Thank you, Jeff, and good afternoon, everyone. I am speaking with you from Bethlehem, Pennsylvania, the home of the Freshpet Kitchens; and Scott; and Heather are in our offices in Secaucus, New Jersey.
We will do our best to not trip over each other on the call and as always please excuse any barking in the background and any other technical issues we might encounter. It is hard to believe that one year ago we gathered with many of you at NASDAQ in New York City to outline our five year strategic plan and what a year it was. I am so proud of our team’s resilience through these trying times.
Fortunately, Freshpet was able to navigate the shifting environment, while still making significant progress against our long term strategic goals.
In fact, the last year, despite its numerous challenges, has seen an acceleration of our business progress towards our 2025 goals.
As such, we are going to update those long-term goals to both reflect the fast start we had in 2020 and also to include the impact of some of our most recent learnings. But first I want to go back to where I started on Investor Day presentation one year ago. In that presentation, I asserted that Freshpet had the potential to join the pantheon of iconic brands that changed the world, brands that change things we do every day and reflected significant changes in society’s values, and priorities, brands that leverage technology to make the previously impossible possible or broadly available, brands like Nike, Starbucks, Gatorade, Netflix and Apple. That may have seemed like a lofty ambition then, and to be clear, it remains a very lofty ambition today, but Freshpet is on that path, and accelerating. Freshpet is changing the way people feed their pets. That change reflects the fundamental shift in how society views both pets and food.
Our pets are no longer creatures who sleep in dog houses, in backyards. They are the favorite child who sits in our beds and our food needs to fresh and natural, not dehydrated and preserved. Those fundamental changes in society’s values and priorities are here to stay, and Freshpet will lead the transition to fresh, and natural food for our pets. Like those other iconic brands that change the world, Freshpet is growing quickly from our infancy, towards juvenile and pre-professional peers [ph], towards the teenage years and then to adulthood. In many ways, Freshpet is like an 11-year-old boy who wears size 15 sneakers. He is growing really fast, and everyone expects him to be big, but along with that explosive growth, there can be some awkwardness.
Our challenge is to do everything we can to achieve our enormous growth potential, while insulating ourselves from some of the bumps along the way. In pursuit of that goal, I think, it is worthwhile to highlight a few of the critical achievements we had last year that demonstrate both our capability and the foundation that we are building to achieve even greater goals. Number one, we accelerated our growth for the fourth consecutive year, posting 30% net sales growth for full year 2020 and ended the year with 38% consumption growth in Q4. Number two, we increased our adjusted EBITDA growth rate for the third consecutive year, growing adjusted EBITDA by 61%.
Third, we increased household penetration by 24%, reaching almost 4 million users for the first time and increased the buying rate by 7% at the same time. Number four, despite the retail challenges presented by COVID, we added 1,146 net new stores, and more importantly installed double fridges in another 1640 stores and upgraded 795 stores. Five, we doubled our installed production capacity and broke ground on a project that will result in a tripling of our capacity by the end of next year. Those capacity additions included completing the construction and startup of Kitchens 2.0, adding more than 200 million in new capacity with significant increases in automation and breaking grounds on Kitchens 3.0 in Ennis Texas.
We also opened Kitchens South in conjunction with a long-term partner. And sixth, we increased our organization headcount from 450 to just under 600, including the hiring and on boarding of three important new leaders, Heather our CFO; Thembi Machaba, our SVP of HR; and Ricardo Moreno, our new VP of manufacturing. In each case, we were able to attract first rate talent, because of the power of the Freshpet proposition and the opportunity to change the way people feed their pets. We got all this done while sheltering in place, working remotely, and devoting significant energy to protecting the safety of our team. I am incredibly proud of the number of people who stepped up and played critical leadership roles for our company when the situation required it. They demonstrated the quality, that should give all of us confidence that we can overcome almost any obstacle and achieve great things. Like that rapidly growing teenager, I mentioned earlier, there were some awkward moments too. We struggled to keep up with demand and ended the year with nearly empty fridges in many stores. That means that we are spending the first quarter of 2021 digging out of a trade inventory hole we dug rather than putting our foot on the gas to grow faster. The good news is that we are making great progress against that. Since January 1st, our manufacturing output has grown and it is now averaging 26% more per day than during Q4 and it is accelerating. Other than the week of winter storm or Lena, our production has outpaced consumption each week since January 1st, enabling us to steadily refill the trade inventory hole. It will take until mid to late April to refill the deficits, but our capability is growing quickly, and we are confident we have built sustainable capabilities that can support the near-term and long-term goals we have set for ourselves. To help manage consumer expectations around the empty fridges, Scott as the Co-Founder and COO has been posting letters to our consumers in social media, explaining the reasons for the empty fridges and outlining our efforts to refill them. The support we have gotten from consumers has been largely positive, not only for the efforts we are undertaking, but also for that transparency with, which we are updating them and also the value we have been placing on employee safety in the face of COVID that has resulted in some of the outer stocks. He even told people that we are hiring, but we are only hiring people who are willing to work. The will be paid and treated well including stock grants and the same benefits he has. He provided them with a link to our hiring website. Consumers loved it, particularly the part about how we treat our employees. Consumers who have seen the social media post are even more attracted to Freshpet than ever before, because they realize we share their values, and this experience also highlights how our team moves quickly and innovatively to solve our most pressing challenges. The improvement in our supply position that began in January is due to exceptional work by our HR team at filling vacancies and recruiting incremental staffing to backfill behind employees, who are out for testing, or quarantine related to COVID.
