Greetings, and welcome to Freshpet Inc Second Quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Katie Turner.

Thank you. Good afternoon, and welcome to Freshpet's second quarter 2020 earnings conference call and webcast. On today's call are Billy Cyr, Chief Executive Officer; and Dick Kassar, Chief Financial Officer; Scott Morris, Chief Operating Officer; and Heather Pomerantz, Executive Vice President of Finance, 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 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. Please note 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 a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. Finally, the company has produced a 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 it will summarize the results they will discuss today. And now, I'd like to turn the call over to Billy Cyr, Chief Executive Officer.

Thank you, Katie, and good afternoon, everyone. I'm speaking with you from Bethlehem, PA. Dick is in his home in Manhattan; and Scott and Heather are in our offices in Secaucus. We'll do our best not to trip over each other on the call. And as always, please excuse any barking in the background and any other technical issues we might encounter. Let me start by saying that while it seems that the world is still quite unsettled, Freshpet has returned to the predictable growth that has been the hallmark of our business for the last several years. We are largely caught up on supply. The stores are back in stock on the vast majority of our SKUs. Our advertising is on air and driving strong increases in household penetration and consumption. Our retail partners have returned to installing new and upgraded fridges, and our Nielsen measured results show the impact of this with continually accelerating growth now running well in excess of where we were in the pre-COVID period and ahead of where we would have been if there had not been a COVID crisis. That is not to say that we are immune to any future changes in the external environment because we aren't. We still face the same uncertainty related to the public health crisis and changing consumer and retail conditions that everyone else faces. But we do believe that our recent results demonstrate our ability to adapt quickly to changing market conditions and continue to deliver strong results. As a result, we are quite optimistic about the balance of the year and our progress towards our long-term goals. The COVID crisis presented some unique challenges, including new safety risks for employees, a badly disrupted retail environment, a surge in e-commerce, and drastic reductions in consumer mobility, but it also presented some new opportunities including lower media rates, higher media viewership and engagement, increased awareness of the role pets play in our lives and the willingness to try new e-commerce options. We believe that Freshpet is ideally positioned to take advantage of those opportunities and break out of the post-COVID surge and trough stronger than we went in. We have a business model where growth is largely driven by advertising. We don't rely on retail promotions or price discounting to drive penetration gains. And we are an incredibly nimble company capable of creating and implementing new ideas very quickly. So at the end of Q1, we announced our post-surge pivot, building on our foundation of keeping our employees safe to rebuild our supply and that would enable us to improve retail availability and offer new e-commerce options. With all of those key elements in place, we were able to turn on our advertising to drive consumption and penetration gains. During the quarter, we strategically invested in each of these areas, including safety enhancements to protect our team, incremental capacity at Kitchen South, incremental retail coverage, new e-commerce options, and strong media support. The results of these efforts speak for themselves. Freshpet is now growing faster than it was before the COVID crisis with the most recent Nielsen mega channel data up in the high 30s, ahead of the 28.8% growth we averaged in January and February. Consumption has grown consistently virtually every week since April 18 and shows no signs of slowing. Household penetration gains are strong. The buying rate is also growing. All this progress would not have been possible without the dedicated efforts of so many of our team members from the folks who have kept our production lines running virtually non-stop since the COVID crisis began to our incredibly nimble marketing and sales teams who used their creativity to seize new growth opportunities in a rapidly changing environment and position Freshpet for accelerated growth, to our dedicated customer and consumer service teams who worked diligently and enabled customers to rebuild their inventories and restore their stores in the face of challenging conditions. But most of all, I want to acknowledge the Freshpet team members who have taken on the responsibility for keeping our teams safe. The very foundation of our post-surge pivot was built on the idea that we could keep our teams safe and they would then be able to catch up to and meet the rising demand. Thanks to the efforts of those teammates, our team members come to work each day, confident that the Freshpet Kitchens are a very safe place to work despite the numerous challenges that the coronavirus presents. Our safety program has three layers of protection designed to stop the virus from entering our facilities, prevent it from harboring in our facilities if it does get in, and prevent it from being spread from one team member to another. This program has resulted in us having no record of the virus being transmitted from one team member to another in our facilities despite the virus being present in our communities. That is not to say that none of our team members have been afflicted with the virus because they have, and it is an awful virus, and it has impacted our team members and their families. But it says that none of our teammates got the virus in our facilities or gave it to another person in our facilities to the best of our knowledge and after significant contact tracing. We consider ourselves fortunate to have had such good results but are also incredibly grateful to the team that has worked tirelessly to keep our team members safe. Without them, none of the outstanding results I'm about to share would have been possible. I would also add that we are very grateful to the teams at St. Luke's Hospital and Lehigh Valley Hospital Network, who have provided us with nurses, testing, advice and help for our teammates in need while they care for so many other members of our community during very challenging times. We could not have achieved the results we did without their support. But we're not out of the woods yet. Until there is a vaccine or effective treatment or the virus is no longer present in our communities, we must continue to be vigilant. Thus, we will continue to incur some of the $4 million in fiscal year 2020 COVID-19 costs that we outlined last