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spk02: Greetings. Welcome to the Real Good Foods third quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Chris Bevanor. You may begin.
spk00: Good afternoon, and welcome to the Real Good Food Company's third quarter 2021 earnings conference call. On the call today is Brian Freeman, Executive Chairman, Gary Law, Chief Executive Officer, and Akshay Jagdali, Chief Financial Officer. You may access our third quarter earnings release which we publish at approximately 4.05 p.m. Eastern Time today. If you have not had a chance to review the release, it's available on the investors portion of our website at www.realgoodfoods.com. Before we begin, I'd like to remind everyone that certain statements made on this call are forward-looking statements within the meaning of federal security laws and are subject to considerable risks and 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 statements of historical fact are forward-looking statements and include statements regarding our projected financial results including net sales, gross profit, gross margin, adjusted gross profit, adjusted gross margin and adjusted EBITDA, as well as our ability to increase our net sales from existing customers and acquire new customers, introduce new products, compete successfully in our industry, implement our growth strategy and effectively expand our manufacturing and production capacity. Forward-looking statements made on this call represent management's current expectations and are based on information available at the time such statements are made. Such statements involve a number of known and unknown uncertainties, many of which are outside of 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. Important factors and risks that could cause or contribute to such differences are detailed in the company's filings with the Securities and Exchange Commission. Except as required by law, the company undertakes no obligation to update any forward-looking or other statements herein, whether as a result of new information, future events or otherwise. In addition, throughout this discussion, we refer to certain non-GAAP financial measures which refer to results before taking into account certain one-time or non-recurring 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 referenced. A reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure is included in our Q3 earnings release, which is available on our website under the Investors tab. And with that, it is my pleasure to turn the call over to the Real Good Food Company's Executive Chairman, Brian Freeman.
spk06: Good afternoon, everyone. We appreciate you joining us on our first earnings call as a public company. It is nice to have the opportunity to meet many of you during the course of our roadshow. Jerry, Akshay, and I look forward to meeting more of you when we attend investor events in the coming weeks. As you're probably aware, last month, Real Good Foods completed an initial public offering, which was an important milestone for the company. The capital we raised from the IPO will provide the resources for long-term growth as we build and scale our business. I'd like to extend a special thanks to our passionate and dedicated team who made the IPO possible. Between our management and board of directors, we have assembled a leadership team with significant experience to scale this business. Finally, I want to stress that at Real Good Foods, we are executing what we believe is a robust long-term growth journey. And for that reason, we are providing 2021 and 2022 annual outlook and long-term financial targets, which Akshay will discuss in more detail. I will briefly review our first quarter financial highlights and discuss the key reasons we believe we're well positioned for long-term growth. Jerry will then cover innovation and our operations, and Akshay will then review our financial results in more detail, discuss our guidance and long-term financial targets. After that, we'll open the call up for your questions. So let's get into our three key results. We are pleased to report a strong third quarter. Sales increased 136% to 23 million compared to Q3 last year. We also saw positive trends in our key profit metrics. Adjusted gross profit margin increased over 400 basis points year-over-year. Adjusted EBITDA margins also improved on a year-over-year basis despite higher operating expenses owing to the growth investments we are making. Growth in the club channel accelerated this quarter despite lapping our entry a year ago. driven by best-in-class velocities and distribution gains. And our retail channel returned to growth this quarter, driven by exceptionally strong velocity gains in our core products. Although this quarter's results were at the high end of our preliminary estimate range and growth was strong, we are not satisfied. We're in the early stages of penetrating our total addressable market and are more aggressively addressing our goal to be at peer average gross margins. Now I'd like to take a few minutes to review our mission and highly differentiate a brand positioning. Our mission at Real Good Foods is to make craveable, nutritious comfort foods that are low in carbohydrates, higher in protein, and made from gluten and grain-free real ingredients, and make these items more accessible to everyone, improve human health, and in turn, improve the lives of millions of people. In other words, We're