Freshpet Inc (FRPT) 2019 Q1 法說會逐字稿

Greetings, welcome to the Freshpet First Quarter 2019 Earnings Conference Call.

(Operator Instructions) Please note, this conference is being recorded.

I will now turn the call over to Katie Turner for opening remarks.

Please, go ahead.

Thank you.

Good afternoon and welcome Freshpet's First Quarter 2019 Earnings Conference Call and webcast.

On today's call are Billy Cyr, Chief Executive Officer; and Dick Kassar, Chief Financial Officer.

Scott Morris, Chief Operating Officer, will also be available for Q&A.

Before 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 current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements.

Please refer to the company's annual report on form 10-K filed with the Securities and Exchange Commission and the company's press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statement made today.

Please note on today's call, management will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA, among others.

While the company believes these non-GAAP financial measures provide useful information for investors, that presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

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

Finally, the company produced a presentation that contains many of the key metrics that will be discussed on this call.

The presentation can be found on the company's investor website.

Management commentary will not specifically refer to the presentation, rather it is a summary of the results they will discuss today.

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

Thank you, Katie, and good afternoon, everyone.

To begin, I will provide an overview of our financial highlights and recent business performance and then Dick will provide greater detail on our financial results.

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

We are very pleased with our start to 2019.

It is very clear that our Feed the Growth plan has generated significant momentum with our customers, with consumers, and within our team.

And that momentum is enabling us to serve more pets and pet parents, fulfilling our mission to change the way people feed their pets and doing that in ways that are good for our pets, for people and for the planet.

In the first quarter, we delivered strong net sales growth.

Our biggest increase in ACV distribution since the first quarter of 2016.

Our adjusted gross margin Improvement plan showed early evidence of progress and we delivered meaningful Improvement on the bottom line despite continuing to invest for growth.

It was a strong and well-balanced performance.

We believe this provides us with good momentum for the balance of the year and as we march toward our 2020 goals.

The robust net sales growth in the fourth quarter continued into Q1, driving a 27% increase in net sales to $54.8 million, slightly above the 24% growth we projected for the year.

The growth was broad-based with megachannel Nielsen-measured consumption up 28% behind 36% growth in grocery, 24% in mass and 18% and big-box pet.

Same-store sales velocity grew 19% and accounted for more than 70% of the year-on-year growth.

Our core dog business, which is the sum of our dog rolls, roasted meals and fresh from the kitchen main meal items was up 29% in the quarter and now accounts for more than 90% of our business.

Our small but rapidly growing e-commerce business which includes curbside programs with our key customers, home delivery via services like home delivery via services like Instacart and Shipt and fresh e-commerce, like AmazonFresh and FreshDirect, was up 107% in the quarter and now accounts for 2.2% of our business.

More than 80% of that business went through our in-store fridge network.

Adjusted EBITDA in the quarter was $2.8 million, up 54% versus year ago despite a $3.2 million increase in our media investment versus Q1 last year.

We believe this is an early indication that 2019 will be the first year where we begin to leverage our increasing scale to deliver adjusted EBITDA growth in excess of our strong net sales growth, fulfilling the fundamental promise of significant strategic, operational and financial benefits of scale embedded in our Feed the Growth Plan.

Recall, we expect to grow net sales in excess of 24% this year and expect our adjusted EBITDA growth of greater than 38% to exceed net sales growth.

You will also recall that we set 5 strategic objectives for 2019.

They include: number one, expand Freshpet consumer franchise; two, strengthen Freshpet retail presence; three, strengthen adjusted gross margin and adjusted EBITDA margin; four, continued measured development in Canada and the U.K.; and five, build capability to support accelerated longer-term capacity expansion.

We made strong progress against each of these goals in the quarter as follows: first, expand the Freshpet consumer franchise.

We successfully grew the size of our consumer franchise versus a year ago and those consumers bought more than they did a year ago.

Total household penetration was up 10% versus year ago and the buying rate increased 16%.

