The Real Good Food Company, Inc. (NASDAQ:RGF) Q3 2022 Earnings Call Transcript

The Real Good Food Company, Inc. (NASDAQ:RGF) Q3 2022 Earnings Call Transcript November 11, 2022

The Real Good Food Company, Inc. misses on earnings expectations. Reported EPS is $-0.51 EPS, expectations were $-0.18.

Operator: Greetings, and welcome to The Real Good Food Company Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded. It is now my pleasure to introduce to your host Chris Bevenour, Vice President, Investor Relations. Please go ahead, sir.

Chris Bevenour: Good morning, and welcome to The Real Good Food Company’s third quarter 2022 earnings conference call. On the call today are Bryan Freeman, Executive Chairman, Jerry Law, Chief Executive Officer, and our Akshay Jagdale, Chief Financial Officer. You may access our third quarter earnings release which we published at approximately 4:30 p.m. Eastern Time yesterday. If you have not had a chance to review the release, it’s available on our Investors portion of our website at www.realgoodfoods.com. Before we begin, I’d like to remind everyone that certain statements made on this call are forward-looking statements within the meaning of federal securities laws and are subject to considerable risks and uncertainties.

These forward-looking statements are intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements made on this call today, other than statements of historical fact, are forward-looking statements and include statements regarding our projected financial results including net sales, gross profit, gross margin, adjusted gross profit, adjusted gross margin and adjusted EBITDA, as well as our ability to increase our net sales from existing customers and acquire new customers, introduce new products, compete successfully in our industry, implement our growth strategy and effectively expand our manufacturing and production capacity. Forward-looking statements made on this call represent management’s current expectations and are based on information available at the time such statements are made.

Such statements involve a number of known and unknown uncertainties, many of which are outside the company’s control and can cause future results, performance or achievements to differ significantly from the results performance or achievements expressed or implied by such forward-looking statements. Important factors and risks that could cause or contribute to such differences are detailed in the company’s filings with the Securities and Exchange Commission. Except as required by law, the company undertakes no obligation to update any forward-looking or other statements here in whether as a result of new information, future events or otherwise. In addition, throughout this discussion, we refer to certain non-GAAP financial measures, which refer to results before taking into account certain one-time or non-recurring charges that are not core to our ongoing operating results and which we believe better reflect the performance of our business on an ongoing basis.

Our non-GAAP financial measures including adjusted gross margin and adjusted EBITDA are referenced. A reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure is included in our third quarter earnings release, which is available on our website under our investors tab. With that it’s my pleasure to turn the call over to the Real Good Food Company’s Executive Chairman, Bryan Freeman.

Bryan Freeman: Hey, thanks, Chris. Good morning everyone and thank you for joining us today on our third quarter earnings call. I will briefly review our third quarter highlights and discuss the reasons we believe we’re well positioned for long-term growth. Jerry will cover operations, and Akshay will then review our financial results and outlook in more detail. After that, we’ll open the call for questions. Starting with our financial highlights for the third quarter, net sales increased 63% to 37.6 million as compared to 23 million in the third quarter of last year. Third quarter sales grew 200% on a two-year stack basis, which is an acceleration compared to 190% growth in the first half of 2022 and 116% growth in full year 2021, on the same basis.

Sales in the retail or measured channel increased 40% as compared to the prior year period driven by strong velocity gains in our core products. The unmeasured channel grew by 76% this quarter, generally in line with our expectations. We have clear visibility on upcoming promotional events and have secured incremental distribution and the unmeasured channel for the remainder of 2022. As a result, we expect unmeasured channel sales growth to accelerate further in the fourth quarter, in addition to the continued strong velocity growth and expanded distribution expectations for our current items in the unmeasured channel for the fourth quarter 2022 and beyond. We expect further expansion of our breaded poultry distribution the first quarter of 2023 owing to strong velocity, performance and existing distribution.

Although year-over-year revenue growth this quarter was strong. We are not pleased with our distribution growth. Distribution grew by 8% which was less than expected and resulted in revenue coming in below our internal expectations. Our growth was driven primarily by strong velocity growth, which continued to exceed expectations. Owing to the slower than expected distribution gains in the third quarter, we now expect sales for 2022 to be towards the low-end of our guided revenue range of 155 million to 160 million. Fourth quarter revenue is expected to be by far the highest revenue quarter since our founding. Retailers are taking note of our strong velocities and we are now seeing renewed distribution growth in the fourth quarter. We expect the trend to continue into 2023.

