Freshpet Inc (FRPT) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience.

You've joined the Freshpet second-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Ms. Katie Turner.

Ma'am, you may begin.

Thank you.

Good afternoon and welcome to Freshpet's second-quarter 2015 earnings conference call and webcast.

On today's call are Richard Thompson, Chief Executive Officer, and Dick Kassar, Chief Financial Officer.

Scott Morris, Chief Marketing 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 law.

These statements are based on Management's current expectations and beliefs and involve significant 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 quarterly report on Form 10-Q expected to be filed with the SEC and the Company's press release issued today for a detailed discussion of the risks that could cause actual results differ materially from those expressed or implied in any forward-looking statements made today.

Finally, please note on today's call, Management will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA.

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 to the financial information presented in accordance with GAAP.

Please refer to the Company's press release for a reconciliation of the non-GAAP financial measures to the most comparable measures compared in accordance with GAAP.

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

Thank you, Katie.

Good afternoon, everyone, and thank you for joining us on today's call.

I will begin with an overview of our second-quarter financial and business highlights.

Then Dick will review our financial performance in more detail and review our outlook for 2015.

Finally, Dick, Scott and I will be available to answer your questions when we finish.

Freshpet's healthy foods brand and consumer mission continues to resonate with pet parents and helped Freshpet achieved another quarter of strong financial results.

In the second quarter, we generated net sales of $28.4 million, up approximately 39% compared to the second quarter of last year.

Our sales growth has continued to outpace our distribution growth across all of our retail channels.

Freshpet Fridges increased approximately 14% year over year to 14,354 while we continued to see strong velocity growth per fridge.

Our positive sales momentum in the second quarter enabled us to continue to leverage fixed costs and help drive increased gross profit.

Adjusted EBITDA improved $3.1 million to $2.8 million.

As sales momentum increases in the future we believe we will continue to benefit from scalable efficiencies and further cost savings from both our Freshpet Kitchens and distribution network.

Our solid year-to-date performance has positioned us strongly for continued future velocity and distribution growth.

I am proud of the progress that we have made as we bring the power of fresh food and fresh thinking to more pets and pet parents across North America.

In the second quarter, we further penetrated new and existing retail partners resulting in expanded distribution.

Favorable consumer trends coupled with the increased demand for better for you pet food products have helped fuel our growth.

We believe that Freshpet is a trusted brand for pet parents illustrated by our high customer loyalty rates, velocity and sales growth.

Freshpet remains committed to bringing healthy foods that our meat-based and minimally processed to the pet consumer.

It is this unwavering commitment that allows us to deliver on our mission to provide pet parents with fresh, all natural pet food.

This simple idea resonates with the way people feed their families and now their pets, and has led us to be one of America's fastest-growing pet food companies.

Our mission and approach to making great tasting, fresh, healthy food is what truly differentiates us in pet food and has strongly positioned us for long-term growth.

In order to capitalize on our opportunity in the marketplace, this quarter we have made key investments in three key initiatives that are fundamental drivers of our growth algorithm and will continue to build our foundation for future success.

One, product innovation.

Two, manufacturing capabilities.

Three, Freshpet leadership team.

I'd like to provide you with the short update on what we're doing on each of them.

One, innovation: continuing our strong track record of delivering innovative, new products and exceptional consumer experience in Q4 of this year and Q1 of 2016, we will begin market testing of our new cat food portfolio entering the $7 billion cat food market.

In addition to our cat food test, we have other innovative new products which will provide us with opportunities that will continue to support our growth.

We are also pleased with our initial test of Freshpet's new baked product.

Our fresh-baked food is the new exciting way that our innovation team has reinvented dry kibble.

As we have said in the past, this innovative product uses all fresh meats, no rendered meals, and the final product is minimally processed with visible super foods inclusions.

While fresh-baked is still in a test phase, given the positive early read from consumers and customers, we've decided to expand the test to a select group of retailers and support it with $3.5 million of incremental marketing spend in the third and fourth quarters of this year.

