Q1 2023 The Real Good Food Company Inc. Earnings Call

Speaker 2: Greetings and welcome to the real good food company first quarter 2023 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. If anyone should require operator systems during the conference please press star zero on your telephone keypad.

Speaker 2: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Shamari Benton, Vice President of FPAA and IR. Thank you, Shamari. Let me begin.

Speaker 3: Good morning and welcome to the real good food companies first quarter 2023 earnings conference call.

Speaker 3: On the call today are Brian Freeman, Executive Chairman, Jerry Law, Chief Executive Officer, and Audrey Jogdale, Chief Financial Officer.

Speaker 3: Our first quarter earnings release crossed a wire at approximately 8 a.m. Eastern time today.

Speaker 3: If you have not had a chance to review the release, it's available on the investor portion of our website at www.realgoodfoods.com.

Speaker 3: Before we begin, I like to remind everyone that certain statements made on this call are four lacking statements within the meaning of federal securities law and a subject to considerable risk and uncertainties.

Speaker 3: These four looking statements are intended to qualify for the safe harbor from liability established by the Privacy Security's litigation reform act of 1995.

Speaker 3: All statements made on this call today, other than the statements of historical fact, are forward-looking statements and include statements regarding our projected financial results.

Speaker 3: including net sales, gross profit, gross margin.

Speaker 3: Ajustic gross profit, a justic gross margin, and a justiipida, as well as our ability to increase our net sales from existing customers and acquire new customers.

Speaker 3: Introduce new products, compete successfully in our industry, implement our growth strategy, and effectively expand our manufacturing and production capacity.

Speaker 3: For looking statements made on this call represent management's current expectations and are based on information available at the time such statements are made.

Speaker 3: Such statements involve a number of unknown uncertainties.

Speaker 3: Many of which are outside the company's control 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.

Speaker 3: Important factors and risks that can 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 state material, whether as a result of new information, future events, or otherwise.

discussion, we refer to non-get financial measures, which refer to results before taking into account certain one time or non-reoccurring charges that are not core to our ongoing operating of results, and which we believe...

Federal Flex, the performance of our business on an ongoing basis.

Our non-GAAP financial measures include adjusted gross margin and adjusted EBITDA of reference.

A reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure is included in our first quarter earnings release.

which is available on our website under our investors tab.

With that, it is my pleasure to turn the call over to the Real Good Food Company's Executive Chairman, Brian Freeman. Hey, thanks, Shamari. Good morning, everyone, and thank you for joining us today on our first quarter earnings call. I will briefly review our first 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 will open the call for questions.

Starting with our financial highlights for the first quarter, net sales were 29.8 million an increase of 78% on a two-year stack basis.

Growth on a year-over-year basis was negatively impacted by the timing of promotional events that boosted sales in the first quarter of last year, but are scheduled to repeat in the second half of 2023. Excluding these transitory timing issues, sales would have been up double digits on a year-over-year basis driven by strong baseline velocities and continued dis-

and extend our brand in the new categories of eating occasion.

Gross margins were 16.7% this quarter, which is 300 basis points improvement sequentially in the best margin in the last eight quarters.

But it's particularly noteworthy about this performance. It's the fact that we achieved this while our plants were less than 40% utilized.

Adjusted gross margins, which account for the capacity utilization impact, were 33.5%, a 580 basis point improvement sequentially, and the best quarterly adjusted margin in a company's history.

Margin in the first quarter reflect improved operational performance and seasonally low commodity costs. Operating performance should continue to improve even more sequentially and we expect commodity costs to remain at or below historical norms, albeit following normal seasonality. We now have greater conviction in meeting our 2020.

an approximate 43% year-over-year increase in our distribution footprint.

This includes approximately 14,000 new distribution points that were recently authorized at a large national grocery retailer for entrees, burritos, and chicken bites with 7,000 the aforementioned distribution points set to increase in the second half of 2023.

and the remaining in January of 2024. These gains also include the previously discussed national rollout of two of our bread and poultry items at a large mass retailer in June , with placement in a section of the store that has six times the velocity as compared to our current placement, as well as the national rollout of our multi-serve Asian entrees. As we've said in the past,

Due to new item reset schedules in the measure channel, this new distribution will come online late in the second quarter and into the back half of 2023. As such, the shape of our growth this year remains back half weighted. These wins have the potential to double our measure channel business on a run rate basis starting in the second half of 2023.

