Greetings, and welcome to the Freshpet, Inc. First Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce, Katie Turner for opening remarks.

Katie M. Turner - Investor Relations

Thank you. Good afternoon, and welcome to Freshpet's first quarter 2020 earnings conference call and webcast. On today's call are Billy Cyr, Chief Executive Officer; and Dick Kassar, Chief Financial Officer; Scott Morris, Chief Operating Officer; and Heather Pomerantz, EVP of Finance, 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.

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, the Company has produced a presentation that contains many of the key metrics that will be discussed on this call. That presentation can be found on the Company's investor website. Management's commentary will not specifically refer to the presentation, rather if the summary of the results they will discuss today.

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

William B. Cyr - Chief Executive Officer

Thank you, Katie, and good afternoon, everyone. I'm talking with you from Bethlehem, PA, Dick is at home in Manhattan, and Scott and Heather are at their homes in New Jersey. We'll do our best to not trip over each other on the call, and please excuse any barking in the background.

Obviously, we are in the midst of highly unusual times, so our comments will be a bit different than we would typically provide so that we can give you a clearer understanding of this unique operating environment, how we are addressing it, the opportunities and risks it creates and the assumptions underlying our guidance. We'll also provide you with our quarterly metrics and analysis, including the presentation we typically provide, and we'll highlight where the coronavirus crisis might be creating distortion, both favorable and unfavorable. We will also share some April results, where we have the data, and it is relevant in the interest of maximum transparency in this turbulent time. That will allow you to see the pantry destocking 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 coronavirus threat as a significant public health challenge and take our role as an essential business seriously. Being an essential business gives us the privilege to stay open, but also comes with a responsibility to operate safely, limiting the spread of the coronavirus amongst our employees, their families and 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 are protecting and hopefully enhancing the long-term value of Freshpet for our many stakeholders.

As we detailed in our press release on April 9, we've gone to great lengths to protect our employees and greatly reduced the risk of coronavirus 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 two people per day for further screening and have succeeded at identifying people, who have the virus, but had no fever or cough. Retained a third-party, deep-cleaning company to clean our 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 our employees to spread out at the breaks and in meetings, provide face coverings for every employee and required their use. Installed the highest quality air filtration to reduce the risk of a airborne virus transmission. Staggered our shifts to avoid a concentration of employees in our locker rooms and common areas. Installed sanitizer dispensers inside virtually every door and sanitized any meeting rooms before and after each meeting. Suspended our absenteeism policy so that no employee would feel compelled to come to work if they were not feeling well. As a result, our absenteeism increased from 2% to 3% to approximately 11% since we implemented this policy. To compensate for this, we brought in incremental staffing and paid for over time. Followed all CDC and FDA guidelines for quarantining employees who may have been exposed, including paid leave while awaiting test results, 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 for it to harbor within our facilities and limiting its ability to spread in our facilities. We cannot protect an employee from getting the virus in the broader community, but we can try very hard to prevent it from entering our facilities and spreading there. We 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 helped us meet the demand, we paid a $500 after-tax bonus to all Kitchens employees in April. And have given all Kitchens employees a $50 gift card to local restaurants every two weeks since mid-March to both give them a break from home cooking and also help local restaurants survive 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 are doing, and so far, our efforts are succeeding and preventing the virus from spreading within our facilities. While we remain vigilant, continually reassessing our needs getting guidance from the CDC, FDA, trade associations and other food manufacturers, advice from our Board and input from our employees. All of these efforts come at a cost, the costs that we think are well worth the expense. Dick will provide more details on those.

In addition to the incremental efforts to protect our employees and continue production, there have been other impacts from the coronavirus crisis. In a minute, I will list some of the more notable ones. But as 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 toolkit 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 to 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 e-commerce, 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 and 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 impacts the retail environment, and our business is better insulated from that type of disruption than many CPG companies. We do not depend on retailers discounting or promotional activity to drive volume or 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. The households that serve Freshpet are very loyal, and dogs eat the same amount every day. So, we have strong and steady demand with a 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 are a few of the most significant impacts we've experienced or are watching closely. First, due to our capacity limits in Q1, and the tremendous surge in buying, we cannot ship to demand and drew down trade inventories, resulting in out of stocks. At times, we were only able to ship 75% of the orders on our books. Even without the surge in buying, behind the coronavirus, we told you at our Investor Day and in our April 9 release that our demand would exceed consumption in Q1 and that we would catch up in Q2. The surge related to COVID-19 only exacerbated this 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 roles and continue to ship those orders while we cut bag orders.

Before the surge in demand, we estimated that the gap between scanner sales and shipments for the quarter could be 3 to 4 points. And in actuality, it was about 5.5 points, resulting in roughly $4 million of net sales that moved into the second quarter. But, 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. While Freshpet's Nielsen Mega-Channel consumption for the four weeks through mid-April, post-surge, averaged high-single-digit growth, and we still have not restored normal trade inventories, and we have a sizable backlog of orders to carry into May. At this pace, we expect to replenish trade inventories by the end of Q2 and have a more normal shipment consumption balance heading into Q3. We are seeing a gradual improvement in weekly consumption trends as April progresses and consumers draw down the pantry inventory they built in early March and our in stocks improve. But there is some year-on-year distortion provided by the movement in Easter. May will provide a much clearer picture of the underlying consumer behavior and buying trends and should reflect much better in-stock levels for Freshpet. June should be even better as it will also reflect the impact of our return to advertising in May.

The rate of dog adoptions in fostering soared in the midst of the crisis. Shelters in major cities reported a significant uptick in pet adoptions in February and March. While 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. A 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 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 endcaps 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 are expecting about 1,000 net new stores this year, down from 1,430 previously projected and about 500 upgrades, down from 559 previously. We are, however, expecting to exceed our second/third fridge target of 500, likely exceeding 1,000 as I will outline later. It is too early to say what the net of all these changes in fridge 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 stop the planogram changes. Some of our larger customers had already stocked 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 is not significant. Any impact on this can be - also be offset by our lean-in investments.

