Sovos Brands, Inc.

The Sovos Brandt First Quarter Fiscal Year 2022 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 that portion of the call, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to Josh Levin. Please go ahead.

Good afternoon, and thank you for joining us on SoBus Brands' first quarter fiscal year 2022 earnings conference call. On the call today are Todd Lackman, President and Chief Executive Officer, and Chris Hall, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ended March 26, 2022, that went out this afternoon at approximately 4 p.m. Eastern Time. The press release, as well as supplemental slides, can be found on the company's website at ir.sobusbrands.com. And shortly after the conclusion of today's call, a webcast will also 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 Sobos 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 that 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. Please note that all consumption data cited on today's call will refer to dollar consumption as the 13-week period ended March 27, 2022, and growth versus the prior year unless otherwise noted. With that, I'd now like to turn the call over to Todd.

Thanks, Josh. For those of you who may have missed it, a little over a week ago, we announced that Josh has joined us as our new Vice President of Investor Relations. Many of you already know him well from his time on both the buy and sell side. And given his familiarity, not to mention his deep knowledge of the packaged food sector, having covered it for nearly 10 years, we are excited to welcome him to the team. I'd like to start today's call off by discussing a few highlights on the quarter. Following updated comments to the current operating environment, I will turn things over to Chris Hall for greater detail on our first quarter results as well as our full year outlook. Looking to our first quarter results, I am extremely proud of how well our team executed. Faced with unprecedented inflationary and supply chain headwinds, as well as lapping 41% brand net sales growth in Q1 2021, we were once again able to deliver double digit top line growth, with results continuing to be led by volume growth in our core categories of sauce, yogurt, and frozen. In regards to these core businesses, which represent over 90% of our portfolio, our brands continue to deliver dollar growth rates that are in line or better than their respective categories. For Sauce, represented by the Rao's brand, we grew dollar consumption by 34% versus 10% for the category. Yogurt, represented by the Noosa brand, grew in line with the category at 5%. And finally, frozen, which includes Rao's and Michelangelo's entrees, as well as Birchbender's waffles, grew by a combined 13% compared to 7% for the combined categories. The combination of sauce, yogurt, and frozen for Sobo's brands grew dollar consumption by nearly 22% versus 7% for the categories in aggregate, with a key point of differentiation being that we delivered such outsized growth almost entirely through increased volume, while the categories were the opposite, with price as the sole driver to growth while volumes were negative. Looking to our largest brand, Rayos, which continues to be the fastest growing center store brand of scale in the United States and represents approximately half of our portfolio, net sales growth remains strong, increasing nearly 20% in the quarter versus 84% in the prior year period. Total Rayo's dollar and unit consumption grew by nearly 35% and 30% respectively. supported by continued gains in TDPs and velocities for the entire franchise. From a household penetration standpoint, total RAOs increased by more than 290 basis points versus prior year to 14 percent, primarily due to sauce and frozen entrees, as they continue to realize substantial distribution, dollar, and unit velocity growth. Specific to sauce, Rayo's dollar consumption increased by over 30% or over three times faster than the category. This rate of growth translated into a 270 basis point increase in dollar share versus the prior year period to 15.1% as dollars, units, TDPs and velocities continued to grow by double digits. which remains in stark contrast to the category where units are down low single digits and the entirety of growth is being driven by price. As a result, household penetration growth for Rayosauce was the fastest in the category, increasing by 250 basis points versus the same time last year to 11.5%, despite the size of the brand at over half a billion dollars in retail sales. And as discussed previously, significant upside opportunity remains to gross sauce distribution given our share of shelf remains low versus dollar share of the category. For perspective, Rayo's has a 20% share or greater in retailers representing 27% of the past 52-week pasta and pizza sauce category sales. Notably, these retailers are geographically dispersed throughout the U.S. Our total frozen entree portfolio, which includes Rao's and Michelangelo's, also outperformed, as dollar consumption of 15% was over two times faster than the category, while units grew in contrast to a decline for the category. Rao's served as the primary driver to growth, with dollars up over 50% on the back of considerable distribution gains. In addition, Michelangelo's also contributed solid middle single-digit growth on strong dollar and unit velocity growth rates that notably outperformed this frozen entree category. Our soup business, the fifth largest brand in the category, also showed great strength in the quarter, with dollar consumption up nearly 30%, or three times the category, making it the fastest-growing soup brand in during the first quarter. Our Noosa yogurt brand. Dollar consumption trends were generally in line with the spoonable yogurt category, while Noosa unit consumption trended 290 basis points ahead of the category. Our 5% growth was primarily driven by strategic efforts to drive trade up to and distribution for larger formats. with our multi-pack and 24 ounce offerings up strong double digits on dollars, units, and TDPs. Our previously announced list price increase on Noosa is starting to take effect here in Q2. As noted on our Q4 call, we recently launched a first of its kind Noosa frozen yogurt gelato into the $7 billion ice cream category. While still early, selling continues to exceed expectations. In an effort to foster additional distribution gains and drive velocities, we plan to ramp up our sales and marketing efforts for the offering as we enter Q2 and the all-important summer selling season. On perch vendors, the first quarter proved challenging, with performance not living up to our expectations. Specifically, some diet-focused segments of our pancake and waffle mix business have been trending down as consumer interest in keto has softened following material growth during the pandemic, while competitive offerings have increased substantially. As a result, we will be introducing new pancake and waffle mixes that are crafted for specific dietary lifestyles in order to drive improved performance in this important segment of our portfolio. Meanwhile, we will continue to execute on other key initiatives of the brand. First, we are focusing sales resources on white space opportunities, including our organic pancake and waffle mixes, which have consistently posted double-digit growth, along with frozen waffles and baking mixes, which are continuing to grow given the brand's ability to travel across categories. And second, the transition of our waffle production to the U.S. from Belgium in the second half of the year will provide meaningful long-term savings as well as greater control over the supply and quality of our product. We remain committed to leveraging Birchbender's differentiated and better few offerings to deliver improved performance. Continuity of supply remains critical to meeting the outsized demand for our products. However, supply disruptions became increasingly frequent during the first quarter. Due to a confluence of factors at play across the industry, we have observed intermittent outages on certain packaging materials such as trays, foil, and lids, as well as continued congestion at the ports. This resulted in service rates below target levels and the suppression of incremental consumption on all brands during the first quarter. While several of these shortages will persist to varying degrees for the foreseeable future, I am proud of how swiftly our team has reacted to this rapidly evolving environment as service rates have improved in recent weeks. Nonetheless, as is the case any time demand outstrips supply, the cost to acquire ingredients and materials rises. As a result, we will continue to execute against our full suite of productivity, net revenue management, and pricing initiatives. With that said, we recently announced we will be taking another round of pricing on our sauce effective late July. Taken all together and based on how we see the world today, we believe these actions should partially offset this latest wave of incremental inflation. As we've stated in the past, we will not hesitate to respond with additional actions if warranted by the market. In summary, we're off to a strong start in 2022 on the top line with line of sight to hitting the high end of our full year net sales guidance. We will remain laser focused on driving household penetration by expanding distribution and awareness. And we will continue to make strategic investments behind sales, marketing and innovation to drive future share gains for our one-of-a-kind brands. At the same time, we will work tirelessly to ensure supply and protect our profitability in this ever-involving, highly inflationary environment. With that, let me hand it over to Chris for more details on the quarter and their updated perspective on the remainder of the fiscal year.