quarter, although the costs will likely be lower in Q3 than in Q2. Part of that reduction is because our absenteeism has dropped significantly since we re-instituted our absenteeism policy on July 1 with exceptions for employees with underlying health conditions or who have someone at home at significant risk. Absenteeism is now running in the mid-single digits versus the mid-teens we experienced in May and June. Now onto the results. We feel very good about what we accomplished in the quarter. We posted our strongest quarter of net sales growth since 2015 and we were able to drive a significant portion of that stronger top-line into our best bottom line performance ever. Net sales were up 33% versus a year ago and adjusted EBITDA was $10 million higher than the result we posted one year ago. As a result of this strong performance and the continued strong trends we are seeing, we are raising our net sales guidance for the year from greater than $310 million to greater than $320 million, representing greater than 30% growth in a year filled with COVID and capacity challenges. We're also raising our adjusted EBITDA guidance by $2 million. Dick will provide more details on our guidance later. The strong top-line results are the product of 21% Nielsen mega channel consumption growth for the quarter, despite starting with less than 10% growth in April's post-surge trough and the volume benefit from refilling the trade inventory hole we dug earlier in the year. The consumption growth accelerated throughout the quarter, ending with 30 plus percent growth in June and still accelerating into July where our growth is now in the high 30s. This is due in part to some outstanding work by our marketing team to make a very timely pivot, replanning and rescheduling our media investment, taking the spending out of the shelter-in-place trough in April and investing more heavily in May through October, taking advantage of the higher viewership and lower media rates we are now seeing. The result was that we saw returns on our media investments well in excess of what we have seen historically, and that is driving the accelerated consumption growth we are seeing today. It is also driving very strong velocity growth, measured as dollars per million ACV, hitting 19% growth versus a year ago in the most recent four weeks. The Q2 growth is also the result of the efforts of our manufacturing team to produce enough product to catch up to the demand. The Freshpet Kitchens never stopped operating in the quarter, producing record quantities. And in conjunction with the additional capacity we put in place at Kitchen South, we were able to increase our fill rates from the mid-70s in early April to the 90s by the end of the quarter. We are still not at the 95-plus percent rate we expect due to tighter capacity on a few items and surging demand, but we are getting close. We will, however, have very tight capacity on our Fresh From the Kitchen items until Kitchens 2.0 begins producing salable product in Q4. As a result of these efforts, we are able to largely refill the trade inventory hole we had at the beginning of the year in which we dug deeper in Q1 behind the COVID surge. Refilling those two holes combined to add 8 points to our growth rate in the quarter versus the consumption growth rate we experienced. But I want to be clear that we ended the quarter with trade inventories still slightly below what we would consider normal, largely focused on a few SKUs that we’re still catching up on. We also got the benefit of a slightly depressed quarter in Q2 last year due to short shipments in that quarter, providing an additional 3 points of growth versus a year ago and improved performance on spoils this year adding another point. Recall, in the second quarter of last year, we had some manufacturing issues that resulted in short shipments and an impact on our gross margin in that quarter. The favorable comparison that created versus year ago will reverse itself in Q3 as we caught up on shipments in Q3 last year. A full reconciliation of the gap between consumption growth and net sales growth in the quarter is in the accompanying investor presentation. If you look at the year-to-date results, you can get a clearer view of how we are performing. Year-to-date, Nielsen mega-channel consumption growth is up 27% versus a year ago through the end of June and accelerating. Year-to-date shipments are slightly ahead of that, up 31% due to the trade inventory hole we had at the beginning of the year, the short shipments in Q2 of last year and the improvement in spoils this year. That reconciliation is also in the accompanying investor presentation. Another driver of our improvement in Q2 was a significant improvement in retail conditions. Our sales teams, in partnership with our customers and our broker partner, were able to restore the retail conditions, and we now have greater than 90% in stocks on most SKUs and most customers. Additionally, we are now benefiting from a significant number of end cap fridges and double fridges in high-profile retail outlets. The consumption growth was broad-based with each class of trade showing growth by the end of the quarter and only pet specialty not showing growth for the whole quarter. But even the big box pet specialty business showed strong growth by the end of the quarter, posting double-digit sales growth every week in June, in part due to the placement of second fridges in more than 744 stores and the foot traffic generated by the resumption of their services business. That growth has accelerated further in July. Our e-commerce business grew rapidly, as you would expect, up 201% versus a year ago. Curbside pickup and last mile delivery services like Instacart grew the fastest, resulting in more than 90% of our e-commerce business going through our in-store fridge network. We are most encouraged by the strong engagement we got from the new advertising we ran that featured our e-commerce options, increasing click-throughs on our website, where we now prominently feature our various e-commerce options and make it very easy for the consumer to get Freshpet any way they want it. Our small-scale DTC business is serving its purpose of providing a customer service to those afraid to go into stores and not comfortable with other e-commerce options as well as teaching us a bit more about DTC. But it is very small and not material to our results. Household penetration was strong at 19% despite canceling the April media due to the conditions of the stores and the shelter-in-place orders. The penetration of our core dog business, i.e., the main meal items, which accounted for 92% of our sales in the quarter, grew 21%. Since the beginning of the year, we’ve added 350,000 households towards our goal of 5 million new households by 2025. That is on pace with our expectations. Buying rate resumed its growth, growing 6% on the total business and 5% on the core dog business. This is what we would expect when the number of new users added in the quarter was not so big that it would overwhelm the gains