here to replace the sugar and carbohydrates that are in our favorite comfort foods with protein and do it in a delicious way that allows people to lead a healthier lifestyle by eating more of the foods they love. So to be clear, our brand stands for three things. One, real food. Each of the ingredients we use are not only clean and recognizable, but more importantly, they are what the consumer already has in their pantry or refrigerator, so they're relatable to everyone. loaded with protein. Each of our products is designed to be high in protein, and many of our products have as much as 2x more protein per serving than those of our competitor. And finally, number three, of course, low in carbohydrates. Many of our products have one-third the carbohydrates or even less than those of our competitors. And as a natural result of this grand promise, our products are grain-free and gluten-free, which is also important to our consumers who are looking to make healthier choices. We know that if we can deliver delicious, craveable food with these brand attributes, we're going to have a huge impact and hopefully change the world. Our mission means a lot to everyone inside Real Good Foods and our community of loyal consumers. And it also allows us to hire and attract like-minded people that care about what we're doing. So why does this matter? It matters because the Real Good Foods brand is addressing a huge and largely unmet consumer needs state. According to the CDC, approximately 13% of all U.S. adults are suffering from diabetes, 35% of U.S. adults are pre-diabetic, and 42% of us suffer from obesity. There are more than 100 million diabetic and pre-diabetic adults in the United States and over 100 million Americans who are considered obese. The American Diabetes Association recently reported that almost 40% of COVID deaths occurred with people who have type 1 or type 2 diabetes. There is a growing scientific consensus that lower carbohydrate intake can help reverse the trends of diabetes and obesity. This evidence is fueling consumer preferences for lower carb and sugar consumption. as well as higher protein content, all of which play to our strengths and constitute considerable tailwinds that we expect to help drive continued profitable growth. We compete in the $170 billion health and wellness industry, which is growing at 11% compound annual growth rate. We chose to enter the frozen food category first because it is ripe for disruption. Health and wellness products within the frozen food category represent only 16% of total category sales, compared to 23% on average across all categories in the grocery store, and 30% penetration in the refrigerated foods category. In other words, there are very few health and wellness options in the frozen food aisle, and we are here to change that. Our goal is to be the leading health and wellness brand within frozen. We expect over time the health and wellness frozen subcategory will continue to grow at a strong double-digit rate and outpace the overall frozen food category. And our brand strives to lead the charge to become a leading health and wellness brand in the category. So why are we winning? Our brand's highly differentiated positioning, our delicious products, the unique innovation model we leverage, the incrementality of our growth, and our digital activation model are the main reasons we are winning in the marketplace and will continue to do so. For example, during the 52-week period ending February 7, 2021, 90% of our growth in the breakfast category was incremental to the category. And this story holds true across our portfolio. In frozen entree bowls, 46% of our growth was incremental to the category. And in frozen prepared poultry, 82% of our growth was incremental to the category. We're driving incremental growth to the category and driving traffic for our retailer partners. In addition, today, Real Good Foods has the largest social media footprint in all of frozen food. For perspective, our social media footprint is larger than all ConAgra brands combined. Perhaps more compelling than our significant social media presence is our high level of engagement with our consumers. The average number of comments on each of our Instagram posts exceed any of the top seven health and wellness brands in our category by five times. This high level of engagement helps us cultivate and maintain authentic relationships with our consumer base and remain well attuned to our consumers' needs. I welcome you to begin following us on Instagram or other social media platforms and continue to engage with our community. Check out how we interact, our brand personality, and how passionate our community is about what we are doing. Our digital activation model is key to how we activate and drive demand to stores and one of the reasons our retailers continue to give us permission to grow our distribution across multiple categories. Moreover, digital remains critical to our strategy as click and collect shopping grows within retailers and fewer shoppers are setting foot in the store. Without a strong digital presence, consumers may not even know that a brand exists. Leveraging our digital activation model and allowing it to serve as a keystone in our business is a key advantage and reason for why we expect to continue to grow over the coming months and years. And now, I'd like to turn the call over to our CEO, Jerry Law, to review our innovation strategy and operations.
