Sovos Brands, Inc.

Good day, and thank you for standing by. Welcome to the Sovos Brands' fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Chris Mandeville, Managing Director of Investor Relations. Please go ahead.

Good morning, and thank you for joining us on Southwest Brand's fourth quarter and fiscal year 2021 earnings conference call. On the call today are Todd Lockman, President and Chief Executive Officer, and Chris Hall, Chief Financial Officer. By now, everyone should have access to the earnings release for the fiscal year ended December 25, 2021, that went out this morning at approximately 7 a.m. Eastern Time. Press release, as well as supplemental slides, can be found on the company's website at ir.sovosbrands.com. And shortly after the conclusion of today's call, a webcast will be archived and available for replay. Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties. If you refer to the company's earnings release, as well as its most recent SEC filings, you will see a discussion of factors that could cause SoBus Brand's actual results to differ materially from these forward-looking statements. Please remember the company undertakes no obligation to update or revise these forward-looking statements in the future. We will make a number of references to non-GAAP financial measures. We believe these measures provide investors with useful perspective on the underlying growth trends of the business and have included in our earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures. Lastly, please note that all consumption data cited on today's call will refer to dollar consumption as of the 13-week period ended December 26, 2021, and growth versus the prior year, unless otherwise noted. With that, I'd now like to turn the call over to Todd.

