Q3 2022 Real Good Food Company Inc Earnings Call
Greetings and welcome to the real good food company third quarter 2022 earnings conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
Now my pleasure to introduce to your host Christopher R&R, Vice President Investor Relations. Please go ahead Sir.
Morning, and welcome to the real good food Company third quarter 2022 earnings conference call on the call today are Brian Friedman Executive Chairman, Gerry Law, Chief Executive Officer, and Akshay jump Alley, Chief Financial Officer.
You may access our third quarter earnings.
Published at approximately 430 P M Eastern time yesterday.
If you've not had a chance to listen let me it's available on our investor portion of our website at Www Dot real good food Dot com.
We begin I'd like to remind everyone that certain statements made on this call are forward looking statements within the meaning of federal securities laws and are subject to considerable risks and I'm sorry.
These forward looking statements are intended to qualify for the safe Harbor from liability established by the private Securities Litigation Reform Act of 1995.
All statements made on this call today other than statements of historical fact are forward looking statements include statements regarding our projected financial results, including net sales gross profit gross margin adjusted gross profit.
Margin and adjusted EBITDA as well as our ability to increase our net sales from existing customers and acquire new customers introduced new product competing successfully in our industry implement our growth strategy and effectively expand our manufacturing and production capacity.
Forward looking statements made on this call represent management's current expectations and are based on information available at the time such statements were made.
Such statements involve a number of known and unknown uncertainties, many of which are outside the company and can cause future results performance or achievements to differ significantly from the results performance or achievements expressed or implied by such forward looking statements.
Important factors and risks that could cause or contribute to such differences are detailed in the company's filings with the securities and Exchange Commission.
Except as required by law the company undertakes no obligation to update any forward looking or other statements herein, whether as a result of new information future events or otherwise.
In addition throughout this discussion we refer to certain non-GAAP financial measures, which refers to results before taking into account certain one time or nonrecurring charges that are not core to our ongoing operating results and which we believe better reflect the performance of our business on an ongoing basis, our non-GAAP financial measures, including adjusted gross margin and adjusted EBITDA.
Perfect.
A reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure.
Put it in our third quarter earnings release, which is available on our website under the investors tab.
With that it's my pleasure to turn the call over to the mill good food companies Executive Chairman Chairman Brian frame.
Hey, Thanks, Chris Good morning, everyone and thank you for joining us today on our third quarter earnings call I will briefly review, our third quarter highlights and discuss the reasons. We believe we're well positioned for long term growth.
Jerry will cover operations and Akshay will then review our financial results and outlook in more detail.
After that we'll open the call for questions.
Starting with our financial highlights for the third quarter net sales increased 63% to $37 6 million as compared to $23 million in the third quarter of last year.
Third quarter sales grew 200% on a two year stack basis, which is an acceleration compared to 190% growth in the first half of 2022 and 116% growth in full year 2020 one on the same basis.
Sales in our retail our measured channel increased 40% as compared to the prior year period, driven by strong velocity gains in our core products.
The Unmeasured channel grew by 76% this quarter generally in line with our expectations, we have clear visibility on upcoming promotional events and have secured incremental distribution in the unmeasured channel for the remainder of 2022 as a result, we expect unmeasured channel sales growth to accelerate further in the fourth quarter.
In addition to the to the continued strong velocity growth and expanded distribution expectations for our current items in the unmeasured channel for the fourth quarter of 2022 and beyond we expect further expansion of our breaded poultry distribution in the first quarter of 2023, owing to strong velocity performance and existing.
Distribution.
Although year over year revenue growth. This quarter was strong we are not pleased with our distribution growth.
<unk> grew by 8%, which was less than expected and resulted in revenue coming in below our internal expectations. Our growth was driven primarily by strong velocity growth, which continued to exceed expectations.
Owing to the slower than expected distribution gains in the third quarter. We now expect sales for 2022 to be towards the low end of our guided revenue range of 155 million to 160.
Fourth quarter revenue is expected to be by far the highest revenue quarter sensor family.
Retailers are taking note of our strong velocities and we are now seeing renewed distribution growth in the fourth quarter.
We expect the trend to continue into 2023, three factors underpin our positive outlook for 2023, one significant wins, we have recently secured into strong baseline velocity growth and three exceptional new product philosophy.
We have secured 39000 distribution points for our new products, which represents an approximate 24% increase as compared to our current distribution footprint of approximately 160000 points of distribution.
These distribution wins include 15000 incremental distribution points since last quarter, including two large retailers committing to a nationwide rollout of our breaded poultry in 2023. Additionally, we have secured expanded distribution in the club channel.
Baseline velocities grew 37% this quarter and continued to exceed our expectations with velocities for new products trending significantly higher than our base products.
