Aug 11, 2015
Executives
Katie Turner - IR Richard Thompson - CEO Dick Kassar - CFO Scott Morris - COO
Analysts
Peter Benedict - Robert Baird Jason English - Goldman Sachs Bill Chappell - SunTrust Robert Moskow - Credit Suisse Scott Van Winkle - Canaccord Mark Astrachan - Stifel
Operator
Good day, ladies and gentlemen and thank you for your patience. You have joined the Freshpet Second Quarter 2015 Earnings Conference Call.
At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer and instructions will be given at that time.
[Operator Instructions] As a reminder, this conference maybe recorded. I would now like to turn the call over to your host, Ms.
Katie Turner. Ma'am, you may begin.
Katie Turner
Thank you. Good afternoon and welcome to Freshpet's second quarter 2015 earnings conference call and webcast.
On today's call are Richard Thompson, Chief Executive Officer; and Dick Kassar, Chief Financial Officer. Scott Morris, Chief Marketing Officer, will also be available for Q&A.
Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements.
Please refer to the company's quarterly report on Form 10-Q expected to be filed with the SEC 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. Finally, please note that on today's call management will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA.
While the company believes these non-GAAP financial measures will provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute to the financial information presented in accordance with GAAP. Please refer to the company's press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP.
And now, I would like to turn the call over to Richard Thompson, Chief Executive Officer.
Richard Thompson
Thank you, Katie. Good afternoon everyone, and thank you for joining us on today's call.
I will begin with an overview of our second quarter financial and business highlights, and Dick will review our financial performance in more detail and review our outlook for 2015. Finally, Dick, Scott, and I will be available to answer your questions when we finish.
Freshpet healthy foods brand and consumer mission continues to resonate with pet parents and helped Freshpet achieve another quarter of strong financial results. In the second quarter, we generated net sales of $28.4 million, up approximately 39% compared to the second quarter of last year.
Our sales growth has continued to outpace our distribution growth across all of our retail channels. Freshpet fridges increased approximately 14% year-over-year to 14,354, while we continued to see strong velocity growth per fridge.
Our positive sales momentum in the second quarter enabled us to continue to leverage fixed cost and help drive increased gross profit. Adjusted EBITDA improved $3.1 million to $2.8 million.
As sales momentum increases in the future, we believe we will continue to benefit from scalable efficiencies and further cost savings from both our Freshpet kitchens and distribution network. Our solid year-to-date performance has positioned us strongly for continued future velocity and distribution growth.
I'm proud of the progress that we have made as we bring the power of fresh food and fresh thinking to more pets and pet parents across North America. In the second quarter, we further penetrated new and existing retail partners resulting in expanded distribution.
Favorable consumer trends, coupled with the increased demand for better for you pet food products have helped fuel our growth. We believe that Freshpet is a trusted brand for pet parents illustrated by our high customer loyalty rates, velocity, and sales growth.
Freshpet remains committed to bringing healthy foods that are meat-based and minimally processed to the pet consumer. It is this unwavering commitment that allows us to deliver on our mission to provide pet parents with fresh all natural pet food.
This simple idea resonates with the way people feed their families and now their pets and has led us to be one of Americas' fastest growing pet food companies. Our mission and approach to making great tasting fresh healthy food is what truly differentiates us in pet food and has strongly positioned us for long-term growth.
In order to capitalize on our opportunity in the marketplace, this quarter we have made key investments in three key initiatives that are fundamental drivers of our growth algorithm and will continue to build our foundation for future success. One, product innovation; two, manufacturing capabilities; three, Freshpet leadership team.
I would like to provide you with a short update on what we are doing on each of them. One, innovation; continuing our strong track record of delivering innovative new products and exceptional consumer experience in Q4 of this year and Q1 of 2016, we will begin market testing of our new cat food portfolio entering the $7 billion cat food market.
In addition to our cat food test, we have other innovative new products, which will provide us with opportunities that will continue to support our growth. We are also pleased with our initial test of Freshpet's new baked product.
Our fresh baked food is the new exciting way that our innovation team has reinvented dry kibble. As we have said in the past, this innovative product uses all fresh meats, no rendered meals, and a final product is minimally processed with visible super foods inclusions.
