Freshpet Inc (FRPT) 2016 Q1 法說會逐字稿

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

You have joined the Freshpet, Incorporated first quarter 2016 conference call.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session, and instructions will be given at that time.

(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 first quarter 2016 Earnings Conference Call and webcast.

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

Scott Morris, President and 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 Quarterly Report on Form 10-Q, which is expected to be filed with the Securities and Exchange Commission, and the Company's press release issued today for a detailed discussion for 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 from 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 comparable measures prepared in accordance with GAAP.

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

Thank you Katie.

Good afternoon everyone.

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

Then Dick will review our first quarter 2016 financial results in more detail.

Finally, Dick, Scott and I will open up the lines for questions.

We are pleased with our start to 2016 as we execute on our mission to bring the power of fresh real food to dogs and cats.

We strive every day to give pet parents products that their dogs and cats love, and that have a positive impact on the pet's live.

We see the results of our work in thousands of happy letters we receive from pet parents all across America, which you can view on www.freshpet.com.

In the first quarter several key metrics showed improvement as compared to the prior year.

These include vet sales, Velocity, store growth, quality, production throughput, purchasing and logistics.

Our first quarter 2016 net sales increased 16.3% to $31.5 million, driven by increased velocity perforage, and increased store count.

Freshpet Fridge store count increased to 15,429 as of March 31st, 2016, up from 14,019 in the first quarter of the prior year.

Product innovation continues to be a key area of focus for our team, and we made good progress on this front in the first quarter with the launch of our Vital whole blend products at pet specialty, and expanding our cat portfolio starting in March.

Whole blends as a meal enhancer that is being offered in the pet specialty category, while our expanded cat portfolio will be offered across all retail sales channels during 2016 and 2017.

Over the year we will see expanded distribution on these products, in addition to the innovation as our kitchens capacity and capabilities come online.

From a manufacturing standpoint our plant expansion remains on schedule and on-budget.

We are on track to have the expansion completed in the second quarter of 2016.

We continue to train our plant personnel and expect commercial production during July and August on our two new production lines.

Upon completion of this expansion, our annualized capital needs will be reduced significantly over the next several years to support fridge growth and maintenance CapEx.

We remain focused on the execution of our strategic initiatives, which have enabled us to generate increased adjusted EBITDA and positive operating cash flow during the past six quarters, while growing net sales and store count at a double-digit rate.

We appreciate the hard work and dedication by all of our team members.

We expect our efforts to drive greater leverage across our business model, improve profitability, and enhance long-term shareholder value, as we progress through 2016.

With that overview, I would like to turn the call over to Dick Kassar, our CFO, to review our financial results in more detail.

Dick.

Thank you Richard.

Good afternoon everyone.

I will now review our first quarter 2016 financial results.

For the first quarter net sales increased 16.3% to $31.5 million.

This growth resulted from both distribution and velocity gains ,including a 10.1% year-over-year increase in Freshpet fridges.

Gross profit for the quarter was $14.9 million compared to $13.3 million during the same period last year.

Gross margin was 47.3% for the first quarter of 2016, compared to 49% for the first quarter last year.

New product introductions lowered our gross margin for the period by approximately 120 basis points, while the hiring and training of our plant expansions scheduled for commercial production during the second and third quarter impacted our gross margin by another 76 basis points.

As a reminder for 2016 we expect the gross margin of approximately 46.7%, which will include additional depreciation and personnel required for our plant expansion, along with incremental costs for our product launches, including cat and Vital Whole Blends.

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

After adjusting for stock-based compensation for fair value of warrant expenses, SG&A expense decreased as a percentage of net sales to 49.4%, from 51.3% in the same quarter last year.

Looking ahead, we expect to 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 $2.5 million for the first quarter compared to $2 million in the first quarter of 2015.

Turning now to the balance sheet, at March 31st, 2016 the Company had cash and cash equivalents of $300,000.

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.

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

We continue to be on track with this project, with an estimated completion for construction in the current quarter.

As a result we expect our operations to begin in June, as we have communicated part of our 2016 plan was to borrow approximately $8 million to $10 million from our credit facility by the third quarter of 2016.

