Greetings, and welcome to Freshpet Second Quarter 2021 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 this conference over to your host, Mr. Jeff Sonnek at ICR. Thank you, sir. You may begin your presentation.

Thank you. Good afternoon, and welcome to Freshpet's second quarter 2021 earnings call and webcast. On today's call are Billy Cyr, Chief Executive Officer; and Heather Pomerantz, 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 annual report on Form 10-K 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. Please note that on today's call, management will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for how management defines such non-GAAP measures, reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP, and limitations associated with such non-GAAP measures. Finally, the company has produced a supplemental presentation that contains many of the key metrics that will be discussed on this call. That presentation can be found on the company's investor website. Management's commentary will not specifically walk through the presentation on the call, rather, is a summary of the results and guidance they will discuss today. Now, I'd like to turn the call over to Billy Cyr, Chief Executive Officer.

Thank you, Jeff, and good afternoon everyone. I want to start by giving you the punch line upfront. Our net sales continue to grow strongly, up 36% in the quarter, so we are raising our net sales guidance for the year. We are now projecting that we will end the year with greater than $445 million in net sales, resulting in the growth rate of 40% for the year and a second half growth rate of 44%. We are not, however, raising our adjusted EBITDA guidance for the year as we will use the incremental contribution produced by the higher net sales to offset some inflation and temporary operating inefficiencies we've experienced. We've announced that we will take pricing to cover those incremental costs later this year, but it won't have much impact until next year. We believe this is a balanced and reasonable approach to creating the greatest long-term value for our shareholders. We are able to raise our net sales guidance because we've been very successful at ramping up our production, producing 44% more pounds in the quarter than we did year ago. This enabled us to generate 36% more in net sales than the year ago quarter, while also beginning to restore our in-house inventory, adding approximately $5 million of net sales value of finished product inventory to our quarter end inventory versus where we began the quarter. In the challenging labor market in which we are operating, that is a significant achievement for our manufacturing and HR teams. And as you will hear in a few minutes, we are taking an even more aggressive approach to our labor strategy, with a goal of creating a strong stable workforce with a distinctive career offering for our employees that will enable them to build more skills, add more…

Thank you, Billy, and good afternoon, everyone. As Billy indicated, net sales for Q2 of 2021 were $108.6 million, up 36% versus year ago, actual Nielsen Mega-Channel consumption was up 37% versus the depressed year ago period, which was the post-COVID trough. The year ago period also included significant trade inventory bill behind the Q1 2020 COVID surge. So the base year net sales were significantly in excess of consumption. We did the same thing this year refilling about $8 million of trade inventory phase to the very strong production performance. We also built our own inventory a bit during the quarter, which has helped us improve customer service on some lower volume SKU that are produced less frequently and where our service had been particularly poor. The reconciliation of the Nielsen consumption to this quarters' net sale can be found in the accompany presentation on our investor relations website. The growth in the quarter continued to be led by strong performance in the pet specialty channel with Nielsen measured big box pet specialty consumption up 57% in the quarter. Our e-commerce business also performed well growing 46% in the quarter, and now accounts for 5.6% of sale. As Billy indicated that does not include any sales through chewy.com as that service did not begin until July. Additionally, our international business grew 48% in the quarter, and we continue to see strong momentum in those markets behind the advertising investments we have been making. Adjusted EBITDA for Q2 was $10.9 million, down 2.9% versus the year ago. The underperformance on adjusted EBITDA traces to both inflation and some temporary inefficiencies that we have described previously largely in freight. Freight costs were 11% of net sales for the second quarter versus 7.8% in the year ago. A portion of this is…

[Operator Instructions] At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Rupesh Parikh with Oppenheimer. You may proceed with your question.

Good afternoon and thanks for taking my question. So, I guess, Billy, Heather just starting out on the pricing front. At this point, any sense of whether there’s any retailer resistance to that price increases you guys anticipate taking? And then secondly, how do you think your projected price increases compared to maybe some of the other pets readout there?

We’ll let Scott take that one.

