Greetings. Welcome to Freshpet Inc. First Quarter 2021 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to your host, Jeff Sonnek, Investor Relations with ICR. You may begin.

Thank you. Good afternoon. And welcome to Freshpet’s First 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 on how management defines such non GAAP measures. A reconciliation of the non GAAP financial measures to the most comparable measures prepared in accordance with GAAP & Limitations associated with such non GAAP measures. Finally, the company has produced a presentation that contains many of the key metrics that will be discussed on this call. The presentation can be found on the company’s Investor website. Management’s commentary will not specifically walk through the presentation on the call, but rather it’s 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 up-front. The Freshpet Kitchens are delivering the increases in output we had expected and are now producing at a rate that is almost 50% above year ago. That is enabling us to refill the trade inventory that we had drawn down during the back half of 20 and satisfy our customers and consumers with much better in-stock conditions. We are not done refilling the inventory on all the [indiscernible] at all customers, but we are getting close. We are incredibly grateful to the customers and consumers who have stood by us during the supply challenges we had over the last six months. We know it is frustrating for our customers to not be able to provide their shoppers with a high quality in stock conditions. They pride themselves on and for consumers to have to search high and low for the Freshpet products that their pets have become accustomed to our team has done everything they could to catch up to demand under very challenging circumstances. I can't say enough good things about the efforts of our production, sales, logistics, and consumer care teams and their tenacity through the challenges of the past year. The progress we've made has allowed us to get back to doing what we do best change the way people, nurse, their pets forever. Our advertising is on the air, household penetration is growing, we are launching new items and our customers are planning to install new fridges, upgraded fridges, and second fridges. As a result of this progress and the strong fundamental trends we are seeing, we remain very bullish on our prospects for both this year. And for the next several years, we are off to a…

Thank you, Billy and good afternoon everyone. As Billy indicated, net sales for Q1 of 2021, well $93.4 million up 33% versus year ago. Actual Nielsen Mega Channel consumption was up 24%. So after dusting for one less day in the quarter, this year continued improvement in the reduction of spoils and the trade inventory reduction, in a year ago. We estimate that four points of our growth came from our efforts to rebuild trade inventory and refill the frigid that is about $3 million of our net sales in the quarter. We believe we have another $12 million of trade inventory that we will refill in Q2. And we are on track to do that. We believe we could have sold more in the quarter. If we could have produced more, we lost about $3.5 million of production to the two major those storms that occurred in the quarter. Well, winter, snow storms should not surprise anyone. These storms had a disproportionate impact on us because of the magnitude of the storms, where we have production facilities. The fact that we had no excess capacity and neither we nor our customers had any inventory to buffer the impact, 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 43% in the quarter. Our e-commerce business also performed well growing 156% in the quarter. And now accounts for 6.3% of sales. Additionally, we had very strong performance in our international market. Our international business grew 36% in the quarter, and we continue to see strong momentum in those markets behind the advertising investments. We have been making clearly the fresh fit business model works outside. Thus adjusted EBITDA for Q1 was $7.8 million up…

Thank you. At this time, we'll be conducting a question and answer session. [Operator Instructions]. One moment, please, while we poll for questions, your first question comes from the line of Ken Goldman with JP Morgan. Please proceed with your question.

Hi, good afternoon. Thank you. You know, I know there's some year on year, I guess, lumpiness or there's some lumpiness of the year on year numbers, but the way I see it, you've guided to annual run rate capacity in one queue of $390 million in potential sales, you've got it to $490 million and to queue for the run rate. So I guess we just average those out and it kind of gets you to a quarterly run rate of about $110 million in dollar sales capacity this quarter. I apologize for doing the mess on the call, but it just feels like you're sort of saying to us, you know, you should probably get close to that $110 million number in dollar sales unless you under ship consumption, which seems unlikely. So I just wanted to make sure my math there is not totally inaccurate and how to think about, you know, implied guidance for two key revenue?

Hi Ken, I'm sorry, I was talking on mute. I apologize. No, I thought I, I someone for the first time in history. Yeah, no, sorry. God, thanks for trying to jump in. So can your math is right. But I caution that there's, there's a couple of assumptions that are built in there. The first assumption is that we have at the end of the quarter that we, that the demand is fully utilizing all the capacity we're filling the, the trade editorial hole now. So it assumes that at the end of the quarter, the Nielsen consumption is using all of it up. The second, the second assumption in there is as we continue to ramp up production, your, the assumption is that what we produce and what is in demand is a dead match. And so as you can imagine, we're going to start doing longer production runs and try to refill some of our inventory to improve our customer service. Because we know as we have more inventory in house, our ability to do fill trucks goes up. So we may end the quarter with higher inventory as opposed to necessarily selling everything that we make. It's not the ideal way to do it, but it's ultimately what could end up happening. But other than that, your math is right.

