Q1 2020 Earnings Call

[music].

Greetings and welcome to the fresh Inc. first quarter 2020, <unk> earnings Conference call.

At this time, all participants are they listen only mode.

Good question and answer session will follow the formal presentation. If anyone should require operator system. During the conference. Please press star Zero and your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce Katie Turner for opening remarks. Thank you good afternoon, and welcome depressed <unk> first quarter 2000.

<unk> earnings conference call and webcast of today's call or Billy Cyr, Chief Executive Officer, and discuss our Chief Financial Officer, Scott Morris, Chief operating officer, and Heather polymer additives.

He VP of finance will also be available for Q1 day before I begin. Please remember that during the fourth of this call management may make forward looking statements within the meaning of the federal Securities laws. These statements are based on managements current expectations and beliefs and involve risks uncertainties that could cause actual results could differ materially from those described any forward looking statement.

Please refer to the Companys Airport I phone 10-K filed with the Securities Exchange Commission and the company properly. If your today for a detailed discussion other risks that could cause actual results could differ materially from those expressed or implied in any forward looking statements made today. Please note that today's call management or for a certain non-GAAP financial.

Sure.

With that and adjusted EBITDA among other while the company believes these non-GAAP financial measures provide useful information for investors. The presentation. All this information is not intended to be considered in isolation or the substitute for the financial information presented in accordance with GAAP. Please refer to today's press release reconciliation of the non-GAAP financial measure.

The most comparable measures prepared in accordance with GAAP finally, the company's predictor presentation that contains many of the key metric that will be discussed on this call that presentation can be found in the company investor website at <unk> commentary will not specifically referred to the presentation, rather if a summary of the results. They will discuss today and now I'd like to turn the call over.

The only fear Chief Executive Officer.

Thank you Katy and good afternoon, everyone I'm talking with you from Bethlehem PA because at home in Manhattan, and Scott that there are at their homes in New Jersey, they'll do our best to not trip over each other on the call. Please excuse any parking in the background.

Obviously, we are in the midst of highly unusual times. So our comments will be a bit different and we would typically provide so that we can give you a clearer understanding of this unique operating environment, how we're addressing it the opportunities and risks it creates any assumptions underlying our guidance. We will also provide you with our quarterly metrics and it.

Alceste, including the presentation, we typically provide and what I like where the Corona virus crisis might be creating distortion.

Favorable and on favorable.

Well also share some April results, where we have the data and it is relevant in the interests of Maxim transparency and this turbulent times that will allow you to see the pantry de stocking that occurred in April following the March surge and consider the two months together for a more complete picture.

To be as transparent about what is happening in this rapidly changing environment, our prepared remarks will be longer than usual.

First and foremost we view the krona virus threat as a significant public health challenge and take our role as an essential business seriously.

Being a central business gives us the privilege to stay open. It also comes with the responsibility to operate safely limiting the spread of the Corona virus amongst our employees their families in our communities and serving the 3 million pet parents, who rely on us to feed their pets with high quality food.

I believe we are living up to these responsibilities and in doing so we're protecting and hopefully enhancing the long term value of freshpet for many stakeholders.

As we detailed in our press release on April nine we've gone to great lengths to protect our employees and greatly reduce the risk of Corona virus in our facilities.

We hired third party nurses to take the temperature and administer a brief health check of employees and any of the limited visitors we allow when they enter our kitchens on average the nurses direct to people per day for further screening and it's exceeded at identifying people who had the virus, but had no fever or cost.

Retain de de third party deep cleaning company cleaner offices common spaces and locker rooms on a weekly basis. In addition to our stepped up cleaning and daily sanitation.

Installed additional space to allow I'm pleased to spread out at the brakes and in meetings.

Provide faced coverings for every employee in required their use.

Installed the highest quality air filtration to reduce the risk of airborne virus transmission.

Staggered our shifts to avoid concentration of employees in our locker rooms and common areas.

Stalled sanitizer dispensers inside virtually every door and sanitized any meeting rooms before and after each meeting.

Suspended or absenteeism policy, so that no employee would feel compelled to come to work if they're not feeling well as a result, or absenteeism increased from 2% to 3% to approximately 11% since we implemented this policy to compensate for this we brought in incremental staffing and pay for overtime.

Followed all C.D.C.N.F.D.A. guidelines for Quarantining employees, who may have been exposed including paid leave well awaiting test result, if they test positive for the virus or have been exposed to someone who tested positive or is awaiting test results.

Our purpose in all these activities has been to prevent the virus from entering our facilities eliminating places it for it to harbor within our facilities and limiting its ability to spread in or facilities, we cannot protect an employee from getting the virus in the broader community well, we can try very hard to prevent it from entering our facilities and spreading there.

Aspire to make our freshpet facilities, the safest place our employees could spend their day.

To show our appreciation to our employees, who continue to work through this crisis and help us meet the demand we paid a 500 dollar after tax bonus to all kitchens employees in April.

Given all kitchens employees, a 50 dollar gift card to local restaurants every two weeks since mid March the both give them a break from home cooking and also help close local restaurants survived the mandatory closing of their dining rooms.

The feedback from our employees has been very positive and they have rewarded us with outstanding efforts simply put taking care of our employees ensures that we can meet the needs of pet parents that is what we're doing and so far our efforts are succeeding at preventing the virus from spreading within our facilities.

Well, we remain vigilant continually reassessing our needs getting guidance from the C. D. C. F D. A trade associations and other food manufacturers advice from our board and input from our employees.

All these efforts come at a cost.

Cost that we think are well worth the expense.

We'll provide more details on those.

In addition to the incremental efforts to protect our employees and continued production there have been other impacts from the krona virus crisis in a minute I will list some of the more notable ones, but did you consider them I want you to know that any impact from these events is temporary and can be offset with other incremental activities in our tool kit and still deliver.

Our net sales plan for the year.

And they certainly will not have any significant impact on our long term goals, nor our confidence in our ability to get to them.

They will however change the mix of tools, we can use to drive growth this year and we want to lean in the continue driving that growth.

We will replace the volume gains we had anticipated from fridge placements and new products with increased investments in advertising and ecommerce take take advantage of some significant opportunities in front of us.

But as you all know the situation is fluid we will continue to monitor it and make any adjustments in both our plans in guidance as necessary.

I also want you to remember that aside from the challenges of keeping our employees safe. The biggest disruptions we are seeing impact the retail environment and our better businesses better insulated from that type of disrupt disruption in many CPG companies.

We do not dependent retailers discounting and promotional activity drive volume we're trial.

Advertising drives 80 plus percent of our growth. This crisis has not impacted our ability to advertise and media rates are coming down potentially making it more efficient.

We do get the last 20% of our annual growth from the combination of enhanced retail presence new stores and from the contribution of new items, but that can be offset with incremental advertising and we got fridges into some big stores before the crisis hit.

Finally, our consumer demand is very consistent and not very fickle.

Households that serve Freshpet are very loyal dog eat the same amount every day.

So we have strong instead, he demand with the vast majority of our growth coming from advertising that is a good place to be right now and we fully intend to take advantage of that strong position once our supply catches up to demand in Q2.

So with those reminders here a few of the most significant impacts we've experienced where are watching closely.

First due to our capacity limits in Q1, and a tremendous surgeon buying we could not shipped to demand and drew down tick trade inventories, resulting in out of stocks at times, we're only able to ship 75% of the orders on our books.

Even without the surgeon buying behind the krona virus. We told you at our Investor day in our April 9th release that are demand would exceed consumption in Q1 and that we would catch up in Q2.

The search related to covert 19, only exacerbated the situation and we ended the quarter with very low trade inventories, particularly on our bags and a very large order backlog carried into Q2. This also resulted in a bit of mix benefit in Q1, as we had ample capacity on higher margin rules and continued to ship those.

