Freshpet, Inc. (FRPT) Earnings Call Transcript & Summary

All right. Welcome back and thank you. I think we're going to get started. So first, as a reminder, this will be our last presentation of the day. I know it's been a long one, sad but true. But that means that afterwards, this room will be locked for all the rehearsals for tomorrow. So make sure, as we move to break out following the presentation, bring -- please bring all your belongings with you. With that said, that was the exciting part -- not really. Let's close out for the day. We've got an amazing presentation lined up. It's my pleasure to introduce the management team of Freshpet to the conference for the very first time. In a world where the consumer is elevating both the importance of health as well as the stature of our furry friends in the home, Freshpet is reimagining pet food by providing fresher, more wholesome and all-natural alternatives to traditional offerings in the category. The execution against the opportunity continues to be strong. Freshpet distribution points exceeded 21,000 at year-end, and innovation is adding to velocity growth. Consequently, the company expects an enviable 26% increase in 2019 sales. Here with us today to tell us more, we have Chief Executive Officer Billy Cyr; President, COO and Co-Founder Scott Morris; CFO Dick Kassar; and Heather Pomerantz, EVP of Finance. Billy, thank you very much for being with us. Welcome to CAGNY.

Great. Thank you, Tim, and thank you for the invitation to be here and the opportunity to tell the Freshpet story. First of all, a show of hands. How many people in here have a dog? Okay. How many of you feed your dog Freshpet? My hope is that by the end of this presentation, that even if you're not one of our shareholders by then or deciding to be one of our shareholders, that you will decide that you should feed your dog Freshpet. And come and see us in the breakout afterwards, and we'll give you a coupon to make that a little bit easier. So we have to start with our usual standard statement, and we have a 2 pager. And at this point, this is going to be some -- now for something completely different. This is who I work for. Her name is Appa. She's a 15-month old Samoyed. She's the fourth Samoyed that my wife and I have had since we got married 32 years ago. We first got a dog as a surrogate for children, and then the next -- when the children came along, we had them as a companion to our children. Now the children have left the nest, we have them as replacement for our children. They've been a part of the life cycle that most people are seeing with pets. And as you might imagine, Appa lives a pretty good life, and frankly, she eats really well. That should be expected. And in fact, I might argue that she probably eats better than I did when I was growing up. You see, I grew up in the '60s and the '70s. And back in the '60s and '70s, as most of you in this room know, food in America was canned and dehydrated, had preservatives, artificial flavors and artificial colors; and sprinkled on it was a little bit of vitamins; and we were told that it was tasty and nutritious. So our meals looked like Hamburger Helper and Rice-A-Roni, Kool-Aid and Tang, and we had canned tuna and canned ham. And we even ate fluorescent-colored breakfast cereals. It doesn't sound very good, but I bet you that's what many of you had. The problem is, that's what the pet category looks like today. Basically, it's using technology that existed in the 1950s and before to make the food that we feed our pets. In fact, kibble was first introduced in 1956. That was before the astronauts decided that Tang was the breakfast drink for them. Canned dog food was created in 1922. It's even older. And if you think about it, that would make sense if our dogs were sleeping in a dog house in the backyard with a chain-link fence around them and a chain attached to their collar. But that's not really what they're doing today. What they're doing today is they are sleeping in our house, in our bed. They might have -- or they're sleeping in a bed next to our bed with their name embroidered on it. So until Freshpet came along, this is what the choices were. You could have dry kibble or mystery meat in a can. But if you think about the change that has happened with the way in which the pets have become the part of our family that we all see them as today, this isn't the appropriate choice. So let me just talk to you a little bit about how we see pets today. Roll the film. [Presentation]

The data is very clear. There's a long-term trend towards making pets a more integral part of our family. We feel guilty when we leave them at home alone. We take them places with us. My wife knows that she can take Appa to Home Depot and Lowe's, Bed Bath & Beyond, and Michaels will welcome Appa into the store. This is the reality that exists today. What I find interesting, though, is that pets are replacing kids. There are 28 million fewer kids under the age of 20 today versus 2000, but there are 22 million more dogs. Dogs have replaced kids whether it's to hold off having -- before you have kids, you have a dog to hold off having kids. And then when the kids leave the house, the dog replaces the kids that have left. We all make a lot of fun of the changes in behaviors or the habits of Millennials, but Millennials are finally buying houses, they're finally making -- setting down some roots. What's really interesting is the reasons that they're buying houses. Fifth on the list is they have the birth of a child. Fourth is marriage. But more important than those two is they need a bigger yard for the dog. This is the life that we live in, and this is a fundamental trend that is driving Freshpet and will make us the choice of the next generation of pet parents in the United States and beyond. So we live at the intersection of 2 incredibly powerful trends: the humanization of pets, making pets part of the family in every way they possibly can be; and at the same time, the desire for fresh and natural food, the end of canned and dehydrated and vitamins sprinkled on and the rise of fresh natural foods the kinds of foods, the kinds of foods that we used to eat and the foods that we're eating today and will eat into the future. So our mission as a company is to awaken the world to a better way to feed our pets. That's what drives our behavior every single day. The management team we have is well suited to do that. You'll hear in a few minutes from Scott Morris, who is the Co-Founder of Freshpet and our President and Chief Operating Officer. He's the guy who had the vision, 50 years after kibble was created, in 2006 to create Freshpet. And he brings the innovative spirit and entrepreneurial quality that is so badly needed in this industry to completely change the way we feed our pets. Alongside him is Dick Kassar, who was an early angel investor and started with the company from the get-go. Dick is currently our CFO. He'll become our Vice Chairman as of October 1 of this year. And alongside that is Heather Pomerantz. Heather just joined us 2 months ago. She will become our CFO on October 1. But she brings the ability to scale -- help us scale this business as we grow incredibly quickly. And I spent 19 years at Procter & Gamble and then did a leveraged buyout and ran a private equity-backed beverage company for 11 years, a $600 million multinational company, and I have the experience it takes to run a bigger business on a larger footprint. Just for those who aren't familiar with our products, we make bags and rolls of fresh pet food. We start with fresh ingredients: proteins, vegetables, fruits, grains. We lightly cook them, we cool them down, we package them in a roll or in a bag, with no preservatives, and we ship them through a cold supply chain, straight to the customer, to their stores to be stored in a Freshpet fridge. And the consumer then buys it, then takes it home then puts it in their fridge, the way we buy food for ourselves and the way we should be buying food for our dogs. So we have a completely different approach to nourishing pets. We think that food ought to be fresh and natural. And that's what Freshpet is. This has been a great ride as a company, and we have a very, very bright future ahead of us. The company has doubled in size almost every 3 years since its founding in 2006, and that's been driven by an increase in household penetration. But we're still incredibly small, an incredibly small share of the total market. We only have $244 million, which is what our guidance is for 2019 -- greater than $244 million in sales in the $30 billion category. In 2017, when I joined the company, we launched a program that we call Feed the Growth. Feed the Growth is built on a very simple premise. The premise was that we had the best pet food that nobody had ever heard of. We only had 35% awareness at the time. So while we had a manufacturing facility that was capable of making $300 million in pet food and an organization that could sell the product nationally and in Canada and in the U.K., and we had -- so we had the broad infrastructure we needed, we had distribution about 40% ACV, we only had 35% awareness. So we made the decision to invest in advertising to drive up the velocity in the stores where we were, to help us fill the plants, to create enough velocity that customers wanted to put us in more stores to expand our distribution, to create added scale and leverage in our manufacturing costs and across our SG&A that we could reinvest back in the business. The plan has worked. Our growth has gone from a 14% growth rate in 2016 to 18% in 2017, 27% in 2018. As I said earlier, we've guided to over 26% growth for 2019, and we'll report our final results on -- next Tuesday at an Investor Day. That's a 24% CAGR with the most recent years running in the 27% range. Six of our last 7 quarters have been over 25% growth rate. Clearly, consumers are paying attention when they find out about Freshpet. And that's the accelerating penetration growth. And particularly note the slope of this curve. Our penetration growth grew 4% in 2016, 12% in '17, 17% in '18 and 25% in 2019. Those are new figures we're just releasing today. The core dog part of our business, the main meal portion of our business. So this is not our treats, and it's not our cat food. It's our rolls and our 2 different versions of bagged products. That we call our core dog business. That grew 30% last year in terms of the household penetration. And again, it's still a very small share of the category. Clearly, we have a lot of momentum. To tell you a little bit more about the opportunity that lies ahead of us and how we build the business on Freshpet, I'm going to turn it over to Scott Morris, the Co-Founder of Freshpet.

