Freshpet Inc (FRPT) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome, to the Freshpet fourth-quarter and full-year 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to hand the conference over to Katie Turner.

Please go ahead.

Thank you.

Good afternoon, and welcome to Freshpet's fourth-quarter and full-year 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 Operating Officer, will also be available for Q&A.

Before I 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 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.

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 for 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 prepared in accordance with GAAP.

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

Thank you, Katie, and good afternoon, everyone.

To begin, I will provide a brief overview of our financial highlights and recent business performance.

Then, Dick will review our financial results in more detail and provide guidance for 2016.

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

We are proud to have completed our first full year as a public company.

2015 contained great achievements along with some significant learning.

We began 2016 on a solid footing with a stronger company to support our mission of introducing consumers across North America to our fresh, all-natural pet products offerings for dogs and cats.

Some of our most notable achievements for 2015 include strong velocity per store growth and repeat customer repurchase rates, which translated into a 33.9% increase in our top line and a doubling of our adjusted EBITDA growth as compared to the prior year.

Several of our key initiatives in 2015 have better positioned us for 2016 and beyond, which include an expansion product portfolio across both dog and cat, improved product manufacturing, new and improved packaging and quality assurance, expansion of our Freshpet Kitchens with Phase 1 completed and Phase 2 well underway, and the continued buildout of our team to support the future growth at Freshpet and the development of our organization.

We are confident that these strategic investments and operating efficiencies will help us to drive greater leverage across our business model to improve profitability and enhance long-term shareholder value.

Freshpet has brought the most significant innovation to the pet food category in more than 70 years.

By bringing our fresh food to pets, we are a first mover and have revolutionized the pet food aisle.

We are changing the way pets eat.

We believe our foundation of innovation, along with our consumer education and awareness programs, will lead to stronger growth rates that outpace the pet food industry for many years to come.

And 2015 was no exception, with our fourth-quarter net sales up approximately 23%, and for the year, net sales were up approximately 34% to $116.2 million.

These increases are due not only to increased store locations, but also velocity gains.

Our net sales growth at 33.9% was more than double our 12% distribution growth.

Freshpet Fridges increased to 15,015 from 13,386 in 2014.

As those of you that are familiar with Freshpet know, we have consistently stated since our IPO that store growth will be variable from quarter to quarter.

While we know Freshpet Fridge locations grow will continue for the foreseeable future, these efforts are often a result of our team efforts over the course of many, many months, even years.

And a retailer's decision whether to install our fridge can be influenced by many factors outside our control.

When a retailer does add Freshpet, however, they have grown velocity, improved pet aisle traffic, which in turn helps grow their overall pet category and results in higher margins.

We also have proven that we generate significant repeat purchase rates.

Time and time again, we have been told that we lead the pet food category in providing the most innovative product offerings.

For these compelling reasons and based on the additional whitespace opportunities in front of us across sales channels, we believe that over time, we will be selling Freshpet in 35,000 stores in North America.

In the last four calendar years, our store growth has been as follows.

2012, we added 1,513.

In 2013, we added 2,322.

In 2014, we added 2,550.

In 2015, we added 1,629.

For 2016, we'll expect to add over 1,500 Freshpet Fridge locations to finish 2016 at over 16,600 stores.

While we have made tremendous progress over the last several years, Scott and his team have worked diligently to greatly enhance our focus and resources to add stores and better position the Company to meet its goals over the next several years.

The work has led us to new channel strategies in addition to better alignment of our entire organization to achieve store acquisition going forward.

This includes changes to our product portfolio, Fridge offerings, sale structure and external partner engagement.

We also now have a unified incentive program that rewards both our internal team and our external teams around store acquisition.

The expansion of Freshpet Fridge footprint is critical and we are optimistic about our opportunities to deliver strong progress in 2016.

I will now share some details on our plans to grow velocity from our innovation and advertising initiatives.

