Greetings and welcome to the Freshpet Third 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 third 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 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, 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, but rather it's a summary of the results and guidance they will discuss 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 third quarter results show that the Freshpet business is delivering on its promises and potential. And as a result, we are off to a fast start towards our 2027 goals. At the beginning of the year, we laid out our new fresh future long-term plan that called for 25% annual top line growth, resulting in $1.8 billion in net sales in 2027 and strong margin improvement with the ultimate goal of delivering 18% adjusted EBITDA margins in 2027. For 2023, the first year of that plan, we committed to continuing our strong track record of net sales growth, while simultaneously fixing the operating issues that were preventing us from generating the margins that we know are attainable in this business. We are delivering on that commitment and exceeding many of the targets we set, putting us ahead of the pace required to deliver our 2027 goals. This increases our confidence in the capability we are building, the strategies we are employing, and our ability to deliver our long-term goals. In Q3, we delivered both top line and bottom line growth ahead of expectations for the quarter. We delivered 33% net sales growth, bringing our year-to-date net sales growth 28%. While we also delivered a step change in our profitability due to strong operational improvements. As a result of that progress, we are raising both our net sales and adjusted EBITDA guidance for the year. We believe our fast start towards our 2027 goals is largely due to the strengthened organization capability we have built and the strength of the Freshpet Consumer Proposition. The team we have built is delivering improvements in our key focus areas of quality, logistics,…

Thank you, Billy. And good morning, everyone. As Billy said, in Q3, we continued the strong performance we saw earlier this year and have raised our net sales and adjusted EBITDA guidance to reflect that strength. Let me break it down a bit further. Net sales came in at $226 million, up 33% versus year ago. Our net price mix was up more than 9.5% versus a year ago in the quarter, and volume measured in pounds grew 23%. The price mix was positively impacted by the two price increases we took in February and last September, totaling 7.5%. The mixed benefit, which we have consistently seen over time as consumers migrate to higher priced items in our lineup, was slightly more than 2 points. Total Nielsen measured dollar growth was 28% versus a year ago in the quarter, but our growth in non-measured channels was much stronger and added almost 4 points to our measured channel growth, which also has been a consistent trend as of late. The growth was broad-based across channels, ranging from a low of 12% in the Pet Specialty channel to 30% in XAOC and greater than 100% in the unmeasured channels. Adjusted gross margin was 40.2% in Q3, 570 basis points better than the year ago, and well above our base expectation. This improved performance was due to a variety of factors, including improvements in the input cost and quality, the benefits of the pricing we took in February, and increasing fixed cost leverage in Ennis. All aspects of our operational improvement plan that our teams is focused on. We expect these elements will continue to improve as we move forward and drive continued margin enhancement, particularly as we grow into the scale of the Ennis operation. Total SG&A was 28.6% of net sales,…

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

Good morning. Thank you. I know you're not talking specifically about 2024 yet, but you did bring up the idea that I think you're generally aiming for 25% CAGR over the next few years. I just wanted to make sure, is the messaging for next year, if there is messaging at all, you're on target for that 25%-ish CAGR in general, but you're going to do if things come in as expected, above 25% in 2023. So maybe you can still do below 25% in '24 and still get to that number? I'm just trying to get a sense if there's any kind of underlying messaging in there or if I'm reading too much into that.

I think you're reading a little much into that, Ken. The message is that our current run rate of volume and mix would support 25% growth. Our long-term algorithm calls for 25% growth. And so we fully would expect to deliver 25% growth next year based on what we can see today. We feel very good about the momentum of the business. We're seeing good consumption. There's no reason for us to think that's not going to be part of the plan.

Thank you. And then just a quick follow-up. And if you said this on the call, I missed it, but Todd, now you're into November, presumably some discussions with vendors have been underway. What's your updated estimate for COGS inflation next year? I think you were roughly thinking on an early basis about low single digit last quarter.

Yes. I mean it is too early to tell. Chicken pricing is the biggest component. We will know that in about the next month. I mentioned on the call, we're very confident we will have gross margin expansion next year. Don't know exactly what that looks like. Obviously, we'll give you more color when we report Q4. But look, I think it's going to be flattish. Right now, things are looking pretty good. I think we'll have some nice leverage from fixed cost. We think the quality cost will continue to decline, feel great about logistics. So very confident about some level of gross margin expansion next year. It's really going to be dependent on what those final input costs are.

