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

Hello and good afternoon now, everyone. Thank you for coming back and tuning back in to Goldman Sachs Global Staples Forum. This time in virtual form rather than live and on stage in New York. Up next is one of the smallest, but absolute mightiest companies I cover, Freshpet. These guys are out to change the way pets eat, and they're doing it with a novel refrigerated food concept, vertically integrated supply chain, a unique route to market that allows them to own their point-of-purchase real estate with traffic-stopping coolers and it's been working. But enough of my preamble, let's now turn over to the management team to tell us what they're doing? How they're doing it? And what's in-store for the future? With me on this virtual stage is Billy Cyr, the company's CEO since 2016. Alongside him, we've got Scott Morris, President and Chief Operating Officer and Co-Founder of the business. We've got Dick Kassar, also another Co-Founder, I believe, Co-Founder, former or in-transit CFO, who's quickly on his way to retiring somewhere either in Florida or Vegas, and it's hard to keep track which. And joining them is his predecessor, Heather Pomerantz, who will soon or has assumed the role of Executive Vice President of Finance, incoming CFO. So team, thank you so much for joining us on stage. I'm excited to have you all here to tell your story.

Billy, let's start with you, and let's take it from the top. This business was suffering some growing pains and momentum have begun to slow when you took the helm in 2016. What steps did you take, did you and the team take to get it back on track?

Thanks, Jason, and I'm glad that we could be here on this conference with you. First of all, I'd start with what was -- what we had when I arrived was what I consider to be one of the best business models that exist in CPG today. It was incredibly well-thought-out product and consumer idea. There was incredibly good depth of thinking in the quality of the marketing, the way in which we went to market, the channel strategies and whatnot. The only thing that we really were missing were some of the skills that were needed to scale the business and to make a couple of choices along the way about where to really focus and prioritize. And the biggest aha for me at the time was when I looked at all the data we had, we had the best product that nobody knew about. And it became very obvious to us that if we invested more heavily in advertising to drive that awareness, that we could ramp up the velocity of the brand. The product would take care of itself in terms of the repeat purchase. That increasing velocity would drive retailers to put us in more stores. The combination of the higher velocity and more stores would get us the scale that we would need in our SG&A -- for SG&A leverage and for manufacturing efficiencies, and we'll be able to reinvest in it all along every step of the way. And we were only able to do that because we had an incredibly well-developed set of advertising and the analytics underneath it that said that when you spent the money on it, it actually delivered the returns. So that was the big unlock, is basically figure out where could you get some horsepower leverage to start that virtuous cycle. And once we did, things took off. And it may -- it really got the retailers' -- got consumers' attention first, then retailers' attention, and we started then capturing some of the benefits in our SG&A, and we've been able to grow from there.

Now you recently hosted an Investor Day. I think it was actually your first sort of inaugural full-fledged Analyst Day. Soup to nuts on this one. You covered a lot of ground. I think the breaking news coming out of it, and there were a lot of newsworthy components, but one of the big headlines was how big do you think this business can become? Which, of course, is a multiple of where it is today. I'm going to operate under the assumption that most here in the audience weren't part of that. So can we take it from the top there? Tell us where you believe this business can go over what time frame? And what sort of data points did you look at to triangulate to get comfortable with that size of the business?

