Sovos Brands, Inc.

Good day, ladies and gentlemen. Thank you for standing by. And welcome to ServiceBrand's second quarter fiscal year 2022 earnings conference call. At this time, all participants are on a listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1. Please be advised that today's conference may be recorded. I would now like to turn the conference over to your speaker host today, Josh Levine. Please go ahead.

Good afternoon, and thank you for joining us on Sobos Brands' second 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 June 25, 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.sobosbrands.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 Brands' 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. Lastly, please note that all consumption data cited on today's call will refer to dollar consumption as of the 13-week period ended June 26, 2022, and growth versus the prior year comparable period, unless otherwise noted. With that, I would now like to turn the call over to Todd.

Thanks, Josh. I would like to start today's call off by discussing a few highlights on the quarter and then provide an update on the current operating environment before turning it over to Chris Hall for greater detail on our second quarter results as well as our full year outlook. Looking to our second quarter results, I am very proud of how well our team persevered in today's uncertain consumer environment while managing through continued supply chain headwinds. We delivered robust 22% top-line growth, with results led by 13% volume and 9% price. Our core businesses, Sauce, Yogurt, and Frozen, which represent 90% of our portfolio, delivered strong dollar growth rates. Sauce, represented by the Rayos brand, grew dollar consumption over 30%, well ahead of the category. Yogurt, represented by the Noosa brand, grew 5%, supported by pricing, which stepped up through the quarter. And finally, frozen, which includes Rao's and Michelangelo's entrees, as well as Birchbender's waffles, grew 6%. Volume growth continues to be a key driver for us, whereas pricing remains essentially the sole driver of growth for the categories in which we play. Notably, and as expected, our pricing accelerated this quarter compared to the first quarter, as our recent pricing actions in a number of categories flowed through to the market. Net sales growth remains strong for our largest brand, Rayos, as we rapidly progress towards building a billion-dollar brand. Rayos continues to be one of the fastest-growing center store brands of scale in the U.S. and represents more than half our portfolio. We grew total Rayos franchise dollar consumption 34%, led by 28% unit growth that was driven by gains in distribution and velocities across our categories. From a household penetration standpoint, total REOs increased by 260 basis points versus prior year to 14.6% as a result of year-over-year gains across sauce, frozen, soup, and pasta. Specific to sauce, REOs dollar consumption increased by over 30%. This rate of growth translated into a 170 basis point increase in dollar share versus the prior year as dollars and units were supported by a balanced mix of double-digit distribution and dollar velocity growth. Additionally, unit growth of 23% was 20 points ahead of the category, leading to unit share gains. Household penetration growth for Rayo Sauce was the fastest in the category, increasing by 210 basis points versus the same time last year to 11.9%. In addition to our success with the Rao's brand in sauce, we continue to see very strong volume-led performance in soup, pasta, and frozen entrees, a testament to the strength of the brand and its ability to travel to other categories. For our soup business, the fifth largest brand in the category, dollar consumption was up 30% with units up 26%. Our pasta business grew dollars 62% and units 57%. And finally, Rao's frozen entrees grew dollars 67% and units 52%. While we grew total frozen entrees dollar consumption by 7% in the quarter behind strong Rayna's growth, we experienced significant supply chain headwinds on our frozen business during the quarter. Specifically, as you might recall, last quarter we shared that our primary pasta supplier to our frozen entrees business was hit by a tornado. This had a material impact on our ability to supply product to the market, causing us to pull nearly all promotional activity to better service our base business. We have reinstated frozen promotional activity in Q3 as inventories are nearly back to target levels. On our Noosa yogurt brand, we grew core spoonable yogurt dollar consumption mid-single digits behind nearly 10% dollar velocity growth, with consistent growth across our core 8-ounce, multi-pack, and 24-ounce sizes. Gelato continues to increase distribution, and our marketing efforts are gaining traction as we see improving trends through the summer. Lastly, on birch benders, the second quarter once again proved challenging, as we expected. the declines were driven primarily by lapping the balance of a key customer promotion that similarly impacted us in the first quarter while we continue to see declining trends in Quito. Our teams are working to improve performance. However, in light of these recent trends and the brand's underperformance, we took a non-cash goodwill impairment that Chris will speak more about later. Shifting to the supply chain, Disruptions once again impacted our performance during the second quarter, even as we put up strong 13% volume growth. We experienced intermittent outages in certain key inputs, including glass, foils, pasta, chicken, and eggs, while also being forced to weather the impacts of higher diesel costs and ongoing delays at the ports. Specifically, Rao's sauce was impacted by shortages of certain jar sizes, and Sobo's frozen entree business was impacted by outages of dry pasta for a number of weeks, which resulted in gaps on shelves during the quarter and elevated downtime in our plant. In the quarter, we also realized heightened inflationary pressures, including increased raw materials, packaging, logistics, labor, and energy costs. At this point, as we look ahead, we don't see the current challenges abating in a meaningful way in the near term. As you know, in response, we have announced pricing against all of our brands, with our second-list price increase on Rayo Sauce going in the market as we speak. We are also executing against our full suite of productivity and net revenue management projects supporting our path to margin recovery. As we've stated in the past, we will not hesitate to respond with additional actions if warranted by the market. In summary, we are pleased with our performance in the first half on the top line and remain confident in the strength of our brands. As a result of our 16% organic sales growth during the first half of the year and confidence in our continued growth momentum, we are raising our sales guidance for the year. I want to commend our team for how they have responded to the challenges we continue to face and know that we will remain nimble and tenacious, taking action quickly to ensure we continue our growth momentum. We remain laser-focused on driving household penetration by expanding distribution and awareness, and we will continue to make strategic investments behind sales, marketing, innovation, supply chain, and other necessary capabilities to drive future share gains for our one-of-a-kind brands, even in the face of a challenging cost environment. Finally, before I turn it over to Chris, I want to welcome the newest member of our board of directors, Mr. Tamer Abueta. Tabor brings 25 years of supply chain experience and perspective, including nearly 20 years at established CPG companies, including Nestle, ConAgra, Heinz, and SC Johnson. He is currently the SVP of Operations and Chief Supply Chain Officer at Stanley Black & Decker. In today's volatile and challenging supply chain environment, and from his long experience in our industry, I have no doubt he will be a great addition to our board. I will now hand it over to Chris for more details on the quarter and our updated perspective on the second half of the fiscal year.