Hi, Rupesh. So we sent out a letter at the end of last week. We carefully went over this with our sales team. We have some conversations with a handful of customers even right as we were developing the price increase. We also looked around what we’re seeing in the market. We have not heard resistance. From our understanding a lot of people are taking pricing at this point. So I think it’s something that a lot of people anticipate and expected. The thing I want to say about the way we did it is we pushed it off as far as we possibly could. We want to take a consumer centric approach like we do to every single thing we do. We want to make sure that everyone wins in every single thing we do too. So we want to really avoid any pricing impact until our availability and our inventory issues. We’re a little bit more muted and not as visible to consumers. So we really pushed off as far as we possibly could. And again, we wanted to think about what is the best way to do this for the consumer, for our customers, and then also Freshpet. It’s a pretty wide array on the pricing meaning there were some items that will move maybe not at all and there were some items that will move significantly. And we’ve done this several times before. And I think at this point we really understand the best practice in how to do this, how to minimize the impact and how to implement it, where we’ll realize the greatest benefit and the limit -- as limited impact as possible.

Okay, great. And then maybe just one follow-up question. Just on out-of-stocks for retail, I’m just curious the latest thinking in terms of when you guys think the out-of-stocks will be at level that you guys are happy with.

Rupesh, you will see in the deck that we published, they shows the TDPs, which is while it’s not the best measure of in-stocks is a reasonable measure. And the TDP data that’s in there shows that the last measure was at like 7.78. If you take our ACD that we have today, and you multiply it by this, the average number of SKUs we had in distribution at our peak last summer, we’d have to be at like 8, 8.50 to be at the same place. And you can see the line, the slope of the line is moving up at a fairly consistent rate. So I’d expect you could take a look at that and you could make your own projection. The thing that’s tough is the tail end is always the hardest part to get when you’re getting into smaller SKUs that are only in specific channels. Those are always going to be the toughest parts of it, but it will happen sometime in this quarter.

Great. Thank you. I’ll pass it along.

Thanks, Rupesh.

Our next question comes from the line of Bill Chappell with Truist Securities. You may proceed with your question.

Thanks. Good afternoon.

Hello, Bill.

Hi, Billy and Scott. And I’m just going to following up on Rupesh’s question. I don’t fully understand like why not be more aggressive with pricing? I mean, all your competitors are stepping up pricing. Every CPG company is passing off pricing. Do you have a potential where the price gaps go away with you in some of the premium, I guess, dry dog food players? And there’s certainly hasn’t been any real elasticity? So I understand protecting the consumer and good to consumer and all that. But I mean, why not this is a window that’s open, why not be more aggressive right now?

So, Bill, as you know, we have very, very aggressive penetration growth goals. And that is really fundamental to us achieving our objectives in the next several years. So the single best thing that you can make sure you’re doing, and again I’m looking across the portfolio, so there are items, again, we will not touch a couple of items because they’re the most price sensitive. And there are some items that we have some opportunity. We have some – they’re fairly – we have the opportunity to take some significant room there. We will be aggressive on those items, but over time what we want to do is we want to build a really, really strong consumer franchise with many, many consumers coming into our brand, into our portfolio. We want to make sure that there are items where there are features and benefits that people are comfortable and willing to pay for. And we want to go over time from a business of know-how and a business of capital investments early on to a business of scale and a really large consumer portfolio. And we feel that we’re going to – I mean, we put out a letter. It’s going to be the most aggressive price increase we’ve taken in potentially ever across the entire line, but it will not be – we’re not – our goal is not to try and get every single thing we could get, our goal is to make sure we get what we need and to make sure that we’re keeping us as available as possible for as many consumers as possible.

Yes. Bill, let me just add to that that I don’t think we’ve disclosed yet what the magnitude of the price increases. So in terms of your question about, are we being aggressive enough, there’s two sides. The one is the size of it and the second is the pricing as is the timing on the size part we haven’t disclosed that it’s simply the number of our customers. The second part of that is on the timing. Many of our customers require a 90-day advance notice on a price increase. And so practically speaking, you won’t see it until 90 days down the road. We also disclosed that we’re doing an ERP conversion on November 1st, which everybody always talks about those potentially creating some disruptions in the business. So we wanted to get that behind us before we got in a position we were doing the pricing, but the reality is the price increases. We’ll get the full benefit of the price increases in next year.

And just to be clear, you don’t see nearing a price ceiling at this point.

We don’t see nearing a price ceiling, no.

No, not at all.

And then just one another question to you Heather to help. Has there been a meaningful change in terms of the Ennis or even Kitchens I do kind of pause to completion or labor or potential that can add just, I mean, certainly construction costs have skyrocketed over the past few months, but also with labor and just trying to find labor, have your calculations changed meaningfully over the past since you’ve really talked about a few months ago?