Thank you so much.

Thanks, Ken.

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

Yes. Thanks, and good morning, everybody. I guess maybe just to start. So on track and on the mix breakout, can you maybe talk a bit about how much line of sight you have on each of those? And you talked about mix being a similar sort of contributor historically. I don't recall specific breakout previously, sort of curious why and how we think about it and how much ability do you have to manipulate that higher with innovation. And on the untracked piece, at 4 points or so contribution was a little bit more than in the first-half. How do you think about that on a go-forward basis? Is there opportunity for that to sustain into '24? Thank you.

Hy, Mark, it's Scott. So historically, what we've seen is mix has definitely been a contributor of typically around 3 to maybe 4 points per year. So you kind of add that to our volume, and that's the majority of what we're seeing. And that's kind of been historical. We're starting to see it again this year. And then the other thing that we're kind of starting to obviously see a ton of expansion in is -- all the non-measured channels. And part of that's club, but part of that is also the online piece, too.

Let me just add to it. One of the reasons why it hasn't been as much of a discussion over the last couple of years is because our mix is oftentimes been dictated by capacity. And this year, our mix -- we have much more of the consumer available to choose on their own. Historically, our Fresh From the Kitchen product has been our fastest-growing part of our lineup, and it's the most premium part of our lineup. And we, frankly, finally have good in-stocks and good supply of that. And so the consumer is able to naturally migrate up through the platform or through the brand franchise as they have historically.

And then I'll add one more piece to it is we've -- as Billy mentioned in the call, we introduced some innovation called complete nutrition. And that's, we think, a great opportunity to bring additional people in. We think that, that's going to help us with overall buy rate over time. And then we're also starting to kind of introduce mixed or bulk cases into the portfolio. So as we see that, we'll see probably buy rate expansion with that. And I think that's going to help us with kind of overall consumption, expansion of mix and in addition actually to penetration.

Got it. And maybe related to the last piece on just the incrementality and sort of building on what you talked about on the HIPPOHs. How do you think about the recruitment? And how many nonusers are there out there to continue driving growth. And what do you know about them in terms of competition or composition of income and generations in terms of users?

Yes. I mean, first of all, you'll see in the presentation we attached that the growth has been fairly broad-based. Obviously, the group that is the highest likelihood of being interested in Freshpet skews younger. So the millennials and the Gen Zs and that's where we're making the most progress. And I think millennials and Gen Zs today account for about 50% of the dog ownership in the U.S. and it's obviously where the growth is coming from going forward. And that's where our proposition really resonates. I think the number I would call is that Gen Z is twice as likely to choose Freshpet as a baby boomer is. So we think that fundamentally over the long haul, there's a very good demographic tailwind that's going to help us with this. And we expect to see -- so we'd expect to see that cohort grow much more quickly.

Thank you.

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

Good morning and thanks for taking my question. So in regards to your marketing efforts, just curious how the responses to your marketing. And then as you look towards next year, just any initial thoughts on the plan for spend, whether you plan to be consistent to 11%? Or just any thoughts there as well?

So I'll answer the response to the marketing piece, and I'll turn it over to Todd on the kind of the planned spend. So basically, I think we've been able to consistently refresh the advertising over time and the marketing and the communication. And we really have been able to see incredible responses to the marketing that we put in place. We see penetration really kind of pushing penetration, really nice, consistent growth over time, and expansion of the portfolio and bringing it, as Billy mentioned in the call, to this really mainstreaming the brand and mainstreaming the idea of Freshpet food and continuing to kind of deliver on that concept. And Todd, I'll let you talk a little bit about plan spend?

Yes. I mean, still a little bit early on in the planning cycle for next year. I'm anticipating it will largely grow with sales budget for the year. That will bring us our media spend over $100 million for ‘24. That's the way it plays out, which obviously we're really excited about. And at that point, we'll be able to start bringing that number as a percent of sales down over the next few years. As you know, that target -- the goal is to get from 11% to about 9%. And I'm really confident we'll have enough in our media budget to be able to do that in the out years. But right now, about growing with sales.

