starting to see our situation our appearance at retail much better than it's been. And the question were asking ourselves, what would the growth have been the last couple of years if we didn't have that situation. And we're starting to see some of these pretty enormous numbers come through both on the -- through Nielsen in the weekly data that we're seeing. And it really what it comes down to is, in stock, we also feel like the media performance and the advertising that we now have on air is the best we've ever had. And we know the correlation between the media and the impact on -- not only driving penetration, but also revenue. We are really confident in our innovation, and we're also seeing really nice steady progression and distribution. So it feels like every single thing is lining up on the business behind finally having enough inventory.

Anoori, I would just close that with the -- it is amazing, it is very different -- we are very different position than most other companies. We’re managing risk means, you manage the net sales via the demand part of it. We think the demand is our strength in the driver and it has been. So we're trying to manage the risk entirely by giving ourselves plenty of cushion and plenty of room on the supply side.

Thank you. Our next question is from Mark Astrachan with Stifel. Please proceed with your question.

I guess just directionally following up on that. You talked about I guess what mid teens 15% or so benefit from pricing this year? Yes, even at 35. So that implies volume trends of, a lot weaker than where they were running. A year ago, you talked about elasticity having not a huge impact. And obviously everybody else in Pet is taking price. So maybe if you could kind of parse those two pieces out there. And why this number couldn't I guess be potentially bigger? I mean, I get wanting to guide conservatively, the price is obviously a much bigger piece of the puzzle this year relative to what it's been historically. So how do you think about that? And then, theoretically, I guess you talked about in the presentation staff capacity, which is still, 100 million plus above what you guided do for revenue? So is that something that you can potentially meet, if demand is there, again, potentially, to what Scott was talking about in terms of kind of the perfect storm here of advertising spend and innovation, et cetera. So there's a lot but anything there will be helpful.

Let me take the front part of it and tell you -- remind, because we did put an awful lot into our prepared comments. But to the first part of your question about pricing at 15%. What we said in the comments was that the -- we've built into our plans, that unit movement would be about 10 points below what the net sales movement where the measured, a track movement would be. So we're getting about a 10-point help, instead of the 15 points that come from pricing. So that's the assumption that we've got in the plan for price sensitivity. If price sensitivity turns out to be less than that, if it's a straight benefit to the bottom line, that would imply five more points of growth from purely from the pricing. Scott, you want to just talk about the upside as you see it based on the demand side of it?

Well, let me touch just a little bit on what we know on pricing at this point, just to level set, everybody if that's all right. So on dry, we're seeing between 8% and 12%, on wet we're seeing, and I'm talking about like where it's going to land, right, and I don't have a crystal ball. But I'm just from what I can see. So far, it looks like it's 8% to 12% and wet is going to be 12% to 30%. As we've mentioned worried about 17% on the two increases together, the first one is in place. The second one is effective as of today, and that was said in the script. I think it's also in the presentation. So we have seen a couple of specific places where there have been moves on a few items. From the first price increase moves on a few items for the full price increase already. So let me talk about the first price increase. And Mark, I don't know if I can totally answer your question. But I'm going to give you pieces to the puzzle. So if you look at the first price increase what we've seen so far, which is between 5% and 6%, depending on the item. It looks like there's virtually no impact so far. Now it's really hard to read because there's a lot of different drivers going on. We're getting back in stock. We also see a little bit of mix, but it looks like there's almost a price increase. There are a few instances as I was mentioning, where there are a few skews and some of our top customers where they've gone ahead and moved all of it already. One of those is our six-pound chicken roll, for example. And we've seen about a 15% price increase which would encompass the move from both the first and the second price increase or the majority of it. And that item over the course of February is up 86% in that same retailer. So it's really hard to read, but it looks like we are moving through the pricing really, really well. But we again, we don't know where it's all going to land. We don't know what's going to happen when the entire the entire lines up but it looks very encouraging at this point. And as we were touching on -- as I was touching on earlier, from a demand perspective, it looks like consumers are waiting for us to get back in stock and get back into our products.