And we expect to repay this indebtedness by the first quarter of fiscal 2017.

As many of you know, in conjunction with our initial public offering, we entered into a $40 million credit facility, of which zero was outstanding at March 31st, 2016.

Each quarter in 2015 we generated positive cash flow from operations, and in the first quarter of 2016 this trend continued.

Finally, we are retrofitting our guidance for 2016.

We expect Freshpet Fridges of over 16,600, an increase of approximately 10%, net sales of over $137 million, an increase of approximately 18%, adjusted EBITDA of over $18.5 million, an increase of approximately 67%.

From a seasonality perspective we continue to expect our net sales growth to be more weighted in the second half of the year, as we realize full benefit of are our distribution and new products, and we continue to expect adjusted EBITDA to more heavily weight 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 less undisposable equipment, new plant start-up expenses, share-based compensation, launch expenses and warrant expense.

We see strong growth for our products across our distribution network.

We will continue to maintain a strong balance sheet and liquidity, to meet demand and further grow our distribution network.

That concludes our financial overview.

Richard, Scott and I are now available to take your questions.

Thank you, sir.

(Operator Instructions).

Our first question comes from the line of Peter Benedict of Robert Baird.

Your line is now open.

Hey Peter.

Hi, guys.

It's Matthew Larson on for Peter.

Hello Matthew.

Hi Matt.

Hi Matt.

Hi.

Just wanted to start off with a few questions.

Nice quarter by the way.

Scott, you can you speak to some of the channel strategy that you guys have begun putting into place this year, to focus the organization around fridge growth?

The first quarter came in nicely above our model.

Just anything that you're seeing as far as early traction there?

Perhaps any new developments related to some of the channel partners you had delays with last year?

So from a store growth standpoint, we had we talked about at the end of last year, and really into the beginning of this year, that we were basically kind of reassessing what many of the opportunities were that we had from a store growth perspective, and how to kind of capitalize on those, and really accelerate them as much as possible.

I would say at this point we're starting to see some modest impact around that, but we really anticipate those coming kind of more in the back of the year, which is the way we have really budgeted.

We talked about it.

Dick had it in the notes a second ago, but we see kind of the strongest store growth in Q3, and then really that work is a foundation for this year but also puts us at a strong point for the next several years out, on how we're looking at different opportunities, developing great portfolio of products, the right fridge mix, and also really the right communications and in addition to incentives that we put across our sales organization, and some of our external partners in order to make sure we're grabbing those stores, and adding them into our distribution mix.

I mean we're really happy with the way the quarter developed,.

But we think it's something that we're going to see more benefit from kind of further out at this point.

Okay.

That's great.

And then Dick, just on the logistics opportunity in the model that you have spoken to before, did you see any incremental leverage on that line item in the first quarter here, and then remind us, what type of savings do you inspect in the second half of 2016 from the new contract that you guys were negotiating?

Yes.

Historically we Tyson has been a great partner, done a great job for us, and we have been running at about 10% of net sales for logistics in 2015.

The first quarter we came in around 9.5%.

We expect to pick up 0.5 to 1 point with our new logistics supplier, and we'll start seeing those numbers creep in more in the second, late second quarter and in the third quarter.

But we feel good about what has happened, and how it's progressed thus far.

Okay.

Just one final one.

Could you quantity the bait sales and EBITDA impact in the first quarter, and just any latest thoughts on that business?

Thanks.

I don't know if what we said for 2016 is we estimated about $6 million worth of sales for the year, and what we have said is anything we earn around that we will reinvest in developing baked.

The first quarter our sales were approximately $1.5 million in baked.

So anything we earn on it, whether we earned in this quarter or whether we earn next quarter, we're going to give back to marketing to further develop the product line.

Thanks guys.

Good luck.

Thank you.

Thank you, Matthew.

Take care.

Thank you.

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

Your line is now open.

Hi.

Thank you.

Can you help me on velocity trends, Scott?

Just I think you gave us a pretty good look at that in fourth quarter.

I think you said that things have slowed a little bit by design, because you were off air.