As many of you know, the introduction of innovation, new products and a diverse portfolio are important to driving sales and velocity growth.

Our innovation team, and their new offerings developed in 2015, have increased our portfolio significantly.

While it is still very early, we are very encouraged about the incremental opportunity we have with our cat product portfolio.

We currently have our cat portfolio in test in various executions from dedicated fridges to an expansion of space in existing fridges.

By the end of May, our expanded cat portfolio will be in approximately 2,000 existing stores and separate fridge placements across the US.

In addition, Vital Whole Blends, our new meal enhancers, will launch in the pet channel in April, providing consumers the ability to utilize a blend of super foods to customize their pets' meals and nutrition.

Our Freshpet Shredded product, launched in 2015, has become one of the top-selling products being launched just over a year ago.

In late 2016, we will be offering this product in a larger size, based on velocity and consumer demand, once we have increased capabilities at our Freshpet Kitchens.

Manufacturing improvements on Shredded have allowed us to generate margins much closer to the rest of our portfolio in recent months.

As we realize greater production efficiencies, we expect the gross margin contribution to improve.

Dick will discuss our gross margin performance in more detail in his remarks.

Our Fresh Baked product, launched in 2015, continues to progress well with our key retail partners.

Today, this product is available in over 5,000 retail locations.

In 2016, we will continue to grow the opportunity, and we will project net sales contribution of over $6 million.

We are reinvesting 100% of the margin back into building the Fresh Baked product line at retail.

So, we expect this to be profit neutral.

Beyond innovation, we will continue to invest in growing our brand awareness and consumer education around Freshpet and products to drive same-store sales.

Consumer trial and repeat purchase rates have increased significantly as a result of our marketing investments over the last few years, and we will continue to connect with consumers through a wide ranging and diverse mix of marketing strategies, such as national television, our easily recognizable brightly lit Freshpet Fridges, digital, social and viral media campaigns.

As in past years, we plan to spend more of our communication investment in the front half of the year.

Turning to our operations plan, we expect our Freshpet Kitchen expansion to be completed in the second quarter of 2016, both on time and on budget.

We are currently working to build our manufacturing team in Bethlehem to staff the new production lines.

We look forward to the new and more efficient production capacity coming online.

We believe the strength of our retail footprint, when combined with our strategic investments in manufacturing and R&D, will significantly add to our capabilities to help support our growth over the next several years.

As I mentioned earlier, our team has built a strong foundation and we are well-positioned for the future growth.

We are confident in our strategic plan and are intensely focused on the execution of our operational and financial objectives.

Going forward, we will further improve our processes, drive greater leverage across our business model, and in turn, enhance long-term shareholder value.

With that overview, I will now 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 of fourth-quarter and 2015 financial results.

Then I will review our annual guidance for 2016, before we take your questions.

For the fourth quarter, net sales increased 23.1% to $30.2 million.

This growth resulted from both distribution and velocity gains across all retail sales channels, including a 12.2% year-over-year increase in Freshpet Fridges.

Gross profit for the quarter was $13.7 million, compared to $12 million during the same period last year.

Gross margin was 45.3% for the fourth quarter of 2015, compared to 48.9% in the fourth quarter last year.

Freshpet Baked product and our Shredded product, both launched in 2015, lowered our gross margin by approximately 210 basis points.

Also, the hiring of additional staff in 2014 for operations, quality assurance and procurement caused a negative effect on margin at current volume levels.

For 2016, we expect a gross margin of approximately 46.7%, which will include additional depreciation in personnel required for our planned expansion, along with incremental costs for our product launches, including Cat and Vital Whole Blends.

The 2016 margin projection captures the $1.5 million startup costs of ramping up the new production lines at our Freshpet Kitchens, prior to realizing higher production volumes, along with a $1.2 million of additional depreciation on the new equipment.

After adjusting for stock-based compensation expense, SG&A expense increased as a percentage of net sales to 40.9% from 40.5% in the same quarter last year.