No, no, change Bill to our plans. The team was very proactive in terms of being able to secure materials ahead, had good foresight there. So no risk in terms of Ennis phase 1 timeline at all with respect to materials or construction and in terms of labor same thing. Actually, the market there at Ennis is a little bit better than – the labor market in Ennis is a little bit better than what we see in Pennsylvania. And so, as they start thinking ahead about having the right labor in place for the commissioning where – as you heard Billy talk about in our comments, we’re well ahead already hiring staff to start training. So, in good shape there as well.

Great.

Yes. And Bill, the biggest piece on labors change is the labor second wage increase that we’re taking in our labor – in our facilities here in Bethlehem, which will be effective on 9/1. It’s we did one in May. We’re doing a second one here. That’s the big cost increase that we’re seeing.

Got it. Thanks for the color. Thank you.

Our next question comes from the line of Mark Astrachan with Stifel. You may proceed with your question.

Thanks and good afternoon everyone. I guess a couple questions for you. One just more point of clarification. So anything in the guidance in the 4.45 or at least 4.45 million that is related to inventory fills that would have been different than what you were expecting on the last quarter meaning that we’re trying to figure out how to think about kind of the apples to apples sales growth. So any change there in terms of what’s embedded. And then second question is maybe a broader question, but you’ve had some time to reflect on out-of-stocks at this point. Obviously, still not completely resolved, but more than it’s been. Any impact on the business is best you can tell any impact from a retailer perspective, from a consumer perspective, one of the things that I’ve been hit on more than a few times by, I call it, concerned folks, I guess is, hey, are we seeing any impact on demand here because scanner data is slowing. Obviously, the comparisons are what they are, but anything you can do to discuss that I think would be helpful.

Yes. Let me take the first part of that and then I’ll ask Scott to talk about the impact as we had on the – anything related to our customers. But as I said in the scripted comments at the beginning, the size of the trade inventory hole has turned out to be larger than what we thought. And while we don’t have a precise number that we are putting in there versus what we’ve been saying before, I would suspect that the number that you’re seeing is probably at least 5 million bigger than what we had previously outlined. So when we gave our guidance at greater than 4.45, we did reflect on that. But the reality is that the slope of the line that we’re seeing on – coming of consumption in the Nielsen data we’re seeing is pretty much right on where we thought it would be. In fact, we have a chart in the deck that kind of shows you where that’s falling at this point. And so, it’s people who have been talking about slowing growth, I remind them that I’ve been telling them that this was what it’s going to look like for quite some time just because of what happened in the year ago and the odd dynamics of the year ago, but the line is falling exactly where we thought it would be and that’s why we feel very comfortable taking the guidance up. And the trade inventory hole is a little bit larger. From a consumer perspective, you’ll also see that the household penetration gain slowed in the quarter versus what our long-term run rate is. We do think that out-of-stocks played a significant role in that. We’re now about a year of consumers struggling to find the item they wanted.…

Great. Thank you.

Our next question comes from the line of Ken Goldman with JPMorgan. You may proceed with your question.

Hi. Thank you. Two from me. Heather, did you mention, and perhaps I missed it, how much trade inventory you're modeling in the back half of the year and what the timing of that might be between the two quarters?

No, we touched on the Q2 refill, being $8 million. We didn't touch on – because we don't know the full magnitude of the number, Ken. So, we didn't touch on that specific number for the back half with respect to that. But we do anticipate some continued trade resell in the back half.

Okay. But with a follow-up to that, I guess, what are you modeling in – are you modeling in the number that you think is beatable there? Or is conservative? Because some – I'm just trying to get a sense because you did raise your guidance. How much of that guidance raised was because of an expectation for increased, I guess, pipeline fill, for lack of a better phrase.

I guess, let me take that, Ken. First of all, I think it will be skewed more to Q3 than it is Q4 where they – because of we're still refilling it as we speak. And we expect it to be done by the end of Q3. And at the same time, we also said in the comments that Q4 will be bigger than Q3. If you recall last year, Q4 and Q3 were about the same size. But we think Q4 will be bigger because of the heavier marketing investment that we have this year. We also have the available supply this year in Q4, because we're bringing on that second line of Kitchen South that comes on in September in addition to the capacity that we already have online. So, when we gave the guidance at $445 million, we had a pretty good handle on where the consumption line was headed. And we also had a sense for how much of trading to refills happen in Q2. What we think will happen in Q3 and we're quite comfortable with the guide and gave being the sum of those two and we'll be in excess of $445 million.

