Q3 2021 Freshpet Inc Earnings Call

Good afternoon, ladies and gentlemen, and thank you for standing by and welcome to the fresh bread 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 will now turn the conference over to your host Jeff Sonic 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 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.

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.

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 presentation of this information is not intended to be considered in isolation or as a substitute for the financial information.

<unk> 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.

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 managements commentary will not specifically walk through the presentation on the call rather just a summary of the results and guidance we 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.

While it 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.

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're not as confident in our ability to produce enough fresh pet demeanor.

Totally exceed $445 million that second line is up and running now, but we can't make up for the last time last we were making the small change in our guidance.

That challenge is typical of the environment. We're 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 interests 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 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 sales net sales growth in the quarter up 28% versus a year ago, we could've 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 met 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 could do to restore customer service as fast as we could.

As a result of that was an increase in our inventory on hand at the end of Q3 of about $8 million of net sales value or 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 fifties and they needed to improve.

Fortunately it is working and we now fill rates in the mid Sixty's and our fill rate on our walls in the nineties.

Judging by the consensus net sales estimate for the quarter, we could've made those choices clearer, we fully anticipated the loss of production from the maintenance and upgrades and called those out in our presentations in 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 Q.

Three 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 believe that our cost increases would be manageable until that but that turned out to not be the case, our cost escalated much more quickly than we had anticipated and more quickly than we had budgeted in our guidance simply put we absorbed rapidly.

<unk> pass without any pricing relief, which we estimate cost 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 year ago, instead of being up 15% versus year ago.

Total choices like that made this a rocky quarter, but even if we had anticipated the incremental cost 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 can 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 relate it 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'll 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 it's all a manufacturing plant could support we had more than enough demand to sell more but between building inventory to improve our customer service and then investing in maintenance and upgrade projects are 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 and quarterly net sales and the $107 6 million in net sales, we actually delivered in Q3 as you will see our.

Pasadena 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 had included our decision to do that in our Q2 earnings presentation. Additionally.

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 shut down in early September so that we could upgrade and automate the line now.

Outlined 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 are 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 in 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.

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 in the quarter, particularly on our roles result is that our fill rates have improved by 20 points since July, but we had $8 million less than net sales than we might've had as I alluded to earlier the timing of it.

Inventory build was different than our expectations as we had expected this to occur in Q4 instead of Q3.

It's 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 a million dollars in net sales in the quarter. While small we expect this issue to continue for at least the balance of this year, we were looking for some longer term solutions to this problem.

Despite these limitations on our production, we still produced a 45% more in Q3 this year than we did last year.

That enabled us to satisfy current retail sales, we feel about $8 $5 million of trade inventory and rebuild some of our inventories.

The result of that was 28% net sales growth versus year ago, you'll find a.

A reconciliation of our net sales growth versus consumption and another reconciliation versus our production and 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 year ago. In early August to its most recent week of 22% growth in average improvement of about one point per week and it is.

On track to be more than 30% ahead of year ago by the end of December nine Nielsen weeks from now.

The two year stacked growth rate stay consistently in the upper fifties 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.

Our ecommerce business grew strongly again this quarter up 57% versus a very strong quarter last year and accounted for six 4% of our total sales mix in the quarter.

Store count grew by 226 in the quarter to 23381, you'll take quite a finishing push to get to our 2021 target of 1000 net new stores as customers remain hesitant to put in new coolers until we are fully stocking existing coolers. So it will be close, but there's a chance we will get there.

We are already well ahead of our annual targets for this year on upgrades and second fridges, but.

It's still added 48 upgrades in 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 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%.

Expect those to reverse by the end of the first half of 2022.

Our U K 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.

And some on the other hand continue to be very strong with our leading customer producing sales growth of 39% versus 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.

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 met sales capacity in Q4.

A reconciliation for that versus Q3's net sales is included in the accompanying presentation.

It's 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 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 were drawing down trade inventory heavily in the quarter.

Well weather could present the same risk this year last year's storms were unusually impactful in the Lehigh Valley and were hoping that we don't face the same severity this year.

Additionally, COVID-19 appears to be much less of a threat this year than it was last year.

Third we will record a meaningful revenue from trade inventory refill in the quarter as I indicated earlier, we largely completed refilling trade inventory on our rules in October and that refill will contribute to our fourth quarter net sales.

