The Real Good Food Company, Inc.

Greetings and welcome to the Real Good Food Company fourth 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 your host, Shamari Venn, Vice President of FP&A and Investor Relations. Thank you, Shamari. You may begin.

Good morning and welcome to the Real Good Food Company's fourth quarter 2022 earnings conference call. On the call today are Brian Freeman, Executive Chairman, Jerry Law, Chief Executive Officer, and Akshay Jogdel, Chief Financial Officer. Our fourth quarter earnings release crossed the wire at approximately 8 a.m. Eastern Time today. If you have not had a chance to review the release, It's available on our investor 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 risk 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 the 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 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 can cause or contribute to such differences are detailed in the company's filings with the Securities and Exchange Commission. Except as required by law, the company undertakes no obligation to update any forward looking or other statements herein, whether as a result of new information, future events, or otherwise. In addition, throughout this discussion, we refer to 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 fourth quarter earnings release, which is available on our website under our Investors tab. With that, it is my pleasure to turn the call over to the Real Good Food Company's Executive Chairman, Brian Freeman.

Hey, thanks, Shamari. Good morning, everyone, and thank you for joining us today on our fourth quarter earnings call. I will briefly review our fourth quarter highlights and discuss the reasons we believe we're well positioned for long-term growth. Terry 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 fourth quarter, net sales increased 39% to $35.7 million as compared to $25.6 million in the fourth quarter last year. Sales in the fourth quarter were below our original expectations, driven by our decision inter-quarter to dial back on a certain promotional event that was a one-time LTO for non-core items in the unmeasured channel that would have ultimately been margin dilutive. This action demonstrates our commitment to profitable growth. And despite pulling back on trade, unmeasured channel sales grew by 81% this quarter and were up 385% on a two-year basis. Sales in the retail or measured channel increased 107% on a two-year basis, which is an acceleration compared to approximately 50% two-year growth on average over the preceding three quarters. Our baseline velocities continue to outperform our expectations and have been the primary driver of growth in 2022. We're able to leverage this velocity growth with our retail partners to activate new TPDs. For 2023, our growth will be driven by distribution gains of our high velocity items. We've secured approximately 50,000 new distribution points for our products to ship in 2023, which represents an approximate 38% year-over-year increase in our distribution footprint. These distribution wins include 11,000 incremental distribution points since last quarter, including further expansion at two large national retailers and several regional retailers. Moreover, this new distribution is for items that have significantly higher velocities than our base business, implying that sales growth will likely outpace distribution growth in 2023 as this new distribution comes online. As we've said in the past, due to the new item reset schedules in the measure channel, this new distribution will come online late in 2Q and into the back half of 2023. As such, the shape of our growth this year is back half-weighted. Now, turning to the unmeasured channel, we are on track to meet or exceed our 2023 plan. There are two important things going on in the unmeasured channel that I would like to highlight. First, our entry into the refrigerated section is a success. This is a new temperature state for us and gives us entry into the multi-billion dollar refrigerated category. The first item we launched this year is our Flotta, which can be found in approximately half of the U.S. and one of our customers in the unmeasured channel. We're experiencing velocities that exceed $2,000 per point of distribution per week, which is 2x the threshold for the category. This success has led us to the authorization of a second item that will launch in April. The second item is our low-carb, high-protein chicken and pepper jack burrito. It will launch in approximately a third of the country. We view the refrigerated areas providing significant long-term growth and plan to expand these items and also introduce protein-based entrees in the coming months and years. The second important topic I want to mention regarding the unmeasured channel relates to our frozen food business. We are currently transitioning our original enchilada into our new creamy poblano enchilada using our new proprietary tortilla. This new version, which we call 2.0, is just now getting on shelves, and we are pleased with the velocities. The transition caused the short-term sales decline for the quarter, but we see this as a smart investment in our future and for achieving our 2023 plan. Our bread and poultry business continues to perform with expanded distribution coming in on time and on plan. So to summarize the unmeasured channel and provide additional perspective, in 2021, we had two items that on a combined and annualized basis achieved 65% ACV. For 2022, We grew to three items with a combined and annualized ACB of approximately 68%. Currently, we have eight items authorized that participate in three different categories in frozen and one category in refrigerated. For perspective, we've never had more than four items authorized simultaneously. We see our breaded poultry, enchiladas, bacon-wrapped items, and refrigerated flout as easily achieving our plan for 2023. with an additional four authorized items providing opportunities for upside to the plan and 2024 future growth. All of this is to say that we are confident in meeting our 2023 full year plan. Finally, I want to highlight our product velocities across all channels. Baseline velocities continue to exceed our expectations with velocities for many of our new products trending significantly higher than our base products. Specifically, Our breaded poultry items are performing the top quartile of all conventional SKUs with velocities that are 8X or 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 meat items. This includes conventional producers such as Tyson and Purdue. 