Sovos Brands Inc. Q1 2023 Earnings Call
And welcome to silver.
<unk> first quarter 2023.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Joe Josh lifting VP of Investor Relations. Please go ahead.
Good afternoon, and thank you for joining us on so those brands first quarter 2023 earnings conference call on the call today are Tom Blackman, 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 April one 2023 that went out this afternoon at approximately four P M Eastern time.
The press release as well as supplemental slides can be found on the company's website at IR <unk> 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 can.
We see it.
And as such does include risks and uncertainties. If you refer to the company's earnings release as well as the most recent SEC filings you will see a discussion of factors that could cause so both brands actual results to differ materially from these forward looking statements.
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.
Please note that all consumption data cited on todays call refers to dollar consumption on a total new low basis as of the 13 week period ended April 2nd 2023 and growth versus the prior year comparable period, unless otherwise noted.
Lastly to avoid any confusion for discussions pertaining to first quarter results and full fiscal 2023 guidance and growth expectations organic net sales growth is calculated as net sales growth adjusted for acquisitions divestitures and the 50 <unk> week in 2022.
With that I will now pass it to Tom.
Thanks, Josh.
I will begin with a discussion of the exceptional performance, we delivered this quarter and.
And that we continue to expect in future quarters.
Before turning it over to Chris to provide greater detail on our results and updated 2023 outlook.
When we spoke to you in our last earnings call. We said that Q1 was off to a strong start building on our robust fourth quarter today.
Today's results reflect chapter meeting volume driven net sales and profit growth with meaningful margin expansion as a result of excellent operational execution.
We have generated very strong momentum in the rayos Mega brands, which we expect to continue through the second quarter and balance of the year.
Given our robust Q1 results and the continued momentum in our business, we are raising our guidance for net sales.
And adjusted EBITDA.
Robust trends for the Rayos brand continued in Q1.
Rayos grew net sales and 38% surpassing $600 million on an LTM basis.
And for the first time ever achieved the number one dollar share in the food channel.
The primary driver of this growth was the substantial gains in household penetration.
Mm 120 basis points versus Q4, but the total franchise and up nearly 100 basis points first Josh.
These gains representing the largest quarterly increase in household penetration in the last three years.
Recall that awareness grew 10 four percentage points.
58% in 2022.
As a result dollar consumption for rayos franchise grew 26% in the quarter.
And source, we grew dollar consumption, 22% with units up 16%, both well ahead of the category.
We also delivered sustained growth in frozen entrees soup and pasta.
With combined retail dollars up 46% in the quarter with each of these rayos businesses growing distribution household penetration and dollars well ahead of their respective categories, resulting in market share gains.
As we show on slide eight we have made considerable progress over the last two years developing each highly incremental businesses.
With our nonstop rayos branded products now accounting for nearly 20% of trailing 52 week measured retail sense.
And our most recent soft launch into frozen pizza, although still in the early stages.
They bring in line with our expectations and we are excited about the retailer and consumer interest we have received thus far.
Importantly, we continue to see massive white space for the Rayos franchise and rayos saw in particular.
While we did experienced the largest quarterly household penetration gains in three years on rayos sauce. Our household penetration is still less than half the level of several competitors.
Unit share is below 7%.
And awareness of 58% is well below the greater than 90% levels for peers.
And the brand remains a highly underpenetrated and under shared in each of its non SaaS businesses.
With many more at home eating occasions today than prior to Covid and traffic trends at restaurants remaining under pressure from cautious consumers, we see a long runway to provide many more consumers the opportunity to enjoy a restaurant quality meal at home with their family.
Turning to new set the brand grew net sales 8% in the quarter.
Driven by strong performance in non measured channels.
Our core eight ounce offering grew dollar consumption 9%.
Outperforming the category on a unit basis, and benefiting from distribution and velocity.
We continue to invest meaningfully in the brand highlighting its taste leadership and strengthening our assortment to drive higher trial and consumption.
And we're building a pipeline of delicious innovation, most notably in core spool yogurt to capitalize on the brand's leadership and indulgence and appeal across all day parts.
Michael annualized net sales were down 6% in the quarter with the launch of source, partially offsetting the proactive decision to exit certain lower margin frozen skus we.
We continued to drive growth in frozen with key grocery retail partners.
Gaining distribution in new channels.
Our total frozen entrees business and <unk>.
Lucifer Michelangelo's in Reais grew net sales, 10% in the quarter with consumption up 11%, which was ahead of the category.
