Greetings, and welcome to the Freshpet Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Katie Turner. Thank you, Ms. Turner. Please go ahead.

Thank you. Good afternoon, and welcome to Freshpet’s second quarter 2017 earnings conference call and webcast. On the today’s call are Billy Cyr, Chief Executive Officer; and Dick Kassar, Chief Financial Officer; Scott Morris, Chief Operating Officer; will also be available for Q&A. Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management’s current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to the Company’s quarterly report on Form [10-K] filed with the Securities and Exchange Commission and the Company’s press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Finally, please note, 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 provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today’s press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. Now, I’d like to turn the call over to Billy Cyr, Chief Executive Officer.

Thank you, Katie, and good afternoon, everyone. To begin, I will provide a brief overview of our financial highlights and recent business performance, and then offer some commentary on the operating environment. Then, Dick will review our financial results in more detail and provide some visibility on the balance of the year. Finally, Dick, Scott and I will be available to answer your questions. We are very pleased with what we accomplished in the second quarter. Our business responded positively to the investments we have made, in line with the Feed the Growth strategy we initiated earlier this year. We believe this positions us very well to exceed the net sales goal we established for the year. Further, the second quarter results are a solid early indication of the effectiveness of our strategy and our ability to deliver our longer term fiscal year 2020 financial objectives. As a reminder, we expect to generate $300 million in net sales as soon as 2020 with 20% plus adjusted EBITDA margins and delivering an annual growth rate of 15% to 20%. Everything we see today, demonstrates that our goals remain very achievable. We have generated significant momentum in our business since the beginning of the year. The most important result in the second quarter was the acceleration of our growth rate. Net sales grew 21% compared to the second quarter last year, behind the increased advertising investment and improved sequentially from a 9.7% year-over-year net sales increase in Q1. Our growth was broad-based. Across measured channels and IRI, our fresh refrigerated consumption was up more than 28% versus year ago in the quarter, and even the unmeasured pet specialty business net sales were up 9% in the quarter, significantly outperforming the category in pet specialty which was down versus a year ago. We…

Thank you, Billy, and good afternoon, everyone. I will provide a little greater depth and give you an expanded view of the balance of the year. As Billy indicated, we grew net sales in the quarter by 21% versus a year ago to $40 million, achieving our goal of 20 plus growth two quarters sooner than we had projected. As a result of the more rapid acceleration of the growth of the business in the second quarter than we had projected an continued strength of the business early in quarter three, we are raising our net sales guidance from at least a $153 million to at least a $156 million. This reflects the greater than expected quarter two net sales and our confidence in the second half of the year. At the same time, our annual outlook reflects the following. A lower marketing spend relative to the first half of 2017 when we spent 72% of our marketing dollars; accelerated growth rate in quarter three and quarter four, which was already built into our full year outlook. As a reminder, we previously communicated that we would have 20% growth in quarter four. And although, our pet specialty sales increased 9% in quarter two, we believe it is prudent to maintain a conservative view on the health of the pet specialty channel. The adjusted gross margin progress will continue to be a bit uneven, but we remain confident with our target of 1.5 points of adjusted gross margin run rate, improving by year end. The second quarter results are a good example as adjusted gross margin grew 50 basis points versus year ago but was down 80 basis points versus quarter one. A significant portion of the change versus quarter one is relative to mix changes and the cost of some…

Thank you. [Operator Instructions] Our first question comes from the line of Rupesh Parikh with Oppenheimer & Company, please proceed with your question.

Thanks for taking my question and congrats on a nice quarter. The first area I just want to touch on is, on your fridge targets. Clearly, the retail landscape is more challenging; we’re seeing some closures out there and a number of retailers are focusing on potentially opening up your units down the road. And I guess on the other hand, your business is very strong right now, you guys are seeing great velocity. I just want to get a sense, as you outlook to next year and beyond, do you think that fridge growth can accelerate higher from the 10% rate currently?

First of all, I think as you noted, it’s important to point out that velocity growth is the biggest driver for us this year and we expect it to continue to be the biggest driver of growth. So, while growing -- increasing number of fridges is always important for us to increase availability, I do think that we’ll have some headwinds, as we go through next year and the year after that as the retail landscape changes. But, I don’t think that changes our view on our ability to get to the net sales growth. We are going to drive this off of the velocity. And I think the retailers will look at the velocity and will make assessments about whether they need to add more fridges or not, based on our success in the fridges that we’re in. So, I think that it’s going to be -- you’re going to see some challenges on placing fridges, but I don’t think that’s going to change a whole lot of how we view our net sales growth.