If our bank 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 will 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 every from 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-19, including increased.

And he has them due to positive test results in our facilities or those of our suppliers logistics partners or customers.

We're 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 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 a delay in getting equipment to start off the second line at kitchen, South at delay caused us to revise our net sales guidance from greater than 445 million to 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 well assignment 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 to startup date to early February of 2022.

This is reflected in the capacity projects chart and the accompanying presentation.

Similarly, we are experiencing shortages or being put on allocation for basic construction materials, they're typically widely available such as installation and steel studs and that has pushed our startup in N S 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 put 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 supply chain challenges I've seen in my 36 years in the CPG industry.

Over the past six months, we produce significantly more than we 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 reaccelerate our growth rate through our investment in media.

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.

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 four 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 to EBITDA margin next year that price increase will go into effect with the orders received an 11 29 21.

We delayed taking this pricing until we can improve our customer service for the purposes of providing you with some added context and sensitivity around the impact of pricing. If we implemented our price increase on the timing of other competitors who've 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 a.

Reported Q3 results.

And we implemented a new labor strategy built around our fresh pet Academy it as stabilizing our staffing and positioning us for the significant growth we have ahead.

You're not out of the woods, yet as it takes time for that strategy to deliver the results we need well you're 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 pets 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 them any pains commented 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 flow. We tried 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 a more efficient manufacturing.

Many of those are obscured by the near term issues. So we will do our best to clear the debris. So that you can see the underlying performance improvements.

Not meant as excuses, but are simply an effort to provide greater clarity.

Now I'll turn it over to Heather so that she can fly that clarity and give you more detail on our results.

Yeah.

Thank you Billy and good afternoon, everyone as Billy indicated I'm going to address the second question that is most likely on your mind.

Our adjusted gross margin performance in the quarter and also it tends to help you see through all the noise to understand our underlying performance.

Finally, I'll update you on our formal outlook for the year, including a revised adjusted EBITDA expectations.

Our Q3 adjusted EBITDA performance came in at $14 6 million, 14% below the ear about this underperformance was driven by significant cost inflation and a continuation of the temporary operating inefficiencies that we described last quarter.

Adjusted gross margin came in well below our expectation at 44% down from 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, South partner, we saw inflation on virtually every cost line that was not under a fixed price contract.

And even in those cases, where the prices that 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 time.

Sporadic shortages of some key ingredient and material 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 and staffing ahead of demand. These costs will be offset by increased productivity as our fresh that Academy training plan take hold.

35 basis points of higher cost between the gross sales line and net sales line.

Customer find special Art Shannon.

Can go away when we have finally caught up on trade inventory.

These increases were partially offset by improved mix and improvements in operating performance related to quality and yield that delivered a total of 85 basis points of improvement.

Well not a component of cost of goods sold.

We include it in SG&A logistics was 11, 6% of sales, which is well in excess of a year ago performance and our long term expectations.

Part of this is freight inflation that we are taking price to cover the largest share is related to shipping half empty truck.

Our short shipment and ERP system implementation.

This cost will go away when we were still in normal customer service later this year and into next year.

As we have indicated we announced the price increase that average is four 8% across the line and is effective with orders received an 11 29 21.

That will have de Minimis impact on Q4, but it will offset a significant portion of our increased cost of goods sold and freight car. 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.

Contract for some of our most significant ingredient in December of each year.

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.

For example.

Since we implemented our new labor strategy, we have seen an increase in productivity per person and for sure and that is contributing to the record production, we are seeing and our Bethlehem kitchens. It is early but the trend is clear.

No need to sustain and expand it.

We also expect to see significant quality improvements from both our training program and the upgraded equipment and kitchens, one there should become evident in the first half of 2020 two.

We have invested in the training of more than 30 of our team members, who will be charged with starting off in the kitchen and Marvel arrive next month.

Some have been training and our Bethlehem kitchen since late June and have already advanced at least one level and our fresh bread Academy training system and will likely have achieved another level before they go home to end.

This investment will pay significant dividends when we start up the kitchen in Q2 of 2022.

We started up our second distribution center in Dallas, Texas, and the Florida, we are still in the testing phase and only sat through 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, there potential impact and the timing and the accompanying presentation. So that you could 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 its 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 branch expansion and immediately prior to a price increase.

We believe we have a cat will be ready for the conversion, but every ERP conversion bring some degree of uncertainty and risk of supply interruption.