Our core dog household penetration was up 18% versus year ago.

The core dog buying rate continued to grow, up 12% versus year ago.

This data shows that we are successfully building a bigger and more loyal consumer franchise.

Second, strengthen Freshpet's retail presence.

Retailers are increasingly embracing the benefits of Freshpet.

Our ACV distribution gains in Q1 were the largest we've experienced in any quarter since early 2016.

We added 554 net new stores in the quarter, ending the quarter with 20,053 stores.

For perspective, we added 273 net new stores in Q1 of the previous year.

The addition of these new stores resulted in an increase in percent ACV of 3.5 points versus year ago to 47.4%.

And total distribution points, TDPs, grew 11%, reflecting both our expanding store count and an increasing number of SKUs in distribution due to our upgraded fridges and second fridges.

We upgraded 203 fridges in the quarter, which, when combined with the 805 upgrades in 2018, completes the 1,000 upgrades by the end of Q1 of 2019 goal that we committed to last year.

Additionally, we now have 341 stores with 2 or more fridges and some of those have 3 fridges.

We expect to see strong distribution gains continue throughout the year and deliver our annual targets of 1,500 to 1,600 more stores, an incremental 500 fridge upgrades and 800 stores with 2 or more fridges.

This should result in ACV gains of about 7% and TDP growth in excess of 10%.

We believe this strong improvement in distribution is due to the strength of our Fresh First retail and consumer concept, retailers' response to our 2 consecutive years of strong and accelerating growth and velocity gains.

This also evident that our Feed the Growth productivity loop, where increased advertising investment drives increased velocity and that drives increased distribution, is working as intended.

Third, strengthen adjusted gross margin and adjusted EBITDA margin.

Adjusted gross margin in the quarter was 50.4%, up slightly versus the year ago period and up 100 basis points versus the previous quarter.

Recall, our adjusted gross margin improvement plan included 3 key elements: manufacturing efficiencies, largely yield and throughput; pricing; and innovation to improve the mix.

In Q1, the improvement versus Q4 was driven by significant gains in productivity throughout the quarter, a little more than 1 month of benefit from our price increases and the margin benefit of our higher-margin innovations.

Taken together, this means that we are making good progress at improving the profitability of our mix.

On the manufacturing efficiency element of our plan, we had record production in Q1, which was driven in part by strong throughput and continued improvement in yields.

The second component of our margin improvement plan is pricing.

Our price increase on selected bag items went into effect in mid-February and has now been reflected on shelf in the vast majority of retailers.

We will get the full benefit of the pricing, the total line average of 2% in Q2.

While it is still early, our volume growth has not been impacted by the price increases despite the fact that we took very sizable price increases, ranging from 7% to 17% on select items rather than taking a 2% price increase on the whole line.

This demonstrates the strength of the Freshpet brand offerings and enabled us to improve the gross margin on the items that consume a disproportionate amount of our line time and were thus lower margin.

This improvement in gross margin has already begun to flow through our P&L.

The third element of our adjusted gross margin improvement plan, product innovation to drive mix, is off to a good start.

This includes some higher-margin bag items and an expansion of our successful multi-protein offering into rolls in a larger size.

The new products began shipping in Q1 but won't be in full distribution until later in Q2, with the full effect felt beginning in Q3, but they did contribute to a more positive mix in Q1 that Dick will detail.

The improvement in productivity and partial benefit from pricing and new product innovation were partially offset by continued hiring and training to staff our fourth line on a 24-hour, 3.5 day schedule in order to keep up with rising demand.

Our staffing was hired and trained in Q1 and is scheduled to begin production in the middle of Q2.

We will see the full benefit in our adjusted gross margin in Q3.

For perspective, our HR and production teams have hired and trained more than 120 people in the last 12 months, a 57% increase in production staffing.

That enabled us to convert 2 lines to 24/7 production in mid-January and simultaneously deliver meaningful increases in yield and productivity.

