diff --git a/src/chronos/chronos2/dataset.py b/src/chronos/chronos2/dataset.py
index 2e1b6a1b..53f5257b 100644
--- a/src/chronos/chronos2/dataset.py
+++ b/src/chronos/chronos2/dataset.py
@@ -5,13 +5,15 @@
 
 import math
 from enum import Enum
-from typing import TYPE_CHECKING, Any, Iterable, Iterator, Mapping, Sequence, TypeAlias, TypedDict, cast
+from typing import TYPE_CHECKING, Any, Iterable, Iterator, Mapping, Sequence, TypeAlias, cast
 
 import numpy as np
 import torch
 from sklearn.preprocessing import OrdinalEncoder, TargetEncoder
 from torch.utils.data import IterableDataset
 
+from chronos.chronos2.preprocess import PreparedInput
+
 if TYPE_CHECKING:
     import datasets
     import fev
@@ -20,16 +22,6 @@
 TensorOrArray: TypeAlias = torch.Tensor | np.ndarray
 
 
-class PreparedInput(TypedDict):
-    """A preprocessed time series input ready for model training/inference."""
-
-    context: torch.Tensor  # (n_variates, history_length), float32
-    future_covariates: torch.Tensor  # (n_variates, prediction_length), float32
-    n_targets: int
-    n_covariates: int
-    n_future_covariates: int
-
-
 def left_pad_and_cat_2D(tensors: list[torch.Tensor]) -> torch.Tensor:
     """
     Left pads tensors in the list to the length of the longest tensor along the second axis, then concats
diff --git a/src/chronos/chronos2/preprocess.py b/src/chronos/chronos2/preprocess.py
new file mode 100644
index 00000000..4fdc53e6
--- /dev/null
+++ b/src/chronos/chronos2/preprocess.py
@@ -0,0 +1,694 @@
+# Copyright Amazon.com, Inc. or its affiliates. All Rights Reserved.
+# SPDX-License-Identifier: Apache-2.0
+
+"""
+Preprocessing module for converting various input formats to list[PreparedInput] expected by Chronos2Dataset.
+"""
+
+from typing import TYPE_CHECKING, TypedDict
+
+import numpy as np
+import torch
+
+if TYPE_CHECKING:
+    import pandas as pd
+
+
+class PreparedInput(TypedDict):
+    """A preprocessed time series input ready for model training/inference."""
+
+    context: torch.Tensor  # (n_variates, context_length), float32
+    future_covariates: torch.Tensor  # (n_variates, prediction_length), float32
+    n_targets: int
+    n_covariates: int
+    n_future_covariates: int
+
+
+def from_tensor(
+    data: "torch.Tensor | np.ndarray",
+    prediction_length: int,
+) -> list[PreparedInput]:
+    """
+    Convert 3D tensor to list[PreparedInput].
+
+    All variates are treated as targets (no covariates).
+
+    Parameters
+    ----------
+    data
+        Shape: (n_series, n_variates, context_length)
+    prediction_length
+        Number of future time steps (for NaN padding in future_covariates)
+
+    Returns
+    -------
+    list[PreparedInput], one per series
+    """
+    if isinstance(data, np.ndarray):
+        data = torch.from_numpy(data)
+    if data.ndim != 3:
+        raise ValueError(
+            f"Expected 3-d tensor with shape (n_series, n_variates, context_length), got shape {tuple(data.shape)}"
+        )
+
+    data = data.to(dtype=torch.float32)
+    n_targets = data.shape[1]
+
+    results: list[PreparedInput] = []
+    for i in range(data.shape[0]):
+        future_cov = torch.full((n_targets, prediction_length), fill_value=torch.nan)
+        results.append(
+            PreparedInput(
+                context=data[i].clone(),
+                future_covariates=future_cov,
+                n_targets=n_targets,
+                n_covariates=0,
+                n_future_covariates=0,
+            )
+        )
+    return results
+
+
+def from_list_of_tensors(
+    data: "list[torch.Tensor | np.ndarray]",
+    prediction_length: int,
+) -> list[PreparedInput]:
+    """
+    Convert list of 1D/2D tensors to list[PreparedInput].