We pushed our April advertising spending back into May and August due to the 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 into Q3. However, the media rates we are now getting for May and beyond are significantly more attractive than what we previously anticipated. The same retail chaos that occurred in US also occurred in Canada and the UK, muting the impact of the advertising investments we are making there as consumers flooded stores and loaded up on their existing brands. We will reassess our advertising timetable once those markets settle down a bit.

We lost some production efficiency in the quarter. We put a higher priority on getting maximum output from our production lines than on labor efficiency. So we deliberately overscheduled 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 - 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 while our 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 our Kitchens 2.0 will start-up at the end of September or early October, instead of our previous plan of starting up in early September, with production at a significant rate in November. The delay in the start-up of Kitchens 2.0 could impact our supply of Fresh From the Kitchen in Q3. We are bringing on a second shift at Kitchen South in Q2. So our overall bag capacity will meet our needs. But we could develop an issue with Fresh From the Kitchen. We don't think that will have a material impact on the year, but it will impact the quarterly cadence, i.e., some net sales might move into Q4 from Q3 and could move some volume from Fresh From the Kitchen to our other bag product, roasted meals.

We are closely watching our supply of various proteins. As all of you have read, the meat packing industry has been hit hard by the coronavirus. While we have not experienced any extended interruptions to date and our chicken prices for the year are fixed, we have had to go to previously qualified second source suppliers from time to time. So we are watching this closely to head off any potential future supply interruptions and have taken some steps to better protect our supply. I will also point out some really good work by our procurement team. They 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 with significantly larger supplies of many key ingredients and packaging. They also finalized some long-standing initiatives designed to put in place backup suppliers on key materials we source and on our fresh ingredients where we cannot build inventory. That does not mean that we have not had challenges. But our challenges have been made significantly smaller and less disruptive, thanks to their good work.

The question all of you are probably asking yourself is, where does this leave Freshpet overall? I would answer that in the following way. We feel very fortunate to have such a robust business, strong balance sheet and to have a plan that is working to protect our employees, and there is 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 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 are well capitalized and have a strong organization. We have also learned quite a bit during this crisis that will strengthen us going forward. We are very well positioned for both short-term and long-term success. As a result of these changes, we have decided to make some incremental investments to 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, the combination of low media costs, a highly relevant message, increased pet adoptions and incremental capacity is the ideal time to lean in on our advertising in the second half.

Enhanced e-commerce, we have developed several initiatives designed to make it easier to acquire Freshpet via 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, tagged advertising supporting online ordering and an SOS program that allows consumers who are desperate for Freshpet to order our most premium Homestyle creations line and have it delivered to their home.

Strengthen retailer coverage. Given the challenges of stocking the stores, we are 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 of the incremental investment we are 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'll preface this by saying that we are very encouraged by our start to the year and think that with only a few minor exceptions, they are reflective of the underlying strength of the business, and they are better than our going in 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. We will get that shipment volume in Q2. So this is probably one of the more normal quarters that a CPG company could report in this environment.

For the quarter, we continued the strong top line momentum we have been delivering since we began our Feed the Growth plan three years ago. We continued to demonstrate that profit gains from leveraging our increasing scale. This is the essence of our strategy. And it is working. We have created a virtuous cycle, where increased advertising drives increased velocity, which drives increased distribution, and that provides the added scale to both reinvest in the business and to 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 that Freshpet makes in their pets' lives. We firmly believe that we are just scratching the surface of the opportunity to change the pet food category, enabling pet parents to provide fresh, healthy, less processed food designed for pets.

In the first quarter, we delivered top line growth of 28%, and this was on top of 27% growth in the year ago quarter. In fact, eight of our last nine quarters have 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 Mega-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 Mega-Channel business was up 29%, in line with our long-term trends. So the last 4-plus points of growth are likely related to the surge in buying and not representative of the underlying consumption. Velocity grew 17% and accounted for more than 60% of the year-over-year growth. Our core dog business, which is the sum of our dog rolls, 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 Shipt and fresh e-commerce like Amazon Prime Now and FreshDirect was up 98% versus a 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 our e-commerce volume and was up 102% in the quarter. There is no doubt that a major shift to online consumption during the shelter-in-place weeks contributed to our growth. But we are seeing very strong growth before that as well.

Adjusted EBITDA in the quarter was $5.7 million, up $2.9 million or 100% versus a year ago as we demonstrated the significant leverage we get from scale, particularly in adjusted SG&A, excluding media.

Progress against our key business drivers was as follows: expanding the consumer franchise. Total household penetration grew 28% versus a year ago to 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 with such robust household penetration gains. We have included a chart in our investor presentation that 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 week in March to see what impact the surge in demand had, and it was negligible, which makes sense. Consumers were not trying new items then. They were stocking up on items they already buy. 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 happens so late in the measured one-year period and because our data suggests that consumers only bought about one extra week of Freshpet versus dry dog food, where they bought almost one month's extra supply. Further, our out of stocks, and we believe consumers' tight fridge space limited their ability to buy forward.

Second, strengthen Freshpet's 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 as the Australian competitor that has been attempting to enter the US 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 are 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 1,000 second fridges over the balance of the year.

Third, increased capacity. In addition to our Kitchens 2.0 project, we started up the small size line at Kitchen South in February. Production is going very well and running ahead of our plan. We are planning on adding a second shift there in Q2, that will provide added buffer against any supply interruptions. Additionally, we've begun hiring in Ennis, Texas. We now have five employees hired to support the planning, design and construction of that facility already and more are on the way.

I will now turn it over to Dick to discuss our Q1 financials in more detail and our outlook for 2020.

Richard A. Kassar - Chief Financial Officer

Thank you, Billy, and good afternoon, everyone. When you consider all the disruptions that occurred in quarter one, we accomplished quite a bit and delivered strong results, which were better than what was included in our internal plan. We announced our new 5/2025 strategic plan to add 5 million new households by 2025. We completed an equity offering that netted $252 million and renegotiated our credit agreement. We now have the capital necessary to support our growth plans through 2025, and we got all that done against the backdrop of the coronavirus crisis.