Okay. And then, I guess going down the road, if you see greater velocity and maybe potentially less fridge growth, from a Freshpet perspective, would that be a positive from ROIC, as you potentially have your fridges out there?

I mean, theoretically, yes, if you have less deployed capital and you have less cost to maintain, I am sure that would be great. But our focus is on driving the net sales growth, and we’ll get to the net sales growth with the velocity as the primary driver. But, if we can do it in more efficient way, we’ll take it.

Okay, great. And then my last question. As you look at the various channels, it sounds like pet superstore, you still have nice pickup there. I am curious to what you’re seeing in the other channels from a velocity perspective?

So, we saw growth across all the channels, and that’s really the real story here. I mean, we do that [indiscernible] success for us in the quarter. So, we’ve got every one of the channels to demonstrate growth. And my time in CPG, [ph] that’s not a common thing. So, the pet specialty was probably in the low end, the high end was in the grocery channel, but mass was very strong, club was strong; we did it well everywhere.

Thank you. Our next question comes from the line of Brian Holland with Consumer Edge Research. Please proceed with your question.

Yes, thanks. Just a couple of housekeeping ones to start, with respect to guidance. So, it seems like Q2 was more or less, the revised higher top line guidance for the full year, it’s sort of a flow through from the Q2 maybe a little bit on Q3. And you talked about the lower marketing spend in the back half and the predictability of that. What kind of balance are you looking to strike? Maybe why not invest more in the advertising right now and continue to build that momentum or do you think there is more than enough in the pipeline? I am just thinking about the reinvestment splits, what’s keeping the EBITDA in line and how much of that may be goes back above the top line and how much of it goes back in the supply chain as we look, maybe in Q2 and then over the balance of the year?

Well, first of all Brian, hats off to you for being closest to the pin on the revenue number for the quarter. You called it pretty well. Secondly, as we thought about the guidance that we provide and you’ve to remember that we’re providing a floor. What we said is at least, we’re not providing a target or a range, so it is a floor. So, as you think about what’s going to come in the back half of the year, we’ve given you as a -- what we think is a good reflection of what’s happened in the second quarter and a little bit of the visibility that we’ve got in the third quarter at this point. As Dick said in his comments, we don’t have as much marketing support in the second half of the year, there is obviously the uncertainty that happens around pet specialty. So, I think that there is a little bit of a let’s take this cautiously and be conservative as we make our projections. In terms of our willingness to invest, we’re willing to invest in both things that will help drive the growth as well as things that will help improve the long term profitability of the business, and that’s why we held the guidance where we did on the EBITDA. We want to retain that flexibility if the opportunity presents itself.

Okay. So, I was sort of flailing, I had a bunch of questions, but then Dick answered most of them in his remarks and ruined my queue, but that’s fine. Just maybe taking a step back, big picture, what we’re seeing with respect to this growth and what’s driving it, right. So, we talked about the increased advertising spend, but you also have these consumers that are sort of the early adaptors. And it seems like dollars per trip and trips per buyer seem to be going up, which imply that you’re getting increased engagement from the legacy consumers and also maybe bringing new consumers based on the household penetration growth. What’s the mix of that and how do you -- what do you think about going forward? How do you continue to engage that early adaptor, how is your advertising focus that way versus bringing new folks in?

I am going to just give you a top-line comment, I will ask Scott to give a little bit more detail on it. but I would say that we are in very early stages of developing this brand. As you’ve noted, our household penetration is very low and the awareness is very low. So, there’s a lot of consumers out there who’ve not yet heard our story. And so, the opportunity to engage them in the brand is still very fresh. And beyond that, the consumers who have tried it or finding that satisfaction is, repurchase is high, they move further and further out the curve. But I think that the opportunity going forward is to expand that franchise fairly quickly and fairly significantly. And I don’t think the consumers we’re encountering now are whole lot different than the ones that we’ve already got in the franchise. But Scott can give you a little bit more color on how we expect to grow that?

Yes. And to reiterate what Billy was saying, we have incredible depth of opportunity with getting new consumers into Freshpet. A lot of people don’t even know what Freshpet is today. So, we are really early in that adoption curve, many more new consumers that we can bring to the franchise. And we have a really different approach to advertising in total. It is a very highly responsive and adaptable model that we apply. And if we are not making progress in any particular area, and it could literally be down to the types of shows in a certain evening that we are utilizing or in digital and we constantly adapt that entire marketing model on a very weekly basis, every other week basis. So, what we are doing is we are allowing the market to see where we make the most progress and that’s where we are investing the dollars, and that allows us to make sure we are getting the most productivity at the advertising model. We monitor it really closely. We modify it periodically because it’s been working so well. So, we think there is just a tremendous opportunity to continue to work that model and gain new consumers into the business.

