FRPT - NASDAQ

Greetings, and welcome to the Freshpet Second Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rachel Ulsh, Vice President, Investor Relations for Freshpet. Thank you. You may begin.

Good morning, and welcome to Freshpet's Second Quarter 2025 Earnings Call and Webcast. On today's call are Billy Cyr, Chief Executive Officer; and Todd Cunfer, Chief Financial Officer. Nicki Baty, Chief Operating Officer, will also be available for Q&A. Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements related to our prospects and plans for growth, efficiencies of Ennis operations, timing and impact of new technology, capital spending, adequacy of capacity, expectations to be free cash flow positive in 2026 and our outlook for 2025 and long term. They involve risks and uncertainties that could cause actual results to differ materially from any forward-looking statements made today, including those associated with these statements and those discussed in our earnings press release and in our most recent filings with the SEC, including our 2024 annual report on Form 10-K, which are all available on our website. Please note that on today's call, management will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for how management defines such non-GAAP measures, why management believes such non- GAAP measures are useful, a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and limitations associated with such non-GAAP measures. Finally, the company has produced a presentation that contains many of the key metrics that will be discussed on this call. That presentation can be found on the company's investor website. Management's commentary will not specifically walk through the presentation on the call, rather is a summary of the results and guidance they will discuss today. With that, I'd like to turn the call over to Billy Cyr, Chief Executive Officer.

