Sovos Brands, Inc.

The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. Ladies and gentlemen, thank you for standing by, and welcome to Service Brand's third 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 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 hand the conference over to your speaker host, Josh Levine. Please go ahead.

Good afternoon and thank you for joining us on SoBus Brands' third quarter fiscal year 2022 earnings conference call. On the call today are Todd Lachman, 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 September 24, 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.sovosbrands.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 Sobo's 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. Lastly, please note that all consumption data cited on today's call will refer to dollar consumption as of the 13-week period ended September 25, 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 off today's call 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 third quarter results, as well as our updated outlook for the remainder of the year. First, I would like to highlight the recent one-year anniversary of our IPO. I couldn't be more proud of our performance over the last four quarters, having delivered 16% organic sales growth on an LTM basis and recently passing $800 million of net sales. Growth has largely been volume-led in a period when most of our peers have not only been almost entirely reliant on pricing, but also are without the ample opportunities we have to drive strong, sustainable growth. Our growth is particularly impressive in light of the challenging operating conditions for our industry. Our largest brand, Rayos, continues to grow robustly, passing $500 million of net sales and growing 30% on an LTM basis. And from a profit perspective, we have been able to essentially maintain our EBITDA despite experiencing double-digit inflation and numerous disruptions to our supply chain while simultaneously stepping up investments to support our growth. This has truly been a remarkable last 12 months of tenacity and perseverance against a very challenging operating environment. We purposely built a team of agile, energetic, and talented leaders and have benefited from their industry experience and growth mindset. We continue to add to our already strong team. We've recently announced that Yuri Aramita has joined Silver's Brands as our Chief Growth Officer. Yuri brings with him proven leadership and experience in building and scaling brands globally. most recently at Reckitt, where he successfully ran their North America hygiene business through the pandemic, and prior to that at P&G, where he spent over 20 years in multiple country and category leadership positions. The confidence we have in our team and their proven ability to execute is a key reason we can sustain our sector-leading growth rates. Looking to our third quarter results, we delivered another solid quarter, generating 16.9% organic sales growth. Pricing was up 14.4%, primarily the result of the previously discussed list price increases we've taken year to date. Volume increased 2.5%. inclusive of a negative eight-point headwind to total company volumes from lapping two large volume-driving events from a year ago for the Noosa and Michelangelo's brands that we did not repeat this quarter. And as expected, our gross and EBITDA margins showed nice sequential progress amidst persistently elevated inflation, even as we continued to support our brands with robust investment. Our core business, Sauce, Yogurt, and Frozen, which represent 90% of our portfolio, delivered strong dollar consumption growth rates of over 17%. Sauce grew dollar consumption 24.3%, once again ahead of the category. Yogurt grew 3.6%, supported by pricing. And finally, Frozen, which includes entrees as well as waffles, grew 16.1%. A nice acceleration versus last quarter as our in-market support normalized and supply chain performance improved. Shifting to our largest brand, Rayos surpassed $500 million in LTM net sales this quarter and is now over seven times larger than when we acquired it five years ago. Rayos continues to be one of the fastest-growing center store brands of scale in the U.S., and is well on its way to reaching $1 billion of annual net sales. For the quarter, TotalRail's franchise dollar consumption grew 27.7%, led by nearly 20% unit growth that was driven by broad-based gains in distribution and velocities. Total Rayo's household penetration increased by 230 basis points versus prior year to 14.8% as a result of adding new households across all categories. Specific to FOSS, Rayo's dollar consumption increased by 24.3%. This rate of growth translated into a 100 basis point increase in dollar share versus the prior year to 14.1%. as dollars and units were driven by velocity and distribution gains. Unit growth of 15% came in well ahead of the last category unit growth. Importantly, Rao Sauce has only a 5.3% share of category units today, further highlighting the immense upside potential for this brand. Additionally, household penetration for Rao Sauce continues to grow. finishing the quarter up 160 basis points versus the same time last year to 11.8%. In addition to sauce, Rao's continues to build its newer beachheads in soup, pasta, and frozen, categories that we see as highly incremental opportunities for the brand. In totality, these businesses have now surpassed a combined $100 million of IRI-measured annual net sales, with dollar growth up nearly 50% year-over-year on an LTM basis, as well as in the third quarter. Consumption is being led by double-digit volume growth across all three categories as we implement our Sobos Brands Playbook. working to increase physical availability on store shelves and then supporting them by growing awareness. While our market shares and household penetration levels today are relatively modest in the context of these multibillion-dollar categories, we see material growth opportunities for the Rayos franchise in these and other categories for years to come. Turning to NUSA, Our yogurt business once again grew consumption mid-single digits on a dollar basis, with pricing and mix driving the growth. Much like the broader yogurt category, we are increasingly benefiting from a greater shift towards larger sizes as consumers seek out value. We will continue to focus on fundamentals to ensure we grow in this large and competitive category while providing new and delicious offerings for consumers. Lastly, on Birchbenders, sales trends were largely as expected. Our teams are working hard to improve performance as we continue to experience challenge trends in the core keto offerings. Shifting the supply chain, performance across manufacturing and logistics operations saw a marked improvement versus last quarter, with service rates approaching target levels on sauce, yogurt, and frozen. On inflation, although we are starting to see cost increases moderate in some areas of our business, we continue to realize elevated inflationary pressures across our cost basket, most notably in dairy, glass, and pasture inflation from our North American co-packers. To offset these costs, in addition to our pricing actions taken to date, we are executing against our full suite of productivity projects. including the automation of multiple packaging lines in our frozen plant in Austin, internalization of fruit prep at our Noosa plant in Colorado, and other process improvements across our entire network. These actions will help improve our margins over time. And 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 very pleased with our top-line growth year-to-date and confident in our growth trajectory. As a result, we are once again raising our sales guidance for the year by $15 million, or two points of growth, at both ends of the range. We are excited by what we have achieved so far this year and what the future holds for our portfolio of brands, led by Reyes on the path to $1 billion of annual net sales. While we will not be offering any concrete guidance for 2023 today, know that we will remain focused on capitalizing on the opportunities to drive household penetration by expanding distribution and awareness, and we will continue to make strategic investments from a position of strength, spending behind sales, marketing, innovation, supply chain, and other necessary capabilities to drive growth for our one-of-a-kind brands, even in the face of a challenging cost environment. I will now hand it over to Chris for more details on the quarter and our updated perspective to year end.