Thank you, Todd. First quarter total net sales were $209.9 million. a 20.5 million or 10.9% increase over the prior year period. This growth was entirely organic and can be attributed to 11.6% volume growth, partially offset by price mix. Volume growth was driven by continued strength across our core categories, sauce, yogurt, and frozen. While positive price was fully offset by negative mix, resulting primarily from a year-on-year decline in pancake and waffle mix at Birch Vendors. At the brand level, Rayo's remained the driving force behind our growth, increasing net sales by 19.4% in the quarter despite a very robust 84% year-ago comparison, as well as intermittent supply challenges that detracted from our ability to fully meet the robust demand for our entire RAOS portfolio. NUSA sales were up 7.7% in the quarter as a continued focus on our core offering translated into favorable mix to larger formats, as well as solid dollar and unit velocity growth outperformance versus the spoonable yogurt category. Michelangelo's grew 6.5 percent, modestly outpacing consumption, which benefited from strong dollar and unit velocity growth, particularly in single serve. And finally, Birch Benders was down meaningfully in the quarter. The lapping of a notable promotional event with a key account that we elected not to repeat this year accounted for over half of the decline. As Todd discussed earlier, Results continue to reflect challenges in diet-focused pancake and waffle mix that we are aggressively addressing. This was partially offset by strong performance in frozen waffles and baking. Gross margins came in at 25.7% of net sales for the quarter, reflecting a 690 basis point decline versus the prior year period. The rate of decline was due to a significant increase in raw material, packaging, energy, logistics, and labor costs. For perspective, milk and proteins were up 57% and 83% respectively versus prior year. In addition, better than expected sell-in of our new Noosa frozen yogurt gelato translated into higher slotting. And lastly, as a reminder, The majority of our pricing and productivity actions take place in Q2 and into the back half of the year. Recall, we only had Rayo Sauce pricing in the market during Q1. It will exit Q2 having executed pricing on the vast majority of our portfolio. Adjusted operating expenses of $36.4 million increased by less than $1 million or 2.5% over the prior year period primarily due to an increase in public company costs, which were not recognized in the prior year period as we were private at that time. Adjusted EBITDA was $27.6 million, a decline of $7.9 million, or 22.3%, versus Q1 2021, while adjusted EBITDA margin was 13.2% versus 18.8% in the prior year period. In addition to the aforementioned inflationary pressures and slotting to support the launch of Noosa frozen yogurt gelato, adjusted EBITDA dollars and margin were also negatively impacted by public company costs, which were not present in the prior year period when the company was private. Net income for the quarter was $4.1 million, or $0.04 per diluted share. compared to $11.7 million or $0.15 per diluted share in the prior year period. Adjusted net income was $13.8 million and adjusted earnings per share was $0.14 per diluted share compared to $20.8 million and $0.27 per diluted share in Q1 2021. Due to the timing of our IPO in September 2021, I would point out that our fully diluted share count of 101.3 million shares was nearly 32% higher than the prior year period and represented a four cent headwind to our Q1 2022 adjusted EPS. At the end of the first quarter, cash and cash equivalents were 70.1 million and total debt was 481.7 million resulting in a net debt to adjusted EBITDA ratio of 3.8 times. On the subject of our outlook, we are maintaining our previously provided guidance for fiscal 2022. However, we would like to offer some perspective on how we expect the coming quarters to unfold. Excluding the benefit of a 53rd week in Q4, which equates to an additional two points to the top line on a full year basis, we continue to expect strong net sales growth over the balance of the year. Given our strong QN results, we have line of sight to hitting the upper end of our full year outlook, which calls for 800 to 815 million in net sales and represents 11 to 13% growth year over year. Regarding profitability, We still expect to fall within our full-year adjusted EBITDA range of $116 to $122 million, but we anticipate margins to remain under pressure in the near term, which could result in us landing in the middle to low end of the range. While Q1 should represent the lowest margin quarter and largest year-over-year decline for the year, we expect sequential margin improvement primarily reflecting an increase in our inflation expectations to low double digits from high single digits. As we enter the second half of the year, greater price realization, elimination of inefficient promotions, and continued execution against our robust pipeline of productivity initiatives should translate into modest year-over-year margin expansion as we exit the full year. As we have said in the past, if circumstances worsen, we are fully prepared to take additional actions as needed. With growth our top priority, I want to reiterate that we will continue to prioritize securing supply in order to meet our strong demand and maintain our focus 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 expect that our leverage will approach approximately three times by year end. Let me now turn the call back over to Todd for some final remarks.