Thank you, Rachel, and good morning, everyone. The message I would like you to take away from today's call is that against the backdrop of subdued dog food category demand, Freshpet's growth continues to significantly outperform the category, and we are driving the operational improvements and capital efficiencies necessary to deliver our long-term margin and free cash flow targets even if the current economic constraints persist. Freshpet is a growth company, and we expect to continually deliver outsized growth. We are also a very nimble company, one that has a long track record of adapting to changing environments. Looking back over the past 6-plus months, it is now apparent that the dog food category has faced a sizable headwind for the first time in years. We have seen economic uncertainty resulting consumers hesitating to trade up their dog food, defer well visits to the vet, decline medical treatments for their pets and defer getting a new dog or replacing a recently deceased dog. Return to office mandates and the high cost of housing have not helped either. This has resulted in declining growth rates for most leading pet food brands, including the leading DTC brands. The effect has been most pronounced amongst dogs as opposed to cats as cats are typically lower maintenance and lower cost, making them a relatively attractive pet to have in times like these. The current environment has challenged our ability to grow at the same rates as the past several years. To adapt to that, we have modified our plans and put in place what we believe are the necessary drivers to reaccelerate our net sales growth, which I'll review in a few minutes, and we've seen some early encouraging signs. We're also increasing the intensity of our focus on the things that we can control so that no matter how long it takes for the economic climate to improve, we can still deliver strong financial results. We've made tremendous progress in our operations and are quite bullish about our long-term prospects for the potential margins, profits and cash generation of the business. Our focus on operating improvements has driven a healthy improvement in our adjusted gross margin. But more importantly, those efforts in combination with new technologies we have developed will enable us to significantly reduce our CapEx while still expanding our manufacturing capacity to meet our long-term demand. As a result, today, we are lowering our CapEx estimates for 2025 and 2026 by a total of at least $100 million. While the operational progress we've made has touched virtually every aspect of our operations, some of the most significant achievements are: one, Ennis has become our most profitable plant. This happened sooner than we had planned and is the result of strong leadership at that site and a testament to the vision and thoughtfulness that went into the design of that kitchen. It is evidence that we've been able to convert our operating experience into continual improvements that will ideally put us well ahead of any potential competitor in our mastery of fresh pet food manufacturing. Further, because Ennis is expected to provide more than 50% of our production volume within the next 2 years, its productivity advantages will have a greater and greater impact on the company's total profits over time. Second, development of new production technologies. We have previously indicated that we have created a new way to make our bag products and expect to start up our first new production scale line with that new technology in Q4 of this year. If it works as we expect it to, we believe it will deliver higher quality product at lower cost through increased yields and throughput. It is the potential to significantly narrow the gap between the margins we make on our rolls and on our bags, and this technology could potentially be the basis for new bag lines going forward. Additionally, we've recently developed a light version of the same technology that can deliver many, but not all of the same benefits and could be retrofitted to our existing lines at relatively low cost with minimal disruption. We plan to test the light version on one of our existing bag lines in the first half of 2026, and it could be reapplied to several of our other bag lines by the end of 2027, if successful. The pilot test runs of this technology indicate that it will work and would enable us to deliver more capacity per line from our already installed production base, and number three, ability to reduce capital spending by a combined total of at least $100 million in 2025, 2026. We've made exceptional progress at improving our throughputs, yields and operating effectiveness, and that is enabling us to get more output from the existing lines and staffing, leading to lower quality costs and improving margins. In combination with our new technologies, we now believe that we can defer at least $100 million in CapEx from 2025, 2026 and still meet the demand we expect to generate for the foreseeable future. This reduction in CapEx will have a direct impact on our cash flow and make the business much less capital intensive for the next few years. To be clear, some of this reduction is the result of slowing demand we've seen so far this year, but the remainder of the reduction is due to the improved operating efficiencies and new technologies we expect to implement over the next 2 years. We are very proud of our team for its ability to adapt to the current environment and still deliver such exceptionally strong performance, which provides the foundation for even greater financial and strategic advantages. We pioneered this category and fully intend to maintain our advantages as the category grows, matures and attracts new competition. With this strong footing, we are in a very good position to drive the growth of Freshpet. As you know, this has been a particularly challenging year on the top line, something that has typically not been an issue for us. Our media model has driven strong and predictable growth for a very long time, and the performance we saw earlier this year caused many to question it or if we had saturated our TAM. Our data suggests that neither is true, i.e., our media model is, in fact, still working, and we still have a large and untapped TAM. We are growing across all channels, income groups and generations. The sales growth is just not as robust as we would like it to be today. We believe our growth rate versus a year ago has now stabilized, and we are encouraged by some green shoots. However, given that we have not seen a greater increase in our year-over-year net sales growth yet, we believe it's prudent to adjust our net sales guidance for the year. Our updated guidance assumes the macroeconomic environment stays relatively the same and that we execute our plans, focusing on areas that are in our control. The 3 key areas we are most concentrated on are: first, marketing. We've updated advertising on air that better explains the difference that fresh food can make and plan to launch another media campaign later this month that we believe will help drive greater household penetration. We have also shifted marketing dollars to other channels like digital, social and connected TV, where we've been underdeveloped previously, and we can be more targeted with MVPs. Second, distribution expansion. We are working on greater visibility in value channels such as club and mass, expanding our small DTC business called Freshpet Custom Meals as well as several other opportunities. Digital orders, which we previously referred to as e-commerce, continue to have outsized growth and were up 40% in the second quarter. Digital now accounts for 13% of our sales. Our revised top line guidance also incorporates a much greater level of certainty on our expansion within the club channel, specifically. As of last week, we've expanded our test in a leading club retailer and are now in 125 stores, and we are optimistic we will be in more stores later this year. Other customers have also committed to adding second fridges and have expressed interest in testing some of the island fridges we previously shared sometime later this year or early next year. Third, value-focused products. We are launching a new complete nutrition bag product and rolling out new multipacks and bundles of rolls and bags, both online and in-store later this year. These will be available in select retailers. Now I'd like to briefly provide some highlights from the second quarter. Second quarter net sales were $264.7 million, up 12.5% year- over-year, primarily driven by volume growth. This was slightly lower than our expectations as shipment growth lagged consumption growth due to a small shift in orders from the end of June to early July. Adjusted gross margin in the second quarter was 46.9% compared to 45.9% in the prior year period. Adjusted EBITDA in the second quarter was $44.4 million, up approximately $9 million or 26% year-over-year. From a category perspective, we continue to be the #1 dog food brand in U.S. food with a 95% market share within the gently cooked fresh, frozen branded food dog segment in Nielsen brick-and-mortar customers, defined as xAOC plus pet. We compete in the $54 billion U.S. pet food category per Nielsen omnichannel data for the 52 weeks ended 6/28/25 and we have only a 3.6% market share within the $37 billion U.S. dog food and treat segment. From a retail standpoint, our products are now in 29,141 stores, 24% of which have multiple fridges in the U.S., and we expect that percentage to continue to grow as we focus on adding second and third fridges in the highest velocity stores. We ended the second quarter with 37,985 fridges or more than 2 million cubic feet of retail space with an average of 20.8 SKUs in distribution. Our percent ACV in grocery, where we're the dog food market leader, was 79% at quarter end and in xAOC, only 68%. Discussions with retail customers continue to be very positive as they recognize the growth in the category has been and we believe will continue to be led by Freshpet food. Household penetration as of June 29 was 14.4 million households, up 11% year-over-year, and total buy rate was $110, up 6% year-over-year. Our heaviest users, what we refer to as MVPs, are growing even faster and totaled 2.2 million of those households, up 18% year- over-year. MVPs represented 70% of our sales in the latest 12 months with an average buy rate of $501. Turning to capacity. As I mentioned earlier, we are expanding capacity to keep up with demand and are able to push out capital expenditures because of the progress we've made operationally. Our operating efficiencies, particularly in Ennis, are well ahead of our glide path, and that frees up significant capacity with no incremental capital. We currently have 15 lines across our manufacturing footprint with an additional bag line expected to commence production in the fourth quarter this year. As I said earlier, this new bag line will be the first time we are testing our new technology at scale, not just at a pilot plant level, but we are very encouraged by its potential. Now turning to our outlook. For fiscal year 2025, we now expect net sales growth of 13% to 16% year-over-year. We are reiterating our adjusted EBITDA guidance of $190 million to $210 million and now expect capital expenditures of approximately $175 million. Todd will walk through more details of our 2025 guidance in a few minutes. In regard to our long-term outlook, Today, we are removing the $1.8 billion net sales target and the related 20 million household target in fiscal year 2027. The sizable reduction in the category growth rate and new pet additions have made it increasingly difficult to maintain our previously projected rate of growth, so we believe it is prudent to remove those targets. To be clear, we do expect to grow at a rate well in excess of the category, thus increasing our market share. We have a large and growing TAM and believe it will provide many years of sustained growth. Additionally, our strong operating performance has given us increased confidence in our ability to deliver our 48% adjusted gross margin and 22% adjusted EBITDA margin targets in 2027, even without the benefits of the added scale as long as our sales volume growth remains at least in the teens. As a reminder, the new production technology was excluded from the long-term margin targets, which allows even more upside to margins if it works. In summary, we believe we have an incredible opportunity to improve the lives of pets everywhere through the power of fresh, natural food, and we've not lost sight of that mission. We are taking actions to adapt to the current macro environment and our scale advantages make us better positioned now than ever to address those challenges. We have a healthy balance sheet, solid operating performance, ample capacity, and we are a stronger organization than we were a few years ago. We've always been resilient and nimble, and our scale today gives us the flexibility to lean into certain areas such as marketing, new technology and innovation to develop solutions to consumer uncertainty today while also expanding our competitive moat. Now let me turn it over to Todd to walk through the details of the second quarter results and our updated guidance. Todd?