Our fresh baked is still in a test phase given the positive early read from consumers and customers. We have decided to expand the test to a select group of retailers and supported with $3.5 million of incremental marketing spend in the third and fourth quarters of this year.
As always, our team will continue to develop and innovate and improve mix of products, which will help drive increased velocity and further optimize our portfolio of products over the long-term. Two, manufacturing infrastructure; in order to keep up with demand and support our fantastic sales growth we have enhanced our strategic manufacturing infrastructure capabilities at our Freshpet kitchens in Bethlehem in two ways.
First, we are upsizing much of the equipment in phase two to provide increased capacity that will exceed $400 million per year in revenues. Second, we took advantage of an unique opportunity to purchase a 60,000-square-foot building on 6.5 acres directly adjacent to our current Freshpet kitchen's location in Bethlehem, Pennsylvania.
Dick will provide more details on our capital plan a bit later. As we have mentioned previously, the first phase of this expansion is now complete, our team has moved on to the phase two of which will focus on the new infrastructure including additional higher capacity, state-of-the-art production lines custom-built to prepare our specialty recipes.
The new facility will earn a Safe Quality Food Level 3 certification, the highest honor of its kind in our industry. Three, Freshpet leadership team; we also recently strengthened our Freshpet organization by expanding our intellectual capital and manufacturing distribution, purchasing, and marketing.
We have added two new highly experienced executives to the team and promoted two existing team members including Scott Morris to Chief Operating Officer. Delivering fresh refrigerated food on a national basis, it is very difficult to do, and our team has worked extremely hard over the last several years to build our infrastructure and create a platform for growth that is not easily replicated.
I would like to congratulate each of our team members on their new positions and look forward to working with them to make our operations and processes even better as we realize future successes. We continued to deliver on our commitment to bring the power of fresh real food to pets as we connect with more and more pet parents.
Freshpet has a bright future in this compelling $20 billion-plus in growing dog and cat food category in the U.S. where we as pet parents treat our pets as another family member.
This is why Freshpet is truly positioned in the right place at the right time with the right products. Our points of distribution continue to grow, awareness and trial are driving velocity to new heights, new product innovation continues to expand our addressable market, and our solid and scalable infrastructure allows us to deliver solid earning growth.
I'm very pleased with our solid financial results in the second quarter and our progress year-to-date. We believe we are at the point where we can truly improve our processes, drive greater leverage across our business model, and in turn enhance long-term shareholder value.
As I always say; quality, quality, quality and steady as we go. With that overview, I'd like to turn the call over to Dick, our Chief Financial Officer who will review our finance results in more detail.
Dick?
Dick Kassar
Thank you, Richard, and good afternoon, everyone. I will review our second quarter and year-to-date financial results and will then review our full year outlook for 2015.
For the second quarter, consolidated net sales increased 39.1% to $28.4 million. Excluding the impact of the fresh baked test products, net sales for the second quarter of 2015 increased 34.3% to $27.4 million over the prior year quarter.
This growth resulted from both distribution velocity gains across all retail sales channels, including a 14% year-over-year increase in Freshpet Fridges. Gross profit for the quarter was $13.7 million compared to $10.1 million during the same period last year.
Increase in gross profit is primarily due to higher net sales and lower manufacturing cost per pound, slightly offset by increased cost of goods sold related to product sales mix that resulted in increased sales from the company's new innovative products. Manufacturing team is gaining insights on how to best optimize manufacturing of our new shred and co-packed baked products.
As we further enhance and refine the process and benefit from economies of scale, our hourly productive lead will increase which will gradually improve our gross margin. Excluding the margin impact from the company's fresh baked test product, gross margin was 48.9% compared to 49.4% during the same period last year.
SG&A expenses decreased as a percentage of net sales to 55.3% from 65.7% the same quarter last year. After adjusting for fair valuation of warrants and stock-based compensation expense as well as season expenses associated with company's secondary offering.
SG&A expense decreased as a percentage of net sales to 47.3% from 64.6% from the same quarter last year. Looking ahead we expect to further decrease SG&A as a percentage of net sales as we increasingly scale our operations and better utilize our existing infrastructure while growing our sales.
Adjusted EBITDA increased $3.1 million when compared to the same period in 2104 to $2.8 million. The Freshpet baked test product, the adjusted EBITDA less than $100,000 in a three month period in the June 30, 2015.