Yes. To start with, we're very much focused on viewing this as a landgrab. We think the world of Freshpet food is the way to go. There's a $30 billion pet food market that's largely kibble and can, and those products, we think, are going to become obsoleted by the evolution or the growth of Fresh offerings. The pets like them better. They're incredibly healthy and nutritious. They're very consistent with the values of consumers today. And so what we're all about is expanding the awareness and thus the household penetration of Freshpet. At the time of our Investor Day, we told folks we were just a little over 3 million households, and we laid out a goal to be -- have 5 million by 2025. So 5 million more households, taking us to 8 million households by 2025. And we laid out all the metrics that go with that, but those metrics were basically, told us that we would add household penetration at a fairly steady, consistent clip over the next 5 years, largely driven by an advertising investment that we would make. And that if we got to 8 million households that in combination with the logical buying rate increases that we have seen over time, would lead you to -- lead us to a business that would be $1 billion in sales in 2025. And so that became the long-term goal that we outlined and the direction that we thought we would go, and we put in place all the building blocks to get there. So a lot of people looked at that and said, "Jeez! These guys are just finishing a year where they did $245 million in net sales, and they're telling us they want to be a $1 billion business." But we've been growing very consistently in the high 20% growth rate for the last 2 years, and we don't see that ending. We've got a very good algorithm that shows when we invest in advertising at 12% of sales, we can drive a growth rate in the high 20s on a consistent basis. And in fact, we've almost been constrained by capacity limitations. If we didn't have capacity limitations, we could probably grow this business faster if we chose to do so. And so what we laid out as part of that 2025 plan included not just the long-term goals and some of the strategies for get there -- for getting there, but we also laid out a plan where we would add capacity so that capacity would no longer be a limiter to our growth. That we could, in essence, grow at the rate at which consumers would be willing to adopt this brand. And a lot of people, if you sit back and think about it, and you look at what's happened in this category over a long period of time, the rate of growth that we're talking about is not unprecedented. In fact, when Blue Buffalo was going through a similar part of its growth curve, it, in fact, actually grew faster. If you look at the year where they were $190 million in net sales and match it up with the year we were at $190 million in net sales, our -- the rate of growth that they had to $1 billion was actually faster than what we've laid out. And the only reason they were able to do that was capacity was not a limiter for them. They were able to access a co-pack supply chain that we don't have the ability to do because our manufacturing is proprietary. So if we take that limitation out, we take out the capacity additions as a limiter of our growth, the ability to add capacity as a limiter to our growth, we think we can grow this business very quickly, and it would not be unprecedented.

Now you've -- it took you a bit more than 10 years to get to 3 million households, and you're expecting to add 5 million households in just the next 5 years. Capacity of size, is there something else that's driving this inflection point? This sort of exponential takeoff of the business, at least in terms of absolute dollar sales or household growth that you're looking for year upon year.

Yes. Let me give you a top line thought, and then I'll ask Scott for his thoughts on it as well. But if you think about what we've been doing in the last year, where we've been investing in advertising at close to the 12% of sales rate, we've been adding household penetration, especially on our core dog part of the business, the part which is the main meal part of our business. It accounts for more than 90% of our sales. We've been adding household penetration at 30-plus percent growth rate. And that, frankly, if you think about it, that gives you confidence that if we can continue to do that kind of rate of growth, we'll be able to make the addition -- we'll add the households that we laid out. And it's really because we have an idea that's on trend. We have consumers that are increasingly interested in products that have the attributes that we do. We've got really good advertising and really talented advertising organization, not just in creating advertising, but running -- doing the media that makes it work for us. But the combination of all those. And then on top of that, retailers deciding to get behind this and put us in more stores at bigger fridges, it's sort of a snowball, once the snowball gets going and you get that consumer momentum and retailers pile on, it just turns into this rapid growth that some people describe as that inflection curve when you get that takeoff point on the adoption curve that we talk about, and that we laid out in our investor presentation. We've gotten past that takeoff point and think, people are doing things to help our brand beyond what we would do. I don't know, Scott, if there's anything you would add to that?

Yes. Touch on it may be a little differently. I totally agree with you, the marketplace is, we are where the puck is moving to. I think people think differently about human food, and we're encouraging them to think differently about pet food, obviously. This is a consumer penetration play. Billy mentioned the idea of like it's a landgrab in a way, and it's a consumer landgrab, I think, is the way he's thinking about that term. And we're at 3 million of 63 million households that he's mentioned. The majority of the advertising that we -- the majority of the growth will come from the advertising initiative that we have a very, very tight model around. It's -- over 80% of the growth over the next several years will come from the investment in advertising. 12% on 100 million and 12% on 300 million are very, very different numbers. And it really comes into a game of almost analyzing it and evaluating it in many, many different ways. But it comes down to the consumer acquisition costs and kind of what we know we've been able to acquire consumers for over the last 3 to 5 years. And what we assume we can acquire them for into the future with that advertising spending increasing each year.

I want to build off a couple of those points, and I guess we'll start with the customer acquisition cost. One Senate could look and say, it's an interesting concept. It's a novel idea. But it's probably niche. And the niche of consumers that it appeals to have likely already created awareness and been penetrated and the cost of acquisition for the next cohort of consumers is going to continue to climb higher, the ability to continue to pull demand is going to become more difficult. How would you respond to such a skeptic?

Scott, do you want to take that?

