Freshpet, Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Fresh Pet Third Quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Should you require operator assistance during the conference, please press star zero to signal an operator. Please note this conference is being recorded. I'll now turn the conference over to your host, Jeff Sonick, Investor Relations for ICR. Thank you. You may begin.

Thank you. Good afternoon and welcome to Fresh Pet's third quarter 2021 earnings call and webcast. On today's call are Billy Cyr, Chief Executive Officer, and Heather Pomeranz, 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 that involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to the company's annual report on Form 10-K filed with the SEC and the company's press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note that on today's call, management will refer to certain non-GAAP financial measures, such as EBITDA, and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for how management defines such non-GAAP measures, a reconciliation of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP, and limitations associated with such non-GAAP measures. Finally, the company has produced a 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's a summary of the results and guidance that we'll discuss today. Now I'd like to turn the call over to Billy Sear, Chief Executive Officer.

Thank you, Jeff. and good afternoon, everyone. While may not be obvious from the results we reported today, Fresh Pets' consumption growth in the quarter was exactly where we expected it to be when we raised our guidance in August and would easily support delivering greater than $445 million in net sales this year. However, supply chain challenges that impacted our equipment suppliers will constrain our Q4 capacity, and that is causing us to change our guidance from greater than $445 million to approximately $445 million. Please don't mistake that for reduced demand, because the demand was very strong, and we ended the quarter with significant unfilled orders. But we lost more than a month of production in September and October on the second line at Kitchen South due to delays getting equipment through the ports. So we are not as confident in our ability to produce enough fresh pet to meaningfully exceed $445 million. That second line is up and running now, but we can't make up for the lost time. Thus, we are making the small change in our guidance. That challenge is typical of the environment we are operating in today. So our Q3 results reflect some tough choices that we've had to make. In each case, the choices were driven by our goal of maximizing the long-term value of the fresh pet opportunity, and we were willing to make some near-term sacrifices to accomplish that. We believe that the pet food market has made a significant shift towards fresh and that it is in our best interest to capture as much of the emerging opportunity as we can and build a large, highly loyal consumer franchise, even if we have to absorb some of the short-term costs and manage through the resulting consequences. This quarter, some of those consequences were more significant than we anticipated and more significant than we budgeted in our guidance. But that does not change how we feel about our focus on maximizing the long-term growth opportunity. Let me highlight a few of those choices and the consequences we felt in Q3. First, while we continued to generate strong net sales growth in the quarter of 28% versus a year ago, We could have generated even more if we had not made the decision to invest in manufacturing upgrades, automation, and much overdue maintenance that will enable us to deliver the quality and supply reliability that we will need to sustain our growth. We estimate that we could have generated up to an additional 10 million of net sales, adding 12 points to our growth rate if we had not made those long-term investments in our manufacturing capability. To be clear, we fully anticipated making those choices when we gave our guidance at the end of Q2 and still believe we are on track to deliver approximately $445 million for the year. Additionally, we optimized our production planning schedule to restore customer service, resulting in longer production runs and higher inventory levels. We believed it was very important for our customers to do everything we could do to restore customer service as fast as we could. The result of that was an increase in our inventory on hand at the end of Q3 of about $8 million of net sales value, with the equivalent of six days, versus where we ended Q2. That has helped us significantly improve our customer service in October, but it also reduced our net sales potential in Q3 by about $8 million. There was no lack of demand that drove that inventory build. In fact, it is quite the opposite. We did it because we had such strong demand that our fill rates in September were in the low to mid-50s, and they needed to improve. Fortunately, it is working, and we now have fill rates in the mid-60s, and our fill rate on our rolls is in the 90s. Judging by the consensus net sales estimate for the quarter, we could have made those choices clearer. We fully anticipated the loss of production from the maintenance and upgrades and called those out in our presentations and Q2 earnings call. However, our estimate of the timing of when we would restore our inventory levels turned out to be incorrect, as we built that inventory in Q3 rather than in Q4. Hopefully, the materials we are providing today give you more clarity on our capacity going forward. Similarly, we made a tough choice that negatively impacted our adjusted EBITDA in the quarter. We delayed taking a price increase until we had restored customer service to acceptable levels. We believed that our cost increases would be manageable until then, but that turned out to not be the case. Our costs escalated much more quickly than we had anticipated and more quickly than we had budgeted in our guidance. Simply put, we absorbed rapidly escalating costs without any pricing relief, which we estimate costs us about $5 million of adjusted EBITDA in the quarter versus the results we would have had if we had taken pricing on the same timing as our competitors. As a result, adjusted EBITDA was $14.6 million, down 14% versus a year ago, instead of being up 15% versus a year ago. In total, choices like that made this a rocky quarter. But even if we had anticipated the incremental costs more accurately, I think it is fair to say that we would have made the same choices, i.e., investing for long-term growth rather than optimizing the near term. Each of our decisions were part of our determined effort to build a solid, long-term foundation for growth so that we could achieve our mission of changing the way people feed their pets forever. To provide greater clarity on the results, Heather and I will focus the bulk of our comments on addressing the two most likely questions on many of your minds related to the results we are posting today. First, why wasn't the net sales growth greater than 28%? And second, what drove the reduction in adjusted gross margin in the quarter and when will it improve? I will address the first question and Heather will address the second. So why wasn't the net sales growth greater than 28% in the quarter? The answer is quite simple. As I alluded to already, that is all a manufacturing plan could support. We had more than enough demand to sell more, but between building inventory to improve our customer service and investing in maintenance and upgrade projects, our net sales continued to be limited by our capacity. To help you understand our capacity limits in the quarter, the accompanying presentation includes a bridge from the $490 million annualized capacity we had at the end of June expressed as $122.5 million in quarterly net sales and $107.6 million in net sales we actually delivered in Q3. As you will see, our capacity was constrained by a planned three-day shutdown of all of our lines in early July for significant maintenance that had been deferred due to staffing shortages during the COVID crisis. We'd included our decision to do that in our Q2 earnings presentation. Additionally, we took one of our bag lines out of commission in two steps, the first phase in late August, followed by the second phase of a full shutdown in early September so that we could upgrade and automate the line. That line will restart later this month with new, more efficient equipment and the ability to deliver higher quality more consistently. Heather mentioned this on our Q2 earnings call, but we were not specific on the timing, only indicating that we would do it before the end of the year. We rebuilt our internal inventory by about $8 million of net sales value in the quarter, While we would prefer to have shipped everything we made, we focused on maximizing the number of pounds we could produce to restore our internal inventories and improve customer service by doing large runs of key items. That means that we produced enough of an item to support several days of shipments before moving on to the next item, increasing our days of inventory on hand of each item by about six days and a quarter, particularly on our rolls. The result is that our fill rates have improved by 20 points since July, but we had $8 million less in net sales than we might have had. As I alluded to earlier, the timing of the inventory build was different than our expectations as we'd expected this to occur in Q4 instead of Q3. It is for this reason that we remain confident in our full year 2021 net sales estimate of approximately $445 million. Finally, our treat supplier had significant capacity constraints due to labor shortages, and that cost us about $1 million in net sales in the quarter. While small, we expect this issue to continue for at least the balance of this year. We are looking for some longer-term solutions to this problem. Despite these limitations on our production, we still produced 45% more in Q3 this year than we did last year. That enabled us to satisfy current retail sales refill about $8.5 million of trade inventory, and rebuild some of our inventories. The result of that was 28% net sales growth versus a year ago. You will find a reconciliation of our net sales growth versus consumption and another reconciliation versus our production in the accompanying presentation. Demand was strong in the quarter and in line with our expectations. the Nielsen measured consumption growth rate accelerated in mid-August, as we had predicted it would, going from a low point with 13% growth versus a year