The increased percentage is due to higher chiller maintenance and depreciation expenses, due to more chillers deployed, higher logistics expenses due to higher volume and higher marketing expense to support our Baked national product launch in March, offset by lower marketing spend on our refrigerated products.

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

Adjusted EBITDA was $4 million for the fourth quarter in both 2014 and 2015.

Included in the $4 million adjusted EBITDA in the fourth quarter of 2015, was a loss of $1.1 million for the launch of our Freshpet Baked product.

Turning to our annual performance for the 12 months ended December 31, 2015, net sales increased 33.9% to $116.2 million, compared to $86.8 million in 2014.

Adjusted EBITDA improved $5.6 million to $11.1 million.

Our Freshpet Baked product launched in 2015 contributed a loss of $3.6 million, to adjusted EBITDA for 2015.

Turning now to the balance sheet, at December 31, the Company had cash and cash equivalents and short-term investments of $11.3 million.

The decrease in cash is primarily due to expenditures related to the expansion of our Freshpet Kitchens, capital investments to increase distribution through the purchase of additional Freshpet Fridges and the purchase of land and 6.5 acres in building directly adjacent to the Freshpet Kitchens.

As you may recall, we are expanding our plant capacity to provide for sales of up to $400 million, which represents an increase of 130% from current capacity levels.

We plan to invest approximately $31 million in capital expenditures to achieve this, of which $18 million has been spent through December 31, 2016.

We continue to be on track with this project and estimate a completion of construction in the second quarter of 2016.

As a result, we expect the new production lines to begin operations in June.

We continue to expect to borrow approximately $8 million to $10 million from our credit facility in the first half of 2016, which should be repaid 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 $0 was outstanding at December 31, 2015.

Each quarter in 2015, we've generated positive cash flow from operation and expect this trend to continue in 2016.

Finally, I'll review our annual guidance for 2016.

We expect Freshpet Fridges of over 16,600, an increase of approximately 10%.

We expect net sales of over $137 million, an increase of approximately 18%.

And we expect adjusted EBITDA of over $18.5 million, an increase of approximately 67%.

From a seasonality perspective, we expect our net sales growth to be more weighted to the second half of the year, as we realize the full benefit of our distribution, media and new product.

We expect adjusted EBITDA to be more heavily weighted to the fourth quarter, as our expenditures lighten considerably, due to the timing of our planned media program.

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

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

That concludes our financial overview.

I will now turn the call back to Richard.

Richard?

Thanks, Dick.

In addition to our earnings today, we announced a CEO succession plan as a result of my planned retirement in July.

As many of you know, I have been a member of the Freshpet Board of Directors since 2010, and assumed the role of CEO in January 2011.

We have achieved tremendous success since then, transitioning from a private to a public company with over $100 million in net sales.

I am proud of our accomplishments.

I have tremendous confidence in our dedicated team members and Freshpet's future growth.

In addition, I want to congratulate our COO and Co-Founder, Scott Morris, on his promotion to the additional position of President.

Scott and I have worked together for many, many years, and he continues to be a very important part of our Freshpet team.

Walt George, an Independent Director of Freshpet, will take a direct role in managing the CEO succession transition process.

For those of you that have not had the opportunity to meet Walt, he is a seasoned executive, and we welcome his perspective and experience in operations, consumer products and the pet food industry.

In closing, we believe Freshpet is well-positioned both culturally and financially for future success.

We have significant opportunity for future growth through our unique and differentiated product offerings, and we will continue to gain share in existing and new retail partners.

With that, Dick, Scott and I are now available to take your questions.

Operator?

(Operator Instructions)

Our first question comes from the line of Bill Chappell from Suntrust.

Hi, Bill.

Hello.

This is actually Stephanie on for Bill.

I just have a quick kind of question.

If maybe you could speak a little bit more on the Baked launch?

I think this is your guidance for $6 million next year is a little bit lower than we expected or maybe you alluded to last quarter.