Thank you, Todd, and good afternoon, everyone. Before I begin, I also would like to echo Todd's comments and compliment our team and their execution in this challenging environment. Third quarter total net sales were $208.9 million, a $30.2 million or 16.9% increase over the prior year period. This growth was entirely organic and was driven largely by price, up 14.4% in the quarter. Our volume grew 2.5% in the quarter, inclusive of a negative 8-point headwind due to lapping two prior year volume-driving events for the Noosa and Michelangelo brands, which we did not repeat this quarter. Excluding Birchbenders, our consolidated organic growth would have been 20.8%. Our core categories, Sauce, Yogurt, and Frozen, drove our growth in the quarter. And at the brand level, Rayo's remained the driving force behind our growth, increasing net sales 33.7% driven by Sauce. On a year-to-date basis, the total Rayos franchise has grown 31%, and importantly, this is in line with consumption. When comparing total Rayos franchise net sales to 2019, the brand grew at a three-year CAGR of 50%, reflecting our ability to sustain leading volume-driven growth rates. Beyond Rayos, Musa net sales grew 2.4%, Michelangelo's declined 3.7%, Adverse vendors declined moderated, as expected. Moving to the rest of the P&L, adjusted gross profit of $62.3 million increased $12.2 million, or 24.2% year-over-year, benefiting from our strong top line results. Adjusted gross margins were 29.8% of net sales for the quarter, reflecting a 170 basis point increase versus the prior year period, and another quarter of sequential progress towards improving our margins. Pricing, increased productivity savings, and mix were tailwinds, helping to offset inflation, which is in line with our forecast for the quarter in the low double-digit range. The year-over-year gains were also balanced by lapping higher shipping and port congestion-related costs, Adjusted operating expenses, inclusive of marketing and selling, of $35.8 million increased by $8.7 million, or 32.3% over the prior year period, as we continue to invest behind our talent, brands, and capabilities to drive sustainable growth for the long term. Similar to last quarter, we prioritized our growth investments defined as marketing plus R&D, The total spend in the third quarter up nearly 20% versus last year, and up over 32% versus the second quarter of 2022, which itself was also up materially on a year-over-year basis. OpEx growth also included public company costs, which were not present in the prior year period when the company was private. Adjusted EBITDA at $29.5 million increased $3.7 million or 14.5% versus Q3 2021, while adjusted EBITDA margin was 14.1% versus 14.4% in the prior year period. Net income for the quarter was $1.5 million or $0.01 per diluted share compared to a loss of $4.6 million or negative $0.06 per diluted share in the prior year period. Adjusted net income was $14.3 million and adjusted EPS was $0.14 per diluted share compared to $7.1 million and $0.10 per diluted share in Q3 2021. Due to the timing of our IPO in September 2021, our fully diluted share count of 101.6 million shares in the quarter was 37% higher than the prior year period. It represented a five cent headwind to our Q3 2022 adjusted EPS. At the end of the third quarter, cash and cash equivalents were 81.9 million, and total debt was $482.2 million, resulting in a net debt to adjusted EBITDA ratio of 3.7 times. As a reminder, last quarter we entered into an interest rate hedge that caps the LIBOR rate for half of our debt at 4%. I would now like to discuss our updated outlook for the balance of the year and some of the underlying assumptions that support it. On the top line, we are raising our fiscal 2022 guidance to $840 to $850 million, reflecting approximately 17% to 18% growth. This compares to our prior guidance of $825 to $835 million for 15% to 16% growth. Our updated guidance reflects 16.3% organic sales growth year-to-date, and our confidence in a strong finish to the year. Remember that this guidance includes the benefit of the 53rd meeting Q4. Further, this guidance also invents the approved supply chain performance that Todd spoke about a moment ago, which has put us in a strong inventory position as we head into Q4. Lastly, we continue to assume some normalization of elasticities into year end. Regarding profitability, we are maintaining our full-year adjusted EBITDA range of $116 to $122 million with guidance at the lower end. For the fourth quarter, we will begin to lap our first list price increase. In addition, relative to the third quarter, we are expecting a smaller mixed benefit as well as slightly higher pass-through costs from our North American co-packers. Finally, I want to reiterate that we will continue to invest in this business to enable the multi-year growth opportunity that we see ahead. This includes supporting our brands, people, and capabilities. These investments align with our primary focus on growth for our portfolio of one-of-a-kind brands with a particular emphasis on taking Raya to $1 billion. From a balance sheet perspective, we continue to expect that our leverage will be below 3.5 times at year end. For a summary of these and other guidance items, please see slide 10 in our earnings slide deck. Let me now turn the call back over to Todd for some final remarks.