Thanks, Chris. Much like we ended 2021, we've started off strong for 2022 with robust top-line growth. Growing inflationary pressures and a host of supply chain headwinds have also continued into the new year. To that end, while our top-line momentum will always take precedence, we will work tirelessly to combat near-term margin pressures and secure long-term profitability. With that, Chris and I are now available to take your questions. Operator? Operator?

Thank you. And as a reminder, to ask a question, simply press star 1 on your telephone. To withdraw the question, press the pound or hash key. Your first question comes from Trevor Saar with William Blair. Please go ahead.

Hey, guys. This is Trevor Saar filling in for John Anderson today. Thanks for all the colors so far. I just wanted to ask quickly on pricing so far. I know you mentioned that you've only got pricing covering rare sauce through the first quarter so far. I just wondered if you see any elasticities on that, any consumer reaction so far, and if you're expecting to see any through the second quarter as you implement more pricing.

Sure. Hey, it's Todd Lackman. Good to talk to you today. So on the elasticity, a couple points. Like what we've seen is our volumes remain, you know, very strong, notably on sauce. We continue – to not see any statistically significant fluctuation in Rayos elasticity since implementing our LPI, though we do know there's a lag effect, which will continue, you know, for the LPI implementation. We'll continue to see that implementation ramp up into Q2. You know, that said, our top-line guidance reflects a conservative level of elasticity for the balance of the year, you know, not just on Rayos, but our other brands, you know, as well. So although we have seen little to no evidence Um, you know, it's, uh, time will, uh, you know, time will tell when we've, we've built that in and that's built into our, to our guidance. You know, I will emphasize a few, you know, a few things here and it's part and parcel with, you know, the, the very good news that we, uh, delivered in regards to top line growth, net sales up 10.9%, lapping 40% growth. You know, last year, household penetration continues to increase robustly for the Ramos brand, as we pointed out, but You know, if you look at Rayo's sauce trends, you know, I know you asked about that in the pricing. Dollar sales in the first quarter up 34%. Category 10 unit sales up 30%. And the category down, too. And our unit consumption for the 52 weeks was up 31%. And unit velocity... you know, for the first quarter was up 11% versus a category sort of down three. And we have new data as of just yesterday, and unit sales for RAO is up 24% versus a category up three. So we'll be monitoring it very, very closely. Right now, growth continues to, you know, grow strong. But, you know, we've been very prudent in how we forecasted our elasticity and, you know, for the balance of the year. That's helpful. Thanks. I'll pass it on. Great. Thanks for the question.

Your next question comes from Andrew Lazar with Barclays. Please go ahead.

Good afternoon, everybody. Hey, Andrew. Hey, Andrew. Hi there. I guess to start off, obviously the top-level momentum, as you've talked about, is very strong. But, of course, as you mentioned, competitors have moved on pricing, and you still have a lot of that to go as you move into the second quarter, yet you're still comfortable with the high end of the sales range for the year. I guess thinking about your comfort level as you start to take greater pricing, if you feel like that has any impact on sales, you know, on volume just because others have already taken it, if you will. And then I'm just going to follow up.

Yeah, no, thanks, Andrew. This is Chris. So our pricing has ramped up across Q1 and into Q2. You might recall the only pricing we had in place was on Ray's initial 6% list price increase. that we put in place at the end of the year. And as the quarter progressed, we did see that flowing through more and more as we closed the quarter. And then really into the last four weeks is now we're into a Q2. So we've got that in place now. And our other pricing on the balance of our portfolio, majority of that is hitting right now in Q2. So soup, pasta, frozen entrees. and NUSA will all be seeing pricing in those categories as well. So that catches up. We expect to see mid-single-digit pricing across Q2. That will continue to build across the balance of the year. And as we close the year, we feel our top-line growth, as you mentioned, where we see the high end of the range, will weight more and more towards pricing as we cross the year. While we continue to maintain the unit growth that Todd mentioned, currently we anticipate ongoing volume growth as well across the year.