Great. And then maybe just one follow-up question. So your operating cash flows are very strong year-to-date. I think you guys at one point thought you could do 30 to 35 and you're already about that. Just any updated expectations on how to think about that line for the balance of the year?

Yes. I mean I think we'll be -- obviously depends on final working capital. We had very strong working capital in Q3. I think a little bit of that was timing, but we're doing a much better job there. I mean I'm anticipating we can do at least $50 million for the year. And look, this is 1 of the bright spots, I think, not only the net sales and adjusted EBITDA, but the operating cash flow and the discipline that the team has put in, in the last year has been really impressive. So we're off to a really good start.

Great, thank you. I’ll pass it along.

Thank you.

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

Hi, guys. Good morning. So first question, just on the fridge placement momentum. Obviously, a big year here in ‘23. Just how you're thinking about that as we move maybe into '24, not just kind of the new placements, but also the second and third fridge placements. Just how are you thinking about that?

Well, we've made incredible progress this year. I mean, it's a banner year, really a record year for fridge placements. And it's not just first fridges we're doing well with. It's a second and in some cases, even third fridges. We continue to see that as being a really big piece of our overall kind of construct in the future where we're adding second fridges into many of the high-volume stores. We expand out -- when we do that, we expand out on some of the current portfolio on things that we have kind of lower stock and lower inventory on, sometimes in holding power over the weekend, but it also allows us to bring some innovation into the market. So really kind of think that's a really important and fundamental piece. Going forward, we're not ready to put up any numbers, but I would -- for 2024 on fridges, but I would expect a return to more historical levels. And I think over the next kind of year and maybe even two to three years, we'll have the benefit of what we were able to do in 2023 and kind of give us an incredible platform to build out the business and the entire company and the brand.

No, that makes sense. And I guess a follow-up to that, Scott, would be -- I mean, not all new stores are created equal, and you've got a lot of momentum with the club channel. Just curious kind of the durability of that, the duration of kind of expanded presence within club and anything else you would say in terms of partners or channels that you maybe not fully penetrated at this point?

Sure. So look, this is the first year that we've had significant expansion in club. We've made great progress. We're going to get the benefit of that for multiple years. My constant joke for the last decade is the best time to put a Freshpet vision as yesterday because every single year, it delivers on same-store sales increases and growth. So I think that we'll get the benefit of the club channel. And it will be oversized or supersized to some extent. So on an average bridge might go up if it goes up 15 points or whatever on a same-store sales basis, if that grows 15% after a year, it will be kind of at that higher rate that a club typically will sell. So we like that. The other thing is we are -- I mean, it's very obvious out there, but we have zero Sam's clubs. We think, over time, there's a really tremendous opportunity for us to start developing a partnership with Sam's and deliver a different type of proposition that is appropriate to their customer, and really see a great opportunity for expansion over time at Sam's.

Terrific. Thanks so much.

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

Hey, folks. Thanks for slot me in. I'm going to take us back to the top with the first two lines of questions, which I think we're all about trying to get confidence in the consensus estimate for 25% growth next year. You mentioned that you're confident based on everything you see. It's a little harder for us to get confidence because we don't see the saw measured contribution or the mix we used to see the Nielsen data, which is tracking below, and we know the big box pet is not particularly strong. So coming back on two points that have already been addressed, but I want to make sure we come back and hit them again because I think they're really important. The mix component, obviously, a nice contributor. You're launching a lower price per pound product. Shouldn't we expect some of your consumers to opt in for that and mix, therefore, to turn into a headwind, question one. And then question two. I'm sorry, I was distracted. There's other news on the tape. And I know Mark asked this, but the 400 basis points, the Costco contribution. You are going to start to cycle the build-out next year and getting the same number of stores as you got this year, just net neutralizes that. It doesn't continue to add incremental growth over and above. So what's the source of the incremental growth? Like how do we keep that incremental 400 basis points coming?

