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spk02: And welcome to Sovel's Brand's first quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Josh Lifkin, VP, Ambassador's Relations. Please go ahead.
spk08: Good afternoon, and thank you for joining us on Sobos Brand's first quarter 2023 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 April 1st, 2023, 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 Sobos Brand's actual results to differ materially from these forward-looking statements. Please remember the company undertakes no obligation to update or revise these forward-looking statements in the future. We will make a number of references to non-GAAP financial measures. We believe that these measures provide investors with useful perspective on the underlying growth trends of the business and have included in our earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures. Please note that all consumption data cited on today's call refers to dollar consumption on a total MULO basis as of the 13-week period ended April 2, 2023, and growth versus the prior year comparable period unless otherwise noted. And lastly, to avoid any confusion, for discussions pertaining to first quarter results and full fiscal 2023 guidance and growth expectations, organic net sales growth is calculated as net sales growth adjusted for acquisitions, divestitures, and the 53rd week in 2022. With that, I will now pass it to Todd.
spk03: Thanks, Josh. I will begin with the discussion of the exceptional performance we delivered this quarter. and that we continue to expect in future quarters, before turning it over to Chris to provide greater detail on our results and updated 2023 outlook. When we spoke to you in our last earnings call, we said that Q1 was off to a strong start, building on the robust fourth quarter. Today's results reflect sector-leading, volume-driven net sales and profit growth with meaningful margin expansion as a result of excellent operational execution. We have generated very strong momentum in the Rayos Mega Brand, which we expect to continue through the second quarter and balance of the year. Given our robust Q1 results and the continued momentum in our business, we are raising our guidance for net sales and adjusted EBITDA. Robust trends for the Rayos brand continued in Q1. Rao's grew net sales 38%, surpassing $600 million on an LTM basis, and for the first time ever achieved the number one dollar share in the food channel. The primary driver of this growth was the substantial gain in household penetration. Up 120 basis points versus Q4 for the total franchise, and up nearly 100 basis points for sauce. These gains represented the largest quarterly increase in household penetration in the last three years, benefiting from robust distribution growth, which was up 22% for sauce in the quarter, as well as higher brand awareness that was driven by a substantial increase in marketing. Recall that awareness grew 10 full percentage points to 58% in 2022. As a result, dollar consumption for the Rao's franchise grew 26% in the quarter. In sauce, we grew dollar consumption 22%, with units up 16%, both well ahead of the category. We also delivered sustained growth in frozen entrees, soup, and pasta. with combined retail dollars up 46% in the quarter, with each of these RAO's businesses growing distribution, household penetration, and dollars well ahead of their respective categories, resulting in market share gains. As we show on slide eight, we have made considerable progress over the last few years developing these highly incremental businesses. with our non-sauce Rao's branded products now accounting for nearly 20% of trailing 52-week measured retail sales. And our most recent non-sauce launch into frozen pizza, although still in the early stages, is delivering in line with our expectations, and we are excited about the retailer and consumer interest we have received thus far. Importantly, we continue to see massive white space for the Rayos franchise and Rayos Sauce in particular. While we did experience the largest quarterly household penetration gains in three years on Rayos Sauce, our household penetration is still less than half the level of several competitors, unit share is below 7%, and awareness of 58% is well below the greater than 90% levels for peers. and the brand remains highly under-penetrated and under-shared in each of its non-sauce businesses. With many more at-home eating occasions today than prior to COVID, and traffic trends at restaurants remaining under pressure from cautious consumers, we see a long runway to provide many more consumers the opportunity to enjoy a restaurant-quality meal at home with their family. Turning to Noosa, the brand grew net sales 8% in the quarter, driven by strong performance in non-measured channels. Our core eight-ounce offering grew dollar consumption 9%, outperforming the category on a unit basis and benefiting from distribution and velocity. We continue to invest meaningfully in the brand, highlighting its taste leadership and strengthening our assortment to drive higher trial and consumption. And we're building a pipeline of delicious innovation, most notably in core spoonable yogurt to capitalize on the brand's leadership and indulgence and appeal across all day parts. Michelangelo's net sales were down 6% in the quarter with the launch of sauce partially offsetting the proactive decision to exit certain lower margin frozen SKUs. We continue to drive growth in frozen with key grocery retail partners and are gaining distribution in new channels. Our total frozen entrees business, inclusive of Michelangelo's and Rayo's, grew net sales 10% in the quarter with consumption up 11%, which was ahead of the category. With healthy inventories, significantly better service and increased brand investments, we are growing distribution and velocity in our Sobos Brands frozen business and remain confident there is a long runway ahead for growth. Broadly speaking, our increased investments in