Orders well, we cut back orders.

Before the surgeon demand, we estimated that the gap between scanner sales and shipments for the quarter could be three to four points and in actuality. It was about five and a half points, resulting in roughly $4 million net sales that moved into the second quarter.

It is important to note we believe a meaningful portion of the actual in home consumption will happen in Q2, so our shipments might end up closely matching the actual consumption. Thanks to our capacity limitations in Q1.

We've already begun to see that we expect our April net sales to be up 30, plus percent versus year ago, well Freshpets Nielsen make a channel consumption for the four weeks through mid April O. surge average high single digit growth and we still have not restored normal trade inventories and we have a sizable backlog of orders to carry into <unk>.

At this pace, we expect to replenish trade inventories by the end of Q2, and having more normal shipment consumption balance heading into Q3.

You are seeing a gradual improvement in weekly consumption trends as April progressive and consumers draw down the pantry inventory. They built in early March and are in stocks improve but there are some year on year distortion provided by the movement Easter.

They will provide a much clearer picture of the underlying consumer behavior and buying trends and should reflect much better in stock levels for fresh Pat.

I mean should be even better as it will also reflect the impact of our returned to advertising in may.

The rate of dog adoptions, and fostering sort in the midst of the crisis shelters in major cities reported a significant uptick in pet adoptions in February and March.

It is hard to tell how this will directly impact our business. It speaks volumes about how people feel about their pets. When times are uncertain that is likely in part why the pet food category has performed so well in recessions.

Retail partner stopped most planned new fridge installations, and new product placements in early March as a result, we placed virtually no fridges in the month of March and don't expect many placements in Q2 for perspective, we placed a total of 111, new fridges in the first 24 <unk> days of April below the pace, we would normally expect.

But not a complete stop.

We did however place a significant number of full sized fridges on end caps in Walmart before retailers suspended their activity and those are particularly high value and will drive volume all year long.

Some customers are beginning to communicate their revised plans, but most customers remain in flux as a result, we do not expect to install as many fridges. This year as we had previously outlined at this point, we're expecting about 1000 net new stores. This year down from 1400, 30 previously projected and about five.

500 upgrades down from 559 previously.

We are however, expecting to exceed our second slash third fridge target of 500 likely exceeding 1000 as I will outline later.

It's too early to say what the net of all these changes infringed placements means but they will be offset by the lean in investments, we intend to make to drive growth.

We expect the volume from new items to be less than what we had previously planned as several customers did not put the new items on the shelf before they stopped Atlanta Graham changes some of our larger customers had already stock the new items and others have communicated that they will in Q3, new items only accounted for a small portion of our growth plan. This year. So this impact.

Act is not significant any impact and any impact on this can be also be offset by early in investments.

We pushed or April advertising spending back into May and August due to lack of supply we had after the surge in March and when so many retailers were struggling to stock their stores. This could impact both our rate of household penetration and consumption growth in Q2, and also the timing of our AD spending pushing a portion of it out of Q2 and Inc. Q3.

However, the media rates, we're now getting for may and beyond arsenic significantly more attractive than what we previously anticipated.

The same retail chaos that occurred in the U.S. also occurred in Canada, and the UK muting the impact of the advertising investments, you're making there as consumers flooded stores and loaded up on their existing brands, we will reassess our advertising timetable once those markets settled down a bit.

We lost some production efficiency in the quarter, we put a higher priority on getting maximum output from our production lines then on labor efficiency. So we deliver <unk> deliberately over scheduled labor to offset absenteeism. Despite that though we still had sporadic days, where we did not have enough labor to run all four lines in our kitchens.

We believe that absenteeism is costing us about 5% to 10% of our output even with the incremental staffing we brought in.

Based on what we know that issue will continue into Q3, and <unk> are into Q2 and likely into Q3.

The construction of kitchens 2.0, now appears to be delayed by about one month.

We were able to continue construction after a two week delay well a contractor qualified the project as an essential business, it's been hard to get all the subcontractors fully staffed every day. So we estimate that are kitchens 2.0 will start up at the end of September early October instead of our previous plan of starting up in early September.

And at a significant rate in November.

The delay in the startup of kitchens 2.0 could impact our supply of fresh in the kitchen in Q3.

We are bringing on a second shift the kitchen south in Q2, so our overall bag capacity will meet or needs well, we could develop an issue with fresh from the kitchen.

We don't think that we'll have a material impact on the year, but it will impact the quarterly cadence I eat some net sales might move into Q4 from Q3 and could move some volume from fresh and the kitchen, two or other bag product roasted meals.

We are closely watching our supply various proteins as all of you have read the meat packing industry has been hit hard by the Corona virus, well, we've not experienced any extended interruptions to date and our chicken prices for the year. Our fixed we have had to go to previously qualified second source suppliers from time to time. So we are watching this close.

They had off any potential future supply interruptions and taking some steps to better protect our supply.

Ill also point out some really good work by our procurement team.

Hey, spotted the potential for significant supply disruptions in late January and began to build inventory of ingredients and packaging materials. Then so we arrived at the crisis the significantly larger supplies. Many key ingredients and packaging. They also finalize some longstanding initiatives designed to put in place backup suppliers on key materials.

Resource and on our fresh ingredients, we cannot build inventory that does not mean that we have not had challenges or challenges have been made significantly smaller and less disruptive thanks to their good work.

The question all of you are probably ask yourself is where does the sleeve freshpet overall.

I would answer that in the following way, we feel very fortunate as such a robust business strong balance sheet and to have a plan that is working to protect our employees and there was nothing in the current situation that tells us that our long term strategy plans and goals need to be altered in fact, we remain very confident that despite the short term chaos, we see too.

Today, the long term opportunity for Freshpet remains significant our strategies remain sound and our team has proven its capability. We have strong demand a proven growth model a diverse customer base, a well capitalized and have a strong organization. We've also learned quite a bit during this crisis that will strengthen us going forward.

We're very well positioned for both short term and long term success.

As a result of these changes we've decided to make some incremental investments offset any impact from the retail issues I described capitalizing on a changing environment and leveraging our competitive strengths, we will invest in incremental second half advertising.

Combination of low media cost highly relevant message increase pet adoptions and incremental capacity because the ideal time to lean in on our advertising in the second half.

Enhanced E Commerce, we've developed several initiatives designed to make it easier to acquire Freshpet P. E commerce through all channels that offer freshpet and are developing some new channels. This will include incremental second fridges to support curbside pickup in pet specialty tag advertising supporting online ordering or ordering in it.

SLS program that allows consumers who are desperate for freshpet to order, our most premium homestyle creations line and have a delivered to their home.

Strengthen retail the pepperidge given the challenges of stocking the stores, we're investing in incremental third party retail coverage to quickly recover our in stock conditions at a time when retailers can't keep up.

The total amount or the incremental investment, we're making is $4 million this year.

Some of the volume we expect to get from that investment will offset the impact of the delays on fridges and new product placements, ensuring that we deliver our guidance and some of that will come next year in either case, we view it as a good investment to continue our momentum.

Now, let me turn your attention to our first quarter results.

I will provide preface this by saying that we're very encouraged by our start to the year and think that with only a few minor exceptions, there reflective of the underlying strength of the business and they are better than are going and plan.

Due to our capacity constraints, we realized very little of the benefit of the surge in demand that you see in the scanner data.

You'll get that shipment volume in Q2. So this is probably one of them more normal quarters that a CPG company report in this environment.

For the quarter, we continued the strong topline momentum we've been delivering since we began our feed the growth plan three years ago. We continued to demonstrate the profit gains from leveraging are increasing scale.

This is the essence of our strategy and it was working we've created a virtuous cycle were increased advertising drives increased velocity, which drives increased distribution and that provides the added scale to both reinvest in the business into also strengthen our bottom line.

