Freshpet(FRPT) - 2023 Q4 - Annual Results

Company Overview and Highlights Freshpet's 2023 results mark an inflection point, with strategic investments yielding improved profitability and strong financial performance CEO Commentary CEO Billy Cyr emphasizes 2023 as an inflection point, with investments driving improved profitability and cash flow, aligning with the 'Fresh Future' plan - Freshpet's 2023 results indicate an inflection point, with investments leading to improved profitability and operating cash flow, validating the 'Fresh Future' plan[2] - For 2024, the company plans to continue strong margin improvement, demonstrate capital discipline, and sustain net sales growth to drive profitability and shareholder value[2] Fourth Quarter 2023 Highlights Freshpet reported robust financial performance for Q4 2023, with significant increases in net sales, a shift from net loss to net income, and substantial growth in Adjusted EBITDA, reflecting improved operational efficiency and higher sales volume Fourth Quarter 2023 Key Financial Highlights (in millions) | Metric | Q4 2023 | Q4 2022 | Change (%) | | :----------------- | :---------- | :---------- | :--------- | | Net sales | $215.4 | $165.8 | +29.9% | | Net income (loss) | $15.3 | ($2.9) | N/A | | Adjusted EBITDA | $31.3 | $18.8 | +66.5% | - The increase in net sales was primarily driven by volume gains of 25%[3] Full Year 2023 Highlights For the full year 2023, Freshpet achieved significant net sales growth for the sixth consecutive year, reduced its net loss, and more than tripled its Adjusted EBITDA, demonstrating strong overall financial improvement Full Year 2023 Key Financial Highlights (in millions) | Metric | FY 2023 | FY 2022 | Change (%) | | :----------------- | :---------- | :---------- | :--------- | | Net sales | $766.9 | $595.3 | +28.8% | | Net loss | ($33.6) | ($59.5) | -43.5% | | Adjusted EBITDA | $66.6 | $20.1 | +231.3% | - Full year net sales growth of 28.8% marks the sixth consecutive year of over 25% net sales growth[1][9] - The increase in net sales was primarily driven by volume gains of 20%[9] Fourth Quarter 2023 Financial Performance Freshpet's Q4 2023 financial performance shows strong net sales growth, improved profitability, and a significant increase in Adjusted EBITDA Net Sales Freshpet's net sales for the fourth quarter of 2023 increased significantly by 29.9% year-over-year, primarily driven by strong volume gains Q4 2023 Net Sales (in millions) | Metric | Q4 2023 | Q4 2022 | YoY Change | | :------- | :---------- | :---------- | :--------- | | Net sales | $215.4 | $165.8 | +29.9% | | Volume gains | N/A | N/A | +25% | Gross Profit Gross profit and Adjusted Gross Profit both saw substantial increases in Q4 2023, with margins improving due to better plant expense leverage and reduced quality costs, despite increased depreciation and equipment disposal costs Q4 2023 Gross Profit (in millions) | Metric | Q4 2023 | Q4 2022 | YoY Change | | :---------------------- | :---------- | :---------- | :--------- | | Gross profit | $74.6 | $45.7 | +63.2% | | Gross profit % of net sales | 34.6% | 27.6% | +700 bps | | Adjusted Gross Profit | $88.5 | $54.8 | +61.5% | | Adjusted Gross Profit % of net sales | 41.1% | 33.0% | +810 bps | - Increase in gross profit as a percentage of net sales was primarily due to improved leverage on plant expenses and reduced quality costs, partially offset by depreciation and equipment disposal costs[4] Selling, General and Administrative Expenses (SG&A) SG&A expenses increased in absolute terms but decreased as a percentage of net sales in Q4 2023, driven by reduced logistics costs and ERP implementation costs, and increased leverage, partially offset by higher media spend and variable compensation Q4 2023 SG&A Expenses (in millions) | Metric | Q4 2023 | Q4 2022 | YoY Change | | :---------------------- | :---------- | :---------- | :--------- | | SG&A expenses | $59.7 | $47.8 | +24.9% | | SG&A % of net sales | 27.7% | 28.8% | -110 bps | | Adjusted SG&A | $57.2 | $37.2 | +53.7% | | Adjusted SG&A % of net sales | 26.6% | 22.4% | +420 bps | - The decrease in SG&A as a percentage of net sales was mainly a result of reduced logistics cost, decreased ERP implementation costs, and increased leverage on depreciation and share-based compensation, partially offset by increased media spend and variable compensation accrual[5] Net Income Freshpet swung to a net income of $15.3 million in Q4 2023 from a net loss in the