As a reminder, adjusted EBITDA is a non-GAAP financial measure. Turning now to year-to-date earnings results, net sales for the first six months of 2015 increased 40% to $55.4 million compared to $39.7 million in the first six months last year including our fresh-baked test product, net sales increased $35.6% to $53.9 million and our gross margin was 49.1% for the first six months of 2015.
Adjusted EBITDA improved $4.4 million to $4.8 million and adjusted EBITDA as a percentage of net sales for the first six months of 2015 was 8.7%. Excluding the impact of the fresh-baked test product adjusted EBITDA would have been $5.3 million for the 2015 year-to-date period.
Turning now to the balance sheet at June 30, 2015, the company had cash, cash equivalents and short-term investments of $23.5 million. The decrease in cash is primarily due to expenditures related to the expansion of our Freshpet Kitchens, capital investments to increase distribution through the purchase of additional Freshpet Fridges and the purchase of land and building directly adjacent to our Freshpet Kitchens.
For the full year 2015, I will reiterate our previously disclosed guidance. We continue to expect Freshpet Fridges in a range of 15,100 to 15,600 representing an increase of approximately 13% to 17% compared to the prior year.
We project our net sales including Freshpet baked test product to be in the range of $112 million to $114.5 million representing an increase of 29% to 32% compared to 2014 and adjusted EBITDA excluding Freshpet baked test product to be in the range of $16 million to $17.5 million an increase of $10.5 million to $12 million compared to 2014. As a reminder, our adjusted EBITDA represent EBITDA plus loss on disposal of equipment new plant start-up expenses, share-based compensation, launch expenses, secondary costs and warrant expansion.
We now plan to strategically expand plant capacity to provide us with sales of up to $400 million represents an increase of 130% from current levels. We plan to invest approximately $31 million in capital expenditures to achieve this of which $5.3 million is spent to-date.
This represents an increase from $24 million to $26 million investment we have previously discussed. Projection completion date in the second quarter of 2016, we expect to borrow approximately $8 million to $10 million from our credit facilities in the first half of 2016.
And we expect to repay this indebtedness by the first quarter of fiscal 2017. As many of you know in conjunction with our initial public offering, we entered into a $40 million credit facility on which zero was outstanding at June 30, 2015.
To recap these investment initiatives, we will spend an incremental $14 million including both our capital and sales and marketing investments. A spend of $3.5 million for sales and marketing support behind our fresh baked test product, $5 million for the 6.5 acres land and building purchase adjacent to our Freshpet kitchens and $5.5 million to expand our planned capacity by at least 130%.
We see a strong growth for our product towards our distribution network. And we will continue to maintain a strong balance sheet and liquidity to meet demand and further grow our distribution network.
That concludes our financial review. I will now turn the call back to Richard for closing remarks.
Richard?
Richard Thompson
Thanks Dick. We are pleased with a strong year-to-date progress.
I'm especially impressed with the hard work and dedication of our valued Freshpet team members are essential to our ongoing success and growth. Our team remains committed to our core values in which we challenge ourselves everyday to find new and better ways of delivering the benefits of fresh, real food to our pets.
We work to be transparent and honest in every facet of our business and finally, we strive to do what's right for pets, people and the planet. We appreciate the support of our pet parents, our retail partners, vendors and shareholders.
We would like now to open up the call and take your questions. Operator?
Operator
Thank you, sir. [Operator Instructions] Thank you.
Our first question comes from the line of Peter Benedict of Robert Baird. Your question please.
Peter Benedict
Hey, guys. My first question, just as we think about the door growth over the balance of this year and into 2016, can you talk about any new geographies or new customers or channels or anything like that that you think could be noteworthy in the doors you are expecting to add?
Scott Morris
We have been able to add a handful of new retailers. We added about three different retailers.
I think the most noteworthy and the most high-profile name, it is a small test, but we did add small test in Cosco over the past several weeks, which we're very enthusiastic about. It's one of these things we have talked about over time.
We feel that the product is a terrific fit. And we have been able to come up with a proposition that we feel is exactly in tune with the consumer there, and we are excited about the opportunity and the potential that this new expansion to clubs really provides for the organization, but it will be something that we will measure into very slowly and really over the long-term, we will have a real impact in our business.
Peter Benedict
Okay. Perfect.