+
+    All variates are treated as targets (no covariates).
+
+    Parameters
+    ----------
+    data
+        Each item: (context_length,) or (n_variates, context_length)
+    prediction_length
+        Number of future time steps
+
+    Returns
+    -------
+    list[PreparedInput], one per input tensor
+    """
+    results: list[PreparedInput] = []
+    for idx, item in enumerate(data):
+        if isinstance(item, np.ndarray):
+            item = torch.from_numpy(item)
+        if item.ndim > 2:
+            raise ValueError(
+                f"Each element should be 1-d or 2-d, found shape {tuple(item.shape)} at index {idx}"
+            )
+        context = item.view(-1, item.shape[-1]).to(dtype=torch.float32)
+        n_targets = context.shape[0]
+        future_cov = torch.full((n_targets, prediction_length), fill_value=torch.nan)
+        results.append(
+            PreparedInput(
+                context=context,
+                future_covariates=future_cov,
+                n_targets=n_targets,
+                n_covariates=0,
+                n_future_covariates=0,
+            )
+        )
+    return results
+
+
+def from_dataframe(
+    df: "pd.DataFrame",
+    target_columns: list[str],
+    prediction_length: int,
+    future_df: "pd.DataFrame | None" = None,
+    known_covariate_columns: list[str] | None = None,
+    id_column: str = "item_id",
+    timestamp_column: str = "timestamp",
+    use_target_encoding: bool = True,
+    validate_inputs: bool = True,
+) -> list[PreparedInput]:
+    """
+    Convert long-format DataFrame to list[PreparedInput].
+
+    Assumptions (when validate_inputs=False)
+    ----------------------------------------
+    - df is sorted by (id_column, timestamp_column)
+    - future_df (if provided) is sorted by (id_column, timestamp_column)
+    - future_df has exactly prediction_length rows per item, same item IDs as df
+    - Target columns are numeric; other columns are numeric or categorical
+
+    Parameters
+    ----------
+    df
+        Long-format DataFrame with columns: id_column, timestamp_column, target_columns, covariates
+    target_columns
+        Column names for target variates
+    prediction_length
+        Number of future time steps
+    future_df
+        Optional DataFrame with future covariate values (same id_column, timestamp_column).
+        Mutually exclusive with known_covariate_columns.
+    known_covariate_columns
+        Optional list of column names that are known-future covariates. Use when future values
+        are not available (e.g., during training). Future values will be NaN-filled.
+        Mutually exclusive with future_df.
+    id_column
+        Column name for series ID
+    timestamp_column
+        Column name for timestamps
+    use_target_encoding
+        When True (default), use target encoding for categoricals (requires single target).
+        When False, use ordinal encoding.
+    validate_inputs
+        When True (default), validates dataframes. Set False to skip validation.