spk07: Thanks, Brian. Good afternoon, everyone, and thank you for joining today's call. I'd like to first dig into our innovation strategy, which can be characterized as fewer, bigger, better, and faster. Starting with our formulation, we have a food-first strategy that uses unique base systems that deliver foods that are craveable, yet high in protein content and lower in carbs. For example, we use chicken and cheese as our base system to create our chicken parmesan tortilla and our chicken parmesan pasta. Our breakfast buns use a vegetable, cheese, and egg system to create a gluten-free, grain-free bun that tastes great and performs well on texture and form factors. We continue to expand these base systems and most recently have come up with a proprietary gluten-free breading system and grain-free sauces, which we'll use to modernize the breaded chicken and Asian chicken categories. Ideation typically comes from our large and engaged digital community, our customers and our employees. Once we have a winning idea, we put together a cross-functional team, including sales, operations, R&D, and marketing to come up with commercial prototypes. These prototypes are then tested with consumers from our digital community who give us instant feedback, which we use to improve our products in a rapid, iterative process. Then we take that product and we put it up on our website for a direct-to-consumer launch. We get yet another round of feedback very rapidly. And then we iterate again. followed up by a product launch. It takes us four to six months to commercialize a product from concept to shelf, and our success rate is relatively high, in large part because we've already received multiple rounds of feedback from consumers prior to broadly launching the product. Our approach has resonated strongly with consumers and allowed us to achieve tremendous growth and become a leading disruptor in the frozen food category. We have grown revenue 110% over the last nine months, and are on pace to achieve a three-year revenue trigger of 55% at the end of 2021. Real Good Foods has just 4% household penetration in the United States and NACE EV of only 20%. We have also achieved broad distribution across more than 160,000 points of distribution retail channel. Our velocities are strong, growing, and our brand has generated strong repeat purchase rates. Operationally, in 2021, We transitioned from a co-pack model to a self-manufactured model, wherein more than 70% of our sales are being self-manufactured, which has allowed us to improve production efficiencies and improve our financial performance. Our team continues to push forward to keep up with the strong demand for our products. We've improved the efficiency of our manufacturing process while more than doubling our production since the beginning of this year. In 2022, We intend to prioritize automating our manufacturing process and significantly improving our manufacturing efficiency and lowering our direct material procurement costs. We also expect to commence operations at a new state-of-the-art fully automated manufacturing facility which we anticipate will triple our capacity. More to come on this in fourth quarter earnings call in March of 2022. As we move forward, Our growth strategies are anchored on innovation, including improving existing products and launching new ones, expanding brand awareness, growing our distribution channels, and investing in infrastructure and capacity so that we can continue to serve real good foods market demand. In a point that one can only find exciting as we look to the future, with all this activity, we believe we are in the very early innings of growth. In summary, real good foods is well positioned for growth. I'd like to now turn the call over to our Chief Financial Officer, Akshay Jagdali, who will walk you through our third quarter financials.
spk01: Thank you, Jerry, and good afternoon, everyone. It's great speaking with you all on our first earnings call as a public company. We're pleased but not satisfied with our third quarter financial results, but are really excited about the significant opportunities for growth ahead. Net sales in the third quarter were a record $23 million, up 136% compared to the third quarter last year. This strong performance gives us confidence in our expectation of achieving approximately $83 million to $85 million in net sales for 2021, reflecting an increase of approximately 113% to 118% compared to 2020. Revenue growth in the third quarter was primarily due to strong growth in sales volumes of our core product driven by expansion in the club channel and greater demand from our existing retail customers. We expect growth in the retail channel to continue to accelerate for the remainder of 2021 and in 2022 fueled by distribution gains with existing customers and the acquisition of new customers. In addition, we anticipate club channel growth will remain strong in future periods as we continue to expand our sales with existing customers and acquire new customers. Our third quarter gross profit was $2.4 million, reflecting a gross margin equal to 10.2% of net sales compared to a gross profit loss of $0.2 million or a gross margin equal to negative 1.7% of net sales in the third quarter last year. Several one-time charges impacted last year's results, and their absence this quarter drove a majority of the 1,200 basis points year-over-year improvement in gross margins. Adjusted gross profit during the quarter was $3.9 