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Edited Transcript of FRPT earnings conference call or presentation 26-Feb-19 9:30pm GMT

Q4 2018 Freshpet Inc Earnings Call

Secaucus Mar 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Freshpet Inc earnings conference call or presentation Tuesday, February 26, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Katie M. Turner

ICR, LLC - MD

* Richard A. Kassar

Freshpet, Inc. - CFO

* Scott James Morris

Freshpet, Inc. - President, COO & Co-Founder

* William B. Cyr

Freshpet, Inc. - CEO & Director

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Conference Call Participants

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* Brian Patrick Holland

Consumer Edge Research, LLC - Analyst of Small and Mid caps Staples & Protein and VP

* Erica A Eiler

Oppenheimer & Co. Inc., Research Division - Equity Research Associate

* Jason M. English

Goldman Sachs Group Inc., Research Division - VP

* Jon Robert Andersen

William Blair & Company L.L.C., Research Division - Partner

* Mark Stiefel Astrachan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Peter Sloan Benedict

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* William Bates Chappell

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Greetings, and welcome to Freshpet Inc., Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Katie Turner, for opening remarks. Please go ahead.

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Katie M. Turner, ICR, LLC - MD [2]

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Thank you. Good afternoon and welcome to Freshpet's Fourth Quarter 2018 Earnings Conference Call. On today's call are Billy Cyr, Chief Executive Officer; and Dick Kassar, Chief Financial Officer. Scott Morris, Chief Operating Officer, will also be available for Q&A.

Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to the company's Annual Report on Form 10-K filed with the Securities and Exchange Commission and the company's press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

Today, to accompany management's discussion, there are presentation slides available on the investors section of Freshpet's website at www.freshpet.com. If you've not accessed the presentation, we welcome you to do so at this time. Please note that on today's call, management will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA among others. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP.

Finally, this call is one week earlier then we're previously held our annual earnings call because the company crossed the market capitalization threshold that required it to become a large accelerated filer at mid-year 2018. As a result, when the company files its 10-K later this week, it will have completed its work to be SOX compliant.

And now I'd like to turn the call over to Billy Cyr, Chief Executive Officer.

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William B. Cyr, Freshpet, Inc. - CEO & Director [3]

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Thank you, Katie, and good afternoon everyone. To begin, I will provide an overview of our financial highlights and read some business performance and then provide an overview of our 2019 strategic plan and Dick will provide greater detail on our financial results and our financial guidance for 2019. Finally, Dick, Scott and I will be available to answer your questions.

We're very pleased with our strong finish to 2018. In the fourth quarter, our net sales momentum continued behind our Feed the Growth Plan. We're able to generate solid leverage across our scalable business model and convert our net sales growth to meaningful adjusted EBITDA that met our financial commitments for the year.

Slide #4. The highlight of the quarter was the strong broad-based 30% top-line growth. Mega Channel consumption was up 29.3% behind 38.8% growth in grocery, 24.8% in the mass portion of xAOC and 19.7% in big box pet. Same-store sales velocity growth accounted for more than 70% of the year-on-year growth. Our core dog business, which is the sum of our dog rolls, roasted meals and Fresh From the Kitchen main meal items was up 34% in the quarter. Our small, but rapidly growing, e-commerce business was up 89% in the quarter and now accounts for 1.7% of our business. More than 80% of that business utilized our in-store fridge network.

Slide #5. We ended the year with total household penetration of 2.04%, up 17% versus year ago and our core dog household penetration was 1.51%, up 31% versus year ago. Buying rate continued to grow in 2018, breaking $100.00 for the first time and more than $105.00, up 10% versus year ago.

Slide #6. For the year, we delivered $193.2 million in net sales, up 27% versus year ago and ahead of our greater than $190 million guidance. This result puts us well on track towards delivering our $300 million, 2020 goal. Again, the growth was broad-based with all classes of trade demonstrating greater than 20% growth and grocery providing the strongest growth at 35.4%.

Adjusted EBITDA in the quarter was $9.2 million, up 34% versus year ago, demonstrating the company's ability to convert top-line revenue growth into an accelerating bottom line through increased fixed cost absorption. Adjusted EBITDA for Fiscal Year 2018 was $20.3 million, up 16% versus year ago and in line with our guidance.

Adjusted gross margin in the quarter was 49.4% due to higher commodity costs, mix and the incremental staffing to convert two more lines to 24x7 production. It is important to note, that while we absorbed higher costs for raw materials and staffing in 2018, we also delivered 140 basis points of plant cost, yield and throughput improvements in the year despite the challenges of an increased bag mix. As we outlined in our January investor presentation, we have a multi-prong plan to restore the gross margin as we move through 2019. I'll provide more details on that later.

Slide #7. We made very good progress on delivering the fixed cost leverage in SG&A that we promised as part of our 2020 plan. Recall, we committed to deliver 700 basis points of fixed cost leverage in SG&A between the end of 2016 and 2020. In 2018 we picked up 240 basis points that we reinvested in higher media spending to drive further growth.

Slide #8. We ended the year with 19,499 stores and had upgraded 805 fridges during the year. At the same time, in Q4, we grew percent ACV by 7% to 45.6% and total distribution points, TDPs, grew 10% reflecting both our expanding store count and an increasing number of SKUs in distribution in each store.

In summary, we believe that 2018 was a very successful year and puts us on track to deliver the 2020 goals we laid out as part of our Feed the Growth Plan two years ago. Recall, our Feed the Growth Plan is designed to accelerate Freshpet's rate of growth, enabling us to fulfill our mission of providing more pets with fresh, all natural foods that enrich their lives and their relationships with their pet parents. We're committed to doing so in ways that are good for our pets, our people and for our planet.

Slide #9. In the pursuit of our mission, we expect to deliver significant value to all of our stakeholders. We will accomplish this by creating a virtuous cycle where increased investment in advertising drives increasing scale that we can use to drive greater distribution, increase manufacturing utilization and efficiency and better leverages our organizational capacity. We expect this will produce increased financial returns that we can use to drive further growth and long-term profitability enabling us to serve more pets.