With healthy inventories significantly better service and increased brand investments, we are growing distribution and velocity in our established brands frozen business and remain confident there is a long runway ahead for growth.
Broadly speaking our increased investments in marketing R&D, selling and supply chain are driving robust sales and profit results for our company.
And marketing and R&D, we increased our growth investments combined 27% in the quarter. Following a high single digit increase last year.
For example, our new advertising campaign for Rayos Cogs.
The deliciousness of slow highly.
Highlights key points of what makes red sauce, so unique including high quality fresh ingredients and the slow simmer opening kettle cooking process the results in our.
Delicious.
One of a kind sauce.
We're leveraging our roster of celebrities and Influencers, who showcase the many ways they use rayos products in their kitchens to their millions of followers.
In R&D, we are leveraging our new innovation center of excellence in Austin, Texas to continue delivering delicious innovation and new products across the portfolio.
And sales were adding more resources and customer facing roles, we're strengthening our net revenue management capabilities and we're investing in data to enable better decisions.
And in our supply chain, our investments in talent and capabilities are really paying off.
Want to commend the team on their performance in the quarter, helping to deliver over 200 basis points of gross margin expansion and 30% adjusted EBITDA growth.
Our inventories are healthy with service for source and yogurt consistently above target and service for frozen is in a significantly better position than this time a year ago.
In addition, our team is doing an excellent job proactively managing our input costs and we are successfully delivering on a wide range of productivity initiatives within the four walls of our factories we.
We see our supply chain capabilities as an important enabler and sustaining volume led growth.
In summary, we are very proud of our first quarter performance, we are executing well across the organization and investing in the business to drive continued household penetration gains.
In fact with household penetration for Somos brands now in excess of 25%.
Over one quarter of all households in the U S have a show most brands product in their kitchen.
And to reiterate given the strong momentum in our business. We are raising our full year guidance. We will continue to invest in brand building talent and capabilities to support our sector, leading volume led growth and we will take the right actions to support profitable.
Growth for our business in the quarters and years ahead.
This hall will now discuss the details of our first quarter and our updated guidance for 2023.
Thank you Todd and good afternoon, everyone.
First quarter total net sales $252 8 million, a $42 9 million or 24% increase over the prior year period.
On an organic basis growth of 26, 7%.
And by 15, 6% volume.
1% price.
For the quarter increased total net sales of 37, 7%.
Exceeding our expectation.
<unk> robust growth across all categories and channels.
We are adding distribution and driving improved velocity across nearly all of our categories are soft business in particular that arent road.
And market accelerating across the quarter.
As a result of the big distribution and household penetration gain Todd spoke about earlier.
News to had a good quarter up eight 2% year over year with growth driven primarily by non measured channels.
We also successfully implemented price increase in February which will provide a tailwind to about a year.
And Michael Angeles declined five 6%, primarily as a result of exiting certain channel specific lower margin skus.
Total frozen entrees, including raising Michelangelo grew net sales 10, 1%.
Okay.
Adjusted gross profit of $71 1 million increased $16 6 million or 34% year over year.
Driven primarily by double digit growth from volume and pricing.
Adjusted gross margins were 28, 1% for the quarter up 210 basis points versus the prior year period.
Margin expansion was a result of pricing and productivity as well as favorable mix driven by higher soft growth.
We also began to see favorability for certain key item in our raw material and packaging costs as prices moderated more quickly than we had previously expected.
As Todd noted earlier, we are very pleased with the progress we've made in operations and supply chain. Following the successful implementation of automation projects, particularly in our frozen entre plant.
Value engineering on our packaging.
And other processing cost initiative.
<unk> greatly improved operating systems.
Along with these projects, we are confident that our pipeline have yet to be implemented it initiative.
Optimizing our logistics network.
Partnerships with key suppliers and leveraging our increased scale will help us take cost out improve our margin.
And free up capacity for further volume led growth.
Adjusted operating expenses at $38 million increased $8 4 million or 28, 3% over the prior year period.
This included a 26, 9% increase in growth oriented investments such as marketing and R&D.
As well as increased support for our talent and capability.
Adjusted EBITDA of $36 million increased $8 3 million or <unk>.
32% year over year.
Adjusted EBITDA margin of 14, 2%.
100 basis points versus the prior year period.
Net income for the quarter was $7 8 million or eight cents per diluted share compared to net income of four play of 1 million four cents per diluted share in the prior year period.
Adjusted net income was $18 1 million and adjusted EPS was <unk> 18 per diluted share.
Compared to adjusted net income of $13 8 million or 14th <unk> per diluted share in Q1 2022.
Yeah.