Our strategy is also working for pets, and the pet parents, who care for them.

We are now producing pet food for more than 3 million households, and that number keeps growing.

Pet parents continue to write and call us to tell us about the amazing difference the freshpet makes in their pets lives. We firmly believe that we're just scratching the surface of the opportunity to change the pet food category, enabling pet parents to provide fresh healthy less processed food design for pets.

In the first quarter, we deliver topline growth of 28% and this was on top of 27% growth in the year ago quarter. In fact, eight of our last nine quarters had growth in excess of 25%.

The growth was driven by continued strong consumption gains generated by the expanded household penetration we delivered in 2019.

Nielsen make a channel consumption was up 33% behind 40% growth in grocery 39% growth in mass and 10% growth in big box pet.

Prior to the surge in early March our Nielsen make a channel business was up 29% inline with our long term trends for the last four plus points of growth are likely related to the surgeon buying and not representative of the underlying consumption.

Lots that he grew 17% and accounted for more than 60% of the year over year growth.

Our core dog business, which is the some of our dog rules roasted meals and fresh from the kitchen main meal items and accounts for more than 90% of our business was up 37.5% in the quarter.

Our small but rapidly growing E commerce business, which includes curbside programs with our key customers home delivery via services like Instacart and shipped and fresh ecommerce like Amazon Prime now and fresh direct was up 98% versus year ago, and now accounts for 3.3% of our business more than 80% of that business went through our.

In store Fridge network.

Curbside pickup now accounts for more than 50% of her E Commerce volume and was up 102% in the quarter. There's no doubt that a major shift to online consumption. During the shelter in place weeks contributed to our growth, but we're seeing very strong growth before that as well.

Adjusted EBITDA on the quarter was 5.7 million up 2.9 million or 100% versus year ago. As we demonstrated the significant leverage we get from scale, particularly in adjusted SGN a excluding media.

Progress against our key business drivers was as follows expanding the consumer franchise total household penetration grew 28% versus year ago, 2.58% in the quarter and core dog penetration grew 33% to 2.0%.

Buying rate was basically flat, which is what we would expect the such robust household penetration gains.

We've included a chart in our Investor presentation. The documents how the household penetration growth has impacted buying rate growth over time. So that you can see this phenomenon, but the long term trend towards growth on both measures is very clear.

We looked at the penetration data by weak in March to see what impact the surge in demand had and it was negligible, which makes sense consumers. We're not trying new items then they were stocking up on it on items they already bye.

We also looked at the buying rate data by week, where we would expect to see some impact, but we saw very little this is likely because it happened. So late in the measured one of your period and because our data suggest that consumers only bought about one extra we could freshpet versus dry dog food, where they bought almost one months extra supply.

Further our out of stocks and we believe consumers type fridge space limited their ability to buy for.

The second strengthen freshpets retail presence.

We only added 297 net new stores in the quarter, which was below our expectations as I mentioned, new installations virtually stopped at the beginning of March.

The same phenomenon occurred on upgrades and second fridges as we added 32 upgraded fridges and 15 second fridges also fewer than anticipated.

However, we will be picking up a large number of second fridges in Q2 at the Australian competitor that has been attempting to enter the U.S. market for several years is now exiting and we expect to pick up a significant amount of their space and acquire those fridges totaling more than 500 that are largely in the pet specialty channel while we.

We're thrilled to get the space the validation of the strength of our business that this decision provides is even more meaningful.

In total we expect to add more than 1002nd fridges over the balance of the year.

Third increased capacity.

In addition to our kitchens 2.0 project, we started up the small sized line at kitchen South in February production is going very well and running ahead of our plan. We're planning on adding a second shift there in Q2 that will provide added buffer against any supply interruptions. Additionally, we've begun hiring in Ns, Texas.

We now have five employees hired to support the planning design and construction in that facility already and more on the way I.

I'll now turn it over to deck discuss our Q1 financials in more detail and our outlook for 2020.

Thank you Billy.

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When you consider all the disruptions that occurred in quarter, one we accomplished quite a bit delivered strong results, which are better than what was included our internal plan.

We announced our new five by 2025 strategic plans with 5 billion new household by 2025.

We completed an equity offering that netted 252 million and renewed renegotiated our credit agreement.

We now have the capital that.

What outgrowth last through 2025, and we've got all that.

Of the around it probably was crisis.

Ability indicated quoted one sales was 70.1 million up 28 cents versus year ago period.

Well many companies report somewhat inflated results for quoted one because of the panic driven buying in March.

That was a very small portion of our growth.

In fact, our capacity constraints limited, we did not borrow much if any sales from quarter to.

Bill you indicated we began to with trade inventories well below our normal operating conditions and are still rebuilding that pipeline.

We expected to catch up in quarter, two <unk> reported how April results show that happy with April sales of greater than 30%.

We invested 11.8 million an advertising in the quarter up 70 cents versus year ago, It consistent with our plan.

We did invest the new AD was.

The shelter in place orders began reminding people that our dog don't know why were so much.

Just glad we are that we should all take care of each other.

That advertising was named one of the top 10 breakthrough as the quarter one based metrics that are more than 2000.

But the other is recognized with Super Bowl.

More importantly, it delivered the strongest response to our appetite.

Sometimes despite all the distraction and pay out going on.

I think that is a good there came as both nimble and also does very good work.

Qualities that have been it will be keys to our success.

Adjusted gross margin for the quarter was 49.5 that down.

5%.

The year ago period at slightly higher than quarter for 2019.

Well I do want to include lots of moving parts, including the startup of the quite a rose line at 24, seven schedule higher processing costs.

<unk> big benefit driven by the availability capacitor capacity on our higher margin role at quarter end and higher selling prices.

Adjusted EPS you gave the quarter was $28.9 billion, 41.3% and that's built an improvement up water intake 10 basis points versus a year ago period.

Media spending was up 1.7 versus year ago period, when you exclude media spending SJ proved by 250 bips versus year ago.

Well, we're not going to invest the incremental 4 million of lead is spending we would easily deliver our total of 750 Investor day improvement by 2020.

However, that extra spending will likely cause us to come up a little bit short this year that increase will likely not repeat next year.

And adjusted EBITDA out of the quarter was 5.7 billion up 2.9 or understand the year ago period, its financial metrics demonstrate the meaningful benefit from scale together course, RP, though essential part of the virtuous cycle embedded out either growth plan.

There's also a good indicator ability to grow adjusted EBITDA that sale that we achieved meaningful scale.

From time to time, who choose to increase investments to capture incremental growth opportunities.

Putting those opportunities we expect to continue to generate scale benefits and that you know.

<unk> adjusted EBITDA margins for the foreseeable future.

We're very encouraged by these strong results were also mindful of the significant uncertainty and the external environment.

At this point.

We are reiterating our sales guidance, despite the disruptions, but are reducing our adjusted EBITDA.

EBITDA guidance to reflect the incremental investments, we're making to replace the valuable.

Delays in retail activity.

That is best.

Total approximately 4 million this year and will ensure we deliver our net sales guidance as business units to accelerate into our kitchen to quite overcapacity.

We are also adding back higher cost of operating the cobot 19 crisis.

We believe we own car $4 million, an extra costs related to cope with 19 Craig.

Including enhanced compensation for our employees.

Increased efforts to protect them higher cost to protect our supply chain and other related costs.

Our guidance.

Net sales of greater than 310 million and that's.

The EBITDA greater than 44 million.

Given how fluid the external environment is we want to be clear about your assumptions that support that guy.

We are assuming the following.

Retail his resume a significant portion that bridge places a new I'd have distribution in quarter three.

We believe they will and this is what we have been told by many of our customers.

Additionally, we are assuming that the present significant restrictions on shopping in store doesn't prevent reasonable consumption and replenishment pattern.

Similar to what we have seen historically.