Given our rapid growth, this demonstrated capability to hire and train so many highly qualified employees will be essential to our long-term success.

When all 3 elements of the gross margin improvement plan are fully in place, we believe we can deliver a 51% adjusted gross margin likely in Q4 and that will put us in position to achieve our 52% adjusted gross margin in 2020 behind further volume growth and a fully employed and trained team.

We also expect to see a significant gain in SG&A absorption this year, increasing absorption by 240 basis points and a cumulative 500 basis points versus where we ended 2016.

Due to our heavy advertising investment and the lumpiness of SG&A spending, we expect to see more of that benefit in the second half of the year.

As a result, SG&A improved by 70 basis points versus year ago in Q1.

But when you exclude our heavier media investment in the quarter versus year ago, we gained significant leverage in SG&A, improving by 310 basis points.

We are confident that our plans are on track to deliver our projected goal.

Adjusted EBITDA margin was 5.1%, a significant improvement versus the 4.2% year ago as we began to reap the benefits of increased scale in all parts of our cost structure while still making significant investments to support Freshpet's growth.

Recall, our adjusted EBITDA will skew towards the back half of the year, as it has for the past 2 years, due to our significant media investment in the first half of the year.

Fourth, continue measured development in Canada and the U.K. Our U.K. and Canadian businesses are still in their infancy.

Last year, we validated that each of the key elements of the Freshpet model works in both Canada and the U.K. This year, we are making good progress at using those elements to build a strong foundation for long-term growth in each country, that is, establishing consumer awareness, increasing velocity and ultimately driving increased distribution.

We are keenly aware, that we must be both disciplined and patient in these markets, building out the fundamentals first before making major marketing investments, but everything we are seeing suggests that the long-term growth potential is significant.

Our Canadian business was up strongly behind our first national advertising program that drove significant velocity gains in the quarter.

Those velocity gains are the fuel that will ultimately drive expanded distribution beyond our current 23% ACV in Canada.

We've also completed the work to strengthen our distribution system in Canada and that is driving better in-stock conditions.

We are very encouraged by this progress.

The U.K. business also made good progress, but it is much earlier in its development.

We began national advertising late in Q1 and saw significant velocity gains in our lead customer once it went on air.

We expect that to generate incremental distribution over time, beyond the 7% ACV we have today.

It is still very early days for Freshpet in the U.K, but the fundamentals are falling into place and continue to indicate good long-term potential.

Fifth, build capability to support accelerated longer-term capacity expansion.

We are in the final stages of the permitting process for construction of Kitchens 2.0 and expect to begin construction shortly after those permits are issued.

This puts us on schedule to deliver the startup in the second half of 2020, as we previously indicated, and we are still projecting that we will spend approximately $100 million.

We have also begun recruiting for the incremental capability we outlined in our annual guidance and hope to have the key personnel in place in the second half of 2019.

Additionally, we are doing the necessary prospecting to select the site for our next capacity expansion in a more geographically diverse location, so that we are ready when rising demand necessitates it.

In summary, we are off to a fast start and have significant momentum to enable us to deliver our 2019 commitments.

These results also give us confidence that we are on track towards delivering our 2020 goals and fulfilling our mission of providing more pets with fresh all-natural foods that enrich their lives and the relationship with their pet parents, and doing so in ways that are good for our pets, for people and for our planet.

I will now turn it over to Dick to discuss our Q1 financials in more detail and our outlook for the balance of the year.

Thank you, Billy, and good afternoon, everyone.

As Billy indicated, net sales in the quarter were $54.8 million, up 27% versus the year ago period.

This strong starts give us confidence that we are on track to meet or exceed our net sales guidance of greater than $240 million for the year.

Our continued strong growth is the result of the increased investment we made in advertising this year, strong improvement in our retail presence and the continued strength of the innovations we launched last year.