Now, turning to the UN Measure Channel. We have strong conviction in our ability to meet or exceed our 2023 plan only to three factors.

First, I am pleased to report that our breaded poultry will be available nationally and in full distribution in the Unmeasured Channel late in the third quarter.

This is a big milestone that we have strived to achieve since launching the item in early 2022. We have a big milestone that we have strived to achieve since launching the item in early

Our breaded poultry velocity and incrementality to the category have earned this expansion and is helping grow category sales for our customers.

Our other items such as our Creamy Poblano Enchiladas and Bacon Wrapped Jalapenos have also earned full distribution in the back half of this year due to their strong performance in the current and prior periods.

Second, I recently launched flautas and low-carb refrigerated burritos have performed well, resulting in expanded distribution of these items. And third, the breadth of our offerings is unprecedented for a brand in our stage of growth and points to the momentum we have. We have a total of eight items authorized in this channel across seven categories and two temperature states.

Summarize the unmeasured channel and provide additional perspective. In 2021, we had two items that on a combined and annualized basis achieved 65% ACV.

For 2022, we grew to three items with a combined and annualized ACV of 68%.

Currently, we have eight items authorized to participate in seven categories in two temperature states. For perspective, we've never had more than four items authorized simultaneously.

All of this is to say that our strategy to expand into new categories across two temperature states is working and creates a strong foundation for durable, predictable growth going forward.

The aforementioned new distribution gains combined with strong base business velocities give us confidence that we will grow sales in 2023 to at least 200 million, representing growth of approximately 41%.

Jerry and Ochske will speak to this in more detail, but I wanted to touch on our margins this quarter once again and provide a high-level view on how we see the rest of the year shaping up. Costs for chicken, cheese, and bacon have come down from historical highs and are currently at or below their long-term historical averages. We continue to expect commodity costs to have a 6 to 10 point positive impact on our margins in 2023, But in this story, I have a story about anirts whether Steveous executioned in Capitol Hill had the home and the boundary, was, of course, that driving a why they're not They're inucker Iner iner Some and in different towns

or the coming quarters. Adjusted EBITDA was a loss of 1.2 million, which was in line with our expectations, and includes the impact of significantly higher than normal R&D costs in support of our strong second half growth agenda. As for 2023, we expected Adjusted EBITDA in the mid to high single digit range.

driven by lower commodity costs, to a lesser extent lower labor, improved plant utilization, and better overhead costs leverage. 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 the health and wellness market and how our brand positioning is resonating with the broad consumer base.

According to SPINS, for the 52 weeks ending April 30th, the 200 billion total health and wellness industry grew 7% year over year, in line with the 7% two-year CAGR.

Over the same period, the 65 billion total frozen food category grew 10 percent, and acceleration compared to the 7 percent two-year cager. It's important to note that the frozen food category has historically performed well during recession, as it tends to benefit for consumers trading down from eating out to eating more at home.

of overall frozen food category. As such, trade down risk within the category to lower price private label options is limited. Additionally, our distribution footprint is focused on retailers that deliver value to their consumers and we have low concentration with luxury, iron retailers that typically lose foot traffic during economic day and on turns.

Our brand promises three primary claims, low carb with 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 size and strong growth profile. Moreover, there are no signs of a slowdown despite the lapping of the pandemic bump and or an economic recession, given frozen foods historically perform well in a recessionary environment.

As for our brand help, we track ourselves against four indicators, household penetration, repeat rate, social community growth and engagement, and velocity.

Starting with household penetration, according to numerator data, as of March 2023, the Real Good Foods brand household penetration is 8.3%, approximately flat from 8.4% in December of 2022. This means approximately 1 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 Amy's, a brand with over 500 million in retail sales. And for a perspective, according to a research report recently published by Jeffrey, the entire plant-based food category had a household penetration of 5%, down from a peak of 9% a couple years ago.

Increasing household penetration demonstrates how well our brand position resonates and how quickly we can connect with a broad consumer base. We view this as a leading indicator of future growth, and as our distribution footprint grows in the back half of this year, we expect to see our household penetration grow significantly. Turn to repeat rates.