Slide #10. In 2019, we'll capitalize on 2018's momentum to keep driving our top-line and will bring further improvement to our bottom line. Slide #11, last year's strong performance has carried into 2019 and gotten us off to a fast start. With Nielsen measured consumption in the Mega Channel, up 26.8% year-to-date, on top of last year's already strong 24.4% growth during the same period. Our plan for 2019 continues the key drivers of the Feed the Growth plan and digs deeper in each of the key focus areas.

Slide #12. There are five key elements to the plan. In the next few pages, I will describe our objectives and each of the elements described on this summary page.

Slide #13, expand the Freshpet consumer franchise, we will continue to invest in media as our primary vehicle for expanding awareness and household penetration, increasing our media investment, again, in line with sales growth, and maintaining the 11%-plus of sales spending rate in the U.S. We expect to spend approximately $27 million in U.S. media. This will drive our household penetration up from its current 2.04% and will further increase our buying rate. The media plan builds on new learnings we gained in 2018 and also includes additional tests that will better prepare us for 2020 and beyond.

Slide #14. Additionally, our innovation program is designed to further extend household penetration as it did last year. We had great success behind our small dog initiative and the launch of Multi-Protein roasted meals. This year, we are extending the Multi-Protein benefits with the launch of our Multi-Protein roll. We are also beginning to target pet parents who cook for their dogs with the introduction of Freshpet Homestyle Creations; a meal kit that allows the consumer to choose their protein and separately choose a mixer to create a home cooking experience with Freshpet quality and nutrition. Up to 14% of calories consumed by dogs today come from sources other than commercial pet food with home cooking being one of the largest contributors. We believe Homestyle Creations is a good alternative for pet parents who want that experience. This product will go into limited distribution this year, only in stores where we are adding a second fridge. We expect both Homestyle Creations and the Multi-Protein roll to further expand the Freshpet consumer franchise.

#2 on Slide 15, strengthen Freshpet's retail presence. The strong momentum we have with our customers will be converted to continued improvements in our retail presence. Two years ago we were focused on new store acquisition which is best expressed in ACV growth. Last year we committed to upgrading 1000 fridges by the end of Q1 of this year and we were on track to deliver that. This year, we are adding a new dimension of retail enhancement; second fridges in some of our largest and most productive retail outlets to further expand the visibility, awareness and availability of Freshpet and enabling further broadening of our product offerings.

We are doing this under a program we call Fresh First which is a retail and consumer concept that encourages people to plan their pets' meals around the fresh components first; just as we do with food for the rest of our family. This concept also demonstrates to our customers the financial and strategic value of building their pet food category around the rapidly emerging fresh segment.

During 2019, we expect to see some of our leading customers begin to implement key elements of this plan. In total, we expect to add 1500 to 1600 net new stores increasing ACV about 7%. Further, we expect to upgrade an additional 500 stores to large fridges and place second fridges in 800 stores. We believe this expanded retail presence will enhance the effectiveness of our advertising investment and help drive an increase in household penetration and buying rate.

Number 3, Slide 16, strengthen adjusted gross margin and adjusted EBITDA margin. As I indicated earlier, we are taking a multi-pronged approach to improving our margins. The first step is pricing. We have selectively raised prices on targeted items that have both the need for higher margins and also pricing flexibility. While no individual item experienced a 2% price increase, the average impact across the entire Freshpet line is 2%. That price increase went into effect earlier this month and it will begin to benefit our margins at the tail-end of Q1 and will be fully reflected in Q2.

The second step is product innovation. We are introducing several new items that have better than line average margins. Those new items will begin shipping in late Q1 and into Q2. We'll see the impact of those launches in the latter part of Q2 and into Q3. Third, while we are continuing to hire incremental staffing, this includes hiring another 40 people in Q1 to begin to convert our fourth line to a 24x7 operation, we will have the bulk of that hiring and training completed by the end of Q2 and we'll begin to realize the benefit of that increased productivity in Q3.

Additionally, we are continuing to drive ongoing yield and throughput gains and that will increasingly improve our margin. We expect our adjusted gross margin for the year to average 50%, but due to the timing of the benefits that I outlined, we expect to end the year in excess of 51%. This will position us well to deliver our 52% gross margin target in 2020.

Slide #17. Finally, we expect to continue driving SG&A absorption improvement gains. We'll pick up 240 basis points of fixed cost leveraging SG&A. That means we will deliver a total of 500 basis points of fixed cost leverage since 2016 and we'll need a comparable amount of progress, about 200 basis points, in 2020 to deliver the 700 basis points of fixed cost leverage in our 2020 SG&A goal.

Fourth, Slide #18, continue measured development in Canada and the U.K. In 2018 we completed our validation work in both Canada and the U.K. Our 2019 plan calls for a modest incremental investment of about $2 million, largely focused on media to begin to drive the awareness needed to support our [fledgling] distribution and to encourage customers to expand their distribution of Freshpet in those two countries.

We believe this is both a manageable investment and the right time to make it as we proceed in a measured way down the path towards creating a long-term growth engine outside of the U.S. beyond 2020.

Fifth, Slide #19, build capability to support accelerated longer-term capacity expansion. It has become apparent the single greatest limiter to our growth, and thus the long-term value creation potential of Freshpet, is our ability to add capacity fast enough to keep up with the demand we can generate. As many of you know, we expect to have to limit our investments in growth in 2020 to glide into the startup of our next increment of capacity in mid-2020.

You also know that we plan to accelerate our growth to fill that new capacity as quickly as possible once it comes online and believe that Freshpet can sustain an elevated growth rate for quite some time afterwards due to our very low household penetration and strong product performance that drives increasing buying rates. Further, we continue to see strong customer support for increased retail availability that can drive our distribution well above 50% ACV.

To support that, we will need to accelerate our investment in the organizational capability to build incremental capacity and maximize its productivity. We're the only people who know how to make Freshpet, so we need to continue investing in technical bench strength to ensure our ability to meet the long-term demand for Freshpet that we believe is possible.

