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Freshpet Inc  (NASDAQ:FRPT)
Q4 2018 Earnings Conference Call
Feb. 26, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to Freshpet Inc Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Katie Turner for opening remarks. Please go ahead.

Katie M. Turner -- Managing Director

Thank you. Good afternoon and welcome to Freshpet's fourth quarter 2018 earnings conference call. On today's call are Billy Cyr, Chief Executive Officer; and Dick Kassar, Chief Financial Officer; Scott Morris, Chief Operating Officer, will also be available for Q&A.

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

Today, to accompany management's discussion, there are presentation slides available on the Investors section of Freshpet's website at www.freshpet.com. If you've not accessed the presentation, we welcome you to do so at this time. Please note that on today's call, management will refer to certain non-GAAP financial measures, such as EBITDA and adjusted EBITDA, among others. While the Company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP.

Finally, this call is one week earlier than we've previously held our annual earnings call. Because the Company crossed the market capitalization fresh threshold that required it to become a large accelerated filer at mid-year 2018. As a result, when the Company files its 10-K later this week, it will have completed its work to be SEC's compliant.

Now I'd like to turn the call over to Billy Cyr, Chief Executive Officer.

William Cyr -- Chief Executive Officer

Thank you, Katie, and good afternoon everyone. To begin, I'll provide an overview of our financial highlights and recent business performance and then provide an overview of our 2019 strategic plan. Then Dick will provide greater detail on our financial results and our financial guidance for 2019. Finally, Dick, Scott and I will be available to answer your questions. We're very pleased with our strong finish to 2018. In the fourth quarter, our net sales momentum continued behind our Feed the Growth plan. We were able to generate solid leverage across our scalable business model and convert our net sales growth to meaningful adjusted EBITDA that matter for financial commitments for the year.

Slide number four. The highlights of the quarter was the strong broad-based 30% top line growth. Mega-Channel consumption was up 29.3% behind 38.8% growth in grocery, 24.8% in the Mass portion of XAOC and 19.7% in big box pet. Same-store sales velocity growth accounted for more than 70% of the year-on-year growth. Our core dog business, which is the sum of our dog rolls, roasted meals and Fresh From The Kitchen main meal items, was up 34% in the quarter. Our small but rapidly growing e-commerce business was up 89% in the quarter and now accounts for 1.7% of our business. More than 80% of that business utilized our in-store fridge network.

Slide number five. We ended the year with total household penetration of 2.04%, up 17% versus year ago and our core dog household penetration was 1.51%, up 31% versus year ago. Buying rate continued to grow in 2018 breaking $100 for the first time and more than $105, up 10% versus year ago.

Slide number six. For the year, we delivered a $193.2 million in net sales up 27% versus year ago and ahead of our greater than $190 million guidance. This result puts us well on track toward delivering our $300 million 2020 goal. Again, the growth was broad based with all classes of trade demonstrating greater than 20% growth and grocery providing the strongest growth at 35.4%. Adjusted EBITDA in the quarter was $9.2 million, up 34% versus year ago, demonstrating the Company's ability to convert top line revenue growth into an accelerating bottom line through increased fixed cost absorption.

Adjusted EBITDA for fiscal year '18 was $20.3 million, up 16% versus year ago and in-line with our guidance. Adjusted gross margin in the quarter was 49.4% due to higher commodity costs, mix and the incremental staffing to convert two more lines to 24/7 production. It is important to note that while we absorbed higher costs for raw materials and staffing in 2018, we also delivered a 140 basis points of plant cost, yield and throughput improvements in the year despite the challenges of an increased bagged mix. As we outlined in our January Investor Presentation, we have a multi-pronged plan to restore the gross margin as we move through 2019. I'll provide more details on that later.

Slide number seven. We made very good progress on delivering the fixed cost leverage in SG&A that we promised as part of our 2020 plan. Recall, we committed to deliver 700 basis points of fixed cost leverage in SG&A between the end of 2016 and 2020. In 2018, we picked up 240 basis points that we reinvested in higher media spending to drive further growth.

Slide number eight. We ended the year with 19,499 stores and had upgraded 805 fridges during the year. At the same time, in Q4, we grew 1% ACV by 7% to 45.6% and total distribution points TDPs grew 10%, reflecting both our expanding store count and an increasing number of SKUs in distribution in each store. In summary, we believe that 2018 was a very successful year and puts us on track to deliver the 2020 goals we laid out as part of our Feed the Growth plan two years ago. Recall, our Feed the Growth plan is designed to accelerate Freshpet's rate of growth, enabling us to fulfill our mission of providing more pets with fresh all-natural foods that enrich their lives and their relationships with their pet parents. We're committed to doing so in ways that are good for our pets, for people and for our planet.

Slide number nine. In the pursuit of our mission, we expect to deliver significant value to all of our stakeholders. We will accomplish this by creating a virtuous cycle where increased investment in advertising drives increasing scale that we can use to drive greater distribution, increased manufacturing utilization and efficiency and better leverages our organizational capacity. We expect this will produce increased financial returns that we can use to drive further growth and long-term profitability enabling us to serve more pets.

Slide number 10. In 2019, we will capitalize on 2018's momentum to keep driving our top line and will bring further improvements to our bottom line.

Slide number 11. Last year's strong performance has carried into 2019 and gotten us off to a fast start with Nielsen measured consumption in the Mega-Channel, up 26.8% year to date on top of last year's already strong 24.4% growth during the same period. Our plan for 2019 continues the key drivers of the Feed the Growth plan and digs deeper in each of the key focus areas.

Slide number 12. There are five key elements to the plan. In the next few pages, I'll describe our objectives and each of the elements described on this summary page.

Slide number 13. Expand the Freshpet consumer franchise. We will continue to invest in media as our primary vehicle for expanding awareness and household penetration. Increasing our media investment, again, in-line with sales growth and maintaining the 11% plus of sales spending rate in the US. We expect to spend approximately $27 million in US media. This will drive our household penetration, up from its current 2.04% and will further increase our buying rate. The media plan builds on new learnings we gained in 2018 and also includes additional tests that will better prepare us for 2020 and beyond.

