Good day, ladies and gentlemen, and welcome to the Freshpet Fourth Quarter and Full-Year 2015 Earnings 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. 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 would 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’re proud to have completed our first full-year as a public company. 2015 contain great achievements along with some significant learning. We began 2016 on a solid footing with a stronger company to support a mission of an introducing consumers across North America to our Fresh, all natural pet product 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 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 build out of our team to support the future growth in Freshpet and the development of our organization. We’re confident that the strategic investments in 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…

Thank you, Richard, and good afternoon, everyone. I’ll review our fourth quarter and 2015 financial results then I’ll 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 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. For 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 $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 expenses to support our baked national product launch in March, offset by lower marketing spend on our refrigerator products. Looking ahead, we will decrease SG&A as a percentage of net sales,…

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 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 public company with over $100 million in net sales. I’m proud of our accomplishments. I have tremendous confidence in our dedicated team members in 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. While 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 in 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?

Thank you. [Operator Instructions] Our first question comes from the line of Bill Chappell from SunTrust.

Hey, Bill.

Hi, actually, this is Stephanie on for Bill. But I just have a quick kind of question, maybe you could speak a little bit more on the Baked launch. I think this is your kind of guidance for $6 million next year is a little bit lower than we expected or maybe you alluded to last quarter. So maybe if you could just speak on in 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 – as we’re looking at the pacing and the – how we’re planning to add stores throughout the year. And that’s really where we’ve kind of gotten to, where we’re comfortable around $6 million number on Baked. We’ve also as a company want to make sure that we’re really focusing the – our strongest efforts on the Fresh business and making sure that bake develops at – kind of an appropriate pace.

Got it. That’s helpful. And then just switching to margins, so I know that you mentioned kind of last quarter, you are having issues with just some of the Freshpet Shredded line. And is that – are most of those resolved and we kind of expect going forward about a 110 basis point hedge should come lower or should be able to kind of alleviate a little bit, or kind of how we’re 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’s 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. I appreciate you.

Thank you.

Yep.

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

Hey, Peter, thanks for calling in.

Hey, guys. Hey, Rich, and good luck in your retirement. I – 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 kind of my first question.

Yes, so that includes $1.5 million for startup of the lines for 2016, along with an additional $1,200,000 in depreciation associated with that lines, which represents about a 180 basis points.

Okay. Now, that’s perfect. I just wanted to clarify that. So that’s about down 30 basis points year-over-year. The – how should we think about the trajectory there? I mean, we’re two-thirds of the way through the first quarter, I mean, any color you can give us in terms of magnitude of gross margin declines in the first quarter? And I mean, does that swing positive in any point during the year, or just 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 we’ll kind of blend towards 46.7% as the year progresses, because, Peter, we’re not going to start on our new lines with a – 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 kind of flow through that production and see where it goes. But 46.7% is a good for this year. And next year, we – as we continue to work the line, it’s like putting on a new product, we’ll 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, or how does it play role in your revenue plan or your margin plans here, is that even material at this point?

No, definitely we’re not – we’re actually not seeing that or we’re seeing some slight benefit from kind of the higher products that we actually see in our fridge. So we’re not – we’re definitely not seeing deflation. As you know, we’re minimalist from a trade promotion standpoint, which is, you can get into a little bit of a tougher situation if your business is highly relying 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 then my last question is just a couple times in the prepared remarks you guys mentioned repeat rates and how they’ve been good. Can you give us a little more color as to maybe what the historical trend has been in terms of repeat rates and how that’s looked maybe in 2015?

Yes, actually, so we look at repeat rates on a two plus basis. And if you look at 2013, with 66%; 2014, 79%; and 2015, 89%, and that’s at the same time we’ve been able to drive penetration. So it deserve really strong numbers obviously.

Okay. One more – I’ll just add one more. Any comment on kind of this in terms of the first quarter velocity trends, I think, you’re kind of mid single-digits here in the fourth quarter. How you’re seeing velocity trending so far in the first quarter? Thank you.

Sure. So what we can talk about Peter, as we can talk about what we’re seeing from an IRI or Nielsen basis. And you look at Q4 and it definitely the kind of versus prior period or versus a year ago everyone look at, there was a little bit of – there’s definitely kind of a come down a little bit. And typically it was really timed around the different things that we have 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’re already seeing in IRI just starting to see some gradual pickup based on our communications work. And then throughout the year, we anticipate seeing nice build from innovation that’s kind of more in the Q probably two, three period. And then finally, ACV, we’ll continue to kind of phase in throughout the year and all those will change the growth trajectory.