As such, we have decided to pull forward into 2019, organizational capability investments originally planned for 2020 so that we can continue to accelerate Freshpet's growth in 2020 and beyond. This includes hiring several new technically skilled employees who will assume responsibility for increasing the throughput of our existing capacity, identifying incremental efficiency and reliability improvements, improving quality and planning our next manufacturing site, slated to start up in late 2022 or early 2023. In total, we expect to increase staffing costs in 2019 by up to $1 million to support more rapid and reliable growth.

As I said, this is spending we originally planned for 2020, so we are just pulling forward the spending by one year and do not expect this increase in spending to impact our ability to deliver our 2020 goals, thus, there's no change in the underlying profitability of the model and we'll put ourselves in a position to drive accelerated growth well beyond 2020.

Slide 20. In total, this plan will continue our strong top-line net sales growth and for the first time deliver adjusted EBITDA growth in excess of our top-line growth. We are projecting net sales of greater than $240 million, plus 24% versus year ago and adjusted EBITDA of greater than $28 million, plus 38% versus year ago.

If you exclude the incremental investments in international markets and the accelerated staffing to support long-term capacity growth, adjusted EBITDA would be up more than 50% and we believe those are prudent investments to make now to support long-term growth and value creation.

Slide #21. We believe these results will put us on track to deliver our 2020 goals. I suspect most of you can now clearly see the path to $300 million based on our strong sustained growth and continued investment in proven growth vehicles. I also suspect that some of you are wondering how we will be able to get to the 2020 adjusted EBITDA goal of $60 million as we'll need to increase our adjusted EBITDA growth rate to slightly more than 100% in 2020.

Dick will provide more detail on that but we believe we are on that trajectory. The combination of the improving gross margin, increased SG&A absorption and higher net sales will get us to our goal.

Before I turn it over to Dick, I want to offer a brief update on our Kitchens 2.0 capacity expansion program that we announced in August. We are in the final stages of the permitting process and hope to break ground within the next month or two. This puts us on schedule to deliver the capacity expansion on the timetable we committed with startup scheduled for the second half of 2020. We are also on track to deliver the project at the targeted cost of $100 million, plus or minus 5%.

Finally, I want to be sure that all of you saw our announcement in late January about the retirement of Chris Harned from our board and the addition of Jacki Kelley to the board. Chris has been a valuable advisor to the Freshpet management team since the company was formed in 2006 and we greatly appreciate his long and dedicated service. We are also very excited by the addition of Jacki to the board. Jacki is a savvy marketer who has successfully operated in the digital economy for a significant part of her career. We are thrilled to have her on board. I will now turn it over to Dick to discuss our Q4 financials and our 2019 guidance.

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Richard A. Kassar, Freshpet, Inc. - CFO [4]

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Thank you, Billy, and good afternoon everyone. Slide 22, as Billy indicated, net sales in the quarter were $51.6 million, up 30% versus the year ago period. I would like to remind you that we adopted new revenue recognition standards in 2018 so the net sales of the prior year, Quarter 4, were $39.8 million under the new standards.

This continued acceleration of the Freshpet growth rate is the result of the increased investment we made in advertising this year. The strength of our product innovation program and continued improvement in our retail presence. The strength of our product innovation is most evident in our mix as our bags business grew rapidly, more than double the rate of the balance of the business, and this contributed to the better than expected net sales. We ended the year with $193.2 million in net sales, up 27% versus year ago and ahead of our most recent guidance.

Slide 23, prior to discussing the rest of the results, I want to inform you of a slight change we made in how we define adjusted gross margin and adjusted SG&A to drive greater transparency when presenting our progress. The changes we are making better align all of our non-GAAP measures addbacks within adjusted gross profit, adjusted SG&A, adjusted EBITDA. Under our new format, the reader can subtract adjusted SG&A from adjusted gross profit to come up with our adjusted EBITDA. This will ensure the reader is better able to assess where our adjusted EBITDA margin increases come from, gross margin or SG&A leverage.

Slide 24, adjusted gross margin for the quarter was 49.4%, down 140 basis points from the year ago period. The driver of the reduction in gross margin are very consistent with the issues we highlighted in Quarter 3, 150 basis points of added cost in Quarter 4 from the hiring of additional 50 people in Quarter 4 to support our move to a seven-day production on two more lines.

We successfully started the seven-day schedule as on one line in mid-September and another two in mid-January. As Billy mentioned, we are now hiring an additional 40 people to begin converting our last line to seven-day production in Quarter 2.

Second, we absorbed 170 basis points of commodity and in-bound freight inflation versus year ago and in total we absorbed approximately $3.3 million in higher commodity costs in 2018. We have now taken pricing to offset a significant part of this inflation and we'll see the benefits in Quarter 2 and beyond.

Third, in Quarter 4, we absorbed 70 basis points versus a year ago due to a mix shift within our core dog products which is 20 basis points more than in Quarter 3. The rapid growth of our bagged products resulted in stronger than expected sales growth and the positive impact on gross profit per pound but also a negative impact on adjusted gross margin.

Finally our manufacturing team continued to make good progress on driving operating efficiencies in our lines, delivering 250 basis points of yield and throughput versus a year ago in the quarter. We expect to continue making that kind of progress in 2019 as we grow into our scale and relentlessly focus on driving efficiencies.

Slide 25, adjusted SG&A in the quarter was $16.3 million, or 31.5% of net sales, an improvement of 200 basis points over the prior year. Improvement in adjusted SG&A leverage was the result of fixed cost absorption of 490 basis points versus a year ago offset by increased media investments of 290 basis points versus a year ago. In total, we have now gained 260 basis points of fixed cost leverage in SG&A towards the 700 basis points we promised for 2020 in our Feed the Growth Plan.

Adjusted EBITDA in the quarter was $9.2 million, up 2.5 million from a year ago period driven by the increase in revenue. Our adjusted EBITDA for the year was $20.3 million consistent with our guidance. We ended the year with no debt and $7.6 million in cash. We did invest $800,000 of capital against Kitchens 2.0 in the quarter and our total spending on that project today is $2.1 million. For the year we produced $18.6 million in cash from operations.

Slide 26, looking ahead to 2019, our guidance is as follows; net sales greater than $240 million, up 24% versus year ago. Adjusted EBITDA greater than $28 million, up 39% versus year ago. The adjusted EBITDA includes two incremental investments; $2 million for international development efforts, largely media spending in Canada and the U.K. and approximately $1 million to support the hiring of additional technical staffing to support an acceleration in our capacity expansion and improvement efforts.