Thanks, Chris. We are proud of what we have achieved in the first nine months of 2022. We generated 16% plus organic growth, materially raised our top-line guidance multiple times and maintained our EBITDA range despite double-digit inflation and numerous supply chain disruptions. Further, we have stepped up our investments behind our brands, talent, supply chain, and capabilities, all with an eye towards driving growth well into the future. As we have said many times in the past, While sales growth is our top priority, we are also working tirelessly to improve our margins and deliver 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 on your telephone. Please stand by while we compile the Q&A roster. Now, first question coming from the line of Andrew Lazar with Barclays. Your line is open.

Great. Thanks so much. Appreciate it. Maybe to start off, I think on the second quarter call, you had talked about expecting pricing to be pretty close to what it was in 3Q, pretty close to what it was in 2Q, or around 9% or so. It obviously came in much stronger than that. So I was hoping first just to get a sense of what the differential was or what came in so much stronger on pricing than you had thought.

Hey, Andrew, I'm going to pass it on to Todd, but good to hear from you. I'm going to pass that to Chris.

Thanks, Todd.

Thanks, Andrew.

Yeah, in Q3, we saw really higher than expected pricing, primarily from mixed, as we saw, way above 30% growth. That drove the majority of the upside on pricing. And we just saw pricing flow through better than expected across the board. So we talked about in Q2 that we were not repeating a couple of events from the prior year, so we knew it would be elevated higher than we saw in Q2. We don't anticipate Q4 being at that same level as we just made it back to our normalized promotional cadence in the quarter. But mix was a big driver in Q3, not only for pricing, but also for our growth margins.

Got it. And that was, I guess, the next question, which is, I think you also had mentioned that you were looking for sequential margin improvement in 4Q, but that gross margins would still be down year over year. Does that still hold, even though your third quarter gross margins came in, again, far better than you had thought?

Well, we were very pleased with our margin in Q3, 170 points improvement year over year, 180 points better than Q2. That was a bit of a surprising and really driven by mixed primarily, and then that flow through of higher pricing across the board. We don't anticipate that same level in Q4. Q4 is a higher promotional quarter for us as we turn into the winter months. We do promote more. We do anticipate good, solid margins. Not the same level we saw in Q3. as we're also going to be a little bit higher. We talked about high single- or double-digit inflation coming across the back half of the year. We mentioned some North American co-packers passing across some additional costs. That will be reflected more in Q4 than it was in Q3. So we see good, strong margins, but not at the same level as we saw in Q3. Great. Thank you so much. Thank you. Thanks, Andrew.

Thank you. One moment, please, for our next question. Our next question coming from the lineup, Jason Inglis with Goldman Sachs. Your line is open.

