Good day, ladies and gentlemen, and welcome to the Freshpet, Inc. Second Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call maybe recorded. I would now like to turn the conference over to Katie Turner. You may begin.

Thank you. Good afternoon and welcome to Freshpet’s second quarter 2016 earnings conference call and webcast. On today’s call are Scott Morris, President and Chief Operating Officer and Dick Kassar, Chief Financial Officer. 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, expected to be 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 statements made today. Finally, please note that on today’s call management will refer to certain non-GAAP financial measures, such as EBITDA, adjusted SG&A 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 today’s press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. Now I’d like to turn the call over to Scott Morris, President and Chief Operating Officer.

Thank you, Katie and good afternoon everyone. I am pleased to speak with you today about our progress. On today’s call, I will start with a brief overview of our financial highlights and recent business performance, then Dick will review our second quarter 2016 financial results in more detail, and finally, Dick and I will be available for questions. Our team continued to execute very well against our 2016 plan and we are pleased with our progress to-date. We strive every day to provide pet parents healthy natural foods that their dogs love and that have a positive impact on their pets’ lives. In the second quarter, we continue to improve on key metrics both on sequential quarter-over-quarter basis and compared to Q2 last year. These include net sales, velocity, store growth in both new and existing accounts, quality, production throughput and logistics. We are also beginning to see growth rates improve versus year ago on both IRI and POS. Focusing on our results in a little bit more detail now, net sales increased 16.4% to $33 million driven by increased velocity per fridge and increased store count. Freshpet Fridge store count increased 10% to 15,795 as of June 30, 2016 up from 14,354 in the second quarter of the prior year. We also have several significant milestones, which we would like to make note of. First, our Freshpet Kitchens expansion remains on plan and beginning in June, we have started to manufacture initial run for products which are just coming to market. Secondarily, we will surpass 16,000 stores with Freshpet Fridges in the next month. These are two significant achievements that the Freshpet team has facilitated through an outstanding level of dedication and determination and we appreciate everyone’s contributions. The first milestone provides us the ability to further expand…

Thank you, Scott and good afternoon everyone. I will now review our second quarter 2016 financial results. For the second quarter, net sales increased 16.4% to $33 million. This growth resulted from both distribution and velocity gains, including a 10% year-over-year increase in Freshpet Fridges. Gross profit for the quarter was $14.9 million compared to $13.7 million during the same period last year. Gross margin was 45.2% for the second quarter of 2016 compared to 48.2% in the second quarter last year. Planned startup costs for the hiring and training our new associates lowered our gross margin for the period by approximately 130 basis points. The remainder of the decline was due to product mix and new product introductions. For the full year, we continue to expect gross margin of approximately 46%, 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 startup costs of ramping up the new production lines at our Freshpet Kitchens prior to realizing higher production volumes along with additional $1.2 million of depreciation on the new equipment. After adjusting for stock-based compensation and leadership transition expenses, SG&A expense decreased as a percentage of net sales to 44.4% from 47.3% 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 $3.5 million for the second quarter compared to $2.8 million in the second quarter of 2015. Turning now to the balance sheet, at June 30, 2016, the company generated cash of $3.4 million from operations compared to $2.1 million during the same period in…

Thank you. [Operator Instructions] Our first question comes from the line of Rupesh Parikh of Oppenheimer. Your line is now open.

Thanks for taking my question. So I just want to start with the housekeeping question first, on the gross margin guidance for this year, I am not sure if I heard it properly or not, is it – last quarter I believe, it was 46.7% for the full year, is that still the expectation for gross margin this year?

We now are expecting approximately 46% for the year based on new products that we brought into the marketplace recently in the second and third quarter.

Okay, great. And then maybe a question for Scott, if you can maybe provide more color in terms of the type of velocity trends you are seeing in the different channels, pet specialty and some of your other channels as well?

Sure. So as we have seen historically, mass continues to kind of percolate along well and really be a leader. What we are seeing that’s a little bit of a transition is where pet – the pet retailers are not performing quite as well in general. So we are seeing a little bit more softness there and some of that actually being picked up in grocery and what I would call maybe alternative formats that including natural and club and a handful of others. And then obviously, the online piece is something that every one is very, very aware of and closely tracking. And just a couple of percent of growth on the online piece is where it can cause some significant softness. We think that’s probably most impacting the pet class of trade.

Okay, great. Thank you for all the color.

Take care.

Thank you. Our next question comes from the line of Joe Edelstein of Stephens. Your line is now open.

Hi, good afternoon everyone.

Hi Joe.

Scott, I know that the new CEO is just only announced last week and Billy isn’t going to be joining as you said and really till after Labor Day, but since you have spent some time with him, can you just talk a little bit more in depth around what you think here is going to bring to the table, what areas of the business that you may have already discussed and if there is any kind of big opportunities I think may have already been outlined at this point?