Okay. Thank you. And then quickly, you've raised your outlook for sales, obviously. You've also raised your outlet for capacity in the back half of the year. Is it fair to say that these factors are unrelated? I would assume so because your second half shipments will still be well above your theoretical capacity. I just wanted to make sure that, that it's more demand and pull driven and not push.

Yes, I mean, without a doubt, it's – there's nothing to change about the way we generate demand. Frankly, what we were updating is, what we actually think those pieces of equipment can get and what our staffing will get. As you heard, it's a rather dynamic staffing environment for us and we've been finding ways to move our staffing around and also attract staffing. That gives us a higher degree of confidence in our ability to produce the revenues that we included in the chart that you're referring to in the deck. But it is not at all driven by a push. It's all being driven by our efforts to secure the maximum supply. Frankly, we've been so frustrated Ken, by our ability to get caught up and frankly, our customers have a reason to be frustrated as well. And this is us looking for every way in which we can get more productivity out. And we think we've found some pretty good way. We said before too, the Kitchens 2 is turning out to be more productive than we had expected. The capacity on that operation is remarkably good.

And to actually extend that to tiny bit further and sorry, I dropped off a moment ago, but capacity has been and will be probably the single biggest limiter that we have for a very long period of time.

Understood. Thank you.

Our next question comes from the line of Peter Benedict with Baird. You may proceed with your question.

All right guys. Thanks. First, just on the increase in the revenue plan for this year, just curious if the addition of Chewy played a role there, or if you – you guys had always kind of had something in there for Chewy on the initial guidance. That’s first question.

We always had it in there.

Okay. Understood. Yes. And then I guess, can you – I know you're not going to frame now the magnitude of the price increase. How about just on the wages, if you think about the two that you all taken, can you give us a sense for how much wages have gone up versus 2020 to – 2020 level, I guess, as we look for all of this year?

Well, I just talk about it in terms of what the hourly wage has done. I don't want to go into the specifics of the total at this point. We might find another way to have a conversation about that, but our regular wage increase that we did some normal sensing back in May was a 3% increase. And we realized that, that was not going to get us where we wanted to get to. So the increase that we're taking in September is much more sizable than that. It varies by level in your organization, but a headline number would be a 20% increase.

And Peter, I think the other way to think about that is, we are trying to kind of go back to principles on how we operate and think about the business. And we believe this is a real significant investment in our company. And because we want the best quality, we want the most efficiency. We want the most effective lines possible. And quite honestly just growth requires us to get more out of our lines, but also if there are more people. And could you imagine if you were adding to your team and someone came in and they were there for a week, a month, three months, six months, and then they left and you had to start over again and again, it puts strain on the rest of the team. So, we're trying it like really create a completely different approach to this, and really invest in kind of the vision for where we're going.

Yes. Now, that makes sense, Scott. Smart move, and that makes a lot of sense. So then Billy, you said dynamic staffing environment, dynamic is an understatement. My last question is just about with the households that are being added, the Millennial and the Gen Z households, just curious, remind us kind of what topics maybe they're gravitating to any differently than maybe your legacy customers, and how that maybe influences your innovation plans for the next few years. Just curious how that's trending?

Yes, actually that's an important question. There's some interesting data that's actually out there at this point. So it looks like more pets were added last year than any year that we've been able to kind of track back and look at. All of the pets –so that's about – it was about a 5% increase. There's usually like 2% increase in pets, or it was like about a 5% increase. So, the number that's been thrown around 7 million, more cats and dogs, right, that are kind of now with consumers versus in shelters or whatever. Of those the biggest group that acquired pets, which logically, right. It was Millennial and Gen Z and also that group is willing to spend more on pet products and they're also more thoughtful about the products that they want. So this is kind of exactly what you're talking about. When we look across our portfolio, and we think about how we're doing. First of all, we well over index with Millennial and Gen Z. So we really think we're a key piece of how pet foods are shaped into the future. In addition to that, we're taking one of our brands it's called Nature's Fresh it's been in the natural channel, and we are taking that brand and we were doing every single thing we can to position that very specifically to win against Millennial and Gen Z. It's always been gap rated meats. I will – I don't want to get into too long an answer. We talk more about it at the Sustainability Summit, but it's gap rated meats. It's actually carbon neutral. Now, it's one of the first carbon neutral tech brands out there and buy and the largest as far as we can tell. So, we’ve really taken a different approach. You'll see a lot of work we're doing on overall the brand, how we're talking about communicating and packaging formulation, et cetera. And then finally, one of the things that we're doing, where we think there's tremendous opportunity over time. We've mentioned it in the past, but we're going to – we're launching this product called Spring and Sprout issues are shipping like right in the next couple of weeks, I haven't seen it on shelf yet anywhere. But we've announced this in the past, it is plant-based meat product and it's a terrific product. We're really, really excited about it, and it really addresses both ethics and meat, but also environmental concerns around proteins. And we think that's going to be an important product, an important addition to the portfolio that we're building out over time, that's focused on the kind of younger consumers.