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%. Gary and Akshay will speak to this in more detail, but I wanted to touch on our margins this quarter. Gross margins are 13.7% this quarter, which is a nine point improvement sequentially in the best margin in the last six quarters. What is particularly noteworthy about this performance is the fact that we achieved this while our plants were less than 50% utilized. Adjusted gross margins, which account for the capacity utilization impact, were 27.7%, a 13 point improvement sequentially, compared to 15.8% in the third quarter of 22, and the second-best quarterly adjusted margin in the company's history. Margins in the fourth quarter reflect a more normalized commodity cost environment and improved operational performance, both of which we believe are sustainable. Costs for chicken, cheese, and bacon have come down from historical highs and are currently at or below their long-term historical averages. We continue to expect commodity costs to have a 6 to 10 point positive impact on our margins in 2023, assuming current trends hold. Additionally, our operating performance improved sequentially as we gained efficiency in our new Bolingbrook facility. As we continue to ramp up production to meet demand, we expect these efficiency gains to be an even larger contributor to margins in 2023 and beyond. Adjusted EBITDA was a loss of $700,000. which was below our internal expectations but improved significantly sequentially from a loss of $4.5 million in the third quarter of 2022 and was the lowest loss we've incurred at the EBITDA level in seven quarters. I want to touch on our decision to transition our distribution to a new strategic partner. It's the right move for our business as it reduces our costs in 2023 and beyond. but it did cost us 300 basis points of margin or close to a million dollars of EBITDA. Barring this transition, we would have exceeded our internal expectations for adjusted EBITDA, but this decision will pay dividends in 2023. As for 2023, we expect adjusted EBITDA in the mid to high single-digit range driven by lower commodity costs, to a lesser extent lower labor, improved plant utilization, and better overhead cost leveraged. 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 spends 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's 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. Also, private label penetration in the frozen category is relatively low at about 9% to 10% That's compared to 20% to 22% on average across all food categories. And private label penetration in health and wellness frozen is even lower than in the overall frozen food category. As such, sprayed down risk within the category to lower price 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 luxury high-end retailers that typically lose foot traffic during economic downturns. As many of you probably know, our brand promise has three primary claims, low-carb with little to no sugar, high-protein, and clean ingredients. Products with these attributes are growing well above the growth in our overall total addressable market. All things considered, the categories we compete in remain highly relevant as evidenced by their large size and strong growth profile. Moreover, there are no signs of a slowdown despite the lapping of the pandemic dump and or an economic recession, as frozen foods historically perform well in recessionary environments. 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 January 1st, the Real Good Foods brand household penetration is 8.4%. That's up from 7.6% in January of 2022. This means approximately one in every 12 households in the United States has purchased our products in the last 12 months. Our household penetration continues to rank second amongst all health and wellness frozen 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 at 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 fourth quarter, our social and digital teams continued to outperform. We generated over 8 million organic impressions and 94 million total brand impressions. We also acquired 22,000 new SMS text subscribers and added 38,000 followers on Instagram, bringing our total to over 460,000 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, which average four to six times as measured by third parties. That's far higher than our peers on average. Our retailer 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 enables us to efficiently test demand for new products before they launch on shelf. This leads to greater household penetration and incremental category growth, not only for us, but for our retail partners as well. These strong brand health indicators underpin our confidence in achieving over $500 million in sales over the long term. Now, moving to innovation, our strategy can be characterized as fewer, bigger, better, and faster. This means we're interested in innovation that is additive to growth, meaningful to the consumer, and profitable. With that in mind, in 2023, we built new plant capabilities that enabled us to enter the refrigerated section. Our plaudits are now on shelf, and our low-carb, high-protein burritos will be on shelf in the second quarter of 2023. Additionally, we plan on introducing a new set of refrigerated, protein-centric meal solutions in the second half of 2023. You will continue to see us expand in the frozen category as we enter the handheld category this year with low-carb burritos, quesadillas, and taquitos. These are large, incremental platforms capable of delivering and accelerating long-term, sustainable growth. We also spend time in continual improvement and refurbishment of our existing items. We know today's consumer is always looking for what is new. To that end, we have recently introduced a new creamy poblano chicken enchilada that uses an innovative new low-carb tortilla. Additionally, as we mentioned on our last earnings call, we are rolling out our new breakfast sandwiches, which feature a newly formulated, fluffier bun. Similarly, our bacon-wrapped stuffed chicken platform innovation will feature new flavor combinations, including gruyere cheese with caramelized onions. And for the holidays, bacon-wrapped cranberry and brie stuffed turkey breast. All of this is to highlight the talented, highly focused team of food developers that work tirelessly to create craveable, nutrient-dense foods. We know if we do that, we will have a massive positive impact on society while growing a large and profitable business. I'd now like to turn the call over to our CEO, Jerry Law, to provide an update on Bolingbrook and our operations more broadly.

