Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the Freshpet 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. [ Operator instructions]. Please note this conference is being recorded. I now turn the conference over to your host, Jeff Sonnek Investor Relations for ICR. Thank you. You may begin.

Thank you. Good afternoon and welcome to Freshpet '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, 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 would 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, Freshpet's 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're not as confident in our ability to produce enough Freshpet 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'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 Freshpet opportunity. And we were willing to make some. For 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…

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 under performance was driven by significant costs inflation and a continuation of the temporary operating inefficiencies that we described the last quarter. Adjusted gross margin came in well below our expectation 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. 1. 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 contracts. 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. 2. 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 Freshpet Academy training plan takes hold. Third, 35 basis points of…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] [Operator Instructions] One moment while we poll for questions. Our first question is from Peter Benedict with Baird.

Hey guys, thank you. First question, not to be shorter-term focused here. But on the fourth quarter, you've laid out a lot of information there. Are we to read that you think the 135 number in revenue, is that a everything goes right number, or is that -- does that have some cushion baked into it? Again, big growth but curious how you're thinking about that. And then I'll have a follow-up.

Peter, it's a good question. We laid out at the assumptions in the prepared comments. It assumes normal conditions, what we can normally expect. If there are some 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 start-up or the ramp up of the line at Kitchen South, the second-line there. Those would be differences versus what we've laid out as guidance. But if for example, on that one, we've been successfully producing on that second-line at Kitchen South for 2 weeks now but it's still operating, I call it -- I would say 20% of its expected run rate. The run rate would have at the end of December. 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're giving that guidance.

Okay. That's helpful. And then, as we think about next year, and I think at the end there just give the sense that the capacity or production today could directly support a pretty big top-line growth number in '22. Given the cost environment snd all that's going on in the business, do you think that you could grow your EBITDA faster than revenue in '22, or is that a year where maybe costs prevent that from happening? Just as a big picture, as we especially think about next year. Thank you.

Yes. Obviously, we're going to play a little bit of catch-up at first. Where -- with the 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 doing -- playing that catch-up, it's going to look like you're accelerating faster than maybe the net sales line is. So 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 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 the net sales. It's certainly plausible that you could see that. But I'd -- I hate to speculate until we have 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. Chapell, your line is live.

Sorry. Good afternoon. Thanks.

Hey, Bill.

I got two questions, both regarding gross margin. First on the pricing. Just trying to understand for the quarter, but you knew that you were not going to do -- take price until fourth quarter and late fourth quarter, 3 or 4 months ago. And, I would assume you were going to lock in a fair amount of your commodity costs, at least three months out. So, what's the difference that happened within the quarter that surprised you?

Heather do you want to take that?

Yeah. 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 that [Indiscernible] chicken you did see across beef, turkey. And we did have to tap into some secondary suppliers where we were facing material shortage. I mean, supplier are facing the same labor issues that everyone is facing. And so there were some instances where we had to go to a higher cost alternative supplier to ensure that we had the materials to support production. We had anticipated inflation, for sure. We talked about that. But it was just a lot bigger. We also had some inflation pass on from co-packers, as well as our partner at Kitchen South. And so that it was just extraordinarily bigger than we had anticipated really, what it comes down to.

What I would add to that, is that almost every supplier today can legitimately declared force majeure and either not supply you or supply you at a higher cost. It's 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 I -- it sounded like you were saying is gross margins or 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 2020 levels or 2021 levels really comes in the back half, or are you saying, " hey, we have a further step down to taken 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.

Yes, I think I would look at in two parts. The variable is better, still a little bit unknown is the progression of inflation into 2022. 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 is going. And we obviously have some ideas, but that's still being finalized at the beginning of December. And then, just across-the-board where inflation will fall as we enter 2022, as we talked about, we will add needed consummate additional pricing as well. To those two variables are more, I would say, the unknown 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 that in Q3, that we did n't improve a little bit more in terms of the temporary operating inefficiencies staying at the level -- levels that we were seeing in 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 scale is going to be a pretty steady improvements in the first half. There are a lot of moving parts next year so we'll be sure to give very clear guidance 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?

