Greetings, and welcome to The Real Food – Real Good Food Company’s Second Quarter 2023 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. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Shamari Benton, Vice President of Financial Planning and Analysis. Thank you. You may begin..

Good morning, and welcome to The Real Good Food Company’s Second Quarter 2023 Earnings Conference Call. On the call today are Bryan Freeman, Executive Chairman; Jerry Law, Chief Executive Officer; and Akshay Jagdale, Chief Financial Officer. Our second quarter earnings release crossed the wire at approximately 8:00 a.m. Eastern Time today.

If you have not had a chance to review the release, it’s available on our Investor portion of our website at www.realgoodfoods.com. Before we begin, I’d like to remind everyone that certain statements 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 historical facts 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 net sales from existing customers and acquiring new customers, introduce new products and compete successfully in our industry, implement our growth strategy and effectively expand our manufacturing and production capacity.

Forward-looking statements made on the 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 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 statements herein, 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 onetime or nonreoccurring charges that are not core to our ongoing operating results, and which we believe better reflects the performance of our business on an ongoing basis.

Our non-GAAP financial measures include adjusted gross margin and adjusted EBITDA are reference. A reconciliation of each non-GAAP financial measure to its most direct comparable GAAP financial measure is included in our second quarter earnings release, which is available on our website under our Investor tab.

With that, it is my pleasure to turn the call over to The Real Good Food Company’s Executive Chairman, Bryan Freeman..

household penetration, repeat rates, social community growth and engagement and velocity. Starting with household penetration. According to numerated data as of July 2023, The Real Good Foods brand household penetration is approximately 8.3% – flat from 8.3% in March 2023.

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 Amy’s, a brand with over $500 million in retail sales.

For perspective, according to a research report recently published by Jefferies, the entire plant-based foods category had a household penetration of only 5%, down from a peak of 9% a couple of years ago.

Our significant 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. And as our distribution footprint grows in the back half of this year, we expect to see our household penetration grow significantly.

Now turning to repeat rates. They continue to be in line with industry averages at 32% in the most recent trailing 52-week data as of July 2023. Given the new distribution of new users we are bringing into our franchise, this repeat rate is exceptionally strong.

Regarding social community growth, the second quarter marked one of the strongest and most efficient quarters for impressions and follow our growth in the history of the company. We generated over 12.2 million organic impressions and 77 million total brand impressions.

Organic impressions are not paid for impressions, and we’re able to generate due to the size of our community. This provides massive long-term value and that we can connect with millions of people to support our initiatives.

For example, when we launched new distribution, we’re able to instantly tell millions of people who are now available in our local store through geo-targeting. This creates velocity at scale and new item performance in a way our peer group cannot achieve without spending millions of dollars on advertising.

We worked with thousands of micro and nano content creators within defined consumer verticals to mobilize and engage with people in a meaningful or entertaining way. We have the largest Instagram community of any frozen food brand in the U.S. with over 476,000 followers, an uptick of approximately 22,000 versus end of the first quarter.

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 our number of followers and subscribers, I can say it’s working and it’s efficient.

Our retailer partners appreciate how we drive new consumers to the categories we participate in, allowing Real Good Foods to grow the frozen category with consumers new to frozen food rather than taking share from others.

In fact, a recent study from SPINS showed that only 3.5% of households who purchased our breaded poultry items were households that purchase breaded poultry from the nation’s largest brand in the prior 52 weeks. This, along with strong velocities is why we have permission to grow distribution.

These strong brand health indicators underpin our confidence in achieving over $500 million in sales over the long term. 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..

Thank you, Bryan. Good morning, everyone, and thank you for joining us on today’s call. Our Bolingbrook, Illinois facility is continuing to ramp up production, and we are on track to achieve significant utilization rate improvements in the second half of the year.

I continue to be very proud of the team and how far we’ve come since opening the new facility. Bolingbrook enables our entry into exciting new categories and gives us much needed capacity to meet the growing demand for our new and existing products.

I was pleased with our gross margin performance in the second quarter, which was in line with our expectations. Our 13.6% gross margin is particularly encouraging given that our plants continue to be underutilized.

Our sales guidance calls for capacity utilization rates to increase from approximately 40% currently to 70% to 80% in the second half of 2023. Higher utilization rates should drive significant fixed cost leverage in the plants, resulting in a significant increase in our gross margins for the second half of 2023.