made on the existing user base as it did earlier this year. Fridge placements slowed in the quarter, as we had indicated they would, but the incremental placements were not inconsequential. We added 253 net new stores in the quarter, bringing our total for the year to 550 and putting us on track for our 1,000 net new stores target. As a result, ACV was up 12% versus the year ago, but only 0.5 points ahead of where we ended Q1. More importantly, we added 764 second fridges in the quarter and now have added 779 for the year. And we upgraded another 186 fridges in the quarter, taking our total upgrades year-to-date to 218. We remain confident that we’ll be able to deliver our revised targets of 500 upgrades and 1,000 second fridges this year. Total distribution points, TDPs, were up 20% versus year ago as a result of the large number of upgrades and second fridges we placed and against the out of stocks we incurred in the year ago period. All this combined to drive this strong top line we saw in the quarter and give us confidence that we will see continued strong performance in the back half of the year. We are particularly bullish on the back half of the year, as we have advertising on the air for most of the summer, for the first time ever with high viewership and low media rates, and that is continuing to drive strong consumption gains. Nielsen mega-channel consumption has been up 37% versus year ago during the first three weeks of July. We entered the third quarter with strong and accelerating consumption growth trends, strong household penetration, and real momentum on fridge placements. All of that should support strong growth and make 2020 our strongest growth year since 2015 when Freshpet grew 34%. To support that growth, we were making very good progress in our capacity expansion initiatives. So far this year, we’ve taken our second roll line to a 24/7 operation in January, started up Kitchen South in mid-February, and added a second shift there by the beginning of June. At this point, we have run rate capacity of $350 million or about $87.5 million per quarter, assuming average absenteeism and holidays and full utilization of the product mix our lines produce. Kitchens 2.0 is on track to start up within the next eight weeks, shipping salable product in October and meaningful quantities in November. Once that facility is fully operational by Q1 of 2021, we’ll have almost $600 million in total capacity, making 2021 the first year in quite some time when we have the ability to grow without worrying about capacity. We intend to take advantage of that capacity. Also, we are breaking ground next week on Kitchens 3.0 in Ennis, Texas. This facility will be built in two phases and is targeted to be operational by the third quarter of 2022. Once fully operational, it will take our total capacity to about $1.3 billion. Adjusted EBITDA in the quarter was $11.2 million, up $10 million or more than nine times a year ago. As we demonstrated the significant leverage we get from scale, particularly in adjusted SG&A excluding media, and the contribution from incremental volume. Before I turn it over to Dick, I want to inform you that next week we will be releasing the proxy for our Annual Shareholder Meeting in September. In that proxy, we will outline a significant series of steps that we are planning to take to transition from the governance practices we’ve had since Freshpet went public in 2014, as a fast growing small cap, private equity-backed company into the governance practices of a fully mature $1 billion company with a broad and sophisticated shareholder base by 2025. We will match the increasing scale and complexity of our business over the next five years with a step by step process that removes many of the governance practices associated with early stage companies. We will begin by recommending the elimination of supermajority voting requirements this year and follow that with a series of actions each year through 2023 that we are committing to in our proxy. This plan was developed by our board after consultation with some of our most significant long-term shareholders with advice from governance experts and by studying the academic literature on the best ways to optimize success for high growth companies like ours. We believe this plan delivers the right balance between the guidance needed by early stage companies and the governance required for larger, more complex companies from our Board over the next phase of our growth. We also believe that laying out and committing to a long-term plan of governance enhancements now provides the greatest clarity for our investors about how we will continue to grow and develop Freshpet and is in keeping with what they've come to expect from us, i.e., a highly disciplined, transparent, and proactive approach to the long-term development of the company they've invested in. We will be speaking with members of our shareholder base about this once the proxy is issued later this month. I'll now turn it over to Dick to discuss our Q2 financials in more detail and our outlook for 2020. As a reminder, this will be the final quarter that Dick will be presenting our financials as the CFO. On October 1, 2020, Dick will become Vice Chairman; and Heather Pomerantz, who joined us in January, will become the CFO. Dick has taken this business from a startup through the angel investor and private equity phases through a public offering and two subsequent equity offerings to a company that now has a market cap in excess of $3 billion and is showing no signs of slowing down. And that is just the last 14 years of his almost 50 years as a financial professional. He had enough achievements before Freshpet to satisfy and impress almost anyone, including a very successful run with private equity backed companies. But in an age when most people think about retiring, Dick started on the Freshpet journey. We're awfully glad that he did. We would not be where we are today, if it had not been for Dick’s intelligence, tenacity, creativity, and good humor. It has been a privilege for all of us to have him as our CFO. The last seven months have provided Heather a tremendous opportunity to learn every aspect of our business, tap Dick's vast knowledge and begin to forge relationships with our team and Board, the analysts who cover us and our shareholders. She has been part of the launch of our new five-year strategic plan, a successful equity offering, the renegotiation of our credit facility and all the challenges presented by the COVID-19 crisis. Her presence gave us added horsepower to manage all that work, simultaneously bringing her up to speed on our business. Through it all, Dick has been a tremendous mentor to Heather, and he will continue to be available to all of us in his new role that has made this one of the most successful transitions we could have hoped for. And I hope it is an indicator to all of you that we continue to put in place well thought out plans to manage the many challenges of a rapidly growing business. And now let me turn it over to Dick.

