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spk02: Greetings and welcome to the Real Good Food Company third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce to your host, Chris Bevanor, Vice President, Investor Relations. Please go ahead, sir.
spk01: Good morning, and welcome to the Real Good Food Company's third quarter 2022 earnings conference call. On the call today are Brian Freeman, Executive Chairman, Jerry Law, Chief Executive Officer, and Akshay Jagdali, Chief Financial Officer. You may access our third quarter earnings release, which we published at approximately 4.30 p.m. Eastern Time yesterday. If you've not had a chance to review the release, it's available on our 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 securities laws and are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor for liability established by the Private Securities Litigation Reform Act of 1995. All statements made on this call today other than statements of historical facts, our 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 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 refers 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, including 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 third 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.
spk06: Hey, thanks, Chris. Good morning, everyone, and thank you for joining us today on our third quarter earnings call. I will briefly review our third quarter highlights and discuss the reasons we believe we're well positioned for long-term growth. Jerry will cover operations, and Akshay will then review our financial results and outlook in more detail. After that, we'll open the call for questions. Starting with our financial highlights for the third quarter, net sales increased 63% to $37.6 million as compared to $23 million in the third quarter of last year. Third quarter sales grew 200% on a two-year stack basis, which is an acceleration compared to 190% growth in the first half of 2022 and 116% growth in full year 2021 on the same basis. Sales in the retail or measured channel increased 40% as compared to the prior year period, driven by strong velocity gains in our core products. The unmeasured channel grew by 76% this quarter, generally in line with our expectations. We have clear visibility on upcoming promotional events and have secured incremental distribution in the unmeasured channel for the remainder of 2022. As a result, we expect unmeasured channel sales growth to accelerate further in the fourth quarter. In addition to the continued strong velocity growth and expanded distribution expectations for our current items in the unmeasured channel for the fourth quarter of 2022 and beyond, We expect further expansion of our breaded poultry distribution the first quarter of 2023, owing to strong velocity performance and existing distribution. Although year-over-year revenue growth this quarter was strong, we are not pleased with our distribution growth. Distribution grew by 8%, which was less than expected and resulted in revenue coming in below our internal expectations. Our growth was driven primarily by strong velocity growth, which continued to exceed expectations. Owing to the slower than expected distribution gains in the third quarter, we now expect sales for 2022 to be towards the low end of our guided revenue range of $155 million to $160 million. Fourth quarter revenue is expected to be by far the highest revenue quarter since our founding. Retailers are taking note of our strong velocities, and we are now seeing renewed distribution growth in the fourth quarter. We expect the trend to continue into 2023. Three factors underpin our positive outlook for 2023. One, significant wins we have recently secured, and two, strong baseline velocity growth, and three, exceptional new product velocities. We have secured 39,000 distribution points for our new products, which represents an approximate 24% increase as compared to our current distribution footprint of approximately 160,000 points of distribution. These distribution wins include 15,000 incremental distribution points since last quarter, including two large retailers committing to nationwide rollouts of our breaded poultry in 2023. Additionally, we have secured expanded distribution in the club channel. Baseline velocities grew 37% this quarter and continue to exceed our expectations with velocities for our new products trending significantly higher than our base products. Specifically, our breaded poultry items are performing in the top quartile of all conventional SKUs with velocities that are eight times our base business. In fact, at one large national retailer, our low-carb, high-protein chicken nuggets were the number one health and wellness item in the category last week. And even more impressively, they were in the top 12% of all frozen poultry and meat items. This includes conventional producers such as Tyson and Purdue. On our last call, we were averaging approximately $65 per store per week, and I am pleased to report that as of last week, our item sales grew to $120 per store per week, and this was without discounts. In other retailers, we are seeing similar performance. The aforementioned new distribution gains combined with strong base business velocities and another solid slate of new product innovation gives us confidence that we will grow sales in 2023 to at least 200 million, representing growth of approximately 30%. Jerry and Akshay will speak to this in more detail, but I wanted to touch on our margin and EBITDA performance this quarter, which was disappointing and missed our internal estimates due to what we believe were two temporary headwinds. First, Efficiency gains from our Bolingbrook, Illinois manufacturing facility were delayed, resulting in a drag on our margin performance this quarter. The good news is we are seeing meaningful improvements on this front in the fourth quarter. And second, commodity costs were larger than anticipated headwinds to