Greetings and welcome to the Freshpet, Inc. Second Quarter 2023 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] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. Jeff Sonnek, Investor Relations at ICR. Thank you. You may begin.

Thank you. Good morning and welcome to Freshpet's second quarter 2023 earnings call and webcast. On today's call are Billy Cyr, Chief Executive Officer; and Todd Cunfer, Chief Financial Officer; Scott Morris, Chief Operating Officer, will also be available with us 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, 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's a summary of the results and guidance they will discuss today. Additionally, we'd ask that your questions remain focused on the performance of the business and the results in the quarter. Management will not discuss the upcoming Annual Stockholders' Meeting or other topics beyond what is being reported here today. With that I'd now like to turn the call over to Billy Cyr, Chief Executive Officer. Billy?

Thank you, Jeff, and good morning, everyone. The message I would like you to take away from today's call is that the Freshpet business has real momentum on both the top line and the bottom line. In both areas, growth and operating efficiency, we believe that we're still just scratching the surface of the enormous opportunity ahead of us and remain convinced that Freshpet food is the future of pet food and we believe that Freshpet is very well positioned to lead the transition to fresh for many years to come. In Q2, we made significant progress on the adjusted EBITDA improvement that we committed to delivering this year, while simultaneously re-accelerating the household penetration and volume growth that supports both our near-term and long-term growth targets. The operational improvements are the result of the intense focus and organizational capability we've built in the areas of quality, logistics and input costs and in improving operating environment. The re-acceleration, household penetration volume growth are the result of our unwavering focus on three foundational pillars that underpin our strategy. The strength of Freshpet proposition, the exceptional support of our customers and our long-standing demonstrated marketing and innovation mastery. I will share a few highlights of our performance and a few thoughts on the outlook for the balance of the year and then Todd will provide more detail on the quarter and an update on our guidance for the year. The highlights are, first, strong net sales growth. We delivered 26% net sales growth in the second quarter and our 20th consecutive quarter with greater than 25% growth. This quarter's growth was in line with the guidance we shared for the quarter that called for mid-20s growth and puts us on track to deliver our 2023 plan and our 2027 goal of $1.8…

Thank you, Billy, and good morning, everyone. As Billy said, in Q2, we continued the strong performance we saw earlier this year and have raised our adjusted EBITDA guidance to reflect that strength. Let me break it down a bit further. Net sales came in at $183.3 million, up 26% versus a year ago. Our net price mix was up slightly more than 7% versus a year ago in the quarter and volume grew around 18%. Total Nielsen measured dollar growth was up 23% versus a year ago in the quarter, but our growth in non-measured channels was much stronger and added about 2.5 points to our measured channel's growth. The growth was broad-based across channels ranging from a low of 15% in the pet specialty channel to 25% in xAOC and greater than 50% in the unmeasured channels. Adjusted gross margin was 39.8% in Q2, 110 basis points better than a year ago and above our base expectations. This improved performance was due to a variety of factors including improvements in the cost of inputs, quality, better pricing, and a solid start-up in Ennis. All aspects of our operational improvement plan that our team is focused on. We expect these elements will continue to improve as we move forward and drive continued margin enhancement. As we ramp up production in Ennis in both our operations and in chicken processing, we will have some margin dilution due to the less-than-full utilization of our capacity and the cost of incremental staffing as we prepare to start off our next line, but we will grow into that over time. The increasing production in Ennis will also make us a much more resilient company able to absorb the kinds of incidentals supply issues that we struggled with in previous years and also lower…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Mark Astrachan with Stifel. Please proceed with your question.

Hey. Thanks. Good morning, everybody.

Good morning.

I guess I'll ask about media spend and sort of how you're thinking about that. In terms of the timing through the year, I get that. But in terms of what it's bringing in, how you're spending relative to a few years ago is still as efficient as it was in terms of the historic correlation, how are you spending it versus social media other sort of new age media purchases versus more traditional. Are you aiming it at new consumers, is it aimed at existing users, how do you think about who you're bringing and how you think about the returns on the different cohorts of folks? And maybe if you could give an update on how you're thinking about the cohorts in terms of repurchases as it relates to the media spend that'll be helpful. Thank you.