+
+    Returns
+    -------
+    list[PreparedInput], one per unique item_id (in original order)
+    """
+    if future_df is not None and known_covariate_columns is not None:
+        raise ValueError("Cannot provide both future_df and known_covariate_columns")
+
+    if validate_inputs:
+        _validate_dataframe(
+            df=df,
+            future_df=future_df,
+            target_columns=target_columns,
+            prediction_length=prediction_length,
+            id_column=id_column,
+            timestamp_column=timestamp_column,
+        )
+
+    import pandas.api.types as ptypes
+
+    covariate_columns = [
+        c for c in df.columns if c not in {id_column, timestamp_column} and c not in target_columns
+    ]
+
+    # Determine which covariates are known-future
+    known_future_columns: set[str] = set()
+    if future_df is not None:
+        known_future_columns = {c for c in covariate_columns if c in future_df.columns}
+    elif known_covariate_columns is not None:
+        known_future_columns = {c for c in covariate_columns if c in known_covariate_columns}
+
+    # Extract target: (n_targets, total_rows)
+    target = df[target_columns].to_numpy(dtype=np.float32, na_value=np.nan).T
+
+    # Extract past covariates
+    past_covariates: dict[str, np.ndarray] = {}
+    for col in covariate_columns:
+        if ptypes.is_numeric_dtype(df[col]):
+            past_covariates[col] = df[col].to_numpy(dtype=np.float32, na_value=np.nan)
+        else:
+            past_covariates[col] = df[col].to_numpy(dtype=object)
+
+    # Extract future covariate values: key present = known-future, value = data or None
+    future_covariates: dict[str, np.ndarray | None] = {}
+    if future_df is not None:
+        for col in known_future_columns:
+            if ptypes.is_numeric_dtype(future_df[col]):
+                future_covariates[col] = future_df[col].to_numpy(dtype=np.float32, na_value=np.nan)
+            else:
+                future_covariates[col] = future_df[col].to_numpy(dtype=object)
+    else:
+        for col in known_future_columns:
+            future_covariates[col] = None
+
+    # Compute series lengths
+    series_lengths = df.groupby(id_column, sort=False).size().tolist()
+
+    return _build_prepared_inputs(
+        target=target,
+        past_covariates=past_covariates,
+        future_covariates=future_covariates,
+        series_lengths=series_lengths,
+        prediction_length=prediction_length,
+        use_target_encoding=use_target_encoding,
+    )
+
+
+def from_list_of_dicts(
+    data: list[dict],
+    prediction_length: int,
+    use_target_encoding: bool = True,
+    validate_inputs: bool = True,
+) -> list[PreparedInput]:
+    """
+    Convert list of dicts to list[PreparedInput].
+
+    Each dict has:
+    - "target": np.ndarray, shape (context_length,) or (n_targets, context_length)
+    - "past_covariates": optional dict[str, np.ndarray], each shape (context_length,)
+    - "future_covariates": optional dict[str, np.ndarray], each shape (prediction_length,)
+
+    Assumptions (when validate_inputs=False)
+    ----------------------------------------
+    - All dicts have same structure (same keys, same n_targets)
+    - All past_covariates have the same column names across dicts
+    - future_covariates keys are a subset of past_covariates keys
+    - future_covariates arrays have length == prediction_length
+
+    Parameters
+    ----------
+    data
+        List of input dicts
+    prediction_length
+        Number of future time steps
+    use_target_encoding
+        When True (default), use target encoding for categoricals (requires single target).
+        When False, use ordinal encoding.
+    validate_inputs
+        When True (default), validates all dicts have consistent structure.
+
+    Returns
+    -------
+    list[PreparedInput], one per dict
+    """
+    if validate_inputs:
+        _validate_list_of_dicts(data=data, prediction_length=prediction_length)
+
+    if len(data) == 0:
+        return []
+
+    # Determine covariate structure from first dict
+    first_past_covariates = data[0].get("past_covariates", {})
+    first_future_covariates = data[0].get("future_covariates", {})
+    past_covariate_keys = sorted(first_past_covariates.keys())
+    known_future_columns = set(first_future_covariates.keys())
+
+    # Stack targets: (n_targets, total_context_rows)
+    target_arrays = []
+    series_lengths = []
+    for d in data:
+        t = np.asarray(d["target"], dtype=np.float32)
+        if t.ndim == 1:
+            t = t.reshape(1, -1)
+        target_arrays.append(t)