In particular, advertising is the single best driver of our growth and consistent with last year's plan, we've committed to invest 11-plus percent of net sales this year in advertising in the U.S. to continue strong growth rates we have seen over the past 2 years.

Despite investing at higher levels than last year, the payback we are getting for that investment has improved for the second year in a row.

We believe this is the result of the synergy between our compelling advertising, enhanced retail visibility and increasingly relevant product innovation.

Each piece makes the other more potent, delivering increased efficiency and greater impact in the market, another meaningful benefit of our increasing scale.

Our price increases also contributed about 1 point of net sales growth in the quarter despite not going to into effect until mid-February.

We expect that the price increases will contribute about 2 points to our top line in Q2, as we are seeing very little price sensitivity on the items where we increased the prices.

As it has for the past year, a shift in product mix to our higher-priced bags added another point to the top line versus year ago.

Adjusted gross margin for the quarter was 50.4%, up 20 basis points from the year ago period and 100 basis points better than quarter 4, despite the mix shift to bags I just noted.

This is strong early indication that the adjusted gross margin improvement plan that we outlined earlier this year is off to a good start.

Fundamentally, that plan is improving the profitability of our mix, either via the pricing innovation plans we put in place and through our efforts to drive manufacturing efficiencies.

While Billy highlighted the overall progress on the 3 key drivers of adjusted gross margin improvement, I want to emphasize the significant progress made in the efficiencies of our kitchens.

Despite the disruption from converting 2 more lines to 24/7 production and hiring the staff for converting the fourth line to 24/3.5-day production, we saw our total throughput increase by 14% versus quarter 4, a meaningful improvement in yields, and labor productivity improved by 4% versus quarter 4. This allowed us to replenish our lower year-end inventory levels so that we can continue serving our customers through our rapid growth and support the buying growth we are seeing behind this year's advertising investment.

Our price increases went into effect in mid-February, and contributed positively to the adjusted gross margin versus year ago in the quarter.

We will get the full impact of the pricing in quarter 2. While our innovations designed to improve mix are just getting started, they've made a positive contribution to the adjusted gross margin in the quarter.

Their ongoing impact on adjusted gross margin depends on how well they sell, but they're off to an encouraging start.

The combination of our pricing and innovation initiatives improved our adjusted gross margin by 130 basis points versus year ago in the quarter.

As we get full impact of the pricing in quarter 2 and our innovations continue to grow, we will believe we'll get an additional 70 points of adjusted gross margin improvement versus year ago for a total of 200 basis points of adjusted gross margin improvement.

Those gains were partially offset by the additional staffing to convert our fourth line, ongoing mix shift towards bags and commodity increases versus Q1 of the year ago that were the basis of our margin improvement plan.

We will anniversary the bulk of those cost increases by year-end quarter 2 so that gains from pricing and innovation will become incremental to the adjusted gross margin on a year-on-year basis in quarter 3, enabling us to deliver our 51% adjusted gross margin goal in quarter 4.

Adjusted SG&A in the quarter was $24.9 million or 45.4% of net sales, an improvement of 70 basis points versus the year ago period.

That includes an increase of more than $3.2 million versus last year in media investment and some annual expenses that fell in quarter 1 this year.

Excluding media spending, which we hold roughly constant as a percentage of sales this year versus a year ago, SG&A improved by 310 basis [points] versus a year ago.

Recall, our goal is to deliver another 240 basis points of SG&A investments this year, taking us to a total of 500 basis points since we began the Feed the Growth Plan at the end of 2016.

We believe we are on track to deliver this year's goal and that will position us to deliver the final 200 basis points of improvement we'll need next year to deliver our total of 700 basis points of SG&A improvement by 2020.

Adjusted EBITDA in the quarter was $2.8 million, up $1 million versus the year ago period driven by the increase in revenue and partially offset by the increased media investment.

We will remain on track to deliver our adjusted EBITDA guidance of greater than $28 million for the year.