Yes. It's interesting. And Jason, I think I would -- if it was -- if I was going to wind back 10 to 12 years ago when we first started, we thought, initially, this might just be a pet specialty play, quite honestly, many, many years ago or maybe some retailers. And we look at it today, and we're in over 3,000 Walmart stores. And I think that is something that has been an incredible achievement by the organization. And we're going into more and more Walmart stores and in more and more visible locations. We've looked across other retailers like Albertsons is a safe way. We gave some examples in the Investor Day presentation, where we looked at the share that we've developed there or we've even looked at markets, and I think that at this point, I think it's well beyond niche, and I think it's -- I wouldn't say we're -- we have the potential to be quite mainstream this concept over time. I mean it's pretty simple. If you're buying meats, where would you buy them from? We don't eat meat that comes out of a bag that sits on a shelf for up to 2 years. I think that consumers are getting their head wrapped around that concept. So I think that it's becoming -- it has the potential to become much, much broader over time?

I would add to that, Jason. If you think about it, one of the things, as we laid out in our Investor Day presentation, we laid out who are prime prospects for this business and who are the people who when you ask them, would say, they definitely would buy and we laid out 2 different models. And in each case, since 2016, the number of people who would become available to us, our addressable market, depending on which metric you're looking at, has tripled. And you look at that and you say, the world is changing. And as Scott said, there's a lot of these attitudes and values for changing. But you're also finding is that the generations are moving along. In 2016, when we laid out the potential for this business, Gen Z was in the household formation age. They were all under the age of 18. Gen Z is now forming households and millennials are in their peak household formation years, and those are audiences that are incredibly interested in a product like Freshpet. So just as time has passed and the audiences have become increasingly favorable, has helped us expand the addressable market.

I buy all that. You also mentioned that you believe you're where the puck is going to. And Scott, I think, you mentioned that. And Bill, you mentioned snowball effect. I think a lot of us also look at e-commerce, particularly in the wake of COVID-19 and say, okay, we've all known that puck was going towards e-commerce here, but with coronavirus shelter-at-home, we may have just now catalyzed that snowball effect in e-commerce. So it's -- CPG overall has probably hit an inflection point and pet food, of course, is a poster child upon that. We're already was further ahead, and now we're seeing pretty material acceleration. Your business being refrigerated would -- and weight dense does not appear on the surface to play well in e-commerce. However, I know it's been a real focal area for you. You've been making progress. You're investing heavily there. So bring us up to speed on how your business is progressing there, what investments you're making? And whether or not we should look at e-commerce penetration acceleration as an impediment to your growth going forward?

Scott, you can take that one?

Sure. So e-comm is something that really back in 2016 when we did a longer-term plan, we recognized that we probably needed to do more in that area. Today, I'm happy to report that it's over 3% of our business, which is still very, very small, but it's actually doubling every single year. So it's actually picking up share. And the way we've done that is through 3 main vehicles for the most part. One of them is through delivery partners that are out there, such as AmazonFresh or Instacart, et cetera. Another one is all the areas that you can actually pick up, which is like walmart.com. Kroger has a click-and-pick program, too. So that's obviously -- those are things that consumers are kind of moving towards and migrating towards, totally agree that people have completely accelerated picking up or wanting things delivered to their home during COVID. And we actually think that, that's something that's going to stick. So one of the things that we just launched actually last Monday, it's kind of still in a test phase is, we're getting -- we're delivering a very, very limited assortment of a couple of products to people at freshpetfood.com. And it's something that we're testing and evaluating to see if it's something we want to have in the longer term, but we felt it was something that we wanted to put up and see how it would work. And we're also -- we also have laid chips on the table in every single way that we can get products delivered to consumers or where consumers can pick them up. We have laid down chips and made investments and evaluated them and started to understand and have a really good understanding of if we're making investments in these things, what type of returns can we get. And we've been able to see very, very positive increases in growth. And that's really what's been delivered that year-on-year doubling over the past 2 years, and we anticipate the same thing this year and potentially beyond that. So those are the main initiatives that we see. We're going to continue to expand everything we can in e-commerce that makes sense for the business, where we can keep our margins appropriate and kind of as close in line to our retail margins as possible.

Now. On your DTC business here, this freshpet.com, I see some of your products, but they seem to be more of your ancillary products, like the patties, the mix-ins. I don't see your hero rolls, your hero shredded product. Am I just looking in the wrong place? Or are you just sort of experimenting with some of these smaller products for the time being?