Slide number 14. Additionally, our innovation program is designed to further extend household penetration as it did last year. We had great success behind our small dog initiative and a launch of multi-protein roasted meals. This year we are extending the multi-protein benefits with the launch of our multi-protein roll. We are also beginning to target pet parents who cook for their dogs with the introduction of Freshpet Homestyle Creations, a meal kit that allows the consumer to choose their protein and separately choose a mixer to create a home cooking experience with the Freshpet quality and nutrition. Up to 14% of calories consumed by dogs today come from sources other than commercial pet food with home cooking being one of the largest contributors. We believe Homestyle Creations is a good alternative for pet parents who want that experience. This product will go into limited distribution this year only in stores where we are adding a second fridge. We expect both Homestyle Creations and the multi-protein roll to further expand the Freshpet consumer franchise.

Number two, on slide 15. Strengthen Freshpet's retail presence. The strong momentum we have with our customers will be converted to continued improvements in our retail presence. Two years ago, we are focused on new store acquisition which is best expressed in ACV growth. Last year, we committed to upgrading 1,000 fridges by the end of Q1 of this year and we are on track to deliver that. This year we are adding a new dimension of retail enhancement, second fridges and some of our largest and most productive retail outlets to further expand the visibility, awareness, and availability of Freshpet and enabling further broadening of our product offerings. We're doing this under a program we call Fresh First, which is a retail and consumer concept that encourages people to plan their pets meals around the fresh components first, just as we do with food for the rest of our family. This concept also demonstrates to our customers, the financial and strategic value of building their pet food category around the rapidly emerging fresh segment.

During 2019, we expect to see some of our leading customers begin to implement key elements of this plan. In total, we expect to add 1,500 to 1,600 net new stores, increasing ACV about 7%. Further, we expect to upgrade an additional 500 stores to larger fridges and place the second fridges in 800 stores. We believe this expanded retail presence will enhance the effectiveness of our advertising investment and help drive an increase in household penetration and buying rate.

Number three, slide 16. Strengthen adjusted gross margin and adjusted EBITDA margin. As I indicated earlier, we are taking a multi-pronged approach to improving our margins. The first step is pricing. We have selectively raised prices on targeted items that have both the need for higher margins and also pricing flexibility, while no individual item experienced a 2% price increase, the average impact across the entire Freshpet line is 2%. That price increase went into effect earlier this month and will begin to benefit our margins at the tail end of Q1 and will be fully reflected in Q2.

The second step is product innovation. We are introducing several new items that have better than line average margins. Those new items will begin shipping in late Q1 and into Q2. We will see the impact of those launches in the latter part of Q2 and into Q3. Third, while we are continuing to hire incremental staffing, this includes hiring another 40 people in Q1 to begin to convert our fourth line to a 24/7 operation. We will have the bulk of that hiring and training completed by the end of Q2 and we'll begin to realize the benefit of that increased productivity in Q3.

Additionally, we are continuing to drive ongoing yield and throughput gains and that will increasingly approve -- improve our margin. We expect our adjusted gross margin for the year to average 50%, but due to the timing of the benefits that I outlined, we expect to end the year in excess of 51%. This will position us well to deliver our 52% gross margin target in 2020.

Slide number 17. Finally, we expected to continue driving SG&A absorption improvement gains. We will pick up 240 basis points of fixed cost leverage in SG&A, that means, we will delivered a total of 500 basis points of fixed cost leverage since 2016 and will need a comparable amount of progress about 200 basis point in 2020 to deliver the 700 basis points of fixed cost leverage in our 2020 SG&A goal.

Fourth, slide number 18. Continue measured development in Canada and the UK. In 2018 we completed our validation work in both Canada and the UK. Our 2019 plan calls for a modest incremental investment of about $2 million, largely focused on media to begin to drive the awareness needed to support our fledgling distribution and to encourage customers to expand their distribution of Freshpet in those two countries. We believe this is both a manageable investment and the right time to make it as we proceed in a measured way down the path toward creating a long-term growth engine outside the US beyond 2020.

Fifth, slide number 19. Build capability to support accelerated longer term capacity expansion. It has become apparent, that the single greatest limiter to our growth and that's the long-term value creation potential of Freshpet is our ability to add capacity fast enough to keep up with the demand we can generate. As many of you know, we expect to have to limit our investments in growth in 2020 to glide into the start-up of our next increment of capacity in mid 2020. You also know that we plan to accelerate our growth to fill that new capacity as quickly as possible once it comes online and believe that Freshpet can sustain an elevated growth rate for quite some time afterwards, due to our very low household penetration and strong product performance that drives increasing buying rates.

Further, we continue to see strong customer support for increased retail availability that can drive our distribution well above 50% ACV. To support that, we will need to accelerate our investment in the organizational capability to build incremental capacity and maximize its productivity. We're the only people who know how to make Freshpet. So we need to continue investing in technical bench strength to ensure our ability to meet the long-term demand for Freshpet that we believe is possible. As such, we have decided to pull forward into 2019 organizational capability investments originally planned for 2020 so that we can continue to accelerate Freshpet's growth in 2020 and beyond. This includes hiring several new technically skilled employees who will assume responsibility for increasing the throughput of our existing capacity, identifying incremental efficiency and reliability improvements, improving quality and planning our next manufacturing site slated to start up in late 2022 or early 2023.

In total, we expect to increase staffing costs in 2019 by up to 1 million to support more rapid and reliable growth. As I said, this is spending we originally planned for 2020. So we are just pulling forward to spending by one year and do not expect this increase in spending to impact our ability to deliver our 2020 goals, thus there is no change in the underlying profitability of the model and we will put ourselves in a position to drive accelerated growth well beyond 2020.

Slide 20. In total, this plan will continue our strong top line net sales growth and for the first time deliver adjusted EBITDA growth in excess of our top line growth. We are projecting net sales of greater than $240 million plus 24% versus year ago and adjusted EBITDA of greater than $28 million plus 38% versus year ago. If you exclude the incremental investments in the international markets and the accelerated staffing to support long-term capacity growth, adjusted EBITDA would be up more than 50% and we believe those are prudent investments to make now to support long-term growth and value creation.

