Q2 2023 The Real Good Food Company Inc Earnings Call
Greetings and welcome to the real food real good food companies second 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.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Shamari Benching, Vice President of financial planning and analysis. Thank you you may begin.
Good morning, and welcome to the real good food companies second quarter 2023 earnings Conference call.
On the call today are Brian Friedman Executive Chairman.
Jerry law.
<unk> Executive officer.
The Austin Chalk Hill, Chief Financial Officer.
Our second quarter earnings release crossed the wire at approximately <unk>.
<unk> time today.
If you have not had a chance to review the release, it's available on our best a portion of our website at Www Dot real good food Dot com.
Before we begin I'd like to remind everyone that certain statements on this call are forward looking statements within the meaning of federal securities laws and as such.
Considerable risk.
<unk> uncertainties.
These forward looking statements are intended to qualify for the safe Harbor from liability established by the private Securities Litigation Reform Act of 1995.
All statements made on this call today.
Other than historical fact are forward looking statements and include statements regarding our projected financial results, including.
Net sales.
Gross profit.
Gross margin at <unk>.
The gross profit adjusted gross margin.
<unk> adjusted EBITDA.
As well as our ability to increase net sales from existing customers and acquiring new customers introduce new products and compete successfully in our industry implementing our growth strategy and effectively expand our manufacturing and production capacity.
Forward looking statements made on the call represent management's current expectations.
They are based on information available at the time such statements are made.
Such statements involve a number of known.
And unknown uncertainties.
Many of which are outside the companys control that can cause future results performance or achievements to differ significantly from the results performance or achievements expressed or implied by such forward looking statements.
Important factors and risks could cause or contribute to such differences are detailed in the company's filings with the securities and Exchange Commission.
Except as required by law the company undertakes no obligation to update any forward looking statements herein, whether as a result of new information.
Future events or otherwise.
In addition throughout this discussion.
Refer to certain non-GAAP financial measures, which we refer to results before taking into account certain one time or nonrecurring charges that are not core to our ongoing operating results.
And which we believe better reflect the performance of our business on an ongoing basis.
Our non-GAAP financial measures include adjusted gross margin and adjusted EBITDA are reference.
A reconciliation of each non-GAAP financial measure to its most direct comparable GAAP financial measure is included in our second quarter earnings release, which is available on our website under our investor tab.
With that it's my pleasure to turn the call over to the real good food companies Executive Chairman, Brian Friedman.
Okay.
Hey, Thanks, Tamara good morning, everyone and thank you for joining us today on our second quarter earnings call I will briefly review, our second quarter highlights and discuss the reasons. We believe we're well positioned for long term profitable growth Jerry will cover operations and Akshay will then review our financial results and outlook in more detail after that we'll open the call for <unk>.
Starting with our.
Financial highlights for the second quarter net sales were $35 4 million, an increase of 15% year over year and an increase of 89% on a two year stack basis, both of which represent a significant acceleration sequentially.
Additionally, we saw a sequential acceleration in sales in growth each month within the quarter with over 30% shipment growth in June and this momentum has carried into the third quarter and is expected to continue into the fourth quarter and beyond the.
The acceleration in sales growth this quarter was driven by the Unmeasured channel, which was up 61% on a year over year basis and up 116% on a two year stack basis.
Both of which represent a significant acceleration sequentially.
Growth was driven primarily by improvements in velocity, which is highly incremental to the categories. We participate in.
Given the strong velocity performance that helps gross sales for our retail partners. We naturally secured additional distribution in the unmeasured channel for the remainder of 2023 distribution improved significantly late in the quarter and is expected to double in the third quarter of 2023.
We are particularly encouraged by the breadth of our offerings in the unmeasured channel, which spans seven categories to temperature states and three eating occasions.
As we exited the quarter and began the third quarter, we had eight items in distribution and over 50% of the store base in this channel, which is more than double compared to a year ago. As a result, we expect unmeasured channel sales growth to accelerate further in the second half. This includes national distribution of breaded poultry appetizer.
And entrees as well as further expansion of our handhelds, which include our flowers and burrito platforms in the refrigerated section.
So to summarize the unmeasured channel and provide additional perspective in 2020. One we had two items that on a combined and annualized basis achieved 65% ACB.
In 2022, we grew to three items with a combined and annualized ACB of 68%. We currently have eight items in distribution that participated seven categories and two temperature states for perspective, we've never had more than four items authorized simultaneously in our history.