Hey, Mark. Good morning. So I think like, historically, we've always been heavily weighted towards the front half of the year from our total media spend, and this year, we have actually more money budgeted towards -- a little bit more budgeted in total dollars towards the back half of this year. So for kind of where we are year-to-date, if you look at our overall media plan and the timing and correlation around household penetration, we were waiting for an inflection point and we're hoping to see it in February and it really started happening in late February, early March. So it was kind of times similarly to what we've seen in the past. If you look at the overall year, we're slightly above our historical on kind of dollars per consumer. So it's cost us a little bit more to get consumers year-to-date, but if you look at the period since that inflection point, it's actually starting to perform well right back in the norm. And I think this goes back to a much broader piece that we're seeing on the business. To be back in stock consistently with full fridges plus the media plus the innovation and all of those things working together, it's what's driving those efficiencies and I think we were still between pricing and not being consistently back in stock and really smooth the supply chain until kind of over the course of Q1. I think that was holding us back. So we're really excited to see the media respond to really kind of drive the household penetration and the thing I think we're most excited about is to be able to see that it's not just driving dollars that we're seeing really, really great progress on a pounds and units front, which I…

That's great. Thanks, Scott.

Thank you. Our next question comes from the line of Peter Benedict with Baird. Please proceed with your question.

All right, guys, good morning. I was hoping maybe you can expand a little bit more on the unmeasured channel growth, how strong that's been. Just some more color on what's driving that and how you see kind of the durability of that above average growth?

Hey, Peter. Good morning. So we have continued to see a really, really nice expansion and when I say expansion, just continued strong and leading growth in the non-measured channel, and those that centered around both club and e-commerce, the e-commerce is still on the smaller side of our business, but we're recognized and I was just mentioning a lot about the marketing performance that we've seen. We've been able to see incredible returns, one we're very, very careful and selective around some of the marketing that we've done around e-commerce. So we're really proud of that. The team has done a terrific job and we just love, we love the progress there and we also see the opportunity in that area. We've been a little bit of a laggard in pressing into that area, partially because we just haven't had the inventory for a few years. So we really don't want to kind of press into a new channel as much. So there's a lot of opportunity there. And on the club front, we've been able to get distribution and we've come with a proposition that works for all the different partners. We think it works well for the consumer, works well for the retailer, and then works really well for us and we continue to see really, really nice expansion there. The other thing that's I think important to note, in those unmeasured channels is we've done a pretty significant amount of work and been able to identify that the consumers coming in on those non-measured channels seem to be incremental to the kind of the overall business. So we really, really like that aspect of it.

Great. Thanks. And then just follow-up would just be around pricing, Billy, that you mentioned a desire to avoid more price increases. Just curious if you could comment on behaviors you're seeing across your price points, across your assortment, and maybe how you feel about how that set right now. Are there any adjustments that you think you might want to make given demand elasticities across your portfolio? Thanks.

Yeah, we feel very good about where we're sitting right now. Obviously, the consumer had to digest 27% pricing in 18 months, and there were some bumps along the way, but we've come out the other side and we feel like we're in a really good place today, the value relationship looks pretty good. The only piece of shift that we've seen is we've seen a little bit more of rolls consumption than bags, but it's very small in the grand scheme of things. For the most part, the consumers, they digest the pricing quite well. It's a little bit hard to see some of the, all the details because our in-stocks have been improving quite a bit since where we were a year ago and that masks some of the price sensitivity you might see. But overall, we feel like we're in a pretty good spot. And frankly, we like where we sit, because the commodities seemed to be somewhat stable, consumers have adopted our pricing. So we feel like we've got a fairly clear smooth sailing for at least the foreseeable future at this point.

Great. Thanks so much, guys.