And, Andrew, you know, the area that you and I talked before, it was on the last call during, you know, this session, was around household penetration. And I do think we're in somewhat uncharted territory with a brand like Rayo's that's Um, actually in measured MULO plus natural specialty measured, it's $510 million of, uh, uh, you know, retail sales, uh, 42% CAGR fastest growing brand in the store, but we're increasing our household penetration about 300 basis points kind of year on year. So while there is certainly going to be an elasticity effect, we're also bringing in tons of new households where, you know, they are buying rails for the first time, each time they enter, uh, you know, the equation and, but we've been very prudent on how we forecasted elasticity going forward. But as you have pointed out, we also are bringing in a lot of new users, not just in the rare sauce business, but across the franchise.

Yeah, thanks for that. And then you mentioned mid-single-digit pricing as you cruise through Q2. What would be your estimate of the sort of cumulative amount of pricing that's now been announced as we think about what price might look like in the P&L in the back half of the year? And that's all I've got. Thank you.

Yeah, no, thank you. Yeah, so now that we have announced pricing across the full portfolio, as well as the second list price on Ray of Sauce, as Todd mentioned, that happens at the end of July. So as we migrate into Q4... we would anticipate high single-digit pricing across the board, including all of our promotional activity. We talked about going after trade spend efficiencies as well. So as it builds, mid-single digits going into the summer, and then more likely high single digits as we close the year out. Great. Thanks so much. Thank you.

Thanks. Your next question comes from Ken Goldman with J.P. Morgan. Please go ahead.

Hi, thanks. Josh, congratulations, and I hope you caught the end of the hockey game last night. I knew you would. Yeah, well, you know. Just curious, is there a way to sort of quantify or think about even roughly the impact of supply chain challenges on their volumes as far as you can tell in the first quarter? And do you expect some or really any of that shortfall to maybe be filled in as the year progresses and your operations improve a little bit?

Sure. Hey, Ken, it's Todd. And I actually caught the end of the game also. And I think a lot of you for the analyst call knew, I guess, I think you all know now we're in the Berkeley office because you can hear the train in the background. So I apologize for that. But to answer your question directly, Ken, look, we did have a variety of call it service interruptions in Q1. I mean, it's a There's just intermittent supply issues that keep coming. And for us, in Q1, it was foils, you know, for Noosa, lids for Noosa, pouches, proteins, trays. We estimate the lost sales due to these outages was roughly $3 to $5 million, or low single digits. You know, while we are seeing improvements in our materials and ingredients supply across Reyes and Noosa, we continue to experience, you know, some issues as You know, as everyone is, a tornado damaged our primary dry pasta supplier facility in Austin. Shutdowns in China have impacted ocean freight that have caused some ripples. So it's a constant challenge, but we're tenaciously addressing it, you know, every single day. But we do estimate in Q1 is about $3 to $5 million, you know, of lost sales due to those service issues.

Okay. And as a follow-up, do those supply disruptions in any way affect your ability you know, to maybe meet your goals in terms of cost reduction initiatives you laid out last quarter? Or is that still on track, no pun intended?

You know, there are, you know, we have, as we laid it out in our prior conversations, you know, we had a strong set of initiatives that we were taking on the cost savings side. You know, from a lot of the automation we're putting into our self-manufactured plant in Austin, value engineering across packaging, the Alma plant, you know, scale as we grow that top line faster than our back office costs. So while those are all still in flight, there have been some delays on the productivity side that we had hoped to get in Q1 are now being delayed beyond Q1 and Q2 in the back half of the year. On top of that, we have, as you'd expect, to continue to explore additional ideas. So we have more things on the plate that we'll be seeing here in the back half of the year. So our back half will be higher than we originally anticipated. But there is a shortfall in Q1 in the first half of the year. some caused by the issues as we described, Ken, and as you asked, some being hard to get technicians into our plants, sometimes hard to get equipment into the plants on some of the automation that we're putting in. So I call it delays, but we'll still anticipate hitting the full year number. It'll be more back half loaded. Thanks so much. Thank you, Ken.

Thank you. Your next question comes from Chris Crowe with Stifel. Please go ahead.

Hi, good evening. Hey, Chris. Hey, and welcome, Josh. And there's a great hockey game tonight at 930 Eastern on the Blues are playing, so you can check that out. Sorry to do that, but yeah. The St. Louis guy here. I just had a quick question for you. I know we've talked about the pricing and how it's inflecting at retail. You can see it in the data. I wasn't sure to what degree you're not seeing elasticity today, but what have you built in going forward? Have you outlined general expectations for a degree of elasticity that you believe is appropriate for your brands as you raise pricing?

Yeah, I know. Thanks, Chris. So we modeled at more historical elasticity rates. The majority of our products, that would be close to one elasticity, be a little bit lower on a couple, but kind of average around one. That's what we built into our projections. whether it was the first round, you know, or what we anticipate here for the balance of the year. Now we are seeing better elasticities than we modeled here through the first quarter, so we're very, you know, enthused by that. But we do believe it was the prudent thing to do to model in more historical levels that we've seen in the past.