Thank you, Brian. Good morning, everyone, and thank you for joining us on today's call. I'm pleased to report that our Bolingbrook, 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. Bolingbrook enables our entry into exciting new categories and gives us much needed capacity to meet the growing demand for our new and existing products. I was pleased with our margin performance in the fourth quarter, which came in above our expectations. Lower raw material costs contributed to the improvement, but the margin performance also reflects the fact that the startup blues that we experienced in the third quarter of 2022 are behind us. I am encouraged by the sequential improvement in efficiencies at Bolingbrook and continued performance at our City of Industry facility. Moreover, we expect operating performance to improve further throughout 2023, driven by better efficiencies, lower labor costs, improved plant utilization, and better overhead cost leverage. Today, we have eight production lines up and running in the Bolingbrook facility with capacity for approximately 200 million in sales with the ability to add another 50 to 70 million of capacity in short order with limited CapEx investments. We are in a good position capacity-wise to be able to meet incremental demand driven by distribution wins we have already secured. We will view the first quarter of 2023 as a transitory period with two noteworthy events. First, the timing of large customer promotion moved to the fourth quarter of 2023 from the first quarter. Second, we took the opportunity to reorganize our distribution footprint to enable further cost savings by simplifying our network and to better serve our customers. Although this move costs us 300 basis points or 1 million in incremental costs in the fourth quarter, it's the right strategic move as it structurally lowers our costs and creates further flexibility in our manufacturing network. We now have a large strategic partner servicing a majority of our customer base simplifying our supply chain and significantly reducing touch points for the company. This transition will significantly lower our overall logistics costs and enable us to achieve our long-term targets. Products made in the new Bolingbrook facility will have structurally lower costs as compared to those made in our City of Industry facility. Driven by lower labor costs, higher throughput, and Bolingbrook's proximity to lower cost raw materials, supplies and a 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 concurrently accelerating our margin improvement efforts. We have already seen the impact Bolingbroke has had in terms of successfully relieving pressure on our city of industry plant, which is operating above 100% capacity utilization throughout most of 2022. With the City of Industry Plant running at more normalized operational levels, it has allowed us to focus on continuous improvement, and in turn, we expect to further improve yields and drive new efficiencies. Specifically, conversion costs in our City of Industry Plant for the fourth quarter were relatively flat sequentially, but down approximately 700 bps of net sales. which is an acceleration from Q3 as compared to the average of preceding four quarters. This improvement was driven primarily by improvement in labor costs. Before I turn it over to Akshay, I'd like to discuss our Big List catalyst as we exit the fourth quarter and move into 2023. We expect our labor costs to continue to come down sequentially as Bolingbroke becomes a bigger portion of our production mix further aided by continued efficiency gains at our City of Industry facility. We are confident in our ability to bring labor costs in line with industry standards of approximately 5-10% of sales. To reiterate, 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 these overhead leverage to drive a further 200 to 300 bps improvement in our 2023 margin profile. Lastly, Bolingbrook has enabled significant productivity savings that have already started to accrue as we move into 2023. This includes the self-manufacturing of our chicken tortillas, cooked chicken that is used in our product fillings, and our proprietary breading blends, which on a combined basis are likely to drive approximately 200 to 400 bps of margin improvement. As for direct materials inflation, the good news is that commodity costs remain favorable and point to a roughly 600 to 1000 bps tailwind for 2023. In summary, Although we walked away from some promotions in the fourth quarter that negatively impacted sales, it was all done with a keen eye on our margin targets. We are pleased by our margin performance in the fourth quarter, which showed significant sequential improvement to the second highest margin in our company's history. We continue to expect 2023 adjusted EBITDA to be in positive mid to high single-digit millions of dollar range. We have strong visibility into the drivers of our continued margin turnaround and feel confident in achieving our outlook. It's an exciting time at Real Good Foods, and I am thrilled to report the tremendous progress our supply chain 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 categories in which we compete. Now I'd like to turn the call over to Akshay, our Chief Financial Officer, who will walk you through our fourth quarter financials.