Hey, guys. Thanks for calling me in, and good afternoon. Hey, Jason. A quick question on your core business with Rayo Sauces. We've been tracking the market share throughout the course of the year, and there's been some edits and flows. But right now, if we look at yours, whether it be your volume share or dollar share, no dollar share. you're tracking a bit below where you were when you entered this year, raising concerns that you could actually flip into declines. Now, recently, you started to pick up off the lows. I guess the other question is, A, what's driving the recent sequential improvement, and how or should we be expecting you to be able to continue to drive that higher and sustain market share growth as we enter next year?

Hey, Jason, it's Todd. So, look, headline, we have absolutely no concern that the growth on Rayo's sauce, you know, is going to slow. I mean, we've got total Rayo's franchises want to, you know, reinforce just past a half a billion dollars LTM, seven times larger than when we acquired it, up 30% versus prior year. You've got sauce dollar consumption for the quarter up 24%. and unit consumption up 14.7%. So, you know, what are those opportunities? And actually on the, you know, we posted online, there's a slide seven that, you know, talks about the different opportunities for the business, you know, on the deck. But a couple of those things are, you know, we're in mid-teens today in regards to, you know, share, but you look at the category leader at 20%. We generate two times more dollars per TDP, 223, and you look at everybody else, like highest, like 130. Number of items, 12 versus the category. And our penetration, although up significantly versus prior year, is still only 12, and you've got the market leaders above 30. You know, we grew units, we grew dollars, you know, we got household penetration, you know, up significantly. So, you know, look, share is going to bounce around going back and forth. It's like, honestly, I don't mean to be flip, but we... We can't control some of the elements that lead to the arithmetic behind what our share is. What we can control is growing this brand at the rates we are today and the rates we are going forward. So we are controlling. The significant amount of investment that we're putting behind the brand from a TDP standpoint, promoting it effectively, making sure we're gaining more and more distribution. So you see velocity up for the quarter. You see distribution in TDPs up for the quarter. And actually, if you look at the two fastest-growing brands, I'm putting in quotes, Rayo's and Private Label. Those are the two fastest growing of all the brands. And Rao's and Private Label, you know, grew across all generational cohorts and all income cohorts, again, for the second quarter in a row. Rao sourced no volume from Private Label, zero. But Private Label is growing almost the same rates as Rao's. private label is sourcing significantly from mainstream. Why? Because there's a lot of great private label sauce out there that's a perfect analog for mainstream sauces. There is not a private label sauce that's an analog for RAO. private label growing robustly, Rao's growing robustly. Consumers are cutting back from out-of-home dining and spending in chunks right now, and they want great restaurant-quality cuisine, and they're buying Rao's. So, you know, what we can control is keeping that Rao's franchise rocking, and we are with sauce, and, you know, as we talked about, we're growing the other beachheads, you know, as well, dry pasta, soup, and frozen.

Good stuff. Thanks for the context. I'll pass it on.

Awesome.

Thank you. One moment, please, for our next question. And our next question coming from the line of Nourie Naughton with J.P. Morgan. Your line is open.

Hi. Good afternoon. Hey, Nourie. Hi. I just had a question, actually following up on Jason's question, but more about just the soft and frozen in particular. How are these products performing relative to what your internal plans were when they were launched. And in your view, what are the main playbook milestones that you'd need to hit for penetration rates to really begin to accelerate from here?

Sure. Hey, it's Todd and Nora. Good to be talking to you. So right now, let's just talk soup pasta frozen. And I know you specifically asked about frozen. I'll be really honest. I mean, did we expect the Rios franchise today to be over half a billion dollars growing at 30%? You know, in 2017, no. But we certainly understand why it's growing, and it's growing fast. And for that reason, we didn't expect that we would have created, you know, a $100 million business combined and growing at 50% of frozen pasta and soup. And all those businesses... Our soup brand, our Rayo's pasta brand, our Rayo's frozen brand is growing faster than any other leading brand. Call it top five, top seven. It's in the category today. And they are all, honestly, exceeding expectations from the year when we launched them, but we certainly are taking them for real now, and we are doing everything we can to make sure we're growing robustly going forward. Now, you ask a really good question because All of those businesses, and it's an enormous opportunity, are less than 2% household penetration. So you've got, you know, our soup business is less than a 2% household penetration. You've got our dry pasta business almost at a 2. And you've got our frozen business at a 2. So it's 2 or less from a household penetration standpoint. But what have we done to get it from 0 to 2 in such a short amount of time is You know, our Sobos playbook is pretty simple. We have a great selling organization. We focus on banner penetration, so ACV, and item penetration, TDPs. And, you know, we basically make sure that we've got a great tasting product, the right package, and we get it in as many stores, many items, the right assortment as we can. And then right when we get that right level of distribution, we just really, you know, drive it. significant awareness with our advertising and marketing spend that we've increased significantly year over year over year. And you can see how much we increased our marketing and R&D spend just in Q3 alone, which is also a differentiating factor. You see a lot of peer companies cutting back on that. We are pedal to the metal on increased investment. So How do we double that to a 4% level of penetration? We're just going to keep adding the right items in the right stores, adding line extensions to those brands, making sure that we're advertising and supporting them effectively with marketing and awareness. You know, we expect them to continue to keep growing into the future along with our sauce business and, quite honestly, along with new category entrants that we expect over the next several years as well.