At the end of the first quarter cash and cash equivalents of $153 6 million.
Total debt was $482 7 million.
Our net leverage finished the quarter at two six times trailing 12 month adjusted EBITDA.
Compared to nearly four times post IPO, which was just 18 months ago.
We continue to believe that a strong cash position gives us a lot of flexibility to invest in our business.
Turning to our 2023 outlook, we are increasing our guidance for net sales and adjusted EBITDA.
This primarily reflects our expectation for stronger performance from rail and we previously assumed.
Given the robust Q1 performance and our increased visibility to the doll of the year.
For net sale, we are now guiding to a range of $935 million to $955 million.
Which implies full year organic net sales growth.
14% to 17%.
We expect volume to continue to be the primary driver of growth.
Led by higher household penetration as a result of Iran's distribution gain.
<unk> velocity performance.
We also continue to expect that elasticities will normalize, albeit at a slower pace than we previously anticipated.
For adjusted EBITDA, we are now guiding to a range of $136 million to $141 million or.
Or 13% to 18% growth.
The increase to our guidance largely reflects the flow through from higher expected net sales.
We continue to expect moderate gross margin expansion for the full year.
Is it a pricing and productivity fully offsetting mid single digit inflation.
We remain committed to investing to support our long term growth plan.
And our updated outlook incorporates high teens growth for.
For our combined marketing and R&D.
Seek to capitalize on the massive wide space opportunity ahead of us.
From a phasing perspective, we continue to expect volume led double digit organic net sales growth in both halves of the year.
With growth in the remaining quarters expected to be consistently.
So double digit to mid teens range.
We expect Q1 gross margin to be the lowest of the year.
Improved level over the balance of 2023.
As we move out of the heaviest promotional quarter for this year.
For adjusted EBITDA, we continue to assume growth and margin expansion will be stronger in the first half.
And finally, given the strong Q1 performance.
We now expect the first half to account for a slightly higher percentage of full year adjusted EBITDA.
We previously assumed.
For a summary of these and other annual guidance items. Please see slide 14, the earning slide deck posted on our Investor Relations website.
I will now hand, it back to Todd for some final remarks.
Thanks, Chris we are excited by how the year has begun we have a tenacious highly talented and energetic team that is executing well. The rayos brand is firing on all cylinders, adding households through distribution and awareness gains and rapidly progressing on its path to $1 billion of annual net sales and beyond.
And with strong operational performance, we are expanding our margins and driving bottom line growth, helping to maximize shareholder value with that Chris and I are now available to take your questions operator.
Thank you.
We'll now be conducting a question and answer session.
Like to ask a question. Please press star one on your telephone keypad a confirmation.
Your line is in the question queue.
Yes.
If you would like.
Question from the queue.
All participants.
It may be necessary.
Before pressing the star keys.
One moment please.
Sure.
Our first question comes from Ken Goldman with Jpmorgan. Please go ahead.
Hi, Thank you two for me My first one is you.
You mentioned that radio is the non sauce business of radios I think is now nearly 20% of your measured retail takeaway correct me.
If I'm wrong on that and you also talked about how pizza is in line with your expectations could you maybe add a little bit of color or just an update really on how the other businesses are doing you know be it super pasta or you know whatever you think is worth discussing I'm just trying to get a sense for how each of them is progressing versus your expectations.
Hey, Ken how are you doing to start okay got it.
Thanks.
Yes, so on the AR the nonstop businesses you're right.
20%, we have some detail on that in the.
But we couldn't be more pleased so if you take total non source IRI last 52 weeks.
And $30 million of retail sales up 46% year on year CAGR since 2020, 60% for that combined entity and these businesses can have been in market for a while we launched two four years ago and it's now the number five dollar share number one or number two fastest growing soup brand over this time period.
Meaning we've either been the fastest are the second fastest growing 13 week period after 13 week period.
We are shipping some new items now with more items to come at the end of the year. We're very very pleased Jamie Albertine weeks dollar sales up 20% year on year versus a flat category.
The lot and just the PDP is up 7% and velocity up 12% with a 2% dollar share pasta launched actually about six months before soup. We're in our fifth year now where the number six brand grew more than 50% in 2022, but we only have a 1.3% share last 13 weeks.
The number.
There's arguments are up 73% year on year.
50 basis points.
50 bps and share continued to build distribution with philosophy is also improving where else have some.
New items shipping more items too.
Distribution up 14% versus distribution the category up 1% velocity up a very strong 52% and then frozen.
Our rayos frozen business up 46%.
