Freshpet Inc

NASDAQ:FRPT

Earnings Call Transcript 2019-Q4

[William Cyr, CEO & Director]

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.

[Unidentified Company Representative]

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.

[Scott Morris, Co-Founder, President & COO]

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.

[Audio/Video 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.

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.

[John Speranza, VP of Marketing]

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?

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. 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. 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 of the plan, that next year, we're looking at what are some of the tests, what are some of the best we want to place, get some learnings, and ones that proved to be fruitful we'll continue to lean in and layer 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 of these in Lisa and Gerado. Thank you.

[Scott Morris, Co-Founder, President & COO]

Thanks, Tom. 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 our 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 was 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 wow us over the next couple of years by the innovation that they're bringing.

[Lisa Barrette, VP of Business Development]

This gives you a little glimpse in our office. This is a product cutting review on a weekly basis. This is winning, and just getting a little experience with our new small dog roll that's coming out.

[Gerado Perez-Camargo, VP of Research & Development]

And this is Pinocchio and I. Pinocchio is a black lab. He's 10 year's old. He's getting a bit of a white beard. And at the weekends, I don't shave and I also get a bit of white beard. My wife was looking up to you know, 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 what philosophic when it comes to making any product and the baseline is very simple. We think of three things. The first thing we think of is, we are going to do make this enjoyable for the pet. Then we think of these also needs to be healthy and nutritious for the pets. And the last thing is, we have to make those 3 things visible to the pet.

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 those kind of 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, those have 300 million of factory, where as we only have 6 million, and that's fine because they get more data. But these not only about getting data, it's 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 he's not only that, is that their airway's 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 in my lungs to get oxygen. I want to divest 12% of that air to get into my nasal cavity. So, I get a kept sample of that air. That's their way they look at it.

And the other thing, I want to show you is their mouths of the pets are also different from ours. These one is upper jaw of a dog and when you look at it, you think, okay, they're a lot of teeth in there. And that's true, they have 25% more than we do. And those teeth are also vigor even a small dog like an beagle and more line of that beagle is three times the size of your molars. So, they have these incredible chewing capability and they do chew, and they can chew up their self fine and think nothing of it. But at the same time that they have that the chewing power, they are capable of incredible tenderness with our mouth.

The mom can take the one their 1 year old pups and moves them around. They can carry one in their mouth without breaking it. And what I am trying to get at is that dogs explore the world with our mouths. And when they put something in their mouth, they don't normally know if it is chewy or soft. They also know if it is hard or rough, smooth. So, the point is, when marketers pet food go and say, this has a real meeting of products. They can fool us. They can fool the pet parent. I guess who they are never going to fool any of these guys. Even before they put it in their mouth they are going to notice that's three on meat or it is not. And then also I want to say you some equalities in the anatomy of the cat, that's the job of a cat and I don't know, if you just have dogs, cats or maybe both but when they lick your hand, there is a difference. The tongue of the dog is really smooth like ours.

The tongue of the cat seems like sandpaper because they have these little spikes that you can see on the screen. So cats are not so much chewers that but they great lappers, they like a different texture. So, when we develop products for cats or for dogs, we develop them, with different pictures because we know that they like different things. And you develop things from their perspective this is what you get. This is what the 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 liked our foods.

And okay. So the dog's both like the food, the cats like 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 if needs 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 issue this is what 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 that 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 with a research group in Illinois. This is a peer review publication and a 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 what you could enhance for example which is a second column, which is darker gray. And in yellow you have the cooking process of Freshpet. And these down here are our amino acids. Amino acids are 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 can cook them very gently with a steam for just a few minutes and then we could them down very quickly and we don't over cook them. It's like when you put an extra steak on the grill, when you are given a party and people going get their steak when it is nice and pink and middle in juicy. And you have to put an extra steak there just in case you know somebody drops their steak or they got to steal the steak of somebody. And at the end of your party, you realize, does that still there initially like charcoal. You are never going to get many nutrients out that steak as you would get from the steak that you have eaten when it is nice and juicy.

And I just highlight here I'm sorry, if you cannot seat at the back to essential amino acids. All these amino acids are essential. They are important for dog. They have to build protein. But, these two are different from the others because it's not something that the others do not. They have with molecule with sulfur in it. And that's the amino acids that dog need to make in 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 see your dogs properly.

Well, we provide more of methionine and cysteine availability than any other dry or canned pet food power because our process is different. And that's working because at the end of the day, their heart is just a muscle and meat is what is made of, and the heart pumps several times a minute blood through all our body, all our life, but in fact it is starts even before we are born. And the day the heart is stops pumping, that's not going to be a good day. So you want have to be perfect.

So, we have been talking about protein, and I want to compare you why we think that Freshpet is better and so why there is a difference there. When you feed the product to your pet that's not 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 somebody moisture. So, what you have to do, you have to compare things on 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, the Freshpet, this is where you're going to find. You're going to find that Freshpet has around twice the amount of protein double than dry food. Any comparison, dry food is going to have around, more than twice the amount of carbohydrate then Freshpet. That's because Freshpet is mainly made with meat. And that's because, dry food in mainly meat 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 hair, hair is 99% protein. And remember the cats and dogs are fully covering hair. Protein is going to make antibodies in their immune system and protein is also going to make your enzymes. So, all of your metabolisms everything 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 box and you look at even it's key role and I don't know about you but I have never heard of any wolf in the wild out there hunting for people, and on top of that people don't have wolfs in the living room different guys like these 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 world has got a really long nose, whereas our pup begin to get a shorter jaw. The eyes here they are almond shape our dogs ten to have the round ones. And even the ears, they are not so became pointy they become smaller or they fall to this side of the head. Because what they are going to look more and more like is like this.

This is -- scientific word for these is called a paedomorphism, which means they are our babies we made him our baby and when you see something like this something in our still wakes up the ones to nurture it was to care for it was to feed it properly. And not only the appearance is different between those two worlds. You got dogs their legs are shorter they are more cubby they are like kind of cute because they are already there's something made are more high peach like [indiscernible] like the babies cry was the mark and you have already seen these kind of pictures in which you're saying a picture of a dog in the 60s or the 50s is officially black and white that is outside the house and then in the 70s, 80s they move inside the house now. They you sleep on the bed there are companies out there making really good living selling prompts and the steps for us to get on to the bed was finished some barrier you think they are going to break. What's the next step for them in the house?

Look at this fellow. Look at that one. And with the concept of what the dog role's in the family in the house is changing, it's evolving. If you are here in the 60s, you can be forgiven for thinking okay, I can keep the dry food the food for this dog in the garage in the sack. And 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 this food in the fridge next to your food. And I have very good news for you. This is my last slide. So, I call these 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 if he comes and wags the tail and if he gets excited because he sees me excited. And Pinocchio doesn't know why I'm excited, and Pinocchio doesn't even know why he's excited but he doesn't care because we are both excited and it is fun to get them excited. And if you don't believe me going to YouTube and try to watch this thousands of videos of people have put their 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 the feeding ceremony. The pet's parent gets up and says, okay, dinnertime, and all the pets, wherever they are in the house running to the kitchen. And the pet parent opens the fridge and gets the role and says okay, today we are having the beef because yesterday you finish 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 happen 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 distinguish this because it's so exciting. And in those 10-15 minutes in the day, they might be the best in 60 minutes in the day of the dog. They are pretty damn good 10-15 minutes in the day of the pet parent as well. And in that time is what we also designed 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 you kind of special. So I have done my bit.

[Lisa Barrette, VP of Business Development]

Thank you. So Gerardo take you through that palatability, the bioavailability of our food, but what are 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, shiner coat, there's no stains under the eyes. There's a major transformation that's happening in pet parent's home.

So if you see a transformation, I think you're going to be not surprised by our satisfaction stores. These are the green charts, the green bars 96,98,100, you're seeing that transformation. Many pet parents will say, I'm 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 to get pet parents like, is this worth of value? I will tell you getting more pet parents to see that transformation to them. It is certainly a good value.