Thank you, Billy, and good morning, everyone. The second quarter results demonstrated strong operational effectiveness and profitability improvement, but were slightly below our expectations on sales. Now I'll give you some more color on our financials and updated guidance. Second quarter net sales were $264.7 million, up 12.5% year-over-year. Volume contributed 10.8% growth, and we had positive price/ mix of 1.7%, primarily driven by mix. We saw broad-based consumption growth across channels. For Nielsen-measured dollars, we saw 13% growth in xAOC, 13% in total U.S. Pet Retail Plus, 12% in U.S. Food and 6% growth in Pet specialty. Consumption growth in the quarter was approximately 14%. However, we saw a slight shift in timing of orders from the end of June to early July that impacted net sales growth by about 1 point. Second quarter adjusted gross margin was 46.9% compared to 45.9% in the prior year period. The 100 basis point increase was driven by lower input costs as a result of higher yields and leverage from our Ennis chicken processing facility and reduced quality costs, partially offset by reduced leverage on plant expenses. Second quarter adjusted SG&A was 30.1% of net sales compared to 31.0% in the prior year period. This decrease was primarily due to lower variable compensation accrual, partially offset by increased media as a percentage of net sales. We spent 15% of net sales on media in the quarter, up from 12.2% of net sales in the prior year period. Logistics costs were 5.7% of net sales in the quarter compared to 5.8% in the prior year period. Second quarter adjusted EBITDA was $44.4 million compared to $35.1 million in the prior year period. This improvement was primarily driven by higher gross profit, partially offset by higher adjusted SG&A expenses. Capital spending for the second quarter was $33.4 million, while operating cash flow was $33.9 million, and we had cash on hand of $243.7 million at the end of the quarter. We are confident in our ability to be free cash flow positive in 2026 and intend to utilize our balance sheet to support our growth going forward. Now turning to guidance for 2025. As Billy said earlier, we now expect net sales growth of 13% to 16% compared to our previous guidance of 15% to 18% growth year-over-year. We are assuming the macro environment and consumer uncertainty stays relatively the same and have adapted our strategy to reaccelerate growth. In terms of cadence, we expect a sequential increase in net sales per quarter. We invested more heavily in media in the second quarter to drive household penetration growth in the second half. We will be launching a new marketing campaign later this month, adding more value-oriented offerings in the fall and expect to increase distribution throughout the remainder of the year, including our expanded test in the club channel. We continue to expect adjusted EBITDA in the range of $190 million to $210 million. For cadence, we expect adjusted EBITDA to be back half weighted with sequential adjusted EBITDA dollar and margin improvement throughout the rest of the year. Media as a percent of sales is expected to be greater than 2024. However, we are monitoring the spend closely and we will pull back if we are not seeing the returns. We still anticipate modest adjusted gross margin expansion year-over-year driven by operational improvements and do not anticipate any material inflation or pricing actions. In regards to tariffs, we are currently seeing a small impact on vegetables sourced from Europe and spare parts and mitigating them where we can. Capital expenditures are now projected to be approximately $175 million this year compared to our guidance last quarter of approximately $225 million and original estimate of $250 million. Some impact from tariffs, particularly on the cost of steel for new construction and new equipment is included in the updated CapEx projection. The majority of our CapEx spend is focused on the installation of new capacity to support demand in the out years, but we are seeing greater capital efficiencies that are allowing us to reduce our spend both this year and next year. We anticipate 2026 CapEx will be the same or less than what we are spending in fiscal year '25, which gives us even more confidence in our ability to be free cash flow positive in 2026. Based on today's guidance for 2025, it is evident that our ability to hit our 2027 net sales target is unlikely, so we believe it's prudent to formally remove the $1.8 billion target. We believe we will have industry-leading growth. And if we are able to maintain net sales growth in the teens on an annualized basis, we are confident in our ability to manage costs, operate effectively and still achieve our long-term margin targets of 48% adjusted gross margin and 22% adjusted EBITDA margin. In summary, while this year is not where we plan from a top line perspective, we are aggressively managing costs and are very pleased with our performance on the bottom line. By focusing on the areas of the business we can control, we are seeing operational efficiencies continuing to drive margin expansion and reduce capital requirements as we further build capacity. We are also further strengthening our competitive position via new, more efficient production technologies, expanded distribution and operating expertise that is delivering greater consumer experiences at lower operating costs. We are building a stronger, more profitable business and believe we have a significant runway for growth. That concludes our overview. We will now be glad to answer your questions. And as a reminder, we ask that you please focus your questions on the quarter, guidance and the company's operations. Operator?