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 business going forward.
Now turning to the retail channel performance.
<unk> growth was 56% on a tier stack basis, but was down year over year. The year over year decline is a function of the timing of shelf resets, which happened with only 12 days left in the quarter and the lapping of a record quarter last year, where the channel saw at 93% growth due to one time promotional events. The good news is we're on.
On shelf now and shipment growth in this channel has already inflected driven by distribution growth from a late June shelf resets combined with higher velocity.
As of second quarter, and our total distribution points for 171000, which is an increase of roughly 23000 total points of distribution versus 'twenty 'twenty. Two. In addition, we have roughly another 30000, new distribution points confirmed for the second half of 2023, which represents an increase of 34.
5% versus the year ago average.
And due to the new item reset schedules in the measured channel. This new distribution started to come online late in the second quarter and will build further in the back half of 2023.
The products that are gaining distributions such as a global multi serve entrees and breaded poultry has significantly higher velocities than our base, which we expect will drive significant overall brand velocity growth for the remainder of 2023, we continue to expect strong double digit growth in the channel for the remainder of the year.
The aforementioned new distribution gains combined with strong base business philosophy gives us confidence that we will grow sales in 2023 to at least 200 million representing growth of approximately 41%.
We typically do not provide quarterly guidance, but I believe it is important to do so today on a onetime basis, given the significant inflection and hockey stick growth trajectory of our business.
We're already seeing this growth happening and I want to assure our shareholders are aware of our strong conviction on this positive development.
For the third quarter of 2023, we expect sales to be in the range of $60 million to $65 million, representing 60% to 73% growth in fourth quarter, 2023 sales of $70 million to $77 million, representing 96% to 116% growth.
This revenue growth inflection in the second half of 2023, approximately doubles, our plant utilization rates reduces our SG&A costs as a percent of revenue and as such and enables us to drive positive cash earnings.
Jerry and Akshay 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 of how we see the rest of the year shaping up.
Gross margins were 13, 6% this quarter, which is 598 bps improvement year over year.
What is particularly noteworthy about this performance is the fact that we achieved this while our plants for less than 40% utilized adjust.
Adjusted gross margins, which account for the capacity utilization impact were 28, 2%.
Representing a 619 bip improvement year over year in the second best quarterly adjusted margin in the company's history.
The strong adjusted gross margin performance this quarter points to the underlying earnings power of this business the.
The year over year improvement in our margins is being driven by our productivity initiatives as well as an overall favorable commodity cost environment.
On a sequential basis, our reported gross margins should improve significantly driven by a significant increase in plant utilization rates and lower labor costs.
Adjusted EBITDA was a loss of $1 9 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.
For the back half of this year, we share of plant utilization rates almost doubling this leverages, our overhead and SG&A and it's how we expect to see positive cash earnings in the third and fourth quarters.
Next let's take a look at the current state of health and wellness market and how our brand positioning is resonating with a broad consumer base.
According to spins for the 52 weeks ending July 16th the 204 billion health and wellness industry grew 7% year over year in line with the 7% two year CAGR over the same period. The 66 billion total frozen food category grew 9% generally in line with the 8% two year.
Baker.
Industry observers have called out the fact that category consumption trends have weakened in recent months versus industry cycles and price increases during a relatively tough economic backdrop for our consumers.
We did not take significant pricing actions like our competitors and as such are not dealing with volume declines related to elasticity. Our growth continues to be highly incremental to the categories. We compete in and we tend to source consumers from a broader health and wellness industry, which is not seen softening trends like the frozen food category.
It's important to note that the frozen food category has historically performed well during recessions as it tends to benefit for consumers trading down from eating out to eating more at home also private label penetration in the frozen category is relatively low at about 9% to 10% as compared to 20% to 22% on average across all.
Food categories, and private label penetration in health and wellness frozen is even lower than in the overall frozen food category as such trade down risk within the category to lower priced private label options is limited.
Additionally, our distribution footprint is focused on retailers that deliver value to their consumers and we have low concentration in what I call a luxury high end retailers that typically lose foot traffic during economic downturns.
Now our brand promise, there's 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.
<unk> profile.
As for our brand health, we track ourselves against four indicators household penetration repeat rates, social community growth and engagement and velocity.
Starting with household penetration according to numerator data as of July 2023, the real good Foods brand household penetration is approximately eight 3% flat from eight 3% in March 2023.
