Sovos Brands, Inc.

Good morning, and thank you for joining us in Silvers Brand's third quarter 2021 earnings conference call. On the call today are Todd Lackman, President and Chief Executive Officer, and Chris Hall, Chief Financial Officer. Please note that during the call, management may make forward-looking statements based on current expectations and beliefs. Any forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from expectations. These refer to today's press release and the company's SEC filings for a detailed discussion of risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements we made today. The company undertakes no obligation to revise or update any forward-looking statements except as required by law. Management's remarks today will focus on non-GAAP or adjusted financial measures. Non-GAAP measures should not be considered as a substitute for financial information presented in accordance with GAAP and can differ from similarly titled non-GAAP measures used by other companies. Please refer to today's earnings release posted on our investor relations website, ir.servicebrands.com, for a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP measures. We have also posted supplemental slides in our investor relations website. This call is being webcast, and a replay will be available on our website for the next 30 days. All consumption data cited on this call refer to dollar consumption as of the 13-week period ended October 3rd, 2021, and growth versus the prior year, unless otherwise noted. Now I'd like to turn the call over to Todd.

Thanks, Christina, and hello, everyone. I am pleased to share our strong third quarter results following our IPO in September and to introduce many of you to the Sovos Brands story. For today's call, I will spend some time sharing why Sovos Brands is one of the most exciting, disruptive, growth-oriented companies in the packaged food sector. I will touch upon a few quarterly highlights that underscore the financial and operational strength of our business. Following my remarks, Chris will discuss our Q3 financial results in greater detail, as well as provide our outlook for 2021. After that, we will open the call for questions. Let me begin by introducing our company. Sovos Brands is the fastest growing food company of scale in the United States. We are a high growth, purposely built food platform and growth accelerator, pioneering a new approach to packaged food with a portfolio of one-of-a-kind brands. Our vision is to build a portfolio of brands that creates joy for consumers by providing absolutely delicious food, resulting in growth that outpaces the food industry average. All our brands, Rao's, Michelangelo's, Noosa, and Birchbender's, are built with authenticity at their core using simple, high-quality ingredients, providing unforgettable food experiences. Our business model is grounded in acquiring one-of-a-kind brands and leveraging a common infrastructure and shared playbook to drive growth. And the significant white space for each of these brands supports our algorithm for sustainable, long-term, profitable growth. We have achieved a combination of double-digit growth and profitability. In the last 12 months, we generated $695 million of brand net sales, up 25% versus a year ago, with an adjusted EBITDA margin in the mid-teens. Our leading net promoter scores underline our strong brand affinities, and with household penetration of 10% or less today, our brands have a significant runway to gain share in $26 billion of addressable market, with an exciting pipeline of potential new products to double our TAM to at least $50 billion over the next several years. Now let's talk about each of our brands. Rao's is the largest and fastest growing brand in our portfolio, offering a selection of pasta and pizza sauces, dry pastas, frozen entrees, and soups. At the core of Rao's is our sauce business, representing approximately 48% of sales and the third largest brand in the pasta and pizza sauce category today, with market share reaching an all-time high of 13.2% this quarter. Consumption of Rao's sauce is growing 29% compared to category growth of 1%. With dollar velocities more than two times the category and distribution growing over 30%. Rao's homemade sauces are made with naturally ripened home Italian tomatoes, pure olive oil, and fresh onions. Our sauces are slow simmered in open kettles and made in small batches just like homemade. We are in the early innings of growth with significant distribution opportunities ahead of us. Recent household penetration data for the pasta and pizza sauce category in the last 52-week period ending October 3rd marks an important milestone for Rayos, with penetration increasing to 10.3% of three full percentage points versus just one year ago. Importantly, Rayo still has substantial runway for growth in the sauce category, with household penetration less than one-third of the two market leaders. Rayo's top quintile velocity performance and leading net promoter score enables us to further expand national distribution while extending Rayo's strong brand equity of authentic