As Billy indicated, quarter one net sales were $70.1 million, up 28% versus the year ago period. While many companies will report somewhat inflated results for quarter one because of the panic-driven buying in March, we think that was a very small portion of our growth. In fact, our capacity constraints limited our growth, and we did not borrow much with any sales from quarter two. As Billy indicated, we began quarter two with trade inventories well below our normal operating conditions and are still refilling that pipeline. We expect to do catch up in quarter two and, as Billy reported, our April results show that happening with April sales up greater than 30%.

We invested $11.8 million in advertising in the quarter, up 17% versus a year ago and consistent with our plan. We did invest in the new ad once the shelter-in-place orders began, reminding people that our dogs don't know why we are home so much. They are just glad we are and that we should all take care of each other. That advertising was named one of the top 10 breakthrough ads of quarter one by Ace Metrix. Now, with more than 2,000 ads tested. Five of the other ads that were recognized were Super Bowl ads. More importantly, it delivered the strongest response to our advertising we have seen in quite some time, despite all the distraction and payouts going on. I think that is a good indicator that our team is both nimble and also does very good work. Qualities that have been and will be key to our success.

Adjusted gross margin for the quarter was 49.5%, down 90 bps from the year ago period, and slightly higher than quarter four 2019. Quarter one includes lots of moving parts, including the start-up of the final rolls line [Phonetic] on 24/7 schedule, higher processing costs, a small mix benefit driven by the availability of capacity on our higher margin roll line at quarter end and higher selling prices.

Adjusted SG&A in the quarter was $28.9 million, or 41.3% of net sales, an improvement of 410 basis points versus the year ago period. Media spending was up 1.7% versus the year ago period. When you exclude media spending, SG&A improved by 250 bps versus a year ago. So we're not going to invest the incremental $4 million of lean-in spending, we would easily deliver our total of 700 bps of SG&A improvement by 2020. However, that extra spending will likely cause us to come up a little bit short this year, but that increase will likely not repeat next year.

And adjusted EBITDA in the quarter was $5.7 million, up $2.9 million or 100% from the year ago period. These financial metrics demonstrate the meaningful benefit from scale we get across our P&L, an essential part of the virtuous cycles embedded in our Feed the Growth plan. It is also a good indicator of our ability to grow adjusted EBITDA in excess of net sales now that we achieved meaningful scale.

From time to time, we will choose to increase investments to capture incremental growth opportunities. But excluding those opportunities, we expect to continue to generate scale benefits in the P&L and expand adjusted EBITDA margins for the foreseeable future. We are very encouraged by these strong results, but we're also mindful of the significant uncertainty in the external environment. At this point, we are reiterating our net sales guidance despite the disruptions, but are reducing our adjusted EBITDA guidance to reflect the incremental investments we are making to replace the volume loss due to delays in retail activity. That investment would total approximately $4 million this year and will ensure we deliver our net sales guidance and position us to accelerate into our Kitchens 2.0 capacity.

We are also adding back higher cost of operating in the COVID-19 crisis. We believe we will incur $4 million of extra costs related to COVID-19 crisis, including enhanced compensation for our employees, increased efforts to protect them, higher cost to protect our supply chain and other related costs. So our guidance is now for net sales of greater than $310 million and adjusted EBITDA greater than $44 million.

Given how fluid the external environment is, we want to be clear about the assumptions that support that guidance. We are assuming the following: retailers resume a significant portion of their fridge places and new item 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 presence of significant restrictions on shopping in stores doesn't prevent reasonable consumption and replenishment patterns, similar to what we have been seeing historically. Data from April suggests that this is a reasonable conclusion, but the dust has not done on this yet.

The effectiveness of our media investment is not adversely impacted by the changing consumer environment. This is the most important factor for us as media drives the lion's share of our growth. We are optimistic that the combination of lower media costs, the increased interest in pets and our ability to refresh our message will deliver effectiveness at least as strong as in prior years once we go back on the year. Additionally, premium pet food has performed very well in previous recessions. So the evidence would support that we should do well, but we are watching this.

Also, we did not encounter any significant supply interruptions, either upstream from us or in our facilities. We are doing everything possible to ensure our continuous operation, but we cannot guarantee that we won't have a significant adverse event that could impact our ability to make or distribute Freshpet. We can sustain incidental interruptions as we have, but we cannot absorb extended outages. We just don't carry that much inventory.

Costs we incurred to manage the crisis are $4 million or less. Our internal estimates for the costs of the efforts we are doing now support that, but we don't know if any new actions will be required. Costs we are incurring and anticipating include the direct compensation payments to employees, incremental sanitizing and social distancing costs, the impact of higher absenteeism and the need for incremental staffing and the cost of health checks for our employees. In quarter one, we spent about $220,000 on this effort. In quarter two, we estimate we will spend $2.3 million.

We have no major customers' credit issues as a result of COVID-19 crisis. Our grocery and mass customers seems to be benefiting from the broader surge in demand, but they are also covering higher costs. Pet specialty retailers, which accounts for about 10% of our business in quarter one, have not experienced the same benefits. We remain very committed to helping those customers succeed in this turbulent environment, but we are a small part of their overall business. This is not an all-inclusive list. For that, please consult the Risk section of our latest 10-Q SEC filings. We want you to know about the major factors that we are considering in establishing our guidance. These times require that kind of transparency and the database approach we like to bring to the business.

We are very bullish on the consumer interest in Freshpet and our ability to drive profitable growth over the long haul. Any hesitation we have is driven by the uncertainty in the retail environment, supply chain and overall economic environment in the near term. For us to say that we have a crystal ball and know how well this will unfold would be gross overstatement and unfair to our investors.

Our liquidity remains very strong, and results of the equity offering we completed in late February. We raised $252 million, of which, we used $76 million to pay down our line of credit. At quarter end, we had $169.5 million in cash, cash equivalents or short-term certificates of deposit. In early April, we amended that and expanded our credit agreement now have $165 million senior secured credit facility that we have not yet drawn on. 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 against Kitchens 2.0 projects so far, another project designed to increase our capacity, and our total spending on those projects to date is $71 million. Working capital increases offset P&L gains, a seasonal phenomenon for our business. So cash used in operations was $3.8 million. We continue to expect positive cash flow from operations for the year.

I'll now turn it back to Billy for a closing comment. Billy?