Well, I think Billy obviously has – he has been a CEO for many years and he has some very methodical approaches to building out an organization. If you will look at where the Freshpet organization is, we have made incredible progress. But in some ways, we still – we are in our adolescence in a way and I think Billy can help us attain what really the future potential is of the organization. He has been a CEO of a $500 million company for many years and we think that he has a lot of strengths and very, very heavy from an analytical standpoint. He is classically trained in marketing and sales. I think he can contribute there. And the reality is we really have a long path in front of us and so much opportunity in front of us that I believe Billy can help us to capitalize on that. And again realize what the potential of this organization is on what we built here. So I mean, he definitely has – I mean, his entire mentality is really, very entrepreneurial. He has great spirit, he really believes in the mission and what we built here as an organization. And the way we are looking at it too and again, I haven’t spent a lot of time with him, but when I have, we would like to think of it as when you have got a great team, everybody on the team brings some different assets. And we really feel like Billy will contribute and bring some really strong assets to the team to help us build everything out here.

I appreciate that, Scott. And you did mention the marketing efforts even during some of your prepared remarks. Our latest survey that we have done has still shown some pretty low brand awareness and I realize a lot of the marketing is going to be second half weighted here, I was hoping you can just remind us on the total spend that you are allocating into the second half and what specific products are really going to get that marketing support. And then lastly just curious if you are seeing any meaningful competition from look alike products at this point?

Yes. So from an awareness standpoint, we track awareness primarily on an annual basis. And every year for the past several years, we have seen significant progress on building our awareness. Now we use aided brand awareness and what we are tracking. I am not sure if you use aided or unaided, I can’t speak necessarily to your study, but I can speak to what we have done. We have seen nice progress. We typically see that progress behind two major components of our growth. One of them is chiller replacements, for the more chillers we have out, the more visible we are and the higher our awareness. And then secondarily on advertising, we see very, very strong correlation from our advertising that correlates not only into sales, but also we do know that it helps build our awareness over time. So we are making good progress. Our spend levels and our share voice are significantly lower than what you are going to see across many of the big brands in the category. As we continue to progress and as we grow, we continue to invest in advertising and see steady progress. As you are well aware this year, we had to be very measured in our approach to investing behind communications because of our capacity constraints in the kitchens. Now in the future years, we may reassess kind of the allocation and rethink on how we are doing some of the communications and then you will see kind of more progress from an awareness build standpoint. So that’s how we look and we have made again, really nice progress on aided awareness, but we do have a small share of voice. From a competitive standpoint, which was the second part of your question, there is a fair amount of completion out there. We are seeing a lot of activity from an innovation standpoint, more innovation coming to market, more differentiation coming into market. The thing that’s obviously, we are so unique in the category and so differentiated that although there is competition, we tend to not get caught in the fray on the competitive activities going on. And fortunately, we haven’t seen a lot of pricing activity, which could potentially have an impact on us. Most of it’s been around innovation, a little bit of pricing, a lot of advertising and investment in the category, but it really doesn’t have as much of an impact on us. It could impact over time store growth, but from a day-to-day velocity standpoint, we feel like we are executing well on our plan and that’s really how the year has been developing.

Okay, I appreciate that. Again and if I could just ask one more, maybe a question for Dick, you did talk to the kitchen expansion and it sounds like that’s largely on track and largely done with really the bulk of the CapEx spend, I was hoping if you can just remind us what the actual expected CapEx would be for this year and if you could give us even just a ballpark range I guess to where it drops down to – into the out years from here? Thank you.

Sure. First of all in 2016, we obviously finished our Phase 2 of the expansion of the plant and in addition to that we are adding about 1,600, 1,700 stores. And that CapEx for the year is around $26 million, $27 million. And in addition to that, we have about – within that $27 million, we have about $2.5 million left on our current planned expansions. Going forward, we expect about $2.5 million of maintenance CapEx on our current facility and about $3,500 per additional store added. So in a year that we would add – 2017, we haven’t focused on it or finalized our plans yet, but if we are in the 1,700 to 2,000 store range it would be somewhere around $7 million for fridge acquisition.

Okay. Thanks and good luck.

Thank you. Our next question comes from the line of Bill Chappell of SunTrust. Your line is now open.

Thanks. Good morning, sorry good afternoon.

Hi Bill.

Just any update, I may have missed it on dry and kind of where that’s going and then also on kind of the – I am trying to understand on kind of the new product launches, what kind of permanent impact they have on gross margin in terms of how long of a drag will they be?

