Q3 2022 Sovos Brands Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Ladies and gentlemen, thank you for standing by and welcome to Southern France.
Quarter of fiscal year, 2022 earnings conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one one.
Please be advised that today's conference maybe recorded.
Now I'd like to turn the conference over to you.
Josh Levine. Please go ahead.
Good afternoon, and thank you for joining us on the service brands third quarter fiscal year 2022 earnings conference call on the call today are Todd Lachman, President and Chief Executive Officer, and Chris Hall, Chief Financial Officer.
By now everyone should have access to the earnings release for the period ended September 24, 2022 that went out this afternoon at approximately four PM eastern time.
The press release as well as supplemental slides can be found on the company's website at IR Dot service brand Dot com and shortly after the conclusion of today's call and webcast will also be archived and available for replay.
Before we begin let me remind everyone that today's discussion contains forward looking statements based on the environment as we currently see it.
And as such does include risks and uncertainties.
If you refer to the company's earnings release as well as its most recent SEC filings you will see a discussion of factors that could cause service brands that the actual results to differ materially from these forward looking statements.
Please remember the company undertakes no obligation to update or revise these forward looking statements in the future.
We will make a number of references to non-GAAP financial measures. We believe that these measures provide investors with useful perspective on the underlying growth trends of the business and have included in our earnings release, a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures.
Lastly, please note that all consumption data cited on today's call. We will refer to dollar consumption as of the 13 week period ended September 25, 2022 and growth versus the prior year comparable period, unless otherwise noted with that I would now like to turn the call over to Todd.
Thanks, Josh I would like to start off today's call by discussing a few highlights on the quarter and then provide an update on the current operating environment before turning it over to Chris Hall for greater detail on our third quarter results.
As well as our updated outlook for the remainder of the year.
First I would like to highlight the recent one year anniversary of our IPO.
I couldnt be more proud of our performance over the last four quarters, having delivered 16% organic sales growth on an LTM basis, and recently passing $800 million of net sales growth has largely been volume at a period when most of our peers have not only bid.
Entirely reliant on pricing, but also without the ample opportunities we have to drive strong sustainable growth.
Our growth is particularly impressive in light of the challenging operating conditions for our industry.
Our largest brand <unk> continues to grow robustly, passing $500 million of net sales and growing 30% on an LTM basis.
And from a profit perspective, we have been able to essentially maintain our EBITDA, despite experiencing double digit inflation and numerous disruptions to our supply chain, while simultaneously stepping up investments to support our growth.
This is truly better what marketable last 12 months.
A nasty and perseverance against a very challenging operating environment, we purposefully built a team of agile energetic and talented leaders and it benefited from the industry experience and growth mindset.
We continue to add to our already strong team, we've recently announced that <unk>. Our meter has joined <unk> brands as our chief growth Officer.
<unk> brings within proven leadership and experience in building and scaling brands globally. Most recently a racket really successfully ran their north America hygiene business through the pandemic and prior to that at P&G, where he spent over 20 years in multiple countries and category leadership positions.
The confidence we have in our team and their proven ability to execute is a key reason, we can sustain our sector leading growth rates.
Looking to our third quarter results, we delivered another solid quarter generating $16, 9% organic sales growth.
Pricing was up 14, 4%, primarily the result of the previously discussed list price increases we've taken year to date volume increased two 5% inclusive of a negative eight point headwind to total company volumes from lapping two large volume driving events from a year ago.
For the new set at Michelangelo's brands that we did not repeat this quarter.
And as expected our gross and EBITDA margins showed nice sequential progress amidst persistently elevated inflation, even as we continued to support our brands with robust investment.
Our core business source, yogurt, and frozen, which represent 90% of our portfolio delivered strong dollar consumption growth rates of over 17%.
<unk> grew dollar consumption 24, 3%. Once again ahead of the category yogurt grew three 6% supported by pricing and finally frozen which includes entrees as well as waffles grew 16, 1%.
Nice acceleration versus last quarter, as our end markets support normalized and supply chain performance improved.
Shifting to our largest brand rayos surpassed $500 million and LTM net sales this quarter and is now over seven times larger than when we acquired it five years ago.
<unk> continues to be one of the fastest growing center store brands of scale in the U S and is well on its way to reaching $1 billion of annual net sales for.
For the quarter total rayos franchise dollar consumption grew 27, 7% led by nearly 20% unit growth that was driven by broad based gains in distribution and velocities.
Total rayos household penetration increased by 230 basis points versus prior year to 14, 8%.
As a result of adding new households across all categories.
Specific to source rayos dollar consumption increased by 24, 3%.
This rate of growth translated into a 100 basis point increase in dollar share versus the prior year to 14, 1%.