Thanks Scott. And when you think about the dry test that you guys did at Target, can you talk about -- maybe give us a better sense of how you felt that went?
Obviously, it went good enough for you to roll this to other partners. But, the level of fresh cannibalization and we are able to measure that with that material, and as you think about this dry as you are continuing to test the dry product, do you think you are going to roll with 3, 4, 5 SKUs here or do you envision this having a lot more SKUs as you start to move into different channels and get into grocery, get into pet specialty et cetera?
Scott Morris
Obviously, we would not have continued to expand the test and kind of spread our wings a little bit further with dry if we weren't happy with the initial results behind it. It is one of these things that we are continue to kind of very carefully layer into the market.
Obviously, it's a gigantic multi-billion dollar marketplace for dry dog food, there is plenty of room. We feel that proposition that we're able to bring to the market was really differentiated.
It is one of these things that takes the significant amount of awareness and education to consumers to kind of communicate those points of difference. So that's something that we were – it's great that we were able to do a test the way we did it, but it’s something that hamstrings you and your ability to in order to kind of communicate to consumers, because you're -- you have very limited distribution at that time.
So now as we're kind of layering in, we're going to support that. We're going to support it in kind of a very fairly conservative manner, but very kind of thoughtful.
It's exactly the way we went through it in our testing and modeling when we did our kind of quantitative research and our quantitative testing. And we're going to be expanding to grocery and into mass, and you'll start to see that popping up -- literally in the past couple of weeks, you'll start to see it popping up.
We're anticipating that it will be anywhere between just a couple of SKUs all the way up to some people have taken 7, 8 of the SKUs and we'll have a nice section, and I think based on that, we'll start to be able to evaluate what's the most effective way for us to come to market. So how large section do we need to have, exactly what do we need to be communicating to consumers, what's the take away.
I mean some of the initial numbers that we're seeing especially in our small bags have been very positive, and they're in tune with kind of bigger and larger brands that have been out there and are established for a while, and now we need to see migration into kind of our middle side and in our larger bags. So we're expecting to see that in Q3 as were the comments from Rickard and Dick, you'll see that we're going to start doing some advertising that talks about us as a company and how we have very differentiated and thoughtful approach to how we develop food, not only in fresh, we’re the first ones that’s really being fresh, but we're taking the same ideas that we're feeling really comfortable and strong about in fresh and now bringing them into the dry or the fresh-baked as we're referring to it, area in the store.
And I think finally your question was around cannibalization, we've seen very, very minimal like when we originally did the quantitative testing we saw around 1% number in cannibalization which almost seems unheard of, but I think -- and that's kind of -- that's really the number that we've been seeing, could it be 2%, you might be able to argue, but it’s very, very small. But I think the thing to keep in mind is that you're dealing with a $13 billion category and still we are very large in that category dry dog food.
I think the cannibalization will be very minimal. It does appear to be adding new consumers to our brand in total, but also consumers that were buying some other dry products.
So, it looks like it’s achieving a majority of objectives, it's something that we're excited about, but we also want to be very kind of cautious around it. Does that answer everything?
Peter Benedict
Yes. That's fair, Scott.
And then just the last question, I'll turn it over. Just on the cat test, Richard talked about kind of rolling that out more aggressively I guess late this year and early next year, just an update on what you guys saw there in the test that you did on cat, and what gives you the confidence to move forward on that?
Thank you.
Scott Morris
What we did is we -- across the U.S. we had just around under 100 stores where we had done some small testing we had done some in one pet specialty retailer and in some of a couple of other retailers where we tested a handful of SKUs.
And what we did is we garnered the learning from that and we've now developed a very solid and crisp portfolio and it’s for cat, and we're actually taking that out to a broader group of retailers to actually put a separate cat refrigerator into some grocery and some mass accounts over time. In several cases that we've been actually surprised that the initial interest from a handful of people around that, but again this is something we're going to be in market and kind of our whole portfolio, it's not the final, but it's a fuller portfolio in Q4 in a cat test.
And then the anticipation is that in Q4 and into Q1 of next year, we'll get it figured out and it will provide us with a lot more store opportunity and growth opportunity into 2016 -- kind of in the latter half of 2016.
Peter Benedict
Okay. Perfect.
Thank you.
Richard Thompson
Thank you, Peter.