prior year, primarily due to higher sales, increased gross margin, and reduced logistics costs, despite increased media spend Q4 2023 Net Income (in millions) | Metric | Q4 2023 | Q4 2022 | YoY Change | | :--------- | :---------- | :---------- | :--------- | | Net income | $15.3 | ($2.9) | N/A | - The improvement in net income was due to contribution from higher sales, increased gross margin, and reduced logistics costs as a percentage of net sales, partially offset by increased SG&A including increased media spend of $10.4 million[6] Adjusted EBITDA Adjusted EBITDA for Q4 2023 significantly increased, both in absolute terms and as a percentage of net sales, driven by higher Adjusted Gross Profit partially offset by increased Adjusted SG&A expenses Q4 2023 Adjusted EBITDA (in millions) | Metric | Q4 2023 | Q4 2022 | YoY Change | | :---------------------- | :---------- | :---------- | :--------- | | Adjusted EBITDA | $31.3 | $18.8 | +66.5% | | Adjusted EBITDA % of net sales | 14.5% | 11.3% | +320 bps | - The increase in Adjusted EBITDA was a result of increased Adjusted Gross Profit partially offset by higher Adjusted SG&A expense[8] Full Year 2023 Financial Performance Freshpet's full year 2023 financial performance demonstrates robust net sales growth, improved profitability, and a substantial increase in Adjusted EBITDA Net Sales Freshpet's full year 2023 net sales grew by 28.8%, reaching $766.9 million, primarily fueled by a 20% increase in sales volume Full Year 2023 Net Sales (in millions) | Metric | FY 2023 | FY 2022 | YoY Change | | :------- | :---------- | :---------- | :--------- | | Net sales | $766.9 | $595.3 | +28.8% | | Volume gains | N/A | N/A | +20% | Gross Profit For the full year 2023, both gross profit and Adjusted Gross Profit increased significantly, with margins improving due to better plant expense leverage, reduced quality costs, and increased net sales pricing, partially offset by higher depreciation Full Year 2023 Gross Profit (in millions) | Metric | FY 2023 | FY 2022 | YoY Change | | :---------------------- | :---------- | :---------- | :--------- | | Gross profit | $250.9 | $186.0 | +34.9% | | Gross profit % of net sales | 32.7% | 31.2% | +150 bps | | Adjusted Gross Profit | $306.6 | $214.1 | +43.2% | | Adjusted Gross Profit % of net sales | 40.0% | 36.0% | +400 bps | - The increase in gross profit as a percentage of net sales was primarily due to improved leverage on plant expenses, reduced quality costs, and decreased input cost as a percentage of sales mainly due to an increase in net sales pricing, partially offset by increased depreciation expense and equipment disposal costs[10] Selling, General and Administrative Expenses (SG&A) Full year 2023 SG&A expenses increased in absolute terms but decreased as a percentage of net sales, driven by reduced logistics costs, decreased ERP implementation costs, and increased leverage, partially offset by activism engagement charges, increased media spend, and variable compensation accrual Full Year 2023 SG&A Expenses (in millions) | Metric | FY 2023 | FY 2022 | YoY Change | | :---------------------- | :---------- | :---------- | :--------- | | SG&A expenses | $281.3 | $238.0 | +18.2% | | SG&A % of net sales | 36.7% | 40.0% | -330 bps | | Adjusted SG&A | $240.1 | $195.7 | +22.7% | | Adjusted SG&A % of net sales | 31.3% | 32.9% | -160 bps | - The decrease of 330 basis points in SG&A as a percentage of net sales was mainly a result of reduced logistics cost, decreased ERP implementation costs, and increased leverage on depreciation and share-based compensation, partially offset by activism engagement charges, increased media spend ($23.1 million), and increased variable compensation accrual[11][12] Net Loss Freshpet significantly reduced its net loss for the full year 2023, improving from $59.5 million in 2022 to $33.6 million, primarily due to higher sales, increased gross margins, and reduced logistics costs Full Year 2023 Net Loss (in millions) | Metric | FY 2023 | FY 2022 | YoY Change | | :--------- | :---------- | :---------- | :--------- | | Net loss | ($33.6) | ($59.5) | -43.5% | - The decrease in net loss was due to contribution profit from higher sales, increased gross margins, and reduced logistics cost as a percentage of net sales, partially offset by increased SG&A including increased media spend of $23.1 million[12] Adjusted EBITDA Adjusted EBITDA for the full year 2023 more than tripled, reaching $66.6 million, with a