marketing, R&D, selling and supply chain are driving robust sales and profit results for our company. In marketing and R&D, we increased our growth investments a combined 27% in the quarter following a high single-digit increase last year. For example, our new advertising campaign for Rao's called The Deliciousness of Slow highlights key points of what makes Rao's sauce so unique, including high-quality fresh ingredients, and the slow-simmered, open-kettle cooking process that results in our thick, delicious, one-of-a-kind sauce. We're leveraging a roster of celebrity fans and influencers who showcase the many ways they use Rao's products in their kitchens to their millions of followers. In R&D, we're leveraging our new Innovation Center of Excellence in Austin, Texas, to continue delivering delicious innovation and new products across the portfolio. In sales, we're adding more resources in customer-facing roles, we're strengthening our net revenue management capabilities, and we're investing in data to enable better decisions. And in our supply chain, Our investments in talent and capabilities are really paying off. I want to commend the team on their performance in the quarter, helping to deliver over 200 basis points of gross margin expansion and 30% adjusted EBITDA growth. Our inventories are healthy with service for sauce and yogurt consistently above target, and service for frozen is in a significantly better position than this time a year ago. In addition, our team is doing an excellent job proactively managing our input costs, and we are successfully delivering on a wide range of productivity initiatives within the four walls of our factories. We see our supply chain capabilities as an important enabler in sustaining our volume-led growth. In summary, we are very proud of our first quarter performance. We are executing well across the organization and investing in the business to drive continued household penetration gains. In fact, with household penetration for Sovos Brands now in excess of 25%, over one quarter of all households in the U.S. have a Sovos Brands product in their kitchen. And to reiterate, given the strong momentum in our business, we are raising our full year guidance. We will continue to invest in brand building, talent, and capabilities to support our sector-leading volume-led growth, and we'll take the right actions to support profitable growth for our business in the quarters and years ahead. Chris Hall will now discuss the details of our first quarter and our updated guidance for 2023.
spk09: Thank you, Todd, and good afternoon, everyone. First quarter total net sales, 252.8 million, a 42.9 million, or 20.4% increase over the prior year period. On an organic basis, growth of 26.7% was driven by 15.6% volume and 11.1% price. For the quarter, RAO's increased total net sales 37.7%. exceeding our expectations with continued robust growth across all categories and channels. We are adding distribution and driving improved velocities across nearly all of our categories. Our soft business in particular led our growth with performance in market accelerating across the quarter as a result of the big distribution and household penetration gains Todd spoke about earlier. Newstead had a good quarter of 8.2% year-over-year, with growth driven primarily by non-measured channels. We also successfully implemented a list price increase in February, which will provide a tailwind to the balance of the year. And Michelangelo declined 5.6%, primarily as a result of exiting certain channel-specific lower-margin SKUs. Total frozen entrees, including raised in Michelangelo, grew net sales 10.1%. Adjusted gross profit of $71.1 million increased $16.6 million, or 30.4% year-over-year, driven primarily by double-digit growth from volume and pricing. Adjusted gross margins were 28.1% for the quarter, up 210 basis points versus the prior year period. Margin expansion was a result of pricing and productivity, as well as favorable mix driven by higher soft growth. We also began to see favorability for certain key items in our raw material and packaging costs, as prices moderated more quickly than we had previously expected. As Todd noted earlier, we are very pleased with the progress we've made in operations and supply chain following the successful implementation of automation projects, particularly in our entrees plant, value engineering on our packaging, and other process and cost initiatives, including greatly improved operating systems. Along with these projects, we are confident that our pipeline of yet-to-be-implemented initiatives, such as optimizing our logistics network, enhancing partnerships with key suppliers, and leveraging our increased scale will help us take costs out, improve our margins, and free up capacity for further volume-led growth. Adjusted operating expenses of $38 million increased $8.4 million or 28.3% over the prior year period. This included a 26.9% increase in growth-oriented investments such as marketing and R&D, as well as increased support for our talent and capabilities. Adjusted EBITDA of $36 million increased $8.3 million or 30.2% year-over-year. Adjusted EBITDA margins were 14.2%, top 100 basis points versus the prior year period. Net income for the quarter was $7.8 million, or $0.08 per diluted share, compared to net income of $4.1 million, or $0.04 per diluted share, in the prior year period. Adjusted net income was $18.1 million and adjusted EPS was $0.18 per diluted share compared to adjusted net income of $13.8 million or $0.14 for diluted share in Q1 2022. At the end of the first quarter, cash and cash equivalents were $153.6 million and total debt was $482.7 million. our net leverage finished the quarter at 2.6 times trailing 12 months adjusted EBITDA compared to nearly four times post IPO, which was just 18 months ago. We continue to believe that a strong cash position gives us a lot of flexibility to invest in our business. Turning to our 2023 outlook, we are increasing our guidance for net sales and adjusted