Thank you, Todd, and good afternoon, everyone. Second quarter total net sales, $197.4 million, a $36 million or 22% increase over the prior year period. This growth was entirely organic and was driven by 13.3% volume growth and 8.7% price, We are very pleased by how we have executed our price increases across our portfolio, with our volume growth remaining robust. From a category perspective, our growth was driven by strength in our core categories, sauce, yogurt, and frozen. And at the brand level, the growth was primarily driven by Rao's and Noosa, offset by declines at first vendors. Rao's remained the driving force behind our growth, increasing net sales significantly 43.6% driven by sauce. On a year-to-date basis, sauce sales for the Rao's brand have grown 30%, roughly in line with consumption. When comparing total Rao's net sales growth relative to 2019, this was the third consecutive quarter where we grew at a 55% CAGR. reflecting remarkable strength and consistency, considering the brand's size of nearly half a billion dollars in net sales. Noosa net sales were up 8.8% in the quarter as pricing flowed through to the market, coupled with the initial contribution from Gelato. Adjusted gross profit of $55.2 million increased $5.5 million, or 11.1% year-over-year, benefiting from our strong top-line results. Adjusted gross margins were 28% of net sales for the quarter, reflecting a 270 basis point decline versus a prior year period and a 200 basis point improvement versus Q1 2022. The year-over-year margin decline was due to the impact of low double-digit inflation with specific pressures observed in our dairy, proteins, packaging, logistics, and energy costs. These headwinds were partially offset by the benefits of pricing and productivity in the quarter, each of which sequentially improved versus the last quarter. Adjusted operating expenses of $32.5 million increased by $7.5 million, or 30.2%, over the prior year period primarily due to increased spending behind marketing, R&D, and G&A as we invested in our brands, talent, and capabilities to drive growth for the long term. For perspective, in the second quarter, we increased our growth investments as defined by marketing plus R&D by 26% versus the prior year. The corridor also included public company costs, which were not present in the prior year period when the company was private. Adjusted EBITDA of $25.7 million declined $1.6 million, or 6%, versus Q2 2021, while adjusted EBITDA margin was 13% versus 16.9% in the prior year period. Net income for the quarter was a loss of $30.3 million or negative $0.30 per diluted share compared to a loss of $1.3 million or negative $0.02 per diluted share in the prior year period. The loss was primarily related to an impairment of first vendors' goodwill. We test our goodwill for impairment at least annually or when circumstances warrant and record any related impairment loss as an expense. Due to the year-to-date underperformance of Birchbenders, we performed a quantitative assessment which resulted in the full impairment of Birchbenders Goodwill, totaling $42.1 million. We believe this should resolve future impairment risk to the brand. Adjusted net income was $12.7 million, and adjusted EPS was $0.13 per diluted share, compared to 13.3 million or 17 cents per diluted share in Q2 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 31% higher than the prior year period and represented a three cent headwind to our Q2 2022 adjusted EPF. At the end of the second quarter, cash and cash equivalents were $72.6 million, and total debt was $482 million, resulting in a net debt to adjusted EBITDA ratio of 3.9 times. I would now like to discuss our updated outlook and some of the underlying assumptions that support it. On the top line, we are raising our fiscal 2022 guidance to $825 to $835 million, reflecting 15 to 16% growth. This compares to our prior guidance of $800 to $815 million, or 11 to 13% growth. Our updated guidance reflects 16% organic sales growth year-to-date, and confidence in our continued growth momentum through the balance of the year, including the benefit from incremental pricing on our array of softs that just went into effect. Remember that this guidance includes the benefit of the 53rd week in Q4, which equates to an additional two points to the top line on a full year basis. Finally, I want to provide some additional color to our second half sales growth assumptions. First, we expect price in the second half to be generally in line with Q2 as the benefit of the recent Rayos soft price increase is expected to be offset by the reinstatement of frozen entree promotions. And second, we continue to expect elasticity to normalize during the second half as we enter what many expect could be a more challenging and uncertain environment for the consumer. Regarding profitability, we are maintaining our full-year adjusted EBITDA range of $116 to $122 million with guidance at the lower end. We continue to assume we will see benefits from price realization and productivity initiatives as we move through the back half of the year. We still expect our full-year inflation to fall within the low double-digit range. However, our updated expectations reflect slightly higher inflation assumptions through the balance of the year, the primary drivers being higher dairy, glass, logistics, and North American and third-party manufacturing costs. Growth remains our top priority, and I want to reiterate that we will continue to invest in the business to enable the multi-year growth opportunity that we see ahead. From a balance sheet perspective, given our updated outlook, higher interest costs, and investments to support our growth, we expect that our leverage will finish the year below 3.5 times. Let me now turn the call back over to Todd for some final remarks. Thanks, Chris.