William B. Cyr - Chief Executive Officer

Thanks, Dick. As Dick said, we had a strong first quarter. In almost any year, that would be a harbinger of things to come. But this is not just any year. We are all dealing with a significant amount of uncertainty in the external environment. When that happens, the smartest things to do are 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'll come out on the other side stronger than we went in, and we are pretty strong when this all started. We are incredibly well-positioned to succeed. We have a winning brand with a strong product and exceptional idea behind it, growing consumer interest in less processed, more natural foods and treating our 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 have worked so diligently under very challenging circumstances. We are also very appreciative of the work done by our customers, suppliers and their employees. We are all in this together. I am proud of how our industry has pulled together to support each other, and we remain committed to working collaboratively with them in 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 who are on the front lines of this fight. Our thoughts are with them all, and we hope that they have the opportunity to go home to love and affection of a dog or cat at the end of their long days. We are deeply grateful for their service and sacrifices.

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

Question & Answers

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ken Goldman with J.P. Morgan. Please proceed with your question.

Kenneth Goldman - J.P. Morgan - Analyst

Hi. Good afternoon, everybody, and thank you as always for all the color and 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 used, I think you said influx. And so, you're not getting exact sort of guidance from them as to what to expect. So, I just wanted to kind of take your temperature a little bit on where - how high your confidence level is that that fridge rollout will be as you expect in that third quarter?

William B. Cyr - Chief Executive Officer

Ken, let me just give you a comment, 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 as they get 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 restoring more normal store hours, initiating planogram changes and whatnot. So, our assessment is based on a look customer-by-customer or what their current status is, and what commitments that they've made to us. So, I feel pretty good that the schedule and the outline that we've given you, get you to these 1,000 net new stores this year is deliverable. But Scott probably has a little bit more color on that.

Scott Morris - President, Chief Operating Officer and Co-Founder

Sure. So I think it's - we've mentioned it 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 sales growth through the year is really driven by the advertising. The stores are critical because we will, obviously, want to have more ACV over the course of the year. But it's - so about 80% of the total increase in sales over the course of the year is really driven by the advertising piece. So the fridge piece is important, but I just want to put that in context first.

The - so, the other thing that we're seeing is, we know that we probably won't hit quite 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 going to - we're looking like we're going to have an incremental 500 second fridges over the course of the year, and that will overall kind of net out to a similar contribution from our kind of fridge growth over the course of the year. So I think that's, I think, important to take into consideration. And as retailers and everybody gets more comfortable with the environment, we're seeing kind of the whole - the planning of fridges continue to come back in. There are some extra precautions, obviously, we're putting in place. And we've actually even seen a fair number of fridges installed even through this quarter, believe it or not, into Q2. So, we like the progress. We've double checked and triple checked with some people. And I think that those second fridges will be a big offset.

William B. Cyr - Chief Executive Officer

Ken, let me just add one other point to it. As Scott said, we've done - we did 111 fridges through April 24. So, 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 Scott talked about sort of how our business model develops. But a lot of the retailers are saying that this crisis has allowed them to figure out really what are the categories, what are the segments they want to be in, what are the businesses that make the most sense. And a lot of them 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 are 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.

Kenneth Goldman - J.P. Morgan - Analyst

Okay. That's helpful. I wanted to also ask - I know there's a lot of moving pieces, and certainly no one can predict the future, especially right now. But you did talk a little bit about 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's no surprises on 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 on the cadence of how that progresses from a takeaway perspective.

William B. Cyr - Chief Executive Officer

Yeah. And Ken, if you look at the investor deck that we published today, we gave the Nielsen data on slide 17, literally all the way through data that came out as of this morning. So it's 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 is a big trough that came on the back end, but we started to 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 if by the end of the quarter, we're back to the run rate in terms of the growth rate that we had. And if you look at the lines on that slide, what you can see is we're headed back towards where that consumption line is, the orange line is the consumption line on there. We're headed back in that direction and we have visibility on scanner data for key retailers, that goes one week beyond that. And we can tell you the trend continues and we feel pretty good about it.

But as you think about what will actually report, remember in Q1, we had a little bit of the search, but really most of that fell into Q2. So during that trough, we got a - we got a good - we had basically refilling the inventory. And then, and we'll see a little bit of that in the May window. So we think, Q2 is going to end up looking like Q1, in terms of total shipments. It's just going to have this funny feeling of filling a trough first and then resuming normal consumption later in the quarter.

Kenneth Goldman - J.P. Morgan - Analyst

Okay. Thanks so much.

William B. Cyr - Chief Executive Officer

Yeah.

Operator

Thank you. 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 morning folks - good afternoon, sorry. This will happen if we work from home too long. Good morning to [Indecipherable] quite alone, your day of the week. So a couple of quick questions. First, Dick, you walked through the $4 million of COVID expense, I saw you excluded that this quarter, is it fair to say that the pro forma adjustment does not impact your EBITDA guidance for the year?

Richard A. Kassar - Chief Financial Officer

Well, what we've excluded is $4 million of COVID expenses, we've only spent a couple of $100,000 in the first quarter. We expect to spend $2 million in the second and the balance in the third and the fourth quarter. And we are excluding that from our EBITDA - adjusted EBITDA numbers.

Jason English - Goldman Sachs - Analyst

That's right. Got it. Thank you. And you mentioned - you mentioned trade down risk and why you're not concerned about a recession is going to impact adoption of the growth, your business. Can you help point me to some of the things that give you confidence. I mean, I know last recession premium held up, but that was also in the wake of the melamine crisis, that obviously capitalized a pretty big uptrading. So there is a lot of noise in that data set. I'd love to hear what you're looking at - that lends confidence back.

William B. Cyr - Chief Executive Officer

Scott, you want to take that one?

Scott Morris - President, Chief Operating Officer and Co-Founder

Yeah. So, Jason, if you look at premium pet food really over the last three recessionary periods, it's typically seen, growth really through every one of those periods. The growth may have been come off a little bit of the top that it was at - but it typically is really grown through each one of those periods. We were very small, but we were around in '07, '08 and that was a pretty tough. We also saw '10, '11. And the thing that - I think we're pretty well positioned around is, we actually have 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 dollar per pound item, to some things that are a little bit more cost effective now. That obviously has some impact from a dollars, a buying rate standpoint, but the margins are actually slightly accretive, which is one of the things that's actually been helpful this quarter, where we actually had a little bit more roll business going on this quarter.