Three factors underpin our positive outlook for 2023, one significant wins we have recently secured and two strong baseline velocity growth and three exceptional new product velocity. We have secured 39,000 distribution points for new products, which represents an approximate 24% increase as compared to our current distribution footprint of approximately 160,000 points of distribution. These distribution wins include 15,000 incremental distribution points since last quarter, including two large retailers committing to nationwide rollouts of our breaded poultry in 2023. Additionally, we have secured expanded distribution in the club channel. Baseline velocities grew 37% this quarter and continue to exceed our expectations with velocities for new products trending significantly higher than our base products.

Specifically, our breaded poultry items are performing in the top quartile of all conventional SKUs with velocities that are 8x our based business. In fact, at one large national retailer, our low carb high protein chicken nuggets were the number one health and wellness item in the category last week, and even more impressively, they are in the top 12% of all frozen poultry and meat items. This includes conventional producers such as Tyson and Perdue. On our last call, we were averaging approximately $65 per store per week and I am pleased to report that as of last week, our item sales grew to $120 per store per week and this was without discounts. And other retailers we’re seeing similar performance. The aforementioned new distribution gains combined with strong base business philosophies and another solid slate of new product innovation gives us confidence that we will grow sales in 2023 to at least 200 million, representing growth of approximately 30%.

Jerry and Akshay will speak to this in more detail. But I wanted to touch on our margin and EBITDA performance this quarter, which was disappointing and missed our internal estimates due to what we believe are two temporary headwinds. First, efficiency gains from our Bolingbrook, Illinois manufacturing facility were delayed resulting in a drag on our margin performance this quarter. The good news is we are seeing meaningful improvements on this front in the fourth quarter. And second, commodity costs were larger than anticipated headwinds to margin. That being said costs per chicken cheese and bacon have come down significantly as of late and we expect this to have a 6 to 10 point positive impact on our margins in the fourth quarter. As such, we still expect to be adjusted EBITDA positive in the fourth quarter of 2022.

As for 2023, we expect adjusted EBITDA in the mid to high single digit range driven by lower commodity costs and to a lesser extent, lower labor and overhead costs. And cash flow from operations is also expected to be positive in 2023. Next, let’s take a step back and look at the current state of the health and wellness market, our total addressable market and how our brand positioning is resonating with this broad consumer base. Our total addressable market is the 242 billion health and wellness industry, which according to grew 6% year-over-year, with 8% three-year CAGR. The frozen health and wellness subcategory continues to outpace overall health and wellness, growing at a 9% three-year compound annual growth rate and about 6.5% year-over-year.

It is important to note that the frozen food category has historically performed well during recessions as it tends to benefit from consumers trading down from eating out to eating more at home. Also, private label penetration in the frozen category is relatively low, and it’s about 9% to 10% as compared to 20% to 22% on average across all food categories, and private label penetration in the health and wellness frozen segment is even lower than in the overall frozen food category. As such trade down risk within the category to lower priced private label options is also limited. Additionally, our distribution footprint is focused on retailers that deliver value to their consumers and we have low concentration of what I’ll call luxury high-end retailers that typically lose foot traffic during economic downturns.

Our brand promises three primary claims, low carb and little to no sugar, high protein and clean ingredients. Products of these attributes are growing well above the growth in our overall total addressable market. All things considered the categories we compete in remain highly relevant, as evidenced by their large size and strong growth profile. Moreover, there are no signs of a slowdown despite the lapping of the pandemic bump and/or an economic recession, as frozen foods historically performed well in a recessionary environment. As for our brand health, we track ourselves against four indicators, household penetration, repeat rate, social community growth and engagement and velocities. Starting with household penetration, according to numerator data as of November 1, The Real good Foods brand household penetration is 8.5%, up from 8.3% in July, 7.4% in March and 4.8% in September last year.

This means approximately one in every 12 households in the United States has purchased our products in the past 12 months. Our household penetration continues to rank second amongst all health and wellness frozen food brands behind only Annie’s a brand with over 500 million in retail sales. Increasing household penetration demonstrates how well our brand position resonates, and how quickly we have connected with a broad consumer base. We view this as a leading indicator of future growth. Turning to repeat rate, they seem to be in line with industry averages of 32% in the most recent trailing 52-week data as of November 1, 2022. Regarding social community growth, we continue to grow the real good foods online community. In the third quarter, our social and digital teams continue to outperform.

We generated over 24.5 million organic impressions, and 228 million total brand impressions. We also acquired 9000 new SMS text subscribers and added 26,000 followers on Instagram, bringing our total to over 442,000 IG followers. We continue to believe that using micro and nano content creators to spark authentic peer-to-peer conversations is a better use of marketing dollars than traditional advertising. Based on a number of followers and subscribers, I could say it’s working and it’s efficient. This is reflected in the strong returns we get on our ad spending. In fact, our returns on ad spending as measured by third parties average 4x to 6x which are significantly higher than our peers on average. Our retail partners appreciate how we drive new consumers to the categories we participate in.