We are very pleased with the first half of 2022, led by our robust, top-line growth. We continue to invest in our brands, talent, supply chain and capabilities to drive growth well into the future, even as we manage against inflationary pressures and supply chain disruptions. As we have said many times in the past, while sales growth will always be our top priority, 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?

Thank you. Ladies and gentlemen, as a reminder, if you'd like to ask a question, you will need to press star 1-1. Please stand by while we compile the CAN-AIR roster. Now, first question coming from the lineup, Ken Goldman with JP Morgan.

Hi, thanks so much. Chris, I wanted to follow up on a bit of guidance that was issued last quarter about the gross margin was supposed to be on path to, I think, be up modestly year on year as you exit the year. I just wanted to get a little bit more color. How do we think about the third quarter gross margin in light of 2Q coming in 200 basis points above 1Q? So I just wanted to get some color there. And I know there was some promotional pullbacks. And then I just wanted to get a little bit of sense of how you still see the gross margin exiting the year, if you have a little more clarity on that at this point. Thank you.

Yeah, sure. Thank you, Adam. You bet. You know, we – I think we're pleased with the sequential improvement we saw in Q2 on the gross margin line. You might recall that's what we did expect coming out of our last call. And we See continued gross margin improvement as we go across the back half of the year. Moderate expansion, you know, Q3 to Q4. We do see incremental inflation versus where we were last time that we spoke. Areas like dairy and glass. and freight remain high and in some cases have elevated since our Q1 call. So we do see more inflation in the back half of the year. We're pleased with the level of pricing we have in the marketplace here as it flows through in Q2, and we're pleased with the progress we're making on our productivity initiative. As we mentioned, that would also be more heavily weighted in the back half of the year. So that combination of higher inflation, still low double digits in total for the year, pricing flow through, the elasticity that was experienced in Q2, the productivity that we've seen back half of the year, we do see that moderate gross margin expansion, though in Q4, we do see landing slightly below where we landed last year. So in our previous call, we hope to get back to that Q4 level. Given this higher level of inflation in Q4, some uncertainty we see in a couple of areas, we are de-risking that Q4 gross margin a little bit.

