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.