Let me take a shot at this. So first of all, on the Costco part, we're still not in the full Costco collection of stores. I think at the end of the quarter, we were in something 370 of the Costco’s, there's like 550. So we still have a long runway of new stores. And then each of the stores that we're in grows at a very rapid rate, and they're relatively early in their life. So I would expect that trend with Costco to continue for quite some time. And as Scott just mentioned, we are not yet in Sam’s, but that certainly becomes another opportunity for us when they decide that that's a play that they like to make. On the mix part, yes, we do expect to see that some number of consumers will migrate to the new complete nutrition product. But what we've seen so far is that, that is more than offset by the migration of the franchise, especially as we've gotten complete distribution on our Fresh From the Kitchen product and some of the other more premium products we've added the lineup. So on balance, we believe that there's continue to be mix gains rather than a mix headwind. Our data, we obviously showed you the data through the end of September. We've had the complete nutrition product in the market in October. We've seen what the sales look like, and we still feel very comfortable that it is not dilutive.

That's good stuff. I appreciate that. And by the way, congrats on all the operational improvement, I should open with that because obviously making great strides, and I want to make sure those are recognized. And it's great to see the driving margins, sticking on the new more value-oriented product. Is that margin neutral, margin dilutive or penny profit neutral, penny profit dilutive?

It is margin neutral.

So we think that's going to open up a lot more penetration, bring people into the portfolio and then keep some people using it on a more consistent basis. Performance has been extraordinary. It's very new and performance has been extraordinary already. And from where we're able to watch it so far, the results have been excellent. And again, I think that across the portfolio, there's lots of mix and trade-up opportunity. Those items are more available. We're adding things on the other end of the entire spectrum on our portfolio on the higher end of the spectrum. We're seeing great growth with those items. Large dog is a great example that was called out too. So we've got all that and then eventually going to, as I mentioned earlier, we're going to start adding these cases in and like these bulk packs. And it's going to change the dynamics of the business, bringing it more and more kind of mainstream and main meal.

I hear you. It makes sense to me. Cool, thank you. I'll pass it on.

Thank you.

Thank you. Our next question is from Michael Lavery with Piper Sandler. Please proceed with your question.

Thank you. Good morning.

Good morning.

Just looking at the household penetration growth by income bucket. And in the last 52-weeks before this complete nutrition launch, you already have that lowest end consumer household penetration up 17%. And so I guess what's driving that? And with this launch, how much higher do you think that should go? If there's already that good momentum, is that really where you see a kick up to some much faster pace? And how do we think about the magnitude of that?

So look, as part of our strategy over time, we want to make sure we have an incredibly wide portfolio of products that really span different price points, different offerings and also different benefits to consumers and what they're looking for in products. So we want to make sure we have everything out there. One of the things that we have the opportunity to do now is as we get more and more scale, we have the opportunity to bring products that are even more value-oriented and build that piece out. And what we know is that sometimes, the initial price point is a little bit of a shock for some consumers. So the goal is to bring them into the franchise let them kind of migrate through and then migrate up over time and use more of our products every single day.

Okay. That's helpful. Just for the consumers' understanding, I'm looking at your slide with complete nutrition package. And obviously, it doesn't say nearly as good or almost as good as some of these others, but how do they understand the differentiation between this and the rest of the portfolio. Obviously, the price point conveys a bit of that message. But what's the right way for them to understand how they're different and what the value proposition distinctions would be?

I mean really, it's definitely -- people make assumptions on products, a lot of times based on price points. So that's probably the number one and leading indicator and having an aggressive price point is a piece of it. But one of the other key pieces is we have brought a little bit more whole grains, complete carbohydrates into this product. And we've kind of called that out on the front. It's very small, and it's subtle, but it's very focused. And it can be -- it is to Freshpet, our incredibly high standards. It is kind of meets and exceeds our standards. I will be feeding my dogs complete nutrition on and off. It's going to be rotated in. It's an incredible product that we're proud of, but we can also offer a value, which can keep some people out of getting into the Freshpet portfolio.

Okay, thanks so much.

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

Hey, thanks, operator. Good morning, everyone. Actually just two really quick ones for me. One is -- and I think this is inferred in all the commentary made, but I think I just want to make sure clear, based on where you stand today in terms of cost inflation and productivity. It doesn't sound like another price increase is contemplated. So I just want to make sure that, as I was hearing that correctly.