ago in early August to its most recent week of 22% growth, an average improvement of about one point per week. And it is on track to be more than 30% ahead a year ago by the end of December, nine Nielsen weeks from now. The two-year stacked growth rate stayed consistently in the upper 50s throughout the quarter, as we had anticipated it would, and it is now consistently exceeding 60% and may potentially break 70% by the end of the quarter. The consumption growth in the quarter was broad-based, but was again particularly strong in pet specialty, where it was up 36% versus a year ago. Our e-commerce business grew strongly again this quarter, up 57% versus a very strong quarter last year, and accounted for 6.4% of our total sales mix in the quarter. Store count grew by 226 in the quarter to 23,381. It will take quite a finishing push to get to our 2021 target of 1,000 net new stores as customers remain hesitant to put in new coolers until we are fully stocking the existing coolers. So we'll be close, but there's a chance we'll get there. We're already well ahead of our annual targets for this year on upgrades and second fridges, but still added 48 upgrades and 51 second fridges in the quarter. While this rate of additions has slowed, we are anticipating significant increases in new stores and second fridges next year based on our increased supply and rapid growth. Household penetration gains were modest due to the out-of-stocks and advertising delays over the past year. Total household penetration was up 9%. Conversely, buying rate benefited from the reduced increase in households and was up well above our long-term target at 17%. We expect those to reverse by the end of the first half of 2022. Our UK business grew 57% in the quarter and has real momentum. We intend to increase our investment in that market next year to capitalize on that momentum. Our Canadian business was constrained by supply and only grew 9% in the quarter. Consumption, on the other hand, continued to be very strong, with our leading customer-producing sales growth of 39% versus a year ago in the quarter. Our full year 2021 net sales outlook implies that Q4 will be significantly larger than Q3, both in absolute terms and in comparison to the year ago. There are four reasons for that. First, we have significant incremental capacity coming online in Q4 at Kitchen South that will provide a meaningful production increase versus Q3. That is a high-capacity bag line with a two-shift operation. It did get off to a slow start due to delays on getting pieces of equipment through the ports in September and early October, but it is running now. I will provide more commentary on that and the impact it will have on our year in a few minutes. But based on what we know today, we estimate that we will have approximately $135 million of net sales capacity in Q4. A reconciliation for that versus Q3's net sales is included in the accompanying presentations. This more detailed look at our capacity for the quarter incorporates all the known factors that can influence the conversion of our estimated annual run rate capacity into an actual operating plan for the fourth quarter. Second, a year ago, Q4 provides a very soft comparison because last December's production and shipments were severely limited by winter storms and COVID-related absenteeism. For perspective, the Q4 net sales growth rate in the year ago was nine points below the Nielsen consumption growth rate, indicating that we're drawing down trade inventory heavily in the quarter. While weather could present the same risk this year, last year's storms were unusually impactful in the Lehigh Valley, and we are hoping that we don't face the same severity this year. Additionally, COVID appears to be much less of a threat this year than it was last year. Third, we will record meaningful revenue from trade inventory refill in the quarter. As I indicated earlier, we largely completed refilling trade inventory on our rolls in October, and that refill will contribute to our fourth quarter net sales. If our bag lines come online as expected, we will finish refilling the trade inventory on our roasted meals in November and December, also delivering net sales above consumption. We do not expect to finish refilling the trade inventory on fresh from the kitchen until early February, but we'll also record net sales above consumption in both Q4 and part of Q1 2022 on that item. And fourth, we have our strongest quarter of marketing support for the year in Q4, reflecting our improved in stocks and our desire to invest to support the rapid capacity expansions we have over the next eight quarters. Historically, we have not supported the business with much marketing support in Q4, so this will be a step change in our growth rate and a bit of a change in cadence versus our past practice. To be clear, we still have risks in Q4. Everything from the potential for winter weather that can disrupt either production or shipping, to labor and transportation challenges that are plaguing the entire industry, to typical production startup issues that could impact new lines and new facilities, and the ongoing threat from COVID, including increased absenteeism due to positive test results in our facilities for those of our suppliers, logistics partners, or customers. We are like everyone else who produces and sells goods in America today, i.e., constantly incurring supply interruptions that require interventions by our team to keep our lines running and enabling us to meet consumer demand. As I mentioned earlier, one issue that we were already aware of that could impact our final results for the year has been the delay in getting equipment to start up the second line at Kitchen South. That delay caused us to revise our net sales guidance from greater than $445 million to the $445 million we now see as a good approximation of reality. While over the long haul these minor delays will mean very little, they are frustrating for all of us as we are diligently working to improve retail availability while simultaneously ramping up much needed capacity to support future growth. While not impacting this year, that delay on line two at Kitchen South will push back the timing of the third line at that site by about one month. It had been scheduled to start up at the end of December. but the installation timetable and some of the construction work will now move the startup date to early February of 2022. This is reflected in the capacity projects chart in the accompanying presentation. Similarly, we are experiencing shortages or being put on allocation for basic construction materials that are typically widely available, such as insulation and steel studs, and that has pushed our startup in NS back by about a month. but we still believe it will fall in Q2 of 2022. Despite those potential short-term risks, we remain very bullish on our prospects, both in the near term and the long term. That is because we are successfully putting in place the critical building blocks to achieve our long-term goal of changing the way people feed their pets forever. In the last few months, we have increased production to the point that in October, we produced almost 60% more pounds than we did last year. We did that in the face of some of the most significant labor and supply chain challenges I've seen in my 36 years in the CPG industry. Over the past six months, we've produced significantly more than was sold at retail, rebuilding retail conditions and providing ample capacity to support strong growth going forward. Our customers are beginning to notice those improvements, and we hope it gives them the confidence to install more fridges next year. We also have projects under construction that will more than double that capacity in the next 18 months. We reaccelerated our growth rate through our investment in media with the inflection point occurring in mid-August and expect to exit this year with consumption growth in excess of 30%. We are investing in significant Q4 media for the first time because we are squarely focused on fulfilling our long-term growth goals and now have the capacity to deliver that. That Q4 media will get us off to a fast start in 2022, and we have favorable year-on-year comparisons during the first half of 2022 that could accelerate our measured consumption growth rate even further. We also announced a 4.8% price increase designed to offset a meaningful portion of the significant inflation we are seeing and position us for improvement in our adjusted gross margin, the EBITDA margin, next year. that price increase will go into effect with orders received on 11-29-21. We delayed taking this pricing until we could improve our customer service. For the purposes of providing you with some added context and sensitivity around the impact of pricing, if we'd implemented our price increase in the time that our competitors had taken their price increases, our adjusted gross margin would have been 240 basis points better, and adjusted EBITDA would have been $5 million better than our reported Q3 results. And we implemented a new labor strategy built around our Fresh Pet Academy that is stabilizing our staffing and positioning us for the significant growth we have ahead. We are not out of the woods yet, as it takes time for that strategy to deliver the results we need. But we are on more solid footing today than we were six months ago. Our team members are getting the training they need and deserve, and we are seeing early signs of the productivity increases that come with that. Each of these efforts will contribute to building a strong foundation for Fresh Pet's continued growth. Unfortunately, the fruits of most of these efforts will not be felt until 2022 and beyond, when they will deliver accelerating growth with better margins. Until then, we are absorbing the many pains common to the CPG industry right now, and also some of those associated with rapid growth. We do know that our shareholders expect us to continually demonstrate that, at scale, Fresh Pet will produce meaningful profit and cash flows. We try to provide the evidence of that by continually updating you on the key drivers of our efficiency improvements, including increased absorption of our G&A expense and the benefits of our more efficient manufacturing. Many of those are obscured by the near-term issues, so we'll do our best to clear the debris so that you can see the underlying performance improvements. These are not meant as excuses, but are simply an effort to provide greater clarity. I will now turn it over to Heather so that she can provide that clarity and give you more detail on our results.

