SECAUCUS, N.J. — As Freshpet continues to cope with inflated costs, operational obstacles and downstream supply chain challenges, the company is adjusting to support its long-term growth potential.

The company released preliminary results for its fourth quarter and full year on Jan. 10, ahead of its planned presentation at the ICR Conference on Jan. 11. Freshpet will publish its finalized fourth quarter and full-year earnings at the end of February.

Freshpet, Inc. is expecting 37.1% sales growth in its fourth quarter, with projected revenue totaling $115.9 million over the three-month period ended Dec. 31, 2021. Full-year net sales are expected to total $425.5 million, up 33.5% from its full-year 2020 results. Adjusted EBITDA is projected at roughly $42 million for the year.

The 33.5% net sales growth for 2021 marks the company’s fifth consecutive year of accelerated revenue. Freshpet’s 2020 full-year net sales were up 29.7% compared to 2019, and 2019 full-year sales were up 27.2% compared to 2018.

In December, Freshpet published a business update downgrading its full-year guidance for net sales and adjusted EBITDA, citing continued supply chain challenges that are limiting the company’s ability to meet growing demand.

Previously, the company expected approximately $445 million in net sales and $50 million in EBITDA for the full year. The company updated those net sales estimates in December to fall between $425 million and $430 million for the full year and estimated adjusted EBITDA to total roughly $42 million. Freshpet’s preliminary full-year results announced Jan. 10 place the company near the lower end of its updated net sales guidance for 2021.

“We are pleased to see consumption trends accelerate through December to approximately 29% for the trailing four-week period ended January 1, 2022, which was consistent with our expectations and demonstrates the significant demand for our products despite limited availability and production issues that constrained growth in 2021,” said Billy Cyr, chief executive officer at Freshpet. “Turning the page to 2022, we are in a significantly improved position from a manufacturing standpoint – consistently producing at levels that can support the strong growth we expect.

“However, we are especially encouraged by the ongoing growth of our ‘Prime Prospects,’ which represent our Total Addressable Market (TAM). We estimate that in the past two years, our target market has grown by approximately 25%, from 20 million households in 2019 to 25 million households at the end of 2021. This is a powerful datapoint that speaks to the alignment of Freshpet with today’s discerning pet parents and Freshpet’s long term growth opportunity.”

In 2016, Freshpet estimated its total addressable market at 7.5 million households. This grew to 20 million in 2019 and is now estimated at 25 million. The company is banking on younger pet owners and their value-driven purchasing habits to drive increased consumption rates in 2022 and beyond.

“Millennials and Gen Z are now becoming the largest share of pet owners in the country, and they are also heavily skewed toward the prime prospects,” Cyr said. “In other words, Millennials and Gen Z who are getting their pets are also having values that are much more likely to make them Freshpet buyers than the previous generations would have been.”

During the ICR Conference, which was held virtually on Jan. 11, Cyr presented a business update on behalf of the company reiterating supply chain challenges seen in 2021, how the company is actively mitigating those challenges, and what to expect in the first quarter of its fiscal 2022.

“We stumbled in 2021, there’s no doubt about it. But we didn’t stumble in terms of our ability to generate demand with consumers – we stumbled on the supply side,” Cyr said during the company’s presentation at the ICR Conference. “What happened was, we underestimated the labor market and supply chain difficulties that you’ve heard from everybody else but, frankly, they were particularly acute for us because we’re growing 35% in the middle of this, and we’re a relatively small company… Those things resulted in significant inefficiencies, shipment shortfalls, and inability to raise prices to offset inflation in a timely manner.”

Production capacity, which has been limiting growth for Freshpet for the last two years, according to Cyr, will be built out in 2022 and expansions will continue in 2023.

“Our capacity expansion plans remain on track,” Cyr stated. “We’re adding significant new capacity to keep up with the demand, and we are also anticipating, like everybody else, a significant amount of inflation and we are going to be taking pricing into account for that inflation.”

In the first quarter of 2022, Freshpet expects a production capacity of $155 million in sales, a figure expected to grow to $175 million in the second quarter, $210 million in the third quarter and $240 million in the fourth quarter.

“We would then take a buffer on top of this… to allow us to absorb a significant disruption in production and still service our customers, still service the consumers, and deliver the net sales that you would expect from us,” he added.

Sizeable inflation for ingredients — specifically proteins— as well as for packaging materials, labor and freight have driven a price increase of 4.8% for the company starting in the fourth quarter of fiscal 2021. Another price increase to cover inflation costs is expected in the first quarter of fiscal 2022.

“We’ve announced two significant price increases to more quickly recover our inflated costs,” Cyr said. “The sum total of our price increases is about 17% between the two, and that’s going to handle the inflation we’ve incurred since Q4 of 2020.”

The company also incurred what Cyr described as “significant inefficiencies in freight,” in which the company was shipping trucks that were “mostly half full” due to limited labor availability in the downstream supply chain.

“We do want to be very clear that we expect significant downstream supply chain disruption during January and maybe into February due to Omicron,” Cyr said. “What we’ve been hearing from across the industry is that the freight system is struggling to keep up with demand as truckers are out with COVID, same thing is true of warehouses and warehouse workers, and we have certainly seen that in the warehouse system that we access… We expect that to abate some time in February and, when it does, the available production inventory that we’ve created will have been moved through the system, but we’re clearly expecting that problem will be there for much of the first quarter.”

The company is implementing a new ERP [enterprise resource planning] system in February to address inefficiencies in its freight operations.

“The conclusion and the learning for us was, we need to do a much better job matching the growth rate with the ability of the supply chain and labor to meet demand – in essence, build a buffer between expected demand and available supply to absorb any delays or unexpected shortfalls,” Cyr said. “Things that we used to take for granted pre-pandemic, we can’t take for granted any longer.”

Demand for Freshpet continues to grow, according to the company, and sustained growth will depend on upcoming capacity expansions, retail availability and alleviated supply chain issues moving into 2022.

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