Data from April suggests that this is a reasonable conclusion, but the dusted that oh this yet.

Effective as of our media investment is not adversely impacted by the changing consumer environment.

It's the most important factor for us as media drives the lion's share about growth.

Optimistic combination of lower media costs increased interest in pet or build you refresh your message will deliver effective but at least as strong as in prior years. Once we go back on the air.

Digitally cregan pet food has performed very well in previous recessions. So the evidence would support that we should do well what we are watching this.

Well, so we do not encounter any significant supply interruptions either upstream from us over there.

<unk>.

[laughter], we're doing everything possible to ensure our continuous operation, but we cannot guarantee they won't have a significant adverse event that income could impact our ability to make or distribute freshpet.

We can sustain incidental interruptions as we have what we cannot absorb extended outages. They just don't carry that much inventory.

<unk> costs, we incurred to manage the crisis, our 4 million or less.

Our internal estimates for the cost of the efforts we are doing now what that but we don't know any new actions will be required.

Cost we are encouraging anticipating include the direct compensation payments to employees incremental sanitizing and social distancing caught.

The impact of higher occupancy as of the need for incremental staffing and the cost of health checks for employee.

Quoted one we spent about $220000.

In quarter two.

We estimate we will spend $2.3 billion.

We have no major customers credit issues as a result to cope with Nike and crisis, our grocery and mass.

Hi, Andrew benefiting from the broader surge in demand.

But they are also covering higher course.

Specialty retailers, which account for about 10% of our business in quarter, one has not experienced the same benefit.

We remain very committed to helping those customers exceeded this turbulent environment, but we are all caught it they're all girls business.

This is not at all inclusive so that police car felt the risk section of our latest then you have SEC filings.

Why don't you know about the major factors that we are considering establishing I'd guide.

He's ties requires that kind of transparency and the database approach, we like to bring to the business.

We are very bullish on the consumer interest in fresh bread and our ability to drive profitable growth over the long haul.

Any hesitation, we have is driven by the uncertainty on the retail environment supply chain and overall economic environment the near term.

For us to say that we have a crystal ball and know how will this will unfold would be a gross overstated an unfair to our investors.

Oh liquidity remains very strong are results of the equity offering completed in late February we raised 252 million of which we use 76 million to pay down our line of credit.

At quarter end, we had 169.5 billion cash cash equivalents or short term certificates of deposit.

And then early April.

And expanded our credit agreement now of 165 billion senior secured credit facility that we have not yet drawn out.

We believe those resources and cash we expect to generate from operations is sufficient to meet our long term capital needs.

We have invested 24.7 million of capital again, it's 2.0 project, so far and other project designed to increase our capacity.

Total spending on those project to date to 71 million.

Working capital increased.

Increases offset female gave a seasonal phenomenal for our business. So cash used in operations was $3.8 million.

We continue would expect positive cash flow from operations for the year.

I'll now turn it back the ability for closing comments.

<unk>.

Thanks Dick.

As Dick said, we'd a strong first quarter in almost any year that would be a harbingers of things to come but this is not just any year. We're all dealing with a significant amount of uncertainty in the external environment when that happens the smartest things to do or to control. What you can control keep your eyes wide open adapt quickly to new.

Information and changing circumstances and take care of your employees customers suppliers and consumers. If we do these well we will come out on the other side stronger than we went in and we're pretty strong when this all started.

We are incredibly well positioned to succeed we have a winning brand with a strong product an exceptional idea behind it growing consumer interest and less processed more natural foods and treating or pet pets, well a highly capable organization that has proven to be up to the challenge in front of us and a strong balance sheet.

We are extremely grateful to our teammates who worked so diligently under very challenging circumstances.

Also very appreciative of the work done by our customers suppliers and their employees were all in this together I'm proud of how our industry has pulled together to support each other and we remain committed to working collaboratively with them and all the federal state and local officials who are fighting this public health crisis, and finally, we can't say enough about.

The work of the professionals in the medical field grew in the front lines of this fight our thoughts are within mall and we hope that they have the opportunity to go home to loved and affection of a dog or cat at the end of their long days, we're deeply grateful for their service and sacrifices that.

That concludes our overview I will now be glad to take your questions operator.

Thank you will not be conducting a question and answer session and the interest the time, we ask that you. Please limit yourself to one question and one follow up.

I'd like to ask a question. Please press star one on your telephone keypad economies in Poland will indicate your line is in the question Q. You May proceed starts to it seems like you have your question Nick you.

Justin.

Clinton, then maybe necessary to pick up your hands that before passing the Starkey. It's one moment. Please only poll for your question.

Our first question comes from the line as Ken Goldman with JP Morgan. Please proceed with your question.

Hi, good afternoon, everybody and thank you as always for all the the color in the detail is very appreciated.

I wanted to ask two questions first.

The one of the risks you talked about in terms of your guidance is that you're assuming that in the third quarter, there's a more normal refrigerator rollout or at least some recovery there, but I think you also said that a lot of your customers are still sort of.

I forget the exact phrase you use I think you said influx and you're not getting exact sort of guidance from them as to what to expect so I just wanted to try to take your temperature a little bit on where you know how high your confidence level is that that fridge rollout will be as you expected that third quarter.

I can't remember you can see a common and Scott can probably give you a little bit more color on it but I would say that every single day, we get more detail from customers are they getting more and more comfortable with their sort of return to normalcy. So for example, we've seen some customers just this week announced that they were at storing more normal store hours.

Initiating a plan a gram changes and whatnot. So our assessment is based on a look customer by customer or what what their current status is and where what commitments that they've made to us. So I feel I feel pretty good that the schedule in the outlined that we've given you get your 2000 net new stores. This year is deliverable, but Scott probably has a little bit.

More color on that.

Oh sure so I think it's.

We've mentioned it and in the script I know, there's a lot of information there and as you've kind of become familiar with the company. The vast majority of the the sales growth through the year is really driven by the advertising. The stores are critical because we obviously want to have more TCV over the course than your but its a.

About 80% of the total increase in sales over the course of years really driven by the advertising piece. So the fringe piece is important but that I just want to put that in context first.

The so the other thing that we're seeing as we know that we probably won't hit Kuwait. The number of total stores this year incremental new stores, but we're able to offset that with the second fridges, we actually feel as though we're gonna. We're looking like we're gonna have an incremental 502nd fridges over the course of year and that'll overall.

Kind of net net out to a similar contribution from our kind of fridge growth over the course in Europe. So I think that's you know that's I think important to take into consideration.

And as retailers and everybody gets more comfortable with environment, we're seeing kind of the whole the planning a fridges continue to come back in there were some extra precautions, obviously, we're putting in place and we've actually even seeing a fair number fridges installed or even through this quarter believe or not and into the into Q2. So.

You know, we like the progress we have double checked and triple check with some people and I think that those second fridges will be a big offset.

Ken Let me just one other point to it is as Scott said you know we've done 100 <unk>. We did 111 purchase through April 24th. So you know we have a pretty good handle of what the retailers are capable of but I think if you take a long look at what retailers are learning in this context and script got talked about where how our business model develops but a lot of the retailers are saying that this this cry.

Basis has allowed them to figure out really what are the categories. What are the segments. They wanted the and what are the businesses that make the most sense and a lot of are now starting to discover that freshpet is a pretty big trip driver a high value consumer to bring in the store. So as they think about how they're going to come out of this I think we're actually going to have a higher level of importance.

To the retailer than we did going into it we were valued for our growth and for the value of the shoppers, but I think people see strategic value of us now more than they ever did before.

Okay. That's helpful. I wanted to also ask you know I know, there's a lot of moving pieces and.

Certainly no one can predict the.

The future, especially right now, but you did talk about a little bit about.