Thank you, Billy, and good afternoon, everyone. As Billy indicated, I am going to address the second question that is most likely on your mind about our adjusted gross margin performance in the quarter and also attempt to help you see through all the noise to understand our underlying performance. Additionally, I'll update you on our formal outlook for the year, including our revised adjusted EBITDA expectations. Our Q3 adjusted EBITDA performance came in at 14.6 million, 14% below the year ago. This underperformance was driven by significant cost inflation and a continuation of the temporary operating inefficiencies that we described last quarter. Adjusted growth margin came in well below our expectations at 44%, down from the 46.1% we generated in Q2 and 49.3% in the year ago. In our case, and given the fluidity of the operating environment, we think it is most useful to look at variances on a sequential basis relative to Q2. Those variances are as follows. 140 basis points of ingredient inflation and higher costs at our kitchen self partner. We saw inflation on virtually every cough line that was not under a fixed price contract, and even in those cases where the price is fixed, We had numerous instances where we had to go to alternate, higher-cost suppliers to get access to the necessary materials to keep our lines running at times due to sporadic shortages of some key ingredients and materials. Our planned price increase is designed to offset much of these costs. Second, 120 basis points of higher labor and overhead costs as a result of our wage increase plan and some investments in staffing ahead of demand. These costs will be offset by increased productivity as our Fresh Pet Academy training plan takes hold. 35 basis points of higher costs between the gross sales line and net sales line due to customer fines for short shipments. These should go away when we are finally caught up on trade inventory. These increases were partially offset by improved NICs and improvements in operating performance related to quality and yield that delivered a total of 85 basis points of improvement. While not a component of cost of goods sold, as we included in SG&A, logistics was 11.6% of sales, which is well in excess of our year-ago performance and our long-term expectations. Part of this is freight inflation that we are taking price to cover, but a larger share is related to shipping half-empty trucks due to our short shipments and ERP system limitations. This cost will go away when we restore normal customer service later this year and into next year. As we have indicated, we announced a price increase that averages 4.8% across the line, and it is effective with orders received on 11-29-21. That will have a de minimis impact on Q4, but it will offset a significant portion of our increased cost of goods sold and freight costs when it is fully effective in Q1 of 2022. I also want to add that the inflation we are seeing has accelerated considerably since we announced our price increase in August and may require us to take additional pricing to cover it. We contract for some of our most significant ingredients in December of each year, so we will not make any decision on additional pricing until we know what those costs will be. It would then take time to implement any additional pricing we would take. We also need to begin capturing the productivity benefits of the labor investment we announced in August, the higher efficiency from our new production line, and the reduction in temporary operating inefficiencies that have plagued us this year. We are seeing early signs indicating the potential for each of them, but I believe it will take until sometime in the first half of next year until we fully realize the potential in each of those areas. For example, Since we implemented our new labor strategy, we have seen an increase in productivity per person and per shift, and that is contributing to the record production we are seeing in our Bethlehem kitchens. It is early, but the trend is clear. We now need to sustain and expand it. We also expect to see significant quality improvement from both our training program and the upgraded equipment in Kitchens 1. Those should become evident in the first half of 2022. We have invested in the training of more than 30 of our team members who will be charged with starting up the Ennis Kitchen and more will arrive next month. Some have been training in our Bethlehem Kitchen since late June and have already advanced at least one level in our Fresh Pet Academy training system and will likely have achieved another level before they go home to Ennis. This investment will pay significant dividends when we start up the Ennis Kitchen in Q2 of 2022. We started up our second distribution center in Dallas, Texas in the quarter. We are still in the testing phase and only shipped to a very small number of customers in Oklahoma at this point. But once that DC is fully operating late next year, we will begin to yield significant reductions in freight and will better insulate our business from weather disruption and labor shortages. I have included a summary of the cost savings opportunities that are underway, their potential impact, and the timing in the accompanying presentation so that you can have greater visibility on our plans to restore our margins. We also expect to get some significant gains in operating productivity from our new ERP system when it is implemented. We delayed the implementation from November to February as we did not want to risk further disruption to our customer service at a time when so many customers are making decisions on fridge expansion and immediately prior to a price increase. We believe we were technically ready for the conversion, but every ERP conversion brings some degree of uncertainty and risk of supply interruption. Our in-house inventories, our customer inventories, and our customer service track record were not robust enough for us to absorb that risk at such a critical time in our customers' decision-making process. We believe we will have much better inventory and a stronger customer service record when we implement the new system in February. However, it is important to note that this decision will further prolong the amount of time that we are absorbing the incremental freight costs associated with shipping less than full trucks. The impact will lessen as we improve our fill rates, but the impact will not be eliminated until we are fully caught up on our bag supply, which has been exacerbated by the delays on Kitchen South Line 2. Media investment in the quarter was 6.3% of net sales, roughly in line with the year ago. This year's media was skewed towards the back half of the quarter, so we did not get the full benefit of the investment in the quarter. We lost leverage on adjusted SG&A excluding media versus the year ago due to the temporary freight inefficiencies and inflation. Excluding logistics, however, we delivered 150 basis points of improved adjusted SG&A leverage, including media, and have delivered 170 basis points of improved leverage year to date. We incurred $100,000 in COVID-related expenses in the quarter and have added those back. We have largely ended our COVID add-back at this point as vaccines are broadly available and we have moved to a more sustained system for protecting our team and ensuring business continuity. However, it is important to note that we fully intend to offer our employees the option to be tested for COVID weekly rather than forcing them to get vaccinated. We are still determining what the cost of that program will be as OSHA just released the details last Thursday. We will factor that cost into our budget and guidance for next year once it is understood. Our net cash used in operation was 3.3 million in the year-to-date period ended Q3. Our cash from operations was impacted by accounts receivable and inventory working capital needs due to strong net sales growth and production in the last month of the quarter. Our cash on hand at the end of the quarter was 170.8 million. We spent 103.2 million in CapEx in the quarter. The Ennis facility is in its highest investment quarters as we are finishing the building and beginning to install equipment. can see a picture of the current state of the ns construction in our supplemental presentation turning to our guidance for 2021 as billy indicated we are now expecting full year net sales of approximately 445 million which is dependent on available capacity and our success with starting up the second line at kitchen south October shipments met our expectations, but we will need the added capacity from the second line at Kitchen South and a successful restart of the Bags line in Kitchens 1 to continue the growth in November and December. This guidance implies that 2021 will be our strongest year of growth since we went public in 2014 and also implies that our Q4 growth rate will be approximately 60%. As Billy indicated, the year-ago December was very soft due to significant disruptions from COVID and weather, and we have a very strong marketing plan in place. Thus, we believe it is achievable. We are lowering our adjusted EBITDA guidance to reflect a rapid increase in inflation, the loss net sales from the delay in starting up Line 2 at Kitchen South, and the delay in our ERP conversion, which would have upset some of the freight issues. Our pricing is designed to offset these costs, but it will not have a material impact until 2022. Thus, we are lowering our adjusted EBITDA guidance to approximately $50 million while maintaining our strong Q4 investment in marketing to get 2022 off to a fast start. In closing, our guidance for 2021 calls for net sales of approximately $445 million up 40% versus a year ago, and adjusted EBITDA of approximately $50 million, up 7% versus a year ago. We believe we are well positioned to continue accelerating our growth, but we have significant work to do to get fresh set position for a strong 2022. The investments we are making are designed to maximize the long-term opportunity. In 2022, we will have production capacity to support a significantly larger business with an increasing mix of more efficient lines. In fact, we already have employees and are operating enough capacity to support a business that could be greater than 40% larger than our revenue guidance for 2021 if we are successful in driving a corresponding increase in demand. The capacity and capability to invest in a very small media program at our targeted rate. significant product innovation that is capable of capturing the interest of millennials and Gen Z. And finally, an expanding retail footprint as some of the most significant retailers continue their expansion efforts. We believe that positions us to win as the fresh pet food segment becomes a sizable portion of the growing pet food category. That will also enable us to accelerate our growth towards our 2025 goals of 11 million households, 1.25 billion in net sales, and a 25% adjusted EBITDA margin. That concludes our overview. We will now be glad to take your questions. Operator?