Our in house inventories are customer inventory and our customer service track record were not robust enough for us to absorb that with 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 observe we are absorbing the incremental freight cost associated with shipping less than full truck.

The impact will lessen as we improve our fill rate, 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 too.

Media investment in the quarter was six 3% of net sales roughly in line with a year ago.

Theres 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 years out due to the temporary freight inefficiencies and inflation at.

Excluding logistics. However, we delivered 150 basis points of improved adjusted SG&A leverage excluding media and have delivered 170 basis points of improved leverage year to date.

We incurred $100000 in Covid related expenses in the quarter and have added those back we have largely ended our COVID-19 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-19 weekly rather than forcing them to get back the need it.

We are still determining what the cost of that program will be as Osha just released a detailed last Thursday, we will factor that cost into our budget and guidance for next year. Once it is understood.

Our net cash used in operations was $3 3 million in the year to date period ended Q3.

Our cash from operations was impacted by accounts receivable and inventory and 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 $178 8 million.

We spent $103 2 million in capex in the quarter.

This facility is in its highest investment quarter as we are finishing the building and beginning to install equipment you can see a picture of the current state of the U S. Construction in our supplemental presentation.

Turning to our guidance for 2020, one as Billy indicated we are now expecting full year net sales of approximately 445 million, which is dependent on available capacity and our success are starting up the second line at kitchen South.

October shipments met our expectation, but we will need the added capacity from the second line at kitchen, South and the successful restart of the bags line in kitchens, one 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 imply that our Q4 growth rate will be approximately 16%.

As Billy indicated a year ago December was very soft due to significant disruption from COVID-19 and whether 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 the rapid increase in inflation. The last net sales from the delay in starting out like two at kitchen, South and the delay in our ERP conversion, which would have offset some of the freight issue.

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 year ago, and adjusted EBITDA of approximately $50 million up 7% versus year ago.

We believe we are well positioned to continue accelerating our growth, but we have significant work to do to get fresh that position for a strong 2022.

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 line.

In fact, we already have in place and are operating enough capacity to support a business that can be greater than 40% larger than our revenue guidance for 'twenty 'twenty. One 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 interests of millennials and Gen Z.

And finally, an expanding retail footprint at 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 goal of 11 million households, 1.25 billion in net sales and a 25% adjusted EBITDA margin.

That concludes our overview.

I'll 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 question.

You may reenter 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.

Alright, guys. Thank you.

I guess first question just.

Not to be shorter term focus here, but on the fourth quarter. I mean do you you've played out a lot of information there.

Are we to read that you think the 135 number in revenue is that up.

Everything goes right number or is that does that have some some cushion baked into it again.

Gross but just kind of curious how you're how you're thinking about that and then I'll have a follow up.

Peter It's a it's a good question, we laid out at the assumptions in the in the prepared comments. It it assumes sort of normal conditions, what we can normally expect it.

If there are some big hiccups in either the weather supply interruptions that are beyond what we're currently seeing or if there were a if there was a bigger than expected delay in the startup or the ramp up of the line at kitchen, South in second line, there those would be differences versus what <unk>.

We've laid out as guidance, but for example on that one we are we have been successfully producing on that second line of kitchen, South for two weeks now, but it is still operating at call. It I'd say, 20% of its 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. No. That's helpful and then as we think about next year and.

I think another kind of at the end there just gave the sense that.

The capacity or production today kind of support could theoretically support a pretty big topline growth number in 'twenty, two 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 'twenty tours 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 doing we're going to play a little bit of catch up at first.

Were 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 two to support it at some point when youre doing playing that catch up it's gonna look like you're accelerating faster than maybe the net sales line is but you're just making up for for some lost time at that point.

And as we indicated in our comments, we think there's even more inflation than where pricing for so we're likely to uptake even further pricing and the question will be the cadence there 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 than the net sales.

It's certainly plausible that you could see that but I'd I'd hate to speculate until we get a better idea of what those costs look like and what our pricing scenario would look like.

Okay, great. Thanks.

Yeah.

Our next question is from Bill Chapell with choice Securities.

Mr. Shapiro your line is live.

Sorry, good afternoon. Thanks.

Hey, Bill.

Yes.

Two questions both kind of regarding our gross margin first on the pricing I'm just trying to understand for the quarter, but you knew that you are not gonna do take price until fourth quarter and kind of late fourth quarter.