As always, our team will continue to develop and innovate and improve mix of products which will help drive increased velocity and further optimize our portfolio products over the long term.

Two, manufacturing infrastructure: in order to keep up with demand and support our fantastic sales growth, we have enhanced our strategic manufacturing infrastructure capabilities at our Freshpet Kitchens in Bethlehem in two ways.

First, we are upsizing much of the equipment in phase two to provide increased capacity that will exceed $400 million per year in revenues.

Second, we took advantage of a unique opportunity to purchase a 60,000 square foot building on 6.5 acres directly adjacent to our current Freshpet Kitchens location in Bethlehem, Pennsylvania.

Dick will provide more details on our capital plan a bit later.

As we've mentioned previously, the first phase of this expansion is now complete.

Our team has moved onto the phase two of which will focus on the new infrastructure including additional higher capacity, state-of-the-art production lines custom-built to prepare our specialty recipes.

The new facility will earn a Safe Quality Food Level III certification, the highest honor of its kind in our industry.

Three, Freshpet leadership team: we also recently strengthened our Freshpet organization by expanding our intellectual capital in manufacturing, distribution, purchasing and marketing.

We have added two new highly experienced Executives to the team and promoted two existing team members, including Scott Morris, to Chief Operating Officer.

Delivering fresh, refrigerated food on a national basis is very difficult to do, and our team has worked extremely hard over the last several years to build our infrastructure and create a platform for growth that is not easily replicated.

I would like to congratulate each of our team members on their new positions and look forward to working with them to make our operations and processes even better as we realize future successes.

We continue to deliver on our commitment to bring the power of fresh real food to pets as we connect with more and more pet parents.

Freshpet has a bright future in this compelling $20 billion-plus and growing dog and cat food category in the US, where we as pet parents treat our pets as another family member.

This is why Freshpet is truly positioned in the right place at the right time with the right products.

Our points of distribution continue to grow, awareness and trial are driving velocity to new heights, new product innovation continues to expand our addressable market and our solid and scalable infrastructure allows us to deliver solid earning growth.

I'm very pleased with our solid financial results in the second quarter and our progress year to date.

We believe we are at the point where we can truly improve our processes, drive greater leverage across our business model, and in turn, enhance long-term shareholder value.

As I always say, quality, quality and steady as we go.

With that overview I'd like to turn the call over to Dick, our Chief Financial Officer, who will review our financial results in more detail.

Dick?

Thank you, Richard, and good afternoon, everyone.

I'll review our second quarter and year-to-date financial results and will then review our full year outlook for 2015.

For the second quarter, consolidated net sales increased 39.1% to $28.4 million.

Excluding the impact of fresh-baked test product, net sales for the second quarter of 2015, increased 34.3% to $27.4 million over the prior-year quarter.

This growth resulted from both distribution of velocity gains across all retail sales channels including a 14% year-over-year increase in Freshpet fridges.

Gross profit for the quarter was $13.7 million compared to $10.1 million during the same period last year.

Increase in gross profit is primarily due to higher net sales and lower manufacturing cost per pound, slightly offset by increased cost of goods sold related to product sales mix as a result of increased sales from the Company's new innovative products.

The manufacturing team is gaining insight on how to best optimize manufacturing of our new shreds and co-packed baked products.

As we further enhance and refine the process and benefit from economies of scale, our hourly productivity will increase which will gradually improve our gross margin.

Excluding the margin impact from the Company's fresh-baked test product, gross margin was 48.9% compared to 49.4% during the same period last year.

SG&A expenses decreased as a percentage of net sales to 55.3% from 65.7% in the same quarter last year.

After adjusting for fair valuation of warrants and stock-based compensation expenses, as well as fees and expenses associated with the Company's secondary offering, S&A expense decreased as a percentage of net sales to 47.3% from 64.6% in the same quarter last year.