In dollars versus 6% for the category distribution of 33% and velocity up 10%. So.
If you look at those three businesses, 20% share of total is growing although sauces growing robustly as you know as well and then pizza.
The area to highlight with pizza is that.
It's early so.
You know in the very early stages.
That said initial sell in is going according to plan commitments continue to build we're generating very strong interest from across the accounts.
And as we've discussed we expect distribution to build as the year progresses, we remain confident that our entry into this very large 7 billion frozen pizza category can be a very meaningful contributor to the brand in the years ahead, which will lead to further volume growth for.
<unk> for the business and I know this wasn't one of your questions, Ken, but I'll, just sort of conclude and highlighting.
Yes, our results were up a very strong 27% in the quarter, but 16% in volume versus down minus five two for the peer average and then if you look at the last 12 months, our volume up 13% versus volume down 4% from the peer average so yes.
Yes, our growth is high but highly differentiated in the fact that its volume led when many of our peers are declining in volume and offsetting that with that with price.
Got it. Thank you for that and then a quick follow up I think your previous guidance was for volume to be up high single digits, and then inflation to be up mid single digits I guess in light of the new top line guidance and your comment about you know maybe some costs mitigating a little bit faster than you would.
Are those are those rangers or ranges rather is still the proper wanted to think about.
Hey, Ken this is Chris.
On volume, that's really what what has driven us to take up our guidance pricing pretty much. The same range, we had anticipated for the year mid single digit.
But we're now in the kind of low double digit range before.
For volume and that should be fairly consistent across the year pricing of course falls off across the year.
First is the the pricing we saw flow through in Q1 by pricing as well as inflation or both mid single digits across the year.
Thanks, I'll, let it go there thank you.
Okay.
Okay.
Next question comes from Peter Galbo.
Bank of America. Please go ahead.
Hey, Chris Todd. Thank you guys for taking the question.
You bet.
Hey.
My mind are pretty quick.
Just curious around you know the sales guidance.
Obviously, you raised kind of buy more than than the beat relative to consensus on the quarter and you know Todd I think you talked at length about some of the factors that are that are driving that and its probably unique within packaged food, but just curious are you feeling a few questions. If if any of that you know raise as well as like a loading factor for for Pizza I'm just as you roll.
That out more nationally if theres any way to dimension that just would like a clarification there.
Sure.
None of that is driven by a loading factor.
In regards to our guidance et cetera, I mean really really I mean.
As you recall from last quarter.
Stated.
There were beginning really strong out of the gates as we began Q1 following a very strong 2022 in Q4 momentum honestly, even stronger than expected.
And what are some of those highlights first.
New household penetration would increase we did not expect it to be the largest household increase in household penetration in the last three years.
240 bps, a year ago on total and 110 bps.
On source and the key driver there is just very healthy healthy distribution gains up 22% year on year Tdp's with more than one quarter of our top 20 accounts growing GDP double digits.
For our brand and the sizing of the total rayos franchises $618 million LTM and as highlighted in our slides are getting into the Ravens, Brad 618, LTM of 40%.
Year on year.
We look at distribution, we talked last call about awareness going from 48% to 58%, we don't get awareness on a quarterly basis, but given our investment levels. We certainly expect that to continue to increase and it's about getting the brand into more households than we.
We are only in the source less than 13% of household so volume led growth number one in the food channel non sausage business is up 46%.
The increase year on year profit growth inclusive of 27% marketing and R&D spend et cetera et cetera. So I highlight is to say that this has nothing to do with any one time shipments and.
Any pipeline fill it's due to the momentum of the business, notably the very strong household penetration gains on source and then the balance of the <unk> franchise.
Got it thanks for that Todd and then Chris just just maybe a two parter that that should be relatively easy I think you said.
You know the EBITDA percentage in the first half or second half would be higher versus previously.
Previously.
Yeah, you bet.
As we talked at our last call, we mentioned, 47% first half EBITDA.
Based on the strength of Q1 again, primarily top line driven for that for the reasons that Tom just gave us but also good on.
Gross margin expansion over a couple of hundred point above our expectations, where it would come in on activity checked in and we've got our automation up and running now down in our Austin plant really delivering cost savings.
Pricing was very strong for the quarter. So very strong gross margin quarter led to a higher EBITDA out. So we're more it's not a dramatic shift in the phasing of EBITDA, but more like 48.
To 48, and a half per said H Y now as well.
What we're seeing.
Inflation, which you mentioned a mid single digit number higher in the first half lower in the back half, but still both halves and basically mid single digit pricing stronger than the first half as we overlap the actions from last year plus some actions that we took in Q1 of this year.