EBITDA. This primarily reflects our expectations for stronger performance from RAOs than we previously assumed, given the robust Q1 performance and our increased visibility to the balance of the year. For net sales, we are now guiding to a range of $935 to $955 million which implies full-year organic net sales growth of 14% to 17%. We expect volume to continue to be the primary driver of growth, led by higher household penetration as a result of RAIS distribution gains and continued velocity performance. We also continue to expect that elasticities will normalize, albeit at a slower pace than we previously anticipated. For adjusted EBITDA, we are now guiding to a range of 136 to 141 million for a 13 to 18% growth. The increase to our guidance largely reflects the flow through from higher expected net sales. We continue to expect moderate gross margin expansion for the full year with the benefit of pricing and productivity fully offsetting mid single digit inflation. We remain committed to investing to support our long-term growth plan, and our updated outlook incorporates high teen growth for combined marketing and R&D as we seek to capitalize on the massive white space opportunity ahead of us. From a phasing perspective, we continue to expect volume-led, double-digit organic net sales growth in both halves of the year. with growth in the remaining quarters expected to be consistently in the low double-digit to mid-teens range. We expect Q1 growth margins to be the lowest of the year with improved levels over the balance of 2023 as we move out of the heaviest promotional quarter for this year. For adjusted EBITDA, we continue to assume growth and margin expansion will be stronger in the first half. And finally, given the strong Q1 performance, we now expect the first half to account for a slightly higher percentage of four-year adjusted EBITDA than we previously assumed. For a summary of these and other annual guidance items, please see slide 14 in our earnings slide deck posted on our investor relation website. I will now hand it back to Todd for some final remarks.
spk03: Thanks, Chris. We are excited by how the year has begun. We have a tenacious, highly talented, and energetic team that is executing well. The Rayos brand is firing on all cylinders, adding households through distribution and awareness gains, and rapidly progressing on its path to $1 billion of annual net sales and beyond. And with strong operational performance, we are expanding our margins and driving bottom line growth, helping to maximize shareholder value. With that, Chris and I are now available to take your questions.
spk10: Operator?
spk02: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from Ken Goatman with JP Morgan. Please go ahead.
spk01: Hi, thank you. Two for me. My first one is, You mentioned that Rayos, the non-sauce business of Rayos, I think is now nearly 20% of your measured retail takeaway. Correct me if I'm wrong on that. And you also talked about how pizza is in line with your expectations. Could you maybe add a little bit of color or just an update, really, on how the other businesses are doing, be it soup or pasta or whatever you think is worth discussing? I'm just trying to get a sense for how each of them is progressing versus your expectations. Awesome.
spk03: Hey, Ken, how you doing? It's Todd.
spk01: Hey, Todd.
spk03: Yeah, so on the non-sauce businesses, you're right, 20%. We have some detail on that in the slides. But we couldn't be more pleased. So if you take total non-sauce, IRI, last 52 weeks, $130 million of retail sales, up 46% year on year. Kager, since 2020, 60% for that combined entity. And these businesses, you know, kind of been in market for a while. We launched Soup four years ago. It's now the number five dollar share. Number one or number two fastest-growing soup brand over this time period, meaning we've either been the fastest or the second fastest-growing 13-week period after 13-week period. We're shipping some new items now with more items to come at the end of the year. We're very, very pleased. Even in the L13 weeks, dollar sales up 20% year-on-year versus a flat category. TDP is up 7%, Velocity up 12% with a 2% dollar share. Pasta launched actually about six months before Soup. We're in our fifth year now. We're the number six brand. Grew more than 50% in 2022, but we only have a 1.3% share. Last 13 weeks, the number, bizarre even to say, up 73% year on year. 50 basis points, up 50 bps in share. Continue to build distribution with velocities also improving. We also have some new items, shipping more items to come. Distribution up 14% versus distribution in the category up 1%. Velocity up a very strong 52%. And then Frozen, our Rao's Frozen business, up 46%. in dollars versus 6% for the category. Distribution up 33%, velocity up 10%. So, you know, if you look at those three businesses, 20%, that share of total is growing, although, you know, sauce is growing robustly as, you know, as well. And then pizza, you know, the area to highlight with pizza is that, you know, it's early. So, you know, in the very early stages That said, initial sell-in is going according to plan. Commitments continue to build. We're generating very strong interest from across the accounts. And as we've discussed, we expect distribution to build as the year progresses, remain confident that our entry into this very large $7 billion frozen pizza category can be a very meaningful contributor to the brand in the years ahead, which will lead to further volume growth for the business. And I know this wasn't one of your questions, Ken, but I'll just sort of conclude in highlighting Yes, our results were up a very strong 27% in the quarter, but 16% volume versus down minus 5.2 for the peer average. And then if you look at the last 12 months, our volume up 13% versus volume down 4% for the peer average. So yes, our growth is high, but highly differentiated in the fact that it's volume-led when many of our peers are declining in volume and offsetting that with price.