So Gerardo and my job in the future is really what is this all 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 in the kitchen, our small dog. The chart in the left shows how we brought a new households with this. I've been an innovation for sometime, I've seen how you create one cereal flavor and then the next and you just swap household from one flavor to the next. You'll be happy to know that through Nielsen we've been able to look at household providers in the first year, and then came back in the second year. So you can see bringing a new households through innovation and they're also able to stay with us over the time.

For those who use Freshet, we've 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 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 household, those are we call our prime prospects, consumers who have a lot of the interest in the characteristics of our current Freshpet consumer. So 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 that was small dog. We had pet parent calling us, "Hey, I love your product but you're fresh in the kitchen is a little too big or do you have anything from a smaller dog". Thanks to Gerardo, he helped us understand. You can just use our current recipe. You need to think about it a little differently.

First is small dog's had really high energy, but also as he talks about their mouth and their needs are different than other sized dogs. So taking our current roasted meals and thinking about how is it better solution for a small dogs lead us to that. As we look to the future, this is a key milestone that will 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 non user 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 those consumers looking for a health solutions.

The second is small dog. One recipe brought insignificant amount of household, but Gerardo help 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 dogs rolls coming out. They're more of a pate, it's a smaller and moister that they can cut to personalize for their pate.

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 a household to mix and match and customize it, but feel good and trusted knowing that it's complete and balanced. As Scott shared is how do we help with making this more accessible to new households. And we have a twin path, which really fits perfectly for people interested in fresh to looking how to get started.

So this is great. We were 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 into really transformational. Really what pet parents you saw, Scott shared our prime prospects there, looking for fresh real food, Gerardo shows the pet is now sitting next to you at the dinner table. I got to feel good about what I'm getting. I wanted to smell fresh and delicious.

So how do we do that? Today, we have rolls and meals that what people think of us. What could be this future idea? We work with a couple 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 put in, is this chopped idea. It's actually has scrambled eggs, beef and a medley of vegetables at this looks like something you would probably eat for lunch. Is this a bowl of protein, but it's complete in 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 unique panel to reach pet parents to go online and talk to consumers who are prime prospects. Those that have a lot of the same interests and wishes is our current users. We ask them a series of questions. What do you think about this idea of sharing it with them? The second is we go to our pet parents our Freshpet consumers. And their brutally honest, be honest with us what's working, what's not? How's 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 is, 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's 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 dogs anticipation coming through. There's another group of parents 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.

[Scott Morris, Co-Founder, President & COO]

2025, we've taking you through the marketing piece. We're taking 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 startup back at 9:45.

[Stephen Weise, EVP of Manufacturing & Supply Chain]

All right, probably like a well-deserved break. Thank you guys for hanging with us. Alright, so we've taken you through our vision, our mission. We're 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 to those consumers are? How we're going to market to those consumers, a little peak into how we think about innovation, not necessarily the exact innovation, but the innovation that will 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. But 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 it helps us to kind of broaden our ACV. But one of the other things we talked about is the ability to have more depth of distribution, second fridges. And I'll chat about that in a 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 of about 4 feet wide. Now 67% of them have a fridges 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 others continue to grow. We've also -- in the gray bars, you'll see that we've started to add second chillers. So now we have a kind of a large group of stores with two chillers. And then a smaller group that actually has three chillers. You will actually, later this year even get to see a store with four chillers. Yes.

So one of the things we get a lot and 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 features are growing 22%. Basically same-store sales about 22% which is very, very like a it’s a strong, strong growth rate for same-store sales. So we're really proud of that number. When we add a second fridge and it grows 41%. We had the second or the third fridge and it grows 50%.

Now we are not fully optimizing 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, you kind of see what the best products are, the absolute best products going the first fridges. The next bit of products and the most innovative products going the second and third fridges. We don't have that full portfolio for the second and third fridge just filled out. We anticipate that this will continue to grow over time in the second and third fridges, because 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 clearly 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 will be able to come out in literally in next couple of weeks we'll literally have a fridge island that will be three fridges, and at some point even four 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 its on us, part of its 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 of the $2,000 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 aisle.

We've 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 will 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 a product in the back room and 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 rise to demand of people that need rise. We will literally create technology and work with people that will send to the store, when we recognize that that store has been flagged that has these out of stock. We'll send the person there, they will fix it, and then we will take a picture that night. After they have registered, they fix it. And that will give us feedback that they have or haven't fixed it.

The goal here is not just to get in to this vicious cycle, but the fix fundamental problems in the 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 I got 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 envisioned potentially for the future, you'll see, Lisa were 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'll be walking to 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's been working on e-commerce for the last couple 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.

[Jake Trainor, Director of Marketing & Head of E-commerce]

So thanks again for everybody for coming out today. Today 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 is 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, Tessa be freaks out when there's dance around. So if you asked her, if she wanted dogs in the house, we probably have a shelter but within the first week.

So just moving into e-commerce, just a little bit about, just how we think about e-commerce for Freshpet. Certainly a unique product. So we think about it in a different way. But as Bill 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 three 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 officially 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 continue moving forward.

The second area is last-mile delivery. And when you think of last-mile delivery, it's really made up of two 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 get 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. All 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 in curbside. It's another key way that consumers want to shop. So 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. At 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 is, but expect it, right. A lot of this is dependent because of our unique product and the refrigeration process and 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 Z consumers that are doing a disproportionate number of their buying really online relative to retail.

For us, though, as a company unlocking online really helps to fulfill both current and future needs for us, right. So as you look at just the millennial versus the boomer consumer, millennials far over index in their purchasing online relative to boomers, 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 up to 2025, it'll 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 already over-indexed 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 and products being able to be delivered to their home, a 79 index and 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 in anyway that pet parents want to buy pet food really requires us to focus on three key areas. The first thing is advancing our partnerships with online fresh leaders. So think of the Peapods, the FreshDirects, the AmazonFreshes of the world. These are 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 put up before I got to the stage. So this endless aisle online. So we have the ability with these type of partners to really build out that in this 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, then bring in a much largely accessible group of consumers. It drives the velocity of our fridges, right. It's not just your eye going into store and buying products. Typically consumers, they'll go to a store -- grocery store a mass store within like a five mile radius of their home. It's pretty traditional. With online click-and-collect can reach up 30 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 bringing more shoppers, it drives our fridge velocity. 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 Shift 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 fill that gap in a more timely manner for us. So it also helps build that out. So with those partners will 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 are I on a computer and you want to buy Freshpet, it's going to be drastically easier. And really across these three pillars, what we continue to focus on is number one best in class A plus content, right. We are a new 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 plus content to educate them. And when they are, we need inner 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 these partners and 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 lead in with those partners in on those programs this next year, and continue to build our awareness and drive people to Freshpet.

[Stephen Weise, EVP of Manufacturing & Supply Chain]

So, I'm going to cover the next section, which is pretty straightforward. What is our potential? Do we share the idea of 5 million consumers of the next several years? How big in Freshpet be? And what we did is we actually use a pretty wide array of approaches. I would literally call it pretty much an all you can eat buffet for someone. This pretty much something for everyone in here.

So we've actually tied again, we actually took 5 different approaches. These two were shared last week at some of the CAGNY presentation where we looked at some of the developer 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 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 are offering. So we use the consumer concept test. Basically, we showed people a one pager on this is what Freshpet this will go to the people that were unaware that people are talking about earlier, and we basically said, are you interested in this concept, and I'll share the results in a minute. They were 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's called prime prospect modeling. And then lastly, you looked at potential appear, we actually went and did a future projection. So we actually engage an outside company that does modeling. They've been pretty darn successful. But we also know they're never quite right. But we -- 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. And we look at our share of dog food in these retailers and actually the one we picked up in this group was Albertsons, Safeway, we think whole foods is an anomaly, right? But nice number, we're on 8.8 share of dog food at Albertsons and Safeway. We think that -- we felt like that was like a good middle ground. And that's our 52 weeks here at that retail. The other interesting thing is this is the growth rate, not only when 8.8 share, we're growing in a 35% rate in Albertsons and Safeway, which is incredible growth rate. There's a little bit ACV in there, but the majority 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 as 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 knowing we developed, we're growing very, very quickly. So we think this is pretty telling. This gives us if you kind of take that extrapolation of $21 billion market and Albertsons and Safeway, I mentioned we were an 8.8 share of dog food. That's gives you a $1.8 billion potential, whereas the 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 market international basis that the $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 two 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 a 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 up on this side, in 2016, we did the same exact test. And we were 10 million dogs owning households were interested. When we did the top two 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 to box.