Three or four months ago, and I would assume you're kind of locked in a fair amount of your commodity costs at least three months out. So just what's the difference that happened in the quarter.

That surprised you.

How did you want to take that yeah, so that.

That is true that had been really for us comes around chicken, we did actually see much more accelerated here pretty soon and bigger in place and an anticipated a number of key areas.

On animal proteins outside of kind of that fixed grade chicken, we didn't see across beef, Turkey, and we did have to tap into sort of a secondary supplier, where we were facing a material shortage. I mean, there you know suppliers are taking 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 integration for sure we've talked about that but it was just a lot bigger and we also had some inflation pass on some co packers them as well as our partner.

Our kitchen, south and so that you know if it was just it was just extraordinarily better than we had anticipated is really what it comes down to.

And Bill 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. That's unfortunately, that's the circle the environment that we're operating in.

Got it and then looking forward with the understanding you're not giving guidance yet but.

Hello.

It sounded like you were saying is <unk>.

Gross margins or I guess gross profit can return to more.

Expected or normalized levels in the first half with pricing in the you know the everything in stock and then the improvements off of kind of 2020 levels are or 'twenty 'twenty. One 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 back half loaded I'm, just trying to understand the cadence of how these things work.

Yeah, and I think I look out into two parts.

The variables that are still a little bit unknown is the progression of inflation into 'twenty 'twenty. Two we you know we haven't locked the biggest piece of our cost structure, which is the chicken contract. That's in the works now and so we don't know where that piece of inflation, that's going on that we obviously have some ideas, but that's.

Still are being finalized at the beginning of the summer and then you know just across the board where inflation well will fall as we enter 2020 to him as he talked about you know we will as needed contemplate additional pricing as well. So those two variables are more I would say the unknown that could.

And then the timing of that second price increase and we have to also balance as well against the first one.

And so what we're still working on that piece the the progress in temporary operating inefficiencies them as well as getting the benefits of being fully at scale in Bethlehem shouldn't really starting to come in the first half yeah. We were surprised as part of the gross margin in Q3 that we.

Did it improve a little bit more in terms of the temporary operating inefficiencies staying at the level them you know the levels that we were seeing in prior quarters.

We do have the wage investment in place now and likely referred to we do expect that really to help turn around those operating inefficiencies. So the combination of that unwinding in the first half of next year, coupled with growing is not about that at scale is gonna be a you know a pretty steady improvement in the first half. There's there are a lot of moving.

Parks next year, there will be sure to give you a very clear guidance as he them as we get into that phase next time.

Perfect. Thanks, so much for the color.

Thanks.

Our next question is from Jason English with Goldman Sachs.

Mr. English they thought sorry, sorry, I was having a hard time find them you bought them I think refined man.

Two questions first you've shown enough data consumption short for Mega channels.

And for the first time in awhile it looks awfully similar to the growth rates, we're seeing in Nielsen Aoc channels.

Especially slowed quite a bit for Ya, 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 take that.

Sure.

So over the course of the year, we have had to kind.

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 a significant acceleration in growth and 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 in migration and some of the consumers and 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 cause a set of our customers across the board.

Okay. Okay. That's helpful.

And with profitability under pressure and it sounds like it's going to stay that way for awhile.

At least to be lower than what you initially anticipated.

I'm guessing that you're going to burn through your cash even faster than what we thought and now settle even withdraw it on at a higher leverage ratio. So Heather is this changing at all how youre thinking about funding the ongoing capex.

It's not there isn't a neighbor we look at them 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.

A progression of the initiatives that drive the margin improvement in that and when you look at Q1 2022 there's a number of initiatives that really starts to take shape to turn that profitability around.

And so we're pretty confident that it's it's temporary in nature and don't and will not impact yeah. You know the cash flow expectations that we have as we get into next year and continue to fund.

Got it okay, what I was hearing.

Right right and all the risky it sounded like there was there was more more carryover headwinds into next year, but my view is no no no not really at all.

I mean, we've got pricing pricing to offset the inflation and again, depending on where inflation.

Started 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 inefficiencies that we've been plagued with all year. So that's the first thing to come in.

We will start 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 one and so as that labor investment really starts to take hold we expect to see the improvements and you know really do you have any sort of a temporary operating inefficiencies.

That's what I as well as growing into our scale. So there's two factors there.

