Freshpet Inc (FRPT) 2019 Q4 法說會逐字稿

Those folks over there, could you guys grab a seat, please?

Ivan, could you go tell him we want to get started.

All right.

Uh-oh, we hear battling dogs.

Is that Steve's or Gala's dog over there making all the noise?

It's not Shiloh.

No.

All right.

Well, thank you.

Thanks, everyone, for coming this morning.

We appreciate you taking the time to come and hear a little bit more about Freshpet.

I want to cover the material that we're going to cover today.

There's 2 pieces.

One is the earnings for 2019, the final earnings that we released.

I'm going to give you a really, really quick run through on those in a minute.

And then we're going to flip over and go into the Investor Day presentation that we'd like you all to hear about.

I will give you a little bit of a warning in advance.

The warning in advance is that we're going to go very deep on Freshpet today.

And part of the reason we're going really deep is because we have an incredibly passionate group of people who are really expert in their area.

And as a result, it's very hard to constrain them.

But the reality is there's a lot of really good stuff that they want to share.

The second reason that we're going to go very deep is because, as a company, we're keenly aware that our stock trades at a very, very high multiple.

And that high multiple is justified by 3 reasons.

Number one, investors believe that the long-term opportunity for Freshpet is enormous.

Second, you believe in our ability to execute against that long-term plan.

And three, the competitive moats that are built around this business are very significant.

Those are what supports the stock price multiple that we have today.

Our hope is that by the end of today's session, that you feel like the opportunity is as big as we think it is or bigger, that you are very comfortable with the capability of the organization to execute against that plan, and that you see that the competitive moats that we've built get only stronger as we scale this business.

So let me start with the housekeeping part.

I will -- the earnings slides that I have today, I'm only going to cover a few of the earnings slides.

The entire deck is available on our website, so you can see all the details that we normally provide you.

So household penetration, store growth and whatnot.

We have released much of the information that's in this deck previously.

So back in -- at ICR in January and at our CAGNY presentation last week, we covered some of this information, but I do want to highlight it.

We will do questions about this at the end of the entire day.

Of course, we have our usual safe harbor statement.

It's a 2-pager now.

So our fourth quarter came in with growth of 27%.

So we ended up with slightly ahead of where we set the guidance for the year.

So $65.8 million in net sales in the fourth quarter, and the EBITDA -- adjusted EBITDA in the quarter was $13.2 million, up 43% versus a year ago.

So this message of an accelerating rate of bottom line growth on top of a very strong top line growth is very consistent.

The -- for the year, our guidance had been to have net sales in excess of $244 million.

We came in at $245.9 million, up 27% for the year.

And the adjusted EBITDA, our guidance had been to be up 29% versus the year -- or up 44%, up over $29 million at $29.2 is where we came in, it's up 44% versus the year ago.

So again, a bottom line that's growing at a faster rate than the top line.

I'm going to skip past all the consumption data because this has been shared, it's been fairly public.

But the most impressive part is our 2-year stack continues to grow, and we're up 64% on a 2-year stacked basis, it's pretty incredible.

There we go.

It doesn't matter what channel we're in, we're growing very quickly.

The rate of growth on ACV is very strong.

The penetration growth, which we shared last week at the CAGNY presentation, is incredibly strong.

The buying rate remains at a very high level, only diluted by the strong penetration growth.

We released the store growth back at ICR, and it was a very impressive performance for the year.

Adjusted gross margin has historically been the place where we've had our biggest issues.

I would describe our gross margin as stable, not making the progress that we had wanted to make.

I think at this moment is where I wanted Shiloh to come running across the stage and everybody can ooh and ah about the puppy.

But the reality is that we had a few hiccups that occurred along the way.

But over the grand scheme of things, the fourth quarter adjusted gross margin is about stable at where we were for the year -- throughout the year.

And for the year, we ended up at 49.4%.

There is a little bit of a mix effect that is occurring in here, and we're going to spend, for the first time, some time in today's presentation talking about the impact that mix has on both the capacity that we need as well as on the margins that we produce.

It's good from a bottom line perspective in terms of total dollars, but it doesn't make the percentage margin look good.

We continue to make significant gains on the SG&A leverage that we've been talking about since 2017.

Where in the fourth quarter, you can see we picked up a few more points of progress on SG&A leverage, excluding media, and for the year, we made a very significant gain, 290 basis points of SG&A leverage towards the 700 basis points that we had talked about.

This remains a significant opportunity for us going forward.

We have just really started scratching the surface of SG&A leverage.

And Heather will talk more about that later on.

So at this point, we feel like we are well on path towards the goals that we laid out in 2017.

And in fact, you will see that we think we are ahead of the revenue target that we laid out of $300 million.

Because to get to that revenue target, we'd actually have to slow our rate of growth from the 27% we've done in the last 2 years to 22%.

The model that we laid out in 2017 is working.

The Feed the Growth Program that talked about this virtuous cycle of investing in media, where we made significant increases in our media investment to drive velocity, to increase our distribution, to get leverage in manufacturing and in our SG&A and then reinvest that back in the business.

That fundamental model has worked for us and has got us to where we are today.

I won't bore you with the rest of the stuff that you can all find on our website and in our 10-K that was filed this morning, and as well as our earnings press release.

So that's the part I want to cover related to the earnings.

If you could pull up the next presentation, and before we do that, we do want to take a moment to do one acknowledgment.

All of you probably saw that in December, we announced that as effective October 1 this year, Dick Kassar, our CFO, will become our Vice Chairman; and Heather Pomerantz, whom we hired as EVP of Finance, will become our CFO.

And so this final -- 2019 is the final full fiscal year that Dick will be signing off on the financials, and this will probably be his last Investor Day.

So we thought it would be appropriate for all of us to have a chance to recognize Dick briefly.

So Scott, take it away.

I'm actually going to ask Cathal Walsh, who is one of the other founders, who doesn't get to -- kind of get into -- in front of you guys quite as much, but I wanted to ask him to come up.

So Cathal actually works with us in Europe.

If you guys don't know him, he is a force of nature.

And I mean that in every aspect of the word, and he's been an incredible partner.

And the reality is we wouldn't be standing here today if he didn't contribute along the way.

But we do want to recognize Dick for all his contributions.

So Dick and I have actually worked together for 18 years, which is pretty amazing, across 2 different companies.

And when you work with someone that long, you get to know that person really well.

And when there are challenges and difficult and tough times, you really, really get to find out what someone's made of, and they don't make people any better than Dick.

And I've worked with him for the 18 years, and we look forward to working together for many, many more years.

He will obviously be involved in Freshpet.

And who knows what else in the future he'll be involved in and pursuing.

But along the way, quite honestly, Cathal and myself created many, many challenges and sometimes some difficult situations for Dick potentially.

And Dick was always there to be supportive and helpful, and he'd always kind of help clean up a little bit for us.

So we thought maybe it was appropriate to have a one of a kind, golden pooper scooper.

And as you can see -- you may not be able to see in the back, but it does say "place large pile here." So once again, Dick -- I mean the contributions that he's given -- made to the organization, unquestionably we really wouldn't be here today if Dick wasn't a part of the organization for as long as he has been.

And again, he will play a critical role going forward and be involved with the organization.

And we really, really look forward to working with him further and his counsel and his wisdom and his partnership, and his friendship most importantly.

So thank you again, Dick.

So now we have the second part, the part that most of you came here for today, the Investor Day.

And as they always do, they gave us yet another version of the forward-looking statements, safe harbor piece.

And we have a choice here where you can all hear me read that line-by-line or we can all stand and look at -- what happened to the picture here?

What happened to the slide?

There's supposed to be a picture there.

Ma'am, can you figure out where that -- there we go.

Or you can sit there and look at a picture of my dog.

I prefer this.

So this is who I work for.

Her name is Appa.

She is a 15-month-old Samoyed.

And she's the fourth Samoyed that my wife and I have had since we got married 32 years ago.

And any of you heard us talk at CAGNY last week will know, I described this as my wife and I got our first dog as a surrogate for children.

We then had -- when we had kids, they were the companions for our kids.

And then now that our kids have left the nest, they've been -- Appa is a replacement for our kids.

When I went home and told my wife that that's the way I had introduced her.

My wife said, "You forgot something." I was thinking "Oh, no, wedding, anniversary, what did I forget?" And she pointed out no, that Appa is more than that.

She's also the surrogate for the grandchildren that our millennial children haven't given us yet.

So that's the role she plays.

So when I took -- when I joined Freshpet 3.5 years ago, I told many of you that I joined Freshpet because I saw this as an opportunity to help change an industry.

That the model that Cathal, Scott started and the rest of the team that's sitting here had developed and refined over the years, I thought it had the potential to change the industry.

And some of you would've been justified if you were a little skeptical, because at the time we had $130 million in revenue in a $30 billion category.

How do you change an industry when you're that small in that big an industry?

And what I'd hoped that you would feel today is that you'd see that we have that potential.

We're on that path.

We have that trajectory, the momentum that we've built over the last couple of years certainly makes that a distinct possibility.

But I want to raise our sights even higher than that and talk a little bit more about how there are brands that change the world.

And that's something that we aspire to turn Freshpet into, a brand that changes the world.

And before you discount that, remember you might have discounted our thought that we could change the industry a couple of years ago.

But we look out over the horizon.

As you think about brands that change the world, they really have 3 common characteristics.

The first is that they change something very fundamental about life, something that you do every single day, whether it's eating or sleeping or how you entertain yourself or how you get to and from work.

But these are things that absolutely change the fabric of your life.

The second thing that they do is they reflect a change in society's values and priorities.

So in a world that may have gone towards mass and industrialized sameness, it brings customization and personalization.

In a world that is time pressured and fatigued, it brings energy or relaxation.

Those are the kinds of things that really can change life.

The third thing they do is they bring a technology or a collection of technologies that may have been present, but not assembled in the order in which they are assembled, to make something that was previously not possible, possible, or at least more broadly and readily available.

And so obviously, the high-water mark or the high bar for that is Apple.

Apple's changed the way that we create, think, the way that we connect.

So from the mouse that meant that you no longer had to type into your computer a computer instructions, to just point and click, to the ability to download a song, any song you wanted at a reasonable price and just one song, and put thousands of your own personal music on a single device that you could then take with you anywhere, Apple has changed the way we entertain ourselves.

And the iPhone has changed the way we connect and access information.

Netflix.

In a world where entertainment was given to us by networks and people like HBO, when they want it and what they wanted to give us, Netflix completely changed the world to a world where we get high-quality entertainment when we want it and where we want it.

Amazon hit the trifecta of giving you incredible range of variety or selection at the best possible price and with convenience, and completely changed the way the world shops.

Nike.

Before Nike, you may not remember -- those of you who are as old as I am would remember, that before Nike, it was Chuck Taylor basketball shoes and Tretorn tennis shoes, and they were used for virtually every form of athletics.

Nike came along with the waffle tread and changed the way in which we exercise.

So in a world that had become increasingly sedentary and was looking for fitness, Nike began to change the way that we do fitness and the way that we compete.

Now all the way up to and including the Vaporfly, which has had all this controversy about whether it actually makes you even better than you should be.

In a world that was time starved and looking for energy, Red Bull came along.

Whether it was to start your day, give you a jump-start in the middle of your day or keep you going at a party late at night, Red Bull redefined how it is that we extend our days and create energy in our lives.

Again, you may not remember what life was like before Gatorade existed.

But before Gatorade existed, if you were an athlete in a high school sport on the sidelines, you had water or believe it or not, carbonated soft drinks.

Gatorade completely changed the way we rehydrate and made athletic beverages a whole new category, and changed the way in which America rehydrates and created science that supports that.

Keurig and Starbucks have changed the way in which we wake up and get energy in the morning and refresh ourselves later in the day.

You think about it, until they came along, the world of coffee was this world of sameness.

It had to come from the pot.

It had to be in this standard package.

And they redefined it to craftsmanship, personalization, customization and quality at a level well beyond what had existed before.

And now people stand in lines to get Starbucks at the morning, in the middle of the afternoon when they need refreshment.

And while those may appear to be very high-water marks, high bars, that's what we aspire to with Freshpet.

Because we aspire to change the way the world nourishes its pets.

And you may sit there and say exactly how does that really meet that standard.

But if you're one of the 63 million dogs that exist in the United States today, and your parents and your grandparents and your great grandparents and all the generations before that, all they ever had every single day was dry dusty kibble or mystery meat in a can, and you get Freshpet, and you get the nourishment, the nutrition, the taste.

Your life is pretty much a step change in difference similar to the step change that I described, whether it was Gatorade or Starbucks or Nike versus what preexisted.

You think about what does exist today.

The pet food industry is a $30 billion industry, and it's stuck in the 1950s.

Kibble was last created in 1956.

And that kind of made sense if you think about what life was like in the 1950s.

In fact, if you had a dog in the 1950s, it probably looked something like this, where it had a chain around its neck and it slept in a doghouse in the backyard.

That's a far cry from the world that we see today, where dogs are now part of your family.

And they're now just sleeping, not in a doghouse, in your house, in your bedroom or in your bed.

It's a completely different world than we had before.

People have come to recognize the role that pets can play in our lives at a level that's way beyond what we envisioned when kibble was created, or even further back when cans were created.

In fact, there's even a science around it.

A couple of years ago, the term zooeyia was created, to define the health benefits that humans get from having a pet in their life.

So going back early in your life, when you start life it helps with your immune system, whether it's the saliva or the dander of the pet, having a pet in your household improves the immune system as it develops for children.

It includes the opportunity for psychosocial development.

How do you treat a pet?

How should a pet treat you?

How do you nurture a pet?

These are skills that kids can learn, especially in era where they may not have siblings.

You go on beyond that into catalyzing social interactions.

When you take a dog out, as all of you saw with Shiloh here, a dog is a magnet for people, and it teaches you how to have social interactions and encourages more social interactions, encourages you to get out and exercise.

So if you were destined to sit on your couch or in front of your computer and your dog wants to go for a walk or play ball, it gets you out and gets you active and vigorous.

Or if you want -- needed coping -- some form of coping or recovery from some trauma in your life, the pet was there to help you.

That's zooeyia, and that's a role that pets play in our lives.

That kind of -- when you think about the food though that we're feeding.

The world that we've gone from is a world that looks like this, canned foods that have moved and we've moved into fresh foods.

Think about the food industry of the 1950s, they believed you could can or dehydrate anything, add artificial flavors, colors and preservatives and sprinkle vitamins on the top and tell us that it was tasty and nutritious.

That's what we call tasty, nutritious today, the thing on the right.

And if you think about the dried and processed foods that we had in the 50s and 60s.

And what we're looking for now today is much more -- less processed, much fresher foods.

So Freshpet, our mission as a company, is to awaken the world to a better way of feeding pets.

We have a completely different ideology for what pet food should look like.

Think about the last major innovation, it came 50 years before Freshpet was created.

1956, kibble was created.

In 2006, Scott and Cathal created Freshpet.

What a change, what a difference.

That may be a more dramatic difference than going from Chuck Taylors and Tretorn tennis sneakers to the waffle Nike, or from what predated the iPhone as a flip phone.

This kind of transformation is a significant transformation of what was possible.

Or even bigger difference is the can of dog food created in 1922 versus our Fresh from the Kitchen product created in 2015.

The market is recognizing this significant change and rewarding Freshpet with significant growth and accelerating growth.

Our growth was 14% in 2016, it went up to 18% in 2017.

Last 2 years, we've been growing at 27% a year.

And we're adding households quickly.

In fact, it's an accelerating rate of household penetration growth.

We've gone up 25% in just total household penetration in the last year and 30% when you look at just our main meal core dog items.

But the reality is, the opportunity is much bigger than just where the 3 million households we're in today.

63 million households in America, we're only in 3 million of them.

The opportunity is significantly bigger than that.

If you think about the way in which significant new innovations are diffused throughout a population, and lots of academics have studied this issue.

One model that's come out, and many of you have probably studied it or seen it, is Roger's Diffusion of Innovation model.

And it basically defines people as whether they are innovators, early adopters, the early majority, the late majority or laggards.

And different people in different categories will adopt new ideas and new technologies at different rates.

But eventually, the growth curve follows this very similar pattern whether we're talking about the adoption of the telephone or television or dishwashers or iPhones or the internet, the rate at which people adopt them looks very, very similar.

So the obvious question for us is, where is Freshpet on that curve?

And what you can see is we believe Freshpet is in the very early innings of this.

Down in the lower left, where it says 12% of prime prospects are using core dog products.

And you look at where the total market potential is up in the upper right, just defined the way we see the data today, the potential is a $2 billion market.

And the reality is that market potential is still growing, and it's growing very quickly.

If we reassessed it again today versus when we did it in late 2019, we'd expect to see the number bigger.

What's even more interesting is there's this point along the curve that all the academics observed, which is called takeoff.

And takeoff is what happens when people other than us, other than those of us who are providing this new technology, but operating in their own best interest, their own economic self-interest, take actions that would accelerate our rate of growth.

We may have been seeing that already.

So retailers in the fourth quarter of 2019 began putting us in more stores at a more rapid rate.

Not because our sales team was more persuasive than they had ever been before, although Eddie may think we have been, but the reality is, it became obvious to them that there was a bigger opportunity here than they had previously realized.

And so in the fourth quarter, they started putting fridges in more stores and bigger fridges because it was in their economic self-interest.

We found household penetration growth accelerated well beyond what the level of advertising investment we made would have predicted.

We start picking up word of mouth in ways that accelerate our rate of growth.

And so we believe Freshpet is that point on that curve, where it's about to hit the takeoff that would accelerate our growth and head towards the market potential.

As a result, our plan that we are talking -- beginning to talk about today for the first time, is Freshpet's 5 by 2025 Feed the Growth Plan.

And what that means is that we want to add 5 million more households to the Freshpet franchise between now and 2025.

We have 3 million as of the end of 2019, we want to go to 8 million households by the end of 2025.

We are very, very mission driven.

We are focused here on trying to get more people to feed Freshpet more of their time.

Our goal is measured in households.

That's what we're shooting for.

We want to get more people feeding more Freshpet.

But if we achieve that objective, we get more people feeding Freshpet on a regular basis, we will end up delivering $1 billion in revenue in 2025.

That's our goal is 5 million new households, $1 billion in revenue.

To do that, we've updated the strategic plan that I outlined first in 2017.

And the strategic plan has 3 changes versus the virtuous cycle we talked about before.

The first change is in the top, where we are entirely focused on advertising as the driver of household penetration gains.

We are now adding innovation.

And the reason we're adding innovation is because we see very significant success at extending the consumer franchise, the household franchise for Freshpet behind some significant new product innovation such as our small dog or Fresh From the Kitchen, and you will see more of that today.

But it's also because our retail franchise is now big enough.

Meaning we have big enough fridges and double fridges in some stores that can accommodate the expanded consumer -- expanded product lineup that supports an expanded consumer franchise.

So they work hand in glove.

And that's the second point down at the bottom.

We're describing it as not just adding distribution or expanding visibility and availability.

And by that we mean, wherever we are, we want to be very easy to find, very noticeable.

Bigger fridges, second fridges, end-aisle fridges or even beyond that, if we go online, we want to be very noticeable online and available.

We want to be available any way and anywhere the consumers choose to buy Freshpet food.

So our definition is visibility and availability, not just distribution.

The third change is the box down in the lower left in about the 7 o'clock position, it says expanding capacity.

In order to keep up with the rapid rate of growth, we will need to add capacity and add it very quickly.

And we'll talk a lot more today about how we plan to do it.

But it is a much more integrated and expansive program than we last talked to you about when we had an Investor Day about 18 months ago.

So what should be your key takeaways today?

I'd ask you to think of 3 things: number one is our total addressable market has nearly tripled since we outlined it at the end of 2016, and it is still growing.

Secondly, Freshpet is going to invest in organizational capacity -- capability, production capacity, innovation and marketing support to seize the opportunity ahead of us.

The way we think about it is we invest in capability before capacity, capacity before demand, but we need to invest in every single piece of that.

And the third part is that we have a winning business model with a wide competitive moat, significant first-mover advantage, and that will deliver meaningful shareholder returns.

So those are the 3 takeaways I want you think of, as you come away from the session today.

Our specific goals for 2025, 5 million more households.

Again, we're very driven by the mission.

The mission of changing the way people feed their pets.

And to measure for that, you measure how many people are feeding their pets a Freshpet.

That will deliver $1 billion in net sales and still growing at a great -- greater than 20%.

And I hope you come away convinced that that is an achievable goal and a 25% -- approximately 25% adjusted EBITDA margin.

Between now and 2025, the path that we will follow will have some variability in it, but we'd expect to have 20% -- 20-plus percent net sales growth every year between now and 2025.

Our adjusted EBITDA will grow every year in excess of our net sales growth rate, but it will vary by -- in the years, depending on the capacity available and the opportunities we have.

So for example, we may choose to make an investment outside of the U.S., which would depress the rate of growth a little bit, but would be planting seeds for -- down the road.

Third is we will continue to invest in advertising as a prime driver of our household penetration gains, invested at 12% of net sales in U.S. advertising with incremental investments that will occur outside the U.S. Continued leverage in SG&A, that will be the single biggest driver of our adjusted EBITDA margin improvement.

We expect to see significant efficiency gains in our manufacturing, and those efficiency gains in manufacturing will offset some dilution that we get from mix.

And Heather will talk to you a lot more about the impact that mix has on our business.

And the last part is significant but phased capital investment to support the capacity expansion.

We know we will need a lot more capacity, but we will do it in ways that we think are strategically smart and phased to match the rate of growth of the business.

In today's session, we're going to cover each of the topics that are essential to that, starting with how big can Freshpet get and how will we do it.

We'll then talk about how we'll meet the demand.

Then Heather will come up here and talk to you about the strategic and financial benefits of the scale -- increasing scale we'll create.

