Ladies and gentlemen. Greetings, and welcome to The Real Good Food Company Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions]. As a reminder, this conference is being recorded.

I’ll now turn the conference over to Chris Bevenour, VP of Investor Relations. Please go ahead, sir..

Good morning, and welcome to The Real Good Food Company's second quarter 2022 earnings conference call. On the call today are Bryan Freeman, Executive Chairman, Jerry Law, Chief Executive Officer, and Akshay Jagdale, Chief Financial Officer. You may access our second quarter earnings release which we published at approximately 7:00 a.m.

Eastern Time today. If you have not had a chance to review the release, it's available on the 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, introduced 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.

That 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 that differ significantly from 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 2Q 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’ Executive Chairman, Bryan Freeman..

Hey, thanks, Chris. Good morning. And thank you for joining us today on our second quarter earnings calls. I will briefly review our second 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 second quarter, net sales increased 65% to $30.8 million compared to $18.7 million in the second quarter last year.

We are pleased with our second quarter sales performance and we expect sales in the second half of 2022 to be stronger than our previous expectations. And as such, we are raising our 2022 sales guidance to a range of $155 million to $160 million.

Importantly, we still expect to be adjusted EBITDA positive in the fourth quarter of 2022 through our disciplined approach to managing costs and the ramp up of our new Bolingbrook facility. Second quarter sales grew 180% on a two year stacked basis, which is an acceleration compared to 116% growth in full year 2021 on the same basis.

Sales in a retail or measure channel increased 97% compared to the prior year period, driven by strong velocity gains of our core products and to a lesser extent new products and new customers. The unmeasured channel grew by 30% this quarter, generally in line with our expectations.

Growth in the channel was slowed due to the timing of shipments and promotional events in the second quarter. We have clear visibility on upcoming promotional events and have secured incremental distribution in unmeasured channel for the remainder of 2022.

As a result, we expect unmeasured channel sales growth to accelerate significantly in the second half and to be better than our previous expectations.

In addition to expected continued strong velocity and distribution of our current items in the unmeasured channel for the back half of 2022, we now expect to see our breaded poultry start to get on shelf regionally in the unmeasured channel towards the end of Q3.

We feel good about where we are today with our innovation rollout and our optimism on breaded poultry is underpinned by the strong RGF labs testing scores, positive retailer acceptance and feedback and strong early velocity reads in the measured channel that I will go into greater detail in a few minutes.

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 a $242 billion health and wellness industry which according to Stan’s grew 6% year-over-year with an 8% three year CAGR.

The frozen health and wellness subcategory continues to outpace overall health and wellness, growing at a 9% three year CAGR and approximately 6.5% year-over-year. Our brand promise has three primary claims, low carbohydrates and little to no sugar, high protein and clean ingredients.

Products with these attributes are growing well above the growth in our overall tam. All 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 for our brand health, we track ourselves against four indicators. Household penetration, repeat rates, social community growth and engagement and velocity.

Starting with household penetration, according to numerator data as of July 24, 2022, the Real Good Foods brand household penetration is 8.3%, up from 7.4% in March and 4.8% in June of last year, our household penetration continues ranked second amongst all health and wellness frozen brands behind only Amy's which as you're probably aware is over a $500 million brand at retail.

Increasing household penetration demonstrates how our brand position resonates and how quickly we have connected with a broad consumer base. Turning to repeat rates, they continue to accelerate growing 16% year-over-year and in line with industry averages of 33% in the most recent data from the latest 52 weeks as of July 24, 2022.

Regarding social community growth, we have been successful in growing the Real Good Foods community. In the second quarter, our social and digital teams continue to outperform. We generated over 4.5 million organic impressions and 82 million total brand impressions.

We also acquired 25,000 New SMS text subscribers and added 27,000 followers on Instagram, bringing our total to over 430,000 Instagram followers. We continue to believe that using micro and nano influencers to spark peer-to-peer conversations is a better use of marketing dollars than traditional advertising.

Based on our number of followers and subscribers. I can say it is working and it's efficient. This is reflected in the strong returns we get on our ad spending, our returns on ad spending is measured by third parties average four to six times which are significantly higher than our peers on average.

Our retailer partners appreciate how we drive new consumers to the categories we participate in. And this grows categories rather than taking share. Our connection to our consumers also enables us to efficiently test demand for new products before they launch on shelf.