Thanks, Chris, and good morning, everyone. 2021 proved to be an exceptional year for Sobos Brands, And I want to thank the entire Sovos team and all of our partners for working tirelessly during this landmark year, notably our frontline heroes who come to work every day to produce our absolutely delicious Sovos products. We achieved many important milestones, such as becoming the number two brand in the pasta and pizza sauce category and successfully completing our IPO last fall. We also delivered record financial performance and exceeded our full year guidance, generating over $719 million in net sales and $115 million in adjusted EBITDA. This represents 25% plus annual growth and marks all-time highs for both metrics. We also had a very strong finish to the year. highlighted by double-digit growth for the top and bottom line in Q4. These results reflect our team's unwavering commitment to profitable long-term growth, even in the face of today's very dynamic environment. We are very pleased with the continued volume growth across our portfolio as distribution and household penetration continue to expand for our disruptive, high-growth, one-of-a-kind brands. For today's call, I'd like to begin with a few fourth quarter highlights to underscore the ongoing strength of our business, as well as offer some thoughts on our advantage positioning heading into 2022. I will then turn it over to Chris Hall to discuss our financial results and outlook in greater detail before opening it up to your questions. Beginning with our largest brand, Rao's was the fastest growing center store brand of scale over the past two years. The strength and momentum of this brand continues behind further distribution and velocity increases. As we exited the fourth quarter, I am tremendously proud to announce that Rao's became the number two pasta and pizza sauce brand in dollar consumption, marking a new all-time high of 15.4% share as of the four-week period ended 12-26. We have gained share in every four-week period since our acquisition in 2017. And these results represent a 220 basis point share improvement over the last 12 months, as dollar growth was up over 28% compared to down nearly 7% for the category. I'm particularly proud of the fact that not only were our gains broad-based across our entire SaaS portfolio, all channels, and all regions, but they were also driven on the back of double-digit unit, dollar, TDP, and velocity gains, which is in stark contrast to the category where units are down mid-single digits and price has been the driving force behind dollar growth. Our household penetration gains are equally impressive as we've increased penetration of our sauce to 10.9%. up over 260 basis points versus the same time last year. This has been achieved despite Rayo Sauce having less than half the distribution and awareness of its top competitors, highlighting the considerable multi-year runway we still have to support further share and household penetration gains. To offer additional context to our future distribution opportunity, I'd like to point you to slide nine of our earnings deck. where we highlight just how underpenetrated we are relative to our rate of productivity. As you can see, we still only have 11 pasta and pizza sauce items on shelf versus 17 to 22 for our top two branded competitors. These 11 items represent only an 8% share of average shelf compared to our dollar share of over 15%. No other sauce brand of scale has as big of a delta. When you have 18 sauce items consistently in the top two quintiles on velocities like we do, this represents a compelling argument for why retailers should continue to allocate more shelf space to the Rao's brand going forward. As an additional leg to our long-term growth of the Rao's pasta and pizza sauce offering, we are commencing a new ventures program in 2022 under the leadership of Risa Critella, our executive vice president of the dinners and sauces segment. Amongst many growth levers that we look forward to unveiling in the coming year, this program will be inclusive of international. where we plan to begin with expansion into neighboring North American markets, such as Mexico and Puerto Rico, as well as optimizing our route to market in Canada. Panning out to the broader RAO's offering, our efforts to extend RAO's strong brand equity of authentic Italian cuisine into new categories and drive household penetration have proven to be successful. Healthy consumption trends didn't stop with our sauce business, as soups and pasta continue to see growth across all metrics. Sales dollars, dollar share, units, TVPs, and velocities, even after roughly three years in market. Our total frozen entree portfolio, which includes Rao's and Michelangelo's, also demonstrated considerable outperformance. also growing dollar sales, share, units, TDPs, and velocities. Both brands contributed nicely to our 20% plus growth in dollars and units versus 11% and 1% respectively for the category, yielding further evidence that the two brands are proving to be complementary on shelf and incremental to growth. Collectively, We have grown household penetration for the total Rao's franchise by 300 basis points to over 13% since the prior year period, with our frozen entree offering, which is less than 15 months old, already the second greatest driver to these gains. Turning to our second largest brand, Noosa. Consumption trends in the quarter were once again strong. Our dollar sales grew at over 2.5 times the spoonable yogurt category. while our unit velocities remained category leading, up over six times faster versus the category. These results are a testament to our continued investment to grow the core, as well as our marketing efforts that are strongly weighted to digital, along with our highly differentiated taste-led yogurt. It's also worth noting that Noosa is delivering such outperformance against a yogurt category that is experiencing low to mid-single-digit dollar growth that is in contrast to years prior. Importantly, Noosa has grown in excess of this for the last 14 four-week periods. These gains are absent of any pricing, which we expect to begin realizing by the end of Q2. Against this backdrop, and because of the renewed focus to which we have on our core NUSA offering, we have a strong foundation to build from and are excited about our prospects for continued growth in 2022. This will also include our entry into the ice cream category with frozen yogurt gelato, which I'll touch upon shortly. Before I do so, I want to emphasize the strength of our overall Sobos Brands portfolio. at a time where most of the center store is lacking unit growth. In our three largest categories of Sauce, Yogurt, and Frozen, which represents over 90% of our portfolio, we saw positive dollar and unit growth that meaningfully outperformed our respective categories in the quarter. Specifically, On dollar consumption, sauce, represented by the Rayos brand, grew by 30% in the fourth quarter versus 3% for the category. Yogurt, represented by the Noosa brand, grew by 13% compared to 7% for the category. And finally, frozen, which includes Rayos and Michelangelo's entrees as well as Birchbender's waffles, grew by a combined 27% compared to 10% for the combined categories. To help bring this outperformance to life, the combination of sauce, yogurt, and frozen for Sobos brands grew dollar consumption by over 25% versus 8% for the categories in aggregate. Yet we have not even come close to fully realizing price across our portfolio when compared to the majority of our packaged food peers. Consumers across all regions of the country and income groups are clearly voting with their wallets as well as their preference for great-tasting, clean-label products. As society settles into a new norm, we believe this will benefit at-home consumption in light of a permanent shift to working from home for many within the labor pool. While trying to maintain a high quality of life, consumers are seeking value, and this is exactly where our Sobos portfolio of one-of-a-kind brands delivers. As consumers have reduced away-from-home eating occasions, they have sought out premium in-home replacements. In this context, we are well-positioned to continue to deliver robust growth given our runway for distribution and potential to increase brand awareness. As part of our growth playbook, we take our one-of-a-kind brands and selectively extend them into new categories in order to grow their TAM. The successes we have seen in soups, pasta, and now frozen for Rayos are a clear example of our playbook at work. And because all of our brands share similar key attributes, we are confident in our ability to take the Sovos Playbook to the rest of our portfolio. In Q1 2022 alone, we will expand our addressable market by nearly $7 billion to $33 billion with the entree into the ice cream category with Noosa. With a strong momentum in our core yogurt business, We are very excited by our recent launch of Noosa Frozen Yogurt Gelato into the $7 billion ice cream category with a truly unique and absolutely delicious product. While still early, we can share that we're running ahead of our initial sell-in expectations. Beyond this introduction, we have a very strong pipeline of innovation for not only additional adjacent categories, but also to continually bolster our core that will support profitable growth for years to come. In addition to our organic growth, we are continuing to evaluate acquisition targets that complement our portfolio and are accretive to our growth and margins. We have a proven track record of growing through M&A and will continue to leverage our scalable platform to further unlock growth opportunities and synergies that create value for our shareholders over the long term. To lead our efforts on this front, we've recently announced that Tom Lee will be joining Sovos Brands as Senior Vice President of M&A and Strategy. Tom comes to us from J.P. Morgan, where he was a senior investment banker advising companies in the consumer packaged food sector over the last 10 years and has led numerous M&A and capital markets transactions, including our own IPO last fall. So he is already very familiar with us, our ethos, and our strategy. And we are excited to work alongside him as he joins us later this month following the completion of his garden leaf. Before I conclude, I'd like to touch upon the current operating environment as well as provide an update on the startup of our Alma facility. As has been widely discussed and similar to our peers across the industry, we are facing a confluence of supply chain and inflationary headwinds, several of which have intensified in recent months. Specifically, in the last 90 days, We have the Omicron variant, end of the picture, producing elevated supply chain disruption and near-term cost and operating pressures related to raw materials, particularly dairy and proteins, logistics, and labor. And now the Russian-Ukraine crisis brings with it heightened uncertainty to the operating environment as well as incremental costs. As a result, in addition to the pricing and productivity initiatives that we discussed on our Q3 call, we will be taking further pricing on a new set of products affected by the end of Q2. In the past 90 days, we have also worked tirelessly to identify additional cost savings opportunities. As we sit here today and with what we currently know, we believe these actions will be sufficient to manage inflation this year. However, we are actively monitoring what continues to be a challenging and evolving operating environment, and we will remain nimble to any adverse impacts to our business that may warrant additional actions. As a means to fortifying and domesticating our Rao Sauce supply chain, I'm pleased to announce that we are beginning production of Rao Sauce in our Alma, Georgia facility this month, with expectations of ramping to full production during Q2. Alamo will serve as a key source of supply for Rayos Sauce, providing ample capacity and flexibility to support our rapid growth and reducing our exposure to the volatile ocean freight markets while retaining the unique attributes that makes Rayos a one-of-a-kind sauce. In summary, the strength of our underlying business is evident. We had a record year financially, We made major gains in market share and hassle penetration for our core offerings, and I am very proud of all that we have accomplished in 2021. While the operating environment remains highly fluid and supply chain pressures will persist into 2022, we will continue to execute on our plan to relentlessly pursue outsized top-line growth, leveraging our growth-oriented capabilities and organizations. while protecting our margins through pricing actions and productivity initiatives. In addition to our expectations for continued strong growth and volume, we are confident that we are taking the actions needed to support another year of strong profitable growth in 2022. With that, let me hand it over to Chris for more details on the quarter and our fiscal year 2022 outlook.