So if you could speak on terms of if this includes new distribution beyond just target or what you are seeing from your test now?

That would be helpful.

Thanks.

Hi, this is Scott Morris.

So, on Baked, what we're looking at is we are looking at the pacing and the how we're planning to add stores throughout the year.

And that is really where we have gotten to where we are comfortable around a $6 million number on Baked.

We've also, as a Company, want to make sure that we are really focusing our strongest efforts on the Fresh business and making sure that Baked develops at an appropriate pace.

Got it.

That's helpful.

And then switching to margins.

I know that you mentioned last quarter you were having issues with some of the Freshpet Shredded line.

Are most of those resolved?

And we expect going forward that 110 basis point hit should come lower, should be alleviated little bit?

Or how are we looking at it in terms of the impact from Shredded?

Yes, this is Dick Kassar.

In October, November, we had a higher shrink than we really were expecting and then we got it back in December, January and February.

So we're feeling good about where our Shredded production is and the amount of pounds per hour going through the process.

So it is much more normalized than it was when it was just a kind of a startup operation.

All right.

Well, thanks so much.

Thank you for calling in.

We appreciate it.

Thank you, and our next question comes from the line of Peter Benedict from Robert Baird.

Hi, Peter.

Thanks for calling in.

Hello, Richard.

Good luck in your retirement.

My first question is around the gross margin.

Dick, you had mentioned 46.7% as a target for 2016.

Is that a GAAP number?

Is that comparable to this 47.0% that you did here in 2015?

That's my first question.

Yes, and that includes $1.5 million for startup of the lines for 2016, along with an additional $1.2 million in depreciation associated with that lines, which represent about 180 basis points.

Okay.

Now, that is perfect.

I just wanted to clarify that.

That is about down 30 basis points year-over-year.

How should we think about the trajectory there?

We are two-thirds of the way through the first quarter.

Any color you can give us in terms of magnitude of gross margin declines in the first quarter?

Does that swing positive at any point during the year or just that the declines moderate as we move through 2016?

In the early part of the year, before we have the construction completed, the margins will be north of that 46.7%.

And then it will blend towards 46.7% as the year progresses because Peter, we are not going to start on our new lines with full production.

We just don't have that volume yet.

So we're going to gradually work those lines and actually kind of just flow through that production and see where it goes.

But 46.7% is good for this year.

And next year, as we continue to work the line, it's like putting on a new product, we will improve processes.

Okay.

That's helpful.

What -- so there has been some more talk of deflation out in the food area, recently.

Can you talk about how deflation -- is that playing a role?

How does it play a role in your revenue plan or your margin plans here?

Is that even material at this point?

No, no, definitely.

We are actually not seeing that.

We are seeing some slight benefit from the higher products that we actually see in our Fridge.

So we are definitely not seeing deflation.

As you know, we are minimalist from a trade promotion standpoint, which is -- you can get into a little bit of a tougher situation if your business is highly reliant on promotion.

We don't have that situation going on so we're, I think, more insulated than most packaged goods.

Okay.

Thanks, Scott.

And my last question is, a couple times in the prepared remarks, you guys mentioned repeat rates and how they have been good.

Can you give us a little more color as to what the historical trend has been in terms of repeat rates and how that looked in 2015?

Yes, actually, we look at repeat rates on a two plus basis.

If you look at 2013 with 66%, 2014, 79%, and 2015, 89%.

That's at the same time when we have been able to drive penetration.

So those are really strong numbers, obviously.

Okay.

One more.

I will just add one more.

Any comment on in terms of on the first quarter velocity trends?

I think you were mid-single digits here in the fourth quarter.

How are you seeing velocity trending so far in the first quarter?

Thank you.

Sure.

What we can talk about, Peter, is we can talk about what we're seeing from an IRI or a Nielsen basis.

And you look at Q4, and it definitely -- the versus prior period or verses a year ago, however you want to look at it, there was a little bit -- there was definitely a come down a little bit.