[Operator Instructions] Our first question comes from the line of Peter Benedict with Baird.

So curious on the path to 22% in 2027. It sounds like from a top line perspective, you kind of preempted that question, which is, I guess, it's a 13% to 16% that you're going to do this year in top line growth. If you do that, that's still sufficient to support 22%. My question is, are there -- can you help us with maybe the SG&A buckets like what underlies that 22% within your OpEx? And is there any kind of a timing step-up maybe with the new technologies that would make the path there maybe heavier in '27 versus '26, just conceptually, not looking for specific guidance, but that's my question.

Sure. As we've talked about, as long as we're in kind of the mid-teens growth over the next couple of years, we feel very good about the 48% and the 22%. The 48%, look, we're going to be close to 47% this year. So we probably have a little -- some of these technologies kick in the way we think they're going to kick in over the next 2 years. There's likely some upside to that 48%, number one. Number two is that sales growth in the teens will allow us to get significant G&A leverage. So we feel terrific about that. We probably have a little bit more to go on logistics. And then media will probably kind of stick with sales over the next couple of years. We'll see how it plays out. There could be a little upside in margin on media, but it's probably going to likely grow with sales. But I think the big upside is leverage both up in gross margin and leverage in G&A is how we feel we can get to 22% with confidence.

Peter, I just want to amplify two points in there. One is the operating performance we're having is so strong, it's what is driving that confidence in the 48%. The second piece is, as we said in the prepared remarks, the benefits from the new production technology are not factored into that target, and that's the basis for Todd's confidence in our ability to exceed the 48% if those technologies work out.

Our next question comes from the line of Brian Holland with D.A. Davidson.

So maybe just a clarifying point here. Is the expectation that you removed the net sales target, but you're sticking with the gross margin and EBITDA margin targets is predicated on, it sounds like, I guess, low to mid-teen growth. So is that generally where you're directionally guiding the market towards or how you expect to be judged through this cycle through '27?

Yes. I mean, not specifically. What we're saying is to hit the 22% EBITDA margin probably requires us to be in that range that you just described. If we would slow down to 10% or lower, getting that 22% would be very challenging just because of the lack of G&A leverage. So look, are we confident that we can be in that kind of range over the next few years? Look, we think we can be in double- digit growth. The question is, just with the uncertainty right now, are we going to be closer to 10%? Are we going to be closer to 20%. So we're not giving specific guidance over the next few years. We'll probably come back at some point in time and do that, but the assumption is if we can hit that low to mid-teens number, the 22% is very achievable.

Okay. And then maybe just kind of asking about the dynamics between household penetration and buy rate. I think the implied media per household looks not quite as bad as feared, but the buy rate did slow a bit, so it seems like you are acknowledging some pressures with trying to attract new households and that seems to be weighing on the trend in household penetration. But on buy rate, I guess I would have assumed that the buy rate would be better if the household penetration was slowing at the rate. So maybe just comment on what exactly you're seeing there? I mean, is this a byproduct of the more vulnerable consumer within your household penetration that may be switching with elevated promotion in the category. What are you seeing that's weighing on the buy rate right now?

So first of all, the buy rate is right now, for the reason you cited, is running above -- the growth rate is a little bit above what our long- term sustaining growth rate is on the buy rate, in part because of the growth in household penetration is not what it used to be. So mathematically, it works out that way. Clearly, there is an impact of consumers not being willing to trade up as much as they have in the past. And that implies not just moving from their dry dog food to a product like Freshpet, but also it implies moving within our platform from more of the lower-cost items in our lineup to the higher cost items. Now when we say that, I just want to be clear, there's a lot of different consumers and a lot of different behavior out there. One of our fastest-growing parts of our lineup right now is our home style creations, which is our most expensive product in our lineup, and so there are some really nice green shoots that we're seeing when you find consumers who are looking to make a change or trade up in their products. It's just how many of them are they're out there.

Our next question comes from the line of Bill Chappell with Truist Securities.

Just a question or a thought on this household penetration now is 11%, and I don't know if the current environment changes your thought of where that can be in terms of -- I understand you saying consumers aren't trading up like they used to be, but is there a point of maybe we're starting to cap out the number of consumers that will buy the high end or super high-end, super-premium dog food. So I'm just trying to understand, does that change your thought? Do you think there's anything else going on with the slowdown? Household penetration seems to be kind of the key metric and just didn't know if you -- if it changed your ceiling outlook for it.

Well, this is Nicki. Our household penetration, we've done a lot of work recently on what we believe our TAM, our total addressable market can be for the future, and within that, we've also looked at where our brand positioning is and how strong we believe our proposition is to grow into that TAM. So when we take a step back and look at it, we've got around 14 million, 14.5 million households at the moment. We still believe we've got tremendous runway to around the mid-30s total addressable market goal, and then within that, we've done a lot of work on these MVPs, these most valuable pet parents that we're really going after, and we're still very nascent, I would say, in our journey to grabbing those consumers that are very interested in our brand. So we've got some goals out there whereby we believe over time, we can go from just over 2 million MVPs to around 7 million MVPs that have a very high level of interest in a fresh, less processed healthy, strong premium brand proposition. I think the other point maybe to build on is our MVPs are actually already in the category. So the other piece of work we've also looked at is within those MVPs, we've actually got 90% that are already in the category today. So by going after more MVPs, we become a little bit less dependent on that category growth rate for the future.