It means approximately one in every 12 households in the United States has purchased our products in the past 12 months. Our household penetration continues to rank second amongst all health and wellness frozen food brands behind only Amy's brand with over $500 million in retail sales.
For perspective, according to a research report recently published by Jefferies. The entire plant based foods category had a household penetration of only 5% down from a peak of 9% a couple years ago, our significant household penetration demonstrates how well our brand position resonates and how quickly we have connected 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 grows significantly.
Now turning to repeat rates they continue to be in line with industry averages at 32% in the most recent trailing 52 week data.
As of July 2023, give the new distribution or new users, we're bringing into our franchise. This repeat rate is exceptionally strong.
Guarding social community growth the second quarter marked one of the strongest and most efficient quarters for impressions and fall our growth in the history of the company.
We generated over $12 2 million organic impressions and 77 million total brand impressions organic.
Organic impressions are not paid for impressions and we're able to generate due to the size of our community. This provides massive long term value and that we can connect with millions of people to support our initiatives. For example, we launched new distribution, we're able to instantly tell millions of people were now available in our local.
Store through Geo targeting this creates velocity at scale, a new item performance in a way our peer group cannot achieve without spending millions of dollars on advertising.
We worked with thousands of micro and nano content creators within defined consumer verticals to mobilize and engage with people in a meaningful or entertaining way.
We have the largest Instagram community of any frozen food brand in the U S. With over 476000 followers, an uptick of approximately 22000 versus ended the first quarter. We continue to believe that using micro and nano content creators to spark authentic peer to peer conversations is a better use of mark.
Getting dollars in traditional advertising based on a number of followers since the subscribers I can say, it's working and it's efficient.
Our retailer partners appreciate how we drive new consumers to the category through participate in allowing real good foods to grow the frozen category with consumers new to frozen food rather than taking share from others. In fact, a recent study from spans showed that only three 5% of households, who purchased our breaded poultry items.
For households that purchase bread upholstery for the nation's largest brand in the prior 52 weeks. This along with strong velocities is why we have permission to grow distribution.
These strong brand health indicators underpin our confidence in achieving over $500 million in sales over the long term.
Now I'd like to turn the call over to our CEO Jerry law to provide an update on Bolling Brook in our operations more broadly.
Thank you Brian Good morning, everyone and thank you for joining us on today's call.
Our Bolingbrook, Illinois facility is continuing to ramp up production and we are on track to achieve significant utilization rate improvements in the second half of the year.
Continue to be very proud of the team and how far we've come since opening the new facility.
Bolingbrook enables our entry into exciting new categories 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 second quarter, which was in line with our expectations are.
Our 13, 6% gross margin is particularly encouraging given that our plants continue to be underutilized or.
Our sales guidance calls for capacity utilization rates to increase from approximately 40% currently to 70% to 80% in the second half of 2023.
Higher utilization rates should drive significant fixed cost leverage in our plants, resulting in a significant increase in our gross margins for the second half of 2023.
Adjusted gross margins, which assume full utilization, we're 28, 2% and point to the underlying margin profile of the business when plants are fully utilized.
We have been deliberate about building capacity ahead of demand all of the hard work and investments made to get the capacity up and running over the past 15 months have put us in a position where we are confident that we can service orders when the significant growth. Our sales team is locked in for the rest of the year hits.
Not only are we in a good position to meet our demand needs, but we are also confident we can do so with targeted efficiencies.
In other words, our growth should be highly incremental to our margin structure for the remainder of the year, especially in the second half.
2023 as plant utilization increases.
While lower raw material costs contributed to a solid margin performance. This quarter margin gains also reflect optimization of our formulations.
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 continue to be encouraged by the potential improvement inefficiencies at bolingbrook and the city and the industry continues to perform well.
Moreover, we expect our operating performance will improve significantly as the year progresses, driven by better efficiencies, resulting in lower labor cross 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 continue to expect our labor costs to come down sequentially, as bolingbrook, which has structurally lower costs compared to our city of industry facility becomes a larger portion of our production mix and achieve our targeted efficiencies.
Every incremental pound coming out of bolingbrook is accretive to our labor costs.
In addition, overall labor costs are 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% to 10% of sales over time.
To reiterate we expect a major portion of this opportunity to flow through in the second half of this year as efficiencies are harvested and both plants and bolingbrook becomes a bigger portion of our production mix.
Additionally, higher sales will drive a step change in plant utilization rates and allow us to leverage lower overhead costs.