Thank you, Jerry, and good morning, everyone. Turning to our financial results, net sales in the fourth quarter were $35.7 million, an increase of 39% as compared to the fourth quarter of last year. Sales growth in the fourth quarter was primarily due to strong growth in our core products and the unmeasured channels. In the unmeasured channel, growth accelerated in the fourth quarter to approximately 81% as compared to 77% growth in the third quarter. Sales growth in the unmeasured channel would have been significantly higher if it weren't for our decision to dial back promotions on certain non-core products to prioritize margins. The strong 81% growth in this channel was driven by distribution gains and, to a lesser extent, velocity increases. As for 2023, we expect another stronger growth in this channel, driven by expansion of our breaded poultry items starting in the first quarter of 2023, significant new distribution wins already secured, as well as commitments to certain planned promotional events. It is important to point out that our growth plan has always been significantly back half weighted, but it is more so now due to the timing of certain promotional events moving from the first quarter to the fourth quarter of 2023. Despite this change in promotional timing, we remain on track to achieve our 2023 sales target for the unmeasured channel. In the retail channel, growth slowed sequentially to 1% in the fourth quarter, as we lacked 105% growth in the fourth quarter of 2021. On a two-year basis, our growth accelerated to 107% in the fourth quarter, as compared to 49% in the third quarter of 2022, 85% in the second quarter of 22 and 70% in the first quarter of 2022. Our growth in this channel continues to be driven by strong baseline velocities while distribution has been flat to slightly up. However, as Brian mentioned, we have strong momentum on distribution wins and are 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 50,000 distribution points for our new items introduced in 2022, which represents an approximate 38% increase year-over-year in 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 our overall sales growth in this channel, and we expect another strong year of growth in this channel in 2023. Our fourth quarter gross profit was $4.9 million, reflecting a gross margin of 13.7% of net sales as compared to a gross profit of $1.3 million or a gross margin of 5% of net sales in the fourth quarter of last year. The increase in gross margin was primarily due to low commodity costs, continued strong operating performance at our City of Industry California facility, and improved efficiencies in our new facility in Bolingbrook, Illinois. Adjusted gross profit during the quarter was $9.9 million, reflecting an adjusted gross margin of 27.7% of net sales as compared to $4.5 million or 17.5% of net sales in the fourth quarter of last year. We had expected margins in the fourth quarter to be higher than the third quarter, owing to lower commodity costs and efficiencies related to the Bolingbroke ramp-up. However, margins came in above our expectations, primarily owing to lower-than-expected direct material costs and, to a lesser extent, greater-than-expected efficiencies related to the Bolingbroke ramp-up. As expected, we exited 2022 with structurally lower costs, particularly on the labor front. Looking ahead to 2023 and beyond, we have a long runway of future productivity savings that will drive incremental margin expansion. Additionally, as Jerry mentioned, the cost of our key commodities has come down significantly in recent months, and if we were to lock in our commodities at current spot rates, our margins in 2023 would be 600 to 1,000 basis points higher. Total operating expenses were 13.6 million as compared to 42.3 million in the fourth quarter of 2021. Adjusted operating expenses increased by approximately 3.4 million to 12 million in the fourth quarter of 2022 as compared to 8.7 million in the fourth quarter of 2021. The increase in operating expenses was primarily driven by increased personnel expenses related to the build-out of our company's operations, finance, and leadership team, as well as increased investments in research and development. Adjusted EBITDA totaled a loss of $700,000 as compared to a loss of $4.5 million in the fourth quarter of 2021. This was below our expectations driven by two factors. One, lower than expected sales due to us walking away from a promotion that would have negatively impacted margins. And two, as Jerry and Brian mentioned, our decision to transition our distribution network to a new strategic partner which resulted in a $1 million increase in our distribution costs this quarter. Now, shifting to our balance sheet and cash flow. As of December 31st, 2022, we had cash and cash equivalents of $7.6 million and total debt of $73.2 million. Our total liquidity position was $37.6 million as of the end of the year. Cash burn in the fourth quarter was approximately $8 million. a significant decrease as compared to $19 million in the third quarter of 2022 and $24 million in the second quarter of 2022. Of the $8 million cash burned this quarter, $1 million was related to core working capital. We have strong visibility into our distribution gains in the upcoming shelf reset cycle in May, which includes a natural rollout of our berry poultry items at a large mass retailer. This significant inflection in our sales growth starting in May should result in a significant fixed cost leverage across our plant network and in GNA, propelling us to be closer to our goal of operating cash flow positive starting in the second half of 2023 and for the full year of 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 the P&L, and there's no incremental CapEx spending associated with that plan. Now, turning to our outlook for 2023. In 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 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 like to hand the call over to the operator to begin our Q&A session. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two if you'd 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 key.