spk01: Got it. Thank you for that. And then a quick follow up. I think your previous guidance was for volume to be up high single digits and then inflation to be up mid single digits. You know, I guess in light of the new top line guidance and your comment about, you know, maybe some costs mitigating a little bit faster than you had expected. Are those are those rangers or ranges rather still the proper ones to think about?
spk09: Hey, Ken, this is Chris. On volume, that's really what has driven us to take up our guidance. Pricing, pretty much the same range we had anticipated for the year, mid-single digits. But we're now in the kind of low double-digit range for volume. And that should be fairly consistent across the year. Pricing, of course, falls off across the year versus the pricing we saw flow through in Q1. But pricing as well as inflation are both mid-single digits across the year. But again, it's really the volume that's driving the upside to our prior guidance.
spk10: Thanks. I'll let it go there. Thank you.
spk02: Next question comes from Peter Galbo with Bank of America. Please go ahead.
spk05: Hey, Chris Todd. Thank you guys for taking the question.
spk10: Hey, Peter.
spk05: Hey, you know, mine are pretty quick. Just curious around, you know, the sales guidance. Obviously, you raised kind of by more than the beat relative to consensus on the quarter. And, you know, Todd, I think you talked, you know, at length about some of the factors that are driving that, and it's probably unique within packaged food. But just curious, feeling a few questions. If any of that, you know, raise as well is like a load-in factor for pizza sales, Just as you roll that out more nationally, if there's any way to dimension that, just would like a clarification there.
spk03: Sure. You know, none of that is driven by a loading factor in regards to, you know, our guidance, et cetera. I mean, really, really, I mean, you know, as you recall from the last quarter, I mean, I stated, you know, we were beginning, you know, really strong out of the gates as we began Q1, you know, following a very strong 2022 and Q4 trend. momentum, honestly, even stronger than expected. And what are some of those highlights? I mean, first, we knew household penetration would increase. We did not expect it to be the largest increase in household penetration in the last three years, up 240 bps a year ago on total and 110 bps on sauce. And the key driver there is just very healthy distribution gains, up 22% year-on-year TDPs, with more than one quarter of our top 20 accounts growing TDP double digits for a brand this size. Again, the total Rayos franchise is $618 million LTM. And it's highlighted in our slides. Again, this is the Rayos brand, 618 LTM of 40% year on year. So we look at distribution. We talked last call about awareness going from 48% to 58%. We don't get awareness on a quarterly basis, but given our investment levels, we certainly expect that to continue to increase. And it's about getting the brand into more households and you know we are only in sauce you know less than 13 percent of households so volume-led growth number one in the food channel non-sauce business is up 46 percent um the increased year-on-year profit growth inclusive of 27 marketing and r d spend et cetera et cetera so i highlight these to say that This has nothing to do with any one-time shipments, any pipeline fill. It's due to the momentum of the business, notably the very strong household penetration gains on Sauce and on the balance of the Ramos franchise.
spk05: Got it. Thanks for that, Todd. And then, Chris, just maybe a two-parter that should be relatively easy. I think you said the EBITDA percentage in the first half or second half would be higher versus previously. I think previously you had had like a 47-53 split. Just wanted to confirm that that was the prior split versus the new one. And then secondly, if we can just revisit the topic of debt pay down, you know, just given, you know, where rates are in borrowing on the term loan. Thanks very much, guys.
spk09: Yeah, no, you bet. So, yeah, as we talked at our last call, we mentioned 47% first half FIBA debt. Based on the strength of Q1, again, primarily top line driven for the reasons that Todd just gave us, but also good on gross margin expansion, over a couple hundred points above our expectations where it would come in. Productivity kicked in. We've got our automation up and running now down in our Austin plant, really delivering cost savings. Pricing was very strong for the quarter. So very strong gross margin quarter led to a higher EBITDA. So we're more, you know, it's not a dramatic shift in the phasing of EBITDA, but more like 48 to 48.5% H1 now is what we're seeing. And again, that assumes all of the things that we know today on inflation, which we mentioned a mid-single-digit number, higher in the first half, lower in the back half, but still both halves and basically mid-single digits. Pricing stronger in the first half as we overlap the actions from last year, plus some actions that we took in Q1 of this year. So that's our EBITDA phasing. And on cash, we're very pleased with the cash we continue to generate. We're very pleased with the strength of the balance sheet. But the cash that we have taken, we're holding on to that for now. We've talked in the past about our uses of cash, which are primarily to reinvest in the business, either to drive top line or to drive productivity. We don't anticipate paying any dividends. So, therefore, we really use that cash to give us optionality moving forward. That optionality could be, again, reinvesting in the business, could be for M&A down the road if there was an opportunity, but that optionality is very important to us. And I mentioned last time, I'll just reiterate, we are earning a nice return on the cash that we're hanging on to. So that will continue to be our strategy for now. We will deliver on a net debt basis, and we'll see what happens here over the next several months and what happens with interest rates, and then we'll decide how to optimize that cash.