Got it. Thank you. If I could just ask a quick follow-up, and then I'll pass it along. I thought that guidance previously was for maybe the gross margin to be up modestly year on year, kind of as you exit the year, so maybe in the last month of the year. I just wanted to make sure that, you know, and I'm probably being too nitpicky here, but just wanted to make sure that as you talk about, you know, that expansion landing slightly below where you were last year, is that for that same period, sort of the end of the quarter? Is it for the whole fourth quarter? Again, I just want to make sure I'm hearing you correctly so we can think about it right.

Yeah, Ken, that'll be for the entirety of Q4 year over year. It'll be improved versus Q3 of this year, but below Q4 of, of 2021. Got it. Thank you so much. Okay. Thank you.

Thanks, Kevin.

Thank you. And our next question coming from the lineup, Andrew Lazar with Barclays. Your line is open.

Great. Thanks so much. I guess first off, I think it was last quarter where you mentioned some of the supply chain challenges you faced, maybe kind of curbed overall sales growth by maybe it was low single-digit sort of impact to the top line. Do you have an estimate of around, even directionally, what it might have held back sales by this quarter?

Yeah, as we talked in Q1, we expected and then did realize 3 to 5 million of business moved out of Q1 into Q2. So we did realize that in Q2. As we operated in Q2, we still did see some sporadic supply chain challenges, notably a couple of sizes of our glass jars for Rayo sauce, not our main 24-ounce, but like a 22-ounce and a 40-ounce. And importantly, we had supply chain challenges in our frozen entree business. You may recall we talked about a tornado that had hit our third-party pasta manufacturer, which we had to go then and find a secondary supplier for that. So we lost some time at the plant as well then. So we did have those challenges in Q2 on frozen entrees. Fortunately, as we're closing the quarter, we're closing in a much better position and getting the inventory rebalanced back into the marketplace. We did cancel the vast majority of our promotions in Q2 against that frozen business. And we will be reinstating that as well here in the back half of the year. So we don't think, we think it was a very marginal impact at all. as we exited Q2 on any volume that will be shifting over into Q3.

Just to build on that one point, hey, Andrew, it's Todd. Our service levels now on frozen and sauce are very close to target levels with those inventories back, and we're back promoting frozen full-on as we enter, as we're into Q3.

Great. And then, Todd, what are you seeing on elasticity right now? I realize you're planning for it to be more going forward, which is prudent, but trying to get a sense of what you're seeing now and sort of how the dynamic is playing out, maybe in your key brands between any trading down that you're seeing versus trading in to at-home eating, even to some premium brands like yours, given it's still a much better value, obviously, than eating out.

Absolutely. So let me hit a couple of those points. So first, it's Right on the elasticity, to date, look, we've seen lower elasticities to our sauce pricing than we expected. And even at the category level, pricing sensitivities remain below historical levels, like through Q2. So, you know, the sauce and our volume, and you see our volume growth, very, very strong, you know, on the Rao's, you know, sauce brand. Up 23%. Unit consumption, unit velocities up 7%. Now, as we implement the second LPI, given elevated gas prices, double-digit inflation across all major areas of spending, you know, we're being cautious as we assume elasticities will revert to normal. Let me just hit yogurt, then I'll talk about the trade-down, you know, point. On yogurt... You know, the brand has grown net sales 8% to 9%, you know, consumption consistently mid-single digit. But we have seen the category continue to evolve with an increasing number of pricing actions, ourselves included. You know, as we look at the LPI that went into market, the list price increase went into market in May, we believe we're seeing elasticities on par with our initial projections, so a little bit different on yogurt. You know, and we've basically been conservative as we've seen them through the balance of the year. Now, to get to your question on trade down, the first area, as you said, and it's in line with that, you know, as we read all of our peers, I mean, we are seeing all the data that What consumers are cutting back on is out-of-home eating, and therefore, those dollars are going towards in-home. And we've seen historically, notably, on a brand like Rayo's, which provides restaurant quality, you know, premium taste in food, that, you know, therefore, that's, you know, helping continue to grow the brand, as you see in the dollar consumption. And I'm just Quoting now some Kantar research in June, 42% of consumers have intentionally decided to eat out less often, 48% of consumers uncomfortable spending money to eat out, 49% expect to cut back or stop spending on food away from home. I'd also quote recent source of volume data on both Rao's and Noosa we have sourced volume from private label versus private label sourcing from us so Though private label is growing private label is sourcing as it traditionally does for mainstream Brands, so you know and you know private label is usually an analog to a mainstream brand not a premium brand like a Rao's or or a Noosa so You know, maybe slowing down a little bit, you know, but, you know, REO's really consistent, you know, growth as we're seeing. So I kind of rambled there, but tried to hit all the points that were embedded in the question.

