Operator: Thank you. Our next question comes from the line of Jason English of Goldman Sachs. Your line is open.
Jason English: Hey guys, we covered a lot of ground already. So I’m just going to throw out one question. Gross margins, how have the expansion initiatives influenced your gross margins? So can we go back in history and look at that as a reasonable reference point of where maybe you can get back to? Or has the push into frozen, which is notoriously a lower margin category, and now Michael Angelo’s into a lower price point. Should we expect that to be structurally mixing lower, still driving great gross profit growth, but just naturally mixing the margin rate perhaps lower than otherwise would’ve been?
Chris Hall: Yes. No, if you do go back in time, let’s just go back to pre-COVID, even back to 2019, we were making great strides in our gross margins. You might recall, we talked about investments that we were making at our two plants that we run up in Colorado, which produces noosa in Austin, which produces our frozen Italian entree. And that gross margin has surpassed 30%, in fact, I think it was as high as 31%. And the inflation has hit, we have the lag on pricing, productivity got delayed and we ran 29.5% margin across H2 2022. So we’re building our way back up to what we believe will be 30% and better as we progress. So we would have every intent that our efforts would get us back to those levels that we were at pre-COVID, call it the low-30s. May just take a little bit longer than we had originally anticipated, but we believe the activities, the initiatives we have in place and opportunities ahead of us, we can get back there.
Jason English: Okay. That’s helpful stuff. And I apologize, I got a little bit distracted during one of the questions. You may have already addressed this. But two questions on debt. First, you generate a lot of cash, why aren’t you not paying down debt, given how high the rates are? And the $240 million that’s locked, I have thought that it had been locked, I guess, that we had read strike rate at 4%. So I think we wrongly interpreted it to be a lock of a 4% rate. I think I heard you say today it’s 7.5% is what that locked component is capped at?
Chris Hall: That’s right. The floating portion is 3.5%, the LIBOR is locked at 4%. So that’s the total of 7.5%.
Jason English: Is that €“ continue, my apologies.
Chris Hall: Sure. And then on the paying down of debt, we €“ again, the cash that we do have it does give us great flexibility. We’re holding onto it. By the way, we do earn a pretty good rate on it as it’s just we’re sitting today. As we progress, we will €“ we generate cash, we will make those decisions on, yes, do we go back and truly delever that? Do we continue to hold onto it? We’ll make the most €“ we think is the highest use of that cash. And again, right now we like the flexibility that it provides us.
Jason English: Okay. Okay. Thank you.
Chris Hall: Thank you.
Operator: Thank you. One moment, please. Our next question comes from the line of Robert Moskow of Credit Suisse. Your line is open.
Robert Moskow: Thanks. I guess, one question is, I seem to remember you had some supply chain disruption in first half of 2022 last year, having to do with storms, I think in Texas at a supplier. Can you quantify how much of an easy comp that provides? And remind me what quarter it was, any dollar amount to that?
Chris Hall: Yes. Thanks, Rob. Yes, that was the winter storm down in the Austin area, so it impacted our frozen business. And then we also had an event at our pasta provider, which is also in Austin. So we were struggling to get pasta for the dinners as well. It was really €“ and then, by the way, there was Omicron as well in Q1. So all of those really hit us at the end of the first quarter, but more importantly into the second quarter, which is when we canceled all of our promotions. So I don’t think you’ll see an impact in Q1. Across Q2, there will be €“ again, I can’t call it material but we are back up and running now. Our service levels are in good shape on frozen. We’ve talked a lot in the past about the investments we’re making down at Austin plant to automate our manufacturing lines, then it had gotten delayed to the back part of 2022 and really all the way almost to the end of the year.
The great news there is those lines are now up and running and we’re starting to really see the benefits of that taking hourly headcount out of the plant, a boosted capacity. So that’s going to €“ that’s a great tailwind for us in 2023. But I would not model in a material impact for whatever volume was lost last year in Q2.
Robert Moskow: What about EBITDA?
Chris Hall: I would say the same thing. The sales weren’t that high. We didn’t really experience any incremental costs during that time. Again, that would cost significant. So I would not €“ either top line or EBITDA, I would not assess a large dollar impact for that from the storm last year.
Robert Moskow: Okay. Well, it felt material last year, so I figured I would ask. A second question, regarding this promotion you did with a non-measured channel customer in fourth quarter. Is this a really big customer? And why you decide to do it? And are you going to do it again in 2023? Like, I just want to make sure it’s not creating a tough comparison in 2023.
Todd Lachman: Yeah, this is €“ hey, Rob, it’s Todd. Well, I mean, I know it’s €“ I guess, my thought is like, first of all, the only reason we’re talking about it unmeasured versus measured is because of the difference in net sales and whatever. I mean, our philosophy is I want you €“ we, our team wants ubiquitous distribution of sauce in every single outlet in which the consumer shops. And some of those customers notably some that are in the unmeasured universe those come, those are big volume events. So while I understand what’s by behind your question, I’ve never been one to strategically think about, hey, I’ve done it in this quarter and now we need to lap it next year. I just €“ in the end of the day, we get the right distribution in the right places, in the right events, and then we just need to figure out how to grow our business year-on-year every quarter and every year.
So I know that’s not a perfect answer to your question, I’m just saying that right now we are just looking to make sure that we have full ubiquitous distribution of Rao’s and all the items. We’re still under distributed vis-Ã -vis our peers, 12 average items versus 20 for the competition, 58% awareness versus 90-plus-percent for the competition. And if we have the opportunities to run some large events to get what we call the world’s best tasting pasta sauce into more consumer’s mouths, we will do that. And if that causes us some indigestion in regards to laughing in Q4, well, then so be it. Our team is up to it. I don’t mean to be flipping all with you Rob on that, but that is kind of our mindset.
Chris Hall: Rob, I’ll just add to that as well. It was a €“ we €“ it was a real enhancement to an event and a little bit of shift in timing, but it was an overwhelmingly successful event. And you might have seen in our €“ in the comments we just made previously, we do €“ we are guiding to low-double-digit top line growth, both in H1 and H2. So just to support Todd’s comments, we’re not seeing that as an overlap that we can’t overlap.
Robert Moskow: Okay. Thank you.
Todd Lachman: Thanks, Rob.