They continue to be in line with industry averages at 32% in the most recent trailing 52-week data as of March 2023.

Regarding social community growth, we continue to grow RealGoodFood's online community. In the first quarter, our social and digital teams continue to outperform. We generated over 3 million organic impressions and 108 million total brand impressions.

We also acquired 5,000 new SMS text subscribers and added 31,000 followers on Instagram, bringing our total to over 466,000 Instagram followers.

We continue to believe that using micro and nano content creators to spark authentic peer-to-peer conversations is a better use of marketing dollars than traditional advertising.

Based on our number of followers and subscribers, I could say it's working and it's efficient. This is reflected in the strong returns we get on our ad spending, which averages 4-6 times as measured by third parties, far higher than our peers on average.

Our retailer partners appreciate how we drive new consumers to the categories we participate in also, allowing Real Good Foods to truly grow the frozen category with consumers new to frozen foods, rather than simply taking share from others. In fact, a recent study from SPIN showed that only 3.5% of households have...

purchased our breaded poultry items were from households that purchased breaded poultry from the nation's largest brand in the prior 52 weeks.

This generates incremental category growth I have not seen before in my career. It means our growth is not only good for us, but it is good for our retail partners as well.

These strong brand health indicators underpin our confidence in achieving over $500 million sales over the long term.

I'd now like to turn the call over to our CEO , Jerry Law, to provide an update on Bolingbroke in our operations more broadly.

Thank you, Brian . Good morning, everyone, and thank you for joining us on today's call. Our Bolingbroke, Illinois facility is continuing to ramp up production and we are on track to achieve targeted efficiencies in the second quarter. I am very proud of the team and how far we've come since opening a new facility. Bolingbroke enables our entry into exciting new categories and

and gives us much needed capacity to meet the growing demand for our new and existing products.

I was pleased with our gross margin performance in the first quarter, which was above our expectations.

Our 16.7% gross margin is particularly encouraging given that our plants were significantly underutilized owing to the cadence of our sales plan, which points to the first quarter being the trough for utilization. For perspective, our sales plan calls for a doubling of our capacity to live.

about building capacity ahead of demand.

All the hard work and investments made to get this capacity up and running over the past 12 months has put us in a position where we are confident that we can scale production to meet our significant growth our sales team has locked in for the rest of the year.

Not only are we in a good position to meet our demand needs, we expect to do so at targeted efficiencies. In other words, our growth should be highly incremental to the margin structure for the remainder of the year, especially in the second half of 2023.

Lower raw material costs contributed to our solid margin performance in the quarter, but it also reflects improved efficiencies in our formulations, which we had planned for and are durable.

This was a tough quarter to judge plant efficiencies given the sub 40% utilization levels as well as the amount of new product activity, both of which have a negative impact on efficiencies.

However, I am encouraged by the sequential improvement in efficiencies at Bolingbroke and City of Industry continues to perform well.

Moreover, we expect our operating performance to improve significantly as the year progresses, driven by better efficiencies, lower labor costs, improved plant utilization, and better overhead cost leverage.

Before I turn it over to Akshay, I would like to discuss the biggest catalyst for the remainder of 2023.

We expect our labor costs to continue to come down sequentially as Bowling Book becomes a bigger portion of our production mix and achieves targeted efficiencies.

further aided by continued efficiency gains at our City of Industry facility. We are confident in our ability to bring labor costs in line with industry standards of about 5-10% of sales. To reiterate, we expect a major portion of this opportunity to flow through this year as efficiencies are optimized in both plants and in the future.

and bowling book 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 this overhead leverage to drive approximately 10 points in our further improvement in our margin profile in the second half of 2023 as compared to the first half.

Lastly, Bolingbroke has enabled significant productivity savings that have already started to accrue as we move into 2023. These include the self-manufacturing of our chicken tortillas, cooked chicken that is used in our product fillings, and our proprietary breading blends, which on a combined basis are likely to drive approximately 200 to 400 basis points of margin improvement.

As for direct material inflation, the good news is the commodity costs remain favorable and point to roughly a 600 to 1,000 basis point tailwind for 2023. In summary, although we walked away from some promotions in the first quarter that negatively impact sales, it was all done with a keen eye on margin targets.