As dollars and units were driven by velocity and distribution gains.
Unit growth of 15% cumulative well ahead of flattish category unit growth.
Importantly, rayos sauce has only a five 3% share of category units today further highlighting the immense upside potential for this brand.
Additionally household penetration for rayos source.
Continues to grow.
Finishing the quarter up 160 basis points versus the same time last year to 11, 8%.
In addition to source rayos continues to build its newer beachheads in Pos.
Pasta and frozen.
Categories that we see as highly incremental opportunities for the brand.
In totality. These businesses have now surpassed a combined $100 million of IRI measured annual net sales.
With dollar growth up nearly 50% year over year on an LTM basis as well as in the third quarter.
Consumption is being led by double digit volume growth across all three categories as we implement our service brands playbook.
Working to increase physical availability on store shelves, and then supporting them by growing awareness.
While our market shares in household penetration levels today are relatively modest in the context of these multibillion dollar categories.
We see material growth opportunities for the <unk> franchise in these and other categories for years to come.
Turning new Sir.
Our yogurt business. Once again grew consumption mid single digits are the dollar basis with pricing and mix driving the growth much like the broader yogurt category, we are increasingly benefiting from a greater shift towards larger sizes as consumers seek out value.
We will continue to focus on the fundamentals to ensure we grow in this large and competitive category, while providing new and delicious offerings for consumers.
Lastly on British vendors sales trends were largely as expected. Our teams are working hard to improve performance as we continue to experience challenging trends in the core keto offerings.
Shifting to supply chain performance across manufacturing and logistics operations saw a marked improvement versus last quarter with service rates approaching target levels on source yogurt and frozen.
Our inflation, although we are starting to see cost increases moderate in some areas of our business. We continue to realize elevated inflationary pressures across our cost basket.
Most notably in dairy glass and pass through inflation from our North American co Packers.
To offset these costs. In addition to our pricing actions taken to date, we are executing against our full suite of productivity projects.
Including the automation of multiple packaging lines in our frozen plant in Austin internalization of fruit prep and our new supplier in Colorado and other process improvements across our entire network.
These actions will help improve our margins over time.
And as we've stated in the past, we will not hesitate to respond with additional actions if warranted by the market.
In summary, we are very pleased with our topline growth year to date and confident in our growth trajectory.
As a result, we are once again, raising our sales guidance for the year by $15 million.
Our two points of growth at both ends of the range.
We are excited by what we've achieved so far this year and what the future holds for our portfolio of brands led by Ross on the path to $1 billion of annual net sales.
We will not be offering any concrete guidance for 2023 today know that we will remain focused on capitalizing on the opportunities to drive household penetration expanding distribution and awareness and we will continue to make strategic investments from a position of strength spending behind sales.
Marketing innovation supply chain and other necessary capabilities to drive growth for our one of a kind brands even in the face of a challenging cost environment.
I will now hand, it over to Chris for more details on the quarter and our updated perspective through year end.
Thank you Todd and good afternoon, everyone.
Before I begin I also would like to Echo Todd's comment and complement our team and their execution in this challenging environment.
Third quarter total net sales were $208 9 million, a $30 2 million or 16, 9% increase over the prior year period.
Growth was entirely organic and was driven largely by price up 14, 4% in the quarter.
Our volume grew two 5% in the quarter inclusive of a negative eight point headwind due to lapping <unk> prior year volume driving events for the new <unk> and micro Angela brand, which we did not repeat this quarter.
Excluding <unk>, our consolidated organic growth would've been 28%.
Our core category soft yogurt and frozen drove our growth in the quarter and at the brand level <unk> remain the driving force behind our growth increasing net sales 33, 7% driven by soft.
Year to date basis. The total rail franchise has grown 31% and importantly, this is in line with consumption.
When comparing total Ram franchise net sales for 2019, the brand grew at a three year CAGR of 50%, reflecting our ability to sustain leading volume driven growth rates.
The <unk> <unk> net sales grew two 4% Michelangelo's declined three 7% adverse vendors declines moderated as expected.
Moving to the rest of the P&L adjusted gross profit of $62 3 million increased $12 2 million or 24, 2% year over year.
<unk> from our strong top line result.
Adjusted gross margins were 29, 8% net sales for the quarter, reflecting a 170 basis point increase versus the prior year period, and another quarter of sequential progress towards improving our margins.
Pricing increased productivity savings and mix were tailwind, helping to offset inflation and in line with our forecast for the quarter in the low double digit range.
The year over year gain for also balanced by lapping higher shipping and port congestion related costs.
Adjusted operating expenses inclusive of marketing and selling of $35 8 million increased by $8 7 million or 32, 3% over the prior year period, as we continue to invest behind our talent for ASIC capabilities to drive sustainable growth.