Okay. So just to clarify, and I'm not, I don't want to pin you down on an exact number here, cause I know things are so fluid right now, but $110 million seems like the maximum you can produce, but there are some caveats to that that could bring it, so potentially slightly below that. And I'm not holding you to that. I'm just trying to get a sense of what you're saying?

It just recognize that there's a human component. Yes. I mean, let's put it this way. Can we get in that direction? Yes. There's the human component. We're adding staffing. We have to produce well every time every week, you get the idea, but we're in that ballpark.

Understood that. That's helpful. Thank you for that. And then you spoke last quarter about a major expansion in e-commerce, obviously e-comm. is doing great for you still. I think we hear though another mention of that major expansion today, unless I missed it. I just wanted to know, are you still on schedule with those partners? Or maybe you have your production challenges temporarily delayed some of the bump-up you might've expected just hoping for an update because that was such a, you know, an important part of the story last quarter. Now you got it?

Yeah. Hey, it's Scott. So no everything is everything is running on schedule. I wish everything was, was running as tight as this. So I, I think what you're going to see from us over the course of this year you'll see a lot of expansion in e-commerce in general. We've actually had to shut down a lot of the marketing and advertising that we've done over the past year, just because of some of the capacity issues. So you'll see expansion with many of the folks that we currently work with where the majority of it goes through our existing fridge network. And you also see some additional e-commerce partners you know, coming, coming would, you would be able to order different things from some new partners we're going to increase the marketing. We anticipate it will continue to increase our share overall share of the business. We're getting a ton of in-bound requests from consumers from a subscription standpoint. We think we'll be able to, we will be able to solve that this year. So we're very excited about that and we're really planning on working with the right partners on to, you know, a really, really good kind of joint set of terms that we can, we can really kind of make a, a major impact in e-commerce over the course of this year.

Thanks, Ken. Your next question comes from line of Steph Wissing with Jefferies. Please proceed with your question.

Thank you. Good afternoon, everyone. I have a question for you, Heather. It's just on the overall cost structure. So you talked about chicken being locked in beef, seeing a little inflation, some packaging inflation, and then freight separately in the selling expense. Can you just help size up each of those to your overall cost pool? So we can just understand a little bit about impact in each of those big buckets?

Sure. That's so just to sort of dimensionalized how to think about our input costs and where they show up the first cost of goods when you split up the, the input costs are about 40% of our cost of goods. And then just as a reminder, freight costs are in SG&A. So w you know, when you're thinking about margin impacts that's the split there. So, yeah, I mean, we, we touched on it, but I'll go into a little bit more detail. We anticipated inflation and beef, which is on track in terms of what we've, you know, it's in line with what we've gotten guidance. We also anticipated packaging inflation mainly in corrugate and, and that's also, you know, reflected in our plans. The only new one that's really emerging is around Redlands and, and right now kind of the resin impact as it appears to be pretty modest in terms of how that will impact our packaging costs overall. So, you know, not a major driver, something that we're comfortable that we can absorb within the overall P&L structure and overall guidance. And then in three you know, we, we touched on it, but I'll just go into a little bit more detail. We ended the beat in freight inflation, both in carrier inflation, as well as fuel surcharge and those assumptions haven't changed versus what we had in guidance. The bigger driver is the issue that I talked about around the cost and vocation of our low fill rate. And, and that's a pretty meaningful on cost. If you look in the presentation, you'll see that that's, you know, when you look at a 50% fill rate versus a 90% fill rate about $0.07 a pound, so it's pretty meaningful. The impact in Q1 on a margin perspective is about 200 basis points. So we had 300 basis points you know, versus versus planning and logistics of which 200 is driven by that flow rate issue sorry versus prior year. And so, you know, it's pretty meaningful, but we do expect that as fill rates improve, it'll naturally come down as we up.

Okay. That's great. And if I could just one follow up, this also relates a little bit to, e-commerce being about 6% of your business, but as you're thinking about deploying more dollars in advertising, he shared with us a little bit about digital versus traditional mix. And then as you see, e-commerce continue to climb higher. Do you distort more and more towards digital activation and conversion?