Italian cuisine into new categories such as dry pasta, frozen entrees, and soup. Rao's frozen entrees are growing consumption at a triple-digit rate, making Rao's the fastest-growing brand in the frozen entree aisle and a strong complement to our well-established Michelangelo's brand. Known for its homemade, authentic Italian heritage and unwavering commitment to quality and fresh ingredients, combined, net sales of our frozen entree business are growing mid-teens. And as Rayos leverages the scale of our Austin manufacturing facility, we expect to generate meaningful operational efficiencies. Noosa is one of the best tasting brands in the yogurt aisle, with products made with high quality ingredients, such as whole milk, real fruit, and 100% pure North American honey. Noosa has outperformed the category in unit sales for 34 straight months. and dollar sales are currently growing at twice the category rate. With the strong momentum in our core yogurt business, we are very excited for our plans to expand Noosa into the ice cream category in early 2022 with the launch of the first ever frozen yogurt gelato. Feedback from consumers and our retail customers has been very, very strong. Birchbenders, our newest acquisition, differentiates itself through its better-for-you, diet-friendly, and guilt-free offerings across traditionally high-guilt categories. Birchbenders' clean ingredient breakfast foods and snacks cater to a variety of lifestyles, including organic, keto, paleo, protein, and plant-based diets. With the number one net promoter score among organic pancake and waffle mix consumers, Birchbenders enjoys consumer brand advocacy and loyalty. Although we are experiencing a challenging lap versus last year's COVID surge in the pancake and waffle mix category, we are pleased with the brand's early success in frozen waffle, baking mix, and frosting categories and plan to launch Birchbenders into ready-to-eat cookies, a $9 billion market, in the first half of 2022. Consumption of our brands in our three largest categories, Sauce, Yogurt, and Frozen, which represent approximately 90% of our brand net sales, increased double digits in the third quarter, significantly outpacing their respective categories. Sauce, represented by the Rayos brand, accounts for approximately 48% of sales and grew consumption by 29% in the third quarter versus 1% for the categories. Yogurt, represented by the Noosa brand, accounts for approximately 25% of sales and grew consumption 11% compared to 5.5% for the category. Finally, Frozen, which includes Rayo's and Michelangelo's entrees, and Birchbender's Waffles is our third largest business at approximately 17% of sales and grew consumption by a combined 28%. At first glance, it is easy to find more differences than similarities across our brands, but that is far from the truth. Our brands share the same attributes, appeal to a similar consumer demographic, are sold in the same channels, and retailers leverage the same growth playbook and utilize the same Sobos brand's infrastructure and capabilities. We are a strategic and valuable partner to retailers as our brands generally drive incremental sales, reinvigorate the categories in which they compete, and attract a highly coveted consumer base with high repeat rates and large basket sizes. Additionally, our premium price points generate higher gross profit per unit for retailers, offering a compelling value proposition. We are very proud to have received Vendor of the Year at Target and Supplier of the Year at Whole Foods in 2020 due to our strong brand performance and best-in-class customer service levels. Our strategy is focused on increasing household penetration by increasing distribution, expanding brand awareness and innovating into new categories. Our platform is designed to provide a foundation for future growth and to capture material synergies as we scale and add new brands. Our successful brand stewardship makes us an attractive partner for many founders who want to take their brands to the next level. Over time, we expect to continue to acquire one-of-a-kind brands with Sobos Brands attributes and significant growth potential that we can unlock with our playbook. Before I hand it over to Chris, let me touch on our Q3 performance. We delivered a 31% increase in net sales or a 17% increase in brand net sales, which includes perch vendors in both comparable periods. Similar to our top line, adjusted EBITDA also grew 31%, resulting in a consistent year-over-year adjusted EBITDA margin of 14.4%. We will continue to invest in our brands to fuel market share gains and increase household penetration, and we expect a strong finish to 2021 with projected full-year growth of mid- to high-teens for brand net sales and mid-20s growth in adjusted EBITDA. I am confident the disciplined execution of our Solos Brands Playbook will fuel long-term, high single-digit net sales growth with expanded margins, making our company one of the most exciting players in the packaged food sector today. With that, let me hand it over to Chris for more details on the quarter and our fiscal year 2021 outlook.