And we want to talk -- then we also want to talk about how we'll take care of pets, people and the planet while we grow.

Environmental and sustainability and ESG is a big part, and it's embedded in our business model today.

And finally, we're going to talk to you about what -- how our investors will be rewarded for the growth that we're going to create.

So then at this point, I'm going to turn it over to Scott.

All of you know Scott.

Scott is, obviously, the President and Chief Operating Officer of Freshpet and also co-Founder of Freshpet along with Cathal.

He's also the pet parent to these lovely creatures.

But you all know, Scott is one of the most innovative people I've ever worked with in my career.

I oftentimes refer to him as the Steve Jobs of pet food, given the analogy I gave you of Apple at the beginning, but incredibly talented executive.

And he is the prime architect of the business model that we've got today and the innovation that we bring, and he's going to take you through how big we're going to get and how we will get there.

So turn it over to you, Scott.

Thanks.

I think the only similarity with me and Steve Jobs is our first name starts with an S and that's where it ends.

But anyway, thank you so much, Billy.

Thank you, guys, for being here.

I know this is -- thank you for being here early.

I know it's a long day.

Hopefully, we'll kind of run through a lot of really helpful and interesting information over the course of the next couple of hours.

We'll try and keep it light hearted.

If not, you let me know, raise your hand if you want me to move slides faster, and I will do that.

The other thing is, I know there's a burning question you all have, yes, everyone gets one of these shirts later today.

Most important.

I do want to thank our team.

They -- everyone worked incredibly hard, not only on this but also just kind of getting ready for this, really developing a 5-year plan.

I mean it's not -- you only get to do it every 5 years.

So the reality is most of the time, you're hopefully working on the business and making sure the business is moving forward.

So we've been kind of on an intense period with lots going on.

So thank you guys, great work.

Thank you guys for believing in us and coming along the way and participating with the progress the company has made over the years.

So again, thank you all so much.

And thank you to NASDAQ and our partners at ICR, who have been great helps too.

Okay.

So this is some of my pets.

This is actually Piper when she was a puppy.

And I have another cat, but she didn't make this photo, ran off, which you could probably understand.

And I call Piper my party girl because she is always up for a good time.

All right.

So let's start with the pet food category.

If you kind of take a look at the category, it's -- you hear a lot about it.

It's a $30 billion category.

This past year, it grew at about a 7% growth rate.

But typically, you'll see like a 3% to 4% CAGR over time.

It's driven by some really kind of strong fundamental trends, and these are really important.

One of them is there's been significant pet population growth and also expansion in the households with pets over the past 3, 5, 7 years.

So that's been really kind of good fundamental.

The other thing is this whole idea of premiumization.

So people are buying kind of better and more expensive pet foods typically over time.

So that's a great kind of opportunity for the category, and that's been one of the driving forces.

So the reality is there's more focus on nutrition overall, with the way pet parents are thinking about it, and I'll talk about that on the next slide, but the reality is the wind's at our back.

So it's -- that's really nice because there's a lot of categories that have contraction going on.

Now I talk about this as 85 years of pet food in 1 minute.

If you kind of think about pet food -- and Billy touched on this, but in the 1940s, there really wasn't pet food for the most part, it was -- pets basically ate what we ate, right?

They were just basically nourished by what were the scraps or kind of whatever like someone was feeding them.

And then commercialized pet food came in, in the '50s, Billy talked about 1956 was when extrusion came up.

In the '80s and '90s was what I call the birth of super premium, which was kind of the step-up in the category, scientifically designed foods.

And over time, that changed this idea of ultra-premium.

In ultra-premium, the core concept in ultra-premium was, it was more meat-based and there were better ingredients.

And there were a lot of brands that did incredibly well.

We believe over time, and this is based on how we eat and how we think about nutrition, is pet food will continue to change.

And over time, it's really moving more and more to kind of simple, good food.

So we believe that's really where the category is going.

Now I would like to tell you that we were brilliant when we laid out our plan in 2006.

I think we did a great job, but we are really fortunate with how we see the category developing.

The other piece of the category I talked about is like premiumization, Billy touched about the relationship people have with their pets.

I want to play a brief video because I know that it's better to see a little bit of a video than hearing just me talk.

So we'll play a brief video that will give you a little bit of a feeling of the relationship people have with their pets today.

(presentation)

So pets are part of all of our lives, and they really inspire us to do great work, and that's really kind of -- really the foundation of the organization when we started it.

So the amazing thing is that pets are literally replacing kids today.

As millennials tend to put off having children, there is incredible growth in the pet population.

There's actually 22 million more dogs and 28 million fewer kids over the past several years, which is an amazing statistic.

So instead of having babies, we're replacing them with fur babies, right?

So that is really kind of another kind of amazing statistic on the category.

But it also is really telling about the relationship that people are having with their pets and how they think about them in their lives.

And I think that video helps illustrate that.

So I think we've may -- I don't know if many of you have seen this.

There is amazing research out there today that literally shows that people with pets live longer, healthier lives.

It isn't our research.

This research has been done by many, many people.

And there's so many reasons for that.

Some of it's because they make us exercise, some of it's the bonds.

Billy talked about even the microbiome that pets bring into our lives, but literally, pets actually help us live longer, healthy lives, which is amazing.

And that, again, kind of inspires us to be pet owners, and we hope all of you guys will be pet owners, too.

So Freshpet lives at that intersection of 2 powerful, powerful trends, the idea of humanization of pets, which we've really highlighted and this idea of fresh, wholesome and simpler natural foods that we're all aspiring to eat in our own diets.

And we're really trying to tap into that.

I talked about how people think about pets and the intersection of this trend.

And again, I wish I was as smart as we look today, being perfectly positioned to kind of where the puck is going to.

But we feel like we're in an ideal position.

Now I want to go backwards a little bit and share with you -- there's a couple of reasons I'm going to share a couple of things here.

If you go all the way back to 2006, '7, '8, '9, '10, it's been an incredible trajectory for us.

And all along the way, we built a bigger and broader organization and brought more capabilities into the organization.

And it's really been kind of, the fundamental thing is, we've added more and more consumers every single year.

So from the outside, the reality is that success like this is great.

It's kind of this line that just kind of goes up.

The reality is, success does not work that way.

There are many twists and turns and there are curves.

But what happens is, every time there's a loop, we learn something, and we have learned a lot.

And there's been definitely different phases all along the way, and it's been great learning for the organization.

That learning and that being part of our organization helps us to be successful into the future.

Billy kind of touched on some of it, but we have -- we have been -- the majority of the management team has been in organizations that are multiple billions of dollars.

I like to say that I worked my way all the way down to 0 at Freshpet.

So we've seen all these different growth stages in different companies that we've participated in.

And we know what a large multibillion-dollar corporation looks like.

And that's really how we're building and thinking about it.

But the learning has come along the way.

One of the things that's taught us in success is that there are some things that were really kind of like these major foundational kind of causes and ideology that we have with the business.

We learned a ton.

And we really felt like we knew that we could build a company that not only could transform the pet food category, but had the ability to create better lives for people, better lives for pets and really be, kind of have a triple bottom line.

So not only focus on profits, but also focus on the economic and societal things.

And we'll talk about this idea of pets, people and planet.

It's really been built into exactly what the organization has been about really since the very beginning.

I know it's been a very, very hot topic for many people today.

And you're probably going, well, why am I talking about it?

Why is everyone talking about sustainability?

Why is everyone talking about this idea of this passion around having a mission-driven organization?

The reality is, it's incredibly important.

It's incredibly important to all of us.

It drives us, it drives our consumers to really be passionate about our company, and also it's just the right thing to do.

I think we can all agree that government is not going to solve our problems, we're going to have to rely on individuals like ourselves and organization.

So we want to help contribute to the world much more than just deliver profits.

So we believe in a healthier, happier world where pets, people and planet all thrive together.

Justin will take us through pets, people and planet later, so I won't go on about that, and he'll do a wonderful job explaining each one of those aspects and the different things that we're doing in those areas.

The next thing I do want to share is values.

So long ago, when we first started the organization, when someone would start in the organization, I'd go and spend time with them.

Cathal or myself, or Dick, we'd spend time with that individual.

And we'd work with them and we'd really be kind of around them all the time.

We're actually now growing to a point where we can't spend as much time with each individual that starts in the organization.

So it's incredibly important to have principles, mission and actually our values laid out so it's super clear.

So literally, when we ask our team to evaluate ourselves -- so Billy and I get evaluated by the rest of the team -- we ask people to evaluate those on these aspects.

That's in our 360 feedback, or our full-circle feedback.

When we're interviewing people, we're starting to ask those questions and figure out how those people can contribute to the different values, and do they believe in them?

When we interviewed Heather, there were specific questions that we were asking.

Would she fit in our organization?

Would she help us achieve the mission?

And I only pick on her because she is the most recent person who joined the team.

So I will play you a little bit of a video of what we feel like we've created as a team and an organization.

And it's -- hopefully, it's going to kind of all tie together in just a minute.

(presentation)

So we really feel like we have built a family, and I think this is what differentiates us from so many organizations out there.

There's still 2 of the founders in the organization.

There are many, many people that have been with us for many, many years.

In fact, this lady in this photo, she was -- Cathal and I met her in a coffee bar.

She's still with the organization.

This is our groundbreaking recently.

We met her in a coffee bar, and she asked, "well, this sounds great, what's my first job?

And we said, you need to go find an office because we don't have an office right now.

This gentleman, Willy, he was literally our second employee.

And I'm not kidding, this man lifted literally probably 1 million pounds of ingredients, before we had the equipment to do it, to make our products.

So these people are still involved in the organization.

And they are kind of the core.

They're absolutely kind of the core, they're the backbone, and we've asked each one of them to be really part of how this organization continues to grow.

Because they knew how it was built, they knew what's made us successful, and they can share those learnings.

It's not me kind of spending time with each individual, it's now over 30 people that are sharing that time and can help us grow.

So it's the tribal knowledge that we have.

It's the expanded team, and we believe that's our platform for success.

So in the very, very beginning, we all wore many, many hats.

And you can see, we kind of did some juggling.

This was actually my response to Billy challenging me that my balance board was not like a really professional balance board.

So I figured I'd juggle while I did it.

All right.

So all right.

So the reality is, if you think about these phases of the organization, so think about these different functions and the different phases, we've kind of been through these generally 3 different phases.

The first several years, we were trying to figure out what was Freshpet.

It was literally the birth of the organization.

And you can see Scott Morris, Michael, Michael, Scott Morris, Cathal, Dick, Cathal, Steve -- Steve here.

So literally, there's a handful of names that we kind of just splattered all around.

We kind of all did everything.

We were on that -- we were juggling.

We were on that balance board.

But you can see and you'll meet Lisa in a few minutes, you'll meet Ivan in a few minutes, you'll see Steve in a couple of minutes, you'll see -- let's see, those are Board members primarily, but we've add -- continue to add people into each phase of the organization.

And then once we had kind of started to establish what the business model looked like, then we added a whole another set of people.

I don't know if you guys caught this, but the original kind of systems, literally we were using Excel.

Then Steve was our kind of in charge of our systems and literally kind of doing it.

And now we literally have people that are helping us to establish what the systems are for the organization and help us grow forward.

So we've added capability in every step of the way, but we kind of have the center of that tree, that core, that founding group of 30 that are still with the organization that we think gives us a platform to grow into the future.

All right.

So I'm going to transition for that, and actually, I'm going to talk about the Freshpet consumers.

All right.

So we are -- like we've done a ton of work over the years around this, and we've done a significant amount of work over the last 12 to 18 months to kind of understand our consumers, understand what the opportunities and the needs are.

One of the first things that you'll see is that we have a very interesting makeup.

You can see kind of the makeup of the dogs, but you also see that the majority of the dogs in our company are -- tend to be smaller dogs that feed our food and the other thing that's really interesting is that we actually tend to have younger dogs, which is pretty interesting -- pretty interesting fact.

We believe that once someone starts on typically any food, but especially our food, they typically be -- are in for a very, very long period of time.

So this is an encouraging factor, that we have so many dogs that are young that are in our franchise.

The other thing that's really interesting and a great fact is if you think about the population of dogs today and the owners, you look at millennials.

But then one of the most important things is, if you look at our index on millennials, actually at 124 index, we haven't even honestly done a brilliant job marketing to millennials.

We're actually going to start doing more of that, and John is going to talk to you about a couple of things in the marketing that we're doing that will help us to attract millennials.

We believe millennials will be an incredible part of our core.

And then also Zs, we over-index with that group, too.

So those are -- that's another very positive aspect.

And one of the things we get asked very often is -- so this is interesting information, but how do people act once they've come into the franchise, and they're buying our products?

So we've actually done some work, and this is kind of on Nielsen panel data.

And what we have found is that people -- and this has been repeated time and time again, that when people buy our product, from when they start to when they most recent purchases, and we took a large group in this, they continue to increase the amount of dollars that they're spending on Freshpet.

That's a really, really positive sign.

And that's really kind of supports the idea.

We always talk about our repeat rate.

So this helps to support that fact.

The next one that's really interesting and telling, and actually helps create an opportunity for us is, you actually can look at this, you'll see that are -- the dogs that are the smaller dogs that we have many, many of, that's -- we become the primary meal for many of those, and even in this 10 to 24 pound category, the place that we don't do as well as people use us more and more of a topper, is in the over 50-pound group.

This creates an opportunity for -- or what are the types of products that we can come with that can help meet the demand of that group.

So you hear Lisa and Gerardo talk to us later on about innovation.

That will be something that's on our list over the next several years.

And there's some really kind of great opportunities that we've identified and some things that we feel that we can -- we're able to conquer.

Years ago, we only had rolls, and people told us we were inconvenient.

And then we came with bags.

And then people said, it looks good, I like the food, but I want it to look even more like human food, more like the food I eat.

And that's one of the more recent products that we'll come with.

Lisa will share a picture of that product called Homestyle in a little while.

So the next thing that you'll see is our penetration and loyalty cycle.

And this is what makes the machine work.

This is critical.

So when people come in, they buy our food because they believe it's healthier upfront.

When they use it, they actually see incredible palatability -- so -- industry-leading palatability.

We've actually shared over time some charts that demonstrate like what the palate is of our products versus the competitors'.

So this is kind of an average.

We have industry-leading palates.

So palatability is when you take our food and a competitive food, put it in front of a dog, what does the dog consume?

It consume 80% of our food versus the competitor food.

So that's the first thing that people notice.

Looks good, smells good.

I put it in front of the dog, the dog loves it.

So that's the first positive experience.

The next thing, after a few weeks of feeding it, people see a visible difference in their dog's health.

Who -- think about that.

If you brought home spinach for your kids and you fed them the spinach, and they were going, this tastes great.

And a few weeks later, their skin and coat looked great and then they have more energy, what would you think?

You'd feel like a pretty good mom and dad, right?

Perfect.

So that gets us to this next piece, which is satisfaction.

97% of the consumers who feed our product feel incredibly satisfied.

Now that is a little bit of a self-fulfilling prophecy, but that again is an industry-leading statistic.

If you take all the products that are out there and take the user base, that product satisfaction level is really, really strong.

The next piece is the 70% repeat rate, right, which is really, really strong.

Now I know what all of you are thinking.

You're going -- well, what happened to the other 30%?

Well, you know what?

I've got that on the next slide.

So these are the reasons why the 30% don't repeat, right?

And I think we maybe have touched on this over time.

Hopefully, it's kind of interesting information but it's, out of stock -- look at these -- out of stock, not available near me or goes bad too quickly.

This one -- remember, the small dog piece?

If you have a 5 or 7-pound Chihuahua, it's hard to get through a lot of food in a week.

So people are struggling with that.

Isn't that an opportunity for us?

Clearly, an innovation opportunity for us over time.

So out of stock, not available near me.

The sales team is working on that from a visibility availability standpoint.

Goes bad too quickly?

They prefer dry dog food.

There's a perception that my dog likes the crunch, and that's fine.

There's a lot of people that will always feel that way.

Has to be purchased too often.

Honestly, it's fresh food.

We are in the fresh food purchase cycle, whether you're purchasing it for yourself or for your pet.

So we're in that cycle.

The dog didn't like, there's going to be some people that didn't like it.

And then there's a group that does feel it's too expensive.

The reality is we're not going to appeal to everybody.

We're not going to be perfect for everyone.

So there's a group that we may not be able to get.

But everything demonstrates to us that there are opportunities for us to continue to come with innovation over time and address some of these consumer challenges.

So the last one, too expensive.

If you take a look at pricing, we've shared this chart, I actually adjusted it from CAGNY.

I added a couple of other items in here.

If you think about what it costs to feed Freshpet on -- this is a for a medium-sized dog.

If you -- what it costs per day to feed Freshpet.

We have products that go from $1.60 a day all the way to $3.30 a day.

But if you want to feed some of the stuff that's 4, 5, 6 pounds -- $7 a day obviously, there's plenty of other products in the category.

I think this is a fair representation of a range of our products.

We're trying to hit all price points, be as widely available to as many people as possible.

We are not going to be the cheapest product out there, I can guarantee you.

But I can also guarantee you we're coming with a different level of quality then what's out there in traditional pet foods.

So the next question you're probably asking is, why haven't everyone tried Freshpet?

So there's a group of aware and then there's unaware.

The unaware people, John later is going to talk to you about the marketing piece, he's got some work to do.

And he's doing an incredible job, but this is the group that John will be targeting, this unaware group.

Of the group that is aware, what are their problems?

What are their concerns?

31%, the biggest group: I don't know, I just don't know enough about, I kind of heard of it, but I really don't know what it is.

Over time, we can educate a lot of those people.

The form, there may be some people that we won't have the right form, dog satisfaction or they're happy with their current.

There's another group that's price/value, it's too expensive for me.

So over time, we've got to make sure that people feel that they're getting a great value for the product.

So again, there's tons of opportunity within this group that is aware of us that hasn't tried us.

And then finally, when we start looking at this and we think forward and we think about what our consumers are going to be like into the future, we know this is just kind of the math of it.

If you look at pure research and you think about how the population is going to shift, more and more people are going to be like of the pet-owning population in 2025, there are going to be more millennials and more Gen Zs.

The good news is we're in a good position because we're already over-indexed with that group.

So we think it's another piece that will be helpful and wind at our back.

So I want to read you this next piece, it's really interesting.

How are the future consumers going to sound?

What is it going to be like?

And this is a little long, but I want to read this.

And the numbers in parentheses are the index of these people like over-indexed versus the average.

I cherish my dog.

I'll go above and beyond for him.

I'm willing to make personal sacrifices to make my dog happy, double what the average is, 202, and I'll go overboard in what I do for him.

I feel how I dog -- how I eat is how my dog should eat.

I buy the best quality food for me, 245 index, amazing, and for my dog too, 221.

I'm concerned about the safety of food and what my dog is eating too.

I make a point to use fresh food as much as possible.

And I read the labels, it should have a short list of ingredients I can pronounce and recognize.

I want to feed my dogs less processed, fresh, real human quality food.

We feel like we're really kind of positioned in the right place, how people are going to be thinking about this in the future.

And I didn't touch on it, but there's the environmental sustainable piece on the bottom too, which is really important for those people.

So the next piece is, so how does Freshpet grow?

So it's actually a really, really kind of simple model.

I've shared with you a little bit about the consumer and how they come in, how they participate in our franchise.

The first piece is the advertising.

We've got to let more and more people know.

And that's where you'll see us making some of the biggest investments, where we have made investments and more investments over time.

The next piece is going to be availability and visibility.

We need to have more places where people can go buy Freshpet.

We're going to talk a lot about this idea of availability and visibility in some of the next sections.

Finally, innovation, there are plenty of products not just to innovate to take up more shelf space.

That's the normal CPG game.

We are innovating to solve problems here, very specific problems and opportunities that we see within fresh pet food.

That will be the focus of our innovation.

Then we want to make sure that there's great product satisfaction and even stronger repeat rates than we've had in the past.

So this is really how people come into the franchise.

In this next section, John Speranza will be taking us through that.

Do you have -- are you mic'd?

Okay.

Great.

So John will be taking us through the marketing section.

And I want to introduce John.

John came to us, he was in the last group that I showed you.

So there were like 3 waves of people.

John's in the last group.

John has basically -- he's classically trained in CPG.

He is a brilliant marketer, and this is from an organization that I pride ourselves on the marketing and how we think about going to market.

He's a great, great marketer, but he's also a great entrepreneur, and he thinks like that, and he's a great part of the Freshpet family.

So John, if you'd come and take us through the marketing section.

Thanks, Scott.

Hi, everybody.

As Scott mentioned, my name is John Speranza.

I'm the Vice President of Marketing.

These are my 4-legged children.

And what's funny, I was putting this slide together, and I looked at the picture, and I was shocked at how it's captured the individual personality of each of our pets.

Angus is down below.

Angus is from New York City and is a rescue and has a little bit of that New York swagger, basically looking at the camera saying, "what are you looking at?

What do you want from me?" Rosie is -- could spend the entire day basically just hugging and snuggling.

And she didn't waste any time taking this opportunity to kind of catch a kiss.

And then lastly, it's Whitey.

Whitey is the last addition or latest addition into the Speranza household.

A rescue cat and pure delight in tormenting both of the dogs.

And as you see here, already plotting on, about to kind of jump on unsuspecting Angus.

So those are my children.

I will say this, they're all rescues.

And when we brought them into our household, they were not in great shape.

And they've -- fortunately, for them, they've been fed nothing but Freshpet.

And we've seen firsthand the transformation, not only just from an overall health, but also a total well-being.

And so this position for me and kind of heading up our marketing and advertising is a lot more than just a job.

It's kind of like a personal mission to make sure that more and more pet parents get to experience the impact that we've seen personally within our household.

And that's what I'm going to take you through today.

It's going to be a lot more around the -- how are we leveraging marketing and advertising to generate demand.

So as you saw, we need 5 million households by 2025.

