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.