Thank you. Our next question comes from Steph Wissink with Jefferies. Please proceed with your question.

I wanted to just pull on the common thread here again and try to stress test your plans for distribution. So you talked about demand, and what your anticipation is for maybe a little bit of household penetration destruction and then revival in the back half. But talk a little bit about the retailer conversations and how your commitments are in terms of [project expense] [ph]. And I think you also mentioned some larger refrigerators to help us reconcile that the guidance with what portion is unit growth, demand growth versus incremental accessibility growth with distribution? Thank you.

Yes, absolutely. The vast majority of our growth this year is going to come through penetration and buying rate, the biggest piece should be penetration. The way we think about it is, our advertising and marketing should drive about 80% of our total growth in the year. And then, the last two pieces of distribution and innovation should be the other driver. So I would say about 80% of our total growth should come through the marketing and the advertising that we're putting in place. So it is the key driver. Although we are getting more stores and we have in the presentation, you'll see, there's a lot of information I know, you'll see about over 1300 new stores, you'll see significant increases in -- not only we upgrading almost 1000 fridges, but we're also adding a fair number, almost 900 second fridges, so all of those pieces are coming into play. And the one thing I will say is, I think we have been very transparent with the retailers and in all of our communications all along the way, we have been far from perfect. But we have delivered lots and lots of bad news. And I think we've laid out the plan that we shared with them early last year about what we're building, we're now being able to show them not only what we're building tangibly, both Kitchens 2 and what we're doing in Ennis and Kitchen South, but now we're actually starting to really fill trucks at different types of levels. And I think that there's a tremendous amount of confidence and working together with us to really build out the first type of category.

Thank you. Our next question comes from Bill Chappell with Truist Securities. Please proceed with your questions.

Just want to understand, I guess, two things, one on the absorption and one on kind of the sales of refilling the shelves. On the absorption, is this basically, you're building a safety stock. And even if the demand is greater than you expect, you want a high level of safety stock, which I guess could go stale throughout the year? Or could that number come down meaningfully, if demand goes up. And then on the revenue -- in terms of filling the channel. I think we expected last quarter, your initial expectations were much higher than consumption growth, as you were refilling the channels. That didn't happen because of supply chain issues. So I would have thought that you would have a big bump in this first quarter as you finally refilling the fridges. Is that not the case? Is that just happening more throughout the year? Or am I missing something? So I guess first, help me understand the absorption and how it works for the year and help me understand the kind of the flow of revenue as you refill the shelves. Thanks,

Bill, let me take the second part of your question and then Heather will answer the first part of your question. But in the second part of your question, we pretty much completed the trade inventory refill as of this week. We've been shipping very strongly and as I indicated in the prepared comments, our net sales or our sales to-date are up about 38%. Last year’s March was a little bit -- last year’s February was weak. Last year's March was much stronger because we were bouncing back from all the storms we had in February. So you'd expect that we got some benefit. And we know what we're giving you is a projection for the first quarter that will kind of be online with where we want to be. I would also just caution that we are doing as we said, we completed our ERP conversion. And we feel very good about where we are. But we just want to give ourselves a little bit of breathing room in case there are any glitches or any issues with trucking or anything else that might happen, like happened in Q4. So we're trying to be a little bit cautious and conservative on it. But the trade inventory refill is pretty much done. Fresh from the Kitchen was going to be the last thing we refilled. And we haven't cut a case on fresh from the kitchen in three weeks. So we've been shipping pretty full. Heather, do you want to take the first part of the question?

Sure. Yes, so Bill, it's not a safety stock, the way you want to think about it is, what we call a buffer capacity, it's really stacked capacity in our cost structure. So we're planning for stacked capacity that supports a business that could be upwards of 15% greater. So if we had no supply chain, kind of operational issues and things continued to operate smoothly with no disruption, then increased demand can be supported by this fixed cost structure that we have in place 15% more. Having said that, in months where we might have some sort of operational disruption, and we talked about in our prepared remarks around what happened in January with Omicron, where we shut down a line during the month of January, that allowed us to sort of operate and support the demand that was there without disrupting customer service. And so that does eat away at that buffer. But having said that, it allows for that disruption without missing any sort of -- missing our, our sales guide. So it protects on the upside. If we do have the upside, then that, of course takes away the margin impact as well.