margins. That being said, costs for chicken, cheese, and bacon have come down significantly as of late, and we expect this to have a 6 to 10-point positive impact on our margins in the fourth quarter. As such, we still expect to be adjusted EBITDA positive in the fourth quarter of 2022. As for 2023, we expect adjusted EBITDA in the mid-to-high single-digit range, driven by lower commodity costs and, to a lesser extent, lower labor and overhead costs. And cash flow from operations is also expected to be positive in 2023. Next, let's take a step back and look at the current state of the health and wellness market, our total addressable market, and how our brand positioning is resonating with this broad consumer base. Our total addressable market is the $242 billion health and wellness industry, which according to SPINS grew 6% year-over-year with an 8% three-year CAGR. The frozen health and wellness subcategory continues to outpace overall health and wellness, growing at a 9% three-year compound annual growth rate and about 6.5% year-over-year. It is important to note that the frozen food category has historically performed well during recessions as it tends to benefit from consumers trading down from eating out to eating more at home. Private label penetration in the frozen category is relatively low and is about 9% to 10% as compared to 20% to 22% on average across all food categories. And private label penetration in the health and wellness frozen segment is even lower than in the overall frozen food category. As such, trade-down risk within the category to lower-priced private label options is also limited. Additionally, our distribution footprint is focused on retailers that deliver value to their consumers, and we have low concentration with what I'll call luxury high-end retailers that typically lose foot traffic during economic downturns. Our brand promise has three primary claims, low-carb and little to no sugar, high-protein, and clean ingredients. Products with these attributes are growing well above the growth in our overall total addressable market. All things considered, the categories we compete in remain highly relevant, as evidenced by their large 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, as frozen foods historically perform well in a recessionary environment. As for our brand health, we track ourselves against four indicators, household penetration, repeat rates, social community growth, and engagement and velocities. Starting with household penetration, according to numerator data as of November 1st, the Real Good Foods brand household penetration is 8.5%, up from 8.3% in July, 7.4% in March, and 4.8% in September of last year. This means approximately one in every 12 households in the United States has purchased our products in the past 12 months. Our household penetration continues to rank second amongst all health and wellness frozen food brands behind only Amy's, a brand with over 500 million in retail sales. Increasing 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. Turning to repeat rates, they continue to be in line with industry averages of 32% in the most recent trailing 52-week data as of November 1, 2022. Regarding social community growth, we continue to grow the Real Good Foods online community. In the third quarter, our social and digital teams continue to outperform. We generated over 24.5 million organic impressions and 228 million total brand impressions. We also acquired 9,000 new SMS tech subscribers and added 26,000 followers on Instagram, bringing our total to over 442,000 IG 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 can say it's working and it's efficient. This is reflected in the strong returns we get on our ad spending, In fact, our returns on ad spending, as measured by third parties, average 4 to 6x, which are significantly higher than our peers on average. Our retail partners appreciate how we drive new consumers to the categories we participate in, allowing Real Good Foods to truly grow the frozen category with consumers new to frozen foods rather than taking share from others. Our close connection to our consumers enable us to efficiently test demand for new products before they launch on shelves. This leads to greater household penetration and incremental category growth, not only for us, but for our retail partners as well. This strong brand health indicators underpin our competence to achieving over 500 million in sales long term. Now, moving to innovation, our strategy can be characterized as fewer, bigger, better, and faster. In 2022, we launched Crispy Chicken Shell Tacos. breakfast bites and bowls, and most recently, chicken nuggets, chicken strips, and multi-serve Asian entrees. Our innovation has extended the brand into large, high-velocity categories, representing approximately $5 billion in aggregate retail sales. We believe these categories are also ripe for disruption because there are few to no healthy nutrient-dense options available today that are craveable. Based on the new distribution we have secured and the strong velocities we are seeing for these products, we expect them to contribute materially to our 2023 revenue. As we look forward to 2023, we think it is appropriate to share with you a sampling of our 2023 new product innovation. These are products whose development is completed, are ready to manufacture at scale, and are ones we are actively showing to our retail partners. There will be additional items introduced in 2023 as we continue to run our innovation flywheel, but these products are far enough along in their commercialization cycle that we feel it is appropriate to share further details. First, we have a breakfast bun that is frankly a step change improvement over our original product. This new bun is light, fluffy, low in carbohydrates and high in protein. The eating experience is no different than the high carbohydrate buns that we're all familiar with. Our breakfast sandwiches have been on the shelf for three