I appreciate the color, and then, Todd, one question on the variable comp commentary, was it just a lower accrual this quarter and I'm assuming for the remainder of the year? Or was there a reversal? Just trying to understand, did that have where things came versus kind of your internal expectations?

Yes. No reversal. We are -- we had a super strong year last year and obviously had a very high incentive comp payout. We are trending lower this year. So it's just a year-over-year delta, no reversal.

Our next question comes from the line of Steve Powers with Deutsche Bank.

I was hoping you could just go maybe a little bit deeper on back half plans to drive demand and what will be different from what we've seen year-to-date. I guess within that, maybe drill a little bit into how big a role the push on value will play? And then also any thoughts around competition, both indirect and direct. I think Blue Buffalo's upcoming launch is top of mind for many investors. So to the extent that, that's impacted your plans, that would be helpful to understand as well.

Yes. Thanks, Steve. I'll start and then Nicki will fill in some more thoughts. But first of all, as we think about the back half, the big drivers are going to be the drivers that we've historically leaned on pretty heavily, which is advertising, but with a different message. We actually have a different message on air today, and we have a new campaign coming, and Nicki can give you a little bit more color on what that's all about. The second is expanded distribution. You heard in the prepared remarks, we've expanded significantly the club store test that we've been describing in the past. We're now in 125 of those stores, and we feel good about what's coming behind that. So that's factored into our expectations for the balance of the year. The third part is the product innovation that we described last quarter. The complete nutrition product that is a bag version of the roll we launched a year ago. That is not yet in any of our numbers. It's going to show up in roughly September, October. So it's not going to have a big impact this year, and we don't expect to have a big impact overall. It's really a driver of household penetration. It's an easier way to enter the franchise, and that's scheduled to roll out in September, October, but it's not a big contributor to the actual net sales this year. The bigger pieces will be the advertising and the retail availability expansions. I don't know, Nicki, do you want to add to that?

Great. Steve, the bit of color I would bring is that we've just got testing results back for the new creative campaign, and we feel really good about where that's coming in at the moment. You will see us start to tell the next layer of the Freshpet story, much more going after our health credentials, and we think we're right on trend at the moment. It's definitely with less processed food being a key focus for humans, and we feel that this is really a rich space for us, especially in kind of more of a clean label environment, too. So I think you'll see that coming through the back end of the year. The other part I would say on retail capability is retail engagement is extremely strong. We're already ahead of our targets, in terms of both new store, new fridges and also multiples when we look at this stage in the year with commitments that are strong for the back end of the year, and then in terms of that product innovation, Billy obviously mentioned the new value entry-level bag, but we also will push heavier into multipack and also what we call virtual bundles, which will offer that a little bit of a discount and a saving, especially for those heavier consumers.

Okay. That's very helpful, and then, Nicki, just on the second half media efforts, is the focus there on continued MVP expansion? Or is the goal to widen the net, go broader and build the funnel for future MVP development? What's the value there?

Yes, that's a great question, Steve. So I think that we will still -- from a media standpoint, we will -- at a very early stage still with the brand development and a big headroom for brand awareness. So you will absolutely see us drive that brand awareness to the maximum number of households. So that will be really going after general dog population in the main, but what you will see coming as new from Freshpet is you will see a heavier upweight in areas like social, digital and other channels that will allow us more of a targeted approach to our story. So you're going to see a balance coming through. We've tested all of our new creative, both with MVPs, but also general dog population, and we feel good about where the results are coming out.

Our next question comes from the line of Robert Moskow with TD Cowen.

I was wondering if you could talk a little more about the nature of the new advertising. I thought I saw some things online already from Freshpet that seem to draw a big distinction between fresh dog food and kibble and saying that kibble is overly processed and fresh is therefore better. To what extent is that part of the messaging? And then like do you foresee any confusion with consumers? Because I think your competitor will be actively marketing fresh in conjunction with kibble, and I think a lot of your consumers already use it in conjunction with kibble. So maybe I'm in too much in the weeds, but how are you thinking about that balance?

Great. No, I think it's a really fair question as it stands. So look, I think that we've got a lot of MVPs that will absolutely be looking for mixing as a key behavior. So whether that is a kibble and fresh food, whether that's with wet food, mixing is very much part of the behavior. We want to make sure that there's a strong understanding of the health benefits that really come from feeding fresh, whether you choose to feed it as a mixer or whether you choose to feed it as a main meal, and I think for us, we've got a big runway and headroom to be able to grow in both mixer behavior and also main meal behavior and really drive also that buy rate and new household penetration. So you'll see -- you've seen a little bit coming through online, but you'll see some different creative and more -- and creative that will appeal to those different MVP subsets as we go through the back half of the year.

Our next question comes from the line of Michael Lavery with Piper Sandler.