So that's our our EBITDA phasing.
And on cash.
We're very pleased with the cash to continue to generate.
With the strength of the balance sheet.
But we have cash that we had taken we're holding onto that for now we've talked in the past about our uses of cash which are primarily to reinvest in the business.
There are to drive top line or to drive productivity.
Yeah, we don't anticipate a.
Dividend, we so therefore, we really use that cash.
Gave us optionality moving forward that optionality could be again reinvesting in the business.
Could be for M&A down the road, if there was an opportunity but that optionality is very important to us.
As mentioned last time I'll, just reiterate we are earning a nice return on the cash that we're hanging on to.
So that will continue to be our strategy for now we will it will delever.
Our net debt basis.
And we'll just see what happens here over the next several months and what happened with interest rates and that will over to side with how to optimize that cash.
Awesome very helpful. Thanks, guys.
You bet. Thanks Peter.
Next question comes from Jon Andersen with William.
Blair.
Please go ahead.
Hey, good afternoon, guys congrats on a great quarter.
How do you see that evolving both near term and longer term.
Do you think that non source portion of the business becomes a bigger part of the franchise.
In the next year three years and what are some of the the margin implications of that mix. Overall are you seeing you know through your automation efforts and productivity or it's the ability to kind of lift the margin structure of the non sauce business.
Because I know the SaaS business is particularly strong thank you.
Oh.
Hey, John sure, let's talk about the.
We sort of.
I have publicly talked about and several of the other calls when we talked about rayos to $1 billion, we've talked about non source being about 20% today.
When we get to a two 1 billion sooner than later.
Think of non source, roughly 30% source, roughly 70% and we've sort of talked about the.
A larger percentage, but most importantly source.
70% of the business and I'll just highlight again why that is.
You've got household penetration of source at 13% versus.
Three two to three key peers above 30%, you've got unit share of source less than 7%.
Got the other two leading.
Players with dollar share a 16% unit share of 16% and 18% respectively were the number two dollar share move up we are the number one dollar share for Q1 in food, but word number seven in unit share. So it shows you the opportunities awareness, 58% versus 35 brands and source that have awareness about <unk>.
Barely 14 versus several peers above 20, so that just shows you a wide sources can it continue to be the key driver and then I highlighted some of the opportunities and just the penetration.
Today less than 3% on our non SaaS categories share, 2% or less.
Et cetera on this other businesses. So we've got a very very strong upside on both and try to continue to emphasize that our number one priority is driving rayos to $1 billion.
As quickly as possible I'll pass it to Chris in regards to your margin question John Thanks.
Thanks, Todd good because we as we can create new products that we engineer those P&L to be an hour and our overall company average on the gross margin line, we may be investing more early on in trade and slotting and things like that but as the items seed in the market.
We are investing money as we've spoken.
At R. R.
To more fully automate that plan for all of our frozen or rather is produced.
So we're really starting to see now the impact of that and the cost savings the efficiencies of those lines.
Is it does it grow in scale. So yeah, we may launch a product at a lower margin as we enter new.
Above plan and kind of a driver of the guidance rage raise for the year.
You know where are you from a capacity standpoint, I know you've added some capacity I believe at alma you're it sounds like automation is helping you.
Do you have any pinch points with respect to capacity or do you feel like the operations and the supply chain are set that kind of support the growth that you foresee with kind of normal capex levels over the next 12 to 18 months. Thanks.
Sure Yeah. Thanks, Chuck we are I would say minimal pinch points across in our largest businesses, let's just talk.
Total source and I'll just compare it because in Q1 of last year, we did have.
Pinch points less because of <unk>.
The more supply constraints, if you recall the words.
Fire at our part of our dry pasta supplier that we used for frozen and a glass shortage due to the war wore in Ukraine et cetera, there's a variety of aspects we talked about in our Q1 and Q2 calls so if we just take our fill rates.
As a measure of.
Basically I mean were at or above target on our soft business up 14, four percentage points service Q1 versus Q1 year ago on our total frozen business of 34 percentage points. This Q1 this year versus Q1 last year, it's a business that we had mentioned that.
We had some.
When I say capacity, it's more around supply constraints that caused capacity issues that led to some service degradation. So.
We have a best in class supply team and we're constantly making sure that we're tenacious and nimble around ensuring that we have the right ingredients and packaging et cetera, we've got a variety of capacity initiatives and productivity in the factories that we run for yogurt and frozen and Youre always going to have some pinch points here and there on the business but.