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. If at any time you wish to remove your question from the queue, please press star two. We ask that you limit your questions to one with one follow-up so that others may have an opportunity to ask questions. You may re-enter the queue at any time by pressing star one. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question is from Peter Benedict with Baird.

Well, hey, guys. Thank you. I guess first question, just not to be short-term focus here, but on the fourth quarter, I mean, you've laid out a lot of information there.

I mean, to read that you think the 135 number in revenue, is that a –

everything goes right number, or does that have some cushion baked into it? Again, big growth, but just kind of curious how you're thinking about that, and then I'll have a follow-up.

Peter, it's a good question. We laid out the assumptions in the prepared comments It assumes sort of normal conditions, what we can normally expect. If there are some big hiccups in either the weather, supply interruptions that are beyond what we're currently seeing, or if there was a bigger than expected delay in the startup or the ramp off of the line at Kitchen South, the second line there, those would be differences versus what we've laid out as guidance. But, for example, on that one, we've been successfully producing on that second line of Kitchen South for two weeks now, but it's still operating at, call it, I would say 20% of expected run rate, the run rate it would have at the end of December. So there's a fairly significant ramp that we need to go through, and that's the kind of thing that we had to make assumptions about when we were giving that guidance.

Okay. Now that's helpful. And then as we think about, you know, next year and 2021, I think Heather kind of at the end there just gave, you know, the sense that the capacity or production today kind of support could directly support a pretty big top line growth number in 2022. Given the cost environment and all that's going on in the business, do you think that you could grow your EBITDA faster than revenue in 2022? Or is that a year where maybe costs prevent that from happening just as a big picture kind of as we think about next year?

Thank you. Yeah, obviously we're going to play a little bit of catch up at first where, you know, with a somewhat depressed EBITDA number this year because we were behind on taking pricing because we frankly didn't have the customer service record to support it. At some point when you're playing that catch-up, it's going to look like you're accelerating faster than maybe the net sales line is, but you're just making up for some lost time at that point. And as we indicated in the comments, we think there's even more inflation than we're pricing for, so we're likely to have to take even further pricing. And the question will be the cadence there. You know, how fast does the cost come on versus how fast can we price for it? and that could have a fairly significant impact on whether you see the EBITDA growing faster than the net sales. It's certainly plausible that you could see that, but I'd hate to speculate until we had a better idea what those costs look like and what our pricing scenario would look like. Okay, great. Thanks.

Our next question is from Bill Chappell with Truist Securities. Mr. Chappelle, your line is five.

Mr. Sorry. Good afternoon. Thanks. Mr. Hey, Bill. Mr. I guess two questions, both kind of regarding gross margin. First on the pricing, just trying to understand for the quarter, I mean, you knew that you were not going to take price until fourth quarter and kind of late fourth quarter three, four months ago. And I would assume you kind of lock in a fair amount of your commodity costs at least three months out.

So just what's the difference that happened within the quarter? It surprised you.

Heather, you want to take that? Yeah, so that is true. The hedging really for us comes around chicken. We did actually see much more accelerated inflation and bigger inflation than anticipated in a number of key areas. On animal proteins, outside of kind of that six-price chicken, we did see across beef, turkey, and we did have to tap into some secondary suppliers where we were facing a material shortage. I mean, you know, suppliers are facing the same labor issues that everyone's facing. And so there were some instances where we had to go to a higher cost alternative supplier to shore up that we had the materials to support production. And so, you know, we had anticipated inflation for sure. We talked about that, but it was just a lot bigger. We also had some inflation passed on from co-packers as well as our partner at Kitchen South. So that, you know, it was just extraordinarily bigger than we had anticipated is really what it comes down to.

And so I would add to that is that almost every supplier today can legitimately declare force majeure and either not supply you or supply you at a higher cost. Unfortunately, that's the environment that we're operating in. Got it.

And then looking forward with the understanding you're not giving guidance yet, but Heather, from what it sounded like you were saying is gross margins or I guess gross profit can return to more expected or normalized levels in the first half with pricing and everything in stock. And then the improvements off of kind of 2020 levels or 2021 levels really comes in the back half.