Did your velocity trends improve in first quarter as you came back on air?

Yes.

They have actually kind of come along exactly as predicted.

We take a real close look at it in both POS and IRI, so we're not seeing all of it yet in what we're seeing from a revenue, a net revenue standpoint.

But we really are seeing kind of really nice progress from a velocity standpoint.

The thing we're running up against, Rob, which you may see is we had an incredible kind of early Q1 last year, in fact about 40% of our growth for last year was in Q1, so we made a ton of to go there, and we're kind of moving right into that.

But versus prior periods we're seeing really consistent nice upwards trends on velocity on every kind of period this quarter.

So every four week period or so, so it's really responding exactly as we kind of planned on the business, and we're really happy with the results.

They seem to be right in line with exactly how we budgeted.

Okay.

Sounds good.

Your tone on the pace of new store adoptions just in the last question, just sounded a little bit less comfortable than you did last quarter.

Just wanted to make sure that you haven't changed your guidance.

Is something changing with respect to the timing versus three months ago, in terms of how quickly you can get those locations?

No.

No.

Not at all.

In fact, when we were at the ICR Conference, we were starting to kind of communicate that and message that out, and we had always planned on the year kind of coming in at this pace.

Q1 was really like right on what we planned.

We knew some of the bigger opportunities were really developing in Q3 this year, which is the way we kind of paced out the year and the growth for the year.

So there are the two things happening kind of back of the year this year, there's more stores coming in the Q3 period, and then once the capacity comes online at the kitchens, there is going to be more innovation contributing to the business growth in that kind of Q3, Q4 period.

But no, no changes at all.

Maybe it was my first question, Rob, and I just hadn't gotten warmed up, but we feel really great.

We feel really great about where we are from a store standpoint.

We're right on for Q1, and we're looking at the number for the back of the year, and we feel like we should be coming in-right on plan.

If you need Richard to turn up the energy level, he's right there so he could dial up.

Thank you, Rob.

Yes.

You're welcome.

All right.

Thank you.

Thank you.

Our next question comes from the line of Joe Edelstein of Stephens.

Your question, please.

It's actually John on for Joe.

How you guys doing?

Good.

Good.

We're doing great.

Nice.

I had a question about the marketing and the strategy that you guys have been using.

Maybe just some color on what's been working, what hasn't, and some future strategy that you're going to implement going forward?

Sure.

So we use kind of three prongs to our growth, obviously, and then I'll talk a little bit about the marketing in one second.

But obviously, stores is a key component and then marketing around communication and education, and I will talk about that more specifically in a second.

And the last one is innovation, and we really have, from the innovation we have been able to bring to market we have seen nice incrementality on that, when you look specifically look at the marketing piece around education and communication, TV has been kind of the anchor tenant in that piece, when we're talking about our marketing.

We continue to kind of stick with our TV model.

It seems to respond really almost exactly as planned.

There's always other variables that are going on in the market, but responds very, very in sync with our plans and our spending.

We're still continuing to see really nice response around that, and the area that we're continuing to do more and more work in as you're probably hearing from all packaged goods companies, is everything around the area of kind of digital, social media, et cetera.

So we think that we have some actually absolute Best-in-Class practices in digital and social media, and how we're working with our consumers.

We're continuing to really push that ahead, as we really see the future and a big piece of the future of marketing, as communicating digitally and socially, and TV won't be as much of an anchor tenant in the next kind of, couple to multiple years out.

So anyway that's really how we focus on it and we're thinking about it.

Does that answer your question?

Yes.

That's good color.

And then do you guys have any annual or quarterly update to the market awareness or brand awareness, or how often do you guys get that data, that feedback from people?

We really look at it annually.

We will get some snapshots over the course of the year, but you see volatility kind of in the quarters, and you need to look at multiple quarters of a trend.

I mean based on the sales that we're seeing, I mean what we have seen for every year, and really any time we have ever looked at it even quarters and half years, we're seeing it consistently grow from a penetration standpoint, meaning we're pushing more consumers into the brand, and we're increasing kind of our loyalty and repeat rates.