Hey Bill, it’s Scott. So on the dry front, on baked, so it’s not unexpected, we are seeing – we are continuing to see gains and we have also saw some distribution losses net-net from a store count standpoint. Bake is going to end up being fairly neutral from a distribution perspective. We are seeing some modest dollar growth in places, but as we kind of mentioned in the beginning of the year, we wanted to spend this year really retrenching on fresh, making sure that we got our growth rates really accelerated again on fresh. We are starting to see that develop, we like that. And then kind of refocus on what the opportunities are from a bake standpoint. So we feel bake will be a contributor for this year and we are making some progress, but it definitely has not been a key focal point for the organization this year. Did that get you a…?

Yes, definitely. And then in terms of just kind of the margin compression from those and other new products launched?

Sure.

Well – at the back half of 2015 our margin was about 45.6%. In the first half of 2017, we are at 46.2% included it’s – in the 46.2% we charged-off around $670,000 for our plant startup expense. So outside of the plant startup expense, which is basically training our employees on the new lines, our margin would have been 47.3% in the first half of 2016. Additionally, we have some CapEx that we are spending in the back half of this year for products that are currently co-packed that we will be bringing on our equipment, which should add about 70 basis points to 80 basis points to take us to approximately 48%. And then on the other side of that, Bill we are going to have depreciation on this equipment as we go forward for the new planned expansion, about $200,000 a month. We haven’t done new 2017, but I know based on our capacity, early on in 2017, we will never have a full line running 10 hours a day on one of our new lines, because we just don’t have the business at this point in time, but we are prepared for the growth. We obviously – we started, we had two lines, a chub line and a bag line. We are currently running the bag line, several hours a day, the second bag line. The chub line will probably start running in the back half of this year, but neither one will be taking a whole shift because we just don’t have the volume at this point in time. But when you are looking out long-term, come late 2017 or early 2018, you will start to bounce off those barriers of 47%, 48% and move forward.

Okay. And then kind of same question on SG&A, you are talking about continuing to see some pretty good leverage in the back half, how should we look at the drivers of that and where should that be going?

Sure. In SG&A, year-to-date we were $34.4 million and included in that was $2.2 million of leadership expenses. SG&A had some variable costs associated and in SG&A we have logistics, which as you know, we changed providers and we are seeing a nice reduction in logistics costs, but it is variable with revenues. We also have brokerage expense which is variable revenues. And in addition to brokerage expense, we have chiller expenses which it kind of moves in the same relationship as additional chillers are hitting the fields. So not all SG&A is fixed, but a predominant amount is fixed. And as if you look at each quarterly release you will see a lower and lower percentage of adjusted SG&A to revenues as a percentage of revenue. We expect that to continue to come down, but the one – the variable piece is which represent about 16%, 17% of sales. They will continue to grow and the balance of SG&A as a ratio to sales will continue to decline.

Okay. And then last one on store count, just your goal of – I was under the impression most of the stores are added in the first half of the year, kind of your line of sight to getting to the full year goal in the back half?

We have kind of been executing right on how we have budgeted the year. We actually see pretty strong growth in Q3 and actually last year we had really strong store growth even in the Q4 period. So we do anticipate like continued store growth through Q3 and Q4. Typically, the way we talk about it is we have about 60% of the total number, about six months out. So if you look at it we can kind of start to see the vast majority of it towards the back of the year and it’s where it’s coming from. And there is obviously always variables in there, but we are tracking on pace.

Okay, great. Thanks so much.

Take care, Bill.

Thank you. Our next question comes from the line of Peter Benedict of Robert W. Baird. Your line is now open.

Hey guys, it’s actually Justin Kleber on for Pete. Thanks for taking the questions. I wanted to start by asking on gross margin as well, particularly the sales mix pressure you are seeing, is that primarily related to the shredded products?

No, it’s really related to kind of all our new products coming out. We have a cat product coming out. We had single serve dog product hitting the marketplace. Our shredded is moving in the right direction as we indicated in the prior year. Our production on shredded on per hour basis is up nicely from the prior year. And as you know, we just launched our large size shredded in June to some retailers and for the balance of the year they will be going to a good percentage of the marketplace. And also on the pricing of shredded, the pricing of shredded for consumption of one pound is about 50% higher than one pound of roll. So it froze off not only a fair margin, but it froze off a nice gross profit from a penny standpoint. But where it is, it’s transitioned in the plant going from a plant that was kind of running full speed, with the two lines to now kind of embracing the third and fourth lines and experiencing a slower movement because we have to staff the line, but we don’t have 10 hours worth of production on those lines. So we are going to – we will be in this range, in the 45% to 47% between now and then by – and the latter part of next year and then kind of move north of that as we attained more volume by getting more distribution.

Okay. Thanks for that color, Dick. And then maybe a question for you Scott, just on SKU productivity, you guys have a good track record of innovation, example being the shredded product, you still also see a lot of fridges or actually a lot of rolls in the fridges, so just curious how you would view the importance of new products versus existing kind of top performing SKUs, as you think about driving velocity and margin and there maybe an opportunity to better optimize the assortment in the fridge as you go forward? Thanks.