Looking ahead, we expect to further decrease SG&A as a percentage of net sales as we increasingly scale our operations and better utilize our existing infrastructure while growing our sales.

Adjusted EBITDA increased $3.1 million when compared to the same period in 2014 to $2.8 million.

The Freshpet Baked test product had adjusted EBITDA of less than $100,000 on a three-month period into the June 30, 2015.

As a reminder, adjusted EBITDA is a non-GAAP financial measure.

Turning now to year-to-date results, net sales for the first six months of 2015 increased 40% to $55.4 million, compared to $39.7 million in the first six months of last year.

Excluding the fresh-baked test product, net sales increased 35.6% to $53.9.

And our gross margin was 49.1% for the first six months of 2015.

Adjusted EBITDA improved $4.4 million to $4.8 million.

And adjusted EBITDA as a percentage of net sales for the first six months of 2015 was 8.7%.

Excluding the impact of the fresh-baked test product, adjusted EBITDA would have been $5.3 million for 2015 year-to-date period.

Turning now to the balance sheet, at June 30, 2015 the Company had cash, cash equivalents and short-term investments of $23.5 million.

The decrease in cash is primarily due to expenditures related to expansion of our Freshpet Kitchens, capital investments to increase distributions with the purchase of additional Freshpet Fridges and the purchase of the land and buildings directly adjacent to the Freshpet Kitchens.

For the full year 2015, I'll reiterate our previously disclosed guidance.

We continue to expect Freshpet Fridges in the range of 15,100 to 15,600, representing an increase of approximately 13% to 17% compared to the prior year.

We project our net sales, excluding Freshpet Baked test product, to be in the range of $112 million to $114.5 million, representing an increase of 29% to 32% compared to 2014.

And adjusted EBITDA, excluding Freshpet Baked test product, to be in the range of $16 million to $17.5 million, an increase of $10.5 million to $12 million compared to 2014.

As a reminder, our adjusted EBITDA represents EBITDA plus loss on disposal of equipment, new plant startup expenses, share-based compensation, launch expenses, secondary costs and warrant expense.

We now plan to strategically expand plant capacity to provide us with sales of up to $400 million represents an increase of 130% from current levels.

We plan to invest approximately $31 million in capital expenditures to achieve this, of which $5.3 million has been spent to date.

This represents an increase from $24 million to 26.

This represents an increase from $24 million to $26 million investment we previously discussed.

The projection completion date is the second quarter of 2016.

We expect to borrow approximately $8 million to $10 million from our credit facility in the first half of 2016.

And we expect to repay this indebtedness by the first quarter of FY17.

As many of you know in conjunction with our initial public offering we entered into a $40 million credit facility of which zero is outstanding at June 30, 2015.

To recap these investments initiatives we will spend an incremental $14 million including both our capital and sales and marketing investments.

A spend of $3.5 million for sales and marketing to support behind our fresh-baked test product, $5 million for the 6.5 acres land and building purchase adjacent to our Freshpet Kitchens and $5.5 million to expand our land capacity by at least 130%.

We see strong growth for our products across our distribution network, and we will continue to maintain a strong balance sheet and liquidity to meet demand and further grow our distribution network.

That concludes our financial review.

I will now turn the call back to Richard for closing remarks.

Richard?

Thanks, Dick.

We are pleased with the strong year-to-date progress.

I am especially impressed with the hard work and dedication of our valued Freshpet team members who are essential to our ongoing success and growth.

Our team remains committed to our core values at which we challenge ourselves every day to find new and better ways of delivering the benefits of fresh, real food to our pets.

We work to be transparent and honest in every facet of our business.

And finally we strive to do what's right for pets, people and the planet.

We appreciate the support of our pet parents, our retail partners, vendors and shareholders.

We would like now to open up the call and take your questions.

Operator?

(Operator Instructions)

Peter Benedict, Robert Baird.

First question, as we think about the door growth over the balance of this year and into 2016, can you talk about any new geographies or new customers, new channels or anything like that that you think could be noteworthy and the doors you're expecting to add?