Slide number 21. We believe these results will put us on track to deliver our 2020 goals. I suspect most of you can now clearly see the path to $300 million based on our strong sustained growth and continued investment and proven growth vehicles. I also suspect that some of you are wondering how we will be able to get to the 2020 adjusted EBITDA goal of $60 million as we will need to increase our adjusted EBITDA growth rate to slightly more than 100% in 2020. Dick will provide more detail on that, but we believe we are on that trajectory. The combination of the improving gross margin, increased SG&A absorption and higher net sales will get us to our goal.

Before I turn it over to Dick, I want to offer a brief update on our Kitchens 2.0 capacity expansion program that we announced in August. We are in the final stages of the permitting process and hope to break ground within the next month or two. This puts us on schedule to deliver the capacity expansion on the timetable we committed with start-up scheduled for the second half of 2020. We are also on track to deliver the project at the targeted cost of $100 million plus or minus 5%. Finally, I want to be sure that all of you saw our announcement in late January, about the retirement of Chris Harned from our Board and the addition of Jacki Kelley to the Board. Chris has been a valuable advisor to the Freshpet management team since the company was formed in 2006. And we greatly appreciate his long and dedicated service. We are also very excited by the addition of Jacki to the Board. Jacki is a savvy marketer who has successfully operated in the digital economy for a significant part of her career. We are thrilled to have her on board.

I will now turn it over to Dick to discuss our Q4 financials and our 2019 guidance.

Richard Kassar -- Chief Financial Officer

Thank you, Billy, and good afternoon everyone.

Slide 22. As Billy indicated, net sales in the quarter were $51.6 million, up 30% versus the year ago period. I would like to remind you that we adopted new revenue recognition standards in 2018 so the net sales in the prior year quarter four was $39.8 million under the new standards. This continued acceleration of the Freshpet growth rate is the result of the increased investment we made in advertising this year, the strength of our product innovation program and continued improvement in our retail presence. The strength of our product innovation is most evident in our mix. As our bags business grew rapidly more than double the rate of the balance of the business and this contributed to the better than expected net sales. We ended the year with $193.2 million in net sales up 27% versus year ago and ahead of our most recent guidance.

Slide 23. Prior to discussing the rest of the results, I want to inform you a slight change we made on how we define adjusted gross margin and adjusted SG&A to drive greater transparency when presenting our progress. The changes we are making better align all of our non-GAAP measures add backs within adjusted gross profit, adjusted SG&A and adjusted EBITDA so that under our new format the reader can subtract adjusted SG&A from adjusted gross profit come up with our adjusted EBITDA. This will ensure the reader is better able to assess where our adjusted EBITDA margin increases come from, gross margin or SG&A leverage.

Slide 24. Adjusted gross margin for the quarter was 49.4%, down 140 basis points from the year ago period. The driver of the reduction in gross margin, a very consistent with the issues we highlighted in quarter three. A 150 basis points is the added cost in quarter four from the hiring of additional 50 people in quarter four to support our move to seven-day production on two more lines. We successfully started the seven-day schedule as on one line in mid-September, and another two in mid-January. As Billy mentioned, we're now hiring additional 40 people to begin converting our last line to seven-day production in quarter two.

Second, we absorbed a 170 basis points in commodity and inbound freight inflation versus year ago and in total we absorbed approximately $3.3 million from higher commodity costs in 2018. We have now taken pricing to offset a significant part of this inflation and we'll see the benefits in quarter two and beyond. Third, in quarter four, we absorbed 70 basis points versus a year ago due to a mix shift within our core dog products, which is 20 basis points more than in quarter three. The rapid growth of our bagged products resulted in stronger than expected sales growth and a positive impact on gross profit per pound, but also a negative impact on adjusted gross margin. Finally, our manufacturing team continued to make good progress on driving operating efficiencies in our lines, delivering 250 basis points of yield and throughput versus a year ago in the quarter. We expect to continue making that kind of progress in 2019 as we grow into our scale and relentlessly focus on driving efficiencies.

Slide 25. Adjusted SG&A in the quarter was $16.3 million or 31.5% of net sales, an improvement of 200 basis points over the prior year. The improvement in adjusted SG&A leverage was a result of fixed cost absorption of 490 basis points versus a year ago offset by increased media investments of 290 basis points versus a year ago. In total, we have now gained 260 basis points of fixed cost leverage in SG&A toward the 700 basis points we promised for 2020 in our Feed the Growth plan. Adjusted EBITDA in the quarter was $9.2 million, up $2.5 million from a year ago period, driven by the increase in revenue. Our adjusted EBITDA for the year was $20.3 million, consistent with our guidance. We ended the year with no debt and $7.6 million in cash. We did invest $800,000 of capital against Kitchens 2.0 in the quarter and our total spending on that project to date is $2.1 million. For the year we produced $18.6 million in cash from operations.

Slide 26. Looking ahead to 2019, our guidance is as follows. Net sales greater than $240 million, up 24% versus a year ago, adjusted EBITDA, greater than $28 million, up 39% versus a year ago. The adjusted EBITDA includes two incremental investments. $2 million for international development efforts largely media spending in Canada and UK and approximately $1 million to support the hiring of additional technical staffing to support an acceleration in our capacity expansion and improvement efforts. Without these added investments, our adjusted EBITDA guidance would be more -- up more than 50%. The cadence of the EBITDA will be impacted by continued front-loading of our media investment consistent with our past practices. In particular, our quarter one media investment will be quite heavy as we continue to drive expansion of Freshpet's household penetration.

Slide 27. Backloaded improvements in adjusted gross margin behind a series of initiatives, Billy outlined. We expect to start 2019 with adjusted gross margin where we finished 2018 and then have a good line of sight to gradually build back and end the year in excess of 51%. The price increases are now in the market, but we will not feel a significant benefit until quarter two. The higher margin innovations will launch in quarter two, so we will feel some impact from them in that quarter, but the bulk of that impact will begin in quarter three. We will continue to absorb higher staffing and training costs until we convert our fourth line to a seven-day operation in the middle of quarter two and we'll begin to get much benefit until quarter three.