This leads to greater household penetration and incremental category growth for not only us, but also our retail partners. Lastly, let's focus on velocity, over the last 12 weeks ending July 10, 2022. According to Stan's Real Good Foods brand velocity in a measured channel increased 50% compared to the prior year period.

What's even more encouraging is that our baseline velocity also grew 52% versus a year ago. This is a signal our consumers are purchasing our products more frequently and our newly introduced products are working more productively.

The strong brand health indicators underpin our competence and achieving over $500 million in sales long term and what gave us confidence to make the investment to increase production capacity with our new facility in Bolingbrook, Illinois, which Jerry will touch on shortly.

Moving to innovation, our strategy can be characterized as fewer bigger, better and faster. In 2022, we have launched crispy chicken shell tacos, high protein, low carb crispy tots, breakfast bites and bowls and most recently, chicken nuggets and strips and multi serve Asian entrees.

Our breakthrough innovation with low carb breaded chicken and high protein tots can be used in multiple form factors. So we are excited about our initial launch. Our innovation can extend the brand into large high velocity categories representing approximately $5 billion in retail sales in aggregate.

We believe these categories are also ripe for disruption because there are very little to no healthy, nutrient dense options on the market today that are craveable. Our versions of favorites such as orange chicken has very little sugar and carbs and is higher in protein.

Thus far I'm pleased with retailer acceptance and the early read on velocities are encouraging. We have commitments from 24,000 new total points of distribution for new breaded poultry breakfast innovation in Asian multi serve entrees that are filling in now through the end of the year.

We had one large national retailer push shelf resets from Q2 and Q3 and we have our breaded poultry and multiservice Asian entrees just now coming onto this retailer shelves. We're only two weeks into the reset, and this is very early days.

But I can report that our low carb, high protein chicken nuggets were the number two health and wellness item in the category last week and was in the top quartile of all frozen poultry and meat items. This includes conventional producers such as Tyson and Perdue.

It's my expectation that our velocities have room to grow from where we are today as we begin to activate our digital launch campaign later this month and let our community know the products are available.

In other retailers, we are seeing similar velocities that are two to three times our base products and in the upper quartile of a broader competitive set that includes conventional brands.

In addition to the aforementioned 24,000 total points of distribution we've secured in the measured channel, we also recently got commitments from a customer in unmeasured channel that gives us confidence that this category will be a meaningful contributor to our growth in 2023 and beyond. Now, I'd like to turn the call over to our CEO.

Jerry Law to provide an update on Bolingbrook and our operations more broadly..

Thanks, Bryan. Hey, good morning, everyone. Thank you for joining us on today's call. I'm pleased report our Bolingbrook facility is continuing to ramp up its phase production startup, on schedule and within budget. I'm very proud of the team and how far we've come since opening in March.

Bolingbrook enables our entry into new categories, and gives us much needed capacity to meet the growing demand for existing products.

At twice the size of our existing city of industry facility, Bolingbrook is expected to add approximately $200 million in incremental capacity by the end of the year, and will have the capacity to produce approximately $250 million to $300 million in revenue at full capacity.

This will enable us to match capacity with the long and short- term demand for our products, and will also significantly accelerate our margin improvement efforts. As Bryan mentioned, we continue to expect to be adjusted EBITDA positive in the fourth quarter of 2022, a full year ahead of our schedule, owing largely to our Bolingbrook investment.

Today, we have four lines up and running and we remain on track to complete the final phase by the end of 2022. As a reminder, the ramp up is not linear and last phase will yield the greatest efficiencies.

We have built flexibility into the design such that the plant is capable of producing a vast majority of our existing products, as well as our new innovation items.

Products made in the new facility will have a structurally lower cost driven by labor, higher throughput and the plant's proximity to lower cost raw materials, supplies and our major distribution hub.

Overall, we believe this new facility puts us in position to meet our long-term goal of achieving $500 million in revenue as well as significantly accelerates our margin improvement.

We have already seen the impact Bolingbrook has had to successfully relieve pressure on the City of Industry facility, 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 normal operational level, it will allow us to focus on continuous improvement and in turn, we expect to improve yields and drive efficiencies there. Before I get turned over to Akshay, I would like to touch on our margin drivers for 2022. Especially in light of this inflationary environment.