And typically, it was really timed around the different things that we had in the marketplace.

So our communications support, our distribution build, and also our innovation, which was planned to basically come down a little bit in the back of last year.

What we are already seeing in IRI, is you're starting to see some gradual pickup based on our communications work.

And throughout the year, we anticipate seeing nice build from innovation that is more on the Q2, Q3 period.

And then finally, ACV will continue to phase in throughout the year and all of those will change the growth trajectory.

Okay.

Perfect that's helpful.

Thanks, guys.

Thank you, Peter, for calling in.

Thank you.

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

Hi, Jason.

Thanks for calling in.

Hi, Richard.

Good to hear your voice.

We will miss it on the calls going forward.

Good luck in the next ventures.

Scott, congratulations.

Okay.

That out of the way.

A few questions.

First, Dick, I may have misheard you.

I think you said gross margins will run north of 46.7% in the front half of the year and then phase lower?

I see probably the inverse of that.

Well, no, we are not going to experience a depreciation, Jason, until July through December, when we are up and running.

In addition to that, the startup expenses, although they will have some in the first quarter it will be mostly in the second quarter as we continue to recruit personnel to perform these operations and simultaneously training those personnel.

And then, as our volume continues to grow -- so, it will dip in the third quarter and stabilize in the fourth quarter.

But blend to 46.7% for the year.

Got it.

That makes sense.

Thank you.

I think you mentioned a headwind in the fourth quarter would shrink on Shredded.

My interpretation of shrink is spoilage and retail returns.

Is that the right interpretation?

If so, why?

I'm sorry, Jason.

Shrink, I meant shrink as yield.

So yield while producing.

Yep.

Okay.

That is helpful.

And then, a higher order question.

You clearly fell short of the units this year.

The thought was that a reason for that was timing related and maybe there is some pent-up demand that could spill into this year.

We can get a snapback.

Your guidance obviously implies that is not the case.

That this may be a run rate that we should expect.

Do you have visibility on that?

Is the reason that you are guiding for a lower number, is it just based on some of these retailers that you thought would come, maybe aren't coming or could you just give us more color behind it?

Jason, we have obviously looked back again and looked at the historical results, which we shared in the script.

And we have mentioned this before, but we've seen years anywhere from 1,500 to 2,500, 2,600 on the high-end.

And based on what we are seeing, we know we are on pace to hit that 1,600 store number.

And that is where we felt like that was an appropriate place to give guidance around.

Makes sense.

I will leave it there and follow-up later.

Thank you, guys.

Thank you, Jason.

Thank you.

And our next question comes from the line of Joe Edelstein from Stephens.

Hi, Joe.

Thanks for calling in.

How are you guys doing?

I'm just curious on two items.

First, the Cat products and the Cat fridges, if you can give us some light there?

And secondly, on the tests you guys are doing in Costco?

Sure.

Let me talk about Cat first.

So, by May, we should have about 2,000 refrigerators in multiple different scenarios.

Let me preface this.

We will have about 2,000 refrigerators that will have some variation of what we are doing with our Cat portfolio.

Let me explain what I mean by that.

There will be fridges that we will have dedicated to just Cat.

There will be fridges that will -- and different sizes of Cat specific fridges, too.

And secondarily, we will also be taking existing fridges that have dog food in it and we will be looking to reallocate the space in some of them to basically optimize that space as much as possible.

Because we're in a phase now where we need to continue to prove out the dynamics and the growth of that the Cat portfolio can provide to us.

And then over time, we anticipate being able to move more and more into standalone refrigerators.

By the end of May, there will be 2,000 stores with some variation.

The majority of them will be in existing dog fridges, but there will be a fair number of cat fridges out there and we anticipate to see that grow over time.

And basically, once retailers are able to see how the test is going, that is we are planting several different seeds and then we will be able to see what that portfolio -- the types of fridges are out into the future from there.

So that was the first thing on Cat.