We expect this overhead leverage to drive approximately 10 points and further improvement in our margin profile in the second half of 2023.
Compared to the first half.
Lastly, our investments in bolingbrook have enabled significant productivity savings.
These include the self manufacturing of our chicken tortillas.
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 materials inflation. The good news is the commodity costs remained favorable and point to a roughly 600 to 1000 basis point tailwind for 2023.
In summary, our operations infrastructure has more than enough capacity to meet the incremental demand we expect for the second half of 2023.
The sequentially higher sales level that we are now guiding to in the third and fourth quarter driven by distribution points already secured.
Mark an important inflection point for the business from a capacity utilization perspective, and will enable us to meet goals, we laid out for 2023.
We are pleased by our margin performance this quarter, which was in line with expectations and showed significant improvement year over year.
We continue to expect 2023, adjusted EBITDA to be in the positive mid to high single digit millions of dollars range and expect to generate positive cash earnings in the second half of 2023.
We have strong visibility into the drivers of our continued margin turnaround and feel confident in achieving our outlook.
Is an exciting time at real good foods and as we enter the second half of the fiscal year. We continue to provide focused support for the growing demand. Our sales group is locked in by investing in talent capabilities and our supply chain.
I feel confident in our ability to effectively navigate the environment, we're in to deliver results and increase value for our shareholders.
Now I'd like to turn the call over to Akshay, Our Chief Financial Officer, who will walk you through our second quarter financials.
Thank you Jerry and good morning, everyone turning to our financial results net sales in the second quarter were $35 4 million, an increase of 15% compared to the second quarter of last year.
Sales in the Unmeasured channel increased by approximately 61% year over year in the second quarter, driven primarily by velocity quote.
It is worth noting again that our velocity growth is highly incremental to the category and the incremental it is higher than we had expected.
Brian mentioned in the measured channel our brand interaction with the leading brand in breaded poultry was only three 5% same.
Same is true in the Unmeasured channel, where our growth has been almost 100% incremental or they can come back Brian .
Given the strong velocity performance against secured incremental distribution in the unmeasured channel for the remainder of 2023.
Probation improve significantly late in the quarter and is expected to double sequentially in the third quarter quite quite great.
Growth in the Unmeasured channel is tracking ahead of our expectation.
And our expectations for the second half growth and materially higher than our previous forecast.
In the retail channel growth was 56% on a two year stack basis, but was down year over year a year over year decline is a function of the timing of shelf resets, which happened very late in the second quarter of 'twenty three.
The lapping of record 90% growth last year.
Last year's growth was in part driven by certain promotional events that did not repeat this year.
Shipment growth in this channel has already inflicted driven by distribution growth from the June shelf reset.
Mind with higher brand velocity.
The new products that we introduced recently have significantly higher velocity than our base products.
We expect will drive significant overall brand velocity growth for the remainder of 2023.
We expect strong double digit growth in this channel for the remainder of the year.
We now have greater conviction in meeting our 2023 revenue target of at least 200 million in sale.
The increase in our conviction is based on the following one.
Better than expected Unmeasured channel growth.
Two strong new item velocities and incremental distribution growth.
And three continued strong momentum on distribution expansion in the measured channel.
To demonstrate our conviction in the implied hockey stick growth trajectory for the remainder of the year, we're deviating from our typical pattern on a one off basis and providing quarterly guidance.
We expect third quarter 2023 sales could be in the range of 60 to 65 million.
Representing 60% to 78% growth.
<unk> fourth quarter 2023 sales of 70 to 77 million, representing 90, 616% growth.
With revenue growth of approximately doubles, our plant utilization rate Rick.
It reduces our distribution and administrative costs as a percent of revenue and as such we expect to generate positive cash are.
Our second quarter gross profit was $4 8 million, reflecting a gross margin of 13, 6% of net sales.
As compared to a gross profit of $2 4 million or gross margin of seven 6% of net sales in the second quarter of last year.
The increase in gross margin was primarily due to decreases in certain raw material costs and productivity and efficiency improvements at the bolingbrook plant.
Adjusted gross profit during the quarter was $10 million, reflecting an adjusted gross margin of 28, 2% of net sales as compared to $6 8 million or 22% of net sales in the second quarter of last year.
Activity initiatives and lower commodity prices contributed to the year over year increase in Martin.
Although adjusted gross margins in the first half of 2023 have averaged higher than our guidance range for the full year, we're maintaining our adjusted gross margin guidance for 'twenty three 'twenty four cassette.