I just wanted to come back to the competitive dynamics and maybe just understand how you think about the impact of something like Blue Buffalo's push. They've been clear they plan to do a good bit of spending themselves. Is it your expectation that, that can drive faster category growth that it would sort of leave you unchanged? Could it drive even better momentum for you? Do you think more competition splits the same pie as more conservative? Just how do you think about what that impact on your outlook is and how investors should be thinking about it?

Yes, Michael. We obviously think that this is the -- first, it's a proof point that this is a very attractive, high-growth, long-term potential category. We're attracting lots of people, not just the Blue Buffalo entry, but there are others who have decided to enter the space in various ways, and it's just validation that this is the future of pet food. The second piece is history will show that over time, category creators like us, if you execute well, tend to end up with the lion's share of the category that they've created, and -- but what also happens is when well-entrenched competitors in the space decide that they want to enter this segment and they do so with a lot of investment, it tends to drive this whole category size and everybody who's in that space wins. So we frankly think, just as we've said previously related to the Farmer's Dog, we think when the Farmer's Dog advertises, it helps us. It helps create this perception that there's a better way to feed your pet than just feeding with kibble and can, and we think that to the extent that General Mills spends a lot of time and money telling people that there is a better way to feed your pet, that's good. If they decide to use it as a topper message, that doesn't hurt. It helps create awareness for the category, creates validation for the category. In the end, though, the category or the segment that we're in, the fresh segment will get bigger, and then at the end of the day, we feel very good about the competitive position that we're in. We have significant scale, both at retail as well as in operations. We are able to deliver a broad product lineup. We have a very well- entrenched consumer base. So we feel very good about the position we're in, and frankly, we're looking forward to the benefit of the increased awareness in the category.

That's really helpful, and we've touched on the advertising a decent amount already, but one more follow-up on that is, can you just maybe give a sense of what insight drove the change? Or what was the starting point of looking for an evolution in the message? Or how did you decide to make a bit of a pivot there?

Yes, I'll take this one, Billy. So in terms of what we've learned really about the brand is we've done a terrific job with Freshpet in really establishing in our advertising, and I'm sure many of you have seen it for the last couple of years, that very strong bond that you have between yourself and your dog, and that comes through very powerfully. You are going to make no compromises in your life. You're going to take your dog on holiday with you. You're going to do everything and your dog is going to be the primary member of your household, but when we really take a little bit of a step back, we felt that we're now ready to tell that next stage in our Freshpet story, and there was a big opportunity from certainly a number of our MVPs asking questions around, hey, you are really healthy. The ingredients that you're using are absolutely fresh. They have some really strong health benefits, why are you're not talking more really about these areas. So for us, it's not an either/or. It really is sort of continuing, if you prioritize your dog as a favored member of your family, it's building out from that message and it's layering in those new health credentials, and this is why we feel good really about that new advertising direction. It will still have that Freshpet tone, that Freshpet humor that many have come to love and expect from us, but it's really going to start to bring in why we think we're special, why we think we're unique and why we think we are the best way to feed your dog.

Our next question comes from the line of Kaumil Gajrawala with Jefferies.

I guess a couple of questions on retail. First is last quarter, there was some issues with the distributor getting into pet specialty. Just curious where you are with that process, is it sort of all resolved now? And then on the expansion into club, I guess you went from test to 125 is incorporated in your guidance to go from 125 to full national? Or is it the sort of thing that it sort of keeps building from here and more of it happens in '26?

Kaumil, the pet specialty distributor issue has been worked out. It created a lot of disruption in Q1, but we pretty much got it all cleaned up by the end of Q1. There's still some pockets where they're not as effective as we had been previously, but there's other places where they're very, very strong. So on balance, we feel pretty good about what our situation is in the pet specialty distribution channel and didn't have any material impact on the quarter. In terms of the club piece, obviously, we're very encouraged by the progress there and the expansion to the 125 stores that we're in. Our guidance for the balance of the year assumes what we believe is the plan. Obviously, we won't communicate what our customer- specific plan is, but what we believe the plan is, is embedded in the guidance that we provided, but I would say that the results that we've seen so far in the stores that we're in and recognize that we've only been in -- we were in the first store back since April. The remainder of the stores has only been the last 2 or so weeks. So it's hard to get any long-term data on those stores, but the first store has done so well, it's made us very bullish and I frankly think our customers is pretty bullish as well, so that's embedded into our thinking in the guidance we've provided.

Got it. I guess that's why the guidance also is for sequential improvement. On EBITDA, I guess you've lowered your top line sort of a few times over the course of the year. EBITDA has stayed the same, is it -- was that always sort of going to be the plan that this efficiency was here and you just weren't sure if it was going to come through or at what rate it would come through that if sales was higher, there'd be more leverage? Or was there an extra push? Did you find something new that helped maintain that EBITDA level even though the sales figure will be a little bit lower?

Look, we are optimistic from a margin perspective this year, but the plants are just over kind of delivering even our optimistic expectations. As we mentioned in the call, Ennis has now gone from being our least profitable facility to our most profitable facility in the first half. We never dreamed that would happen so quickly. So we're thrilled about the progress there. The quality costs 2% in the quarter are much lower than even our most optimistic assumptions. So the things are just -- we're operating really, really well. It's a shame actually, we don't have more volume going through the plants right now because we'd be delivering even more superior gross margin and EBITDA dollars, but the operations is the really positive side of the story this year, and once we get the top line hum a little bit more, you'll see more drop to the bottom line.