ROIC for the long term.
Similar to last quarter, we prioritize our growth investment to find as marketing impact R&D.
Total spend in the third quarter up nearly 20% versus last year and up over 32% versus the second quarter of 2022.
Which itself was also up materially on a year.
Year over year basis.
Opex growth also included public company costs, which were not present in the prior year period, when the company private.
Adjusted EBITDA of $29 5 million increased $3 7 million or 14, 5% versus Q3 2021.
While adjusted EBITDA margin was 14, 1% versus 14, 4% in the prior year period.
Net income for the quarter was $1 5 million or one per diluted share compared to a loss of $4 6 million or negative <unk> <unk> per diluted share in the prior year period.
Adjusted net income of $14 3 million and adjusted EPS was <unk> 14 per diluted share compared to $7 1 million and 10 cents per diluted share in Q3 2021.
Due to the timing of our IPO in September 2021, our fully diluted share count of 101 6 million shares in the quarter with 37% higher to the prior year period. They.
They represented a <unk> <unk> headwind to our Q3 2020 to adjusted EPS.
At the end of the third quarter cash and cash equivalents were $81 9 million and total debt was $482 2 million, resulting in a net debt to adjusted EBITDA ratio of three seven times.
As a reminder.
Last quarter, we entered into an interest rate hedge at cast the LIBOR rate for half of our debt at 4%.
I would now like to discuss our updated outlook for the balance of the year as some of the underlying assumptions that support it.
On the top line, we are raising our fiscal 2022 guidance to $840 to $850 million.
Reflecting approximately 17% to 18% growth.
This compares to our prior guidance of $825 million to $835 million.
Or it came in 16% growth.
Our updated guidance reflects 16, 3% organic sales growth year to date, and our confidence and a strong finish to the year.
Remember that this guidance includes the benefit of the 50 <unk> week in Q4.
Further this guidance also that the improved supply chain performance that Todd spoke about a moment ago, which had put us in a strong inventory position as we head into Q4.
Lastly, we continue to assume some normalization of elasticity into year end.
Regarding profitability, we are maintaining our full year adjusted EBITDA range of $116 million to $122 million.
With guidance at the lower Ed.
For the fourth quarter, we will begin to lap our first with price increase.
In addition relative to the third quarter, we are expecting a smaller mix benefit as well as slightly higher pass through cost from our North American co Packers.
Finally, I want to reiterate that we will continue to invest in this avnet to enable the multiyear growth opportunity that we see ahead.
This includes supporting our brands people and capability at.
These investments align with our primary focus on growth for our portfolio one of a kind brands.
With the particular emphasis.
<unk> two 1 billion.
Yes.
From a balance sheet perspective, we continue to expect that our leverage will be below three five times at year end.
For a summary of these and other guidance items. Please see slide 10, and our earnings slide deck.
Let me now turn the call back over to Todd for some final remarks.
Chris.
We are proud of what we've achieved in the first nine months of 2022.
We generated 16% plus organic growth materially raised our topline guidance multiple times.
And maintained our EBITDA range, despite the double digit inflation and numerous supply chain disruptions.
Further we have stepped up our investments behind our brands talent supply chain and capabilities, all with an eye towards driving growth well into the future.
As we have said many times in the past while sales growth is our top priority. We are also working tirelessly to improve our margins and deliver long term profitability.
With that Chris and I are now available to take your questions operator.
Thank you, ladies and gentlemen, as a reminder, if you'd like to ask a question you will need to press star one one on your telephone.
Please standby, while we compile the Q&A roster.
Now first question coming from the line of Andrew Lazar with Barclays. Your line is open.
Great. Thanks, so much I appreciate it.
Maybe to start off I think on the second quarter call you.
You had talked about expecting pricing to be.
Pretty close to what it was.
And <unk> pretty close to what it was in <unk> were around 9% or so it obviously came in much stronger than that so I was hoping first just to get a sense of what the what the differential was or what came in so much stronger on pricing than you thought.
Hey, Andrew I'm going to pass on on top of good could do good to hear from you if you're going to pass it to Chris.
Thanks, Todd Thanks, Andrew Yeah in Q3.
We saw really higher than expected pricing primarily from mix.
As we saw.
<unk> 30 above 30% growth that drove the majority of the upside on pricing.
And we just saw pricing flow through better than expected across the board. So we talked about in Q2 that we were not repeating a couple of events from the prior year that we knew would be elevated higher than we saw in Q2, we don't anticipate Q4 being at that same level as they have played back.
Our normalized promotional cadence in the quarter, but mix was a big driver in Q3, not only for pricing, but also for our gross margins got.
Got it and that was I guess the next question, which is I think you also had mentioned that you were looking for sequential margin improvement in <unk>.