years and continue to be the leading health and wellness item in the breakfast category. But through our continual improvement process and as our brand scales into more and more households, we know our product must taste better than their conventional counterparts. Internally, we see our iterative process is no different than what we have lived through with meaningful consumer technology such as the iPhone. The improvement in product quality and this new version of our buns is analogous to the improvements between the iPhone 3G and the iPhone 14. We expect this improved offering to flow through our supply chain late in the first half of 2023, which we'll be communicating through our social footprint in the near term. Second, we've developed a proprietary low-carbohydrate flour tortilla system that will be incremental to our current chicken tortilla offerings. Unlike the breakfast sandwich, this new product will be on shelf alongside our current chicken tortilla items. I would note, just as Amy says 10 different enchilada offerings, we too have permission to extend beyond our original products. We will see this new tortilla used with our new creamy poblano sauce and filled with chunks of seasoned chicken breast. It could be one of our most craveable items to date. Third, We are taking the same tortilla system and rolling out a new low-carbohydrate flauta available in salsa verde, salsa roja, seasoned chicken, southwestern chicken, and in various breakfast offerings. In addition to having this item available in the frozen section, we are pleased to report that we will be extending into a second temperature state, the refrigerated aisle. There's significant demand for this item in the perimeter of the store, and we have the manufacturing capability to fill this demand. I expect to see flouters in the refrigerator door near you as early as the first quarter of 2023. Finally, we're leveraging our breakthrough breaded poultry system and will expand into the snacks and appetizers category with new boneless bites and various flavors such as zero sugar hickory barbecue and garlic parmesan. We will be the only low carbohydrate, high protein boneless chicken wing in the category. And I would also remind everyone that our novel breading system is what enables us to achieve this incredible value proposition. I'd now like to turn the call over to our CEO, Jerry Law, to provide an update on Bolingbroke and our operations more broadly.
spk04: Thank you, Brian. Good morning, everyone. And thank you for joining us on today's call. I'm pleased to report that our Bolingbroke, Illinois facility is continuing to ramp up its phased startup of production. I'm very proud of the team and how far we've come since opening the new facility in March this year. Bolingbrook enables our entry into exciting new categories and gives us much needed capacity to meet the growing demand for our new products and existing products. Twice the size of our existing City of Industry facility in California, our Bolingbrook facility is on pace to add approximately 200 million in incremental capacity by the end of this year. and will have the ability to produce approximately 250 million to 300 million in sales at full capacity. This will enable us to match capacity with the long and short term demand for our products and will also significantly accelerate our margin improvement efforts. Today, we have six production lines up and running in the facility. We are currently in the final phase of facility startup. And as a reminder, the ramp up is not linear. and the last phase will yield the greatest efficiencies. We have built significant flexibility into the plant design such that it is capable of producing the vast majority of our new and existing products. Products made at the new Bolingbrook facility will have structurally lower costs as compared to those made in the City of Industry facility. Driven by lower labor costs, higher throughput, and Bolingbrook's proximity to lower-cost raw materials, supplies, and our major distribution hub. Overall, we believe this new facility brings us closer to meeting our long-term goal of achieving $500 million in revenue while currently accelerating our margin improvement efforts. We've already seen the impact Olienbrook has had in terms of successfully relieving pressure on our City of Industry plant, which was operating above 100% capacity utilization through the first quarter and into the second quarter of this year. With the City of Industry plant running at a more normalized operational level, it has allowed us to focus on continuous improvement, and in turn, we expect to improve yields and drive efficiencies. Specifically, labor costs in our City of Industry plant for the third quarter came down 800 basis points sequentially to 11% of net sales. This improvement was the primary driver of the approximate 260 basis point sequential improvement in labor costs in the third quarter. Before I turn over to Akshay, I would like to touch on our margin performance in the third quarter and provide drivers for the fourth quarter and into 2023. Margins for the third quarter came in below our expectations, owing to a slower than anticipated ramp up in efficiencies at Bolingbrook and a higher than expected raw material costs. During the third quarter, we experienced what I would characterize as the startup blues related to excessive equipment breakdowns as we strive to perfect production processes. Our breading system for the newly launched breaded poultry and Asian items is novel and has proven to be tough on the equipment we installed, requiring reengineering to harden the equipment to improve reliability. I believe we are the first company to produce breaded poultry with such a novel breading system at scale, and the operational issues we encountered were what we would characterize as startup blues, and these impacted our efficiencies significantly in the quarter. I have managed 14 plants in my previous role at J&J Snack Foods, which