We have been able to add a handful of new retailers.

We added about three different retailers.

I think the most noteworthy and the most high profile name, it is a small test, but we did add a small test in Costco over the past several weeks which we're very enthusiastic about.

It's one of these things we've talked about over time.

We feel that the product is a terrific fit.

We've been able to come up with a proposition that we feel is exactly in tune with the consumer there.

And we're excited about the opportunity and the potential that this new expansion into clubs really provides for the organization.

But it will be something that we're going to measure into very slowly and really over the long term will have a real impact on our Business.

Okay, perfect thanks, Scott.

And when you think about the dry test that you did at Target, can you talk about -- give us a better sense of how you felt that went?

Obviously it went good enough for you to roll this to other partners.

But the level of fresh cannibalization, were you able to measure that?

Was that material?

And as you think about this dry, as you're continuing to test the dry product, do you think you're going to roll with three, four, five SKUs here or do you envision this having a lot more SKUs as you start to move into different channels and you get into grocery, you get into pet specialty, et cetera?

Well we were -- obviously we would not have continued to expand the test and spread our wings a little bit further with dry if we weren't happy with the initial results behind it.

It is one of these things that we're going to continue to very carefully layer into the market.

Obviously, it's a gigantic multi billion-dollar marketplace dry dog food.

There's plenty of room.

We feel the proposition that we're able to bring to the market was really differentiated.

It is one of these things that takes a significant amount of awareness and education to consumers to communicate those points of difference.

So that's something that we were -- it's great that we were able to do a test the way we did it, but it's something that hamstrings you and your ability in order to communicate to consumers, because you have fairly limited distribution at that time.

So now as we're layering in, we're going to support that.

We're going to support it in a fairly conservative manner, but very thoughtful.

It's exactly the way we went through it in our testing and modeling when we did our quantitative research and our quantitative testing.

And we're going to be expanding to grocery and into mass.

And you'll start to see that popping up: literally in the past couple of weeks, you'll start to see it popping up.

We're anticipating that it will be anywhere between just a couple of SKUs, all the way up to some people have taken seven, eight of the SKUs and we'll have a nice section.

And I think based on that we'll start to be able to evaluate what's the most effective way for us to come to market.

So how large a section do we need to have?

Exactly what do we need to be communicating to consumers?

What's the take away?

Some of the initial numbers that we're saying especially on our small bags have been very positive.

They're in tune with bigger and larger brands that have been out there and are established for a while.

And now we need to see migration into our middle size and our larger bags.

So we're expecting to see that in Q3 as were in the comments from Richard and Dick.

You'll see that we're going to start to come advertising that talks about us as a Company and how we have a very differentiated and thoughtful approach to how we develop food.

Not only in fresh, we're the first ones to really be in fresh.

But we're taking the same ideas that we feel really comfortable and strong about in fresh and now bringing them into the dry or the fresh-baked as we're referring to it area in the store.

And I think finally, your question was around cannibalization.

We have seen very, very minimal.

When we originally did the quantitative testing we saw around a 1% number of cannibalization, which almost seems unheard of, but I think -- and that's really the number that we've been seeing.

Could it be 2% you might be able to argue but it is very, very small.

But I think the thing to keep in mind is that you're dealing with a $13 billion category and until we are very large in that category of dry dog food, I think the cannibalization will be very minimal.

It does appear to be adding new consumers to our brand in total, but also consumers that were buying some other dry products.

So it looks like it's achieving the majority of our objectives.

It's something that we're excited about, but we also want to be very cautious around it.

So does that answer everything?

That's fair, Scott.

And the last question and I'll turn it over.

On the cat test Richard talked about rolling that out more aggressively late this year and early next year.

Just an update of what you saw there in the test if you did on cat and what gives you the confidence to move forward on that?

Thank you.

What we did is we -- across the US, we had just around under 100 stores where we had done some small testing.