Thanks, Scott. I will get out of here with one last one. Just kind of looking back to the store count and the base here you are today and the focus there seems to be on future store growth. Billy, I think you and I’ve talked before, 17,000 plus doors seem to be more than enough to double, maybe triple your household penetration from where you are right now. So, in that sense, maybe you don’t need that many more stores. But, I can appreciate that getting more stores, brings more visibility, people see the fridge and start asking questions about the brand et cetera, et cetera. But, how much do you think about the velocity on that fridge and where you are at and the risk of extending yourself? I mean, are we any -- I wouldn’t think that we’re anywhere near that point today. But, how do you think about it going forward? And do you have to be mindful about how fast you grow that distribution? And what are your retail partners telling you about how fast they want you to grow or think you should grow from a placement standpoint?

Let me start with the end. The retailers love to see the velocity increases in the fridge. It’s good for them. It’s very good for us as well, but they love to see that and that is the key metric that they’ll use in deciding whether they’ll put more fridges in more stores. But they also have other factors that they will consider, amount of spaces available in the store, the demographics of the other stores as well as their -- just frankly, their priorities and strategies across the whole store, whether choosing to invest in today versus other categories. In terms of how we think about it, I will tell you, the velocity thing is critically important to me. One of the interesting metrics when you look at this quarter, we had about the same amount of store growth this quarter that we did in the same quarter a year ago. But our growth rate was dramatically higher and it all came from the higher velocity. And so, of course it’s been asked what are the benefits and what are sort of the implications of that higher velocity? One of them is we believe that the higher velocity will ultimately turn into better in-store conditions. When you get the volume and the product turning, the consumer buys fresher product, they’re more likely to see good stock rotation, more likely that the customers going to find at a regular habit to stock the shelf. And so, we think it’s a very thing for us; it also -- frankly, the more volume we can pull out of the same fridge, it’s that one fridge that we have to service, maintain and manage it from a capital perspective and from a operating expense is a very good thing for us. When you think about the potential upside from the velocity in a fridge, we’re nowhere near the range of what’s possible out of the existing base. We’re about 50% ACV today. Most consumers can find us in one of the stores they shop. If we’re not in the local grocery store, we’re in the local Walmart, we’re in the local Target, we’re in the local pet specialty store in the neighborhood. So, the consumers can find us today wherever they’re looking, but what we want to do is get the velocity up in the fridges where they are because we think in the end, the potential is to be -- if we’re selling in some fridges $200 or $300 a week, we think they can get up to $400, $500 a week and some that are $500 can get to a $1,000. It’s not inconceivable for us to get to those kinds of numbers. We’ve got some fridges that are operating well above those levels.

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

Thanks. Good afternoon. Just for some -- Dick, as I look at gross margin in the second half, obviously as you said, it’s a big ramp. Is there -- should we expect the kind of a stair step function from third quarter to fourth quarter or are we going to take a nice jump immediately in the third quarter and be pretty similar as we go to the fourth?

Well, we’re at 49.5, last year we finished at 49.6, we guided to 51.1 as the run rate in the fourth quarter of 2017. It doesn’t mean, I’m going to be 51.1 for the year. As we said in the script, we’ve been doing some testing of trying to get more efficiency on our four lines. So, we would be probably in the kind of the range we’re in now in the third quarter, and then by the fourth quarter that testing -- cause we’re already a month and a week into this quarter, the testing that we’re doing in the second quarter and some in the third quarter will give us the opportunity to get that 1.5 points. If you recall, we said in our three year plan we were trying to get 3 points by 2020, and we’re trying to get half of that this year and then carry into next year.

Okay. That helps. And then, on SG&A just -- I think you said there was a 1.8 million higher of advertising spend in the quarter and total SG&A was barely up more than that. So, were there other offsets in the quarter, did you end up spending as much as you originally planned on advertising or did you end up getting -- feeling like you hit a ceiling and didn’t need to spend as much?

No, really -- what you’re seeing and buried in SG&A is incentive accruals, and we book our incentive expense based on our progress on EBITDA for the year. So, you’re seeing a slight offset, approximately $1 million through June 30, 2017. So, we still have about $3.8 million to go in the back six months in our media plan, and that’s about 70% higher than what we spent in last year’s back six months.