Or are you saying, hey, we have a further step down to take in the first half and then we have a big I'm just trying to understand the cadence of how these things work.

Yeah, I think I would look at it in two parts. The variables that are still a little bit unknown is the progression of inflation into 2022. We haven't lost the biggest piece of our cost structure, which is the chicken contract. that's in the works now and so we don't know uh where that piece of inflation is going to land we obviously have you know some ideas but that's still being finalized at the beginning of december and then you know just across the board where inflation will will fall as we enter 2022 um as we talked about you know we will as needed contemplate additional pricing as well so those two variables are more, I would say, the unknowns that could move. And then the timing of that second price increase, we have to also balance as well against the first one. And so we're still working on that piece. The progress in temporary operating inefficiencies as well as getting the benefits of being fully at scale in Bethlehem should really start to come in the first half. We were surprised as part of the gross margin in Q3 that we didn't improve a little bit more in terms of the temporary operating inefficiencies staying at the level. you know, levels that we were seeing in the prior quarters. We do have the wage investment in place now, and like we referred to, we do expect that really to help turn around those operating inefficiencies. So the combination of that unwinding the first half of next year, coupled with growing into that baseline scale, is going to be, you know, a pretty steady improvement in the first half. There are a lot of moving parts next year, so we'll be sure to give, you know, very clear guidance as we as we get into that phase next time we speak.

Perfect. Thanks so much for the color.

Thanks. Our next question is from Jason English with Goldman Sachs. Mr. English, go ahead.

Sorry. Sorry. I was having a hard time finding that mute button. Thank you for responding. Two questions. First, you showed an updated consumption chart for megachannels. And for the first time in a while, it looked awfully similar to the growth rates we're seeing in Nielsen AOC channels. So, Jesse, that especially slowed quite a bit for you. It's no longer outpacing Nielsen so much. So, can you talk a little bit more about what's happening there? Scott, do you want to take that? Sure. So, over the course of the year, we have had to – kind of really think about how we're producing and the cadence of what we're producing. And there was a period of time where we had a lot more inventory moving towards some of our pet specialty customers, and that really caused significant acceleration in growth. The other thing that we're also seeing is that There's been a lot of pricing activity in the market, and there has been a little bit of a movement and migration in some of the consumers in some of the different formats. We are also now at a point where, as Billy mentioned, we're getting to a more steady state from our operations, and we're able to kind of fulfill kind of a more even set of our customers across the board. Okay. Okay. That's helpful. And with profitability under pressure, it sounds like it's going to stay that way for a while, at least be lower than what you're initially anticipating. I'm guessing that you're going to burn through your cash even faster than what we thought and now settle, even withdraw down debt at a higher leverage ratio. So, Heather, is this changing at all how you're thinking about funding the ongoing CapEx?

It's not, Jason. I mean, when we look at, you know, it's a pretty near-term issue that we're facing as we look at the back half of this year. And we feel we've included a sort of progression of the initiatives that drive the margin improvement in the debt. And when you look at Q1 2022, there's a number of initiatives that really start to take shape to turn that profitability around. And so we're pretty confident that it's temporary in nature and will not impact the cash flow expectations that we have as we get into next year and continue to spend.

Got it. Okay. When I was hearing the trade and all the risk, it sounded like there was more carryover headwinds into next year. But from what I'm hearing from you, it's no, no, not really at all.

I mean, we've got pricing, you know, pricing to offset the inflation. And again, depending on where inflation starts to come in for next year, we're contemplating additional pricing to offset that. But the factors that you have coming in next year, starting in Q1, we've got the ERP implementation. which will offset the temporary freight inefficiencies that we've been plagued with all year. So that's the first thing to come in. We really expect to start to see the fruits of the labor investment. We're already seeing some of that, but it's very, very early days. We just implemented that on September 1. And so as that labor investment really starts to take hold, we expect to see the improvements in really dealing with some of the temporary operating inefficiencies in Bethlehem, as well as growing into our scale. So there's two factors there. And then longer term, we'll start to move towards a higher percentage of our mix with higher seed lines. So that will continue as we expand capacity. That continues as early as Q1 and out through 2022 and beyond. So we do feel confident in that turnaround. I know it's been a lot of surprise this quarter and with the revised guidance, but we're very confident in the underlying cost structure and turnaround and believe this is temporary in nature.

Jason, I would just add to that. Jason, I would just add that we were a little bit hamstrung because we had to delay taking our pricing until we got our house in order on the shipments. We're now in a much better position to at least keep the gap between any inflation we see and the price increase at a more reasonable level. There's always going to be a lead time with our customers, but we can certainly make it less than what turned out to be this time. Yeah, I hear you. But as Bill just pointed out, his last question, you had delayed that price increase a while ago, and it's not at all an explanation for why March is a week this quarter. It sounds like you keep using it as the excuse for it, but I think that was exactly as planned, right? Well, the price increase was as planned, and we went out and announced it on that timing. But the cost that we incurred in the quarter came on much more quickly than we thought. We're now in the process of figuring out what those costs are going to be for the first quarter and beyond for next year, and we're going to figure out what pricing we need to take to match it much more quickly. Yeah, makes sense. All right, thank you. I'll pass it on.

Our next question is from Brian Holland with Cowden & Company.

Yeah, thanks. Just to follow on the pricing question, was that a completely proactive move by you or a delay, or did you get pushback from customers?

No, this is something we did proactively.

We have not been in a good spot with bill rates. You can see that the chart that Billy included in the deck, I think it's probably one of the pages, I think it's page 11, is really worth taking a look at. When you're running at 40, 50, and even to the 60% fill rates with your customers, it's really not a discussion that you really want to put forward a price increase. understandably, you know, that everyone wants us to move on those quickly. But it's not really the right time to be doing it. And then more importantly, from a consumer standpoint, we have been disappointing consumers because we haven't been in an inventory position that we would like to be in for quite a while. And we felt the right thing to do to continue to kind of have the consumer trust that we have in our brand, our portfolio, our products, is to kind of delay the pricing as much as we possibly could. So we made that decision strategically, both from a customer and a consumer standpoint. I think as Billy talked about in the script, I think if we were going to do it all over again, we probably would make the same decision. It's the right timing and it's the right thing to do for the long term of the business. Now, that being said, there were several things that came on. quicker, more aggressively than we had anticipated in the quarter. Um, we will get this pricing into place. We announced it will get into place and we'll do further adjustments as necessary as the addition is. The majority of the industry is already done. We'll get those in place in reasonable order to get our pricing and gross profit back in in a place where we're at a more steady state in the not distant future.