It's a really interesting question. It's something we've tested our way through over the past, kind of even five years on, on, on how we go to market. And we were -- we make sure that the dollars that we're spending, we keep incredibly crows track on do an incredible amount of analysis to make sure that there is productive as possible. The vast majority of our spending continues to be on television. We, we are finding that there's some great places in, you know, in connected TV and OTT that we can spend dollars in they're really productive. We have, we have nice spending in digital, but it's definitely not the it's the minority of our overall spend, as we do a little bit more e-commerce and what we've done over the past year, we get a really, really good return on ad spend when we're advertising specifically in the dollars go to a, a partner that, that has a way for a customer consumer to order it directly, so, you know, you took [indiscernible] the card is an example. So as we're doing advertising in some, the different areas, we're getting really, really good return on ad spend, and we're going to continue to kind of press into that area until we see any type of diminishing returns. So I don't think it'll cause a dramatic shift in, in what you're we're seeing overall, because it's still a very, very small piece of the total, the total pie for us. But over time, we definitely anticipate potentially, you know, moving some dollars into that area.

Thank you very helpful.

Your next question comes from the line of Rupesh Parikh with Oppenheimer and company. Please proceed with your question.

Good afternoon. Thanks for taking my question. So as you look at the April data, clearly consumer mobility has increased. I was just curious if you guys are seeing any changes in consumer behavior or where they're purchasing [inaudible] have you seen some changes with the increased vaccinations, et cetera?

e data, first of all, in the deck we show, you know our estimate of what April's consumption is, or our sales were, and then also you see the Nielsen data for the month. And so you can see we're seeing an upward trend along in terms of both consumption as well as the shipments that we're doing. The, the thing that's tough for us to tell is, is we have two things going on at the same time. Advertising went on the air for us on April 19th and our in-store presentation has improved consistently throughout the month of April. And so with those two factors, we we'd, expect to see continued strong upward trends and consumption. So it's hard to separate that out from anything else, like, you know, vaccinations and people having more mobility, the attitudinal data, we've seen the, the consumer comments we're getting all suggests that the behavior is very similar, but I, I have to believe that psycho-graphically consumers are feeling a little bit more liberated.

Okay, great. And then maybe just one follow-up question. So clearly you guys have you're, you have some cost pressures in your business. It seems like this year you'll be able to manage through how do you think about the pricing lever going forward? Is that something maybe you revisit later this year for next year, or just curious on pricing, how you guys think about that going?

Yeah, Rupesh. Heather had made some comments in the in the, in the prepare remarks that basically said, we'll take a look at that, but probably later, later on this year, we'll look at it and see what the cost picture looks like. Frankly, we have to restore our customer service and get ourselves in a good position with both our retailers and our consumers before we even think about that. And then we'll take a look at it and see what the, what the position you know, what the cost inflation is that we have?

Hey, Rupesh. And that being said, add on a tiny bit, that being said, we have done pricing in the past. We've been able to manage it very well. The businesses responded incredibly well to it. So we do know it is a lever. But it, it, Billy said, it's not something that we're, we want to apply in the near-term.

Okay, great. Thank you.

Your next question comes from the line of Bill Chappelle with Truist. Please proceed with your question.

Thanks. Good afternoon. Hello there, I guess, first question, trying to understand kind of the out-of-stocks and, and, and how we see the at retail. I mean, doing a fair amount of sort checks, you can find some pretty bare fridges. You can even, even as recent as past couple of weeks, and historically it's always, you know, it's rare where you could find a fully stocked fridge, just because it was either growing so fast or just because of kind of customer service or getting it to the, to the fridge levels. Should that change over this year? I know you said you're going to have production up to make your sales goals, but I didn't know if the out of stocks would still be an issue throughout the year where you may be leaving some sales on the table?

Yeah, let me take a shot at, and Scott might have some comments to add on it, but the out-of-stocks were at their very worst shortly after the snow storms that we had in February. And whether you measure using TTPs, which is sort of a poor man's, but publicly available way of identifying what our out-of-stocks are, or we do some of our own internal audits. The bottom line is we've seen consistent improvement week on week since that decks in February and to the point that as of the most recent week, you know, there are still some fridges out there and it's, it's in certain places and certain customers and uncertain skews, you'll see some spotty conditions. But we fully expect to see much better looking fridges in the next several weeks. And if you take a look at the PDPs as a sort of a benchmark of it last August, mid August, when we were just the first time we sort of ran out of capacity, that was our high water Mark. And we had a lot of very full fridges back then. And I'd expect us to be back at that level within the call at the next six weeks or so. And at that point, you know, yes, you'll find some fridges that don't have all the skews all the time, but you will find largely a well-stocked fridges. Scott, do you have anything to add to that?