So just to be clear, as we move to the fourth quarter, you would expect kind of the run rate of that absorption to be kind of low single digit millions. Is that, right? I mean, you're starting high, and then you're kind of growing into it, you won't hold this kind of level forever.

I think we will always plan to have some buffer capacity, given our level of growth. But having said that, the outcome of how this impacts the financials will depend on how things progress. If we could face margin impact and absorb -- and not absorb any of it, if every month we had some sort of operational constraints, which we don't expect to have, like January. But having said that, we could also support a higher demand. And that's why we're spending on media head and trying to invest for that increased growth, we can absorb that with this buffer capacity as well. So by the end of the year, it will either result in supporting higher demand. And so therefore, you would achieve a higher margin or it would support the guide and not impact margin because we have that buffer capacity there.

Thank you. Our next question is from Robert Moskow with Credit Suisse. Please proceed with your question.

I was hoping for a little more clarity on slide 37, where you show the profitability of Bethlehem campus when it's 535 million in sales. And I guess that's where I'm questioning is, your total company's not at 535 yet. So what's the sales basis for this scenario? And how do you come by these numbers that shows the cash generation?

Heather, you want to take that?

So, the 535 is a capacity view of the Bethlehem campus Rob. So and what we've done is, we've taken and it's simply a reflection of the capacity of the facility and revenue, the cost structure related to that, which is now -- it's not fixed, because we'll continue to drive efficiency initiatives and drive cost savings initiatives to even improve that. But as it stands right now, when you look at that net sales capacity with the current cost structure of Bethlehem, you have a 50.2% margin. So that's the first stopping point. Then what we've done is we've taken a fair share of the SG&A expenditures, to have a view of what is the contributions of that facility look like? And again, that's the question shade of our SG&A expenditures, which we know we're working on driving further improvements via scale, we have growth leverage in G&A, as well as logistic scale. So that will even improve. But we wanted to take sort of a stopping point to say what is this worth now, knowing that it'll even get better. And that's what that margin represents.

Rob just to clarify one point, 535, it says in the footnote down, there's a total company sales of 600 million, it would mean that if we were deciding to use all the capacity in Bethlehem, and source the rest of the stock that we need to get to a $600 million number would come from other sites. We may choose in, depending on the mix of the products that we sell this year, we may choose to not have some of it come from Bethlehem, some of it might come from Kitchen South or might come from Ennis, depending on what kind it is and where it is. But as the capacity and staffing plan that we've demonstrated and proven they're operating today, this is what you deliver at the pricing, this is at the full year -- if you had a full year of the pricing that's in place as of today.

So it's also the full, it also assumes all the pricing goes through as well.

Yes, that's in the footnote full year benefit is 228 ‘22 full price increase.

Okay. So, it's all it as soon as all of your pricing is offsetting the inflation, which has been substantial.

That's correct. It just results in basically a two-month correction, because it didn't have the pricing in January, February, but it had the costs.

Thank you. Our next question is from Brian Holland with Cowen. Please proceed with your question.

Yes, thanks. Good evening. So just to clarify here on the guide, and the 13 million to 17 million, you are front loading your media spend, I think, Billy, you mentioned potentially leaning heavier into the media spend, as we go through the year. So is the thought process here that as long as the risk factors that you laid out, that are supporting the why you would want to have that buffer capacity in place. So and it comes online on time or no further delays than what you've currently projected, everything else is okay. And you're seeing the correlation between your media spend and your sales, you would lean into those, you would lean into that excess buffer capacity in the second half of the year through increased media spend, that would close the gap between your buffer capacity, which is 660 million and we would lose the absorb cost. Assuming that's what you chose to do, is that the way to think about that?