And that translates into a marketing objective of fueling awareness, penetration and loyalty.

And we do that by awakening pet parents to take a fresh look at pet food.

And in our articulation, we challenge ourselves on 3 main things -- we challenge ourselves a lot more than that.

But one -- from a communication standpoint, be super, super distinct and be different than the rest of the pack that's out there, be simple and clear in who we are, why we do what we do and the foods and fresh recipes that we make.

And lastly, when we bring our value prop to life, making sure that we're winning not only the heads, but the hearts of pet parents.

And this consumer-first orientation, we're very considerate in how consumers consume media.

And when do they want to hear from a brand?

And how do they want to hear from a brand?

Just because we have access to talk to them doesn't necessarily mean we should be talking to them all the time.

And so we're really choiceful in the tactics we use.

We use broad-reaching video and a whole suite of digital tactics, everything from, as you see here, paid social, search, display, native and a variety of others that are outlined here.

When we do engage with pet parents, what do we want to say?

And these are 2 -- this is our kind of bringing our value prop to life.

And we've got 2 main anchor campaigns.

The first on the right side is Letters.

And this is much more of a heart-first consumer testimonial expression where we are showcasing real letters from real pet parents who have seen, very similar to my own experience, seen the transformative effect of feeding Freshpet to their pet.

On the left is our second campaign, umbrella, and that's called Awakening.

And Awakening uses humor to really share some kind of challenging news to pet parents.

And we do this through user-generated content and dog videos that shows reactions when they learn what perhaps some nasties that might be lurking in their dry kibble that they're being fed today.

All of this is supported underneath with an always-on digital and social campaign.

And we break that into different pillars.

The first is around kind of celebrating pets and love at first bite moments, we call it.

The second is around the benefits of fresh.

And this is a little bit more of a functional expression that talks about the clear eyes and great coats, et cetera, from feeding Freshpet.

Philanthropic and charitable initiatives.

Justin is going to take you through, and you're going to hear a lot more about that, but we put that under Tails of Good.

And then lastly is really simple telegraphic, and you saw the video when Billy was presenting of what are -- what is inside our food and really just celebrating the transparency and the simpleness that's around Freshpet.

So to kind of give you a little glimpse as to what pet parents will actually see on any of their devices, we put together a very quick video that will showcase some of what I just took you through today.

So if we could just play the video?

(presentation)

Great.

And so our media model has been very reliable in delivering growth in sales and in consumer household penetration.

And so these bars represent when we support our brand, and the green line represents our same-store sales at our leading retailers.

So we've stripped out all the distribution growth that Eddie and his team have continued to garner each quarter.

And as you see, when we support our brand, our sales grow; when we go dark, our sales growth flattens.

And so we've been leaning more and more into supporting the brand, up 71% since 2017, and all the while continuing to look at what's working, what's not working and do more of what's working, and that has enabled us to get -- decrease our consumer acquisition cost by 31%.

And now our media model pays back within the calendar year.

And as referenced, we see a very strong correlation between household penetration, which is the lower dark green line, as you see here; and our cumulative media spend, which is the orange line above it.

And so again, this is another data point that continues to fuel our thesis around the media model.

And so looking ahead, we'll continue to leverage and continue to do what's been very effective for us, broad reaching, you saw over 70% in the unaware pie chart that Scott shared, broad-reaching awareness tactics, all the while continuing to apply these additional tools that we will constantly test and see, you know what?

We tested a tactic, encouraging results, let's begin to layer that in more and more as we go forward.

An example of that this year is actually over-the-top, or OTT.

And so this is our test, learn and apply methodology.

Every -- we know tomorrow's media environment is going to be dramatically different than what it is today.

And so each year, when we're beginning to plan that next year, we're looking at what are some of the tests, what are some of the bets we want to place, get some learnings.

And ones that prove to be fruitful, we'll continue to lean in and layer in, in the years to go.

And so as we continue to perform and the media model continues to operate, we get ourselves further and further down the road of awakening the world to a better way of feeding our pets.

And so now I'd like to -- actually, I think Scott's going to introduce both Lisa and Gerardo.

Thank you.

Thanks, John.

So yes, so Lisa and Gerardo are kind of a force of nature innovation team.

Yes.

Lisa, again, has classically trained packaged goods experience.

She's a marketer, but she's an innovator at her core.

And we feel like we've been really, really strong in innovation.

Lisa has led many of the innovations over the past several years.

Gerardo is one of the newer members of the organization, and he brings an incredible capability and broadens our science, our knowledge of pets.

Gerardo has actually worked at many of the larger pet companies around the world and has just tremendous experience.

And these guys are going to, like, wow us over the next couple of years, the innovation that they're bringing, so.

This just gives you a little glimpse in our office.

This is a product cutting we do on a weekly basis.

This is Winnie and just getting a little experience with our new small dog roll that's coming out.

And this is Pinocchio and I. Pinocchio is a black lab, he is 10 years old.

He is getting a bit of a white beard.

And at the weekends, I don't shave, and I also get a bit of white beard.

And my wife was looking at Pinocchio, was looking at me, looking at Pinocchio, looking at me, and she said, "You know, it is getting increasingly difficult for me to tell you two apart." So in case you're wondering, I am the one on the right.

I am going to tell you about the way we think, about our philosophy when it comes to making a new product.

And the baseline is very simple.

We think of 3 things: The first thing we think of is, we are going to make this enjoyable for the pet; then, we think of this also needs to be healthy and nutritious for the pet; and the last thing is, we have to make those 2 things visible to the pet owner.

And when you think about things from the perspective of the pet, the first thing that you have to realize, and I know you already know this, dogs can smell so much better than we do.

But the difficult thing to explain is, how much better?

And to conceptualize how much better they can actually smell.

And I can give you some figures like, okay, dogs have 300 million olfactory receptors, whereas we only have 6 million.

And that's fine because they get more data.

But it's not only about getting data, it's about how you process the data as well, right?

And if you compare our brain to the dog proportionally, the dog spends 40% more processing power to analyze the smell than we do.

And it's not only that, is that their airways' anatomy is different from ours.

When we inhale, we take air to get it into our lungs and extract oxygen from it.

They do that, but they actually think, "No, I don't want all the air inspired in my lungs to get oxygen.

I want to divert 12% of that air to get it into my nasal cavity, so I can sample that air." That's the way they look at things.

And the other thing I want to show you is that the mouths of the pets are also different from ours.

This one is the upper jaw of a dog.

And when you look at it, you think, okay, there are a lot of teeth in there.

And that's true, they have 25% more dental pieces than we do.

And those teeth are also bigger.

Even a small dog like a beagle, a molar of that beagle is 3x the size of your molars.

So they have this incredible chewing capability and they do chew, and they can chew up your sofa and think nothing of it.

But at the same time that they have that chewing power, they are capable of incredible tenderness with their mouth.

The mom can take the 1-year old pups and move them around.

They can carry one egg in their mouth without breaking it.

And what I am trying to get at is that dogs explore the world with their mouths.

And when they put something in their mouth, they don't only know if it is chewy or soft, they also know if it is hot, cold, rough, smooth, juicy.

So the point is, when marketers of pet food go and say, this has got real meat in the product, they can fool us, they can fool the pet parent, but guess who they are never going to fool?

Any of these guys.

Even before they put it in their mouth, they are going to know if that's real meat or it is not.

And I also want to show you some peculiarities in the anatomy of the cat.

That's the tongue of a cat.

And I don't know if you have dogs, cats or maybe both.

But when they lick your hand, there is a difference.

The tongue of the dog is really smooth, it's like ours.

The tongue of the cat feels like sandpaper because they have these little spikes that are like you can see on the screen.

So cats are not so much chewers, but they are great lappers.

They like a different texture.

So when we develop products for cats or for dogs, we develop them with different textures because we know they like different things.

And when you develop things from their perspective, this is what you get.

This is what Scott was talking to you about.

You compare the percentage intake of the green, which is Freshpet, versus the percentage intake of the competitors, which are in different colors.

They like our food.

And, okay, so the dog likes the food, the cat likes the food, but does the owner notice that they like it?

I can guarantee you that every pet owner knows what their cats and dogs like and they don't like.

They just need to look and a hint to say, "Hey, this is what I want." And the thing is, they never lie.

When they are happy to see you, you know they are genuine.

They are happy to see you.

And when they tell the owner, this is what I like, the owner gets it.

You don't need to talk to communicate.

Let me give you an example.

If I am in the house, and I say something silly or do something wrong, my wife comes and gives me the eye.

She doesn't need to say anything, I know I am in trouble.

So okay, we know the dogs and the cats like it, but is it good for them?

This is the second point I wanted to talk to you about.

And this is a study that has been done with a research group in Illinois.

This is a peer review publication in the Journal of Animal Science.

And what we do is, we compare the exclusive cooking process that we have at Freshpet versus traditional cooking processes that you have in dry pet food, which is the first column in kind of light gray; the cooking process for when you put chicken into a can, for example, which is the second column, which is darker gray; and in yellow, you have the cooking process of Freshpet.

And these down here are amino acids.

Amino acids are the building blocks of protein.

And you can see that all these amino acids are more available when you cook them the way Freshpet cooks them.

And that's because we cook them very gently with a steam for just a few minutes, and then we cool them down very quickly and we don't overcook them.

It's like when you put an extra steak on the grill when you are giving a party, and people go and get their steak when it is nice and pink in the middle and juicy.

And you have put an extra steak there just in case somebody drops their steak or they got to steal the steak of somebody.

And at the end of the party, you realize that that steak is still there and it will be like charcoal.

You're never going to get as many nutrients out of that steak as you would get from the steak that you have eaten when it was nice and juicy.

And I have highlighted here, and I'm sorry if you cannot see it at the back, 2 essential amino acids.

All these amino acids are essential.

They are important for the dog.

They have to build protein.

But these 2 are different from the others because they have something that the others do not.

They have a molecule with sulfur in it.

And that's the amino acid that dogs need to make taurine.

And taurine is what you need to have a healthy heart.

And we have heard that heart could be harmed if you don't feed your dogs properly.

Well, we provide more of methionine and cysteine availability than any other dry or canned pet food out there because our process is different.

And that's working because at the end of the day, the heart is just a muscle and meat is what it's made of.

And the heart pumps several times a minute blood through all our body all our life.

Well, in fact it starts even before we are born.

And the day the heart stops pumping, it's not going to be a good day, so you want that to be perfect.

So we have been talking about protein.

And I want to compare you why we say that Freshpet is better and show you why there is a difference there.

When you feed the product to your pet, it doesn't matter how much moisture the product has because at the end of the day, the pet is going to convert the moisture of that product into its own body moisture.

So what you have to do is you have to compare things on a dry matter basis.

And I know you all are pretty good at math here, so you can do that yourselves.

But if you do it with any dry food with Freshpet, this is what you're going to find.

You're going to find that Freshpet has got around twice the amount of protein, double than dry food.

And in comparison, dry food is going to have around, what, more than twice the amount of carbohydrate than Freshpet.

That's because Freshpet is mainly made with meat.

And that's because dry food is mainly made with carbohydrate sources that come from plant material.

And protein is important because you make most of the things in your body with protein.

You make your muscle, you make your hair; hair is 99% protein; and remember, the cats and dogs are fully covered in hair.

Protein is also going to make the antibodies in your immune system, and protein is also going to make your enzymes.

So all your metabolisms, anything that your body needs to create is going to need protein.

Now some pet food companies put a picture of a wolf on their packaging.

And they say, "Hey, this is the way the ancestors of your chihuahua is fed." And then you open the bag, and you look at it and it is kibble, and I don't know about you, but I have never heard of any wolf in the wild out there hunting for kibble.

And on top of that, people don't have wolves in their living room.

They have guys like this, they have terriers.

And you can see that they are different, you can probably tell them apart between these 2 dogs and between me and Pinocchio in the previous picture.

You can see that the wolf has got a really long nose, whereas our pups begin to get a shorter jaw.

The eyes here, they are almond shaped, our dogs tend to have round ones.

And even the ears, they are not so big and pointy, they become smaller or they fall to the side of the head because what they are going to look more and more like is like this.

This is -- scientific word for this is called paedomorphism, which means they are our babies, we made them our babies.

And when you see something like this, something in our instinct wakes up that wants to nurture it, wants to care for it, wants to feed it properly.

And not only the appearance is different between dogs and wolves.

You look at dogs, they're short -- their legs are shorter, they are more chubby, they are like kind of [flea] pickers, they are a bit clumsy.

Their -- sounds they make are more high pitch, like barking or yapping like a baby's cry.

Wolves, wolves don't bark.

And you have already seen these kind of pictures in which you say, a picture of a dog in the '60s or the '50s is obviously black and white, but it's outside the house; and then in the '70s, '80s, they moved inside the house, now they sleep on the bed, there are companies out there making really good living selling ramps and steps for those to get onto the bed.

What's the next barrier you think they are going to break?

What's the next step for them in the house?

Well, look at this fellow, look at that one.

And with the concept of what the dog's role in the family in the house is changing, is evolving.

If you are here in the '60s, you can be forgiven for thinking, "Okay, I can keep the dry fed -- food for this dog in the garage in a sack." But when you have a concept of your bed like this, you want to feed it the same things that you are feeding in.

You want to put his food in the fridge next to your food.

And I have very good news for you.

This is my last slide.

So I call this, excitement is contiguous.

And I can tell you, I am in the house and sometimes just for the fun of it, I get excited, I get Pinocchio excited.

And I go, "Hey, Pinny, what are you doing man?

What's up to -- what are you up to?" And he comes and wags the tail, and he gets excited because he sees me excited.

And Pinocchio doesn't know why I am excited, and Pinocchio doesn't even know why he is excited, but Pinocchio doesn't care because we are both excited and it is fun to get them excited.

And if you don't believe me, go into YouTube and try to watch the thousands of videos of people have put there with their dogs being goofy or doing funny things.

And every house with a pet knows that in that house, at feeding time, that is what I call a feeding ceremony.

The pet parent gets up and says, "Okay, dinnertime." And all the pets, wherever they are in the house, run into the kitchen.

And the pet parent opens the fridge and gets the roll and says, "Okay, today, we are having the beef because yesterday you finished the chicken.

So we are -- I need my chopping board and I need my knife and this is your bowl, and "Oh, he has got carrots.

Oh, I think you're going to like this one." And while all that is happening above the counter, below the counter, the dogs are going bonkers.

And they can smell the food and they are salivated and their eyes are popping out and they cannot stay still because it's so exciting.

And those 10, 15 minutes in the day, they might be the best 10, 15 minutes in the day of the dog, but they are pretty damn good 10, 15 minutes in the day of the pet parent as well.

And that time is what we also design for, not only for the enjoyment, not only for the health, but also for those 10, 15 minutes that make the pet parenthood so much [kind of] special.

So I have done my bit.

Thank you.

So Gerardo took you through that palatability, the bioavailability of our food.

But what do pet parents really see?

Scott touched on this just a little bit.

Over 80% of our pet parents see a significant difference in their pet, that transformation, kind of what you've seen in our letters campaign.

But what is it?

Energy, I have brought my pup back, shinier coat, there's no stains under the eyes.

There's a major transformation that's happening in pet parents' homes.

So if you see a transformation, I think you're going to be not surprised by our satisfaction scores.

These are the green chart, the green bars, 96%, 98%, 100%, you're seeing that transformation.

Many pet parents will say, I am willing to pay more because if I could get a few more years in my dog's life, and that is also why we have really a good value.

So I know Scott had shared opportunity for us is to get pet parents like, is this worth the value.

I will tell you, getting more Freshpet parents to see that transformation, to them, it is certainly a good value.

So Gerardo and my job in the future is really what does this bowl look like for 2025?

How do we get 5 million more households to try Freshpet?

And it's really about taking where we are today, looking at fresh real food to reimagine it.

Fortunately, we have a lot of success in this.

Think about our Fresh From the Kitchen, our Small Dog.

The chart on the left shows how we brought in new households with this.

I've been in innovation for some time.

I've seen how you create one cereal flavor and then the next, and you just swap households from one flavor to the next.

You'll be happy to know that through Nielsen, we've been able to look at households who bought us in the first year and then came back in the second year.

So you can see we bring in new households through innovation, and they're also able to stay with us over the time.

For those who use Freshpet, we have changed their behavior.

It's what Billy had shared in the upfront.

They feel guilty using dry food.

They want the best quality.

Freshpet does that.

But what's next?

How do you make it look like really fresh real food for me that's human quality?

It's quite simple.

It's just providing better solutions than we have today in that landscape.

Our model for growth, we've looked at a bunch of different models, how do we make sure we don't get the next new flavor, how do we really be more transformative?

And it's really quite simple.

New households, those are what we call our prime prospects.

Consumers who have a lot of the interests and the characteristics of our current Freshpet consumer, but don't buy us today.

And then what are those solutions on the bottom?

How do we unlock opportunity to make Freshpet right for them?

Example of that was Small Dog.

We had pet parents calling us, "Hey, I love your product, but your Fresh From the Kitchen is a little too big," or "do you have anything for my smaller dog?" Thanks to Gerardo, he helped us understand you can't just use our current recipe, you need to think about it a little differently.

First is, small dogs have really high energy.

But also as he talked about, their mouth and their knees are different than other sized dogs.

So taking our current roaster meals and thinking about how is it better solution for a small dog led us to that.

As we look to the future, this is a key milestone that we'll continue to do.

So for 2020, we're excited to share with you our innovation.

And how does it build from our current platform?

The first is rolls.

If you think about our rolls today, it's been a lot of flavor expansion.

But if I'm a nonuser of Freshpet, how do I know all these great benefits?

Well, start by telling them.

So our Sensitive Stomach has prebiotics in it, to help with digestive and skin coat needs and having that available for more of those consumers looking for health solutions.

The second is Small Dog.

One recipe brought in significant amount of households, but Gerardo has helped us understand, small dogs also have a lot of dental issues and have that high energy.

How do we think about their needs to have a better solution in that front?

We have 2 new Small Dog rolls coming out.

They're more of a pâté, it's smaller and moister, that they can cut to personalize for their pet.

And then our newest line is our Homestyle creation.

Pet parents, there's people who are cooking, but they just don't know how to get started.

They want highest quality, but where to begin.

So our Homestyle creation really provided an opportunity for households to mix and match and customize it, but feel good and trusted knowing that it's complete and balanced.

As Scott shared, it's how do we help with making this more accessible to new households?

And we have a twin pack, which really fits perfectly for people interested in fresh, but looking how to get started.

So this is great.

We're building from our current platforms, you see a lot of runway for innovation, but how do we expand from here?

And that's really going to further expansion and to really transformational.

Really, what pet parents you saw, Scott shared our prime prospects, they're looking for fresh real food.

Gerardo showed that pet is now sitting next to you at the dinner table.

I got to feel good about what I'm getting.

I want it to smell fresh and delicious.

So how do we do that?

Today, we have rolls and meals that where people think of us, what could be their future idea?

We worked with a couple of partners to help us think about new ideas.

We have insights as well as our consumer affairs team looking at what's missing.

What are the wishes that pet parents, how do we bring it to life?

So one of the more recent concepts we've put in is this chopped idea, it actually has scrambled eggs, beef and a medley of vegetables.

I mean this looks like something you would probably eat for lunch, this a bowl of protein, but it's complete and balanced and making sure it fits the needs of pet parents.

How do we know this is the right direction?

How do we feel good about where we're going?

Well, we take these ideas and put it into a [new need] panel.

To reach pet parents, we go online and talk to consumers who are prime prospects.

Those that have a lot of the same interests and wishes as our current users, we ask them a series of questions.

What do you think about this idea, sharing it with them?

The second is, we go to our pet parents, our Freshpet consumers, and they're brutally honest.

They'll be honest with us, what's working, what's not, how is the price point, what do they wish for?

That combination together helps us really understand the potential of this concept.

So the blue is kind of our control, helping us with our Homestyle creations today.

But then this idea, you see a significant like 15-point difference.

What we understood is even when we're building the Homestyle creation, there's really 2 consumers out there.

Everyone is looking for the next fresh real food, but there's a group of people who want to do the work.

As Gerardo shared, they'll spend those few minutes and love their dog's anticipation coming through.

There's another group of parents who are like, "I love my dog, I want to give them fresh food, I just want something complete and done for me," and this meal is certainly doing that.

So as we look to the future, we have tremendous success.

Innovation has been that foundation that has helped us grow over the years.

And you can certainly see, we have a plethora of ideas to help us build for the future.

And with that, I'll turn to Scott.

Bringing [it forward] to 2025.

We've taken you through the marketing piece, we've taken you through the innovation piece.

The next piece we're going to go through is accessibility and visibility.

But I see the pain on your faces.

And I recommend that we take a short break, and we'll have a hard start-up back at 9:45.

(Break)

All right, probably like a well-deserved break.

Thank you guys for hanging with us.

All right.

So we've taken you through our vision, our mission.

We've taken you through our kind of long-term goal of having 5 million consumers in 2025.

We've taken you through how we're going to market -- who those consumers are, how we're going to market to those consumers, a little peek into how we think about innovation, not necessarily the exact innovation, but the innovation that we'll be bringing in the near term and then over the next several years and how we'll be thinking about it.

And the next piece of that puzzle on how we get those 5 million consumers, we've got to improve our accessibility and visibility.

Well, what does that mean?

ACV is kind of the simplest, most common way we think about accessibility.

So we're in a little over 50%, 52% ACV today.

That continues to grow every single year.

We're adding stores, and that helps us to kind of broaden our ACV.

But one of the other things we talk about is the ability to have more depth of distribution, second fridges.

And I'll chat about that in 1 second.

The next piece is how can we be accessible to even more people, and that will be from an e-commerce standpoint.

And Jake will be talking about that in a minute, I'll introduce Jake.

All right.

So accessibility and visibility.

This is a really interesting and compelling chart.