Thank you, Billy, and good afternoon, everyone. When Freshpet got started in 2006, I never dreamed that I would have the opportunity to present quarterly results like the ones I'm going to share with you today. Despite the incredible chaos in the world, Freshpet is hitting on all cylinders. We are delivering very strong and accelerating growth and successfully taking the benefits of that growth to the bottom line. We are on track to deliver and exceed the $300 million net sales goal we laid out more than 3.5 years ago when we launched our Feed the Growth Plan. And we are off to a very good start towards our $1 billion goal in 2025. We are adding bench strength and manufacturing capacity at a rapid rate to support that goal. As Billy indicated, quarter two net sales were $80 million, up 33% versus a year ago period. For the first six months of 2020, net sales are up 31% versus year ago. The six-month view allows us to normalize the impact of the surge that occurred in March and the trough that occurred in April. As we said, at the end of the first quarter, our capacity limits in quarter one prevented us from having shipments match retail scanner sales, but would allow our shipments to better match actual in-home consumption. We had to refill the depleted trade inventory pipeline in quarter two, so our first two quarters look more consistent with each other and more normal than most CPG companies will. More importantly, though, we have emerged from the chaos in the last five months in very good shape with the strong growth rate and real momentum. Our post-surge pivot has worked. As a result, we are raising our net sales guidance for the year to greater than $320 million. That would take our growth rate for the year to at least 30%. This growth rate is stronger than the first half growth rate when you adjust out the rebuilding of inventory that we did in the first half and the softer comparison in quarter two. Additionally, this year’s third quarter would be a tougher comparison than quarter two because that is when we rebuilt trade inventory in the year ago period. But with our current 30 plus percent growth rate we're seeing in our Nielsen mega-channel data, we believe the new guidance is appropriate. Adjusted gross margin for the quarter was 49.1%, up 60 basis points from the year ago period. Versus what we did in quarter one, our mix shifted back towards bags from rolls as we had indicated it would, and that negatively impacted our margin. We also had a full quarter of production at Kitchen South, which provides a slightly lower margin, but overall, we had strong performance in the quarter. However, we are now expecting higher beef prices for the second half of the year that will impact the gross margin a bit, and we may come in slightly below our target of 49% to 50% gross margin for the year as a result of that cost increase. Without it, we believe we would achieve the goal. It will also eat into the contribution from the incremental sales reflected in our revised guidance. Without that increase in beef costs, our contribution from the $10 million in higher net sales would be about $4 million. But we think we could absorb about $2 million in higher beef costs during the second half of the year. So we're only raising our adjusted EBITDA guidance to $46 million from $44 million. If those higher beef costs persist into 2021, we'll look for opportunities to offset those increases via pricing and other efficiency improvements. Our media spending this year will really be a bit more evenly balanced between the first half and the second half than in prior years due to the COVID crisis. We pulled advertising out of April and spread it throughout the summer. As a result, our advertising will be split 65:35 between the first half and the second half. That turns out to be quite fortuitous as media rates are lower now and there's higher viewership. That is creating significant media efficiencies that we want to capitalize on. Adjusted SG&A in the quarter was $28.1 million or 35.1% of net sales, an improvement of 1,130 basis points versus the year ago period. Moving the media out of April, shelter-in-place time period to May through August drove 340 basis points of that improvement. When you exclude media spending, adjusted SG&A improved by 260 basis points versus the year ago, and keeps us on track for our 2020 goal. Adjusted EBITDA in the quarter was $11.2 million, up $10 million versus the year ago period. These financial metrics demonstrate the meaningful benefit from scale we get across our P&L, an essential part of the virtuous cycle embedded in our Feed the Growth Plan. It's also a good indicator for our ability to grow adjusted EBITDA in excess of net sales as we achieve meaningful scale. From time to time, we will choose to increase investments to capture incremental growth opportunities. But excluding those opportunities, we expect to continue to generate scale benefits in the P&L and expand adjusted EBITDA margins for the foreseeable future. We are continuing to project that we will incur $4 million extra costs related to the COVID-19 crisis this year, including enhanced compensation for our employees, increased efforts to protect them, higher cost to protect our supply chain and other related costs. As the results indicate, this has been a very good investment, has allowed us to run our lines continuously and catch up to the demand. But more importantly, it was the right thing to do for our employees and that was why we did it. In the second quarter, we incurred $1.6 million of that $4 million. Year-to-date, we've incurred $1.9 million. We believe that we will continue to incur costs, but at a low level in quarter three and they will taper off in quarter four. About three quarters of those costs or about $3 million are wage and absenteeism-related costs and the remaining $1 million covers the cost to keep people safe, such as nurses in our operations. As we communicated previously, we are adding back these costs to our adjusted EBITDA. So to reiterate, our guidance is now for net sales greater than $320 million and adjusted EBITDA greater than $46 million. Our guidance continues to assume that the external environment progresses as it has for the last month or two, and that there are no additional significant disruptions to the supply chain, our customers, or our consumers, including any issues from an adverse macroeconomic environment and increased social unrest. Our liquidity remains very strong. At quarter end, we had $128 million in cash, cash equivalents or short-term certificates of deposit. In early April, we amended and expanded our credit agreement and now have a $165 million senior secured credit facility that we have not yet drawn on. We believe those resources and cash we expect to generate from operations is sufficient to meet our long-term capital needs. We have invested $71 million of capital against Kitchens 2.0 projects so far, another project designed to increase our capacity, and our total spending on these projects to date is $91 million. Working capital increases offset P&L gains, a seasonal phenomenon for our business. So cash used in operations was $5.1 million. We continue to expect positive cash flow from operations for the year. In closing, we are incredibly well positioned to succeed. We have a winning brand with a strong product, an exceptional idea behind it, growing consumer interest in less processed, more natural foods and treating our pets well, a highly capable organization that has proven to be up to the challenge in front of us and a strong balance sheet. We are extremely grateful to our teammates who have worked so diligently under very challenging circumstances. We are also very appreciative of the work done by our customers, suppliers and their employees. We are all in this together and I'm proud of how our industry has pulled together to support each other, and we remain committed to working collaboratively with federal, state and local officials, who are fighting this public health crisis. And personally, this has been an incredible fun ride. We started from zero and have created 500 jobs, a nationally recognized brand and a product that is good for our pets and that our pets love. I can't tell you how proud I am of what we've accomplished together. The people I work with every day are so dedicated to what they do and so incredibly professional. And it was a real joy to see how we were changing the way people feed their pets for the better. Finally, I can't say how much I appreciate the investors who have believed in us and the analysts who have spent so much time with us, trying to get to know the story and challenging us to think harder about what we are doing. We are better for it and I'm glad that we've been able to reward those investors who stuck with us with significant value that has been created. That concludes our overview. We'll now be glad to take your questions. Operator?