Allowing Real Good Foods to truly grow the frozen category with consumers new to frozen foods, rather than taking share from others. Our close connection to our consumers enables us to efficiently test demand for new products before they launch on shelf. This leads to greater household penetration and incremental category growth not only for us, but for our retail partners as well. This strong brand health indicators underpin our confidence to achieving over 500 million in sales long-term. Now moving to innovation, our strategy can be characterized as fewer bigger, better and faster, and 2022 we launched crispy chicken shell tacos, breakfast bites and bowls and most recently chicken nuggets, chicken strips and multi-serve Asian entrees. Our innovation has extended the brand into large high velocity categories representing approximately 5 billion in aggregate retail sales.

We believe these categories are also ripe for disruption because there are a few to no healthy nutrient dense options available today that are craveable. Based on the new distribution we have secured and the strong velocities we’re seeing for these products, we expect them to contribute materially to our 2023 revenue. As we look forward to 2023, we think it is appropriate to share with you a sampling of our 2023 new products innovation. These are products whose development is completed or ready to manufacture at scale and ones we are actively showing to our retail partners. There will be additional items introduced in 2023 as we continue to run our innovation flywheel, but these products are far enough along in their commercialization cycle that we feel it is appropriate to share further details.

First, we have a breakfast bond that is frankly a step change improvement over our original product. This new bond is light, fluffy, low in carbohydrates and high in protein. The eating experience is no different than the high carbohydrate funs that we’re all familiar with. A breakfast sandwiches have been on the shelf for three years and continue to be the leading health and the wellness item in the breakfast category, but through our continual improvement process, and as our brand scales into more and more household, we know our product must taste better than their conventional counterparts. Internally, we see our iterative process is no different than what we have lived through with meaningful consumer technology such as the iPhone. The improvement in product quality, and this new version of our bonds is analogous to the improvements between the iPhone 3G and the iPhone 14.

We expect this improved offering to flow through our supply chain late in the first half of 2023, which will be communicating to our social footprint in the near term. Second, we’ve developed a proprietary low carbohydrate flour tortilla system that will be incremental to our current chicken tortilla offerings. Unlike the breakfast sandwich, this new product will be on shelf alongside of current chicken tortilla items. I would note, just as Amy’s says 10 different enchilada offerings, we too have permission to extend beyond our original products. We will see this new tortilla used with our new creamy poblano sauce and fill the chunks of seasoned chicken breast; it could be one of our most craveable items to-date. Third, we’re taking the same tortilla system and rolling out a new low carbohydrate flour available in Salsa Verde, Salsa Roja seasoned chicken, southwestern chicken and in various breakfast offerings.

In addition to having this item available in the frozen section, we are pleased to report that we will be extending into a second temperature state the refrigerated aisle. There’s significant demand for this item in the perimeter of the store and we have the manufacturing capability to fill this demand. I expect to see flours in the refrigerator door near you as early as the first quarter of 2023. Finally, we’re leveraging our breakthrough breaded poultry system and will expand into the snacks and appetizers category with new bonus bites and various flavors, such as zero sugar hickory barbecue and garlic parmesan. We will be the only low carbohydrate high protein boneless chicken wing in the category. And I would also remind everyone that our novel breading system is what enables us to achieve this incredible value proposition.

I’d now like to turn the call over to our CEO, Jerry Law to provide an update on Bolingbrook and our operations more broadly.

Jerry Law: Thank you, Bryan. Good morning, everyone. And thank you for joining us on today’s call. I’m pleased to report that our Bolingbrook, Illinois facility is continuing to ramp up its phase startup of production. I’m very proud of the team and how far we’ve come since opening new facility in March this year. Bolingbrook enables our entry into exciting new categories and gives us much needed capacity to meet the growing demand for new products and existing products. Twice the size of our existing City of Industry facility in California, our Bolingbrook facility is on pace to add approximately 200 million in incremental capacity by the end of this year and will have the ability to produce approximately 250 million to 300 million in sales at full capacity.

This will enable us to match capacity with a long-and-short-term demand for our products and will also significantly accelerate our margin improvement efforts. Today we have six production lines up and running in the facility. We are currently in the final phase of facility startup. And as a reminder, the ramp up is not linear and the last phase will yield the greatest efficiencies. We have built significant flexibility into the plant design such that is capable of producing the vast majority of our new and existing products. Products made at the new Bolingbrook facility will have structurally lower cost as compared to those made in City of Industry facility driven by lower labor costs, higher throughput and Bolingbrook proximity to lower costs raw materials, supplies and our major distribution hub.