We drew $10 million on our line of credit in the quarter to cover the normal seasonal variations in our cash flow and to cover the cost of rebuilding our inventory levels to maintain our customer service behind higher volumes.

We also invested $4.9 million of capital against the Kitchens 2.0 project in the quarter, and our total spending on that product to date is $7 million.

We continue to expect to produce positive annual cash flow from operations.

We are in the final stages of revising our credit line to cover the cost of our capacity expansion and any further expansion needs through 2024.

We expect the terms to be more favorable than our current credit agreement and to have finalized that agreement very soon.

In conclusion, we are off to a good start in 2019.

We delivered a very strong and balanced quarter 1. We have significant momentum.

That gives us confidence that we are on the right path towards fulfilling our mission, while simultaneously creating significant value for all of our stakeholders.

Our team is excited and focused, recognizing the unique opportunity each of them has to help Freshpet change the way feed their pets forever.

That concludes our overview.

We will now be glad to take your questions.

Operator?

(Operator Instructions) Thank you.

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

Just a couple clarification questions.

First, you talked about maybe the initiative on mix shift to improve margins.

And I'm just trying to get -- wrap my head around that in terms of, other than the impression that rolls were much higher margin than bags and bags are growing faster than rolls.

And so help me understand how that works out.

Sure.

So you're right that rolls have a higher margin than bags.

What we've done, not only on rolls and on bags, we've actually come with innovation that has slightly higher margin in both those areas.

Then we've -- in addition, we've also done some pricing, which -- in addition to all of that coming together.

So yes, we've basically rolled out a handful of pieces innovation that have higher margins in each of the respective forms.

Got it.

So it's not a mix between the 2, it's just trading consumers up?

Right, it is.

And then the mix between the 2 with the pricing has kind of become more balanced than it has in the past 2.

Got it.

And then on the extended ACV and the new doors, that's all fantastic.

I just -- I guess, a year ago, we were talking about deemphasizing door growth, it's more about velocity.

Was there something that changed?

Were you getting a pull from more retailers now that you've been so successful?

I mean why such the big jump in ACV, per se?

So we've had retailers who are now starting to express a little bit of a FOMO, their fear of missing out, because they've seen the incredibly rapid growth that we've had for 2 years in a row.

So we've had a lot more pull from the retailers and that's what you're seeing.

So whether it's new doors or whether it's upgrades or it's getting second fridges put in.

So that's what's it all about.

We are all about ACV.

ACV is the key driver here.

Doors is the key metric that we provide so folks can benchmark versus where we've been in the past.

But it's all about getting the maximum amount of ACV, and we have a lot of momentum right now.

Got it.

And last one for me.

Just as I'm looking on the quarters, kind of the cadence of advertising, this was a big quarter.

I would expect it, I guess, to come down next quarter and then pick back up in the third quarter.

Is that the right way to think about it?

So I think, historically, what we've done is we've kind of talked about the splits over the course of the year just on kind of first half and back half.

And then this year, our advertising spend will be about 70% in the front half and about 30% in the back half of the year.

So -- and then the first 2 quarters are going to be fairly evenly split.

So yes, a definite weighting towards the front of the year.

And the thing that I think we're very, very excited about and I know Billy mentioned it in the script and Dick also mentioned it is the return that we continue to see on the advertising is incredibly strong and is exactly as the model has predicted.

Got it.

Nice to see a gross margin improvement in the quarter.

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

Wanted to ask sort of related question to Bill's, and just maybe give an update on where you are in the rollout of your largest customers?

If you want to name names, maybe just kind of broadly talk about the ACV in some of those.

And what the opportunity might be in converting more of those into adding Freshpet Fridges versus some incremental retailers out there?

And maybe just broadly, how you think about the whitespace between existing and new retailers?

So there are definitely some new retailers out there for us.

The way we like to think about it is, we're in 9 of the top 10 pet food retailers across the country.

There are -- in the top 10, there's really only a couple that we have significantly low distribution in.