Margins would still be down year over year.
Does that still hold even though your third quarter gross margins came in again far better than you had thought.
While we are very pleased with our margin in Q3 hundred and 70 points improvement.
Your over year 180 points better than Q2 that was a bit of a surprising are really driven by mix, primarily and then that flow through of higher pricing across the board.
And we don't anticipate that same level in Q4 Q4 is a higher <unk>.
Motion a quarter for us.
We carried into the winter months, we do promote more we do anticipate good solid margins.
At the same level, we saw in Q3.
We're also going to be a little bit higher we talked about high single double digit inflation coming across the back half of the year, We mentioned the North American co Packers passing across some additional costs that will be reflected more in Q4 than it was in Q3 that we see good strong margin, but not the same.
Level as we saw in Q3.
Thank you so much.
Thank you thanks, Andrew.
Thank you one moment please for our next question.
Our next question coming from the line of Jason English with Goldman Sachs. Your line is now open.
Hey, guys. Thanks for fitting me in.
Good afternoon.
A quick question on on your core business with Rayos sources.
We've been tracking the market share throughout the course of the year and there's been some ebbs and flows.
But right now if we look at whether it be your volume share dollar share in market.
You're tracking a bit below where you where we enter this year.
<unk> raised concerns that you could actually flip into declines now recently started to pick up off the lows I guess the question is what's driving the recent sequential improvement.
And how should we be expecting you to be.
The team to drive that higher sustained market share growth as we enter next year.
Hey, Jason it's Todd so look headline.
No concern that the growth on radio source.
It is going to is going to slow I mean, we've got total rayos franchises.
Reinforce just passed a half a billion dollars LTM seven times larger than when we acquired it up 30% versus prior year <unk> got source dollar consumption for the quarter up 24% and unit consumption up 14, 7%.
So.
What are those opportunities and actually on the <unk>.
We posted online there is a slide.
Seven.
Talks about.
The different opportunities for the.
For the for the business.
On the deck, but a couple of those things are.
Mid teens today in regards to.
Sure.
But you look at the category leader at 20% regenerate two times more dollars per TDP 223, and you look at everybody else like highest like 130 number of items 12 versus the category and our penetration although up significantly versus prior year strongly 12, and you've got the market leaders above above 30.
We grew units free grew dollars you got household.
<unk> up significantly so.
Sure, it's going to bounce around going back and forth. It's like obviously I don't mean to be flip but.
We can't control some of the elements that lead to be arithmetic behind what our share is what we can control is growing this brand.
The rates, we are today and the rates we are going forward. So we are controlling the significant amount of investment that we're putting behind the brand from a GDP standpoint, promoting and effectively making sure we're gaining more and more distributions yossi velocity up for the quarter, you see distribution and GDP is up for the quarter and actually if you look at the two.
<unk> fastest growing brands I'm, putting in quotes rayos and private label those are the two fastest growing of all the brands and rayos and private label grew across all generational cohorts and all income cohorts again for the second quarter.
Rayos sourced no volume from private label zero, but private label is growing almost the same rates as rayos private label is sourcing significantly from mainstream why because theres a lot of great private label source out there that's a perfect analogue for mainstream sources. There is not a private label source that's an analog.
For rail so private label growing robustly rayos growing robustly consumers are cutting back from out of home dining extending in chunks right now and they want great restaurant quality cuisine, and Theyre buying radio. So what we can control is keeping that radios franchise rocking and we are with source and as we talked about.
We're growing the other beachheads.
As well dry pasta soup and frozen.
Good stuff thanks for the context I'll pass on.
Awesome.
Okay.
Thank you one moment please for our next question.
And our next question coming from the line up.
Dorian Nelson with Jpmorgan Your line is open.
Hi, good afternoon.
Hi.
Actually following up on Jason's question more about just soften further and in particular <unk>.
How are the products performing well.
Your internal plans were when they were launched.
Yes.
What are the main.
Labor milestones that you'd need to hit for penetration rates to really begin to accelerate.
Sure.
It's probably too good to be talking to you. So.
So right now, let's so let's just talk suite positive frozen.
And then I know you specifically asked about frozen.
I'll be I'll be really honest I mean can we expect the rayos franchise today to be over half a billion dollars growing at 30%.
Yes.
In 2017 no.
We certainly understand why it's growing and it's growing fast and for that reason, we didnt expect that we would have created.
100 million dollar business combined growing at 50% of frozen pasta and suite and all of those businesses.
<unk>, our soup brand, our rayos positive rental rates frozen brand is growing faster than any other leading brand call. It top five top seven it's in the category today, So and they are all honestly exceeded expectations from the year that when we launch them, but we certainly are taking them for real now and we are doing everything we can to make sure we're grow.