Okay, perfect. That’s helpful. Thanks, guys.

Thank you, Peter, for calling in.

Thank you. And our next question comes from the line of Jason English from Goldman Sachs.

Hey, Jason, thanks for calling in.

Yes. Hey, Richard, good to hear your voice. We’ll miss you 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 margins – gross margins will run north of 46.7% in the front-half of the year and then phased lower, I see probably the inverse of that?

Well, now, we’re not going to experience a depreciation, Jason, until July through December when we’re up and running. And in addition to that the startup expenses although they’ll 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 dip kind of in the third quarter and kind of stabilized in the fourth quarter, but blend 46.7% for the year.

Got it. That make sense. Thank you. I think you mentioned headwind in the fourth quarter will shrink on Shredded. My interpretation of shrink is spoilage in 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’s helpful. And then higher order question. You clearly fell short of sort of the units this year. The thought was that – a reason for that was timing related and maybe there’s some pent-up demand that could kind of spill into this year and we can get a snapback. Your guidance obviously implies that’s not the case that this maybe a run rate that we should expect. But do you have visibility on that? Is the reason that you – you’re guiding for a lower number, is it just based on sort of some of these retailers that you thought would come maybe are coming, or can you just give us more color behind it?

Jason, we’ve obviously looked back again and looked at the historical results, which we shared in the script. And we’ve kind of mentioned this before, but we’re seeing years anywhere from 1,500 to 2,500, 2,600 on the high-end. And based on kind of what we’re seeing, we know we’re on pace to hit that 1,600 store number, and that’s where we felt like that was an appropriate place to give guidance around.

Makes sense. I will leave it there, follow-up later. Thank you, guys.

Thank you, Jason.

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

Hey, guys, this is John.

Hey, Joe, thanks for calling in.

Oh, hey, it’s John.

[Multiple Speakers] John.

Yes, how are you guys doing? Just curious on two items. First, the cat products and the cat fridges, if you can give us some light there? And then secondly, on the test, 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’ll have about 2,000 refrigerators that will have some variation of what we are doing with our cat portfolio. So let me explain what I mean by that. There will be fridges that we will have dedicated to just cats, there will be fridges that will – in different sizes of kind of cat specific fridges too. And then secondarily, we’ll also be taking existing fridges that have dog food in it and we’ll be looking to reallocate the space in some of them to basically optimize that space as much as possible, because we are 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 kind of standalone refrigerators. So, 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 cat of fridges out there, and we anticipate to see that grow over time. And basically, once retailers kind of are able to see how the test is going that’s we’re planting several different seeds and then we’ll be able to see kind of 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, so let me give you just touch on the historical. So in July, we into a test at Costco. We are in 10 stores, and this is all stuff that you can obviously see under the marketplace. We’re still in those 10 stores. We feel very good about the results that we’re seeing. We’ve 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’re able to share.

That makes sense. It’s actually good clarity. And then I guess a quick follow-up, is the number still 5,000 stores for the Baked product, or did that change at all this quarter?

We’re on our way to around 6,000.

6,000 stores or dollars? Maybe I’m hearing this wrong?

I’m sorry, 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, cool. Got it. Thanks, guys.

Thank you, John, for calling in.

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

Hey, Rob, thanks for calling in.

You’re welcome, Richard. It’s been a pleasure working with you over the year. Best of luck.

Thank you.

And so I guess, Scott, I wanted to know you might have mentioned already, but I remember last year, I thought you post the advertising in the first quarter last year, or are you doing it again in first quarter? And is there another quarter where it pauses again, so just kind of check the timing. And then secondly, I think I have asked this kind of question before. But the 1,500 was the low-end of this new store guidance, and you’re 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’re in the process of putting them in physically or can you give me a sense of what that – what that’s defined as?