Conceptually right, there's a timing issue in all those in that scenario that you laid out where as we said, we're front loading the media to like 65%, first half 35%. In the second half, if we found ourselves running towards net sales that were well in excess of what our plan is. We would have the opportunity to add more media in the second half, you wouldn't get as significant benefit. It was more carrying you towards the next year. But you would have that opportunity. But there are lead times both on the media commitments as well as on the making sure you ramp up all the right staffing the right places. We will have plenty of staffing to support a significant part of that. We just want to make sure they're also reflecting whatever the risks are, that are out there, whether there are transportation risks, whether they're ingredient risks, whatever, there could always be some of those other elements that can constrain us. And we just want to make sure that we have the capacity before we lean into the higher level of media.

Understood, and then just on the media spend. You mentioned International and you're tacking France into that mix now and leaning heavier into that. Maybe I don't know if it's possible to dimensionalize between kind of like media spend behind North America or U.S. specifically, and the rest. But if we think about that, how much are we spending on the U.S. relative [indiscernible]? Are we leaning in heavier there is that spent –

Definitely 90% U.S. is the way to think about it.

And Brian, strategically and conceptually, we sourced the U.S. to where we think it needs to be before we put the revenue into the other markets but to the media and to the other markets. But we have more than adequately funded the other markets but we do not put media money into those countries at the expense of the U.S.

Thank you. Our next question is from Peter Benedict with Baird. Please proceed with your question.

I have two questions. First, can you maybe talk about the CapEx budget, how you kind of see that this year, and maybe next? And how kind of the bigger the borrowings are going to flow? That's my first question.

Heather, you want to take that?

Yes. So I know we've touched on in the prepared remarks that we're looking at our plans. And, we are doing that, but from a 2022 perspective, from a spend perspective, it's largely in line with what we've shared. So just from a financial perspective. And we're reviewing plans, as we said, of course, as you know, from a marketplace perspective, there's longer lead times and inflation that we're facing. But our focus and looking at the refined plans is really around, taking an opportunity to look for capital efficiency and ways to optimize. And so, one of the things that we are doing is looking at our existing infrastructure and how we can continue to expand on our existing infrastructure, as well as, increase capacity in smaller increments. So it's all in the works. And what you should know, from a funding perspective, consistent with what we shared at ICR, is that we're looking to amend our credit agreement at this point to provide the flexibility to support those plans.

Okay. And then, just wanted to clarify the kind of a cost view. That's, I guess, embedded here with the inflation. Are you just assuming that the costs that you exited the fourth quarter with or kind of what's going to persist for the rest of the year? Is it more what you're seeing today, you're assuming continues the rest of the year? Or are you assuming either any relief on the inflation front or incremental headwind, and I understand that cost, inflation is commodities, it's on phrase, it's on a whole variety of things, but just trying to understand how you built this plan from that perspective.

So, first of all, this reflects what we know, of course, exiting 2021, coupled with what we locked in in terms of our chicken contract, which is meaningful piece, as well. It contemplates our expectations of inflation for this year, for the full year. As best we know it right now, a lot of what we buy is on a contract. But there is variability, of course, within the cost structure as we saw, of course, in 2021. What you see in terms of the margin impact is a reflection of -- our best expectations of the inflation. But a mismatch really around price versus inflation, where the second price increase, as we mentioned, started today. So you're missing -- when you think about when that comes in, it's about two and a half months of a mismatch in terms of price versus inflation.

Thank you. Our next question comes from Bryan Spillane with Bank of America. Please proceed with your question.

Just two quick ones. For me, the first one, maybe this is just -- I’m a little dense on this. But if we're looking at the $660 million, I guess staff capacity at Q4, how much of that? Does that include both price increases? And I guess we're trying to think available capacity for '23. How much of it has been increased, I guess just in pure pounds versus dollars available, just because you've got more pricing now contemplated, then, I guess you would have thought a year ago. So just trying to see if there's actually more pound capacity available and that there's not a risk that, you can -- if you over deliver on volume that creates some additional tightness and capacity.