Thank you, Todd, and good morning to everyone on today's call. I am very pleased to report strong fourth quarter results, as well as our beat to our full year guidance for both net sales and adjusted EBITDA, capping off a milestone year for Sovos Brands as we moved into the public domain. Fourth quarter total net sales of 189.2 million increased by 27.5 million, or 17% compared to the same period last year. led by strong volume growth across core categories, sauce, yogurt, and frozen. At the brand level, Rayo's net sales increased by 25% this quarter, on top of 93% growth realized in Q4 2020. This robust growth was driven by strong consumption and continued market share gains across the Rayo's portfolio of sauce, soup, pasta, and frozen entrees. Adding to Rayo's success in frozen entrees, Michelangelo's increased roughly 10%, modestly trailing 15.5% consumption growth, which we take as a healthy indicator that our tiered premium approach in frozen entrees is working well. Noose and net sales grew nearly 2% in the quarter, with consumption up 13%, which was the brand's fastest-growing quarter since acquisition. The delta in net sales to consumption is due to a non-repeat of a key customer event performed in Q4 2020. Unit velocity trends continue to be category leading at a rate of 3.5 times faster than the total category as we focus on assortment optimization on shelf and building brand awareness. Finally, Birchbenders contributed $10 million to net sales this quarter. Unit consumption of Birchbender's frozen waffles was up 13%, and baking mixes was up 7.8%, both of which continue to outpace their respective categories on unit sales in Q4 behind distribution growth and as consumers adopt our brand. Pancake mix unit consumption at negative 6.6% continued to be down, but ahead of the category at negative 7.4%. As expected in Guide 2 on our Q3 call, gross margins realized a notable sequential improvement to 31.4% of net sales versus Q3 2021. Versus the prior year period, margins were down 220 basis points due largely to continued industry-wide challenges, including higher logistics costs, inflation, and increased promotional support. particularly when compared to abnormally lower spending levels in Q4 2020. These headwinds were partially offset by favorable mix as well as productivity realized during the quarter. Adjusted operating expenses of $42.5 million increased by $2.9 million, or 7%, over the prior year period, primarily due to $1.6 million in variable sales expense in light of our strong top-line growth, as well as public company costs, which were $1.3 million in the quarter, and not recognized in the prior year period as we were private at that time. Adjusted EBITDA for the quarter increased approximately 10% to $26.5 million, or 14% of net sales, versus $24.2 million, or 14.9%, in the prior year period. However, results for the quarter include $1.3 million in public company costs, which did not exist in the prior year period. If we look at this on a comparative basis and burn Q4 2020 results with a similar level of public company costs, last year's fourth quarter adjusted EBITDA margin would have been 80 basis points lower. This apples-to-apples comparison would imply only a 10 basis point reduction in adjusted EBITDA margin for Q4 2021. Q4 income tax expense was a 4.5 million benefit compared to an income tax cost of 2 million in the prior year period. The decrease in our income tax expense is primarily attributable to an increase in deductible expenses for tax purposes. Net loss for the quarter was 3.8 million or $0.04 per diluted share compared to a loss of half a million or a penny per diluted share in the prior year period. Adjusted net income came in at $13 million and adjusted EPS was $0.13 per diluted share compared to $10.8 million and $0.14 for diluted share in the prior year period. Please note that our Q4 2021 adjusted EPS is based on a fully diluted share count of 100.3 million shares, while in Q4 2020, we only used 74.1 million shares. This difference reflects the timing of our September 2021 IPO, as well as the subsequent exercise of our green shoe. Now, turning to our balance sheet, at the end of the quarter, we had a cash balance of $66.2 million and total debt was $481.5 million, bringing our net leverage down to 3.6 times adjusted EBITDA as the primary use of our IPO and Green Chew proceeds were used to reduce debt by roughly $300 million in Q4. The flexibility on our balance sheet, as well as our robust cash generation, put us in a good position to potentially accelerate growth and unlock incremental shareholder value through accretive high-growth M&A that makes business and financial sense. Turning to our fiscal year 2022 guidance, we expect net sales of $800 to $815 million, which represents approximately 11% to 13% growth, and is expected to be fairly balanced between volume and price mix. Adjusted EBITDA of $116 to $122 million, or approximately 1% to 6% growth versus the prior year, net interest expense of $23 to $25 million, an adjusted effective tax rate of approximately 25%, and capital expenditures of approximately 2.5% of net sales primarily focused on automation and other productivity projects at our manufacturing facilities, as well as growth-enabling initiatives. Two items worth noting for comparability's sake are, one, 2022 will be a 53-week period versus 52 weeks observed in 2021. Invented in our guidance, we expect if additional weeks to contribute roughly 15 million or 2% to the top line while we plan to reinvest any variable profit generated from this extra week to support future growth. And two, as we were a public company for only three months out of fiscal year 2021, public company costs will weigh more heavily on our adjusted EBITDA growth in 2022. If one were to fully burden fiscal 2021 results with an equivalent $6 million of public company costs expected in 2022, our adjusted EBITDA growth would be approximately 5% to 10% versus the 1% to 6% previously mentioned. Excluding the impact of a 53rd week in Q4, we anticipate total Sobos brand's quarterly net sales growth to be fairly consistent and in line with our long-term algorithm in the high single-digit range. Underpinning this outlook, our core sauce, yogurt, and frozen businesses will continue to serve as the primary drivers, representing approximately 80% of our growth in 2022. While volume will serve as the basis of our net sales growth, pricing, as we view it, warranted in the current environment will play an increasing role in the coming year. Since our Q3 call in early November, we have seen a continuation of higher costs for certain input costs, such as milk, chicken, and packaging, while the combination of robust demand for our products and recent disruption from Omicron, as well as the Russia-Ukraine crisis, have further exacerbated near-term distribution and supply chain pressures. To combat what we now anticipate will be high single digit inflation for the year versus mid single digit previously, we are taking more aggressive net revenue management actions. Having already informed you of list price increases on nearly two-thirds of our portfolio, new pricing actions recently announced have us touching all brands with list price increases by the end of Q2. We also continue to work diligently to eliminate our least efficient promotions while keeping a maniacal focus on velocities and unit growth. In addition to our deep pipeline of productivity initiatives that includes automation in our manufacturing facilities, optimization of our co-manufacturing network, packaging value engineering, and further competitive procurement actions, we have identified a number of incremental cost-saving activities to help mitigate expected inflationary pressures in 2022. Due to our expectation that supply chain pressures will remain for the foreseeable future, and given the timing of our net revenue management actions, productivity, and incremental cost-savings efforts, we expect growth and adjusted EBITDA margins to be down in the first half of 2022 versus the prior year period. While we expect to grow Q1 net sales by high single digits against the 40% plus year ago comparison, we are not immune to the inflationary environment, and pressures to our margins will be most impacted in Q1 by the following. Increased input costs such as dairy, chicken, and packaging continued supply chain costs and logistical constraints, and a full quarter of public company costs that were not realized in the comparable prior year period. Our projections assume pricing on the majority of our input costs consistent with current levels throughout the course of the year, while we actually anticipate further increases in certain oil-based materials. As we progress into the second half, the benefits from our various pricing actions and productivity initiatives should ramp, allowing for margin improvement in Q3 and Q4. That said, if circumstances worsen relative to our forecast, we are fully prepared to take additional actions as warranted. Additionally, let me emphasize that we will continue to prioritize securing supply and maintain momentum on driving household penetration and awareness. From a balance sheet perspective, given our cash on hand, strong fundamentals, and expectations for solid operating cash flow, we are confident that we will continue to delever in the coming year. Barring any M&A, we expect our leverage will approach three times by year end. Let me now turn the call back over to Todd for some final remarks.