So I think historical trends have been pretty strong. We've participated and experienced 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 adversity in the market. I mean, if it's, if it's a horrible recession, I think it could have some impact. We're watching the data literally weekly, and I won't typically share this much information, but we're looking across all different customers and we're seeing it go from the spike, the trough and it goes from single-digit to teens, the 20 to mid-20s at some of the customers that you won't expect to see quite the growth rate coming back as quickly as it has and it looks like it's responding well already. I know we're not there yet, but it looks fairly positive so far even.

William B. Cyr - Chief Executive Officer

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 there is a very strong loyalty to the Freshpet, once you've adopted the Freshpet how that you stick with it. 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, is the thing that becomes a little bit more difficult. If they are into a recessionary environment, but were still small in the total category at 3 million households or 63 million households with dogs, we're not asking everybody to change their pet food. And I apologize that was my dog barking in the background, as we promised there would be one. So, but you can imagine the - that for the - for the number of people we're trying to attract, it's still getting from 3 million to 8 million households is our goal over the five-year period. We still think that's very doable, even if there is a little bit of an economic headwind.

Jason English - Goldman Sachs - Analyst

Understood. Got it. Thank you, guys. I'll pass it on.

Richard A. Kassar - Chief Financial Officer

Thanks, Jason.

William B. Cyr - Chief Executive Officer

Thanks.

Operator

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

Robert Moskow - Credit Suisse - Analyst

Hi. Thank you. I guess a couple of questions about what's going on at the plants guys - you have 11% absentee rate. Are people feeling safe to come to work? Have you tried calling up or taking surveys to see how their attitude is, because I think that's one of the biggest challenges at the meat packing plants, is that, people just don't feel safe. And then secondly that you're excluding the COVID cost this year, but is there a chance that some of those costs spillover into next year as well? And maybe even become just a higher cost of doing business, if it means we have to have higher safety methods in place for longer. Thanks.

William B. Cyr - Chief Executive Officer

Yeah. Rob, those are really good questions. And as we said at the beginning, it's safety of our employees is our number 1 priority. In terms of the first question, why is there an 11% absenteeism rate. When we talk to - when we did follow up with the employees who are chronically missing, and ask them why is it? In the vast majority of the cases it's because there's somebody at home, who has some underlying health issue, where they want to do everything they can to avoid creating a risk for that person. And so they view potentially going to work as possibly risk.

We've also been communicating very aggressively with all of our employees, every single week, what it is that we're seeing, we're very transparent with the information, just as we are with investors, we're transparent with our employees about what we're seeing. And what we - what the results have been. And so far we have no evidence of any transmission of the virus within our employee base. That doesn't mean they don't have it, that because it exists in the community, we exist in the northeastern part of United States. But we have no evidence that is transmitting and our employees seem to reinforce that. But they are - as you might imagine, part of a community where they're seeing this fairly broadly. But the absentee rate that we're seeing is 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 - March production was pretty close to where February was. And in April, we had good production. If you just look at the chart that we put in the investor deck today, on slide 10, where we gave people what our shipments are for both March and April. And remember, we came in constrained on capacity and constrained on trade inventory, we shipped more than 30% ahead a year ago, on 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 - all these costs are going to be recurring, the single biggest parts of those costs are the absenteeism and the incremental pay to employees. So clearly if we have to continue to do that into next year, that does become a recurring cost. But we have structured them, as bonuses to our employees, not as an increase in the underlying wage rate. And against the backdrop, where there is going to be a fairly significant amount of unemployment, I don't think we'd have to raise the overall wage rate. The cost for the nurses and the external incremental spacing and the sanitation that we're doing, are very minor compared to the added compensation that were paying. So I guess it's a long winded way, even if we have to maintain the added nurses and sanitation, we can do that without having material effect, it's the wages and the incremental pay, that's really the biggest impact and the cost of line production time.

Robert Moskow - Credit Suisse - Analyst

Got it, and makes sense. And the second element I thought it was pretty important is, is getting into the stores to replenish the refrigerators that are running low, since store inventory is running low. What extra steps have you needed to take to make sure that - I don't know if your drivers or your brokers, maybe it's a combination right now, can actually get into those stores to execute what they need to do?

William B. Cyr - Chief Executive Officer

Scott, do you want to take that?

Scott Morris - President, Chief Operating Officer and Co-Founder

Yeah. So what we do is every - every store is on a slightly different cadence or every chain is on a slightly different cadence. But every couple of weeks we get a pretty full set of pictures from all the different stores, we reviewed the pictures. The lesson, we want to do with someone - send someone into the store, if we - if we don't have inventory. So we're trying to make sure that there is inventory in the warehouse, inventory in the back room and then we're actually going ahead and sending people into the store to help replenish.

What we're finding is that the store personnel are just so behind, and then there are times where they're not taking as good a care of 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 one of our broker partners. And a couple of other folks that we work with, that can help get us - get to retail and cover. It's a pretty broad number of stores where we need to put the pressure, and assist in stocking some of those fridges.

Robert Moskow - Credit Suisse - Analyst

Okay. There's a talk in our household of getting a second dog, so we'll keep you updated, market research of one person. Thank you.

Scott Morris - President, Chief Operating Officer and Co-Founder

I think, I think we see a lot of [Speech Overlap]. Yeah, yeah, a big trend. I think, if I remember correctly, there is at least one other analysts, that I think, might have gotten a puppy recently.

Robert Moskow - Credit Suisse - Analyst

Yeah. It's for real. Thank you.

Scott Morris - President, Chief Operating Officer and Co-Founder

Yes.

Operator

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

Peter Benedict - Robert W. Baird - Analyst

Hey, guys. First one, as you mentioned the Australian competitors [Technical Issues] some of those placements, in pet specialty. Can you [Technical Issues].

William B. Cyr - Chief Executive Officer

I couldn't hear that.

Scott Morris - President, Chief Operating Officer and Co-Founder

Yeah, I didn't know if it was my phone or Peter's.