67% of our stores have at least one large chiller today.

When we started, the majority of our fridges were these waist height or chest height fridges that were about 4 feet wide.

Now 67% of them have a fridge that's 4 feet wide by about 7 feet high, our typical kind of large fridge, and that's continuing to grow every single year.

You can see '17, '18, '19, how those continued to grow.

We've also -- in the gray bars, you'll see that we've started to add second chillers.

So now we have kind of a large group of stores with 2 chillers, and then a smaller group that actually has 3 chillers.

You will actually, later this year, even get to see a store with 4 chillers, yes.

So one of the things we get a lot.

Now this is one example at one retailer, and I'm not going to tell you who.

So please don't ask.

But this is one retailer where we have single fridge stores.

And you can see the stores with single fridges are growing 22%.

So basically, same-store sales about 22%, which is very, very -- like that's a strong, strong growth rate for same-store sales.

So we're really proud of that number.

When we add a second fridge, it grows 41%.

When we add the second -- or the third fridge, it grows 50%.

Now we are not fully optimized in those second or even third fridge stores.

The goal there is to continue to bring more innovation that helps us in those stores to fill out that fridge and have a better portfolio.

So literally think about Darwin for our products.

We bring products out.

And over time, we kind of see what the best products are.

The absolute best products go in the first fridges, the next set of products and the most innovative products go in the second and third fridges.

We don't have that full portfolio for the second and third fridges filled out.

We anticipate that this will continue to grow over time in the second and third fridges because of the innovation we're bringing and the differentiation we're bringing in those products.

So if you think about kind of today single fridges, kind of now literally more and more second fridges, those are the conversations we're having, and we're extremely excited.

Quite honestly, we are humbled by the acceptance of not only consumers, but also retailers and really honored to be able to contribute to the category from a growth rate standpoint.

And this year, we'll be able to come out and literally in the next couple of weeks, we'll literally have a fridge island that will be 3 fridges, and at some point, even 4 fridges later this year.

So this is terrific because we're putting more fridges out there.

But the reality is, we have all seen fridges that don't have as much product in them as we would like, and I'm sure all of you would like to.

So there's obviously challenges there.

Part of it is literally kind of brute force and training people over time to restock those fridges.

Part of it's on us, part of it's helping the retailers do a better job.

The good news I can share with you is the fridges that do $200, $300, $400 a week and the fridges that do $1,000 a week, and we have many that do $1,000 a week, they have a similar out of stock rate at about 6%.

But what we're doing is we're trying to use technology to improve our fridge fill rates and our fridge position and in-stock rates at retail.

So if you think about it, we have electricity.

Pretty cool, right?

No one else has electricity in the aisle.

We have actually established a way we can take a picture of the inside of the refrigerator.

That's actually going to go to the cloud.

We'll use artificial intelligence that will actually be like similar to facial recognition software, to establish where those out of stocks are and what products they're on.

We'll actually bounce that off of what we expect the inventory to be in that store.

So we actually know in that store, there should be product.

Is there product in the back room in that store?

We will then disperse a person.

And we're thinking of it as Uber.

The reality of Uber is it's literally creating supply of rides to demand of people that need rides.

We will literally create technology and work with people that we'll send to the store when we recognize that that store has been flagged that has these out of stocks.

We'll send a person there, they will fix it, and then we will take a picture that night after they have registered that they've fixed it, and that will give us feedback that they have or haven't fixed it, okay?

The goal here is not just get into this vicious cycle, but to fix fundamental problems in these stores that have the problems.

But the reality of right now is, I have people kind of driving all around the country, getting bugs on their windshields and basically running into stores, they run into some stores and they go, "No, this one looks pretty good," but I just paid for that.

The goal is to make sure we're sending people going into stores where there's out of stocks that need to be fixed.

So applying technology that -- as we have more and more and more fridges, we want to bring state-of-the-art technology to the retailers.

We want to have the best merchandising, the best lit and the most in-stock using this technology.

So what we envision potentially for the future?

You'll see Lisa was just talking and Gerardo were talking about the Homestyle line, where we'll continue to kind of push out and have more and more fridges, and we think at some point in the future, hopefully by 2025, you will be walking into a pet food aisle and it could look something like this.

So obviously, terrific aspirations.

Now the next gentleman coming up.

I will call him, you probably won't love this, he is one of our young stars in the organization.

He is now recently named the Director of E-commerce.

That's because we know we have a tremendous opportunity from an accessibility standpoint and from an e-commerce perspective.

Jake has been working on e-commerce for the last couple of years for us, and he's made great, great progress, but we know there's incredible opportunity to come.

And with that, I will introduce you to Jake.

Thanks.

Thanks, Scott.

All right.

So thanks, again, everybody for coming out today.

Today, I just want to give you guys a glimpse of just some of our results in e-commerce in 2019, and what we're looking at really from a path forward for 2020 and beyond.

Before I jump into that, though, there's been a lot of pictures of everyone with their dogs.

I don't have dogs, but these are my 2 beautiful children.

You have Tessa, she's 2.5; and Addison, who is 10 months.

Tessa is an absolute dog lover.

Any time we go for a walk or we're at her cousins' houses, she absolutely freaks out when there's dogs around.

So if you asked her, if we -- if she wanted dogs in the house, we'd probably have a shelter within the first week.

So just moving into e-commerce, just a little bit about just how we think about e-commerce for Freshpet, right?

Certainly, a unique product.

So we think about it in a different way.

But as Billy mentioned earlier, more broadly, we want to be available anywhere in any way that pet parents want to buy pet food, right?

And we think about that really within 3 distinct segments.

The first is online fresh delivery.

And really over the past year, the biggest development for us within that segment has been with AmazonFresh.

So traditionally, you had to pay a monthly fee to participate and buy Freshpet within that network on their site.

Back half of 2019, they essentially dropped that fee for all Prime subscribers.

So we have much broader access to a much wider level of consumers really across the country.

And we've seen some nice growth from that in the back half of the year, and it will certainly continue moving forward.

The second area is last-mile delivery.

And when you think of last-mile delivery, it's really made up of 2 key partners, you have Instacart and Shipt, right?

So essentially, technology platforms that partner with our grocery and mass retailers, build an assortment online and you or I then go to those websites, and we shop for our products, and they're delivered to our homes.

So Instacart and Shipt, they continue to build out their user base, right?

More cities, more retail partners and we benefit as they grow.

Both of them are also now starting to really look at different ways that consumers are looking to shop online, right?

Right now they're in delivery, but they're also both moving into click-and-collect and curbside.

It's another key way that consumers want to shop.

So we'll -- again, we'll continue to benefit as they grow.

The third key area that we look at is click-and-collect, right?

A lot of our grocery and mass customers are participating within this area.

Really, the biggest developments for us, we see key customers like Walmart expanding click-and-collect over 3,000 stores over the last year; you have Kroger, 1,600 stores.

And both of them are now testing delivery, right?

So as they build out their capabilities, we benefit from that.

So in 2019, we delivered $6.2 million in sales through e-commerce.

We grew our e-commerce business over 100%.

E-commerce delivered roughly 2.2% of our total sales, right?

So still behind kind of what you would see from the industry averages, but expected, right?

A lot of this is dependent, because of our unique product and the refrigeration process, on our customers and our partners building out those capabilities to help us really reach consumers.

The other thing to note though is that 84% of our sales came through our brick-and-mortar network.

So sales coming from our grocery and mass customers through click-and-collect, pulling from our stores, from Instacart and Shipt, again, pulling from our stores through their customer partnerships.

So a big portion of our sales does still service and drive velocity of our fridge network.

More broadly, though, as we look at the pet food category over the last year, e-commerce drove over half of pet food growth in 2019.

So e-commerce grew 30%, while retail was up just 3.8%.

And certainly as we look towards the future, while e-commerce drove 16% of total sales in 2019, out to 2023, we expect that to be close to 26% and certainly could exceed it.

So this shift online from retail, it's really being driven by, as Scott and Billy had mentioned, it's those millennials, it's those Gen X -- Gen Z consumers that are doing a disproportionate number of their -- that are buying really online relative to retail.

For us, though, as a company, unlocking online really helps fulfill both current and future needs for us, right?

So as you look at just the millennial versus the boomer consumer, millennials far overindex in their purchasing online relative to boomers.

It's kind of what you'd expect, right?

And Scott had mentioned earlier, by 2025, roughly 60% of dog households will be either millennials or Gen Z. These are shoppers that today are buying significantly more of their products online, whether it's in pet food or other categories, and certainly out to 2025, it will be significantly more, and these will be the consumers with the buying power in the category.

And when we look at the makeup of our consumer, again Scott had touched on this, but our consumers are already overindexed and wanting to buy products online, and same with our prime prospects that we're looking to attract.

The challenge for us and the gap that we have is really fulfilling those needs.

When we talk to those millennial consumers, you can see there's a gap, 81 index, we underindex in products being able to be delivered to their home; a 79 index in being widely available online.

So as we look to the future, certainly in 2020 and beyond, really fulfilling that gap and solving that is going to be a key opportunity for us.

So being available anywhere and any way that pet parents want to buy pet food really requires us to focus on 3 key areas.

The first is advancing our partnerships with online fresh leaders.

So think of the Peapods, the FreshDirects, the AmazonFreshes of the world.

These were really the first movers when it came to fresh groceries or certainly our ability to participate within e-commerce.

Those are partners that we really partnered with early on.

And as we look at them, we actually have a disproportionate share relative to what we see on the retail side.

So for us, really, in 2020, we're going to continue to build those partnerships out with the right programs and certainly continue to expand our assortment.

You saw that last picture that Scott had put up before I got on the stage.

So this endless aisle online.

So we have the ability with these type of partners to really build out that endless aisle, to test new and different items with these partners and then potentially reflect that back in retail.

So another testing ground for us, another way to bring consumers into the brand.

The second pillar is leveraging the power of our fridge network.

When you think about customers that are building out, whether it's click-and-collect capabilities or delivery capabilities within the retail space, that really makes those partners really that much more important to us.

As we have our fridges in those stores, them bringing in a much largely accessible group of consumers, it drives the velocity of our fridges, right?

It's not just you or I going into a store and buying products.

Typically, consumers, they'll go to a store -- grocery store or a mass store really within like a 5-mile radius of their home.

It's pretty traditional.

With online, click-and-collect can reach up to 20 miles plus of consumers.

So you have a much broader set of consumers that you can now bring in.

So as these customers build out the capabilities to bring in more shoppers, it drives our fridge velocity, right?

It makes those conversations with our retailers that much easier to add more stores, to add more fridges, to upgrade fridges.

And certainly as they build out the different technologies, whether it's their own or whether it's through Instacart and Shipt and the partnerships they have, it also helps us out with out of stock management, right?

There's different alerts that these retailers will get that tells them to then, there's an item out of stock in that fridge in that store, it helps them then fill that gap in a more timely manner for us.

So it also helps build that up.

So with those partners, we'll continue to build that out and advance those partnerships next year.

Really the third and last pillar is, we will make it drastically easier for pet parents to buy Freshpet online this year.

Over the course of this year, we have a number of things that we're working on, that if you or I are on a computer and you want to buy Freshpet, it's going to be drastically easier.

And really across these 3 pillars, what we continue to focus on is, number one, best-in-class A+ content, right?

We're a newer unique brand within the category.

There's a higher level of education.

We can only do so much of that through our advertising and our website.

And a lot of consumers now, they're searching online, whether it's Amazon or these bigger sites, and that's really where they're finding the product information, right?

So we want to make sure that we have best-in-class A+ content to educate them, and when they are leaning in and learning about the brand, to convert them.

The second piece is we want to continue to build out effective programs with our partners.

We've tested a number of different programs across all of these partners with different tactics over the last couple of years.

We have a clear understanding now on what really drives the strongest return on investment for us.

So we'll lean in with those partners and on those programs this next year and continue to build our awareness and drive people to Freshpet.

Thank you.

All right.

So I'm going to cover the next section, which is pretty straightforward.

It's, what is our potential?

Billy shared the idea of 5 million consumers over the next several years.

So how big can Freshpet be?

And what we did is we actually used a pretty wide array of approaches.

I would literally call it pretty much an all-you-can-eat-buffet for someone.

There's pretty much something for everyone in here.

So we've actually tied -- again, we actually took 5 different approaches.

These 2 were shared last week at some of the CAGNY presentation, where we looked at some of the developed retailers that we had, and we did some extrapolation, I'll share that.

We looked at some markets that we're in, and we also did some extrapolation around that to give us kind of an idea or some perspective on what the potential is.

But then we also went back to what this -- what we've done and we've always focused on, which is consumer.

How many consumers are interested in the things that we're bringing to market in our offering.

So we used a consumer concept test.

Basically, we showed people a 1-pager on this is what Freshpet.

This would go to the people that were unaware, the people that I was talking about earlier.

And we basically said, "Are you interested in this concept?" and I'll share the results in a minute, they are very interesting.

We also did consumer modeling, where -- this is a very standard approach, but basically you identify your consumers today and you actually look at what -- how many of those consumers are like that out in the marketplace?

So we've actually kind of looked at that.

It's called prime prospect modeling.

And then lastly, we looked at potential up here, but we actually went and did a future projection.

So we actually engaged an outside company that does modeling.

They have been pretty darn successful, but we also know they're never quite right, but it gives us a very good guidance on -- and reinforcement of the things that we're thinking about.

So I'll take you through some of the work that's been done here.

The first one is, you take -- basically, this is super simple.

I actually mentioned it earlier.

In the $30 billion pet food category, there's $21 billion that's dog food.

Okay?

And we look at our share of dog food in these retailers, and actually the one we picked in this group was Albertsons, Safeway, we think Whole Foods is an anomaly, right, but a nice number.

We're an 8.8% share of dog food at Albertsons and Safeway.

We think that -- we felt like that was a good middle ground.

And that's our 52-week share at that retail.

The other interesting thing is, this is the growth rate, not only we are 8.8% share, we're growing at a 35% rate in Albertsons and Safeway, which is an incredible growth rate.

There's a little bit of ACV in there, but the majority of that's actually same-store sales.

On this side, we actually took some of the leading markets that we have in these green bars.

So you took Chicago and Milwaukee, Sacramento, pick one of these markets.

We actually took San Diego, just as an example, but as -- in a whole market, and these markets are defined by Nielsen, these are not our definition of the market.

And we looked at what our shares were of dry dog food in those markets.

And again, look at the growth rates in these markets, not only are we developed, but we're growing very, very quickly.

So we think this is pretty telling.

This gives us -- if you kind of take that extrapolation of a $21 billion market, and Albertsons and Safeway, I mentioned we were an 8.8% share of dog food, that gives you a $1.8 billion potential.

We're actually demonstrating that today.

The reason we're doing so well in Albertsons and Safeway, they were early and they did a great job in their execution, and it's a focal point for those guys.

They've done a really nice job.

There's been many other retailers that have done great work, too.

Take a look at a market.

We took the San Diego market.

If we had a 10.4% share of the $21 billion mark on a national basis, that'd be at $2.2 billion.

So this helps to kind of demonstrate again what the potential of our business is.

The next slide I'm going to take you through is actually the consumer piece.

So there were 2 ways we did it.

Remember, it was a consumer concept where we show people the concept that didn't know about Freshpet.

The other one was the prime prospect methodology.

So that methodology helps us to identify our current consumers, it determines what their attitudes are and then it matches them out into the marketplace and then basically it pinpoints the potential future consumers.

Now the reality of these consumer approaches, you never achieve your full consumer potential.

That would be ridiculous to explain that we're going to have all of these consumers, but we know we'll have a strong, significant majority of them over time.

So when we took the consumer concept test on this side, in 2016, we did the same exact test, and we were 10 million dog owning households were interested when we did the top 2 box purchase interest.

When we did it again in 2019, it was actually 28 million households were interested in that concept, and that's top 2 box.

Top box is defined as definitely would buy, definitely would buy.

That's pretty extraordinary.

It's actually a 3x on where it is, and why?

Because everyone's trying to eat differently.

We've been out there.

People are seeing fridges in stores.

They're thinking about food differently, they're thinking about pets differently, all the things that we talked about earlier on.

So that's multiplied by 3 times.

On the probably would buy, it's the one on the next line there, you got 16 million, okay?

And I'll talk about how we think about this group that we're focused on, out of this 28 million, what we think the potential is.

When you take the prime prospect methodology on this side, there's actually 20 million households.

You guys remember probably over the past couple of years, if you've been following the stock, we've been sharing a number of 7.5 million households was our total addressable marketplace.

We did the same exact research, the same exact thing just a few years later, and it's pretty amazing, the progress that we've made.

Part of it is the marketplace, and part of it's the work that we've done as an organization, 20 million households.

So let's take a look at how we think about these 2 groups.

So if you just take the 2019 numbers, the brand-new research that we did, the first, the consumer concept piece on this side.

Typically, there's a multiplier that people will put in place.

This is just kind of conventional wisdom and I hate conventional wisdom, it's always wrong, right?

But the conventional wisdom would be, there's 12 million definitely buy, you take a 8 factor (sic) [0.8 factor] So 8 (sic) [0.8], you're going to get the people that said, I will definitely buy this, you get about 80% of those.

It's a good guidepost.

That will give us 9.6 million.

On your second box, yes, I'd probably buy that, I'd probably buy that.

That group, you actually apply a much lower factor, that's a 0.4 factor.

And people can argue a little bit plus or minus on those factors.

This is probably a good starting point.

So I actually drew the line in around 10 million households here, and I'll show you that in a second.

On the same thing here.

So on the 20 million -- on the prime prospect, there were 20 million households.

So we, again, kind of put the line in the middle, we think we can achieve about half of those households by 2025, right?

If you multiply that group out, 10 million households at about $170 a year buy rate, that gives you a $1.7 million business.

I do want to make sure that everyone realizes these numbers are retail dollars right now.

I will break them down from retail in just a moment when we talk about our specific net sales projection.

So if you want to -- if you -- I know there's a lot here.

But -- so basically, what we did is we looked at these 2 methodologies.

Either consumer methodology, we felt like 10 million was a very, very achievable number over the next 5 years.

And we've also looked at when we've done our own internal modeling, what is the cost -- John shared our marketing earlier.

What is the cost every single year when we make the marketing investments, and what's our consumer acquisition cost, our CAC?

And we've been watching that.

It's actually gone down over the past couple of years.

We're not budgeting it to go down significantly in the future.

And we've actually literally planned our media out all the way to 2025 and what the media might look like and what the costs are of that media and how many consumers we can get.

That's a whole separate approach that we've done internally to evaluate what our future potential is.

So that kind of gets us to this 10 million number.

So if you want to kind of play math games, and I think everyone has done some exercise -- many of people who are in the room have done some exercise around this.

If you look at your households and you peg your households and you're focused on dog-owning households in this and you take -- think about buying rate, so the buying rate grows across the top of about what the consumers spend on a per year basis.

We believe this yellow highlighted area is what the retail revenue potential is.

Buying rate is typically expressed as a retail number when you see that buying rate number, okay?

So again, that gives us basically our dog projection, okay?

What's not in here, and I'll share on the next couple of pages is cat and international.

So then what we did is we actually went to the outside modeling partner, and we said, here's all the work we've done, here's all the research that we've done.

And they looked basically across 3 critical variables.

They actually used 19 variables to do the initial model, but there were 3 critical ones: The first one was the advertising spend and then the innovation, and it's based on historical innovation that we've done, along with availability -- I'm sorry, along with awareness; the next one is ACV.

How can we grow ACV, and how have we grown it historically, how do we plan to grow it into the future; and the last one was, what's the correlation between our advertising and the increase in penetration over time?

And they've used those variables to project what they believed was future for Freshpet.

And it actually came up, they believe it's an $8 million [8 million] dog owning household universe in 2025 based on the investments that we have planned over time.

So total U.S. households 137 million, 69 million dog owning households, 8 million buying Freshpet.

If you think about the dog owning households at 69 million, 8 million sounds like a very reasonable number for us to be able to achieve over time.

The next slide basically wraps the whole thing up.

So this is basically the same slide that I shared in the beginning with the 5 different kind of methodologies.

The ones on top are really the potential that the organization has.

And this one is the external modeling.

The modeling, in this case, I do have it as a $1.5 billion number, again, in retail sales, that does include -- I've added in cat and international into that.

We'll talk about a little bit later what does retail mean.

So our average retail when you factor down, probably an important number, is about 30% markup on our products.

So if you multiply it by a 0.7, that's going to give you a really good factor.

And then our gross to net is going to be the other variable that you're going to need to take into consideration when you're factoring down to factory.

This all leads us to a chart where we've done a lot of work.

Take all the inputs that we've had, the external modeling folks, and you can see the advertising investment, how it's planned out over time.

And we've used a lot of historical data and our productivity along the way as we've made those marketing investments.

How we've grown ACV.

What the, basically, awareness comes down to, and how that improves and drives our overall net sales over time.

And you can see how that kind of works and how we anticipate it playing out.

So where we'll end up in 2025?

8.1 million U.S. dog owning households that are buying Freshpet.

I showed you the buying rate chart, could be a wide range, but we think it's in that number, I shared $170 is probably a good number, a good foundation for what we believe it will be in the future, plus cat sales plus the international sales.

And this is the projection and how we've thought about this over time.

Billy is going to take you through a little bit more detail and a summary of these facts later on.

I'm sure there'll probably be a fair amount of questions on some of this work that's been done.

But we wanted to kind of share it with you, and I know it's kind of a tough form to go through that much data.

We've done incredible diligence around this and spent a lot of time on it.

We know that there is incredible potential.

It's how we achieve that potential over time.

Hopefully, we share with you the marketing and what we're doing from an accessibility standpoint and innovation standpoint that will help us achieve some of that.

And with that, I've mentioned this idea of pets, people, planet.

It is really kind of a core tenet, not only to the people in the room and the people in our organization that work with us, but it's also important to the consumers.