Thank you. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.

Thank you. Good morning.

Good morning.

Can you just unpack a little bit and help us make sure we understand what drives the volume acceleration in the second half and just how much of the EBITDA guide is tied to that pickup as well?

I'll talk about the acceleration and let Todd will talk about the EBITDA pickup, but what's driving is the consumers have digested the pricing and the in-stock conditions look good. We're getting lots of second fridge replacements and the media is on air and working the way it worked historically, as Scott outlined in the earlier question. So it's the, basically, the return to the business model, getting to work without all the bumps and out of stocks and media not necessarily being on air. So it's really back to business as usual. I don't know, you want to talk about back half?

Yeah, back half is pretty simple, it's really two aspects. One is, as you know, we spent more heavily in media in the first half, almost two-thirds of our spend happens in the first half versus second half, so that delta between first half and second half in absolute dollars is almost $25 million, that's a huge chunk of the EBITDA second half weighting there and then just sequentially every quarter, we're anticipating revenue will be larger. And we'll obviously get a variable margin off of that. So those are really the two big pieces and we'll continue to see very favorable logistics costs. I think we will even do a little bit better in the second half than we did in the first half, but those are the big buckets.

Okay, that's helpful. And just I know you said it's early for next year and that makes perfect sense as far as some of the input cost visibility, but can you give us a sense of timing of when you have your discussions to lock in chicken? I think you contract that annually. Obviously, those prices have come off and just curious kind of when the sweet spot is for figuring out when you would be locking in for next year and how far away that is?

Yeah, I mean, we officially lock in December but the discussions start as early as September and it's sort of dance that goes on between us and the chicken suppliers over that time period, and it's always hard to say because as you think you know the chicken market can move fairly quickly. The growing cycles on chickens is very short and so supply and demand can expand and contract fairly quickly. So we're optimistic, we're encouraged. I do think you have to remember that our price on chicken didn't go up as much as what you'd see in the publicly reported information for chicken for the human market, but, so it doesn't have as much room to go back down, but there is still a little bit of room there. We don't know what we'll see by the time we get to the end of the year, though.

Okay, great. Thanks so much.

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

Thanks, operator. Good morning, guys.

Good morning.

Good morning.

Hey, Billy, if I could -- we got a couple of questions on this today and so maybe if you could talk a little bit about, I think, it's slide 30 in the presentation where you lay out the volume growth or the volume chart. And can you talk a little bit about how that looks like on a multiyear stack basis? I think the question that a lot of people have kind of -- has come into my inbox this morning is just how much of the volume acceleration is basically just the comparisons and maybe some distribution fill and just how you gain comfort with that and trying to look at it on some sort of stack basis? So I guess net of it is, how much of it is easy comps versus household penetration and growing again?

Yeah, I think the way to think about it is that what you're getting to is in the year-ago period, in the early part of the year, you had a continually elevating price, which is driving a little bit on the price side not necessarily on the pound side. On the pounds, but once the prices stabilize both this year and then a year ago, the pound growth starts accelerating growth and we're seeing on a week-to-week basis, we're seeing the pounds go up very consistently, which is a little bit unusual for this time of the year. For us to be in the summer and see pound consumption increasing week to week, obviously, there's a little bit shift as you go through the weeks of the month, but for the most part, we've been seeing consistent growth on a sequential basis throughout the summer and that's very, very encouraging to us. So we're very bullish on the volume growth side of the story. And we've obviously seen even more data than there but what we can tell you is the volume growth continues to accelerate quite a bit.

Let me -- I'll just expand on that a tiny bit. So if you take an average of Q4, and this is Nielsen Mega and you basically take that average and you look at where we are to date, we're up about 12% versus kind of that Q4 average in pounds. And so it's been, and it's been, like Billy said, it literally from February forward, every couple of weeks it's been consistently up. So the compare -- I think you can look at comparables, but I think you look at where you were at the end of the year and you look at versus the prior period, and it's been consistently up since February and I mean -- and we -- every couple of weeks, we're setting new records in volume.