Without these added investments, our adjusted EBITDA guidance would be up more than 50%. The cadence of the EBITDA will be impacted by continued front loading of our media investment consistent with our past practices. In particular, our Quarter 1 media investment will be quite heavy as we continue to drive expansion of Freshpet's household penetration.

Slide 27, backload improvements in adjusted gross margin behind the series of initiatives Billy outlined. We expect to start 2019 with adjusted gross margin where we finished 2018 and then have a good line of site to gradually build back and end the year in excess of 51%. The price increases are now in the market but we will not feel a significant benefit until Quarter 2. The higher margin innovations will launch in Quarter 2 so we will feel some impact from them in that quarter but the bulk of that impact will begin in Quarter 3. We will continue to absorb higher staffing and training costs until we convert our fourth line to a seven-day operation in the middle of Quarter 2 and won't begin to get much benefit until Quarter 3. Thus in total, you should expect to see improvements in our gross margin begin in Quarter 3 and accelerate from there.

As Billy indicated, we believe that we are well positioned to deliver our 2020 goals. We believe our current strong growth rate supports our ability to deliver the revenue target we have set so I want to focus on how we will get to our $60 million in adjusted EBITDA goal. To do that, I have produced a bridge that you can find on Slide 28.

First, at $300 million in [said] sales, we will generate $24 million more in contribution then we will at $240 million based on our 40% contribution margin. Secondly, the plan we are implementing this year will put us at 51% plus adjusted gross margin by Quarter 4 and will add another 100 basis points as we scale into the business at $300 million. That adds 200 basis points to where we expect to be in 2019 or another $6 million in contribution.

Third, we expect 50 basis point improvements in freight and brokerage [used] scale, worth another million and a half. Annual increases in G&A would be offset by reduction in the incremental investments we are making internationally or an increase in the profitability of those markets with added scale. In total, that delivers us slightly more than $60 million of adjusted EBITDA. In 2019, we expect to produce $23 million in operating cash flow. At this point, we believe that the maximum draw on our bank lines to support the Kitchens 2.0 project will be approximately $60 million and we won't reach that point until early 2020.

In conclusion, we believe we are on the right path delivering strong year-on-year growth and beginning to demonstrate our ability to grow into our scale by delivering adjusted EBITDA growth in excess of net sales growth. And we are doing this while simultaneously making strategic investments to drive long-term growth and profitability for the business that would create meaningful shareholder value.

That concludes our overview, we will now be glad to take your questions. Operator?

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Questions and Answers

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Operator [1]

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Thank you. At this time we'll be conducting a question and answer session. (Operator Instructions) Our first question comes from the line of Rupesh Parikh with Oppenheimer & Co.

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Erica A Eiler, Oppenheimer & Co. Inc., Research Division - Equity Research Associate [2]

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This is actually Erica Eiler on for Rupesh, thanks for taking our questions. So I was hoping maybe you could talk a little bit more about the price increases you've taken. You know, how are they playing out so far versus your expectations? Are there any early signs of consumer pushback or are consumers accepting those price increases? Just any color you could share there would be super helpful.

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Scott James Morris, Freshpet, Inc. - President, COO & Co-Founder [3]

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Certainly. Hey Erica, it's Scott. So the pricing that we put in place was about a 2.1% price increase across the entire line, it was focused on a handful of bag items which are -- tend to be our lower margin products. Those have been implemented through the trade at this point. They've been well accepted across the trade, there's been really no pushback whatsoever. And we've seen some pricing go up, it was effective 2/4. We have seen some retail pricing go up, it is very early, but the initial read is very positive; units look to be staying flat at this point because we get to see kind of almost immediate POS across several of our retailers. So units are staying flat which is actually driving some potential incremental growth at this point.

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Erica A Eiler, Oppenheimer & Co. Inc., Research Division - Equity Research Associate [4]

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Okay, that's very helpful. And then just -- could you maybe share your latest views on commodities and other cost pressures in the business such as freight and how you're thinking about those this year?

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Richard A. Kassar, Freshpet, Inc. - CFO [5]

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Sure, for 2019 on commodities, so we already have some slightly favorable prices for chicken going into 2019 and we've locked that in for the year. On feed prices, we're out about six months and we feel comfortable where they are similar to where they were in the back half of 2018. And as far as freight is concerned, you know as we continue to grow at these levels, we're putting more pounds on the truck and our LTLs go from a couple of pallets to a few more pallets so we get optimization there and we see there's less pressure in the refrigerated market again in this time of the year and compared to earlier in 2018. So we feel comfortable there.

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Operator [6]

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Our next question comes from the line of Brian Holland with Consumer Edge.

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Brian Patrick Holland, Consumer Edge Research, LLC - Analyst of Small and Mid caps Staples & Protein and VP [7]

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If I could just ask about the -- a little bit more about the top-line guidance, I was pleasantly surprised at where you initially guided mindful that you've come in ahead of that number each of the past two years. But was a little bit surprised when I think about obviously implementing pricing, lapping really successful innovation in the prior year, you know, some of the innovation that you have planned for 2019 looks pretty compelling especially the Homestyle Creations but limited distribution there. So if I think about kind of the dynamics of lapping -- some tough compares, and I mean at your growth level you're going to be lapping tough compares in perpetuity but is it -- is it really just the strong repeat rates just holding through here and all of these new buyers you picked up in 2019 continuing to flow through? I -- if you could just maybe talk about some of the puts and takes there and maybe what the catalysts are specifically.

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William B. Cyr, Freshpet, Inc. - CEO & Director [8]

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Yes, so first of all, Brian, as you know, we're very bullish on the growth of the business and the long-term growth rate. We think that the things that we did in 2018 certainly created an acceleration and momentum and we're carrying that into this year. And as you saw in the presentation, we showed how the growth rate that we've seen in the first seven weeks of this year is running in excess of the growth rate that we had in the first seven weeks of last year. So we feel very bullish about that and it's being driven by the right, the same fundamentals that you've seen, everyone has seen all along which is, we continue to expand household penetration, we continue to see the buying rate that goes up.