Appreciate it. Thank you.

Yep.

Thank you. And our next question coming from the lineup. Chris Groh with Stifel. Your line is open. Hi.

Good afternoon. Good afternoon. I just had a quick question for you and a bit of a follow-on. I guess to be clear with this increase in cost inflation you expect in the second half or a slightly higher level of increase, given your pricing is in place and has been announced already, do you expect pricing, I guess, and productivity savings to offset cost inflation in the second half of the year?

Hey, Chris. As we've seen this inflation increase, continue to rise in these areas that we mentioned. We continue to pursue the pricing actions that we put in the marketplace through now, including the RAO's second LPI, which is literally in the marketplace just now as we speak. And as we mentioned, our productivity initiatives would be more back half weighted, and we're seeing that as well. So as we move across H2, you know, we will see still a lag on our pricing and productivity versus the inflation that we are seeing. So that's what I mentioned previously. We don't anticipate getting back to the Q4 prior year margins as we exit the year. So we're not covering 100% of that inflation that we're projecting into Q4 as we exit the year. Okay.

Thank you for that. And I had a question. You had a pretty aggressive increase in marketing, R&D, and that flowed through SG&A. And that was obviously very encouraging for the future growth of the brands. I just want to get a sense, is that something you expect to continue? Any kind of framework for how to think about it for the year? And maybe then from a high level, kind of where that's directed, kind of where you're focusing a lot of those dollars?

I know. Very good. Well, you know, as we've mentioned, really all of our calls, you know, top line growth is our number one priority. And we've seen the result of that. And we are benefiting from the investments that we have and continue to make throughout Q2. We actually saw our marketing and R&D investments fill up by 20% year over year. As we move across the back half of the year, we expect to continue to make those investments. In fact, we will actually spend more investment into the marketplace in the back half of the year than we did in the first half of the year on that combination of marketing and R&D. While the growth rate may not be as much as it was year over year, it will be incremental dollars going into the marketplace in the back half of the year versus the first half of the year. So we are committed to making those investments. We're committed to, you know, reaping the top line momentum that we see ahead of us.

Okay. Thank you. Thanks, Chris. Thanks, Fred.

Thank you. And our next question coming from the line of Robert Moscow with Credit Suisse. Your line is open.

Hi. Thanks. Maybe just a couple questions. Chris, can you just remind us, like, how to quantify – the productivity benefit of Alma opening up and how that will help your back half because it is a very steep ramp of EBITDA growth required to still hit your guidance in the back half. So what's the unlock there? And then secondly, on Birchbenders, does writing down this brand impact at all your long-term growth algorithm that you provided earlier? during the IPO.

Hey, Rob, it's Todd. I'll let Birchbender first pass it to Chris on the other question. So the answer is no. The writing down of Birchbender is in no way, shape, or form affects our long-term algorithm in regards to growth. So I'll just leave it at that.