Top box is defined is definitely would buy, definitely would buy. That's pretty extraordinary. It's actually 28 million household were interested in a three that concept, and that's top 2 box. Top box is the finders definitely would buy. That's pretty extraordinary. Its and 3 x and on where it is and why because everyone's trying to eat differently. We've been out there, people are seeing fridges and 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 is why 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 this 28 million what we think for the potential is.

When you take the prime prospect methodology on this side there's actually 20 million households. You guys remember probably the past couple of years, you've been following the stock, we've been sharing a number of 7.5 million households with 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's the marketplace and part of its the work that we've done as an organization, 20 million households. So let's take a look at how we think about these two groups. So if you just take the 2019 number, the brand new research that we did, the first the consumer that concept piece on this side.

Typically, there's a multiplier that people put in place. This just kind of conventional wisdom. And I hate conventional wisdom, It's always wrong, right. But conventional wisdom would be there's $12 million definitely buy, you take eight factor. So eight, 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, right. That would give us $9.6 million. On your second box, yes, I'd probably buy that. That group, you actually play a much lower factor. That's a point four 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 prospects, 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, I know there's a lot here. But so basically what we did is we looked at these two methodologies, either consumer methodology we felt like 10 million was a very, very achievable number over the next five years. And we've also looked at when we'd done our own internal modeling, what does it cost? John shared our marketing earlier, what does it cost every single year when we make the marketing investments, and what's our consumer acquisition costs, our CAC. And we've been watching that, it's actually gone down over the past couple of years. We're not budging 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's done some exercise, many of people in the room have done some exercises around this. If you look at your households and you've paid your households and you're focused on dog owning households in this, and you think about buying rate, so the buying rate grows across the top level about what the consumers spend on a per year basis. We believe this yellow highlighted area is what the retail revenue potential is, buying rates typically expressed at a retail number, when you see that buying rate number, okay. 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 part 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 three critical variables. They actually used 19 variables to do the initial model, but there were three critical ones. The first one was the advertising spend and then 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 are we growing 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 increase in penetration overtime? 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 dog owning household universe in 2025, based on the investments that we have planned overtime. 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 overtime.

The next slide basically wraps the whole thing up. So this is basically the same slide that I shared in the beginning with the five different kind of methodologies. The ones on top are really the potential that the organization has, and then this is the external modeling. The modeling in this case I do have it as a $1.5 billion number in retail sales. That does include, 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 overtime, 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 the awareness comes down to and how that improves and drives our overall net sales overtime.

And you can see how that kind of works and how we anticipate it playing out. So we're wind up in 2025 8.1 million U.S. dog only households that are buying Freshpet. I showed you the buying rate chart could be a wide range when we think it's in that number I shared 170 is probably a good number of 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 in a summary of these facts later on. I'm sure there will be probably be a fair amount of questions on some of this work that's been done. But we've wanted to kind of share it with you. And I know it's kind of a tough for him to go through that much data.

We've done incredible diligence around this and spend a lot of time on it. We know that there is incredible potential is how we achieve that potential over time. Hopefully, we share with 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 pet people planet. It is really kind of a core tenant, 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 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 worked together Freshpet. Justin is an incredible kind of multitalented gentleman. Years ago, I remember he used to walk around the office and he would after people would leave, he turned 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 with 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.

[Justin Joyner, Business Development Manager]

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 initiative 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 is she sits there and enjoys this lovely small view of a lake. So what's going on here is not just a pretty picture of two people two 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 bond

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 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, decrease stress, those benefits come from the CDC website. So there's 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, and something we're so proud to be a part of because our food provides the 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 inception, so 13 years and we're getting testimonials now. The last 12 months we got over 600 points of contact where consumers send an email, they called, they said, 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 overtime. And I happened to be one of these crazy pet parents that have seen results of Freshpet. I have a new puppy is 10 months old there on the right is Johnny and one day in September we took him to the beach with my older dog, who's 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, you mean you never give anything grand 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 year-to-year. 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's going to make it to 16 because we're going to have a birthday party. So, will 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 trust. 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, and these dogs really help, get the whole family get to some storm sort of form a 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 our 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 401-K so they chance to plan further future and plan for the retirement. We have incredible healthcare plan 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 places when they note it if something, god forbid were to happen, they have that safety net of a good healthcare plan. But some of the fun things that are offered, there is Freshpet 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, is, there's a sense of comradery, like literally, you have Dick and Scott and everybody to sit in the table with the sales guys or whoever happened to be in the office and get a chance to catch up. And it contributes to this feeling of a Freshpet family. And that sounds corny and cliche 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 than are captured in the picture. Find out 20 of us that worked for around 18 years, some of us more than that 23 years, if you go back to the 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. It's set to help grow for 25, 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 a 90th percentile compared to other companies. But 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 and 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's been talking a lot about here lately. And there's 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, few guys, I mean, the investors are all pushing us to focus on this. Number two, our consumers are doing it. And Scott was just explaining how we're going to get to a billion dollars 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 number one goal would be to reduce or eliminate all of our carbon footprint. That is a unobtainable goal. Obviously, 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 generate 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 wholesale teams 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 offset and renewable energy credits. For 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 call we did a pretty

comprehensive carbon footprint analysis, and what it allowed us to understand was the top five buckets of carbon footprint that we had. 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 three emissions because they are technically -- they're governed by a party outside of the company, because we purchased 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.

Chillers 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 used to power those chillers obviously generate some form of carbondioxide. The other ones probably makes sense, what I loved about this analysis and what we all really appreciate 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 three larger buckets for 2020.

And then going forward in 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, larger project, larger term project. So, 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 were necessary.

So, just to make everybody aware on and this is part of the DNA, as 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 it's 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 it was 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 everyday based on us electric usage. It was a power hog. So our chiller team post, this was manufactured I think in Germany, it's an overseas supplier, but our chiller team was pushing our domestic supplier to manufacturing were huge manufacturer of refrigerators for Coke, Pepsi and the like, we push them really hard to give us a lot of the benefits of this cooler like the LED lighting, the Agilent 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 chiller as they age out and it's also any new chillers that ship out are going to get this new model about 9.5 times 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 three. And if any of this refrigerant had leaked to the global warming potentials of 1,430. So incredible improvement, we can't take all the credit for that. True already had a lot of work have a lot of efficiency in the works. But we did push them really hard or a couple 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 as they don't get stuck. A lot of those old true models, the sliding doors get stuck in a three inch crack. So the refrigerator continue to cycle and run up the power bill. So, this is a huge win, we anticipate that the 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 were replaced.

And then we're excited to announce that as of January 1 of this year, we have purchased enough renewable energy credits. There were 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 and once we shared this with, they'd been pretty excited 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 renewal of energy credits, we can feel good that we've helped to offset some of that chiller electric usage.

And then the other piece you saw, the air travel was another one of the top five 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 track 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 was a lot of big companies Apple, United, Tiffany, Gucci. I 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 or 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 it Scott and I've 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 methodologies so we can calculate it for 2020 and beyond. And then also a roadmap for how do we get to carbon neutral? What are those steps that need to be taken? What would that timeline look like? And we're engaging with a third party. This has a ton of experience with big companies that can help us with this. This is small-ish, but big for step. We have made the decision to turn our Natures Fresh brand carbon neutral starting July 1 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 sue of they are 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. 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.

[William Cyr, CEO & Director]

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 opportunities 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 a 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 specialized. Our lines because we relatively small scale. We're in essence generalize lines, they produced a variety of products. The more we can make some of the lines specialized, the ability, increase the throughput, the efficiencies and the margins is 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've 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 the sort of the infrastructure. We want to make sure it's a phase expansion plan that allows us to build capacity in excess of demand, but not so far and excess of demand that we are in essence -- stranding or leaving ourselves with an excess of costs.