Thanks, Chris. 2021 was truly an extraordinary year for Sovos Brands, both operationally and financially. I want to thank all of our associates and team members for managing through these challenging times and their contributions to the company's success to date. As we move into 2022, we are energized and excited by what lies ahead. The operating environment will remain demanding, and we don't discount the potential for further actions being needed if conditions justify it. However, we are highly confident in our ability to rise to the occasion. We have the right brands, one of a kind, authentic, and absolutely delicious, high-growth brands that consumers love, yet they are still relatively underdeveloped with considerable runway for growth in distribution, awareness, and household penetration. We have the right strategy, the proven and repeatable Sobo's Playbook, capable of accelerating growth and expanding brand white space. We have the right platform, one that is scalable and well-suited for future accretive M&A. And most importantly, we have the right people who are excited, committed, and motivated by what we are creating, a different type of food company. one that is growing faster than any other food company of scale in the U.S. With that, Chris and I are now available to take your questions. Operator?

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question is from Brian Holland with Cowan. Your line is open.

Yeah, thanks. Good morning. I was curious if you could help us think about, you know, the top line guide for 2022. As I look at sort of my forecast, you know, and sort of dimensionalize this, I'm thinking about consumption, I'm thinking about price, I'm thinking about selling. You know, if we think about since you've come public, where have you been most positively impacted? I mean, is it just the, I guess I'm thinking about where that delta is. Is it just the price, or is it maybe the selling for something like Noosa frozen yogurt that may have exceeded expectations?