Our next question comes from the line of Rupesh Parikh with Oppenheimer & Company.

I guess just going back to the consumer, just curious what you're seeing within different income brackets, and as you look at your portfolio, are you seeing any shifts within your portfolio?

In terms of what we're seeing really across income groups, I think as Billy sort of highlighted first half, we're still growing across all income groups, and we're also growing across all demographics as well and all channels within that. So I think we're feeling good overall that the Freshpet proposition is working for all. In terms of where we are seeing higher returns, certainly within MVPs, it's really coming through that higher income bracket. So we are a little bit disproportionate with MVPs into higher income overall, which is, again, probably what you would expect to see in the current consumer environment, too, and then when we sort of take a little bit of a step back and we think about where things are going a bit more in the future, I think as we start to increase the growth rate of MVPs coming through, I do think that we will start to see a little bit more of a trend into higher income, and I think that we will see an expansion in particular within millennials and Gen X, which is already where we are strong. And then within the portfolio, as Billy mentioned, Homestyle Creations is performing extraordinarily well at the moment. We've also launched new innovation earlier this year in the Homestyle Creations Chicken Bites, which has far exceeded our expectations. So we see this part of the portfolio being a big opportunity for future innovation over the coming years as well.

Our next question comes from the line of Peter Galbo with Bank of America.

Todd, maybe just two kind of cleanups. One, I think you said it was about 1 point of shipments that shifted from Q2 to Q3. So we should see that point obviously come back or outpace scanner, I guess, in the upcoming quarter? And then the second one, just to clarify, the CapEx, the $100 million that's kind of lower over the next couple of years, I know you said a part of it was lower demand versus the efficiency, but maybe you could just split out kind of how much of it is the demand needs versus what you've actually done better.

Yes. So on your first part, Peter, total consumption was actually with measured and unmeasured was about 14% for the quarter, and obviously, with 12.5% net sales growth, we did shift behind consumption. We saw that shift, that $3 million to $4 million go out of June into July. So we had a very -- we had a nice July performance from net sales growth. So we felt very confident that, that shift did occur. We've seen it come through in the July results. So that's very positive. The quarter probably just the POS tends -- it's stable, which is great, but it's not increasing, and we're a little frustrated it's not popping up a little bit sooner. So net sales growth is probably going to be similar or slightly above kind of what we just put up for Q2. Regarding your CapEx question, it's difficult to say exactly how much of that $100 million was growth versus the efficiency. The big push out -- the big savings in that $100 million over the next couple of years is the delay in Phase 3 of Ennis, which is a big ticket item. So obviously, some of it is the slowdown in growth, but when you look about -- look at the OEE efficiencies that we've made over the last year, they are substantial. When you look at the ability in the new technology, both the new line that we're having in Bethlehem, which we're very confident about, plus the light version that we mentioned that we can put on several lines, and we've run tests on that, we're very confident that, that will add incremental capacity, and there's other things that we can do within our four walls that will increase capacity. There's different other areas that we're focused on, which are going to drive incremental capacity with very little to no capital expenditures. So when you look -- we're looking right now with the capacity that we have installed, not staffed, but installed, we have about $1.5 billion worth of capacity. So that gives us tremendous confidence that we can lower the amount of CapEx over the next couple of years, and again, the big push is Phase 3 and Ennis, we can delay. Again, some of that's clearly to slow down the business, but we would not be able to delay that capital if we didn't have the efficiency gains that we're seeing right now. As I mentioned earlier, Ennis has just made a huge turnaround, and the improvement in yields, the improvement in OEE, that team is just working really, really well together, and that gives us confidence to push capital out. So that's the big driver.

Yes. Peter, I just want to amplify, it's a little bit wonky, but we are really fixated on yields and throughputs in our manufacturing operations, and both the new technologies that we're working on and the existing OEE efforts, the overall equipment effectiveness efforts are focused on driving those, and the results that we've seen have been really remarkable. I'd say we're about a year ahead where we thought we'd be on the OEE and the technologies are icing on the cake on top of that, and those things are just -- it's basically free money for us is you get more production per hour of labor and you get more output per dollar of ingredients you put in at the beginning. It's pretty darn remarkable return for us, and so we're going to continue to invest in those kinds of programs, and it reduces the CapEx at the end of the day, and that's a really big win for us.

Our next question comes from the line of Jim Salera with Stephens Inc.

Bill, I wanted to dig into something that you said at the beginning of your prepared remarks, which is just in addition to kind of the overall economic noise, you're seeing a little bit of drag on from return to office and housing costs increasing, and those seem like trends that are probably a little bit more durable than the economic waxing and waning. So just any comments on -- do we see maybe a peak number of dogs per household post-COVID. Do you have any sense for kind of where that might progress moving forward? And maybe just the overall number of dogs per household is kind of in a slower growth trajectory? And just how do you think about that presents any kind of persistent challenges moving forward?