We are pleased by our margin performance this quarter, which showed significant sequential improvement to the highest margin our company's history. We continue to expect 2023 adjusted EBITDA to be in the positive to mid-high single-digit millions of dollar 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 am thrilled to report the tremendous progress of our supply chain and operations teams have made, all in order to support our growing demand. I still believe we are in the very early innings of growth.

and are well positioned to capture market share and categories in which we compete.

Now I'd like to turn the call over to Akshay, our Chief Financial Officer, who will walk you through the first quarter financials. Thank you, Jerry, and good morning, everyone. Turning to our financial results, net sales in the first quarter were 29.8 million, a decrease of 21% as compared to the first quarter of last year.

The year-over-year decline in sales this quarter was driven primarily by the timing of certain promotional events that drove sales growth in the first quarter of last year, which now fall in the second half of this year. Excluding these promotional timing issues, sales would have been up double digits this quarter.

driven by continued distribution gains in the measured channel, new product, and strong baseline velocity. Underlying velocities remain strong and were up sequentially in the first quarter.

Sales in the unmeasured channel declined by approximately 35% year-over-year in the first quarter owing to the aforementioned promotional timing issue.

Excluding the impact of promotion, sales would have been up in the mid-teens on a year-over-year bid. On a two-year stack basis, growth remained strong at 77%. We expect growth to accelerate both on a year-over-year and two-year basis for the remainder of the year. On May 8, items were authorized for distribution in March.

which is a two-fold increase in the number of items we have ever previously had authorized at any one time.

Several of the new items authorized are in categories that have 50% higher velocities than are base business and as such will be additive to our brand level velocities in this channel. Points of distribution in the unmeasured channel which are a good proxy for volume growth, in March.

as we were transitioning into newer versions of our legacy product and had yet to gain distribution for our new product.

distribution has increased substantially in the second quarter and we expect this trend to continue as the year progresses on the back of the significant new distribution wins already secure growth in legacy item distribution as well as commitments to certain planned promotional events since we reported 4Q earnings in late March

we have gained greater visibility on the outlook for growth in this channel.

Specifically, we now have commitments for nationwide distribution of our breaded poultry, as well as our 2.0 enchiladas in the second half of 23. These commitments, combined with our new product win, are in fact,crews helping with their daytime as well as year- Checking proclaim, gathering, and ensuring your

give us greater confidence in achieving our 2023 sales target for the unmeasured channel.

including the impact of promotional timing, sales growth would have been in the mid single digits on a year-over-year basis.

Shipment growth outpaced consumption this quarter, which we attribute to the new product activity that is yet to be captured by syndicated data and usually takes 90 days to integrate. We expect both shipments and consumption to accelerate for the remainder of the year, starting in the second quarter, driven by the aforementioned 40% increase in distribution points or records.

and show your over your growth starting in the second quarter as the comps normalized and we gain further distribution on new items that have higher velocity.

As such, we remain bullish about our prospects for measure channel growth in 2023.

As Brian mentioned, we now have greater conviction in meeting our 2023 revenue target of at least $200 million in sales.

The increase in our conviction is based on the following. One, continued strong momentum on distribution expansion in the measure channel, including approximately 14,000 new distribution points at a large national grocery retailer. Two, commitments for national and full distribution of our bread, poultry, and 2.0 enchiladas in the unmeasured channel.

of 4.2 million or a gross margin of 11.3% of net sales in the first quarter of last year. The increase in gross margin was primarily due to lower commodity costs and the positive impact of our productivity initiatives, which include reformulation and throughput increases. The 16.7% gross margin performance this quarter.

implies an approximate 300 basis points sequential improvement, which is particularly encouraging given the fact that our plant utilization remained below 40% and declined sequentially.

Adjusted gross profit during the quarter was $10 million, reflecting an adjusted gross margin of 33.5% on net sales as compared to $6.5 million or 17.2% on net sales in the first quarter of last year. Productivity initiatives and lower commodity prices contributed to the year-over-year increase in margin.

We should also note that certain key commodities like chicken, pork, and cheese were at seasonally low levels in the first quarter and contributed to our adjusted gross margin being the highest in the company's history.