Several factors are contributing to this implied sequential moderation in adjusted gross margins, including negative product mix seasonally higher costs for certain key inputs.
And higher levels of above the line brand support like slotting fees to support growth.
On a reported basis gross margins are expected to increase substantially in the second half driven primarily by lower labor and overhead costs.
Looking ahead to 2023 and beyond we have a long runway of future productivity saving that will drive incremental margin expansion.
Total operating expenses were $15 5 million in the second quarter as compared to $12 2 million in the second quarter of last year.
Adjusted operating expenses increased by approximately $4 1 million.
$1 5 million in the second quarter.
Compared to $9 4 million in the second quarter of last year.
The increase in operating expenses was driven primarily by the increase in research and development costs to support the strong new product pipeline in 2023, 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 9 million in the second quarter as compared to a loss of $3 3 million in the second quarter of last year. This was generally in line with our expectations cash burn in the second quarter improved sequentially, but was still relatively high owing to the plants being significantly under levered.
For most of the quarter.
Relaxation rates improved towards the end of the quarter and we were cash flow breakeven during that period.
Also continue to invest in inventory to support the significant acceleration in growth expected in <unk> 2023 and beyond.
We have strong visibility and significant inflection in our sales growth starting in the third quarter, which should result in significant fixed cost leverage across our plant network and then G&A.
Selling us to positive cash earning power.
Following the end of the second quarter, we announced an amendment to our credit facility.
We are pleased with disagreement which further enhanced our liquidity position and will provide us with access to non dilutive capital.
Our growth and transition to positive cash generation.
As such we have ample liquidity to fund our current needs and execute the plan we have laid out.
Now turning to our outlook for 2020 three.
And 2023 we're reiterating our expectations for net sales of at least 200 maryanne adjusted gross margins of at least 24%.
Adjusted EBITDA in the mid to high single digit range.
As for cash flow, we expect to transition to positive cash earnings in the second half of 2020 three.
Long term, we continue to expect net sales of approximately 500 million adjusted gross margins of 35% 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 question and answer session operator.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Thank you. Our first question comes from the line of Jon Andersen with William Blair. Please proceed with your question.
Good morning, Thanks for the question.
I wanted to ask first about the sales guidance.
Kind of reiterated the outlook for the full year.
At a high level is the right way to think about that.
You know, you're seeing better performance or expectations in the second half in the non measured channel.
But this is offset a little bit by what sounds like maybe <unk>.
Later distribution or late quarter shelf resets in the measured channels. So is there a bit of a trade off there between non measured and measured this year, that's kind of leading you to kind of reiterate the.
Full year sales outlook.
Yeah, Hi, good morning, John Yeah, I think that's directionally accurate.
You can kind of see that shape. When you know you look at what were guy.
Guiding towards for Q3 and Q4.
So unmeasured is really.
Making up for some of the lateness in terms of those additional 30000 TPB, we see coming in in the back half.
You don't look we're still really impressed by the velocities, we're seeing with our items today.
Yeah that was kind of my next question. So so where you have seen.
The new products, you know get to shelf.
In the measured channels can you can you talk about that like where you've seen which products, which customers represent the I think the 20 25000 incremental TD piece, you've already seen and what's still to come.
Metal 30 in the back half of the year and then also.
Perhaps like are you is it too early or are you able to say anything about the <unk>.
The velocities you are seeing in some of the newer items like breaded poultry I think at a large mass customer.
Sure.
The quality of the T. T D is really.
Far better than our base.
Being driven by our global multi serve entrees and obviously our bread of poultry.
That's a long winded way of saying you know, we see anywhere from two to five.
Our base <unk>.
Products in terms of velocity and so the majority of her two.
Points of distribution are those two platforms in the measured channel.
And that's why you see.
Yeah.
The growth in our guidance to outpace on a percentage basis the growth of our points of distribution.
You asked about specific velocity reads.
It's not too early to provide some guidance on that and what we're seeing is the velocity of those two platforms are really coming in where we expected.
And what I would say is that is really impressing us is.
And some customers we've gone from one.
Item in the bread of poultry category to three and they're really not cannibalizing each other.
The incremental two additional items in that door.
Our actually complementing the.
The volume or getting out of that door, which.
As impressive and it just is a reflection of the size of the category and the velocity of that door or of that category that we're able to do that.
That's great one more on.
You mentioned I guess this quarter and I think last that time.