Okay. Thanks for that. And then just a quick follow-up to that, I don't, maybe I missed this, but I know you've got the MegaChannel in the slide deck, but you talked about non-measured and some of the other channels, so do you have a composite of all channels kind of what consumption was in the quarter and kind of where it's running now? So if we were because -- We can't see all of those, the other two. So just trying to get a sense of what the composite of all channels looks like consumption-wise.

Yeah, so the unmeasured is still a relatively small part of our business. We quoted that volume was up 18% in the quarter and that is the composite that includes the measured and the unmeasured, it's based on our shipment data, so we can use that to project it, and that's the acceleration we've seen quarter-to-quarter 12% to 14% to 18% in this quarter and we're still seeing that continue to accelerate. The big driver of that is the part that's in the unmeasured is, as we said in the call, is growing at a rate that's in excess of 50%. And so while it's relatively small, it is an expanding portion of the growth.

Okay. So we should look at the 18 volume as a decent proxy for consumption. There's not like a lot of inventory or any kind of pipe like new distribution or anything like that?

No, that is based on looking at what we shipped and it's also looking at the Nielsen measured numbers as well as what we can track for the customers who are not included in the measured part and that's how you arrive at the 18.

Okay, cool. Thanks, guys.

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

Thanks.

Hello?

Can you hear me?

Now we can.

Good morning. It's just a follow-up on the pricing issue, I understand you're comfortable with the pricing and consumers are increasingly comfortable with the pricing, but what happens if you see more of the dry premium competitors roll back on price where the price gaps get bigger because that seems to be -- I know it's a different market and different product, but that seems to be a, I guess, a risk throughout packaged food in general that we started to see as costs come back, there's more promotions in the marketplace. So, any thoughts there?

Yeah. So, Bill, I think you're right, I think that the reality is fresh food, Freshpet is kind of its own specialized universe. But at the end of the day, there's still, like, it's still a food marketplace. And there are certain, I think people have to get -- consumers have to get comfortable with basically what the value proposition is of what we're offering versus what they can get in dry, and -- but I do think that one of the things that we've seen which has been really amazing is we went up a very significant amount. Like, Billy quoted in the script, almost 27% price increase and to see the expansion that we're seeing in penetration and buying rate, it's extraordinary. And I really think it demonstrates the specialness of what we brought to consumers. I know, I do think that if people start doing a significant amount of promotion, I mean, it could have like a short-term disruption. But I think that we've been able to work through this really well in the past bringing what we brought to market. Now, secondarily, we actually made a handful of decisions over the past, literally six months, to make sure that we're continuing to offer the best value proposition we possibly can. And there's going to be some additional innovation that we're launching in the back of this year that will kind of address that and offer even better value to some consumers at parity-type margins for us. And then we'll also offer some new innovation in the beginning of next year. So I think your point is we're cognizant of that. We think we're at a really good place. We do know that there could be significant promotion going on in the category and we've tried to kind of forward think what we can do in order to kind of offset some of that. But overall, it has not -- we've seen a ton of activity in the past, it has not slowed our progress.

Got it. And I guess on the same vein for the follow-up, I know in the past you've done some, certain customers, do you feel the need to expand that even further if customers are price sensitive or are you very comfortable where you stand?

So, Bill, you cut out just a tiny bit. You said something certain customers and I missed that. I think that was an important --

Yeah. I'm sorry. You're doing private label already for certain customers?

Yeah. Okay.

And this is really was a need to expand that? Yeah.

Okay, got it. Okay. So actually, I'm glad you brought that up. We have actually -- we've actually, based on what we're seeing in the market and where we are and the progress that or the lack of progress we've made with some of that private label, we're going to start, like, basically winding the majority of that -- of those offerings down. We've shared that with most of our customers. And there will always be some discussion, but if you think about the program where it is today, it's going to have, it's going to be significantly less over the course of next year. So we'll tighten that up. And when we have done the private label items, we've been able to actually, for the most part, have margins that are, I'd say, acceptable, they're not, they're definitely not leading by any means, but they've been acceptable to us. So, but overall we think we can, we better utilize that capacity towards some innovation and different things that we'd like to bring to market.