spk05: Awesome. Very helpful.
spk10: Thanks, guys. You bet. Thanks, Peter.
spk02: Next question comes from John Anderson with William Blair. Please go ahead.
spk07: Hey, good afternoon, guys. Congrats on a great quarter. Hey, thanks, John. Yeah, I wanted to just come back to the mix of Rayo's, the total franchise now nearly 20% non-sauce. You know, how do you see that evolving both near term and longer term? Do you think that non-sauce portion of the business becomes a bigger part of the franchise in the next year, three years? And what are some of the margin implications of that mix overall? Are you seeing, you know, through your automation efforts and productivity efforts, the ability to kind of lift the margin structure of the non-sauce business? Because I know the sauce business is particularly strong. Thank you.
spk03: Hey, John. Sure. Let's talk about the, you know, we sort of – I have publicly talked about it in several of the other calls. You know, when we talk about RAOs to a billion dollars, we've talked about non-sauce being about 20% today. You know, we, I'd say roughly when we get to a, you know, to a billion dollars, sooner than later. Think of non-sauce, roughly 30%, sauce, roughly 70%. And we've sort of talked about that before. So non-sauce will be a larger percentage, but most importantly, sauce 70%, you know, percent of the business. And I'll just highlight again, you know, why that is. I mean, you've got household penetration of sauce at 13% versus a Two to three key peers above 30%. You've got unit share of sauce less than 7%. You've got the other two leading players with dollar share of 16%, unit share of 16% and 18% respectively. We're in the number two dollar share in Moolah. We are the number one dollar share for Q1 in food. But we're number seven in unit share. So it shows you the opportunities. Awareness, 58%, versus there's five brands in Sauce that have awareness above 90%. And then the distribution, we've talked about just average number of items of barely 14 versus several peers above 20. So that just shows you why Sauce is going to continue to be the key driver. And then I highlighted some of the opportunities and just the penetration. I mean, less than 3%. On our non-sauce categories, share 2% or less, et cetera, on his other businesses. So we've got very, very strong upside on both. And, you know, that's why I continue to emphasize that our number one priority is driving Rayos to a billion dollars, you know, as quickly as possible. I'll pass it to Chris in regards to your margin question, John.
spk09: Thanks, Todd. So as we could create new products and we engineer those P&Ls, to be at our overall company average on the gross margin line. We may be investing more early on in trade and slotting and things like that, but as the items seed in the marketplace, we anticipate those margins getting up to that company average We are investing money as we've spoken of at our plants in Austin to more fully automate that plant after all of our frozen, whether it's Michelangelo or Rams is produced. And so we're really starting to see now the impact of that and the cost savings, the efficiencies of those lines. And as we scale up the businesses, let's take pizza, for example, as that continues to grow, we will be advantaged on pricing it as it does grow and scale. So we may launch a product at a lower margin. As we enter new TAMs, the incrementality is such that it enables us to do that. We're getting new space, new sections of the store, new shoppers. So we'll take a tradeoff in the early days of incrementality, and then that margin will build up to the company average or better as we progress.
spk07: Very helpful. One quick follow-up. You mentioned that obviously the volume growth has been terrific, above plan and kind of a driver of the guidance raise for the year. You know, where are you from a capacity standpoint? I know you've added some capacity, I believe, at Alma. It sounds like automation is helping you. Do you have any pinch points with respect to capacity, or do you feel like the operations and the supply chain are set to kind of support the growth that you foresee with kind of normal CapEx levels over the next 12 to 18 months? Thanks.
spk03: Sure. Yeah, thanks, John. I would say minimal pinch points. You know, across our largest businesses, let's just talk, you know, total sauce. And I'll just compare it, because in Q1 of last year, we did have pinch points, less because of more supply constraints. If you recall, there was a fire at our dry pasta supplier that we used for frozen and a glass shortage due to the war in Ukraine, et cetera. There's a variety of aspects we talked about in our Q1 and Q2 call. So if we just take our fill rates as a measure of Basically, I mean, we're at or above target on our sauce business up 14 full percentage points service, Q1 versus Q1 year ago. On our total frozen business, up 30 full percentage points. This Q1 this year versus Q1 last year, it's a business that we had mentioned that we had some, when I say capacity, it's more around supply constraints that caused capacity issues that led to some service degradation. We have a best-in-class supply team, and we're constantly making sure that we're tenacious and nimble around ensuring that we have the right ingredients and packaging, et cetera. We've got a variety of capacity initiatives and productivity in the factories that we run for yogurt and frozen. And you're always going to have some pinch points here and there on the business, but to me, that's all part of running. a business that's growing as rapidly as ours. But right now, as I said in the prepared remarks, that we are at or above target on our sauce and yogurt business and significantly better than a year ago in approaching target on a frozen business for service.