included hundreds of startups that were similar to and, frankly, much more complicated than what we are experiencing in our Bolingbrook plant. Encouragingly, efficiencies and throughput at the plant have improved significantly in the recent months and weeks. During the quarter, our overall efficiencies in the plant are up over 20% and the throughput has more than doubled as additional lines have come online. We expect to be at targeted efficiency levels by the end of the first quarter of 2023. As Bolingbrook becomes a bigger portion of our production mix, combined with continued efficiency gains at City of Industry for right size in the operation, we expect our labor costs to continue to come down significantly. Specifically, we expect to lower our labor costs by approximately 500 basis points and bring them down in line with industry standards of five to 10% of sales. We expect a major portion of this opportunity to flow through within the next 12 months as efficiencies are optimized in both plants and Bolingbrook becomes a bigger portion of our production mix. Additionally, higher sales will drive plant utilization rates higher and allow us to leverage lower overhead costs. We expect a 200 to 300 basis point improvement in margins driven by overhead leverage in 2023. Lastly, Bolingbrook has enabled significant productivity savings that have already started to accrue in the latter half of the third quarter and will build as we move into 2023. These include the self-manufacturing of our chicken tortillas and cooked chicken, which on a combined basis are likely to drive approximately 200 to 400 basis points of margin improvement. As for direct materials inflation, we experienced a larger than expected impact this quarter, driven in part by high inventory costs carrying over from the second quarter as well as continued year-over-year inflation in the third quarter. The good news is that commodity costs have continued to come down since our last call and are now expected to be a much larger tailwind to margins in both the fourth quarter of 2022 and into 2023. In summary, although we are not happy with our third quarter results due to these margin pressures, areas that negatively impacted our results have shown significant improvement in the fourth quarter and are expected to improve further into 2023. As such, we continue to expect to be adjusted EBITDA positive in the fourth quarter of 2022 and expect 2023 adjusted EBITDA to be in the positive mid to high single digit millions of dollars range. We have strong visibility into the drivers of our continued margin turnarounds and feel confident in achieving our outlook. It's an exciting time at Real Good Foods, and I'm thrilled to report the tremendous progress our supply chain and operations teams have made, all in order to support our growing demand. I still believe we are in the very early innings of growth and are well positioned to capture market share in the frozen categories in which we compete. Now I would like to turn the call over to Akshay, our Chief Financial Officer, who will walk you through our third quarter financials.
spk03: Thank you, Jerry, and good morning, everyone. Turning to our financial results, net sales in the third quarter were $37.6 million, an increase of 63% as compared to the third quarter of last year. Sales growth in the third quarter was primarily due to strong growth in our core products and the unmeasured channel. In the unmeasured channel, growth accelerated in the third quarter to approximately 76% as compared to 31% growth in the second quarter. The sequential and year-over-year acceleration was driven by distribution gains and, to a lesser extent, velocity increases. We have clear visibility on upcoming promotional events and our new products in the distribution are performing very well. As such, we expect unmeasured channel sales growth to accelerate further in the fourth quarter. As for 2023, we expect another strong year of growth in this channel, driven by expansion of our bread and poultry items starting in the first quarter of 2023, significant new distribution wins already secured, as well as commitments to certain planned promotional events. In the retail channel, growth slowed sequentially to 40% in the third quarter, as we did not achieve the distribution gains that we were expecting. the lower than expected distribution growth was partially offset by continued strong growth in baseline velocities. As Brian mentioned, our distribution performance has already improved and we're bullish about our prospects for 2023. Three factors underpin our positive outlook for 2023 revenue growth. One, significant wins we have already secured. Two, strong baseline velocity growth. and three, exceptional new product velocities. We have recently secured approximately 39,000 distribution points for new items introduced in 2022, which represents an approximate 24% increase relative to our current footprint of 160,000 distribution points. Moreover, these new items have velocities that are already three to eight times our base business. As such, These new distribution wins are likely to be materially additive to overall sales growth in this channel, and we expect another strong year of growth in this channel in 2023. Our third quarter gross profit was $1.8 million, reflecting a gross margin of 4.7% of net sales as compared to a gross profit of $2.4 million or a gross margin of 10.2% of net sales in the third quarter of last year. The decrease in gross margins was primarily due to an increase in plant manufacturing costs related to the ramp up of our new facility in Bolingbrook, Illinois, and higher raw material costs. For perspective, given we now operate two facilities, plant overhead costs were approximately 760 basis point drag on margins this quarter as compared to a year ago. Adjusted gross profit during the quarter was $5.9 million, reflecting an adjusted gross margin of 15.8% of net sales as compared to 3.9 million or 17.1% of net sales in