Got it. And then, Billy, I guess the question is, have you done any testing or maybe to Scott as well as, to figure out what it does for sales as you start to pull back on advertising? Can you still get the same level of growth with the lower amount? How sensitive is it or how -- and I’ll ask it, I guess in terms of can you pull back meaningfully now that you’ve got the momentum going and really see it keep going?

So, Bill, this is Scott. Typically, what we’ve seen throughout all the work we’ve done in media investments is every time we invest in media, and I am just using that as a generic term for however we decide to communicate our dollars whether it’s TV or digital or print, no matter what vehicle is. That drives us up to really a new plateau on the business and that gets us to kind of that run rate. And then, what we’ve been able to see more and more is we really hold that rate. We used to see kind of a modest decline over time, which is typical when you kind of pullback on your advertising. We’re actually seeing kind of a steadying. And then, when we invest again, we kind of move up to the next plateau. So, that’s really how we look at the model working. And once we are at that plateau, plateau from a dollar sales per month, however you want to think about it, that will -- that carries through forward, and then you’ll get the benefit versus the year ago for that same period, and so you go back on air or apply some additional media dollars to it. Does that make sense? So, I think in order for us to see significant growth, we’re in a need to utilize media, it’s not something that we’re going to kind of pull back from and see significant growth on the business.

And I probably would extend that to say, we’ve been off the air from the television perspective since early June. So, we’re now eight weeks in and we can see in the IRI data pretty consistently the business has really held its ground that we gained, going back to the sticking of the proposition. When we go back on air, we expect to see the business ramp up at a very consistent rate with what it did when we went on air early this year and that’s part of the reliable and predictable model that we’re seeing. So, I feel pretty good about the results that we’ve seen since we’ve been off air and I am looking forward to what happens when we go back on air.

Got it. That helps. And then, last one, you had alluded to cart bridges, is there a number of cart fridges where customers have opened the second -- I guess created the second fridge yet or is there a number you can quote or that’s still in the planning process?

We do have some cat fridges out there. We have a handful of tests going on in a couple of different grocery retailers, and we also have some at mass. We’re also trying several different scenarios and fridge sizes in the mix of products that we’re putting into the fridges, and even some adjustments that we’re making in the dog food fridges in order to kind of gain information to establish how we move forward with the cat portfolio in the future. And I know you’ve heard us talk about this, we’re in a really enviable position. We really do kind of evaluate where the different opportunities as a company that we can invest. And cat -- building a cat portfolio is one of the many opportunities that we can invest. And every kind of quarter, we really sit down and we evaluate where the best investments are and where we can get the best return on both kind of near-term and longer term, and that’s really how we’re making those decisions.

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

Just a couple of questions. Can you give us an update on how you’re progressing with your broker network that you would, I guess, reorganized with Acosta? What are you seeing from that and how is it helping you execute in store? And secondly, the advertising that you are doing this year, I thought I remembered like $13.5 million kind of being a number, up 60% from a year ago, how are you tracking year-to-date on that? Are you on track and may be roughly how much of it was in first half? May be you’ve said that already, but may be help me out.

Okay. So, from an advertising standpoint, we are exactly on track for where we spend. What’s the exact number we spent year-to-date, Dick?

$9.8 million.

Okay, $9.8 million of the $13.5 million, which is about a 70% increase versus year ago. So, exactly as we had planned and budgeted for the year.

Okay. And then, so, it will taper down in the second half?

Yes, absolutely, and similar to how we have done it in the past. With regards to the broker network and Acosta’s our partner. It’s still fairly early. We have actually -- it’s been really kind of phased approach. We have started to change the way we do some coverage in mass and now into grocery. We are seeing some slightly better results, but I don’t think this is the perfect solution for us, and we continue to evaluate what the perfect model is out there to cover our retail stores. Because we recognize that there is a significant opportunity there to improve our overall fridge conditions. So, we are -- we always continue to evaluate what are the better -- best ways in order to do that. What we do see is that when fridges do get up to the higher velocity levels, we do see kind of lower out of stocks and overall better conditions because it becomes a very habitual routine that’s going on at retail. So, we’re -- as we make nice progress on velocity, we think that in some cases, it will help to improve overall retail conditions.

And can I just take one more in for Dick? You might have mentioned it already but what kind of manufacturing efficiencies are -- should we be in store for heading into next year, how is your manufacturing kind of productivity going?