One moment, please, while we poll for questions. Thank you. Our first question is from John Anderson with William Blair.

Please proceed with your question.

Hi. Good morning, everybody. I wanted to start with the fourth quarter sales, which were about $13 million below the low end of your guidance range. Um, was that all explained by the, um, um, step back from promotion that you referred to in the quarter? Um, I guess that's lower quality volume or lower margin volume that you decided to step back from. Uh, are there other things that also maybe didn't come in as strong as you had hoped? And is there, um, additional, I guess, work that you need to do in thinking about, you know, volume that you may or may not, you know, pursue just given the economics of it. Thanks.

Yeah. Hey, good morning, John. It was entirely due to, you know, making an inter-quarter decision to reduce our trade spend on a specific promotion. You know, when we think about that, whether we want to do something or not, we think about it in three buckets. One, is it strategic or is it worth the investment? Is it a platform or an item that's worth investing against? Two, is it margin dilutive? And obviously, third, does it hurt profitability? And in the case of what we looked at, we couldn't check any of these boxes. And so we made the right decision because at the end of the day, we're here to put up improved margins and become profitable. In terms of our 2023 plan, I really don't see that happening on a go-forward basis in the future. What's driving our growth in 2023, as I'm sure you're aware, is our baseline velocities and the products that are profitable. And so, with expanded distribution of the new TPDs and you know, the innovation that we have already built profitability in, we see 2023 really moving forward well.

Okay. And then on sticking with the 2023 sales view, I think in the prepared remarks, you referred to at least 200 million, and also that representing at least 30% growth. But just my back of the envelope math, that would require at least 41% growth in 2023. Am I thinking about that right based on the actual results delivered in 2022 that you would need 41% or better growth in 2023? And then just if you could talk a little bit more about the drivers there, that's about $60 million of incremental business in 2023. And and how you see that kind of coming in either by, you know, channel, retail versus non-measured, perhaps, you know, velocity versus distribution to give us a little more sense of how that will, you know, how you're seeing that play out. Thanks.