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, developed some 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 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, 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 private innovation.

In all of this, we need to be mindful that there is a big shift going on. Our roles 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 in 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 then we will roll lines. And so the 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 roles 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 rolling bag lines to will end up with our expectation is 11 bag lines and 7 roll lines. We just need to build that into the design. You think about how much capacity you're 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 five years and get to the $1 billion in revenue. But the actual curve will be probably a little less even than what this would project. But it tells you what kind of capacity what we're going to need. In the plan that we've developed, it shows that basically, we should get ourselves in a position where we have the capacity one year in advance. So when we think we're going to end up out here at a $1 billion in sales, when we need to have $1 billion and 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 and advance. We want to get to the point of uninhibited growth.

To the take you through and talk to you about our current progress on our manufacturing, I'm going to introduce Michael Hieger, who is been with a company since very early basically the get go. He's the architect who is 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 in the office really, really early when I work in the kitchens. Sometime between five and six 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 thinking how does he get here by 8 o'clock. I'm like, no problem. He will be here. No problem. Michael is the guy who put makes all his works. So he'll tell you a little about Kitchens. 2.0.

[Michael Hieger, SVP of Manufacturing Operations]

Alright, so we're going spend a few minutes Kitchen 2.0. And really, it started clear back in early 2017 when we started designing business facility. And it's kind of morphed into a artist rendering here and now it is totally come to come to life and it's a true building that we have on site. And Kitchens2.0 is in Bethlehem, Pennsylvania, right next to the existing Kitchen 1.0. And this picture here aerial shot come 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. This 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 facility, we have concrete going down and we've got about 75% of the floor going down inside of the building. And we are on track for a Q3 startup. And we've 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 three 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 have 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 badging system. So these big bags back here in the backseat or 2000 pounds super sacks. And instead of our team members having to pick up and lug around 50 pound bags ingredients, will be able to use these 2000 pound super sacks, it'll be a little bit easier for them.

On the palletizing side and our existing operations, we do all that by hand. So we are stacking our cases at the end of the line by hand, but a lot of strain on the legs, knees back the arms of team members doing that. But the automated pelletizing system will take care of and do that automatically.

From a quality perspective, we're always looking to increase the quality of the products that we were making. And shortlist here some of the things that we are doing, is we're going to be doing the X-ray inspection of our chip products. So 100% of those products are coming in the line going to be inspected by the X-ray machine for any type of form material and to give us a better sense of the quality going out the door of those products.

Also, we have a 4-corner case labeler there, but what's the label 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 on high on the shelf. Right now, we only put labels on two side of the case, and we have some complaints about, " Hey, I can't always find the product I'm looking for, because I can't see the label on a case."

Also we'll doing some leak detection on our pouch line, where we'll be doing 100% inspection there to ensuring that there's no leaks in any of our pouches because we gas flush that product and we want to make sure it all the gas stays inside the bag does not save out. And another comment here on the bag packing system, we also saw on the safety side. This will be more consistent-- producing more consistent dry batching formula for us that we use our process, because it's fully automated system, whereas right now, we have people that are actually scooping up product, put it into a bag, wait another 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 then also increasing the reliability. So we put some redundant processes into the facility one being 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 palletizing system and the automated batching system was kind of speak for themselves a little bit and talked about them earlier, and we're just going to let the equipment work there. We don't have to have people doing that work with the equipment do the work.

Scale parts washer, I kind of described that is, 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 a 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 plants into this new facility.

We've 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 the Kitchens 2. facility is were 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 going to be collecting all the rainwater and using that for onsite irrigation.

Do you see these big pipes right here, these are buried underneath the parking lot. And they're about 60 inches tall. So there's some pretty big number pipes all there -- all the rain will be collected into there. They will 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 Kitchen South, and we found a co-manufacturer to install kind of specialized line to run our small particle products that being cat and small dog.

And they get that line up and running in early February from producing product now, and in producing good product for us. They also have space one additional line in the futures 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. So co-manufacturer has their activities that are doing in their facilities in their building, but the team members that are working on our processes and our products, they're dedicated to just our process.

So with that, I'll turn it over to Steve and he's continued to talk about some other capacity opportunities.

[Stephen Weise, EVP of Manufacturing & Supply Chain]

This is Maggie. Maggie joined our family all over 15 years ago. My wife and I thought we were getting a little puppy that would turn into a family dog. He's actually turned into a third daughter. So, she gets some of the other daughters complain that she gets a little better than they do, but they left home and she's stuck with us. So, we're very thankful Maggie and it's one of the reasons we talked 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 to 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 blank canvas that included all 48 Continental United States and we looked at three 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 three things and really spent a lot of time up front 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 out through taxes.

If you were a history buff, it would kind of look like mid-1800s cotton belt that provided all three of these things. And then we went from a de-selection 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 provide 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 working in Ennis, or working in Ennis and live in Dallas and we can support both of those continued growth in those careers.

Lastly as a supply chain. Once again, being close to Dallas. Dallas has a great refrigerated distribution infrastructure in place. Right one of the five best places the United States for that provides us 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 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've met with the people of Dallas County and the state and they echo 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 got to do something big. So we looked at a big site. You can see our current Bethlehem site, it's kind of overlayed 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 billion dollars that Billy talked about a few minutes ago and Scott talked about earlier today. Also provide 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 and we designed it with a kind of three 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 a hygienic design, and so we not only have built on what we already knew about hygiene 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 was build something that was expandable so that we could stay ahead of demand. So we built the first phase that were planning the design the first phase with the idea of a phase two.

So the first phase includes kind of the infrastructure around utilities, the infrastructure around communal space, the infrastructure around storage with a look toward a phase two, 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 two to look 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 two around a different manufacturing process and we're using today and one that will build a wider and deeper moat for competition, and one that will also open the doors for some product innovation that would struggle with today.

So we're going to leave you with a block diagram as a vision, want to leave you with a little picture of what you will see a couple of years from now. You were to come down to Ennis, Texas and visit our operation and this is what we're it should look like.

Push the wrong button here, Billy. Yes, there was video. Here it is. Here we go.

[Audio/Video Presentation]

[William Cyr, CEO & Director]

As 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. 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 and it 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 the community. They've done a phenomenal job and we're very thrilled to have our folks consider that our second home. In fact will 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 1.0 is $300 million in capacity. We added kitchen South which when we go to a around the clock operation 5 day round clock operational will give us $50 million takes up to 350. Kitchen 2.0 will take us up to 590, we actually have the ability as Michael said to put another line in a kitchen South, which should take us up to $640 million, and as Phase 1 wide to $300 million a capacity another $400 million when we do Phase 2 there, which I guess is up to a total of $1.3 billion.

We go back to what I said before about we want to do this in a phased approach. You can see right now we built up to here in the middle of the place, we have three 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 a scale. All of you know, we hired Heather recently, she is EVP of Finance and she will become our CFO. She's 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.

[Heather Pomerantz, EVP of Finance]

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 two loves Aspen -- the very talented Aspen with two tennis balls in his mouth. The very loving Boulder, and the two of them actually super excited. This is a wagging tail 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," this is a dog 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 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 into the new finance leader into a company like this, you're very excited about finding the missing value. So you're really as 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 it 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 a 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 vision. 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 in Scott said 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 jack of all trades. 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 as 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 margin. 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 2022 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 and that will be a sizable accretion. And that will come naturally, I'll talk about it in more detail, but I 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 and logistics. This is an area that when you're small is 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 next? We've talked about it throughout the presentation. Mainly what's happening is that through our bag innovation in those roasting meals and fresh in the kitchen, which are margin dilutive on a gross margin perspective. That is becoming a larger part of our overall portfolio. That is important, because that is helping us for household. 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 count basis, it is penny profit-accretive. What's going to happen in gross margins? We talked about the capacity bill. We talked about new equipment automation, which is drive efficiency and it will. So if you look at just Kitchens 1.0, you look at the gross margin sort of separate perspective without any other aspects around it other manufacturing, some of the mix headwinds. That facility would operate at around 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 overtime over that journey to 2025.