Thus, in total, you should expect to see improvements in our gross margin begin in quarter three and accelerate from there. As Billy indicated, we believe that we are well positioned to deliver our 2020 goals. We believe our current strong growth rate supports our ability to deliver the revenue target we have set. So I want to focus on how we will get to our $60 million in adjusted EBITDA goal.

To do that, I have produced a bridge that you can find on slide 28. First, a $300 million in net sales we will generate $24 million more in contribution then we will at $240 million based on our 40% contribution margin. Secondly, the plan we are implementing this year will put us at 51% plus adjusted gross margin by quarter four and we'll add another 100 basis points as we scale into the business at $300 million. That adds 200 basis points to where we expect to be in 2019 or another $6 million in contribution. Third, we expect 50 basis point improvements in freight and brokerage use scale worth another $1.5 million.

Annual increases in G&A would be offset by reduction in the incremental investments we're making internationally or an increase in the profitability of those markets with added scale. In total, that delivers a slightly more than $60 million of adjusted EBITDA. In 2019, we expect to produce $23 million in operating cash flow. At this point, we believe that the maximum draw in our bank lines to support the Kitchens 2.0 project will be approximately $60 million and we'll reach that point until early 2020.

In conclusion, we believe we are on the right path to delivering strong year-on-year growth and beginning to demonstrate our ability to grow into our scale by delivering adjusted EBITDA growth in excess of net sales growth. And we are doing this while simultaneously making strategic investments to drive long-term growth and profitability for the business that would create meaningful shareholder value.

That concludes our overview. We will now be glad to take your questions. Operator?

Questions and Answers:

Operator

Thank you. At this time, we will be conducting a question-and-answer session. (Operator instructions) Our first question comes from the line of Rupesh Parikh with Oppenheimer & Company. Please proceed with your question.

Erica Eiler -- Oppenheimer & Company -- Analyst

Good afternoon. This is actually Erica Eiler on for Rupesh. Thanks for taking our questions. So, I was hoping maybe you could talk a little bit more about the price increases you've taken. How are they playing out so far versus your expectations? Are there any early signs of consumer push back or consumers accepting those price increases? Just any color you could share there would be super helpful.

Scott Morris -- President and Chief Operating Officer

Certainly. Hey, Erica, it's Scott. So the pricing that we put in place was about a 2.1% price increase across the entire line. It was focused on a handful of bag items which are tend to be our lower margin products. Those have been implemented through the trade at this point, they've been well accepted across the trade, there's been really no pushback whatsoever. And we've seen some pricing go up, it was effective 2.4%. We have seen some retail pricing go up, it is very early, but the initial read is very positive. Units look to be staying flat at this point, because we get to see kind of almost immediate PoS across several of our retailers. So units are staying flat, which is actually driving some potential incremental growth at this point.

Erica Eiler -- Oppenheimer & Company -- Analyst

Okay, that's very helpful. And then just could you maybe share you latest views on commodities and other cost pressures in the business such as freight and how you're thinking about those this year?

Scott Morris -- President and Chief Operating Officer

Sure. For 2019 on commodities, so we already have some slightly favorable prices for chicken going into 2019 and we've locked that in for the year. On beef prices, we're out about six months and we feel comfortable where they are similar to where they were in the back half of 2018. And as far as freight is concerned, as we continue to grow at these levels, we're putting more pounds on a truck and our LTL's go from a couple of pallets to a few more pallets. So we get optimization there and we see there is less pressure in the refrigerated market again in this time of the year and compared to earlier in 2018. So we feel comfortable there.

Erica Eiler -- Oppenheimer & Company -- Analyst

Okay, great. I will turn the call over. Thank you so much.

Operator

Our next question comes from the line of Brian Holland with ConsumerEdge. Please proceed with your question.

Brian Holland -- ConsumerEdge Research -- Analyst

Yeah, thanks, good afternoon gentlemen. If I could just ask about the -- little bit more about the top line guidance. I was pleasantly surprised that where you initially guided mindful that you've come in ahead of that number each of the past two years. But was little bit surprised when I think about obviously implementing pricing, lapping really successful innovation in the prior year, some of the innovation you have planned for 2019 looks pretty compelling, especially the Homestyle Creations, but limited distribution there.

So if I think about kind of the dynamics that's lapping some tough comparisons, I mean it's your growth level, you're going to be lapping tougher comparison perpetuity. But is it really just the strong repeat rates just holding through here and all these new buyers you picked up in 2019 continuing to flow through? If you could just maybe talk about some of the puts and takes there and maybe what the catalysts are specifically?

Scott Morris -- President and Chief Operating Officer

Yeah, so first of all, Brian as you know, we're very bullish on the growth of the business in the long-term growth rate and we think that the things that we did in 2018 certainly created an acceleration and momentum that we're carrying that into this year. And as you saw in the presentation, we showed how the growth rate that we've seen in the first seven weeks of this year is running in excess of the growth rate that we had in the first seven weeks of last year.

So we feel very bullish about that and it's being driven by the right, the same fundamentals that you've seen or everyone's seen all along, which is we continue to expand household penetration, we continue to see the buying rate that goes up.

As we think about the rest of this year, we're seven weeks into or eight weeks into the year, so we have a long runway ahead of us. We are comparing ourselves against some very big innovations that we've launched last year. We feel very good about the innovations we're launching this year, but we're just are mindful that we're early into a fairly long game. And we feel very good about the long-term trend. What's most important to us is that it puts us on track for our $300 million goal in 2020. I think it's now within -- you can see how you can get from where we're planning to be in 2019 and get into 2020 and we feel like we've got the key drivers that will deliver that.