As we think about the rest of this year, we're seven weeks into, or eight weeks into the year, so we have a long runway ahead of us. We are comparing ourselves against some very big innovations that we've launched last year. We feel very good about the innovations we're launching this year but we just, you know, are mindful that we're early into a fairly long game and we feel very good about the long-term trend.

What's most important to us is that it puts us on track for our $300 million goal in 2020. I think it's now within -- you know, you can see how you can get from where we're planning to be in 2019 and get into 2020 and we feel like we've got the key drivers that will deliver that.

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Brian Patrick Holland, Consumer Edge Research, LLC - Analyst of Small and Mid caps Staples & Protein and VP [9]

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So forgive my ignorance, but I did catch your slide about where you are year-to-date versus prior year and the acceleration across channels. But that is a decel from sort of the December quarter. So, can you just help me -- I mean, is that just timing of media catching on? Is there -- just remind me what might have happened or what typically happens from a seasonal standpoint that would make that less -- that compare where you are today versus the December quarter less relevant than where you are today versus February of last year?

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William B. Cyr, Freshpet, Inc. - CEO & Director [10]

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Yes, so basically what it says is if we put the media on you begin to see the acceleration happen and we're starting from a place where if you're trying to figure out what my average growth rate is going to be for the year, you know, it's going to be the sum of the growth rate that you have in the first quarter through the second, third and fourth and we're starting at a higher place on growth rate than we did last year and if the media kicks in at a higher level of media spending, we expect to see it continue to grow.

Why would it step down from the end of Q4 into the beginning of Q1? You're just starting to come up against, you know, very, very big compares but we're also going to grow from that point and we're growing from a higher point than we started last year.

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Brian Patrick Holland, Consumer Edge Research, LLC - Analyst of Small and Mid caps Staples & Protein and VP [11]

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And then last question, if I just think about the cadence throughout the year, I think you very clearly laid out the gross margin [inflections] should probably happen in the second half of the year. So I think about the incremental $3 million that you laid out both on international investment and on the technical side in staffing there, is that -- can you grow your EBITDA margin in the first half of the year or does the majority of the media spend and some of those other investments are they a little more first half weighted such that you would maybe see a similar inflection on the SG&A or an acceleration in SG&A, maybe is more appropriate; similar to gross margin throughout the year?

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William B. Cyr, Freshpet, Inc. - CEO & Director [12]

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So Brian, the international investment will be more frontloaded just as we do with the U.S. business where we get a pretty significant return for investing in advertising earlier in the year. The SG&A staffing behind the technical staffing, that will probably be more back-loaded as we go throughout the year just because we've got to identify and hire and bring in the right people. So that will be a little bit more back-loaded. I don't know about the EBITDA and margin, Dick you might want to talk on that.

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Richard A. Kassar, Freshpet, Inc. - CFO [13]

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No, the EBITDA mar -- the -- it's the continuation of strong EBITDA in the fourth quarter and late third quarter as a result of our media spend that we've announced of approximately $27 million, plus the $2 million in international is going to be front-ended. So it will be similar to what it was in 2018 and 2017 and even in 2016.

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Operator [14]

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Our next question comes from the line of Peter Benedict with Robert W. Baird.

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Peter Sloan Benedict, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [15]

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First question is just on the second fridge rollout here, 800 stores this year. Can you give us a sense of how broad that participation is across your -- across your retail partners and how -- what should we think about in terms of the longer-term opportunity with this. Is 800 a pace that you can continue going forward, could it accelerate from here in the out years. Just help us frame that a little bit, thank you.

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William B. Cyr, Freshpet, Inc. - CEO & Director [16]

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Sure, so we're really enthusiastic about the double or the second fridges being added in. So just for perspective, we have, right now, we've made some good progress year-to-date. We have about 300 multi-fridges in already; 264 double and we actually have 50 triples. That actually goes across a fair array of our lead customers. There's probably about four or five of some of our lead customers that are already participating at different levels. But I think what's happening is, as we continue to see really strong same store growth sales every year, year-on-year, I think retailers are looking at it and recognizing the opportunity in Freshpet and are just feeling comfortable in justifying the actual, the second coolers, from a space standpoint especially given the frequency of traffic and the margins that we deliver to the category.

So, we think there's a long road in front of this. Obviously the second fridges will go in the most productive stores that we have first but we think that there's a pretty broad opportunity across the entire portfolio over the next couple of years to expand out into seconds and thirds in some cases across, really across the U.S. and a broader array of customers.

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Peter Sloan Benedict, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [17]

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Okay, so if the penetration is probably somewhere roughly 4% or 5% of the doors maybe by the end of this year would have multi-fridges, I mean, that's something that -- are you comfortable saying we'll go to double digits in the next few years in terms of penetration across the chain?

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Scott James Morris, Freshpet, Inc. - President, COO & Co-Founder [18]

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Yes, I would say that's probably the direction that we're heading as long as we continue to see the same store sales growth and there's nothing that tells us that we won't. That's exactly what we're seeing. I mean, I'm already looking kind of the four and seven weeks into this year, we're looking at the way the sales are progressing and ACV is always a contributor but the key driver is behind the advertising expanded penetration which is driving greater velocity on a per-store basis. So, yes, we think we will continue to pick up shelf space or fridge -- incremental fridges across a deepening amount of our customer base.

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Peter Sloan Benedict, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [19]

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Okay, great. Thanks for that Scott. And then just a question on the international household that you're seeing, can you help us understand what's the behavior look like from those households whether it be repeat rates or buying rates. You know, given how long you've been in those markets relative to maybe where you were in the U.S. at a similar time, are they behaving similar? Or are they different in any ways. What can you tell us about how the international customer is behaving?