Yeah, I feel we touched a little bit on it in the past, and then, and sometimes we look at it and I think everyone in the organization sometimes does scratching their head on how we're putting up the numbers. We're putting up with some of the in-stock conditions that we have which I think is a good signal we have in stock conditions at some, you know, retailers that are as low as 30%, 40% all the way up to 80%, but no, one's even into the, you know, w we may have a couple of people that are recently getting into the mid eighties, but, but we're, we're, we have a good, a lot of opportunity a ton of opportunity. And I think as we continue to get the rest of the portfolio, people want to buy certain things. If we get the rest of the portfolio stilled out, I think they're really nice upside for us. You know, over the, over the course of the year.

Got it. You talked about kind of pushing out some of the, the new store openings one at a little bit. And I might've asked this before about innovation and, you know, even kind of skew count expansion. They'll have you, have you done any near-term adjustments with everything that went on in the quarter where you need to push that out even further, just to increase throughput the most popular skews?

What we've had Billy, you want to go ahead?

No, no.

I was gonna say, go ahead. Oh yeah, Bill. So we were a lot of our innovation this year was actually centered on lines that were not our high capacity lines. We have a handful of smaller, lower capacity lines that enable us to get some of that newer innovation out. We've been able to utilize those. So it didn't take away from the, a lot of the capacity that we needed to put towards our base items. So we were fortunate with that. We did get some of that innovation out. There was a little bit of it that did kind of slide slip, and some of it will even go to next year at some retailers, but the majority of the innovation will go out as scheduled and as planned throughout the year.

Okay, great. And then let's sneak one, one last updated kind of sense of how much the, the U S pet ownership has spiked over the past 12 months.

We've seen so many numbers on that, just like you have as well. I, I will tell you I've seen numbers that were as low as 2%, and I've seen numbers in the, you know, high, mid single digits the best number I've seen, which suggests that the pet ownership and I'm now speaking mostly about dogs was up like 3%, maybe a bit more than 3%. There was a big pull forward last year, but I don't believe the numbers that said it was a whole lot more than mean if you got me to four you know, I'd be surprised.

Okay, Hey Bill, I appreciate one thing. Yeah. The other on the pet ownership piece, I saw a study that was done recently that was really encouraging that not only was there, you know, some, some increase in pets, there's only so many types to go around, but there is still pent up demand. And, and it, it still, it seems like it's continuing I think hopefully people realizing it's pretty awesome to have a dog or a cat or a pet in your family. And so I don't think it's going away and it may continue to, you know, continue to grow over the next year or so.

No, that's great. Thanks for the color.

Your next question comes from line of Peter Benedict with Baird. Please proceed with your question.

All right, guys. I guess what question on, on kind of production and know one of the slides you had in here you had about GBP 519,000 a day is the average in April. And I think during the presentation or the call here, you spoke to some improvements coming from, from some of the Kitchen 2.0 lines, some increased coming in Kitchen itself, trying to get a sense for where you think pound production per day could be. As we look out over I don't know, maybe towards the second half of the year or the end of the year benchmark or however you want to frame it.

Yeah. I don't think I haven't mapped it out in terms of pounds. One of our manufacturing guys might've done that. And it's also very, we have to be careful because when we use pounds, because, you know, we bring in a lot of, of ingredients and that's the way we measure this throughput, but it turns into cases and it, it turns into meals ultimately that we feed a feed, a pet. What I can tell you is the chart that we've also included in the deck that shows sort of, as you converted into revenue, that shows what the revenue would be in each of the quarters is probably the best indicator of what we think we're going to get, because one of the things that's going to happen as we expand the capacity, one of the lines that we're expanding the capacity on the most and where we're shortest right now is on our Freshmen. The Kitchen line and Freshmen Kitchen is the highest price per pound of our, you know, of our mainstream items. And so when we start producing that, the pounds won't be as big as some of the other items, but the dollars will go with it. And so I just caution that using pounds is the only metric to think about our capacity could become a little bit misleading as we get further into the year. But suffice it to say is we're going from where we are today, where we have all of our equipment running. We're now adding shifts. As we add shifts, we pick up capacity first on our bag, then are on a roll lines and then ultimately start up another line of Kitchen South, which will be another bag line. So we'll see more of the mix moving near term into roles, longer term into bags, and that will impact both the pounds and the dollars.

Okay. That's, that's helpful. Thanks, Billy. I guess the the P&L you know, how the loss on equity investment line in there? Not sure if you guys are willing to speak a little bit more about that, apply some color into that, but in the P&L, I figured I'd ask Scott. You want to talk about that?