William B. Cyr - Chief Executive Officer

No, Peter, we couldn't hear your question. You kind of broke up.

Peter Benedict - Robert W. Baird - Analyst

Better now?

William B. Cyr - Chief Executive Officer

No. Try again.

Scott Morris - President, Chief Operating Officer and Co-Founder

I mean, I think it was around the competitor from Australia that…

William B. Cyr - Chief Executive Officer

I think he said, I think I heard him say, are we buying the fridges?

Scott Morris - President, Chief Operating Officer and Co-Founder

We actually are buying those fridges at a amortized rate, so that we will actually end up being the owners of those fridges.

William B. Cyr - Chief Executive Officer

Peter, you still there?

Operator

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

Brian Holland - D.A. Davidson - Analyst

So I wanted to ask about the $4 million in incremental investment, specifically the advertising. So first question would be - how much of that $4 million, is tied to advertising? And then how do you get comfortable with - obviously, we've moved back to expected starting data Kitchens 2.0, you have a surge in pet adoptions. So you've pulled the addressable market forward.

And I think it makes a ton of sense to be advertising towards that. But I've been wondering as I've watched the news about this trend to pet adoptions, whether it's actually a positive for you guys or not to pull forward the addressable market while you're still a bit capacity constraints? So can you walk through the comfort with increasing the advertising spend, which is obviously the primary catalyst for incremental revenue, your ability to support that with 2.0 coming on and maybe kind of a shifting timeline of getting that on board?

William B. Cyr - Chief Executive Officer

Yeah, Brian, let me talk to the capacity part and then Scott will talk to you about the advertising, how, what the cadence of the advertising is going to be. But if you go back to that slide 10 again, recognize that in March and April, we were able to ship more in the 30% ahead a year ago. I think the number we're showing there is 33% in April and 34% in March. The problem was - that you 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 of 24/7, back in January. We brought on capacity at Kitchen South in the middle of February. We've got that running really well. We're bringing on a second shift to Kitchen South that will be up and running by June 1st.

So we're very comfortable that will 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 will be down to a specific item as opposed to an overall limited ability to supply the bags. But I feel very good about our ability to more than meet the needs of the bag business now - that we're - base we've been given a little bit of 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 of June. And once we're there and we have that added capacity at Kitchen South, I think, we're going to be in good shape, other than a little bit of tightness on Fresh From the Kitchen. Scott, you can talk a little bit about the cadence on the advertising and why we think it's a good idea.

Scott Morris - President, Chief Operating Officer and Co-Founder

So, a very wise gentlemen, reminded me about the Alamo recently. He said, make sure to save your bullets 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's coming - that has come online and this is continuing to come online.

And we are trying to coordinate all of that, where when the advertising will start-up, just literally a week or two before, I think we're kind of getting towards more optimal in-stock levels. But keep in mind, that means that, we will still have 80% and 90% of the fridge full. What we don't want to do - and it takes advertising, a couple of weeks to continue to really build up. So we're trying to start at appropriate time, it's - we're actually kind of, I would say layering into it, at this point, and we're getting a rolling start. There is balances, there is media is not only effective right now, but it's also very cost effective. So we're getting a great response to the media. But it's also very cost effective in order to run it.

So we really 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 programs which Billy mentioned, and we have some - it's mentioned in the slide. We're putting some additional e-commerce programs in place, where if people are going to retail and they're frustrated that we're trying to help them out and make sure that they can find the product.

Brian Holland - D.A. Davidson - Analyst

Okay, thanks. And then just the last one for me, I guess with respect to these - the 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 - is this a base that's right in your wheelhouse, maybe younger consumers, smaller dogs more likely to spend at premiumized level? I understand that a lot of this maybe just too soon to know. But just curious if you have any insight or what level of engagement you might have had from new customers, even those who may not have adopted yet either through the website or any other forums.

William B. Cyr - Chief Executive Officer

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. It's a unique time where they're home or both of them, whether it's - they're home or them and their spouse are home, and it's a 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. Everyone's home. The kids are home, the parents are home, etc. So it's kind of a unique opportunity, and I think a lot of people are taking advantage of it. I think there's going to be a lot of people that, that should be - will be really perfect for.

The other thing we're seeing a lot of is, it's not the first pet, it's actually a lot of people adding a second. And for those people, they are highly involved pet owners. Typically, we love to see specially a smaller dog, multiple households is really kind of perfect right in the sweet spot of our target. So now we got to go tell them about Freshpet and bring them into the brand. We - it was mentioned, too, but 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, being launched in the very near future, too. So we're 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, we're basically launching out of what's going on with COVID and positioning ourselves as best as we can into the future.

Operator

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

Rupesh Parikh - Oppenheimer - Analyst

Good afternoon, and thanks for taking my questions.

William B. Cyr - Chief Executive Officer

Thanks, Parikh.

Rupesh Parikh - Oppenheimer - Analyst

Just going back to, I guess - Billy, just going back to, I guess, new household acquisition. So obviously, it's more challenging to go into grocery stores these days. So just curious, like as you guys look at new household acquisition, like how important is that in-store experience that consumer bring seeing your fridge versus the efforts you do on media side? Obviously, media is bigger, but just want to get a sense of how it splits up.

William B. Cyr - Chief Executive Officer

It's a good question, Rupesh. 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 closely. So we go on air, you start seeing the household penetration go up. And we look - 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 going to be, though, is once you become aware, and you want to buy it, what is your preferred way of buying it? We did include a chart in our investor deck on slide 9 that talks about how that's changed a little bit. And how there's an emerging interest in e-commerce that's coming out of this that 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 that Scott 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 the Freshpet, and they can find it in a variety of different ways. If you go to our website, you can see some of the options that 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.

Rupesh Parikh - Oppenheimer - Analyst

[Speech Overlap] yeah, go ahead.

Scott Morris - President, Chief Operating Officer and Co-Founder

And Rupesh, I'll probably add. And so then - so I think that's overall, exactly how the model works, it's definitely the advertising driven. Think about fridges as - we add a lot of fridges, it's a multiplier effect. And the thing - the two things to consider is, in the beginning of the year, we - the fridges that we added were very high ACV fridges, right? So there were a lot of fridges that like went into a Walmart. They were on a Walmart on main cab. And then the fridges we're adding, we're adding a lot of second fridges in addition to new fridges. For the total year, if you just - if you take away new stores for a second and just say fridges installed, we're actually going to be basically right on where our fridge number would be with the incremental second fridges. So I think we've got that working.