No. It's an experiment and in the near term, as we've price-shared over the past several months on and off, we have had significant capacity constraints. We didn't want to put up products that had significant capacity constraints, and we also wanted to make sure that on a kind of dollars per pound, we can actually ship these as affordably as possible. On some of our larger, heavier products that are more cost-effective at retail, that's obviously something that may not make as much sense. And the other thing is those are widely available at retail, some other types of delivery or pickup. And we don't want to be in the business where we're competing with our retailer partners.

Yes. Totally understand. That makes total sense. A reminder to the folks in the audience. There is, in the webcast, an area where you can enter a question. If you have a question, by all means, post it there. I'll be able to see it and I'm happy to vocalize it for management team here to make sure your question gets asked. Guys -- Scott, you mentioned capacity, and I know it was part of also, Bill, your conversation earlier about you want to make sure the capacity is there, so you could actually go after the growth and not have it be an impediment to your growth. Bring us up to speed, you've got a couple of projects underway. You're expanding capacity in existing facilities, you're greenfielding new facilities, you're doing all this at a time where labor disruptions are high, and we're going through COVID-19. So we've got a lot of moving pieces. Where do we stand? What's the progress on these various work streams?

Yes. Let me kind of map out for you what the various capacity expansion projects are and then how they match up versus the demand. So this year, in January, we took our fourth line, a roll line to the 24/7 production. And as a result of that, we have been able to meet all the demand on rolls and have enough capacity on our roll product for the balance of this year. So there's no issue on the rolls. The second capacity expansion project we did was in February. We started up what we call Kitchens South, which is a line that does our small P size, small bag size products. That started up in the middle of February and has been ramping up capacity, and it's actually doing quite well. In the beginning of June, we will take that line from a 1-shift operation to a 2-shift operation. And the combination that will produce about $50 million of annualized capacity for us. The next incremental capacity that comes on for us will be our Kitchens 2.0. which is our second kitchen, which is a facility built on the same campus in Bethlehem, Pennsylvania, as our first kitchen, but it's a separate building. And that kitchen will come online with construction completed and start-up beginning about the first of October or so, first week of October, with meaningful volume coming off of it in November. What does that mean for this year? What that means is, we started this year with a little bit of a hole in the trade inventory because we ended last year with a little bit better than we expected sales in November and December. And so we started with a little bit of a hole. We filled that hole on the roll side fairly quickly with that, taking that fourth line to 24/7. But we are expecting to fill the hole on the bag side and a little bit of a deeper hole because we were running a little bit of a deficit on our capacity in the first 6 weeks of the year. But when we brought on that Kitchen South, we were expecting to catch up on our trade inventory by, call it, by the end of March or so. But then we had the surge that happened in March, where customer demand and consumer demand exploded. And so we dug a little bit of a deeper hole. So at the end of the first quarter, what we reported was consumption that was in excess of what our shipments were. So the consumption was up 33.5 points, and our shipments were up 28%, and that delta was purely taken out of trade inventory. What we also reported, though, was because in the shelter-in-place period in the sort of this behind the surge, what we saw was consumption was only up 10% in the month of April, but our shipments were up 33%. So what you end up with is, starting to refill some of that trade inventory. The month of May, where we expect that by the end of the month of May, we will have refilled most of the trade inventory hole, we dug at the beginning of this year as we've been producing very consistently and doing a really good job in keeping the operations going through this crisis. And so we'll have -- the vast majority of our SKUs will be caught up by the end of the month of May, and it will make June a much, much more normal year, and it'll certainly make it so that we end the quarter in a situation where we have the capacity from Kitchen South and from that rolls line that more than adequately meet our need. We will have a little bit of a shortage in Q3 on our Fresh From The Kitchen product, which is part of our bag lineup. That shortage of capacity is just because that product is only made in our facility, and we need the capacity from our Kitchens 2.0 to make more Fresh From The Kitchen. So we'll be drawing down some trade inventory in Q3 on that product before we catch up again in Q4 once that capacity comes online. At the end of this year, though, we will have more than enough capacity to support a business that's well north of $500 million as we head into 2021. And that certainly will bridge us well until we get to our facility that we announced that we'll be building in Ennis, Texas. We'll be breaking ground on that facility in August of this year, and we expect to start it up in the back half of 2022.