We are robustly going forward now you asked a really good question.
All of those businesses and it's an enormous opportunity are less than 2% household penetration.
So <unk> got our soup business is less than 2% household penetration you've got our.
Dry pasta business, almost said it too and you've got our frozen business attitude. So its two or less from a household penetration standpoint, but what have we done to get it from zero to two in such a short amount of time.
Our <unk> playbook is pretty simple we have a great selling organization, we focus on banner penetration for HCV and item penetration GDP and we basically make sure that we've got a great tasting product the right package and we get it in as many stores many items the right assortment as we can.
And then right when we get that right level of distribution, we just really.
Driving significant awareness with us with our advertising and marketing spend that we have increased significantly year over year over year and you can see how much we increased our marketing and R&D spend just in Q3 alone which is also a differentiating factor you see a lot of peer companies cutting back on that we are titled to the metal.
On the increased investment so how do we double that to a 4% level of penetration or just.
Keep adding the right items in the right stores, adding line extensions to those brands, making sure that we're advertising, it's important to remember effectively with marketing and awareness.
We expect them to keep continue to keep growing into the future along with our source visits from quite honestly.
Along with new category entrants that we expect over the next several years as well.
Alright, thank you for that.
And as my follow up on that.
Early but.
Perhaps you could share how youre thinking about cost inflation as we go into 2023, what are some of the high level puts and takes and how much you might have already been able to lock in thank you.
Very good yes.
Yes.
Talk to specifically about 2023 today and what we are very confident and it is certainly the.
The continued momentum we have in the topline and as Todd has kind of laid out.
On the cost side from what we have visibility to today.
Feel confident in the plans that we've implemented or will be implementing across our productivity platform.
Value engineering on packaging as well as our net revenue management as we move forward.
So where our visibility stands today, we feel we've got that in.
Hand for 2023.
And we our sales team the same pressures that you are hearing about really across the board could be agro issues one day.
Starting to see relief on on it.
Trans Atlantic shipping, which is a.
Positive for us as we balance across all of those where we had visibility to that we feel confident in our plan. We don't hedge. So we don't have a lot of coverage right now for 2023 are entering into settlement agreements.
We buy a quarter out or a couple of quarters out on some of our specific packaging and even some of our raw materials.
Fully covered basically for 2020 to resolve it fell off at all in things like dairy and chicken and meet that basically covered for Q4 2022 entering into our agreement now for 2023.
Yes.
Sure.
Got it thank you.
Okay. Thank you.
Thank you and our next question coming from the line of Cody Ross with UBS. Your line is open.
Great. Thank you so much for taking our questions.
If we exclude the promotional event your sales would have been up roughly 25% in the quarter. Your guidance assumes a sequential slowdown of about five points or so in the fourth quarter. Even though you are lapping a much easier comp are you seeing anything in the marketplace right now that suggests there would be a slowdown.
No we're not.
But as we have talked about on our prior calls we as their approach in Q4 and as we put pricing in place mid Q3.
Couple of other items were assuming.
A normalization.
<unk> tier cities as we move forward, we are still in the uncertain environment.
Yes, Todd.
And we're seeing growth across all demographics income levels, but we're still modeling and assuming that there is going to be a return to.
To a more normalized less <unk> going forward if that doesn't occur that would suggest there could be upside to those numbers, but that's what we have baked into the guidance that we provided.
That's very helpful. I appreciate that.
Then as my follow up you noted the rayos franchises on path to deliver over $1 billion in sales can you just remind us and walk us through the building blocks to get there and are you concerned at all that the rayos franchise growth will cannibalize, Michael and closing frozen. Thank you.
Perfect.
Thank you very much.
Todd so.
I mean, we're not concerned about.
Cannibalization actually we've seen in accounts, where both of those brands are it's been quiet.
Incremental are combined.
Sure now of Michelangelo's wires frozen is about two two.
From call it roughly a one five when it was just.
And then Michael Angeles franchise before frozen so we've seen.
Adam if we see household penetration of the <unk>.
<unk> is significantly greater than it was just <unk>, Michael Angela So so no I mean, Michael Angelos.
It has a real reason for being.
Its price premium to the market leader, but rayos is priced super premium to the market leader.
And they are differentiated there's items on michelangelo's like.
Plant parmesan, that's different than some of the items on rayos such as.
Meatballs so.
They are differentiated and we don't see that as an issue now in terms of your bigger question what are the building blocks.
Number one is soft source is still the majority of our <unk> franchise today, even though we've created this sort of enormous other beachhead of non sauce businesses.
Just talked about.
So the number one building block.
Basically.