Yes. I mean, obviously, until we price our chicken, we can't say for sure. But our read of the tea leaves would suggest that we will not be taking pricing at least not in the first part of next year. So we feel comfortable about where we sit from a commodities perspective based on the markets and the small portion of our commodity costs that we've already locked.

Okay. And then the second question, in the prepared remarks, Bill, you talked about there was a discussion about, kind of, balancing demand stimulation with not overheating the supply chain, basically, right? So can you talk a little bit more about that? Just how do you, I don't know, like what does the dial look like? How do you turn the dials to make sure you're not overstimulating demand? And I guess, what are the bandwidth, right, in terms of just how much you could actually exceed the 25%. Just trying to get an understanding of kind of how you approach that?

Yes. I mean one of the benefits of this business is it's probably one of the most reliable and predictable businesses that I've seen in my 30-some plus years of CPG. We don't do any trade promotion, no discounting. The single biggest driver, and by far, the vast majority of the growth comes from advertising investment. And so our dial is advertising investment. It's not literally you turn it on and tomorrow, you see it, but if you turn it on, you start adding the users that will contribute meaningful volume over the coming months. And so that's the way which we can control the demand going forward. And that's where we spend the bulk of our time is literally laying in advertising spending against what we think our capacity needs are going to be. So the reason we made the comment in the prepared remarks about the dialing it in fairly closely is three or four years ago, we would put a line in and it would give us capacity that would last us a year or two years and you're kind of fine on it. Now at the scale that we've achieved, when you put a line in, you can pretty quickly burn through the capacity of a line in less than a year. And so we can't afford to have this thing planned for 25% and deliver 33% on an ongoing basis, because you just won't have the infrastructure in place. You just won't have the equipment installed. Lead times on equipment are long, construction takes a long time. Staffing is quick. We can staff up in 90-days. But if we're going to suddenly outperform our expectations by 5 or 10 points as we might have done over the last couple of years, we could find ourselves short shipping again, we don't want to do that. So at this point, we're very comfortable planning for, call it, 25% growth. There's a little bit of headroom on top of that, and we plan for a little bit of headroom on top of that, but we certainly don't want to be pushing over 30%.

Alright. Thanks, Billy.

Thank you.

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

Thanks. Good morning.

Good morning.

Just a little bit more on pricing, especially move to next year. One, do you think you get back to a normal cadence of just doing some pricing every year going forward? Or is there some pushback on the pricing you've taken so far? And then two, and probably more importantly, I know you have a different product than the than the dry goods. But I mean do you see some increased promotions in kind of the competitive landscape that may change your pricing attitude? Or do you think everybody is going to kind of hold the line even at the premium, super premium side as we move into '24?

Hey, Bill. So let me talk about the category first. I have -- as volume has kind of gotten softer we are looking at it. Category volume. Yes. Yes, I'm sorry. Yes, the category volume has gotten softer. We are kind of all over it, and we keep waiting for someone to really kind of start pressing on the pricing dial. Have not seen it, have not seen increased promotion. There's been very, very little kind of growth there. It's been interesting. At some point, I think you'll see a bit of it. But we haven't seen anything yet. But again, I think that historically, you'll see some people kind of layer some of it in, but not a lot. From our standpoint, I think what we try and do is we will take pricing like when appropriate and very strategically and very targeted in everything that we're doing. So will we do a couple of points here and there? Yes, that's probably going to be something that we'll always look at. But a lot of the pricing that we have done is from how we've kind of modified and changed the portfolio and the products that we brought into the market. It hasn't been just an across the board or 2% or 3% price increase. We've basically put new items in at higher price levels. And we've just kind of taken different opportunities over time in order to do a little bit on pricing.

Bill, I would add to that, we also expect that there is fairly sizable opportunities for us to improve the gross margins from throughput and yield, we have built organizational capability over the last, call it, year that is really focused on increasing throughput, driving efficiencies in the manufacturing operation, driving efficiencies in the supply chain much more competitive bidding on some of the key components that we buy or used to just have to take whatever you could get whatever was available. And now there's much more ability to do strategic sourcing. So all of those elements will help us and could mitigate the need for further pricing. It doesn't mean we won't try to take some pricing at some point, but the need for it won't be as great.