+        series_lengths.append(t.shape[-1])
+    target = np.concatenate(target_arrays, axis=1)
+
+    # Stack past covariates: {name: (total_context_rows,)}
+    past_covariates: dict[str, np.ndarray] = {}
+    for key in past_covariate_keys:
+        arrays = [np.asarray(d.get("past_covariates", {})[key]) for d in data]
+        stacked = np.concatenate(arrays)
+        if np.issubdtype(stacked.dtype, np.number):
+            past_covariates[key] = stacked.astype(np.float32)
+        else:
+            past_covariates[key] = stacked.astype(object)
+
+    # Stack future covariates: {name: array or None}
+    future_covariates: dict[str, np.ndarray | None] = {}
+    for key in known_future_columns:
+        arrays = [np.asarray(d.get("future_covariates", {})[key]) for d in data]
+        stacked = np.concatenate(arrays)
+        if np.issubdtype(stacked.dtype, np.number):
+            future_covariates[key] = stacked.astype(np.float32)
+        else:
+            future_covariates[key] = stacked.astype(object)
+
+    return _build_prepared_inputs(
+        target=target,
+        past_covariates=past_covariates,
+        future_covariates=future_covariates,
+        series_lengths=series_lengths,
+        prediction_length=prediction_length,
+        use_target_encoding=use_target_encoding,
+    )
+
+
+def _build_prepared_inputs(
+    target: np.ndarray,
+    past_covariates: dict[str, np.ndarray],
+    future_covariates: dict[str, np.ndarray | None],
+    series_lengths: list[int],
+    prediction_length: int,
+    use_target_encoding: bool,
+) -> list[PreparedInput]:
+    """
+    Build list[PreparedInput] from stacked arrays. Handles categorical encoding.
+
+    Assumptions
+    -----------
+    - Arrays are stacked in item order (item 0's rows first, then item 1's, etc.)
+    - Categorical columns have object dtype; numeric columns have float32 dtype
+    - future_covariates keys are a subset of past_covariates keys
+    - Key present in future_covariates = known-future covariate
+    - Value is the actual future data (shape: n_series * prediction_length) or None if unavailable
+
+    Parameters
+    ----------
+    target
+        Shape: (n_targets, total_context_rows), dtype float32
+    past_covariates
+        {name: values} for all covariates (past-only and known-future)
+        Each array shape: (total_context_rows,)
+    future_covariates
+        {name: values_or_None} for known-future covariates.
+        Each array shape: (n_series * prediction_length,), or None if values unavailable.
+    series_lengths
+        Context length of each series (sum = total_context_rows)
+    prediction_length
+        Number of future time steps
+    use_target_encoding
+        When True, use target encoding (requires n_targets == 1). When False, use ordinal.
+
+    Returns
+    -------
+    list[PreparedInput], one per series
+    """
+    n_series = len(series_lengths)
+    n_targets = target.shape[0]
+    n_covariates = len(past_covariates)
+    n_future_covariates = len(future_covariates)
+
+    # Build item ID codes for target encoding
+    id_codes = np.repeat(np.arange(n_series), series_lengths)
+    future_id_codes = np.repeat(np.arange(n_series), prediction_length)
+
+    # Encode covariates
+    encoded_past_covariates: list[np.ndarray] = []
+    encoded_future_covariates: list[np.ndarray] = []
+
+    for key, values in past_covariates.items():
+        is_known_future = key in future_covariates
+        future_values = future_covariates.get(key)
+
+        if values.dtype == object:
+            # Categorical: ordinal encode first
+            all_past_values = values.astype(str)
+            categories = np.unique(all_past_values[all_past_values != "nan"])
+            cat_to_code = {cat: i for i, cat in enumerate(categories)}
+            n_categories = len(categories)
+
+            # NaN in past gets its own code
+            nan_code = n_categories
+            n_categories_with_nan = n_categories + 1
+
+            past_codes = np.array([cat_to_code.get(v, nan_code) for v in all_past_values], dtype=np.intp)
+
+            future_codes = None
+            if future_values is not None:
+                all_future_values = future_values.astype(str)
+                future_codes = np.array(
+                    [cat_to_code.get(v, nan_code) for v in all_future_values], dtype=np.intp
+                )
+
+            if use_target_encoding and n_targets == 1:
+                encoded_past, encoded_future = _target_encode(
+                    id_codes=id_codes,
+                    cat_codes=past_codes,