Okay. Lots of areas, I could take that, but I want to come back and hang on one point there: Consumption slowed to 10% in April, I think, you said, which is quite a bit slower than you've been running at, quite a bit slower than you're expecting for the year. I imagine some of that's because of the consumer pull forward. So as consumers running down to pantry inventory, but tell me if I'm wrong. And maybe also, can you tell me how consumption has trended since then, where presumably, we should be past kind of little lumpiness of pantry stock and pantry online.

Yes. It has trended up. It's moving in the right direction. And we look at the Nielsen data every week and we just looked at it again this morning, and it's continuing its growth versus year ago, continually gets bigger than it was, be in the previous week. This latest week, the Nielsen mega-channel data is up 18%. So it's continuing to move in the right direction. Think about the conditions that need to be in place in order for us to get to the path where we were prior to the crisis hitting. First thing that has to happen is we have to have adequate supply. We did not have that in March and in April. We're now getting back to that. And by the end of the month of May, we should be in a good place on supply relative to what the needs of our customers are. The second thing that has to happen is that we have to get the retail conditions right. In other words, we have to be able to go and dig out the product that might be buried in the back room of a retailer or fix the shelf tags or some way, fix up the retail conditions. We are making that supplemental investment in the month of May to get people into stores to go and fix those retail conditions. So that's the second part. The third thing that has to happen is that we have to get the external environment has to open up. States have to open up, allow a little bit more mobility, people out of their homes. And retailers have to get comfortable on the hours that are open and whatnot, so that we can get to a place where there's a little bit more normal consumption going through retail channels, and we're seeing that. Every year that goes by, we see an increasing number of retailers, expanding the store hours, some of whom have eliminated one-way traffic in aisles. They're just getting more and more comfortable with operating in this environment. And the fourth thing that has to happen is we have to get back on the advertising. We took our advertising off the air in April because the product just wasn't available. We began airing advertising again 2 weeks ago. And so we now are back on our game. I expect that all 4 of those things will have been in place and having effect by the time we get into the month of June. So we'll have adequate supply. Retail conditions will be better. The world will have opened up significantly more than it was in the months of April and May, and our advertising will have an effect. And that's the basis on which we've laid out our plan for this year. And all the data we're seeing in all the Nielsen data would confirm that we're headed in that direction. Nothing has changed versus what we had laid out in our earnings call 2 weeks ago.

Okay. And if we rewind the clock to the beginning of the year, I think you stood up at a conference in early January and said, you expected to do $300 million-plus of revenue this year. Now to your point a couple of weeks ago, you're saying north of $310. And that's coming despite the turbulence that you just mentioned, right? You just mentioned a lot of sort of risk factors and things that need to fall in place. And on top of that, the one thing you didn't mention, but you talked about, it certainly came out a lot in the conference call was "Hey, the other byproduct of all this is retailers have put a pause on some of their store remodels or the store builds. And naturally, that's going to impede your ability to get the units, the new store penetration." So in light of that, your store penetration not growing to the same max that you expected plus these incremental risk factors, what gives you confidence that your revenue is actually going to be better now for the year than you thought it would have been just a few months ago?

Yes. So we started the year by saying we'd be north of $300 million. But as you know, we came out with our guidance at the end of February, we said it would be north of $310 million. And we just held the guidance on the post-crisis period. We held the guidance on the sales. And what we said we were going to do is we were going to offset those hurts from delayed fridge placements and delayed new product placements, and also the delay of the advertising out of the month of April and into May and in the back half of the year by making $4 million in incremental investments that would be focused against the retail coverage against incremental advertising, about half of that is in incremental advertising. And we would also -- retail coverage incremental advertising and e-commerce and the e-commerce programs that Scott outlined previously. The sum total of those efforts is designed to offset the loss of retail fridge placements, new product delays and the advertising being pushed back. And we think that, that algorithm still works, and we think that gets us to our target for the year.

Now a question coming in from the audience. And I'm not sure if you have good share requirements data to answer this, but they want to know, where do you think you're taking share from primarily as you experience this growth? And then second question, kind of unrelated, but still it's a question top of mind for me too, so I'm glad somebody asked it. We had a lot of -- we were all -- or at least I was very focused on DCM and the impact on grain-free and science, et cetera, how it was going to change consumption. A lot of noise with COVID-19, like really overshadowing all of that. But let's kind of bring it back to that, does it still matter, DCM concerns? Are you seeing any impact on the industry still and any impact on your own business?