So, a good way to think about where the financial benefits will come from scale is thinking 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 procurements savings, right? So as you're going to start to buy four times more what you buy, you should get a benefit in procurement. And actually you can 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 commodities based pricing. And we 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 and 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 sense.

In terms of scale automation 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 change over's, 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 the excess 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, I've got a few charts I'm going to take you through in terms of the why around that. And then our unique to us as our chillers and we feel that's also an area where we will gain significant benefit or benefit both financial, but also 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 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 products. 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 rate, just by moving from 1 to 4 palette shipments on the truck to 5 to 14 that's actually worth a percentage point of benefit, because on a percent of net sales.

You can see actually right now that we only have 36% in full truckload shipments, but we are doing a high percentage of case pick, and case pick is basically literally picking different configurations of cases to make a mixed palette. It's very inefficient case picking alone is an incremental costs in and of itself, but it also can create partial palettes 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 last year, you can see our current shipment mix. So, our current shipment mix we have in our least sufficient 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 cost us 5.6% in that sale. 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 and full truck loads and short distances, you would be achieving a 2.6% of net sales. So 350 bps of 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 you've grown the network and then what do we expect to happen? So first and foremost is that, there's financial benefit. So we're improving on service. Service of our chillers is a sizeable spend and that unit costs 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 fridge's to 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 call 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 aisle to the lighting and the aisles and the beauty aisle, et cetera, that you guys all see. We get that with our fridges automatically. So we don't have to think about how are we creating in-store theater, we get it already with our fridges.

Also, we'll improve product availability as we expand the fridge network, both additional stores as well as additional chillers. So what do we expect going to happen in G&A? We talked about we will invest in this organization. So we're not -- we can't become a $1 billion business which the size of organization that we have right now. But we will grow our G&A at a pace less than our net sale. So, we have modeled this in a way that allows us to add strategic investment and 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 was sort of more of a non-financial, it leads to financial, but what is in the non-financial 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, 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 sizeable investment to compete, and our broad product assortment is going to be

very, very difficult to match at scale. 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 an exceptionally expensive. And I can assure you that any smart CPG leader that says let's go try to be Freshpet and go to their leadership team and a big strategic competitor, the headwinds to try to get that investment, it would be nearly impossible, it would be very difficult for them to sell that in internally.

So this 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 pet in philanthropy only grows sizably with scale. We're improving the health and wellbeing 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 can tell you from being at Freshpet for five 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 love 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.

[Ivan Garcia, VP of Finance]

Thank you. Good morning everyone. How's everyone doing? So this is my dog. This is Jeannie. As I stare at her I feel the love hormones. She's a 8 year old pipal beside her about six 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 looks at me, she's my dinner date as well. Alright, so 2025 plan. I think everyone's going to the understand how the plan looks. At this point, Scott, Billy has done an amazing job discussing what our plan is to drive growth and get an additional $5 million, a 5 million households. But I want to learn 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, look at CapEx spend, so obviously, everyone's you've seen that on the balance sheet, but we also have certain costs that goes the P&L, ramp up costs. And that's an investment that we make. 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 thrown them directly online immediately, we hire them beforehand. We train them, we make sure that with the lines we have, -- 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.

But 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. Then we 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 three of those projects are you have a payback of less than three years at full capacity, and an IRR of greater than 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 talked about adjusted EBITDA, but this is talking about cash

and I love adjusted EBITDA, but I really love cash.

And what this chart represents is this is our cash that we're generating from the P&L prior to any media investments. So if you can see in 2016, we were at 15% of net sales, 2019 21.5% of net sales. And we expect by the time gets to 2025, the business will be generating $320 million of net sales prior to any media investments. This is truth 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 three times 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. But 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 may 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 are that can more than offset the costs associated with higher production costs.

Next on once again, mix it moving towards bag products. We'd love to make investments with innovation that should offset that. And then as we continue to grow will constantly have temporary drags on gross margin as we growing capacity. Scaled loans to be able to offset that, As we grow, and get to $1 billion we should be able to grow into the find a lot picker. 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 bring it all together going to 25% gross margin. How we're going to get there? We're going to get 1,000 points bps from adjusted SG&A. 1.0 from adjusted gross margin, we'll go ahead and reinvest 1.5 points in media. And then we have these two boxes what we're calling to-be-decided boxes. So we have many savings initiatives. We're still trying to figure out what the potential upside on that is. We also know stuff will happen in the future. Things that we don't know today. So at this point, our model saying that our stated initiatives will at minimum be able to offset any unforeseen circumstances that we have as we continue to scale.

All right, so that's a 2025 plan. So now it's year one of the 2025 plan, which is 2020.To turn 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 and investing systems. In the near-term our adjusted gross margin will be lower than we previously planned back when we first start with 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 to see 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 for end of 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 the ramp up costs that we've been talking about. So there you can see a range of 1 percentage points 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 starting as a start up a new line, we're starting up a new facility. So first time we're ever going to be in Kitchen, so it's the first time we're ever going to be in Kitchens 2.0. And we want to ensure that 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.

Now, we've all been waiting for guidance 2020 no one's seen this yet. So our net sales $310 million, they 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 try to understand how the quarters will be a layout. Few things keep in mind, our sales volume cadence will be consistent with years past with exceptional one item.

So when we look at our bags capacity, we believe that in Q1 and Q3 that will be somewhat tight. So there is potential for certain shipments in Q1 and Q3 to flip into Q2 and Q4. We look at our advertising investments. Also keep in mind that during the first half, we will spend more so much the years past, but there is potential for Q2 show a little bit of a dip we try to manage through any potential capacity issues that we have in Q2, or Q3, I'm sorry.

And then gross margin in 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. Upgrade fridges total of 2,150 and second fridges towards the 2 fridges 1,300 stores by the end of the year. Our ACV, we're projected to be at 56% and a total distribution points of increase of 9% year-over-year.

And now just to summarize our 2025 plan, net sales $20 billion, $25 billion adjusted EBITDA margin of 25%, media investment 12%, free cash flow excluding capacity bills we might have in 2025 will be 15% all with leverage ratio of less than 3. Thanks.

[William Cyr, CEO & Director]

Sort of just a summation, but I want to remind everybody that our mission is to awaken the world to the better way feeding pets and our goal is to find a way to feed 5 million more households Freshpet. So this is what's 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 is $630 is the amount you would spend on a £30 dogs. You've heard them exclusively Freshpet in a year and you bought the product and an average size an average retailer.

The growth potential for Freshpet. If you do the math on media spend as Scott showed you, which is that in here that is here. And it was exciting. But I'm going to keep going and hope the distraction. The math works for us. The increase in the media spend against the households rise up to $2 billion and 5 million more households. This is a Scott showed you with a few extra lines on it, but basically we've had 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 the household formation phase of life yet, they were sub 80 years old. They are now at the age where they are contributing and they're contributing and Scott showed you in a very big way.

Okay. All right works is that the end anyway. So, I want to give you one other piece of perspective on how achievable this billion dollar goal is. Blue Buffalo data for household penetration during that they publishes their publicly available data and mash 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 with 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 it into what was the net sales progress. I lined this up and started this chart up in the year where Blue Buffalo is 190 million and we are 192 million in sales and shows the trajectory from that point going forward. And you can see our curve to get to a 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 a billion dollars 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 rolling 46% awareness. Our household penetration is only 3 of 63 million households, our buying rate is only $106 million. The ACV distribution rolling 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 businesses only about 4% of our business and internationals Canada plus the UK and fact that they 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 a $1 billion. Our penetration would be about 8 million households. We would have awareness of 75% and a buying rate of call $160. We would have over 65% ACV technology enabled fridges and more than 50% of our stores and we have more than 4000 stores with double fridges or better. We have a meaningful business in the UK and Canada. We would have a very robust dog business and a developing cat food business. e-commerce will be well more north of 10% of our sales and bags will become our dominant product form.

We'll be operating three fully operational kitchens, we'll have an expanded program on sustainability and our place we've gone from about 450 today to about 1000. We would have an expanding clinical database that Gerardo refer to that will be supporting the benefits of Freshpet food, our satisfaction would remain at the highest level.