We had done some in one pet specialty retailer and then some in a couple of other retailers where we tested a handful of SKUs.

And what we did is we garnered the learning from that and we now developed a very solid and crisp portfolio and it's for cat.

And we're actually taking that out to a broader group of retailers to actually put a separate cat refrigerator into some grocery and some mass accounts over time.

We've -- in several cases that we've been actually surprised at the initial interest from a handful of people around that.

But again this is something we're going to be in market in our full or portfolio, it's not the final but it's a fuller portfolio in Q4, in a cat test.

And then the anticipation is that in Q4 and into Q1 of next year, we'll get it figured out and it will provide us with a lot more store opportunity and growth opportunities into 2016, in the latter half of 2016.

Okay, perfect.

Thank you.

Jason English, Goldman Sachs.

Thank you for the question.

I'm hearing the rhetoric you -- around sales and the outlook sounds pretty robust.

You've got dry pet expanding, you've got a new attack plan on cat, you've got Costco in test.

It sounds upbeat, but it doesn't quite fit with the numbers.

When I look at your guidance just taking the midpoint for sales it implies that the back half sales decelerate to something around 23% growth.

Good growth, but markedly lower than where we're at for the first half of the year.

So am I missing something there?

Well I think the first thing I want to make sure I'm clarifying around is that the guidance that we have provided is specifically around our fresh sales.

It does not include anything around fresh-baked.

So I think that's the first consideration.

I think one of the other things that we think is really important as we're looking at this is we had originally budgeted a fairly flattish year from a standpoint of our growth was fairly flat across the year.

We saw in the very early 30s from a growth standpoint across each quarter.

And what we were able to materialize and see in Q1 was slightly ahead of our expectations and then Q2 we're still -- we're happy with the results.

So we don't exactly know what Q3 and Q4 will bring.

However, we aren't -- we do know we're going to continue to press harder in Q3 around marketing and that marketing will center around fresh-baked.

So we're hoping as we deepen the accelerator a little bit that we will get back to some of the growth rates that we saw earlier, but don't know exactly.

And we wanted to make sure that we were smart about our guidance and not moving it as we want to make sure we're meeting and/or exceeding expectations.

Yes, got it.

That makes sense and that's helpful.

One more question from us on margins.

Thinking back to early days in the process of the IPO, Richard, I think you had a figure and we had a similar figure about incremental margin or incremental EBITDA on every dollar of sales, somewhere north of $0.40 on the $1 would drop through to EBITDA, I think, was the math.

Year to date you're tracking close to the $0.28 and gross margins are a smidge below what we were expecting.

What's causing -- maybe it's timing related I don't know, but can you walk us through some of the factors that are causing the drop through to be a little bit less than we initially expected?

Well we were talking about -- we can't be -- it's Dick, Jason.

We were talking on a full-year basis going forward from September of 2014 onwards and we still feel good about 40% to 45% of any incremental dollar sales falling to the adjusted EBITDA line.

Where we had a slight issue is on the innovation.

We were guiding through 52% by finishing the year around 52% gross margin.

We're -- year to date we are at 49.1%.

The innovative products are taking a little longer to normalize through our production process, and we expect by the end of the year to be in the 50% to 51% range and get to 52% by the first quarter, second quarter of 2016.

But if you back out your depreciation on chillers and you back out your depreciation coming from the manufacturing facility and the stock option expense and just work with adjusted EBITDA and look what our original marketing expense before this incremental $3.5 million on the baked, that 40% to 45%, 40% still works.

We front ended our marketing expense in 2015.

And as the year goes on, the $60 million that we're projecting to sell in the back half of the year should deliver those numbers that we indicated.

Got it.

Thanks a lot, I'll pass it on.

Bill Chappell, SunTrust.

Going back to baked.

I understand not including it in the quarter, excluding it because it was in test, now that we're going forward full on and expanding into other retailers, can you give us a ballpark figure in terms of what you're expecting this year, because it is real revenue?