Sorry. I was having a hard time finding that mute button. I think we're finally in. 2 questions. First, you showed it up with the consumption chart from mega channels, and for the first time in a while, it looked awfully similar to the growth rates we're seeing in Nielsen AOC channels suggests that especially slowed quite a bit for you, but no longer outpacing Nielsen so much. Can you talk a little bit more about what's happening there?

Scott, can you take that?

Sure. Over the course of the year we've had to 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. 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 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 fulfill a more even set of our customers across the board.

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 if it would draw 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, and when we look at -- 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 initiative that drive the margin improvement in the deck. 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 don't -- and will not impact the cash flow expectations that we have as we get into next year and continue to spend.

Got it. Okay. What I was hearing, [Indiscernible] delayed and all the risky, it sounded like there was more carryover headwinds into next year, but my view is no. Not really at all.

I mean, we've got pricing to offset the inflation. And again, depending on where inflation starts to come in for next year, we are 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 fade inefficiencies that we've been plagued with all year. That's the first thing to come in. We'll start -- we really expect to start to see the fruits of the labor investment. We're already being some of that, but it's very, very early days. We've 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 the eliminates of the temporary operating inefficiencies that that will have as well as growing into our scale. So there's two factors there. And then longer term we'll start to move toward the higher percentage of our mix with higher fee 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 are very confident in the underlying cost structure and turnaround and believe this is temporary in nature.

Jason, I would just add that we were a little bit hamstrung because we had to delay taking our pricing till 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 k 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 it turned out to be this time.

Yes. I hear you but as Bill just went out last question, you had delayed that price increase a while ago and it's not at all an explanation for your margins are weak 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 are 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, makes sense. All right. Thank you. I'll pass it on.

Our next question is from Brian Holland with Cowen and Company.

Thanks. Just a follow-on on the pricing question. Was that a completely proactive move by you or a delay, or did you get push back from customers?

This is something we did proactively. We have not been in a good spot with fill rates. You can see there's a chart that Billy included in the deck, I think it's probably one of the pages. I think it's page 11. It's 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, 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 have the consumer trust that we have in our brand, our portfolio, our products, is to 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 just was -- 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 get this pricing into place. If we announced it, we'll get into place, and will do further adjustments as necessary as the majority of the industry has already done. We'll get those in place in reasonable order to get our pricing and gross profit back 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 gross margin. But Q4 is going to demand about 60% growth. It's going to be your heaviest Q4 from the media set spend standpoint, and then you're setting up '22 and '23 with hopefully, presumably, your best capacity situation or best -- 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 in presumably a better supply backdrop.

Let me take a shot at that, and 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 return to what they were. If 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 -- and made the commitments for our Q1 media investment based on what we know about the capacity that we have today. And as Heather said, we are already have operating capacity that will support growth. That's more than 40% ahead of what our current guidance is for this year. So there's fairly significant capacity. It's available to us in Q1 and we feel comfortable growing, 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 macking out each quarter throughout the next year of when did the line comes on, what form does it make, roles versus bag, 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 through the last year. And we already know that the first pinch will be, we can get a little tight on our roles as we watch the Ennis startup to the first-line coming up out of Ennis will be a rolls line. We need that to come on in the second quarter because those -- 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 our 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 things we're looking at. Literally quarter-by-quarter capacity coming online that would support the kind of advertising investment that would drive the top-line growth that frankly we expect and I think our investors expect.

The only thing I'd build on that is, we've been playing pedal break with advertising all year, based on capacity. It looks like that you can start to see it, even though again, as mentioned, 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 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 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 a nut you have to crack in November and December?

Without going into too much detail here because I haven't seen the net sales number, I've only seen the gross sales number, but let me give you a little bit of context. In 2018 and 2019, the 3 months of the fourth quarter, October, November, December, were all roughly the same size in terms of net sales. And it's 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 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 or bigger than November and December. And so it's not at 60% rate. It didn't have to be. It had to be at a level that if you delivered that across the quarter, we get you to a good place.

