SECAUCUS, NJ. and BOCA RATON, FLA. — According to Billy Cyr, chief executive officer and executive director of Freshpet, Inc., the company has nearly quadrupled its business over the last five years from $152 million to $575 million in sales.
Cyr shared this metric during his presentation at the 2023 Consumer Analyst Group of New York (CAGNY) Conference on Feb. 22, which was shortly followed by the company’s release of its quarterly and full-year earnings for the three- and 12-month periods ended Dec. 31, 2022.
“I would like you to take away from today's call is that our house is getting back in order after the stumbles we had earlier in 2022,” Cyr said in the company’s earnings call on Feb. 27.
For the fourth quarter, Freshpet reported a net loss of $2.9 million, down from the $9.3 million loss it experienced in the fourth quarter of 2021. Quarterly net sales were up 43.1% to $165.8 million. For the full year, net loss was $59.5 million, up from $29.7 million in 2021, and net sales were up 39.9% to $595.3 million. Sales growth for both the fourth quarter and full year was attributed to pricing, velocity, distribution gains and innovation, according to the company.
Adjusted gross profit for the fourth quarter totaled $54.8 million, accounting for 35.6% of net sales. Year-ago comparisons show a decline in adjusted gross profit from $47 million or 40.6% of net sales. Adjusted gross profit for the full year was $214.1 million, or 36% of net sales, compared to $184.6 million or 43.4% of net sales in 2021. The company attributed the decline in adjusted gross profit as a percentage of net sales to increased plant startup costs, ingredient and labor inflation and quality issues.
Adjusted EBIDTA for the fourth quarter was $18.8 million, up from $7.6 million in the fourth quarter of 2021. For the full year, adjusted EBITDA was $20.1 million, down from $35 million in 2021.
“We had a very strong finish to 2022,” Cyr stated. “Between record net sales growth, improved performance on quality and logistics, and a strong start-up of our Ennis Kitchen, we were able to exceed our guidance and build a strong foundation for 2023. With the Ennis Kitchen now on-line, we finally have enough capacity to meet the growing demand for Freshpet. That will enable us to focus on driving our operational improvements and margin enhancement under our Fresh Future plan while finally having the ability to fully leverage our marketing, innovation and distribution capabilities.”
The company’s Ennis, Texas, plant is now up and running. As of now, 33 SKUs of the company’s rolls products have been qualified for production in Ennis, and production and shipment expectations are ahead of schedule. Once the first two production lines at Ennis are fully staffed, the company expects to add nearly $250 million in capacity, Cyr said. The company is bolstering its workforce to meet demand and will shoulder incremental overhead costs of the new plant as it continues to expand capacity toward higher net sales.
“Our start-up expenses came in a bit lower than we had projected because the Ennis startup is going very well and is ahead of schedule,” Cyr said. “We are now producing virtually the entire range of rolls and at volumes that are in excess of our previous projections. This allowed us to switch shipments to the state of California to come from the Dallas [distribution center] in mid-January, ahead of our schedule. We are also ahead of schedule on the startup of the bag line in Ennis and expect to be shipping a wide variety of SKUs from that line in Q2.”
Until the bag line in Ennis is fully operational, the company will ship bagged product from its Pennsylvania kitchens to its Dallas distribution center to serve customers in Texas and on the West Coast.
The company has also been working to improve its logistics performance. The company achieved shipping costs equal to 9.4% of net sales in the fourth quarter, compared to 12.2% of net sales in the third quarter. Cyr noted the company is experiencing the best fill rates since 2019.
“This improvement in logistics costs brought the total logistics as a percent of net sales for the year down to 10.7% from 11.2% in the year ago period, but well above the 8% we experienced in the years prior to the pandemic and remains a significant opportunity that we expect to begin to realize in 2023,” said Todd Cunfer, chief financial officer.
Additionally, input costs as a percentage of net sales decreased over 2022 from its peak at 36.8% in the second quarter to 33.6% in the fourth quarter. Quality costs also decreased from a peak of 6.2% of net sales in the third quarter to 4.7% of net sales in the fourth quarter.
Freshpet has implemented a 5% price increase, which went into effect on Feb. 6. Cyr noted this price adjustment is expected to adequately cover raw material and energy inflation currently facing the company. The recent price increase follows an initial 12.5% price increase in February 2022, as well as an additional 2.7% increase in September.
“We've locked pricing and inputs that account for greater than 75% of our costs so far, and we'll continue to add to our supply agreements as the year goes along,” he said.
The company continues to bolster its retail presence, planning 1,200 new stores and the addition of 3,000 second and third fridge upgrades in roughly 1,000 existing locations.
“At the end of 2022, we had about 1.5 million cubic feet of fridge space at retail,” Cyr said. “We expect that to grow to more than 1.7 million cubic feet by the end of 2023.”
The company grew its total household penetration from 8.2 million households in 2021 to 9.6 million households in 2022, an increase of 16%. Total buying rate grew 14% from $77.23 in 2021 to $87.94 in 2022.
Cyr closed his prepared earnings call remarks by noting a “critical leading indicator” of operational improvement: hourly employee retention.
“There appears to be a strong correlation between the improving retention we have had amongst our hourly workforce and the improvements we are seeing in throughput, quality, fill rate and many more,” Cyr said. “…. As we saw team members climb the ladder of the Freshpet Academy, we have seen our operating performance improve in turn. In this way, we believe that the investment we made in our talent and the Freshpet Academy is working. We are attracting more skilled team members, providing them significant training opportunities and rewarding them with career and compensation gains. As a result, our retention has improved dramatically, and we've advanced a large number of our team members to higher levels within the Freshpet Academy.”
Freshpet shared its full-year 2023 guidance, aiming for approximately $750 million in net sales, which would represent growth of roughly 26% year-over-year. Adjusted EBITDA is expected to be at least $50 million, and capital expenditures for 2023 are projected at roughly $240 million. The company expects to “feed the growth” this year through strong advertising investments, significant expansion of its retail presence, and new product launches.
“We are starting the year with well-stocked fridges, healthy inventories and experienced and well-trained production staff, a robust lineup of new product innovations, strong customer commitments for incremental fridges, outstanding advertising on the air, and pricing in the market that more closely matches our input costs,” Cyr said. “It will take some time for all those improvements to align and drive the resultant margin enhancement that we expect, but the early indicators are encouraging.”
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