Typically our breaded poultry items are performing in the top quartile of all conventional skus with velocity that are eight times our base business.
In fact at one large national retailer are low carb high protein chicken Nuggets were the number one health and wellness item in the category last week and even more impressively. They were in the top 12% of all frozen poultry and meat items. This includes conventional producers such as Tyson and Purdue.
On our last call, we were averaging approximately $65 per store per week I am pleased to report that as of last week.
Item sales grew to $120 per store per week and that was without discounts and other retailers, we're seeing similar performance.
The aforementioned new distribution gains combined with strong base business philosophies and another solid slate of new product innovation gives us confidence that we will grow sales in 2023 to at least $200 million representing growth of approximately 30%.
Gary and Akshay will speak to this in more detail, but I wanted to touch on our margin EBITDA performance this quarter, which was disappointing and missed our internal estimates due to what we believe or two temporary headwinds first efficiency gains from our Bolingbrook, Illinois manufacturing facility were delayed.
<unk> and a drag on our margin performance this quarter.
The good news is we are seeing meaningful improvements on this front in the fourth quarter and second commodity costs were larger than anticipated headwinds to margin.
That being said cost per chicken cheese, and bacon have come down significantly as of late and we expect this to have a six to 10 point positive impact on our margins in the fourth quarter.
As such we still expect to be adjusted EBITDA positive in the fourth quarter of 2022.
As for 2023, we expect adjusted EBITDA in the mid to high single digit range, driven by lower commodity costs and to a lesser extent lower labor and overhead costs and cash flow from operations is also expected to be positive in 2023.
Next let's take a step back and look at the current state of their health and wellness market, our total addressable market and how our brand positioning is resonating with this broad consumer base. Our total addressable market is the 242 billion health and wellness industry, which according to spins grew 6% year over year with an 8% three year.
CAGR, the frozen health and wellness sub category continues to outpace overall health and wellness growing at a 9% three year compound annual growth rate in about six 5% year over year.
It is important to note that the frozen food category has historically performed well during recessions as it tends to benefit from consumers trading down from eating out to eating more at home also private label penetration in the frozen category is relatively low and it's about 9% to 10% as compared to 'twenty to 'twenty two.
2% on average across all food categories, and private label penetration in the health and wellness frozen segment is even lower than in the overall frozen food category as such trade down risk within the category to lower priced private label options is also limited.
Additionally, our distribution footprint is focused on retailers that deliver value to their consumers and we have low concentration with what I'll call a luxury high end retailers that typically lose foot traffic during economic downturns.
Our brand promise of three primary claims low carb and little to no sugar high protein and clean ingredients products with these attributes are growing well above the growth in our overall total addressable market.
All things considered the categories, we compete in remain highly relevant as evidenced by their large sites and strong growth profile. Moreover, there are no signs of a slowdown despite the lapping of the pandemic bump and or an economic recession as frozen foods, historically performed well in a recessionary environment.
As for our brand health, we track ourselves against four indicators household penetration repeat rate social community growth and engagement and velocities.
With household penetration acquainted numerator data as of November 1st the real good foods brand household penetration.
Is eight 5% up from eight 3% in July seven 4% in March and four 8% in September of last year.
This means approximately one in every 12 households in the United States has purchased our products in the past 12 months. Our household penetration continues to rank second amongst all health and wellness frozen food brands behind only Annie's brand with over $500 million in retail sales.
Increasing household penetration demonstrates how well our brand position resonate and how quickly we have connected with a broad consumer base. We view this as a leading indicator of future growth.
Turning to repeat rates they continue to be in line with industry averages of 32% in the most recent trailing 52 week data as of November one 2022.
Regarding social community growth, we continue to grow the real good foods' online community in the third quarter, our social and digital teams continue to outperform we generated over $24 5 million organic impressions and 228 million total brand impressions. We also acquired 9000, new SMS text subscribers and added 26.
Followers on Instagram, bringing our total to over 442000 hygiene followers.
We continue to believe that using micro and nano content creators to spark a fintech peer to peer conversations is a better use of marketing dollars from traditional advertising base.
Based on a number of followers and subscribers I can say, it's working and it's efficient. This is reflected in the strong returns we get on our AD spending in fact, our returns on AD spending as measured by third parties average four to six decks, which are significantly higher than our peers on average our retail partners. Appreciate how we drive new consumers to the cat.
So we participate in allowing real good foods to truly grow the frozen category with consumers new to frozen foods, rather than taking share from others or close connection to our consumers and enable us to efficiently test demand for new products before they launch on shell to sleep, the greater household penetration and incremental category.
Not only for us, but for our retail partners as well.
This strong brand health indicators underpinning competence to achieving over 500 million in sales long term now.