And we really believe that we can do a better job from a pets, people, planet standpoint.

It will continue to be an important platform for us.

Justin is going to share that information with you.

Justin and I have worked together at Meow Mix.

We work together at Freshpet.

Justin is an incredible kind of multi-talented gentlemen, that years ago, I remember, he used to walk around the office and he would -- after people would leave, he'd turn off all the lights in the office if people left their desk lights on.

And I realized that's the guy that we need focusing on sustainability and the environmental focus that we need to have as an organization.

So he's leading this effort as a kind of a part-time job right now and he's doing terrific work.

So with that, Justin, thanks so much.

Yes.

Thank you for that, Scott.

And I appreciate the opportunity to be here because it gives me a chance to do a lot more than just turning off a few light bulbs.

And I'm very excited to share with you the pets, people and planet initiatives here at Freshpet.

We believe that pets and people live better together, and Billy has touched on that a little bit earlier in the presentation, Scott's touched on it, marketing touched on it, but there is an incredible bond between pets and their pet parents.

And this picture, I love this picture because the dog is basically as big as the woman as she sits there and enjoys this lovely fall view of a lake.

But what's going on here is not just a pretty picture of 2 people, 2 beings, enjoying a pretty view.

There is a chemical pathway being developed here.

And most of you probably heard of oxytocin.

It's a love hormone that's used within the body to develop bonds between a mother and a child and also between pets and their pet parents.

And I was reading an article, and I love the way it was said, but it said that dogs have been so successful through evolution because they basically hijacked our oxytocin pathways, so that we start thinking of them as their children.

When they look at us, it's scientifically proven that we get a boost in oxytocin.

When we rub their ears, they get a boost in oxytocin, and that generates that bond and creates an amazing relationship that has a number of great benefits.

And these benefits shown here, whether it's lower cholesterol, lower triglycerides, decreased stress, those benefits come from the CDC website.

So they're scientifically proven results of this powerful relationship.

And what's so great about that is, as humans, we recognize how important this relationship is, and we're able to make choices to help maintain that relationship and keep our pets healthy and keep the relationship healthy, and that's where Freshpet comes in.

It's something we're so proud to be a part of because our food provides a healthy foundation, a nutritional foundation, to allow pets to live as long and healthy as they possibly can.

And it starts with the food, we have fresh ingredients, it's minimally processed to preserve the nutrition, all natural, no preservatives, nothing from China, no corn, wheat or soy, no byproducts.

And a lot of these buzzwords are things that consumers look for.

They flip the bag over, I mean I've been in a bunch of demos where I'm showing the products at Costco, people will flip the bag over.

They want to know what's in that product, and they love seeing this.

But what's even better than that is after working here for -- I've been here since its inception, so 13 years, and we're getting testimonials now.

The last 12 months we got over 600 points of contact where consumers sent an e-mail, they called, they sent a letter to us and they told us just what Freshpet was doing for their pets.

And they believe this with all their heart.

They don't need a scientific study to say that their dog is feeling better, that their dog is more energetic, that their dog is happier.

And that results in very committed consumers that are going to continue to purchase Freshpet over time.

And I happen to be one of these crazy pet parents that have seen the results of Freshpet.

I have a new puppy, it's 10 months old, there on the right, it's Johnny.

And one day in September we took him to the beach with my older dog, who is now 15.83 years old, because I'm down to the days with him, and I never honestly expected him to live beyond 12 years.

All my other dogs had unfortunately passed away around 12 years.

I would give anything -- excuse me, I would give anything for him to live for the rest of my life.

I mean I love him so much.

I think Freshpet for this day in September because he's smiling ear to ear, he had the best day, we played in the water, he went swimming.

I was kind of surprised how much he wanted to go swimming.

But I truly believe that Freshpet gave him and me those amazing valuable years and days.

So he's still around, I've told him he is going to make it to 16 because we're going to have a birthday party, so hopefully he'll do it.

But we love to celebrate these bonds.

And we do that through some charitable giving.

We've donated over 8 million meals to rescues and shelters nationwide.

And then more recently, and we want to thank Eddie Young for bringing this charity to us, but there's a nonprofit called 4 Paws For Ability in Cincinnati, Ohio, and that's Shiloh, you might have met her, she's a dog in training.

But this amazing group is responsible for training service dogs to help children and families that have children with special needs.

So a lot of the children are either autistic or maybe they have seizure issues.

And these dogs really integrate themselves in the family, they become a big brother, a big sister and they help the children live a more normal life.

And if you could imagine the stress of having a child with that type of disability, it impacts the whole family.

Well, these dogs really help the whole family get to some sort of form of normalcy.

And we're so proud to support them.

We provide all the food for them.

And we love the mission and are happy to be a part of that.

So all of Freshpet's success really wouldn't be possible without its people.

And we believe that by providing industry-leading benefits, we can attract and retain top talent.

And we do have a number of great perks that are pretty unique within the industry.

For instance, everybody in the company gets to participate in a stock option program, so they receive stock options.

They also participate in 401(k) matching.

So they have a chance to plan for their future and plan for their retirement.

We have an incredible health care plan.

And that's been made clear to me as I've compared notes with some of my friends that work at other companies, but we have a great health care plan.

And that takes a lot of worry off people's plates, when they know that if something, god forbid, were to happen, they have that safety net of a good health care plan.

For some of the fun things that are offered, there is free Freshpet food for employees.

We also offer available pet insurance.

And then we have -- if you work in headquarters, and I don't right now, I used to, and now I'm remote, but they have an incredible healthy snack bar and they have catered lunches often that just pop up out of nowhere.

And what I loved about it was it's -- there's a sense of camaraderie, like literally, you have Dick and Scott and everybody to sit in the table with the sales guys or whoever happens to be in the office, and you get a chance to catch up, and it contributes to this feeling of a Freshpet family.

And that sounds corny and cliché maybe, but it's the truth.

There's 36 employees that have over 10 years of experience at Freshpet, which is really incredible.

And then I started looking at this picture, and I'm going, "But wait, I know I've worked with some of them -- hold on, sorry.

I've worked with like 18 years with all these people.

And there's probably 10 more that aren't captured in this picture, probably about 20 of us that have worked for around 18 years, some of us more than that, 23 years, if you go back to previous companies.

And Dick was telling me there's a couple of people that he's worked with for going on 30 years that are now at Freshpet.

So we're an incredibly tight close knit group that knows each other really well, pushes each other really hard, and it creates a happy and empowered and productive workforce that's set to help grow to our 2025 goals.

And then I was getting some good information from HR.

We started tracking some of our retention rates and our employee Net Promoter Scores, and those are through the roof.

We've got a 95% annual retention rate.

So when people come to Freshpet, they are happy, they don't want to leave.

And our Net Promoter Score is up to almost 8.4, which is the 90th percentile compared to other companies.

And what that means is we basically don't have to spend so much time recruiting.

So we can focus on growing the business and training existing employees rather than having to find new employees.

So now we're to the planet section.

And obviously, this is a hot topic that everybody has been talking a lot about here lately, and there are so many areas of focus, whether it's pollution, overfishing, habitat loss or most importantly, probably, and urgently global warming.

And this is something that's been part of the DNA -- Scott mentioned this a little bit -- but it's been part of Freshpet's DNA from the start.

But we've really begun to tighten our focus in the last 12 months for a number of reasons.

One, you guys, I mean the investors are all pushing us to focus on this.

Number two, our consumers are doing it.

When Scott was just explaining how we're going to get to $1 billion in sales by 2025, a lot of that is due to our prime prospects.

And those millennials, those Gen Zs, those consumers are super concerned about sustainability, and they're basically not willing to do business with companies that don't consider sustainability a top priority.

So we've made that one of our top priorities as well.

Our #1 goal would be to reduce or eliminate all of our carbon footprint.

That is an unattainable goal, obviously, as we're in the business of making products.

And so everything we do from traveling to a sales meeting or shipping products or running the electricity for coolers, generates some form of carbon dioxide equivalent or global warming gas.

But what we can do is to tackle the pieces that we know where we can improve efficiency, where we can avoid some emissions, maybe through WebEx conference calls.

We've been pushing really hard for our whole sales team to avoid as many face-to-face contact meetings as possible.

We're never going to eliminate them completely, but we can do what we can.

And then obviously, we have some other tools in our toolkit through carbon offsets and renewable energy credits.

For those things like airfare that we can't completely avoid we can try to work with partners to offset and mitigate those emissions.

As part of this process, last fall we did a pretty comprehensive carbon footprint analysis.

And what it allowed us to understand was the top 5 buckets of carbon footprint that we have.

And by far and away, and this was a little surprising to me.

I didn't understand exactly how big this would be.

But our protein sources contribute the majority of our carbon footprint.

And those are considered Scope 3 emissions because they are technically -- they're governed by a party outside of the company, because we purchase those proteins from a third party.

But we understand that this is very important for us to address.

And so we're going to be in the future working with our farmers, working with our suppliers to try to help mitigate the emissions from those farms.

Chiller, electric use, that's number two, and that makes a lot of sense.

We have over 22,000 chillers now globally.

So all of the electricity that's used to power those chillers obviously generates some form of carbon dioxide.

The other ones probably make sense.

What I loved about this analysis and what we all really appreciated about it was, it gave us an area of focus.

It gave us sort of like, okay, here's the things we can tackle, here's what we can -- here's the low-hanging fruit.

And we actually have some programs we're going to share with you where we've basically mitigated these 3 larger buckets for 2020.

And then going forward, ingredient production is going to be our top priority.

We really need to tackle that.

That's going to take some time.

It's a larger project, larger-term project, but we have some exciting things we've already begun discussions on, like agricultural digesters, which capture the methane or break it down in a way that it doesn't even generate methane.

Regenerative farming, which is a new farming, kind of back to the future farming technique where it's actually carbon negative because it sequesters enough carbon in the soil to make up for all the carbon generated by all the other inputs.

And then of course, we have the opportunity to participate in carbon offsets where necessary.

So just to make everybody aware, I mean this is part of the DNA that Scott was mentioning, the plant to the kitchens has been wind-powered.

All the electricity that powers the plant has been wind-powered using renewable energy credits since 2015.

So that's been pretty cutting edge, honestly.

It's also a landfill-free facility, and has been that way since 2016.

So nothing in the facility is actually taken to a landfill.

We either recycle it or we incinerate it to generate electricity.

And this is really cool.

And I wish the chiller team was here to celebrate this because we had an old refrigerator.

This was the one that we launched Target with.

It was an amazing refrigerator, LED lighting, open air design so that consumers could just reach their hands right in and grab it, looked amazing.

But what we didn't realize is that it was generating quite a bit of carbon every day based on its electric usage.

It was a power hog.

So our chiller team pushed -- this was manufactured, I think, in Germany.

It's an overseas supplier.

But our chiller team was pushing our domestic supplier, True Manufacturing.

They're a huge manufacturer of refrigerators for Coke, Pepsi and the like.

We pushed them really hard to give us a lot of the benefits of this cooler like the LED lighting, the Edge-Lit display, but also give us better efficiency, and this is what we've come up with.

This launched in 2019, and it's replacing all of the old chillers as they age out.

And it's also -- any new chillers that ship out are going to get this new model.

About 9.5x more efficient.

It also uses a refrigerant that is much less impactful from a global warming perspective.

So if, for instance, the refrigerant leaks on these new ones, its global warming potential is only a 3. And if any of this refrigerant had leaked, the global warming potential was 1,430.

So an incredible improvement.

We can't take all the credit for that.

True already had a lot of work of -- a lot of efficiency in the works.

But we did push them really hard.

There were a couple of things they said were impossible, like the LED lighting.

They also really resisted the swing doors.

We requested swing doors, so that consumers could access the refrigerator in a much easier, and we could stock it a lot easier.

The other benefit of the swing doors is they don't get stuck.

A lot of those old True models, the sliding doors would get stuck, like with a 3-inch crack.

So the refrigerator would continue to cycle and would run up the power bill.

So this was a huge win.

We anticipate that this same learning will translate to our other refrigerators, and you'll see our fleet get more and more efficient as time goes by and the old ones are replaced.

And then we're excited to announce that as of January 1 of this year, we have purchased enough renewable energy credits through a wind farm in Texas to make all of our refrigerators wind-powered, and this will be globally.

So all 22,000 refrigerators are now considered powered by wind.

Our retailers have been really excited about this.

The ones we've shared this with, they've been pretty psyched to see that we've done this.

What's cool about this application of renewable energy credits, is that it's really a best use case scenario because with 22,000 locations, we can't control the electricity that each of those chillers would be pulling from the grid, but by purchasing the renewable energy credits, we can feel good that we've helped offset some of that chiller electric usage.

And then the other piece you saw that air travel was another -- one of the top 5 buckets.

And as we all know, air travel is extremely carbon-intensive, but we are a sales organization, so we do need to travel.

And what we've decided to do is to purchase carbon offsets.

And this is a strategy that a number of companies are doing.

I just saw a big announcement by Nike that they're offsetting all of their corporate travel using a program very similar to ours.

And we've decided to partner with Conservation International.

They're a global nonprofit.

They have this great project in Africa called Chyulu Hills, where they have designated this tract of land worth preserving because of biodiversity and because of impacts for the watershed and also its impacts for carbon sequestration.

And we're in good company.

Conservation International works with a lot of big companies, Apple, United, Tiffany, Gucci, mentioned Nike, also Disney is a big client of theirs.

So we feel really great about this, and we love the way it aligns with our pets, people and planet initiative because we're preserving biodiversity, we're providing clean water and air, and we're also getting the carbon credits.

So 2020, we're still -- got a lot on our plate.

And this is actually what I'm most excited about is that Scott and I have been talking a lot about, we need an auditable, verifiable carbon footprint that we can use as a benchmark, so establish it for 2019, come up with methodology so we can calculate it for 2020 and beyond.

And then also a road map for how do we get to carbon neutral?

What are those steps that need to be taken?

What would that time line look like?

And we're engaging with a third party that has a ton of experience with big companies that can help us with this.

But it is a smallish, but big first step.

We are -- we have made the decision to turn our Nature's Fresh brand carbon neutral starting July 1st of 2020.

And the way we're going to do this is with offsets through Conservation International, but this brand is particularly primed for -- as far as the consumers that buy this brand, it's sold in the Natural channel.

They're already shopping in Whole Foods.

They're aware of the issues we have with global warming, they're aware of carbon offsets.

We feel like this is going to be a huge home run for us, and we can't wait to present it to Whole Foods.

This is something we haven't had a chance to talk to them about yet because it just, it's hot off the press, but it's a perfect brand to do this with.

Perfect way for us to put our toe in the water and line in the sand and show everybody that we're serious about this.

With that, I'm going to hand it over to Billy.

The idea of sustainability is built into our proposition right from the get-go, and we're pleased with the progress we're continuing to make.

Scott laid out for you in great detail that we see the opportunity for this to be a very big business.

And the obvious question then becomes, how will we meet all that demand.

So I want to talk about the strategies, and then I will turn it over to our manufacturing experts to talk to you a little bit more about our progress.

The strategies that we're using are pretty basic and simple.

First is we've got to plan ahead.

Obviously, our growth of late has been very, very robust.

And so we're playing a little bit of catch-up at this point.

But our goal is to get to the place where we are actually ahead of demand and demand -- or the capacity is no longer a limiter of our growth.

The second is specialize.

Our lines, because we're relatively small scale, were, in essence, generalized lines.

They produced a variety of products.

The more we can make some of the lines specialized, the ability to increase the throughput, the efficiencies and the margins is a pretty significant opportunity.

Third is we want to diversify our supply.

Many of you have asked us, geez, you have all your operations based in Bethlehem.

What happens if there's a natural disaster or a weather event, something like that?

So we'll talk about what we're doing to diversify the supply, not just where our facilities are, but where we draw some of our input materials are.

Fourth is phased.

We don't want to get so far ahead of ourselves, both from a spending perspective, but also from a building sort of the infrastructure, we want to make sure it's a phased expansion plan that allows us to build capacity in excess of demand, but not so far in excess of demand that we are, in essence, stranding -- or leaving ourselves with in excess of cost.

Partner.

We've done almost everything on our own so far.

But there are some critical partners that we are using, both to help us do some of the manufacturing that we've been doing, but also partners who can help us design our facilities, construct our facilities, develop some of the technologies that we want to develop going forward.

In essence, a logical extension of our organization.

And last part is innovate.

Part of the benefit of phasing, is it allows us to do some of the innovation work where we can reinvent the way in which we make Freshpet.

We told some of you that we hired last year a new person to do process development for us, Lynn Bingham, who came to us in August.

And he's working on, in concert with Gerardo, some new ways in which we can make Freshpet higher quality, more consistent, lower cost, safer for our employees to operate in the manufacturing facility.

And by phasing our manufacturing, we give ourselves the opportunity to do that innovation or apply that innovation.

In all of this, we need to be mindful that there is a mix shift going on.

Our rolls business is still growing, and it's growing at a very rapid rate.

But you should know that the launch of some of our greatest innovations over the last couple of years has changed our mix.

And Heather's going to talk about more detail about the financial impacts of that mix change.

But from a capacity perspective, we need to anticipate that we will need more bag lines than we will roll lines.

And so bags, in fact, are where we are very tight on capacity right now.

That's why we started up an incremental bag line, and Michael will talk about that in a minute.

But we need capacity in our bag lines.

Our rolls are growing 18%, 20%, 21%, but the bags are growing 35%, 36%, 37%.

So as we think about going out through 2025, our mix will go from being 50-50 roll and bag lines to -- we'll end up with -- our expectation is 11 bag lines and 7 roll lines.

We just need to build that into the design.

If you think about how much capacity are we going to need?

This isn't a projection of our sales by year.

It's just giving you a sense for what they could look like if we grow at a 27% CAGR over the next 5 years and get to the $1 billion in revenue.

But the actual curve will be probably a little bit -- a little less even than what this would project.

But it tells you what kind of capacity, what we're going to need.

And the plan that we've developed, it shows that basically, we should get ourselves in a position where we have the capacity 1 year in advance.

So when we think we're going to end up out here at $1 billion in sales, when we need to have $1 billion in capacity here before we get to the $1 billion.

And we need $800 million in capacity in that year so we have it built out in the year in advance.

We want to get to the point where we have uninhibited growth.

So to take you through and talk to you about our current progress on our manufacturing, I'm going to introduce Michael Hieger, who has been with the company since very early, basically the get-go.

He is the architect who has designed and built everything we've got to date.

He's also the guy who is building our Kitchens 2.0.

And I will also tell you that I get into the office really, really early.

And when I work in the kitchens sometime between 5 and 6 in the morning, I've never arrived there and found that Michael wasn't already there.

Michael came in from Pennsylvania this morning and people were thinking, how's he going to get here by 8:00.

I'm like, no problem.

He will be here, no problem.

Michael is the guy who makes all this work.

So he'll tell you a little bit about Kitchens 2.0.

All right.

So we're going to spend a few minutes talking about Kitchens 2.0.

And really, it started quite back in early 2017 when we started designing this facility and it kind of morphed into a -- a artist rendering here.

And now it has fully come to life and it's a true building that we have on site.

And Kitchens 2.0 is in Bethlehem, Pennsylvania, right next to the existing Kitchens 1.0 and so this picture here, aerial shot, kind of closely resembles the rendering that we just looked at a little bit ago.

And you can see walls are up, roof is going on, and we're making a lot of good progress.

Knock on wood, we've had some good weather here lately.

That's allowed us to gain a little ground in the construction schedule.

We do have our production equipment coming about mid-March to start being installed in the facility.

On the inside of the facility, we have concrete going down.

We've got about 75% of the floor going down inside of the building.

And we are on track for a Q3 start up.

And we also have hiring and training programs in place.

I was just talking with Don this morning, and we have, about 20 of the 42 people that we need to get this started up at the end of Q3 are already in place.

So we already have business programs going.

When we started to design Kitchens 2.0, we wanted to keep 3 things kind of on the forefront of our minds.

We wanted to increase team member safety.

We wanted to increase product quality, and we wanted to lower our costs.

And so we'll talk a little bit about how we're doing some of that.

And on the safety side, we had a long list of things that we did to improve safety over some of our existing operations.

But just to highlight a couple of them here.

We're putting in an automated batching system.

So these big bags back here in the back, these are 2,000 pound super sacks.

And instead of our team members having to pick up and lug around 50-pound bags of ingredients, we'll be able to use these 2,000 pound super sacks.

It will be a little bit easier for them.

On the palletizing side in our existing operations, we do all that by hand.

So we are stacking our cases at the end of the line by hand.

Puts a lot of strain on the legs, the knees, the back, the arms of team members doing that, but the automated palletizing system will take care of that and do that automatically.

From a quality perspective, we're always looking to increase the quality of the products that we are making.

And short list here of some of the things that we are doing is we're going to be doing the x-ray inspection of all of our [chub] products.

So 100% of those products that are coming on the line are going to be inspected by the x-ray machine for any type of foreign material and it will give us a better sense of the quality going out the door of those products.

Also we have a 4-corner case labeler.

And you might say, what's a labeler got to do with increasing quality?

But what that's going to do is it's going to put a label on each side of the case.

It's going to make it a lot easier for our retail partners to find that case in the back room when it's sitting up high on the shelf.

Right now, we only put labels on 2 sides of the case.

And we have some complaints about, "Hey, I can't always find the product that I'm looking for because I can't see the label on the case." Also we'll be doing some leak detection on our pouch line, where we'll be doing 100% inspection there, of ensuring that there is no leaks in any of our pouches, because we gas flush that product, and we want to make sure that all that gas stays inside the bag and does not escape out.

And another comment here on the batching system, we also saw on the safety side.

This will be a more consistent -- producing more consistent dry batching formula for us that we use in our process because it's a fully automated system.

Whereas right now, we have people that are actually scooping up product, putting it into a bag, weighing it into their scale.