Okay, thanks. And specific to Alma, so Alma is open and operational, and we continue to ramp up production. It's fully commissioned, making sauce that really matches the high-quality sauce we're making in Italy as well. And we're building supplies right now, building inventory on both jars and Italian tomatoes in Alma. You know, we've talked before about some of the major benefits of the U.S. operation include balance sheet. It does allow us to have a much shorter order to fulfillment timeline It allows us to take advantage of short-term, you know, marketplace opportunities. And we won't need to maintain as much inventory as we have previously, as much safety stock, when it was all coming out of Italy. Now, on the productivity front, versus, you know, we currently source roughly 20% of our RAO sauce. domestically, Alfredo and Mifesos predominantly, from other domestic suppliers. That then will shift into the Alma operation, and we will see productivity there. The Alma operation will be less costly than the other domestic suppliers that we have. So we will see productivity there. But we have a whole other slate of productivity initiatives really hitting in the back half of the year. We mentioned previously that we had seen delays in productivity coming up out of the first half of the year as we were having delays in getting equipment and even engineers into our plants. We've talked a lot about the automation we're putting into our Austin frozen entree plant. Well, now that is the two lines that we're automating. One is now up and operational. The second one will come here as we execute three, because that will be in place down in Austin. And up in our Bellevue, Colorado plant, making new socks, we've in-housed our fruit preparation, our puree preparation, and we will see those cost savings from being that in-house in the back half of the year as well. So really that back half, which gives us confidence in the sequential improvement of margins, is the full flow through of pricing and that more heavily weighted productivity in the back part of the year. Alma and the other initiatives that we have in place.

Thanks. I think you've quantified some of the dollars of those productivity savings in the past. Is there any way to give us a rough range?

In total for the year, we'll see 2% to 2.5% of our total cost of sales productivity very heavily weighted to the back half of the year. 60% to 70% of that or more will be in the back half of the year. Very helpful. Thank you. Okay, thank you.

Thanks, Rob.

Our next question, coming from the line of Peter Galba with Bank of America, Ilana Feldman.

Hey guys, good afternoon. Thanks for taking the question. Hey, Todd, I just wanted to maybe expand on your comments around the poor congestion issues. You know, there's been some stories, I think, about more rampant congestion in the southeast. And I just want to know, are you having more issues, I guess, getting finished product imported, you know, into parts of the country? Is it really... you know, hey, we can't get raw materials in through, you know, Savannah or Charleston to get it over to Alma for production on Rayos. Just any greater detail there would be helpful.

Yeah, you know, I would say a key word is, you know, intermittent and effects. As we talk about it, it's really the finished goods that are coming over, you know, from Italy here. I mean, there's also effects of, you know, other elements, but... You know, I wouldn't say it's affecting any one, the southeast port more than, you know, the northeast that we use. You know, there was an example of, you know, foils that occurred in Q2 on Noosa, et cetera, but, you know, it's a little bit hit or miss. And, you know, it's affected us, but I would say it's more intermittent, Peter, versus something that's, you know, longstanding. And, you know, very importantly, honestly, our supply chain team has done an absolutely phenomenal job managing through that congestion. We have just a great supply chain team, logistics team, et cetera, and they've been able to fly through the turbulence and make sure that we're able to get all the supplies that we need in light of the fly through the turbulence and make sure that we're able to get all the flies that we need in light of the very unprecedented operating environment that we're in today. I would also, I guess the last thing I'd say too is, you know, we do have expanded utilization of our West Coast DC, which will diversify our volume between the East and West, which will be a longer-term benefit for us as well.

Okay, no, that's helpful. And Chris, maybe just on the increase in marketing and R&D in the second half, just any way to help us quantify that sequentially, you know, how much of a step up in dollar terms we might see?

On a year-over-year basis, it will be double digits. I can't tell you exactly how much, but it will be double digits. Not as much as the 26% that we put in HQ2. And within the year, you know, we typically will see, you know, I call it a 40-60% split, 40% H1, 60% H2. I think it will give you a good range to, you know, you'll actually see in the marketplace.

Got it.

Thanks very much, guys. Sure thing.

Thank you. And our next question coming from the lineup, Cody Ross with UBS. Your line is open.

Hey, guys. Thank you for taking our question. You raised your full-year sales guidance. However, your 2-H guidance is pretty much in line with the street, suggesting a modest slowdown across your portfolio from what you just posted. I just want to get a sense, is that more conservatism from your end, or have you actually began to see a bit of a slowdown from your recent price increases?