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Scott James Morris, Freshpet, Inc. - President, COO & Co-Founder [20]

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So the main market that we're in is the U.K. and we did a fair amount of work there about a year and a half, two years ago, just from a positioning standpoint and I think that what we had heard is really what we per -- saw when we did the research in the market and obviously there's an incredibly high level of involvement with pets. So then the next thing you need to do is validate, is the concept strong and are people receptive to it? We did a little bit of work around that and we were able to basically put fridges in and see, I would say, good, not great, but we were able to just put fridges in and product in with very little levels of marketing, kind of almost gorilla marketing type tactics; put those in place and see good sales levels and we do see kind of very similar dynamics; very low penetration that we saw in the early days; low penetration, strong repeat rates and then the key really from that standpoint is, once you establish a really strong base, you need to basically tell your story and get the message out there and drive penetration into the brand.

And we did a small advertising test in the U.K. this last year. We saw very, very strong, surprisingly strong results, from the TV investment. I think someone quoted it's like water in the desert and it was, it was very impressive. And now we're actually going to expand that on a broader basis, both in the U.K. and then also in Canada where we have a little bit -- kind of more developed foothold in Canada but we recognized opportunities in both those markets by taking the TV tactics and putting them in place. We also did a test in Canada on TV, but by putting those in place to kind of expand the penetration and drive consumers into the brand.

It's very similar to what we saw five, six, seven years ago here where early on in order to kind of validate and get people comfortable with the ideology behind the food, TV seems to really get people comfortable with the idea. It's not this unusual product that's in a fridge in the pet aisle. It seems to help it -- be able to get comfortable with it and bring it more into the mainstream. So, we're really applying that learning into these two international markets and it's -- they've progressed nicely. We don't see them being dramatic contributors to the top-line but they are important in the out years.

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William B. Cyr, Freshpet, Inc. - CEO & Director [21]

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Peter, I would add to that. We did get a little bit of panel data in the U.K. that tells us that the proposition is incredibly attractive not just for us but also for our retail partners and that obviously bodes well for long-term expansion and distribution. When we put the advertising on the air, what we saw was about 33% of the shoppers were new to the retailer and about 73% of the dollar sales that they picked up were new to the retailers that were carrying the brand and the repeat rates were 70%. So you can imagine, if you're a retailer, you're looking at this and you're viewing this as a good opportunity to get in this and drive the kind of foot traffic gains that we saw and the category growth gains that we saw in the U.S.

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Operator [22]

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Our next question comes from the line of Mark Astrachan with Stifel.

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Mark Stiefel Astrachan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [23]

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I guess, first, this -- was curious housekeeping wise, what is in the numbers for 2019 sales for international and for cat, just sort of -- is it relative to where we were in 2018? Just sort of clarification there would be great.

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Scott James Morris, Freshpet, Inc. - President, COO & Co-Founder [24]

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So the numbers for the international markets are still very, very small. What we are talking about is an incremental investment that will help jump-start the distribution gains we get in those markets but we're not expecting to see meaningful top line contribution out of those markets until we get into the post-2020 period, frankly until we get more capacity online.

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Mark Stiefel Astrachan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [25]

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Got it, okay. And then just related a little bit to the last question, I guess I'm curious why now in the accelerated investment outside of the U.S.? You obviously talked about some of the on-air work that you did in the U.K. the back half of last year, clearly successful, but I guess you were already doing that. So is it that it just came in better than expected, do you think there's more competition on the horizon, do you think it's just now is the right time, have you figured out how to get the product more efficiently from Pennsylvania to the U.K., is it that the retailers are driving it because (inaudible) want to put it into more stores, just, etc.? What kind of -- give us a bit of help on that.

And then just sort of related, what is the brand awareness in the U.K. kind of today after the incremental investment and where do you want it to go?

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Scott James Morris, Freshpet, Inc. - President, COO & Co-Founder [26]

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Well, first of all, fundamentally, you -- I think we all believe that there's a significant value to first mover and there's a significant value to establishing the Freshpet franchise very early on and so our motivation is to progress down the path of establishing the Freshpet brand and business model in as many places as it makes sense on the most kind of prudent timetable. We want to be very prudent with the investments that we make. And so if you think about that flywheel that we have going in the U.S. where we invest in media to get distribution which helps us get some scale and pay things off, you have to start at some point at a relatively small scale and get it going. So, last year was validating that the tools that we have work.

This year it's sort of priming the pump with putting out enough advertising that can generate the customer interest that starts expanding the distribution but distribution takes time and if we just waited until 2020 or 2021 to start investing in the advertising, we may not have the distribution to match it. So we're getting the flywheel going now so that by the time we get to the point where we're ready to put our foot on the gas we have a distribution -- we have enough distribution to merit the investment that we would be making. So it's really just getting that flywheel going. Does that make sense?

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Mark Stiefel Astrachan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [27]

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Yes, it makes sense and on the brand awareness piece, where do you ballpark it kind of today versus where you think it can go or where you want it to go with the investment?

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Scott James Morris, Freshpet, Inc. - President, COO & Co-Founder [28]

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It's probably incredibly low and probably more ghost awareness than anything else at this point. So I don't know that I would even put a number on it, I don't have a specific number.

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Operator [29]

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Our next question comes from the line of Jason English with Goldman Sachs.

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Jason M. English, Goldman Sachs Group Inc., Research Division - VP [30]

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I wanted to come back to another question on the multi-chillers, the multi-cooler stores. On the slide that you show there, you actually list it as a multi-brand cooler. What does that mean?

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William B. Cyr, Freshpet, Inc. - CEO & Director [31]

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So one of the things -- that's actually very perceptive of you. So what we've done is we actually have -- under Freshpet we actually have three different brands that we launch across different retail formats and basically channel lines have really become erased. So what we've started to do is we're utilizing the best set of products, sometimes they're under brands for some of the unique propositions they bring, and we're actually bringing those into the second cooler to make sure that we have the right assortment and a broader portfolio to address kind of consumer interests in those retailers.

So, we had a brand that was more focused on the natural channel, called Freshpet, Natures Fresh, and it's made with basically [GAC] rated meats, there's some specific formulas and an ideology behind that sub-brand and we're actually going to be bringing that a little bit more mainstream into a handful of other retailers with -- that have those second coolers.

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Jason M. English, Goldman Sachs Group Inc., Research Division - VP [32]

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Good, so they're still you're sub-brands, you're not losing exclusivity on your coolers.