Now moving to innovation, our strategy can be characterized as fewer bigger better and faster in 2022, we launched crispy chicken shell tacos breakfast Spike bowls, and most recently chicken Nuggets chicken strips and multi serve Asian entrees, our innovation has extended the brand into large high velocity categories.
Representing an approximately 5 billion in aggregate retail sales. We believe these categories are also ripe for disruption because there are a few to no healthy nutrient dense options available today that are craveable.
Based on the new distribution, we have secured in the strong velocities, we're seeing them to these products, we expect them to contribute materially to our 2023 revenue.
As we look forward to 2023, we think it is appropriate to share with you a sampling of our 2023 new product innovation.
These are products, whose development is completed are ready to manufacture at scale and are ones that we are actively showing through our retail partners.
There will be additional items introduced in 2023 as we continue to run our innovation flywheel, but these products are far enough along in their commercialization cycle that we feel it is appropriate to share further details.
First we have a breakfast THAAD and that is frankly, a step change improvement over our original product that's new.
New bond is light fluffy lowered carbohydrates and high protein the eating experience.
No different than the high carbohydrate bonds that were all familiar with our breakfast sandwiches who've been on the shelf for three years and continue to be the leading health and wellness item in the breakfast category.
But through our continual improvement process and as our brand scales into more and more households, we know our product must taste better than their conventional counterparts internally. We see are iterative process is no different than what we have lived through with meaningful consumer technologies such as the iPhone.
The improvement in product quality and this new version of our bonds is analogous to the improvements between the iPhone three G and the iPhone 14.
We expect this improved offering of flow through our supply chain late in the first half of 'twenty, 'twenty, three which will be communicated through our social footprint in the near term.
Second.
We've developed a proprietary low carbohydrate flour tortilla system that will be incremental to our current chicken and Turkey offerings.
Unlike the breakfast sandwich this new product will be on shelf alongside our current chicken tortilla items.
Would note just as Andy says 10 different enchilada offerings, we too have permission to extend beyond our original products. We will see this news for Tia used with their new creamy poblano soft himself with chunks of season chicken breast it could be one of our most craveable items today.
Third we are taking the same for Tia system and rolling out a new low carbohydrates cloud are available and salsa Verde salsa Rojas season, chicken southwestern chicken and embarrass breakfast offerings. In addition to having this item available in the frozen section. We are pleased to report that we will be extending into a second.
<unk> state the refrigerated aisle.
There's significant demand for this item in the perimeter of the store and we have the manufacturing capability to fill this demand.
I expect to see flowers in the refrigerator door near you as early as the first quarter of 'twenty 'twenty three.
Finally, we're leveraging our breakthrough breaded poultry system and will expand into the snacks and appetizers category with new boneless bites and various flavors, such as zero sugar Hickory barbecue and garlic parmesan.
We'll be the only low carbohydrate high protein boneless chicken wing in the category and I would also remind everyone that our novel Breading system is what enables us to achieve this incredible value proposition.
I'd now like to turn the call over to our CEO Jerry law to provide an update on Bolling Brook in our operations more broadly.
Thank you Brian Good morning, everyone and thank you for joining us on today's call I'm pleased to report that our Bolingbrook, Illinois facility is continuing to ramp up its phase startup of production.
I'm very proud of the team and how far we've come since opening new facility in March this year.
Bolingbrook enables our entry into <unk>.
Exciting new categories and it gives us much needed capacity to meet the growing demand for our new products and existing products.
Twice the size of our existing city of industry facility in California, Our Bolingbrook facility is on pace to add approximately $200 million and incremental capacity by the end of this year and we'll have the ability to produce approximately 250 million to $300 million in sales at full capacity.
This will enable us to match capacity with a long and short term demand for our products and will also significantly accelerate our margin improvement efforts.
Today, we have six production lines up and running in the facility. We are currently in the final phase of the facility startup.
And as a reminder, the ramp up is not linear.
And the last fees will yield the greatest efficiencies.
We have built significant flexibility into the plant design such that is capable of producing the vast majority of our new and existing products.
Products made at the new Bolingbrook facility will have structurally lower cost as compared to those made in city of industry facility.
Driven by lower labor costs, higher throughput and bowling books proximity to lower cost raw material supplies and our major distribution hub.
Overall, we believe this new facility brings us closer to meeting our long term goal of achieving $500 million in revenue well currently accelerating our margin improvement efforts.
We've already seen the impact Bolingbrook has had in terms of successfully relieving pressure on our city of industry plant, which was operating above 100% capacity utilization through the first quarter and into the second quarter of this year.
With the city of industry plant running at a more normalized operational level. It has allowed us to focus on continuous improvement and in turn we expect to improve yields and drive efficiencies.
Specifically labor costs in our city of industry plant for third quarter came down 800 basis points sequentially to 11% of net sales.