Okay, great. Thanks so much for that.

Our next question comes from the line of Steph Wissink with Jefferies. You may proceed with your question.

Thank you. Good afternoon, everyone. We have two questions if we could. Heather, I think this one's maybe best suited for you, but it's related to the one line per quarter addition and capacity. If you could just help us think through the stair-step of how much revenue value each line could add as we think about the next six to eight quarters or so.

Sure. So yes, actually in the company presentation there's a chart that shows that continued ramp up. But when you think about where we are headed versus the end of this year, we're adding the one line, one additional line in Kitchen South, which brings the installed revenue capacity by the end of this year to $760 million. So that's sort of the first days of the project. As we enter next year, we have an additional line at Kitchen South that will come on actually in the beginning of Q1. And that line will have revenue capacity of about $50 million then Ennis starts to ramp up. So starting in beginning of Q2 and then each Q3 and Q4 we'll have each of the Ennis line coming on Ennis’ one line coming on board with a total of $400 million by the end of 2022 in Ennis. And at the same time, we'll be working on our Kitchen South Building 2 project. The plan on that project is to install three lines over the course of 2023 with revenue worth about $300 million. There's some variables to those numbers. And the key is that we have new technology that we're testing. And so depending on that new technology Kitchen South Phase 2 – Building 2, as well as the second phase of Ennis could be impacted with incremental revenue potential depending on the actual outcome of the new technology.

Okay. That’s very helpful. And I just want to follow-up on pricing. I just wanted to de-compartmentalize the two drivers; so labor inflation being one reason to take price, the other you mentioned was shipping inefficiencies and Heather, maybe just to talk a little bit more about the temporary nature of that. I think you mentioned as the back half progresses, and as you gain efficiency, the inefficiency burden on gross margin would start to mitigate. So just wanting to understand a little bit about, are you taking price to cover both, and then once those inefficiencies roll-off, you’ll see a little bit of margin benefit, or do you expect this to just cover the ongoing shipping inefficiencies you anticipate in the business?

Yes. So I’ll just describe first the inefficiencies. There’s two elements of inefficiencies; one that impacts gross margin, the other that that impacts SG&A, where the logistics costs are in our P&L. But what immersion in Q2, we described is some temporary processing inefficiencies to temporary operating inefficiencies as we’ve been ramping up the new lines in Plant 2 as you would expect with new staff. We just, you know, some of those sort of getting the kinks out as you’re ramping up, sort of exceeded expectations. And we do have many new folks that are coming into that facility and so there’s a lot of training and learning curve that has to happen there. Those inefficiencies we expect actually by the end of this year to be self-resolved in Plant 2. The other inefficiency is in freight that we’ve been talking about since the beginning of the year where our symptoms don’t allow us to allocate inventory to order and transportation is planned, because our fill rates are so low with a much larger expectation than is actually shift. And so that inefficiency also, two things will happen, one as we improve our inventory position and have improved fill rates that will self resolve, but we also are building a capability to allocate inventory into our new ERP. And so that will by November, that particular issue will be resolved. Our pricing plans are looking ahead are focused on where we expect inflation to be headed into next year, and obviously there’s a few variables to that. But at this point it’s really to offset the expect – anticipated inflation as Scott mentioned earlier. And we’ll see where that lands up as we – the big variable, of course for us will be chicken and where we lock that pricing at the end of this year.

And Steph, I’d add that we think that some of our cost increases are, as Heather described in sort of are temporary inefficiency. Then we’re not pricing for those because we think those are going to go away. What we’re pricing for is the inflation that we think is not going to be – go away, which is basically the inflation that’s due to labor, both our own internal labor, as well as the labor at some of our suppliers, and they’re going to start passing that labor cost on to us, and we’re already seeing it this year. And so anything that has a labor component, that’s driving inflation, we have the price to cover that, but if it’s around temporary inefficiencies, we’re not pricing for that. We’re going to get the efficiency gains from our operation, as we’ve described it in the past, both from scale, as well as from moving to the more efficient lines that we’ve got. And then also diversifying our shipping to a second shipping point, those kinds of things are going to get us the efficiencies that we need to drive the margin.