million, reflecting adjusted gross margin equal to 17.1% of net sales compared to $1.3 million, or 13% of net sales in the third quarter last year. The 2.7 million increase in gross profit and 410 basis point increase in gross margins was primarily due to an increase in net sales, including in the amount of products sold that were self-manufactured, partially offset by increases in labor, packaging, and raw material costs. For perspective, direct material cost inflation peaked in 3Q21 at 24% compared to 10% on average for the full year 2021. We now believe most of the inflation is structural in nature and as such are implementing broad-based price increases. The impact of these price increases will start to impact our results in late 4Q21 and more fully through 2Q22. Going forward, we expect gross profit improvement will be delivered primarily through improved volume leverage, manufacturing efficiencies and material and packaging input cost reductions. Total operating expenses were $7.9 million or 34.5% of net sales compared to $2.8 million or 28.7% of net sales in the third quarter of 2020. The increase in operating expenses both in absolute dollars and as a percent of net sales was primarily driven by increased investments in marketing, research and development, and selling expenses to support the growth of the business. Higher distribution costs also contributed to the increase in lost form operations. These additional investments and costs were partially offset by the 2.5 million increase in gross profit. Adjusted EBITDA was a loss of 3 million compared to an adjusted EBITDA loss of 1.3 million in the third quarter of 2020. The increased adjusted EBITDA loss was primarily driven by higher operating expenses partially offset by higher net sales and gross profit. Looking ahead, we expect adjusted EBITDA to be a loss of between 8 million to 9.5 million for 2021. Now shifting to our capital structure, subsequent to the end of the third quarter, we completed our IPO through which we issued 5.3 million shares of our Class A common stock at a price of $12 per share. After giving effect to underwriting discounts and commissions, the conversion of convertible notes, the pay down of outstanding debt, pay down of certain contingent liabilities, as well as cash borrowings under the newly amended credit facility, Our pro forma cash balance was $44 million and pro forma debt balance was $21 million. The newly amended credit facility has a total of $70 million in capacity, including $50 million on the revolver and $20 million on the CapEx facility. With $17 million currently drawn on the credit facility, we now have incremental capacity of $53 million, which combined with our $44 million in pro forma cash balance is more than enough to fund our operations for the foreseeable future. Turning now to our outlook, our guidance philosophy is to reflect anticipated growth within our existing business and any confirmed distribution wins achieved to date. Products yet to be commercialized are not included in our guidance. We intend to provide annual sales and adjusted EBITDA guidance each year when we report 4Q results and to update this guidance quarterly. We're making an exception this year and providing preliminary estimates for 2022 as we believe it is important to do so at this early stage of being a public company. For 2021, we expect net sales of approximately $83 million to $85 million or Euro-Rio growth of 113% to 118%. Adjusted gross margin of approximately 19.6% to 21% and adjusted EBITDA loss of approximately $8 million to $9.5 million. For 2022, We expect net sales of approximately 115 million to 125 million, or year-over-year growth of 37% to 49%, adjusted gross margin to increase year-over-year, and adjusted EBITDA loss of approximately 8 million to 15 million. Our 2022 guidance does not take into account the impact of our new bowling group manufacturing facility in the greater Chicago area, which we anticipate commencing operations in the first quarter of 2022. We intend to provide details on the full impact during our 4Q21 earnings call. As Brian mentioned, we're more aggressively addressing our goal to be at pure average gross margin, and as such, we're more confident that our adjusted gross margin will be at least 30% over the long term with adjusted EBITDA as a percentage of net sales approaching low team levels. Over the long term we expect our revenue growth to be at least 30% but in the near term for the growth rates to exceed that amount. With that we are now available to take your questions. Operator?
spk02: And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A 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 participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And our first question comes from the line of John Anderson with William Blair. Please proceed with your question.
spk05: Good afternoon, everybody, and congratulations on the IPO. Thank you. I wanted to just begin asking a little bit about the sales growth that you're seeing both in the third quarter and the fourth quarter, second half of the year. I know it's a combination of expansion with new customers and club in particular, but also growth with existing customers. And so could you talk a little bit more about which products, how some of the new products and the new distribution is performing, the feedback you're getting from some key retailers, and the kinds of discussions that you're having with those customers around opportunities in 2022?