Brian Holland -- ConsumerEdge Research -- Analyst

So, forgive my ignorance, but I did catch your slide about where you are year-to-date versus prior year in the acceleration across channels. But that is a decels from sort of the December quarter. So can you just help me, I mean, is that just timing of media catching online, is there, just remind me what might have happened or what typically happens from a seasonal standpoint that would make that less -- that compare where you are today versus December quarter less relevant than where you are today versus February of last year?

Scott Morris -- President and Chief Operating Officer

Yeah. So basically what we had said is as we put the media you begin to see the acceleration happen, and we're starting from a place where if you're trying to figure out what my average growth rate is going to be for the year, it's going to be the some of the growth rate you have in the first quarter through second, third and fourth. And we're starting at a higher place on growth rate than we did last year. And as the media kicks in, at a higher level of media spending, we expect to see it continue to grow. Why would it step down from the end of Q4 into the beginning of Q1? You're just starting to come up against very, very big compares, but we're also going to grow from that point. And we're growing from a higher point than we started last year.

Brian Holland -- ConsumerEdge Research -- Analyst

Okay. And then last question, if I just think about the cadence throughout the year, I think you've very clearly laid out the gross margin inflection should probably happen in the second half of the year. When I think about the incremental $3 million that you laid out both on international investment and on the technical side and staffing there, I mean is that -- can you grow your EBITDA margin in the first half of the year or does the majority of the media spend, and some of those other investments, are they little more sort of first-half weighted, such that you would maybe see a similar inflection on SG&A or an acceleration in SG&A, where it is more appropriate, the similar to gross margin throughout the year?

William Cyr -- Chief Executive Officer

So, Brian, the international investment will be more front-loaded just as we do with the US business, where we get a pretty significant return for investing in advertising earlier in the year. The SG&A staffing behind the technical staffing that will probably be more back-loaded as we go throughout the year just because we've got to identify and hire and bringing in the right people. So that will be a little bit more back loaded. I don't know about the adjusted EBITDA margin, Dick you might just comment on that.

Richard Kassar -- Chief Financial Officer

No, the EBITDA margin -- it's the continuation of strong EBITDA in the fourth quarter and late third quarter as a result of our media spend that we've announced at approximately $27 million plus the $2 million in international is going to be front ended. So it will be similar to what it was in '18 and '17 and even in '16.

Operator

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

Peter Benedict -- Robert W. Baird -- Analyst

Hi guys. First question is just on the second fridge rollout here, 800 stores this year. Can you give us a sense of how broad that participation is across your -- across your retail partners and how -- what should we think about in terms of the longer-term opportunity with this? Is 800 a pace that you can continue going forward? Or could it accelerate from here in the out years? Just help us frame that a little bit. Thank you.

Scott Morris -- President and Chief Operating Officer

Sure. So we're really enthusiastic about the double or the second fridges being added in. So just for perspective, we have right now we've made some good progress on a year to date, we have about 300 multi-fridges and already 264 double, we actually have 50 triples. That actually goes across a fair array of our lead customers, there's probably about four or five of some of our lead customers that are already participating at different levels, but I think what's happening is, as we continue to see really strong same-store growth sales every year, year-on-year, I think retailers are looking at it and recognizing the opportunity in Freshpet and are just feeling comfortable in justifying the actual -- the second coolers from a space standpoint, especially given the frequency of traffic and the margins that we deliver to the category.

So, we think there's a long road in front of this. Obviously the second fridges will go in the most productive stores that we have, first, but we think that there is a pretty broad opportunity across the entire portfolio over the next couple of years to expand out into the seconds and thirds in some cases across -- really across the US and our broader array of customers.

Peter Benedict -- Robert W. Baird -- Analyst

Okay. So if the penetration is probably somewhere roughly 4%, 5% of the doors maybe by the end of this year would have multi-fridges, I mean, that's something that are you comfortable saying we'll go to double digits in the next few years in terms of penetration across the chain?

Scott Morris -- President and Chief Operating Officer

Yeah, I would say that's probably the direction that we're heading, as long as we continue to see the same-store sales growth and there's nothing that tells us that we won't and that's exactly what we're seeing. I mean -- already looking at kind of the four and seven weeks into this year, we're looking at the way the sales are progressing and ACV is always a contributor, but the key drivers behind the advertising expanded penetration, which is driving greater velocity on a per store basis. So yes, we think we will continue to pick up shelf space or fridge, incremental fridges, across a deepening amount of our customer base.

Peter Benedict -- Robert W. Baird -- Analyst

Okay, great, thanks for that, Scott. And then just a question on the international household that you're seeing. Can you help us understand what's the behavior look like from those households, whether it be repeat rates or buying rates, given how long you've been in those markets relative to maybe where you were in the US at a similar time, are they behaving similar, are they different in anyways, what can you tell us about how the international customer is behaving?

Scott Morris -- President and Chief Operating Officer

So the main market that we're in is the UK and we did a fair amount of work there about a year and a half, two years ago just from a positioning standpoint. And I think that what we had heard is really what we saw when we did the research in the market and obviously there's an incredibly high level of involvement with pet. So then the next thing you need to do is validate is the concept, strong and are people receptive to it. We did a little bit of work around that, we were able to basically put fridges in and see, I would say, good, not great, but we were able to just put fridges in and product in with very low levels of marketing kind of almost gorilla marketing type tactics. Put those in place and see good sales levels and we do see kind of very similar dynamics, very low penetration that we saw in the early days, low penetration, strong repeat rates. And then the key, really from that standpoint is, once you establish a really strong base, you need to basically tell your story and get the message out there and drive penetration into the brand. And we did a small advertising test in the UK this last year, we saw a very, very strong, surprisingly strong results from the TV investment.

I think someone quoted it's like water in the desert and it was very impressive and now we're actually going to expand that on a broader basis both in UK and then also in Canada where we have a little bit kind of more developed foothold in Canada but we recognized opportunities in both those markets by taking the TV tactics and putting them in place. We also did a test in Canada on TV, but by putting those in place to kind of expand the penetration and drive consumers into the brand. It's very similar to what we saw five, six, seven years ago here, where early on in order to kind of validate and get people comfortable with the ideology behind the food, TV seems to really get people comfortable with the idea. It's not this unusual product that's in a fridge in a pet aisle. It seems to help it, where we will get comfortable with it and bring it more into the mainstream. So we're really applying that learning into these two international markets and if they've progressed nicely, we don't see them being dramatic contributors to the top line, but they are important in the out years.