Yeah. To answer your first question, the good news is the products that we're getting the expanded distribution on have anywhere from four to six times greater velocity than our base business. So although we have 50,000 confirmed TPDs, they're far more productive points of distribution than what our base business is, and that's why we're very confident of achieving the $200 million revenue number for the year. So I think that's a big factor. With regard to the difference between measured channel and unmeasured, our measured channel business, I couldn't be more pleased with it. We have the greatest momentum I've seen since I've been here, both with retailers and with the consumer. Our velocities continue to outperform my own expectations, and retailers have noticed it, and that's why we continue to get new authorizations as we show our products. And the other good news is Those products run in Bolingbrook, which have a significantly better margin profile than our legacy products as well. So from that standpoint, you know, it's one of those situations where what's selling well and what has retailers excited also has a very nice margin profile.

Does that answer your question, John?

Yeah, it does. Thanks, Brian. I guess... I could follow up with you on the growth rate. Again, it seems like it needs to be more like 41% in 2023 over 100.

Yeah, let me, this is Akshay. Thanks for that. And thanks for pointing that out. Yeah, our intention there, so we are reaffirming at least 200 million and we are agreeing with you that that implies at least 41% growth. So that was a miss on our part. We did not intend to indicate that there could be 30% growth. It's going to be above 40% growth and at least $200 million in revenue. So thanks for asking that.

Okay. And the last one, you know, the – The scanner data, I know it's very limited in, I guess, its ability to provide a complete view, particularly for your business, which has such strong presence in non-measured channels. Typically, we don't want to put too much weight on any kind of four-week or quad-week period, but the first couple of months of the year, it looks like it hasn't really re-accelerated and maybe moderated further. How are you thinking about, I mean, what are you seeing in the measured channels now? Because it sounds like on the one hand, Brian, you're excited about what you're seeing, but it doesn't look like it's fully reflected in what's coming through the latest couple of months. And then for the cadence of the year, you know, can you give us some color around how you think about the cadence of 2023, both top line and bottom line, given the you know, the factors that you've talked about. Thanks.

Sure. You know, John, there are a couple of important items that did not get, new items that did not get picked up by IRI. But look, I mean, let's take a step back here. I mean, the one-year comp are lapping over 100% growth year over year. And on a two-year basis, we're at 107% growth, which is an acceleration over 50% of preceding three-quarters. But, you know, at the end of the day, come May and June, you're going to see a massive growth in consumption data due to the high productivity SKUs that are coming on shelf. And as those 50,000 new TPDs come in, I mean, today we're probably only at about 170,000 points of distribution today. With the reset cycles coming in in May, June, you have very high velocity SKUs, 50,000 points of distribution. You'll see a massive growth in the consumer IRI data.

Great. Thank you. I'll pass it on. Thank you. Our next question is from Bill Chappell with True Securities. Please proceed with your question. Thanks. Good morning.

I just wanted to follow up on the, uh, uh, in particular on the, the quarterly kind of what we were talking about of the change in promotion and just trying to understand the timing of that. I mean, I would, I guess several questions, I guess one, I would think you would have had pretty good analysis of profitability kind of when you put the promotion and plan, you know, several quarters before. And then, so I'm just trying to understand, why all of a sudden it changed intra-quarter, and then when this actually happened, just because obviously you last reported in November, and there wasn't much comment about anything like this. So just trying to understand the timing of this, why you didn't catch it sooner, and why the metrics would have changed so quickly.

Yeah, hey, Bill. Good morning. What I would say is,

We had an opportunity to pull back on the promotion inter-quarter, and we took it. And we did it because of our discipline. We really wanted, you know, we're focused on improving our margins and being profitable and not growing just for growth's sake. And as a team, when we came together, we said, look, we can't check the three aforementioned boxes, and so we're going to make this move. The same is true on the logistics side. You know, we took a look at our current matrix, and we know that our job to deliver at least 8% logistics cost in 2023. And in order to deliver that, we knew we had to do a significant change to our matrix. And it costs us close to a million bucks to do it. But now we're set up for 2023 to deliver on that. the results that we all expect to achieve in 23. So, you know, the way I would think about it is you've got a management team here who's serious about becoming profitable and not growing for growth's sake.