Thank you, Todd. Good morning, everyone, and welcome to our first earnings call. We were pleased to demonstrate our continued momentum in Q3 with healthy double-digit sales and adjusted EBITDA growth in line with our top line, excluding amortization and acquisition-related costs, initial public offering readiness, non-cash equity-based compensation, and other items detailed in this morning's press release, adjusted diluted EPS for $0.10 per share this quarter. Third quarter net sales of $178.7 million increased by nearly $42 million, or 31%, compared to the same period last year. The Birchbenders brand, which was acquired in October 2020, and was therefore not included in the results this quarter for the prior year, contributed $13.8 million of the increase. The remainder of the net sales increase was primarily attributed to increased shipments with our two largest brands, Rao's and Noosa, driving the most significant increases, including Birchbenders Q3 2020, Net sales prior to the acquisition, brand net sales increased by 17% in Q3 2021. Net sales of Rao's increased by 35% this quarter, driven by strong consumption and market share gains across sauce, soup, and pasta. Consumption for the total Rao's brand increased 36%, driven by strong distribution gains for our core portfolio, while unit velocities continued to grow. Double-digit growth in the consumption of Rayo sauce continued to outpace the category by 28 percentage points, consistent with the pre-COVID trend, and velocity growth was more than double the category average. Rayo's dollar market share in the sauce category reached 13.2%. In addition, sales from new categories, such as soup, continued to grow, driven by both distribution gains and favorable velocities. Rayo's Soup is also outpacing the category in terms of dollar growth by 4x and is now the fifth largest brand in the ready-to-serve soup category. Lastly, Rayo's Frozen has gained market share with dollar growth outpacing TDP growth. Combined with Michelangelo's, consumption of our total frozen entree business is up double digits. Net sales of Noosa this quarter increased by 9%. benefiting from higher velocity, strong merchandising events, and new distribution gains. Consumption continued to accelerate in the third quarter, with gains in every top 10 account. We remain focused on driving healthy growth for the brand, and going forward, we expect to achieve mid-single-digit growth annually. Finally, Birchbenders contributed $14 million to net sales this quarter. While consumption of pancake and waffle mixes has moderated, with challenging COVID-related year-over-year comparisons. On a two-year basis, Birch Bender's brand net sales were up 84% on a year-to-date basis. The brand is finding good success with its new frozen waffles and baking mixes with strong consumption gains in the third quarter, demonstrating the brand's ability to travel to new categories. Gross margin was 27.9% of net sales compared to 33% in the same period last year. The margin decline, which was largely anticipated, was a function of higher logistics costs, inflation, and increased promotional support, particularly when compared to abnormally lower spending levels last year. We incurred higher transportation costs to secure and expedite supply-critical for meeting the strong demand for our products, and navigate unprecedented port log jam and volatile shipping costs. With our growth-oriented mindset and the momentum in our business, we will continue to make the right decisions and investments to drive the industry-leading growth of the Sovos brand's portfolio, and I will discuss our inflation expectations and the actions we are taking in a few moments. Gross margin was also impacted by the acquisition of Birchbenders, which will see margin improvement as we implement our full value creation plan as part of its integration. Adjusted operating expenses of $33.9 million declined by 1% over the previous year. Depreciation and amortization expense increased to $7.2 million from last year. Excluding adjustments of $4.6 million this year and $5.1 million the prior year period, Adjusted operating expenses declined 1% due to lower marketing and general and administrative expenses, partially offset by the inclusion of Birch vendors. Despite the incremental cost increases we've incurred to meet consumer demand, I am pleased to report that we delivered adjusted EBITDA growth of 31% to $25.8 million, resulting in an adjusted EBITDA margin of 14.4%, consistent with the same period last year. Operating income of $11.4 million grew 81% versus the same period in the prior year. Interest expense of $12.5 million represented an increase of $8.3 million. The increase in interest expense resulted from a higher balance of borrowings outstanding related to our June 2021 shareholder distribution, as well as borrowings associated with the Burk Spender's acquisition. Income tax of 3.1 million for the 13 weeks ended September 25th, 2021 represented an increase of 3.7 million compared to