the third quarter of last year. We had expected margins in the third quarter to be lower than the second quarter owing to higher commodity cost drag and inefficiencies related to the Bolingbroke ramp up. However, margins came in below our expectations primarily owing to greater inefficiencies related to the Bolingbroke ramp-up and, to a lesser extent, higher than expected direct material costs. We expect adjusted gross margins to improve sequentially in the fourth quarter, driven primarily by lower direct material costs and, to a lesser extent, lower labor costs driven in part by Bolingbroke efficiency gains. we expect to exit 2022 with structurally lower costs, especially on the labor front. Beyond 2022, we have a long runway of productivity savings that will drive incremental margin expansion. Additionally, as Jerry mentioned, the cost of our key commodities have come down significantly in recent months. And if we were to lock in our key commodities at current spot rates, our margins in 2023 would be 600 to 1,000 basis points higher. Total operating expenses were 12.4 million as compared to 7.9 million in the third quarter of 2021. Adjusted operating expenses increased by approximately 3.4 million to 10.7 million in the third quarter of 22 as compared to 7.3 million in the third quarter of 2021. The increase in operating expenses was primarily driven by increased personnel expenses related to the build out of the company's operations, finance, and leadership teams, as well as increased investments in research and development. Adjusted EBITDA totaled a loss of 3.8 million as compared to a loss of 2.7 million in the third quarter of 2021. This was below our expectations. driven entirely by lower than expected gross profit. We continue to expect positive adjusted EBITDA in the fourth quarter, which would be a significant sequential and year-over-year improvement. The improvement is expected to be driven by lower direct material costs and, to a lesser extent, lower labor costs and fixed cost leverage. Now, shifting to our balance sheet and cash flow. As of September 30, 2022, we had cash and cash equivalents of $5.4 million and total debt of $61.4 million. We had $43.3 million drawn on a revolver at the end of the quarter with $31.7 million in available capacity, which combined with our $5.4 million cash balance implies a total liquidity position of $37.1 million. Cash burn in the quarter was approximately $19 million, as compared to $24 million in the second quarter. Of the $19 million cash burn this quarter, $7 million was related to core working capital. We expect core working capital to be a source of cash going forward, driven by the lowering of inventory to more normalized levels. Additionally, we expect losses to narrow significantly alongside our transition to positive adjusted EBITDA starting in the fourth quarter and to positive cash flow from operations in 2023. As such, we have sufficient liquidity to fund our current needs and execute the plan we have laid out. As a reminder, it's important to note that the Bolingbrook facility and equipment is being leased with costs flowing through our P&L. and there is no CapEx spending associated with that. Now, turning to our outlook for 2022 and 2023. For 2022, we now expect net sales to be at the lower end of our guided range of approximately $155 million to $160 million, reflecting an 84% to 90% increase as compared to 2021. Adjusted gross margin is still expected to be in the range of 19 to 21%. And adjusted EBITDA is expected to the lower end of our guidance range or a loss of 7 million to 9 million. For 2023, we expect net sales of at least 200 million. Adjusted gross margins of at least 24%. adjusted EBITDA in the mid to high single-digit million range, and positive cash flow from operations. Long term, we continue to expect net sales of approximately $500 million, adjusted gross margin of 35%, and adjusted EBITDA margin of 15%. This concludes our prepared remarks. I would now like to hand the call over to the operator to begin our question and answer session. Operator?
spk07: Thank you.
spk02: At this time, we will be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. 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.
spk07: One moment, please, while we poll for questions. We have a first question from the line of John Anderson with William Blair. Please go ahead. Hi. Good morning, everybody.
spk06: Good morning, John.
spk05: Morning. I just wanted to first touch on the the comments around distribution in the third quarter. Is there anything more you can say about perhaps what caused the lag in kind of you achieving some of the points of distribution that you had hoped for in the third quarter? And then also, as you think about the distribution that you have secured, which sounds significant going forward, how we should think about that kind of phasing in, how much of that is already in place, and how much is, you know, kind of to come and over what time period? Thanks.
spk06: Sure. For the third quarter, I think we saw many of our retail partners really kind of not lean in with us and give us all of the stores that they currently, you know, could have and really kind of took a little bit of a wait-and-see approach. The good news is because our velocities are so impressive and the products are performing so well, we secured 39,000 new distribution points. And so the way we see that kind of rolling out is somewhat in Q4 and then into Q1 and Q2. I think that that number will continue to grow in terms of new TVPs as we go into 2023. But I did want to just point to two, there were two large retailers that have now committed to nationwide rollouts of our breaded poultry. And what's so exciting as you go into 2023, John, is I mean, The velocities that we're experiencing with these products are five to eight times our base products. So these new distribution points are going to be highly productive for the company. So that's kind of how we see this playing out.
