The Real Good Food Company, Inc.

Greetings and welcome to the Real Good Foods third quarter 2023 earnings 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, Mr. Shamari Benton, Vice President of FP&A. Thank you, Mr. Benton. You may begin.

Good morning and welcome to the Real Good Food Company's third quarter 2023 earnings conference call. On the call today are Brian Freeman, Executive Chairman, Jerry Law, Chief Executive Officer, and Akshay Jagdel, Chief Financial Officer. Our third 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 the investor portion of our website at www.realgoodfoods.com. Before we begin, I would like to remind everyone that certain statements made on this call are forward-looking statements within the meaning of federal security laws and are subject to considerable risk and uncertainties. These forward-looking statements are intended to qualify for 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 could 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 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 refer to results before taking into account certain one-time or non-reoccurring 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 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 third quarter earnings call. I will briefly review our third quarter highlights and discuss the reasons we believe are 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 third quarter, net sales are $55.6 million, an increase of 48% year-over-year, and an increase of 141% on a two-year stack basis, both of which represent a significant acceleration sequentially. Growth would have been even higher if we had been able to fill orders on time as consumption was up 90%, far exceeding shipment growth. For perspective, our consumption growth of 90% in the third quarter accelerated 80 points sequentially, and this momentum has carried into the fourth quarter. The acceleration of sales growth this quarter is driven by the unmeasured channel. Branded sales in the unmeasured channel were up 90% on a year-over-year basis and up 200% on a two-year stacked basis, both of which represent an acceleration. Growth was driven primarily by distribution growth, which doubled sequentially. We're 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 approximately eight items in distribution, 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 momentum to continue into the fourth quarter of 2023 and beyond. 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. 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 in two temperature states. For perspective, we've never had more than four items authorized simultaneously in our history. All 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 and up 12% year-over-year. The year-over-year growth would have been even better if we were able to fill customer orders on time. From a perspective, consumption grew 30%, far outpacing double-digit shipment. Both shipment and consumption growth significantly accelerated sequentially, driven by distribution growth from the June shelf recess combined with higher velocity. The new products that we introduced recently have significantly higher velocities than our base products, which we expect will continue to drive significant overall brand velocity growth for the remainder of 2023. We expect strong double-digit growth in the channel for the remainder of the year. As of the third quarter end, our total distribution points were 187,000, which is an increase of roughly 58,000 total distribution points from the beginning of this year. In addition, we have roughly another 17,000 new distribution points confirmed for the fourth quarter of 2023, which, if achieved, would represent 58% growth from the beginning of this year. The products gaining distribution include our global multi-serve entrees and bread and poultry, which has significantly higher velocities than our base, which we expect will continue to drive significant overall brand velocity growth for the remainder of 2023. We continue to expect strong double-digit growth in this 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 2024 to at least $245 million, representing growth of approximately 30%. Terry 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 remainder of the year shaping up. Gross margins were 20.9% this quarter, which is a 1,614th improvement year-over-year and the second-highest margin in our history. The year-over-year improvement in our margins is being driven by our productivity initiatives, an overall favorable commodity cost environment, as well as better plant utilization rates. ON A SEQUENTIAL BASIS, OUR REPORTED GROSS MARGINS IMPROVED 725 BITS, GOING TO THE INCREASE IN SALES AND CORRESPONDENTLY BETTER FIXED COST LEVERAGE IN THE PLANTS, WHICH WE EXPECT WILL CONTINUE INTO THE FOURTH QUARTER OF 2023 AND 2024, GIVING A STRONG MOMENTUM. ADJUSTED EBITDA WAS 1.2 MILLION, WHICH WAS IN THE MIDDLE OF THE RANGE WE PROVIDED WHEN WE PRE-ANNOUNCED A FEW WEEKS AGO. Again, for the fourth quarter of 2023 and 2024, we see our plant utilization rates continuing to increase. This leverages our overhead and SG&N and is how we expect to see positive cash earnings in the fourth quarter of 2023 and 2024. Now, Jerry will expand on this later, but I want to talk about how we plan on accelerating our production growth to meet surges in demand on a couple of fast-growing items. The primary change we're making is to add incremental capacity that creates redundancy in areas where we are seeing the most demand. Capital required to do this is made possible in part from our recent equity raise, and we expect the improved uptime and incremental capacity for certain products to come online this month. Next, let's take a look at the current state of the health and wellness market and how our brand positioning is resonating with this broad consumer base. According to SPIN, for the 52 weeks ending September 10th, 2023, the 206 billion health and wellness industry grew 7% year-over-year, in line with the 7% three-year CAGR. Over the same period, the 75 billion total frozen food category grew 5%. Several industry observers have called out the fact that category consumption trends have weakened in recent months as industry cycles for 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. Another headwind we believe frozen food brands are facing is their high glycemic value. According to NPD, the number one attribute consumers are looking for is to get away from sugar. In fact, according to Spin, there was a $4 billion switch away from higher sugar foods to low sugar foods in the last 52 weeks as of June 18th. This trend is durable, and it is accelerating. A further catalyst to this is the significant consumer interest in adoption of GLP-1 drugs. A recent Morgan Stanley AlphaY study showed that 45% of the U.S. adult population has interest in these drugs. The study also showed that those who are taking GLP-1 drugs shift away from sugary foods and begin eating more poultry and protein-based foods. Yet, when you walk the frozen food aisle, it is difficult to find meal solutions that are not high in carbohydrates and sugar. We believe this is why our growth continues to accelerate while others are declining. For the latest 12 weeks ending October 8, 2023, RGF's measured channel grew by 31%. On a dollar-per-store-per-week basis, our breaded poultry items are the highest-velocity health and wellness item in the U.S. Our single-serve entrees platform continues to post total points of distribution and velocity gains as we lap one- and two-year trends. And our multi-serve entrees continue to grow in both velocity and points of distribution. We have the right item at the right time, and we plan to lean in even further in 2024. To that end, I'd like to spend a few minutes on our near-term innovation agenda. I'm pleased to report that our new breaded fish fillets and fish sticks have been accepted in approximately 1,700 stores with the first ship this December. This is our initial entrance into the $7 billion frozen fish category, and we are pleased with the relatively fast acceptance of this new item with our retailer partners. I believe this is further evidence of how our brand position that is leading the low glycemic consumer movement is resonating with retailers and consumers. Second, our low-carbohydrate, high-protein flautas and burritos can now be found in the refrigerated section in mass retail. This is an example of taking success in the unmeasured channel and bringing it to the measured slash retail channel. We believe this can be a significant growth accelerator in the coming quarters. We are launching our new low-sugar, low-carbohydrate barbecue pulled pork and pulled chicken entrees in approximately 1,900 stores and a national retailer in January with a first ship in December. As a reminder, conventional barbecue sauce proteins are loaded with sugar, while ours has only two grams of sugar per serving, and it's delicious. Further, we recently gained a new large customer on the Unmeasured channel, that will be launching our frozen bacon-wrapped stuffed chicken entrees in approximately 2,000 stores in the first quarter. In summary, we have a lot of momentum going into 2024, and we continue to believe we have permission to achieve our stated goal of achieving at least $500 million in sales over the long term. I'd like to now turn the call over to our CEO, Jerry Law, to provide an update on Bolingbrook and our operations more broadly.