Well it’s going well. As I said in the call, in the script, we are doing some testing now to increase our speed. If you recall, we basically said when we were going to add the two additional lines that we’d expect to pick up 30% more velocity per hour, and we are working towards those goals. In addition to that, we believe by the end of the third quarter, a fair amount of that testing will be behind us and we’ll be picking up the 1.5 points by the fourth quarter. Going into the next year, as we said, we would have a three-year goal to get to three full margin points in our COGS to our gross margin and we will be focusing on that during budget planning coming in the back half of this year.

Okay. I am sorry. I thought the testing was something else, got it. Thank you.

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

Yes. Thanks and good afternoon everyone. Curious about how you think about store growth from a fridge standpoint in the context of how you are thinking now about fridge expansion? What specifically do you think you get from new chains versus existing, maybe talk about how many in the quarter are you placing in existing stores versus other? And I guess thinking about, are we talking about a slowdown within those stores those chains we’re already in versus going into new, and whether there’s more opportunity going forward for that or sort of what are you seeing there that’s really driving the rate of change from your end from the reseller end slowing that uptick a bit?

I don’t think we think of it as slowing. I think that what we told people our rate was, we’re on track for the rate that we had projected and will project going forward. I think the thing you have to remember is it’s very lumpy and also any progress that we make on putting a second fridge in a store or finding a way to support a curbside is not included in our store measures. So, the only thing is included [ph] is when we open up a new outlet. I can tell you we’ve been seeing success across the board in all classes of trade, we’re seeing increased store counts, we’re getting pretty good success in the independent stores, but we’re also seeing in some of the larger chains. We’re present in just about every chain at this point. So, there really aren’t any places where you say we have to open up a new chain. It’s really adding stores and chains where we exist and we’re making progress across the board.

And let me -- I’ll build a couple of points potentially on top of that that maybe helpful too. If you think about our overall growth rate, in IRI, we’re seeing around a 27, 28% growth. Of that, about five or six points of that are from distribution. So, the vast majority of its velocity based. And we see the road in front of us where we can continue to see really strong velocity growth for very, very long period into the future. Now that aside, we do think that distribution growth is critically important but we -- and as far as we can tell in front of us, we feel good about the number this year. We like what we see in front of us and we know we’re going to continue to expand fridges. We don’t know the exact rate, as Billy said, it could be lumpy. What we are continuing to see is, if you look at where the expansion is coming from, it’s coming from, we’re always getting new customers, there are literally new retailers every quarter that do come into play, of various sizes. The vast majority of them are from existing because we’re in 9 of the top 10 pet food retailers in the country, so the majority of them come from existing retailers that we work with. But, the thing that is most important and we’ve studied this a couple of times is when we do go into new stores within a tight geography, even geographies where we have ACV, we do see incrementality coming from those individual stores. So, we do know that that adds to the overall business growth over time. And although you can -- can you drive down the road and a few miles away and can you get Freshpet most places in the U.S., yes. But we do think the distribution is a nice addition as a way for us to grow. Philosophy is going to be clearly the number one and really carry us quite a long way into the future.

Got it, that’s helpful. I guess, sort of building on that and sort of a broader discussion. So, you’re clearly seeing results from the increased ad spend. Why not reassess or what goes into the decision to continue with what you’ve been doing historically in terms of spending less in the back half versus first half, meaning that you’ve had success, why not keep the pedal to the metal and sort of see where you can go?

I think you heard in our comments that we’re retaining the right to do that, depending on how the year progresses. But, I think that if the conclusion you’re reaching is that we should be continually increasing our investment in advertising, I think what you’re hearing from us is that the data would support that and we feel pretty good about that. And the model that we laid out for folks was that we weren’t at a constant media spend but our media spending would grow as our revenues would grow. As we look at our plans for 2018, we’re clearly going to look at, should we go to a more aggressive media spend over a longer period of time and we will get a good return for that. The data we have so far suggests that that might be the case. But, we really need to sit back and take a look at the whole range of opportunities for investment we can make as well as what kind of growth can we manage on a reliable basis? We don’t want to get in a position where we can’t produce high quality product and services in the right way.

Got it, okay. And then, just lastly for Dick. The balance sheet or working capital, you made comments that the cash flow should improve over the balance of the year. So, I assume that means some of those changes that you saw there is a drag to cash or cash used in the quarter would reverse going forward?