Great. Thank you for that. And that's my follow up. I know it's a bit early, but perhaps you could share how you're thinking about cost inflation as we go into 2023. What are some of the high level puts and takes and how much you might have already been able to walk in? Thank you.

Very good. You know, we're not going to talk to you specifically about 2023 today. And what we are very confident in is certainly the continued momentum we have on the top line as Todd just kind of laid out. Then on the cost side, for what we have visibility to today, we feel confident in the plans that we've implemented or will be implementing across our productivity platforms, value engineering and packaging, as well as our net revenue management as we move forward. So for where our visibility stands today, we feel we've got that in hand for 2023. And we are still seeing the same pressures that you're hearing about really across the board. Could be agro issues one day. We are starting to see relief on transatlantic shipping, which is positive for us. As we balance across all of those, we have visibility, too, that we still have in our plan. We don't hedge. So we don't have a lot of coverage right now for 2023. We're entering into some agreements on what we buy a quarter out or a couple quarters out of some of our specific packaging and even some of our raw materials. We're fully covered basically for 2022. We're going to still open on things like dairy and chicken and meat, but basically covered for Q4 2022, entering into our agreements now for 2023.

Got it. Thank you.

Okay, Nora. Thank you.

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

Great. Thank you so much for taking our questions. If we exclude the promotional event, your sales would have been up roughly 25% in the quarter. Your guidance assumes a sequential slowdown of about five points or so in the fourth quarter, even though you're lapping a much easier comp Are you seeing anything in the marketplace right now that suggests there would be a slowdown?

No, we're not. But as we have talked about in our prior, you know, calls, as we're approaching Q4 and as we put pricing in place mid-Q3 on Rayo's couple of items, we're assuming a normalization of elasticities as we move forward. You know, we're still in that uncertain environment. You know, Todd may have mentioned we are seeing growth across all demographics, all income levels, but we're still modeling and assuming that there's going to be a return to more normalized elasticities going forward. If that doesn't occur, then I would suggest there could be upside to those numbers, but that's going to get baked into the guidance that we provided.

That's very helpful. Appreciate that. And then as my follow-up, you noted the Raos franchise is on path to deliver over a billion dollars in sales. Can you just remind us and walk us through the building block to get there? And are you concerned at all that the Raos franchise growth will cannibalize Michelangelo's and Frozen? Thank you. Okay.

It's Todd. So, no, we're I mean, we're not concerned about cannibalization. Actually, we've seen in accounts where both of those brands are, it's been quite, you know, incremental. Our combined share now of Michelangelo's Oreos frozen is about, you know, a 2-2, you know, up from call it roughly a 1.5 when it was just, in the Michelangelo's franchise before frozen. So we've seen additive. We see household penetration up. The combined business is significantly greater than it was just Michelangelo. So, no, I mean, Michelangelo has a real reason for being. It's priced premium to the market leader, but Rayo's is priced super premium to the market leader. And they're differentiated. There's items. on Michelangelo's, like eggplant parmesan that's different than some of the items on Rao's, such as meatballs. So they're differentiated, and we don't see that as an issue. Now, in terms of your bigger question, what are the building blocks, number one is sauce. Sauce is still the majority of our Rao's franchise today, even though we've created this sort of enormous – other beachhead of non-sauce businesses that I just talked about. So the number one building block is basically continuing to grow sauce and taking it from called a roughly a 15 share today to a 25 share. I think you've seen in previous slides that we've provided. Rayo's is greater than a 20 share in a lot of accounts today. And that correlates to just having the right number of items on shelves. So we see a clear path to getting Rao's to a 2025 share. That's building block number one. Building block number two is continuing to grow the three beachheads that we're in. And those are dry pasta, soup, and frozen for reasons that I previously articulated. We will be launching between now and the time we achieve that milestone into at least one, maybe two other categories. So that's another building block as well. And as I've talked in previous Pauls, You know, there are some very, very close and international, okay, non-complex, easy, international. For example, Canada, where we sell very robustly but we're undershared, and that is another, you know, sort of lever to blow past $1 billion in net sales for the rail franchise. So those would be the building blocks.

Great. Thank you so much. I'll pass it on. Thanks a lot.

Great to hear from you.

Thank you. And our next question coming from the line up, Michael Laver with .