+                    target=target[0],
+                    n_items=n_series,
+                    n_categories=n_categories_with_nan,
+                    future_id_codes=future_id_codes if future_codes is not None else None,
+                    future_cat_codes=future_codes,
+                )
+                encoded_past_covariates.append(encoded_past)
+                if is_known_future:
+                    encoded_future_covariates.append(
+                        encoded_future if encoded_future is not None
+                        else np.full(n_series * prediction_length, np.nan, dtype=np.float32)
+                    )
+            else:
+                encoded_past_covariates.append(past_codes.astype(np.float32))
+                if is_known_future:
+                    encoded_future_covariates.append(
+                        future_codes.astype(np.float32) if future_codes is not None
+                        else np.full(n_series * prediction_length, np.nan, dtype=np.float32)
+                    )
+        else:
+            encoded_past_covariates.append(values)
+            if is_known_future:
+                encoded_future_covariates.append(
+                    future_values if future_values is not None
+                    else np.full(n_series * prediction_length, np.nan, dtype=np.float32)
+                )
+
+        if not is_known_future:
+            encoded_future_covariates.append(
+                np.full(n_series * prediction_length, np.nan, dtype=np.float32)
+            )
+
+    # Split into per-series PreparedInputs
+    past_splits = np.cumsum(series_lengths[:-1]).tolist() if n_series > 1 else []
+    future_splits = (
+        list(range(prediction_length, n_series * prediction_length, prediction_length))
+        if n_series > 1
+        else []
+    )
+
+    results: list[PreparedInput] = []
+    for i in range(n_series):
+        # Target slice
+        p_start = sum(series_lengths[:i])
+        p_end = p_start + series_lengths[i]
+        target_i = target[:, p_start:p_end]
+
+        # Past covariates slice
+        if encoded_past_covariates:
+            past_cov_i = np.stack([arr[p_start:p_end] for arr in encoded_past_covariates])
+        else:
+            past_cov_i = np.zeros((0, series_lengths[i]), dtype=np.float32)
+
+        # Future covariates slice
+        f_start = i * prediction_length
+        f_end = f_start + prediction_length
+        if encoded_future_covariates:
+            future_cov_i = np.stack([arr[f_start:f_end] for arr in encoded_future_covariates])
+        else:
+            future_cov_i = np.zeros((0, prediction_length), dtype=np.float32)
+
+        # Build context: targets then covariates
+        context = np.concatenate([target_i, past_cov_i], axis=0)
+
+        # Build future_covariates: NaN padding for targets, then covariate futures
+        target_padding = np.full((n_targets, prediction_length), np.nan, dtype=np.float32)
+        future_full = np.concatenate([target_padding, future_cov_i], axis=0)
+
+        results.append(
+            PreparedInput(
+                context=torch.from_numpy(context).to(dtype=torch.float32),
+                future_covariates=torch.from_numpy(future_full).to(dtype=torch.float32),
+                n_targets=n_targets,
+                n_covariates=n_covariates,
+                n_future_covariates=n_future_covariates,
+            )
+        )
+
+    return results
+
+
+def _validate_dataframe(
+    df: "pd.DataFrame",
+    future_df: "pd.DataFrame | None",
+    target_columns: list[str],
+    prediction_length: int,
+    id_column: str,
+    timestamp_column: str,
+) -> None:
+    """
+    Validate DataFrame structure. Raises ValueError on failure.
+
+    Checks:
+    - Required columns exist
+    - Target columns are numeric
+    - All series have >= 3 points
+    - future_df has same item_ids and exactly prediction_length rows per series
+    """
+    required = {id_column, timestamp_column} | set(target_columns)
+    missing = required - set(df.columns)
+    if missing:
+        raise ValueError(f"DataFrame is missing required columns: {missing}")
+
+    for col in target_columns:
+        if not np.issubdtype(df[col].dtype, np.number):
+            raise ValueError(f"Target column '{col}' must be numeric, got dtype {df[col].dtype}")
+
+    series_sizes = df.groupby(id_column, sort=False).size()
+    short_series = series_sizes[series_sizes < 3]
+    if len(short_series) > 0:
+        raise ValueError(
+            f"All series must have >= 3 points. Found {len(short_series)} series with fewer."