Scott, do you want to take those?

Sure. So let me talk about share first. So we've actually looked at this several times over the years. And it is pretty amazing that we don't take share any -- from any one brand specifically. We're very -- we seem to be very fair share on any brand that's at least in the premium or upper premium, super premium segments that we kind of take share from. And we're still a very small business in a very, very large industry. So most of those brands aren't feeling like a massive impact. So it's fairly representative of what you'd see in the category -- across the category. Specific to DCM, it is interesting. The FDA is still reporting, getting some calls, but the calls have slowed down significantly. There was initial impact, and you did a -- Jason, you actually did a really great piece on the impact in DCM. There was initially some definitely clear impact in the industry. We had actually seen a very, very mild impact because a very small percentage of our total business is done in grain-free products. We were also -- we're not one of the brands that was called out with any issue with DCM. We have been an incremental to that. We'd also done our own work and testing with dogs and a panel checking proper heart function, doing a long-term feeding study, et cetera. And had noticed that there were no DCM markers or issues around that. And we believe that, that comes down to not only our ingredients, but also our cooking and nutritional ideology overall, and how we formulate our products. Low amounts of legume, if any, and many products. However, we did make some modifications on a couple of formulas in the market, to remove them just from a consumer perception standpoint. So I think we're well positioned for that over time. I think there's going to be more work being done and more industry meetings and studies that will be released over the next several months. I would say, both with DCM and also you mentioned earlier, we're talking about e-comm, as those 2 trends have definitely kind of been things that are tied that maybe pushed against some products, we've been able to maintain our growth rates through whether it was DCM and the growth in e-comm, in pet food, in general, over the past several years. So I think it's just an indication of the strength of the business and the strength of the overall business model and kind of how we grow.

And you heard, the resiliency of our growth has been impressive. There's no doubt about it. And as an FYI for the audience, I think you guys know this, I'm a believer in the concept. And my fridge is stocked full of Freshpet right now. In fact, we've now converted. We got stopped out at shredded because it was out of stock. So we had to buy the beef rolls and my dogs love it. So we're now into beef rolls. Even though I have to slice it, which is I'm not a big fan of, but who cares, they smile too much. They're too happy. I'll go through that trouble.

Dick is thrilled to hear that, Jason, because we make a higher margin on that.

I know. I know he is, I know. So -- well, let's go there then. There were 2 other questions I had. One of them was margins. So you brought it up. You guys have had -- you've had some margin targets that have consistently proven to be a bit aggressive for a number of reasons, whether it be new capacity doesn't quite hit the efficiency level you hoped, whether it be business mix is against you, whether it be like some of this year, you choose to take the opportunity to discretionarily spend into the business. But you've got a lot of new capacity coming online, which I believe is designed not only to be able to fuel the growth, but also to improve some of the economics. What are your margin goals now going forward? And what gives you confidence in your ability to deliver against them?

Heather, do you want to take that?

Sure. Yes. So we shared at our Investor Day that we have an objective to achieve a 25% EBITDA margin by 2025. And even with everything that's going on in the short term, that objective remains strong. So when you think about the path to get there, I mean, the first point we were just talking about from a mix perspective. So if we start with gross margin, realize that, from a track record perspective, there's been some sort of up and down around gross margin. It's not the main driver of our objective, but you're right, we do expect to get efficiency as we start launching new factories and build in improved equipment, improved layouts, et cetera. Having said that, the migration from rolls to bags within our mix does have a margin headwind against us. So from a gross margin perspective, on that roadmap to 25% EBITDA, we expect to get about 100 bps improvement in the gross margin over that time period, kind of netting the factory efficiencies with the mix offset. So the larger part of our EBITDA accretion comes from where we've proven to deliver around G&A and scale. And so while you would expect we are going to scale the organization, and invest strategically in certain areas of the organization and then G&A. We'll do that at a much slower pace than the net sales growth and get a sizable benefit there. We've achieved that type of scale benefit over the last 4 years and expect that to be a strong contribution. And then the last piece comes from logistics. And you can imagine that from the perspective that our shipping in a refrigerated logistics network is probably one of the most expensive ways to ship, couple that with a business that is smaller in scale, you end up shipping quite inefficiently across the refrigerated network. And so this becomes kind of a key driver of our expectations around scale, where the -- where we migrate towards a larger portion of our truckloads being full truckload, where we optimize pallets and have less case picking, et cetera. And we also will get a benefit in terms of having the second facility, a second location in the Midwest in Texas that will reduce the number of miles that we have to travel. So when you bring that all together, that also becomes a key contributor to the margin accretion over the next 6 years.