That’s very helpful. Thank you.

Thanks.

Our next question comes to one of Jon Andersen with William Blair. You may proceed with your question.

Hi. Excuse me, good afternoon, everybody.

Hello, there.

My first question is on, should we, and I guess, multi faceted, I’m curious, I think the additional Chewy will help it to what extent will accelerate your e-commerce business and where you think e-commerce goes as a percentage of sales over the next couple of years. And then where do you think the biggest benefit will be derived? Is this a household acquisition tool? Is it a buy rate enhancer or some combination of both?

So, hey, Jon. It’s Scott. So, we touched a little bit on this – we had a couple of discussions where we’ve touched a tiny bit on this, but look we think that if you broadly look at where we are today, we recognize there are definitely a group of consumers that want to be able to get products delivered to their homes in some way. There are, right now we have a handful of ways that you can do it. You can do the click on – click and pick the buy online pickup in store. There are a handful of services. We think that the partnership with Chewy makes a lot of sense for both companies. We’re really excited about it. I believe personally that over time, what will happen is that this will, I think as consumers get into a regular cadence, I think that it will not only provide an opportunity for consumers that want convenience but also consumers that want a consistent cadence. And so I think it will give us a great opportunity to expand buying rate over time. So with respect to the specifics around that, we don’t know, we’re two weeks, three weeks into launch, its super early. They’re great partners. They seem like – it seems like it’s going to be a great partnership and relationship over time. I don’t know how it shapes, but the research we had done demonstrates that it will both open up penetration and buying rate over time. And I think there is a ton of potential there.

Okay. And have you – have you structured your – your, the kind of the product offering and your pricing in a way that it makes you channel agnostic across the portfolio at this point?

Yes. We have, and if, one of the things like, and I know, like everyone’s thinking like Scott mentioned principles and values, like multiple times here, but one of the things we have down, like, and I’m serious about, like every time I do everything, like anything we do, I literally look at and go, how does everyone win from this activity, right? How does a consumer win? How did our partners win? All of our partners win? How does Freshpet win? And if we can’t construct a way that everyone wins, we are very, very, we just won’t do it. And we’re super fortunate. We’ve got, we have more potential, we have tons and tons of potential, and we have so much opportunity for growth that we want to be really kind of thoughtful in the way we’re constructing our business, our portfolio, and who the partners that we’re working with, et cetera. So yes, we are – we’re agnostic if you want to – if you want to talk about it that way. But I mean, every different customer, every different channel brings different benefits. They have different types of consumers, and we’re making sure that we’re kind of developing a portfolio that best meets what that consumer and what that customer is looking for.

Okay. That’s helpful. One quick follow-up. In a prepared comments, someone I think, maybe Billy mentioned, expecting more stores and second fridges next year with supply conditions better in-store merchandising conditions improved. Could you add a little bit more color to that? Maybe it’s too early to think that way, but you’re up low to mid-single digits in store count. In the first half of this year, do we see acceleration off of that in 2022 given the commentary? Thanks.

So yes, it’s another, it’s an important question, and keep in mind that the vast majority of our growth comes from penetration, which is behind our marketing advertising. That’s really what that drives 80% plus of the growth for the business. Back to the store piece, it is obviously really important. The thing that makes our marketing more effective is the widening availability. It makes it more accessible, more convenient, more stores. And then even the second coolers, the productivity of the second coolers has been extraordinary. The problem is we got to keep them full. That’s been our biggest – that’s been our biggest trick. But adding second coolers into productive stores is really, really powerful. So the way I look at this is rightfully so the conversations we’re having with our partners are very centered around, hey, we don’t have enough product, so there has been some hesitancy to add lots of coolers, but we look we’re having a great year, like we’re progressing nicely as lot of second coolers that have been added. You can, it’s Page 26 in the PowerPoint. So we’re making really nice progress, but there are some people that are kind of slow walking and as we have more products next year, we think that, like we think everybody’s figured this out in the last 18 months, 24 months. Look at the size of Freshpet; look at the consistent year-on-year growth of Freshpet. Look at the same store sales growth of Freshpet. Look at the stickiness of the consumers that it brings in. So I think people that haven’t been awakened to the potential where Freshpet can do for the category. I think we’re really there and I think it’s going to create a tremendous opportunity for us. Like, we’re definitely not ready. We got to finish this year. We’re definitely not ready to give numbers, but I think it’s – it’s really, it’s been really encouraging. Don’t know what the numbers look like next year, but it’s been encouraging and we should see, I would say a good year on that. We are going back to the first point; the vast majority of it is penetration and advertising based. We should be spending more dollars than ever next year in advertising, and that should drive velocity – penetration, velocity and overall revenue growth.