Okay. I follow that. But I guess my question. One of the things that I saw on the presentation, and I don't know if it's been in your previous quarter presentation, 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. I know you're making a very big promise to us. It sounds like you're making a very big promise to the retailers. And yet I just feel like given the environment is so challenging, you're talking about not doing as much pricing, you're talking about pushing up the European 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 -- I worry that you're like an old guy who keeps trying to run really fast and it keeps pulling his muscle. And it's like maybe you should just go slower. Not to say that there isn't -- the speed isn't a good thing, but maybe this environment and all that you're going through with COVID and labor and all that stuff just isn't too much because I worry that that little thing of those customer fines for Mr. 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 when 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 our 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 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 were going up. Looking at this, just to put it in perspective, this week, we have a fill rate that's ahead of where it was 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 comments 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. We feel pretty good about the trend line and the things that are driving the trend line are, we're getting much more consistent, reliable supply. The labor investment we made, it may sound like it was a 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 got. 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. 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 planning against normal

outcomes, but we are in a very unusual environment. We would've never dreamed that we would have 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 your scrambling to find a supplier that can get it to you. That just -- that's the world that we're living in, but we think we've got it ironed out. Frankly, there's only 8 weeks left in the year. So based on everything we know, we think we're in the right spot.

Okay. That color is very helpful. Thanks so much.

Yeah.

Our next question is from Rupesh Parikh with Oppenheimer.

Good afternoon. Thanks for taking my question. So Billy, going back to your comments in the call at the start, about consumption there is tracking in line with what you guys thought for the quarter. Curious on marking so far as tracking versus expectations. As you look at the consumption data, coming in line with your expectation s, 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 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, a line that's in between the two. We actually drew a line starting on the Nielsen Data back on March 6th, where we 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 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 in the years past, that'll be a little bit of a new learning for us. But so far, really haven't seen any variation. I don't. Scott, is there any other thought you have on that?

No. I think you've got it. And we've always -- we've tried to take a little bit of a haircut because of some of the challenges we've had with keeping fridges fall 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 is progressing as planned and we do have fair amount of spend left in the last 60 days here.

Okay. Great. Thank you. I'll pass it along.

Our next question is from Mark Astrachan with Stifel.

Yes. Thanks. Afternoon, everyone. I guess just building on the last question a little bit. If you take a look at your growth versus category growth in recent weeks, months, that Delta has narrowed a bit. 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 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 companies seemingly doing well. So does that all complicate where the long term outlook can be in Freshpet positioning their end?

Scott, you want to take that?

Yeah. So on some work, we've spent -- 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 our media, the ability to grow especially when we have product and stock. We were just talking about pet specialty earlier. I think when Peter asked that question. I think it was Peter who asked a question about or actually, it might have been Jason talking about pet specialty. Where we have product, we're seeing really nice growth and acceleration. So that's super important. One of the things that's really important to put into perspective is the majority of the growth that we're seeing in the category and for 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're seeing pretty nIce growth rates, especially in wet 10%, 12%, 13%, 14%, maybe even a little higher costs. 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 has been a little bit of a closing of the gap more recently. Now that's not to say overall category growth is still in the high single-digits, but a lot of that's being taken offline. So it's not as easy to see in the Nielsens. That's a dynamic we believe is going on, but there is -- when you see k these consumer trends over time, there is nothing that's leading us to believe that it's anything but accelerating specially as Millennial and Gen Z become more of the consumer base in the future.

Thank you.

Our next question is from Stephanie Wissink 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, Billy, this is best for you. Thinking about the volatility in the business, and as you look forward into 2022, 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 of it. Heather take comments on or comment on the adjusted EBITDA side. I think where you're going to see is that the consumption is going to the -- in absolute terms. It's 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 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 look at the Nielsen, 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 year ago just because the year-ago is going to be a little bit screwy. Heather, what do you think about the EBITDA?