So it's a little bit complicated, because there's a lot of moving parts in there. First, we actualized all of the capacity numbers based on what our one experience has been, the efficiencies, we're seeing the yields we're seeing. That 660 number that we had been sharing before had been prior to the assumptions for price increases. So theoretically, there's the increased value of the price increases that would flow through. There is some mix differences because those different items, the capacity doesn't necessarily all match up with the same size of the price increases. So there's some moving parts that are in there. If the broader question is, is there some risk that we're going to be tight on pounds capacity in this plan. We think we've got plenty of headroom and we have the ability to flex the headroom quite a bit. If you think about what we said in the prepared remarks. The first place that we could be tight is going to be on rolls, the rolls line that's coming up in the third quarter now from Ennis is going to be -- we're going to be tightest on rolls, when we get there. Once that comes on, and it's such a large increment of capacity, we should be fine in rolls for a while. The next place we're going to have capacity tightness and pounds will be on fresh from the Kitchen. And that's where we heavily dependent on the bag line that comes up in Ennis, which will be coming on up in the fourth quarter. But we'll have lots of roasted meals, bag capacity. So if the demand that comes in, as it comes in throughout the year is on roasted meals, there's no issue with available capacity. Depending on where you're are and rolls and fresh from the Kitchen, you could be just short of capacity coming on. But once it's on, you have more than a pound of capacity and the ability to expand that pound capacity through incremental staffing hours. So it's a long-winded way of saying I'm not worried about the pound side of this thing. I think that we're pretty well prepared for that, assuming we get the construction of Ennis up and get it started up.

Okay, now, that's helpful. And then maybe just one second question, Billy is just, can you just give us a sense or your perspective on, just how competitors in the fresh segment coming into the market have impacted the demand for fresh? And I guess we've seen a lot of advertising for the Farmer's Dog and their social media following right, as followers have increased, substantially in the last six months. You've got, I guess, just food for dogs now in Petco with distribution there in frozen. So, just trying to understand, as you see more competitors coming into the market, is it actually just expanding? awareness of fresh, it's just good for the segment in general? Or are you concerned at all about just the competitive dynamics heating up?

I would say that with a world of exploding in our case, and it's just making the opportunity that much bigger, but Scott can give you a lot better color on it.

Yes. So obviously, we take -- keep a really close eye on all of this. And I think maybe the best place to answer that or start with that is, when we look at where the future state is. And you've heard us talk a little bit about that. But we believe that the future state for fresh and fresh and frozen, however people want to divvy it up. It's kind of a $6 billion, kind of piece of the pie. Some people have seen four, some people have seem six. It's a very, very big piece of the category into the future. So there's a tremendous amount of potential. I mean, obviously, our goal is -- we're the incumbents, we think we have an incredible proposition, portfolio we've built -- we've been really thoughtful to try and build a really, really good business. So we've seen a lot of people come in over time. I mean, there was a, I think you remember, probably a few years ago, there was a billion Margo product, and there was a farmers market product. The frozen DTC guys have -- they've been around since like 2014/2015, pick your number, they've been growing, they've grown to, well over $200 million on the retail number. So we've seen a lot going on, and all during that time, we've been able to maintain a 25%, 30%, 35% growth rate, depending on the year. So we think there's an incredibly big TAM, we know that we've been able to grow incredibly well through it. And then as we've watched some of these competitors come to market in multiple different classes of trade, typically, our performance has not been impacted whatsoever at the retailer they're at. And we've also tend to outperform them significantly. So I mean,…

Thank you. Our next question is from Jason English with Goldman Sachs. Please proceed with your question.

Congrats on the capacity for getting that right sized. You mentioned the step up in media to 12% of sales. Can you tell us where you finished 2021 out?

Heather, do you have that?

Yes, I do. We finished 2021, I’m just pulling up really quick to give you, about 10.5 -- little over 10.5%.

Okay. So this was the biggest year-on-year increase in media spend, I think in the company's history. But you're pointing to as a driver of the slowing penetration growth? How do I put those two?