Thank you, sir. At this time, we will be conducting a question-and-answer session. The operator will now provide instructions. The first question today comes from Peter Benedict of Baird. Please proceed with your question.

Hey guys. Good afternoon. And I'll start off congrats to Dick. Obviously, quite a journey with this one. So well done. Congratulations. It's been great working with you. I guess the first – I have two questions. The first question is just maybe, Billy, how you're thinking about the sustainability of this new consumption growth trend that you're seeing? You talked about your ability to fulfill it and the capacity. But just thinking about more on the demand side, is there – are there indications that new pet adoptions are helping drive this? Or how are we thinking about that? And as you think about the second half of this year, 30% growth, any differences between third quarter and fourth quarter that you see today that we should think about? That's my first question.

Yes. Thanks, Peter. Obviously, we're very pleased with the growth we had, and we gave you a lot of ways to think about the trend that we have so far and what you should expect for the balance of the year. Simply put, the way to look at the first half of the year was we ran at 27% consumption growth versus a year ago, yet we've seen it accelerate. As I said in the prepared remarks, growth in the last three weeks of July was 37% in the Nielsen mega-channel data, so you can see there's quite a bit of acceleration. As we think about the comparisons, there's a tough compare in Q3 versus a year ago because we filled the pipeline in July of last year, versus the flip side of what happened in Q2. We also have a capacity limit in Q3, as I said in the prepared remarks, about $87.5 million of capacity if we shipped everything perfectly according to our capacity and the mix exactly matched our capability. So it's a fairly tight third quarter. The fourth quarter, when Kitchens 2.0 comes online, is when things really loosen up for us, and we'll have a lot of capacity, particularly for our Fresh From the Kitchen product. Looking at where that leaves us heading into next year, we believe we will end this year with significant momentum on an expanded household penetration base because the media investment we're making, which is skewed more toward the back half of this year than in prior years and is a sizable investment, will leave us with much deeper household penetration gains that we'll carry into next year. Next year will be the first year in several years where we really won't be tapped by capacity limits. We'll be able to run fairly free. So when you think about the tailwinds we'll have, we'll benefit from the added household penetration and the added capacity we've gotten. Retailers are now very energized by what they've seen from the growth rate on Freshpet, how quickly we came out of the trough, and how strong our overall growth rate is. The business that left them on other dog food brands that went into e-commerce and probably isn't coming back as quickly as they might have hoped makes us look even more strategically important. We're starting to see retailer pull for more fridges, bigger fridges, and second fridges. So when you ask how long the trend is going to last, I'd say the conditions look very favorable, and we are looking forward to next year being a very, very robust year of growth for us.

Okay. No, that makes sense. And I guess my second question is just maybe an update on the direct-to-consumer efforts. I mean, I know 90% or more of your e-commerce is going through the existing fridges. But just trying to understand maybe the efforts that you started this year around the DTC, and then your plans to kind of expand maybe consumer access to Freshpet through direct channels. That's my second question. Thanks.

Scott will take that one.

Hey, Peter, it’s Scott. So we – as we've talked over the past couple of years, we want to be as omnichannel as possible and making sure we have our products in our portfolio as available to as many people as we can in many different ways. E-commerce has been something that's expanded a lot in the last couple of years. And the way I like to think about what's happening with COVID is it's something that was probably going to develop over three years, it probably developed in three months, where it's forced a lot of people, including my 72-year-old mom, to get shipments from Instacart. And more and more people are using click-and-collect and many of the different vehicles out there. Now, you'll probably remember that the vast majority of e-commerce supports our fridge network. So that's everything from Instacart and Shipt, everything around the ClickList from Kroger and all the click-and-collect models. So those grew quite fast because they had capacity to really expand and absorb the influx of consumers coming in. We also saw a really great growth around everything that was like Amazon Fresh or FreshDirect, all those models too. We did go ahead, and during our response – one of our responses to COVID was we did kick off a very small test around direct-to-consumer. We were finding there were a handful of consumers that are very concerned about going to a store and didn't feel like there was good access. So, we did kick something off. We tested it for a while. It's still up and running, and we're getting some orders. It's incredibly minimal at this point, but it's been a really, really good experience and educated us as an organization for the time being. And I think what we'll do is we'll continue to evaluate that and decide how we address this into the future. Right now, many of our retailers are really excited about the opportunities to continue to build out the portfolio of retail, and that's obviously going to be the majority of our focus.

Okay. It makes sense. Thanks so much guys. Good luck for the second half.

Great. Thanks, Peter.

The next question is from Ken Goldman of JPMorgan. Please proceed with your question.

Thank you and Dick, heartfelt thanks from me, too, for all of your help, much appreciated. Best of luck. I wanted to ask if you could be a little bit more specific on where the meat inflation is coming from that you talked about. I think you do lock in your chicken earlier in the year, and we saw beef higher for about a month and then it really collapsed. So just curious if you could add a little bit more color into that comment that you made. Thank you.

Ken, this is Billy. The inflation that we're seeing is on beef. We buy different cuts of beef than you might see in typical grocery stores. But chicken is fine, as you noted, we've locked in chicken for the year. So it's exclusively a beef issue.

Okay. Thank you for that. And then follow-up. If you mentioned this, I didn't hear it, I apologize, but I know you talked about media rates being lower. Did you lock in those rates through October? Or is there a potential volatility into what you're paying if demand for advertising goes up?

Scott, do you want to take that?

Yes. The vast majority of that is locked in. And look, the rates – I mean, Billy touched on this, the rates have come down 5%, 7% up to 10% depending on what you're buying. But I think it's the productivity or the effectiveness that's gone up, and that's an impact of people being a little more focused on TV. But we've also had really extraordinary creative that we've been able to put on during this period. So I think we really kind of played this out incredibly well. What we did is we literally kept an eye on when we were going to have a little bit more capacity. And then we went ahead and as soon as we thought we were going to have it, we committed to additional media because we knew the cost was better and it was also being more effective. So I think we kind of played coming out of COVID pretty well.

Great. Thank you

Thanks, Ken.

The next question is from Bill Chappell of Truist Securities. Please proceed with your question.

Thanks, good afternoon. Just trying to understand the kind of capacity for the remainder of the year. I mean we and I'm sure you've heard that there's been certainly a spike in kind of pet ownership across the U.S., and clearly, it seems like you're seeing some of that show up in July. Like is there a ceiling over these next three, four months until 2.0 comes out in terms of growth? Would you look to source some of that out? And does that have some impact on margins? Just trying to understand the path between here and 2.0 opening up.