And is it still expected to be net neutral to earnings if we do include it, or is this still something that will be -- could be dilutive as we spend for the first two quarters?

Well, no for the year we expect -- you can see the first half of the year we made about $100,000.

No, so we're looking at the end of the year to have a margin.

We're going to scale our margin towards 35% because right now our gross margin is around 30%.

And then we're going to take those funds and reinvest in them, so we basically -- in the Company and in baked, so we basically saying for an adjusted EBITDA for 2015 the baked will be neutral to the organization.

On a revenue standpoint, is $5 million, $10 million, what's the ballpark we should be thinking about?

I would think $5 million is probably a fair number for 2015.

Okay.

And then Scott, I think you had alluded to move into grocery and mass, are these larger grocery and mass retailers or how big, how small should we thinking or looking for?

We are -- they're major players.

There's some smaller guys, but we were very selective in the people we went to.

You are going to see it in -- this is all public at this point, but you're going to see it in Walmart.

You're going to see it in a lot of our key retailers.

You'll see it in Wakefern in the area.

You're going to see it in a lot of the major retailers across the country.

And again it was something that we were not planning and we were not trying to do a national launch.

We were trying to go into people that met a set of criteria that we felt comfortable with.

And so that's how we were progressing with it.

But we're into the thousands, many thousands of stores number.

Okay and a last one from me.

Richard, can you -- clearing the air again on quality control, mold, retail any issues stuff like that?

Because there seems to be a lot of noise that affects the story inter quarter.

No, there really isn't any news or any more news on mold or quality.

As I've always said, quality, quality, quality and quality people, quality products and quality customer service.

And we're making great product at the plant, and I think there was an awful lot of noise around what social media was saying, which was unfortunate.

But there's some people out there trying to wish us not good stuff.

But having said that, making fresh food and making fresh food every day and sending fresh food around the country every day is a hard job.

It's not easy.

And fresh food if the package gets adulterated in some way, it that the product is fresh food, it'll mold.

We've -- the experiences we have is not any different than we've had for the last six or seven years.

Unfortunately as I said some people try to make a big deal out of it, but we're very comfortable with our quality.

We certainly are working on lots of innovation around quality and we're doing lots of things over the next 12 -- have been working on and continue to work on other things to make quality even better.

Just to clear, you haven't seen any meaningful step up of complaints or returns or anything like that?

No, as I said in the last seven years there hasn't been anything that I would say is abnormal.

And if anything, we're good on all functions and all phases.

So quality is -- we're very happy where we are.

Great, thank you.

(Operator Instructions)

Robert Moskow, Credit Suisse.

Couple questions.

Getting back to Jason's questions on gross margin.

You said that your gross margin realization is going to be delayed because of the -- the shredded product is a little more complicated to make.

But you're also talking about dialing up cat food maybe a little bit ahead of your original expectations.

I got to imagine that would be dilutive to your core gross margins.

Do you feel comfortable that with all this innovation going on that 51% to 52% target for 2016 is still achievable or do you think with all of this innovation going on it might be pushed out a little bit more?

Well the good news is we are a growing Company.

We're growing in the mid-30s.

We're not only growing in revenues but we're also growing at tonnage.

And we have a team on the field at our Bethlehem plant.

And our Bethlehem plant is quite a bit of fixed cost with fixed depreciation, fixed management, fixed IT systems.

So as more velocity comes through, and our velocity is probably 3% or 4% higher than we thought it would be at this point in time from what we had originally projected, and we are basically within a few dollars of where we projected the end of the year.

So as long as our velocity continues to grow, which it is, and on our volume grows we're going to take advantage of our Bethlehem facility to fix cost of our Bethlehem facility and deliver that incremental margin.

The other piece in this announcement was the use of $5 million expenditure on our new plant to get new equipment that gives us the capability speed of the next two lines is 30% greater than our current speed.

And that also is going to add to margin.

So I'm fairly confident.

And the other point on cat is although we may be co-packing cat, cat is a much higher price per pound and it leads to very attractive margins.