Continuing to grow source and taking it from call. It a roughly a 15 share today towards 25 share I think you've seen in previous slides that we provided rayos.
Rayos was greater than a 20 share in a lot of accounts to get it and that.
Correlates to just having the right number of items on shelf. So we see a clear path to getting rayos to a 2025 share Thats building block number one building block number to us.
Continuing to grow the three beachheads that we're in.
And those are dry pasta soup and frozen for reasons that I previously articulated.
We will be launching between now and the.
Time, we achieved that milestone into at least one maybe two other categories. So that's another building block as well.
Previous Pauls.
There are some very very close and international Okay non complex easy.
International for example, Canada wherever we sell very robustly, but we're under shared.
And that is another sort of lever to blow past $1 billion in net sales for the Royals franchise. So those are the building blocks.
Great. Thank you so much I'll pass it on.
Excellent great to hear from.
Thank you.
Next question coming from the line of Michael Lavery with Piper Sandler Your line is open.
Yes.
Good evening. Thank you.
Okay, just wanted to Hey, Michael.
Want to start with the long term opportunity and you pointed out slide seven there's a lot of ingredients there for a compelling sales story to the trade.
Just in terms of getting more items on the shelf.
Are you getting any pushback from retailers for sort of near term drill.
Driven by macro uncertainty is there any more hesitation.
Resets or to change the mix on the shelf or is it still sort of business as usual at the moment.
No I mean, I would say hey, Michael it's Todd predicted to hear from you.
No I think I mean, if we.
I mean, im looking literally malfa like latest numbers through <unk>.
We're still.
We've consistently grown distribution on this business for every quarter since we've owned it.
And that's ranging from.
Double digits.
Single digits, but we're growing distribution now high single digits for this last quarter $52 26 year to date 13 week four week periods.
We still have significant opportunity in a variety of our retailers.
For that so we're not seeing pushback.
But I think as I've talked about before it's not like we're the.
The objective is to go in and grab nine items.
So we look to grab two.
Two or three items, where we should retailers has been very receptive some of the areas that I've talked about before where my favorite statistics is that the.
The amount of profit that a retailer makes on a jar of rayos 24 hour source. Thanks.
<unk> three is basically.
Equal to what they sell a jar of the market leader for so the shelf price of the market leader is the profit that they make from a jar of rails, we are bidding.
Call It seven brands the fastest growing for the last five years or so.
If I could add items.
We're going to spin in the top three tiles and 75% of our items spending quintiles water to all of the rest Spain in <unk>. So if I can add.
Spending items that drive by category I think I've mentioned before.
<unk> two <unk> I need to look back maybe three we've driven almost 100% of the category growth in source. So.
And that's why you see them not only adding radios, but other premium players as well, which I think is great for the category. It's can training the consumer on.
Paying more for <unk>.
Slowly simard.
Basically kettle may saw setting, it's a real real boon for rail. So we are seeing no headwind in regards to gaining distribution for <unk>. So we don't foresee that in the future given the role that a place for our customers.
No that's great color and then just.
Just to follow up on some of the composition of the fourth quarter.
The <unk>.
Mix and price lift and a <unk> <unk> impact pretty well.
<unk> much.
Okay.
Thanks, Michael.
Thank you one moment for our next question our.
Next question coming from the line of Brian Holland with Cowen Your line is open.
Okay.
Good afternoon.
I guess.
Wanted to ask you about what we're seeing and you know you talked about lapping pricing in <unk>, obviously, we're going to see some sequential gross margin pressure I guess off of a really strong <unk>.
Relative to expectations.
We've heard from serving food companies about taking price.
And you guys are lapping pricing I didn't hear anything about taking any incremental pricing any reason why you would hesitate on taking another round of price action just in the context of obviously where were seeing your gross margin trend right now year on year year to date and what's implied for <unk> and also just given you know youre one of the more.
You have one of the more inelastic portfolio is that certainly we track I'm looking at the scanner data so with that as context, just understanding how you're thinking about pricing and you're right the price from here.
Yeah.
Today, we've been very successful on executing a couple around the pricing of an array of thought.
Taking you had pretty strong pricing across all of our brands to our portfolio.
As we think going forward considering.
The uncertainty of the economic situation consumers.
Consumers are not they're strapped for cash in 2023.
Our prudent approach to how to think about pricing going forward.
As I mentioned earlier, we believe the combination of pricing that we have.
Having the market now.
All with the productivity.
A tailwind we have moving forward given some delays that we had in productivity initiatives here in 2022 that we have adequate tailwind too to take us into 2023.
Based on the visibility that we have.
<unk>.
And we all know.
The price of Windows are getting tighter at retail.