No, and I understand that, and I don't see anything wrong with the decision. I just, I guess I would have thought that right now, if you have a promotion set for June, you have a pretty good idea of, or estimate or forecast what the sales, the profitability of that promotion would be. So I'm just trying to understand what, you know, something that was $13 million in sales that seems like a pretty meaningful, something that was already in place months in advance. So I'm just trying to understand what changed inch or quarter to then pull the plug.

I think it was really about our philosophy on how we're going to drive this business.

If I can add, Bill, I'd just say this should tell you that we're even more focused on margins than we ever were before. If you look at what we've seen in the market, we're not getting credit for any of the sales growth or sales we're putting up anyway. We've been focused on improving our profitability since we IPO'd. We brought our profitability forward by over a year since what we'd said at the IPO. And this is just another step towards that journey. We're all about profitable growth. And if there's tough decisions we made, even if they're intra-quarter, we're committed to making those.

Okay, I'll follow up on that. And then on the transition cost to the distributor, was any of that one time, I'm just trying to understand, were you taking back inventory from the former distributor, was it just kind of termination fees, or was it all this, just all startup costs, that incremental kind of costs in the fourth quarter just for going to the new distributor?

Yeah, it's one time, and what you're really doing is moving a lot of your finished goods a second time, and because we needed to simplify where the inventory is stored, and you end up taking a hit in the quarter. So it's a one-time cost associated with simplifying our matrix and moving it all into the new supplier.

And so that's, you know, it's a great setup for 2023. Perfect. Thanks so much. You bet. Thanks, Bill.

Thank you. Our next question is from Rob Dickerson with Jefferies. Please proceed with your question.

Great. Thanks so much. I have a couple. First one, I guess just to touch on gross margin. You know, clearly it came in a little bit better in Q4, and then for the year it came in, let's say, you know, around 20%, 21%. The guidance is still, you know, at least 24%. Sounds like, you know, you have made maybe some incremental improvements through Q4. And I think if I heard you correctly, even if I just take the low end of what input costs tailwind could be, assuming you locked it in now, that could change, but let's just take the low end and then take the low end of what op leverage could be. I mean, you know, and I'm excluding any, you know, mixed shift in the factory line benefits. I get to like an 800 base point tailwind. Right? But let's say even if you did 20%, 22, it's not 24, then maybe you just provide some clarity as to kind of, you know, what clearly could be maybe some upside in that gross margin in 23. I'll start with that. Thanks.

Yeah. Hey, thanks for the question. This is Akshay. I'll take that one. So, it's a great question. We have a long way to go in the year. our, you know, commodity costs and a commodity basket is not necessarily hedgeable, as you know, right, on chicken and some other commodities. So things can move around, especially quarter to quarter. And so, you know, there's an appropriate amount of conservatism built into our guidance. And, you know, given our history also, we wanted to make sure we put up the numbers before we, adjust or guidance, you know, in either direction. So it's very early in the year, but what you're seeing is exactly fact-based, and certainly there's significant tailwinds in commodities that if it continues the way it is, certainly could lead to some upside for 2023. All right, great.

And then I guess just coming back to the

the line of questioning around the shift in Q4 and focus on margin. I was out in California a few weeks ago at the big expo that a lot of people go to. So it's a lot of smaller companies. And the feel was clearly like, oh, everyone's trying to get to be positive and cash flow positive. That clearly matters, especially in this environment, not just from a perspective of let's say, of the market, but maybe a perspective of like survivorship, number one. And then kind of my question, though, is, you know, is that kind of a point of discussion that's increasingly come up with the retailers? And, you know, I ask this because not every company your size on a sales basis is clearly putting up you know, the gross margin you just put up in Q4. So then you say, okay, well, we're at 70,000 distribution points, I think is what you said, and you secured 50,000 new. I mean, that's, you know, that's a big step, right? It's like a 70% increase. Velocities are strong. I'm just curious, you know, when you speak with your retailers, you know, it's kind of pointing to this profitability, maybe vis-a-vis some other smaller companies helping you actually really secure that new distribution. on top of the velocities that you're able to show with the new products.