Got it. And then switching back to some of the questions on the club channel. And I mean at the store level, we've seen a lot of changes over the past few months, I mean I know you've got any benefit, but can you maybe give us an idea of where we are. I think Costco has 11 regions. And I'm not sure if you're in every store. And it seems like there's more opportunity in front of you than behind you, but I just want to make sure I'm looking at the right way.

No. We believe that there's a tremendous amount of opportunity in front of us. First of all, obviously, year 1, you get into the store. This has been a pretty amazing year and pretty significant expansion. So we're going to have the benefit of that really all next year. Plus we're, call it, 2/3 of the way into the Costco goes through Q3. So there's more Costcos to come and then not only domestically, but then in some other areas, even into Canada and Mexico and even in the U.K., there's plenty more Costcos. But the biggest single piece is -- and I touched on this earlier, we're in zero Sam's, and we think that over time, the right proposition going into Sam's could be really helpful. And provide us like another opportunity to be exposed to another group of consumers that shop for pet food at Sam's.

Great, Thanks so much.

Thank you.

Thank you. Our next question is from Rob Moskow with TD Cowen. Please proceed with your question.

Hi, everyone. This is [Jacob Akin] (ph) for Rob. Congrats on the quarter.

Thank you.

I just have two quick clarifying questions and then a broader question. So first, for media spend, last quarter, you said that it would be up $15 million in the second half. Is that still true? Or it was today an update to that? And then for like freight and logistics costs, does your guidance assume that the fuel cost and the stuff will stay where they currently are or go back to more normalized levels? Or was it include?

Your question on media first. So yes, we were up about $5 million in Q3 year-over-year. We'll be up approximately $10 million in Q4 spend, only a couple of million dollars last year. So we'll be kind of in the plus or minus $13 million range of spending for Q4, which we're really excited about. I think it will give us a little bit of a help in Q4, but more importantly, get us off to a strong start as we go into 2024. Logistics been holding steady. We don't see a big change sequentially between Q3 and Q4. We've had a little bit of an uptick in diesel cost, not significant, but we've seen some favorability in some other areas. And so we're feeling very good about the logistics expense right now.

Awesome. And then just more broadly back to media. You said that next year, you kind of expect it to grow close to sales, maybe above $100 million rough math. But then going forward, you'll expect it to leverage with sales growth. But it's my understanding that your media and sales are kind of like 1:1 when you try on meaning you get sales. So how do you expect to generate this 25% sales growth in the later years with a lower media as percentage of sales?

There's certainly some scale benefits as we get further and further out. One of the things that we've seen is the more you build out your fridge network and you get the visibility amplifying the advertising. So stores with two and three fridges amplify the advertising. And so we think that part of the reason that our advertising has gotten so effective and driven growth in excess of what we had planned for was because of the increased retail visibility. And that doesn't go away. Yes, net new fridges is a good thing, but the installed base of fridges, lighted fridge sitting in a store, double or triple fridges, continues to amplify the value of the advertising every successive year. We think that's frankly where we're going to get some of the benefit, but also scale in the media. We'll get some benefit there as well.

Yes. And just for perspective, and I've said this before, I mean, if we reached the $1.8 billion goal in 2027 and get the media spend down around 9% of sales, which we expect on both as $160 million of media spend, one brand, basically one country, we think that's a powerful resource to drive 25% CAGR.

Awesome. I appreciate it. And congrats again.

Thank you.

Thank you. Our next question is from Jim Salera with Stephens. Please proceed with your question.

Hi, guys. Thanks for squeezing us in. I wanted to ask on the expanded distribution of the large dog offering as well as the complete nutrition. What does that look like in the fridges in store, which SKUs get taken out in replacement those? Or is that kind of a way to dangle that offer in front of retailers to motivate them to put in that second fridge?

Yes. It's -- as we build out new products, we typically will really have a very deep discussion with the retailers about adding a second fridge. It takes up a fair amount of space. You're typically dedicating at least a full kind of two feet to it in a fridge on a shelf in order to get packed out. So it takes up a fair amount of space. You never want to kind of take out existing items that are performing extremely well. So it is a really, really big push to go into our second fridges and even some of our third fridges over time.