spk05: Yeah, that's terrific, very helpful. And I guess to follow on that point, Brian, I think last quarter you mentioned that some of the breaded poultry, the new products was – turning at $65 or so per store per week. Sounds like that has accelerated significantly. I think you mentioned maybe 120. Has that build been accomplished without, I mean, is there some promotional activity or display going on that's driving that, or is that just kind of an organic build in terms of the velocities there? Thanks.
spk06: You know, that's what's really got me excited. No promotion. no secondary displays or features with that $120 we experienced last week. In fact, I would say the shelf placement isn't even that great as well. We're typically on the top or bottom shelf. So there's actually room to grow that velocity. So that, you know, at 120, we're at 12% of the total category outselling the majority of Tyson and Purdue items. And, you know, we're not even into healthy eating season, which begins, you know, on January 3rd. So I actually think we have room to grow. Now, obviously, we're not putting that growth into our guidance expectation for 2023. But it's just really impressive. And frankly, I never expected to see velocities this high. So, you know, no promotion, no secondary displays, no discounts. It's pretty remarkable. you know, at the end of the day, velocity means everything. And when you have performance like that, and you also are bringing incremental revenue to those categories, the distribution growth will come and we're starting to see, you know, those authorizations happen now. It just did not happen in the third quarter, like we expected. And that's why this quarter looks the way it does.
spk05: Makes sense. A lot of questions here, but I'm just going to end with two quick ones. One, um, You know, Jerry, when I hear you talk about maybe equipment breaking, it concerns me just around the ability to kind of ramp the production and service demand. So if you could provide a little bit more color around how you are progressing on that front and give us confidence that Bolingbroke is going to be able to support customers with high service levels, particularly with all this innovation and new distribution coming. And then the second question, if we can just squeeze it in, maybe more for Akshay. I think you mentioned on the raw materials, if you locked in prices today, you'd see a six to 10 percentage point impact on gross margin. But the guide for next year is less than that in terms of gross margin expansion. So, I mean, why wouldn't you lock in today And why wouldn't the guidance be higher for gross margin expansion in 2023? Thanks.
spk04: Thanks, John. I'll take the first half of your question there. You know, we got the plant up and running, you know, the core of the plant, you know, on time. And, you know, we're going through our planned, you know, ramp up phase strategy. And, you know, the initial line was a lower speed line that we had brought up very quickly in March of this year. that gave us a degree of confidence. However, you know, the stumbling block was when we turned on the high-speed credit line. So, you know, we have a line that targets, you know, 1,000, 1,200 pounds an hour. We turned on a line that, you know, targets 3,000 or 4,000 pounds an hour. And we started to see some issues at that higher rate. You know, some weeks, you know, our output was, you know, sub-20%. We made the decision to figure it out and run through it. frankly, to fill the orders and protect the TPDs that we had gained. Our margins paid for the price for this. Our breaded chicken product is very novel, first of a kind as far as I know. And our breading system is really very sticky, very high viscosity batter systems, and different than anything that's on the market. And think about what we're doing here. We are doing a grain-free, gluten-free, high-protein product, never been done before. Not to mention, the stuff just tastes great. To boot, I want to just toot our horn on that. But the materials were unexpectedly and really extraordinarily tough on some equipment that we had purchased. One piece in particular was the root cause. We successfully re-engineered that piece of equipment. We hardened it, we strengthened it, and we've gotten over the hump of that piece of equipment being a roadblock. And now we're up in the late 70s and 80s with efficiencies. We've been able to connect days and weeks together of production. So I think we've got something to crow about there, and we're really happy with that progress. And so as far as being able to fill orders that we're seeing, our confidence is high now. We continue to see those gains late in third quarter, throughout the fourth quarter. We continue to get better as we exercise the line, but we've come into a new phase of the startup. I hope that answers your question there.
spk07: Yes, it does. Thank you. Thank you.
spk03: I'll take the second part of that question. This is Akshay. Hey, John. Thanks for the question. Yeah, so you did the math right. if we locked in all our commodities today, the benefit to our margins would be much greater than what we're guiding to. We are, so why is that? Well, first off, I think it's prudent this early in the stage to add some room, you know, some conservatism. So that's number one, right? We're doing preliminary guidance here in 3Q, typically companies wait till 4Q to do that. We're still locking in our plans. Secondly, some of these commodities are not hedgeable, let's say, or at least you can't lock in as far out as you'd want. Then there's the whole year still to go. What goes into the margins other than commodities, obviously, is the revenue plan on the volume side, et cetera. There's just a long way to go. But mathematically, yes, relative to where our guidance is right now, there could be upside if prices stay where they are or at least stay at historical averages, right? So that math that we provided, it's important to note that it's more taking into account historical average prices rather than sort of seasonally low prices that we're experiencing right now. So commodity is a big tailwind. We've got to turn the corner here and really show the margin improvement. Once we do and we're further along in terms of hedging, et cetera, you know, we'll update our guidance accordingly.