Timing of promotions.
It has had an impact on sales.
The sales comparison I should say promotion last year that didn't repeat this year can you talk about the cadence of of any events you're planning this year to activate consumers now that this this distribution is getting into place I guess, what I'm getting at is.
Do you do you have kind of been a forest.
Forced to absorb a bit of a headwind with respect of promo timing in the first half does that reverse in the second half.
Sure so to recap I mean, we were lapping 93% growth right in the measured channel, but when when you look at when I think about just our brand health or baseline velocity was up 8% and so that's really healthy.
You know will.
Once we get the.
Our points of distribution on shelf and of course, we'll we'll invest against them and make sure that folks.
You now see us on shelf.
We'll do that through some trade, but our plan is not to really increase our trade spend from historic level.
And how about on the.
Club side, the non measured anything there with respect to kind of.
Year over year comparison promotion.
You know what I will say is well.
We will have national distribution.
With our appetizer platform, our breaded poultry platform and our entre platform.
In the frozen section in the back half.
And the volume that we will be promoting however, the volume is so significant from an.
On a percent revenue basis.
We don't really see.
Our gross to net changing from historic levels.
Great. Thanks, so much.
Thanks, John .
Our next question comes from the line of J P. While I'm with Ross M. Can please proceed with your question.
Great.
Good morning, and thanks for taking the questions maybe.
Maybe if we could just start.
Could you just refresh my memory on.
Some of them move into the refrigerated state and I just wanted to make sure. It has that been rolled out in on shelves already for some time and if so could you just kind of give us a rundown on on how that's looking in.
And if not then.
For another day.
Sure J P.
We launched our.
Our handheld platform in the refrigerated section in the Unmeasured channel.
A couple of quarters ago and we.
We can the success and the velocity of the items has exceeded my expectations.
And so that's what's really driving additional.
Additional distribution growth.
Today, if I were to guess.
Our handheld platform in Unmeasured channel and one customers probably and this is a gas probably in the 60 or 70% range already and.
And so that's been a great tailwind for the company and what now that we've proven it out.
Youll start to see us show up in the measured channel in the back half of this year in the refrigerated section.
And we think that that could be a growth driver in 2024 and beyond.
Got it thank you and then.
I forget exactly what the quote was I think you touched on the prepared remarks Sean.
Kind of some some weakness in in either one or all of the frozen category and you alluded to something along.
Price that had been taken by some of your competitors and that may be kind of a tailwind for you and I'm just curious, especially with your high velocity categories could you just remind us kind of where your price stacks up versus competitors and perhaps what that means.
Think about price going forward.
Sure so from a category dynamic.
Perspective.
Frozen has.
It has declined the growth has declined from approximately 7% down to 1%.
And you see the sudden they headlines.
You see unit sales.
Decline and you know and we think that's a lot due.
Due to the significant.
Due to significant price increases that they took on we're talking about price increases stacked up at close to 20% in the category.
That we're not seeing that with our products and that's because here's the key point J P.
Health and wellness industry continues to grow at 7% in fact in the latest four weeks, it's up 7% and that's where we source our consumers from.
So while others sort of a commoditized frozen food business, you see unit sales.
<unk> declines and deceleration in growth down to only 1%, we're not seeing that in our platform because we're a health and wellness brand.
And with regard to the pricing strategy.
We aim to be somewhere in that 10% to 15% premium to conventional products.
And we're able to do that because of the investments we've made in our plants and you.
Art.
What we've done to scale the business and you don't provide a health and wellness frozen food item without you know overly high conversion rates.
Yeah.
Great that makes sense and one last quick one if I could.
Just on on household.
Hold penetration.
I think there was a comment that you might expect to see it move higher in the back half of the year and correct me if I misheard that but just curious as you kind of look where you're at now.
And where you'd like to be.
What really is the.
Big item, you need to drive that higher or big few items that you think will really drive that sort of step function change in household penetration.
Sure. It's it's distribution you know we're calling for.
You now sort of at least 35, 40% growth in the measured channel so that will necessarily that's just in the.
You know the third quarter and so that necessarily means we will grow our household penetration.
And so we're looking forward to pulling that data this time.
Next quarter, so really J P. It's distribution, we know that the products that we have.
Are performing well from velocity basis on a store by store level.
We just are excited to see the distribution finally get on shelf and that will drive.
Household penetration.
It makes sense I really appreciate the time guys.