We hand weigh all those dry ingredients, but this system will make it a much more consistent process.

And we can't forget about lowering some costs as well and also increasing the reliability.

So we've put some redundant processes into the facility, one being the boiler system.

We put a redundant boiler system in there.

So we can take one boiler down for maintenance or its annual inspection, but then we can still continue to run the plant without any interruptions.

So we have some reliability there.

On the palletizer system and the automated batching system.

Those kind of speak for themselves a little bit.

We talked about them earlier, and we're just going to let the equipment do the work there.

We don't have to have people doing that work, we're going to let the equipment do the work.

Scale parts washer, I kind of describe that as it's a big dishwasher.

So at the end of the night, we go into sanitation mode.

We've got to clean all these parts on the scale, and we're going to take and put all those parts into this scale parts washer, and it's going to automatically clean it a lot more efficiently than our sanitation team being able to stand there and wash it down with a hose and the scrub brush.

Also within Kitchens 2.0, we're going to be putting in an R&D pilot plant.

So it's going to be kind of a new playground for Gerardo and his team to develop some new innovation.

They've been doing everything so far off of some benchtop capabilities.

So they'll be actually have a true pilot plant into this new facility.

And we heard Justin talk about what we're doing to do some offsetting in the environment, and some things that we're continuing to do with Kitchens 2.0 that we're also doing over at the Kitchens 1.0 facility is, we're 100% landfill free.

We're also going to be using 100% wind energy.

And something a little unique that we're doing in the new facility is we're going to be collecting all the rainwater and using that for on-site irrigation.

You can see these big pipes right here.

These are buried underneath the parking lot, and they're about 60 inches tall.

So they're some pretty big diameter pipes, all the rain will get collected into there, and then we'll pump that back out and use that for irrigation.

We also know that our business is continuing to grow and grow, and we were needing some additional capacity.

And so we found that capacity in Kitchens South, and we found a co-manufacturer to install kind of a specialized line to run our small particle products, that being cat and Small Dog, and they got that line up and running in early February and have been producing product now and producing good product for us.

They also have space for an additional line in the future if we need that.

And it's a little bit of a unique setup that we have with this co-manufacturer, where we purchased all the equipment that went into it.

And it's also a dedicated staff that runs that equipment in there as well.

The co-manufacturer has their activities that they are doing within that facility, within their building, but the team members that are working on our processes and our products, they're dedicated to do just our process.

So with that, I'll turn it over to Steve, and he's going to continue to talk about some other capacity opportunities.

Thanks.

This is Maggie.

Maggie joined our family over 15 years ago.

Wife and I thought we were getting a little puppy that would turn into a family dog.

She has actually turned into a third daughter.

So she gets -- some of the other daughters complain that she gets treated a little better than they do, but they left home and she's stuck with us.

So we're very thankful to Maggie, and it's one of the reasons we talk about the need for capacity.

So we talked a lot about Gen Z and millennials.

But there's also a few of us out there that don't quite qualify for millennial.

But do wear cool t-shirts or aspire to wear cool t-shirts and Maggie eats a lot of Freshpet, and we know there's a lot of other dogs that do the same.

So we want to talk about our new location.

I think we announced this morning it was at Ennis, Texas and I thought we'd walk through how we picked Ennis, Texas just briefly.

So we started with a -- like a blank canvas that included all 48 of the continental United States.

And we looked at 3 primary criteria that we needed, availability of fresh chicken, availability of great talent, and the opportunity to improve our particular outbound supply chain.

So we started with this blank canvas, looked at those 3 things and really spent a lot of time upfront on what I would call a deselection process, and we deselected most of the United States and ended up with an area, kind of ran Georgia up through Texas.

If you were a history buff it would kind of look like mid-1800s cotton belt, that provided all 3 of these things.

And then we went from a deselection process to more of a selection process.

There's kind of more boots on the ground.

We went out and visited a number of communities, a number of sites, and we ended up in Ennis.

Texas has a big chicken industry today, big and it's growing, and the state is very supportive of continued growth.

So we're excited about that.

The city of Ennis has a manufacturing base and perhaps, more importantly, their education system supports manufacturing careers and provides some curriculum for that.

It's very close to Dallas.

So kind of families that have dual career paths, we feel they could live in Dallas and work in Ennis or work in Ennis and live in Dallas, and we can support both of those continued growth in those careers.

Lastly, is supply chain.

Once again, being close to Dallas.

Dallas has a great refrigerated distribution infrastructure in place, right, 1 of the 5 best places in the United States for that.

Provide just an immediate benefit, getting into the West Coast, where we have a big base of business.

But as we continue to grow, it's very competitive going into the lower Midwest and the Southeast.

So it checked all the boxes.

But even more important than that, when we met with the city of Ennis, we saw the vision of the community there, the vision of the community leaders, what they had been doing and what they were planning to do for their community and the people, residents of their community, and we're providing a great place to work.

They're providing a great place to live.

It just looked like a great marriage.

We've continued -- we met with the people of Dallas County and the state and they echoed those words, and we feel very good about where we're at.

So we're feeling great about Ennis.

And probably more importantly, Ennis is feeling just terrific about us.

So we decided to go to Texas.

If you're going to Texas, you've got to do something big.

So we looked at a big site.

You can see our current Bethlehem site is kind of overlaid here.

About 15 acres, and we're looking at something north of 70 acres.

This provides us with a platform for continued growth out through that $1 billion that Billy talked about a few minutes ago, and Scott talked about earlier today.

Also provides some opportunity to do some things with sustainability that we really can't do on our current site.

So we feel we've made a good -- we haven't quite purchased it yet, it's under contract, already has natural gas, already has electricity, already has water, already has a high-speed pipe for data.

So we're feeling very good about the selection of this site.

So we also -- last summer, even as we were finalizing our site selection, started designing a building, so -- and we designed it with kind of 3 criteria.

We talked a lot about culture already.

So we want the building to reflect our culture.

We talk a lot about quality.

A lot of our quality is based on really high hygienic design.

And so we not only have built on what we already knew about hygienic design.

We brought in an engineering company that specializes in human food and continue to push us on hygienic design.

So we feel very good about that.

But the third thing we really wanted to do is build something that was expandable so that we could stay ahead of demand.

So we built the first phase that -- we're planning to design the first phase with the idea of a Phase 2. So the first phase includes kind of the infrastructure around utilities, the infrastructure around communal space, the infrastructure around storage with a look towards Phase 2, which would be primarily a pure manufacturing space.

So one of the other reasons, I think Billy alluded to it, was we're really looking to Phase 2 to look at some new technology.

We announced last fall that we were looking at some additional capabilities in the area of process innovation.

We're already testing some things in that field, certainly on a small scale and certainly not proven, but we're very excited about what we're testing.

We honestly believe we'll be able to design Phase 2 around a different manufacturing process than we're using today, and one that will build a wider and deeper moat for competition and one that will also open the door for some product innovation that we would struggle with today.

So we're going to leave you with a block diagram of the vision.

I want to leave you with a little picture of what you will see if a couple of years from now, you were to come down to Ennis, Texas and visit our operation, and this is what we're -- what it should look like.

Pushed the wrong button here, Billy, but...

Video is supposed...

Yes, there was.

Video, here it is, here we go.

(presentation)

That enthusiastic bearded guy is Willie Everett, who's over there.

He is the General Manager for our Ennis, Texas facility and he has bought a house in Ennis, Texas as of December.

I have to tell you a quick little anecdote, when Scott and I went down with Steve last April to check out Ennis and decide if this is where we wanted to make our second home.

We had the Mayor, the Head of the Chamber of Commerce, the city manager, the Head of the Hospital, the Head of the Schools all meeting with us and we're sitting around a table.

And as soon as Scott introduced himself and said, "I grew up on Long Island, and I'm here, the city manager's dog walked around in the middle of the table and took a dump on the floor.

So "New York City" - anyway.

So I wanted to give you a quick view of -- but we love them.

We thought it was a fabulous place.

And if I can say one thing, Ennis is a great example where great leadership can deliver exceptional results.

The leadership of that community over the last 15 or 20 years painted a vision for how to take an old community that had been a boom town in the cotton days and the railroad days in the late 1800s, and turn it into a revitalized community by investing in their community.

They've done a phenomenal job, and we're very thrilled to have our folks consider that our second home.

In fact, it'll end up being our biggest base of operations by the time we're fully done.

But I want to give you a quick sense for how the capacity all comes together.

Our existing kitchens at 1.0 is $300 million in capacity.

We added Kitchens South, which when we go to a round-the-clock operation, 5-day round-the-clock operation will give us $50 million, takes us up to $350 million.

Kitchens 2.0 will take us up to $590 million.

We actually have the ability, as Michael said, to put another line in at Kitchens South, which would take us to $640 million.

Ennis Phase 1 will add $300 million of capacity, another $400 million when we do Phase 2 there, which gets us up to a total of $1.3 billion.

But go back to what I said before, about we want to do this in a phased approach.

You can see right now, we've built up to here in the middle of the place.

We have 3 more phases that will come on in anticipation of demand, ahead of demand, but in a phased process.

And that allows us to spread the investment out and also enable us the opportunity to manage the opportunity for technology advancement.

So at this point, I'm going to turn it over to Heather, who's going to talk a little bit about the benefits we get of scale.

All of you know we hired Heather recently.

She is the EVP of Finance and she will become our CFO.

She is also incredibly passionate about her pets, and that's part of what drew her to the opportunity here.

We're absolutely thrilled that she decided to join us.

She is a great asset for us.

One of the things that she will bring is the capability for us to put systems and processes in to scale our organization.

So Heather, take it away.

Right.

Thank you, Billy.

All right.

So as Billy shared, I am an animal lover.

And so to start off, I have to introduce you to my 2 loves.

Aspen, the very talented Aspen with 2 tennis balls in his mouth.

The very loving Boulder, and the 2 of them actually super excited -- this is a wagging tale -- to eat Freshpet, and they were not before on Freshpet and they hated their food, and they are very, very happy campers.

Before I jump into a little bit more about me.

I was practicing this weekend, and I had my presentation printed and my daughter said, "Oh my god, oh my god, pictures of the dogs, let me look." And then she spotted that on the side of the Boulder picture that she was chopped out of the picture.

So we then went on to a whole game of who do you love more?

Do you love me more than Boulder, do you love me more than Aspen.

I had to explain to her that I love everybody differently.

But she was okay with it.

And so why else am I here?

And from a career ambition perspective, my objective was to join -- to become a CFO of a highly, highly successful company.

And so combining my personal passion with that career ambition is why I'm here at Freshpet.

So I've been asked to talk about the benefits of scale for the business.

And before I jump into that, I will say, coming in as the new finance leader into a company like this, you're very excited about finding the missing value.

So you're really -- you have -- I have 19 years at Unilever, another year at Nature's Bounty.

My whole career has been around partnering with the business to find value creation.

And so I thought I was going to come in, and there was going to be lots of low-hanging fruit.

And what I was surprised by coming in early on, was actually -- this is an exceptionally well-run company.

I think you guys know that from getting to know the business, but there actually isn't a lot of low-hanging fruit.

The value creation is going to come with scale.

And so first and foremost, the obvious place that you think about when you think about scale, is cost leverage, right, the financial benefits and that's going to come both from leverage.

So when you grow, you just naturally on your fixed costs get a benefit of leverage, but also around actions in key areas that we can create value in the business.

But also what comes with scale is a strengthening of our competitive position.

And that covers consumers and I'll talk about the connectivity with consumers, that grows our partnership with retailers and our manufacturing footprint.

And as we scale, all of those get bigger and our competitive position gets stronger.

And the last piece is the increased organizational effectiveness.

And you saw when Scott showed earlier how the tree has grown with the core and adding resources that have more specialization as we grow.

So with the founding team, they were jacks of all trade.

They were doing lots of things across the business.

They are exceptionally talented, but didn't have as much time to focus.

Now we will add talent with specialization, with experience, to be able to bring new ideas to the business, while freeing up the core talent that has the experience of the business to focus more on where they can add value.

So the money chart, what you guys have been waiting for from a profit perspective.

At scale, we expect our adjusted EBITDA margin to reach approximately 25%.

So how do we think about that?

First, we think about what have we done so far?

So if we start at 2016 and we think about our progress from 2016 to 2019, most of the adjusted EBITDA margin accretion has come from SG&A leverage, and in particular, in the G&A space.

So you see from 2016 to 2019, we've achieved about 560 bps of SG&A leverage.

And then through 2020, we expect that to be about 700 bps.

That's been offset by some margin headwinds.

I'm going to talk about what's happening in gross margin, but you've heard us talk about some of the near-term headwinds in gross margins.

We have headwinds from our mix.

We think that's actually an important mix to drive our growth.

But we also have some margin headwinds on subscale production for small pieces that's impacting that gross margin.

As we look at 2020 to 2025, there's -- this is a big accretion.

I've never done this in my career.

It's exceptional, but we have high conviction in our ability to deliver this.

First and foremost, we will continue to drive the G&A leverage.

That will be a sizable accretion, and that will come naturally.

I'll talk about it in more detail, but that will come naturally from scale.

But the other big item is in logistics, and I'm going to go into a lot of detail on where we think we can drive value creation in logistics.

This is an area that, when you're small and your refrigerated can be highly inefficient.

We'll continue to get progress on chiller efficiency, and we will start to have accretion in gross margin.

So what's happening in mix?

We've talked about it throughout the presentation.

Mainly what's happening is that through our bag innovation, in both roasted meals and fresh from the kitchen, which are margin-dilutive on a gross margin perspective, that is becoming a larger part of our overall portfolio.

We -- that is important because that is helping us grow households, right?

So when you think about some of the headwinds that Scott talked about earlier, whether that's around convenience or just other headwinds around why they would enter the franchise, the bag innovation actually brings new households into the franchise.

What that does from a margin perspective?

It does have an unfavorable margin impact.

However, on a per-pound basis, it is penny profit-accretive.

So what's going to happen in gross margins?

We talked about the capacity build.

We talked about new equipment, automation, which will drive efficiency and it will.

So if you look at just Kitchens 1.0, and you look at the gross margin, sort of -- in a sort of separate perspective without any other aspects around it other than manufacturing, some of the mix headwinds, that facility would operate at around a 51% gross margin.

As we layer on newer and more efficient factories, that margin grows.

We anticipate Kitchens 2.0 with higher throughput and better technology, margins heading towards 53% and even 54% [within it].

But what happens in conjunction, in parallel with that as we move and scale the business is that we will continue to have growth in the bag mix as well as continue to leverage some of our other manufacturing areas, and that's going to have a negative impact on the margin.

Overall, we expect gross margins to be steady.

And we will have some accretion over time over that journey to 2025.

So a good way to think about where the financial benefits will come from scale is think about the end-to-end supply chain.

So actually, when I was asked to think about this presentation, my intuition first was to think about procurement savings, right?

So as you're going to start to buy 4x more what you buy, you should get a benefit in procurement.

And actually, you could see here, I have the smallest dollar sign on it.

So we will save money in procurement.

But just to put some dimension around it, a large portion of what we buy or almost half of what we buy is proteins, and that's commodity-based pricing.

And we've looked at things like hedging and whatnot, but that's really not an opportunity.

It's not an opportunity in chicken, and there's not a hedging instrument that's relevant for us in beef.

And so when you think about where the scale opportunity comes in procurement, it's really around packaging, which is a smaller part of our spend.

In terms of scale, automation in COGS, we'll get benefits from automation and better technology.

But we will also get benefits from running higher volumes.

So if you think about running higher volumes in the factory, you have less changeover, so you're running it longer, which leads to less waste and higher yields.

And the last piece in this space is continued fixed factory overhead absorption.

So we will, of course, add to overheads as we expand capacity, but at a slower pace, and therefore we will get an overhead leverage benefit in our cost of goods based on that.

We think the bigger opportunity is in logistics.

So I've got a few charts I'm going to take you through in terms of the why around that.

And then our unique -- unique to us is our chillers, and we feel that that's also an area where we will gain significant benefit -- or benefit both financial, but also a competitive advantage through our chillers.

So starting with logistics.

So a lot of data on the chart, but let's just think about the current logistics that we have.

So we're a smaller business.

We are shipping in a refrigerated network, which is expensive.

And so when you think about scaling and logistics, you're thinking about increasing and filling up trucks because it's less expensive and reducing the miles that you travel.

And right now, we ship everything from Bethlehem across the nation, also internationally.

That is also making it more expensive to ship our product.

So when we think about what's going to happen with scale, the first thing is we are going to start to shift to larger order sizes.

And just to dimensionalize this, based on our current rates, just by moving from 1 to 4 pallet shipments on a truck to 5 to 14, that's actually worth a percentage point of benefit because -- on a percent of net sales.

You could see actually right now that we only have 36% in full truckload shipments, but we are improving, but at a pace that will continue to grow as we get our scale.

And then we also are doing a high percentage of case pick.

And case pick is basically literally picking different configurations of cases to make a mixed pallet.

It's very inefficient.

The case picking alone is an incremental cost in and of itself, but it also can create partial pallets, and that's actually an inefficiency in shipping as well.

So what's going to happen in terms of cost of transportation as we think about moving from less than truckload to full truckload and long distance shipping to shorter distance shipping?

So just for simplicity, if you draw a line across down the Mississippi, that's how we're differentiating short and long.

And on the left here, you can see our current shipment mix.

So our current shipment mix, we have in our least efficient shipment dimension 31% less than truckload shipping over long distance.

In the ideal world of full truckload short distance, it's only 20%.

That blended rate of our current shipment mix costs us 5.6% of net sales.

In an ideal world -- in a theoretical maximum situation, which isn't going to happen, I would not promise that -- where you are fully shipping in full truckloads and short distances, you would be achieving a 2.6% of net sales.

So 300 bps to gain here.

We will end up somewhere in the middle.

But this is an area that we think is a big benefit that will come from scale.

So what about our chillers, our unique sort of asset in our business?

What's been happening as we've grown the network?

And then what do we expect to happen?

So first and foremost is that there's financial benefits.

So we're improving on service -- service of our chillers is a sizable expense.

And that unit cost per year has been improving, and we expect that to continue to improve.

That's a key part of our G&A progress that we expect.

Fridge CapEx also will become an opportunity to become more efficient.

And from a financial perspective, when you think about spending money on retail coverage, as we expand fridges you get more for your money when somebody goes for a visit.

But then when we layer on the new technology that Scott talked about, that benefit will come even in a bigger way.

The other big thing to think about with chillers is the benefit we get of what I would call free shopper marketing.

So again, 19 years at Unilever, the journey there that I saw with creating what they called in-store theater and a shopper experience was very, very expensive.

It was something that had to be negotiated with retailers, and they spent a lot of time designing it and had to make it fresh every year.

And it's everything from little hang tags on the aisles to the lighting in the aisles and the beauty aisles, et cetera, that you guys all see.

We get that with our fridges automatically.

So we don't have to think about how we're creating in-store theater.

We get it already with our fridges.

Also we will improve product availability as we expand the fridge network, both additional stores as well as additional chillers.

So what do we expect is going to happen in G&A?

And we talked about, we will invest in this organization.

So we're not -- we can't become $1 billion business with the size of organization that we have right now.

But we will grow our G&A at a pace less than our net sales.

So we have modeled this in a way that allows us to add strategic investment in talent, to scale the business where we think appropriate at a rate greater than inflation, but at a rate less than our net sales.

So what happens from a competitive positioning perspective?

So this is sort of more of the nonfinancial.

It links to financial.

But what are some of the nonfinancial benefits?

And the first is, as we widen the consumer base, 3 million households to 8 million households, that actually creates much stronger consumer connections that are very, very difficult to replicate in a competitor because of that 70% retention rate.

So it's -- when you start feeding your pet, especially Freshpet, I can guarantee you there's no way that dog is going to switch back to kibble.

It's not going to happen.

And so as we expand that footprint, that is a competitive headwind to others, a higher barrier to entry.

The enhanced retailer presence, it is -- we -- as you guys know, we invest in these fridges ourselves.

This is a massive undertaking for a company that would try to come in and actually make a sizable investment to compete.

And our broad product assortment is going to be very, very difficult to match at scale as we -- as you saw with the innovation platforms that are coming.

The last piece is the large manufacturing footprint.

And as that scales, that becomes even more difficult to replicate and exceptionally expensive.

And I can assure you that any smart CPG leader that says, let's go try to be Freshpet and goes to their leadership team at a big strategic competitor, the headwinds to try to get that investment, it's -- it would be nearly impossible.

It would be very difficult for them to sell that internally.

So this is my last chart, and it might be the most important one, which is that scale enables us to fulfill our mission more broadly.

So we have significant pet philanthropy, and we will continue to do that.

Our ability to impact in pet philanthropy only grows sizably with scale.

We're improving the health and well being of more pets.

So more pets are eating our food, but we're now also offering targeted health benefits, which continues to increase that benefit.

We're improving the lives of our employees.

When we add [NF], we're almost doubling the size of our employee base.

And all of our employees are stockholders.

And I could tell you from being at Freshpet for 5 weeks, it is a great place to work.

The last piece is better relationships with our pets.

And again, just a personal last tidbit to share.

My dogs loved me before, but now that they are fully eating Freshpet, the minute I take that out of the fridge, they are going bananas.

So with that, I'm going to hand it over to Ivan, who will talk to you in more detail about financials.

Thank you.

Good morning, everyone.

How's everyone doing?

So this is my dog.

This is Genie.

As I stare at her, I feel the love hormones.

She's a 8-year-old pit bull, we got her about 6 years ago, we rescued her from a local city shelter.

She's amazing.

She's my best friend.

She's my life companion.

And when my wife is upset at me, she's my dinner date as well.

All right.

So 2025 plan.

I think everyone is starting to understand how the plan looks at this point.

Scott and Billy have done an amazing job discussing what our plan is to drive growth and get an additional $5 million -- 5 million households.

