The Real Good Food Company, Inc.

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.

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.

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.