That's great to hear. Thanks so much.

Thank you, Bill.

Thank you. Our next question comes from the line of Cody Ross with UBS. Please proceed with your question.

Good morning. Thank you for taking our question. You guys have been able to re-accelerate volume growth in household penetration, but I just wanted to dig into the metrics you provided on slide 25. Your household penetration is up 10% on a 52-week basis, how does that compare to your plans coming into the year and can you just describe in detail for us more of your volume growth plans in the back half? What you're looking for from household penetration from here?

Yeah. So it's a really good question. I think I had mentioned it in the very beginning when Mark was asking about the advertising. We actually got off to a slow start. January and February were a little bit slower than we would have liked to see from a household penetration standpoint but actually since March, we've seen that re-acceleration and it's actually, we're basically back on track to what type of level of performance we'd like to see in the cost to acquire consumer. So if you'd asked me that in March, we thought it was starting to turn, but it's now really turned and it's really clear which way the line is going, which is up into the right, which is terrific and we've actually posted some more recently, a couple of really, really good weeks and that's on a rolling kind of 52. So pretty big improvements and I think it's, a lot of its behind, again, going -- we're back in stock, we're back in stock consistently, we've got really good innovation. We've got great a great media plan and I think we have epic creative right now. The creative and the advertising that we put in place seems to literally have talk value and really be kind of well adopted and absorbed by consumers in the marketplace. So we feel like we're returning, I think Billy used the term earlier, we're returning to the historical growth algorithm.

Got you. That's super helpful. And then I guess, Todd, just to put a finer point on a question that was earlier, do you think you can hit your revised EBITDA guidance that's higher now if you did not accelerate volume as you guys plan? And I'll pass it. Thank you.

Yeah, look, I mean, so obviously, no change in our full-year outlook. So we're still, we're still holding to the $750 million level. So really no change in what we think the volumes are going to be for the full year. I would say that the re-acceleration happened a little bit later than we thought. Q2 got off to, it was perfectly fine, but wasn't as strong as we had hoped and but now that re-acceleration is a bit steeper than we originally thought. So where we are as we enter Q3, we feel terrific about. So again, no change to the full-year guidance, we thought we could hit that, just the curve is a little bit different than we originally anticipated.

Thank you. Best of luck going forward. I'll pass it on.

Great. Thanks.

Thank you. Our next question comes from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.

Good morning and thanks for taking my question. So just going back to the Ennis facility and the ramp so far, just curious, any positive or negative surprise as you continue to ramp that facility?

I guess I would say that, as you can imagine starting up a greenfield facility is always got ups and downs in it, and we've had our fair share of ups and downs as we've gone along. What I'll tell you is where we are today is we feel very good about the progress we made on the roll side of the business and it's going very, very well and the chicken processing is doing very well. The bag side of the business took a little bit longer and steeper to ramp up than what we would have hoped. We are now producing all the items in the line-up, we feel very good about that, but it took a little bit longer to get to the production levels that we wanted in qualifying all the items, and in part, that's why we've begun to do the staffing for the line, the next bag line. So we give ourselves a little bit more time to start that up. We need that to be producing in Q1 of next year. So we started adding some staffing now, so we can give ourselves a little bit more lead time on the ramp-up of the bag line. But other than that, it's going well. We feel good about it. As we said, it's over 20% of our production at this point. And for two lines, that's pretty darn good.

Great. And then maybe just one follow-up question for Todd. So you've beaten out EBITDA two quarters in a row by a significant margin. Just curious, if we see more upside in the back half of the year, would you consider reinvesting in the business or is there more a bias to let it flow through to the bottom line?