So we're very, very pleased with the growth that we've seen in the first half of the year. You know, 16% net sales through the first half, 12% volume growth. And then, like you mentioned, that pricing really taking hold in Q2 and into the second half of the year. And we have a lot of confidence in the back half of the year, taking that full year guidance up to roughly 15% to 16% from the prior 11% to 13%. we will see that growth in the back half of the year more weighted towards pricing versus what we saw in the first half for volume. That's especially true in Q3, where there are a couple key individual customer events that we ran back last year that we are not repeating this year. So our volume growth in Q3 will be a little muted versus what we've seen year-to-date. And then importantly, we've modeled into our projections for the back half of the year that elasticities normalize. We mentioned the second Reyes LPI going to the marketplace right now. So we felt it prudent to assume we would see more historical level of elasticity here in the back half of the year. And then with just the uncertainties, you know, going on in the world, in the U.S., especially today, you know, do we see the pressure on the consumer? Will we see a return in general to the elasticities that we have expected to see and have seen historically? So it's really that return to normalized elasticities that has landed where we have the back half projections.

Great. That's helpful. And I just want to clarify some of your comments on pricing because I think some of it was helpful, but I am a little confused. You did 8.7% roughly price mix this quarter. Some of it was benefited by not having promotions on your frozen business. And you expect price mix to largely be in line with what we saw from this quarter, so call it 8, 9%. But yet you expect price to be a The bigger contributor in the back half, I believe your back half guidance is for roughly 1516% growth. So that would be roughly 5050. So how do I square these?

Yeah, so we've again, we talked all year about, we knew our, our growth would be more volume driven in the 1st half of the year in price driven in the back half of the year. As I mentioned, Q3 specifically, we will see muted volume growth due to the not overlapping a couple of events we ran last year, promotional events. So the back half, while it feels like that, call it 9% pricing, we do then therefore see volume more than 5% to 6% range of the back half to get to that 15%. So that's where we see that more heavily weighted pricing in the back half of the year.

That's helpful. I'll pass it on. Thank you very much. Thank you.

Thank you. And our next question coming from the lineup, Michael Avery with Piper Sandler. Your line is open.

Thank you. Good afternoon. Hey, Michael. You talked about some of the capacity constraints and how that impacted promotional activity. Did that also have any impact on distribution expansion momentum or innovation launches or anything that may now give a little bit of a volume lift in the second half once you've got some of the relief there?

Hey, Michael. It's Todd. So the direct answer is no. didn't affect any really new distribution at all. We are, I mean, but look, it did affect in Q2 our ability to service notably frozen secondarily some key sizes on sauce. And, you know, those results didn't affect, you know, new distribution opportunities, and they did not affect any new launches. You know, that said, as, you know, Chris highlighted before, we are you know, now fully promoting frozen in Q3 when we pretty much went dark on promoting frozen in Q2 so that, you know, when this retailer inventories get restocked, et cetera, it'll have a beneficial impact in Q3, but nothing on new products or new distribution per se, except for, you know, retail pipeline, Phil.

Okay. That's helpful. And just, wondering if you can give the latest on how you're thinking about any further m a you mentioned you expect to finish with three and a half times net leverage which presumably means excluding m a but does it mean that you also are planning not to have any between now and then no i mean i'll let chris talk to the uh

I'll let Chris talk to the leverage side. Strategically, M&A will play the same role going forward as it has historically, but the first thing I will highlight that I have highlighted on the last several calls is that we are We are primarily focused right now on growing our core categories. I mean, you can start 22% net sales growth driven by volume. I mean, I'd be remiss if I didn't highlight right now, this is our, sorry, Michael, I'm shamelessly stealing your question. Time to highlight. This is our fourth quarter as a public company. Four quarters in a row, double-digit top-line growth. Four quarters in a row, double-digit growth led by volume. Four quarters in a row, that volume driven by our core categories of sauce, yogurt, and frozen. And as we've talked about the distribution opportunities across those three, notably sauce, which is the largest percentage of our portfolio, So we are focused on driving those volume gains. We're focused on driving distribution. I'd also say, as I've highlighted before, we have driven double-digit distribution growth on rails every quarter since we have acquired that brand which is rapidly on track to uh grow to a billion dollars um you know that said you know we've used m a as a lever in the past so we continue to see a steady flow of m a opportunities at any given moment we're evaluating a number of targets maintain a long list of potential companies that meet the criteria And so, you know, that's the lever that, you know, we'll continue to look at as we grow in the future. But right now we're really focused on continuing to drive our business organically, notably in our core categories. And I'll pass it to Chris just for a second on the leverage question, Michael.