Operator
Thank you. Our next question comes from Jason English of Goldman Sachs.
Your line is open.
Jason English
Hi, folks. Hey, thank you for the question, can you hear me all right?
Richard Thompson
Yes. We can hear you right.
Jason English
Excellent. So I'm hearing that the rhetoric you guys around sales and the outlook sounds pretty robust, you've got dry pet expanding, you've got a new attack line of cat, you've got Costco in cats, this sounds upbeat.
But it doesn't quite go with the numbers, when I look at your guidance taking the mid-point for sales it implies that the back half sales accelerates to something around 23% growth -- good growth. But market is lower than where were at the first half of the year, so am I missing something there?
Scott Morris
I think the first thing, I want to make sure I'm clarifying around is that the guidance that we have provided is specifically around our fresh sales, it does not include anything around fresh baked, so I think that's the first consideration. I think one of the other things that we think is really important as we're looking at this as, we've originally budgeted a fairly flattish year from the standpoint of our growth was fairly flat across the year.
We saw in the very early 30s from a growth standpoint across this each quarter and what we are able to materialize and see in Q1, so they're ahead of our expectations and then Q2 we're still -- we're happy with the results. So we don't exactly know, well Q3 and Q4 will bring, however, we aren't – we do know we're going to continue to kind of press harder in Q3, we are marketing and that marketing is centered around fresh baked.
So we're hoping as we kind of deepen the accelerator a little bit that we will get back to some of the growth rates that we saw earlier but don't know exactly we want to make sure that we were smart about our guidance and not moving it as we were kind of make sure we're meeting and/or exceeding expectations.
Jason English
Yes. Got it.
That makes sense. And that's helpful.
One more question from me and that's on margins. Thinking back to early days in the process of the IPO, Richard, I think you had a figure and we kind of had a similar figure about incremental margin or incremental EBITDA on every dollar of sales, somewhere north of $0.40 on the $1 [would drop through] [ph] to EBITDA, I think was the math.
Year-to-date you're tracking close to the $0.28 and gross margins are a smidge below what we were expecting. What's causing – maybe it's timing related I don't know, but can you walk us through some of the factors that are causing the drop through to be a little bit less than we initially expected?
Richard Thompson
Well, we were talking about – Jason, we were talking on a full year basis going forward from September of 2014 onwards and we still feel good about 40% to 45% of incremental dollar sales falling to the adjusted EBTIDA line where we had a slight issue is on the innovation. We were guiding to 52% by finishing the year around 52% gross margin.
Year-to-date we're at 49.1, the innovative products are taking a little longer to kind of normalize through our production process. And we expect by the end of the year to be in 50% to 51% range and get to 52% by the first quarter or second quarter of 2016 But, if you back out, if you back out your depreciation on chillers and you back on your depreciation coming from the manufacturing facility and stock option expense and just work with adjusted EBITDA and look at our what our original marketing expense before this incremental $3.5 million on baked that 40% to 45%, 40% still works.
We kind of front-ended our marketing expense in 2015 and as the year goes on the $60 million that we're projecting to sell on the back half of the year should deliver that -- those numbers that we indicated.
Jason English
Got it. Thanks a lot guys.
I'll pass it on.
Richard Thompson
Thanks Jason.
Operator
Thank you. Our next question comes from Bill Chappell of SunTrust.
Your question please.
Bill Chappell
Hi.
Richard Thompson
Hey, Bill.
Bill Chappell
Hey, how are you?
Richard Thompson
Good.
Bill Chappell
Just going back to baked. I understand kind of not including it in the quarter excluding it because it was in test, now that we're kind of going forward full on and expanding into other retailers, I mean can you give us a ballpark figure in terms of what you're expecting this year because it is real revenue?
And is it still expected to be net neutral to earnings if we do include it or is this still something that will be – could be dilutive as we spend for the first two quarters?
DickKassar
Well, now for the year we expect – consider first half of the year we made about 100 grand. So now we are looking at the end of the year to have a margin, we are going to scale our margin towards 35.
Right now our gross margin is around 30. And then we are going to take those funds and kind of reinvest in them.
So we basically in the company and in bake, so we basically kind of saying our front-ended adjusted EBITDA for 2015, the bake will be neutral to the organization.