Yeah, look, we have -- it's a very good question and we'll continue to evaluate the returns on additional media if we choose to go do that, but I just want to point out, even though almost two-thirds of the spending is first-half weighted, we have significantly more media in the second half this year than we do next year, I mean, we're going to be up about 40% year-over-year in Q3 and then as you know, we've spent very, very little in Q4 and we'll spend probably over $10 million in Q4 this year. So we have versus prior year and even previous year, we have a solid amount of media in the second half, but look, if we see an opportunity to invest more, we'll definitely take a look at it, but as you know, over time, we'd like that media as a percent of net sales to come down a bit to allow to get to our 18% EBITDA margin target in 2027, but we'll be smart if we see a great opportunity, we'll take advantage of it.

Great. Thank you.

Thank you. Our next question comes from the line of Jim Salera with Stephens, Inc. Please proceed with your question.

Hi, guys. Thanks for taking our question. Billy, I think in your opening remarks, you had mentioned that there was a 2300 bridge commitment from a single customer. If you could just give us some idea around what was the catalyst for them to make in order of that size. Is this something that they've been looking at, now is the right time for them or -- just give us some insight into why that decision now.

Yeah. So I'll expand on that a bit. It's -- I think this is something that's been coming for several years. We actually put a strategy in place, probably about three or four years ago that we called Fresh First. And the idea was how do we get consumers to think about filling their pet foods bowl with fresh first and how the retailer start off the aisle with fresh first because of the inherent benefits in our business model, and I think what's happened is us talking about that and the progress that we've made on the consumer front and then finally being able to build in Ennis, have that customer come and visit there and see that we were going to have plenty of capacity, they got really comfortable going ahead and expanding. And it was an existing customer, very large customer, one of our top kind of five customers and wanted to expand and double down and really put in seconds and third fridges. And I think the core of it, and I've heard this repeated time and time again over the past maybe two years is retailers are looking around going the benefits that Freshpet food brings to their store and their aisle are the same benefits they see on the human side where they see increased traffic, new consumers, strong margins, a lot of dollars per consumer, and really an overall quality halo impact for their entire aisle. And I think they realize that and they realize that it's really advantageous for both their business and then the overall pet food aisle and they've made that decision along with lots of others. And I think we're going to continue to see many retailers kind of follow in behind them and add more and more fridges. I mean we have, we're going to have more, we'll have more fridges almost year-to-date that we've had in some years. So I think we're excited about the change and I guess it goes back to Todd's comment earlier, we've got to make sure that retailers are confident we can fill those fridges, and if they, if we can and we have been able to, then they are willing to put in more.

Yeah, and let me just amplify that point, that this particular customer last July, Sante Group, starting at the buyer and the planner for the pet category all the way up to the CEO to Ennis to walk it and get convinced that we could supply them and they spent a better part of almost a full day with us and at the end, they came away convinced that we'll be able to supply them and we're willing to make that kind of commitment. So now that we've got good fill rates, they can see the net is there and it has the capacity, I would expect other customers to have the confidence to lean in and put more fridges in.

Okay. Great. And then maybe as a follow on to that. If we think about the pet aisle in retailers and obviously, it varies a little bit from store to store, but given that the majority of your new fridges or second and third fridges, how much actual space is there in a lot of these? I mean, did they have to expand the pet aisles or is there enough in most retailers to accommodate a second and third fridge of the larger fridges?

Yeah. So even in a grocery store, you'll see, just in dog food, you'll see typically, at least 40 feet to 48 feet. So there's -- that's just in the dog food section. So that -- there's plenty of room. And I think over time that we're going to continue to take more and more of the calories in the category and deliver kind of really strong metrics to the retailer. I think that there is plenty of opportunity and plenty of room for us to continue to expand for many years to come.

Okay. Great. Thanks, guys. I'll pass it along.