And we have seen that consistently for several years now, and based on the response of the business.

We went on air on TV, we're seeing growth based on almost exact correlation to the TV spending.

Which typically means we have grown penetration, and at the same time we have been able to hold on or potentially, usually grow our loyalty rates too.

So I don't have that the data in front of me, but I would assume based on history that it would be really in line with what we have seen.

Yes.

That is good.

And then maybe just a real quick response to how the store conversation is going to the retailers.

I know Target had an issue, has that been resolved, or how are all of the store talks going?

So every retailer has unique circumstances that can potentially get in the way over the course of the year.

The way we budget this year is recognizing that we may run into some of those situations, so I don't want to really get into specifics around any one specific retailer, but the conversations are still very strong.

They are still seeing really nice growth.

We're seeing significantly better growth with our same-store sales, or whatever metric a retailer typically want to look at, we're seeing really strong growth, versus what they're seeing in their category which they love, we continue to deliver super strong margins.

Typically category leading margins for them and then in addition, we're driving a lot of traffic into their stores, and that's what a fresh product does versus some of the other products.

So we think we can be a real contributor to their category.

The more people are educated, and the more data and analysis that they look at, typically the more positive the conversations are with the retailers.

So we're continuing to make slow, steady progress across every single trade group, retailer.

Very positive conversations in general, and looking real positive for the year.

That's encouraging.

Thanks, guys.

Thank you.

Thank you.

Our next question is from the line of Mark Astrachan of Stifel.

Your line is now open.

Yes.

Thanks.

Good afternoon everyone.

Good afternoon.

Hi Mark.

Hey, guys.

I wanted to ask about the split of fridge growth between existing and new customers if you could, please, in terms of what your expectations will be?

Sure.

So the thing that is always very encouraging is, we're seeing growth and we can kind of look at the, I don't know if we have the compact number in front of us, but what we can say is we are continuing to see store growth from new retailers, brand new retailers, what we call white space opportunities, but we are also seeing growth from the existing customers, and that's kind of a perfect combination.

If you can have your existing customers who are growing deeper and deeper into their distribution and their stores, but also we're adding new customers in, so in the last 120 days we have added four new retailers into our kind of portfolio.

So that's very positive.

We continue to believe we will see several more come throughout the rest of this year, but we're also again seeing nice consistent distribution growth from existing customers, and I think that's one of these things that's a great indication, and speaks volumes to the success of the business, and their perception of it, and what they see longer-term.

That's great.

And then shifting a little bit the growth rate between pet specialty and food drug mass, so it still seems like pet specialty is a bit weaker.

Maybe you could talk a bit about what you're seeing there, sort of how that roles through your expectations for the year, please?

Yes.

So we have been seeing it in the back of last year on and off, we definitely kind of saw some peaks of that, and I think we may have mentioned it, and we're definitely seeing it this year, where we are seeing a little bit of a softening on growth rates in the pet specialty channel.

And that's not really just us.

I think that they're seeing that in general, and I think the data seems to support that.

They're not seeing the high single digit numbers that we have kind of traditionally seen, and I think there's several different aspects of that.

One of them, I think that many retailers have really sharpened their pencil to compete against pet specialty.

Secondarily, you will hear commentary around traffic and online sales.

I think there's another component.

So we kind of went into this year knowing that was the case.

We knew for the most part where a lot of our stores were coming from, and also had expectations around our velocity increases and timing, we're doing a lot of work across, kind of going back to the original question on channel strategy.

It's not just about gaining stores, but it's about getting as much velocity out of each channel as possible.

We have done a lot of work to really make sure that we are improving our velocity, and the nice thing is we are staying ahead of pace for what any of these channels are seeing.

But I think the pet specialty piece is the one area where we are seeing a little bit more softness in the market.

I don't think it's exclusive to us.

Great.

Thanks, guys.

Thank you.

Thank you.

(Operator Instructions) Our next question comes from the line of Dominic Ruccella of Wedbush.

Your question, please.

Hey guys.

Thanks for taking my question today.

I'm actually in line for Phil Terpolilli.

My first question was in regards to the cat product.