Overall, we believe this new facility brings us closer to meeting our long-term goal of cheesing 500 million in revenue while currently accelerating our margin improvement efforts. We’ve already seen the impact Bolingbrook has had in terms of successfully relieving pressure on our City of Industry plant, which was operating above 100% capacity utilization through the first quarter and into the second quarter of this year. With the City of Industry plant running at a more normalized operational level. It has allowed us to focus on continuous improvement and in turn, we expect to improve yields and drive efficiencies. Specifically labor costs in our City of Industry plant in the third quarter came down 800 basis points sequentially to 11% of net sales.

This improvement was the primary driver of the approximately 260 basis points sequential improvement in labor costs in the third quarter. Before I turn over to Akshay, I would like to touch on our margin performance in the third quarter and provide drivers for the fourth quarter and into 2023. Margins for the third quarter came in below our expectations, owing to a slower than anticipated ramp up in efficiencies Bolingbrook and a higher-than-expected raw material costs. During the third quarter, we experienced what I would characterize as the startup blues related to excessive equipment breakdowns as we strive to perfect production processes. Our breading system for the newly launched the breaded poultry and Asian items is novel and is proven to be a tough on the equipment we installed, required reengineering to harden the equipment to improve reliability.

I believe we are the first company to produce breaded poultry with such a novel breading system at scale. And the operational issues we encountered were what we would characterize as startup blues, and these impacted our efficiencies significantly in the quarter. I’ve managed 14 plants in my previous role with J&J Snack Foods, which included hundreds of startups that were similar to and frankly much more complicated than what we are experiencing in our Bolingbrook plant. Encouragingly, efficiencies and throughput at the plant have improved significantly in the recent months and weeks. During the quarter, our overall efficiencies in the plant are up over 20% and the throughput has more than doubled as additional lines have come online. We expect to be at targeted efficiency levels by the end of the first quarter of 2023.

As Bolingbrook becomes a bigger portion of our production mix to mind with continued efficiency gains at City of Industry for rightsizing the operation, we expect our labor costs to continue to come down significantly. Specifically, we expect to lower labor costs by approximately 500 basis points and bring them down in line with industry standards of 5% to 10% of sales. We expect a major portion of this opportunity to flow through within the next 12 months, as efficiencies are optimized in both plants, and Bolingbrook becomes a bigger portion of our production mix. Additionally, higher sales will drive plant utilization rates higher and allow us to leverage lower overhead costs. We expect to 200 to 300 basis point improving margins driven by overhead leverage in 2023.

Lastly, Bolingbrook has enabled significant productivity savings that have already started to accrue in the latter half of the third quarter and will build as we move into 2023. These include the self-manufacturing of our chicken tortillas, and cooked chicken, which on a combined basis are likely to drive approximately 200 to 400 basis points of margin improvement. As for direct materials inflation, we experienced a larger than expected impact this quarter driven in part by high inventory costs carrying over from the second quarter, as well as continued year-over-year inflation in the third quarter. The good news is that commodity costs have continued to come down since our last call and are now expected to be a much larger tailwind to margins in both the fourth quarter of 2022 and into 2023.

In summary, although we are not happy with our third quarter results, due to these margin pressures, areas that negatively impacted our results have shown significant improvement in the fourth quarter and are expected to improve further into 2023. As such, we continue expect to be adjusted EBITDA positive in the fourth quarter of 2022. And expect 2023 adjusted EBITDA to be in the positive, mid to high single digit millions of dollars range. We have strong visibility into the drivers of our continued margin turnarounds and feel confident in achieving our outlook. It’s an exciting time at Real Good Foods and I’m thrilled to report the tremendous progress our supply chain and operations teams have made. All in order to support our growing demand.

I still believe we are in a very early innings of growth and are well positioned to capture market share in the frozen categories in which we compete. Now I would like to turn the call over to Akshay, our Chief Financial Officer who will walk you through our third quarter financials.

Akshay Jagdale: Thank you, Jerry and good morning everyone. Turning to our financial results, net sales in the third quarter were 37.6 million an increase of 63% as compared to the third quarter of last year. Sales growth in the third quarter was primarily due to strong growth in our core products and the unmeasured channel. In the unmeasured channel growth accelerated in the third quarter to approximately 76% as compared to 31% growth in the second quarter, the sequential and year-over-year acceleration was driven by distribution gains and to a lesser extent velocity increases. We have clear visibility on upcoming promotional events and our new products in the distribution are performing very well. As such, we expect unmeasured channel sales growth to accelerate further in the fourth quarter.

As for 2023, we expect another strong year of growth in this channel, driven by expansion of our breaded poultry items starting in the first quarter of ’23, significant new distribution wins already secured, as well as commitments to certain planned promotional events. In the retail channel growth slowed sequentially to 40% in the third quarter, as we did not achieve the distribution gains that we were expecting. The lower-than-expected distribution growth was partially offset by continued strong growth in baseline velocities. As Brian mentioned, our distribution performance has already improved and we’re bullish about our prospects for 2023. These factors underpin our positive outlook for 2023 revenue growth. One, significant wins we have already secured, two, strong baseline velocity growth, and three, exceptional new product velocities.