Hey, Brian, how you doing? It's Todd Lackman. Good morning. So just getting to your question, I mean, the headline answer, it's volume, right? And, you know, I'll highlight now sort of getting into the Q&A is, I mean, honestly, in stark contrast, you know, to our peers, we are driving volume growth. And, you know, as we look at, you know, growth in 2021, as we're looking at 2022, the majority of our growth is coming from our core businesses. That would be sauce, then yogurt, and then frozen products. But as I've been highlighting, you know, again, we are driving volume growth. If we just look at Q4, Rayo's volume growth up 29%. This is Rayo's sauce in a category down 5. Our soup business in Q4 up 28% in volume, down 2% for the category 5. And if you look at just our pasta, dry pasta business, up 53% in volume, down 5% from a volume standpoint. And then, you know, even if you look at our yogurt business, up about 7% in units in Q4, down 1%. And that's continuing, you know, Brian, as we look at Just the most recent data that we have, 13 weeks ended 227, Rao's Sauce, 31% in volume, down 4% in the category. Soup up 34%. We don't talk a lot about soup, but in 2021, Rao's Soup was the only brand to grow volume in the category of all the top 10 brands. And importantly, there is so much more meat on the bone, for lack of a better expression. You know, you look at RAOs, and we massively increased household penetration this year up to 10.9%. You can see in the data on SOSS, 13% for total RAOs. We've been increasing household penetration by 60 to 70 basis points per quarter. I know there are some talking about, you know, we just need to increase it 70 to 80 basis points per year. You know, we're blowing that away. We've more than doubled our household penetration over the last several years. You saw that in regards to just our – Average number of items, 11 versus 17 to 22 for the top two competitors. Awareness very, very low. So we are very, very confident in the high end of our sales growth range. We will prioritize growth and feeling very positive. And then there is pricing to come. on our business as we've talked about. You've got Rayo Sauce pricing being reflected now as we talked about. We've taken pricing now across all brands and all portfolios. But really the headline here, again, in stark contrast to our peers, is volume growth. And we see that volume growth continuing through this year and well into next year and beyond. And Chris, any additional perspective on the pricing side, price volume?

Yeah, no, absolutely. So As we spoke on our Q3 earnings call, we had announced pricing across a portion of our business, roughly two-thirds of the business. Since that time, given the surge in inflation that we've all experienced industry-wide over the last several months, we have announced additional pricing and at this point have touched or will touch here the next couple of months all of our brands, and really across basically all of our categories. So we see pricing as we continue and progress across really late Q1 into Q2. By the end of Q2, we will see pricing across all brands. Our combination of our pricing actions coupled with the productivity actions we talked about last call and incremental initiatives that we now have in flight, we believe we'll be covering the majority of the inflation certainly across the year. There will be a lag across H1 as we implement these programs. So we will see higher margins the back half of the year than we will in the first half of the year. And we have factored all that into the guidance that we have provided here today. Thanks, Todd and Chris.

Appreciate all that color. And then maybe just kind of a bigger picture question as we move forward. You know, I get asked about the premiumized portfolio that you own and how that might fare in an increasingly inflationary environment. You know, sort of interesting that private label remains under pressure. I think that's supply constraints to some extent. But, you know, with higher gas prices, I wonder how you think about, and if you've looked at historically how brands such as those you own are perform in those types of environments? And I'm thinking about the trade between sort of eating out and eating at home. And so two questions there. How do you think those brands have performed in those instances? And also, you know, how you plan to market that value proposition to consumers?

Sure, Brian. So, you know, just one point really quickly. In the categories in which we compete, sauce, yogurt, frozen entrees, private label has a very low dollar share category versus kind of the average for center store. So that's point number one. Private label is, you know, is not a large player in those categories. But then getting to your, you know, your broader question, I know we've talked about this, you These are brands that fare well in a down economy. In a broader economic slowdown, consumers cut back on travel and leisure spending, including restaurants. And they look to sub their restaurant meals with high-quality replacements. As we've looked over time over the last – even when we acquired the Rayos brand, we looked back at the previous 10 years, almost a perfect correlation. If the economy's down, Rayos goes up, et cetera. Now Rayos has been going up regardless. I think, as you saw, the fastest-growing brand in the center store, any brand above $100 million in sales over the last – two years, but consumers are looking for restaurant-quality products like ours that are perfectly suited to capture that occasion. You know, just a dinner at home with Rayo's Pasta Arbeata Sauce, about $12, $14, depending on where you live, where you shop, versus going out to a restaurant you know, an Italian restaurant that can cost a lot, lot more of that. Same with whether it's breakfast with Birchbender's pancakes or Noosa, et cetera. So, you know, what we're seeing is our products, which are cleaner label, absolutely delicious and, They're highly substitutable with restaurant occasions. I mean, if you take Rao's or even, you know, Rao's is a great example. We were growing robustly before COVID. We grew even faster during the COVID surge, and we're lapping the COVID surge, you know, in the 30% to 40% range today. So we see cooking at home is here to stay as habits and practices have changed, and in that recessionary environment, we have full confidence that our products are exactly what the consumers would want. Lastly, as I've talked about before, You know, our products are highly differentiated. They are not me-too mainstream brands that are easily substitutable. There is no sauce like Rayo's in regards to its taste and quality. Noosey yogurt tastes lead. You know, everybody else is playing the game, how much taste can we take out of yogurt? You know, we're looking to put taste into the yogurt, and that's behind the strong growth of the Noosey business as well. So anyway, I think that would hit that one. Great. Thanks. Thanks a lot. You got it, Brian. Thanks, man.