spk09: I'll just add to that, with all the opening up for the sauce business, um with other additions that have made both in the in our co-packers um italy facility as well as alma we have ample uh growth available to us on the sauce business even down in alma we currently have operating with 10 kettles we we have the infrastructure there to double that quickly to 20 kettles. And over time, the facility has room that we can expand even further by just adding additional kettles. So we're in really good shape for the type of growth we've been seeing on the sauce business at 30% plus. And we're well, you know, good amount of capacity on the Noosa business as well in our plant in Colorado. Sounds great.
spk10: Thanks, Chuck. Thanks, John.
spk02: Next question comes from Matt Smith with Stiefel. Please go ahead.
spk04: Hi, good afternoon. Thanks for taking the question. Hey, Matt. Hey, Matt. I wanted to ask first about the impact from your latest round of pricing that went into effect in February. Was that just the Noosa business or was there or do you expect additional pricing in the Rao's brand? And the pricing actions to date have had very little impact on your volume performance and don't seem to be impacting household penetration gains. So are you seeing anything in the market with your latest round of pricing that indicates elasticities are picking up or does the outlook calling for softening of elasticity really just reflect a degree of caution given the environment?
spk09: No, thank you for that. Our pricing actions that we've taken over 2022 into Q1 of 2023, basically took two rounds of pricing on across every category, every brand. The latest being in February, a roughly 8% to 10% pricing on NUSA, depending on the SKU, and on our frozen portfolio. So that's hit the marketplace in February. And at this point, we have adequate pricing in the marketplace. or the inflation that we are anticipating. So we're pleased with where our pricing is. We're very pleased with the elasticities, which have continued to be better than historical and better than what we had modeled, especially on the Rayos business. That's a function of distribution gains, household gains, awareness gains. So we're getting lots of new buyers into that category, driving great volume growth. And the pricing has been well accepted by our retailers as well as our consumers. A little more elasticity on the yogurt front, where we did put our second round of pricing in in February. Across our first round of pricing, we also took up the depth of our promotions. and try to raise our actual promoter price points where our competitors really maintained existing prices when on deal. So we've seen a little bit of unit fall off there. We're going back, we're fine-tuning that. We will be returning, we have been, to some of our more effective volume-deriving use of promotions. And that's in the marketplace now. We're seeing a positive impact from that. So we do not anticipate further pricing at this point. We're always prepared to if the conditions warrant. But we're pleased our promotional strategies have been consistent across the year. Same promotion, we were roughly 40% on deal, for instance, in the sauce category and have been consistently over time. And we successfully raised the depth of those promotions Again, which is helping us drive through the 11% pricing that we saw in Q1. That will drop as we move across the year with the overlap of the action we took in 2022. But the key message is you have no further pricing anticipated and no real changes to our promotional strategy or cadence.
spk03: And the other area, Matt, hey, how you doing? This is Todd. It's just to highlight the idiosyncratic nature of, you know, RAOs as it relates to elasticity. I got to admit, idiosyncratic is not a word I use that often, but now use quite frequently. We talk about RAOs and the point being that you have, when you have the household penetration that we do, which is very low, let's just take sauce. 13%. So you've got 87% of households that have not purchased Rao's sauce. So at any given moment, and you increase household penetration at the slope and rate that we are, you know, in the sauce aisle, at the same time, you could have a consumer that potentially, oh, you know what, I'm not going to buy Rao's sauce today because of the price. And at the same time, a new consumer is going to be, wow, I haven't purchased Rao's in the past year, or maybe I've never purchased Rao's. I'm going to purchase it. So It's an element that I believe is unique. I think it will continue to be a tailwind for us as we go forward. I know a variety in the analyst community have talked about it, but I do think it helps sort of insulate us in an inelastic fashion as to the new households that are continually coming into the franchise. And when it's your first time, you're therefore, by definition, inelastic because you haven't purchased the brand yet. before, regardless of what REOs category you're purchasing into.
spk04: Thank you for that. And maybe just as a follow-up then, maybe a better measure to understand the impact of pricing would be your view of the ultimate, you know, achievable household penetration for REOs. Is that impacted by the degree of pricing you've had to take or perhaps the you're seeing a lower buy rate from some of these newer households folding into the brand or lower repeat rate reflecting the higher price point. Hey, Matt.