Our next question comes from the line of Bill Chappell with <unk>. Please proceed with your question.
Thanks, Good morning.
Good morning.
Just wanted to start.
I appreciate the topline kind of cadence for for three two of them for you, but just want to understand how much I.
I guess variability what happens is it seems like there's a fair amount.
Driven by distribution gains and didn't know if youre expecting a fair that the distribution gains that started this quarter or you know they could fall between September and October and so there could be any change just kind of how confident you are on that cadence would be great.
Yeah, Bill you know what I'll say at a high level is the fact that we did kind of a one time quarterly guidance thing I think.
Yeah.
Reflects our strong conviction of the cadence.
And you know look we're at a point in the year, where we think we have really good visibility for the remainder of the year.
But with that I'd like to throw it over to Akshay and get his comments on on your question as well.
Hey, Bill good morning.
So good question.
I know you are asking this in the context of a.
The noise that happened last year late last year, So we've been very.
Can you guys hear me.
Yes, so we've been very deliberate.
About about the guidance right and you would not be providing going out on a landman, providing the guidance.
He didn't have the confidence, especially in light of what happened late last year right. So we feel very confident about the numbers because of <unk>.
A lot of it is distribution base.
That distribution is already secure.
There is a limited downside risk to that.
And on the velocity, it's important to note that most of these items are being in distribution now for a while.
We're not like totally guessing on.
Larceny, either so they can always be some changes, but order of magnitude you know, we're doubling our quarterly run rate on revenue.
One.
Call out and.
You know basically club.
So that's why I'm done this one off guidance.
Change is.
So that you guys are confident that we're going to have these members.
Okay.
And then just kind of a more of a.
A bigger picture question.
You cite the.
The household penetration numbers and I understand the numerator is not a perfect vehicle, but.
How do I, how am I supposed to look at eight 4% household penetration, but only kind of a $200 million revenue run rate.
Because it would seem like an even greater frozen and fresh categories that you've got that kind of household penetration or that kind of market share you know we're talking in the billions. So I just know how you look at that is that the opportunity is that and how should we be on I mean, if you go to 15% household penetration.
But you're only at a $300 million run rate does that imply that the opportunity is not as good I'm just just trying to figure out what makes sense as I look at that number. Thanks, Yeah for sure I mean.
We do look at it as a leading indicator and it just what it's telling US is our brand position is resonating with one in 12 U S households.
To your point with that kind of household penetration, we should be a much larger business and I think the reason for that because we're still really young. This is this is just the beginning and now you see us literally what we're saying is we're going to double this business going into the back half.
And what we need to do to really drive that some revenue is getting more items.
In the same stores.
So where we've been in the past because we're such a young company is we don't have enough items in the store I'll.
I'll remind you we had on.
On average we had about nine items per store.
Worse as you know Amy switch has 40 to 50.
And so we were with that with that low number of items in store, we're not able to drive the amount of revenue that that household penetration would imply so in summary.
What it's telling you is it's our brand position is resonating our jobs to get more items more day parts more usage occasions to those same users that want our brand and that's what we're in the middle of doing right now.
Hey, just just to add to that sure.
That's right.
Yeah.
But yes, so just the numbers around that you know this better than I do about but you know the health and wellness brand, that's 15 or sorry that we compare ourselves to.
Average household spent $60 annually on that Brian Alright, and average household does so.
Apply that math, you can get to those larger numbers on the 10 million. What's interesting is we're adding new consumers at a very high rate right now.
Ryan mentioned, it's really a leading indicator so we doubled our household penetration over the last 12 months in the first half if you just take our revenue number.
Household was spending $10 and household annually on us and now the second half is pointing to $30 right. So we've got this distribution gain and so that's how the numbers are going to play out but the first step is to get those households to try our products. They like them and then you know give them all.
<unk> bought more and more now.
We think it's.
The most important brand health in theater and personally I think.
This metric is the most positive data point for our brand a period.
No that's great. Thanks, so much for the color.
Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.
Great. Thanks, so much good morning.
So I guess just in terms of top line.
Talking about the acceleration in the back half I get it.
At the same time some of the distribution should be kind of just gradually or increasingly ramping as you get through year end.
Clearly not looking for 24 revenue guide number, but I am kind of curious as you talk about this kind of two acts and whats implied kind of revenues in the back half of this year relative to the back half of 'twenty two.
It doesn't sound like there's anything.
Clearly that would prevent you from taking that trajectory through at least the first half of 'twenty four.