We expect direct material inflation to now be in the low double digits in 2022. We have several initiatives in place to offset these higher costs, including higher pricing, trade optimization, and cost productivity initiatives. The biggest offset is productivity, followed by pricing and trade optimization.

Given how early stage we are in our productivity agenda, the savings we have identified for 2022 represent approximately 10% of our cost base which is two times our long term target a 5% growth productivity.

We believe that pricing we have in place along with the productivity initiatives will enable us to deliver on our revised gross margin guidance of 19% to 21% for 2022. It's an exciting time at Real Good Foods and I'm very excited on the progress we've made in both supply chain and operations in order to support the growing demand.

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

Thank you, Jerry and good morning, everyone. Turning to our financial results, net sales in the second quarter were $30.8 million, an increase of 65% compared to the second quarter last year. Sales growth in the second quarter was primarily due to strong growth in our core products and strong growth in the measured channel.

In the retail channel, growth momentum continued with 97% growth compared to the second quarter last year. We achieved this growth despite a delay in shelf resets at a major national retailer.

The strong growth in the retail channel is being driven by recent new customer wins, expansion with existing customers, and continued strong velocities in core products. We are pleased with retail acceptance of new products and early reads on velocities are positive, especially for breaded chicken.

Our full year expectations for the retail channel remain unchanged despite the aforementioned delays in shelf resets at a major national retailer. In the unmeasured channel, growth remained strong in the second quarter with sales growing 30% compared to the second quarter of last year, driven by distribution gains.

Albeit included in our internal plan and guidance, it is important to point out that the timing of promotional events significantly impacted unmeasured channel growth this quarter. On a two year basis, sales in this channel grew over 20 fold.

As Bryan mentioned, we have clear visibility in upcoming promotional events, and have recently secured incremental distribution in this channel. As such, we expect unmeasured channel sales growth to accelerate significantly in the second half and to be better than our previous expectations.

Our second quarter gross profit was $2.4 million reflecting a gross margin of 7.6% of net sales, compared to gross profit of $2.7 million or a gross margin of 14.2% of net sales in the second quarter 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, excluding the $1.7 million in Bolingbrook manufacturing cost this quarter, our margins would have been 13.1%, which is a sequential improvement compared to the 11.3% gross margin we reported in 1Q ‘22. And the 4.9% gross margin we reported in 4Q ‘21.

Sales of products manufactured in Bolingbrook were minimal this quarter given that plant was still in early ramp up phase. Adjusted gross profit during the quarter was $6.8 million, reflecting adjusted gross margin of 22% of net sales, compared to $3.9 million or 20.9% of net sales in the second quarter last year.

Adjusted gross margin improved roughly 500 basis points sequentially compared to 17.2% in the first quarter, which was ahead of our expectations, and driven primarily by better price realization.

We continue to expect our adjusted gross margins to improve sequentially in the second half, driven primarily by greater contribution from productivity measures, as well as lower labor costs. We expect to exit 2022 with structurally lower costs, especially on labor.

Beyond 2022, we have a long runway of productivity savings that we believe will drive incremental margin expansion. Recall that we expect to generate at least five percentage points of gross productivity savings annually and expect that over time we'll be able to drop at least two percentage points off this to the bottom line net of inflation.

As Jerry mentioned, we're in the early stages of harvesting productivity savings and expect gross productivity to be in the double digits as a percent of COGS in the short term.

In other words, in the short term, we are relying more heavily on productivity initiatives than pricing to offset inflation, which we believe is the right strategy for a brand at our stage. Moreover, our strategy seems to be working. Given the strong velocity growth and share grains we're seeing across our portfolio, despite taking prices up.

Total operating expenses were $12.2 million compared to $6.8 million in the second quarter of 2021. Adjusted operating expenses were $10.4 million compared to $5.5 million in the second quarter of 2021, or an increase of approximately $4.9 million.

The increase in operating expenses is primarily driven by selling and distribution expenses to support growth to the business, increased personnel expenses related to the build out of the company's operations, finance and leadership teams, and increase investments in marketing and research and development.

Adjusted EBITDA was a loss of $3.2 million compared to a loss of $1.4 million in the second quarter of 2021. Sequentially, as compared to the first quarter of 2022, the adjusted EBITDA loss narrowed by $100,000.