As you can imagine, Jim, we spent a lot of time looking at this. There's been a theory out there that there was a huge pull forward on dog adoptions in the pandemic, and we're just eating back into that pull forward, and there's legitimacy to that argument. But I'd also say that I think we're now 5 years into that period, and I think we're pretty much at the end of that tail. There's another dynamic, and you referenced to the housing piece and the return to office. It's -- that has a generational element to it as well. One of the things that we are seeing in the data is you'd naturally expect that the high-income baby boomers who are now later in life have a dog that might pass away, and they're less likely to replace that dog because they want to spend time with their grandkids, they want to go on a cruise or whatever and dogs limit their abilities to do that, and that's a natural pattern. It's happened forever, but what's often -- what's usually been there to counteract and replace it is the younger generations would be in that household formation stage where they would be getting a pet, and that's the part that's not happening. It's not happening at the rate that it should because people are now worried, I have to leave the dog at home, my landlord won't let me get a dog. I can't afford a house. So those pieces are there and they're present and they're impacting the ability of the younger generations to get the pet that they would get. It's not a huge part of our volume dynamic, but it is a piece of the puzzle, but those markets, as you point out, are very cyclical and that over time, you'd expect that those things would return to a more normalized growth rate because the reality is the desire to get a dog doesn't change. People still have the desire to get it and they will get it, get the dog at some point. It just may not be this year or next year. Our focus is on the things that we can control, and what we can control is we have the most compelling advertising message, which is what Nicki described, getting really focused on the benefits of fresh, getting the right availability, the right product assortment, right innovation and delivering the products at the right cost, and as long as we do that, we feel very good that, as Todd said, we'll outperform the category. We will outperform the category by quite a bit, and this will become a very big segment of the market. We just can't change the housing market and the return to work policies. Those things will take time and will naturally occur, but when those things return to a more normalized path, we'll be there and we'll be winning.

Great, and then maybe just pulling on that thread a little bit more. You also mentioned some of those dynamics maybe favor cat ownership versus dog ownership in some scenarios. I know cat food is a much smaller piece of your business. Is there any potential we could see on the innovation side, maybe some more pivot towards expanding the cat offering? And if you can just offer any thoughts, I don't know if that would require any substantial change to equipment or how you run the lines or anything? Just some thoughts there would be helpful.

Yes. I mean, Jim, we obviously are very interested in the cat food market because as you point out, it is growing. It's right now, while the dog food market is down in the, call it, low single digits, the cat food market is up in mid-single digits, and it's for the reasons that we cited and you reiterated in your comment. We do have a small cat food business. We'd like to have a bigger cat food business. It's going to take some time, cats have a very different way of eating than dogs. Dogs have big jaws, they like to chew. Cats tend to eat with their tongue, they lap food, and so it has very different requirements. There are very different requirements for the product on a cat food, and you also have to have fridges in the right places and you have the right messaging. We're working on it. We have an interest in that area, but it's not something that's going to happen this year.

Our next question comes from the line of Marc Torrente with Wells Fargo.

I guess just building on the last reply, maybe more philosophically, how are you prioritizing top line growth at this point? Are current trends leading you to accelerate other potential opportunities that have been discussed in the past such as new channels, international or adjacent categories? Or are you comfortable letting the business grow at current rates and continuing to pace or scale up?

Yes. I would start with our -- we're clearly focused on the U.S.-based dog food business as our #1 priority. First, because it's where we have the greatest strength and secondly, because we think the opportunity there is still enormous. We're still a very small share of a very large pie. It doesn't mean that we aren't looking at and continuing to do some development work in cat food, as I just mentioned. Our business in Canada is one of those that we've been looking at, our U.K. business, we're trying to figure out exactly what the right investment profile is for each of those areas, but we are a U.S.-based dog food business, and that's where you're going to see the bulk of our investment going forward. In terms of managing the top line, we're going to invest when we get good returns. And when we don't get great returns, we won't invest. We're in a very good position from a margins perspective, from a cash generation perspective, from a capacity perspective, organizational capability. So we have lots of choices, frankly, a lot more choices than we had a few years ago. We just need to be judicious about it. We don't want to chase growth at all costs, but we are a growth company, and we need to deliver growth, and so we're going to do that.

I would say the opportunity in the digital world is enormous. We're growing very nicely around 40%. It's only about 13% of our net sales today for the category, it's probably around the mid-30s. I'll let Nicki talk about some of the things we're doing and the team that she is building, but there's an enormous opportunity on the digital side.

Thanks, Scott. I think that that's one of the -- if I had to say, three focus areas that I would have as I start to look at kind of where our biggest growth opportunities are, e-com in particular, and then building out digital from a marketing standpoint is, I think, very significant overall for us with 35% of the pet category going through online. We have an incredibly low share in this space, and it's something that we are looking at where our partnership is and then also looking at how we can leverage. We've got 28,000 fridge network, which are like micro fulfillment centers really across the U.S., and we're seeing some very good returns with last-mile delivery partners like Instacart and others as well as a very strong growth with our Click and Collect business. So expect to see more from us in this space as well as we start to go through next year.

Ladies and gentlemen, that concludes our time for questions. I'll turn the floor back to Mr. Cyr for any final comments.

Great. Thank you, everyone, and thank you for your interest. I want to end with a thought for you. This is a quote, is from an unknown source, quote is, "If your dog is fat, you're not getting enough exercise," to which I would add, a Freshpet meal will get any dog off the couch and give them the energy to help you work off unwanted pounds. Thank you very much for your interest.