Secondarily, on the test in Costco.

Let me give you, just touch on the historical.

In July, we went into a test at Costco.

We are in 10 stores.

This is all that you can obviously see on the marketplace.

We are still in those 10 stores.

We feel very good about the results that we are seeing.

We have had continued discussions with Costco and we're basically just evaluating exactly how we move forward in the future.

At this point, we don't have any specific plans that we are able to share.

That makes sense.

It's actually good clarity.

A quick follow-up, is the number still 5,000 stores for the Baked product or did that change at all this quarter?

We are on our way to around 6,000.

6,000 stores or dollars?

Maybe I'm hearing this wrong.

6,000 stores.

And then, what was the run rate for 2016 for Baked, in dollars?

We did $4.6 million in Baked, in 2015.

Yes, okay.

Got it.

Thanks, guys.

Thank you, Joe, for calling in.

Thank you.

And our next question comes from the line of Robert Moskow from Credit Suisse.

Hi, Rob.

Thanks for calling in.

You're welcome, Richard.

It's been a pleasure working with you over the year.

Best of luck.

And I guess, Scott, I wanted to know, you might have mentioned it already, but I remember last year, I thought you post the advertising in first quarter last year?

Are you doing it again in first quarter and is there another quarter where it pulses again?

Just we can check the timing.

And secondly, I think I've asked you this kind of question before, but the 1,500 is the low-end of the new store guidance.

And you are on track for that, you said.

Can you help me understand what on track means, though?

Is that defined as customers who have committed verbally to putting in those units?

Or is it like they are in the process of putting them in physically?

Can you give me a sense of what that is defined as?

Sure, let me touch on the advertising piece first.

It is a really good question because it is obviously a key driver of our velocity growth.

Over the course of last year, Q1 and Q2 are key drive periods from a communication standpoint, in addition to having innovation at that time, that is where we saw these great, great growth spikes.

This year, you are seeing Q1 and Q2 again, period where we have our advertising in.

However, our innovation will start coming in, in Q2 and Q3 this year.

That will be one of the core differences, but we are pulsing the advertising Q1, Q2.

And there will be another phase of advertising a little bit further back in the year, also.

So hopefully, that answers your advertising communication question.

And then on the store basis.

At this point, and I think we have shared these numbers with you.

But obviously, we have incredible visibility for Q1 and we probably have at this point, 70% visibility for Q2, and probably around 50% visibility for Q3.

So the further out we go, the less visibility we have exactly from a store count standpoint.

And literally every week, things continue to line up as we progress into the year.

But based on what we are seeing, we are on a good pace for the 1,600 store count and feel that that's the right place to be giving guidance.

If there are things or opportunities that break, hopefully, there is a potential upside around that.

But that is not what we want to plan on.

Okay.

That makes sense.

Thank you for that, Scott.

All right.

Thanks, Rob.

Thank you.

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

Hi, Mark.

Thanks for calling in.

Good afternoon, guys.

A couple clarification questions.

Specifically, what's in the guidance for the Cat product for 2016?

Also, how should we think about the SG&A expense progression through the year?

Do you want to touch on the Cat piece, Dick?

Yes, the guidance is basically the 2,000 chillers that we laid out there.

Those will be in place in May, whether they be in a chiller that's a second chiller in the store or whether it's in our existing chiller.

We're going to be watching those revenues and we have that incorporated into our plans of $137 million, of achieving at least $137 million.

As far as SG&A goes, you may or may not recall, SG&A is linear in several categories.

It is linear with revenues and logistics.

It is linear with revenues in chiller depreciation because as we add chillers and chiller mix, it is semi-linear in chiller and chiller depreciation.

It is linear in brokerage.

Where we get leverage is we get leverage in potentially in marketing.

We get leverage in G&A, and we get basically leverage in option expense.

So that is where the leverage is.

We are looking at approximately $8 million increase in 2016, of which couple of million dollars is for incentives for the team to achieve the objectives set by the Board.