The sequential improvement in adjusted EBITDA was driven by improvements in gross margins, partially offset by the increase in administrative expenses.

We expected adjusted EBITDA improvement in the second half of the year, driven by factors mentioned earlier, including higher productivity savings, lower labor costs and continued fixed costs leverage. Now shifting to our balance sheet and cash flow. As of June 30, 2022, we had cash and cash equivalents of $12.6 million, and total debt of $49 million.

Our revolver balance increased by roughly $26 million sequentially, with the vast majority or $19 million of the increase related to increases in working capital to fund our growth.

The working capital increase was driven by a planned increase in our inventory to help minimize the potential for supply disruptions during a major plant ramp up and transition of production. We expect our inventory levels to normalize and come down as the year progresses.

Subsequent to the quarter end, we amended our credit facility to increase the capacity of our revolver to$ 75 million to provide us with even more flexibility.

Our cash balance of $12.6 million combined with our unused revolver capacity of $35 million provides us with liquidity of $47 million, which we believe is more than enough for us to fund our business for the foreseeable future without needing to raise more capital.

As a reminder, it's important note that the Bolingbrook facility and equipment is being leased with costs flowing through the P&L and there's no CaPex spending associated with that plant. We continue to expect to be adjusted EBITDA positive in 4Q ’22 and EBITDA positive in 2023 with limited CaPex requirements.

All considered we have ample liquidity to fund our current needs, and execute the plan we've laid out. Turning to our outlook for 2022. We're raising our net sales guidance and narrowing our ranges on adjusted gross margins and adjusted EBITDA.

We now expect net sales of approximately $155 million to $160 million, reflecting an increase of approximately 84% and 90% compared to 2021. Adjusted gross margins are expected to be in a range of 19% to 21%. And adjusted EBITDA is expected to be alas in the range of $7 million to $9 million.

Long term, we continue to expect net sales of $500 million, adjusted gross margins of 35% and adjusted EBITDA margin of 15%. With that, we're now available to take your questions.

Operator?.

[Operator Instructions] Our first question is from the line of Jon Andersen from William Blair..

Hey, good morning, everybody. Thanks for the question. The new sales guidance, which you should pointed out you raised today implies an acceleration in sales growth in the second half of the year relative to the second quarter. You touched on this in your prepared comments. But I do want to make sure I understand.

What's driving the acceleration in the second half? And your level of visibility and thus confidence in that?.

Yes. Hi, good morning, Jon. We really like what we're seeing on a velocity standpoint. And with regard to the raise, a lot of that's coming from expanded distribution, the measure and the unmeasured channel.

And then in terms of our degree of confidence, we have really good visibility in the back half Q3, Q4 for this year, and that's why we felt it was appropriate to do this raise..

It sounds like the expanded distribution in the unmeasured channels is due at least in part to acceptance of some of your innovation. I think you mentioned breaded poultry. Is that a fair statement? And I'm wondering, you did touch on velocities a little bit, I know, it's super early.

But you touched on some of the initial velocities you're seeing for breaded poultry.

I'm wondering, is there been any, significant, kind of promotional activity, either merchandising activity in stores around that launch? Or your own kind of digital efforts yet that have driven that? Or is that still to come?.

Still to come. And that's why, we're so encouraged by it, the velocities that I referenced in my prepared comments. And again, you're right, very early, we're only two weeks in. That's the products on shelf not being promoted. And so to cap those, that kind of read, velocity, read right out of the gate it’s very encouraging.

It's also before we've really leaned in with our community as well. So that's why I think we still have room to grow from where we are today. And look, I like what we're seeing at this early stage..

And I know that some of the breakfast item enhancements.

I think, in market, we've noted the breaded poultry, you've noted it, we've seen it in certain cases, where do things sit with respect to kind of the Asian entree platform? Is that something we should be thinking about more for kind of 2023 given all of kind of the other efforts that you're making at the moment? Yes, just an update on that particular platform I'd be interested in..

Yes, multi serve Asian entrees are just now coming on shelf as well. We're seeing nice velocities there. I believe will be a significant growth driver in 2023. But we're off to a good start with those items as well..