Thanks so much.

Our next question comes from the line of Robert Moskow with Credit Suisse. You may proceed with your question.

Scott, I’m glad that you’ve devised a win-win, win-win system for your customers and everyone. I wish you worked in the auto industry, it might help out my family quite a bit, but right now, what we know is…

My next project.

Yes, we need to get you, where you can help us out more. So, I had a question on Slide 17, actually you provide your fill rates going back. I guess this is several quarters. And I guess what’s noticeable to me is, it looks like it doesn’t get much past 65%. And you have a trend line, moving up into the right. A couple of questions, is this – are these yellow dots, but here’s the most recent one, the one on the farthest to the right, or is it somewhere else? Like what was your fill rate in the quarter? And, if your fill rates are kind of in this 40% to 65% range for what looks like a pretty long period, is it possible that this might be part of the nature of the business, that there’s just a – that there might be something intrinsically difficult about keeping these fringes full, given the multiple steps to get product into them. Just a question.

Rob. And I think you’re referring to the slide that says, as we need to build inventory fill rates go up is that the one you’re referring to?

Yes, that’s the one.

So that is data that says the slide we used last quarter, it’s not the – most recent data, we’re using it to demonstrate the point. But the reality is, we’ve operated fill rates that were, in the 90% plus for quite a long time, until we got into COVID. So it’s not, there’s nothing about this business model that keeps you from getting to full trust. And in fact, with the new ERP system, we’ll be able to allocate the orders to the inventory to the orders, and we’ll be able to get to full trucks. The other part of it is getting the fridges fall. And what we’re finding is and it’s not surprising is that the higher the velocity, the business, the better the fridge conditions are, because the stores then have more reason, more incentive, more reminder to keep filling the fridges. So, some of our best filled fridges are in the highest velocity store. So it’s a learning curve when you’re low volume and low velocity to get fridges full. But as you get to be a more important part of the storage volume and a more important habit, the fridges look better.

Okay. But so what do those dots represent then, Billy? Are those quarterly results or monthly results or what are they?

Just out of the relations.

Yes.

Yes, it’s showing the correlation of the one on the left is the correlation of the fill rate with our – with inventory levels. And so you see it inventory levels are improving the fill rate improves. And then on the right, the chart there is showing the direct correlation that we have where the cost per pound is goes down as the fill rate improves. And so it’s not a period of time, it’s more the link of those two factors with…

But each data point gives an instance within a day or a week.

Right.

Okay, so they’re very short time.

So basically, I mean for the trucker, the more cost effective it is.

I got you now. Okay. And then follow-up then, you talked about the ERP transition in November, it seems like a lot is happening all at once. How much inventory do you need to build up to give you cushion during that transition? Because it seems like, inventory is still not where you want it to be?

Yes, so let’s think it is, when we do the conversion, we’ll have to shut down the operation for a couple of days to implement the system, do the testing, the training, whatnot. And we’re taking advantage of that downtime to actually upgrade some equipment on one of our lines. But how much inventory you have to build. I mean, ideally, you would be in a position where you could continue to ship your orders during that time period with a high fill rate. We think that full inventory on our business is somewhere between four and five weeks of inventory. That sounds like a lot for a Fresh Products business. But you have the range of brands and skews that we have across the portfolio. So, you need to have about four to five weeks of inventory. Today, depends on what day you’re looking at? But we probably have about two to two and a half weeks of inventory. But we’re producing as you saw on the other charts we’re producing well in excess of demand every week. Well in excessive consumption every week. So, we’re building both our inventory and trade inventory as this goes. So, we should be good shape.