But I want to spend a little bit more time talking about the investments that Freshpet is willing to make and ready to make in order to support that growth.

Those investments are going to span both the P&L and balance sheet.

So if you look at the first item, we look at CapEx spend.

So obviously, everyone is used to seeing that on the balance sheet.

But we also have certain costs that go to the P&L, ramp-up costs.

And that's an investment that we make where once we go ahead and start up a line or start up a plant, we have a very methodical approach to that start-up.

So rather than just hiring people off the street and throwing them directly on the line immediately, we hire them beforehand, we train them, we make sure that with the lines, we go through the multiple steps.

And obviously that has a cost associated with it, but we think that's a small price to pay in order to ensure that we don't put our mission at risk.

With that being said, once the capacity -- once the plant is at full capacity, we then lean in on media spend as high as 12% of net sales in order to ramp up that capacity as soon as possible.

And then we're also going to make investments in systems as well as organizational capabilities to ensure that we're able to support this business through its rapid growth.

So like I said, capacity build.

Obviously it's going to be the most significant investment.

All 3 of the slate of projects that we have, have a payback of less than 3 years at full capacity and an IRR of greater than 20% -- 20% or greater.

So this is my favorite chart.

This is my cool chart of the day.

So I know a lot of times we talk about adjusted EBITDA.

But this is talking about cash.

And I love adjusted EBITDA, but I really love cash.

And what this chart presents is, this is our cash that we're generating from the P&L prior to any media investments.

So as you can see, in 2016 we were at 15% of net sales; 2019, 21.5% of net sales.

And we expect by the time we get to 2025, the business will be generating $320 million of net sales prior to any media investments.

This ensures in the near term we feel very confident with financing this expansion through a combination of debt and/or equity, but we also want to ensure that we don't go above 3x leverage.

So how are we generating all this cash income?

And Heather spoke in detail about this.

But historically, most of our EBITDA leverage has come by way of SG&A, and we're going to continue to build upon that as we head into 2025.

With that being said, we are also going to go ahead and look at improvements that we can make around our gross margin.

As some of you might know, we've had temporary drags on our gross margin.

One of them is by way of higher production costs associated with increasing our quality.

While Kitchens 2.0 is going to be a more cost-efficient facility, both lines will be more efficient, and we hope that those offsets -- that could more than offset the costs associated with higher production costs.

Sales mix.

Once again, mix is moving towards bag products.

We [look] to make investments with innovation that should offset that.

And then as we continue to grow, we'll constantly have temporary drags on gross margin as we grow into capacity.

Scale alone should be able to offset that as we grow and get to $1 billion, we should be able to grow into those lines a lot quicker.

And also one thing to keep in mind, each line becomes a smaller piece of the business as we continue to grow.

All right.

So bringing it all together.

Going to 25% gross margin, how are we going to get there?

We're going to get 1,000 points bps from adjusted SG&A, 1 point from adjusted gross margin.

We'll go ahead and reinvest 1.5 points in media.

And then we have these 2 boxes, what we're calling the to-be-decided boxes.

So we have many savings initiatives.

We're still trying to figure out what the potential upside on that is.

But we also know stuff will happen in the future, things that we don't know today.

So at this point, our model is saying that our savings initiatives will at minimum be able to offset any unforeseen circumstances that we have as we continue to scale.

All right.

So that's the 2025 plan.

So now it's year 1 of the 2025 plan, which is 2020.

So certain things to keep in mind.

Once again, we will invest in the business in order to drive growth and support the growth.

So we'll go ahead and have significant U.S. advertising.

We'll go ahead and invest in expansion, invest in systems.

In the near term, our adjusted gross margin will be lower than we had previously planned back when we first started with Feed the Growth initiative.

We'll talk a little bit more about that on the next slide.

But we will continue to drive SG&A leverage.

So initially, when we first started the Feed the Growth Plan, we said that we would get 700 basis points of leverage.

We will meet that by the end of 2020.

All right.

So the gross margin.

We're ending the year 2019 at 49.4%.

We expect to gain 1.2 points on COGS overhead leverage and efficiencies, and then 40 bps from pricing.

That will be offset with these ramp-up costs that we've been talking about.

So there you can see that we have a range of 1 to 2 percentage points.

It's a rather wide range.

And I do fully appreciate that.

But one thing I want you guys to keep in mind is we're not starting up a new line.

We're starting up new facilities.

So it's the first time we're ever going to be in Kitchens South.

It's the first time we're ever going to be in Kitchens 2.0.

And we want to ensure that as we've laid out our plan and guided you guys to what we will achieve, we fully acknowledge there's a lot of unknowns going into 2020 with our gross margin.

So now what we've all been waiting for, guidance 2020.

I'm sure no one's seen this yet.

So our net sales, $310 million.

We will exceed $310 million.

26% growth year-over-year.

Our adjusted EBITDA will be greater than $48 million.

Change of 65% year-over-year.

So as we're looking at the 2020 plan and we try to understand how the quarters will lay out, a few things to keep in mind.

Our sales volume cadence will be consistent with years past with the exception of 1 item.

So when we look at our bag capacity, we believe that in Q1 and Q3, it will be somewhat tight.

So there is potential for certain shipments from Q1 and Q3 to slip into Q2 and Q4.

When you look at our advertising investments, also keep in mind that during the first half we will spend more, similar to years past, but there's potential for Q2 to show a little bit of a dip as we try to manage through any potential capacity issues that we have in Q2 -- or Q3, I'm sorry.

And then gross margin, Q1 will have significant ramp-up costs.

There will be Kitchens South as well as the conversion of our fourth line to 24/7 in Kitchens 1.0.

So that will be a drag on our gross margin, but we do expect for that gross margin to increase as we move forward throughout the year.

And then estimated store growth.

So store count, 23,000 stores 2020, 7% growth year-over-year.

Upgraded fridges, total of 2,150.

And second fridges, stores with 2 fridges, 1,300 stores by the end of the year.

Our ACV, we're projecting to be at 56%.

And total distribution points of -- increase of 9% year-over-year.

Okay.

Now just to summarize our 2025 plan.

Net sales 2025, $1 billion.

Adjusted EBITDA margin, 25%.

Media investment, 12%.

Free cash flow, excluding any capacity builds we might have in 2025, will be 15%, all with a leverage ratio of less than 3. Thanks.

Sort of just a summation, but I want to remind everybody that our mission is to awaken the world to the better way of feeding pets and our goal is to find a way to feed 5 million more households Freshpet.

So this is what Scott told you, 5 million more households by 2025.

We want to see the buying rate go up.

And remember, we're still getting a very small share of the households actual purchasing on Freshpet.

$630 is the amount you would spend on a 30-pound dog if you fed him exclusively Freshpet in a year and you bought the product in an average size and average retailer.

The growth potential for Freshpet, if you do the math on media spend, as Scott showed you, which is -- is that in here?

That is here.

I knew it was exciting, but I'm going to keep going and hope that it's distraction.

The math works for us.

The increase in the media spend against the households drives you to the $1 billion with 5 million more households.

This is the Scott -- chart Scott showed you, with a few extra lines on it.

But basically we need to get 40% of the household potential to switch over to Freshpet in order to achieve the $1 billion goal.

We have huge demographic tailwinds behind us.

Back when we did our study in 2016, Gen Z wasn't in household formation phase of life yet.

They were sub-18 years old.

They are now at the age where they are contributing and they're contributing, as Scott showed you, in a very big way.

Okay.

All right.

We're just about at the end anyway.

So I want to give you one other piece of perspective on how achievable this $1 billion goal is.

Blue Buffalo data for household penetration during -- that they publish, it's their publicly available data, and matched it up, their years of 2015 to 2018 against what we would be at 2022 to 2025.

And you can see, as aggressive as the household penetration gains are that we are talking about, it's less than what Blue Buffalo actually achieved.

That should tell you that pet parents are willing to change their pet food at a rate that is in fact even faster than the rate that we are projecting.

When you turn that into what was the net sales progress, I lined this up and started this chart up in the year where Blue Buffalo was $190 million and we were $192 million in sales, and showed the trajectory from that point going forward, and you can see our curve to get to $1 billion is actually even slower than the Blue Buffalo curve.

Now they had an advantage.

They didn't have to build plants.

They could use co-manufacturing facilities.

But again, this is a proof point for you to explain how $1 billion is achievable in the pet food category, that we can get consumers to adopt Freshpet at that kind of a rate and still achieve our goal.

So what are the opportunities ahead for us?

We're only at 46% awareness.

Our household penetration is only 3 million of 63 million households.

Our buying rate is only $106 million.

The ACV distribution, we're only at about half the stores in the country.

And we haven't even really touched on what we can get out of cat food or international.

Cat food is only 4% of our business today, and the cat food market is about 30% of the total market.

Our international business is only about 4% of our business and International is Canada plus the U.K. And in fact, if you did proportionally, we have 40% of our business outside the U.S., and we are continuing to work and develop those markets.

So what will be the scope of Freshpet in 2025?

The scope of Freshpet is, we would have about an 8% market share at $1 billion.

Our penetration would be about 8 million households.

We would have awareness of 75% and a buying rate of, call it, $160.

We would have over 65% ACV, technology-enabled fridges in more than 50% of our stores, and we would have more than 4,000 stores with double fridges or better.

We would have a meaningful business in the U.K. and Canada.

We would have a very robust dog business and a developing cat food business.

E-commerce will be well north of 10% of our sales, and bags will become our dominant product form.

We'll be operating 3 fully operational kitchens.

We'll have an expanded program on sustainability, and our employees will have gone from about 450 today to about 1,000.

We would have an expanding clinical database that Gerardo referred to, that will be supporting the benefits of fresh pet food.

Our satisfaction would remain at the highest level.

All right.

We have an industry-leading sense -- we'd have a significant pet philanthropy and a leading Net Promoter Score.

We'd have over $100 million in advertising spend.

We'd be growing north of 20%, more than $1 billion in sales, and we'd have 25% adjusted EBITDA margin and strong free cash flow.

So my hope is that by the time we get there, when we say the word Freshpet, you will have the same feeling and reaction that my dog Appa does when I say Freshpet.

(presentation)

That's only when she knows the meal is coming, not even when the food is there.

So anyway, thank you very much for your interest and attention today.

We believe it is our time.

We are going to change the pet food category and change it for the better, and that Freshpet will become one of those brands that changes the world.

So thank you.

At this point, I guess we will take questions from the room.

Is that right?

Yes.

Okay.

All right.

Jason, this microphone?

There's a microphone right there.

No, you want to use this.

All right.

All right.

Scott, do you want to come on up here, we'll field these together.

First you'll -- Jason, do you like my dog?

Is that working?

There we go.

That was a trick.

Thank you so much for the detail.

The -- I guess where I'm left with some unanswered questions is really about the cash cost to get there, to 2025?

Yes.

Because if I do the quick math on finishing 2025, like around 3x net leverage, that's $750 million.

You should generate at least $500 million of cash from ops, kind of implies you may burn through north of 1.2, 1.25 on CapEx to get there, which is way more than I was expecting.

Is that right?

Or maybe we just get right to the heart of it, what are you expecting to spend on CapEx?

And what's the cadence?

So we aren't laying out the specific cost because we're early in the planning phase.

We've given you the cost of Kitchens 2.0.

We've already paid for the Kitchens South, that's already been flowed through the balance sheet.

We're working on refining exactly what the costs are going to be for the facility and this, we've kind of scoped out the size, we're doing a lot of work.

We've got some rough numbers on it.

But I don't want to make it sound like it's going to be small, because that facility, when we build it, we have to put in all the basic infrastructure, the systems and the parking lots and all the basic stuff for the first 3 lines that go in there.

We will pay for that out of both cash that we have available from operations as well as on our balance sheet, and we would consider equity if we needed equity to fill it.

Okay.

So there's a jump of at least $1 billion or $2 billion.

I'm going to try to pin you down on this.

It sounds like that's not too high of a number for us to be using.

For you -- I'd have to go through and look at the components.

I don't know, Dick, if you have a point of view on that?

You had better come over here, because there is a mic, they need to hear you on the phone.

[balance sheet] disclosed the numbers in 10-K of $300 million for [the first 3 lines].

And we're now kind of evaluating where to go next.

Rupesh.

So first, going back to a longer-term addressable market, I just want to get a sense of how you guys factored in competition?

And how you factored in the economic conditions as well -- or the economic environment?

Yes.

So competition, when you create a market size, you assess what is the potential market that's out there.

Theoretically, somebody else can come along and be participating in that.

If you look at the history of these things, you will get a competitor at some point.

There will be, undoubtedly be a competitor.

And normally the market ends up being the guy who came first, if he executes well, ends up with 80% of the market.

The next guy who comes along picks up 20% of the market.

Again, generalizations.

But if you think about the way we've thought about the addressable market, even at $1 billion, we're still only at 40% of the total addressable market.

So there's room for a lot of expansion on top of that.

In terms of changing the economic environment, the economic environment, we assume -- you have to assume that it's so much static.

There will be periods that are good, and there will be periods that are bad as you go along.

But we did look at how the category [performs] in a bad economic environment.

In fact, category is very resilient.

It's incredibly resilient to economic swings because as people cut things out, the pet food is one of the last things they cut out.

I don't know if you have anything to add to that?

No, I totally agree.

I mean it's -- in the cycles, I mean you can kind of look at the growth of pet food, and I shared like a 4% CAGR.

It is pretty amazing how resilient it has been during some of these kind of -- kind of upsetting or down kind of economic times.

People will cut out kind of more luxuries.

And you guys have probably heard me talk about this before, but the idea -- I'm going to cut out like newer clothes or jewelry or trips, et cetera, but to cut out food for my child, right, as we've talked about, I think that's really one of the last places that people will turn to.

Could our growth slow slightly?

Yes, there is a potential that it could slow slightly by a couple of points.

But over time, it will catch up.

Right.

And 1 -- yes, just 1 follow-up question.

So on the gross margin line.

So obviously, in Q4, that came below your expectations.

So as you look at your forecast for this year, is there anything you did differently, build in more conservatism or just your confidence in achieving gross margin guidance out there?

Well, I'd say, first of all, from an operating perspective, one of the things that we've now reflected in the going forward is a change in the process that was designed to make us less volatile.

I won't go into the details of it.

But suffice it to say that part of the volatility we had this year was the system.

We probably could have spent a little bit more to make it a little bit more static, but we're now spending.

And the way we're spending on it is -- think of it in terms of amount of time you spend doing sanitation and the amount of extra processing that you do, but it gets us to the point where you take some of the ups and the downs out of the system.

And so once you build that cost in, your risk or your variability is greatly reduced, and we did that.

I'd also say that -- Ivan described it incredibly well.

And I don't think we properly introduced Ivan.

Ivan is our VP of Finance, very talented guy.

He's been here since prior to the IPO.

But we asked him to take a look at -- as you think about the work that we're doing with Kitchens South, make sure that we plan conservatively for what those costs are going to be because, as he said it very well, it's a new facility in a new place with new people.

There's a lot of newness that has to be factored in.

I think we've captured it.

We'll see.

I think the thing that is most surprising on the gross margins is we were very -- we're disappointed about the lack of progress that we've made there.

But when we actually sat there and looked at that chart, it's like a pretty tight range over time.

And most people look at that and call that stable.

We were disappointed.

But it's a fairly stable gross margin, and that's sort of what we're projecting going forward.

We gave up production for quality.

And that's the most important thing.

Our reputation is the most important thing.

So normally, we would have sanitation for X hours a day, and we've decided to up that.

Yes, Bill?

Yes, 2 questions.

First, just the goal of 25% EBITDA margins hitting scale when you hit a $1 billion in sales.

I mean a few years ago, we were kind of talking about those margins at $400 million in sales.

So is there a reason why you can't hit 25% at $900 million?

And as we get past $1 billion in sales, is there a reason why 25% is the ceiling?

Yes.

So first of all, the margins that we talked about for $300 million or $400 million of sales was on the gross margin line.

And all the pickup that we've gotten has been out of SG&A.

And what we're showing from 2020 to 2025 is almost entirely on the SG&A side, and showing relatively static on the margin side, there's a lot of -- gross margin side.

There's a lot of good stuff happening on the gross margin side.

But we have the headwinds on mix that was described in some of the outsourced part of the manufacturing process.

Could you get there at $900 million?

A lot of it is scale dependent.

I think that's what Heather showed you, is a lot of that SG&A absorption is scale dependent.

But we also as you might imagine, planned a little bit conservatively around that as well.

We have a pretty tight operating mentality on SG&A of, you have this much for wage inflation, organization expansion year in and year out is this much, and sales is at a significantly higher level.

And the chart shows, we've delivered that pretty consistently for the last several years, and we're projecting that out through 2025.

So I feel pretty good about it.

Does that mean there's more beyond $1 billion?

Probably, but you're starting to get to, you're pretty well operating at scale.

And one of the things that we have to start thinking about is we have a very tightly focused business in the U.S. I mean it's a single brand.

The classes of trade that we're in, while they are diverse, it's -- we don't have a complicated selling system.

We don't have a lot of people doing trade promotion management and a lot of back-office that's related to that.

The minute our business has a significant SKU outside the U.S., we have to put a new organization, new infrastructure.

You'll have an increase in the SG&A that's associated with that.

So we have to balance all those factors.

And then just a follow-up on the new products.

Maybe if you look at every other pet product on the shelf, they have a specific product for puppies and then regular dogs, and then for weight management and for elderly dogs, but you don't.

And a lot of them also in the vet channel have for arthritis or stuff like that priced up.

You seem to kind of have a 1 size fits all, which could be the nature of the product.

But I mean is there a plan to try to migrate consumers up or to bring more consumers for meat-based in there?

Or is it really just -- we're just trying to build households right now.

That's a 2, 3 years, 4 years down the road?

Over time we -- the first goal is to basically commend the idea of fresh, refrigerated food for as many people as possible.

Especially when you're dealing with a single cooler, the most productive SKUs aren't those ones that have unique need states.

Over time, you saw an example -- we do have puppy and the most likely SKU and a lot of the second coolers is the puppy SKU or the Sensitive Stomach SKU.

So there's more and more of those SKUs that are going to be going into our second and third coolers.

That is not just an opportunity for us to look for space.

This is an opportunity for us to kind of innovate and give a broader portfolio to individuals, and we will fill out all of those kind of unique need states for different consumers over time, but we also want to make sure that we're using our space as productively as possible.

So we're trying to be really thoughtful around that.

And the work that the team is doing, it's not -- we're not just sitting around kind of doing the numbers.

We're asking the team, every single person on the team and every single function that you saw today, we're asking them to create, what does your business, what does your area of responsibility look like over the next 5 years?

So we've shared kind of snippets of different things, but everyone is thinking through, what does the portfolio look like?

What does the -- what does our overall business look like in 5 years from now.

And you'll definitely see more of those type of products coming.

Ken?

Thank you for all the details on 2025.

One thing that I didn't pick up on was, and maybe it wasn't mentioned, was competition.

What do you have baked in there?

What are your assumptions for what some of the larger pet food manufacturers that are not currently in fresh are going to do to sort of -- I mean it's such an incredible category, you compared yourself at the beginning to some of the most successful companies in the history of the world.

That's going to attract...

That's us.

Yes.

That obviously will attract some other people into the business.

So I -- the thing that's interesting is when we did our work or like when we've done all the modeling and all the work around the consumer and what the potential is, that's based on us investing in the category.

We actually could see a potential where this kind -- and I'm still showing you kind of 8%, 10%, 12% of households.

There is a real chance that in the future, if there is a second or potentially even third player, this literally could expand the penetration or the growth of Freshpet food significantly over kind of our anticipated growth rate.

So we could see the category getting much, much bigger.

I definitely -- I mean think about it today, just back up, forget about us for a second.

There could be a world where 25% to 30% of the pet food sold in the U.S. is a fresh or refrigerated type of food.

And in that scenario, as Billy mentioned, when those incremental investments come in, and the pet category really does begin to shift, yes, it will kind of change our operating dynamics, and we've been trying to be thoughtful of that and take those into consideration in our business planning.

But we've -- we recognize that it will be a bigger piece of the pie, and we think that we'll -- we're positioned to kind of take the biggest piece of it, potentially over time.

So the thing that I would add to that, which is the, one of the things that I've seen is, I said it before, when you have a category like this, that is defined by somebody new and somebody else comes in along the way, the market split, as I said earlier, ends up looking like it's an 80-20 split.

You also see the market grows faster.

The added competition and the investment as Scott said, you end up with a much more rapid rate of category growth.

So the guy who is the category creator actually ends up with a bigger business than he otherwise would have ended up with, but it's a 80 share of the category.

The thing you have to see is then, what are the practices of that person who comes in.

If that person comes in with a low priced alternative and turns it into a price game, they skim off a different kind of consumer.

And you have to figure out how to respond to that.

If they come in with a super premium priced product that tries to take off the top end, you would react very differently to that.

We did a very exhaustive look with our Board last summer at who are all the potential competitors?

What are the assets that they would bring?

How might they approach this category?

And the conclusions you would reach would be very different depending on who that competitor was.

So in terms of developing our modeling, we had to do it based on what we would do and what the market was and leave ourselves room so that we knew that, even if somebody else was in there sharing some part of the market in some way, that there was still plenty of room for us to hit our numbers.

So 1 other example.

So over the past 3 years, there was a competitor that came in to the business.

They -- we competed head-to-head with him in HEB.

I've tried -- I shared a little bit of the story.

They came in at a lower price, anywhere between 10%, all the way to 40% lower price on a kind of per pound or per feeding basis.

It was a fresh refrigerated food.

They're now gone.

They've been eliminated from HEB.

I think that there could be other opportunities for someone to come into the category.

But 1 of the things that we've done is not only from a branding standpoint, and a positioning standpoint, and a pricing standpoint -- like I showed that pricing chart.