To me, that's all part of running.
Our business is growing as rapidly as ours, but right now as I said in the prepared remarks that we are.
At or above target on our source and yogurt business.
And significantly better than year ago, and approaching target on our frozen business for certain.
Just to add to that with all the opening up for.
The soft business.
With other additions that have made both in the in our co Packers, Italy facility as well as alma we have ample growth available to us on the soft business even down at Alma we currently have operating with 10 channels.
We have the infrastructure there to double that quickly to 'twenty to 'twenty Cadillac and over time. The facility has room that we can expand even further I guess, adding additional kettles. So we're in really good shape for the type of growth you've been seeing on on the soft business in the 30% plus.
And we're well.
Good amount of capacity on the new business as well at our plant in Colorado.
Sounds great.
Thanks Chuck.
Yeah.
Next question comes from Matt Smith with Stifel. Please go ahead.
Hi, good afternoon, thanks for taking the question.
Imagine that I wanted to ask first about the impact from your latest round of pricing that went into effect in February was that just the new Sip business or was there or do you expect additional pricing in the rayos brand and the pricing actions to date have had very little impact on your volume performance and don't seem to be impacting <unk>.
Household penetration gains.
So are you seeing anything in the market with your latest round of pricing that indicates elasticities are picking up or or does the outlook, calling for softening of elasticity really just reflect a degree of caution given the environment.
Yeah. Thank you for that.
Our pricing actions that we've taken over 2022 into Q1 of 2023.
It's likely to take two rounds of pricing on across every category every brand.
<unk> being in February a roughly 8% to 10% pricing on new cell depending on the SKU.
And on our frozen portfolio does hit the marketplace in February .
And at this point, we have adequate pricing in the marketplace.
Or the inflation that we are anticipating that we're pleased with our bureau pricing is we're very pleased with the elasticities, which have continued to be better than historical and better than what we had modeled specially on the res business. That's a function of distribution gains household game.
The awareness gains.
So we're getting a lot of new new new buyers into into that category driving great volume growth and the pricing has been.
Well accepted by our retailers as well as our consumers little.
Little more elasticities on there.
On the yogurt front, where.
Where we did put our second round of pricing and in February .
Across our first round of pricing. We also took up the depth of our promotions.
And try to raise our ash, a promoted price points, where our competitors really maintained existing prices went on deal. So we've seen a little bit unit falloff there that we're filling back we're fine tuning that we will returning we have been to some of our more.
More effective.
Volume driving new self promotion and that's in the marketplace now we're seeing a positive impact from that so we do not anticipate further pricing at this point, we're always prepared to an.
If the conditions warrant.
We're pleased our promotional strategies have been consistent across the year.
We same promotion yield we were roughly 40% ideal for instance in the <unk> category and have that consistently over time.
And we successfully raised the depth of those promotions.
Again, which is helping us drive through the 11% pricing that we saw in Q1 that will drop as you move across the year.
Overlap of the action, we took in 2022, but the key message is no further pricing anticipated and no real changes to our promotional strategy or cadence and the other.
Area, Matt Hey, How're you doing.
This is Todd is just to highlight.
The idiosyncratic nature of rayos as it relates to elasticity I got a minute.
Idiosyncratic, it's not afford it.
I use that often but now use quite frequently we talk about red oak and the point being that.
You have when you have the household penetration that we do which is very low, let's just take sort of 13%. So you've got 87% of households that have not purchased rayos saw so at any given moment and you increase household penetration at the slope in rate that we are.
In the source aisle at the same time, you could have a consumer that potentially.
I'm not going to buy rayos source today because of the price and at the same time, a new consumer is going to be well I havent purchased rayos in the past year, or maybe ive never purchase rather than going to purchase it. So.
An element that I believe is unique I think it will continue to be a tailwind for us as we go forward I know.
A variety of <unk> and the analyst community I've talked about it but I do think.
It helps sort of insulate us in an inelastic fashion as to the new households that are continually coming into the franchise that when it's your first time here. Therefore by definition. It elastic because you haven't purchased the brand before regardless of what rayos category you're purchasing into.
Thank you for that and maybe just as a follow up then well maybe a better measure to understand the impact of pricing would be your view of the ultimate achievable household penetration for rayos is that impacted by the degree of pricing you've had to take or perhaps.
You're seeing a lower buy rate from some of these newer household folding into the brand.
Or lower repeat rate, reflecting the higher price point.
Hey, Matt it's Paul.
Got it.
A couple of things were so let me just hit your first point.