spk03: It's, well, yeah, I think you know my point. You know, a couple things. Let me just hit your first point. You know, I think we don't really think of the ceiling on household penetration necessarily as it relates to, you know, pricing per se, just because price gaps stayed relatively consistent, kind of like pre, post, et cetera. So, you know, we kind of, if you think of the market leaders, the mainstream market leaders, of which we're three times more expensive of, and, you know, you've got, you know, I'm talking the other tiers that are in the top three, you know, they're above 30%. So I think realistically, we're probably not going to make it to 30%. But I think it's totally, I mean, we have our sights on 20% household penetration for sauce at least. You know, we're at 13 today. I mean, that's a massive increase in share going from 13% to 20% as we think about it. And, you know, that 12.9% sauce penetration is, you know, right now we're about a $16 share, et cetera. So that's That's point number one. Point number two, we actually, Rayos, if you look over the past several years, we've had a significant increase in two-plus buying households. So we have the strongest repeat in the category. We have the very significant growth in households that buy two times or more, et cetera. The last thing I'll talk about, I've mentioned this before, we measure every quarter. Sort of a nine box grid when we look at three different generational cohorts, you know, Gen Z millennials at one end, boomers and seniors at the other end, and we look at lower, middle, upper class, and we're consistently the only brand that is growing in households, percent households buying in all nine boxes. and lower income households contributed to 23% of Rayo's total source growth in the last quarter. So we're, regardless of price, we're showing growth across all income cohorts and growing robustly in the lower and middle income cohorts. And the last point I will highlight, And I think I've talked about this before. I mean, if you go into the store now, while I know that Rao's is 3X times mainstream, we know that it's dramatically different sauce, right? It's whole tomatoes, slow simmered, simple, high quality ingredients versus, you know, paste, sugar, water, and dehydrated onions and canola oil in a jar. So, and people see it, they recognize the difference. But if you look at the price of Rao's right now and you walk a store, this is last 13 weeks, average prices of top selling items. One of the top-selling hot sauces that is very familiar, I'm not going to say the name, is a 12-ounce bottle more expensive than Rao's. A variety of the leading brands of cereal, more expensive than Rao's 24-ounce. A leading 36-ounce, several salad dressings, more expensive than Rao's. You know, in the end, I know I've talked before about feeding your family for $15 or less. I think a very relevant comparison is walk the store and look at the cost of a variety of items. And, you know, given the inflation in the store, Rayo's Sauce compares very, very favorably to a host of commonly purchased items in the food store.
spk04: That's great context, Todd. Thank you for that. I'll pass it on. You got it.
spk02: Next question comes from Cody Ross with UBS. Please go ahead.
spk00: Good afternoon. Thank you for taking our question. I just want to discuss your RAOS performance because it continues to outperform our expectations. Can you just discuss how it performed relative to your expectation? It sounds like it's higher. Where is the brand exceeding your expectation? What's driving that? Is it the distribution gains? It sounds like you knew some of that from last quarter.
spk03: is it the buy rate if you do just shed some light and then i have a follow-up sure hey cody it's uh it's todd yelp yeah i mean honestly the household penetration gains significantly greater than expected um largest um we didn't expect at this point in time you know given the size of the household penetration even though we're under penetrated did not expect the largest quarterly increase in household penetration in the last three years. So household penetration is one. And what's driving that, I mean, one is the distribution gains. We knew coming into the quarter that we had new distribution. 22% growth in TDPs, greater than we had expected at the time when all the pieces kind of came together. So that's robust. I think we'll see when we look back, awareness gains that we've grew a full 10 percentage points last year. You know, we're continuing to invest very heavily in the business. Total marketing and R&D was up 27% year-on-year, you know, off of a strong base. So, you know, we are investing heavily. And the majority of that goes to Rayo, secondarily Noosa. So I think those are some areas when you look at distribution growth, you look at awareness, velocity as we look at the sauce business is doing quite well when it's often difficult to keep velocity at a good level when you increase distribution as robustly as we are. And then as I talked about previously, I mean, we've got the soup business growing. This is a fifth year in soup, growing 20%, category flat. Pasta, fifth year, growing 73%, category 11, frozen up 46% in category of six. So, you know, we were expecting a strong quarter, but it's stronger than we had expected. I'd say, secondly, there was you know, some strong growth and unmeasured channels. If you look at the difference of our net sales growth versus IRA, I think 38% versus like 26-ish. So...
spk00: Part of that is unmeasured channels.
spk03: And that's not just one-time pops. That's some really solid distribution, permanent distribution gains that we garnered in the second half of the year in unmeasured customers that's paying dividends for us in Q1 and will pay dividends throughout the year. So those are just some highlights.
spk00: That's super helpful. And then I just want to talk about your capital allocation at M&A. You've done a great job delivering the balance sheet, and it's terrific to see your goal that you're on track to reach two and a half times leverage by the end of the year. As you think about capital allocation and M&A, would you look for M&A in separate categories, adjacent categories, or could it be a case where you look within your existing categories and perhaps other smaller players within either sauce or yogurt that have come on the scene and are starting to do well? I'll leave it there. Thank you.