The second thing is, how does the advertising work within this environment? And again, I don't like to look at weekly data by any means. But what we've done is, in 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've been 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 it was a drop off. And then we're actually seeing the penetration start to build, and literally as of 10, 15 days ago, we can see the penetration starting to build again, even though we're really not advertising at this point, there is some residual effect. So we'll watch it closely as the advertising comes back on air. But the web response to the advertising has been the best we've ever seen.

Rupesh Parikh - Oppenheimer - Analyst

Okay, great. I'll pass the line. Thank you.

Operator

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

Bill Chappell - SunTrust Robinson Humphrey - Analyst

Yeah. Thanks for squeezing me in. I guess two questions, both around guidance. On the top line, I don't - I guess I had - I know you're comfortable with at least $300 million sales, but that's a lot of room. Is that an increase, you think, from where we stood three months ago, a decrease? Or too early to tell? I'm just trying to understand kind of what that means over the past three months of the environment?

Richard A. Kassar - Chief Financial Officer

So the guidance is 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 of that number. Bill, it's not as precise science as we would like and probably as others would like it to be as well. Because it's a kind of fluid environment, but our confidence level about our ability to clear the $310 million as we've given us guidance with the programs we put in place is, I'd say, where it was beforehand. 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 the year, we picked up the Walmart stores, the advertising was over-delivering for us.

We had a real head of steam, and we saw this crisis come and it kind of slowed us down a little bit. And because consumers won't go out and try new things, and that's why we created this program that we're calling our breakout plan so that you come out of it with the same momentum that you went into it. You 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 we're in excess of $310 million for the year.

Bill Chappell - SunTrust Robinson Humphrey - Analyst

So it kind of ties to the second question. I mean what you're saying is you may not have gotten to that without the incremental $4 million spin. And then within that $4 million, is that the right way to look at it? Of you're just spending more because you talked about lower ad rates, you look to maybe some other positives. You've pushed out some - the spending that would have happened by these past two quarters to the back half. So I'm just trying to understand, is that - one, is - we needed that extra $4 million hit to EBITDA to get to our sales number? And two, is it a $4 million number? Or is it kind of a net $4 million, there's other positives and negatives to get to that $4 million?

Richard A. Kassar - Chief Financial Officer

Well, there are always a bunch of puts and takes in there. But as you think about it, the things that we are having delayed the two of the things that are delayed are things that are not P&L items. The capex that goes with the fridges. And the reduced number of 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 them ready to go. And they just are delayed in getting out in the market. And so there's no P&L savings from doing those things. But there is to replace them, there is a P&L expense for getting the third party into the stores, buying the advertising, doing some of the advertising support that's going with the e-commerce program.

So we are in a way changing - exchanging some capex-related items or some investments that were previously made for investments we're making this year. But your question was, would you have gotten there? The answer is we feel a higher degree of confidence in getting there with this new plan. We wouldn't have had to do this if we hadn't had the retail disruption. It's just - it's very clear, we would have preferred to go the other way, but we feel very good about this plan. And we just think those other things are delayed. We will get those. Retailers are telling us they believe in this category. They want to - we'll get those, we'll just get them at a later time. And so we thought it's in our best interest to grow and to use the capacity that we have available to us, and that's why we're making those investments.

Bill Chappell - SunTrust Robinson Humphrey - Analyst

Okay, great. Thanks.

William B. Cyr - Chief Executive Officer

Thanks, Bill.

Operator

Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Please proceed with your question.

Bryan Spillane - Bank of America - Analyst

Hi, good afternoon, it's Bryan Spillane.

William B. Cyr - Chief Executive Officer

Hey, Bryan.

Bryan Spillane - Bank of America - Analyst

So just one question for me. You've mentioned it a couple of times just makes me - in talking about maybe the merchandising, getting people into the store to stop the cooler. So just wasn't clear to me, were out of stock an issue in the first quarter and are they an issue now? And I guess what I'm trying to get at is, if they are, are your sales at all being impeded right now just by maintaining good in-stock levels in store?

William B. Cyr - Chief Executive Officer

Scott, you want to take that one?

Scott Morris - President, Chief Operating Officer and Co-Founder

Yeah. I would say before we knew what COVID and social distancing was, our in-stock levels were being impacted unquestionably. It really - you can kind of see it in whether it's pictures or many of the ways that we track in-stock levels and availability. We definitely - if we have had those products in, Q1 would have been a bigger number unquestionably or January and February would have been a bigger number. Then you - on top of that, you add the COVID, the crisis, that surge, and being kind of low on inventory and being behind, it exacerbated the problem. And I would say fridges are the worst right now than we've really ever seen them. I think they're getting better from where they were weeks ago, and I think they'll progress significantly over the next two to three weeks, but they're unquestionably the worst that we've ever seen. Some people will go to another item.

A lot of times, people are going, oh, you know what, they didn't have it at this - like in a typical purchase cycle, they're like, oh, they didn't have it today, but I'm going to get 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 - they're having overall bigger baskets, bigger shopping trips and less frequent shopping trips. 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 you - the top of the list is we've got to get the inventory build back up. And the team is working 24/7 in order to do that. The next piece is to get retail improved and right, and the next piece will be the advertising into the mix and continue to kind of accelerate growth through this quarter.

William B. Cyr - Chief Executive Officer

Bryan, let me do some metrics on that for you then. In January, 8% of Freshpet users would tell you they were having difficulty finding the item they wanted. By the second week of April, when the surge had happened, it was 32% of Freshpet users. And as of this weekend, it's down to 15%. So it was not where we want it to be. It's gotten better, but we still have a little bit of time to go until we get back to a level that we'll feel comfortable with.

Bryan Spillane - Bank of America - Analyst

Yeah, no, 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 help to help with that in-store merchandising. So is that really the physical sort of aspect of closing that gap? Is that just getting those extra hands in the coolers?