Yes, sure, so let me touch on the advertising piece first. It is really a good question, because it – it’s obviously a key driver of our velocity growth. So over the course of last year kind of Q1 and Q2 are key drive periods from a communication standpoint. In addition to having innovation at that time, and that’s where we saw the great, great growth spikes. This year you’re seeing kind of Q1 and Q2 again period where we have our advertising, and, however, our innovation will start coming in Q2 and Q3 this year. So that will be one of the core differences. But we are pulsing the advertising kind of 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 and communication question. Again, on the store basis, so at this point, and I think we’ve kind of shared these numbers with you. But obviously we have the 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. So in every – literally every week things continue to line up, as we progress into the year. But based on what we’re seeing, we’re on a good pace for the 1,600 store count, and feel that’s the right place to be giving guidance. If there are things or opportunities that break hopefully, there’s a potential upside around that, but that’s not what we want to plan on.

Okay. That makes sense. Thank you for that, Scott.

All right. Thanks, Rob.

Thank you.

Thank you. And our next question comes from the line of Mark Astrachan from Stifel.

Hey, Mark. Thanks for calling in.

Hey, good afternoon, guys. Couple of clarification question. So 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 that cat piece, Dick?

Yes, the guidance is basically the 2,000 chillers that we laid out there. They will be in place in May, whether they will be in a chiller, that – we – that’s a second chiller in the store or whether it’s in our existing chiller. And we’re going to be watching those revenues and we have that incorporated into our plan 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’s linear with revenues in logistics, it’s linear with revenues in chiller depreciation, because as we add chillers or and chiller makes it it’s semi-linear in chiller and chiller depreciation. It’s linear in brokerage, where we get leverage as we get leverage in potentially in marketing. We get leverage in G&A. And we get basically leverage in option expense. So that’s where the leverage is. We’re 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. Okay, so just going back to cat, so what – is there a specific dollar amount that you’re willing to give that’s baked into that $136 million, $137 million?

When we – no, when we test a product that’s what we’re doing. We’re testing a product in our refrigerators. We know it will achieve velocity. The cat category is $7 billion. We’re looking to obviously grab some of that. There are perhaps 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 and to the – and but we have a conservative number in our plan and hopefully we exceed it.

Got it. Okay. And then switching gears a bit question wise. So, Scott, probably I wanted to understand a bit better how you think about return on marketing spend on the sort of overall how you’re measuring the success and sort of your expectations in learnings as you face things and tried with baked in the back-half of the year and sort of see things going forward?

Yes, absolutely. So we – I think I’m actually quite proud at the level of math that’s involved around our marketing and the thoughtfulness around the returns. And we’re definitely always trying things and obviously new things don’t always work out perfectly. But we’re able to consistently see over time, you’ve probably heard us quoted before, but it’s pretty specific model around what we do around TV. For every 1000 GRPs, we see a very kind of formulaic. I mean, we typically quote around 1% growth around 100 GRPs. And that model has really stayed intact other than a couple of brief periods over – almost four years now. So it is a very – it’s 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 returning gets better and better. So the dollars that we’re spending on TV, we get overall a higher percent increase and at the same-store sales number that I’m sharing that the 1% number. So anyway, so as we see that over time, if we continue to get better returns on it and it’s something that, there’s a lot of work that goes into it, not like just we kind of set it and forget it. We’re constantly monitoring it, evolving it, and evaluating the returns that we’re getting on the spend. And then we’re also very diligent around evaluating if there’s a spend that we’re making whether it’s in marketing, or innovation, or anything that we’re doing in the organization, we’re 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’s helpful. And then just lastly on Baked. I guess, when we take a look at the scanner data as you all do, and we haven’t really seen the business grow off of sort of where it had run rated through, call it, third quarter last year. I guess, I’m 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 sort of opportunity as you think about it more going forward? And just sort of 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’s 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 kind of stopped growing as much, our spend – basically once we got out of kind of that Q3 period, we weren’t spending against the business as much. Throughout this year, we’ve been able to – throughout last year, we’ve 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. But – and I think we’ve always said this, the absolute core of this business is around fresh that’s where we want to be investing, growing, and making sure that that piece of business is really on fire and healthy. And then I think Baked will definitely have its role going forward.

Got it. Thank you.

Thank you. Thank you for calling in.

Thank you. And 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. And, again, we’re very excited about moving forward in 2016. We think we’ve got a very solid foundation in manufacturing and on the admin and sales marketing area. So we’re very excited about moving forward. So, again, thank you for calling in, and I’m sure we’ll 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.