We you know and then longer term.

Got to move towards a higher percentage of our mix with higher fee line. So that will continue as we expand capacity and that you know.

Continues as early as.

Q1 in and out through 2020, two and beyond so yeah. We do 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 turned around and believe this is temporary in nature.

Jason I would just add to that much is Jason I would just add that we were you know we were a little bit hamstrung, because we had to delay taking a pricing until we got our house in order on the shipments were 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.

We can certainly make it less than it what turned out to be this time.

Yeah, I hear you, but as Bill just pointed out is the last question you had delayed that price increase a while ago and it is not at all.

An explanation for why he marches a week this quarter it sounds like you'll keep using it as the excuse for it but I.

It was I think that was exactly as planned right.

Well the the price increase was as planned and we went out and announced it on 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 the match it much more quickly.

Yeah. It makes sense all right. Thank you I'll pass it on.

Our next question is from Brian Holland, with Cowen and company.

Yeah. Thanks, just to follow on on the pricing question.

Is that a completely proactive move by you or to delay or did you get pushback from customers.

No. This is this was something we did proactively.

We have not we have not been in a good spot with fill rates you can see there's a chart 1 billion included in the deck I think it's probably one of the pages I think it's page 11 is really we're taking a look at when youre 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 forth.

The price increase understandably.

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 of products is to kind of delay the pricing as much as we possibly could so we made the decision strategically both from a customer and a consumer standpoint.

We 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 just it's the right timing and it's the right thing to do for the long term of the business now that being said we did there were several things that came on.

Quicker more aggressively than we had anticipated in the quarter. We will we will get this pricing into place. It we announced it will get into place and we will do further adjustments as necessary as the as the majority of the industry is already done we will get those in place and reasonable order to get our pricing and gross profit back in.

<unk>.

In a place where we're at a more steady state in the not distant future.

Okay I appreciate that color Scott and then if I could just tack on also a question was.

It was asked earlier about the setup into 2022 and EBITDA growing faster than the sales I think the question was asked in the context of maybe gross margin.

But you know Q.

Q4 is going to demand about 60% growth, it's going to be your heaviest Q4 from the mediaset spend standpoint.

Then youre setting up 22, and 23 with hopefully, presumably youre burst capacity situation or our best smart our most margin for error.

So then the other variable here is is what you do with advertising how have 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.

Fly backdrop.

But let me take a shot at that and then I'll, let Scott add to it but first of all we want to see the continued consumer movement and in terms of velocity improvements behind the advertising investment and we want to start seeing the household penetration gains returned to what they were if that's not going to happen this quarter, it's going to be happening in the <unk>.

Next quarter, we're already making the commitments for.

It 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 guidance is for this year. So there's fairly significant capacity that's available to us in Q1, and we feel comfortable.

Boeing are 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 you will quickly use up every increment align and so we are actually mapping out each quarter throughout the next year or when did the line comes on what form does.

It make rolls versus bag, and what will our supply position b as we approach each of those windows and trying to make sure that we're in either a good inventory position for 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.

As we watched the N at start up to the first line coming up that event. It will be a rolls line, we need that to come on in the second quarter, because those will all have a role in flying today are operating and they're all operating at 24, seven and we're producing every every pound we can now which is in excess of the demand. That's what's enabled us to get to a basically a 100% fill rate in the last week.

We need to be 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.

Yeah, the only thing I'd build on that as we've been playing kind.

Kind of pedal break with advertising all year based on capacity.

It looks like that you can start to see it again as mentioned.

We're starting to get fill rates up they're not perfect, but there are a whole lot better than they've been in a really long time things are starting to like 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 behind the capacity that's coming.

It's intended to get us into a really good spot.

At the beginning of next year.

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

Hi, Good evening My first question.

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 I'm not you have to crack in November and December.

Without going into too much detail here, because I haven't seen the net sales number ive only seen at gross sales number, but let me give you a little bit of context in 2018 in 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 a 107% in December.

So it kind of gives you a sense for how deep the the whole was from last December that we're gonna be lapping.

So there's this October was up against the strongest month of last year's quarter and it was demonstrably bigger than November and December and so it's not at a 60% rate. It didn't have to base. It had to be at a level that if you deliver that across the quarter would get you to a good place.