So we feel good about the cat issue.

The cat issue, okay.

The cat opportunity, Dick.

Damn cats.

He was bitten by a cat when he was little.

Scott, you had mentioned that the cat products might get their own refrigerator case, and I don't want to make too big of a deal of that because it's very early.

But is that a -- it sounds like a much higher incremental cost whereas it might have been a lot easier to put it in the cases that you've already got.

Was that always part of the plan, or is that new?

No, that actually is definitely part of the plan.

And there's two pieces to that, Rob.

It's actually pretty interesting.

We actually look at the refrigerator today, and as you know we think about it as our own -- it's a store within a store, and our goal is to optimize the sales as best we possibly can out of that each one of those units.

So optimization is the key piece of that.

If you look at the sales per linear inch in that fridge and we take into consideration gross margin, cat tends to be some of the underperforming SKUs in that fridge.

So actually as we've actually planned to over time, and this is probably over a three-year time period, where we migrate, not in all stores but in some stores, as we migrate some of the cat SKUs out we can actually put some more productive dog food SKUs and additional innovation in dog back into the main, or base, refrigerator.

And people are basically trained to shop where they shop, meaning if you're shopping for cat food you walk down to the cat section.

And in some stores it's actually fairly far away.

It can be a couple aisles over.

So in those stores we're going to have a smaller fridge.

It will be smaller, it won't be full height, in the cat food section and we're looking to make sure that the payback is very similar to the payback we currently have, we've quoted 15 months.

So it'll be a smaller more cost-effective fridge.

We don't know if the velocity will be exactly the same as a dog food cooler, probably less, but we expect the payback to be in a similar time frame.

So it actually works together in the most productive stores, the larger most productive stores will have many of them over time, over the next three years, will have a cat food fridge.

And that allows for increased dog innovation and increased productivity of the original, the base dog food fridge, too.

Rob it's like the old thing is let's fish where the fish are, right?

So let's fish where the cat food people are in the cat food aisle and see what happens.

It's a good way to catch cats if you use fish.

And I'm assuring you we will be doing that.

Last question.

I think you describe first quarter definitely ahead of your plan.

Second quarter you said you were happy with the results.

Is it fair to say that the first half of the year is ahead of plan as you originally had it.

And is second quarter pretty much in line with what you thought it would be?

Yes, I think that's fair.

We were marginally ahead in Q2.

I think Q1 was a -- we were rolling in Q1 for sure.

And the other thing -- and if you look at the way the marketing spend has been parsed through the year, Q1 was the higher spend, Q2 was actually backed down intentionally.

And the reason we backed it down is because in Q3, we have a new campaign that's launching.

In fact, the press release I think just went out yesterday or in the last day or so and the TV just went on air today.

But we have a new campaign and it's integrated -- it integrates and talks about the entire Company's approach to pet food.

And it actually has scored better than any TV we've ever done in the past.

So we're expecting exciting things from it, but time will tell.

Great, thank you.

Scott Van Winkle, Canaccord.

The $3.5 million that we talked about incremental sales and marketing investment, was that specifically and only around the baked product, or is that more of the new branded campaign about how you go about producing food?

It will be behind that campaign, but the reason we're instituting that campaign and it is focused around the Fresh Baked.

So the support will be Fresh Baked.

Not all that money, the increment of $3.5 million, will go specifically to advertising.

We will have sampling, demos, some couponing, et cetera, that's specific around Fresh Baked and much more targeted to communicate the different proposition on Fresh Baked.

So I assume that the sampling and store-by-store promotions is going to be the majority of it or is there going to be enough doors near term to support television spend?

When we started television many years ago, and we were probably spending on TV probably a little bit early for the brand and the size, and I think we're in a situation again where we're going to go ahead and do the TV.

We're not in as many stores as you might see when you turn on TV.

But when you start looking at store by store -- the store-by-store economics of doing many things, it gets very expensive very quickly.