Okay, appreciate the color, Scott. And then if I could just tack on also a question was asked earlier about the setup into 2022 and EBITDA growing faster than sales. I think the question was asked in the context of maybe gross margin. But, you know, Q4 is going to demand about 60% growth. It's going to be your heaviest Q4 from the media spend standpoint. And then you're setting up 22 and 23 with, you know, hopefully, presumably your best capacity situation or most margin for error. So then the other variable here is what you do with advertising, how heavy you lean into that. So I'm curious what we could be looking for, what you're thinking about this quarter that might help dictate how aggressive you are next year and presumably a better supply backdrop.

Let me take a shot at that, and then I'll let Scott add to it. But First of all, you know, we want to see the continued consumer movement and in terms of velocity improvement behind the advertising investment. And we want to start seeing the household penetration gains return to what they were. That's not going to happen this quarter. It's going to be happening in the next quarter. we're already making the commitments for uh and have made the commitments for our q1 media investment based on what we know about the capacity that we have today and as heather said you know we are already have operating capacity that would support growth that's more than 40 ahead of what our current uh guidance is for this year so there's fairly significant capacity that's available to us in q1 and we feel comfortable growing uh spending the advertising investment to stay after that, to achieve that. I would point out, though, as you grow at the rate that we're currently growing, and you will quickly use up every incremental line, and so we are actually mapping out each quarter throughout the next year of when does the line come on, what form does it make, rolls versus bags, and what will our supply position be as we approach each of those windows and trying to make sure that we're in either a good inventory position or a good supply position such that we don't end up in the same spot we've been in for the last year and we already know that the first pinch will be we can get a little tight on our roles um as we watch the ns startup because the first line coming up out of venice will be a rolls line we need that to come on in the second quarter because All of our rolls lines today are operating, and they're all operating at 24-7, and we're producing every pound we can. Now it's in excess of the demand. That's what's enabled us to get to basically a 100% fill rate in the last week. we need to hold that inventory supply position until we get that next line up and running. But that gives you a sense for the kinds of things we're looking at, literally quarter-by-quarter capacity coming online that would support the kind of advertising investment that would drive the kind of top-line growth that, frankly, we expect and I think our investors expect.

The only thing I build on that is we've been playing kind of pedal break with advertising all year based on capacity.

It looks like you can start to see it, you know, again, as mentioned earlier, We're starting to get fill rates up. They're not perfect, but they're a whole lot better than they've been in a really long time. Things are starting to kind of come together. Lines are opening up. As they do, we'll continue to really press into advertising. This quarter will be one of the most significant quarters in advertising we've ever had behind the capacity that's coming. And it's intended to get us into a really good spot into the beginning of next year.

Thank you. Our next question is from Wendy Nicholson with Citi.

Hi, good evening. My first question is just with regard to October specifically. I know you said it was on plan, but can you give us a sense for just percentage growth you saw in October just so we have a sense of how big, you know, a nut you have to crack in November and December?

Without going into too much detail here because I haven't seen a net sales number. I've only seen a gross sales number. But let me give you a little bit of context. In 2018 and 2019, the three months of the fourth quarter, October, November, December, were all roughly the same size in terms of net sales. And it just gives you a little bit of a sense for the length of the month, the shopping behavior and whatnot, because we didn't do any promoting or whatnot. If we did the net sales number that we did in October of this year, and we did it against the December that we had last year, we just held steady at the same rate. We'd be up 107% in December. So it kind of gives you a sense for how deep the hole was from last December that we're going to be lapping. So this October was up against the strongest month of last year's quarter, and it was much bigger than November and December. And so it's not at the 60% rate. It didn't have to be. It had to be at a level that if you delivered that across the quarter, it would get you to a good place.

Okay. Okay, I follow that. But I guess my question, one of the things I saw in the presentation, and I don't know if it's been in your previous quarter presentations, I have to go back and check, is a tiny little line of the customer fines or the fines for the late delivery or missed delivery. And I'm just wondering, again, it's sort of a philosophical, like I know you're making a very big promise to us, sounds like you're making a very big promise to the retailers, and yet I just kind of feel like just given the environment is so challenging. You're talking about not doing as much pricing. You're talking about pushing out the ERP launch. So you know it's that difficult. So why set such a big bogey for November and December? Because if you're setting it for us, I imagine you're setting it for the retailers as well. And I just wonder if there isn't Like, I worry that you're like an old guy who keeps trying to run really fast and he keeps pulling his muscle. And it's like, maybe you should just go slower, you know, and not to say that, you know, there isn't the, you know, speed isn't a good thing. But maybe this environment and all that you're going through with COVID and labor and all that kind of stuff just isn't too much because I worry. that that little thing of those customer fines for missed or late deliveries is going to grow, and those retailers are either going to say, no, we don't want a second fridge, or no, we don't want you in the store. Is there a risk to that, or am I just overly nervous for you?

So first of all, Wendy, as a 58-year-old guy who is a runner and ran through college, that comment resonated with me. Okay. I hope it wasn't too personal. And Scott was a runner, too, and he was a hurdler, so he's even worse. But I would say, if anything, it's actually better and easier now than where it has been. So, you know, we've been working like the dickens to try to get our legs underneath us and get us to the point where our fill rates are going up. I mean, just looking at this, just to put it in perspective, this week we have a fill rate that's ahead of where it was a year ago. Our TDPs are ahead of where they were a year ago. Our own internal measure of retail fridge conditions is ahead of where it was a year ago. And our consumer comment on out-of-stocks are better than they were a year ago. We are in a better position now than we were a year ago for the first time in a year and actually moving up, getting better every single week. So we feel pretty good about the trend line and the things that are driving the trend line are we're getting much more consistent and reliable supply. So the labor investment we made, it may sound like it, you know, It was nice to do, good to do. It stabilized the staffing considerably. Getting that line up at Kitchen South, and it is actually running, and it's delivering what we thought it was going to deliver on the ramp-up scale we thought. So we feel pretty good about the underlying drivers, but we don't want to also lead people to think that there's absolutely no risk in here, and that's why we were very explicit about what the risks are that we thought could still be out there. We think they're all within the realm of reasonable and we're planning against sort of normal outcomes, but we are in a very unusual environment. We would have never dreamed that we would have had some of the situations that we've seen over the last year where literally you find a critical ingredient is no longer available or you're on very short supply and you're scrambling to find a supplier that can get it to you. That's the world that we're living in, but we think we've got it ironed out. Frankly, there's only eight weeks left in the year. So based on everything we know, we think we're in the right spot.

Okay.

That caller is very helpful. Thanks so much.

Our next question is from Rupesh Parikh with Oppenheimer.

Good afternoon. Thanks for taking my question. So I guess, Billy, just going back to your comments in the call at the start, just about consumption, it was tracking in line with what you guys thought for the quarter. Just curious how marketing so far is tracking versus expectations. As you look at the consumption data, you know, coming in line with your expectations. So I guess there really wasn't anything that surprised you, even with some of the challenges out there.