Okay. Thank you. Just a quick follow-on or question on you talked about some volume declines across your categories on a year-over-year basis. Is that – This is obviously going against very tough comps in the prior year, whether for you or for your categories. Is that the reason you think it's driving it, or is pricing coming through more so in your categories? You're starting to see some of the elasticity that's driving some of that decline in volume in those categories.

Broadly speaking, Chris, how are you doing? Good talking to you. Thank you. So broadly speaking, if I look at just 13 weeks, if I look on the dollar side on our core categories, let's just talk sauce, yogurt, and frozen, last 13 weeks or even 52 weeks, dollars are up for all of those categories, okay? But on a 13-week basis in all of those categories, units are down, okay? on a 13-week basis in the first quarter. And that trend has continued. So, you know, and that's driven by as prices are, you know, basically being, you know, reflected on shelf, that's driving dollar sales increases, unit declines. So, again, that's in the broad categories. You know, that's in the categories of frozen entrees, in yogurt, and in sauce. And that's what we're seeing. But, Obviously, we've talked previously right now about our pricing trends. you know, that we have. So, you know, in regards to the pace that we have announced and are taking pricing, and right now we are growing well ahead of that in regards to units, notably on sauce, you know, as well as yogurt and on our frozen Michelangelo's and Rayo's as we're driving double-digit distribution gains and velocity gains. I'd say the other you know, area, Chris, that I think is unique is in our categories, private label is very, call it underdeveloped. I mean, private label share in total MULO across food and beverage is about 21%. In the combined core categories that I just referenced, private label has a share of 6.7%. So it's about, you know, less than a third, you know, of the total food and beverage MULO If you double-click deeper, it's frozen entrees. It's about a four-share, seven private label in yogurt, and ten in sauce. So there's not really much of an effect there. And so those brands do kind of have a lack of a direct substitute, whether it's a kettle. you know, a whole tomato kettle sauce or whether it's a whole milk yogurt like Noosa and also our products, you know, while there's a lot of private label substitutes for what we call kind of the Me Too mainstream brands. No, I'm not saying we're fully insulated. I'm just saying, you know, when you look at our categories, you look at our brands, it's not affecting us as much as it might be some of the other players and other categories.

That's great. Thanks for all that information. I appreciate it.

Thank you. Your next question comes from Brian Holland with Cowan & Company. Please go ahead.

Yeah, thanks. Good afternoon, everyone. I wanted to ask about Rayos and kind of the opportunity that you outlined today. You know, a quick math suggests, you know, a 20% share of sauces would be maybe 150 million opportunity retail. That's before accounting for demand growth, pricing, etc., You picked up about maybe 1,000 basis points the past four years or so. I trust the next 500 basis points will be harder to get than the last 500. But can you help frame for us sort of a timeline when you think you could get to that 20 threshold?

So, hey, Brian, it's Todd. Good to be talking to you. In regards to a timeline, if you think, I mean, we purchased the brand, and I get your point, right? you know, whether, you know, ease or hard earlier or later in the journey, but we purchased Rao's in July of 2017. I called it for a share, and we're at 15-ish share now, and that's in five years. You know, I'm not going to do the exact math and commit to a number of when we're going to get to a 25 share. I would just say that while I'm here, I mean, I'm literally looking at right now the share gain for every region of the country. And I'm just using this as a few markers for your really good question, Brian, right? But we are growing anywhere from 1.9 to 4.3% in any of the measured IRI regions. And those range from being in eight share in the Plains to a 21 share in the Northeast. And so we are growing in chunks in every single region of the country. And we are actually growing dollar share in 14 out of 15 customers' dollars and 11 out of 15 in units in regards to, you know, share. And interestingly, too, I think, you know, the data is in – We talked about it in the script, and we redo this now every quarter. Not only is Sobos the fastest-growing food company of scale in the U.S., but Rayo's, although it's over $500 million in spins, mulo, and natural, we continue to be the fastest-growing brand of scale of any greater than $100 million, growing 42% over the past two years. So, you know, as we look at it, the white space still in Sobos, items per shelf, and we added a slide in the earnings deck that shows in 27% of the category, Rayos has a greater than a 20 share, so there are a lot of accounts where we have low 20s, mid 20s, low 30s share. And that's just not in the Northeast. That's across the United States. And we see where we get 16, 17, 18 items in the store, we're going to get up to that share level. So we're there today. So that's a little bit of a hesitation of giving a timeline is that we are at that share level today. And there's a variety of big banners. there. So we've got a lot of white space and we continue to grow share on an annual basis anywhere from 200 to 300 basis points given the measured timeline and we'll continue to be driving distribution, driving awareness, leading to velocity and growing this brand organically. And sauce, as I've highlighted, Brian, we've talked, continues to be the number one priority for us is to grow that sauce business primarily and then secondarily frozen across the category in our yogurt business. So

Yeah, I appreciate the color, Todd. And then on the frozen yogurt side, I just wanted to ask about that. You know, the value proposition, as you've communicated it, and certainly as I think about it, is, you know, competing on taste in core yogurt. The ice cream category certainly doesn't suffer for taste, right? So when I think about you guys moving over there, I'm just curious if you can help us or preview some you know, kind of the messaging and how you're going to generate trial and build some traction around this brand. Because I would guess, you know, what works in yogurt may not work quite the same in ice cream.

So, Brian, what did you think of the taste of that yogurt?