So TV still is really a terrific alternative, especially when we can communicate and talk about the Company.

And we think not only will the campaign have benefit, and the adds are split up, so they're not -- some are on both.

Some are on Baked and some are on Fresh, and there's three different, basically, communication points in the advertising.

So it will help support the entire brand, but also be very focused on the Baked launch.

And if a consumer is out there and they're interested in it, it's going to be in distribution enough where they can go find the product for sure.

Got you.

So Scott, when you sit back and I think you said that maybe you spent a little less in Q2 waiting for the new campaign to come forward.

When you get to the end of 2015, what's that advertising, marketing, promotion budget look like relative to what you thought it was going to look like going into 2015?

Is it really just the $3.5 million incremental?

Yes, it is the $3.5 million incremental and it's split between TV and then the other in-store sampling, couponing, demos, as I was mentioning.

Scott, we talked about that a lot but this is a deal that -- I want to invest for the future.

We signed up to be a growth Company and signed up to make all this work and it's the right time and the right place with the right product to be able to spent some of the cash that we have.

And the $3.5 million to spend it for our future growth and future investment for 2016, it's the right thing for the Company.

And that's what I'm here for is to be sure we're doing the right things for the Business.

Yes, great, thanks.

And Dick, so one other question on the Baked side when you -- I think you said by year end or for the year it'll be neutral to adjusted EBITDA.

When you say neutral to adjusted EBITDA I think your excluding this $3.5 million spend.

Yes.

Okay, great.

Thank you very much.

Mark Astrachan, Stifel.

Couple housekeeping questions.

Wanted to get a sense of what the growth of the product is on the on track channel, the non food, drug and mass, Petco, PetSmart that sort of thing.

And then wondering is there any contribution to the sales guidance for this year for the cat test in the fourth quarter?

Mark, can you -- I missed the very beginning, I apologize.

Yes I was just try to figure what the growth was for the Baked product, or not for the Baked, for the Fresh product in the untracked channels in Petco, PetSmart that sort of thing.

We don't -- we're not launching --

He's not talking about Baked, he's talking about Fresh -

Yes, I'm talking not the Fresh, the core product.

Okay, okay.

So on -- and you'll see when you see the SKUs that is a year-over-year change second quarter was pet and natural channel was 20.3% in revenues.

And then we had in the quarter we had $6.3 million -- $6.7 million in sales for the quarter, or up 20% year over year.

And we're in all the Petcos, with PetSmarts basically 95% of them.

So we're running at of $27 million, $28 million run rate.

So -- and the other thing to keep in mind there is that the -- I don't have an exact number, but there has been very little distribution growth because we were in the vast majority of the PetSmarts and Petcos.

Literally a couple stores across PetSmart and Petco.

So that's basically -- it almost the same-store sales, not far off from the same-store sales number.

Right, okay.

And the contribution in the numbers, if any, from the cat product launch in the fourth quarter?

No, we haven't -- it's not in the guidance.

Yes and it'll literally be just a couple of hundred stores in the fourth quarter.

So it won't be substantial enough to really have a meaningful impact on the business.

Got it.

And then just one follow up Scott to the first question.

So you were talking about same-store sales number.

What about your view of what that is for the track channels and the food drug mass retailers?

So if you look at the quarter it's about 14% versus year ago.

Okay, great.

Thank you.

Thank you.

At this time I'd like to turn the call back over to Management for any closing remarks.

I think we've said everything we need to say.

We're really happy with where we are.

We're really excited about where we're going and we look forward to the second half and continuing the innovation and good work that we're doing.

So I want to thank everybody for their time today and we look forward to speaking with many of you over the coming days, weeks and months.

And I encourage you all to go out buy some Freshpet and get us a new consumer.

Thanks a lot.

Thank you, sir.

And thank you, ladies and gentlemen, for your participation.

That does conclude Freshpet's second-quarter 2015 earnings conference call.

You may disconnect your lines at this time.

Have a wonderful day.