spk06: Yeah, thanks, John. You know, I go back to the incrementality that our brand has to the categories we participate in. So in other words, we're helping our retail partners grow their categories as opposed to just simply taking share. And because of that we're seeing a lot of enthusiasm and permission, frankly, to grow our footprint. You know, today we're in approximately 15,000 stores with only about 10 items. So that kind of gives you a flavor of how this is still very early innings for the company. And there's plenty of room to grow. For 2022, You know, we see our growth being driven by a combination of distribution as well as velocity. About two-thirds of our growth will be from distribution and one-third from velocity. I failed to mention earlier that we did see very nice velocity upticks in Q4 of 21, and we see those velocities continuing to accelerate, actually. I don't think I answered your question completely, John, so feel free to ask me to go a little bit deeper if you'd like.
spk05: Yeah, we'll keep peeling the onion a little bit, but that's helpful, Brian. So are you in the quarter and maybe in the second half here, are you generally shipping to consumption or are there material changes? pipeline benefits associated with new business wins or conversely, are you, um, experiencing any, um, do you have any customers on allocation just given supply chain constraints, et cetera. So again, the question here is really just as you kind of think about the second half of this year, are the sales that you're reporting largely in line with kind of the sell through at retail or there's some puts and takes that we should be considering.
spk06: We're shipping to consumption, and from a capacity standpoint, certain product categories, we are under stress. And, you know, I continue to have the view that demand exceeds our ability to supply right now with potential customers we could actually put on at the moment. I do not see any pipe fill or anything of that nature impacting our results in 21.
spk05: So as an earlier stage kind of business and brand with, to your point, Brian, a lot of white space, big addressable markets, coming with an innovative approach to these categories, how do we, I'm thinking about the guidance philosophy, and maybe this is what Akshay spoke to, what level of confidence can you kind of express to us in the outlook, particularly the top line outlook for 2022, it sounds like you've been prudent in terms of what you've included, what you've excluded, but, you know, why not take into account Bolingbroke, for example, if you plan to have that up and running in Q1, why not take into account some of the, you know, some of the new platform opportunities, whether it be the Asian Entree platform or, or tenders, et cetera. Just help us kind of better understand that and the potential conservatism in the 2022 outlook.
spk06: John, our discipline is to not put products that have not been commercialized yet into our plan as Akshay had spoken earlier. And I think that we'll continue to follow that discipline. I think we'll have an opportunity in Q1 to really go into greater detail around Bolingbroke and the impact that it will have not only on capacity, but capabilities and margin as well. But at this time, I felt that we felt that the right way to think about things is really just put out there what we know. And, you know, I'll let Akshay kind of expand on that a little bit further.
spk01: Thanks. Yes. Thanks, Brian. John, great question. So in terms of the confidence that we have in our forward outlook, just wanted to go back and just get into our guidance philosophy. So when you look at the measured channel, which is what you have greater visibility on, that's going to drive about 40% of our growth next year. And our philosophy there is we put in our guidance high probability distribution wins. So we put it in the kind of 80, 90% probability of wins that we think are in the bag is what's included in our guidance. And that's going to be in the measured channel driving about 40% of our total growth. The unmeasured channel is... where a lot of our club businesses, and as you probably know, we have tremendous momentum there, best-in-class velocities, and we have visibility to higher distribution and more events to promote our products as well as new customer in that channel. So we feel we're in the early stages of explosive growth and club that's continuing, great visibility there. And then in the measure channel, we have visibility on the distribution wins, and we only include the high probability bucket in our guidance. And just lastly, on Bolingbroke, you know, we're going through a very detailed budgeting process, and so we feel it's prudent that we go through that process and give you the full picture, which we'll be ready to give you in March, and it's really exciting for us. So hopefully that gives you a little more color.
spk05: Yeah, that's really helpful. Just one more if I might, and then I'll pass it on. So is it fair to say, understand the guidance approach then for 2022, but when I think about two areas in particular that are interesting that could contribute, you have four platforms you've talked about, innovation platforms, including the Asian entrees, including the tenders, including the protein fries and tots and some breakfast items. Are those four platforms still in play, i.e., you know, plans to commercialize over the next, let's say, 12 to 18 months? And Bolingbrook, as far as you know, at this point, the plan is they have that producing saleable product sometime during the first half of 2022. Are both of those accurate statements? Yep, yes, and yes. Okay, great. Thanks. Congrats on the quarter and talk soon. Thanks, John.