We have recently secured approximately 39,000 distribution points for our new items introduced in 2022, which represents an approximate 24% increase relative to a current footprint of 160,000 distribution points. Moreover, these new items and velocities that are already 3x to 8x are based business. As such, these new distribution wins are likely to be materially additive to overall sales growth in this channel, and we expect another strong year of growth in this channel in 2023. Our third quarter gross profit was 1.8 million, reflecting a gross margin of 4.7% of net sales, as compared to a gross profit of 2.4 million, or a gross margin of 10.2% of net sales in the third quarter of last year. The decrease in gross margins was primarily due to an increase in plant manufacturing costs related to the ramp up of our new facility in Bolingbrook, Illinois, and higher raw material costs.

For perspective, given we now operate two facilities, plan overhead costs were approximately 760 basis point drag on margin this quarter, as compared to a year ago. Adjusted gross profit during the quarter was 5.9 million, reflecting an adjusted gross margin of 15.8% of net sales, as compared to 3.9 million or 17.1% of net sales in the third quarter of last year. We had expected margins in the third quarter to be lower than the second quarter owing to higher commodity cost drag and inefficiencies related to the Bolingbrook ramp up. However, margins came in below our expectations, primarily owing to greater inefficiencies related to the Bolingbrook ramp up and to a lesser extent, higher than expected direct material costs. We expect our adjusted gross margins to improve sequentially in the fourth quarter driven primarily by lower direct material costs, and to a less extent lower labor costs driven in part by Bolingbrook efficiency gains.

We expect to exit 2022 with structural lower costs, especially on the labor front. Beyond 2022, we have a long runway of productivity savings that will drive incremental margin expansion. Additionally, as Jerry mentioned, the cost of our key commodities have come down significantly in recent months. And if we were to lock in our key commodities at current spot rates, our margins in 2023, would be 600 to 1000 basis points higher. Total operating expenses were 12.4 million as compared to 7.9 million in the third quarter of 2021. Adjusted operating expenses increased by approximately 3.4 million to 10.7 million in the third quarter of ’22 as compared to 7.3 million in the third quarter of 2021. The increase in operating expenses was primarily driven by increased personnel expenses related to the build out of the company’s operations, finance and leadership teams, as well as increased investments in research and development.

Adjusted EBITDA totaled a loss of 3.8 million as compared to a loss of 2.7 million in the third quarter of 2021. This was below our expectations, driven entirely by lower-than-expected gross profit. We continue to expect positive adjusted EBITDA in the fourth quarter, which would be a significant sequential and year-over-year improvement. The improvement is expected to be driven by lower direct material costs, and to a lesser extent lower labor costs and fixed costs leverage. Now shifting to our balance sheet and cash flow. As of September 30, 2022, we had cash and cash equivalents of 5.4 million, and total debt of 61.4 million. We had 43.3 million drawn on a revolver at the end of the quarter, with 31.7 million in available capacity, which combined with our 5.4 million cash balance, implies a total liquidity position of 37.1 million.

Cash burn in the quarter was approximately 19 million, as compared to 24 million in the second quarter. Off the 19 million cash burn this quarter, 7 million was related to core working capital. We expect core working capital to be a source of cash going forward, driven by the lowering of inventory, to more normalized levels. Additionally, we expect losses to narrow significantly alongside our transition to positive adjusted EBITDA starting in the fourth quarter, and the positive cash flow from operations in 2023. As such, we have sufficient liquidity to fund our current needs and execute the plan we have laid out. As a reminder, it’s important to note that the Bolingbrook facility and equipment is being leased with costs flowing to our P&L, and there is no CapEx spending associated with that.

Now, turning to our outlook for 2022 and 2023. For 2022, we now expect net sales to be at the lower end of our guided range of approximately 155 million and 160 million, reflecting an 84% to 90% increase as compared to 2021. Adjusted gross margin is still expected to be in the range of 19% to 21%. And adjusted EBITDA is expected to the lower end of a guidance range or a loss of 7 million to 9 million. For 2023, we expect net sales of at least 200 million, adjusted gross margins of at least 24%, adjusted EBITDA and the mid-to-high single digit million range and positive cash flow from operations. Long-term, we continue to expect net sales of approximately 500 million adjusted gross margin of 35% and adjusted EBITDA margin of 15%. This concludes our prepared remarks.

I would now like to hand the call over to the operator to begin our question-and-answer session. Operator?

Q&A Session

Operator: Thank you. At this time, we will be conducting a question-and-answer session. . We have a first question from the line of Jon Anderson with William Blair. Please go ahead.