spk07: Thanks a lot. Appreciate it. Thank you.
spk02: Again, to ask a question, participants may press star 1 on their touchstone phone now. We have next question from the line of Bill Chappell with Twist Securities. Please go ahead.
spk09: Thanks. Good morning. Kind of on the same line of John's questions, I appreciate all the innovation and all the opportunity, but at some point do you worry about there's too much innovation or too kind of far afield? I understand stuff like chicken tenders are fairly straightforward and but it seems like some of the stuff could be a little more complex and maybe challenge the bowling book facility by doing so many different things at the same time and risk kind of hurting service levels. So, I mean, any thoughts on that of maybe slowing some of the innovation as you roll out or expand distribution so quickly?
spk06: We feel good about it. You know, again, when you think about our innovation, fewer, bigger, better, think about like our new low-carbohydrate, high-protein flour tortilla system. From a manufacturing standpoint, the plant really doesn't recognize a difference between doing that or our current chicken tortilla product. So we're really thoughtful about our equipment set when we add this type of innovation. But the other point, Bill, is we're putting on a combined amount of capacity of $400, $500 million. And our job is to fill these plants as quickly as possible in a profitable way. And so we're well on our path to do that. And I feel really good about the innovation that we're rolling out.
spk07: Okay. And in terms of the
spk09: the rollout this quarter, I mean, the, I guess, slower distribution this quarter, you know, is that true? Did you see that kind of across other competitors' competition or you just feel like that was just, the retailers were kind of in a flux and there's a variety of reasons why they didn't go as fast as you would expect. I don't fully understand, you know, why there would have been a slowdown this quarter and why you're as comfortable that it'll reaccelerate the next two. I'm not saying it won't. I'm just, you know, a little more color will be great.
spk06: Yeah, Bill, I'm not going to blame this on, you know, category dynamics in any way. I think that it's just that's how it played out for real good foods. But look, I mean, again, the velocity that we did put up and are putting up, and we continue to see those velocities grow. And you guys can see it in the measured channel. You can see it in the SPINS data. At the end of the day, that's all that really matters. And that's why now they're coming on and authorizing additional points of distribution. So, you know, it was just one of those cycles that we went through. Now, on the other hand, an unmeasured channel, it's the opposite story. You know, we're seeing acceleration in Q4. We're seeing expanded distribution. We're seeing faster embracing. of our innovation, and that's what's really, you know, driving the Q4 quarter. And then as we go into 2023, you know, I think that will continue to happen. And in our guidance for 23, switching back to measured channel, you know, we see at least 25% growth there with plenty of upside as we move along and continue to get more and more points of distribution.
spk07: Got it. And then one last one for me. Good? Please.
spk03: Sorry. Just wanted to add one thing, if I could, on what Brian said on the distribution. So just to provide some numbers, right, our guidance reduction is about $3 million, right? That's all in retail, all distribution. That's about seven points of expected distribution growth, let's call it, for the year. or 20,000 points of distribution. We've talked last quarter about one large retailer delaying shelf resets. That's part of that. But the most important thing is this is a pure timing issue. So we had expected that with the velocities that we're seeing, that some of these retailers would intra-shelf reset, give us distribution because that's how good the velocities are. That didn't happen in time this quarter, but we've got that distribution for next year and some, right? So, you know, we're 20K short this year on distribution, but we got that and some with 40K plus right now and growing. So I just wanted to kind of make that point is, yes, we're disappointed it didn't happen this quarter. A lot of that's, you know, up to the retailers. We're pushing hard. But our products are performing, and we've got it now, especially at this large retailer, mass retailer. We've got that distribution. It's a big deal. It's foundational. And, you know, it's going to flow through more fully in 23.
spk09: Yeah, no, absolutely. It's a high-class problem, so I realize that. One last one. On those distributions you kind of talked about, even the placement of the chicken tenders is some high, some low. How do you envision? the total rollout to be, you know, especially as you're expanding over the next, would you expect kind of there to be a block in some retailers of real good foods products, or is it going to be in the chicken tender out? There's going to be real good foods in the prepared meals. There's going to be real good.