Thanks, Billy. Good evening, everybody. I know it has been a very, very long day, but I have some very exciting news for everyone. First of all, I think we have a great business story, really interesting information we're going to share, but I get to share a picture of my dog. And I not only have 1 video. I actually have 2 videos in my section to make it exciting and move along. All right. Pretty awesome, right? All right. So this is Piper. This is my dog. I have 2 cats, but they didn't want to pose in this scene, as you could imagine. But we do have 2 cats, and we've had pets in our family all along. And they are just an incredible part of our overall family. I thought it would really be good to kind of back up just a little bit and talk about the category that we're in. It's an amazing category. And it's kind of surprising for me to say this: I've actually been in this category for 25 years across 3 companies, which sounds amazing every time I say that. I don't think there's ever been a better time to be in the pet food category than there is today if you're positioned correctly, and we believe we are really well positioned. It's about a $30 billion a year category, and it's actually growing at about a 4% CAGR over time. This past year, the growth rate was a little bit higher than that. And that's tremendous. The thing that's most interesting is the reason the growth has been so consistent is a couple of main factors. One of them is the population growth of cats and dogs has been growing modestly over the last couple of years. But the other point that's actually even more important is this idea of premiumization, where people are kind of migrating to higher-end products in a category and also with more focus on nutrition. And I'll talk about that as I talk on the next slide, too. So the bottom line is, when we think about the category, it's a great category to be in, and the wind is truly at our backs. So a little bit more about the category. I like to call this chart 85 years of pet food in 1 minute. If we did the history of man in this, we could be finished by the end of the conference, I think. If you look all the way back to 1940, pets basically ate scraps and leftovers, and they kind of ate what we ate. Pretty interesting. And then in the 1950s, Billy mentioned, that's really when commercialized pet food came around. And up until the 1970s and '80s, 96% of the calories consumed by pets in America were actually being consumed by commercialized pet food, so completely gone away from scraps and kind of real food. In 1980, '90, there was this birth of super premium. And then more recently, in around 2010, there was a term called ultra-premium. And the ultra-premium part of the category was really focused on higher meat content and better-quality ingredients. What we believe over time is that in 2025, there's going to be a consistent change in the category, and people are going to move back to more real, simple food. And there's just -- the reasons for that is it's because it's how they're eating and how they think about food. So they're thinking about how I eat. They're thinking about what's in my pet's food. And also that involvement, they're more and more involved. As Billy said, there's more and more Millennials. They want to know what's in their food, they want to know where it's coming from, they want it to come from a company with a soul that they can reach out and touch and that has a strong social mission. So Freshpet truly has the potential to change the category forever. And we believe that we're positioned to really take advantage of that. If you think about where the puck is going to, we believe we are where the puck is moving to. And we believe Freshpet does have a way to really do that and accomplish that and change the category forever in a way that's good for pets, people and the planet. And I'll talk about pets, people and planet in a minute. But we're going to go ahead and show like kind of a highlight video and overview video of Freshpet first. [Presentation]

So we operate very, very differently. We have this concept that we introduced many years ago called pets, people and planet. And you may many times -- and I know there's been a lot of discussion around missions and sustainability at this conference. I'm proud to say this is something we baked into the business literally from the beginning. And you may also be thinking, well, why are we -- why is there so much talk about it? Well, this is something that our team is incredibly passionate about and really, really driven by. And it's the reason we're able to do so many of the things we're able to do. Secondly, the consumers expect this today from companies, especially kind of newer, smaller companies. And bottom line, it's just the right thing to do. I think we all know that we can't rely on government anymore to solve all of our problems. I think we've got to