I can grab that, Heather. Sorry. We went, we went on mute. Sorry about that loss, there is representative of our percentage ownership in the investments that we've made reflective of that businesses Q4 performance, and that's basically all that we could share.

Okay. All right. That's all right. And then I guess last question for Scott with your, your social media video today, it's approaching 2000 Jews across Instagram and Facebook. How's that trending relative to your expectations?

Yeah, well, we launched it around 11 o'clock and I was quickly told that I have no chance for any type of award from, from the, from the video. So I'm a little concerned, but I'm going to work harder next time. I mean, look, I think it's been pretty well received if you kind of go through the comments, I think very, very well received, honestly. You actually see some people in there, like send me a subscription kind of thing, or I waited for you. I think it's been really supportive and I think it's been supportive all the way through and you know, it's been, it's been great to see over the next kind of two weeks this will, this will have a long tail on it. And we'll be putting a little bit of spend behind it to communicate it out because it's, it's not it's not about vanity. It's about like really trying to be transparent and communicating with our consumers and making sure that, that people, people see it. So I think we'll see some, the numbers grow and the people that, you know, want to want to, you know, hear about it. We'll, we'll get a chance to kind of, you know, see what we're talking about, but so far so good. I think, if Andrew Cuomo got an Emmy for his COVID press conferences, Scott should get an Oscar for that right. And all things I'm not acting, there's no acting going on. It's just the real deal. Well, listen, well done on that night, I think all you've been doing with the letters and now the video it's great because obviously it tough situation for some consumers, but I think it goes over well. So anyway, just wanted to flag that way.

All right. Thanks guys. Yeah. Thanks

Your next question from the line of Jason English with Goldman Sachs, please proceed with your question

Hey folks. Hello. There, no clue what that last exchange was. So it looks like I've got to go to check out my MySpace account and figure out what's happening on social media these days. But I will say we are one household that is thrilled to have been able to find fresh that once again, on a regular basis going, he goes to six different stores. So I'm very happy to see the out of stock situation, a better place onto my questions, a couple of quick ones on logistics, we talked a lot about it today. Remind me what is it like, how big is it as a percentage of sales, and can you give us an order of magnitude in terms of the impact this quarter of, of what it changed from, and Heather going to take that?

Yeah. So last year, so prior year, kind of full year, it's around eight and a half percent and you know all else being equal. We expect that to continue to go down with scale. Having said that we anticipated freight inflation and fuel surcharge inflation of about a hundred basis points in Q1, actually the performance was 300 basis points worse than prior year. So it's about 200 basis points impact for Q1 from the fill rate issue. And if you look at this, have a chance to look at the chart in the presentation, you can see how it moves the fill rate, but on a cost per pound. Right now we're looking at about $0.07 per pound on costs due to the issue.

Wow, big numbers. Thank you. And I, I appreciate that the story of dish and said, then derail will buy two things. You cited you’re at your service levels. I'm sure COVID has also been a disruptor too, in terms of resets new store builds, et cetera. But if, as we think about the out of stocks, which arguably more implant, I think he thought you'd be up and running or back to better service levels quicker than you were. Have you missed any key windows? So is this just a deferral of when we get the stores or is it possible that we've just missed until next year?

So we just have to move store count out of this year and into next year. Let me tell, let me Scott, we'll talk about the customer dynamic. I will tell you the call when we gave our guidance; it was the end of February. So we had fairly good visibility about what the customers would be doing. So the guidance we gave for the year accounted for any of those kinds of shifts that might've occurred, but Scott can tell you a little bit more about how customers are thinking about what will come this year versus next year.

Yeah. So there, there are a couple of windows that we did miss because they were, you know, they were just we just, couldn't kind of get our what we needed to from a, from a production standpoint together. And they you know, they're, they're meaningful, but it has really mentioned, they're reflected in the numbers are ready from the store count standpoint and also from an annual revenue standpoint. So we're, we're, I think we're in good shape from, from that. And we're already, as people are starting to see some fill rates come back we're sharing them, you know?

Being incredibly transparent on all the information we're sharing with them, you know, what lines we're opening when, how we're opening them up, the adding the shifts. I think that they've had a lot of confidence in, in what we've been communicating and we're actually back in conversations with a bunch of them on additional opportunities, which some of them will develop potentially later this year. But I think most of it will be that will really be early next year. And, you know, kind of the, the front half of next year, I would think that we would outpace what we've historically done, who would be my guests. It's also important to know that Mo many of our customers right now are looking at, you know, year on year trends that are not very favorable on the rest of the pet food market. And we're growing at a very strong rate. And you'll see, there's a chart in the deck that shows, you know, literally how big we are now in grocery compared to the other brands and how much our growth rate is for the total category. And so I think if you're a customer and you're trying to figure out where you want to put your investment in a space we are increasingly an important part of that conversation.