Yeah, sure. So, you know, any M&A work that we would do would obviously have to make, you know, outstanding economic as well as business sense. We have strict guidelines for what we'll consider as an acquisition. We've done four over the five-plus years of our existence. We definitely are modeling the impact of even potential interest rate increases in our M&A work. Ultimately, what's important to us is that we can comfortably service whatever debt we do take on and ensure we can pay down that debt to a comfortable level in a short amount of time. And we don't really solve for particular leverage. We solve for how quickly we can delever down to normal state of leverage following acquisition. So cash flow generation is definitely something we scrutinize. We've had a history of very solid cash flow, robust generation, and the ability to pay down debt once we do go to the credit markets. We do pay down that debt faster than our underwriting would have suggested. So we like the range that we're in now for leverage. You know, we're right under four, and we may go above that for an acquisition. But, again, the key is to quickly de-lever and get back into that range we've spoken of before, kind of an under four, four and a half, really under four on a pro forma basis.

That's great, Keller. Thank you both. You bet.

Now, if someone likes to ask a question, please press star 1-1. One moment for our next question. Our next question coming from the lineup, John Anderson with William Blair. Your line is open.

Hey, I got in there. Thanks for the question. I want to get a sense for how things are progressing with the new NUSA launch in Gelato. I know it's early, but you're moving that brand into a multi-billion dollar ice cream category. And we'd just love to hear your view on how it's going so far, sell-in, sell-through, and maybe your kind of expectations for that going forward. Sure.

Hey, John. Todd Lachman here. As we... You know, what we can really highlight is it's exceeding our expectations in, you know, in sell-in, so better than expected sell-in to the new frozen yogurt gelato. Have you been able to taste it, John?

I tasted it in Expo West.

Okay, fantastic. Well, anyway, absolutely delicious. Sell-in is better than expected, and Velocity continues to build, you know, as a result of national marketing promotions across Europe. You know, across the board, big in-store promotional push. So that's really what we can say on gelato. I mean, we really just – we're in the middle of the summer season. We're really bullish on the launch of gelato. But sell-in better than expected.

Okay. Well, stay tuned for more updates in the future. The second question is, in frozen – You know, you have two brands that play there, and I'm wondering if you didn't talk too much about Michelangelo's in the prepared comments. I'm wondering if you could discuss a little bit about the interaction between Rao's and Michelangelo's in Frozen. Are they both, you know, what role they play? Can they coexist? Is that how you kind of see those two brands kind of developing in that particular category as you go forward? Thanks.

Absolutely. No, they can absolutely coexist. Michelangelo's is premium price to the category. Rao's is super premium price to the category. Look, Rao's is newer, so it's growing at a much higher rate than Michelangelo's. Our total frozen business dollar consumption grew 7% in the quarter. But I will say, as we discussed, we had supply issues that impacted our entire frozen business. And so, therefore, whereas consumption of Michelangelo's is down a little bit, net sales for the brand were up. I mean, you'll see that through. In light of the supply chain constraints, we did need to make a priority call. We prioritized Rayo's a bit over Michelangelo's, so that was a little bit of a tweak that affected Michelangelo's for the quarter. But Michelangelo's has a very loyal following. It's been a consistent contributor to our portfolio since we acquired it in January of 2017 and what we have seen that those two brands are able to coexist very well where they're both in distribution together. There's also some unique items that Michelangelo's has, for example, eggplant parmesan that we don't have on Rao's and that Rao's has, such as frozen meatballs that's not offered by Michelangelo's. And those are just a couple of different examples. So some unique items, some premium ingredients from Rao's that justifies the premium price, and as we said, our total frozen business. You know, we're very bullish on and we're driving both of those brands. But the priority of the two is Rayos as we are really driving Rayos to that billion-dollar sales goal that we're well on track for. Thanks so much. You got it, John. Thanks.

I'm showing up for the questions at this time. I would now like to turn the call back over to Mr. Todd Lockman for any closing remarks.

Awesome. Look, thanks again, everybody, for joining us and showing an interest in our story. I look forward to engaging with many of you in the coming weeks. Please feel free to reach out to Josh to follow up on discussions. Until then, have a great evening and take care. Thanks a lot.

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