And I'll let Scott comment on it as well, but I track this very closely. We've talked quite a bit about what we've labeled media efficiency, and it's the conversion of our advertising investment to Nielsen measured sales and then med sales. And we've told people all along that the media efficiency was going to be better than 2019, but not as good as 2020, sort of a line that's in between the two. We actually drew a line starting on the Nielsen data back on March 6th, where we kind of came out of the storms of February and the world normalized at least a little bit. And we're pretty much hugging that same line that exists, you know, halfway between the 2019-2020 media efficiencies. And it really hasn't varied a whole lot since then. So it's delivering what we thought it would deliver. It's a little early to make comments about what we aired in October and November, December. And since we haven't done much in those months and years past, that'll be a little bit of a new learning for us. But so far, you know, really haven't seen any variation. I don't know, Scott, is there any other thought you'd have on that?

No, I think you got it. And we've always tried to take a little bit of a haircut because of some of the challenges you've had with keeping fridges full on media.

But the media looks very tight to what we've expected given that. And I think from what we've seen so far in October, it looks like it's progressing.

It looks like everything's progressing kind of as planned. And we do have a fair amount of spend left in the last 60 days here. Okay, great. Thank you all possible.

Our next question is from Marcus Christian with people.

Yeah, thanks. Afternoon, everyone. Um, I guess just building on the last question a little bit.

If you take a look at your growth versus category growth, kind of in recent weeks, months, the delta has narrowed a bit. So I guess what gives you confidence that the household penetration opportunity remains the same, especially, obviously, given what you've outlined in terms of the slower household penetration, given the lack of availability, caught up with the buying rate piece? You know, you see just generally stronger growth from competitors. And one of the things that we hear from folks, not necessarily that it's correct, but one of the concerns I think out there is, hey, those competitors, not to mention the D2C private company seemingly doing well. So does that all complicate kind of where the long-term outlook can be and Fresh Pets positioning therein?

Scott, you want to take that? Yeah. So, Mark, we spend every week looking at this and thinking about what's going on. There is not – fundamentally we have not seen any changes in in consumer behavior consumer interest um the productivity of our media um the ability to grow especially when we have you know product and stock we were just talking about pet specially earlier i think when peter asked that question um i think was peter asked a question about uh or or uh that actually might have been jason talking about pet specialty where we have product um we're seeing you know really nice growth and acceleration. So that's super, super important. One of the things that's really kind of important to kind of put into perspective is the majority of the growth that we're seeing in the category and from most of the competitors is pricing action. If you look at whether it's units or you look at price per pound, we're seeing, you know, you're seeing pretty nice growth rates, especially in wet, 10%, 12%, 13%, 14%, maybe even a little higher across some brands. That looks like the pricing is 90-plus percent of that growth. So units and pounds, there has not been a significant increase. We don't have any pricing in play yet, so that's why we think that there's been a little bit of a a closing of the gap more recently. Now, that's not to say overall category growth is still, you know, in the kind of high single digits, but a lot of that's being kind of taken offline, so it's not as easy to see in the Nielsen's. So that's a dynamic we believe is going on. But there's – when you see these consumer trends over time – There is nothing that's leading us to believe that it's anything but accelerating, especially as millennial and Gen Z become more of the consumer base in the future. Thank you.

Our next question is from Stephen with Jefferies.

Hi, everybody. I have a follow-up question to an earlier one. I'm going to ask it in a slightly different way, but maybe Heather or Just thinking about the volatility in the business and as you look forward into 22, do you expect that the range of outcomes starts to narrow or that it remains as wide as what we've seen during 2021?

I'll talk about the consumption side and let Heather take comments or comment on the adjusted EBITDA side. I think what you're going to see is that the consumption is going to, in absolute terms, is going to much more closely match what you're going to see as our reported sales. And so to an extent that variability will be gone. We will, of course, be lapping a year where you had, you know, significant changes in inventories, ours in the trade inventory, that will make the year-on-year comparisons look kind of fuzzy. So you're going to have to look past that and start looking at the consumption data. But because of the position that we're going to be in at the end of this year, because of the growth that will come from the advertising, I think we're going to return to our historic pattern where if you looked at the Nielsen's, you can pretty much get a good sense for where our absolute consumption and sales are going to be. And then you're going to have to do a little bit of triangulating to figure out what that means versus a year ago, just because the year ago is going to be a little screwy. Heather, what do you think about the EBITDA?

Yeah, I mean, I think as we look into 22 and beyond, the tailwinds for improvement start to outweigh the headwinds as we know them today. I mean, of course, the noise, the short-term noise is coming largely from inflation ahead of pricing. which will sort itself out next year as we're able to have the first price increase take effect, and then we'll see where we need to do a second. But when you think about the different drivers of improvement, from a tailwind perspective, we've got our ERP implementation that I referred to in terms of eliminating the freight inefficiency. That's 200 basis points of inefficiency that we've been facing all year. The second piece is really having Bethlehem at scale with the labor investment in place. So you start to think about the elimination of the temporary operating efficiencies because we've got now the right labor, we've hired the right labor with more manufacturing experience who are then progressing through our Fresh Fed Academy and are much more skilled in terms of how they perform day to day. So that's going to be a big driver of improvement. And then as we continue to expand capacity, we continue to increase the number of high speed lines um, in the overall sort of pie chart of, of lines. And so the majority of our production starts to be on higher speed lines. Um, having said that, you know, there are a couple headwinds that we'll face along the way. So as we expand and, you know, contract, but, you know, in the near term, expand production, which with our kitchen south partner, that's going to be, you know, a headwind. And we've talked about that as being a more sort of, uh, less linear, line item that, you know, sort of expands and contracts over time, so it reaches its end state when we're looking at the $2 billion in capacity. We'll start to see a continued mixed shift towards bags again. That's been really constrained this year. And so, you know, we expect that mixed shift to continue, and that will be a headwind. And the last piece is going to be, you know, as we're expanding our capacity, in whether it's more capacity of kitchen itself, but more so at EDIT, we will have moments of unabsorbed cost that we need to manage through. We'll try to be extremely tight on that, but that is another headwind that we have to manage very closely. But again, the tailwinds are going to outweigh these headwinds, and so we feel very confident in the underlying improvement going forward. Heather, can you really quickly talk about labor? I think one of the things from your analyst's day that we took away is that your new lines require a lot less manpower, a lot more automated. So as we think about labor investment over the course of the next couple of years, is it going to lessen as a percentage of your overall expense base? I think it will, but I think that that takes a little bit of time to actually get there. So, you know, in the more near term, especially with newer technology that, you know, can be, you know, a bit more complex in terms of just, you know, understanding how it operates and getting the maintenance cadence right there. There is sort of a near-term investment in labor that's required to sort of get that into a steady run rate. But for sure, the lines should operate with less labor, you know, less sort of production operators along the way. And we continue to focus efforts around automation. We're doing that. We're building that on the back of Line 1, for example, as we bring The line one in our Bethlehem kitchen one back up will have more automation on the back end of the line, which should save on labor. So it's going to be a function of our ability to get to a mature state in running the line, the newer technology line, as well as continue to drive more automation, either via retrofit or just continuous improvement efforts as we go.