Although we exited 2022 with a structurally lower cost, given the cyclical nature of some of our key commodities, we expect our adjusted margins to moderate in the second quarter as we absorb the impact of seasonally higher costs for some of our key commodities.

With that being said, we are maintaining our adjusted gross margin guidance for 2023 of at least 24%.

Looking ahead to 23 and beyond, we have a long runway of future productivity savings that will drive incremental margin expansion. Additionally, as Jerry mentioned, the cost of our key commodities are down significantly on a euro-a-year basis. And if we were to lock in our key commodities at current spot rates, our margins in 23 would be 600 to 1,000 basis points higher.

Total operating expenses were $15.7 million as compared to $12.9 million in the first quarter of 2022.

Adjusted operating expenses increased by approximately $2.5 million to $12.7 million in the first quarter of 2023 as compared to $10.2 million in the first quarter of 2023.

The increase in operating expenses was driven entirely by the increase in research and development costs to support the strong new product pipeline in 2023. For perspective, R&D costs were $3.1 million or 10.3% of sales this quarter and are expected to moderate as the percent of sales for the remainder of the year.

We continue to expect R&D costs to be roughly 3-4% of sales for the full year. R&D costs tend to be lumpy on a quarterly basis depending on the level of new product activity as well as the timing and scale of commercialization.

Adjusted EBITDA totaled a loss of $1.1 million as compared to a loss of $3.3 million in the first quarter of 2022. This was generally in line with our expectations. Cash burn was greater than expected this quarter owing toyright?ARY22 Join us here

Our plants being significantly underutilized as a result of the shift in promotional timing we talked about earlier. We also invested in inventory to support the significant new product activity in the quarter as well as some opportunistic buys to take advantage of lower commodity costs. We have strong visibility into our distribution gains in the upcoming shelf-reset cycle in May.

which includes the national rollout of bread and poultry items that allows mass retail. This significant inflection in our sales growth starting in the end of May and early June should result in significant fixed cost leverage across our plant network and in GNA, propelling us to be closer to a goal of being operating cash flow positive starting in the second half of 2020.

outlook for 2023.

In 2023, we continue to expect net sales of at least $200 million, adjusted gross margin of at least 24%, adjusted EBITDA in the mid to high single digit range, and positive cash flow from operation.

Long term, we continue to expect net sales of approximately 500 million, adjusted gross margins of 35% and adjusted EBITDA margins of 15%.

This concludes our prepared remarks. I would now like to hand the call over to the operator to begin our Q&A session. Operator.

We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participant, please use your speaker equipment and may be necessary to pick up your handset before pressing the star key.

One moment please while we pull for questions.

Thank you. Our first question is from John Anderson with William Blair. Please proceed with your question.

Morning, everybody.

Good morning.

I wanted to start with.

trying to better understand some of the new news versus the prior quarter.

Could you describe a little bit more specifically what has improved from a distribution standpoint? I think we knew last quarter that you had achieved significant new distribution on bread and poultry with a large mass customer.

But if I'm interpreting the prepared comments correctly.

it sounds like you've also added significant new wins.

both maybe in Asian entrees and with breaded poultry and non-measured. So could you just kind of tease out what's incremental to what we had heard on the last call? Thanks.

Yeah, hey, good morning, John . This is Brian . In the measure channel, you're right. You're exactly right. A large.

national retailer recently authorized four of our multi-serve entrees into all banners, all stores with great placement. So we see that kind of rolling out in Q3. And so and that's just because I think

We do have that product in stores today, and retailers are starting to see the velocities and incrementality that we're delivering. In the unmeasured channel,

Yeah, the new news is bread and poultry will be available nationally.

is bread and poultry will be available nationally.

in full distribution in late Q3. And that's something that we've really been working hard on. Again.

incremental revenue for our retail partners. And so we're helping them grow the categories and we were able to earn that placement and we're pretty excited about the impact that we'll have on the company.

That's helpful, thanks. And then kind of turning back to the.

the rollout of breaded poultry with that large mass account. Two questions about that. One is...

what gives you confidence in the velocity performance there? I think you've been on shelf for some time with one item. I'd just love to hear your comments on the trajectory of the velocity that you've seen on that item, because that should be a pretty good predictor of.

of how that business performs going forward as you take it nationally. And then what are in your assumptions for the guidance on those particular items? Are you baking in

anything that we should be aware of with respect to the performance of that product once it rolls out nationally. I know it's moving into a new door. I think you're having to have two items on shelf instead of one today. So, talk to us a little bit more about that. Thanks. You bet. They're great to we're going to fax you a freshings and I was so secretary from my desire to use us. I was five. Sorry to theinated you've had a short, eight hours.