This improvement was the primary driver of the approximate 260 basis point sequential improvement in labor costs in the third quarter.
Before I turn it over to Akshay I would like to touch on our margin performance in the third quarter and provide drivers for the fourth quarter and into 2023.
Margins for the third quarter came in below our expectations.
Owing to a slower than anticipated ramp up inefficiencies at bolingbrook and a higher than expected.
Raw material costs.
During the third quarter, we experienced what I would characterize as historic blues related to excessive equipment breakdowns as we strive to perfect production processes.
Our breathing system for the newly launched the breaded poultry and Asian items is novel and its proven to be a tough on the equipment, we installed requiring reengineering to harden the equipment to improve reliability.
I believe we are the first company to produce breaded poultry with such a novel Breading system its scale and the operational issues, we encountered where what we would characterize as sort of blues and these impacted our efficiencies significantly in the quarter.
Managed 14 plants in my previous role with J&J snack foods, which included hundreds of startups that were similar to and frankly much more complicated than what we are experiencing are bolingbrook plant.
Encouragingly efficiencies and throughput at the plant have improved significantly in the recent months or weeks.
During the quarter, our overall efficiencies in the plant are up over 20% and the throughput has more than doubled as additional lines have come online.
We expect to be a targeted efficiency levels by the end of the first quarter of 2023.
As bolingbrook becomes a bigger portion of our production mix combined with continued efficiency gains at city of industry from right sizing the operation.
We expect our labor costs to continue to come down significantly.
Specifically, we expect to lower labor costs by approximately 500 basis points and bring them down in line with industry standards of 5% to 10% of sales.
We expect the major portion of this opportunity flow through within the next 12 months as efficiencies are optimized in both plants and Bolling Brook becomes a bigger portion of our production mix.
Additionally, higher sales will drive plant utilization rates higher and allow us to leverage lower overhead costs.
We expect a two to 300 basis point, improving margins driven by overhead leverage in 2023.
Lastly, bolingbrook has enabled significant productivity savings that have already started to accrue in the latter half of the third quarter and will build as we move into 2023.
These include the self manufacturing of our chicken tortillas and cooked chicken.
Which on a combined basis are likely to drive approximately 200 to 400 basis points of margin improvement.
As for direct material inflation, we experienced a larger than expected impact this quarter driven in part by high inventory costs carrying over from the second quarter.
As well as continued year over year inflation in the third quarter.
The good news is the commodity costs have continued to come down since our last call and are now expected to be a much larger tailwind to margins in both the fourth quarter of 2022 and in the 2023.
In summary.
Although we are not happy with our third quarter results due to these margin pressures.
Areas that negatively impacted our results have shown significant improvement in the fourth quarter and are expected to improve further into 2023.
As such we continue to expect to be adjusted EBITDA positive in the fourth quarter of 2022, and expect 2023 adjusted EBITDA to be in the positive mid to high single digit millions of dollars range.
We have strong visibility into the drivers of our continued margin turnaround and feel confident in achieving our outlook.
It's an exciting time at real good foods and I'm thrilled to report the tremendous progress our supply chain and operations teams have made.
All in order to support our growing demand.
I still believe we are in a very early innings of growth and are well positioned to capture market share in the frozen categories in which we compete.
Now I would like to turn the call over to Akshay, Our Chief Financial Officer, who will walk you through our third quarter financials.
Thank you Jerry and good morning, everyone turning to our financial results net sales in the third quarter were $37 6 million, an increase of 63% as compared to the third quarter of last year sales.
Sales growth in the third quarter was primarily due to strong growth in our core products and the unmeasured channel.
In the Unmeasured channel growth accelerated in the third quarter to approximately 76% as compared to 31% growth in the second quarter, the sequential and year over year acceleration was driven by distribution gains and to a lesser extent velocity increases we.
We have clear visibility on upcoming promotional events and our new products and their distribution are performing very well.
As such we expect Unmeasured channel sales growth to accelerate further in the fourth quarter.
As for 2023, we expect another strong year of growth in this channel driven by expansion of our breaded poultry items, starting in the first quarter of 'twenty three.
Significant new distribution wins already secured as well as commitments to certain planned promotional events.
In the retail channel growth slowed sequentially to 40% in the third quarter as we did not achieve the distribution gains that we were expecting.
The lower than expected distribution growth was partially offset by continued strong growth in baseline velocities as Brian mentioned, our distribution performance has already improved and we're bullish about our prospects for 2023.
Three factors underpin our positive outlook for 'twenty 'twenty three revenue growth.
One significant wins, we have already secured two strong baseline velocity growth and.
And three exceptional new product velocities.
We have recently secured approximately 39000 distribution points for new items introduced in 2020 two.