Got it.

Just going back to Cat.

Is there a specific dollar amount that you are willing to give that is baked into that $136 million, $137 million?

No, when we test a product, that's what we're doing.

We are testing a product in our refrigerators.

We know it will achieve velocity.

The Cat category, $7 billion, we are looking to obviously grab some of that.

There are a significant number of cat owners around the country and we have seven SKUs now versus one SKU that we had in the prior year.

So we're going to watch how that goes.

But we have a conservative number in our plan and hopefully, we exceed it.

Got it.

Okay.

And switching gears a bit questionwise.

Scott, probably -- I want to understand a bit better how you think about return on marketing spend?

Overall, how you are measuring the success and your expectations and learnings as you face things and tried with Baked in the back half of the year and see things going forward?

Absolutely.

I think, I am actually quite proud at the level of math that's involved around our marketing and the thoughtfulness around the returns.

We are definitely always trying things and obviously new things don't always work out perfectly.

But we are able to consistently see over time.

You have probably heard us quote it before.

But it is a pretty specific model around what we do around TV.

For every 100 GRPs, we see a very formulaic -- we typically quote around a 1% growth around 100 GRP's.

And that model has really stayed intact other than a couple of brief periods over four years now.

So it is a very -- it is a great growth engine.

The nice thing about the advertising quotient that I just shared with you, is that as the business continues to get bigger and bigger, the return gets better and better.

So the dollars that we are spending on TV, we get an overall higher percent increase.

That's the same store sales number that I am sharing, the 1% number.

So anyway, as we see that over time, if we continue to get better returns on it, it is something that there is a lot of work that goes into.

It's not like we set it and forget it.

We are constantly monitoring it, evolving it and evaluating the returns that we are getting on the spend.

And we are also very diligent around evaluating if there is a spend that we are making, whether it is in marketing or innovation or anything that we are doing in the organization.

We are always trying to figure out where the best place is to spend those dollars to get the best return from a growth standpoint

Got it.

That is helpful.

And then lastly, on Baked, when we take a look at scanner data as you all do, we haven't really seen the business grow off of where it had run rated through, call it, third quarter last year.

So I guess I am just curious how you think about this product?

A, why the retailers are sticking with it?

B, are you pleased with just how it was positioned on shelf?

Is there an incremental opportunity as you think about it more going forward?

And how this product exists along with the legacy business?

Where does it fit in on a longer-term basis, would be helpful?

So, the thesis around the idea on Baked, it's still quite an act, where it is a product that we know about half of our consumers are using some type of dry food.

Typically, it is on a transition to utilizing more and more fresh food, which is terrific.

What we have been able to see is it does source a very unique consumer group.

Most of it, as far as we can tell, the vast majority of those dollars tend to be highly incremental to our business, which is another good factor for us.

When you see that the run rate has stopped growing as much, our spend -- basically once we got out of that Q3 period, we weren't spending against the business as much.

Throughout this year, we have been able to -- throughout last year, we have been able to establish exactly what does drive that business and we're going to be investing against it very very cautiously to see how it continues to grow over the course of the year.

There will be some more distribution gains on it over time.

And we still think there is a very interesting opportunity around Baked, and I think we've always said this, the absolute core of this business is around Fresh.

That is where we want to be investing, growing, and making sure that that piece of business is really on fire and healthy.

And I think Baked will definitely have its role going forward.

Got it.

Thank you.

Thank you for calling in.

Thank you.

That concludes our question-and-answer session for today.

I would like to turn the conference back over to Company Management for any additional comments.

No, we don't, but we appreciate everybody calling in.

Again, we are very excited about moving forward in 2016.

We think we have got a very solid foundation in manufacturing and on the admin and sales marketing area.

So we are very excited about moving forward.

Again, thank you for calling in and I am sure we will be talking to you in the near future.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the program and you may now disconnect.

Everyone, have a good day.

Thank you.