Jon Andersen: I just wanted to first touch on the comments around distribution in the third quarter. Is there any anything more you can say about perhaps what caused the lag and kind of you achieving some of the points of distribution that you’d hoped for in the third quarter. And then, also as you think about the distribution that you have secured, which sounds significant going forward, how we should think about that kind of phasing in, how much of that is already in place, and how much is kind of to come in over what time period? Thanks.

BryanFreeman: For the third quarter, I think we saw many of our retail partners, really kind of not lean in with us and give us all of the stores that they currently could have, and really kind of took a little bit of a wait and see approach. Good news is because our velocity are so impressive and the products are performing so well. We secured 39,000 new distribution points. And so the way we see that kind of rolling out is somewhat in Q4, and then into Q1 and Q2. I think that that number will continue to grow in terms of new TDP as we go into 2023. But I did want to just point — there were two large retailers that have now committed to nationwide rollout of breaded poultry. And what’s so exciting as you go into 2023, Jon, I mean, the velocities that we’re experiencing with these products are 5x to 8x our base products. So these new distribution points are going to be highly productive for the company. So that’s kind of how we see this playing out.

Jon Andersen: Yes. That’s terrific. Very helpful. And I guess, to follow on that point, Bryan, I think last quarter, you mentioned that, that some of the breaded poultry, the new products was turning it $65 or so per store per week. Sounds like that is accelerated significantly. I think you mentioned maybe 120. Has that build been accomplished without, I mean, is there some promotional activity or display going on, it’s driving that or is that just kind of an organic build. And in terms of the velocities there? Thanks.

Bryan Freeman: That’s what’s really got me excited. No promotion, no secondary displays or features with that $120 we experienced last week. In fact, I would say the shelf placement isn’t even that great as well. We’re typically on the top or bottom shelf. So there’s actually room to grow that velocity. So that, at 120, we’re at 12% of the total category, outselling the majority of Tyson and Perdue items. And we’re not even into healthy eating season, which begins on January 3, so I actually think we have room to grow. Now, obviously, we’re not putting that growth into our guidance expectation for 2023. But it’s just really impressive. And frankly, I never expected to see velocities this high. So, no promotion, no secondary displays, no discounts, it’s pretty remarkable.

And at the end of the day, velocity means everything. And when you have performance like that, and you also are bringing incremental revenue to those categories, the distribution growth will come and we’re starting to see those authorizations happen now. It just did not happen in the third quarter, like we expected. And that’s why this quarter looks the way it does.

Jon Andersen: Make sense. A lot of questions here. But I’m just going to end with two quick ones. One, Jerry, when I hear you talk about maybe equipment, breaking concerns me just around the ability to kind of ramp the production and service demand. So if you could provide a little bit more color around, how you are progressing on that front and give us confidence that that Bolingbrook is going to be able to support, customers with high service levels, particularly with all this innovation and new distribution coming. And then, second question, if we can just squeeze it in and maybe more for Akshay. I think you mentioned on the raw materials. If you locked in prices today, you’d see as six to 10 percentage point impact on gross margin. The guide for next year is less than that in terms of gross margin expansion. So I mean, why wouldn’t you lock in today? And why wouldn’t the guidance be higher for gross margin expansion in ’23? Thanks.

Jerry Law: Thanks, Jon. I’ll take the first half of your question there. We got the plan up and running, the core of the plan you on-time, and we were going through our planned ramp up phase strategy. And the initial line was a lower speed line that we had brought up very quickly in March of this year, that gave us a degree of confidence. However, the stumbling block was when we turned on the high speed bread lines. So we have a line that targets 1000, 1200 pounds an hour, we turned on a line that targets three or 4000 pounds an hour. And we started to see some issues at that higher rate. Some weeks our output was sub 20%, we made the decision to figure it out and run through it. Frankly, to fill the orders and protect the TPDs that we had gained.

And our margins paid full price for this. Our breaded chicken product is very novel. First of kind as far as I know. And our breading system is really very sticky, very high viscosity batter systems, and different than anything that’s on the market. And think about what we’re doing here. We are doing a grain free, gluten free high protein product never been done before. Not to mention this stuff just tastes great to boot, I want to just toot our horn on that. But the materials were unexpectedly and really extraordinarily tough on some equipment that we had purchased one piece in particular, was the root cause. We successfully reengineered that piece of equipment. We hardened it. We strengthened it. And we’ve gotten over the hump of that piece of equipment being a roadblock.

And now we’re up in the late 70s and 80s with efficiencies, we’ve been able to connect days and weeks together of production. So I think we got something to crow about there. And we’re really happy with that progress. And so as far as being able to fulfill orders that we’re seeing, our confidence is high now. We continue to see those gains late in the third quarter throughout the fourth quarter, we continue to get better as we exercise the line. But we’ve come into a new phase of the startup. I hope that answers your question there.