Jason, I think it's a really key point. And the biggest challenge we've had is, we've had periods where we are completely out of stock on cat food. We're completely out of stock on bags, or completely out of stock on rolls. And over the course of the year, you can see those moves were when we are out of stock on those specific items that people tend to really prefer like forms, which is really the first decision that people make. We lose those people for periods of time. Now, what I can tell you is, when those products come back in stock, the growth rate is extraordinary and it's explosive. I can show it to you like by item. So when we finally get all of our products in, I think we're going to have a really, really significant explosion in our penetration. Now, I think it's an interesting way to look at it. But in a way, being having all that adversity this past year, and being able to put up the growth numbers that we put up and it coming more from [buying rate] [ph]. I think it demonstrates the dedication that a lot of consumers have to our product and how they were willing to stick with us because quite honestly, we did not -- we aggravate a lot of folks. So we're keeping a close eye on it. It appears like we're off to a really good start. The business of responding well to media already this year, you can see it in the growth rate. You're going to see penetration -- it's always a slightly trailing indicator before we get into the data. But it looks like we're going to be back on track with our penetration growth.

Well, Scott, in terms of back on track, you were running sort of low to mid teens penetration growth pre-COVID. And over the last two years, so to your CAGR, during COVID is around 16%. Why isn't that on track, like if so now, I heard you cite a 24% number. I'm not sure where that is. But these the data we're looking at your longer term CAGR on penetration has been sort of mid-teens. But your underwriting something above trend, what gives you that confidence.

Let me just take a shot. I think I'm not sure what data you're looking at on the penetration numbers. But as we think about the penetration, the penetration gains were in the 20s for back-to-back years in years 19 and 20. And when we look at it -- look at the media spending and the conversion from that index, it's been at a very consistent rate, and consistently improving rate with the only year where we are off within 21. And we were off because frankly, the out of stocks. We had a better than expected year in 20 because of all the pandemic related stuff. But 21, the efficiency in 21 for a conversion of media into penetration was better than what it was in 19. So we saw a continued improvement. And so if you convert the media spending that we're planning this year into household penetration, we feel comfortable, we're going to get back to where we were, the trend line that we were on.

Thank you. Our next question is from Rupesh Parikh with Oppenheimer. Please proceed with your question.

And I'll be quick here. So just in terms of the guidance the 13 million to 17 million on absorbed expenses. So we see higher sales during the year, would the flow through be higher than normal for the sales?

Heather, do you want to take that?

Rupesh, can you just clarify what you mean on flow through?

Yes. So you already have these costs built into our base of 13 million to 17 million. So if you end up seeing higher sales in your guidance, would the flow through on those incremental sales be higher than normal?

It will, yes, you will just have the variable in costs on there. So we will basically improve margin for each dollar of -- you get a margin benefit because you don't increase the plant costs related to that. And that’s dimensionalized in our slide deck as well where you see the adjusted EBITDA impact on the flow through as well there.

Okay, great. And then just one more quick question. I know labor availability and freight costs were headwind last year. What do you guys see right now in the labor availability, front? And then for freight costs, I know it's very volatile out there. Have you seen any stabilization? Or is it still hard to conclude where it's going to end up?

I'll take a shot at that. The labor part, we think the move that we made last year was the right one. And it's working. And we've seen an improvement in our retention rate or think of it as we've cut in half the turnover rate that we were seeing before. And so we feel very good about the move we made. It's doesn't mean that we're perfect, we have to stay on top of it. We also did some changes in the employee benefits that are designed to better meet the needs of the of the younger workforce that we have today. But we feel like that move has worked. And we're not worried about labor availability, at least not for the foreseeable future. On the freight side, that is a tough market. We're seeing costs go up because of fuel costs and we're also seeing the availability of trucking. It is better now than it was in the end of the fourth quarter. But it's still not what I would call a great place to be. We're a long way away from being in balance and stable on freight transportation at this point.

Thank you. Our next question comes from Jon Andersen with William Blair. Please proceed with your question.