Okay. You invited me to ask you a follow up in, on that one. So this is the same more you, you said the category. I mean, here's what I heard the category outlook for the category is not that great for the rest of the year is what is what I just heard you say, you're an exception, but my question is why would that be? I mean, back to the point earlier, we've got 3% more pets. They're getting the larger, they're going to eat more. I get it on pet snacks where maybe people aren't as home as watching my kids are feeding. My dogs treat left and right. They can't wait to get back to school and save on my tree budget. So I imagine pet treat sales go down, but is the reason to be cautious on the overall category?

The reason is that if I'm speaking from the perspective of the retailer who saw a fair amount of their business move to e-commerce and it didn't come back.

Got it. Thinking about how you allocate your space at retail or Freshpet fridge is a really good way to invest your space. Yeah, that makes sense. Thank you.

Your next question comes from the line of Mark Astrachan with Stifel. Please proceed with your question.

Yeah, thanks and afternoon, everyone. I wanted to start -- I wanted to start with a follow-up to the last question. So you, you made a pretty, I guess, forceful statement about, you know, stay tuned on, on e-commerce and partners there. Is there any way to think about the incrementality from an e-commerce a customer maybe even a pure play e-commerce customer relative to what you would do potentially in a store and how you're thinking about that in terms of flow through in the model?

Yes, we have done a fair amount of work, trying to establish exactly what the impact will be on our business and everything. From what we can tell is in the very first of all, it's going to be a very kind of slow easing you know, launch. And it's going to look, it takes some time for people to that it's available in different places, no matter where that is. So it's going to take some time to kind of have its full impact. We think in the very beginning it will be as, as much there'll be penetration gain, but a lot of it will be kind of moving consumer from, you know, potentially from one place to another. We want to limit that as much as possible. That's not our goal by any means over time. We think the single greatest benefit is it will increase our buying rate dramatically. And I'm going to talk like a little bit, I'm talking like a multiples because when you see someone that is on either some type of subscription or some type of you know, consistent basis where they're getting a product on a, on a certain cadence the overall dollars that they spend is significantly higher. So we think it's going to open our buying rate up tremendously, and it's, won't be something that'll just have this year's impact. It could be also, you know, next year and even the year after impact we have specific dollar amounts that we've kind of put into our budget that roll into our overall guidance for this year for the, for what we're doing in e-commerce. So there's no, there shouldn't be kind of any, you know, upside surprises if we have done our modeling correctly. And I think as we kind of get them, you know, some of these launches and behind us, I, I think that we'll be able to kind of share a little bit more detail at this point. I, I think I'm telling you probably as much as I feel like we, we can share.

Yeah. That's, that's helpful. On the buying rate, just not relating to the last question, but just broadly, it was up year on year in one queue. Yeah. And I guess relative to last year, and it's always sort of been thought of, at least by me, that household penetration goes up, binary comes down because you have people kind of coming in at a lower buying rate, sampling rate, however you want to think about it. So what drove the increase in one queue, you know, was, was there people kind of pantry loading from an out-of-stock standpoint? How do you think about that, that number over the balance of the year and yeah. How do you think about it as well? In terms of the incremental that you're, you're talking about in terms of the products which have been out of stock, which also have a higher dollar value going forward?

Yeah. let me take that, let me, let me take a shot at that, and then Scott, if you want to add to it. But first of all, I had to remember the buying rate number that we quote in the deck is a 52 week number for the ending at the end of the quarter. So the up 3% reflects the past 52 weeks. And our historical run rate has been in the call. It, you know, mid single digits kind of run rate. We, you know, we'd like to see that number up in the six or 7% range. It was lower than I would have expected because of the out-of-stocks where basically consumers couldn't find the products that they were looking for. Is there any hoarding, I would say if there was any hoarding, you know or loading up on by consumers every one of those who loaded up it was offsetting somebody who couldn't find any other product elsewhere. So I my sense is that as we get better in stock conditions, you're going to see the buying rate go up. In addition to the buying rate improvement that Scott mentioned related to the e-commerce.

Got it. Okay. That's helpful.