It represents an approximate 24% increase relative to our current footprint of 160000 distribution points.
Moreover, these new items at velocities that are already three to eight times our base business as such these new distribution wins are likely to be materially added to.
To overall sales growth in this channel and we expect another strong year of growth in this channel in 2023.
Our third quarter gross profit was 1.8 million, reflecting a gross margin of four 7% of net sales as compared to a gross profit of $2 4 million or a gross margin of 10, 2% of net sales in the third quarter of last year.
The decrease in gross margins was primarily due to an increase in manufacturing costs related to the ramp up of our new facility in Bolingbrook, Illinois, and higher raw material costs for perspective.
We now operate two facilities plan overhead costs were approximately 760 basis point drag on margins this quarter as compared to a year ago.
Adjusted gross profit during the quarter was $5 9 million, reflecting an adjusted gross margin of 15, 8% of net sales as compared to $3 9 million or 17, 1% of net sales in the third quarter of last year.
We had expected margins in the third quarter to be lower than the second quarter, owing to higher commodity cost drag and inefficiencies related to the bolingbrook ramp up however margins came in below our expectations, primarily owing to greater inefficiencies related to the bolingbrook ramp up and do it.
Lesser extent higher than expected direct material costs.
We expect adjusted gross margins to improve sequentially in the fourth quarter, driven primarily by lower direct material costs and to a lesser extent lower labor costs driven in part by bolingbrook efficiency gains.
We expect to exit 2022 with structurally lower costs, especially on the labor front.
Beyond 2022 we have a long runway of productivity savings that will drive incremental margin expansion.
Additionally, as Jerry mentioned the cost of our key commodities have come down significantly in recent months.
And if we were to lock in our key commodities at current spot rates our margins in 2023 would be 600000 basis points higher.
Total operating expenses were $12 4 million as compared to $7 9 million in the third quarter of 2021.
Adjusted operating expenses increased by approximately $3 4 million to $10 7 million in the third quarter was 22.
As compared to $7 3 million in the third quarter of 2021. The increase in operating expenses was primarily driven by increased personnel expenses related to the build out of the company's operations finance and leadership teams as well as increased investments in research and development.
Adjusted EBITDA totaled a loss of $3 8 million as compared to a loss of $2 7 million in the third quarter of 2021.
This was below our expectations driven entirely by lower than expected gross profit.
We continue to expect positive adjusted EBITDA in the fourth quarter, which would be a significant sequential and year over year improvement.
The improvement is expected to be driven by lower direct material costs and to a lesser extent lower labor cost and fixed cost leverage.
Now shifting to our balance sheet and cash flow.
As of September 30th 'twenty, 'twenty, two we had cash and cash equivalents of $5 4 million and total debt of $61 4 million.
We had $43 3 million drawn on our revolver at the end of the quarter.
With $31 7 million in available capacity, which combined with our $5 4 million cash balance implies a total liquidity position of $37 1 million.
Cash burn in the quarter was approximately $19 million as compared to 24 million in the second quarter. After 19 million cash burn this quarter 7 million was related to core working capital.
We expect core working capital to be a source of cash going forward driven by the lowering of inventory to more normalized levels.
Additionally, we expect losses to narrow significantly alongside our transition to positive adjusted EBITDA, starting in the fourth quarter and the positive cash flow from operations in 2023.
As such we have sufficient liquidity to fund our current needs and execute the plan. We have laid out as a reminder, it's important to note that the bolingbrook facility and equipment is being leased with costs flowing through our P&L and there is no capex spending associated with that.
Now turning to our outlook for 'twenty, 'twenty, two and 'twenty 'twenty three but.
2022 we now expect net sales to be at the lower end of our guided range of approximately 155 million to $160 million.
That thing in 84% to 90% increase as compared to 2021.
Adjusted gross margin is still expected to be in the range of 19% to 21%.
And adjusted EBITDA is expected to the lower end of our guidance range.
Or a loss of 7 million to $9 million.
For 'twenty 'twenty three we expect net sales of at least $200 million.
Adjusted gross margins of at least 24%.
Adjusted EBITDA in the mid to high single digit million range.
And positive cash flow from operations.
Long term, we continue to expect net sales of approximately 500 million adjusted gross margin of 35% and adjusted EBITDA margin of 15%.
This concludes our prepared remarks, I would now like to hand, the call over to the operator to begin our question and answer session.
Operator.
Thank you.
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One moment please for questions.
We have a first question from the line of Jon Andersen with William Blair. Please go ahead.
Hi, Good morning, everybody good morning, John .
Good morning.
I just wanted to first touch on me.
The comments around distribution in the third quarter.
Is there any any anything more you can say about perhaps what what caused the.