I know last quarter you guys were still in the test.

But I was wondering if you guys have any further updates in terms of how that's going any feedback you have been hearing from the channel right now?

Yes.

So from a cat standpoint we had actually mentioned it, I think it was in the script last quarter, that we expected to see it in over 2,000 stores by the end of May.

We anticipate to be right on track there.

The cat food products that have gone into market, appear to be performing kind of at the levels and at expectations that we're seeing.

One thing that is really nice on the cat food products obviously, is they're highly, highly incremental to existing fridges when we have an existing fridge, and we also have it in standalone fridges, too.

So there's a couple hundred standalone fridges out there.

Those continue to progress, and what we're doing is we're continuing to prove out that model in existing fridges, and utilizing that as a stepping stone in order to have more and more independent cat fridges out there over time, and as you can imagine, there's a obviously a tremendous opportunity for the organization as that starts to develop over the next couple of years.

So really good progress.

Seems to be in sync with how we budgeted.

We'll continue to keep a close eye on it, and support it in every way we can, and it looks to be kind of on track and successful, and kind of later in the year, when we have kind of a little bit more settled in from a distribution perspective, we'll start to support that, and hopefully, see nicer and even more incremental growth coming out of it.

Okay.

That's helpful.

Then kind of following up our on that, when you guys are working with the retailers are you guys feeling any less hesitation to put a second fridge in, versus just having you bring it into the dog fridge, or is that even acting, or is the dog fridge acting as a test to possibly bring in a cat fridge later on, down the road?

Do you guys have any color to offer on that?

Yes.

It's actually a really good question, and I think if you kind of rewind back even what we experienced with the dog food fridges, there were retailers that automatically see it, understand it, and think about it as a way to help grow their category, and add incremental consumers in, and very sticky traffic into their category.

And there's a handful of retailers that have raised their hand, and we're moving forward with them, and that is terrific.

But there are others that really do want to ladder in slower, and in those cases that's where we're taking the cat food products, we are putting them into the existing dog food fridge, proving out the sales that we can get from that, and then eventually, like I was mentioning, we'll use that as a stepping stone.

So it's one of these things that it's not going to happen real fast, but the nice thing is it's a very, very large significant opportunity for us over many, many years to come.

Got you.

Okay.

Thank you for that.

And then last one kind of switching gears a little bit.

On the competitive front are you guys noticing you guys are running into more competition in the pet specialty channel, just due to maybe a higher concentration of healthy alternatives, versus what consumers find in the grocery store, the food drug and mass channel?

How do you guys see that progressing?

How is it going so far?

Are you guys seeing any changes on the competitive front there?

So pet specialty is always a very, very, I mean if you walk into a pet store, you can recognize it is a highly fragmented and very, very diverse category, and more so than many, many packaged goods categories.

And the fortunate thing is we have been able to develop the vast majority of our distribution across PetSmart and Petco, so we are highly developed at those retailers and in the larger big-box pet specialty accounts, and many of the other regionals.

So we're really fortunate there.

The other thing that we're really fortunate around, is we have our own merchandising unit as you recognize it's our refrigerator, so there is a lot of activity in the stores.

We're very, very unique.

We're going to continue to bring really strong consumer grabbing innovation and communications, and we kind of have the benefit of having our own unit, and it does put us at somewhat of a competitive advantage.

We have obviously a long way to go, and a tremendous amount of opportunity to increase sales in pet specialty, but although there is some more activity, and a lot of brands out there, a lot of competition, we have been able to maintain really nice growth rates there, and the retailers tend to be quite happy with the performance.

Got you.

Okay.

Very helpful.

Thank you.

You are welcome.

Thanks for calling in.

Thank you.

At this time I would like to turn the call over to CEO, Richard Thompson for any closing remarks.

Sir.

Thank you very much.

I would just sort of like to thank you everybody for calling in this afternoon and participating in today's call.

And we look forward to continuing growing our business, and I wish everybody a great evening.

Thank you.

Thank you sir.

And thank you ladies and gentlemen for your participation.

That does conclude your program.

You may disconnect your lines at this time.

Have a wonderful day.