Heather, you began all that by saying, aside from sort of the current data disruption in the industry. Is the current state of disruption in the industry creating margin pressure for you?

So we've shared what we're doing in the near-term around the COVID expenses -- COVID-related expenses and we've outlined in a lot of detail some of the things that we put in place to ensure that our factory is safe. I mean the priority has been on making sure that all of our employees are safe, while we continue to produce. And so some of that's come in investments around -- specifically around increasing safety around and having a nurse at the entrance and checking temperatures and checking for symptoms, increased sanitation, increased PP&E for employees, et cetera. We've also increased in the short term, some of the wage-related element to recognize our employees for being part of this team and working hard during this very difficult time. In the longer term, we don't expect a majority of those expenditures to be in our steady state. So we're treating that as an add-back in 2020. When we think out to what might be required in the longer term, we feel that, that -- those expenditures are something that we can manage and absorb well within our overall cost structure. And then the only other short-term implication, real short-term has been in the Q1 delivery where we had that higher mix of rolls, which we expect to be offset in Q2. So from a 2020 perspective, we do expect gross margin around 49% to 50% still being our delivery for this year.

Jason, let me just add one point on. When Heather was taking you through the COVID-related costs and one of the common questions we get is, how do you know these are not going to be repeatable costs? And the answer is nobody really knows how long this set of circumstances is going to last. But we've said we estimated about $4 million in costs this year for COVID-related. $3 million of those $4 million are direct compensation payments to employees or the cost of incremental staffing because you have absentee employees. There's only the last $1 million of it is the -- of that $4 million is nurses, sanitation and whatnot. And in an environment where there's a question about how much unemployment is there going to be, it's hard to believe that over the long haul, we're going to end up having to carry all those wage-related costs. If we ended up carrying the costs related to the cost of sanitation and nurses and whatnot, I frankly would be very comfortable and look for other ways to offset that because I think those practices become very good practices.

Yes. Yes. But a key point there is, there are incremental expenses, but all things that are contemplated in the most recent guidance. Like there's no new surprises that you've come out since then, correct?

Correct.

And Billy, you highlighted, to my ears, I heard you stress a few more risk factors around revenue build for the remainder of this year. Then I recall hearing you say on the last conference call, should I read into that? Or no, no, like that's how you saw the world that way then, and you still -- like nothing has really changed.

Nothing's changed. I mean it was 2 weeks ago that we did that call. And I will tell you, everything that I've seen since then has matched up with what we were expecting in terms of the way the Nielsen consumption comes out, how retailers are coming back and confirming their plans for putting fridges in store, the impact of some of the e-commerce initiatives that we put in place, everything is happening the way we had expected it. But I would also say we're all -- we're not crazy here. We know that we're in a very dynamic environment. There's a lot of things that are changing. I think if somebody looks at us, what they ought to think about that this crisis has really reinforced is that you want to invest in companies that have very nimble and very creative management teams and we've demonstrated that in this case. Whether it was the advertising that we had on here within 3 weeks of the shelter-in-place, that highlighted your dogs doesn't know why you're staying at home longer. They're just glad that you're there and everybody take care of each other and stay safe. And that got -- that was a piece of advertising got top 10 breakthrough ads in the first quarter. To our track record of keeping our kitchens running throughout this crisis, while many people are struggling to do that, we haven't had to close our facility. We've been able to keep it operating because we've been very nimble, very quick about adopting the very best safety practices to enable our facility to protect our employees and keep running. And I can go on and on, the e-commerce initiatives that Scott outlined. We went from concept to execution on some of these things in a matter of weeks. So we are very nimble, very creative. And if we find the circumstances changing, we'll adapt to those changes. But versus what we said 2 weeks ago, I don't see any differences.

Right. And I don't want the near-term turbulence to overshadow what's really been a great long-term story with a lot of opportunity left in front of it. Congratulations on the success so far guys. And thank you so much for making yourselves available and joining us today. We're actually over time right now. So I've got to cut this off because I have to get to another one, but I've got to moderate in fairly short order. But once again, thank you all. Be well. I hope the rest of you meetings go well today.

Great. Thank you.

Thank you.

Thank you. Take care.