Lagging kind of you achieving some of the points of distribution that you would hope for in the third quarter and.
And then also as you think about.
The the distribution that you have secured which sounds significant going forward.
How we should think about that kind of phasing in how much of that is already in place and how much is kind of come and over what time period.
Sure for the third quarter I think we saw many of our retail partners really kind of not lean in with us and give us.
All of the stores that they currently.
So they have and really kind of took a little bit of a wait and see approach.
The good news is because our velocity are so impressive and the products are performing so well.
We secured 39000 new distribution points.
And so the way, we see that kind of rolling out is.
Somewhat in Q4, and then into Q1 and Q2.
I think that that number will continue to grow in terms of new T V P.
As we go into 2023, but.
But I did want to just point to two there were two large retailers that have now committed to a nationwide rollout of our breaded poultry and you know what so.
Exciting as you go into 2023, John It's I mean the.
The velocities that we're experiencing what these products are five to eight times are based products.
So these new distribution points are going to be highly productive for the company.
So that's kind of how we see this playing out.
Yeah. That's that's terrific very helpful and I guess to follow on that point Brian .
Last quarter, you mentioned that some of the breaded poultry the new new products was.
Turning it $65 or so per store per week. It sounds like that has accelerated significantly I think you mentioned, maybe 128 is that build been accomplished without I mean is there some promotional activity or display going on that's driving that or is that just kind of you know an.
Building in terms of the the velocities there. Thanks.
You know that's what's really got me excited.
No promotion no secondary.
Secondary displays or features with that $120, we experienced last week.
In fact, I would say the shelf placement isn't even that grade as well, we're typically on the top or bottom shelf. So there's there's actually room to grow that velocity.
With that you know a 120, we're at 12% of the total category out selling the majority of Tyson and Purdue items, and we're not even into a healthy eating season, which begins in January 3rd. So I actually think we have room to grow now obviously, we're not putting that growth into our guidance.
Expectation for 2023.
But it's just really impressive and frankly I'd never expected to see velocity is high.
So.
No promotion no secondary displays no discounts, it's pretty remarkable and I at the end of the day velocity means everything and when you have performance like that and you also are bringing incremental revenue to those categories.
The distribution growth will come and we're starting to see those authorizations happened now it just did not happen in the third quarter like we expected and that's why this quarter looks the way it does.
It makes sense a lot of questions here, but I'm just gonna.
And with two quick ones one.
You know Gary what I hear you talk about maybe equipment.
Breaking it concerns me just around the.
The ability to kind of ramp the production and in service demand. So if you could provide a little bit more color around how you are progressing on that front and give us confidence that that bolingbrook is going to be able to support.
The customers with high service levels, particularly with all of this innovation and new distribution coming and then second question. If I can just squeeze it in maybe more for Akshay I think you mentioned on the raw materials if.
If you locked in prices today, you'd see us 602.
A 6% to 10 percentage point impact on gross margin, but the guide for next year is less than that in terms of gross margin expansion. So I mean, why wouldn't you lock in today.
And why wouldn't the guidance would be higher for gross margin expansion in 2023.
Thanks, John I'll take the first half of your question there.
We got the plant up and running the core of the plant.
On time, and we were going through our planned.
The ramp up phase strategy and you know the initial line was a lower speed lie.
A line that we had brought up very quickly and in March of this year.
Give us a degree of confidence however.
However, the stumbling bra block was when we turned on the high speed bread line. So you know we have a line that targets you know 1200 pounds an hour we turned on a line that targets three or 4000 pounds in our and we started to see some issues at that higher rate some weeks or al.
Put was.
Sub 20%, we made the decision to figure it out and run through it.
Frankly to fill the orders and protect the PPD that we had gained.
You know our margins paid for price for this you know our breaded chicken product is very novel first of a kind as far as I know and our breeding system is is really very sticky very high viscosity batter systems and different than anything that's on the market and.
If you think about what we're doing here you know we are doing a green free gluten free high protein product never been done before not to mention the stuff just pace great taboo at I want to just toot our horn on that.
But the materials were unexpectedly and really extraordinarily tough one.
Some equipment that we had purchased one piece in particular, what's the root cause we successfully re engineered that piece of equipment.
Hardened it strengthened.
And we've gotten over the hump of that piece of equipment being a roadblock in now where we're up in the late Seventy's and Eighty's with efficiencies.
We've been able to connect days and weeks together of production.
So you know I think we've got something to Crow about there and we're really happy with that progress and.
So as far as being able to fill orders that we're seeing you know our confidence is high now.
We continue to see those gains are late in the third quarter throughout the fourth quarter.
And to get better as we exercised a line, but you know we've come into a new phase of the startup.
I hope that answers your question there yes. It does thank you.
Thank you I'll take the again I'll take that.