And I think Jerry may have mentioned that the contribution to volume was very limited or the volume coming out of the Bolingbrook plant was immaterial, very limited in 2Q.

where are you in terms of ramping up kind of production out of that facility? I think that's sort of productivity, not only supporting the innovation, obviously, and maintaining high service levels and expanding distribution, but also on the productivity front.

Will that begin to ramp pretty quickly here in the third quarter? How should we think about that?.

Yes, that's right. I'll turn it over to Jerry but before I do, your comments are accurate. We had approximately only a $1 million of revenue coming out of Bolingbrook in Q2 that has dramatically changed in Q3. And the other benefit from Bolingbrook that I wanted to mention is it's allowing us to take our utilization rate in industry down.

And so we start to see performance and margin improvement coming out of the City of Industry plant. But I'll pass it over to Jerry to kind of give you a greater view of what's going on in Bolingbrook today.

Jerry?.

Yes, Thanks, Bryan. Good morning, Jon. So yes, we're -- we have two spirals four lines up and running in the plant now. Last week, we moved to two shifts in the plant, which was a big step for us. We have the last set of lines being commissioned in about the next 10 days.

So as far as the panels being produced in the plant, we're certainly on the uptick, efficiencies and yields are improving each week. I'm not in Bolingbrook this week, which is a big sign that we're on our way. I've been living there for the most part of the last couple of months getting this thing to come out of the ground.

So that's a sign that things are starting to move. We’ve commercialized chicken enchiladas, we're now making our own tortillas there, for enchiladas, we have the kitchen commissioned, we have the majority of the team hired, and they're starting to gel together. And we're really proud of what we're seeing there.

So the next handful of months, you'll see a significant step change in both our throughput and our productivity agenda. So we're excited about what the future has there. And we're well on our way..

Great.

One last one, maybe for Akshay, how should we read the decision to upgrade, or I should say increase the capacity on the revolver, is there an assumption around increased cash consumption in the near term? And are you confident here that you can internally fund kind of the growth that you're looking at, for the sake of you said, for the time being?.

Thanks, Jon. Good morning. So, yes, so good question. The way you should view it is, it just increases our flexibility significantly from where we are. So it's, think of it more as cushion, right, so we have $47 million of liquidity.

And if you just take the consensus estimates for the second half, and flow them through with zero, neutral working capital drag, it implies about $9 million of cash, you have free cash flow usage for the remainder of the year. So we have $47 million in liquidity. And I guess you could say the street is expecting, about $9 million of usage.

And then as we've said in ‘23, we're going to be EBITDA positive. And so we feel very good about where we are, from a liquidity standpoint. We don't need anywhere close to the liquidity that we have created for ourselves. But that is cushion that's nice to have, especially, in this environment that we're in.

So we've built what I would call a war chest, relative to what our needs are..

Our next question is from the line of Bill Chappell from Truist..

Thanks. Good morning.

Hey, just a housekeeping, can you quantify what the impact in the -- from the national rollout from 2Q to 3Q?.

I'm sorry, Bill, you broke up for a minute there.

What's the question?.

Sorry. I think you alluded to a push out of a contract or a distribution gain from 2Q to 3Q. I didn't know if you could quantify the impact on the quarter, if there was one..

Yes. It was in the range of a couple million dollars..

Got it. And then second on kind of supply chain. Obviously, I know you have good visibility into the orders for the back half. That's the acceleration.

Now what's kind of the state of distribution and supply chain bottlenecks in terms of not your manufacturing, but getting into the doors? Do you feel like most of those issues are behind you? Or is there any risk or with that risk to kind of meeting your expectations in the back half?.

What we've done to mitigate that risk and service our customers is increase our inventory levels, which is what you saw happen in on our balance sheet in Q2. We also have forward deployed the finished goods closer to the customer as well. So we've opened up an additional hub for our finished goods. And that helps as well.

But at the end of the day in this supply chain environment, it requires manufacturers to increase inventories of the raw materials, packaging, and obviously finished goods as well. And that's what we've done. We also kind of went extremely long in Q2 just because of the plant startup at Bolingbrook.

And as Akshay had said in his prior comments, you'll start to see that kind of come down and normalize in Q3 and Q4.

Does that answer your question, Bill?.

Yes, absolutely. And then looking to kind of innovation. So obviously, ‘22 is a robust launch of a lot of things. And so kind of looking to ‘23. I know it's -- you've yet to announce big things there.