I think, you know, as Billy was saying, Mark, there's a ton of like there's puts and takes on all of this. So it's like what products that we have available, what do we not have available? Was there hoarding where people, some people couldn't find it so they couldn't buy as much over the quarter? I think it's honestly, it's a tough one to read. I would go with what the historical progress that we've made. It's probably a cleaner look. And, and until our kind of in-stocks gets settled out over the, you know, the next kind of six, eight weeks when they really get settled out, I think you'll see kind of that real consistent progression, how we've modeled over time.

Got it. I don't know if I'm still on, I wanted to ask maybe a follow-up related to that. Have you seen any of your customers kind of push consumers into different products as a result of these out-of-stocks and yet, how are you addressing that if that had any impact on the business?

Know, look there's a handful of customers. They, they they've done what they've needed to do for their business. They have consumers coming into their stores. We don't have product shame on us, right. W we're not, we're not taking care of anybody that way, and they have pushed some people in some different directions. I honestly going through the comments today, there's not a ton of comments. I mean, we usually get, you know, w we'll get, you know, a thousand plus comments on when we post these notes. Most of the people were cheering for us and telling us I tried some other things. I mean, you can see it in some of the notes already. I've tried other things and I'm coming back and my dog didn't like, or my dog didn't eat or whatever it may be. So I think once we get ourselves set, once we get the, the innovation out there over the course of this year, I think we're going to see people coming and going back to the, the, you know, the, you know, the, the business. And it's frustrating to have some of our customers you know pushing people in different directions, but I understand it. And you know, I hope they most of them are they understand the situation and they're good partners and we'll work our way through it.

Got it. All right. Well, thanks all.

You're next question comes from the line of John Anderson with William Blair. Please proceed with your question.

Hey, good afternoon, everybody. Hello there? Just a few. Most of my questions have been asked and answered on e-commerce. If you were to add a new partner, significant new partner, how should we think about the economics of that relationship? Do you shoot to be agnostic relative to the overall business, or are there some distinct considerations there that you might you know, take the incremental households, incremental buy rate over the long-term in exchange for maybe a tighter margin?

Yeah, so it's interesting. I got a early on in my career, I got an incredible lesson on as you develop a piece of business, make sure it is not margin dilutive, if you think it's going to get big over time. And just like everything that we've done at fresh stuff, we've really tried to be thoughtful and just do things the right way. We are, we are margin neutral with, with really almost entirely across our business other than Europe, we are very margin neutral. I mean, it's amazingly margin neutral, and we've made sure that we want to you know, develop partnerships that are really going to be margin neutral because you, you can't have a huge piece of business that, that you know, develops over time. All of a sudden it's 10%,15%,20% of your business, and now you've got a massive margin problem. So you, you created one opportunity and dug yourself a giant hole. That's almost impossible to unwind. So we've worked really hard as we've developed all of our partnerships to make sure that the, the, the, the, the relationship and the margins look you know, look appropriate for, for our business. And it works from a value standpoint for the consumer, it works for the, the partner our, our retailer or E-com partners. And it works for us. And if, if you, if you can't figure out how to make it work for all three, you got to go back to the drawing board and we've done it a lot of times, quite honestly over the past kind of, you know, 10 years call it. But, but especially in, in you know, in the last move that we make in the market, you got to make sure that you're, you're putting yourself in a good spot. Typically there's one way these margins go over time and it's down. So you got to make sure that you're putting yourself in a good position upfront.

That's helpful. Thank you. Shifting gears media spend 10%, I think last year was the media ratio. You started out this year with 12% in Q1. I understand the puts and takes around that, but it sounds like the spigot is on for the balance of the year. What's the right way to think about the media ratio for the year and the cadence following Q1?

So the ratio for the year, we're targeting 12, in that Ballpark as the way to think about it. And we have in the deck, we give you a pretty clear indication in the Cadence that once we're back on the air, which was in April, that the media will be on continuously for the, basically for the balance of the year and the spending will be comparable in each of the quarters perfect, and an absolute dollar basis.

Okay. last one for me, pet specialty, you're killing it and pet specialty. Could you talk a little bit about the dynamics? Is this format or channel phenomenon? I mean, the category performing well in that channel, is it a fresh pet, you know, specific situation and how long do you expect it to persist? Thanks.