individually do things, and corporations are going to be responsible for that. We feel like we've really stepped up. We -- as I said, we've built it in from the very beginning. So a couple of examples. On the pets piece, not only our food, but we've delivered -- over the past 7 years, we've delivered 8 million meals to pets in shelters that are awaiting their forever homes. We're very proud of that piece. Secondly, the work environment. We're incredibly proud of the work environment. Our retention rate is best-in-class of any company out there. We also have industry-leading benefits. Every single person, every single person in the company gets stock because we want everyone aligned and everyone passionate about our mission and what we're trying to do. And our manufacturing on the planet piece, everything is -- it's -- all the electricity is powered by wind, and we're landfill-free, and we're not stopping on any one of those aspects. We continue every single year to build in more and more aspects of our pets, people and planet program. One of the things you saw in the video a moment ago is we work really, really hard to make sure that every single person, no matter who they are, if it's a partner, it's a retailer that touches this company, comes away better off. And we really, really are focused on that. So let me talk a little bit about our food. I talked about how we operate differently, wherein our nutritional ideology is very different. We actually start off with fresh ingredients. We start off with things that you can kind of look at and see: Oh, that's chicken. That's beef. Those are carrots, peas, cranberries, blueberries, et cetera. You kind of can recognize those. We start with as many unprocessed ingredients as possible, and then we actually cook them as little as possible. It's steamed or pasteurized. That's really kind of the foundation. That light cooking helps us to deliver optimal nutrition. Now this is a very kind of complex chart. But basically, what it shows is these are the key amino acids dogs need. There's 10 essential amino acids for dogs. There's actually 11 here. If you use steamed chicken versus chicken meal, which is used in almost all dry dog foods, probably 98% of dry dog foods, or retort chicken, the bioavailability of amino acids is better. Now you're kind of wondering why am I telling you this. This is part of the proof on why consumers are having such a great experience. And I'm going to cover that next. So once we take these great ingredients and we cook them less, we have better bioavailability. That leads us to industry-leading palatability. This is an industry-standard test that's out there. Our food and a competitive food are put in front of a dog, and he gets to consume as much as he wants of whatever food. And you can see the green bars are the consumption of Freshpet. We win pretty much hands down, and we think it's because -- and they can't tell us. We think it's because of the ingredients and the cooking method. That leads to -- after a few weeks, an 82% -- 82% of consumers notice a visible difference in their dog's health. 82%, that's pretty amazing. So as you can imagine, that's incredibly compelling and incredibly satisfying for consumers. It's very, very powerful from an emotional standpoint for a consumer: I bought something that I believe was healthier. My dog loved it. And I believe he actually seems to be healthier. Well, that leads us to incredibly strong satisfaction. These are our consumer satisfaction. It's basically category-leading consumer satisfaction, the people that use our products. It's up in the high 90s. And that really puts us into a great place. It puts us with happy consumers and happy dogs and delivers incredibly high repeat rates, which I'll touch on in just a moment. In addition, we work really hard to make sure our products are available as widely as possible from a price point standpoint. And if you look at this, we've taken a handful of products across the category, approximate cost to feed a dog -- a medium-sized dog. I know most people think, oh, my goodness refrigerated dog food. That's got to be expensive. Yes, it's definitely on the higher end of the category, but there are products that are more expensive than Freshpet, unquestionably, and there's many more that are not on this list. So you can see where we -- our products are the ones that are in the green dots, basically. So it's pretty widely available as much as possible. So it's actually fairly simple how we grow. We feel like we start off with a great concept in fresh, healthy food. We have advertising that is award-winning. And the reason it's award-winning is just because of effectiveness. And I'll show you about the effectiveness in a minute. We have incredible merchandising that's very unique and differentiated. Our refrigerators are in now over 21,000 stores. And we come up with consistent innovation. That