You know, what you're expecting between shipments and consumption for May and June and maybe a little bit more of a balance this quarter what numbers roughly should we be looking for as May and June go forward in terms of Nielsen data I just want to make sure. There is no surprises on the when the downside because you are talking about a very strong.

Total.

Shipment number for the second quarter, but maybe Nielsen might lag that at the beginning I just wanted to get any kind of sense you can become a cadence of how that progresses from a take away perspective.

Yeah, and Ken if you look in the Investor deck that we published today, we gave a lot the Nielsen data on slide 17, literally all the way through data that came out a as of this morning. So its data through April 25th to give you a sense for what this looks like and what you can see is there is a big surge.

In the March period that everybody knows about there's a big trough that came on the backend, but we started seeing it come back up out of that we don't think that we're getting back to normal right at the very beginning of may but we wouldn't be surprised by the ended the quarter. We're back to the run rate in terms of the growth rate that we hadn't if you look at the lines on that slide what you can see.

He is we're headed back towards where that consumption line as is the Orange line is the consumption line on there were headed back in that direction and we have visibility on scanner data for key retailers that goes one way beyond that and we can tell you that trend continues and we feel pretty good about it but as you think about what washer report remember in Q1.

We had a little bit of the surge, but really most of that fell into Q2. So during that trough. We got a you know we got a good Bennett, we hit a basically refilling the inventory and then and we'll see a little bit that in the in the M. may window and so we think Q2 is going to end up looking like Q1 in terms.

So total shipments it's just going to have this fund. This this funny feeling of you know filling a trough first and then resuming normal consumption later in the quarter.

Great. Thanks, so much.

Yep.

Thank you. Our next question comes from the line of Jason English of Goldman Sachs. Please proceed with your question.

Hey, good way folks.

Good afternoon, sorry, Mike.

What happens we looked at all to walk you even your mortensen evenings get confused let alone your data.

So a couple quick questions first Dick you walked through the $4 million of coal that expense I saw you excluded that this quarter is it fair to say that's a pro forma adjusted does not impact your EBITDA guidance for the year.

Well, we what we've excluded as a $4 billion to cover the expenses. We've only spent a couple hundred thousand the first quarter.

We expect to spend 2 million in the second in the balance the third and fourth quarter, and where excluding that from our EBITDA adjusted EBITDA numbers.

That's what I've got it thank you and you mentioned.

You mentioned trade down risking why why you're not concerned about a recession is going to impact adoption of the growth your business.

He can can you help point me to some of the things that gives you comfort in the I mean, I know last recession for you held up but that was also in the wake of the melamine crisis.

That that obviously catalyze the pretty big Uptrading. This there's a lot of noise, but data set a love to hear what you're looking at that lends confidence that.

Hi, Scott you want to take that one.

Yeah, So since Jason if you look.

That premium pet food really over the last three recessionary periods. It's typically seeing growth really through every one of those periods on the growth may have been come off a little bit of the other top that it was that but as it typically is really grown through each one of those periods.

We were very small, but we were around and Oh, seven or eight and that was a pretty tough. We also saw 10 11 at the thing that I think we're pretty well positioned around is <unk>.

We we actually have will obviously have a very wide range of products and we think that one of the things that you could see is some people moving off of some of our highest dollars per pound item to some things that are a little bit more cost effective now that obviously has some impact from a from a dollars a you know a buying rate standpoint put the.

The margins are actually slightly accretive which is one of the thing, but actually been helpful. This quarter, where we actually had a little bit more roll a roll business going on this quarter.

So I think historical trends have been pretty strong we've participated and experience some of those on freshpet.

Overall, the business has had tremendous growth despite what's really what's going on in the marketplace and we've been able to really grow through all kinds of diversity in the market I mean, it if it's a if it's a horrible recession I think it could have some impact we're watching the data literally weekly and I wouldn't tip.

Please share this much information, but we're looking across all different customers and we're seeing it go from you know the spike the trough and it goes from single digit to teens to 20 to mid twenties at some of the customers that you wouldn't expect to see quite the.

Quick quite the growth rate coming back as quickly as it has in it it looks like its responding well already I know, we're not there yet but it it looks fairly positive so far even.

Jason and I would add to that is the if you think as you think about our business and we've said this pretty consistently that <unk>, there's a very strong loyalty to freshpet once you've adopted the freshpet habit, you stick with it so.

So we think we have the loyalty for the existing franchise is not a price sensitive based nobody's buying it on deal. It's the attracting new users through the thing that becomes a little bit more difficult. If if they are into a recessionary environment or so small in the total category you know at 3 million households, with 62 million households, with dogs, we're not we're not asking ever.

Nobody to change their there their pet food and I apologize I was my dog parking in the background as we promise or would be one so but you can imagine the that for the for the number of people were trying to attract its you know it is still getting from 3 million 8 million households is arc.

All over the over the five year period, we still think Thats very doable, even if there's a little bit of an economic headwind.

Understood got it. Thank you asked I'll pass on.

Thanks, Jason.

Thanks.

Thank you. Our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.

Hi, Thank you I guess, a couple of questions about about what's going on at the plants guys.

11% absentee rate.

A car are our people feeling safe to come to work.

Have you have you tried calling up or or taking surveys to to see how they're there.

Attitude is because I think that's one of the biggest challenges at the meat packing plant so that.

People just don't feel safe.

And then secondly, you know that you're excluding the cobot cost this year, but is there a chance that at some of those cost spill over into next year as well.

And maybe even become just at a higher cost of doing business. If it means yeah, we have to.

Have higher safety methods in place for longer. Thanks, Yeah, Rob those are really good questions and as we said at the beginning you know safety of our employees is our number one priority in terms of the first question you know the why is there an 11% absenteeism rate when we talk to when we did follow up all.

The employees, who are chronically missing and ask them why is there in the vast majority the cases, it's because there is somebody at home.

It is a has some underlying health issue, where they want to do everything you can to avoid creating a risk for that person.

And so they view potentially going to work as possibly risk Weve also been communicating very aggressively with all of our employees every single week. What is that we're seeing were very transparent with the information just as we are with investors were transparent with our employees about what we're seeing and what we you know what the results have been and so far.

We are no evidence of any transmission of the virus within our employee base. It doesn't mean, they don't have it that cause that exist in the community. We exist in the North Eastern Party, United States, but we have no evidence that is transmitting in our employees seem to reinforce that but they are as you might imagine part of a community where theyre seeing this fairly broadly, but the absentee rate that we're seeing it.

As one that we can manage and we've been able to keep up with demand. We had record production in February we got into March or per March production was pretty close to where where February was in April we had good production. If you just look at the chart that we put in the in the Investor decks and fly 10, where we gave people what our shipments are for both.

March and April and remember we came in constraint on capacity constrained on our trade inventory, we shipped more than 30% of had a year ago and both of those months. So even with the absentee rate, we're able to ship it out very very high level in terms of the are these costs are going to be recurring the single biggest parts.

So those costs are the absenteeism, an incremental pay to employees. So clearly if we have to continue to do that into next year that does become a recurring costs, but we have structured them as bonuses to our employees not as an increase in the underlying wage rate and against a backdrop, where there's going to be a fairly significant amount of unemployment I don't think we'd happy.

And raise the overall wage rate the costs for the nurses and the ex the external incremental spacing and sent and the sensitization that we're doing our very minor compared to the added compensation that we're paying.

So I guess I'm, that's a long ways to improve to maintain the added.

Nurses and sanitation, we can do that without it having material effect, it's the wages and the incremental pay that's really the biggest impact and the cost of mine production time.

Got it it makes sense and and the second element I thought it was pretty important is is getting into the stores to replenish refreshes that that are running low store inventories running low.

What extra steps have you needed to take to make sure that.

I'd say, here's your your drivers or your brokers, maybe its combination right now can actually get into those stores to execute what they need to do.

Scott you want to take that yeah. So so what we do is every <unk>.