All right, we have industry leading sense. We have a significant pet philanthropy in our leading net promoter score, didn't have over $100 million in advertising spend, we'd be growing north of 20% more than a billion in sales and we have 25% adjusted EBITDA margin and strong free cash flow. So my hope is that by the time we get there when we say that we're at Freshpet, you will have the same feeling and reaction that my dog Appa does when I say Freshpet.

[Audio-Video Presentation]

That's the only one she knows the meal's coming not even when the food's 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.

[William Cyr, CEO & Director]

Is that right? Yes. Okay. All right. This microphone. There's a microphone right there. You want to use this? All right. Do you want to come on up here? We'll field these together. First, Jason, do you like my dog? Is that working? Yes, there we go.

[Unidentified Analyst]

Okay. That was the trick. Thank you so much for the detail. I guess where I'm left with some on answer questions. It's really about the cash costs to get there by 2025. Because if I do the quick math on finishing 2025 like around three times net leverage, it'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 can just get right to the heart of it. What are you expecting to spend on CapEx and what's the cadence?

[William Cyr, CEO & Director]

So, we aren't laying out this 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 Kitchen South that's already been float through the balance sheet. We're working on refining exactly what the costs are going to be for the facility and we've kind of scoped out the size. We're doing a lot of work. You 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 three lines that go in there. We will pay for that out of all both the 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.

[Unidentified Analyst]

Okay. So to jump [indiscernible] Billy, I know not going to try on this.

[William Cyr, CEO & Director]

It sounds like, that's not too high of a number first for you. I have to go through and look at the components. I don't know Dick, if you have a point of view on that.

[Unidentified Company Representative]

You had better come over here cause then mic, they need to hear you on the phone.

[Unidentified Company Representative]

Hey, John. [indiscernible] Balance sheet [indiscernible] find the numbers. Okay. Both the number at 10-K of $300 million for first three lines, and we're kind of evaluating to go next.

[Unidentified Analyst]

Yes, thanks. So first going back to a longer-term addressable market. I just want to get a sense of how you guys talk to your in competition and how you factor in the economic conditions as well as the economic environment.

[William Cyr, CEO & Director]

Yes. So competition, when you create a market size, you assess what is the potential markets that's out there, theoretically, somebody else can come along and we participating in that. If you look at the history of these things, you will get a competitor or some point. There will be undoubtedly be a competitor. And normally the market ends up being the guy who came first, if he is willing to put 80% of the market, the next guy comes along, picks up 20% of the market, again, generalizations but if you think about the way we thought about the addressable market, even at a billion, we're still only at 40% of the total addressable market. So there's a 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 is somewhat static they'll be periods that are good, and there'll be periods that are bad as you go along. But we did look at how the category 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 if you have anything to add to that.

[Scott Morris, Co-Founder, President & COO]

No, I totally agree. I mean, it's in cycles, I mean, you can kind of look at the growth of pet foods and I shared like a 4% CAGR. It is pretty amazing how resilient has been during some of these 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, etcetera, but to cut out food for my child, right. As we talked about, I think that's really one of the last places that people will turn to, could our growth slows slightly, yes, there is a potential that it can flow slightly by a couple of points, but over time, it will catch up.

[Unidentified Analyst]

Just one follow-up questions. On the gross margin line, so, obviously in Q4, they came below your expectations. So, if you're looking at your forecast for this year, is there anything you did differently building more conservative? Or just your confidence and achieving gross margin guidance out there?

[William Cyr, CEO & Director]

Well, I think 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 to 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 are now spending and the way we're spending on it is in think of it in terms of amount of time you spend doing sanitation and the amount of extra processing 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. I don't think we've properly introduced 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 are doing a kitchen out. Make sure that we plan, conservatively for what those costs are going 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. And I think we've captured it. We'll see.

I think the thing 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 we actually sat down looking at a chart, it's like a pretty tight range over time. And most people look then 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.

[Unidentified Company Representative]

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.

[Unidentified Analyst]

Two questions, first -- just, the goal of 20 EBITDA margins hitting scaling, when you hit a billion in sales in three years ago, we were 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 the $1billion in sales? Is there a reason why 25% is the is the ceiling?

[William Cyr, CEO & Director]

Yes. So first of all, the margins that we talked about $300 million or $400 million in 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. Showing relatively static on the margin side, there's a lot gross margin. There's a lot of good stuff happening on the gross margin side. But we have the headwinds on mix that was describing somebody outsource 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 shows you is a lot of that SG&A absorption is scale dependent. But we also as you might imagine plan a little bit conservatively around that as well. We have a pretty tight operating mentality on SG&A. You had this much more wage inflation, organization expansion year in a year as this much and sales is that a significantly higher level higher level. And the chart shows we've delivered that pretty consistently for the last several years. And we're projecting that out to 2025.

So I feel pretty good about it. Does that mean there's more beyond a $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, at the single brand, the classes, the trades that we're in, while they're diverse is we don't have a complicated selling system. We don't have a lot of people doing trade promotion management, a lot of back office is related to that. The minute or business has a significant skew outside the U.S. we have to put a new organization and infrastructure. You'll have an increase in the SG&A that's associated with that. So we have to balance all those factors.

[Unidentified Analyst]

And then just follow up on the new products. If you look at every other pet products on the shelf, they have specific products for puppies and then regular dogs, and then for weight management and for elderly dog but you don't. And a lot of them also and that channel have, for arthritis or stuff like that Trey stuff. You seem to kind of have a one size fits all which to be nature of the product. But I mean, is there a plan to try to migrate consumers up or to bring more consumers for need based in there or is it really just, we're just trying to build households right now. That's a two, three years, four years down the road?

[William Cyr, CEO & Director]

Overtime, the first goal is to basically cement the idea of fresh, refrigerated food for as many people as possible. Especially when you're dealing with a single cooler, the most productive use aren't those ones that have unique need space. Over time, you saw an example we do have puppy and the most likely skew and a lot of the second coolers is the puppies skew, or the sensitive some skew. So there's more and more of those skews that are going to be going into our second 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 needs space, 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 being 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 you saw today, we're asking them to create what does your business what is your responsibility look like over the next five years? So we shared kind of snippets of different things, but everyone's thinking through what is the portfolio look like? What is our overall business look like in five years from now. And you'll definitely see more of those types of products coming.

[Unidentified Analyst]

Thank you for all the details on 2025. One thing that I didn't pick up on was and maybe 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 it such an incredible category, you compare yourself at the beginning to some of the most successful companies in the history of the world? That's going to be.

[Scott Morris, Co-Founder, President & COO]

Okay. Yes. That obviously will attract some right other people into the business?

[Scott Morris, Co-Founder, President & COO]

So the thing that's interesting is we did our work. We've done all the modeling and all the work around the consumer and what the potential is, that's things fun up investing in the category. We actually could see a potential where this 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 of the growth of Freshpet food significantly over kind of our anticipated growth rate.

So we can 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 for refrigerated type of food.

And in that scenario as Billy mentioned, when those incremental investments come in and the tech category really does attain the shift. Yes, it will kind of change our operating dynamics. And we've been trying to be thoughtful that and take those into consideration or business planning. But we recognize that it will be a bigger piece of the pie and we think that will position to kind of take the biggest piece of it potentially overtime.

[William Cyr, CEO & Director]

So the thing that I would add to that, which is the one thing that I've seen is, I said before, when you have a category like this is defined by somebody new and somebody else comes in along the way. The market split, as I said earlier, it's looking like it's an 80/20 split. You also see the market goes faster. The added competition events in the 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 flooded things at share of the category.

The thing you have to see is that one of the practices of that person comes in. That person comes in with a low price alternative, and turns it into a pricing, 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 price product that tries to take off the top thing, you 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.

[Unidentified Company Representative]

So one other example. So over the past 3 years, there was a competitor that came into the business. We competed head to head of them in each up. I've shared a little bit of the story. They came in a lower price anywhere between 10% all the way to 40% lower price on kind of firsthand are 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 one of the things that we've done is not only from a branding standpoint and a positioning standpoint and a pricing standpoint, like I said 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 with competing.