Good evening. Thank you. Just wanted to come back. Hey, Michael. I want to start with the long-term opportunity, and you pointed out slide seven. There's a lot of ingredients there for a compelling sales story to the trade. Just in terms of getting more items on the shelf, are you getting any pushback from retailers for sort of near-term, driven by macro uncertainty? Is there any more hesitation to do resets or to change the mix on the shelf, or is it still sort of business as usual at the moment?

No, I mean, I'd say, hey, Michael, it's Todd. Good to hear from you. No, I think, I mean, if we... I mean, I'm looking literally now at the, like, latest numbers through nine. We're still – we've consistently grown distribution on this business for every quarter since we've owned it. And that's ranging from double digits to, you know, high single digits. But we're growing distribution now high single digits for this last quarter, 52, 26 year-to-date, 13-week, four-week periods. We still have significant opportunity in a variety of our retailers, you know, for that, so we're not seeing pushback. But, you know, I think as I talked about before, it's not like we're the objective is to go in and to grab nine items, you know, at once. I mean, we look, you know, to grab, you know, two or three items where we should. Retailers have been very receptive. Some of the areas that I've talked about before, one of my favorite statistics is that the The amount of profit that a retailer makes on a jar of Rao's 24-ounce sauce is basically equal to what they sell a jar of the market leader for. So the shelf price of the market leader is the profit that they make from a jar of Rao's. We have been... of the top, call it seven brands, the fastest growing for the last five years. So if I can add items that are going to spin in the top three quintiles, and 75% of our items spin in quintiles one or two, all the rest spin in third quintile. So if I can add fast-spinning items that drive my category. I think I've mentioned before, in at least two of the years, I need to look back, maybe three, we've driven almost 100% of the category growth in sauce. So, you know, and that's why you see them not only adding rails, but other, you know, premium players as well, which I think is great for the category. It can train the consumer on, you know, paying more for, you know, slowly simmered, basically kettle-made sauce, and it's a real boom for Rayo. So we have seen no headwind in regards to gaining distribution for Rayo sauce, and we don't foresee that in the future, given the role that it plays for our customers.

That's a great color. And then Just to follow up on some of the composition of the fourth quarter, I think the mix and price lift in 3Q you unpacked pretty well. As far as how that looks sequentially coming into 4Q, would 4Q's price mix maybe be similar to the 9 or slightly more percent in 2Q? Is that kind of a good starting point for us to think about it? You touched on some of the ways gross margin will be impacted sequentially. I just want to maybe at least clarify, you were referring to gross margin, not EBITDA margins. Could that be up sequentially versus 3Q?

Yeah, this is Chris. So, as you think about Q4, you know, what you said is exactly right. We would anticipate, you know, pricing more in that very low double-digit area, similar to what we saw in Q2. And then we return on the volumes up to mid-single digits. That would be the makeup of Q4 top line. Okay. On the gross margin we talked about, I don't anticipate that same level of mix upside as well that we saw in Q3, along with the pricing upside. Though I do anticipate our EBITDA margin, I do anticipate sequential improvement there versus a year ago and versus Q3.

Okay, great. Thanks so much.

Thanks, Michael.

Thank you. One moment for our next question. And our next question coming from the lineup, Brian Holland with Cohen, Yolanda Philpin.

Good afternoon. I guess I wanted to ask about what we're seeing in, you know, you talked about lapping pricing in 4Q. Obviously, we're going to see some sequential gross margin pressure, I guess, off of a, you know, really strong 3Q or, you know, relative to expectations. we've heard from several food companies about taking price um you guys are lapping pricing i didn't hear anything about taking any incremental pricing any reason why you would hesitate on taking another round of price action just in the context of obviously where we're seeing your gross margin trend right now year on year uh year to date and what's implied for 4q um and also just given you know you're one of the more you have one of the more inelastic portfolios that certainly we track looking at the scanner data. So with that as context, just understanding how you're thinking about pricing and your right to price from here.

Yeah, so today we've been very successful executing a couple of rounds of pricing on Array of Sauce and have taken pretty strong pricing across all of our brands in our portfolio. As we I think going forward, considering the uncertainty of the economic situation, you know, consumers are not there strapped for cash in 2023. We're taking, you know, a prudent approach to how we think about pricing going forward. As I mentioned earlier, we believe the combination of pricing that we have in the market now, along with the productivity, really a tailwind we have moving forward, given some delays that we had in productivity initiatives here in 2022, that we have adequate tailwind to take us into 2023 based on the visibility that we have on inflation. So we also anticipate the pricing windows are getting tighter at retail, and we're taking that into account as well. But we're pleased now with our relative pricing position as we think about our net revenue management, price gaps, and things like that. We feel like we're in a good position, really focused on driving that top line, maintaining volume growth, very important to us that we grow our unit sales in growing household penetration, you know, across our key brands. So, we take all that into effect, into consideration, and we actually base our pricing decisions on it. As I mentioned, we're very pleased with the pricing value in the marketplace currently.