Yes. And also our EBITDA comes in heavily, we have 5.1 through six months, we said at least $16 million by year-end. So that’s certainly going to help. We’re taking a working capital hit in the first six months of the year because of the growth of our revenues. I mean, last year, we were around in the low $33 million, this year we did $40 million -- so this quarter we did $40 million. So, that’s going to be a hit, growth from here will continue. We will see working capita gradually grow, but the big EBITDA pickup in the back half of the year is going to generate our better cash position than we currently have and we still have a fair amount availability in our line.

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

Good afternoon. Thanks for the questions. On the velocity growth that you’ve experienced of late, accelerated velocity growth, could you talk a little bit about how that breaks down? I mean, to what extent is it being driven by the acquisition of new households, households’ penetration versus purchase frequency or dollars per buyer among existing accounts, existing customers, if you have a sense for that? And how do you think about that going forward, is it a pretty balanced algorithm or are you looking to lean more heavily into kind of one side of that or the other?

Hey Jon, it’s Scott. So, what we’ve typically done and typically seen over the years is we’ve seen really nice progression on all metrics from a consumer standpoint. So, we’ve seen really good progression on not only penetration, but also buying rate, share requirements, loyalty. So, that’s typically what we’ve seen over time. Now, we know what we’re doing now is we’re kind of leaning more and more into advertising. So, we expect that penetration will be really one of the leading growth areas for us. So, we’ll see more people coming into the business. The main focus for us is once someone’s in the business, they have an incredible product experience and that’s where we focus a lot of time, improving quality on a day in, day out monitoring and improving quality on day in, day out basis. So, that’s really the major metric that we see going forward. We don’t have data on a kind of monthly basis. We typically look at it on a quarterly, historically, annually, but now we’re starting to look at it on a quarterly basis, and we’re seeing a nice progression from a penetration standpoint, and the model really seems to be delivering and the investment really seems to be delivering on that penetration.

Is there anything with all of the -- with the demand generation investments you’re making, the media spending increases, is there anything that you’re doing kind of in store from a merchandising perspective, from a couponing perspective to build awareness, promote trial, or is this all focused on outside the store media?

The first piece that we’ve really established, the way we do business is we really don’t almost do any coupons whatsoever. I mean, we hand out more coupons personally than we probably distribute other than maybe if it is a small test somewhere. So, we really don’t do any couponing, there’s really almost no merchandising on this business. And really that’s ideal from an efficiency standpoint and from a logistic standpoint, especially on a fresh business. So, that’s really the business funnel we have established, as we invest in the business. So, that’s really, like that’s kind of the core piece there. And it’s -- basically, the way we see it going forward is continuing to invest in media and advertising that drive that penetration and improve and bring more consumers into the franchise.

I would add one piece to that which is the sales folks that we have and the customers that we have, when they do a really good, some of the very best work is getting the assortment right in each fridge. So, while we don’t do price merchandising but making sure that we are selling the right SKUs, we have the right number of pacings for the right SKUs, to make a meaningful difference in the productivity of any individual store’s fridge. And so, there’s real work that’s done by our sales team to make that happen, by our customers and working with them and with the data they have in the stores to get different results out of the exact same line-up that we offer with the exact fridge. You can get different results, if you do good job in your assortment.

Makes sense. That’s helpful. Two quick ones. The commentary around competitor entry and you fully expect that you will draw competitors into the market over time. Was that more kind of a general broad-based statement, are you seeing anything in terms of change with respect to competition of late?

I think, as you know, there is a competitor who’s been one customer in the Southwest for several years; they are still there; they haven’t gone away; and they haven’t gained distribution anywhere else. But, I would suspect that they and others will find this category attractive and will make efforts to try to expand beyond their base or others will try to enter the category. I think the message that we want to leave people with is we have a huge head start on anybody who tries to enter this and scale is a huge advantage. Scale is expressed in the number of fridges that are placed, scale in terms of the brand equity that we are building, scale in our ability to efficiently distribute products, or manufacture product in a low cost, high quality fashion. And so, while we’ve initiated this program this year to accelerate our growth and we intend to continue accelerating the growth, anybody who chooses to enter the market, whether they are big or small, is going to have to chase after or someone is moving very fast already has a fairly sizable scale advantage.

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

Hello. Good evening, folks. Billy, you walked us through a few of the metrics you are aspiring to in 2020, reiterating top and bottom-line. I apologize if I missed it, but you had a unit number out there of 23,000?

Yes.

Where do we stand on that today in terms of target?

I don’t think we would change that based on what we know today. I really just shorthanded the goals for the year 2020 when I delivered my opening comments. We wouldn’t change that. But what I would tell you though is that we think we can get to the revenue number, even if we don’t get to that number just because of our demonstrated ability to improve velocity.