Okay. That's helpful. And then, Todd, maybe a follow-up. I know people have touched on the logistics piece, but I think you just -- you guys delivered really impressive results there. Should we think of the current logistics expense of that kind of sub 7% rate as sustainable moving forward? And maybe you guys just delivered on that kind of better than the 2027 target on an ongoing basis?

Yes. I mean we laid out, to your point, we laid out a goal of 7.5% logistics back in February. Obviously, one of the bright spots is we've already beat that target. So yes, we think we will long-term, be below the 7.5%. Obviously, if there's a big spike in diesel or lane rates from time to time, that could drive it periodically higher. But long-term, we're very confident at this point with reasonable diesel costs that we will be sub-7%. And from what we can see right now, obviously, something has changed, but we feel good about being 7% or below for next year as well.

That's helpful. And then if I could maybe sneak in one last question. On the breakdown of the household growth rate by income, I was honestly surprised to see low income up as much as it's been. Can you just give us an idea of maybe what SKUs are driving that? And then from a consumer perspective, is kind of the value proposition that you guys offer that a consumer that has a little bit tighter of a budget would still be buying premium pet feed?

Yes. Jim, one of the things I always struggle with in providing the data by income is it treats all income is if it's funding the same size of household, the reality is that a significant number of our consumers who fall in that lower income bucket are in the smaller sized households, they might be single and have a dog they might be, the kids may have left the nest in so that them and the dog. And so the discretionary income they have available is significantly higher despite the relatively low overall total income. And given our skew towards younger households, we have a fairly significant number of millennial and Gen Z consumers, who are in that bucket, but for whom the dog is the only thing or the most important thing in their life. They don't have a car, they don't have a spouse. Their expenses are relatively narrowly confined.

Okay, awesome. That's very helpful. I'll pass it along.

Thank you. Our next question is from Jon Anderson with William Blair. Please proceed with your question.

Hey, good morning, everybody. Thanks. Just two quick ones. On the productivity work, congrats on the benefits that you're delivering there. As you look to the Fresh Future goal, of getting to 18% EBITDA margin by 2027. It looks like this year will come in closer to 8% from an EBITDA margin perspective. So you've got about 10 percentage points over the next four years. Can you talk a little bit about the path you expect during that time frame? Is it straight line? Does the improvement ramp in the out years and what some of the drivers are there? And then the follow-up to that is, Todd, I think you mentioned gross margin you expect it to be sequentially lower in the fourth quarter than the third quarter. When do you think you hit an inflection point where we did see kind of sustained gross margin improvement sequentially going forward? Thanks.

So let's take your first question on EBITDA margin. So yes, look, we're going to get around 500 basis points of EBITDA margin improvement this year, which obviously is terrific. We're not going to get 500 basis points each and every year and obviously don't need to. So where is that next 10 points that you mentioned going to come from. So obviously, 5 of it has to come from gross margin. We're going to have about 39.5%-ish gross margin for this year. So we have about 550 basis points to go. So obviously, that's half or a little bit more than half of it. We talked about the media spend that will come down as a percent of sales, a couple of hundred basis points. We probably got a little bit more room to grow in logistics, but not significantly. Obviously, we've made tremendous strides there. And then the rest of it, quite frankly, just comes from SG&A leverage. If you're growing 25%, we do not need to grow head count and other expenses more than high single digits. So there's a tremendous amount of leverage in SG&A as well. So those are the components. And we have really good visibility to it. Obviously, gross margins that the trickiest part to debt, and we have to execute really, really well, but we're very confident with the scale of the business. and our ability to execute and we can be more productive and efficient in our lines that, that will occur. The cadence -- look, the cadence is really hard to predict. Again, I think we'll -- I'm confident we'll have some nice improvement, both on gross margin and EBITDA margin next year. Again, it's a little bit too early to commit to a number. Again, I got four years to get 10 points. So I got to get 250 basis points on average of EBITDA margin per year. Again, very confident we will do that. But the exact cadence of that is hard to predict. But I think we'll get another nice chunk next year.

Thank you.

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

Great. Thank you, everyone. I'll leave you with this thought. The humorous Jerome K. Jerome said about dogs. They never talk about themselves, but listen to you while you talk about yourself and keep up an appearance of being interested in the conversation, to which I'd add, we reward them for the patience and feed them Freshpet. Thank you very much for your interest.

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