spk02: And our next question comes from the line of Bill Chappell with Truist Securities. Please proceed with your question.
spk03: Thanks. Good afternoon and congratulations as well on the IPO. Thanks, Bill. A simple one. Since the IPO was six weeks ago, maybe you could tell us what has changed, what has surprise you, you know, positive, negative in the past six weeks in terms of maybe distribution gains, velocity, anything just kind of as an update, just since you gave a lot of updates six weeks ago, you know, would be helpful, especially as we look into 22 on the distribution side.
spk06: You know, Bill, from my perspective, I think that you see us rotating on taking broad-based pricing actions. Um, it's, it's become clear to us that much of the inflation that we've been seeing is, uh, structural. Uh, and so from that standpoint, um, I would call that out. Um, and then, um, I would just say that to your point, I mean, this team is very ambitious, but we're just marching down the field, um, you know, executing, um, I think that there's lots of exciting news to come in 2022. And I think John kind of touched on some of those pieces as well. But it's just really nice getting through the roadshow and really getting back and just grinding the business day in and day out. But I'd like to open it up to Jerry or Akshay to answer that question as well from your perspectives.
spk07: I'd have to agree with Brian. It's Jerry, by the way. The focus back on the business and in the field to be able to really take a deep dive and focus on margin improvement and how we're gonna do that and execute quickly on that. This is something we've done before. The scaling we've been through didn't come for free. And, you know, we intend to make the plant, you know, world class. And, you know, I've taken plants from, I'd say, no class to world class. And that's really something to crow about sometimes. And it's really important to recognize that we're, you know, we're focused on the business and we're focused on delivering, you know, future quarters and, you know, and guiding to where we think the ball's going to be. So you'll see us, you know, continuing to focus on tightening the screws. And I think just the relief of being to that point has been, something that we've appreciated going through the process. Akshay, do you have anything to add?
spk01: Yeah, just one thing, Bill. That's a great question, really made me reflect a little bit. I would say the biggest thing is we actually have the growth capital to fund this business now, so it's really exciting. So this is the best fundamental position the company has been in, period. And so it's really exciting. We're on the offense really for the first time and the brand is ready to be fueled, you know? And so we've got a ton of opportunities. And so, you know, my job has gotten a little harder because we have money to spend and we just have to prioritize. So it's been really exciting times for us, but great question.
spk03: No, thanks. Thanks for the color. And then on the kind of cost inflation issue, uh being it structural cost inflation is certainly not unique to you and we've seen certainly almost all of the the packaged food and frozen food players already take pricing so maybe help us understand like are you behind some of your i guess not you know more traditional peers in terms of taking pricing and playing catch up are you are the price gaps going to meaningfully change with those traditional uh players or you know and and And how soon does this all phase in? Thanks.
spk06: Yeah, Bill, we actually saw price gaps compressed to a point that we were uncomfortable because, as you're aware, we're a premium brand. And so that really stimulated taking action. The other piece to it is, you know, as we look beyond and out into 2022, I mean, we agree with the consensus out there that labor rates Our structural freight is structural. We are seeing some easing in some commodity buys and others seem structural. So just as responsible stewards of capital here, you know, it's the right thing to do. And we have the, I wouldn't say we're behind, but we certainly don't want to be left behind. And that's why we've taken it. And actually his opening remarks, We saw some impact and we will see some impact in late Q4 and the rest of it coming in middle of Q1. Got it. Thanks so much.
spk02: Yep. And just as a final reminder, if anyone has any questions, you may press star 1 on your telephone keypad to rejoin or join the question and answer queue. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.
spk04: Great. Thanks so much, and congratulations. I guess my first question, Brian, you know, I think you said earlier that you are shipping to consumption. But at the same time, you're a little bit more capitalized now, and you're obviously in full growth mode, and it's very early days. And I think maybe I heard Akshay say, or it could have been you, Brian, that there could be opportunities. So let's just say you can't really aggressively chase as much right now, just given capacity vis-a-vis demand. As we think about the longer-term growth potential of the business, as we learn more about the Chicago facility by opening early next year, do you sit here now and say, okay, we now are capitalized, we're extending that capital to further support the growth algorithm of the business longer-term, and once we have that capacity, that as we get through 2022, you know, hopefully we can actually be even more aggressive, right? Maybe you could do kind of more promoting in Costco or you're pushing more on new incremental distribution. Just trying to figure out kind of where you are kind of in the life cycle, right? You're obviously growing at Tony doing very well, but could you be doing better, you know, if you had a little bit more capacity?