Jon Andersen: Yes, it does. Thank you.

Akshay Jagdale: Yes. I’ll take the second part of that question. This is Akshay. Hey, Jon, thanks for the question. Yes. You did the math, right. If we locked in all our commodities today, the benefit to our margins would be much greater than what we’re guiding to. We are. Why is that? Well, first off, I think it’s proven this early in the stage to have some room, some conservatism. That’s number one, right? We’re doing preliminary guidance here. And 3Q typically accompanies with the 4Q to do that. So we’re still locking in our plans, okay? Secondly, there’s some of these commodities are not edible, let’s say, or at least you can’t walk-in as far around as you’d want. And then, there’s a whole year still to go. So what goes into the margins other than commodities, obviously, is the revenue plan on the volume side, et cetera.

So there’s just a long way to go. But mathematically, yes, relative to where our guidance is, right now. There could be upside at prices stay where they are, or at least stay at historical averages, right? So that math that we provided, it’s important to note that it’s more taking into account historical average prices, rather than sort of seasonally low prices that we’re experiencing right now. So commodity is a big tailwind. We’ve got to turn the corner here and really show the margin improvement. Once we do and we’re further along in terms of hedging, et cetera. We’ll update our guidance accordingly.

Jon Anderson: Thanks a lot. Appreciate it.

Operator: Thank you. . We have next question from the line of Bill Chappell with Truist Securities. Please go ahead.

Bill Chappell: On the same line of Jon’s questions. I appreciate all the innovation and all the opportunity but at some point you worry about there’s too much innovation or too kind of far afield. I understand stuff like chicken tenders are fairly straight forward manufacturing, but it seems like some stuff can be a little more complex and maybe challenge the Bolingbrook facility by doing so many different things at the same time, and risk kind of hurting service levels. So I mean, any thoughts on that have been slowing some of the innovation as you roll out or expand distribution so quickly.

Bryan Freeman: We feel good about it. Again, when you think about our innovation, fewer, bigger, better. Think about like our new low carbohydrate, high protein flour tortilla system, from a manufacturing standpoint, a plant really doesn’t recognize the difference between doing that or current chicken tortilla products. So we’re really thoughtful about our equipment set. When we add this type of innovation. But the other point, Bill is, we’re putting on a combined amount of capacity of $400 million, $500 million. And our job is to fill these plants as quickly as possible, in a profitable way. And so we’re well on our path to do that. And I feel really good about the innovation that we’re rolling out.

Bill Chappell: Okay. And in terms of the rollout this quarter, I mean, I guess slower distribution this quarter. Is that true? Did you see that kind of across other competitors, competition, or you just feel like that was just the retailers were kind of in a flux and there is variety of reasons why they didn’t go as fast as you would expect. I still don’t fully understand why they would have been slow down this quarter and why you’re as comfortable that it’ll really accelerate the next year, nothing wrong. I’m just — little more color will be great.

Bryan Freeman: Yes, Bill, I’m not going to blame this on category dynamics in any way. I think that it’s just, that’s how it played out for Real Good Foods. But look, I mean, again, the velocity that we did put up and are putting up and we continue to see those velocities grow, and you guys can see it in the measured channel, you could see it in the SPINS data. At the end of the day that’s all that really matters. And that’s why now they’re coming on and authorized an additional points of distribution. So it’s just one of those cycles that went through. Now, on the other hand, an unmeasured channel, it’s the opposite story. We’re seeing acceleration in Q4. We’re seeing expanded distribution. We’re seeing faster embrace of our innovation.

And that’s what’s really driving the Q4 quarter. And then as we go into 2023, I think that will continue to happen. And in our guidance for ’23, switching back to measured channel, we see at least 25% growth there with plenty of upside as we move along and continue to get more and more points of distribution.

Bill Chappell: Got it. And then one last one for me.

Akshay Jagdale: Sorry. I just wanted to add one thing, if I could on what Bryan said on the distribution. So just to provide some numbers. Our guidance reduction is about $3 million, right? That’s all in retail, all distribution. That’s about seven points of expected distribution growth, let’s call it for the year, or 20,000 points of distribution. We’ve talked last quarter about one large retailer, delaying shelf resets that sort of that. But the most important thing is, this is a pure timing issue. So we had expected that with the velocities that we’re seeing that some of these retailers would, intro shelf reset give us distribution, because that’s how good the velocities are. That didn’t happen and in time this quarter, but we’ve got that distribution for next year and some.

We’re 20k short this year on distribution, but we got that and some with 40k plus right now and growing. So I just wanted to kind of make that point is, yes, we’re disappointed didn’t happen this quarter. A lot of that’s up to the retailers, we’re pushing hard, but our products are performing and we’ve got it now, especially at this large retailer, mass retailer, we’ve got that distribution. It’s a big deal. It’s foundational. And it’s going to flow through more so in ’23.