I think many are going to interpret the comments sort of suggest that you may not get the unit growth that you aspired to before. And given that you guys are talking quite positively of the benefits of distribution, the second interpretation is you won’t get there because the retailers don’t necessarily want more….

That’s not the message that we’re delivering. What we think what we’re telling you is we are incredibly encouraged by the velocity story that we’re seeing and the way it’s developing. We’re also seeing a very rapidly changing external environment that is not easy to project how many retailers are going to be out there and how many stores we’re going to have three years from now. We’re not in any way saying that the retailers who have us, are in anyway unhappy with the results and seeing the opportunity to expand the footprint or the presence of our products in their stores. It’s just as you think about what’s happened to the retail environment, we can’t quite tell who’s going to be where -- who’s going to have how many stores in 2020. We’re very confident that we have a very attractive proposition. And if there is any form of retail contraction that occurs, we’ll still get there on velocity.

That’s helpful clarification, I’m glad I asked the question. I think that supports [ph] me get that out there. So, let me ask a related question on the velocity momentum. And Scott kind of talked about this earlier about the virtuous cycle of velocity help service but there has been concern about out of other stocks and fridge holding capacity during peak shopping hours and the ability to seasonably grow scales, the coolers, the sales for cooler at that level given service levels. Where are you now in terms of out of stocks, if you have any metrics, how is it tracking, and what’s your view of how much higher sales can go in these coolers without jeopardizing sort of the out of stocks and reaching a bit of a bottleneck on coolers?

Jason, it’s interesting because we’ve been facing this out of stock issue really for the past really since we’ve almost been in business. So, we’ve dealt with this. And the irony of the situation is we’ve tried a lot of different things and it’s gotten markedly better in some cases and not as -- we’ve made a little bit of progress here and a little bit of progress there but we’ve kind of also lost some ground in a couple of cases too. Our average is -- the average fridge has about 6% out of stocks is the way to think about it. Now that’s not good, but if you were perfect at retail, you’d be about 3% out of stock. So, do have out of stocks, absolutely, is it worse than a dry shelf stable product that you’d see out there. Yes, it is worse. Is it impeding some of our progress, yes it is, and it’s something that we’re absolutely working on. But the irony is also in a situation is - so we’ve doubled our sales over that period of time. And then if we look at the fridges and the same chain where we do -- I’ll make up numbers for a second that we do $200 a week and we’re $400-$500 a week in the same chain, the out of stocks seem to be at about the same level. So, we think this is something that’s holding us back and there’s opportunity but we also know that there is incredible opportunity to kind of move forward, even given this situation. Now, the thing that’s nice is we’re continuing -- we think there’s some potential breakthroughs, but even beyond the retail piece, there are some other opportunities that we have to go -- if consumers are running into this problem, they’re finding alternative means in order to buy the product out there, whether it’s something like an Instacart or a dotcom type product that’s out there, so that some consumers are actually solving it in that way. Now that’s not what we’re really encouraging but we know that that’s a potential solution over time too. So, we kind of see -- we see where, we are we definitely are working on it. It’s really frustrating to us. We know that we will eventually kind of have a breakthrough. And as the business gets bigger, it’s easier and easier for us to deploy different types of solutions to solve that problem. So, it’s not just a total business but on a per store basis, it allows us to apply some different types of resources in that individual store as the business gets bigger. That may not have made sense when we were doing a $100 a store week, we’re doing $200 a store week, you can do some different things.

And I also just want to comment on the progress that has been made. In that for example, Scott highlighted the out of stock is about 6% that’s what we’re seeing now, that’s what we saw a year ago, we saw it two years ago, yet we’re doing it at higher velocity. Velocity across some of the class of the trade this year is up 15%. You’d expect that if you were growing at that rate of velocity growth, you’d see significantly we’re out of stock in New York but we’re actually doing -- the stores are doing better job of servicing it and we’re getting a little bit better coverage, but as you grow, when you grow as fast as we are, your raising to keep up. So, 6% is not a good place to be, we’d rather be much better than that. We’re working on a lot of things to do that. But the progress that we made has kept that from becoming a bigger number, even as we’ve increased the velocity.

Thanks. One last question and then I’ll close it out. Do you have any data on the interaction between your consumer and the Blue Buffalo consumer? And how you’re thinking about the potential impact, if at all Blue Buffalo’s expansion into the mass retail channel?