Sure. So we have actually done a major project this past year that we just finished off, and we are now really in the process of implementing. And we actually, we are calling it space maximization. And we literally look at every inch of that fridge and we look at it on a sales on per linear inch – linear inch and then longer-term gross profit expected from those individual items. And then we will actually make fridge assortment decisions based on that. So it’s literally, just like a retailer thinks of the store, we think of our fridge in the same respect. So what we do is as we are coming out with innovation, we are making sure that the innovation is incremental to what we have in the fridge and that we are able to kind of remove things and see incremental sales out of it. And we really have been very successful in that. If we look historically, we have been able to take our base products and continue to grow our, what we are calling our base products year-after-year and same-store sales. We have also been able to add a lot of sales through innovation because it’s differentiated and it really does open up the market to new consumers. So we are actually kind of in a major transition right now. So you are starting to see in July, August and you will see the final changes into the September period, with a handful of retailers. Some maybe straggling into October, where we feel very good that, that will deliver significant incremental growth out of the fridges for the next year forward after that change. And I think it’s a continuing evolution, where we look at the lowest performing items in the fridge and we basically move them out and we are moving more productive items in. So we think there is room to – continued room to optimize there, but we are very cognizant. We are not coming out with a new flavor to kind of put it out there. We are making sure that it provides incremental sales. And the items that we have been able to put out there have been successful and the ones that we are putting out now look very, very encouraging from the results we have already seen in some of the lead accounts. So sorry for the long answer, but.

No, that’s great. Thanks for all the color. Best of luck, guys.

Take care.

Thank you. [Operator Instructions] Our next question comes from Dominic Ruccella of Wedbush Securities. Your line is now open.

Hi guys. Thanks for the call. I am actually on the line for Phil today, I am wondering if you could give us a quick update from last quarter and what you are seeing on the cat products, how is that progressing, how many fridges you guys have that in now, anything you guys can provide on that would be helpful, I appreciate it?

Sure. So on the cat products, we are now in several thousand – we are approaching over 6,000 fridges. We have cat products in today that we have added since the beginning of this year. So I want to be really clear on that. Now secondarily, so we are continuing to expand our cat portfolio and it’s really on two fronts. The first front is within existing fridges. We are expanding out and building out what the right mix of cat products are. From there, we are continuing to take that learning and we are applying that model to dedicated cat fridges. So right now there area 250, 248 cat fridges across the U.S. that are independent cat fridges. And we are recently seeing some real significant improvements in the velocity that we are getting out of those cat fridges and we are actually, over the course of the next kind of six months we are actually going to be doubling the number of tests. So the tests don’t give us a lot of stores, but what they do is they give us a lot of seeds that we are implanted that should grow into additional stores. So we are kind of getting – again we are kind of in an early phase here, but the dedicated cat fridge is around 248, we will see several other tests developing. And we are starting to see some expansion from the existing tests. So this is going to be something that will have a major impact or more significant impact on the business next year and this is a kind of a developmental year for us in cat. But encouraged with the results and that’s – these results are really kind of sales related and we have several new items that are coming in a cat portfolio that we build it out. So we have several items in a dedicated cat fridge. But I would say, we are still in a figuring out stage, but it’s a promising development and a nice opportunity for us next year.

Got it. And then just a follow-up on that, I know you mentioned that you are working on the mix, but obviously it’s still early, is there anything you could – color you can provide in terms of what the velocity is you guys are seeing there, I mean is that similar to the dog fridges, is it similar to how the dog fridges were in the earlier days of their release, any other color you can provide on the velocity you are seeing?

Sure. So I think the best way to think about because it’s so varied across all the different retailers and formats that we are in. So right now, we are seeing about 40% to 50% of what we are seeing out of a dog fridge, but there are two major factors. And one of them is, it’s in its infancy and it’s kind of like the early days of the dog fridges. So there is a little bit of like a way in as we figure it out piece of it. So that’s obviously, highly important. So we are seeing that. The other thing is these fridges are much smaller than the dog fridges. We are typically seeing waist height fridges, so they are smaller, they take up less space and then demand less space from the retailer. So obviously, that’s a consideration. So we again – we kind of like the results we are seeing. We have a little bit of ways to go to kind of figure the full model and once we kind of get the rest of that portfolio out there and we have established, this is the model it is exactly how it is. From there it will allow us and we can take those results and share them with many retailers. It will – we will get a lot more buy and a lot faster, once we have that model kind of really solidified.

Got it, understood, that was helpful. Thank you.

Thank you. And I am showing no further questions at this time. I would like to hand the call back over to management for any closing remarks.

Thank you for everyone joining us. We really appreciate your participation, your questions and your interest in the business and look forward to continue to work with everyone. Good evening.

Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program. You may disconnect. Have a great day everyone.