The Real Good Food Company, Inc.

Greetings, and welcome to the Real Good Food Company's second quarter 2023 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 Benton, Vice President of Financial Planning and Analysis. Thank you. You may begin.

Good morning, and welcome to the Real Good Food Company's second quarter 2023 earnings conference call. On the call today are Brian Freeman, Executive Chairman, Jerry Law, Chief Executive Officer, and Ashae Jogdell, Chief Financial Officer. Our second 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 in our investor portion of our website at www.realgoodfoods.com. Before we begin, I'd like to remind everyone that certain statements 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 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 net sales from existing customers and acquire new customers, introduce new products, and compete successfully in our industry, implement our growth strategy, and effectively expand our manufacturing and production capacity. Forward-looking statements made on the 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 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 statements herein, whether as a result of new information, future events or otherwise. In addition, throughout this discussion, we refer to certain non-GAAP financial measures, which refer to results before taking into account certain one-time or non-recurring charges that are not core to our ongoing operating results, and which we believe better reflect the performance of our business on an ongoing basis. Our non-GAAP financial measures include adjusted gross margin and adjusted EBITDA, our reference. A reconciliation of each non-GAAP financial measure to its most direct comparable GAAP financial measure is included in our second quarter earnings relief, which is available on our website under our investor 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 second quarter earnings call. I will briefly review our second quarter highlights and discuss the reasons we believe we're well positioned for long-term profitable 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 second quarter, net sales were 35.4 million, an increase of 15% year-over-year, and an increase of 89% on a two-year stack basis, both of which represent a significant acceleration sequentially. Additionally, we saw a sequential acceleration in sales and growth each month within the quarter. With over 30% shipment growth in June, And this momentum has carried into the third quarter and is expected to continue into the fourth quarter and beyond. The acceleration of sales growth this quarter was driven by the unmeasured channel, which was up 61% on a year-over-year basis and up 116% on a two-year stack basis, both of which represent a significant acceleration sequentially. Growth was driven primarily by improvements in velocity, which is highly incremental to the categories we participate in. Given the strong velocity performance that helps grow sales for our retail partners, we naturally secured additional distribution in the unmeasured channel for the remainder of 2023. Distribution improved significantly late in the quarter and is expected to double in the third quarter of 2023. We are particularly encouraged by the breadth of our offerings in the unmeasured channel. which spans seven categories, two temperature states, and three eating occasions. As we exited the quarter and began the third quarter, we had eight items of distribution in over 50% of the store base in this channel, which is more than double compared to a year ago. As a result, we expect unmeasured channel sales growth to accelerate further in the second half. This includes national distribution of breaded poultry, appetizers, and entrees, as well as further expansion of our handhelds, which include our flautas and burrito platforms in the refrigerated section. 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. In 2022, we grew to three items with a combined and annualized ACV of 68%. We currently have eight items in distribution that participate in seven categories and two temperature states. For perspective, we've never had more than four items authorized simultaneously in our history. All of this is to say that our strategy to expand into new categories across two temperature states is working and creates a strong foundation for a durable, predictable growth business going forward. Now turning to the retail channel performance, Sales growth was 56% on a two-year stack basis, but was down year-over-year. The year-over-year decline is a function of the timing of shelf resets, which happened with only 12 days left in the quarter and the lapping of a record quarter last year where the channel saw 93% growth due to one-time promotional events. The good news is we're on shelf now, and shipment growth in this channel has already inflected driven by distribution growth from the late June shelf resets combined with higher velocities. As of second quarter end, our total distribution points were 171,000, which is an increase of roughly 23,000 total points of distribution versus 2022. In addition, we have roughly another 30,000 new distribution points confirmed for the second half of 2023, which represents an increase of 35% versus the year-ago average. And due to the new item reset schedules in the measure channel, this new distribution started to come online late in the second quarter and will build further in the back half of 2023. The products that are gaining distribution, such as our global multi-serve entrees and breaded poultry, have significantly higher velocities than our base, which we expect will drive significant overall brand velocity growth for the remainder of 2023. We continue to expect strong double-digit growth in the channel for the remainder of the year. The aforementioned new distribution gains, combined with strong base business velocity, gives us confidence that we will grow sales in 2023 to at least $200 million, representing growth of approximately 41%. We typically do not provide quarterly guidance, but I believe it is important to do so today on a one-time basis given the significant inflection and hockey stick growth trajectory of our business. We are already seeing this growth happening, and I want to ensure our shareholders are aware of our strong conviction of this positive development. For the third quarter of 2023, we expect sales to be in the range of 60 to 65 million, representing 60 to 73% growth. In fourth quarter 