So, we’ve lived in the same channel as Blue Buffalo for a number of years. And over that period of time, we’ve doubled and tripled our business in pets, at the same time they’ve had incredible growth rate. So, we’ve actually seen a fair amount of synergies with participating and competing with them in the same format. We’ve also seen a lot of pet specialty entries, none this size, but then come into grocery and mass over time, there is a larger one this year. We definitely kept a close eye on it -- our business has really had nice performance this year regardless of that. We do see strong interaction with Blue Buffalo but it’s not necessarily a replacement purchase, many times it’s an additive purchase between the two businesses. But the thing that we think is really the greatest benefit potentially is 80% of our business is done in grocery and mass, and if they do come in the grocery and mass, there is a real opportunity for them to bring additional traffic into the store. As they bring additional traffic in, we think that there could be some really nice upside potential for us in many of those places that they are going to be distributed. And the other thing is we know what our store number is and we’re making nice progress in that through the year. So, it looks like it’s going to be a really big launch and really different than I think what people have anticipated. But I think that we could be a terrific partner of retail with them.

Thank you. [Operator Instructions] Our next question comes from the line of George Kelly with Imperial Capital. Please proceed with your question.

Hi, guys. A couple of questions for you. So, first on the returns on your advertising spending. Wondering if there has been a deterioration at all since you started really ramping advertising spending in the first half this year.

No Actually, there hasn’t been -- we’ve actually seen -- we’re trending slightly ahead of our model, just slightly ahead of our advertising model than what we planned and actually what we’ve seen in prior years. So, we’re really encouraged by that. Part of that has to do with the media planning and buying, the other piece of it is the creative and the productivity they we can get out of the creative. But we’ve been able to track slightly ahead of that and we are really happy to see that because sometimes when you do spend more, you get to manage more returns as we mentioned.

Well, that’s outstanding. And is that -- so you’ve -- that’s exceeded expectations. You went through the maths on the call during your prepared remarks of the incremental EBITDA that you are investing back into growth. Is any of that incremental spending related to advertising or how are you allocating that?

At this point, we are -- if we do invest additional in media, it would be very modest. There is going to be a couple of other testing and business development opportunities that we will be investing in behind that. So, at this point, we don’t anticipate significant investments and incremental investments in our marketing, advertising.

Okay, got you. And I think you are not giving out any additional details on what those business development investments are?

Yes, I don’t -- right now, I don’t -- they’re small enough where there are things that probably aren’t relevant to the overall success and there are things that we are working on for more, ‘18s and ‘19s in order to be prepared and really well position to hopefully exceed growth into the future.

And some of them is also our investments in efficiency improvements to help get the profitability that we want out to have over the long haul. So, it’s going to be a balance between, both growth oriented as well as profitability oriented investments.

Okay. And then, next question on fridge productivity. If you were to take your top -- I am just trying out a remember, maybe it’s 10% of fridges or maybe it’s 25%, but how much more -- what’s the velocity improvements over your average fridge with the top performing group?

That’s a really good question. We actually track -- we’ll do a lot of different detail on tracking, same-store sales, we’ve done it by first type, we’ve done it by length of time in the fridges, and we see very, very consistent growth across every different variable that you can imagine. So, whether it’s fridge size, whether it’s retailer, whether it’s length of time in where our fridge is in place, year-after-year, we are seeing really strong same-store sales growth. So, one of our largest retailers for example where we have many years of history, we have been able to see well over 20% same-store sales growth in fridges that have been there for two and three and four years. So, it’s a really good question and it’s an important thing for us to think about, but it’s another one of those things that definitely show us the potential of the business and the productivity of the advertising and that the best time to put a fridge in for Freshpet is yesterday, we’d like to tell retailers. But it can really be a [indiscernible] success if they put it in there earlier.

Okay. And then last question is just on pet specialty. Did I hear you right that the overall specialty -- that segment, the smaller segment of your business grew 9% in the quarter? And have you heard just anecdotally, do you think that that channel is improving or did you vastly outperform the overall traffic in channel?

You heard correctly that our net sales in the quarter were up 9% in pet specialty and we did actually outperform the category. The data that we have seen, we have now just transitioned from IRI to Nielsen. So, have visibility on pet specialty, a little bit better and the category there was down mid to high single digits, over that same period of time. So, we dramatically outperformed the category.

Thank you. Ladies and gentlemen, there are no further questions at this time. I’d like to turn the floor back to management for closing comments.

We appreciate your time and interest and look forward to talking to you again at the end of Q3. Thank you.