Yes, that’s a really good question. So right now, as you have said, the rolls capacity we're fine on. We started our second rolls line going to 24/7 back in January, and we're going to be fine on that until the end of the year. So bags is the only place we've had issues. If you recall, we started up Kitchen South in February, and we put a second shift in there in June, and that has helped us catch up. So it means the place that we're going to be tightest is on our Fresh From the Kitchen product because that's only made in our facility and only on one of our two lines. When we start-up Kitchens 2.0 in the fall, that will effectively triple our Fresh From the Kitchen capacity once it's up and fully operational. And so that's sort of the next lever. There is a little bit of a potential for tightness on some of the bag products between now and then. But if you think about it, right now, we have $350 million of capacity if everything was used uniformly, which means that it's basically a ceiling of $87.5 million a quarter, assuming normal absenteeism and normal holiday scheduling. So as you think about heading through the third quarter, it will be kind of a tight quarter. As we head into the fourth quarter, Kitchens 2.0, we're very comfortable we'll start-up in September, ship salable product sometime in October and then meaningful quantities in November and December. So by the time we get to the end of the year, even if we've drawn down some trade inventory in the third quarter and the first parts of the fourth quarter, we should be able to refill any trade inventory holes that we have created. There might be a little bit of out of stocks, not a lot, on Fresh From the Kitchen. But for the most part, I think we'll be able to get fully caught up by the end of the year. So it's just a little tight and mostly on Fresh From the Kitchen. Does that – is that clear enough? Or do I need to give you a little bit more…

No, that's great. And then just a follow-up. I think you've had a store brand from one retailer in your fridges now for about a year. So kind of any update how that's going? Are you expanding it to bags? And then do you expect any kind of trade down if we have an extended recession?

Bill, yes, so I think that’s a really good question. It's something we are really thoughtful about. We've been very thoughtful about the items that we've chosen. We don't anticipate any further expansion of those items in the near term. Although over the very long term, we do anticipate that we will do some additional partnerships with some retailers if we can find the right proposition that's incremental to our portfolio. That's really what we did with that first test that we did, and we've been able to prove out that it works. But in the near term, in the next six to 12 months, we don't anticipate anything significant changing from where it is today.

Okay. Thanks so much.

Okay. Thanks, Bill.

Thanks a lot Bill.

The next question comes from Mark Astrachan of Stifel. Please proceed with your question.

Yes, thanks, and good afternoon everyone. I wanted to go back to one of the earlier questions and then kind of build on that. So you alluded to leverage in driving customer acquisition costs, meaning that they were becoming more favorable. What are the new consumers that are coming in, as you see it, in the breakout that you all like to give between visitors, mixers and loyal users? And partly, I ask it because I want to ask more of a main question around the buying rate. So that was up decently for core dog after being flattish last year. So are we talking about more productive consumers that you're bringing in with these leveraged customer acquisition costs? Can you maybe give us a bit more detail there? And then how do you think about that on a go-forward basis? Because presumably, it's not just household penetration that's increasing, it's obviously the other side of it as well that drives the sales growth upside.

So the people who are coming in – first of all, I would say that when looking at the usage patterns, we don't yet have enough detailed data on these most recent increases. We do know, though, that we are seeing a disproportionate amount of our growth coming from younger audiences — millennials and Gen Z — that's where the market seems to be shifting. It might be a little early in the life cycle to say what their exact usage habits are other than the most recent data we have. Pre-COVID, the data suggested that the people who are coming in are very similar in terms of buying habits and practices as the people we've been acquiring over the last several years. They're going through a very similar curve in terms of the practices of 'buy it, try it, mix it, top it, and ultimately use it more regularly,' which is what we're seeing. In terms of the buying rate, we're glad to see that, but we actually decompose that quite a bit over the last couple of quarters. When we looked at it, if you took out the significant number of new people we were adding, the people who have been around for more than a year were increasing buying rate at about the same rate we've seen historically. So we were not at all worried about that buying rate looking flat earlier; it was diluted by the rapid increase in new users. Scott, do you see it any differently?

No, that's exactly right. We have some sneak peeks from a handful of different retailers and shopper cart data, and it does look like it's a very similar consumer group that's coming in. Over time they appear very similar and their adoption curve will be trial and then over time graduate up to higher levels of usage. The buying rate is being driven by existing consumers in our take; I don't think it's the new consumers that are driving the buying rate. One other point: the launch of our Small Dog product, now into its third year, continues to grow very rapidly. Those users tend to adopt it and use it as a complete meal replacement, and that's certainly helping us.

Yes, that's very helpful. Thanks guys.

Thanks, Mark.

The next question comes from Brian Holland of D.A. Davidson. Please proceed with your question.

Thanks. Good afternoon. And allow me to pass on my congrats to Dick as well and best wishes. If we talk about, Billy, the past couple of years, one of the first things you've talked about is capacity is your biggest limitation to growth. As we start to move into 2021 that eases a little bit. So I'm curious with 2.0 coming on board, do we pivot from capacity being your biggest constraint to growth to really how much you want to spend on media? And from a media standpoint that seems like it might be driven by how much you want to control that growth such that you can serve it reasonably if that makes sense. If you could just help me understand how you're thinking about managing growth going forward, because obviously you could run pretty hard on media and you wouldn't see a slowdown in the household penetration, but certainly at some point that becomes maybe an issue to serve that level of growth. If you can help me understand how you sort of walk that tight rope.

That's a very good question, Brian. First of all, as we've said all along, when we have capacity, we want to fill it. It's both in our financial best interest and our strategic interest because we view this as a land grab. So as we head into 2021, we have every incentive to, as productively as we can and making sure we're getting good returns for the investments, fill that capacity but do it in a responsible way where we don't compromise our quality or our ability to supply the product. We are also breaking ground next week on Kitchens 3.0 in Ennis, Texas, targeted to be operational by Q3 2022. We'll evaluate the pace of future investments based on returns, capacity utilization, and our ability to execute. If we get good returns for the investment and we can accelerate our growth, it's in everyone's best interest for us to consider adding more capacity.

Great, thanks and I appreciate the color. I mean, Scott question for you, when I think about the media spend and the campaign and how you look to reach new users, you might argue that the messaging might have to look drastically different today than six months ago. So just curious if you can talk about how you sort of pivoted the messaging to new or potential new consumers. Thanks.