So every stores on a slightly different cadence or ever change on a slightly different cadence, but every couple of weeks, we get up a pretty full set of pictures from all the different stores, We review the pictures.

The lesson, we want to do is someone send someone into the store if we.

If we don't have inventory so we're trying to make sure that theres inventory and the warehouse inventory in the back room and then we're actually.

Going ahead, and sending people into the store to help replenish or finding is that a that this the store personnel or just so behind and then there's there are times, where they're not taking as good a care or the fridges as we'd like.

So those are really the steps, we're working with a third party that we always work with its a one of our broker partners and a an a couple of other folks that we work with a that can help get us get to retail and cover a pretty broad number of stores, where we where we need to put the pressure and assist and stocking some of those.

Those purchase.

Okay.

There's talk in our household is getting a second dogs, so well keep you updated [laughter].

Research of one person.

I think I think we see a lot of hard yeah, Yeah Big trend I think if I remember correctly, there's at least one other analysts, but I think might have gotten a pop years.

Yeah.

It's for real thank you yes.

Thank you. Our next question comes from the line of Peter Benedict with Baird. Please proceed with your question.

Oh, Hey, guys.

As you mentioned the Australian competitive.

I think.

Some of those placements in pet specialty <unk> [laughter].

I know this is.

As you get replaced.

Yeah.

<unk>.

Right.

I couldn't tell her that yeah I didn't know if it was my phone or Peters no. Peter we couldn't hear we couldn't hear your question you kind of broke up.

Berger.

Not try again.

I mean, I I think it was around to the you know the competitor or from Australia that that.

Thank you Fred I think are going to say, yes are we buying the fridges.

We actually are buying those bridges at a amortized rate.

We will we will actually end up being the owners of those fridges.

[noise] theater, you still there any.

Thank you. Our next question comes from the line of Brian Holland with D.A. Davidson. Please proceed with your question.

So I wanted to asked about the EUR 4 billion, an incremental investment specifically the advertising. So first question would be how much of that slipped my name is tied to advertising and then how do you.

How do you get comfortable with obviously, we've moved back to expect it started data kitchens 2.0, you have a surge in.

Pet adoptions, so you've pulled the addressable markets sport.

And I think it makes a ton of sense to be advertise it towards that but I I just wondering as much as I've watched the news about this trend to pet adoptions, whether it's actually a positive for you guys were not to pull for the addressable market, while you're still a bit capacity constrained. So can you walk through the comfort with increasing the advertising spend which is on.

Obviously the primary.

Catalyst for incremental revenue a your ability to support that with.

2.0, coming on and maybe you know kind of the shifting timeline of getting that'll look.

Yeah, Brian Let me talk the capacity part and then Scott will talk to you about the advertising how that would the cadence the advertising that's going to be but if you go back to that slide 10 again recognize that in in March and April we were able to ship more than 30% of had a year ago. I think you know the number we're showing there's 33% in April and 34% in March.

The problem was that it came in a surge in March and we started the year with low trade inventory because we are tightly constrained, but remember we brought on an incremental rolls line or 24, seven and back in January we brought on capacity a kitchen south in the middle of February we've got that running really well, we're bringing on a second shift the kitchen, south that'll be up.

Up and running by June Onest. So we're very comfortable that we'll have ample capacity to meet our needs as I said on the call. The only issue is that the kitchen, south is not capable of making our fresh from the kitchen product. So we could get tight on the inventory on fresh from the kitchen at the end of Q3 heading into Q4.

But we will have more than enough capacity on the overall bag business and our roasted meals business. So it would be down to a specific item as opposed to an all on overall eliminate our limited ability to supply the the bags, but I feel very good about our ability to to more than meet the needs of the bag business now that were base, we've been given a little bit.

A breather in the month of April to start catching up we'll probably be fully caught up by the end of May maybe the first week in June and once where that once we're there and we have that added capacity a kitchen, south I think we're going to be in good shape other than a little bit of tightness on pressure in the kitchen, Scott you can talk a little bit about the cadence on the advertising and why we think it's a good idea.

So a very wise gentleman reminded me about the Alamo recently.

[laughter].

Make sure to stay at your bullets or when you need them.

And the conversation was what we're trying to do is we're looking at trade inventory fridges trade inventory.

Our inventory in our and our ability to produce and what we've been producing and the incremental capacity that that's coming off that has come online and that is continuing to come online and we are trying to coordinate all of that were went the advertising will start up just literally a week or two before.

I think we're kind of getting towards more optimal a in stock levels, but keep in mind that well that means that we'll still have 80 or 90% of the French full well, we don't want to do and it takes advertising a couple weeks to continue to really build up so we're trying to started at appropriate time it.

Those were actually kind of I would say layering into it at this point, we're getting a rolling start.

Is there the balances there media is not only effective right now, but it's also very cost effective.

So it's we're getting a great response to the media, but it's also very cost effective in order to run. It. So we want to take advantage of that as much as possible, but we also don't want to drive people to fridges that are empty. So we are coordinating all those activities I will tell you, it's not going to be perfect. In every case, but we're doing everything we can and in addition, we're trying to put a couple of those E Commerce program.

Which still we mentioned a and B we have some of its its mentioned in the slide we're putting some additional ecommerce programs in place where if people are going to retail and their frustrated we're trying to help them out and make sure that they can find the product.

Okay. Thanks, just the last one for me.

I guess with respect to be do this spike in pet adoption.

What do you know at this point about the composition of these new pet parents or maybe to the extent that they're bringing second pets into the home, but I mean this is this a base that's right in your wheelhouse, maybe younger consumers smaller dogs more likely to spend their premiumize level.

And I understand that a lot of this maybe just to search it though but just curious if you have any insight or what level of engagement you might have had from new customers, even those who might not have adopted yet either through the web site or any other forms.

It's a is that you got it is a pretty broad group that seems to be adopting I think from what we can tell so far it looks like the group, where there was a little bit more of an over indexed seem to be professional people for the most part its a unique time, where their home or both of them whether it's a there.

Home or them in their spouse or home and its unique time for them to be able to adopt a pet added to their family and be able to have it where they can train. The dog you know everyone's home. The kids are home. The parents are hung set our so it's it's kind of unique opportunity and I think lot of people are taking advantage of it.

I think there's going to be a lot of people that.

That that should be will be really perfect for the other thing we're seeing a lot of is not the first pet it's actually a lot of people, adding a second.

Im going to end for those people that are highly involved pet owners typically we love to see especially smaller dogs.

Multiple household multiple household some is really kind of perfect written the sweet spot of our target. So.

Now, we Gotta go tell them about freshpet and bring them into the brand.

We it was mentioned too, but the the advertising spot that we developed which was a great job by the marketing team and our agency called home is terrific. There's actually another spot that's going to be called delivered and you can imagine what that's about a being launched in the very near future too so were.

Really trying to be very quick and nimble to respond to what's going on in the environment and make sure that we're not really just coming out of this where basically launching out of what's going on with Cove, it and positioning ourselves as best as we can I'm into the future.

Thank you. Our next question comes from the line of Rupesh part with Oppenheimer. Please proceed with your question.

Good afternoon, and thanks for taking my questions I'm, just going back to I guess.

Hey, Bill you just going back to guess new household acquisition.

So obviously, it's more challenging go in a grocery stores. So just curious like as you guys look out new household acquisition like how important is our in store experience excimer <unk> senior bridge versus the opportunity do on media side.

He's been media's bigger, but just want to get us on so.

Now how it out it slips out.

It's a good question <unk> patch. The simplest thing is to say that it obviously is the culmination of multiple things advertising, creating awareness visibility in the store hearing about it from a friend, but if you take a look at when our advertising is on the air and when our penetration goes up you can see they match up pretty darn close way so.

