Freshpet, Inc. 2026 Q2 Earnings Call

Please go ahead. Good morning, and welcome to Freshpet's second quarter 2026 earnings call and webcast.

On today's call are Billy Cyr, Chief Executive Officer, and John O'Connor, 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 the size of the category and our TAM, our strategy and expectations for growth, the competitive advantages of our manufacturing on quality and cost, fridge expansion expectations, opportunities in capital efficiencies, timing of new lines and capital spending, 2026 guidance, and 2027 targets.

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 our most recent filings with the SEC, including our 2025 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 it 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 our results and the number of competitors trying to emulate us continue to prove that fresh is the future of pet food, and we remain well-positioned to capture a meaningful share of what we believe can become a $10 billion category over time. Our confidence is grounded in the scale, quality, and cost advantages we have built through our owned manufacturing network, our broad product portfolio, and our expanding on-the-channel presence. We've built a business over the last 20 years around a wide range of product forms, sizes, prices, and channels and believe our manufacturing scale and expertise is one of our greatest competitive advantages, enabling us to create the highest quality products at the lowest cost.

Our second quarter financial results were ahead of our guidance range for the year, demonstrating the power of our business model. We delivered our strongest growth rate in over a year and our highest adjusted gross margin since Q1 of 2020. As a result, we are raising our sales and adjusted EBITDA guidance ranges for 2026, which John will cover in a few moments. We accomplished this against a challenging consumer backdrop, with higher gas prices and weaker consumer sentiment affecting trade-up behavior across a number of categories, including pet food. This is a pattern we have seen before, and it is one we anticipated. We are also mindful that the macro remains volatile and are not relying on sustained improvements to deliver our updated guidance.

Amidst that volatile consumer backdrop, our consumer franchise remains healthy, with an increasing share of our growth coming from increases in the buying rate of our consumers. That is a reflection of both our focus on the MVPs who spend five times more per year than the average household and account for 71% of our sales and the tentative consumer backdrop. We closely monitor the combination of household penetration growth and buying rate growth as a good proxy for our total net sales growth and know that the balance between the two can shift over time based on the economic backdrop and the strength of our efforts to win more MVPs. Over the last 52 weeks, that combination totaled 13%, with 7% coming from buying rate growth as we grew MVPs at a much higher rate than we grew overall households.

Those strong results give us the confidence to continue investing behind the long-term opportunity while maintaining discipline in how we balance growth, profitability, and returns on capital. We are seeing encouraging evidence that our business model is working across three key areas: on-the-channel access, marketing and consumer engagement, and manufacturing scale and expertise. First, on the channel. We continue to expand access to Freshpet in the places and channels where consumers increasingly want to shop. We believe we're uniquely positioned to compete in multiple channels rather than one. This will really unlock that MVP consumer. Our products are available in over 30,000 stores. Approximately 25% of our U.S. and Canadian stores have multiple fridges. That footprint is increasingly valuable because our fridges do more than support in-store sales. They also serve as micro-fulfillment points for our on-the-channel demand.

Our multiple chiller expansion will enable holding capacities to support both online and in-store sales and the broadest possible assortment to be available nationally. In the second quarter, digital orders grew 41% and accounted for 16.7% of our total business. This was up from 16.1% in the first quarter, and approximately 78% of those sales volume went through our extensive fridge network. Additionally, our growth in D2C and pure-play e-commerce was particularly strong in the quarter. We are encouraged by the way retailers are responding to consumer demand for fresh pet food, with total distribution points up 13% in the second quarter. We continue to see opportunities to add fridges to existing high-velocity locations, expand selectively with new retail partners, and broaden our presence in channels such as club. For example, we have 33 Fridge Islands in market today across select stores in mass, pet specialty, and grocery.

Further, we now expect to expand our presence to at least 700 rural lifestyle retail stores by the end of the year. We are now testing a third SKU in a set of club stores. We will continue experimenting with retail partners on what fridge configuration and merchandising work best, but at this point, do not expect a material expansion of our Fridge Islands in 2026. Discussions for 2027 are underway now. Taken together, we believe that both retail-based TDP growth and e-commerce growth are a good representation of how we can continue to deliver strong on-the-channel growth. We still have limited market share in the category, with only 4.3% in U.S. dog food and treats, according to Nielsen on-the-channel data. However, we are the fastest-growing brand in dog food in dollars and the second most popular brand among new Gen Z and millennial dog households.

Second, our marketing and consumer engagement is becoming more effective as we sharpen both the message and the audience definition. Our latest campaign, Better Food for Your Better Half, is designed to deepen the emotional connection with pet parents while reinforcing the difference fresh food can make. In terms of households, we are particularly encouraged by the strength we are seeing among millennials, e-commerce shoppers, club shoppers, and our highest value households. These are areas where we made deliberate investments, and the early results suggest those investments are beginning to pay off. We are disproportionately winning with millennials and Gen Z compared to the category, and they are the future pet parents that are driving the total addressable market growth. They also over-index to purchasing online and in the club channel, where we see a long runway for growth.

We are building a stronger, more durable consumer franchise by increasing availability and improving relevance and deepening relationships with the pet parents who are most likely to participate in the long-term shift from conventional pet food to fresh. Third, our manufacturing scale, technical capability, and expertise continue to be a meaningful competitive advantage, and that is evident in both the operating performance we have delivered and the noticeable difference between the products we produce and those that our competitors are able to produce. We now have three lines utilizing our new bag product technology, two in Bethlehem and one in Ennis, and we are encouraged by the improvement in quality, throughput, yield, and unit economics and what it could mean for innovation.

Those lines are running well, and we expect to continue to refine our operating performance on those lines for the balance of the year, just as you would expect with any breakthrough new technology. You can see some evidence of that in the slightly higher quality costs in the quarter, which are due to disposals we incurred during the startup phase. We have clear line of sight to the margin improvements that we can unlock with this technology. At fully optimized performance, we expect over 100 basis points of gross margin improvement on the entire business from the lines we have already installed. We expect approximately 25 basis points of improvement from the new technology in 2026 and more in 2027 as we continue to improve and optimize performance. These technology investments are not just operational improvements. They are strategic enablers. They support better product quality, greater capacity, and new forms of innovation that can help us serve a broader range of consumer needs over time and attract new MVPs to the brand.