We've actually covered a fair array of the category, and the different positionings that consumers are interested in and that potentially people would compete in.

So I think we've kind of staked good territory from a branding and positioning standpoint.

And look, it's definitely -- does it make you invincible?

Absolutely not.

But I think we're in a very kind of envious (sic) [enviable] position at this point to compete with if someone does show up.

The other reality of, this is not easy.

Not easy at all.

It took us -- I showed you the phases of growth.

It took us many, many years and hundreds of millions of dollars in order to get here.

If I was going to show up at a major organization and say, "Hey, I want to launch a fresh pet food business.

And this is going to be an interesting opportunity for us, and I need about $300 million or $400 million in order to do this," they'd say, "Oh, that's interesting.

What is your year 1 revenues?" Oh, there would be at least $25 million.

And I've done many, many launches in the pet food category.

$25 million or $40 million is out-of-the-ballpark success when you do a year 1 launch.

What's your year 2 revenues?

Maybe $45 million, $50 million.

What are you your year 3 revenues?

Maybe $75 million or $100 million.

So now they've invested that amount of money and the first case that they have to make, think about the cost of that first case and the scale benefits that we get as we grow.

So there's no perfect answer here.

I will say that we think we're -- again, we're kind of well positioned and we're looking forward to kind of growing the business as fast as we possibly can because we want to be -- have as much of a head start as we can if someone does come into the category.

In Australia, we've talked about it as 25% of the market.

And the guys who first came in, in Australia, still own 80% of that 25%.

Yes, Mark?

I wanted to go back to Jason's question in part.

So when you showed your chart of capacity and demand, it still seems like going out to 2025, it really wasn't as -- with as much cushion as I think you probably would want.

So I guess the question on a going-forward basis is, how do you think about that once we even get to 2025?

I mean I appreciate that it's 5 years from now.

But if you get where you want to get, you're still going to have that same problem and it's going to be this expectation and a more spend.

So can you get more efficient in how you're thinking about capital allocation in South, that's obviously more of a co-packer relationship.

Why can't you do that more with the existing businesses?

What do you hope you potentially can learn from what you're doing in Texas, so you don't have to do this going forward.

Let me just start with, start at the beginning of the premise of your question.

In that chart, we end up in 2025 with $1.3 billion in capacity on a $1 billion business.

And so there's a fairly significant amount of cushion, assuming we fully build out the Ennis site as we've mapped it out.

And so that's the first reason is, there is the room.

Second is you have to remember, unlike many other people in the CPG industry, where you need to have capacity in excess of demand because you have a lot of variation in your demand.

Our demand is incredibly consistent because people feed their dogs the same amount every day.

And once we acquire a consumer, they remain fairly loyal.

And we don't do any price promoting.

So we can run up closer to the capacity line more so than almost any other CPG business can, just because of the dynamics of the space that we're in and the way in which we operate this business.

But in terms of getting out ahead of this, the way that curve is working is, it gets us about a year ahead on capacity.

But because we'll have a bigger facility in Texas that we can add the lines in, it gives you the ability to accelerate that rate if you need to accelerate, as opposed to where we now are.

We had to greenfield Kitchens 2.0, we have to greenfield the Kitchen -- the next kitchen.

But one of the things that -- when you're talking about, are there things you can do, whether it's like Kitchen South where you could be a little bit more efficient.

We're going to learn a lot from that.

We literally just started that up last month, or I guess this month, literally just started up.

We have conversations going with a partner that -- where we are doing that, and we really like what's going on there, but we have to see how that unfolds.

And that could be another avenue, another option for us.

I clearly mapped that we put a second line on this schedule, and that's certainly one of the options.

The other piece is I wouldn't downplay the opportunity we have to reinvent the way we make fresh pet food.

We've mentioned several times today that we hired somebody to go work on that.

Gerardo and Lynn Bingham, who we hired, have been doing some really cool experiments.

And the simplest way I can describe one of the things is, if you lay a fresh pet line out today, it's about 405 feet long from front-end to back end.

That's a big line with lots of unit operations in it.

But the value-add part of that operation is probably only like 100, 105 feet or something.

It's not a lot of the operation.

So they're looking at ways in which we can completely shrink that down and become a lot more efficient, produce a higher-quality product at a lower cost and probably end up having less CapEx that goes with it.

That's part of why we're building Ennis in phases, is we want to leave the room open that if by the time these guys finish piloting that work, they can come back and say you know what, we want to put in completely different lines that are completely different than what we've done before.

So the next phase of that facility gets built out differently.

And that is not budgeted.

That's not in the budget.

So if we have any of those breakthroughs, those things will be accretive.

Bob?

Two questions.

I just want to make sure, I want to check Jason's math also.

It might be a dangerous thing to do.

But you did say...

It's 27 pages.

So...

Yes.

But the leverage limit, you said was 3x.

Is that right?

Yes.

So if you have a 25% margin on $1 billion, that's $250 million of EBITDA.

So does that mean that the most debt you would want is 7 50.

Is that a fair number?

Yes.

So was that -- in terms of cash costs, if Ennis is only $300 million, how do we get like above $1 billion in cash costs on top of that?

It's just the ongoing cash flow being negative for the next few years?

Is that how we get there?

Well, the capital that we would need to spend based on this layout to that -- from now is around $400 million.

I'm sorry, how much?

Around $400 million.

Going forward.

Going forward.

So we're talking -- we have an estimate of $300 million for Ennis.

We have spent about $55 million already on 2.0, so we've got about $50 million to go.

And then the Kitchens South costs us, we said $15 million.

So this is nonchiller capital.

So that's about $365 million between now and 2025.

Okay.

So I'll just huddle with Jason later on as -- over a $1 billion.

Jason is very accurate.

We've experienced his stuff for many years.

So he's very accurate.

Well then, I'll just use his number.

But the next question was on platforms.

You mentioned 3 platforms.

I just want to make sure I get the nomenclature right.

You have roasted meals, fresh from kitchen and the rolls.

Is that the -- is that it for platforms?

Or is that new item that you saw -- that you showed us, would -- that looked like a TV dinner, is that another platform on top of that or it's just a..

I -- we would consider that and some others as potentially other platforms over time.

And we also want to make sure that when we do Ennis, it will obviously have kind of what are our kind of core businesses, right, the rolls and the bags, and there's some different forms that are within the bags.

But also opportunity that if there are other forms that are really kind of taking off, we have opportunity to bring those up to significant scale.

Okay.

So is the idea that in order to get to $1 billion, you do need new platforms to get to $1 billion?

Or do you think that these 3 get you there?

I think that they assist us and make us more efficient along the way.

One of the reasons that our advertising and actually our consumer acquisition costs has actually been going down is because our innovation has been so good.

So I think that's a multiplier, honestly.

The existing platforms and the existing distribution could be a dramatically bigger business, but it would get there a lot faster if we do really relevant product innovation.

Peter.

You mentioned that you're going to make it, I think you said drastically easier to buy Freshpet online in 2020.

Can you expand on that?

And when will we -- when will it be that much easier to buy online?

Yes.

So at this point, I can't tell you specifically the action steps, but we do have them in the plan, and they will be announced.

Within the next 120 days, you'll see kind of a clear different ability to buy from an e-commerce standpoint.

And we're -- we're -- we are pretty enthusiastic.

We also know that this is going to improve, like when we have out of stock issues, it's going to improve that.

There's also frequency challenges that some people face, not being able to get to certain stores in a timely period.

We think it's going to help with that and really significantly expand our buying rate.

So I can't expand on it at this point, but I would say that we wouldn't put Jake leading this up if there wasn't anything to do.

I guess, the next question.

How do you weigh the benefits of the increased capacity from the Kitchens South, with the risk of kind of the process is now stepping a little bit out of in-house?

And do you think about that?

Is that a risk or not really?

Yes.

And it's interesting.

We've done a lot of work, and I didn't put it in the slides because we had lots of slides.

But one of the things that we've done is we have -- the way we've been able to build those business, it's not just the internal competencies, but we've actually found partners all along the way that have been close partners for many, many, many years.

And I think someone mentioned the term co-pack.

We don't think of Kitchens South as co-pack whatsoever.

It is -- it's our line, it's our equipment, it's our room.

No one else can even come into that room without it being basically a Freshpet badge.

So it's really our space.

And we think that that's kind of the right model.

We've also taken technology that we think is the least proprietary, in all honesty, the least proprietary and brought it there versus some of the most complex things that we do.

So we feel good about that.

But which all goes back to, it's literally the partners that we've had in place for many, many years that we trust, that we feel good about, can keep a secret and take care of our business and trust it just the way they would take care of their own.

I would add to that, though, that there's another piece besides what do you have to protect, but it's also what do you want to get and it's not just capacity.

The people we pick have some knowledge that's different than our knowledge.

And our expectation is the combination of their knowledge and our knowledge is going to teach us how to do that particular product line with the small size, small bag size products more efficiently than the way we do them today.

And so our hope is that by the time this operation is fully going, that we'll be better than where we were before.

Not just another place to make Freshpet, but a better way to make Freshpet, and that would probably inform us as we look at Ennis Phase 1 or Phase 2 about what we might want to do differently there.

And then just last question, I apologize if I missed it, but as part of the $1 billion target, where is international figured in that?

I mean I think you said it was 4% of sales today.

And is 10% too high?

Do you need -- at what point do you need a facility over in Europe?

So we've assumed in developing to the $1 billion that it was proportional to the business as the business grew, it didn't expand in its opportunity.

The opportunity is clearly there and Cathal is sitting over there.

And so I have to be careful because my expectations for him are higher than what I'm going to tell you.

But the reality is that we think there's a huge opportunity to take the model that we perfected in the U.S., apply it to the U.K. and grow much, much more rapidly and then prospecting on the Continent.

But we didn't want to build our forecasts on that basis.

So our forecasts are almost entirely based on a U.S.-based dog food business.

Now if you also -- if you think about where we are, we will be making investments going forward in order to enable that.

We have to do it in a prudent manner, kind of lay it in as you get learning and say it's worth going to the next step.

And we won't do that unless we see the size of the prize being fairly big, but that's sort of the way we're thinking about it.

Just 2 questions related to, I guess, the gross to net on revenues and gross margins.

One is, I think, if I heard it right, there's no -- you're not really expecting to be promoting going forward.

And so I guess as you think about the life cycle of the product and household penetration, why would that not be the case, that at some point price becomes a barrier to get into households, and we've seen it with some of these other categories that you mentioned at the beginning.

So that's the first question, and then I have a follow-up.

Yes.

So it's -- I think what we've demonstrated is we can be highly successful with the model today and continue to grow very, very aggressively with the model the way it is.

There's always going to be a group of consumers.

If you have a group of consumers that are not -- is not saying that your pricing is too high, you're probably priced too low, in all honesty.

We've done it where we've tried to make it as widely accessible to as many people.

We think that when you do pricing, what you do is -- and I've studied this in many, many packaged goods businesses.

You typically lower the loyalty over time, and I think it's disruptive to especially a fresh business model.

We think that there's a long runway in front of us, the way we operate.

And there's always going to be people that are asking for a lower price.

The reality is, there's a great value here, and there's an incredible consumer market opportunity in front of us.

So I think we need to kind of stick with that model.

I would also just add to that, which is that the opportunity for pricing is to move somebody from a comparable good over to your good.

And that makes a lot of sense if you're all just selling bags of kibble or cans of dog food, but there's nobody who's selling something like ours.

So the ease of switching from 1 to another is not very great.

So I don't know -- it doesn't make a lot of sense for us to discount to pull people over and only in essence, pull them over on the basis of price.

We'd rather track them based on the proposition because once they get there, the hesitancy to change your dog food is really high.

You just don't want to have digestive upset.

So once we get them, we want to hold them, but we don't want price to be the thing that holds them.

The second question is just the leverage on the coolers.

And I think if I understood Heather's [bill] as the volume -- as the coolers get bigger and there's more volume going through the coolers, the cost to serve essentially comes down.

I guess my question related to that is, what we've seen in like the soft drink industry as Coke and Pepsi is focused more on adding coolers and the complexity of the coolers have changed.

There's more variety, more products, different velocity products.

They've actually had to go back and add resource.

So smaller route size, actually more feet on the street servicing those coolers.

So I'm trying to understand, if it becomes more complex, why wouldn't you need to have more resources there to take those coolers...

Well, let me just make sure because there's a -- having been [Audio Gap] the business.

Part of theirs is not [servicing] the coolers, but it's supplying them and whatnot, and they have a lot of infrastructure that's built around that.

We ship through a warehouse system into the fridges.

So we're only talking about the maintenance costs of the fridges.

And the maintenance cost that we apply to the fridges is through a third party.

And so the more we can get density, in essence route density around those fridges, the more efficient it gets.

So if they show up at a store and there's 2 fridges, 1 that had an issue, and second one that needs preventive maintenance, they can do that on the same stop.

AS opposed to in a less concentrated market, where they go to this store, and the next one is 10 miles away or there's not a second fridge in the store, it gets to be a much, much more expensive service operation.

So it's a little bit of a different model than what you see in the beverage business.

So 1 other thing that I think may be helpful and interesting.

We actually have had the reverse.

So we actually -- we had all different-sized coolers height-wise, we had all different scenarios.

We tried out -- anybody who had a cooler, we tried out their models.

And the reality is we still have a lot of those.

Over time, we're consolidating down, and we're actually trying to get down to 2 manufacturers for the most part and a simplified offering of fridges in almost every aspect.

Because I don't necessarily want to be Southwest Airlines, but there's definitely a model there from an efficiency standpoint in every aspect of how we run our business, how we think about it, planogram it, [hold] parts, service, et cetera.

Brian over there and then we'll come back over here.

Quick question, excuse me, about the sales per household, the buy rate that you have built in going forward.

Studying similar adoption models, you see that the early adopters or the earliest adopters seem to be the most loyal.

You have a pretty marked ramp.

I'm just curious what the construct of your buy rate looks like?

How much of that is comprised off of just continuing loyalty or building loyalty, whatever you're seeing with each subsequent wave of adopters?

Or is it more large dog in the mix and your plan to attack those opportunities?

So what we've done is we've looked at historical groups of consumers, how they've come in and how they've grown.

We understand in each year what the kind of number of consumers that we have coming into the franchise.

And the reality is, as we grow further and further out, there's a larger and larger pool of consumers that are sticking with us and that are got buying more and more of our products.

We also see people kind of graduating from some lower-priced items to actually not only more in total, but actually higher-priced items, an additional kind of products with different features and benefits, addition of treats it might be, et cetera.

So overall, we're looking at that buying rate historically, and kind of it going forward consistently increasing at a fairly set rate, is how we've thought about it.

We've also -- when we've looked at it, the consumers that look to come in, in the future, actually have many aspects that are -- demonstrate high loyalty and actually higher buying rate.

You mentioned large dogs, will definitely be a component of it.

If you have 2 golden retrievers and 2 chihuahuas, think of the amount of the consumption, even if those people on the golden retriever end are mixers, we're still going to get more dollars for that household over time.

So there are several different factors we tried to look at and kind of -- and anticipate and model going forward.

Part of the work that we did too, is you would think about, Brian, if we have to grow from where our guidance is for 2020 to 2025, you have to grow 27% kind of CAGR to get there.

You're going to get some part of it on penetration, some part of it is going to be based on the buying rate.

And as we've shown over the last 2 years, the more rapidly you have that penetration go up, it causes the buying rate to go flat.

But when we had periods where we were flat or on the -- or not as aggressive growth on the penetration, we saw the buying rate going up in 10%, 11% range.

And so the simplest way, and it's not exactly mathematically right.

But the simplest way is the sum of the 2 growth rates has got to get you to 27%.

Right now, we're running at a growth rate on the core dog business, which is an increasing share of our business, over 90% of our business is running at 30%.

So you can actually have a negative buying rate between now and then if you continue to grow the household penetration at that rate, negative increases in the buying rate over time and still get to the $1 billion number.

Yes.

John.

Could you talk a little bit about your in-store merchandising conditions?

I'm curious how the technology you described earlier, going into the fridges could help reduce out of stocks?

What your expectations are in terms of timing and kind of the benefit that that can provide?

So those are going into test right now.

It's a scalable technology.

We've worked with the people that really kind of invented this and help -- are helping them to really kind of scale this out.

I think we're adding, like, I think with many of our partners, I think we're adding kind of new ways for them to think about how to utilize it.

We don't know the exact improvements.

But I think that it's fair to say that if we know that there is a fridge with consistent issues because we're seeing that -- those pictures, we can really kind of focus our efforts.

Where today it's a very, very kind of difficult model out there to understand what's going on, and we'll actually have the potential to have better visibility of what's going on in that fridge then the retailer will in that store, because we'll have kind of eyes -- kind of we're calling it the Eagle Eye project.

We'll literally be able to have eyes on that fridge every single night if we want to look at what it is.

So we'll take that -- those pictures and we'll actually deploy specific people, and I used the term, like Uber, right?

So basically, supply and demand.

So we'll send the resources or the people that can help fix retail to that specific store, and hopefully remedy the core problem that's causing those out of stocks over time.

Also the other thing that's very interesting is, as you continue to increase the dollars per store, which we have every single year for the past probably 10 years, the dollars per store.

When you all of a sudden have a store that's doing $500, $700, or $1,000 it allows you to think very differently about the resources you'd apply to a store doing $1,000 a week versus a store doing $150 a week.

And think about -- if you did a small improvement in a store doing $1,000 a week, it's pretty interesting how those resources pay back quite quickly.

So that's kind of, as we gain scale and as we have increasing sales through those fridges, it really changes our thinking on how we kind of service those fridges and think about them.

One quick one.

It kind of comes back to -- we talked about it a couple of times already.

But if you look at the consumption growth over the past several quarters, been -- the absolute growth has been terrific and the level has been consistent as well.

But the mix, velocity versus maybe ACV or distribution growth has changed with more moderating velocity growth and an increase in ACV.

Could you talk a little bit more about what's driving that?

And would you expect that to change going forward as some of the newer stores that you've acquired, newer households mature into the brand?

First of all, I want to make sure we have the definitions right.

The number that we share in the charts that you're referring to is not a pure velocity measure.

It is a velocity measure in the sense that it's [dot] $1 million per $1 million ACV but that's not the same as same-store sales, which is what most people are thinking about.

If you're a retailer who is selling Freshpet today and you're looking at your same-store sales growth, you're still seeing very, very healthy numbers on a same-store sales basis.

But when we add a lot of new distribution late in the period and you divide the net sales across that new distribution, the millions of dollars per million ACV drops.

So you don't have the same rate of growth.

But if you're 1 of the retailers looking at us today, you're not worried about your same-store sales, you're feeling pretty good about the same-store sales.

We're going to see peaks and valleys along that.

The fourth quarter of 2019 was a blockbuster for us on new distribution.

And it's not just the quantity that went in.

It's frankly also the fact that retailers did it in the fourth quarter.

In the fourth quarter, they usually don't want to touch their stores at all.

So the fact that they went in and did it says that they saw a big opportunity.

What we modeled for 2020 was much more in line with our historical performance.

We could be surprised, somebody could come and say, I really want to go all in now and there are some places where that could happen.

But we've modeled a much more traditional level.

And if we had that traditional level going forward, you'd expect to see us having the reported $1 million per $1 million ACV that looks like it looked like at the end of '18 and the beginning of '19.

Okay.

The quality of the ACV we added has been...

Phenomenal.

Very, very strong.

Over time, we don't expect -- I mean we know ACV is going to increase.

But this is truly a consumer penetration-based model.

That's really kind of the focus on how we're thinking about it and how we're building it out over time.

Will we continue to pick up ACV?

Yes.

The more important factor, actually, over time, will be kind of the, with idea of visibility.

So it's not just a -- I have a fridge in a store, it's what type of fridge?

Is it a bigger fridge?

Or is it a second fridge?

And those will be kind of significant contributing factors over time too.

We have a question over here.

I was curious as ownership of small dogs has grown faster within like the pet category.

Has that benefited FreshDirect (sic) [Freshpet]?

And if so how much -- can you quantify how much of your growth has benefited and what you see is the trend going forward?

So I do think that that trend, if you think about the relationship with a small dog and a larger dog, it is a slightly different relationship.

And as I know we talked about dogs in general today, but there is a little bit more of a doting behavior in small dogs.

The trend we see over time is there will be more and more smaller dogs.

When I say -- I'm not talking about tiny, tiny dogs, but overall smaller dogs and less really large dogs.

That's another potential wind behind our back over time.

I talked about pet population in general, but that's another kind of benefit that we can see over time.

I don't think we can specifically attribute the growth that we've gained to the exact change in the pet population.

But we do know that that is helpful to us over time.

And I have another question.

Could you share with us what your share of voice is in the media, your media spend within...

I have not looked at that lately, and we're very, very proud of our advertising levels of $24 million, $27 million, $30 million a year, but it is a tiny, we are a tiny, tiny amount of what's going on in the category.

There's almost a $1 billion is a number I've often heard in pet food advertising over the course of the year.

So we have a very, very small share of voice.

But the thing I think that's important is the dollars that we spent have been able to be incredibly productive and predictable over time.

And we know with the exact -- I've mentioned the CAC costs, the consumer acquisition costs.

We know exactly what we get for the media spend.

And I think John tried to illustrate a slide.

We're not thinking about media today and just playing it forward.

We're testing things 12 to 18 months out to put us in a position where we know that the performance will maintain and stay very, very strong.

In addition, we're testing things well outside of media to make sure that if at any point, media does change dramatically, that there's other opportunities for us to continue to build our business and gain more and more consumers into the franchise.

Some initial testing has demonstrated that we've been able to take -- completely eliminate media and -- on like specific stores in a couple of markets, we've been able to grow share and dollars and get a great return off of some of these alternative tactics.

So it gives us comfort that if literally typical traditional TV does somewhat go away, that we have other means to gain consumers into the franchise.