Hey, Rob. We're at approximately 170 points of distribution with 50,000 points confirmed. You know, the conversation with retailers is all about are we helping them grow the category? In other words, is our revenue incremental? Are we bringing new users into the category? That's number one. Number two, how are the velocities of your items performing compared to the rest of the category? You can check those two boxes. That typically means you'll get expanded distribution and growth for the business. And I can tell you that our products perform the top quartile of other products in the door. And in some cases, like in the case of breaded poultry, We're in the top 10%, 12% of all products in the frozen meat section. And we're obviously driving new users because of our brand attributes and our digital community. So because of that, that's why we have permission to grow, why they're giving us expanded distribution, and frankly, why new temperature states are being presented, opportunities and new temperature states are being presented to us. you know, it's not lost on me that it's a big move going into the refrigerated, um, section. You know, we built that plant capability. It's, uh, it's a, being in the, having the opportunity to go to the perimeter of the store is a big deal. And, um, you know, our first product out, um, is a big success. So I just love the setup for 2023. Um, and that's why you hear us with such conviction around, uh, you know, our guidance for the year.

All right, great. And then maybe just one quick one, kind of what you're speaking to on the refrigerator side, maybe if you just quickly refresh my memory, apologies, kind of what that one new item is in refrigerated. And then I know you called out the protein-based burrito, but then there was some commentary around entering kind of protein-based entrees. So anything you have, I guess, one, on the refrigerated side, and two, kind of, you know, are there other incremental skews in the pipeline on protein-based entrees that are kind of within the guide in the new distribution in the back half of this year? That's it. Thanks.

You bet. So we launched with Flautus. We've got burritos coming alongside of it. You'll see our burritos show up in April. There is nothing in the guide with regard to protein-based meal solutions. But now that we have that capability, the team, you know, has developed those items. They're commercial ready. They're not in the guide. We're not going to put them in the guide for 23. But nonetheless, I'm very excited about it. We see a big opportunity over there.

All right. Thank you so much. You bet. Thank you. Our next question is from George Kelly with Roth MKM.

Please proceed with your question.

Hi, everybody. Thanks for taking my questions. First one for you, just on your full year revenue guide, you said in the prepared remarks just how back half loaded it would be. So just helping if you can quantify that at all. I mean, is like a 60-40 split reasonable or any other way that you can help us understand how that growth will will ramp throughout the year.

I think that's directionally accurate when you consider the reset timing of the category, George. I think that's directionally right. You know, what's also exciting is when you look at that, think about what our run rate will be as we exit 2023 and what that means. I know it's still early to talk about 24, but think about how that how that will look as we exit 23 is pretty exciting for the company.

Absolutely. Yeah, thanks. And then second question for me, on your balance sheet, what is the current rate on your debt? And to get to that operating, I'm assuming that your model calls for solid kind of operating cash flow profitability in the back half. But to get there, how much more do you expect to tap into your revolver? And that's all I had. Thank you.

You bet. Hey, Akshay, would you mind taking that?

Sure. Yeah, so our cost of debt is in the low double digits now with rates where they are and how high they've gone in the last few months. But keep in mind that our revolver is PIC, paid in kind. So it does not impact our cash. It impacts our availability. And as you saw probably a couple weeks ago, we did an amendment and expanded our credit facility, which essentially created at least $20 million more in liquidity for us, which is a big win, especially in this environment. As far as your question on how much will we use, I mean, we're not giving free cash flow guidance, especially not for the first two quarters, but What I tried to say in my remarks is we've got this big reset happening with a very large retailer here in May, literally a month away. Our gross margins are already at 14% when we're 50% utilized. Think about the fixed cost leverage and what impact that's going to have on our margins and also on our cash flow. We're maintaining our guidance for operating cash flow positive for the full year. And we also said here starting in May, June, we should start to be operating cash flow positive as well. So we remain on track to achieve that. And a lot of it's just going to come from better utilization and everything else that we're doing to improve margins.

Gotcha. Thank you. Thank you.

So no further questions at this time. I'd like to hand the floor back over to Executive Chairman Brian Freeman for any closing comments.

Thank you for joining us on this fourth quarter call. I look forward to updating you on our progress on our upcoming call on Q1. Thank you and have a good day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.