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 position at this point. To compete with if someone does show up. The real reality of this is not easy, not easy at all. It took us, it shows 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 off at a major organization and say hey, I want to launch a Freshpet 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 say, it's interesting. What's your one revenues, although be at least $25 million.

And I've done many, many launches in the pet food category. $25 million or $40 million is that out of the ballpark success when you do a year one launch, which of your two revenues, maybe $45 million to $50 million. What are your three revenues. Maybe $75 million to $100 million. And 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 are again, we are 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 as has as much of a head start as we it can, if someone does come into the category.

[Unidentified Company Representative]

And you know in Australia, we talked about 25% of the market and the guys who first came in and Australia still own 80% of that 25%. Mark.

[Unidentified Analyst]

Thanks. 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 up to 2025 years it really wasn't as with as much cushion as I think you probably would want. I guess the question I going for basis is, how do you think about that once you even get the 2525. I mean, I appreciated this five years from now but if you get where you want to get, you're still going to have that same problem and is going to be this expectation that have more it's been so. Can you more efficient in how you're thinking about capitation south that's obviously more a co-packer relationship. Why can't you do that more with existing businesses, what do you hope your potentially can learn from what you're doing in Texas you don't have to do this going forward.

[William Cyr, CEO & Director]

Let me just start with start beginning of the premise of your question. In that chart, we end up at in 2025 with $1.3 billion in capacity on a billion dollar business, and so there's a fairly significant amount of cushion, assuming we fully throwout the Ennis as we've mapped it out. And it says the first thing 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, your demand, our demand is incredibly consistent, because people feed the 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 -- and getting out ahead of this. The way that curve is working is it gives 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 kitchen 2.0 is it greenfield the kitchen, the next kitchen. But one of the things that you're talking about are the things you can do, whether it's like Kitchen South where you can be a little bit more efficient. We're going to learn a lot from that we literally just started that off last month, or I guess this month, literally just started off. We have conversations going with a partner that we were 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 have you put a second line on this schedule, and that's certainly one of the options, the other pieces, I wouldn't downplay the opportunity, we have to reinvent the way we make fresh pet food. We mentioned several times today that we hired somebody to go work on that Gerardo and [indiscernible] on 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 Freshpet headline out today, it's about 405 feet long from front end to back end. It's a big line with lots of unit operations in it. But the value add part of that operation is probably only like 100 or 105 feet or sometimes not a lot of the operation. So, they're looking. So they're looking at ways in which we can completely shrink that down and it become a lot more efficient to produce a higher quality product with lower cost and probably end up having less CapEx that goes with it. That's part of why we're building [Annison] 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 a completely different lines that are completely different than what we've done before. So, the next phase that facility gets built out differently.

[Unidentified Company Representative]

And that is not budgeted.

[William Cyr, CEO & Director]

Yes. That's on the budget. So, if we have any of those breakers, those things will be accretive.

[Unidentified Company Representative]

Bob.

[Unidentified Analyst]

Thanks. Two questions. I just want to make sure I want to check Jason's math also might be a dangerous thing to do, but you did say there's 27 pages, but the leverage limit you said was three times, is that right?

[Unidentified Analyst]

So if you have a 25% margin on a billion, that's $250 million of EBITDA. So does that mean that the most debt you would want is 750, is that a fair number?

[William Cyr, CEO & Director]

Yes.

[Unidentified Analyst]

So with that, in terms of cash costs, is only $300 million, how do we get like above $1 billion in cash costs on top of that is just the ongoing cash flow being negative for the next few years. Is that how we get there?

[Unidentified Company Representative]

Well, the capital that we would just spend based on this layout from now is around $400 million.

[Unidentified Analyst]

I'm sorry, come again.

[Unidentified Company Representative]

Around $400 million going forward. We have an estimate of $300 million for NS. We spent about $55 million already on 2.0. So, we've got about $50 million to go.

[Unidentified Analyst]

Okay.

[Unidentified Company Representative]

And then, the Kitchen South cost us, we said $15 million. So, this is non chiller capital. So that's about $365 million between now and 2025.

[Unidentified Analyst]

Okay. So I'll just have a look, Jason right or wrong with $1 billion.

[Unidentified Company Representative]

Jason. Jason is very accurate with his experience of many years.

[Unidentified Analyst]

But then I'll use his numbers. But the next question was on platforms. You mentioned three platforms, I just want to make sure I get the nomenclature right. You have roasted meals, Freshpet kitchen, and then the roles. Is that it for platforms? Or is that that new item that you saw that you showed us with it looked like a TV dinner? Is that another platform on top of that.

[Unidentified Company Representative]

We would consider that and some others as potentially other platforms overtime, and we also want to make sure that when we do NS that we obviously have kind of what our kind of core businesses, right? The roles 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.

[Unidentified Analyst]

Okay. So is the idea that in order to get to a billion, you do need new platforms to get to a billion or do you think that these three.

[Unidentified Company Representative]

I think that they assist us and make us more efficient along the way. One of the reasons that our advertising and actually or some acquisition costs has actually been going down is because our innovation has been so good. So I think that's a multiplier, honestly. I think existing platforms and the existing distribution could be a dramatically bigger business, but it gets there a lot faster, if we do really relevant product innovation.

[Unidentified Analyst]

All right. Thanks.

[Unidentified Company Representative]

Yes, Peter.

[Unidentified Analyst]

Thanks guys. You mentioned that you're going to make it, I think you said drastically easier to buy fresh online in 2020. Can you expand on that and when will we -- will it be that much in environment?

[Unidentified Company Representative]

Yes. So at this point, I can't tell you a 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 are in pretty enthusiastic, we also know that this is going to improve, like when we have out of stock issues is 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 thing is going to help with that and really significantly expand our buying rate. So can't expand on at this point. But I will say that we wouldn't put Jake leading this up if there wasn't anything to do.

[Unidentified Analyst]

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?

[Unidentified Company Representative]

Yes. And it's interesting. We've done a lot of work, and I didn't put it in the slides because we have lots of slides. One of the things that we done is we have the way we've been able to build those business, is 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's our line, it's our equipment, it's our room, no one else can even come into that room without it being basically your Freshpet badge.

So it's really our space. And we think that's kind of the right model. We've also taken technology that we think is the least proprietary, in all honesty, the least primary and brought it there, versus some of the most complex things that we do. So we feel good about that. But so it 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 you keep a secret and take care of our business and trust it just the way they would take care of their own.

[Unidentified Company Representative]

I would add to that, though, that there's another piece besides, what do you have to protect, but 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 for 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 will be better than where we were before. Not just another place to make Freshpet, a better way to make Freshpet. And that would probably inform us as we look at NS phase one or phase two about what we might want to do differently there.

[Unidentified Analyst]

And then this is last question, I apologize if I missed it, but as part of the billion dollar target, where is international figured in that and I think you said it was 4% of sales today and it's 10% too high. At what point you need a facility over in Europe?

[Unidentified Company Representative]

So we've assumed and developed to the $1 billion that it was proportional to the business as the business grew within expanded opportunity. The opportunity is clearly there and Cathal is sitting over there. And so I'd 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., applied in the UK 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. And we're to enable that we had to do it in a prudent manner, kind of laid 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.

[Unidentified Analyst]

Thanks. Just two questions related to I guess the gross to net on revenues and gross margins. One is I think, 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 in some of these other categories that you mentioned the beginning. So that's the first question. And then a I've follow up.

[William Cyr, CEO & Director]

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 group of consumers is not saying that your pricing is too high, you're probably priced too low and all honestly, we've done it where we've tried to make it as widely accessible to many people. We think that when you do pricing what you do is and I 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.

[Unidentified Company Representative]

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, kibble or cans of dog food. But there's nobody who's selling something like ours. So the ease of switching from one 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 pulled them over on the basis of price. We'd rather track them based on the proposition because once they get there, they 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 between the wholesome.

[Unidentified Analyst]

The second question, is this the leverage on the coolers. And I think if I understood Heather's build, as the volume -- as the coolers gets 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 heavy is focused more on adding coolers and the complexity of coolers have changed. There's more variety, more products, different velocity products. They've actually had to go back and add resource. So smaller outside, actually more feet on the street, servicing those coolers. So I'm trying to understand if this becomes more complex. Why wouldn't you have more resources?

