Freshpet's Q3 2025 Earnings Call: Contradictions Emerge on Production Tech, Pricing Strategy, and Competitive Dynamics

Date of Call: November 3, 2025

Financials Results

• Revenue: $288.8M, up 14% YOY
• Gross Margin: Adjusted gross margin 46.0%, compared to 46.5% in the prior year period (down 50 bps YOY)

Guidance:

• 2025 net sales growth ~13%.
• 2025 adjusted EBITDA $190–$195M; Q4 EBITDA and margin expected to improve vs Q3.
• Adjusted gross margin flat YoY; Q4 gross margin ~47% (recouping ~130bps from inventory drawdown).
• 2025 CapEx ≈ $140M; additional spending for island fridges or accelerated tech is optional/incremental; full‑year 2025 expected to be free‑cash‑flow positive.
• 2027 targets: ~48% adjusted gross margin and ~22% adjusted EBITDA with low‑teens sales growth (≈20% adj. EBITDA at high single‑digit growth).
• Media as a percent of sales expected >2024; Q4 will be lowest dollar and percent spend.

Business Commentary:

• Revenue Growth and Operational Performance:
• Freshpet reported net sales of $288.8 million for Q3 2025, up 14% year over year.

• The growth was primarily driven by volume contributions and positive price mix, despite a deceleration in sales growth this year due to challenging economic conditions.

• Adjusted EBITDA and Free Cash Flow:

• Freshpet's adjusted EBITDA for Q3 2025 was $54.6 million, up approximately $11 million or 25% year over year.

• The company achieved positive free cash flow in the third quarter and is expected to be free cash flow positive for the full year, a year ahead of the 2026 target.

• Market Share and Product Innovation:

• Freshpet increased its market share in the U.S. dog food category to 3.9%, with adultenet sales across retail stores now at 29,745, up 24% from the previous year.

• The company is expanding its product offerings to reach new households, including the introduction of new Complete Nutrition Bags and multi-packs, to encourage trial and household penetration.

• Capacity and Investment Strategy:

• Freshpet is leveraging its installed capacity of $1.5 billion, with plans to retrofit existing bag lines with new technology to improve margins and reduce the gap with roll products.
• The company is focused on managing capacity effectively without compromising its ability to grow, reducing CapEx this year and next to ensure financial discipline.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted positive free cash flow in Q3 and expects full‑year 2025 FCF positive one year ahead of plan; net sales +14% YOY; adjusted EBITDA $54.6M, up ~25% YOY; stated they continue to outperform the dog food category and remain confident in hitting 2027 margin targets if growth re‑accelerates.

Q&A:

• Question from Peter Benedict (Baird): Timeline and decision process for new production technologies (full vs light version), and whether benefits would be used for pricing or reinvested to accelerate growth?
  Response: New technology is promising but early; light conversion line starts Q2 next year and delivers many benefits at lower CapEx; full rollout decision depends on operational/market performance (likely assess in H2 next year); primary goal is to improve bag margins first; pricing changes undecided.

• Question from Peter Benedict (Baird): Early learnings on competitive dynamics, pricing/positioning, and any retail impact from new entrants (including frozen players)?
  Response: Competition validates the category; so far no material retail displacement—retailers remain supportive; some discounting noted from new entrants, but Freshpet is sticking to its strategy and monitoring panel data for switching.

• Question from Brian Holland (TA Davidson): Details on the Fridge Island test with the large mass retailer—timeline, per‑store impact, success criteria and timing for expansion?
  Response: Island units (~2.5x capacity of a chiller) installed in 16 stores with more coming; they enable broader assortment and trial; retailer and Freshpet are defining sales‑velocity criteria; ~4‑month lead time expected before scaled rollout.

• Question from Brian Holland (TA Davidson): Early view on 2026 building blocks and how media spend will be sized given fewer incremental parents?
  Response: 2026 guidance will be provided in Feb; media remains central but will be allocated to high‑ROI channels (more digital/e‑commerce); island impact likely H2 2026; media spend will be disciplined and evidence‑driven.