Appreciate the color, Chris. And then, you know, maybe following on to Mike Lavery's question asked in a slightly different way. You know, a lot of your runway or a fair amount of your runway is sort of tied to the incrementality of this innovation pipeline, which looks really robust. I'm curious how retailers are responding in this environment to your new product launches. So maybe this is Entree to ask about, you know, the noose of frozen gelato, which I appreciate is small today. But just wondering, you know, how customers are reacting to your innovation, how receptive they are in this environment, and how the consumers are responding to maybe trialing new products but premium price products. Awesome.

Hey, Brian, how are you doing? I think, didn't you wait in line like six times at the last show to get a taste of that gelato?

No comment. They lost count.

Okay. Hey, how are you doing? It's Todd. Before I talk about gelato, I do want to reinforce, and I don't think this is what you were implying from the thing. Well, I know we're saying, I know your point about being innovation dependent, but Soup and dry pasta were both launched four years ago, and they're both growing. Basically, soup is up 20, just in the last quarter, up 26%, units up to 18, velocity up 20, fifth largest brand growing household penetration. Dry pasta launched over four years ago. Up 50%, fastest-growing brand of the top five, as is soup. Units up 34%, velocity 56%. And Frozen is in its fourth year now, launched three years ago. And dollars up 55, units up 50. So I'm just saying from those, just great examples of, yes, they were innovation four years ago, but they are seated in the marketplace doing extremely well. We're doing everything we can to continue to grow, you know, those businesses today. Yes, there will be new beachheads. You know, in the future, and we test those very rigorously, but I do want to say, you know, sauce and soup and pasta and frozen, which combined to now equal a $515 million LTM business growing at 30%, are all pretty well established. Now, in gelato, selling better than expected, as we talked. As a matter of fact, the sell-in that we had, ACV, not only in regards to what we've delivered, but others in the marketplace, some of the quickest ACV that we've seen on an item, continue to build velocity. We're launching some incremental items this year. So, you know, it's on shelf, tastes delicious, but it's early on. So it's been in the marketplace. you know really started showing up in shelf and q2 so uh we're pleased so far and uh and more to come behind gelato yeah did i address uh what you're asking prior to having to take in a different direction no no todd that's fine um i appreciate that color

Thank you. One moment for our next question. Our next question coming from the line of Peter Galba with Bank of America. Your line is open.

Hey, guys. Good afternoon. Thanks for taking the question. You bet. Chris, maybe just to start, and I know you're not giving 23 guidance, but can you just remind us how you contract for some of your inputs? So, I mean, if you're seeing... you know, deflation and deflation and some of the, you know, the major proteins and still seeing inflation and things like dairy, just how far out when you do contract, does it, does it kind of go, you know, for, for next year, is it a three month window or can you kind of contract for the full year in one shot?

Yeah, sure. And it really varies by, by category. There, there are some, some items that we will contract out a year. So for instance, Tomatoes, tomatoes coming out of California that we've locked in a whole year in the crop season. We locked that in a few months ago. So we know exactly what our domestic tomato costs will be for the balance of 2023 through the next harvest. Then there are items like dry or wet eggs that we'll contract out for a year, sugar, things like that where the price looks you know, advantageous or works within our cost structure, we'll go a year out. And we have done so. There are other items that things like cheese, butter, we may go, you know, three to six months out. And we have done that in the past. And we're looking at those agreements right now for 2023. Milk is an example of something we don't hedge at all. So we're paying kind of the monthly FDA rates that are published every month. Things like resin, diesel will actually be on a variabilized rate, and we typically pay for like the quarter, the average price for the quarter of the prior quarter will flow through. So all of our, whether it's packaging or, you know, raw input, We treat each one differently, and we do try to, you know, take advantage where we can and lock in prices. Obviously, that then helps us lock in pricing, you know, and the other market-driving activities that we would anticipate as we're managing through our plan. So it's a mix that will build across the year. We always are forward-bought on, you know, some level of our input costs.

Great. No, that's very helpful. And maybe just as a follow-up, Todd, you know, there's been a couple of questions and obviously some headlines just around, you know, European natural gas prices and obviously your large co-packer in Italy, I would think, uses a fair amount of natural gas. So just kind of how you're thinking about that or working through that with them as we get towards the winter months and into next year. Thanks very much, guys.