As we previously discussed, you will see some of the cost of this added labor in our adjusted gross margin early in 2021. But we believe that it is necessary to provide our consumers and customers with the pet food they need. Since we gave you a preview of our 2020 results earlier this year, when we presented at the ICR Conference, I will leave it to Heather to provide the final details on Q4 and the year. I will instead focus my comments on where we are going in 2021 and our longer term goals.
We have taken some time to analyze our 2020 results and all the consumer data we gathered during the year. In total, it presented a very encouraging picture of the long-term opportunity for Freshpet. When we met one year ago, we shared our plan to convert 5 million more households to Freshpet by the end of 2025, getting to 8 million households in total.
As ambitious as that sounded a year ago, we are well ahead of schedule.
In fact, we are almost one year ahead of the pace we needed to deliver 8 million households. What’s more, we did that despite pulling back on our advertising investment spending only about 10% of sales, instead of our target of 12% and significant out-of-stocks that made it hard for consumers to find our products at times. If we simply continue to grow household penetration at the rate we have for the past two years or 24%, for the next four years, we would exceed our 8 million household goal one year earlier and by a wide margin. Think about this in a different way, if we return to our pre-COVID era of customer acquisition cost of about $50 per consumer and invested in media at our traditional 11% to 12% of net sales rate, we believe we would also greatly exceed our 8 million household goal. This and other analysis prove to us that we could achieve a far higher share of the greater than 20 million household, total household total addressable market or TAM that we have outlined and do it at a faster clip. Further, while we have not rerun the study to determine if the TAM has growth, we believe it is highly likely that that TAM is larger today than it was when we ran the study more than a year ago. The number of millennials and Gen Z, who have entered the household formation stage of life and acquired a dog is growing quickly, and they are our best prospects for future Freshpet users. We saw that powerful dynamic play out in 2020.
We also shared some compelling buying rates cohort data at the January ICR Conference that demonstrated how our underlying buying rate grows over multiple years and ultimately reaches more than four times at year one purchase rate. That data was like the Rosetta Stone for us, unlocking and understanding of our long-term potential in a way that we could not have been able to do before. The combination of that household penetration growth and buying rate data convinced us that the market demand for Freshpet over a foreseeable timeframe was much bigger and could be realized much faster than our initial 2025 goals suggested. The only limiter to our ability to achieve that opportunity would be our ability to build capacity fast enough to satisfy demand.
Given that, we spent much of the year working on ways to accelerate our capacity expansion. We did the following.
First, we proved that we can construct and startup Kitchens 2.0 successfully, even under the severe limitations imposed by COVID.
Second, Kitchens 2.0 also proved that we good create and operate higher throughput lines with more automation that drive better margins. That demonstration of our technical capability is an important proof point for us and the higher capacity of those lines is very encouraging.
Third, we started up operations with a long term partner at Kitchens South, initially installing one of our lines in a dedicated facility that they operate, and ultimately, explaining that to a two shift operation capable of producing about $50 million per year.
We have since expanded that relationship by committing to install a second line. By the end of 2021, we will have 100 million of capacity operating at that partner and have proven the strength and durability of that partnership and are ready to expand it further to enable more rapid capacity expansion. Fourth, we broke ground on our biggest project yet, NS Phase I. We built and trained an entirely new team capable of designing that facility in conjunction with the Kitchens experts in Bethlehem and some long-term engineering partners, and are on track to open that facility next year, initially bringing on at least $400 million in capacity and the ability to add the second phase that could add at least $500 million more. Fifth, we installed and are operating a smaller scale line that supports meaningful product innovation such as home sale creation meals. And sixth, we significantly advanced some new manufacturing technology that has the potential to produce more Freshpet and less space, potentially lowering our future capital costs and increasing the capacity of some of our existing facilities. To be clear, we are not ready to deploy that technology yet, but we are working to qualified for NS Phase II and for a future project at Kitchen South that I will discuss in a minute. Even with all that capacity install or under construction, we think we will need even more to satisfy the demand for Freshpet. We think the long-term opportunity for Freshpet is a well north of $2 billion and that we will achieve more than our original goal of $1 billion in 2025.
So today, we are announcing that we are raising our long-term goal from $1 billion in net sales in 2025 to $1.25 billion in 2025, and simultaneously increasing our household penetration target from 8 million households to at least 11 million households by 2025. Due to the rapid increase in new buyers we are anticipating, we are holding the anticipated buying rate at about $162 per household per year.
We are also holding our adjusted EBITDA margin target at 25%, planning on investing the incremental G&A savings from added scale and incremental capability for growth, including international staffing and more R&D, plus some modest margin dilution from having increased production through our partner at Kitchens South.