leads us to great product satisfaction and also very high repeat rates. That is literally what makes the entire model work. If we advertise and people stick into the product, that obviously gets us incredible returns and our cost per acquisition, obviously, continues to be very strong because of these metrics. So if you think about our advertising, it's really the anchor tenet to driving penetration. There's 2 major campaigns. One of them are Letters. It's kind of a modern-day testimonial where people literally write -- have written letters to us about the experiences with their dogs. That's one campaign. And the other campaign is called Awakening. And the idea of Awakening is to challenge people to think differently about their current pet food and think about how they have changed the way they eat and how they might want to feed their dog. So we're going to go ahead and play 2 of these ads next. [Presentation]

What's in the ad are user-generated content literally taken from the Internet, and we ask people to use them. So it was a nice way to weave them into the advertising. So cute advertising, right? It works. This is over 2019. The orange bars are the investments that we made. And you can see when we were on air -- this is same-store sales. When we were on air, we got a 12% increase in the front half of the year. We went off air, it flattens out. When we go back on air, and it goes up 6% in the back of the year. So if you look at 2017 versus 2019, we've increased our media spend by about 72%. Our consumer acquisition cost has actually gone down 31%. We did not plan it that way, we didn't budget that way, and we're not thinking about it that way into the future, where it will continue to decline. So we're pleasantly surprised by that piece. And our revenue return is 11 months versus 20 months. If I took a single point of advertising and looked at the return, it actually takes only about 4 months, less than 4 months, first, to get a return on revenue and about 7 to 8 months to get a return, a kind of a typical return on the investment, which is pretty amazing, which kind of means we should be spending more in advertising, right? Innovation, which is the other cornerstone, has been able to demonstrate to us consistently that we've been able to build more consumers into the franchise by coming out with new innovation. They hear about the advertising, they find products that are really -- they like and they appreciate. One of our newer products is Small Dog. We didn't have anything in the line that was specific to small dogs. We literally ran the same advertising, put that out there, and that was an incredible build in penetration, people coming in from the Small Dog product. But we've been able to do that consistently. If you look back 7, 8, 10 years, we've been able to come back -- come in with consistently high-performing innovation into the fresh category. This is the last piece, basically our merchandising. And when we started a few years ago, we had many fridges that were literally waist height or chest height. Today, 67% of our stores have a refrigerator that is 4 feet wide and up to 7 feet high. And we've been able to continually increase that as a percent of our mix. We also have more and more stores with 2 fridges. We have some stores even with 3 fridges now. So it is interesting to see how that's developing. This is an example of fridges, where it goes from 1 to 2 fridges. This year, we'll even have some stores with 4 fridges, which will be interesting to see how that tests out. That's leading us to these consistent household growth or the penetration growth. We now have 3 million people that use Freshpet over the course of the year. I think the important number is, is the pie chart on the right. Basically, what you're seeing is that there's 3 million people, and there's over 60 million households that actually have the potential to use Freshpet. We'll talk a lot more at our Investor Day next week about what we believe our addressable market is over time. It's expanded tremendously, and we're very excited about what the potential is. The last piece is the buying rate. Typically, you increase penetration at the rate we're doing -- we are growing at. It's very, very hard to expand buying rate, and we've been able to deliver that over time, consistent buying rate increases. So this is kind of a long-term vision for what the pet category could like look like in 2025. We've built a solid business. We believe it has tremendous potential. The way we think about it is anything that's in a human refrigerator, we are thinking a human food refrigerated section of the store, we're thinking about could that be something we could bring to market for pets, especially because they are more and more part of our family every single day. I want to thank you very, very much for your time and your consideration and hanging out late with us, guys.