And what we're starting to see we're starting to kind of close the distribution in those.

With the ones that are kind of closer in line in the top 10, we typically range from about 40, and we have some now that are approaching 70%, 80% and 90% distribution.

So some of them, there's not a lot of distribution left, but there a lot of very, very big players that we have kind of in the 40% and 50% distribution range.

And the thing that we continue to see is, every single year, we continue to grow distribution in every single one of those.

We know that we're comfortable in saying that we will probably not be at 100% distribution at any point in the near future, but we see a very, very long runway across not only the existing retailers, but also some of the new retailers starting to come in.

Got it.

That's helpful.

And then maybe switching to the split between dog and cat.

So dog up 29 implies cat obviously a bit weak or down.

Maybe just talk about how you prioritize that.

Obviously, some of that relates to second fridges or multiple fridges in stores.

But maybe just talk about priorities there.

And what that opportunity could potentially look like when you potentially start to realize better focus on it?

So one of the things that we do is we try and be incredibly agnostic when we plan out the fridges and think about how we're allocating space, and we try to look at the highest productivity on a dollars per literally linear inch and also gross profit when we kind of plan [the ground the] fridge is out.

So what we were seeing was we are getting better return on many of the dogs items that we were putting in versus cat items.

Now there are a core set of cat items that are really important for us to have.

And right now, we're kind of retrenching, leaving those cat items in.

And as we expand second coolers over time, we plan to continue to expand the cat portfolio, and as we have more and more space, that will continue to build into that.

There is tremendous opportunity in cat for us, as you are aware.

I mean there's around 5% of our total sales are in cat food, there's no reason why at some point in the future, it couldn't be 30% out into the future.

But going back again, I think the way we've built the plan that we communicated to everyone is that it is a U.S. dog-based plan that we're communicating over the next couple of years.

And as we really kind of figure out the opportunities in cat or in the U.K. or Canada and some of these other initiatives that we are working on, those will hopefully be incremental growth opportunities.

And I'd just kind of add to that, I think as Scott described, there's very important set of priorities that we have to set here because we do want to manage the resources that we have, the capacity we have, the fridge space we have to generate the consistent and steady and very strong growth that we've demonstrated.

And right now, we're getting the best return for focusing that on the U.S.-based dog food business.

But it does not mean there's not significant opportunity to grow the cat business longer term, it's just as we're at this change of our life, we have to make priority choices.

The next question is from the line of Jason English with Goldman Sachs.

Congratulations on another strong quarter.

Advertising spend continues to ramp, as you said it would.

It's driving sales growth, as you foreshadowed that it would.

All great to see.

With the spend ratio you mentioned, I think 11% of sales, it looks like you are on track to spend roughly $50 million, maybe a little bit north of $50 million this year.

Behind one brand, that's a big budget.

At what point do you think you hit critical mass, start to see diminishing returns on that?

And at that point, I mean, I guess, there's 2 implications, one the P&L leverage that can flow through it, but also the impact on continued sales momentum.

So the way we have -- the way we've planned the -- I think I answered the question little bit earlier on kind of on the split and then the productivity in the media.

The way we have the media planned this year is actually about a $26 million, $27 million total spend is what we're planning out.

And obviously, we're always reviewing that to see if it's the best place that we want to spend at.

But that's really kind of how we been thinking about that spend for this year.

And then I think when we're starting to talk about -- we want to keep it at that 11% level and then we'll continue to monitor that and the productivity as we look into the following years and also the capacity constraints that will come in to in 2020.

Jason, as you think about it, if the spend rate that we're spending this year at the 11%, the payback we get on that advertising investment is within 1 year.

When we started this, it was at 1.5 year.

It's now down to within 1 year of payback.

And so as we head into 2020, we'll probably have to glide the spending down to 9%, which is what we guided to when we set the 2020 plan just so we can make sure we manage within the capacity.

But when we get excess capacity, we open Kitchens 2.0.