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

Yeah, good morning. Thanks for the question. The past 18 months or so, perhaps even longer have been more oriented around building the capacity, enhancing fill rates, and getting in-stock levels back and I'm wondering to what extent you're now looking at it as innovation, as a key driver, maybe both in terms of kind of filling out the kind of value equation for consumers also targeting maybe some specific segments that you feel you've been underrepresented in? So your question is, I guess, what should we expect from an innovation perspective over the next 12 to 24 months and how does that kind of compare to what perhaps we've seen over the past 12 to 24? And then can you just provide a comment on your packaging restage? I think you've talked about packaging rework that's coming and some of the consumer test results around that. Thank you.

Yeah, I'm going to give you just a top-line comment and Scott can tell you about the innovation and the packaging. But the top-line comment is that all the capacity that we've built out has largely been focused on the existing bags and rolls line because we think the opportunity there is enormous and our projections are built upon that. Having said that, we have built flexibility into our system to be able to accommodate a little bit more innovation and if we get that, that's gravy to us, but we think the opportunity on the bags and rolls is absolutely enormous and so we're going to put the bulk of our attention and focus on continuing to maximize that opportunity. Having said that, there's a lot of innovation opportunities, we've got a very innovative team. So, Scott can just give you a little bit of color on that.

Yeah, actually. So I'll start with the term that we use internally which is, there is innovation then there's renovation, renovating some existing products and making simple improvements. And then there's retirement. And we want to make sure that we're retiring things that aren't productive and productivity is on a pounds and but it's also something -- things around margin too. So we do think about it that way. We want to make sure that the innovation that we're coming with, we're making sure that we're making progress on margin over time. But the biggest single place that I would say the impact of what I would call innovation, which is a very, very big area, and we're literally looking at innovation and also renovation on our existing lines and making sure that they are more productive and that will give us the giant win in the future. So there is both teams are oriented constant stream of very smart innovation but it's tight, but also making sure that we're retiring some things that aren't productive and innovating and using that word on our overall production processes to make grow margins and increase throughput and really get to an overall better and better process for the company which will expand margins over time.

And the packaging restage.

Thank you. Sorry. On the packaging restage, I believe it's going to launch in the beginning of, end of Q3, beginning of Q4, you'll start to see it kind of gently flow out. It seems to be, we don't do this -- we try and be very kind of thoughtful about these things every time -- I mean, some companies every time there's a new brand managers, there's a new package and we're try and do it every three to five years. We think what we're coming with is pretty significant step change, we test everything very, very thoroughly quantitatively. The quantitative test results that we've done over time tends to be incredibly predictive. So we think that it will be something that will be a support and help for us next year. And congratulations again to the sales team for their work and expanded distribution, the innovation team and that's broad, that's very broad here on the work that they've done, and then also the marketing team on not only the packaging, I mentioned the advertising earlier.

Thanks.

Thank you. Our next question comes from the line of Connor Rattigan with Consumer Edge Research. Please proceed with your question.

Good morning, guys. Thanks for the question. So just wondering have you observed any noticeable pack mix shift across your portfolio to larger sizes? I mean, I know last year was a bit of an anomaly given the gas price issue, but from what I recall in the summer months typically consumers tend to shift to larger pack sizes as they're traveling and such. And if so, how should we sort of think about that in the context of the top line and gross margin?

Yeah, I don't think we've seen a whole lot of mix shift inside, there's a slight shift towards those on larger size in the most recent periods, but it's not, nothing that big. The biggest difference is the comment I made earlier which is there's a little bit more roles development this year than what we would have historically had, which is, it's obviously the more economical way to feed your dog. But even that's not very significant. So in terms of the margin impact, we don't have a huge difference between sizes, we do have a difference in margins between rolls and bags and rolls tend to have higher margins than the bags do.

Okay, great. Thanks. And then also just, Scott, I just wanted to follow up on the comment you made earlier that consumers in non-measured channels are highly incremental. I mean, I guess is this kind of a result of your current media spend? I mean maybe it's just targeting those specific consumers or is this just a function of just a distribution roll out? And maybe if you have any data on that you can share on sort of, I guess, what these consumers look like maybe in terms of income and whatnot or if there are any different than your other consumers, that would be great?