I think we don't really think of the ceiling on household penetration necessarily as it relates to.
As it relates to.
Pricing per se just.
Just because the price gaps.
Stayed really can revlimid relatively consistent kind of like pre post et cetera. So we kind of if you think of the market leaders the mainstream market leaders of which three times or three times more expensive.
You've got a cogs the other peers that are in the top three there are about 30%.
So I think realistically.
Probably not going to make it at 30%, but I think it's totally.
I mean, we have our sights on.
20% household penetration for source at least we're at 13 today, I mean, thats, a massive increase in share going from 13% to 20%.
As we think about it in that 12.
9% source penetration is right now we're about a 16 dollar share et cetera. So.
That's point number one point number two we actually rayos if you look over the past several years, we've had a significant increase in two plus buying households. So.
We have the strongest repeat in the category, we have very significant growth in households that buy.
Sort of a nine box grid and when we look at three different generational cohorts.
Gen Z millennials at one end boomers and seniors at the other end and we look at lower Middle Upper class.
We're consistently the only brand that is growing and households per cent households, buying in all nine boxes.
And lower income households contributed to 23% of rayos total soft growth in the last quarter. So were regardless of price, we're showing growth across all income cohorts and growing robustly.
In the lower and middle income cohorts and the last point I will highlight.
And I think I've talked about this before I mean, if you go into the store in a while I know that rayos as three X times mainstream we know that it's dramatically different source right. Its whole tomato slow simmered simple high quality ingredients versus.
Salad dressings more expensive than rail so in.
In the end I know I've talked before about feeding your family for $15 or less I think a very relevant comparison is walk the store and look at the cost of variety of items.
And given the inflation in the store rayos soft compares very very favorably to a host of commonly purchased items and the food.
That's great context, thank you for that I'll pass it on.
Next question comes from Cody Ross with UBS. Please go ahead.
Good afternoon. Thank you for taking our question.
I just wanted to discuss your rayos performance because it continues to outperform our expectation can you just discuss how it performed relative to your expectation at.
It sounds like it's higher where is where is brand exceeding your expectation what's driving that is it the distribution gains. It sounds like you knew some of that from last quarter is it the buy rate. If you do just shed some light and then I have a follow up.
Sure Hey, Kodiak, it's Todd.
Yeah, I mean honestly the household penetration gains significantly greater than expected.
Largest.
We didnt expect at this point in time, given the size of the household penetration, even though we're underpenetrated did not expect the largest quarterly increase in household penetration in the last in the last three years.
So household penetration is one and what's driving that I mean, one is the distribution gains we knew the district, we knew coming into the quarter that we had new distribution.
22% growth in GDP.
Greater than we had expected.
At the time when it all all the pieces kind of came together so that's robust.
I think we will see when we look back awareness gains that we grew a full 10 percentage points last year.
We're continuing to invest very heavily in the business total marketing and R&D was up 27% year on year.
Off of a strong base. So we are investing heavily in the majority of that goes to rayos secondarily news.
So I think those are some areas. When you look at distribution growth you look at awareness velocity as we look at the SaaS business.
<unk>.
It's doing quite well when it's often difficult to keep velocity at a good level. When you increased distribution as robustly as we are and then as I talked about previously I mean, we've got the soup business growing.
Fifth year in a suit growing 20% category flat Pos that fifth year growing 73% category of 11 frozen up 46% of category of <unk>. So.
We we were expecting a strong quarter.
But it is stronger.
And then we had expected I'd say secondly, there was.
So strong growth in unmeasured channels. If you look at the difference of our net sales growth versus IRI think 38% versus like 26 ish.
So.
Part of that is unmeasured channels and that's not just one time pops at some really solid distribution permanent distribution gains that we've garnered in the second half of the year in unmeasured customers, that's paying dividends for us in Q1 and will pay dividends throughout throughout the year. So those.
We're just somehow.
Some highlights.
That's super helpful. And then I just wanted to talk about your capital allocation and M&A, you've done a great job delevering the balance sheet and it's terrific to see your goal.
We're on track to reach two five times leverage by the end of the year as you think about capital allocation and M&A would you look for M&A in separate categories adjacent categories or could it be a case, where you look within your existing categories and perhaps other smaller players within either source or yogurt.
Come on the scene or are starting to do well I'll leave it there. Thank you.
Yes.
Look.
I think it's Chris I'll really highlight honestly right now Chris sort of touched on it you know Cody, but just to sharpen I mean are.
Our number one focus is driving rayos.
Billion.
And beyond and as we have learned and seen us we've launched in the dry pasta in soup.