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William B. Cyr, Freshpet, Inc. - CEO & Director [33]

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No, no. We're not, we're not. They are 100% our coolers, and we're not losing exclusivity there. There are our brands that we're basically putting into a -- just a wider assortment where we can make sure that more consumers are exposed to them.

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Jason M. English, Goldman Sachs Group Inc., Research Division - VP [34]

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And Billy, in your prepared remarks, you talked about how we should understand the cadence of spend versus capacity. I think as we go into 2020 and to my ears, I heard some demand tempering coming into 2020 which with the demand tempering maybe -- we may get some margin expansion followed by demand investment to reaccelerate sales. A, did I hear that right because what we should have [known], and I don't think I did, and if I did hear it right, is any of that tapping the brake pedal a bit going to start in the back half of 2019?

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William B. Cyr, Freshpet, Inc. - CEO & Director [35]

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No, on the last part of the question, you did hear correctly but basically what we're saying is we are slated to have new capacity come online sometime around mid-year. And so we're very mindful that we don't want to get to the point where our growth rate outstrips the available capacity. So when we get to 2020 we look at the plan. We've got to be kind of guiding it in so that as we grow, the new capacity comes online. It doesn't come online all at once, it takes time to start it up and get it to run reliably. So we may skew the investments a little bit differently than we would any other year. We may skew more spending towards the second and third quarters than necessarily the first quarter. That's all going to be decided when we get a better handle on exactly when the capacity comes online. But we do know this, if we -- if we run at the rate we keep running, there would be a possibility that we could run past the capacity but we're not putting our foot on the brakes.

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Jason M. English, Goldman Sachs Group Inc., Research Division - VP [36]

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Understood. And last, real quick housekeeping question. The piece of comp that you're pulling out of COGS going forward, it stepped up a lot in the fourth quarter. I think it was like over a hundred basis point drag on gross margins if we put it in there. Is that a new run rate or is it just sort of timing year-end closing, you get a 4Q spike or said differently, what is the gross margin impact of that and what is your expectation going forward?

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William B. Cyr, Freshpet, Inc. - CEO & Director [37]

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Yes, let me take sort of a conceptual look and Dick can give you the details but one of the things that we've done to distinguish ourselves as an employer is that we announced in Q4 that we would be giving equity to all of our employees including the team members who work for us in our kitchens. We also gave some special grants to employees who have been with us for quite a long time and those all appeared in the fourth quarter.

The grants to the hourly employees will end up being against expenses in Q1 of this year, is the first time they'll show up -- those will show up, but the long-time employees would show up in Q4 and that was a one-time grant.

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Richard A. Kassar, Freshpet, Inc. - CFO [38]

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In addition to that, we changed our likelihood of achieving certain performance goals in our SG&A and raised our likelihood to 75% in three different categories which were basically revenue and EBITDA associated with the year 2020.

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Jason M. English, Goldman Sachs Group Inc., Research Division - VP [39]

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Okay, I guess what I'm getting at is, so you're redefining gross margin but you're not redefining your gross margin target. Is there materiality? Like should that 52 really be going -- your 52 target really go to 53?

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Operator [40]

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Our next question comes from the line of Bill Chappell with SunTrust Robinson Humphrey.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [41]

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Just both in the quarter and then going forward, trying to understand the commodity headwinds or the input headwinds with the thought that you're largely bought forward on kind of your chicken and other key ingredients. I mean, was there a surprise in the fourth quarter or was there something I missed?

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Richard A. Kassar, Freshpet, Inc. - CFO [42]

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No, we didn't have a commodity hit, it's the same commodity hit we had basically all year. When we bought forward in -- we brought forward in 2019. Our pricing that we had in 2018 was for the entire year for chicken. So whatever hit we had for the increased cost associated with chicken, you know, was all year long. The other hit we had in the quarter was we've increased our staffing over the last six months by approximately 130 people. Some of those came on in the second quarter and hit the third quarter, some came on in the third and fourth quarter and really are only actually producing product in the first quarter of 2019 when we went to two additional lines on the seven-day ship.

And, you know, the training of those people and the expenses associated with them and in addition to that we have inbound freight costs during the year but our margin in the fourth quarter was basically similar to our margin in the third quarter, not just the gross margin.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [43]

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And I guess get to -- do you feel like, you had said earlier that people might be skeptical about getting your long-term EBITDA goal and I think the skepticism all comes on gross margin. And so I'm just trying to understand, do you feel like for this year with the number of new lines, the pull-forward, the growth, that you have a good handle on gross margin, that this is a number that can start to improve?

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Richard A. Kassar, Freshpet, Inc. - CFO [44]

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Yes, I do think so. Basically -- you know, we hired 140 people, we hired -- and it's really a talented pool that we hired. You know, we're known in the neighborhood for being a great employer, we've announced those equity grants that Billy alluded to earlier. So we're getting good people, we're getting people not only with some experience but certainly strong IQs. And we're finally going to get some scale for those people, you know, running 24x7 on three lines as we are today and then by the second quarter we'll have a fourth line running basically two shifts a day for three and a half days a week and then the price increase that we put in, that Scott alluded to, 2.1%, all are helping go forward to achieve not only to get to a run rate by the fourth quarter of around 51%, but get us to 52% in 2020.

And if you look at that bridge that we put in the deck, you'll see what our plan is and on top of that, we have our SG&A leverage which we're very -- we're doing great on. We got 500 basis points projected by the end of this year and we expect to pick up at least another 200 basis points next year.

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William B. Cyr, Freshpet, Inc. - CEO & Director [45]

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Bill, let me just add to that. One of the most important metrics for me as I watch how we're doing it, the things that we can control, yield and throughput and we made good progress on that year-on-year and that's sort of an underlying evidence of our fundamental capability. We will grow out of the issues that we had related to the incremental staffing, you know, there does come a point where we're fully utilized and fully staffed and fully trained and that will happen in the end of the second quarter.

The externality, one of them is mix. We can -- we have some control on that. We think we have a pretty good visibility on where our mix is going to go based on the trends and this year's innovation, unlike last year's innovation, is much more focused on things that are positive to the mix rather than last year's innovations had a negative consequence for the mix. The one thing that you can't tell is the commodities. Commodities we solved for this year with pricing, we have the -- the vast majority of our commodity costs are well known or well planned for this year. There's always the possibility that something comes out of the woodwork that you'd have to deal with as it came up but the big one, the big heavy hitters are either bought forward or are pretty well known or contracted. So I feel pretty good about that side of it.