Bill Chappell
On a revenue standpoint, I mean is $5 million, $10 million what kind of ballpark, we should be thinking about.
Dick Kassar
I will think $5 million is probably a fair number for 2015.
Bill Chappell
Okay. And then with that Scott, I think you had alluded to maybe into a grocery and mass or these larger grocery and mass retailers who are – how big, how small should we be thinking or looking forward?
Scott Morris
We are – they are major players. I mean there are some smaller guys, but we were very selective in the kind of the people we went to.
You are going to see it in, I mean, it's all public at this point. But, you are going to see it in Wal-Mart, you are going to see it in a lot of our key retailer, you are going to see it in Wakefern in the area.
You are going to see it in a lot of the major retailers across the country. And again, it was something that we were not planning and we were not trying to do a national launch.
We are trying to kind of go into people that kind of met/set a criteria that we thought comfortable with as well as kind of how we are progressing with it. But this – we are into the 1000s of – many thousands of stores kind of number.
Bill Chappell
Okay. And the last from me, Richard should I just clearing the air again on, kind of quality control, mould, your retail, any issues stuff like that because it seems to be a lot of noise that affects the story intra-quarter?
Richard Thompson
No. There really isn't any news or any more news on mould or quality as I've always said quality, quality, quality and quality, people quality products and the quality customer service and we are making great product at the plant and I think there was awful lot of noise around what social media was saying which was unfortunate.
But, there is some people out there trying to – which is not a good stuff. But having said, that making fresh food and making fresh food everyday and sending fresh food around the country everyday is a hard job.
It's not easy. And fresh food, if the package gets adulterated in someway – product as a fresh food it will [move] [ph].
With the experience we have is not any different than we have had in the last six or seven years. Unfortunately as I said some people try to make a big deal out of it.
But, we are very comfortable with our quality. We certainly are working on lots of innovation around quality and we are doing lots of things over the next 12 – we have been working on and continue to work on other things to make quality even better.
Bill Chappell
Just to clarify, you haven't seen any meaningful step-up of complaints or returns or anything like that?
Richard Thompson
No. As I said, there is – in the last seven years, there hasn't been anything that I would say is abnormal and if anything – we are good on all functions and all phases.
So quality is – we are very happy where we are.
Bill Chappell
Great. Thank you.
Richard Thompson
Thank you.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Robert Moskow of Credit Suisse.
Your line is open.
Robert Moskow
Hi, thanks. How are you doing?
Richard Thompson
Good, good. Thanks.
Robert Moskow
Getting back to Jason's questions on gross margin, you said that your gross margin realization is going to be delayed because of the – I guess the shredded product is all more complicated to make. But, you are also talking about dialing up cat food although it maybe a little bit ahead of your original expectations.
I got to imagine that that would be kind of dilutive to your core gross margins? Do you feel comfortable that with all these innovation going on that 51% to 52% kind of target for 2016 is still achievable or do you think with all of this innovation going on it might be pushed out a little bit more?
ScottMorris
While the good news is, we are a growing company. We are growing in the mid-30s.
But not only growing in revenues, we are also growing in tonnage, okay? And we have team on the field at our Bethlehem plant and our Bethlehem plant is quite a bit of fixed cost with fixed depreciation, fixed management, fixed IT systems.
So as more velocity comes through and our velocity is probably 3% or 4% higher than we thought would be at this point in time we had – from what we had originally projected. And we are basically within a few dollars of where we projected at the end of the year.
So as long as our velocity continues to grow, which it is and on a volume growth we are going to take advantage of our Bethlehem facility to fixed – our Bethlehem facility and deliver that incremental margin. The other piece in this announcement was the $5 million expenditure on our new plant to get new equipment that gives us the capability to speed of the next two lines is 30% greater than our current speed.
And that will also is going to head to market. And so I'm fairly confident.
The other point on cat is, although we maybe co-packing cat. Cat is a – is a much higher price per pound.
And it leads to very attractive margins. So we feel good about the cat issue.
Robert Moskow
The cat issue. Okay.
Another –
RichardThompson
Cat opportunity.
Robert Moskow
Damn cats.
Scott Morris
He was bitten by a cat when he was little.
Robert Moskow
Scott, you had mentioned that the cat products might get their own refrigerator case and I don't want to make too big of a deal of that because it's very early, but is that a –it sounds like a much higher incremental cost whereas it might have been a lot easier to put just in the case that you have already got. Was that always part of the plan, or is that kind of new?