It's a good question, Brian. The marketing team, our creative agency and our planning agency did a brilliant job. The ability to be incredibly quick and nimble in this atmosphere really afforded us some incredible opportunities. That allowed us to put new creative on air that was relevant at the time when people were home and watching tons of TV. We also layered in digital advertising and communications. The theme is 'think big, but stay small' and operate with partners who can move quickly. That entrepreneurial approach allowed us to capitalize on windows where media rates were attractive and viewership was high.

Appreciate it, Scott. Thanks. Best of luck to everyone.

Thanks.

The next question is from Jon Andersen of William Blair. Please proceed with your question.

Hi, good afternoon, everybody, and congratulations Dick. It's been fun working with you.

Thank you.

My question is around retail execution. Bill, you mentioned in the prepared comments that obviously, retailers have had a lot on their plates that's caused perhaps a little less new distribution this year. Where do you think retail customers sit today with respect to their both ability and willingness to place new fridges? And what are your expectations for net new stores through the balance of the year or by the end of the year?

On the last part of your question, our expectations are consistent with the guidance we gave you last quarter, which is a thousand net new stores. Obviously a big part of that depends on how many stores are open and operating because some stores have been affected. We're still sticking with that guidance. Regarding retailers' willingness to place fridges, most of them are back to doing their normal merchandising routines and operations; it may not be perfect but it's pretty close and could go backwards if conditions change. What we've seen is strategic interest in Freshpet has grown through this experience — customers placed second and third fridges in some stores in the middle of the chaos because they believe Freshpet helps them win in this environment. That interest may not convert to stores immediately this year, but we expect it to convert in the first half of next year.

Great, that's helpful. One quick follow-up: when we think about the cadence for the second half, there's been a lot of discussion around capacity. It sounds like you have capacity implied around $87.5 million per quarter with the perfect mix of bags and rolls and Fresh From the Kitchen. Assuming the mix comes in different than that, should we be thinking about stronger growth in Q4 perhaps than Q3 given Kitchens 2.0 coming on and addressing Fresh From the Kitchen limitations? Or do you expect a pretty uniform growth rate through the second half of the year?

Historically, our third and fourth quarters have been about the same size, but this year it might skew more towards the fourth quarter for exactly the reasons you mentioned. Also, if you measure by shipments versus Nielsen consumption, Q3 will be a tougher comparison because of last year's rebuild, so you should expect to see a bit more in Q4 as Kitchens 2.0 comes on and we can refill any inventory drawn down in Q3.

Great. Thanks so much and congrats on a great quarter.

Thanks.

The next question comes from Rupesh Parikh of Oppenheimer. Please proceed with your question.

Good afternoon and thanks for taking my question. So I guess just going back to some of the new customers that you gained during the quarter, any sense of whether those consumers are buying Freshpet for the first time directly online or through click and collect versus getting it directly from your fridges?

Scott, do you have any thoughts on that?

Yes, the majority of them end up being retail customers. There is a slightly above average group buying through e-commerce, but the vast majority find us in store and buy in store. The core idea is we tend to be bought alongside other fresh groceries — milk, eggs, produce — that trip is where we're typically purchased. So while e-commerce grew quickly, it largely supported the in-store fridge network rather than replacing it.

Okay, great. And then if you look at, Billy, the strong consumption trends recently, any sense whether consumers are stockpiling more since they're seeing the product at the fridges right now?

When you look…

Every once in a while there are people who buy an extra SKU because they couldn't find it previously, but because Freshpet is a fresh product, it's not conducive to stockpiling. Over 90% of our products were available; at times some stores had availability issues but not widespread stockpiling. So a few people might buy an extra bag here and there, but that's not the fundamental driver.

And Rupesh, if that were widespread, we would have seen it in May. We're shipping and growing more rapidly in July than we were in May and June, so we don't see evidence of sustained stockpiling.

Okay. Great. And I'll sneak in one quick one. Then just on advertising what did you see from your peers during the timeframe? Were they also using similar intensity or did they pull back? Any thoughts on what you're seeing from peers?

Some of this is anecdotal as the data can be lagged, but it looked similar to slightly down for many peers. There were some new entrants that spiked advertising. Overall, share of voice probably stayed even, with some easing among more traditional players during certain periods.

Okay, great. Thank you.

The next question comes from Ryan Bell of Consumer Edge. Please proceed with your question.

Hi, everyone. When you think about the short-term increase in work from home, has there been a way that you've been measuring increased pet parenthood trends? And then outside of the short-term implications, has your team done any work to understand what a one incremental day at home across 10 to 20% of the workforce would imply for new dog or pet ownership rates?

We've looked a lot at pet adoptions. The data is sketchy — pet adoptions and fostering are often blended together. We saw a significant uptick in adoptions early in the crisis, but you can't manufacture dogs overnight and the adoption rate dropped on the backside. It looks like there was a pull forward in adoptions and fostering. In total, if a couple hundred thousand net new dogs were added, it doesn't materially change our long-term opportunity given 63 million dogs in the U.S. We are focused on household penetration: time at home reinforces the value of Freshpet and the relationship people have with their pets. People have time to research and reconsider their pet food, which is helping us. We don't know how long it will last, but we intend to make the most of it while it continues.

Great. Thanks. That's helpful. If we're in a particularly negative economic environment and it stays entrenched, do you have strategies about mitigating negative effects? If consumers start to trade down, would that be lower priced innovations? Any other strategies?

Historically, premium pet food does well in a down economy — we looked at 2007–2010 — and we've not seen widespread trading down. If consumers face significant income loss, responses vary and historically pet food is one of the last things people cut back on. We have a wide range of price points; larger roll formats and mass channels provide lower cost per pound, while premium items are higher. The items growing fastest are our higher-end products — we don't see evidence today of consumers trading down for value.