I'll take the Sichuan, Florida that question. This is Akshay hey, John Thanks for the question.
Yes.
If you did the math right.
If we locked in all our commodities today.
The benefit to our margins would be much greater than what we're guiding to we are so why is that well first off I think it's prudent this early.
And in the stage.
To add some room you know some conservatism that's number one right were doing preliminary guidance and three kilo typically companies wait for <unk> to do that so we're still locking in our plans. Okay. Secondly.
There's some some of these commodities are bought.
Hedgeable, let's say or at least you can't lock in as far out as you would want.
And then Angela the whole, yes still to go so what goes into the margins.
Commodities I would say.
Now is the revenue plan on the volume side et cetera. So there's just a long way to go but mathematically, yes relative to where our guidance is right now there could be upside if prices stay where they are or at least stay at historical averages right. So that math that we provided it's important.
Now that it's it's more taking into account historical average prices rather than sort of seasonally low prices that are that we're experiencing.
Currency right now so commodities are big tailwind, we've we've got it turned the corner here and and really show the margin improvement once we do and we're farther along in terms of hedging et cetera, you know what.
Well update our guidance accordingly.
Okay. Thanks, a lot appreciate it.
Thank you.
Again to ask a question participants mantra star one on your Touchstone for now.
We have a next question from the line of Bill Chappell of it.
Triste Securities. Please go ahead.
Thanks, Good morning.
Hey, Jonathan.
On the same line of Johns questions.
I appreciate all the innovation and all the opportunity, but at some point do you worry about theres too much innovation or two kind of far field I understand stuff like chicken tenders are fairly straightforward manufacturing, but it seems like some of the stuff can be a little more complex and maybe challenged the bolingbrook facility by doing so many.
Current things at the same time.
And risk kind of hurting service level. So I mean any thoughts on that have been slowing some of the innovation.
As it is as you rollout or expand distribution so quickly.
Yeah.
We feel good about it you know again.
When you think about our innovation fewer bigger better.
Think about like our new low carbohydrate high protein flour tortilla system from a manufacturing standpoint.
Our plant really doesn't recognize the difference between doing that or current chicken tortilla products. So we're really thoughtful about our equipment debt when we add this type of innovation.
The other point.
Bill is you know, we're putting on a combined amount of capacity of 400 $500 million and our job is to fill these plants as quickly as possible.
In a profitable way and so we're well on our path to do that.
And.
I feel really good about the innovation that we're rolling out.
Okay and.
In terms of the.
The the rollout this quarter I mean, the I guess slower distribution this quarter.
Yep.
Is that true did you see that kind of across other competitors competition or you just feel like that was just the retailers were kind of bit of flux and there's variety of reasons why.
They they didn't go as fast as you would expect I fully understand.
Why are they there would've been a slowdown this quarter and why youre comfortable that it will reaccelerate next to nothing won't I'm, just a little more color would be great.
Yeah, Bill I'm not going to blame this on you.
Category dynamics in any way.
I think that.
It's just that's how it played out for real good foods.
But look I mean again the velocity that we did put up and are putting up and we continue to see those velocities grow and you guys can see it in the measured channel you can see it in the spins data at the end of the day.
That's all that really matters and that's why now they're coming on and authorized an additional points of distribution. So.
You know it was just one of those cycles that we went through now on the other hand in the Unmeasured channel. It's the opposite story you know we're seeing acceleration in Q4, we're seeing expanded distribution we're seeing.
Faster embrace.
Our innovation and that's what's really driving the.
Q4 quarter, and then as we go into 2023, and I think that will continue to happen and in our guidance for 'twenty three switching back to measured channel, we see at least 25% growth there.
With plenty of upside as we move along and continue to get more and more points of distribution.
Got it and then one last one for me and good.
Sorry, just wanted to add one thing if I could on what Brian said on the distribution.
So just to provide some numbers right.
Our guidance reduction.
It's about $3 million right.
Right.
All in retail all distribution, that's about seven points of expected distribution growth lets call it for the year.
20000 points of distribution, Okay, Lisa talked last quarter about one large retailer.
Delaying shelf resets that's part of that.
Okay, but the most important thing is it is this is a pure timing issue. So we had expected that with the velocity that we're seeing that some of these retailer what you know.
Intra shelf reset gave us distribution because that's how good the velocities are that didn't happen and in time this quarter, but we've got that distribution for next year and some right. So you know we're 20 K short this year on distribution, but we got that.
And some with 40, K plus right now and growing.
I just wanted to kind of make that point is yes, we're disappointed it didn't happen this quarter.
A lot of that's up to the retailers were pushing hard but our products are performing and we've got it now, especially at this large retailer mass retailer at least got that distribution is a big deal. It's foundational and I'm you know, it's going to flow through more fully in 'twenty three.