And how well they are doing in market.
We could we could acquire a one of a kind soup brand, but we would rather launch rayos into the soup category, we could acquire a one of a kind of frozen pizza and theres. Some really nice highly differentiated niche brands that are underpenetrated that we could expand but we would rather large rayos into that segment. So I think right now.
The focus for our use of cash et cetera is to reinvest back in the business to drive the rayos franchise franchises, primarily new secondarily.
That said.
We are constantly fertilizing our list of potential opportunities in.
In the food area.
And I think I've mentioned before that clearly categories that are adjacent to some of ours now whether that's.
You know around the aisles that we're in now et cetera.
Sure.
Would potentially be attractive but.
Right now honestly, our number one priority is driving rayos to $1 billion and beyond we're focused now on the pizza launch.
More new category launches to come that we can talk on future calls not at this time and.
That's what we're looking to leverage our kind of capital for US again to extend this rayos brand that is.
Connecting very very well with consumers both from a brand equity standpoint and product standpoint.
In 2023 in the years to come.
Sure.
The next question please.
Okay.
Yes.
If you would like to ask a question. Please press star one on your telephone keypad.
Next question comes from Michael Lavery Piper Sandler.
Please go ahead.
Thank you and good afternoon.
Hey, Michael.
Can you just touch on the second quarter, a little bit more and especially with just volumes sales and volumes in particular, so strong in the first quarter should we be mindful of maybe any pull forward or any unmeasured channel.
Moves that might be a part of that that we should just keep in mind as we think about modeling, particularly on the top line.
Yes, sure well this is Chris.
One difference moving forward is pricing if you recall that the last year, we really had very minimal pricing in the first quarter.
Overlap that this year with it was 11% pricing that will fall off in Q2 and for the back half here.
Good robust double digit pricing in Q2 of last year. So that's the one big change.
We're still very excited.
Low mid mid double digit growth across all of the quarters for the balance of the year that we're projecting so it's still very solid growth. It won't have the pricing and it will be more volume volume driven starting in Q2 and for the balance of the year.
And then we also had its already last year, where in Q1 of last year.
Shipments our net sales was well below consumption.
And then in Q2 of last year that that reversed.
Then in this year in Q1, our net sales with higher than consumption.
And then that will probably reverse back here in Q2 on a two year basis are totally aligned.
Last year, Yeah last year in Q1, we had some CSM foggy service outages. So that that really gave to Q1, our booth. So again, it's kind of mid double digit growth balance of the year, starting in Q2 with less pricing.
Where we see ourselves landing.
Yeah that that reversal from <unk> to <unk> happening again alone.
Likely so that's good to make sure to be aware.
And then could you just.
Give an update on the Michael Angeles source launch in terms of distribution I think it went into to one retailer at first is that heading anywhere a little bit more more broadly.
Sure Michael.
So.
I'd say, yes, so it's really it's just that one retailer now in both.
We'll highlight both the exclusive retailer that we're in now.
And ourselves so most brands pleased with the results we're outperforming a variety of other similarly priced items.
So although early.
International rollout is still something we're assessing we're pleased with the performance right now and we're beginning to expand.
Our launch into other select retailers for shipment in the second half, but right now both ourselves and the retailer are are very pleased and honestly I think as I've talked on previous calls Michael we see an opportunity honestly you take.
A larger share of the overall category with two brands at very different price levels, they're both great tasting kettle cooked slow simmered sops sources.
But they're very different from each other cook time type of Tomatoes that we use some of the ingredients et cetera. So I figured that there is an opportunity for that michelangelo's equity to play.
Price points significantly below rayos, but above.
That of mainstream brands at a price that justifies the quality, which is dramatically different than.
Main stream paste based sauce.
Okay, that's great.
Just a last quick housekeeping, one I apologize if I just missed this but I know you said that the rail sauce is now at the <unk>.
$1 share.
Did you say what the share is apologies if I just didn't catch it.
So that's the number one dollar share in the food channel.
So that's that's essentially 17% dollar share in the food channel. So we're number two.
In total new low but in the food channel. We are number one dollar share in the food channel Rayos saw.
Yes.
And it's up 17 show you said.
That's a 17% share.
That's great. Thanks, so much.
Thank you Michael.
There are no further.
At this time I would like to turn the floor back over to Todd Blackman for closing comments.
Awesome. He so thanks again for joining us and showing an interest in our story, we look forward to engaging with many of you in the coming weeks. Please feel to reach out to Josh for follow up discussions until then have a great evening and take care.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Okay.
[music].