So I'm sure there's some seasonal dynamics under there some promotional play out that could change, but kind of just very broadly speaking.
Everything else being equal.
Every year if you can.
Kind of to exit in the back half of 'twenty. Three you should probably seems like we should to exit as well in the first half of 'twenty four is that logic makes sense.
Yeah, I agree I mean, I think the run rate is something that.
I would sort of be the baseline.
For the next year, but what's what's more important.
Is that those run rates you know this is a positive cash flow business that is profitable.
And that's really what the team is.
It's focused on and but that kind of volume and plant utilization Rob.
It's really what.
As the inflection point for the company and why we felt it was important to provide a one time basis, some quarterly guidance for you.
Okay, Okay cool.
And then I just wanted to clarify.
Kind of back half gross margin language Hum.
Sir apologies for not following everything that I say are Jerry you kind of make one comment and then there were some comments made by Akshay as well clearly just to your point right with the volume coming through velocities plant utilization overhead SG&A leverage.
I mean it.
If you could just kind of maybe remind me personally safely.
Like where should we be thinking gross margin could be in some range as we get through the back half because.
Yeah, you still hold the 24% or greater gross margin guidance, but you know everything I'm hearing, it's clearly better than the 24%. So I'm just trying to get kind of like.
Best workplace.
[laughter].
I've got a throw that over to Akshay.
[laughter] alright, thanks, Yeah, I I take full credit for causing the confusion. So let me try to unwind that.
So listen I think the consensus numbers are calling for about 25% our.
Adjusted gross margins.
That is a.
Sequential decline a R E.
<unk> from a decline from where we ended the first half.
And there's good reason for that right so number one.
We've made some investments in Boston line to drive growth by slotting.
Slotting is a great example.
And that is back half weighted number to certain commodities like cheese and bacon are seasonally much higher in the second half than they are in the first half number three some of the items.
That are coming on shelf in a big way in the back half are new items and to start off with lower gross margins than the more established items. So you know.
Those are reasons why the margins would be sequentially lower on an adjusted.
Basis, Okay and theirs.
So being.
With conservative Chris that we buy a lot of stuff on spot many things can happen, but I think where the consensus numbers are feels right to me.
And.
The more important thing that we keep pointing out is.
Reported margins are gone now and quite significantly and I was gonna see reported margins converge with the adjusted margins because our plants are going to be utilized and we make one adjustment just.
Show, you and investors like what the underlying earnings power of those businesses. So when we're at 80% utilized.
Bad debt adjustment, there's nothing ball or close to it so.
We're gonna see solid.
You know in the Twenty's sort of reported margins and that's going to allow us to generate a cat.
So did I.
Confused you more or did this out.
No. It helps but we'll follow up if I could clarify later again.
And I.
I guess, just lastly, maybe.
Maybe Brian you want to take this one.
Yeah, Theres a slide in there.
I guess about the study you did for breaded chicken.
W. Two.
Circles of the overlap since it was kind of limited overlap so far with another huge mass and brand.
While at the same time customer acceptance has been positive right incremental with the category.
Do you believe kind of longer term, especially as you get this new distribution in mass as we get through the back half of the year.
Maybe there actually could be more conversion rate I mean, it's clearly a positive for the category if your incremental from a retailer perspective.
It's also would be like really positive for you if you could get incremental cost.
No more overlap such that you could actually convert some of those consumers to your brand.
Thanks.
You know I follow your line of reasoning, there, Rob and what you're saying makes sense, but what what I would say to that is.
This number is kind of shocking to me.
That only three 5% of those who bought our breaded poultry those households bought the nation's largest brand in the prior 52 week. So.
No it doesn't go from.
3.5% overlap to seven or eight maybe but it still is a huge win for our retailer partners.
It also shows and demonstrates that we're sourcing users from the health and wellness category that weren't participating in the category before and that is growing faster than frozen. So it's really a shocking number to me and it's one of it's incredibly positive and it gives us permission to grow our distribution with retailers.
And it also kind of makes it sort of in the safe Harbor.
Scenario within frozen food. So it's one of the most positive thing that I can think of when I think about long term growth and maintaining and growing distribution in the years to come.
Yeah perfect. Thank you I appreciate it.
Thank you we have no further questions at this time, Mr. Freeman I would now like to turn the floor back over to you for closing comments.
Well, thank you for joining us on our second quarter call and we look forward to doing this again in a few in 80% to 90 more days. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.