Our next question comes from Jay English with Goldman Sachs. Your line is open.

Hey, good morning, folks. Thanks for slotting me in. Hey, Jason. Let's see. Congrats on the continued demand and sales success. It's impressive. It's great to see. Obviously, your results and outlook highlight that you're not immune from some of the cost pressures out there, but I wanted to dig in a little bit more on that. I think you said fiscal 22 guidance predicated on high single-digit inflation. Is that a percentage of your input costs or is that a percentage of COGS overall?

This is Chris. That is a percent of our total cost-of-sale structure, so including our raw material packaging, command, internal manufacturing, which would include our plant overheads as well as our labor costs. So that's an all-in rate. Our actual inflation on pure commodities would be higher than that high single digit. But as you absorb it across the total base, you're at that high single digit.

Thank you. That's a surprisingly large number given what we kind of view as a relatively fixed cost structure on radios. What is happening with radios? Are you making – to your partner there to help them out in this situation, and is that contributing to that inflation rate?

As we've discussed before, we have a fabulous relationship with La Regina. The quality of the product, both when it's produced in Italy or soon in the U.S., is obviously a key driver of the RAO's growth that we've been experiencing. As we continue to work with La Regina, We do support in various ways to ensure we get the product supply we need to meet this 30% plus growth that we've been experiencing. In doing so, we have and will continue to pay for accelerated lanes, shipping lanes, cross Atlantic lanes. We'll lean in as we did much so in Q3 of last year, less in Q4, again, to ensure that product supply that we have. As you well know, the operating environment remains volatile. We have incorporated into our projections current levels that we're seeing in the marketplace across our commodities and, in fact, have included a potential uptake in oil-based, oil-derivative things like resin or packaging. So that's in our guidance factored in today. So while we're not opening up, as we mentioned before, the contract we do have in place with La Regina, we will lean in and support when and as needed, and that is factored into our guidance.

So you mentioned the freight lanes that you're leaning in and helping with there and some sort of contemplation of the oil derivatives. You didn't mention tomato costs. The California Tomato Growers Association negotiated a 20% increase for fall delivery of tomatoes here in the U.S. I'm guessing if they could renegotiate today in light of where fertilizer and the fuel for their tractors is going to be running, that that would probably be closer to 30% or 40%. I imagine your partners over there in La Regina are going to face similar pressure on Is it prudent for us to assume that you're going to have to absorb higher tomato prices into next year, even though I appreciate the fixed cost nature of your contract?

The majority of our tomatoes, certainly those used for Rayos that are procured over in Italy, are very much advantaged with our co-packer. He has a very large tomato business, and the tomatoes that we use are grown right there locally. very near our plant. So we don't anticipate any increase in our tomatoes that are used for our Rao's production. We do buy tomatoes domestically as well for things like our frozen entrees, our Italian frozen entrees. We are 100% covered on our tomato purchases across 2022, so we think we're in good shape if there is additional tomato inflation. Got it. Okay, thanks. I'll pass it on. Thank you.

Thanks, Jason.

Our next question comes from Andrew Lazar with Barclays. Your line is open.

Hi. Good morning. Good morning. Good morning, Andrew. I think like most of your peers, obviously, you expect a back halfway to EBITDA year as it will take some time for pricing and productivity to sort of catch up. In trying to get, I guess, a better sense of how much flexibility you're building into the plan, I guess, how would you see gross margin playing out for the full year? And to the extent you can provide some sort of weighting between first half and second half EBITDA, that would be helpful.

Very good. So as I mentioned, we have factored into our projections for the year commodity packaging costs, as we're seeing in the marketplace today. So we're not assuming that we're going to see improvement across the back half of the year. Now, our year-over-year comparisons are more favorable as you work across 2022, as we really saw the inflationary pressures really tick up somewhat in Q2 of last year, but really into Q3 and Q4. So as we move into Q1, we will see a rate of decline on our margins fairly similar to what we saw in Q3 on the gross margin lines. That will then improve sequentially across the year as our overlaps do get easier, and more importantly, as our pricing actions, many of which hit in Q2, and our productivity initiatives, again, many of that hit in Q2 and beyond. We spoke a lot of those actions were taken primarily at our internal manufacturing plants versus the automation we're putting in down at our Austin plants. those will hit more aggressively in Q3 and Q4 as well. So as we think about the year, as you mentioned, Andrew, very much back half weighted, and we will see margin decline year over year in the first half, and then we'll see that improvement over the second half.

And then I guess lastly, obviously you talked about how strong volumes have been across the portfolio. As more of the pricing flows through, what type of assumptions are you building in into the plan for elasticity, I guess. Were your assumptions called for volume growth to just sort of slow a bit sequentially from obviously pretty heavy numbers as more pricing flows through, or how do you build that in? Thank you.

You bet. So as we put Rayo's sauce pricing in, LPI late Q4 into Q1, the very, very good news there is we're seeing very minimal impact on elasticity. Todd mentioned volume growth. volumes still hanging very much in line with what we saw before the pricing. So we have very, very positive response so far to the pricing that's in the marketplace. We have modeled elasticity at more traditional rates when we factored into our guidance. We are seeing the marketplace, not just for Covost, but across the industry, we have seen favorable elasticities Now, we do know there is, you know, there has been some more softness more recently than there was initially. So, we were fairly conservative on elasticity assumptions. We felt we factored it in accurately into the projection that we provided. Again, the great news is we continue to see tremendous volume growth on the Rayo sauce that we took the pricing on initially. Yeah, Andrew, I'll just, you know, build on that.