You're right, our bread of poultry has been on the shelf for almost a year now. What we've seen is very stable velocity, very predictable business.

That's the beauty of our guidance for the rest of the year, that the distribution expansion that we've obtained are all from products that have been on shelf for nine months and in some cases almost 12 months.

In that category in particular, you see very stable velocities, very predictable velocities.

It's true that in the measure channel, we'll be moved over into a door that has six times the velocity of the current door that we're in, but of course we're not going to include expected velocity gains in a meaningful way in our guidance. You know, that's a discipline that we've maintained since we went public and we continue to do that.

Back in early Q4 of last year, product is still on shelf today obviously. It's expanding and we see you know nice stable velocities as well and that's why we were able to earn the national distribution that we'll get in Q3. So you know part of its category dynamics.

It's a stable category with predictable velocity. But to be really clear, we don't include expected velocity gains in a meaningful way in the guide. Okay. And maybe one more follow-up. I don't know if this might be for Terry or Akshay.

On the gross margin, it's strong on an adjusted basis in the first quarter at north of 33%. You're guiding, I think, at least 24 for the full year, which would imply a pretty significant come down as we move forward. Is that just conservatism given?

everything you have going on from a new distribution perspective, ramping up Bolingbroke.

you know, how should we interpret that and how do you see the kind of the cadence of gross margin playing out from here through the balance of the year? Thank you.

You know, I'll turn this to Akshay, but before I do, at a high level, I think it's prudent not to change guidance at this time. And for me, at a high level, it's really about plant utilization.

is really where the opportunity is. It's just so obvious. But Akshay, why don't you go ahead and jump in on that one?

Yeah, thanks, Adrian. So, great question. You know, the way you want to think about it is, you've looked at the numbers in our guide. We didn't change the guide. It implies, you know, roughly 24% adjusted gross margins for the rest of the year.

Certainly, there's some conservatism in there, but I think it's prudent because there's plenty of year to go. However, the way you want to think about the building block is this quarter, the commodity cost benefit was higher than it will be.

all else equal by about 350, 400 basis points. Why? Because some of our key commodities like chicken, and cheese, and bacon are at their seasonal low points in this quarter. So that won't sustain.

And then you have to add labor and overhead as significant contributors for the remainder of the year with all of the initiatives that we have in place. So the overhead piece as Brian mentioned, really easy to understand. With the volume that we have coming.

we're going to increase our utilization rates from 40% to 80%. That's going to have a tremendous positive impact on overhead leverage and cash flow, right? So that's easy. And on labor, you know, every pound coming out of Bolingbroke is going to be accretive to our overall labor cost. And we're going to have more and more pounds coming out of Bolingbroke, and more and more bread, poultry, pounds.

which are very efficient from a labor perspective. So our labor costs are still 17%, 18% of sales. They were the same in one queue. So we've been talking about labor as a huge driver of savings, and that has yet to accrue for a number of reasons, that it's all timing related.

In our control, great visibility. There's 7, 800 basis points that will accrue in the next 9 to 12 months on labor. And that's why we continue to feel really good about our guidance on operating cash because we're about to turn the corner in a major way on these value drivers. Did that help?

Yeah, very helpful, Akshay. I appreciate all the commentary. And good luck. Sounds like an exciting three quarters coming up.

I appreciate all the commentary and good luck. Sounds like an exciting three quarters coming up. Thank you.

Thank you. Our next question is from JP Wollum with Roth Capital Partners. Please proceed with your question. Good morning, everyone, and thanks for taking my questions. Maybe if we could just start, I think this is actually something that may have come out of the April presentation. But, look at this phone call right now. It must be... blWin? No, no, no.