spk07: Is it going to be kind of more individual placements kind of across different categories throughout frozen?
spk06: Yeah, it will be, in the case of breaded poultry, it's going to be in the breaded poultry door right next to Tyson and Purdue because that's where we're winning. And what I see happening in 2023 is one, maybe two shelves of real good food items and a nice brand block of one to two shelves in that door. And, you know, that's how we've kind of executed, that's how we've kind of run our play, Bill. I mean, you see one or two shelves of us in breakfast. You know, our goal is one or two shelves and entrees and the same is true in snack and appetizers. You know, the company benefits from driving incremental revenue and so do our retail partners because, you know, they see us as a growth driver for each of those doors because we push our community and we create excitement in the categories we participate in. And that strategy is unique to Real Good Foods, and it's working for both our retail partners and us.
spk07: Great. Thank you. Thank you.
spk02: Thank you. We have next question from the line of George Kelly with Roth Capital Partners. Please go ahead.
spk08: Hey, everybody. Thanks for taking my questions. So first one, Akshay, I was surprised and impressed to hear you mention in your prepared remarks that you expect to reach positive cash flow from ops in fiscal year 23. So just curious, could you maybe bridge between EBITDA and that positive cash flow from ops? Just curious what the assumption is regarding working capital and interest, et cetera, if you can help bridge those two.
spk03: Yeah, great question. So, you know, we've said mid to high single digit adjusted EBITDA, right? And bridging from adjusted EBITDA to regular EBITDA and cash flow, there's two steps. One is what's the planned startup cost? You know, instead of looking at it as a dollar number, you know, the revenues change and think of it as like 3% of revenue. So in this case, maybe five, you know, $5 million or so. Um, so that's one, right? Uh, so you start with a high single digit EBITDA, you take out about five, you're down to, uh, a poor EBITDA. And then, you know, there's, there's a stock based comp of 2.8. That's already, uh, excluded from that, but just to point that out. And then when you get into, so that's, you know, a positive number, EBITDAX.com is a, you know, $3 to $5 million number, let's call it, if you just follow the math. And then on the working capital side, you know, we think we're going to have a source of cash there. I don't want to quantify exactly what that's going to be, but it's a big opportunity for us. So it would be $3 million, $5 million is kind of what you should think about order of magnitude and could be higher. So we have 70 days of inventory at the end of this quarter. We were at 100 days at the end of last quarter. So Jerry and the team have done a great job. managing that down. We think we can get that down to even 50 over time. And as our COGS come down, the absolute number comes down even greater. So that's the big unlock where we've already seen significant movement on the working capital side. And then what you have also in the cash flow equation is uh, you know, cash interest expense, right? Which is, uh, around, let's call it $4 million cash interest expense. So those are all the pieces. If you take all of them, I don't know if you're following all of that, but, uh, that gets you to a positive, uh, operating, uh, cashflow, um, even with our preliminary guidance.
spk08: Okay. That's really, that makes sense. Yeah, it did. It did. Yep. Thanks. And then two other quick ones. Um, Brian, you talk a lot about the incrementality of your various products and categories. I know it's still early days, but same thing happening within breaded chicken. And then second question is pricing. What are your pricing expectations? What's baked into your 23 guidance? That's all I had. Thank you.
spk06: Sure. We got an early read on a panel study that suggested that over 80% of people buying our breaded poultry in that category were incremental to the category. So that's a pretty remarkable number. It just kind of shows the power of, I think it's just two things, the power of our social media team to drive and let our community know. But number two, you know, there's a lot of people that don't participate in the frozen food category simply because there's carbohydrates and sugar and not the protein they're seeking. So That combined with Velocity is why we're finally getting authorizations to roll these products out. With regard to pricing action in 2023, you know, we don't have any plans to take price. You know, and the reason for that is as we all are seeing significant reduction in our input costs on our core commodities. And in terms of our pricing strategy, you know, we look at the gaps between us and conventional products, and we like that, you know, we're maintaining that 10% to 15% premium, and that's where we'll continue to sit.
spk07: Excellent. Thank you. Thank you, George. Thank you.
spk02: Ladies and gentlemen, we have reached the end of the question and answer session, and I'd like to turn the call back over to Brian Freeman, Executive Chairman, for closing remarks. Over to you.
spk06: Thank you, everyone, for joining us on our third quarter call, and we certainly look forward to reporting Q4 in a few months.
spk07: Have a great day. Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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