So... The full impact of the, you know, the full list price increase on RAOs is not fully reflected, but ARPs are going up. And as Chris said, we've not seen any statistically significant fluctuation in RAOs elasticity through a recent study since implementing the LPI. And while I know there's a lot of other noise in the data that I'll, you know, share right now, if you just look at the four weeks ending 227, unit growth on Rayo's 25% last four weeks, 31% last 13 weeks. So that's over the time period that the LPI has been reflected. And if you look at the, it's basically equal to or slightly above our unit sales growth on sauce in the 13 weeks ended 1226. If I look at unit velocity in Q4 versus Q1, you know, this year for the most recent data, you know, As of two weeks ago, it's roughly flat. It's about 13% for both of those periods. So we are tracking this closely, but we haven't seen a drop-off on unit growth or unit velocity to date. Thank you so much. Yep.

Our next question comes from Chris O. with Stifel. Your line is open.

Hi. Good morning. Hey, Chris. Good morning, Chris. Hi. Hi. I just had a quick question, a bit of a follow-on to Andrew's question in relation to your first half, second half phasing. You have some really incredible momentum right now in the business on the top line. So it would seem like the first half of the year would have some of your strongest revenue growth as well. I just want to get a sense of, as we think about that coming into the year, is that first half of the year a stronger revenue growth period? And then related to that, how much of the EBITDA margin pressure you see, like, in the first half of the year, is that all driven by gross margin, or is there anything on the SG&A side that's affecting that as well?

Yeah, so thank you, Chris. As we operate across the year, you know, also of importance to us is maintaining the investment that we're making, you know, to continue the top-line growth. So we will invest behind marketing, R&D, even slotting costs to make sure we're getting the distribution gains both on our core as well as the new product launches such as Gelato, which is actually launching right now and off to a very good start. So we will maintain those investments across the year. We see the top line fairly consistent quarter-to-quarter with the guidance provided, high single digits, you know, across the year where, you know, the consumption that you're seeing year-to-date would be very consistent with that outlook for us. On the productivity front, it will be more back half-loaded as we continue to implement our, not just our CapEx-enabled capital projects permanently within our own internal plans, but as we start up Alma here, as Todd had mentioned previously, as we have value engineering ideas in our packaging, such as reducing weights of resins, things like that. So we do see a ramp up on productivity in the back half of the year. And then finally, I will mention this year, we are incorporating public company costs that we did not experience back in 2021 until Q4. So there will be higher you know, OpEx expenses across the first three quarters as we incorporate those costs into our P&L.

Okay. Thank you for that. And just one other quick question was on the new products. You obviously launched Gelato. I haven't tried it yet, but I do look forward to that. Just a couple of the other new products, there's some you've slated for, at least initially you had slated for later this year. Are those still on track? Can you talk about maybe the ones you expect should come later this year?

Sure. Hey, Chris, this is Todd. So, you know, first I would say, you know, starting with Noosa Gelato is that, you know, that's off to a very strong start. You know, sort of mentioned it in the opening remarks, selling stronger than expected. Kind of half joke that rumor has it it was the head of Expo West, last week in regards to sampling line going around the whole expo. The selling has just started. It's very early, but as of what we know today, and as I said, we're very excited about that launch. The second one that was out for this year that we've launched into limited customers is Birchbender's Cookies into the cookie category. So with some of our launches, we launched them into limited distribution, which is what we've done with Birchbender's Cookies, which Similarly, we start launches with a smaller core retailer group. The second area that I would talk about, I think you're referring to as we've talked about several times, Rao's into the frozen pizza section. We're looking at that 23, 24. So we are on track to launch into that next new category, but we're being judicious about when that timing might be. And the last area that I would say you know chris is just the focus on the core you will continue to see innovation from us on our sauce business whether it's our limited reserve line online with a column Calabrian, you know, chili sauce or white truffle sauce or, you know, basically a new pizza sauce item, etc. You know, you're going to continue to see innovation in the sauce category. We're now the number two brand, and it's important that we continue to bring innovation across pack sizes, across our flavorings, as well as Nusa yogurt, as well as frozen. So, yes, we have cam expansion. But honestly, just as if not more importantly, you know, we've got massive opportunity within the core categories, you know, that we play in. And, you know, I want to double-click on that one point because I know we just talked about elasticity. And one, again, very unique element to Sobos that does help, you know, sort of counter the potential effects of elasticity is the massive penetration upside on all of our businesses. So while, you know, yes, there might be an effect of higher pricing at some point in time, what we have that is very unique is a brand like Rayo's growing 30% to 40% with distribution gains is the fact that we are only an 11% of households, and we're gaining households in chunks. So that's a very nice counter and upside to us as we continue throughout and into future years.

Thank you for that.

Thanks, Chris.

Our next question comes from Anur Natan with J.P. Morgan. Your line is open.

Hi, good morning. Thanks for the question. I was curious if you could help us with some color on how we should be thinking about your annual sales sales, either by brand or by category, kind of what are your expectations for growth would be helpful. Thank you.