All right. Thank you, Scott. Obviously, a lot of passion there and a guy who's created something dramatically different and is changing the category. My mission now is to just tell you a little bit more about the underpinnings of the business and what makes this one of the best insulated businesses that I've seen in my 35 years in the food and beverage space. So we have a very difficult business model to replicate. It starts with a highly differentiated product, consumer preferred, as Scott told you, that delivers noticeable nutritional benefit. It's not easy to make it. The technology and the understanding of how to do that with ingredients we've got resides in our folks and the people who have lived in our organization. That drives incredibly high brand loyalty. And in combination with our advertising, that's an expanding base of consumers who become attached to our pet food. And those of you who have a dog will know once your dog is on a diet, you really don't want to change the dog's diet very readily for fear of digestive issues or other health issues. So once we build a base of consumers who are attached to our product and attached to our brand, that becomes a very strong piece of insulation for us. The Freshpet Fridges. We have over 21,000 Freshpet Fridges in stores across this country. And it's not just the presence of the fridge. It's the visibility, the brand reinforcement, the communication of the brand promise and also the shelf space that it enables us to do more and more product innovation. And they're in the best retailers. We're in 9 of the top 10 retailers in the United States, top 10 pet retailers in the United States. The only one of the top 10 pet retailers we're not in is Sam's. The supply chain. Any of you who've been in the chilled business before, refrigerated business, know that there's significant benefits from scale. So we are building scale in the refrigerated distribution, and there's nobody else in the pet food space who has that refrigerated distribution to the pet food aisle. And we even have an exclusive distribution system to the pet specialty part of the market. And then the manufacturing. We built a kitchen that opened in 2013, expanded it in 2015 and '16. Our next kitchen, Kitchens 2.0, is under construction in Bethlehem on the same campus where our first one is, and that will open this summer. We have an installed base of manufacturing capability that is equaled by no one else. But it's not just the assets. It's also the know-how. How do you make a product that with no preservatives, only the fresh refrigerated system can go through the shelf life or go through the supply chain and arrive at this consumer's fridge with enough shelf life that they can have a fresh product experience. All told, that is an incredible barrier to entry. There are other people who might be in the human meat business or who might be in the pet food business that have some of these assets, but there's nobody who has all of them. And they certainly don't have all of them at scale. And our mission is to build scale as quickly as we can. What's also really interesting about the business model, and this has just been designed in from the get-go, is the -- how efficient the model is and how effective it is. Scott mentioned the 70% repurchase rate. The beauty of a 70% repurchase rate is that we don't have to spend money propping up our existing user base. We spend money out seeking new users and let the product create the loyalty and then use our funds to go out and get the next user, drives an incredible amount of efficiency. We don't do any discounting. Everything is sold at full price. There's several big advantages of that. First, when we acquire new users, they're not price shoppers. They're people who are coming into the brand because they believe in the brand's promise, not because they saw it on sale. The second benefit we get from that is dogs eat the same amount every day. And if you feed the same dog food to your dog every day and there's no discounting, we get an incredibly reliable and consistent supply chain where you don't have to build capacity for demand that is at a peak behind some merchandising, instead you build capacity to the actual demand that you have. Third, designed right from the get-go is a Freshpet brand with multiple, distinct sub-brands. Those sub-brands allow us to be in multiple classes of trade and not have channel conflict. So the Freshpet Vital brand is in the pet specialty channel. The Nature's Fresh brand under Freshpet is in the natural channel. Freshpet Select is sold in grocery and mass. And Deli Fresh is in the club channel. This allows us to give each retailer products that are tailored to their proposition, to the kinds of shoppers that they're trying to appeal to, and not create channel conflict. The last part is the fridges. We own $95 million worth of fridges that are installed, that we maintain them, but they are brand beacons. If you think about it, in a store with a 4-foot wide, 7-foot tall fridge that's lighted, clean, reinforcing our brand concept, it amplifies our advertising message every single day. It tells you what makes this product different. But we also want to be available anywhere and any way in which people want to buy their pet food. E-commerce is a tiny share of