Okay, Okay, I follow that but I guess my question one of the things I saw on the presentation and I don't know if it's been in your previous corporate presentations I have to go back and check is a tiny little line of the customer fines or the defined for the the late delivery or Miss deliberate and I'm. Just wondering again, it's sort of a fib.

All of topical like I know, you're making a very big promise to off it sounds like you're making a very big promise to the retailers and yet I'm just kind of feel like just given the environment is so challenging you you're talking about not doing as much pricing you were talking about pushing out the ERP launch. So you know what's that difficult. So why such a big bogey for November and December.

Because if you were 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 I worry that you like an old Guy who keeps trying to run really fast and it keeps telling us muscle and it's like maybe you should just go slower.

And not to say that you know there isn't a you know speed isn't a good thing, but maybe this environment and all of 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 Mr. Late deliveries, it's gonna grow and those retailers are either going to say no. We don't want a second fridge.

Or we don't want you in the store is there a risk to that or am I. Just you know overly nervous for you. So first of all Wendy is a 58 year old Guy who is a runner and ran through college I that comment resonated with me.

I hope it wasn't to personal and Scott was a run or two when he was a hurdler. So he's even worse, but I.

I would say, it's a if anything it's actually better and easier now than where it has been so you know we we've been working like the Dickens to try to get our legs underneath us and get us to a point, where our fill rates were going up I mean, I'm just looking at it as just put it in perspective. This week, we have a fill.

Right. That's ahead of where it was a year ago. Our T. D piece 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 ever.

Single week, so we feel pretty good about the trend line and the things that are driving the trend line or we're getting much more consistent and reliable supply. So the labor investment we made it it may sound like it you know it was.

Nice to nice to do good to do it it stabilize 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.

Yet about what the risks are that we thought could still be out there. We think they're all within the realm of reasonable and planned 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 in very short supply and you're scrambling to find the supplier. They can get it to you that that's just that's the world that we're living in but we think we think we've got it figured out and frankly, it's the only eight weeks left in the in the year.

So based on everything you know, we think we're in the right spot.

Okay that color is very helpful. Thanks, so much.

Our next question is from refresh Perique with Oppenheimer.

Good afternoon, and thanks for taking my question. So I guess I'm really just going back to your to your comments in the call to 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 and if you look at the consumption data.

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.

You know and I'll, let Scott comment on that as well, but I you know I I track. This very closely you know we've talked quite a bit about what I, what we've labeled media efficiency and it's the conversion of our advertising investment to Nielsen measured sales and then net 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 six 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 halfway between the 2019 2020 media efficiencies and it really hasnt varied a whole lot. Since then so it's it's it's delivering what we thought it would deliver its a little early to make comments about what we what we aired in October and November December and since we haven't done much in those months in years past that'll be a little bit.

A new learning for us, but so far we really haven't seen any variation I don't Scott is there any other thought you'd have on that.

I think you got it I mean, we've always tried to take a little bit of a haircut because of <unk>.

Some of the challenges you've had with keeping fridges full.

On media, but the media looks very tight to what we'd 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 is progressing as planned and we do have.

Fair amount of spend left in the last 60.

60 days here.

Okay, great. Thank you I'll pass it along.

Our next question is from Markus attrition with Stifel.

Okay.

Yes, Thanks and afternoon everyone.

Hum.

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.

Is that Delta has narrowed a bit so I guess, what what gives you confidence that the.

The.

Household penetration opportunity remains the same especially obviously given what you've outlined in terms of the slower household penetration given a lack of availability caught up with the buying rate piece.

You know you see just generally stronger growth from competitors and you know one of the things that we hear from folks not necessarily that it's correct that but one of the concerns I think out there is hey, those competitors not to mention you know the D to C. Private company seemingly doing well so does that all complicate kind of wear.

The long term outlook can be and in fresh pets positioning there.

Scott you want to take that yeah. So some work we spend we spend every week looking at this and I'm thinking about what's going on there is not fundamentally we have not seen any changes in consumer behavior consumer interest.

The productivity of all of our media the ability to grow, especially when we have product in stock. We were just talking about pet specialty earlier I think when Peter asked that question I think it was Peter asked a question about or or Oh actually might have been adjacent talking about pet specialty where we have product. 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 for most of the competitors as pricing action.

If you look at whether it's units or you look at price.

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 cost some brands.

That looks like the pricing is 90 plus percent of that growth. So units in pounds. There has not been a significant increase oh, we don't have any pricing in play yet. So that's why we think that there's been a little bit about.