Bill Chappell: Yes. No, absolutely, it’s a high-class problem. So I realized that. One last one, on those distribution of you kind of talked about, even the placement of the chicken tenders is some high some low. How do you envision the total rollout to be especially as you’re expanding over the next? Would you expect kind of there to be a block in some retailers of Real Good Foods products? Or is it going to be in the chicken tender or there’s going to be Real Good Foods in the prepared meals, there’s going to be, it’s going to be kind of more individual placements kind of across different categories, all throughout first?

Bryan Freeman: Yes. It will be in the case of breaded poultry. It’s going to be in the breaded poultry door right next to Tyson and Perdue because that’s where we’re winning. And what I see happening in 2023 is one, maybe two shelves, The Real Good Foods items, and a nice brand block of one to two shelves in that door. And that’s how we’ve kind of executed. That’s how we’ve kind of run our play, Bill. I mean, we see one or two shelves of us in breakfast. Our goal is one or two shelves on entrees. And the same is true and snack and appetizers. The company benefits from driving incremental revenue and so do our retail partners because, they see us as a growth driver for each of those doors because we push our community. And we create excitement in the categories we participate in. And that strategy is unique to Real Good Foods. And it’s working for both our retail partners and us.

Bill Chappell: Great, thank you.

Operator: We have next question from the line of George Kelly with ROTH Capital Partners. Please go ahead.

George Kelly: So first one, Akshay, I was surprised and impressed to hear you mentioned in your prepared remarks that you expect to reach positive cash flow from ops in fiscal year ’23. So just curious, could you maybe bridge between EBITDA and net positive cash flow from ops? Just curious what the assumption is regarding working capital and interest, et cetera, if you can help bridge those two.

Akshay Jagdale: Yes. Great question. So we’ve said mid-to-high single digit adjusted EBITDA and bridging from adjusted EBITDA to regular EBITDA and cash flow, there’s two steps. One is, what’s the plant startup costs? Instead of looking at it as dollar number to the revenues change and think of it as like 3% of revenue. So, in this case, maybe $5 million or so. So that’s one. So you start with a high single digit EBITDA. You take out about five, you’re down to reported EBITDA, and then, there’s stock-based comp of 2.8, that’s already excluded from that, but just to point that out. And then, when you get into so that’s, a positive number EBITDAX stock comp is $3 million to $5 million number, let’s call it if you just follow the math.

And then, on the working capital side, we think we’re going to have a source of cash there. I don’t want to quantify exactly what that’s going to be, but it’s a big opportunity for us. So you pay $3 million, $5 million is kind of what you should think about order of magnitude and to be higher. So we have 70 days of inventory. At the end of this quarter, we were at 100 days, at the end of last quarter. So Jerry and team has done a great job managing that down. We think we can get that down to even 50 over time, and as our COGS come down, the absolute number comes down even greater. So that’s the big unlock where we’ve already seen significant movement on the working capital side. So and then what you have also in the cash flow equation is cash interest expense, which is around, let’s call it $4 million cash interest expense.

So those are all the pieces if you take all of them, I don’t know if you’re following all of that. But that gets you to positive operating cash flow, even with our preliminary guidance. Does that make sense?

George Kelly: Yes, it did. Thanks. And then, two other quick ones. Bryan, you talk a lot about the incrementality of your various products and categories. I know it’s still early days, but same thing happening within breaded chicken. And then second question is pricing, what are your pricing expectations? What’s baked into your ’23 guidance? That’s all I had. Thank you.

Bryan Freeman: Sure. We got an early read on a panel study that suggested that over 80% of people buying our breaded poultry in that category, we’re incremental to the category. So that’s a pretty remarkable number, and just kind of shows the power of, I think it’s just two things. The power of our social media team to drive and let our community know. But number two, there’s a lot of people that don’t participate in the frozen food category, simply because there’s carbohydrates and sugar and not the protein they’re seeking. So that combined with velocity is why we’re finally getting authorizations to roll these products out. With regard to pricing action in 2023, we don’t have any plans to take price. And the reason for that is, as we all are seeing significant reduction in our input costs, on our core commodities.

And in terms of our pricing strategy, we look at the gaps between us and conventional products. And we like that — we’re maintaining that 10% to 15% premium. And that’s where we’ll continue to set.

George Kelly: Excellent. Thank you.

Bryan Freeman: Thank you, George.

Operator: Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I’d like to turn the call back over to Bryan Freeman, Executive Chairman for closing remarks. Over to you.

Bryan Freeman: Yes. Thank you, everyone, for joining us on our third quarter call and we certainly look forward to reporting the Q4 in a few months. Have a great day.

Operator: Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.