• Question from Tom Palmer (JP Morgan): Composition of the $140M CapEx guide, how $1.5B installed capacity can be staffed, and drivers of the EBITDA margin gap between growth scenarios?
  Response: The $140M covers current projects, tech rollouts and fridge installs for out‑year demand; installed lines can be staffed in ~90–120 days per line; additional spending for islands/accelerated tech would be incremental; gross margin target (~48%) is achievable in both growth scenarios (ex‑tech) and the EBITDA difference (≈20% vs 22%) is driven mainly by SG&A leverage.

• Question from Rupesh Parique (Oppenheimer): Drivers behind Q4 implied sales moderation and how to think about gross margin path to 48%?
  Response: Q4 conservatism reflects current consumption trends, weekly Nielsen data and possible retailer timing/inventory moves; expect Q4 gross margin ~47% (recouping ~130bps from Q3 inventory reduction); longer‑term margin improvement driven mainly by plant conversion leverage, yield improvements and lower input costs.

• Question from Robert Moscow (TD Cowan): How quickly can you staff the $1.5B of installed capacity and can you quantify benefits from the light version retrofit?
  Response: Existing installed lines can be staffed in ~90–120 days; it's too early to fully quantify throughput/yield gains from the light retrofit, but management expects meaningful bag margin improvement over time and a substantial narrowing of the bag‑to‑roll margin gap by ~2028.

• Question from Angeline Go (Deutsche Bank): How will Freshpet approach trade promotions given heavy promotional activity from competitors?
  Response: Freshpet will generally avoid trade‑promotion driven spikes, prioritizing media‑led full‑price customer acquisition and long‑term brand equity; focus shifts toward efficient digital and e‑commerce investments rather than heavy retail promotions.

• Question from Michael Lavery (Piper Sandler): Impact and permanence of prior CFO's discipline and what traits are sought in the next CFO?
  Response: Cultural and process discipline introduced under the prior CFO are embedded and durable; next CFO search focuses on a strategic, conceptual leader complementary to the deeper in‑house finance capabilities; management confident in attracting top candidates.

• Question from Michael Lavery (Piper Sandler): How to balance near‑term initiatives (new ads, product launches, club expansion) against consumer weakness and competition for Q4?
  Response: Initiatives (new advertising, distribution expansion, Complete Nutrition Bag) support growth but are offset by weak consumer sentiment and new competitors; current guidance assumes observed Nielsen trends continue.

• Question from Peter Galbo (Bank of America): If Q4 revenue is flat to Q3, what does that imply for H1 2026 cadence and how to interpret sequential dynamics?
  Response: Q3 included one‑time timing and pipeline fills that inflated results; Q3→Q4 often shows minimal sequential change historically; too early to project H1 2026—management expects a more normal cadence next year and continued share gains versus the category.

• Question from Peter Galbo (Bank of America): Clarify the $77.9M valuation allowance release—will you be a cash taxpayer and when; what book tax rate to model?
  Response: The $77.9M release is a one‑time valuation allowance recognition after demonstrating sustained profitability; tax expense will appear on the P&L but cash taxes are offset by NOLs until approximately 2028 when cash tax payments may begin; use federal plus New Jersey rates for initial book tax modeling.

• Question from John Anderson (William Blair): Plans to scale e‑commerce/DTC and how meaningful it could be; and reminder of Freshpet's moat in light of competition?
  Response: E‑commerce (14% of sales) is a priority—scaling click‑and‑collect, last‑mile and PurePlay partnerships; DTC is small but provides high incremental households and strong buy rates; moat includes entrenched fridge footprint, manufacturing scale and proprietary tech, brand equity and broader product assortment, with continued investments widening that advantage.