Well, I thought it was phenomenal, but I guess my question is, I mean, yeah, everyone's read my reviews. But the question is, like, you know, when you move into ice cream, if you're trying to convert someone that's eating another ice cream, you know, what they have is probably they think is delicious, right? So just understanding how that's going to work.

No, no, definitely. I didn't mean to flip it all there. So a couple things. Number one, as we've talked about it, Noosa in the yogurt category is unapologetically about taste. And it is a taste-led yogurt. It is highly differentiated. And we are absolutely thrilled that the majority of the category continues to look to take taste and out of yogurt because it just differentiates Noosa more every single day. And so now how can we bring that great taste of Noosa along with the health halo of yogurt into the ice cream category? I would say, and data has shown it, that consumers really aren't that thrilled today with frozen yogurt in the ice cream category. There's nothing that really delivers day in and day out an absolutely delicious taste, much like Noosa does in the yogurt category. And we believe we've developed that product. It's tested very well. It's in the market now. And roughly speaking, roughly, depending on the flavor, a pint, of Noosa frozen yogurt gelato is about half of, you know, the calories of a pint of an ice cream, you know, sort of player. So it's significantly, you know, sort of less. And I said roughly because it depends on the flavor, depends on the ice cream, you can kind of compare, but it is less. And then you have the yogurt halo, you know, there. So we're basically saying, look, you can have absolutely great taste, you know, but feel better about it because, you know, it's frozen yogurt gelato versus just frozen gelato itself. So the sell-in has exceeded expectations. As you saw, there was an element of that that played through in regards to slotting in the first quarter, but it's a good thing that the sell-in is going well, and we're just ramping up our marketing and promotional investment as we enter the summer selling season.

Appreciate the color. I'll leave it there. Thanks. Thank you, Brian.

Thank you. Your next question comes from Jason English with Goldman Sachs. Please go ahead.

Hey, good evening, folks. Thanks for slotting me in. A couple of questions, I suppose. Your 11% organic sales growth pretty meaningfully lagged what we saw in Nielsen. It's one of the larger gaps. Is your business growing much slower in on-measure channels, specifically Costco, which I know is a big customer for you?

I can't comment on Costco, but you hit the key driver of why consumption is greater than sales is basically because, you know, IRI measures about 75% of the total universe and we grew slower in the unmeasured portion of the 25% that IRI doesn't measure. But basically, yes, to your question. But we can't comment on the specific customer because there's a lot of customers in that 25 in the balance of the universe.

Yeah. The math obviously suggests that it's very low, if any, growth in the on-measure channels, if that's what we assume. Your distribution, I know you built out those on-measure channels a lot quicker, and you've had much more of a distribution ramp in the measure channels. Is this an early indicator of what we should expect is like once you reach this distribution saturation points going to a low to no growth in the measure channels as well?

No. I mean, I think honestly there's a couple of things, Jason. Number one, we grew 84% on RAOs a year ago. So that is playing into the, in the spirit of putting everything in the blender of what's coming out. 84% growth on RAOs last year was very, very large. Um, And there absolutely is really no correlation on reaching full saturation of distribution in a variety of the customers in the unmeasured universe. There's an element of some out-of-stocks that occurred in regards to supply disruptions, et cetera. But, you know, we see healthy distribution runway in a majority of the universe. And a lot of those that you kind of would be referencing are kind of in the measured side category. of the equation, not necessarily, you know, unmeasured. So there's really not a correlation there. There's just a lot of factors playing into it.

Got it. That's helpful. Um, and somebody probed earlier on private label value. It all kind of blends together. Um, I appreciate the private labels shares low in your aggregate category basket, but that's a part because you got cheap brands like banquet and frozen or Prego and Rago and some regional brands and sauces that, that probably suck the oxygen out for private label. Um, Are you seeing any evidence of consumers trading down to those brands or retailers choosing to lean into them a little bit more to get some sharper price points with a heightened sensitivity that maybe values on the bank are beginning to matter more for consumers?

Jason, you're talking about leaning in more on value brands versus private labels.

Yes, away from your brands. Exactly, because as you pointed out, you just don't have a lot of private label categories, but you do have some value brands that are quite big.

Yeah, we have not seen that. You know, we've actually seen the premium. If you look and, you know, if you dissect, you know, we get IRI. I think you guys get Nielsen. If you dissect by price tier, premium still is outgrowing, you know, the other tiers. We actually, you know, we get data on a quarterly basis by income data. strata. We grew triple digits past two years with low-income, less than $30,000 household income, and middle-income, $30,000 to $70,000 demographics. So Rayos is growing robustly across all-income demographics, notably lower-income demographics as well. Because I do think it comes down to the fact that You know, we're not talking about a Tesla. We're talking about, you know, a jar of sauce that you can buy on promotion at a pretty affordable price. And the differentiation of our product, a whole tomato sauce, sauce made in an open kettle that tastes just like homemade is highly differentiated versus the balance of the category, you know, similar to our yogurt, et cetera. So we have not seen that trend. As a matter of fact, we've seen our brands, I just use Rayo's as a proxy, growing, you know, not just robustly, but across all income, you know, all demographic groups.

Yep. Got it. Thanks a lot. I'll pass it on.

You got it, Jason. Thank you.

And your next question comes from Michael Lavery with Piper Sandler. Please go ahead.