substantial increase in margin as a percentage of net sales, driven by increased Adjusted Gross Profit partially offset by higher Adjusted SG&A expense Full Year 2023 Adjusted EBITDA (in millions) | Metric | FY 2023 | FY 2022 | YoY Change | | :---------------------- | :---------- | :---------- | :--------- | | Adjusted EBITDA | $66.6 | $20.1 | +231.3% | | Adjusted EBITDA % of net sales | 8.7% | 3.4% | +530 bps | - The increase in Adjusted EBITDA was a result of increased Adjusted Gross Profit partially offset by higher Adjusted SG&A expense[13] Financial Position and Cash Flow Freshpet's financial position shows a strong cash balance and increased operating cash flow, supporting ongoing investments in its long-term capacity plan Balance Sheet Summary As of December 31, 2023, Freshpet reported a strong cash position and increased total assets, while also having significant debt outstanding, indicating ongoing investments in its long-term capacity plan Balance Sheet Snapshot (as of December 31, 2023, in millions) | Metric | Amount | | :---------------------- | :------------- | | Cash and cash equivalents | $296.9 | | Debt outstanding (net) | $393.1 | - The company plans to utilize its balance sheet to support ongoing capital needs for its long-term capacity plan[15] Cash Flow from Operations Cash flow from operations for the full year 2023 saw a substantial increase, driven by improved profitability and more efficient working capital management Full Year 2023 Cash Flow from Operations (in millions) | Metric | FY 2023 | FY 2022 | YoY Change | | :---------------------- | :---------- | :---------- | :--------- | | Cash from operations | $75.9 | ($43.2) | +$119.1 | - The significant increase in cash from operations was driven by improved profitability and more efficient working capital[14] Full Year 2024 Outlook Freshpet provided optimistic guidance for full year 2024, projecting continued strong net sales growth and a significant increase in Adjusted EBITDA, alongside planned capital expenditures Full Year 2024 Guidance (in millions) | Metric | Guidance | | :----------------- | :------------------- | | Net sales | At least $950 | | Net sales growth | At least 24% from 2023 | | Adjusted EBITDA | $100 to $110 | | Capital expenditures | ~$210 | - The company does not provide guidance for net income or a reconciliation to Adjusted EBITDA due to the unavailability of reliable estimates for certain components of net income[16] Additional Company Information This section provides details on Freshpet's conference call, company mission, and important forward-looking statement disclaimers Conference Call Details Freshpet hosted a conference call on February 26, 2024, to discuss its financial results, with webcast and telephonic replay options available for investors - A conference call was held on February 26, 2024, at 8:00 a.m. Eastern Time, with a live webcast available through the 'Investors' section of the company's website[17] - A replay of the conference call is archived on the company's website and available via telephonic playback until March 11, 2024[18] About Freshpet Freshpet is dedicated to improving the lives of pets through fresh, real food made from locally farmed meats, vegetables, and fruits, prepared in small batches and kept refrigerated. Their products are distributed across various retailers in North America and Europe - Freshpet's mission is to improve the lives of dogs and cats with fresh, real food, using natural ingredients cooked in small batches at lower temperatures[19] - Products are kept refrigerated from production to retail and are available in grocery, mass, club, pet specialty, natural, and digital retailers across the United States, Canada, and Europe[19][20] Forward-Looking Statements The release contains forward-looking statements regarding future growth, profitability, and financial guidance, which are subject to risks and uncertainties detailed in SEC filings. Freshpet disclaims any obligation to update these statements unless required by law - Statements regarding long-term growth, profitability, capital discipline, and 2024 guidance are forward-looking and subject to risks and uncertainties outlined in the Company's Form 10-K and 10-Q filings[21] - Freshpet undertakes no obligation to publicly update or revise any forward-looking statement unless required by law[21] Non-GAAP Financial Measures Definitions This section defines key non-GAAP financial measures used by Freshpet, including