Scott Morris
No. That actually is definitely part of the plan.
And there is two pieces to that Rob actually pretty interesting. We actually look at the refrigerator today and as you know, we think about it as our own – it's a store within a store.
And our goal is to optimize the sale at best we possibly can out of that each one of those units. So optimization is the key piece of that.
If you look at the sales per linear inch in that fridge and we take into consideration gross margin cat tends to be the – some of the underperforming excuse in that fridge. So actually as we – we have actually planned to over time – and it's probably over a three-year time period where we migrate not in all stores, but in some stores as we migrate some of the cat SKUs out, we can actually put some more productive dog food SKUs an addition innovation in dog back into the main or base refrigerator.
And people are basically trained to kind of shop where they shop meaning if you are shopping for cat food you kind of walk down to the cat section. And in some stores it's actually fairly far ways, it can be a couple of isles over.
So in those stores we are going to have a smaller fridge, it will be smaller – it will be full height in the cat food section and we are looking to make sure that the payback is very similar to the payback we currently have, we quoted 15 months. So it will be a smaller more cost effective fridge.
We don't know if the velocity will be exactly the same as the dog food cooler probably less. But, we expect to pay back to the – in a similar timeframe.
So it actually works together in the most productive stores, the larger most productive stores will have – many of them will over time – over the next three years we will have a cat food fridge and that allows for increased dog innovation and increased productivity of the original, the base dog food fridge too.
Richard Thompson
Rob, it's like -- same thing is with fish -- with a fish all right. So let's fish with the cat food people are in cat food isle and see what happens.
Robert Moskow
It's a good way to catch cats, if you use fish?
Richard Thompson
I'm assuring you, we will be doing that.
Robert Moskow
But, last question, I think you described first quarter definitely ahead of your plan, second quarter you said you are happy with the results. Is it fair to say that the first half of the year is ahead of plan as you originally had it and the second quarter pretty much inline with what you thought it would be?
Scott Morris
Yes. I think that's fair.
I mean we are just marginally ahead in Q2. I think Q1 was a – we are rolling in Q1 for sure.
And the other thing, if you look at the ways the marketing spend has been parsed through the year, Q1 was the higher spend, Q2 was actually back down intentionally. And I mean the reason we backed it down is because in Q3 we have a new campaign is launching in fact the press release I think just went out yesterday or last day or so in the TV just went on air today.
While, we have a new campaign and it's integrated – and it integrates and talks about the entire company's approach to food. And it actually has scored better than any TV we've ever done in the past.
We're expecting exciting things from it, but time will tell.
Robert Moskow
Great. Thank you.
Richard Thompson
Thank you for calling in Robert.
Operator
Thank you. Our next question comes from Scott Van Winkle of Canaccord.
Your line is open.
Scott Van Winkle
Good evening.
Richard Thompson
Hey, Scott. Thanks for calling in.
Scott Van Winkle
Great. So the $3.5 million that we talked about kind of incremental sales and marketing investment.
Was that specifically and only around the baked product or is that more of a kind of the new branded campaign that about how you go about producing food.
Scott Morris
It will be behind that campaign, but the reason we're instituting that campaign and it is focused around the fresh baked. So the support will be fresh baked not all the money -- the incremental $3.5 million will go specifically to advertising we will have sampling, demos, some couponing et cetera that's specific around fresh baked and much more targeted to communicate the different proposition on fresh baked.
Scott Van Winkle
So I assume that sampling and kind of store-by-store promotion is going to be the majority of it, or is there going to be enough doors kind of near term to support television spends?
Scott Morris
When we started television many years ago and we were probably spending on TV probably a little bit early for the brand and the size. And I think we're in a situation again where we're going ahead and due to TV we're not in as many source as you might see it when you turn on TV.
But when you start looking at store-by-store, the service door economics of doing many things it gets very expensive very quickly. So TV still is really a source of alternative especially when we continue to talk about the company and we think not only will the campaign have benefit and as they're split up, so they're not -- they're some where on both somewhere on baked and somewhere on fresh and there is three different basically communication points in the advertising, but so it will help support the entire brand, but also be very focused on the bake launch.