I think there are a few things. Yeah. There are a few things that are going into to play on that one. John one of them is I think we put ourselves in a good situation from a, like a, a foundation standpoint, meaning there were a lot of lot of stores with big fridges and a lot of stores now with second fridges. And there's been really nice expansion in pet specialty over the, you know, the past year or two and those that's still paying dividends because when we have a second fridge, it allows us to get more variety and innovation into the fridge in addition to having more inventory. So it solves a handful of a handful of challenges there. I think there, the other dynamic that we have seen a little bit with pet specialty is I think we are really, really suffering in a few other formats. And I think people are making a trip, especially the more involved pet parents are making a little, few extra trips to a PetSmart or Petco or pet supplies plus type of store any type of pet store. And they're finding our products there. And I think that's adding to it too, but I do think it's a combination of several factors, good base, good foundation innovation. And then, then also I think some, some people finding it where they have not necessarily seen it before. So and, and I think this is going to continue for, for quite a while. I mean, we also know that once people start in a spot, they're pretty darn sticky in the, in the location where they originally found the product.

Yeah. That makes sense. Thanks so much everybody. And good luck going forward.

Your next question comes from the line of Robert Moscow with Credit Suisse. Please proceed with your question.

Hi just a couple of quick ones. I, you might've mentioned in the beginning of the call, like what percent of your cogs is labor. But I, I wanted to ask again, because, you know, you talk more than most of your peers about wage inflation and what it takes to get people to get to the come to the plants. And you're also expanding you have a really successful product. So I'm just kind of curious, is it, are you seeing wage inflation rise to a level that, which is getting more alarming to you? Or is it just kind of like mid, single digit kind of inflation that it, it wouldn't necessarily on its own necessitate, you know, price changes.? And then I had a quick follow-up?

Let me take that and Heather might add some commentary on how much labor is part of our P&L but the, the overall pieces. It's not at the alarming level. There is a more of a localized issue that we're addressing here in the Lehigh Valley where the Freshpet Kitchens are, the Lehigh Valley's become a major distribution hub for Northeastern part of the United States. And so there's a fairly significant number of sizable employers who are fishing in the pond, looking for a warehouse labor, you know, FedEx, Amazon, Walmart, whatnot, a lot of big warehouses. And so it means the lower end of the market is fairly over-fished and so one of the things we're trying to figure out is what does it take to get the skilled labor that we need, and what are the wage rates to do that. We're competitive today, we're attracting people. The total package that we offer people includes more than just wages. It also includes what we think is a fairly generous benefits package. We feed people and whatnot. So it's a very, it's a very good working environment. We want to win on environment, not on the wages but it is a more of a localized effect as the way I would describe it. Heather, you want to give any other commentary on the labor as a part of our P&L?

Sure, so just to be more specific around the implication for this year, so wages are about 60% of our cogs or labor and overheads, I should say is about 60% of our cost of goods. And within that, of course is wages. We, you know, low single digits in terms of broad inflation, but just as a reminder, we've also increased our night shift premium by $2 an hour. So we have now a $3 premium on the night shift, and that was an on cost that we've included in our plans for the year, but certainly is an inflationary item that we've, we've got this year.

Okay. So is inflation wage inflation different in and Texas? It's not, not quite as acute.

Yeah. You know, we're going to start doing our hiring in Ennis, Texas the second half of this year. We'll have to see what it ends up looking like. It does feel like there's a lot of people moving to Texas at this point, but when we pick that as a site, we were very comfortable with the wages in that market. And we, frankly, I think we can get very high caliber talent at the wages that we'd expect to pay. So we're optimistic about that.

Okay. And then just last question you mentioned that you're, you're the top selling pet food brand in grocery stores. Very impressive. Is it similar in mass also is that implied in those charts too? Or is it a little lower in mass now?

It's lower and mass. So think of it this way is we have the biggest brand we're bigger than all the dry dog food brands in grocery. And the reason I called that that out was because that's where some of our significant distribution expansion opportunities are. So if you're one of those retailers, you'll be looking at that data and say, this is where I should invest them in my space. The broader number, when you think about the whole Nielsen mega channel or including data, including in that is mass, is that we are the fastest growing and not just in percentage, but in absolute dollars. And that's the second chart that's included in that deck that shows how much our dollar absolute dollar growth is relative to the rest of the brands in the category. We are growing absolute dollars faster than everybody else's.

Okay. Great. All right. Thanks guys.

Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Mr. Billy Cyr for closing remarks. Thank you.

Thank you everyone for your attention. I want to just leave you with one thought. This is from Aldo Huxley “To his dog, every man is Napoleon; hence the constant popularity of dogs”, to which I would add. If you feed them Freshpet and your dog dies, you deserve to be called emperor Napoleon. Thank you for your interest in Freshpet. And we look forward to talking to you again at the end of the next quarter. Okay. Thank you.

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