Our updated long-term plan would deliver CAGR through 2025 of 31% in net sales, 23% in household penetration and 7% in buying rate, all in line with our 2020 actual performance, which we achieved with less marketing investment, significant out of stocks and broad scale disruptions at retail. Basically, what we are saying that we think that we have the tools and capability to repeat the performance we had in 2020 for the next four years. To deliver, we will need more capacity sooner, so we are taking the following actions to accomplish that.
First, accelerating existing projects, these include, starting up our second line of Kitchens South in Q3 of this year rather than Q4; and secondly, pulling forward to start up of our Ennis facility by one quarter, targeting to open in Q2 of 2022 instead of Q3.
We are now paying for extended construction hours to complete the project early and have any sent the contract to get it done on time.
Secondly, leveraging the capabilities of our partner to increase capacity faster, our partner has a deep engineering bench and has proven to be an effective partner over the past year.
So we are developing plans to add the third line of Kitchens South that will enable some new product innovation and add significant capacity.
Additionally, we have initiated discussions with them about adding another building with the capability to produce another $300 million of product and are targeting to have that ready by the beginning of 2023.
Third, we are also increasing our estimate of the production capacity of the Ennis production lines to reflect the learnings we are getting in Kitchens 2.0 and some further upsizing of the equipment. Both phases of the Ennis project will include the technology we validated and Kitchens 2.0 with some selective increases in the capacity of some pieces of equipment. In total, this will allow us to increase the anticipated capacity from the first three lines in Ennis Phase 1 from $300 million that we had previously outlined to $400 million, and the four lines in Phase 2 from $400 million to $500 million. In total, we are building the capacity to deliver almost $2 billion in net sales by 2025, with some of it coming online sooner than previously planned to meet the accelerated near-term growth rate. To accomplish this goal, while being mindful of balance sheet leverage, we may see to raise equity as part of our financing plans. We filed a preliminary prospectus supplement today regarding a potential equity raise. The goal of this raise is to ensure that along with our recent credit facility amendment, which increases are available debt to $350 million of balance sheet does not become a limiter.
We are mindful of the total amount of capacity we are planning, so our plan does not call for us committing to second phase of Ennis until early 2023. That phase is planned to deliver $500 million of capacity at a cost of about $100 million.
Finally, let me turn my comments to 2021. In line with the long-term plan and the incremental manufacturing capacity we have available to us, our plan for 2021 calls for another increase in our growth rate going from 2020’s 30% growth to 35% growth in 2021, which results in net sales guidance of greater than $430 million. The growth rate will be a bit back loaded due to the delay in our advertising investment in Q1 and the time we need to rebuild trade inventories. But once those are in place, we will be investing heavily to drive growth. With U.S. advertising returning to 12% of net sales for the year and include slightly more of the U.S. media in the back half versus the first half. This cadence is unusual for us, but it is necessary with the trade inventory hold we are trying to feel first. That spending pattern will also create significant momentum for the business at the end of the year and that is in part why we are pulling the Ennis project forward and adding a third line of Kitchens South that will ensure that we have adequate capacity as we enter 2022. We believe that many of our leading customers will be matching that growth and investment with incremental stores and second fridges both later this year and early in 2022.
However, both we and our customers will delay some new fridge installations until we can guarantee that we can supply them reliably. Thus our near-term store additions will be reduced, but the longer term store additions and upgrades will be very robust. In total, we expect to add greater than 1000 net new stores upgrade greater than 500 stores and add second and third fridges in greater than 550 stores this year and significantly more next year. We believe the incremental advertising investment and the modest overhang from new capacity will cause the adjusted EBITDA margin to dip temporarily this year before resuming its upward trend in 2022. Underpinning that margin acceleration are two primary drivers, continued improvement in G&A, which we believe will improve by approximately 220 basis points in 2021 and a resurgence in adjusted gross margin as we work through 2021. We believe we will end the fourth quarter of 2021 at a rate higher than we achieved for full year 2020.
We have a solid portfolio of new products, we are launching this year.
We are adding a brief version to a wildly successful small dog product launching our flagship Fresh From the Kitchen product in U.K. and launching a test of a plant-based product in limited distribution in the United States. In total, I believe we have a compelling plan for 2021 and are very well-positioned to continue accelerating the growth for Freshpet.
Our team has demonstrated incredible capability doing some of the most challenging circumstances.
We are inspired by our mission to change the way people nurse their pets and greatly appreciate all the support we have gotten from consumers customers and shareholders, while we manage our way through those challenging circumstances. Equally important, we appreciate the support of our team, many of them whom worked long hours, short staffing or remotely to deliver for our consumers. In particular, I cannot say enough good things about the leaders within our team who took on the responsibility for keeping our team safe. They inspired confidence, demonstrated supreme professionalism and navigated uncertain waters with the vision, determination and flexibility needed to get us through the storm we all faced, all of this owe them a bit of gratitude. Thank you.
Now, let me turn it over to Heather to provide more detail on our 2020 results and our guidance for 2021.