We have every interest in increasing the investment that we make backup into the 12% range.

And the reason we do that is because of the payback we're getting is so good and we're also finding that the payback is improving, as Dick said in his comments that the payback is getting better each year.

And it's a combination of the impact of the advertising plus the increased retail availability and visibility it gets and the more relevant product innovation that we have.

So as long as we see those dynamics in place, I think we're inclined to continue to invest, and we think we're getting pretty good payback for it.

Understood.

And sorry, I mixed up a couple of numbers there.

But the core of my question was...

I wish -- Jason, I wish I had $50 million.

No, I hear you.

And give it a few years, you'll have the revenue there and probably the media there too if you keep this momentum going.

But one key question is whether the EBITDA is going to be there.

Looking at your bridges in terms of how you build on incremental margins, contribution margin is clearly a key enabler, which I think you define as gross margin, less brokerage fees, less logistics cost.

Yes.

Given that's core kind of driver, can you give us an update on where that's coming in at, in terms of the incremental margin on those 3 components combined?

Yes, we're around 41% right now.

Gross margin.

Got it.

So roughly in line if not modestly ahead of your 40% target?

Yes.

Yes.

The next question is from the line of Peter Benedict from Robert W. Baird.

My first question is just around the market response to the traction you guys are seeing.

I mean obviously, the revenues are there.

But just the retail partners and the second fridge initiative for this year, you're at 341 right now.

I think you said you expect maybe another 500 over the balance of the year.

Can you help us understand maybe the cadence of that?

And is this coming across all of your channels?

Or is there any particular channel that's showing the most interest there?

So on the second -- I think that Billy used the term earlier that we've been using internally, this is the idea of FOMO, which is the fear of missing out.

I think retailers are looking around and they're recognizing that we have consistent growth cadence coming in.

It's been really positive for a very long time.

We're starting to see a little bit more scale in our business.

We're still very small, but there's little bit more scale coming.

Then they're looking that kind of those same-store sales metrics, which is -- really continues to be really, really positive and growing.

And I think they're looking around and recognizing that there's -- as we continue to grow the category, this is a tremendous opportunity for them and it's a really strong way for them to continue to keep shoppers in their store, buying fresh items.

So I think they look at that and then there's a handful of people across multiple different formats that are testing the second fridges.

So we have grocery, we have some mass and then we also have pet that's been testing it.

So we're starting to see that rolling out in grocery and mass early this year.

I think we're going to see pet coming in with additional -- significant additional fridges in the back in addition to a couple of other grocery retailers.

So it seems like it's being well received.

The results that we're getting are consistent with what we had anticipated and what the retailers had anticipated.

And I think with the media spend, as the improvements in overall growth rate, I think that over time, more and more people are going to become more interested in and what we're bringing to market and adding either larger our second fridges into their aisles.

And Peter, I would add, if you're a retailer who has decided to make the pet food category a strategic priority for you, that you view this as a signature category or one where you're trying to make statement as you're watching, trying to compete with other forms of commerce, those are the folks who tend to be leaning in the furthest.

And they're also the ones who probably already have a fairly good share on our business today, where adding a second fridge delivers for them an added assortment and significantly higher revenue because of that added assortment.

That's great.

That's helpful.

My other question, just as around kind of related to the response you're seeing at retailers.

I mean, some of our channel checks with people suggests that there is kind of a rising demand or interest from some of these guys to do some private label.

I mean, this is a category that's obviously starting to take off.

Can you talk about what's going on with you guys with that respect?

And what you're kind of seeing in the market?

So we have gotten requests, many, many requests over the years and what we've basically asked everyone to think about is what's the incremental contribution of having a private-label product.

So as we've looked at that, we've found one opportunity very recently where we felt like it was a good match with the portfolio and we are trying it out in a handful of stores to kind of see what the productivity of those SKUs are.

But I think that as retailers think about this, I think they are really committed to this segment and the growth and they recognize that it's a very, very tight amount of space.