[William Cyr, CEO & Director]

Well, let me just make sure because there's a having been in business. Part of theirs is not purchasing the coolers. It's supplying and whatnot, and they have a lot of infrastructure that's built around that. We sift through a warehouse system into the fridges. So we're only talking about the maintenance costs of the fridges. And the maintenance costs that we apply to the fridge is it 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, there's two fridges, one that had an issue, a second one of these 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.

[Unidentified Company Representative]

So one of the things I think may be helpful and interesting. We actually have to reverse. So we actually, we had all different size coolers height wise. We had all different scenarios mix. 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 manufacturers for the most part. And a simplified offering of fridges in almost every aspect, because I don't know if they 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 whole parts service, et cetera. Client over there and then we'll come back over here.

[Unidentified Analyst]

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 of 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 discontinuing loyalty or building loyal whatever you're seeing with each subsequent wave of adopters? Or is it more large dog in the mix, and you're planning to attack those opportunities?

[Unidentified Company Representative]

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 understanding 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 drop buying more and more of our products. We also see people kind of graduating from some lower price items, actually, not only more in total, but actually higher priced items, and additional kind of products with different features and benefits, edition of treats that might be on et cetera.

So overall, we're looking at that buying rate historically and kind of going forward consistently increasing at a fairly set rate is how we thought about it. We've also looked at the consumers that look to come 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 chuao's, think that the amount of the consumption. Even if those people and the golden retriever in our mixers, we're still going to get more dollars for that household overtime.

So there's several different factors we tried to look at and kind of and anticipate and model going forward. But part of the work that we did to as you think about Brian, if you 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 few years, more rapidly, you have to penetration go up it causes the binary to go flat. But when we had periods where we were flat or not as aggressive growth on the penetration. We saw the binary going up in 10%, 11% range.

And so the simplest way, it's not exactly mathematically right to the simplest way is, the sum of the two growth rate has got to get you to 27%. Right now, we're running at a growth rate on the core dog business, which is 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.

[Unidentified Analyst]

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 can provide?

[Unidentified Company Representative]

So they're going to test right now. It's a scalable technology. We've worked with the people that have really kind of invented this and 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 was a fridge with consistent issues, because we're seeing that those pictures, we can really kind of focus our efforts we're 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 and 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 use the term like Uber, right. So basically supply and demand. So we'll spend 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 overtime. Also, the other thing that's very interesting is as you continue to increase the dollars per store, which we had every single year for the past 5 to 10 years, the dollars per store, when you all of a sudden have a story of swing $500,000 to $700,000 it allows you to think very differently about the resources you'd apply to a store doing $1,000 a week versus store doing $150 a week.

And think about if you did a small improvement 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 to those bridges, it really changes our thinking on how we can service those bridges. And think about them.

[Unidentified Analyst]

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, then 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 your household put mature into the brand?

[Unidentified Company Representative]

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 sense that it dot million dollars per million ACV. But that's not the same-store sales, which is what most people are thinking about fewer a retailer who is selling Freshpet, today, you're looking at your same store sales growth, you're still seeing very, very healthy numbers in the same store sales basis. But when we add a lot of new distribution late in the period, and you divide the net sales across a new distribution, the millions of dollars per million ACV drops in so you don't have the same rate of growth. But if you're one of the retailers looking at it today, you're not worried about your same-stores sales you're feeling pretty good about the same-store sales.

We're going to see peaks and valleys on 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 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. But 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's 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 million dollars per million ACV. That looks like it looked like at the end of '18 in the beginning of '19.

[Unidentified Company Representative]

The quality of a ACV we added has been very, very strong. Overtime, we don't expect I mean, we know ACVs is going to increase, but this is truly a consumer penetration based model that's really kind of focus on how we're thinking about and how we're building out overtime. And we continue to pick up ACV, yes, the more important factor actually overtime will be kind of the

what 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 overtime there.

[Unidentified Company Representative]

We had a question over here.

[Unidentified Analyst]

Hi. I'm curious as ownership as small dogs has grown faster within the pet category, has that benefited Freshpet and can you quantify how much of your growth has benefited and you see as the trends going forward?

[Unidentified Company Representative]

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 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 overtime. 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 overtime.

[Unidentified Analyst]

And I have another question. Could you share with us what your share of voices 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 have tiny, tiny amount of what's going on in the category. There's almost a billion dollars 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 is important is the dollars that we spent have been able to be incredibly productive and predictable overtime. And we know what the exact I've mentioned CAC cost, the consumer acquisition costs.

We know exactly what we get for the media spend, and I think John tried to illustrate on 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 and 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 bring consumers into the franchise.

[Unidentified Analyst]

And then just one follow-up on that. So, I think one of the takeaways from Cagney was that, the other large CPG companies that have animal divisions want to increase the branding efforts, the more marketing going forward.

[Unidentified Company Representative]

Yes.

[Unidentified Analyst]

So I guess, how would you protect your ROI in face of

[Unidentified Company Representative]

It is pretty interesting. Probably over in has really been extraordinary and the amount that they have increased. So when we kind of take a step back and look at it, there has been a massive increase in television advertising and that kind of mass advertising over the past 5 to 7 years. We've been able to kind of keep pace and keep our groceries going in light of that. I think that, those major investments, I don't think you'll see quite the extraordinary ramp up that you've seen from some of the players, like a Blue Buffalo over the past five to seven years, I don't think you'll see quite that ramp up. And I think we'll be able to maintain and actually grow our share of voice, which is to your prior question, with the investments that we planned out over time. Just because of our growth rates, it gives us the ability, it's one of those benefits of scale that Heather's touched on a little bit.

The question in the back of the room over here,

[Unidentified Analyst]

Just quick one for me, just on your forecast, GM kind of being flat going forward. If you look at the industry, on a daily basis is going away 3% to 4%. If you assume 1% of that is a mixed benefit coming through and kind of work your way down just back of the envelope. You've got kind of 150 basis points of benefit as a GM line coming for from Kitchen 2.0. Could you just kind of help me work through like the balance what's also now you've talk to bring on capacity, like a year forward? And then also the bags being a headwind, can you kind of quantify that for me?

[Unidentified Company Representative]

Yes. I can handle. When Heather showed our chart, basically, she said, we opportunities but just not happens. We do have the fresh from the kitchen line where, we're going to go from £50,000 -- £55,000 a day to the new line in 2.0. We'll go over £90,000 a day which would pick up about 600 basis points about on 20% of our product line. But we've experienced and you can see it in the during the year, further processing more cleaning stuff that kind of hit shit and it hits was basically Billy said, yes, we're in the 49% to 50% range. We're in that, those buckets. When we laid out the 5-year plan, we kind of just said, let's just keep it at 51. There's a lot of stuff going on, we're going to do a lot of hiring. We're going to doing a lot of training. As new people come on, the new line doesn't come on, every line does about $100 million in sales. So we're not going to be at $100 million in sales day one. So you're not going to be perfectly efficient on labor and overhead until you get to those skills. So we laid out 51%, we know we have stuff coming, that could probably enhance that. But we have experienced that other stuff occurs. This kind of takes that down. And we just felt that let's not push the envelope.

[Unidentified Analyst]

Okay, I guess just a follow-up to that. So what you're saying is, and then in a steady state, you'd expect that today, couple of basses points while once you stop not that you necessarily work once it's still pretty young still. And absolutely normal stuff.

[Unidentified Company Representative]

Absolutely. I mean, we said we would be $300 million and $60 million, and we could do that in 1.0. Okay, but we're not doing 1.0 now. Now we're 2.0, so we got investments to make this more media to spend. We would have spent a lot less media in 2020, if we were just trying to hit $300 million.

[William Cyr, CEO & Director]

I don't see any other questions. So at this point, we say thank you very much. Katie, are there boxes or anything out there? Okay. So we have gifts parting gifts for everybody and box launches. I guess box launches are over there where the toasts over that way so you get your lunch and then you get your toast on the way out. So thank you for coming very much.