Net sales

Freshpet battles ‘turbulent times’ with net sales and capacity growth

SECAUCUS, NJ. – Freshpet, Inc.’s double-digit revenue growth partially offset a significantly higher net loss and lower adjusted EBIDTA in the second quarter of fiscal 2022, as reported by the company on Aug. 8. The company announced another price increase, effective next month and adjusted its full-year outlook to reflect moderate adjusted EBIDTA growth versus previous expectations.

“We made solid progress on our most important long-term value drivers in the second quarter, despite external challenges such as inflation and some short-term internal challenges with our operations,” said Billy Cyr, Chief Executive Officer of Freshpet. “We are encouraged by our strong consumption growth in the face of rising prices, the acceleration in the growth of our household penetration rate and the strong performance of our production which has supported it. However, the combination of Inflation and near-term operational challenges negatively impacted our bottom line during the quarter, and we are factoring these factors into our outlook for 2022.

“We continue to take the necessary corrective measures, such as a further price increase to offset inflation, and we are strongly committed to resolving operational issues so that the fruits of our strong growth become more apparent,” Cyr added. .

Second-quarter net sales were $146.0 million, up 34.4% year-over-year, driven by speed, pricing, distribution gains and innovation, shared the company. Net loss totaled $20.6 million, up 174.7% from $7.5 million in the second quarter of 2021. Adjusted EBITDA was $3.9 million, down 64.2% from $10.9 million a year ago.

“Adjusted EBITDA was lower than expected during the quarter due to the timing of media investments, inflation, logistical challenges and the quality issue we had in June,” Cyr noted during the talk. the company’s second-quarter earnings call on Aug. 8. “We have already taken the necessary steps of actions to accommodate the critical issues, including announcing a third price increase. However, the cost of the quality issue and the new time gap between inflation and our prices force us to lower our adjusted EBITDA guidance for the year to $48 million from $55 million.

Gross margin of $52.2 million represented 35.8% of net sales in the second quarter, down slightly from gross margin as a percentage of net sales in the second quarter of last year.

The company attributed the increase in net loss to higher selling, general and administrative (SG&A) expenses, which were $70.4 million in the second quarter of 2022, from $49.6 million a year ago. one year old. SG&A expense as a percentage of net sales increased to 48.2%, up approximately 2.6% year-over-year. Freshpet cited increased media spend for this increase in SG&A spending, partially offset by growth in net sales.

Cost inflation and supply chain challenges continue to plague the fresh pet food company, like so many others in the industry. The company incurred higher costs for logistics, which amounted to $2.4 million in the second quarter. Heather Pomerantz, CFO of Freshpet, noted that the cost of many key ingredients and inputs continues to rise, while protein has leveled off and underlying construction and equipment costs have “come down significantly.”

Still, the company will implement a third price increase – this time to 2.6% – at the end of September.

“We replaced a pandemic with inflation, but unfortunately we retained the supply chain issues that accompanied the pandemic,” Cyr said. “And now we are facing a potential recession…While recent challenges have caused inconsistencies in our margin delivery performance, we are in a much stronger position today than we have been in the past. two years, with a more formidable organization that provides greater control and confidence in the long-term opportunity that Freshpet presents.

Cyr assuaged stakeholder doubts during the company’s second quarter earnings call by affirming the resilience of the pet food category and the Freshpet brand. He said he expects the brand to “perform very well in a recession.”

“We believe that a short, shallow recession could better align supply and demand for the various ingredients and equipment we purchase, reducing costs, shortening lead times and improving availability of the materials we depend on,” he added. “This could lead to greater capital efficiency and better margins.”

In addition to the mix of challenges experienced in the second quarter, Freshpet issued a voluntary recall of one batch of its Select Fresh From the Kitchen Home Cooked Chicken recipe for dogs on June 17 for a potential Salmonella contamination. The company noted that only a small portion of the batch had been distributed to retailers across the United States, with the rest destined for destruction.

Pomerantz said the recall partially impacted lower adjusted EBITDA in the quarter, as well as logistical challenges and additional inflation.

“We have experienced increased inflation in certain input costs, primarily due to labor and energy, as well as increases in transportation costs at our suppliers and we expect these continue for the rest of the year,” she explained. “Additionally, our cost for diesel and natural gas is well above the cost we estimated when we gave our first guidance.”

Soaring gas prices also affected Freshpet customers in the second quarter. Pomerantz shared retail foot traffic and household penetration growth suffered in June, but as gasoline prices fall, the company is seeing a “strong rebound.”

The company also reassessed its capital spending plans for fiscal 2022, now expecting to spend significantly less than expected.

“We are updating our CapEx expectations to reflect our current best estimate of the actual timing we will experience with our various capacity addition and refrigerator expansion projects,” Cyr explained. “Our initial estimates were very conservative and designed to give us significant flexibility. But now that we’re more than halfway through the year, we’ve got a lot more exposure, and we expect to spend about $80 million less this year than the previously projected $400 million.

The company is operating at full capacity from its existing kitchen in Bethlehem, Pennsylvania, and is preparing for the official opening of its “even bigger and more efficient” facility in Ennis, Texas in September.

“We look forward to opening our new state-of-the-art Freshpet kitchen in Ennis, Texas next month, which when fully operational will bring our total capacity to over $1 billion,” Cyr said. this, we have further refined – and reduced by $80 million – our capital expenditure guidance for this year with the aim of maximizing short-term efficiency while allowing us to continue to progress towards our long-term growth objectives. term.

Freshpet hopes to produce its first salable products in Ennis by the end of next month, with first shipments expected in October.

“Once this start-up takes place, it will unlock significant potential for Freshpet,” Cyr said. “In addition to the significant increase in production capacity, it is designed to be our most cost-effective, sustainable and highest quality facility, with the ability to grow and support an even larger business.”

In May, Freshpet announced plans to build another manufacturing kitchen in Hanover Township, Pennsylvania, which is expected to be operational in the second half of 2023. The facility will span 99,000 square feet and house new lines of pet food manufacturing to drive product innovation and increase capacity.

“Despite the litany of new hurdles and our own acknowledged missteps, we deeply believe that Freshpet remains one of the best growth opportunities in the CPG space, if not the broader consumer sector,” Cyr concluded. “We have consistently demonstrated our ability to grow the business at very high rates and have now done so at higher prices, improving the pricing power of the brand.”

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