Thank you. Good afternoon. Hey, Michael. Just was trying to get a little bit more color around the top line guidance. And I guess, you know, partly just recognizing your first quarter, you've already got more than a quarter of the year under your belt. You've got the 53rd week coming in the fourth quarter. You've got strong momentum and some new launches coming. It's just also, you know, being a new public company, we don't have a huge amount of history. You look at 2020, and, of course, it's distorted in the cadence of quarters by all the pantry loading and stockpiling into Q. So a little bit trying to understand maybe just how much seasonality we need to make sure we keep in mind and also how much maybe conservatism or, you know, any headwinds ahead we should be mindful of.

Thank you. Hey, this is Chris. You know, and we did. We're very pleased with the tough line results coming out of Q1, 11% volume, gains in household penetration, gains in distribution, gains in velocity. As we've, you know, and again, we're just in the early innings of pricing. So, again, as we've built out our models in being, you know, we think, prudent on what we anticipate happens in the balance of the year as price takes more of a hold, as well as there are intermittent supply disruptions. We've managed to do those very nicely in the first quarter, but they're still out there as well. So given those circumstances, we modeled at the high end of our range, so we're very comfortable with those projections. And You know, we anticipate, as I mentioned earlier, as we go across the year, we'll continue to see volume growth as pricing takes on, you know, more of a percent of that growth, and that lands us in the top end of that range.

Okay, that's helpful. And just a follow-up on looking at slide nine where it shows how your share is so much stronger in stores where you have greater distribution. No surprise there. But given the high price point and the better margins the retailer would have for your products, it seems like this is a pretty easy sell story for any of the ones in the less than 20 share to add more items. I guess how quickly can some of that come? Does it depend on capacity? Is it just waiting for reset timing? What are some of the things that might be gatekeepers for how much you might be able to add to some of the distribution in the stores where you've got less share now?

Sure. So, Michael, hey, it's Todd. Good to be talking to you today. So a couple things, you know, as you noted and we've talked about, 18% 80% of Rayo's items, so like roughly 18, spin in the top two quintiles. So you're right. I mean, we've got the fastest growing items there. If you look at the other three of the top four competitors, between 30% and 40% of their items spin in quintiles four and five. So your point is, I get, which is, hey, if there was like no... governor on reset timing or anything else, it feels like there should be an exact flip towards, you know, these items. But, you know, you mentioned probably one of the key ones. I mean, there is reset timing. Some of those have gotten, like, delayed in the world of COVID in regards to how frequently they occur, et cetera. We don't really see, well, we have had intermittent outages, you know, in sauce, as we talked about, whether that's packaging related, whether it's port delays, containers. In the end of the day, we've been servicing the business at a good rate. It's a little bit below target, but we're getting back and doing a heck of a job. That has not been a barrier to getting any distribution gains per se, but I'd also say Even though, yeah, it's a premium sauce, it's a higher unit sale, we bring in a higher basket size, we spin well, it's still not like you walk in and get, hey, we have eight items, now we're going to get ten more tomorrow. It's basically the job of our sales organization and our customer service and supply to really kind of make the selling go in. And we have been putting points on the board. I mean, every single 13-week period since we acquired the brand, we have grown distribution double digits. And we've grown velocity double digits over that same time period. So it's remarkable. We've been adding them, but, you know, it's not like that it all happens in one 13-week period or one year period for some of the reasons you mentioned, Michael. But we're projecting continued distribution gains. We've got growing household penetration in chunks. And that's going to continue to be a key growth engine for us, notably on sauce, but also, you know, on the frozen business, which is growing, you know, robustly. And, you know, we don't talk much about soup, but, you know, Little Rayo Soup, now the fifth largest soup brand there, has been the fastest growing soup brand of the top brands over the past 13 and 52 weeks. And we've been in the market now for over three years.

That's great, Keller. Thanks for the time. Yep.

Thank you. And your next question comes from Peter Galbo with Bank of America. Please go ahead.

Hey, guys. Good afternoon. Thank you for taking the question. Hey, Peter. Maybe just to start, I wanted to dig in a little bit on the gross margin in the quarter. Chris, you know, obviously – It came in a little bit lower than I think even we had expected. Having spoken to you guys kind of mid-March, it seems like some of that was just the end of the month. Inflation got worse, but also maybe just that these slotting fees came in higher. Can you quantify for us maybe just how you came in relative to your own expectations, maybe what slotting was as it hit the gross margins, deconstructed for us on the quarter? Thanks.

Yeah, no, thank you for the question. So as we closed the corridor, we did close the corridor very strong, very strong volume, not just on the gelato, but really across the board. And as we did continue to experience both port issues, congestion, as well as just ongoing high transatlantic freight costs, As we absolutely had the bias to growth and went after that volume, we did incur incremental costs above and beyond what we would normally experience against that volume. So, for instance, we expedite drayage to get it off the boat. The demurrage and drayage were higher than we would normally see. Some of the intermittent supply challenges we've seen as well caused us to have to do things like air freight in some packaging materials. So things like that are happening, and as we have this double-digit volume growth, that does add incrementally to those costs. That accounted for roughly half... of the larger margin fall-off that we'd anticipated. And really the other half was the spotting fees on NUSA. We've gotten up and over our original ACV targets coming out of Q1. And then as we, you know, we accrue for those fees at the time of shipment, and then the volume comes up, comes in afterward, that got us at the end of period three as well. So we're very happy with that. But between those items, split pretty evenly against the margin.