spk06: Uh, for sure. And, um, again, You know, it's a young company, early innings of growth, but yet a huge TAM with a really powerful brand presence and great loyalty amongst our community. Meanwhile, you know, we're delivering incrementality to retailers, so we have permission to expand. Bowling Brook, you know, the footprint of that is 2X of industry growth. Plus it's fully automated once it comes online. So probably on a per square foot basis, the capacity there will be greater than what the actual footprint would suggest. So we're excited to bring that online, and I think it will allow us to fully realize the next step of the business. Again, Rob, I go back to the TAM, and even after we fill up that plant, I still won't be satisfied. I think there's still far more to be done.
spk04: Okay, fair enough. And then maybe to you, Jerry, I know you mentioned kind of overall innovation strategy, fewer, bigger, better. um so far you know brian i think you said you know 10 skis on average and 15 000 doors um we've kind of you know seen some of the potential new innovation as you think out again right with that tam and the potential of the overall brand um when when you speak to that innovation strategy at least for now and you're speaking to the tam for now Just to be clear, I mean, the focus is in frozen, right? This isn't, you know, you're not saying, well, we could start in frozen and maybe we can go, you know, into what other, you know, whatever other subcategory.
spk07: No, I agree that we'll be in frozen. You're not going to see us anytime soon, you know, take a left turn and jump across the store. You know, there's plenty of space for us to innovate in frozen, right? You know, we bring people, we pull people into the category. You know, we are looking at these four big categories that are coming up for us, and we think that's enough on our plate to hit what we put out there and allow us to continue to grow. And you won't see us skew proliferate. You're not going to see us come up with, you know, 14 different versions of a entree bowl. It'll be core skews.
spk04: Got it. So it would sound as if, you know, each new... innovative product is so to speak core with higher probability velocities that's how you're thinking about it that's how we think about it all right and then just last question uh question quickly i just on the margin opportunity um i think you did a decent job of explaining it that on the call but i do want to come back to it uh just given again you know you're still small but you're making a lot of changes, and I think that might be driven by you, Jerry. So maybe if you could just spend a minute or so, you know, just explaining a little bit more detail kind of where some of these efficiencies come from, right? You have volume leverage, efficiency, maybe some reduced raw material costs over time, but maybe just on the plant side, you know, if you think about this automated plant coming, online relative to kind of maybe how the business has been operating in the past two years, you know, what are some of those real core improvements on the cost side such that, you know, gross margin can expand fairly quickly maybe once we get past the first half of next year. That's it.
spk07: Yeah, the inflection point that you'll see is the automation. So it's the installation of machinery equipment, you know, to reduce headcount on the line and increase our throughput. And it's pretty straightforward stuff. I mean, you've covered with me for a long time. You've seen me do this before. And, you know, the opportunity in Bolingbrook to start clean with a fresh line, you know, it's a little bit of shock at all. In fact, I walked through there with Brian the other day, you know, to show him through the plant. And we looked at it on paper, and he hadn't really realized the scale of what we're building there. You know, we're building lines of significance that aren't you know, startup lines. These are lines for serious food manufacturers. And that step change in philosophy is where we'll realize the gains and margin, you know, when we step from a startup into a world-class manufacturer. Does that make sense?
spk04: Yeah, no, it makes complete sense. Just wanted to confirm. Thank you so much. Appreciate it. You're welcome. Thank you, Rob.
spk02: And it looks like we have reached the end of the question and answer session. I'll now turn the call back over to Brian Freeman for closing remarks.
spk06: Thank you for joining us today. I'd like to thank our entire team at Real Good Foods for their hard work and dedication. Wish everybody a safe and happy holiday season. And we look forward to speaking to you again at upcoming investor events and on our fourth quarter and full year 2021 earnings call next March. Have a great evening. Thank you.
spk02: This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.
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