And over the long-haul, the thing that makes the biggest difference in our ability to drive gross margin is the ability of our manufacturing people that drive yield and throughput in our lines and they've consistently demonstrated that for the last two years and we would expect that to continue going forward.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [46]

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Got it and then just last one for me, just any more color you can give on where the growth is coming from? And when I say that, is it doors that are -- doors that have been around for a year or two that are going from kind of 2% to 5% share within that store or is it doors -- like an Albertson's that have been at 8% are going to 10%? Is it small dogs going to larger dogs, just trying to understand what gives you confidence in the growth and where it's coming from?

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Scott James Morris, Freshpet, Inc. - President, COO & Co-Founder [47]

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So Bill, you know, at the highest level I think we've probably mentioned it in the past but the vast majority of the growth is coming from velocity and then the minority of it, 80% of it is coming from velocity, 20% of it is coming from ACV build. What we are kind of really enthusiastic about is as we get into these second coolers, it can be very meaningful contributed to revenue over time. We don't -- we have some of that budgeted, it's a small kind of number right now and it's going to grow to a larger number. So just that presence helps us from a visibility standpoint.

When you talk about like where else is it coming from, obviously we have opportunities to continue to expand the portfolio, have a wider array of products. Small dog is a great example, we launched a small dog product a year ago. It's been a major contributor. We're going to continue to kind of add items into that piece of the portfolio. We've launched a handful of other proteins. So we're focusing on not only forms, but we're also focusing on proteins, use occasions. So it's pretty broad based and I think that's the thing that we feel most confident about is that the way growth is coming is fairly broad and then we also have other components whether it's around international that over time, or online that will continue to really kind of contribute and step up further. So we -- I think that's the thing that we're most excited about is the breadth of the way the growth is coming in across the portfolio.

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Operator [48]

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Our next question comes from the line of Jon Andersen with William Blair.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [49]

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Yes. Most of my questions have been asked, and answered. Just a couple quick ones. In the prepared comments, I think Billy thanks for the color around household penetration and the buy rate. I don't think you directly addressed repeat rates and I was just wondering if you could talk a little bit about the repeat rates you're seeing as you bring these new households into -- you know, into the franchise through trial. Are they holding up at kind of the 70% level you've seen historically?

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William B. Cyr, Freshpet, Inc. - CEO & Director [50]

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Yes. It's at the bottom of Slide 5. We include the repeat rates for all the same periods and it continues to look equally strong which is -- I mean, that's a pretty powerful dynamic to be able to drive penetration at the rate we're driving it and see strong repeat rates that's usually -- that's very unusual.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [51]

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On the -- on the second fridges, can you talk a little bit about the location and also the positioning? This was kind of talked about a little bit earlier but are these second fridges adjacent to the current ones, are they in different locations in the store and then are they assorted differently? It sounds like you're using maybe a little bit of a sub-brand approach to try and target a different consumer within those four walls?

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William B. Cyr, Freshpet, Inc. - CEO & Director [52]

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Yes, the vast majority of those fridges will be directly adjacent to each other. So we're -- it will kind of improve the overall visibility of what we're bringing. We're putting best-in-class fridges with really strong lit headers, really clean open doors, LED lighting inside and a wider portfolio. The vast majority of them are that way but we do have many scenarios where they are -- some of them may be in an aisle where a second one may go on an endcap. So we have a couple of different scenarios. But the vast majority will be adjacent to each other.

We are bringing a slightly broader portfolio of products, one of the new sub-brands we talked about which is a new line extension we just came out with, which is Homestyle, which is a product that's a little bit more targeted towards people that are actually cooking for their dog. There's a lot of this going on across the U.S. It's pretty amazing how many people are actually cooking for their dog. It's a sizable piece of business but we also recognize that people that are currently feeding existing commercial foods will be attracted to that product too. So that's just another way we're continuing to expand the portfolio because that will give consumers an opportunity to pick a protein and then pick a specific mixer that they can include with that protein and do something where they really can like do some kind of quote, unquote cooking for their dog.

It tested incredibly well, it's only been in the market for three weeks now. We have seen some sales, they've been small at this point but you know, I think that probably covers the question around not only fridges but also how we're thinking about broadening the portfolio and the branding.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [53]

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Absolutely. Last one for me is just around e-commerce. It sounds like you've had some really nice growth in that part of your business, almost 90%. It's still a very small percent of your overall business but, you know, what are you -- are you pleased with the results there? What are you doing to make sure that you're kind of keeping up from an online perspective given the nature that you're offering is a little bit different being refrigerated versus dry and probably harder to kind of manage from a home delivery standpoint.

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William B. Cyr, Freshpet, Inc. - CEO & Director [54]

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Yes, so one of the things that I think we're actually most excited about is that about 80% of the total sales on the online business actually support our existing fridge network which supports the proposition with the existing retailers. So if we can deliver to consumers that are interested in buying something online and also support the fridge network where -- and that's -- that's a much lower cost method to get that product to consumers where you're shipping the first 500 miles to kind of an existing established large network and then use the last mile as a delivery that's tied in with typically other refrigerated products. We think that's the perfect model for us.

What we've been able to see is as we've used marketing dollars, and not discount dollars but marketing dollars, and we market that, we've been able to see really tremendous growth on the online piece of business. We're -- and I think you're probably aware of it. It's probably important to note again but we really don't do any price discounting or couponing across the entire business. We will do samples, we will do some demos periodically, especially on some new products, but we've been able to kind of meter that out with the amount of marketing spending we're putting into e-commerce and then kind of moderate the growth that we're seeing come from e-commerce based on the investment.

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Operator [55]

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Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to management for closing remarks.

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William B. Cyr, Freshpet, Inc. - CEO & Director [56]

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Yes, thank you very much for your interest and attention. We are very bullish and very excited about our plans for 2019 and we look forward to speaking with you again as we progress throughout the year. So thank you very much.

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Operator [57]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.