Contradiction Point 1

Production Technology and Margin Strategy

It involves the timeline and impact of new production technology implementations on pricing and margin strategy, which are crucial for financial planning and investor expectations.

What is the timeline for accelerating new production technology and its impact on pricing and margin strategy? - Peter Benedict (Baird)

2025Q3: It’s hard to commit to a timeline as it depends on reliability and market performance. The light version of the technology will start up in Q2 2026. It offers some benefits but may not be as significant as the full version. The focus is on improving bag margins. - Billy Cyr(CEO)

Could you clarify the SG&A buckets underlying the 22% OpEx target for 2027 and whether new technology investments will increase the 2027 path compared to 2026? - Peter Sloan Benedict (Baird)

2025Q2: Benefits from new technologies are not factored into long-term targets. - Todd E. Cunfer(CFO)

Contradiction Point 2

Competitive Dynamics and Market Share

It concerns the company's stance on competitive dynamics and market share, which directly affects strategic decisions and investor assessments.

How are you assessing the competitive dynamics in the dog food market with new entrants? - Peter Benedict (Baird)

2025Q3: The competition validates the fresh food category’s potential. There's been limited impact on Freshpet's business. Freshpet remains focused on increasing market share and improving profitability. - Billy Cyr(CEO)

What is the impact of Blue Buffalo's push on your outlook, and how should investors view it? - Michael Scott Lavery (Piper Sandler)

2025Q2: Blue Buffalo's push validates that this is a high-growth category. The strategy is to maintain market share by focusing on scale, product offerings, and strong consumer base. - William B. Cyr(CEO)

Contradiction Point 3

Production Technology and Pricing Strategy

It involves changes in the strategic timeline and expectations for production technology and pricing, which directly impact Freshpet's operational efficiency and consumer pricing.

What is the timeline for new production technology acceleration, and how it affects pricing and margin strategies? - Peter Benedict (Baird)

2025Q3: It’s hard to commit to a timeline as it depends on reliability and market performance. The light version of the technology will start up in Q2 2026. It offers some benefits but may not be as significant as the full version. The focus is on improving bag margins. Pricing strategy will be determined by market conditions, with potential emphasis on sharpening price points. - Billy Cyr(CEO)

What's the most incremental in value products, marketing, and channel strategies compared to previous plans? - Peter Benedict (Baird)

2025Q1: Our strategy is to not change the pricing at this time. We still believe that the current pricing is the appropriate pricing and that we should continue to drive consumer trial through the media investment. - Billy Cyr(CEO)

Contradiction Point 4

Online Business Growth and Market Penetration

It involves differing expectations and strategies for Freshpet's online business growth, which impacts their digital market penetration and potential revenue streams.

How will Freshpet's online business grow materially in 2026, and what is the current moat strength? - John Anderson (William Blair)

2025Q3: The online business is underpenetrated. Freshpet aims to leverage the DTC channel for incremental households. The moat is strengthened by technology, manufacturing scale, brand equity, and product assortment. Continued investments are being made to further build the moat. - Billy Cyr(CEO)

What impact has the DTC expansion had, and what are the recent updates on e-commerce? - Michael Lavery (Piper Sandler)

2025Q1: DTC is small but performing well. E-commerce, especially click-and-collect, offers tremendous growth opportunities leveraging our efficient supply chain and micro fulfillment centers. - Scott Morris(CMO)

Contradiction Point 5

Competitive Dynamics and Market Impact

It involves the company's perception of and response to increased competition, which can directly impact market share and profitability.

How do you view competition in the dog food market with new entrants? - Peter Benedict (Baird)

2025Q3: The competition validates the fresh food category's potential. There's been limited impact on Freshpet's business. - Billy Cyr(CEO)

What are the key changes in the pet specialty channel strategy and the transition to a new distribution partner? - Analyst

2024Q4: We are reevaluating our distribution strategy for the pet specialty channel. The channel has faced challenges, and our market share is underdeveloped. - Todd Cunfer(CFO)