+        )
+
+    if future_df is not None:
+        future_missing = {id_column} - set(future_df.columns)
+        if future_missing:
+            raise ValueError(f"future_df is missing required columns: {future_missing}")
+
+        past_ids = df[id_column].unique()
+        future_ids = future_df[id_column].unique()
+        if not np.array_equal(np.sort(past_ids), np.sort(future_ids)):
+            raise ValueError("future_df must have the same item IDs as df")
+
+        future_sizes = future_df.groupby(id_column, sort=False).size()
+        wrong_length = future_sizes[future_sizes != prediction_length]
+        if len(wrong_length) > 0:
+            raise ValueError(
+                f"future_df must have exactly {prediction_length} rows per item. "
+                f"Found {len(wrong_length)} items with wrong length."
+            )
+
+
+def _validate_list_of_dicts(
+    data: list[dict],
+    prediction_length: int,
+) -> None:
+    """
+    Validate list[dict] structure. Raises ValueError on failure.
+
+    Checks:
+    - All dicts have "target" key
+    - All targets have same n_targets
+    - All past_covariates have same column names
+    - All future_covariates have same column names and are subset of past_covariates
+    - future_covariates have length == prediction_length
+    - past_covariates have length == target length
+    """
+    if len(data) == 0:
+        return
+
+    allowed_keys = {"target", "past_covariates", "future_covariates"}
+
+    first_past_keys = sorted(data[0].get("past_covariates", {}).keys())
+    first_future_keys = sorted(data[0].get("future_covariates", {}).keys())
+    first_target = np.asarray(data[0]["target"])
+    first_n_targets = 1 if first_target.ndim == 1 else first_target.shape[0]
+
+    if not set(first_future_keys).issubset(set(first_past_keys)):
+        raise ValueError(
+            f"future_covariates keys must be a subset of past_covariates keys. "
+            f"Got past={first_past_keys}, future={first_future_keys}"
+        )
+
+    for idx, d in enumerate(data):
+        keys = set(d.keys())
+        if not keys.issubset(allowed_keys):
+            raise ValueError(
+                f"Invalid keys at index {idx}. Allowed: {allowed_keys}, found: {keys}"
+            )
+        if "target" not in keys:
+            raise ValueError(f"Element at index {idx} is missing required key 'target'")
+
+        target = np.asarray(d["target"])
+        if target.ndim > 2:
+            raise ValueError(
+                f"Target must be 1-d or 2-d, found shape {tuple(target.shape)} at index {idx}"
+            )
+        n_targets = 1 if target.ndim == 1 else target.shape[0]
+        if n_targets != first_n_targets:
+            raise ValueError(
+                f"All targets must have same n_targets. Expected {first_n_targets}, "
+                f"got {n_targets} at index {idx}"
+            )
+        history_length = target.shape[-1]
+
+        past_covariates = d.get("past_covariates", {})
+        if not isinstance(past_covariates, dict):
+            raise ValueError(
+                f"past_covariates must be a dict at index {idx}, got {type(past_covariates)}"
+            )
+        if sorted(past_covariates.keys()) != first_past_keys:
+            raise ValueError(
+                f"All past_covariates must have same keys. Expected {first_past_keys}, "
+                f"got {sorted(past_covariates.keys())} at index {idx}"
+            )
+        for key, val in past_covariates.items():
+            val = np.asarray(val)
+            if val.ndim != 1 or len(val) != history_length:
+                raise ValueError(
+                    f"past_covariates['{key}'] must be 1-d with length {history_length}, "
+                    f"got shape {tuple(val.shape)} at index {idx}"
+                )
+
+        future_covariates = d.get("future_covariates", {})