William Cyr -- Chief Executive Officer

Peter, I would add to that. We can get a little bit of panel data in the UK that tells us that the proposition is incredibly attractive, not just for us but also for our retail partners and that obviously bodes well for long-term expansion in distribution. When we put the advertising on the air, we saw it was about 33% the shoppers were new to the retailer and about 73% of the dollar sales they picked up were new to the retailers that were carrying the brand and the repeat rates were 70%. So you can imagine, if you're a retailer you're looking at this, and you're viewing this as a good opportunity to get in this and drive the kind of foot traffic gains that we saw and the category growth gains that we saw in the US.

Peter Benedict -- Robert W. Baird -- Analyst

Okay, great. That's really helpful. Thanks for all the color, guys. Good luck.

William Cyr -- Chief Executive Officer

Yeah, thanks.

Operator

Our next question comes from the line of Mark Astrachan with Stifel. Please proceed with your question.

Mark Astrachan -- Stifel -- Analyst

Thanks and afternoon, everybody.

William Cyr -- Chief Executive Officer

Hi, Mark.

Mark Astrachan -- Stifel -- Analyst

I guess first is, was curious housekeeping wise. What is in the numbers for 2019 sales for international and for cat, I'm just sort of, is it relative to where we were in '18 to sort of clarification there would be great.

William Cyr -- Chief Executive Officer

So the numbers for the international markets are still very, very small. What we are talking about it is an incremental investment, it will help jump-start the distribution gains we get in those markets, but we're not expecting to see meaningful top line contribution out of those markets until we get into the post 2020 period, frankly until we get more capacity online.

Mark Astrachan -- Stifel -- Analyst

Got it, OK. And then just related, a little bit to the last question. I guess I'm curious why now and the accelerated investment outside the US, you obviously talked about some of the on-air work that you did in the UK, the back half of last year clearly successful, I guess you were already doing that. So is it that it just came in better than expected? Do you think there is more competition on the horizon? Do you think it's just now is the right time and you figured out how to get the product more efficiently from Pennsylvania to the UK? Is it that the retailers are driving it because Tesco announced they want to put it into more stores just et cetera, kind of give us a bit of help on that. And then just sort of related, what is the brand awareness in the UK kind of today after incremental investment or where do you want it to go?

William Cyr -- Chief Executive Officer

Well, first of all fundamentally, I think we all believe that there is a significant value to first mover and there is a significant value to establishing the Freshpet franchise very early on. And so our motivation is to progress down the path of establishing the Freshpet brand and business model in as many places as it makes sense, on the most kind of prudent timetable. We want to be very prudent with the investments that we make. And so if you think about that flywheel that we have going in the US where we invest in media to get distribution, which helps us get some scale and pay things off, you have to start at some point at a relatively small scale and get it going.

So last year was validating that the tools that we have, work. This year it's sort of priming the pump. We're putting out enough advertising that can generate the customer interest that starts expanding the distribution, but distribution takes time and if we just waited until 2020 or 2021 to start investing in the advertising, we may not have the distribution to match it. So we're getting the flywheel going now. So that by the time we get to the point where we're ready to put our foot on the gas, we have enough distribution to merit the investment that we will be making. So it's really just getting that flywheel going. Does that makes sense?

Mark Astrachan -- Stifel -- Analyst

Yeah, it makes sense. On the brand awareness piece, where do you ballpark it kind of today versus where you think it can go where you want it to go with the investment?

William Cyr -- Chief Executive Officer

It's probably incredibly low and probably more goes to awareness than anything else at this point. So I don't know, I don't even put a number on it, I don't have a specific number.

Mark Astrachan -- Stifel -- Analyst

Okay. Thanks guys.

Operator

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

Jason English -- Goldman Sachs -- Analyst

Hey good evening folks.

William Cyr -- Chief Executive Officer

Hi there.

Jason English -- Goldman Sachs -- Analyst

I wanted to come back to another question on the multi-chillers, the multi-cooler stores. On the slide that you show there, you actually listed as a multi-brand cooler, what does that mean?

Scott Morris -- President and Chief Operating Officer

So one of the things that's actually very perceptive of you. So what we've done is we actually have -- under Freshpet we actually have three different brands that we launched across different retail formats. And basically channel lines have really become erased. So what we've started to do is we're utilizing the best set of products, sometimes they're under brands, for some of the unique propositions they bring. And we're actually bringing those into the second coolers to make sure that we have the right assortment and a broader portfolio to address kind of consumer interest in those retailers. So we had a brand that was more focused on the natural channel called -- Freshpet Nature's Fresh and it's made with basically GAAP rated meats. There's some specific formulas and an ideology behind that sub-brand and we're actually going to be bringing that a little bit more mainstream into a handful of other retailers with that have those second coolers.

Jason English -- Goldman Sachs -- Analyst

Good. So there's still your sub-brands you're not losing exclusivity on your coolers?

Scott Morris -- President and Chief Operating Officer

No, no, we're not, there are 100% of our coolers and we're not losing exclusivity there. There are brands that we're basically putting into a -- just a wider assortment, where we can make sure that more consumers are exposed to them.

Jason English -- Goldman Sachs -- Analyst

And Billy in your prepared remarks you talked about how we should understand the cadence of spend versus capacity I think as we go into 2020. And to my hears I heard, I heard some demand tempering coming into 2020 which where the demand temporary maybe -- we may get some margin expansion, followed by demand investment to reaccelerate sales. A) Did I hear that right? Because what we should have done it, I don't think I did, and if I did hear it right, is any of that tapping the brake pedal a bit good to start in the back half of '19?