Closing of the gap more recently.

Now that's not to say overall category growth.

There's still you know in the kind of high.

Single digits, but it's a lot of that's being kind of taken off line. So it's not as easy to see in the Nielsen's. So that's the dynamic we believe is going on but there is.

When you see these consumer trends over time.

There is nothing that's leading us to believe that it is anything but accelerating especially as millennial and gen Z become more of the consumer base in the future.

Thank you.

Yes.

Our next question is.

Steven Wissink with Jefferies.

Hi, everybody I have a follow up question to an earlier when I'm going to ask it in a slightly different way, but maybe Heather. It's really this is best for you just thinking about that the volatility in the business and as you look forward into 'twenty. Two do you expect that the range of outcomes start to narrow or that it remain.

As wide as what we've seen during 2021.

I'll talk about the consumption side of it a lot heavier take comments on or comment on the the adjusted EBITDA side.

I think what youre going to see is that the consumption is going to be up in absolute terms is going to much more closely match, what youre 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 significant changes in inventories ours.

And the trade inventory that will make the year on year comparisons what kind of fuzzy so youre going to have to look past that and start looking at the consumption data, but because of the position that we're gonna 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 forgot a day and then youre going to have to do a little bit of triangulating to figure out what that means versus year ago, just because the year ago is going to be a little screwy.

What do you think about the EBITDA.

Yeah, I mean, I think as we look into 'twenty, two and beyond the tailwind for improvement start to outweigh the headwinds as we don't know about today and then of course, the the noise. The short term noise that's coming up.

Largely from inflation ahead of pricing, which will sort itself out next year as we're able to have the first price increase to take effect and then we'll see where we need to be in 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.

Inefficiencies that that's the that's 200 basis points of inefficiency that we've been facing all year I think.

Second piece is really having bethlehem at scale with the labor investment in place. So you start to think about it.

The elimination of the temporary operating efficiencies because we've got now the rate labor, we hired the right labor with more manufacturing experience, who are then progressing to have fresh that academy at a much more scaled in terms of how they you know.

For farm you know day to day. So that's a 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.

In the overall sort of pie chart of lines and so the majority of our production start to be unhappy line I'm, having said that you know there are a couple of headwinds that will face along the way so as we expand and you know contract, but you know in this in the near term expand production, which with our kitchen south partner.

That's gonna be a headwind and we've talked about that as being a more sort of a less linear a line item that you know sort of expand and contract over time until it reaches its end state.

When we're looking at the 2 billion of capacity will start to see a continued mix shift towards bags again, nothing really constrained this year and so you know that we expect to that mix shift to continue and not Natalie.

As a headwind in the last piece is going to be you know as we're standing up capacity and whether it's more capacity at kitchen, south of them or so and it we will have moments of unabsorbed costs that we need to manage through it we'll try to be extremely tight on that but that you know is another headwind that we have to manage very closely but again.

<unk> are going to outweigh.

These headwinds and so we feel very confident in the underlying improvements going forward.

Heather can you really quickly talk about labor I think one of the things from your analyst 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.

And given the more and more near term, especially with our newer technology that you know Kenny could be.

The 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 is required them to sort of get that into a steady run rate, but but for sure. The line should operate with less labor you know less sort of production operators.

Along the way and we continue to focus efforts around automation and believe we're doing that we're building out in the back of my mind for example, as we bring up the lives one in our Bethlehem kitchen, one back up we'll have more automation on the backend and alignment should save on labor. So it's going to be a function of our.

Ability to get to a mature state running the lines the newer technology lives as well as continuing to drive more automation and either be a retrofit them or just continuous improvement effort as we go.

Jeff I would add to what Heather just said is wait 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.

<unk> is going to it's going to evolve over time, but we are 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 is a is we think that's a very good strategy and that's something that we did with our fresh better.

We launched for September the early indications are very very positive and we think we frankly needed to keep looking harder at that and in a variety of other ways to see whether theres more to get out of that strategy.

Thank you much appreciated.

Thanks.

Our next question is from Robert Moskow with Credit Suisse.

Hi, Thanks, guys.

I thought three months ago that you had expected and exit rate and your consumption to be 35% or higher and I think you're saying, it's now 30%, but I would've thought that you know what's your philosophy. Good your your fill rates improving you got the big advertising.