Yeah, you bet. So, yeah, absolutely. Our Italy-based manufacturer, La Regina, produces the vast majority of our sauce. A great partner for us. They've grown with us from whatever $60, $70 million business we bought it to over $500 million today. They've been willing to make the investments at that plant to drive capacity, automate, and cost savings along the way. We talk to them daily. They feel they're in a very good position on the reserves that they have in place to run their plants, primarily gas and hydro-based production. They have Italy as a country, as well, has done a very good job of diversifying where they acquire their gas from and other types of energy. So we feel, they feel that they're in a good position now. Yes, costs are up. Then we bake that into our projections as well. But we're more confident in the ability to continue to supply to our, you know, our very high growth rates. In addition, we are at a very strong inventory position today. We've been running the plants very aggressively and we're entering into Q4 and we'll exit here at a great inventory position. And then finally, we have the Alba plant down in Georgia, which will be capable of producing up to 30% of our requirements, you know, on top of what we can produce in Italy. So with that, we feel like we've got ourselves well covered, and we'll continue to make the, you know, make the adjustments and the plans we need to ensure we can meet that, you know, what we're seeing is a 30-plus percent growth rate around salt.

And the train's coming in.

One more for our next question. And our next question coming from the line of Robert Moscow with Credit Suisse. Your line is open.

Hi, thanks. Maybe this has been asked already, but I was wondering why you chose not to repeat the promotion that you cited the prior year and caused the eight-point volume hit. And maybe more broadly speaking, Is your promotional activity down a lot this year from an overall perspective, or does it all kind of even out when you go quarter by quarter?

Yeah, no, very good. On the first question specifically on, you know, why not repeat the event, you may recall, if you go back to prior earnings calls, we had some capacity, some service issues specifically on Michelangelo's and our pro-dollar trade business. As we worked across Q1, Omicron hit early. If I recall, we had a tornado hit our pasta plant, our third-party pasta plant. So we knew we were going to be up against some capacity constraints as we were going to be managing across Q2 and Q3. In fact, we then canceled basically all of our frozen promotional events in Q2 because of that supply and the supply challenges. We did then exit Q2 in a much better position. And we put those promotions back into the marketplace in Q3. In fact, on frozen, you know, very pleased with our consumption results on the combination of Rao's and Michelangelo's frozen, nearly 20% growth in consumption. during a quarter where our shipments for Michelangelo were below a year ago because of not repeating the event. But really that capacity constraint and really just the efficiency of the program itself led us to the path to make that choice. And then on a general question on promotion, We've maintained a lot of the elements of our promotional plans that we would have had in place, you know, pre-COVID, during COVID, and post-COVID. We have taken, as we've taken lift prices, there are areas where we've risen our key promotional price point. There are situations where we might have reduced some frequency. We may have reduced some duration of events. But overall, as a general statement, we've been successful maintaining a good, strong level of in-store promotion, while, as Todd mentioned, we've elevated our investments in out-of-store marketing to support the brand, even as our price points are increasing. We really see that continuing into Q4 and beyond. We got good, strong, we get great support from our retailers, get good quality merchandising, and even if the situations were raising our debt, we are still seeing very nice lifts on those promotions. So we don't see a big, you know, downtick and then uptick in our promotional strategy. It really is the same basic strategy looking backwards as well as looking forward.

Okay. Thank you.

Thanks, Rob. Thanks, Rob.

Thank you. One moment for our next question. I'm showing we have a follow-up question from Brian Holland with Cowan. Your line is open.

Yeah, thanks. Appreciate you letting me sneak a follow-up back in here. But maybe just, you know, given everything that we've talked about today, all the puts and takes, obviously your top line continues to perform as it has. um significant momentum but also makes the comps incrementally tougher as we go forward and then you know obviously the puts and takes uh below the top line inflation etc productivity can you help us have us help give us a sense of as we look into 2023 whether that shapes up as you're seeing it right now as an on algorithm year i think your guidance at the time the IPO was sort of high single digits, top line, low double digits, EBITDA. I'm just wondering if you feel like you've got the levers in place to drive that next year.

Yeah, I mean, simply put, Brian, first of all, good to have you back. Boomerang, boomerang question back into the mix. But yeah, we feel we've got the levers in place to have an all-on algorithm here in 2023. I mean, I won't say any more than that, but I will basically assertively Say yes.

That's as succinct as you need it to be. I appreciate it, Todd. Thank you.

You got it.

Great. So, look, thanks again, everyone, for joining us, showing an interest in the Sovos brand's story. We look forward to engaging with many of you in the coming weeks. Please feel free to reach out to Josh for follow-up questions. Until then, have a great evening and take care. Thanks a lot, everyone. Thanks a lot.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect. Good day.