Got it. That's very helpful. Thanks, Chris. And, Todd, maybe just an update on the Alma, Georgia facility. You know, I know You had some issues kind of getting it open earlier in the year. Are you kind of fully staffed and running at, you know, levels that you're happy with at this point? Just anything to help us there. Thanks.

Yeah, fantastic. Peter, good to talk to you today. So, yeah, Alma is up and operational, fully commissioned making sauce that matches the high-quality sauce we make every day in Italy. We're going to continue to ramp up production through Q2, building up inventory on key supplies like jars and Italian tomatoes now, and really excited about the improvements in service working capital benefits that the Alma facility will provide to the Rayos brand. So, you know, we are up operational and making sauce in Alma.

Thanks very much, guys.

Thank you. Thank you.

Your next question comes from Cody Ross with UBS. Please go ahead.

Hey, good afternoon, guys. Thanks for slotting me in. Cody, as the last – hey there. Gross margins pointed out down more than you expected. It looks like you're taking price later than your competitors are. Why is that?

Yeah, so the pricing that we're taking is on the pace that we anticipated the pricing actions. We were measured at the start as we worked through the end of last year, measured, and we wanted to make sure we remained balanced on household penetration is still very important to us. I know Todd has pointed out that's our huge growth driver is household penetration and distribution in store and awareness from our, you know, from our, our equity building campaigns.

That would be what I would just add to Cody is, uh, look, we don't, I can't speak to competition. I do know that, you know, as we've talked about and we have, we just announced, we've got a second price coming in on rails. Um, we've got all the other pricing initiatives that we have. We have productivity. We understand the impacts of inflation. But we have brands with low household penetration, and we will make the calls that we need to to really get new households in and drive units. And you look at a brand like Rayo Sauce right now, and we are growing units close to 30% on sauce. We're growing units close to 30%. I mean, if you look at, you know, just our – You know, so putting pricing aside right now, last 13 weeks, just data yesterday, units up 26% on mayo sauce, 22% on soup, 30% on dry pasta, 36% on frozen. You know, and pricing initiatives are taking effect now as well as productivity. Chris can talk more about the margin profile, but I think the blend of our pricing initiatives, the blend of productivity, all the other things that we're doing to attack that, as well as driving unit growth on our brands, we like that combination.

Yeah, so, you know, Todd is exactly right. We are very much seeing all that pricing coming through, take that, you know, last four-week IRI data, and it's getting to the level that we would have anticipated. Now, pricing, of course, there's a lag for us on, you know, the surge of inflation that we've been seeing here recently, you know, when our pricing will actually hit the market. There's a lag there, and the same thing with productivity. We talked about some delays due to just the macro environment, you know, and and some constraints that are going on really across the globe. So that lag is pushing the margin improvements that we had anticipated really in the back half of the year. And we always talked about a back half weighted EBITDA year, and even more pronounced so now with the global tensions and other things that we see going on. But we believe that the level of pricing that we're putting into the marketplace here over the balance of the year, as well as the productivity initiatives that we're going to have in place, you know, put us in a good position to manage that inflation as we move across and really exit the year.

Got it. Thank you. That's helpful color. And then a common question we get from investors is about trade down risk, which has already been discussed on this call. But evidence that those investors speak to is your reluctance to take price or, you know, slower moving and take price. So in combination with your answer that you just provided, how would you respond to the folks that would say, Hey, this is, you know, evidence that they are a higher risk for a trade down given their premium portfolio?

Yeah, we haven't, you know, I, to date, we haven't continued to monitor it closely, but if you look at our brands and the performance, you know, I'd say like, you know, number one, Trade down risk assumes there's something to trade down to. And, you know, as we said, Rayo's almost competes in a category in and of itself. And there's other players there, but it's a whole tomato, slow simmered sauce, cooked in open kettles with real olive oil. um, you know, fresh garlic, onions, et cetera, versus canola oil, dehydrated onions and paste and water and added sugar. And, you know, so therefore, and consumers seeing that they, they can see that as opposed to going out, um, you know, for, you know, to a restaurant for $60 or so for a family of four, they can feed their family of four jar of rayos, dry pasta, side salad for like 15 bucks. And so, um, You know, I think what we're seeing, we continue to see growing across every customer, every region of the country, I mean, every demographic. We don't see that trade-down, you know, issue, though we have planned prudently from an elasticity standpoint on going forward that there will be some, you know, lost volume from the pricing. So I think time will tell, but, you know, so far we're just continuing to to drive distribution and drive mental availability of our brands through increased awareness and really highlighting our highly differentiated products and brands vis-a-vis, you know, the competition.

Great. Thank you. I'll pass it on.

Thank you. And, ladies and gentlemen, this concludes our Q&A session for today. I will turn the call back to Todd Lackman for his final remarks.

Awesome. So, look, thanks again, everyone, for joining us and showing an interest in the Sobo story. Look forward to engaging with many of you in the coming weeks as we attend several conferences. And until then, have a great evening and take care. Thanks a lot.

Thank you, everybody, for participating in today's conference. And you may now disconnect.