Adjusted Gross Profit, Adjusted SG&A, EBITDA, and Adjusted EBITDA, and their components Adjusted Gross Profit Definition Adjusted Gross Profit is defined as gross profit before specific non-cash and non-recurring items, providing a clearer view of core operational profitability - Adjusted Gross Profit is defined as gross profit before depreciation expense, non-cash share-based compensation, and loss on disposal of manufacturing equipment[23] Adjusted SG&A Expenses Definition Adjusted SG&A excludes certain non-cash, non-recurring, or specific operational costs from SG&A expenses to present a more normalized view of selling, general, and administrative costs - Adjusted SG&A is defined as SG&A expenses before depreciation and amortization, non-cash share-based compensation, loss on disposal of equipment, ERP implementation costs, capped call option fees, and activism engagement advisory fees[24] EBITDA and Adjusted EBITDA Definition EBITDA and Adjusted EBITDA are non-GAAP measures used to assess the company's operating performance by excluding various non-operating, non-cash, or non-recurring items from net income (loss) - EBITDA represents net income (loss) plus interest expense net of interest income, income tax expense, and depreciation and amortization expense[25] - Adjusted EBITDA further adjusts EBITDA by adding back loss on equity method investment, loss on disposal of property, plant and equipment, non-cash share-based compensation expense, ERP implementation costs, capped call option fees, and activism engagement advisory fees[25] - Management believes these non-GAAP measures provide a meaningful view of ongoing operating results for investors[26] Consolidated Financial Statements This section presents Freshpet's consolidated balance sheets, statements of operations, and cash flows, providing a comprehensive view of its financial health Consolidated Balance Sheets The consolidated balance sheets show Freshpet's financial position as of December 31, 2023, highlighting significant increases in cash and cash equivalents and total assets, alongside the introduction of convertible senior notes Consolidated Balance Sheets (Key Figures in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Cash and cash equivalents | $296,871 | $132,735 | | Total Current Assets | $427,319 | $261,965 | | Property, plant and equipment, net | $979,164 | $800,586 | | Total Assets | $1,464,421 | $1,125,383 | | Total Current Liabilities | $89,222 | $89,614 | | Convertible senior notes | $393,074 | — | | Total Liabilities | $510,967 | $93,814 | | Total Stockholders' Equity | $953,454 | $1,031,569 | Consolidated Statements of Operations and Comprehensive Income (Loss) The consolidated statements of operations reflect Freshpet's strong revenue growth and improved profitability in Q4 and full year 2023, moving from a net loss to net income in the fourth quarter and significantly reducing the full-year net loss Consolidated Statements of Operations (Key Figures in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :------------------------------------ | :-------- | :-------- | :-------- | :-------- | | NET SALES | $215,420 | $165,833 | $766,895 | $595,344 | | GROSS PROFIT | $74,575 | $45,709 | $250,872 | $186,033 | | SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES | $59,680 | $47,775 | $281,318 | $238,016 | | INCOME (LOSS) FROM OPERATIONS | $14,895 | ($2,066) | ($30,446) | ($51,983) | | INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS | $15,289 | ($2,918) | ($33,614) | ($59,494) | | NET INCOME (LOSS) PER SHARE - BASIC | $0.32 | ($0.06) | ($0.70) | ($1.29) | | NET INCOME (LOSS) PER SHARE - DILUTED | $0.31 | ($0.06) | ($0.70) | ($1.29) | Consolidated Statement of Cash Flows The consolidated statement of cash flows for 2023 shows a significant positive shift in cash from operating activities, while investing activities continued to be a net outflow due to substantial capital expenditures, and financing activities provided a net inflow Consolidated Statement of Cash Flows (Key Figures in thousands) | Metric | FY 2023 | FY 2022 | FY 2021 | | :------------------------------------ | :-------- | :-------- | :-------- | | Net cash flows provided by (used in) operating activities | $75,940 | ($43,227) | $647 | | Net cash flows used in investing activities | ($239,093) | ($233,364) | ($322,099) | | Net cash flows provided by financing activities | $327,289 | $336,538 | $326,993 | | NET CHANGE IN CASH AND CASH EQUIVALENTS | $164,136 | $59,947 | $5,541 | | CASH AND CASH EQUIVALENTS, END OF PERIOD | $296,871 | $132,735 | $72,788 | - Acquisitions of property, plant and equipment, software and deposits on equipment remained a significant use of cash in investing activities, totaling $239.1 million in 2023[33] - Financing activities in 2023 included proceeds from the issuance of convertible senior notes ($393.5 million) and purchase of capped call options ($66.2 million)[33] Non-GAAP Reconciliations This section provides detailed reconciliations of GAAP to non-GAAP financial measures, including Gross Profit, SG&A, and Net Income (Loss) to Adjusted EBITDA Gross Profit to Adjusted Gross Profit Reconciliation This section provides a reconciliation of GAAP Gross Profit to Adjusted Gross Profit, detailing adjustments for depreciation, non-cash share-based compensation, and loss on disposal of manufacturing equipment for both quarterly and full-year periods Gross Profit to Adjusted Gross Profit Reconciliation (in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :-------------------------------- | :-------- | :-------- | :-------- | :-------- | | Gross profit | $74,575 | $45,709 | $250,872 | $186,033 | | Depreciation expense | $8,103 | $6,566 | $41,209 | $20,774 | | Non-cash share-based compensation | $2,299 | $2,505 | $10,995 | $7,293 | | Loss on disposal of manufacturing equipment | $3,547 | — | $3,547 | — | | Adjusted Gross Profit | $88,524 | $54,780 | $306,623 | $214,100 | | Adjusted Gross Profit as a % of Net Sales | 41.1% | 33.0% | 40.0% | 36.0% | SG&A Expenses to Adjusted SG&A Expenses Reconciliation This reconciliation details the adjustments made to GAAP SG&A expenses to arrive at Adjusted SG&A, including exclusions for depreciation, share-based compensation, ERP implementation costs, and activism engagement fees, for both quarterly and full-year periods SG&A Expenses to Adjusted SG&A Expenses Reconciliation (in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :-------------------------------- | :-------- | :-------- | :-------- | :-------- | | SG&A expenses | $59,680 | $47,775 | $281,318 | $238,016 | | Depreciation and amortization expense | $4,248 | $3,565 | $15,849 | $13,781 | | Non-cash share-based compensation (a) | ($2,315) | $3,178 | $13,941 | $18,799 | | Loss on disposal of equipment | $86 | $193 | $774 | $396 | | Enterprise Resource Planning (b) | $465 | $3,613 | $2,457 | $8,558 | | Capped Call Transactions fees (c) | — | — | $113 | — | | Activism engagement (d) | — | — | $8,177 | — | | Organization changes (e) | — | — | ($67) | $734 | | Adjusted SG&A Expenses | $57,196 | $37,227 | $240,074 | $195,748 | | Adjusted SG&A Expenses as a % of Net Sales | 26.6% | 22.4% | 31.3% | 32.9% | - Non-cash share-based compensation for Q4 2023 includes a true-up reversal due to reassessment of performance-based vesting conditions for multi-year awards[35] Net Income (Loss) to Adjusted EBITDA Reconciliation This section reconciles GAAP Net Income (Loss) to Adjusted EBITDA, outlining adjustments for non-cash expenses, interest, taxes, and other specific non-recurring items to provide a clearer measure of operational profitability for both quarterly and full-year periods Net Income (Loss) to Adjusted EBITDA Reconciliation (in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :-------------------------------- | :-------- | :-------- | :-------- | :-------- | | Net Income (loss) | $15,289 | ($2,918) | ($33,614) | ($59,494) | | Depreciation and amortization | $12,351 | $10,131 | $57,058 | $34,555 | | Interest expense, net of interest income | ($394) | $1,148 | $1,069 | $5,208 | | Income tax expense | — | $159 | $210 | $282 | | EBITDA | $27,246 | $8,520 | $24,723 | ($19,449) | | Loss on equity method investment | — | $762 | $1,890 | $3,731 | | Loss on disposal of property, plant and equipment | $3,633 | $193 | $4,321 | $396 | | Non-cash share-based compensation (a) | ($16) | $5,683 | $24,936 | $26,092 | | Enterprise Resource Planning (b) | $465 | $3,613 | $2,457 | $8,558 | | Capped Call Transaction fees (c) | — | — | $113 | — | | Activism engagement (d) | — | — | $8,177 | — | | Organization changes (e) | — | — | ($67) | $734 | | Adjusted EBITDA | $31,328 | $18,771 | $66,550 | $20,062 | | Adjusted EBITDA as a % of Net Sales | 14.5% | 11.3% | 8.7% | 3.4% | - The non-cash share-based compensation adjustment for Q4 2023 reflects a true-up due to a reassessment of the probability of achieving performance criteria for multi-year awards[37]