SECAUCUS, NJ. — Freshpet, Inc. shared its third-quarter earnings for the three-month period ended Sept. 30, detailing ongoing plans to mitigate logistics disruptions, cut capital expenditure costs, and support its goal of achieving $1.25 billion in net sales by the end of 2025.
Third-quarter net sales were up 40.7% to $151.3 million, with growth supported by pricing, velocity, distribution gains and innovation, Freshpet stated. Billy Cyr, chief executive officer at Freshpet, said the company is “well ahead of the pace needed to achieve our 2025 net sales goal of $1.25 billion.”
The company reported $18.4 million in net losses, up significantly from $2.1 million in the third quarter of 2021. Adjusted EBITDA also declined from $13.5 million in the third quarter of 2021 to $3.5 million in the third quarter of 2022. The company attributed this largely to the inclusion of plant start-up and launch expenses, which it began accounting for in its adjusted gross profit and adjusted EBITDA last quarter.
According to Freshpet, these operational expenses totaled $9.6 million this year, compared to $1.2 million last year. Third-quarter plant start-up costs totaled $8 million in the third quarter alone.
The company provided an update for its production kitchen in Ennis, Texas, which is expected to begin shipping product within the next two weeks. Freshpet shared that 12 SKUs have been qualified for production, and operations are already occurring around the clock.
“The second line in Ennis, a bag line, will begin test runs in January, about one to two months later than previously indicated, and we expected to begin shipping product about one to two months after that,” Cyr said. “This added time is designed to ensure that we have completed the optimization of the rolls line start-up, where we have a greater need for the capacity. We have adequate bag capacity in our system to meet the current level of demand, so this delay will not impact our growth. However, it will delay the full utilization of the Dallas DC until later in Q1 or early Q2.
“We also believe that, at scale, Ennis will be our most efficient plant,” he added. “The Ennis facility has the capability to have higher throughputs with less labor and longer run times as a result of greater automation, some technology improvements, and through enhanced sanitary design. Additionally, the on-site chicken processing will offer improvements in quality and cost versus what we experienced in Bethlehem.”
Gross profit was $44.5 million, or 29.4% of net sales, compared to $41.5 million, or 38.6% of net sales, in the third quarter of 2021. Adjusted gross profit was $52.2 million, or 34.5% of net sales, compared to year-ago $46.8 million, or 43.5% of net sales. The company again attributed gross profit declines in the third quarter to increased plant start-up costs, as well as ingredient and labor cost inflation and quality issues.
“We put in place a more rigorous system of tracking underlying cost drivers, adjusting the frequency and duration of our supply commitments, and are working with our suppliers to find ways to create greater cost certainty that works for them and for us,” Cyr said.
“…The point is that we are seeing headwinds sooner and using that information to take more timely price increases,” he added. “As a result, we have now taken a hard look at our anticipated cost for 2023 — roughly two months sooner than we have in previous years — and have concluded that the basket of input costs will go up in the near term. And in response to that work, we've already announced a 5% price increase to go into effect in early February. That increase is designed to protect our margins and to greatly reduce the impact of any timing mismatch.”
Increased media spending and logistics costs drove up Selling, General and Administrative (SG&A) expenses in the third quarter of 2022. The company’s $18.4 million net loss was also attributed to increased SG&A expenses, along with plant start-up costs.
“We delivered a strong, on-plan quarter,” Cyr said. “More importantly, we are executing on our plan to address the cost challenges and improve margins. While it is still early, we are attracting the high-quality talent we need, taking the necessary remedial actions, and putting in place the systems needed to further improve our performance. The benefits of those efforts should become increasingly apparent in the quarters ahead.”
Speaking of talent, the company announced Nov. 1 the appointment of two new leaders. Todd Cunfer has been named chief financial officer, effective Dec. 1, and Dirk Martin has been tapped as vice president of customer service and logistics, effective Dec. 7. Dick Kassar, current interim CFO at Freshpet, will return to his previous position as vice chairman on Dec. 1.
These two appointments are expected to bolster the fresh pet food company’s financial and logistics acumen and support the company’s operational plans to drive margin expansion. This includes improvements to logistics, commodities and quality, among other things.
Cunfer offers 25 years of experience with financial planning and analysis, treasury, capital structure, commercial operations, supply chain management and M&A activity from previous roles in the CPG industry. He most recently served as CFO at The Simply Good Foods Company and, before that, held several leading financial roles at the Hershey Company over the course of 20 years. Cunfer earned his bachelor’s degree in finance from the College of William in Mary, followed by a Master of Business Administration from the University of Virginia’s Darden School of Business.
Martin brings more than 20 years of logistics and supply chain management experience to his new role at Freshpet. He most recently served as senior director of logistics at Lamb Weston, a frozen potatoes manufacturer, where he led a successful three-year cost optimization effort. He has also held senior logistics roles at Univar, Inc., Nexeo Solutions, LLC, Clean Harbors and Stanley Black & Decker. Martin is a current member of the Council of Supply Chain Management Professionals (CSCMP) and the Institute for Supply Management (ISM). He is a US Marine Corps veteran.
“As Freshpet’s VP of customer service and logistics, Dirk brings extensive supply chain, warehousing and transportation skills that will be critical as we build a multi-level distribution network,” Cyr said. “We are thrilled to welcome both Todd and Dirk to the Freshpet team and look forward to leveraging their financial and operational acumen as we continue to improve our profitability and generate sustainable value for our shareholders.”
Also in its third-quarter earnings report, Freshpet detailed its penetration has grown to more than 5 million households so far this year, up 14% from 2021. Buying rate has also increased to $149.60 so far in 2022, up 19% from 2021. The company’s “super heavy and heavy” dog food buyers — those who purchase at least $40 worth of product over the recent 10-week period — have increased as well to 2.8 million people, up 31% from 2.2 million in the concurrent period in 2021.
“Price sensitivity has stabilized behind the large price increase in February,” Cyr said. “…We've just begun to see the third, much smaller 2.6% September price increase show up at retail, but have not seen any indications of significant price sensitivity behind that increase and don't expect to see much. As anticipated, household penetration continued to grow now that we are back in stock and media is on the air.”
E-commerce and omnichannel sales — including fresh delivery, last-mile delivery and “click and collect” sales — accounted for 7.6% of the company’s total revenue in the third quarter, totaling $12.2 million and up 65% from the third quarter of 2021. Eighty-seven percent of the company’s sales continue to come from brick-and-mortar channels.
Freshpet has added 1,020 new stores to its retail network so far in 2022, including the addition of 374 new stores in the third quarter. Branded fridges have been upgraded at 408 locations, and second or third fridges have been added to 382 stores so far this year. The company’s total store count now includes 24,651 locations.
Following its third-quarter earnings report, Freshpet reiterated its full-year guidance for net sales and adjusted EBITDA. Net sales are expected to exceed $575 million, which would represent an increase of approximately 35% from 2021. Adjusted EBITDA is expected to exceed $15 million.
The company’s forecast for capital expenditures in 2022 was adjusted to $290 million, reflecting a reduction of $30 million from previous projections. In 2023, Freshpet plans to spend roughly $230 in capital expenditures, down $70 million from its previous expectations.
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