the income tax benefit of 0.2 million in the prior year period. The increase in our income tax expense is primarily attributable to an increase in non-deductible expenses for tax purposes. Third quarter net income was a loss of $4.6 million or a loss of $0.06 per diluted share compared to a gain of $2.2 million or $0.03 per diluted share in the prior year period. Adjusted net income was $7.1 million compared to $9.6 million last year. Adjusted diluted earnings for the quarter were $0.10 per share based on 74.1 million shares on a diluted basis. With the timing of our IPO and the subsequent exercise of the Green Chew, shares outstanding were approximately 101 million shares as of October 5th, 2021. Now, let me touch on a few highlights from our balance sheet and cash flow. At the end of the quarter, we had a cash balance of 43.1 million and total debt was 774.8 million. Our primary use of net IPO and Green Shoe proceeds of $302.7 million will reduce debt by $299 million in Q4 as proceeds were received post Q3 close, which will also reduce our future interest payments. Operating cash flow for the 39-week period was $18.3 million compared to $52.8 million for the prior year period primarily due to higher working capital, driven by lower accrued expenses, higher accounts receivable related to net sales growth, and inventory replenishment following the high COVID-19 demand in the previous year. Now, let me discuss our outlook for full year 2021. With our continued momentum, we expect net sales of $710 to $715 million and adjusted EBITDA of $113 to $115 million. We expect a full-year adjusted EBITDA margin of approximately 16%. We continue to expect higher inflation, including higher distribution costs, given the tight global supply chain, and we anticipate mid-single-digit inflation to persist near term. Like other companies, we are seeing cost increases in several raw materials, like milk, fruit, resin, and cardboard. Transportation challenges continue due to logistical issues at major ports, as well as intermodal and trucking delays, which have resulted in long lead times and higher logistics costs. We have and will continue to develop multiple levers to mitigate inflationary pressures on top of the many initiatives that are currently in place. Some of our current levers include automation in our manufacturing facilities, optimization of our co-manufacturing network, packaging value engineering, and further competitive procurement actions. In addition, we are partnering with our largest supplier, La Regina, in building a domestic manufacturing facility, which will provide sourcing flexibility and lowest landed cost capabilities. We expect this facility to become operational in early 2022. Collectively, these initiatives will reduce our supply chain costs while improving manufacturing efficiency and customer service. Our extensive list of cost reduction initiatives will begin implementation in late Q4 with substantial completion by late Q1 to early Q2 2022. These actions are expected to mitigate additional inflation, and we expect gross margin trends to improve sequentially from Q3 levels. However, we will remain nimble as we manage our pricing and cost structure and will react accordingly as conditions warrant. While volume gains across our portfolio remain our greatest growth enabler, we will continue to take price as necessary and maximize trade efficiencies with a holistic approach towards net revenue management. We previously announced a list price increase for our largest product line, Rayo Sauce, which takes effect late Q4. To combat additional inflation we have seen and expect in the coming year, we have announced new list price increases for additional products effective in late Q1 2022. We are also removing our least efficient promotions to drive net price increases and assist in mitigating inflation. We expect our new pricing actions to take hold in the marketplace and become more beneficial beginning next year. Our performance this year has enabled us to lap comparisons from the 2020 COVID surge and grow brand net sales by 72% on a year-to-date basis over the comparable period in 2019. Long-term, we believe our focus against increasing household penetration of our current brands, as well as selective TAM expansion via new product innovation, will sustain high single-digit sales growth organically. We expect adjusted EBITDA growth in the low double digits with expanding growth and EBITDA margins as we increase productivity and leverage capabilities across our shared organization. And finally, with our robust cash generation, future M&A opportunities will provide additional optionality for growth. To conclude, investing in growth remains our highest priority for capital allocation. With our operational discipline, we are well positioned among the high growth, profitable names in the CPG sector with a promising stable of brands that will delight consumers for years to come. With that, let me turn the call back over to Todd for some final remarks.