William Cyr -- Chief Executive Officer

No, on the last part of the question, you did hear correctly. But basically, what we're saying is we are still slated to have new capacity come online sometime around mid-year. And so we are very mindful that we don't want to get to the point where our growth rate outstrips the available capacity. So when we get to 2020, we look at the plan. We've got to be kind of guiding it in, so that as we grow the new capacity comes online, it doesn't come online all at ones.

It takes time to start it up and get it to run reliably. So we may skew the investments a little bit differently than we would any other year, we may skew more spending toward the second and third quarters than necessarily the first quarter. That's all going be decided when we get a better handle on exactly when the capacity comes online. But we do know this, if we run at the rate we keep running, there would be a possibility that we could past the capacity. But we're not putting our foot on the brakes.

Jason English -- Goldman Sachs -- Analyst

Understood. And last real quick housekeeping question. The piece of comps that you're pulling out of COGS going forward, it stepped up a lot in the fourth quarter. I think it was like a 100, over 100 basis point drag on gross margins, if we put it in there. Is that a new run rate or is it just sort of timing, year-end closing, and you get a 4Q spike or said differently, what is the gross margin impact of that? And what is your expectation going forward?

William Cyr -- Chief Executive Officer

Yeah, let me take a sort of conceptual look and Dick can give you the details, but one of the things that we've done to distinguish ourselves as an employer is that we announced in Q4 that we will be giving equity to all of our employees including the team members who worked for us in our Kitchens. We also gave some special grants to employees who have been with us for quite a long time. And those all appeared in the fourth quarter. The grants to the hourly employees will end up being gets expensed in Q1 of this year is the first time, those will show up but the long time employees would show up in Q4 and that was a one-time grant.

Richard Kassar -- Chief Financial Officer

In addition to that, we changed our likelihood of achieving certain performance goals in our SG&A and raised our likelihood to 75% in three different categories which were basically revenue and EBITDA associated with the year 2020.

Jason English -- Goldman Sachs -- Analyst

Okay. I guess what I'm getting at is your redefining gross margin, but you're not redefining your gross margin target? Is there materiality? I think should that 52 really be going your high target whether you got to 53? Okay, got it. Cool, thank you, guys.

William Cyr -- Chief Executive Officer

Thanks, Jason, take care.

Operator

Our next question comes from the line of Bill Chappell with SunTrust Robinson Humphrey. Please proceed with your question.

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

Thanks. Good afternoon. Just both in the quarter going forward, trying to understand the commodity headwinds or the input headwinds with the thought that you're largely bought forward on kind of your chicken and other key ingredients, I mean, was there a surprise in the fourth quarter that or something I missed?

Richard Kassar -- Chief Financial Officer

No, we didn't have a commodity hit, it is the same commodity we had basically all year. When we bought forward in 2019 -- we bought forward in 2019 our pricing that we had in 2018 was for the entire year for Chicken. So whatever hit we had for the increased costs associated with chicken, it was all year long. The other hit we had in the quarter was we've increased our staffing over the last six months by approximately 130 people. Some of those came on in the second quarter and hit the third quarter, some came on in the third and fourth quarter and really are only actually producing product in the first quarter of 2019 when we went to two additional lines on the seven-day shift.

And the training of those people and the expenses associated with them. And in addition to that, we have inbound freight costs during the year. But our margin in the fourth quarter was basically similar to our margin in the third quarter, adjusted gross margin.

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

And I guess, it gets to -- do you feel like, I think you said earlier that people may be skeptical about getting long-term EBITDA goal. And I think it's skepticism all comes on gross margin. And so I'm just trying to understand do you feel like for this year with the number of new lines to pull forward the growth that you have a good handle on gross margin, that this is a number that can start to improve?

Richard Kassar -- Chief Financial Officer

Yes, I do thinks so. We -- basically we hired 140 people, we hired and it's really a talented pool that we hired. We were known in the neighborhood for being a great employer, we've announced those equity grants that Billy alluded to earlier. So we're getting good people, getting people not only with some experience but certainly strong IQs. And then we're finally going to get some scale for those people running 24/7 on three lines as we are today and then by the second quarter, we'll have a fourth-line running basically two shifts a day for 3.5 days a week. And then the price increase that we put in that Scott alluded to 2.1%, all are helping go forward to achieve, not only to get to a run rate run rate by the fourth quarter of around 51% but get us to 52% in 2020. And if you look at that bridge that we put in the deck, you'll see what our plan is. And on top of that we have our SG&A leverage, which we are very -- we're doing great on. We got 500 basis points projected by the end of this year and we expect to pick up at least another 200 basis points next year.

William Cyr -- Chief Executive Officer

Hey, Bill, let me just add to that. One of the most metrics for me is I watch how we're doing at the things that we can control yield and throughput. And we made good progress on that year-on-year. And that sort of an underlying evidence of our fundamental capability. We will grow out of the issues that we had related to the incremental staffing, if there does come a point where we are fully utilized and fully staffed and fully trained and that will happen in the end of the second quarter. The externality, one of them is mix, we can have -- we have some control on that. We think we have pretty good visibility on where our mix is going to go based on the trends. And this year's innovation unlike last year's innovation is much more focused on things that are positive to the mix rather than last year's innovations had a negative consequence for the mix.

The one thing you can tell is the commodities. Commodities, we solve for this year with pricing. We have the -- vast majority of our commodity costs are well known, are well planned for this year. There's always the possibility that something comes out of the woodwork that you'd have to deal with as it came up. But the big ones, the big heavy hitters are either bought forward are pretty well known or contracted. So I feel pretty good about that side of it. And over the long haul, the thing that makes the biggest difference in our ability to drive gross margin is the ability of our manufacturing people to drive yield and throughput in our lines, and they have consistently demonstrated that for the last two years and we'd expect that to continue going forward.

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

Got it. And then just last one from me. Just anymore color you can give on where the growth is coming from? And when I say that, is it doors that are -- doors that have been around for a year or two that are going from kind of 2% to 5% share within that store? Or is it doors that are built like an Albertson's that have been at 8% are going to 10%, is it small dog going to larger dogs. Just trying to understand what gives you confidence in the growth and where it's coming from?