Most of my questions have been asked and answered. Just one quick one. The new fridges for 2022 step up, sounds like more than 3000 whether that be new stores or upgrade your second fridges? Can you talk about first the cadence that you expect through the year? And second, a little bit of color around where these placements and upgrades are going to be concentrated? And what that typically does for you, does it drive household penetration? Does it drive buy rate? What's the kind of the benefit as reflected in your primary drivers of your business? Thanks.

Hey, Jon. So from a cadence standpoint, we believe they're going to be fairly evenly spread through the year, more so than we have seen in certain years. But I would say fairly evenly split. We can end up like a 60:40. But it's going to be pretty darn close kind of an even spread. Where we're getting those placements? Part of them are, almost all of them are existing customers. There's a couple of newer customers, but almost all of them are existing customers or just expanding distribution in stores we're not. On the second fridges, those are stores that are performing quite well and are now either being remodeled or there's a situation where they deemed it where they feel like that we have the need and enough velocity and demand to add a second fridge in there. And the way we think about all of the fridges being placed not only new, but also second fridges, as we use them as a multiplier effect on our marketing or on our advertising. So we have a year where we have extraordinary. So we think of -- it's interesting because Jason was touching on this question a minute ago, when we think about acquiring consumers, we typically look at it at from a CAC basis like a consumer acquisition basis. So what does it cost us to acquire a consumer for our business and the range has been call it $45 to $55, let's just say that's the range. It's pretty close in there. It depends on the year and it depends on what's going on. If we have a year where we get extraordinary placements, we have really good advertising and really good innovation, you're going to see things on the lower end, so like a $45 CAC or so from an acquisition standpoint. If we didn't have any of that you might see kind of 55 or slightly higher. Last year was an exceptional year because of the out-of-stock issues. But that's kind of how we think about it and how it helps kind of -- think of it as a complement to the overall kind of growth on the business. Again, about 80% of the growth is driven in marketing, the marketing a slightly more effective because we get a lot more fridges, they're higher visibility fridges and we have really good innovation. So that's really kind of how we typically kind of think about building the revenue model for the business.

That's helpful. If I could squeeze one follow up in on innovation. Billy, I think you mentioned a good slate of innovation mostly mid-year. I know you're not going to talk about specific items not asking you to talk about specific items. But can you talk conceptually about the size of the innovation pipeline? And maybe the focus of it, type of dog, occasions, different forms, just to give us a sense for what we may be opening up here in terms of incremental TAM? Thanks.

I don't think we have enough time for Scott to answer that question.

So Jon, it's another one of these things where we spend a lot of time thinking about. I think we've gotten to a point where we know when we're adding innovation, innovation is going to improve our business performance because like some people have unlimited shelves, right? Or the potential of unlimited shelves, we don't, we have our fridges, and we sometimes have second fridges. So we want to be very, very prudent and thoughtful on the innovation we're bringing to market. So when we're testing innovation, it has to be more successful than what we already have out there. And it has to bring incremental consumers into the business into the portfolio. So that's really how we evaluate it. So we continue to always identify where are there gaps and where are there opportunities. One of the things we've seen is there is a lot of opportunity around size specific items, certain sizes of dogs, certain aspects around sustainability, people are really interested in, we're going to do more and more around sustainability, you'll see different things that we're doing on our lines and our businesses and our products. You're also going to see more and more plant-based items continue to come. We think there's a tremendous area of opportunity. And then finally, we know that convenience and customization is really, really interesting to a subset of consumers. And that's really what we want to tackle and we think that we have an opportunity from a fresh perspective, to do an amazing job customizing and creating a very convenient products for consumers that feel very specific to their pets. So there's a there's a pretty broad array. Probably I think, late this year, we'll probably do a very extensive sharing session with the investor and analyst community and we'd love to kind of share more details at that point.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Mr. Cyr, for any closing comments.

Great, thank you. Let me just leave you with one thought from American humorist, Corey Ford. Properly trained a man can be dogs best friend. To eliminate any doubt properly training means that you know to feed Freshpet every day. Thank you for your interest and attention. Good night.

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