So I think they're going to want to develop it in a way that's -- has the highest level of productivity for that chiller.

And if over time, private label becomes -- there's a role for it and literally a role for it, I think that something that we'll continue to talk about and think about and kind of assess specific opportunities that we want to pursue.

And then, our work has shown that at least the initial past year, the private-label products actually being priced at a premium to the Freshpet product, is that -- are we accurate?

Yes.

Yes, you are accurate and I think that's a case where there was an opportunity to bring some incrementality to the existing portfolio.

And it was something that worked for the retailer and worked from a consumer standpoint and was productive for us.

And that's something we thought might be a fit and again it's in a small number of stores, it's a test.

And we're kind of evaluating as an organization, is this a good path to make us get as many dollars out of refrigerator as we possibly can?

And to develop the category the way we think the category should be developed.

We don't want to turn this into a price-driven category, so that's why that kind of an opportunity might fit.

(Operator Instructions) Next question comes from the line of Chase West with Consumer Research.

Quickly just want to touch on Bill's question from earlier.

With the apparent shift back to ACV, how should we think about buyer growth through the rest of the year?

Do you guys you think you can maintain the current growth throughout the year?

Bill, the thing we like most about where the business is and I don't -- I know we ended up talking a little bit about ACV, but we are very, very confident in the way we move this business is through adding more consumers in and which is penetration and then adding -- continue to have growth in the buying rate.

So ACV is kind of like the extra-whipped cream with a cherry on top, it's a byproduct of that.

Yes, it really is.

It is a byproduct so the major focus would be to add consumers and add buying rate and that's the focus of all the advertising we do, which is where we are spending the most money.

It's also the focus of the innovation that we bring and the thing that we love about what we are seeing with the way the business is developing is the growth is so broad-based, meaning if you look at almost any retailer in any geography, domestic or international, if you look at any form for us, whether it's rolls or bags, every single aspect is growing and when you kind of look at the growth drivers, which is communications as we mentioned, innovation, the idea of depth of distribution or our second cooler, every one of those is really contributing very positively.

So the growth is very, very broad.

It's across every single aspect of the business and things are performing really, really well.

But I do want to kind of reinforce that ACV is an important contributor.

It's probably -- it's less than 20% of the overall growth of the business.

I mean, advertising and innovation are the 80% of the aspect and that's driven by getting more people and penetration and the buying rate piece.

So Chase, very specific to your question, we think the very driver for us of the penetration gains is the advertising investment and so the penetration gains will fall in line with the advertising investment and what will happen is it will be a -- it trails it.

So the advertising, one, the consumer doesn't go out and buy it that day or that week.

But over time, it's a cumulative benefit and I think if you look back at history, what you'll see is we kind of start getting off to a little bit of a start in the beginning of the year and then we kind of ramp it up and we continue to grow household penetration as all the way through the end of the year and then we go out there in the fourth quarter and it takes a little while to get it started back up again in the next year.

But fundamentally, we follow the media spending.

The household penetration gains follow the media spending.

Got it.

That's very helpful.

And just switching gears slightly.

I know second fridges are the main initiative here, but Bill you called out third fridges in some stores.

How should we think about the trajectory of third fridges going forward?

Maybe are they like in a different area of the store than the original fridge?

I think that third fridges right now are -- there are relatively few of them, but they're only in the very high-velocity stores where you need it for the holding power and to have the fullest range of assortment.

I would think that in the near term, it's really going to be -- that's going to be the case where you get yourself in a situation where you need it to have -- accommodate the full assortment and to have enough and the holding power for the velocity you see in the store.

At this time, I will turn the floor back to management for their closing remarks.

Yes.

I'd like to leave you with a thought.

The humorist Will Rogers once said, if there are no dogs in heaven, then when I die, I want to go where they went; to which I would add, wherever that is, we hope you find a Freshpet Fridge there.

Thank you, and have a good night.

Thank you.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.