So you know we go on air you start seeing the out the household penetration go go up and we look at we get the data on a weekly basis, and obviously weekly is not the best indicator and there's a lag effect, but we can see pretty clearly that advertising is the primary driver of the increases in household penetration. The next question is gonna be though is one.

She become aware you want to buy it what is your preferred way buying it. We did include a chart in our investor deck on slide nine that talks about how that's changed a little bit on how there is an emerging interest in E. Commerce, it's coming out of this it there obviously was before it's an even bigger interest and that's why we put together these programs and it's a collection of programs.

Thats got referred to that are designed to make it easier for the person who says I really don't want to go into a store, but I want to try to freshpet and they can find it in a variety of different ways to go to our website you can see some of the options are available. So I think that the biggest driver here is going to be the advertising, but we do need to make it available in a way in which they want to buy it.

And that's all probably yes.

And so then so I think that's overall exactly how the model works, it's definitely the advertising driven thinking about frigid as as we add a lot of fridges, it's a multiplier effect and the thing that the two things to consider is in the beginning of the year. We the fridges that we added were very high ACB fridges right. So they were a lot of fridges at like went into a.

Walmart they were on a Walmart or nine cap and then the fridges, we're adding our we're adding a lot of second fridges. In addition to a new fridges you know for the total year. If you. If you just if you take away new stores for a second just say fridges installed we're actually going to be basically right on where our fridge number would be with incremental second fridges. So.

So I think we've got that working the second thing is how does how does the advertising work within this environment and again I don't like to look at a weekly data by any means but what we've done as an addition to Nielsen a lot of our retailers have really exceptional data where they can look at how consumers are coming into the brand and we've been able to see like exactly like when we.

Even advertising how consumers are coming in how there was basically this big Spike, which is mostly a stock up trip as Billy mentioned earlier, where was the drop off and then we're actually seeing the penetration start to build them literally as a 10 10 15 days ago. We can see the penetration is starting to build again, even though we're really not advertising at this point there is some residual.

No effect and so we'll watch it closely as the advertising comes back on there, but the web response to the advertising has been the best we've ever seen.

Okay, Great I'll pass it along thank you.

Thank you. Our next question comes from the line a Bill Chappell Suntrust. Please proceed with your question.

Hey, Thanks for squeezing me in I guess.

Two questions both around guidance on the top line I don't I guess that I know you're comfortable with at least 300 million sales, but is you know that's a lot of lot of their room is that an increase you think from where we stood at three months ago, a decrease or you know it's too early to tell I'm just trying to understood.

I'm kind of what that means.

Over the past three months of the environment.

So you know the guidances for greater than 310 million and we decided to make the incremental investments to ensure that we've made full use of our capacity and came north to that number yeah Bill it's not it's not as precise.

Sciences, we would like and probably as others would like it to be as well because you know, it's kinda fluid environment, but our confidence level about our ability to clear the to clear the three tenants we've given its guidance with the programs you put in places I'd say, where it was before hand. It just has taken us having to adapt to the environment in order to deliver that.

Frankly, though you have to also remember back at the beginning of year, we picked up the Walmart stores. The advertising was over delivering for US we had a real head of steam and we you know we saw this crisis comment it kind of slowed us down a little bit and because you know consumer shrunken out and go out and try new things and that's why we created this program that we're calling yard.

Breakout plan, so that you come out of it with the same momentum that you went into it you are put in place things that reflect the current environment you spend against things that are proven to grow for us and you come out and you just charge ahead, and we think that that plan and the data and the metrics. We've got support that where you know were in excess of $310 million for the year.

So it kind of doesn't my second question and then what you're saying is you may not have gotten to that without the incremental $4 million spend and then within that 4 million is that the right way to look at it appears spending more because Doug about lower AD rates you look maybe some other positives you've pushed pushed out some.

The spending that would've happened by these past few quarters to the back half. So I'm just trying understand is that.

One is that we needed that extra $4 million hit to EBITDA to get to our sales number and two is it a $4 million number is net <unk> is it kind of net 4 million there other positives and negatives to get to that 4 million well. There are always a bunch of puts and takes in there, but as you think about it the things that way.

We are having delayed the two other things are delayed or things that are not you know personnel items you know the capex it goes with with the fridges.

And the reduced number of on new stores that come with that and then the new product investment we already did all the R&D work, we created the products, we had I'm ready to go and they just are delayed and getting out in the market and so there's no personnel savings from doing those things, but there is to replace them. There is a piano expense for getting the you know the third party.

Into the stores buying the advertising do somewhat during some of the advertising support that is going with the E. Commerce program. So we aren't away changing exchanging some capex.

I didn't related items or some investments that were previously made for investments we're making this year, but you know your question was would you have gotten there. The answer is we feel higher degree of confidence and getting there with this with this new plan. We wouldn't have had to do this if we hadn't had the retail retail disruption it's just.

It's very clear we would've preferred to go the other way, but we feel very good about this plan and we just think there's other things are delayed we will get those retailers are telling us. They believe in this category. They want to cool get those will just get them at a later time and so we thought it's our best interest to grow and to use the capacity that we have available to us and that's why we were making those investments.

Okay, great. Thanks.

[noise]. Thank you our next question comes.

Comes from the line I'm still struggling with Bank of America. Please proceed with your question.

Hi, Good afternoon, it's Brian Blaine.

Hey, Brian.

So just just one question for me.

Just a couple of time.

Just sneak in talking about maybe the merchandising getting people into the store to stop the cooler. So it wasn't clear to me we're at a stocking issue in the first quarter and are they are they in issue now and I guess, what I'm trying to get out is.

If they are or your sales at all being impeded right now just by maintaining good in stock levels in store.

You want to take that one.

Yeah, I through I would say before we knew what covert and social distancing was our in stock levels for being.

Impacted unquestionably, but it really you can you can kind of see it in whether its pictures or many of the ways that we track in stock levels and availability.

We definitely if we had had those products in Q1 would have been a would've been a bigger number I'm questioning your January and February would've been a one of that a bigger number then you on top of that you add the the coated the crisis that surge and being kind of low on inventory and being behind it.

It exacerbated the problem and I would say fridges or the worst but right now that we've really ever seen them I think they're getting better from where the two weeks ago and I think they'll progress significantly over the next two to three weeks, but theyre unquestionably the worst than we've ever seen some people will go to another item a lot of times cheaper going Oh, you know washed.

They didn't have it at this like in a typical purchase cycle like Oh, they didn't have it today, but I'm back here in two days I'll get it then and that's not happening right now because people are not shopping quite as frequently in general so they're getting there having overall bigger baskets bigger bigger shopping trips and less frequent shop.

So we think it's really hurting us and to be able to deliver and have the numbers, where they are I think we're feeling pretty positive we've got to get the I mean, if the top of the list is we've got to get the inventory built back up and the team is working 24, seven or to do that the next pieces get retail improved and right and.

The next piece will be add the advertising and into the mix and continue to kind of accelerate growth.

Through this through this quarter, Brian Louis metrics on that for you then in January 8% of Freshpet users booked would tell you they were having difficulty finding the item. They wanted it by the second week of April when the search it happened it was 32% of Freshpet users and as of this weekend, it's down to 15%. So it was.

You know not where we wanted to be it's gotten better, but we still we still have a little bit of time to go to we get back to a level that we all feel comfortable with yes, no that that's very helpful. And then just closing the gap is a function of I think you mentioned previously earlier in the call that you're bringing on some more third party helps to.

To help with that in store merchandising so is that really to the.

The physical sort of aspect of closing that gap is that just getting those those extra hands in the coolers.

So the elements you have to do as Scott said. It is you have to first build to supply well now that the you know there's we're in this trough where Nielsen consumption for the last four weeks is up 10%, but we've been able to produce at a rate level that is call. It 30 plus percent above the above year ago, We're now able to start rebuilding some.