But should I be thinking of ‘23 kind of just backfilling and really pushing some big launches here and trying to get more indoors? Or do you expect it to be a similar type of rollout of kind of new and different items as we move into ‘23?.

Well, we are innovative company, it drives our community. We have a pretty robust innovation pipeline. Now having said that support 2023, now having said that, I think you're spot on, especially when you see these encouraging velocities.

The sales team focus for 2023 is going to be driving doors and just making sure that our products are available for the folks that want access to it, but expect to hear some new stuff from us, probably in Q4, as we start talking about 2023..

Our next question comes from the line of Rob Dickerson from Jefferies..

Great, thanks so much. I guess maybe just first question for Akshay. Gross margin obviously came in pretty nicely Q2, ahead of kind of where we thought it was going to come in. You said it was driven by pricing. So maybe you've just spent a minute on kind of like why the pricing came in a little bit better than you would expected.

And then secondly, tied to that, when I look at the guide for the year, it’s tighten guide, which is great. But does seem like there's also some uptick potential in the fourth quarter might it kind of get you to that positive EBITDA that you're alluding to. I think you've also said you'd expect margin to improve sequentially in the back half.

So I am just trying to kind of right size, what happened in the quarter to get you the better gross margin? And then if margins are improving in the back half, I mean frankly, it seems like hitting that gross margin guide that you tighten doesn't seem to be a tremendous challenger, real risk there. That's the first question..

Akshay?.

Yes. Thanks, Bryan. Hey, nice to, good morning there. Good question. And it's my type of question. It's like a multi, multi segmented question. I love those. So gross margins. So the reason gross margins improved sequentially. You call it out perfectly. Our price realization was much higher this quarter than last quarter.

And Bryan mentioned that in his comments I believe. It wasn't necessarily better than our expectations. I'd say, what happened that drove margins to be slightly better than our expectations is just the blocking and tackling and execution in the plants was better. But yes, the pricing came in as we had expected.

It certainly drove the sequential improvement. But as Jerry had mention, there's generally bringing Bolingbrook on has impacted City of Industry positively. And we're really starting to see a pretty major inflection in the cost production in that plan. So I think that was what I would call, better than our expectations slightly this quarter.

As far as the shape and the trajectory going forward for margins, we, overall, there's no change, right, we narrowed our guidance. The midpoint of our gross margin guidance is exactly the same. So there's really no material change in our expectations. But I’ll just point out, as far as cadence, we have, we built a lot of inventory, as you saw, right.

And that is relatively high cost inventory. So we are going to flush that out in this quarter. So that will impact 3Q margins.

But if you look at where we are today, from an operating standpoint, on cash cost basis, our costs are already structurally lower, and every single day getting structurally even lower as we execute on our plan with Bolingbrook being a bigger part of our production mix.

And as that happens, City of Industry continues to operate, with much, much higher efficiencies every day. So that's the 3Q, you will see a residual impact of the higher costs flowing through COGS with the inventory that we have.

But then, we should see structurally better margins that we're currently experiencing flow through more fully as the year progresses.

So was that -- did that cover a most of your questions?.

Yes, that was great. I appreciate it. And then two quick questions. The other second question is just, you had a comment, in your remarks around, some delay in a shelf reset at a major retailer. I didn't fully catch that.

I wasn't sure if that was already expected and within the original guide, or was the point that maybe there's a little delay for whatever reason, but you're still upping the revenue guide, given increased distribution wins in on measured channels?.

Yes. Rob, you're thinking about it the right way.

Akshay, if you wanted to provide a little more color for Rob?.

Yes. So the delay in the resets at this particular large retailer was a quarter, right, there was a pretty significant delay. And it wasn't included in our guide, we did not expect it. So it was a negative surprise.

However, our retail measured channel expectations remain the same, which means, what's implied by that is the other parts of our business are doing better. And that offset this negative impact, which is a timing impact. It’s, we are on shelf with that particular retailer.

And velocities are as we expected, but basically one quarter’s worth of sales for our new items had shifted, let's call it to future periods..

Okay. Perfect. And then I guess, just lastly, maybe more for Bryan, kind of broadly speaking, kind of how you're viewing velocities relative to the pricing you've already taken.