our business today, just over 2% of our business today. But it doubled last year. And our mission is to sell the best, freshest pet food, and we will make it available whatever way the consumer wants. So we're in Instacart and Shipt. We're in all the curbside programs. We're in AmazonFresh. And as those opportunities continue to develop, we will make sure that we are part of them. We are not smart enough to know what the consumer is going to decide and what's going to be the winning proposition in fresh e-commerce. So we will play a hand in every one of them. The plan that I laid out in 2017, the Feed the Growth plan, we've learned a lot, and we've had great success. And now we're at the next stage of our growth. And at our Investor Day next Tuesday, we're going to be laying out the next 5-year plan. It takes us through 2025. The plan that we have has only a few modifications versus what was the plan that we laid out in 2017. And one of the most important modifications is we're no longer fixated on just adding stores. And we call that distribution. We're focused on what we call visibility and availability, and we want to continue to expand that. We want to be in more stores. We want to expand our distribution. But in the stores we're in, we want a bigger fridge or a second fridge or a third fridge or a fourth fridge, both for the visibility benefits that we get but also for the opportunity to carry a wider range of very distinct products that uniquely appeal to different kinds of consumers for different sets of circumstances. And that's the change on the block at the top. Where it was advertising before, it's now advertising and innovation, our 2 prime drivers of expanded household penetration. The advertising model is working. Scott showed you that. Innovation is going to help us. And in combination with bigger fridges, we can expand household penetration even faster. The last change of this plan is the block down in the lower left, at about 7:00, that says expand capacity. With the rate of growth that we've got, we need to build the capability and the capacity to meet the growing demand. And we're very deliberate and very intentional about building that capacity and is part of our strategic plan. We have significant opportunities to grow. We only have 46% household awareness today. We're only in 3 million of the 63 million pet-owning households in the United States alone. Our buying rate is only $106, and if you had a 30-pound -- average 30-pound dog who fed Freshpet every day, you'd be spending $630. If we get more and bigger dogs, you get more and more dollars per household per year. Our ACV distribution is only 52.3%, up 15% versus a year ago in the fourth quarter but still a long way to go with more stores. Many of you may be familiar with this diffusion of innovation model. And it's kind of a step-back for us and say we're in this -- looking at this business that is taking off and growing so quickly, where is it going? How is this going to change the pet food category? And if you take a look back, many people have studied this kind of an issue in other categories. They have looked at what brought along electricity and the telephone and the cell phone and the smartphone? And what did that innovation diffusion curve look like? And they pretty much all follow exactly the same pattern. There are innovators. There are early adopters. There's the early majority, late majority and laggers. And all of you probably studied this at some point in your careers. Where do we fit on that? Where is Freshpet today? Well, there's this point along that curve that they call takeoff. Anybody who studied it looked at it and says takeoff is what happens when not only does all your pushing drive a business. So the advertising you spend, the products you launch, all the effort you put into making the business go, Scott has been toiling at this with Dick for the last 14 years, trying to get this business going. All of a sudden, what happens is people look at it and go, huh, it's in my economic self-interest for me to do something with this. Retailers put you in more stores, more prominently delay -- display you in stores. People who do product reviews start writing about you because their readers care about it. Consumers view it as social currency to tell their friends: Oh, have you tried Freshpet? It's really good. My dog really likes Freshpet. It's really amazing. All those things cause a business to grow. Now I can't tell you today that Freshpet's right at that takeoff point because almost anybody who's been on this curve before will tell you they didn't see it through the windshield. They saw it in the rearview mirror. But when it happened, it happened. And we think Freshpet with the rate of household penetration growth that we saw in the second half of last year and the rate of new store growth we saw last year, is either at or approaching that takeoff point where growth accelerates. Now how big could Freshpet become? Where does that curve go? How high does it get on that diffusion of innovation model? Well, we'll talk a lot more about that on Tuesday, and we have a lot of really good ways. But I want to give you one way to extrapolate it. So I have a chart here that shows 5 leading retailers. These were not cherry-picked to be the very best