Yeah, no absolutely, it's a high class problem.
I realize that one last one on those distributions that you've kind of talked about how even.
The placement of the chicken tenders as some high some low how do you envision.
The total rollout to be.
Especially as you're expanding over the next would.
Would you expect kind of there'd be block and some retailers of real good foods.
Or is it going to be in the chicken Cinderella just give you a real good foods in the prepared meals theres going to be real good I mean, it's going to be kind of more.
Yeah.
Individual placements kind of across different categories.
Throughout frozen.
Yeah.
Yeah. It will be in the case of breaded poultry, it's going to be in the breaded poultry door right next to Tyson and Purdue because that's where we're winning and what I, what I see happening in 2023.
One maybe two shelves of real good food items.
A nice brand block of one to two shelves in that door.
And that's how we've kind of executed that's how we've kind of run our play Bill I mean, you see one or two shelves of us in breakfast.
You know our goal is one or two shelves and entrees and the same is true in stack and appetizers.
You know the company benefits from driving incremental revenue and so do our retail partners because you know they see us as a growth driver for each of those doors, because we push our community and we create excitement in the categories. We participate in and that strategy is unique to real good foods and it's worked.
King for both our retail partners and us.
Great. Thank you.
Thank you.
Thank you.
We have next question from the line of George Kelly with Roth Capital Partners. Please go ahead.
Hey, everybody thanks for taking my questions.
So first one akshay I was.
Surprised and impressed to hear you mentioned in your prepared remarks that you expect to reach.
Positive cash flow from ops in fiscal year 'twenty three so just curious could you.
Maybe bridge between EBITDA and net positive cash flow from I was just curious what the assumption is regarding working capital and interest et cetera.
Outrageousness too.
Yeah.
Great question. So we said mid to high single digit adjusted EBITDA, right and bridging from adjusted EBITDA to regular and EBITDA.
Cash flow, there's two steps one is what's the plant startup costs.
You know instead of looking at it as a dollar number.
Revenues change and think of it as like 3% of revenue.
So in this case, maybe five $5 million or so.
So that's one right. So you start with a high single digit EBITDA you can take out about five.
You're down to our reported EBITDA and then you know there's there's.
Stock based comp of 2.8, that's already sort of excluded from that but just to point that out.
And then when you get into so that's you know us a positive number EBITDA ex stock comp.
As a you know $3 million to $5 million number let's call. It. If you just follow the math and and then on the working capital side. You know, we think we are going to have a source of cash there.
I don't want to quantify exactly what that's going to be but it's a big opportunity for US you know so.
Between $5 million.
It's kind of what you should think about order of magnitude and it could be higher so we had.
70 days of inventory at the end of this quarter, we were at 100 days at.
At the end of last quarter or so.
Jerry and the team has done a great job managing that down we think we can get that down to even.
50 overtime and as our costs come down the absolute number comes down even greater right. So that's the big.
Unlock where we've already seen significant movement on on the working capital side. So.
And then what you have also in the cash flow equation is.
Our cash interest expense, which is around let's call it $4 million cash interest expense. So those are all the pieces. If you take all of them I don't know if you are following all of that but.
That gets you to a positive operating cash flow.
Even with our preliminary guidance.
Okay, that's really that makes sense.
Yeah. It did it did yep. Thanks, and then two other quick ones.
Brian you talked a lot about the incremental <unk> of your various products and categories.
I know, it's still early days, but it's the same thing happening within breaded Chicken and then second question is pricing what are your pricing expectations, what's baked into your twenty-three guidance. That's all I had thank you.
Sure. We got an early read on a panel study that suggested that over 80% of people are buying.
Buying our breaded poultry in that category were incremental to the category.
So that's a pretty.
Pretty remarkable number and it just kind of shows the power.
I think it shows two things the power of our social media team to drive in letter community know, but number two.
Theres a lot of people that don't participate in the frozen food category simply because theres carbohydrates, and sugar and not the protein they're thinking so.
That combined with velocity is y.
We're finally getting authorizations to roll these products out.
With regard to pricing action in 2023.
No we don't.
Have any plans to take price.
You know and the reason for that is as we all are seeing significant reduction in our input costs on our core commodities.
And in terms of our pricing strategy you know, we look at the gap between us and conventional products and we like that you know, we're maintaining that 10% to 15% premium and that's where we'll continue to to set.
Excellent. Thank you.
Thank you George.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back over to Brian Friedman Executive Chairman for closing remarks.
Yeah. Thank you everyone for joining us on our third quarter call and we certainly look forward to reporting Q4 in a few months have a great day.
Thank you.
Today's conference you may disconnect your lines at this time, thank you for your participation.
Yeah.
Yes.
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