And if the consumer is out there and they're interested in it, it's going to be in distribution of where they can go find the product for sure.
Scott Van Winkle
Got you. So Scott, when you sit back and I think you said that you may be spent a little less in Q2 waiting for the new campaign to come forward.
When you get to the end of 2015 what's that kind of advertising marketing promotion budget looks like relative to what you thought it was going to look like going into 2015, is it really just the $3.5 million incremental?
Scott Morris
Yes. Yes.
It is the $3.5 million incremental and it's a split between TV and then all the other kind of in-store sampling couponing, demos as I was mentioning.
Richard Thompson
Hey. And Scott we talked about that a lot, but this is the deal that -- I want to invest for the future.
We signed up to be a growth company and signed up to make all this working and it's the right time, the right place for the right product and to be able to spend some of the cash we have and the $3.5 million to spend it for our future growth and future investment for 2016, it's the right thing for the company and that's why I'm here for is to be sure we're doing the right things for the business.
Scott Van Winkle
Yes. Great, thanks.
And Dick, one other question on the baked side, I think you said by year-end or for the year it will be kind of neutral to adjusted EBITDA, when say neutral to adjusted to EBITDA I think you're excluding this $3.5 million spend?
Dick Kassar
Yes.
Scott Van Winkle
Okay.
Dick Kassar
Yes.
Scott Van Winkle
Great. Thank you very much.
Richard Thompson
Thanks Scott. Appreciate you calling in.
Operator
Thank you. Our next question comes from Mark Astrachan from Stifel.
Your question please.
Mark Astrachan
Yes. Hi, good afternoon, everybody.
Couple of housekeeping questions just wanted to get a sense what the growth of the product that's in the track channels the non-food, drug and mass pick up that sort of thing? And then just wondering, is there any contribution to the sales guidance for this year for the cat test in the fourth quarter?
Scott Morris
Hey, Mark can you – I missed at the very beginning. I apologize.
Mark Astrachan
Yes. I was just trying to figure out what the growth was for the baked product or not for the baked – for the fresh product in the untracked channels and Petco, PetSmart that sort of thing?
Scott Morris
Well, we don't – we're not launching –
Richard Thompson
No, no. He is not talking about baked.
He is talking about --
Mark Astrachan
Yes. I'm talking -- I'm not just like in the fresh the core product.
Scott Morris
Okay, okay.
Dick Kassar
And you will see what is in the Q that is year-over-year change second quarter was pet natural channel was 20.3% and revenues and we had in the quarter we had 6.3 million – 6.7 million in sales for the quarter or up 20% year-over-year. And we are in the all the Petco and PetSmart basically 90% and 95% of them.
So we are kind of running at $27 million, $28 million run rate.
Scott Morris
The other thing to keep in mind there is that the – I don't have an exact number, but there has been very little distribution growth because we were in the vast majority of the PetSmart and Petco because literally a couple of stores across PetSmart and Petco. So that's basically it's almost the same-store sales not off from the same-store sales number.
Mark Astrachan
Right. Okay.
In the contribution, is the number, if any from cat product launch in the fourth quarter?
DickKassar
No. We haven't.
It's not in the guidance.
Scott Morris
It will literally be just a couple of hundred stores in the fourth quarter. So it won't be substantial enough to really have a meaningful impact on the business.
Mark Astrachan
Got it. And then just one follow-up Scott to the first question, you were talking about same-store sales number, what about your view of what that is for the track channels, just the drug mass retailers?
Scott Morris
Yes. So if you look at the quarter, it's about 14% versus a year ago.
Mark Astrachan
Okay. Great.
Thank you.
Richard Thompson
Thanks for calling Mark.
Operator
Thank you. At this time, I would like to turn the call back over to management for any closing remarks.
Richard Thompson
I think we have said everything we need to say. We are really happy with where we are.
We are really excited about where we are going. And we look forward to the second half and continuing the innovation and good work that we are doing.
So I want to thank everybody for their time today. And we look forward to speaking with many of you over the coming days, weeks and months.
And I encourage you all go out and buy some Freshpet, get us some new consumer. Thanks a lot.
Operator
Thank you, sir. And thank you, ladies and gentlemen for your participation that does conclude Freshpet second quarter 2015 earnings conference call.
You may disconnect your lines at this time. Have a wonderful day.