Richard A. Kassar - Chief Financial Officer

So the elements you have to do is, as Scott said, it is, you have to first build the supply. Well, now that the - 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 level that is, call it, 30% plus above the year ago. We're now able to start rebuilding some of our internal supply and our customer supply to, 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 a position where the retailers are able to pull the product through. They have the labor, they have the time. They can get it into the fridges, and that's what the incremental effort is that we want to put in place because pause 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 a 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 pantry inventory needs to be gotten to the right place. We feel pretty good about that. That's in the right place. We've gone through the trough. We've come back up out of that. So supply is getting there, it'll be there in some time in the next, call it, four weeks or so. And then the stores will be fixed in sometime in the next month or two.

Bryan Spillane - Bank of America - Analyst

Okay, great. Thanks for that color.

William B. Cyr - Chief Executive Officer

Yeah.

Operator

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

Jon Andersen - William Blair - Analyst

Thanks, good afternoon everybody.

Richard A. Kassar - Chief Financial Officer

Hi, Jon.

Jon Andersen - William Blair - Analyst

Hey, couple of quick ones. One on supply of key inputs, ingredients, 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 to what extent you see this as a risk factor or a potential swing factor as you look to the kind of the full year outlook?

William B. Cyr - Chief Executive Officer

Yeah. So as you know, Jon, the biggest input we use is chicken. We price our chicken once a year. So we priced it in December for the rest - for the following year. And so we have our chicken price lock. 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 critical suppliers to put in place a backup supplier who's 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 of the proteins of weight. 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 haven't had any interruptions or any of our productions interrupted by the lack of availability, but we have - we've been able to keep up with it. There is going to be some pricing flexibility or pricing issues that we'll see potentially on 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 or energy costs that we have maybe an offset.

Jon Andersen - William Blair - Analyst

Great. One other follow-up. On the e-commerce 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, I'm just wondering how you would kind of characterize your position vis-a-vis 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? Were these planned prior to COVID? Are they new? Have they been accelerated? And then just what you're doing to kind of make sure you capture your fair share of this growth because it does seem like it's more permanent. Thanks.

William B. Cyr - Chief Executive Officer

Scott, you want to take that?

Scott Morris - President, Chief Operating Officer and Co-Founder

Yeah, yeah. So Jon, the first thing that we did as immediately as we could, we have a fair amount of e-commerce initiatives underway and when we think about e-commerce, if you break them out into deliver to my home or pick up at curbside, think about Instacart from deliver to my home or AmazonFresh or shipped those scenarios, FreshDirect, Peapod, etc. And then the other initiatives are all the click and collect, click and pick, where it's Walmart, Kroger, etc. So we did as much as we could to push consumers into that direction because we know it's a little bit more accessible. That typically will come with existing shopping trips.

The next thing we did was we actually implemented what we call the DTC SOS program, where we literally from scratch - I think we decided - I'm going to say it was probably March 10 that we wanted to put this program into place, and it's actually going to launch next week at a launch on Monday, where just for a very select number of items, we're actually going to do some direct-to-consumer for a period of time. And because we know we have consumers that are still having trouble finding the product. So we're dealing with that piece. And then we are also continuing to evaluate and look at other e-commerce 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 mentioned a minute ago, which is called deliver, where we'll - on those ads, we'll literally have, at the end, a where to buy, and it'll have a deliver to my home or click and pick or click and collect, and it will show the logos of the retailers that have those services. So I would say that if you - over the past several years, online or the direct-to-consumer, 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 we're available anywhere a consumer wants to buy us, and we're rapidly accelerating our work in that area.

Jon Andersen - William Blair - Analyst

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

William B. Cyr - Chief Executive Officer

Okay.

Operator

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

William B. Cyr - Chief Executive Officer

Mark?

Operator

Mark, please check if your line is on mute?

Mark Astrachan - Stifel - Analyst

Can you guys hear me?

William B. Cyr - Chief Executive Officer

Yeah. We can.

Mark Astrachan - Stifel - Analyst

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 bored. But he is also [Indecipherable]. On that note, so two questions, maybe sort of related. Customer acquisition costs in 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 - your internal ones versus what we all had kind of thought when you think about things like rolls versus bags in terms of what you said about what you have capacity wise? And then where does that come out? If you think about the average between 2020 and kind of 2025 to get to those numbers, where would we be in 2020? It would seem like we're on the lower end of that, but I just wanted to kind of walk through those puts and takes.

Scott Morris - President, Chief Operating Officer and Co-Founder

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. 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 attentive. I mean I think that the reality is we're spending more and more time with our pets, and I think people are a little bit more cognizant of it. So we've seen great, great response rates.

The other thing we're seeing is that lower media cost. Looks like it could be anywhere between 10% to 15% lower media cost, which, I mean, that'll make a significant impact in how us are attaining new consumers, and 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 a 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 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 watch this literally every single week, when we had that - those COVID weeks, we actually saw the buying rate spike way up, because it really was stock up, it was an incremental consumers to that point.

Then we saw a drop down. We saw penetration kind of drop off during that kind of month of March really and into early April. And then it looks like it's starting to kind of respond back and kind of move up on the penetration and both the buying rate piece. So I don't know where it's exactly going to be. It's been interesting that buying rate held up as well as it did when we - our 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 think we have - go ahead.

William B. Cyr - Chief Executive Officer

No, 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 of penetration and buying rate. Because the consumer buys it, tends to buy and use it as a complete replacement and they oftentimes 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's a fairly good buying rate that we get out of those households. And we are now back fully in supply. I mean that business grew 60% last year. It was growing 60% even when we were constrained. Now that we're not constrained on that item with the Kitchen South being in place, that's going to be a big contributor for us.

Mark Astrachan - Stifel - Analyst

Great. Thanks, guys.

Operator

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

William B. Cyr - Chief Executive Officer

Yeah, just - thank you all for your interest. Obviously these are unusual time. So I'll leave you with one thought, dogs are not our whole life, but they make our lives whole. And that's from Roger Caras, the pet advocate, photographer and writer. So feed them Freshpet, and their lives will be whole too. Thank you for your time.

Operator

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FRESHPET INC

Q1 2020

Earnings Transcript

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