Hey, Rob. And the other thing to think about is, and I’m not minimizing it, because they’re big things. There is a lot going on. But we’ve been doing like, there’s a group of 40 people here that literally started the company, right, that started, we all started together pretty much in the very beginning. So, every three years or less, we double the size of the company since 2006. So yes, now the numbers are getting bigger. And but we brought in, like, smarter people, right? Heather on the phone, and I’m just focusing on the win-win-win. So that in all seriousness, there’s always been a lot going on. And we’re not by no means we’re where we perfect, but we’ve been able to manage a lot of it really, really well.

Okay. All right, thank you.

Thanks.

Our final question comes from the line of Ryan Bell with Consumer Edge Research. You may proceed with your question.

Hi regarding the household dynamics, you said, you’re seeing a slowing in household penetration sort of relative to the expectations in the higher buy rate, is the primary driver of that, that the increased buy rate is coming from just having more long-term users and fewer new buyers coming in, that would dilute the buy rate or there’s something else maybe for some of the new users that are saying, also buying at higher rates.

We’ve saw the data we published earlier this year. The first part is yes. When you aren’t diluting the buyer, the existing buyers, as much the buying rate goes up. So there’s no doubt about that. And if next year with the Scott’s enormous marketing budget, if we start posting 30% plus increases in penetration, you should expect the buying rate to go down not go up. It’s just the way the math could end up working. But there is a longer term phenomenon that’s going on, which is that we’ve seen each cohort that entered the franchise over the last five years, started at a higher level of purchasing than it, then the cohort that came in the year before them. So they are coming in with they’re buying higher value items, or higher price for pound items. They’re buying more of them they’re making – they’re using the product more frequently or more regularly. So, we’re seeing that phenomenon. There’s also the likelihood there’s some amount of consumer hoarding that’s going on, as consumers down, there’s a scarcity of the Freshpet product, they wanted, so they went to the store, they bought it. And what that does is it gives the buying rate for some user, lucky user found it goes up and the penetration for the other guy goes down because they couldn’t find anything. I think that’s small, but it is real.

That’s helpful and about the specialty channel. Do you think that, that’s going to continue to deliver outsized growth? And regarding the two year relationship? I know it’s been early, but have you found anything in terms of how that’s impacting your existing e-commerce user base?

So you want to pick those two?

Yes, so on the pet specialty, so I think I don’t know if you caught it earlier. But one of the things that we’re definitely seeing is a lot of new consumers, very heavy Millennial Gen Z, they think about shopping differently, and where they’re shopping, how they’re shopping, the types of foods that they want to buy. We think that this is a trend that’s driving, pet specialty in general, like if you look at their numbers overall across the board and food, they’re out there doing nicely. And if you look at our numbers, they’re nothing short of extraordinary. We think that there’s like a pretty long road in front of this, in addition to that kind of that secular trend. We’ve also added a lot of second coolers and many of these stores, which allows for a broader product portfolio, and hopefully, in many cases, a little bit more product, which makes it more available. So we continue to – we expect to continue to see really strong growth rates. And Ted for, for pretty long period of time, don’t know how long but I think it will be for quite a while. It’s we were again, we’re very excited about the chewy partnership, the relationship, we think there’s a lot of potential there. It’s super early. And, we don’t – we won’t get into the specifics of dynamics between customers, et cetera. We just don’t get into that level of data. So, but it’s, even if I even – if we were going to do that it’s way early way.

Thanks. And the last one foe me, in terms of the freight cost impact. It’s being driven by some of the issues with existing earpiece system. Is there a way to give the magnitude of that actual impact that we would expect to be going away.

Yes, so as you heard we talked about the fleet as a percent of net sales at 11% for the quarter versus 7.8% last year. And we do have free inflation in the first half of about 10%. The way that it splits out in terms of the inflation versus the fill rate and in efficiency, about 100 basis points comes from the inflation in the first half, and the balance of it is coming from this affiliate issue. So it’s depending on the quarter, it’s somewhere between 150 basis points to 200 basis points have an impact.

Thanks. That’s very helpful. And that was it for me. Thank you so much.

Thanks, Ryan.

Ladies and gentlemen, we have reached the end of today’s question and answer session. I would like to turn this call back over to Mr. Billy Cyr for closing remarks.

Thank you. I’m going to close with a quote from Anne Taylor, the author of Accidental Tourist. Ever consider what our dogs must think of us. I mean, here we come back from the grocery store with most amazing haul chicken, pork, half a cow. They must think we’re the greatest hunters on earth. And I would add to that include Freshpet and they’ll think you are a god. Thanks, everybody for your interest in your attention.

Thank you for joining us today. This concludes today’s conference. You may disconnect your lines at this time.