Yeah. Well, I'll answer the back half question first. So there really hasn't been much of a change in the type of consumer. So they're similar household income, $80,000 is kind of the average income. I mean it's, amazingly, like a lot of times people go, this must be for like very high-income households. What it comes down to is relationship with pet and the importance that people put on nutrition and that's for themselves and their family. So we're seeing a similar group of consumers that we kind of historically have seen across the business. Our belief is that there are certain consumers that tend to primarily shop for pet food in a specific store or channel. And as we've added some of that distribution whether it's through e-commerce or in some of the clubs, those consumers that are primarily shopping in that channel for pet food are now going, Oh, wow, there is a new product here, I have heard of it. So I think the media has been encouraging them, but they haven't been making that trip in a more traditional grocery channel, which we have much broader distribution in. So that's what we believe. And that's what we're, from everything we've been able to see that their primary shopping trip is in that channel. And now we're able to have them become part of the Freshpet family.

Okay, great. Thanks for the color. Appreciate it.

Thanks.

Thank you. Our final question this morning comes from the line of Robert Moskow with TD Cowen. Please proceed with your question.

Scott, how are you doing?

Hey, there. Welcome to your new home.

Yeah, it's pretty great. I guess one last question. Todd, I think, you mentioned that you won't be committing capital to volume until you know for sure that the volume's there. Is there any way to quantify what kind of volume growth you'll need in 2024 to hit that threshold? It sounds like the next phase of Ennis is pretty much you're going to go, you're going to do it, but is it 5%, is it 10%, 15%? Is there any way to put a number around it?

Around volume, Rob?

Yeah, volume. How much volume growth in 2024 would be the threshold to justify the next round of capital outlays?

Yeah. So, as you know, the algorithm for us over the next five years is to grow the topline on average 25%. And for '24, I mean, we don't anticipate any additional pricing. So we'll have a little bit of a wrap-around on that last price increase that we took in February. But for '24, it's going to be almost all volume, so close to 25% the way we're seeing it right now will be volume growth for '24. So that's why, Billy made some earlier comments, we're starting to get that second bag line in Ennis staff sooner rather than later because we're seeing acceleration right now and again we're anticipating a lot of volume growth over the next couple of years.

Okay. Go ahead.

And, Rob, if I could add to it is, we already have, as we said in the comments, Phase 2 is under construction, we split Phase 2 into two pieces. So there are two lines in the first part of Phase 2. Recall though, we also have some other lines in the system that are not fully utilized right now, so the reality is, what we said is when the projects that are already committed, we have up to almost $1.5 billion in capacity. So all you have to do is look at that and say that's what's committed and how long it will take us to grow into that and then recognize that when you need anything beyond that, you need an 18-month lead time to do it at a minimum, depends whether it's a building or a line, but you need about 18 months.

Okay. Well, I guess, that's kind of the nature of the question. Like, if volume is only say 15% in 2024, what does that mean for the capital allocations that you've put out there? Is there enough flex in the system to tamp it down in an event like that?

Yeah, there's two ways to tamp it down. One is we will slow CapEx spending. We're obviously we're not anticipating that we're going to slow to that degree, but for some reason we did, we would absolutely slow down our CapEx spending for the next year. The second one is we have flexibility on how many of these lines that we would staff. So if we're not seeing the growth that we're anticipating, we will not staff all those lines, but again, from what we're seeing right now, we anticipate very, very strong growth.

Yeah. I agree. All right. Thank you very much.

Thank you.

Thank you.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Cyr for any final comments.

Great. Thanks, everyone, for your interest and your time. I'll end with a thought for you from the author Karen Davidson. She said, a dog can express more with his tail in minutes than an owner can express with his tongue in hours. To which I would respond feed them Freshpet and their tail won't stop talking until it's time for the next meal. Thanks, everyone. Thanks for your interest.

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