retailers. These were picked because in every one of these retailers, we're in at least 76% of their stores. So we're in the vast majority of their stores. Some of them are as high as 90% of their stores. Like Target, we're in 90% of their stores. What this chart shows you is our last 52-week share of the total dog food category in those stores. So at Target, we have a 6% share of that $21 billion of dog food. At Whole Foods, we have a 22.3%. Down in the white on the bottom of the bars, it shows what our last 52-week growth rate is. So despite the fact that these are pretty high numbers for -- in the dog food category, we're still growing at rates from the mid-20s up into the high 30s. Let's take a look at it on a market perspective. That's the part on the right. So if you look at Chicago or Milwaukee or Sacramento, San Diego or San Francisco, our shares go from 7% to 10.3% or 10.4%. Again, these are not picked because they're our best markets because, in fact, our best markets are more in the Northwest. But they would be pretty representative kinds of markets for us. So what does all this mean? Let's pick 2 examples. Albertsons and Safeway, where we're in over 80% of the stores with that retailer and we have an 8.8% share. If you extrapolate what that share would be of the $21 billion dog food market, that will be $1.8 billion in retail sales. If you do the same on the San Diego market where we have a 10.4% share and you extrapolate that on the $21 billion dog food market, we'd be at $2.2 billion in retail sales. And remember, our net sales for this year, were guided to greater than $244 million. We have a very, very long runway ahead of us. But it's not just in the U.S. We've also been planting seeds in Canada and the U.K., and we'll ultimately work on the continent. Our mission there has been to validate the business model works. We've done that. We know that the fridges work, the products are right, the advertising can work and whatnot. And so now we're in the process of building out the distribution, using our advertising the same way we use it in the U.S. to drive velocity, to make it in the customers' economic interest to put us in more stores, and ultimately, we'll get to the point where we have a model that is very economically powerful and in a virtuous cycle that builds the business in each of those markets. So those are our long-term growth opportunities. We have to keep up with this growth. So I mentioned before we have a kitchen in Bethlehem, PA, the original kitchen. We expanded it in 2015 and '16. Our Kitchens 2.0, which is what's pictured there, will open in the third quarter of this year. I can tell you today that we are under roof and concrete has been poured, meaning all the concrete work has been done inside so weather is no longer a risk, and we feel comfortable that we'll be able to open that kitchen in the third quarter of this year. We'll also announce at our Investor Day next week the location of our next kitchen, which will be bigger than all of our kitchens today when it's fully built out and will provide us enough capacity to take this business over $1 billion. This scale is turning into some improved economics. Up until now, up until 2019, we've been reinvesting the benefits of scale in SG&A back in advertising to drive growth, taking 590 basis points out of SG&A as we grew into that organizational infrastructure and turning it into increased advertising spending. We're now at the level where we feel very comfortable at 12% of net sales in advertising. It can drive 25-plus percent growth, and we will no longer have to increase that spend, and the savings we get from scale and SG&A will fall to the bottom line. And we're starting to see the benefits of that scale. I want to, today, say and affirm that our guidance for 2019, we're reaffirming that guidance for greater than $244 million in net sales and greater than $29 million in EBITDA. And you can see delivering that would result in net sales growth of 26% or more and adjusted EBITDA growth of 43% or more. So we've started to get that uptick, that benefit of scale in the bottom line. We'll also generate positive net income for the first time in 2020. But there are opportunities for margin expansion: freight load size and distance traveled, when we open a second remotely located facility, we'll cut down the miles our freight has to travel; G&A leverage; scale and automation in COGS. And that's rewarding all who touch our business. As Scott said, every one of our employees owns stock in our company or will own. Within the first year of their employment, they'll end up owning stock in Freshpet. Shareholders who've been with us for a while have been greatly rewarded. Since we started the Feed the Growth program, our market cap has gone from $300 million to $2.7 billion, but we think we're just scratching the surface. But we do this not just for those folks, but we do it for the pets because of what all that they do for us, the pets that are so important to our -- us in our lives. Appa says thank you for your support and for your attention. We are on a mission of awakening the world to a better way of feeding our pets. I thank you for your attention, and we have time for a few questions.

Bill Chappell?

Can you hear me now?

Yes.

We can, but I don't think they can.