And we're taking that into account as well, but we're we're pleased now with with our relative pricing position as we think about our net revenue management price gaps and things like that we plateaued at this position only focus on driving that top line maintaining volume growth very important to us that we grow our our unit sales.
And growing household penetration.
Our key brands, so we take all that into effect.
Iteration.
And yes, we base our pricing decisions on as I mentioned, we're very pleased with the pricing in the marketplace.
Currently.
Bruce I appreciate the color Chris.
And then.
Maybe following on to.
Mike <unk> question.
Slightly different way.
You know a lot of your runway.
A fair amount of your runway you sort of tied to the Incrementals city of this innovation pipeline, which which looks really robust I'm curious how retailers are responding in this environment to your new product launches.
So maybe this is I'll try to ask about.
The new soft frozen gelato, which I appreciate is small today, but just wondering you know how the how customers are reacting to your innovation how receptive they are.
In this environment and how the consumers are responding to maybe trialing, new products, but premium priced products.
So hey, Brian how are you doing I think the new can you wait in line like six times the last show to get a taste. So thats a lot of.
No comment they lost count okay.
Thank you.
Hey, how are you doing it.
It's Todd before I talk about a lot of I do want to reinforce.
And I don't think this is what you were.
Implied from the thing.
I know were saying I know you pointed out being innovation dependent.
Sue and dry pasta was launch were both launched four years ago and.
And they are both growing.
Basically soup is up 20.
Last quarter, 26% and units up 18 velocity up 25th largest brand growing household penetration dry pasta launched over four years ago.
50% and fastest growing brand in the top five as a suite units up 34% velocity, 56% in frozen is in its fourth year now launched three years ago and $1 55 units up 57.
I'm just saying from those are just great. Examples of yes. They were innovation for years ago, but they are seated in the marketplace doing extremely well we are doing everything we tend to continue to grow those businesses today, yes, there will be new beachheads.
In the future.
Tesla is very rigorously, but I do want to say source and soup in pasta and frozen, which combined to now equal $515 million LTM business growing at 30% are all pretty well established now in gelato.
So with better than expected as we talked.
As a matter of fact.
The sell in that we had HCV.
Not only in regards to what we've delivered but others in the marketplace or in our quickest ACB that we've seen on an item continue to build velocity.
We're launching some incremental items this year so.
Onshore tastes delicious.
But it's early so it has been in the marketplace.
Really started showing up in shelf in Q2 so.
We're pleased so far and more to come behind gelato.
Okay.
The address.
We're asking Brian are happy to take a different direction.
No no that's fine.
I appreciate that color.
Okay.
Okay.
Thank you our next question.
And our next question coming from the line of Peter Galbo with Bank of America. Your line is open.
Hey, guys. Good afternoon, thanks for taking the question.
You bet.
Chris maybe just to start and I know youre, not youre, not giving 'twenty three guidance, but can you just remind us.
How you contract for some of your inputs. So I mean, if you are seeing.
Relation and deflation in some of the major proteins and still seeing inflation in things like dairy just.
How far out when you do contract does it does it kind of go for next year or is it a three month window or can you kind of contract for the full year in one shot.
Yes sure.
Really very bye bye.
By category there are some some items that we will contract out a year. So for instance.
Tomatoes.
Tomatoes coming out of California.
Locked in the whole a whole year of the crop season.
We locked that in a few months ago. So we know exactly what our domestic tomato costs will be for the balance of.
Really 2023 through the next harvest.
There are items like <unk>.
Ray or wet eggs that will contract out for a year sugar, yeah things like that where the price loss.
Advantageous our work within our.
Our cost structure will go a year out and we have done so.
Other items that things like cheese butter, we may go three to six months out and we have done that in the past and we're looking at those agreements right now for 2023.
<unk> is an example of something we don't hedge it all so we're paying kind of the monthly SDA rates that are published every month things like resin.
These all will actually be on a variable is right and we typically pay for like the quarter. The average price for the quarter of the prior quarter will flow through to all of our lives packaging or raw input we treat each one differently.
And we do try to take advantage, where we can lock in prices, obviously thats been helps us lock in pricing.
Other market driving activities that we would anticipate and we are managing through our plant.
So it makes it will build across the year, where all of our forward bought on.
So the level of our input costs.
Great.
Very helpful.
And maybe just as a follow up Todd you know theres been a couple of questions and obviously some some headlines just around.
European natural gas prices, and obviously youre, a large co packer in Italy.
I would think he uses a fair amount of natural gas. So just kind of how youre thinking about that are working through that with them as soon as we get towards the winter months and into next year. Thanks very much guys.
Yes, you bet.
Yes, absolutely.
Italy based manufacturer La Regina.
<unk>.
It produces the vast majority of our source great.
A great partner for us who have been they've grown with us.