Steph, I would add to what Heather just said, and I think she's trying to walk a fine line between we may have less overall people, but the people that we have, we may be paying them more, meaning a higher skilled group of people, better trained group of people, and where that nets out in terms of what it looks like on our P&L in terms of labor expense. It's going to evolve over time, but we're quickly realizing that there's a significant return for investments in labor and in talent, meaning hiring higher quality people and paying higher quality people more so you reduce turnover. We think that's a very good strategy, and that's something that we did with our Fresh Pet Academy when we launched for September. The early indications are very, very positive, and we think we frankly need to keep looking harder at that in a variety of other ways to see whether there's more to get out of that strategy.

Thank you. Much appreciated.

Thanks. Our next question is from Robert Moscow with Credit Suisse. Hi. Thanks, guys.

I thought three months ago that you had expected an exit rate in your consumption to be 35% or higher. And I think you're saying it's now 30%. But I would have thought that with your velocity good, your fill rates improving, you got the big advertising, I would have thought you would have been able to keep the 35% and higher. So why is it a little bit lower? Is it just distribution related again? So the 35 that was out there was, when we drew it on the chart, it was up against the last two weeks that you're seeing in the year, which are notoriously low. And when we drew it out, we're now showing it as versus where you thought we'd be in the month of December. So it's just sort of the cadence that you're expecting to see for the last month. And if you look at the weeklies, I don't know if you get the weeklies, Robb, but there's a very significant variation in the weeklies in the month of December, and that's what that reflects. But it's in the same ballpark. It's really not much of a difference. Okay. I'll let it go. Thanks.

Yep. Our next question is from Ben Bienvenu with Stevens.

Hey, thanks. Good afternoon.

Hello there.

Okay. I want to ask, as it relates to raw materials, both to build out capacity and to build out production of product, Heather, you talked about expected higher costs on chicken as you reprice in December. In doing so, do you expect to be able to get all of the products that you plan to receive, or do you expect to still be shorted on product? And then as you think about if we see raw material or supply chain challenges worsen, how does that impact? How should we think about that as a potential net negative pushing back against the positive improvements in overall productivity as you scale out production to the earlier question around cash burn and kind of cash availability to expand production?

yeah let me take a shot at that so first of all um as we've all learned that you really need to have a broad and diverse supply base in order to succeed in this environment and frankly we've been very fortunate that our supply chain team has done a remarkably good job of making it that we've never had to shut down lines because we could not get access to material we've had to scramble quite a bit in advance and get material from a greater distance and at a higher cost but we were able to keep our lines running because we had done the work to develop backup suppliers or qualified backup suppliers on many of the most critical ingredients. There's still some more of that work to be done. So as we get to be larger and larger scale, the suppliers that we come to rely on, you need to have either a bigger backup supplier or a second tier supplier in the mix. The people who may have been able to meet that need earlier may not may no longer be able to meet the needs that we've got. So our supply chain team has been working pretty darn hard to develop backup suppliers or second sources or third sources on the most critical ingredients. And so far, you know, they've been able to do it and keep our lines running. The embedded part of that question, though, is can you do it at the same cost? And that hasn't been as easy, and that's certainly part of the negotiation work they were doing, and certainly it's one of the things that we'll factor into making a decision on pricing. Okay, thanks. I'll leave it there.

Our last question is from John Anderson with William Blair.

Good afternoon. Thanks for squeezing me in. A couple quick ones. Most have been asked already. On pricing, it sounds like a second price increase is more likely than not, given kind of the current situation, particularly vis-a-vis chicken. So how quickly can you affect the second price increase? And do we have any risk of the kind of a timing mismatch which seems to be playing a bit of a role in the EBITDA reduction this year kind of occurring in some fashion in 2022. Let Scott take that one. Yeah. So we're going to try and in the next couple of weeks, I think Heather chatted a little bit about this at some point, in the next couple of weeks we should have a pretty good idea on several of our core ingredients. we'll know exactly kind of where they're landing, and then we will make decisions from there. We've already started reviewing what the different opportunities are around pricing. And, you know, evaluating, you know, the pricing, the different price points that we kind of, you know, potentially cross over and what we believe, you know, the impact in velocity could be. So we've done all that work. We're kind of ready for it. It's probably from when we make a decision, it's probably 120 days. So it would be, you know, sometime in, you know, late Q1, early Q2 would probably be when the second round of pricing would probably come into play. And at that point, we think, you know, not only will we be getting a little bit more normalized state, but we think that some of these supply chain challenges will have moderated and will be operating in a much more steady state. That's, you know, that's what our crystal ball says. Okay. And you've always benefited from a very high repeat rate, I think, in the 70% range. Given some of the industry-wide challenges, but some of the challenges you've had given capacity constraints in whether it be fill rates, in stock levels at retail, I mean, are you concerned about any permanent impairment to household penetration, attrition in the customer base? Have repeat rates fallen off? How do we think about this? Is this just a transitory thing, or is there some more permanent impairment we need to consider? No, primarily transitory. I mean, I'm sure there's some people that, you know, have not purchased this as much. We know that. And we've also seen our buy rate ironically go up because our penetration hasn't grown quite as much because we've backed off of advertising and we haven't had product availability. And there's some products we haven't had almost at all for certain periods of time. So that's caused some of our penetration to kind of, you know, moderate a little bit, not grow as fast as we would like to see. But we think this is transitory. We've been through some things like this in the past with the business over, you know, 10 years or so, and it's always recovered really, really nicely. And as soon as we've kind of gotten to a more steady state where we'll have product available, our advertising returns, we'll be seeing, you know, growth returning very consistently with what we've historically seen. Maybe if I could just squeeze one more in on the media spend rate. Where do you think you end up in 2021 on the media spend rate? And it sounds like next year you plan to lean in. I think in the past you set up to 12% as a media spend rate. Would that be a way to think about next year? And again, where do you think you'll end up this year?

um heather do you want to you want to uh tackle this year and i'll i'll talk about what we know at this point for next year yeah i mean we've uh in terms of this year obviously originally our our plans uh were on a motor guide on the top line and we brought that up so from a percent basis we are we will be off the uh the long term kind of 12% both a function of the higher revenue, but also a function of some refinement in the media spend that we have made through the year, given the capacity constraints and some of the proper pressures. Our plan for as we progress into next year, though, coming off of a strong Q4 is to get that media level back up to the 12%, you know, sort of longer term run rate that we would like to be at. That is the plan as we go into 2022.

Thanks so much, everybody.

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

Great. Thank you. I would like to end with a quote. The quote comes from Maurice Meterlink, who was a Nobel Prize winner in literature in 1911, from his book, Our Friend the Dog. We are alone, absolutely alone, on this chance planet, and amid all the forms of life that surround us, not one, excepting the dog, has made an alliance with us, to which I would add, feed them fresh pet, and they will call it even. Thank you, everyone, for your interest and attention.

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