2023 sales of 70 to 77 million representing 96 to 116% growth. This revenue growth inflection in the second half of 2023 approximately doubles our plant utilization rates, reduces our SG&A costs as a percent of revenue and as such enables us to drive positive cash earnings. Jerry and Akshay will speak to this in more detail. but I wanted to touch on our margins this quarter once again and provide a high-level view of how we see the rest of the year shaping up. Gross margins were 13.6% this quarter, which is 598 BIP improvement year over year. What is particularly noteworthy about this performance is the fact that we achieved this while our plants were less than 40% utilized. Adjusted gross margins, which account for the capacity utilization impact, were 28.2%, representing a 619 BIP improvement year-over-year and the second-best quarterly adjusted margin in the company's history. The strong adjusted gross margin performance this quarter points to the underlying earnings power of this business. The year-over-year improvement in our margins is being driven by our productivity initiatives as well as an overall favorable commodity cost environment. On a sequential basis, a reported gross margin should improve significantly driven by a significant increase in plant utilization rates and lower labor costs. Adjusted EBITDA was a loss of 1.9 million, which was in line with our expectations and includes the impact of significantly higher than normal R&D costs in support of our strong second half growth agenda. Again, for the back half of this year, we see our plant utilization rates almost doubling. This leverages our overhead in SG&A, and it's how we expect to see positive cash earnings in the third and fourth quarters. Next, let's take a look at the current state of the health and wellness market and how our brand positioning is resonating with the broad consumer base. According to Spence, for the 52 weeks ending July 16th, the $204 billion health and wellness industry grew 7% year-over-year in line with the 7% two-year CAGR. Over the same period, the 66 billion total frozen food category grew 9%, generally in line with the 8% two-year CAGR. Several industry observers have called out the fact that category consumption trends have weakened in recent months versus industry cycles and price increases during a relatively tough economic backdrop for consumers. We did not take significant pricing actions like our competitors and as such are not dealing with volume declines related to elasticity. Our growth continues to be highly incremental to the categories we compete in, and we tend to source consumers from the broader health and wellness industry, which has not seen softening trends like the frozen food category. It's important to note that the frozen food category has historically performed well during recessions as it tends to benefit for consumers trading down from eating out to eating more at home. Also, private label penetration of frozen category is relatively low at about 9% to 10%. as compared to 20 to 22% on average across all food categories. And private label penetration health and wellness frozen 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 limited. Additionally, our distribution footprint is focused on retailers that deliver value to their consumers and we have low concentration and what I call luxury high-end retailers that typically lose foot traffic during economic downturns. Now, our brand promises three primary claims, low-carb with little to no sugar, high protein, and clean ingredients. Products with these attributes are going 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 profiles. As for brand health, we track ourselves against four indicators, household penetration, repeat rates, social community growth and engagement, and velocity. Starting with household penetration, according to enumerated data as of July 2023, the Real Good Foods brand household penetration is approximately 8.3%, flat from 8.3% in March 2023. 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. For perspective, according to a research report recently published by Jefferies, the entire plant-based foods category had a household penetration of only 5%, down from a peak of 9% a couple years ago. Our significant 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, and as our distribution footprint grows in the back half of this year, we expect to see our household penetration grow significantly. Now, 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 July 2023. Given the new distribution of new users we are bringing into our franchise, this repeat rate is exceptionally strong. Regarding social community growth, the second quarter marked one of the strongest and most efficient quarters for impressions and follower growth in the history of the company. We generated over 12.2 million organic impressions and 77 million total brand impressions. Organic impressions are not paid-for impressions. and we're able to generate due to the size of our community. This provides massive long-term value in that we can connect with millions of people to support our initiatives. For example, when we launch new distribution, we're able to instantly tell millions of people we're now available in our local store through geotargeting. This creates velocity at scale and new item performance in a way our peer group cannot achieve without spending millions of dollars on advertising. We worked with thousands of micro and nano content creators within defined consumer verticals to mobilize and engage with people in a meaningful or entertaining way. We have the largest Instagram community of any frozen food brand in the U.S. with over 476,000 followers, an uptick of approximately 22,000 versus the end of the first quarter. 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. Our retailer partners appreciate how we drive new consumers to the categories we participate in, allowing Real Good Foods to grow the frozen category with consumers new to frozen food rather than taking share from others. In fact, a recent study from SPIMS showed that only 3.5% of households who purchased our breaded poultry items were households that purchased bread and poultry from the nation's largest brand in the prior 52 weeks. This, along with strong velocities, is why we have permission to grow distribution. These strong brand health indicators underpin our confidence in achieving over $500 million in sales over the long term. 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.