+        if not isinstance(future_covariates, dict):
+            raise ValueError(
+                f"future_covariates must be a dict at index {idx}, got {type(future_covariates)}"
+            )
+        if sorted(future_covariates.keys()) != first_future_keys:
+            raise ValueError(
+                f"All future_covariates must have same keys. Expected {first_future_keys}, "
+                f"got {sorted(future_covariates.keys())} at index {idx}"
+            )
+        for key, val in future_covariates.items():
+            val = np.asarray(val)
+            if val.ndim != 1 or len(val) != prediction_length:
+                raise ValueError(
+                    f"future_covariates['{key}'] must be 1-d with length {prediction_length}, "
+                    f"got shape {tuple(val.shape)} at index {idx}"
+                )
+
+
+def _target_encode(
+    id_codes: np.ndarray,
+    cat_codes: np.ndarray,
+    target: np.ndarray,
+    n_items: int,
+    n_categories: int,
+    future_id_codes: np.ndarray | None = None,
+    future_cat_codes: np.ndarray | None = None,
+    smooth: float = 1.0,
+) -> tuple[np.ndarray, np.ndarray | None]:
+    """
+    Per-item target encoding using vectorized bincount operations.
+
+    Computes smoothed mean target value for each (item, category) pair:
+        encoded = (smooth * item_mean + category_sum) / (smooth + category_count)
+
+    Assumptions
+    -----------
+    - id_codes and cat_codes are non-negative integers in [0, n_items) and [0, n_categories)
+    - future_id_codes (if provided) are valid item IDs that appear in id_codes
+    - future_cat_codes are non-negative integers in [0, n_categories)
+
+    Edge cases
+    ----------
+    - NaN values in target are excluded from sum/count computations
+    - Unseen (item, category) pairs naturally get item_mean via the smoothing formula
+
+    Parameters
+    ----------
+    id_codes
+        Item ID for each row, shape: (n_rows,)
+    cat_codes
+        Integer category codes, shape: (n_rows,)
+    target
+        Target values, shape: (n_rows,). May contain NaNs.
+    n_items
+        Number of unique items
+    n_categories
+        Number of unique categories
+    future_id_codes
+        Item ID for each future row, shape: (n_future_rows,). Optional.
+    future_cat_codes
+        Category codes for future rows, shape: (n_future_rows,). Optional.
+    smooth
+        Smoothing parameter. Higher values give more weight to item mean vs category mean.
+
+    Returns
+    -------
+    encoded_past
+        Encoded values for past rows, shape: (n_rows,), dtype float32
+    encoded_future
+        Encoded values for future rows, shape: (n_future_rows,), dtype float32.
+        None if future_id_codes and future_cat_codes not provided.
+    """
+    mask = np.isfinite(target)
+    target_masked = np.where(mask, target, 0.0)
+
+    item_sums = np.bincount(id_codes, weights=target_masked * mask, minlength=n_items)
+    item_counts = np.bincount(id_codes, weights=mask.astype(float), minlength=n_items)
+    item_means = np.divide(item_sums, item_counts, out=np.zeros(n_items), where=item_counts > 0)
+
+    combined_codes = id_codes * n_categories + cat_codes
+    sums = np.bincount(combined_codes, weights=target_masked * mask, minlength=n_items * n_categories)
+    counts = np.bincount(combined_codes, weights=mask.astype(float), minlength=n_items * n_categories)
+
+    lookup = (smooth * np.repeat(item_means, n_categories) + sums) / (smooth + counts)
+    encoded_past = lookup[combined_codes].astype(np.float32)
+
+    encoded_future = None
+    if future_id_codes is not None and future_cat_codes is not None:
+        future_combined = future_id_codes * n_categories + future_cat_codes
+        encoded_future = lookup[future_combined].astype(np.float32)
+
+    return encoded_past, encoded_future