Thanks. That's it for me.

The next question is from Robert Moskow of Credit Suisse. Please proceed with your question.

Hi. I guess people have already asked my pet adoption questions, which is top of mind for me. But Slide 16, I was surprised to see your data showing that the wet and dry dog food category is down without Freshpet for the last 12–13 weeks and four weeks. Obviously, your business is doing great, so this is all separate from your business. But are you surprised that the sales for the rest of the category is weak given the fact that everyone is spending more time at home and presumably doting on their dogs?

Rob, what you’re seeing there is the business that moved online because that’s in measured channels; it doesn’t include online. People moved online and didn’t come back.

Got it. That’s all I had. Thanks.

The next question is from Jason English of Goldman Sachs. Please proceed with your question.

Hey, good evening folks. Thanks for slotting me in. And Dick, very sincere congratulations for everything you’ve accomplished here and your prior career path. We’ll certainly miss working with you on a regular basis. Hopefully, our paths cross once again. On to my questions. You guys mentioned the work you did in analyzing the past recession. I’ve done the same work and reached the same conclusion. But I appreciate that data has a lot of noise in it because it followed on the wake of the melamine crisis, which I think caused a hypersensitivity with consumers and really sparked a pretty aggressive trade up right into the recession. Have you been able to look at any other periods in time where perhaps we didn’t have the same type of distortion? And if so, what have you found in that analysis?

I haven't seen another period directly comparable to that. But one point: the number of dogs in households during that period also increased considerably, so people weren't cutting back on having dogs. That suggests continued interest in feeding pets. Scott, anything to add?

I think what you're seeing is rooted in a fundamental trend in how people think about food and how they eat. If you buy organic milk for your kids, it's often the last thing you cut. Food choices tend to be preserved, and I think that supports premium pet food staying resilient.

That's interesting. My intuition is the same. I didn't ask to create skepticism, just curiosity. Where I do have skepticism is around buy rate, which you've had many questions about, and the ability to grow it by 50% from 2019 to 2025. Some skepticism has been enhanced by stay-at-home duration — personally, as a loyal Freshpet consumer with three dogs, I'm capped out on capacity at home. Will at-home capacity be a gating factor on how big the business can be over time?

I don't know. Scott, your thoughts?

There are some people — for example, if you have two large dogs and try to freeze Freshpet, it can be a challenge. But people shop up to two or three times a week; as we're available in more places there's more options to buy Freshpet. If you fed even a 30-pound dog mainly Freshpet over a year, you'd be in the $500–$700 range, so there's room on buy rates for smaller and medium dogs. Also, products growing the fastest tend to be our higher-end, more expensive products; these are areas where we see further upside through innovation and differentiated offerings. There is a ceiling, but from what we can see, there is more room at the top end in terms of price and product variety.

Last question: you’ve consistently shown the relationship between sales and advertising. You're approaching media budget levels that are significant for a single brand. At what point should we be concerned about diminishing returns or decay in the efficacy of advertising as you scale further?

Good question. Our media planning agency and marketing team have tested plans all the way north of $100 million and different channels, dayparts, networks, and digital. The biggest threshold we crossed was around $30 million, which we’ll cross this year; we were concerned about diminishing returns but testing demonstrated we can scale. The goal is to have 12 months of testing for creative and media plans so that results apply into the next year's media levels. If we get north of $70 million, that's another threshold where we'd expand targets into new arenas. We feel confident in the scalability given the tests we've run.

Great. Thanks. I appreciate the answers.

The next question comes from Ashley Helgans of Jefferies. Please proceed with your question.

Good afternoon and congrats on the quarter. Any update on the international business? And where are you in your marketing efforts in those regions? Thanks.

Thanks, Ashley. The COVID crisis hit Canada and the UK, our two international markets, similarly to the U.S. — people flocked to stores, then sheltered in place. Unlike in the U.S., where we have broad distribution and could pause and restart advertising effectively, our international programs were interrupted and we didn't get the expected benefit from advertising investments because people weren't reconsidering brands during shelter-in-place. Prior to COVID, we were doing well in those markets and our advertising was driving the business as expected. We'll need to reset and restart those efforts next year. The good news is we can meet our goals from our U.S.-based business; the international progress will be reaccelerated when conditions allow.

Okay, great. Thank you so much and congrats again.

The next question is from Bryan Spillane of Bank of America. Please proceed with your question.

Hey, good afternoon, everyone. I just have one question related to incremental retail coverage. You referenced taking on some incremental retail coverage to fix stores. Is that more permanent? And putting aside the immediate need to fix stores, is there a benefit that you get from having incremental coverage? Would that enhance the cooler placement moat you're building at the point of sale?

When we saw stores couldn't get shelves in the right condition due to labor constraints, we jumped in to help get things corrected and then followed with media. We've tested various levels of retail coverage and cadences with partners. The trend is toward using visuals and technology: we're moving to a system where digital pictures are uploaded nightly and evaluated with AI to assess stock conditions. We're testing it and it's working well. As sales per store increase, the ROI for retail investments improves — things like labor or technology become more economical. We want to be in the best position at retail at all times and will invest where we see returns.

So Scott, in that instance, the fridge would take a picture of itself? It's like a selfie uploaded to the cloud?

Yes. We've developed technology to take a picture of the inside of the fridge and use AI to identify which product is out of stock. We're into testing and it's progressing well. Over time we'll get very smart on this.

Thank you.

Thank you, Bryan.

There are no additional questions at this time. I’d like to turn the call back to Billy Cyr for closing remarks.

Yes. Thank you, everyone, for your interest. Obviously, congratulations to Dick for delivering a heck of a quarter and a heck of a business over time. I’ll leave you with one final thought. This is from Dean Koontz, who says, 'Once you’ve had a wonderful dog, a life without one is a life diminished.' To which I would add, reward that wonderful dog with Freshpet and some love, and you can call it even. Thanks everybody.

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