I want to just focus on household spend. I think there was kind of a comment in that presentation about industry average being something around $50 and RGF only being at about $10. I was just hoping maybe you could share kind of.

why that is as low as it is today and maybe just how you get closer to that industry average it seems like that obviously goes a long way towards your targets and just longer term targets so just kind of curious how how that number ramps up closer to industry average

Yeah, you're right. Great question. Great insight to the category. Health and wellness brands average actually closer to $60 per household. So to tie that down

Household penetration is really an indicator of future growth. And what it takes to get to that $60 is just more points of distribution. Why? Because the consumer needs a variety in their basket. And so to give you perspective, the brands such as Amy's that, you know, have a variety of different brands.

achieve that kind of dollars per store, they're going to average over 40 to 50 items in any given grocery store. Today our TPDs are so low we're at 9 to 10.

So that's number one. So our job is to, you know, grow our TPD. Good news is, you know, we said in our prepared remarks that we have over 50,000 new points of distribution, so that's going to help. And then the other thing, this is just me speaking on this, when you talk about bread and poultry, that's a higher frequency item.

And I think that will grow our dollars per consumer as well. It's an item that's enjoyed by all of the households, and it's a higher velocity area of the store. So look, at the end of the day, our low dollars for households shows the room for significant growth. How do we get there? Do we grow the number of items?

I know we're a little post quarter end here. What is, first off, is there anything remaining in terms of the revolver? And then second would just be in terms of inventory and thinking about operating cash flow for the year. There is something we could calculate to the face of this Et tuach this weekend.

You know, have you built inventory to a higher level than you would expect given kind of the distribution gains? And will we see any kind of major drawdowns that will benefit operating cash flow in concert with the shelf resets? So maybe that's a 3Q big drop.

Any kind of color you can point out there, and then just also the revolver availability. Thank you. Yeah, good question. So, we have sufficient liquidity currently under our revolver.

and our plan remains to self-fund the business. And we've talked about turning the corner on, turning operating cash flow positive here in the short-term with the resets that are ongoing. If we execute our plan, which we fully expect to –

we think we have an opportunity to actually refinance our debt at lower costs and increase our liquidity even further.

So that's where we think we are from a liquidity standpoint. We have sufficient liquidity and access to more. Secondly, yes, inventory build was greater than expected this quarter. I think it's timing related and new product related. So that's what happened. So we had about $8 million of

working capital related cash usage this quarter. And timing wise, it was somewhat unexpected relative to the original plan, again because of everything we've talked about with the cadence of our sales plan. But absolutely, there is a big opportunity for us to reduce our days on hand for inventory. We're working really hard on it.

when you are growing as rapidly as we are, and expanding your base of products and the categories you compete in, you are going to see increased inventory temporarily, and that is what you are seeing. So it is a good problem to have.

It's collateralized debt, so it gets added to the borrowing base, so it's easy to borrow off of. But yeah, we did increase inventory. We will lower it over time, but right now we are in heavy growth mode, and that investment is absolutely necessary. We also this quarter made some opportunistic purchases of commodities like bacon that are going to accrue to the margin and cash flow for the remainder of the year.

Hopefully, that helps. Did that answer your question? Yeah, I think definitely. Any color you can share about when the refinance or is it way too early to even contemplate that? Yeah, we're not providing guidance specifically on that. We're focused on executing our plan.

to do anything but opportunistically they if the opportunity comes up nationally will pull the trigger

Great, yes, and I will pass it along. Best of luck. Thank you guys. Thank you. Our next question is from Rob Dickerson with Jeffries. Please proceed with your question. Great, thanks so much. I guess just kind of circling back to...

The guide... Let's see, kind of make sure I got everything. I guess what I'm hearing is, you know, actually you said 350, 400 basis points and kind of the step down given the seasonality and input cost. But then at the same time, right, it seems like there could be some incremental top-line advantages to some of the poultry that's being rolled out in late Q3. The story with the

then we have the whole conversation around utilization and labor. So I guess you know prior question was they are you being conservative but you know even if you take that 350 to 400 basis point step down then I mean it seems like gross margin this year you know should in theory be you know much much better than the 24% right I know you're saying 21st

24% or higher, but it just seems like it should be much better than 24%. So I guess like why not take it up to like 26 or higher? Sometimes companies take it up a little bit. Sounds like you're being very prudent and careful in Q1, but all the commentary right now is super positive.