I mean, it sounds like kind of the headline is, the velocities haven't really changed much, despite the higher pricing, and I'm not sure if that's on like the majority of your skews SKUs or if there's differential in certain channels, we keep hearing that consumers are maybe shifting to, more discount channels on the -- at least on the surface, maybe more in to club.

So just trying to get a gauge as to kind of what you saw in the quarter on the velocity side relative to pricing. And if you did see, there may be a little bit more strength in certain channels than others. That's all. Thanks..

Yes. Rob, I mean, nice thing about this quarter, as you saw our net pricing realization flow through, and at the same time, you saw our baseline velocities in the measured channel accelerate and over 50%. So I think that kind of is a clear signal of how we're thinking about elasticity. With regard to the consumer just in general.

I think we're really well positioned for, if you expect the consumer to continue to come under more and more financial pressure I think Real Good Foods is uniquely positioned for that, really in three ways, one, as you know, frozen food always benefits from this type of economic environment, just from a value to the consumer basis, it's a great place to be.

Second, when you look at Real Good Foods distribution footprint, we over index with retailers and unmeasured channel providers that really deliver the greatest value to the consumer. And finally, the product design and brand promise of being high in protein is what the consumer really seeks to feed their families.

So as we continue through the macro environment that we're in, I actually view Real Good as being very well positioned..

Our next question comes from the line of George Kelly from ROTH Capital Partners..

Hi, guys, thanks for taking my questions. Just to bolster with a couple of modeling questions. I'm curious if you could help us with the breakdown of revenue between 3Q and 4Q, just sort of a general split. And then secondly, on pricing, curious if you're planning on taking additional pricing in the second half..

Yes, George, good morning, I'll pass the modeling question over to Akshay. But with regard to pricing, we do not have any plans today to take further price. However, if the environment and if our input costs expectations change, we will not hesitate just as we have not hesitated in the past to take price.

But at this time, we have no plan or to take future pricing.

Akshay, you want to roll through the differences of the Q3, Q4 with George?.

Yes, that's a great question. Thanks, George. Good morning. So I think the remainder of the year is going to be more evenly distributed. So if you just take our full year guidance correctly, year-to-date revenue, the next two quarters will be 50:50. So it is more evenly distributed than our previous expectations.

And what's factored into that is the new distribution that's impacting fourth quarter and the other factors that we discussed, including the delays, et cetera that we've seen. So even break between what's remaining on our revenue guidance for the next two quarters..

Okay, great. And then another quick modeling question.

Did inventory, where do you expect to end the year?.

Yes, great question. We have some, so we took on a significant amount of inventory in the first half that was a strategic and tactical move we made to manage this transition of bringing on Bolingbrook while not having any supply disruptions, right.

So that was a strategic tactical move that we made, it took our days on end to about 100 days, and we should be in the, we targeting in the 70 to 80 days range. So it's going to -- there's going to be a significant reduction in overall inventory, especially as you're looking at it in the context of COGS.

And we do expect that that will flow through in the form of, a source of cash in terms of working capital. And to my comment earlier about what the street is expecting on free cash flow, that was assuming a neutral working capital assumption.

So we do think inventory is going to come down, we are targeting to come down by 20-25 days, which is going to be a significant dollar amount, and it should have a material positive impact on our free cash flow for the second half..

Okay, great, then just two quick, last questions. First, resets just curious, you commented that one [Inaudible] curious how comfortable you are with the second half resets? Is that some of there's a bit of risk around just because of labor issues and all the challenges that retail is facing.

And then second question is which innovation -- which your new products are going into club?.

Hi, George. No, at this point, we've got really good visibility for the remainder of the year. And, I talked about in my prepared remarks 27,000 confirmed TPDS for the innovation that rolls through Q3, Q4. So I really don't see additional reset timing issues for the remainder of the year. So feel good about that.

What was your second question, George?.

Just which are the new products that the big launch recent launches are going into club?.

Oh, as we said, we see breaded poultry being accepted there. We're excited to see what happens there. And you'll see that on shelf in Q3. And when you overlay the velocities we are seeing in the measured channel, we liked our chances. The product performing there as well..

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. Now I would like to turn the conference back to Mr. Bryan Freeman, for closing comments..

Well, thank you for joining the call. And we look forward to reporting again in November. Thank you..

Thank you. So the Conference of The Real Good Food Company has now concluded. Thank you for your participation. You may now disconnect your lines..