William Cyr -- Chief Executive Officer

So, Bill, at the highest level, I think we've probably mentioned in the past, but the vast majority of the growth is coming from velocity. And then the minority of it 80% of it's coming from velocity, 20% of it's coming from ACV built. What we are kind of really enthusiastic about is, as we get into the second coolers, they can be a very meaningful contributor to revenue over time. We don't -- we have that some of that budgeted, it's a small kind of number right now and it's going to grow to a larger number. So just that presence helps us from a visibility standpoint. When you talk about like where else is coming from, obviously, we have opportunities to continue to expand the portfolio, have a wider array of products, small dog is a great example. We launched a small dog product a year ago, it's been a major contributor, we're going to continue to kind of add items into that piece of the portfolio.

We've launched a handful of other proteins. So we're focusing on not only forms but we're also focusing on proteins used occasions. So it's pretty broad based. And I think that's the thing that we feel most confident about is that the way growth is coming is fairly broad and then we also have other components, whether it's around international that over time or online, that will continue to really kind of contribute and step up further. So we -- I think that's the thing that we're most excited about is the breadth of the way the growth is coming in across the portfolio.

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

Got it. Thank you.

William Cyr -- Chief Executive Officer

Thanks, Bill.

Operator

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

Jon Andersen -- William Blair -- Analyst

Good afternoon, everybody.

William Cyr -- Chief Executive Officer

Hi there, John.

Jon Andersen -- William Blair -- Analyst

Just most of my questions have been asked and answered. Just a couple of quick ones. In the prepared comments I think Billy, thanks for the color around the household penetration and the buy rate. I don't think you directly address repeat rates and I was just wondering if you could talk a little bit about the repeat rates you're seeing as you bring these new households into the franchise through trial. Are they holding up at the kind of the 70% level, you've seen historically?

William Cyr -- Chief Executive Officer

Yeah, it's at the bottom of slide five. We include the repeat rates for all the same periods and it continues to look equally strong, which is -- I mean that's a pretty powerful dynamic to be able to drive penetration at the rate we're driving it and see strong repeat rates that's usually that's very unusual.

Jon Andersen -- William Blair -- Analyst

And then on the second fridges, can you talk a little bit about the location and also the positioning, this was kind of talked about a little bit earlier. But, are these second fridges adjacent to the current ones, are they in different locations in the store? And then are they assorted differently? It sounds like you're using, maybe a little bit of a sub-brand approach to try and target a different consumer within those four walls?

William Cyr -- Chief Executive Officer

Yeah, the vast majority of those fridges will be directly adjacent to each other. So we will kind of improve the overall visibility of what we're bringing, we're putting best in class fridges with really strong lift headers, really clean open doors, LED lighting inside and a wider portfolio. The vast majority of that way, but we do have many scenarios where they are some of them maybe an aisle where a second one may go on in cap. So we have a couple of different scenarios, but the vast majority will be adjacent to each other. We are bringing a slightly broader portfolio of products. Then one of the new sub-brands we talked about, which is a new line extension we just came out with which is the Homestyle, which is a product that's a little bit more targeted toward people that are actually cooking for their dog. There's a lot of this going on across the US. It's pretty amazing how many people are actually cooking for their dog.

It's a sizable piece of business, but we also recognize that people that are currently feeding existing commercial foods will be attracted to that product to. So that's just another way, we're continuing to expand the portfolio, because that will give consumers an opportunity to pick-up protein and then pick a specific mixer that they can include with their protein and do something where they really can't like do some kind of quote-unquote, cooking for their dog .

It tested incredibly well. It's only been in the market for three weeks now. We have seen some sales. They've been small at this point, but I think that probably covers the question around nice fridges but also how we're thinking about broadening the portfolio and the branding.

Jon Andersen -- William Blair -- Analyst

Absolutely. Last one for me is just around e-commerce, it sounds like you've had some really nice growth in that pretty good business almost 90% it's still very small percent of your overall business. But what -- are you pleased with the results there? What are you doing to make sure that you're kind of keeping up from an online perspective given the nature that your offerings is a little bit different being refrigerated versus dry and probably harder to kind of manage from a home delivery standpoint? Thanks.

Scott Morris -- President and Chief Operating Officer

Yeah. So that one of the things that I think we're actually most excited about is that about 80% of the total sales on the online business actually support our existing fridge network, which supports the proposition with the existing retailers. So if we can deliver to consumers that are interested in buying something online and also support the fridge network we're -- and that's a much lower cost method to get that product to consumers where you're shipping the first 500 miles to kind of an existing established large network and then use the last mile as a delivery that's tied in with typically other refrigerated products.

We think that's the perfect model for us. What we've been able to see it as we've use marketing dollars and not discount dollars but marketing dollars and we market that, we've been able to see really tremendous growth on the online piece of business. We're -- and I think you're probably aware of it, it's probably important to note again, but we really don't do any price discounting or couponing across the entire business. We will do samples, we will do some demos periodically, especially on some new products. But we've been able to kind of meter that out with the amount of marketing spending we're putting into e-commerce and then kind of moderate the growth that we're seeing come from e-commerce based on the investment.

Jon Andersen -- William Blair -- Analyst

Thanks a lot for the color.

William Cyr -- Chief Executive Officer

Right. Thank you, Jon.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.

William Cyr -- Chief Executive Officer

Yes, thank you very much for your interest and attention. We are very bullish and very excited about our plans for 2019. And we look forward to speaking with you again as we progress throughout the year. So thank you very much.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Duration: 69 minutes

Call participants:

Katie M. Turner -- Managing Director

William Cyr -- Chief Executive Officer

Richard Kassar -- Chief Financial Officer

Erica Eiler -- Oppenheimer & Company -- Analyst

Scott Morris -- President and Chief Operating Officer

Brian Holland -- ConsumerEdge Research -- Analyst

Peter Benedict -- Robert W. Baird -- Analyst

Mark Astrachan -- Stifel -- Analyst

Jason English -- Goldman Sachs -- Analyst

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

Jon Andersen -- William Blair -- Analyst

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