Sure. Hey, Nori. Good to talk to you. You know, I think what we can – we don't, you know, provide guidance per brand, you know, per se, but I would just say 80% of our growth this year will come from sauce, frozen entrees, and core yogurt. So, again, 80% of our growth will come from sauce, then frozen, and then yogurt. What I will also say is, you know, it's very clear, as you can see in the consumption data, you know, we have Rao's growing robustly. Just from a – you saw that – well, I think, you know, we mentioned Rao's $420 million of net sales in 2021, up 34%. That's total Rao's brand. If I just look at Rao's sauce through the most recent period – We've got last 13 weeks, Rao's sauce dollars going 36%, Rao's soup going 33%, Rao's pasta going 28%, and Rao's frozen up 63% all over those periods. So, you know, clearly we are driving the Rayo's business hard. And it's not just by distribution. It's by marketing support. It's by innovation across, you know, the portfolio. Doing the same with Noosi Yogurt. Again, driving distribution, driving marketing gains, et cetera, and on the frozen portfolio. And we talked Noosi, you know, gelato, which is not included in that 80%. So, you know, those are the highlights that I would provide there, Nori.

Great, thank you. And then as a follow-up, I wanted to get some more color on your international expansion plan. Why is now the right time to be expanding outside of the U.S.? And then what's the timeline on this, and how much is it expected to add to top line in 2022? Sure.

I think the highlight for 2022 – not much. I mean, it's very small. We're, uh, you know, what we've highlighted here, uh, I think, you know, we discussed, uh, you know, previously is we are putting the foundation in this year for international expansion and sort of building the foundation of the house and framing them over using a house analogy, framing the house, doing whatever next year in 2023 to really begin to pay dividends, uh, but really in neighboring North American markets. Um, You know, we should have a larger share in Canada. We've had successes there with select customers. We're putting in the infrastructure there to really drive Rayo's more robustly in Canada, in Mexico, in Puerto Rico. We've had success with some select customers distributing in certain markets. There has been pull, as we've talked about, Rayo's brand growth. is pretty much known now around the world, and there's been a lot of ask for us to supply Rao's, but we're being selective because right now the number one opportunity for us is in the U.S. market, first and foremost on sauce, then on yogurt, then on frozen, but in the other areas of Rao's as well. Really little to no incremental benefit this year, but we are putting the foundation in this year so we can really drive some strong growth in 2023 and beyond.

Helpful. Thank you.

Thank you. Our next question comes from Roscoe with Credit Suisse. Your line is open.

I think that's me. Just maybe a couple things here. Can you quantify how much you think the ALMA savings are going to be for the back half of the year when that gets started? And then also, I think you said that you budgeted further premiums for shipping lanes from overseas for 2022. Can you give us a sense of is it going to be higher than it was in 21? Is that related to the high ocean freight you have to pay, or is it related to volume? How much of an increase do you expect in that bucket?

Yes, very good. So what's almost up and running, there's a few different advantages that we're going to get from that. I think first and foremost is a positive impact to cash flow, as we will have local production. We will not need to hold onto as much safety stock. We think we can take a couple weeks out of our system there. And we can react to immediate demand opportunities with that production here out of Atlanta, out of Georgia. So that's the first benefit of our cash flow. Secondly, we do procure some of our sauces, our ranch sauce, domestically today. Things such as meat-based items We will have cost reductions versus that balance of production that's made in the U.S. today, and ALMA can produce 20% to 30% of our requirements as we look across 2022 once it's fully running. So we'll see productivity on that front, and we'll see the balance sheet improvement, again, from that inventory management that will improve. That is factored into our numbers as we shared with you today. And then on the freight lanes, we're taking that on a week-by-week, month-by-month basis. We are seeing the pressure right now, so we are leaning in. And we, as I mentioned, will continue to do so. Whether it's more or less than we did last year is yet to be determined, given the volatility that we're seeing with – with first Omicron early in the year and now some of the global tensions that we're experiencing. But we will just manage that as we progress across the year, and we'll react accordingly just to ensure that we have the supply that we need. And then an advantage, again, of having the Alma plan up and running is we can be much more selective on the rates we pay, whether to expedite shipments or not. We won't need to as much as we may have had to in the past because we'll have that local production. So that's going to be another benefit that we'll realize through our P&L. Just one other comment there.

Hey, Rob, good morning. Good to hear from you. Look, on Alma, we are absolutely thrilled that we are going to have a state-of-the-art, I call it a mirror facility, to what we have in Italy. Same kettles, the same equipment. I mean, under the leadership of our supply chain team from Kirk Jensen and Felice Romano of La Regina, I mean, we're just thrilled about what we've created in Alma. It'll be running soft this March, full production as we head into Q2. And it'll just be a real benefit for us to have, again, a mirror facility of that beautiful facility over in Italy operating here in Alma, Georgia. So very, very exciting. I want to move into closing remarks. Honestly, thanks again for your participation, interest, and Sovos. Great talking to everybody this morning. Incredibly proud of what we've accomplished in 2021, and we're excited to continue the strong execution against our priorities as we drive growth and increase shareholder value in 2022 and beyond. Have a great week and speak to all of you soon.

This concludes today's conference call. Thank you for participating. You may now connect.