spk03: Yeah, look, I mean, I think it's Chris. I'll really highlight, honestly, right now, and Chris sort of touched on it, you know, Cody, but just to sharpen it. I mean, our number one focus is driving Rayos to a billion dollars and beyond. And as we have learned and seen as we've launched into dry pasta and soup and how well that they are doing in market, you know we could we could acquire a one-of-a-kind soup brand but we would rather launch rayos into the soup category we could acquire a one-of-a-kind frozen pizza baron there's some really nice highly differentiated niche brands that are under penetrated that we could expand but we would rather launch rayos into that segment so i think right now you know the focus for our, you know, use of cash, et cetera, is to reinvest back in the business to drive the Rao's franchise primarily, Noosa secondarily. You know, that said, we are constantly fertilizing our list of potential opportunities, you know, in the food area. And I think I've mentioned before that, you know, clearly categories that are adjacent to some of ours now, whether that's, you know, around the aisles that we're in now, et cetera, you know, would potentially be attractive. Right now, honestly, our number one priority is driving Rayos to a billion dollars and beyond. We're focused now on the pizza launch. More new category launches to come that we can talk on future calls, not at this time. And that's what we're looking to leverage our capital for is, again, to extend this Rayos brand that is connecting very, very well with consumers both from a brand equity standpoint and product standpoint in 2023 and the years to come.
spk10: Tori, can we get the next question, please?
spk02: Sure. As a reminder, if you would like to ask a question, please press the star 1 on your telephone keypad. Next question comes from Michael Avery with Piper Sandler. Please go ahead.
spk06: Thank you. Good afternoon. Hey, Michael. Can you just touch on the second quarter a little bit more especially with just sales and volumes in particular so strong in the first quarter. Should we be mindful of maybe any pull forward or any unmeasured channel moves that might be a part of that that we should just keep in mind as we think about modeling, particularly on the top line?
spk09: Yes, I sure will. This is Chris. One difference moving forward is pricing. If you recall, by the last year, we really had very minimal pricing in the first quarter and overlapped that this year with, I think it was 11% pricing. That will fall off in Q2 and for the back half year. We had good, robust, double-digit pricing in Q2 of last year. So that's one big change. Now, we're still very excited. You know, low, mid, double-digit growth across all the quarters for the balance of the year is what we're projecting. So it's still very solid growth. It won't have the pricing in it. It'll be more volume-driven starting in Q2 and for the balance of the year. And then we also had this oddity last year where in Q1 of last year – Shipments, our net sales was well below consumption. And then in Q2 of last year, that reversed. And then in this year, in Q1, our net sales was higher than consumption. And then that will probably reverse back here in Q2. On a two-year basis, they're totally in line. We had last year, yeah, last year in Q1, we had some, you know, some spotty service outages. So that really gave Q1 a boost. So, again, this kind of mid-double-digit growth balance of the year starting in Q2 with less pricing, you know, is where we see ourselves landing.
spk06: Yeah, that reversal from 1Q to 2Q happening again looked likely. So that's good to make sure to be aware of. And then can you just, Give an update on the Michelangelo Sauce launch in terms of distribution. I think it went into one retailer at first. Is that heading anywhere a little bit more broadly?
spk03: Sure. Hey, Michael. It's Todd. So, you know, I'd say, yeah, so it's really one retailer now. And both, you know, I will highlight both the exclusive, you know, retailer that we're in now, you know, and ourselves, Sobos Brands, pleased with the results. We're outperforming a variety of other similarly priced items. So although early, international rollout is still something we're assessing. We're pleased with the performance right now, and we're beginning to expand, you know, our launch into other select retailers for shipment in the second half. But right now, both ourselves and the retailer are very pleased. And, you know, honestly, I think as I've talked on previous calls, Michael, we see an opportunity, honestly, to take a A larger share of the overall category with two brands at very different price levels. They're both great tasting kettle cooked slow simmered sauces. But they're very different from each other. Cook time, type of tomatoes that we use, some of the ingredients, et cetera. So I figure that there's an opportunity for that Michelangelo's equity to play at a price point significantly below Rao's, but above that of mainstream brands at a price that justifies the quality, which is dramatically different than mainstream paste-based sauces.
spk06: Okay, that's great. And just a last quick housekeeping one. I apologize if I dismiss this, but I know you said that Rayo Sauce is now the number one dollar share. Did you say what that share is? Apologies if I just didn't catch it.
spk03: Yeah, so that's the number one dollar share in the food channel. So that's essentially a 17% dollar share in the food channel. So we're number two. In total, Moolah, but in the Food Channel, we are number one dollar share in the Food Channel, Rao's sauce.
spk06: And it's a 17 share, you said? That's a 17% share. That's great. Thanks so much. Thank you, Michael.
spk02: There are no further questions at this time. I would like to turn the floor back over to Todd Blackman for closing comments.
spk03: Awesome. Hey, so thanks again for joining us and showing an interest in our story. We look forward to engaging with many of you in the coming weeks. Please feel to reach out to Josh for follow-up discussions. Until then, have a great evening and take care.
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