I would've thought you'd been able to keep would've been able to keep the 35% and higher. So so why is it a little bit lower or is it just distribution related again.

The 35 that was out there was a way through it on the chart. It was up against a though the last two weeks that youre seeing in the year, which are notoriously low and when we drew it out we're now showing it is versus where you thought we'd be in the month of December. So, it's just sort of the the K.

That you're expecting to see for for the last month and if you look at the weekly as I know if you get the weekly drop but there's a very significant variation in the weeklies are in the month of December and that's that's what that reflects but it's it's in the same ballpark, it's really not much of a difference.

Okay.

I'll, let it go thanks.

Yes.

Our next question is from Ben Bienvenu with Stephens.

Hey, Thanks, good afternoon.

Hello there.

So I wanted to ask you know as it relates to raw materials, both to build out capacity and to.

Build out production.

Uh Huh, 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 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.

Financial 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 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 had to <unk>.

Granville quite a bit in advance and get material from a greater distance and at a higher cost, but we were able to keep our mines running because we had done the work to develop backup suppliers well qualified backup suppliers on many of the most critical ingredients.

There's still some work that work to be done so.

So we you know 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 next the people who may have been able to meet that need earlier may not may no longer be able to meet the needs. We've got so our supply chain team has been working pretty darn hard.

Hard to develop backup suppliers or second sources, our third sources on the most critical ingredients and so far 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 Ah that hasn't been as easy and that's certainly part of the.

<unk> work they were doing and certainly it's one of the things that will factor into making a decision on pricing.

Okay. Thanks, I'll leave it there.

Yep.

Our last question is from Jon Andersen with William Blair.

Good afternoon, Thanks for squeezing me in.

Hey.

A couple of quick ones most have been asked already.

On pricing it sounds like.

A second price increase is more likely than not given.

Hum.

Kind of the current situation, particularly vis a vis chicken so.

How quickly can you effect the second price increase and do we have any risk of the kind of the timing mismatch, which seems to be playing a bit of a role in the EBITDA reduction this year are kind.

Kind of occurring in some fashion in 2022.

That's got to take that one yeah.

So we're going to try and.

In the next couple of weeks, we should I think Heather chat a little bit about this some point next couple of weeks, we should have a pretty good idea on several of our core ingredients will know exactly kind of where they're landing and then we will make decisions from there. We're already we've already started reviewing what the different opportunities are around pricing.

And evaluating the pricing the different price points that we kind of you know potentially cross over and what we believe the impact in velocity could be so we've done all that work. We've we're kind of ready for it it's probably from when we make a decision it's probably one.

<unk> hundred 20 days so it would be sometime in 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 there's some of these supply chain challenges will have have moderated and we'll be operating in a much more steady state.

That's a you know that's what our Crystal ball says.

Yeah.

Okay, and you've always had a or benefited from a very high repeat rate I think in the 70% range.

Given some of the industry wide challenges, but sort of the challenges you had given capacity constraints.

And 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 or is it or is there some more permanent.

We need to consider.

Now primarily transitory I mean I'm sure. There's some people that were not purchases 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 backed off of advertising and we havent had product availability and there are some products we haven't had.

<unk> almost at all prefer for certain periods of time. So that's caused some of our penetration to kind of.

Moderate a little bit not 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 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 will have product available or advertising returns, we anticipate seeing growth returning very consistently with what we've what we've historically seen.

Maybe if I could just squeeze one more in on the media spend rate, so what where do you.

Thank you end up in 2021 on the media spend rate.

And it sounds like next year, you're playing to lean in I think in the past you've set up to 12% is the media spend rate would that be a way to think about you know next year and again, where we're at.

You think you'll end up this year.

Heather do you want to do you want to tackle this year and then I'll talk about what we know at this point for next year.

Yeah I mean.

The in terms of this year. Obviously originally are our plans are well underway.

Our guide on the on the topline and we brought that up so from a percent basis. We are we will be off yeah, they're long term kind of 12% on both a function of the higher revenue, but also from sending some refinement in the media spend that we have made through the year given the capacity constraints in some of the profit pressures are.

Friends for as you progress into next year, though I'm coming off of a strong Q4 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.

Great. 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 just I would like to end with a quote quote comes from Maurice Maeterlinck, who was a Nobel Prize winner literature and 1911 from his book our friends. The dog we're 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.

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