I think as we look into '22 and beyond, the tailwind for improvement start to outweigh the headwinds as we know them today. I mean, of course, the short-term noise that's coming largely from inflation ahead of pricing, which will foot 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 the second. 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 Bethlehemic scale with the labor investment in place. So, you start to think about the elimination of the temporary operating inefficiencies because we've got now the right labor -- we've hired the right labor with more manufacturing experience who are then progressing through our Freshpet 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 in the overall pie chart of lines, and so the majority of our production starts to be on higher-speed lines. Having said that, there are a couple headwinds that we'll face along the way. So as we expand and contract, but in the near-term, expand production with our Kitchen South partner, that's going to be a headwind. And we've talked about that as being more -- less linear line item, that expands and contracts over time til it reaches its end-state when we're looking at the 2 billion in capacity. We'll start to see continued mix shift towards bags. Again, that's been really constrained this year. And so that we expect that mix shift to continue and that that will be a headwind. And the last piece is going to be, as we're standing at capacity, in whether it's more capacity at Kitchen South but more so at Ennis, we will have moments of un -absorbed cost that we need to manage there. 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 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 if 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 in more near-term, especially with newer technology that can -- could be a bit more complex in terms of just 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 get that into a steady run rate. But for sure, the line should operate with less labor -- less 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 1 in our Bethlehem Kitchen 1 back up. We'll 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 lines, as well as continuing to drive more automation either via retrofit or just continuous improvement efforts as we go.

Steph, I would add to what Heather just said is -- I think she's trying to walk a fine line between. We may have less overall people but the people that we have may be paying the more. Maybe 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 is going to evolve over time, but we are quickly realizing that there is 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 Freshpet Academy we launched for September. The early indications are very, very positive and we think we frankly need to keep looking harder at that, and 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 Moskow with Credit Suisse.

Thanks, guys. I thought 3 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've got the big advertising. I would've thought you've been able to keep -- would've been able to keep the 35% and higher. So why is it a little bit lower? Is it just distribution related again?

The 35 that was out there was, when we drew it on the chart it was up against the last 2 weeks that you're seeing in the year, which are notoriously low. 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 the cadence that you're expecting to see for the last month. If you look at the weekly then I know if you'd get though weekly drop, but there's a very significant variation in the weekly's 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.

Our next question is from Ben Bienvenu with Stephens.

Hey, thanks. Good afternoon.

Hello there.

So 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 re-priced 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 as a potential negative, pushing back against the positive improvements in overall productivity, as you scale out production to the earlier question around cash burn and 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 shutdown 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 we -- 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, 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 and work they are doing. And certainly it's one of the things that we'll factor in to making a decision on pricing.

Thanks. I'll leave it there.

Our last question is from Jon Andersen, with William Blair.

Good afternoon. Thanks for squeezing me in. 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 the current situation, particularly vis -a - vis chicken. How quickly can you effect the second price increase, and do we have any risk of the timing mismatch which seems to be playing a role in the EBITDA reduction this year, occurring in some fashion in 2022?

Let Scott take that one.

Yeah. So we're going to try and get -- in the next couple of weeks we should have 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. We'll know exactly 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 potentially cross over,a and what we believe the impact in velocity could be. So we've done all that work, we've -- we're ready for it. It's probably -- From when we make a decision, it's probably 120 days. So it would be sometime in late Q1, early Q2, would probably be when the second round of pricing will come into play. And at that point, we think -- not only will we be getting a little bit more normalized state, but we think there's some of the supply chain challenges will have moderated and we will be operating in a much more steady state. That's what our crystal ball does.

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 some of the challenges you had given capacity constraints, in whether it be fill rates, in-stock levels at retail. Are you concerned about any permanent impairment to household penetration, attrition in the customer base, and repeat rates falling off? How do we think about this? Is this just a transitory thing or is there some more permanent impairment we need to consider?

Now, primarily transitory. I mean, I'm sure there's some people that 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 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 10 years or so. And it's always recovered really, really nicely. And as soon as we've kind of gotten to a little more steady-state where we'll have product available, our advertising returns, we can see thing -- growth returning very consistently with what we've historically seen.

Maybe if I could just squeeze one more in on the media spend rate. What -- 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?

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

Yeah. I mean, we've -- in terms of this year, obviously, originally, our plans were on a lower guide on the top-line and we brought that up. So from a percent basis we are -- we will be off the long-term 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 profit pressures. Our plans 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% 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. Just -- I would like to end with a quote. Quote comes from Maurice Maeterlinck, who was a Nobel Prize winner in literature in 1911, from his book Our Friend 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 in alliance with us. " To which I would add, feed them Freshpet 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.