So, like, is there anything that's just preventing you from saying, hey, yeah, we're doing an awesome job and you know what? Yeah, it's going to probably be higher than 24%.

I'll take that. You know, it's a good question. I think it's proven for us to be.

appropriately conservative. Most of our commodities, as you know, especially the big ones aren't hedgeable. We are hedged advantageously on cheese right now, but you know.

Chicken market can be quite volatile at times, and so we want to leave some room for that, things that are out of our control. And we've got to execute on our plan, and we are confident that we will. And let's see how we perform in the second quarter, and we'll reassess.

guidance then, right? Because we got to get these pounds through the plant and that's what we want to see happen. We know if we do that efficiently what the numbers will look like and you know that too. But yeah, I think once we do that we'll have greater confidence and we'll be further enough in the year.

to be able to adjust our margin expectations. We've had now 2 quarters of really good performance despite being 40%, 50% utilized. So yes, we are feeling better.

But, you know, we've got to perform and we're going to let our results speak for themselves. All right, fair enough.

And then Brian just kind of want to circle back to I guess the bread and poultry conversation. You know, you said, I think you said, correct me if I'm wrong, you know, incremental like fairly material distribution gain and a non-track channel, right? Sounds like that's, I assume that's club....

And I just forget, so apologies. You're already in math, so I'm just curious, as you think through kind of the potential here in bread and poultry, and then there are other subcategories, right? You've spoken to Asian.

There also is a comment that you made on the call about the two different temperature states. So I'm just curious, right now, kind of what I'm hearing on this call is we have visibility. I think the line was because of essentially the orders that have taken place. The orders are there. You know it's coming. You have to actually ship it, get it through the plant, have everything work. We're highlighting breaded chicken.

But, you know, given the success already of the brand, I guess the two direct questions I have are, you know, are there other conversations with those other subcategories that maybe we're not highlighting as much, number one. And then number two is, you know, with the skews you're getting in non-tracked inbred or poultry,

The assumption here is this is all incremental, right? Because it's in a different part of the freezer case, and that's part of the broader plan, right? And multiple locations within the freezer dependent on the category. So, this is all a step up in incremental SKUs in non-TRACT, but then how does this benefit kind of the broader landscape of your overall SKU selection in conversations you're probably already having? That's it. Thanks a lot.

Yeah, I mean our strategy in the unmeasured channel is to have a portfolio of products that are in two different temperature states and in seven different categories. So what you'll see play out in addition to bread and poultry, you're going to see a frozen breakfast item roll out. I should not say roll out. You'll see a frozen breakfast item.

and parts of the country. You know, we have an appetizer item. Obviously, our entrees. You know, it shouldn't go overlooked that, you know, our enchilada, our new Poblano enchilada will be in full distribution in late Q3 as well. So, you know, the strategy behind it, Rob, is to have a durable, predictable business. And the way you get there is by having, you know, having offerings that are in different eating occasions, different day parts, in different categories, in different temperature states. And if we do that, which is what we're going to do,

lot and we think that innovation, that category is long overdue and we're working hard at it and I think you'll hear us talk about that in 2024.

Did I hit, was that clear enough? Yeah, I think that's clear enough. And, you know, maybe just one quick follow up to. You know, as you mentioned R and D, and then also to just touch on marketing, obviously there can be operating leverage that will flow through the plants with higher revenue and efficiencies.

you know, you've been highlighting since day one, you know, the success rate of social media, right, kind of how you're marketing the product. You know, is there any change potentially that could come to that strategy, not in a bad way, but in an incremental way, you know, either via trade spend or, you know, different channels of marketing and kind of demand, you know, consumer...

make money and be significantly positive to DAW.

The good news is, being the largest social media footprint of any frozen food and having these authentic conversations, we activate over 1,500 nano and micro influencers. It's really efficient, Rob.

But in terms of you know, really throwing money at the marketing side at some point in the future You're not going to see us do that until we are making a lot of money and you know What excites me about the quarter if it shows the true? You know potential that this business can you know, we'll make money in the future all we got to do is get the pounds through the

Super. Thanks.

Thanks. Thank you very much, Beth.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Brian Freeman, the Executive Chairman, for any closing comments. Hey, thank you for joining us on this call this morning, and we look forward to reporting our second quarter results in a few weeks. Have a good day.