Of our internal supply and our customer supply to you know in essence get the trade inventory right, but it starts with getting our supply right. The second is to get the store right to get it to position where the retailers are able to pull the product through they have the labor. They have the time, a they can get it get it into the fridges and that's what the incremental effort is that we.

Want to put in place because frankly, the retailers are scrambling to keep up with all the increased demand that they've got the higher sanitation the more needs to protect their employees and their shoppers. So we want to supplement that to get sort of pick up the carnage, that's happened and get it back to where we would like it to be going forward and then the third part is the consumer.

Sure and used to be gotten to the right place we feel pretty good about that that's that's in the right place we've gone through the trough would come back up out of that so supply is getting there it'll be there in sometime in the in the next call. It four weeks or so and then the stores will be fixed in sometime in the next month or two.

Okay, great thanks for that color.

Yep.

Thank you. Our next question comes from the line of Jon Andersen with William Blair. Please proceed with your question.

Thanks, Good afternoon everybody.

Hi, there.

Hey.

Couple of quick ones one on.

Supply.

A key inputs ingredients I'm thinking here also largely of kind of some of the proteins that are important parts of your cost of goods can you talk broadly about both pricing and availability.

On the supply side, and you know to what extent.

You see this as a.

The risk factor or potential swing factor as you as you look to the kind of the full year outlook.

Yeah. So as you know a John the biggest input we use is chicken, we price or chicken once a year. So we price it in December for the rest for the for the following year.

And so we have our chicken price locked.

We also have gone to great lengths over the last couple of years to build out the base of our supply. So for every one of our suppliers. We put in place a are critical suppliers, who put in place a backup supplier who is capable of meeting our needs and we've had to do that on in some cases, we've had to go to backup suppliers, particularly in the areas.

Proteins Flake, we also will store some frozen protein inventory, we obviously like to use the fresh the bulk of the time, but we do keep some frozen available in case, we end up really tight. So at this point, we havent had any a interruptions are any of our productions interrupted by the lack of availability.

But we have we've been able to keep up with it there is gonna be some pricing flexibility or pricing issues that we'll see a potentially on the you know the the beef and pork, but at the same time, we have other things that we'll look at that might be an offset which are things potentially like.

You could see the oil costs are energy cost. So we have maybe offset.

Great.

One other follow up on the.

Ecommerce part of your business I know, it's a relatively modest part of your business today, 3% or so but growing rapidly as you pointed out.

And with the additional interest in online purchasing a you'd I'm just wondering how you would kind of characterize your position vs. I'd be competitors, it's different for you because of the.

Fresh nature of your product but.

Could you put any more color around maybe some of the initiatives. The efforts that you talked about where these planned prior to co bid or are they new have they been accelerated and then you're just what you're doing it kind of make sure you capture your fair share of the this growth because it does seem like it's more permanent thanks.

Yes.

And Scott you want to take that yeah yeah.

So so John the the first thing that we did as immediately as we could we have a fair amount of E commerce initiatives underway and we think about E. Commerce. If you break them out into delivered on my home or pick up at curbside.

Think about instacart from deliver to my home or Amazonfresh or ships those scenarios freshdirect peapod et cetera, and then the other initiatives are all that click and collect click <unk> pick where its Walmart Kroger et cetera. So we did as much as we could to push consumers into that direction, because we know what's a little bit more accessible on that too.

Basically will come with existing shopping trips.

The next thing we did was we actually implemented what we call the DTC SLS program, where we literally from scratch.

I think we decided.

I'm going to say was probably March 10th that we wanted to put this program into place comment it's actually going to launch next week at lunch on Monday, where I'd just for a very select number of items, we're actually going to do some direct to consumer offer for a period of time and because we know we have consumers that are still having trouble finding the product. So we're doing with.

You know we're dealing with that piece and then we are also continuing to evaluate and look at other ecommerce programs.

That we can potentially deliver our products through now the last piece that's coming on is we're actually going to be putting on some advertising, which I I mentioned and I'm going to go which is called the liver well on the on those ads will will literally have at the end where to buy and it'll have a deliver to my homework.

Our clicking click <unk> pick or click and collect and all showed the logos are the retailers that have those services. So I would say that if you over the past several years online or or the direct to consumer online growth online delivery to home has increased dramatically we've been able to grow.

Through that I think we're still confident that we can grow very well, but we also want to make sure that were available anyway. The consumer wants the bias and we're rapidly accelerating our work in that area.

Great. Thanks, so much for all the detail. Thank you.

Thank you. Our final question comes from the line of Mark Astra can with Stifel. Please proceed with your question.

Mark Maki technically if your line is on meal.

Can you guys Jeremy.

Yeah, we can.

Sorry about that.

Good afternoon guys.

I wanted to let you know by the way before the question is the first one I've listened to with your customer in the room and he seems very board.

[laughter].

On that note so two questions maybe sort of related.

Customer acquisition cost and the current environment, maybe Scott how do you think about.

That in terms of what it looks like versus what your original expectations were and then as the other kind of bucket to sales growth how do you think about.

Buying rate in 2020 relative to what expectations were you're on your internal ones versus what we all have kind of thought we'd think about things like roles versus bags in terms. What you said about what you have capacity wise and then where did that come out if you think about the average between 2020 and kind of.

25 to get to those numbers, where would we be in 2020. It would seem like we're on the lower into that but I just wanted to kind of walk through those puts and takes.

So on the advertising piece, we've had a couple of glimpses into this and from what we can tell at this point the advertising seems to be very very very high responses to the advertising a better better response than we've ever seen and part of that's creative but part of it is just a lot of people.

Watching TV and seem to be very very attentive I mean, I think that the reality is we're spending more time with their pets, and I think people or little bit more cognizant of it. So we've seen great. Great response rates. The other thing we're seeing is that lower media costs.

It looks like it could be anywhere between 10% to 15% lower media costs, which I mean that they'll make a significant impact.

And how the you know the us our attaining new consumers on what the cost per consumer acquisition is.

I don't have a new number in place yet I think it's going to be kind of another probably couple of months until we get a really good handle on exactly where that is I would expect that it would be neutral to potentially down but we just don't know that at this point.

So then on the on the buying rate piece I think it will be interesting to kind of see how that plays out the thing we have seen is that although.

And we've watched this literally every single week when we had that those covert weeks, we actually saw the buying rate spike way up because it really was stock up it was an incremental consumers at that point then we saw a dropdown we saw penetration kind of drop off.

During the that kind of month of March really in a into until early April.

And then it's then it looks like it's starting to kind of respond back and kind of move move up.

On the penetration and both the binding rate piece, so I don't know where it exactly going to be.

It's it's finishing that buying rate held up as well as it did when we are bags, which are the most.

Expensive items through Q1 have been the items that we've been the shortest on and have been really somewhat scarce quite honestly some of our products. So I don't actually we have Oh go ahead.

I just going to amplify that last point because the thing that we were tightest on capacity and the reason we put kitchen south in place was our small dog. We are now back fully in supply and on the small dog item and that has been a very big driver for us a penetration and buying rate because the consumer buys it tends to buy it and use it as a complete replacement and they often.

Times have multiple dogs in the household and it's a fairly premium on a price per pound basis. So even though they don't eat as much there is a fairly good buying rate that we get out of those households, and we're now back fully in supply met business grew 60% last year was growing 60%, even when we were constrained.

Now that were not constrained on that item would be kitchen, south being in place that's going to be a big contributor for us.

Great. Thanks, guys.

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Thank you we have reached the end of the question and answer session I'd like to turn the call back over to management for any closing remarks.

Yeah, just thank you all for your interest obviously these are unusual time. So I'll leave you with one thought dogs are not a whole life, but they make our lives hole and that's from Roger Caris. The a pet advocated photographer writer so feed them freshpet and their lives will be whole too. Thank you for your time.

Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

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