Wherever a $60 million to $70 million business, we bought it to over $500 million today, they've been willing to make the investments at that plant to drive capacity automate.
And cost savings along the way.
We talk to them daily.
They feel they are a very good position on.
The reserves that they have in place.
To run their plants.
Gas and hydro based production they have Italy is the country as well as a very good job of.
Diversifying their there where.
Or are they acquire their gas from another other types of energy.
So we feel they feel that they are in a good position now yes costs are up than we baked that into our our projections as well.
Confidence in the ability to continue to supply to our very high growth rate.
In addition, we are in a very strong inventory position today, we've been running the plants very great.
Very aggressively.
Entering into Q4 this year to great.
Troy position.
And then finally, we have the Alba plant down in Georgia, which will be capable of producing up to 30% of our requirements.
Top of what we can produce at Italy, so with that we feel like we've.
<unk> got ourselves well covered and we will continue to make they make the adjustments in the plasma of EQ to ensure we can meet that what we're seeing is a 30 plus percent.
Growth rate area.
And the <unk> covenant.
Our next question and our next question coming from the line of Robert Moskow with Credit Suisse. Your line is open.
Hi, Thanks.
Maybe this has been asked already but.
I was wondering why you chose not to repeat the promotions that you cited the prior year end.
It caused us the eight point volume hit.
And maybe more broadly speaking.
Is your promotional activity down a lot this year from an overall perspective.
Or does it all kind of even out when.
You go quarter by quarter.
Yeah, no very good.
The first question is specifically on why not repeat the event.
May recall, if you go back to prior earnings calls.
We had some capacity some service issues, specifically on Michelangelo's and our profile our trade business.
We worked across Q1.
All of our product.
Early because I recall, we had a tornado hit our pasta plant our third party part of the plan.
So we were we knew we were going to be up against some capacity constraints as we are going to be hedging across Q2 into Q3. In fact, we we then handful basically all of our frozen.
<unk> events in Q2 because of that supply the supply challenges we did.
Exited Q2 in a much better position.
And we put those promotions back into the marketplace in Q3 and in fact on frozen we are very pleased with our consumption results. The combination of rayos and my plans are frozen.
40% growth in consumption during a quarter, where our shipments for for Michelangelo's were below year ago, because of not repeating the event early that capacity constraint and really just get efficiency of the program itself led us to.
The path to make that to make that choice.
And then on a general question on promotion.
We maintain a lot of the elements of our promotional plans that we laid out in place.
Pre Covid era.
It's Kelvin.
We have taken.
Lift prices there are areas, where we have risen our key promotional price point.
There are situations, where we might have reduced.
Frequency, we may have reduced duration of events.
But overall as a general statement, we've been successful in maintaining a good draw on the level of in store promotion.
While as Todd mentioned, we've elevated our investment in store marketing.
To support the brands, even as our price points are increasing.
We see that continuing into Q4 and beyond.
We have good strong a greater portion of our retailers good quality merchandising and even if the situations where a rep.
Bringing our debt, we're still seeing very nice lift.
The promotions so we're not we don't see a big.
<unk> and an uptick in our promotional strategy that really is the.
Same basic strategy looking backwards as well looking forward.
Okay. Thank you.
Thanks, Rob.
Sure.
Thank you one loan for our next question.
I'm showing we have a follow up question from Brian Holland with Cowen Your line is open.
Yes. Thanks I appreciate you letting me sneak a follow up back in here, but maybe just.
In the <unk>.
Given everything that we've talked about today all the puts and takes obviously your topline continues to perform as it has.
Significant momentum, but also makes the comps incrementally tougher as we go forward and then obviously the puts and takes below the top line inflation et cetera productivity.
Can you help us help us give us a sense of as we look into 2023, whether that shapes up as youre seeing it right now.
And on algorithm year I think your guidance at the time, the IPO was sort of high single digits top line low double digits EBITDA I'm. Just wondering if you feel like you've got the levers in place to drive that next year.
Yes, I mean simply put Brian first of all good to have you back Boomerang Boomerang question back into the mix, but.
Yes, we feel we've got the levers in place to have an on algorithm year in 2020.
Okay.
I'd say anything more than that but I will basically assertively say, yes.
It's just the things that you needed to be I appreciate it. Thank you.
Got it.
Okay.
So is that.
I was just fine.
Yes.
Great. So look thanks.
Thanks again, everyone for joining us showing an interest in the silver <unk> brands.
Story, we look forward to engaging with many of you in the coming weeks. Please feel free to reach out to Josh for follow up questions. Until then have agreed evening and take care. Thanks, a lot everyone.
Ill.
Ladies and gentlemen that doesn't go conference for today. Thank you for your participation you may now disconnect good day.
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