Adjusted gross margins, which assume full utilization were 28.2% and point to the underlying margin profile of the business when plants are fully utilized. We have been deliberate about building capacity ahead of demand.

All of the hard work and investments made to get the capacity up and running over the past 15 months have put us in a position where we are confident that we can service orders when the significant growth our sales team has locked in for the rest of the year hits.

Not only are we in a good position to meet our demand needs, but we are also confident we can do so at targeted efficiencies. In other words, our growth should be highly incremental to our margin structure for the remainder of the year, especially in the second half of 2023 as plant utilization increases.

While lower raw material costs contributed to a solid margin performance this quarter, margin gains also reflect optimization of our formulations. This was a tough quarter to judge plant efficiencies given the sub-40% utilization levels as well as the amount of new product activity, both of which have a negative impact on efficiencies.

However, I continue to be encouraged by the potential improvement in efficiencies at Bolingbrook and the City of Industry continues to perform well.

Moreover, we expect our operating performance to improve significantly as the year progresses driven by better efficiencies, resulting in lower labor costs, improved plant utilization and better overhead cost leverage. Before I turn it over to Akshay, I would like to discuss the biggest catalyst for the remainder of 2023.

We continue to expect our labor costs to come down sequentially as Bolingbrook, which has structurally lower costs compared to our City of Industry facility becomes a larger portion of our production mix and achieves our targeted efficiencies. Every incremental pound coming out of Bolingbrook is accretive to our labor costs.

In addition, overall labor costs are further aided by continued efficiency gains at our City of Industry facility. We are confident in our ability to bring labor costs in line with industry standards of about 5% to 10% of sales over time.

To reiterate, we expect a major portion of this opportunity to flow through in the second half of this year as efficiencies are harvested in both plants and Bolingbrook becomes a bigger portion of our production mix. Additionally, higher sales will drive a step change in plant utilization rates and allow us to leverage lower overhead costs.

We expect this overhead leverage to drive approximately 10 points in further improvement in our margin profile in the second half of 2023 as compared to the first half. Lastly, our investments in Bolingbrook have enabled significant productivity savings.

These include the self-manufacturing of our chicken tortillas, chicken that is used in our product fillings and our proprietary breading blends, which on a combined basis are likely to drive approximately 200 to 400 basis points of margin improvement.

As for direct materials inflation, the good news is that commodity costs remained favorable and point to a roughly 600 to 1,000 basis point tailwind for 2023. In summary, our operations infrastructure has more than enough capacity to meet the incremental demand we expect for the second half of 2023.

The sequentially higher sales level that we are now guiding to in the third and fourth quarter, driven by distribution points already secured, mark an important inflection point for the business from a capacity utilization perspective and will enable us to meet goals we laid out for 2023.

We are pleased by our margin performance this quarter, which was in line with expectations and showed significant improvement year-over-year. We continue to expect 2023 adjusted EBITDA to be in the positive mid- to high single-digit millions of dollars range and expect to generate positive cash earnings in the second half of 2023.

We have strong visibility into the drivers of our continued margin turnaround and feel confident in achieving our outlook.

It’s an exciting time at Real Good Foods and as we enter the second half of the fiscal year, we continue to provide focused support for the growing demand our sales group has locked in by investing in talent, capabilities and the supply chain.

I feel confident in our ability to effectively navigate the environment we are in to deliver results and increase value for our shareholders. Now I’d like to turn the call over to Akshay, our Chief Financial Officer, who will walk you through our second quarter financials..

one, better-than-expected unmeasured channel growth; two, strong new item velocities and incremental distribution growth; and three, continued strong momentum on distribution expansion in the measured channel.

To demonstrate our conviction in the implied hockey stick growth trajectory for the remainder of the year, we’re deviating from a typical pattern on a one-off basis and providing some quarterly guidance.

We expect third quarter 2023 sales to be in the range of $60 million to $65 million, representing 60% to 73% growth, and fourth quarter 2023 sales of $70 million to $77 million, representing 96% to 116% growth.

This revenue growth approximately doubles our plant utilization rate, reduces our distribution and administrative costs as a percent of revenue, and as such, we expect to generate positive cash earnings.

Our second quarter gross profit was $4.8 million, reflecting gross margin of 13.6% of net sales as compared to a gross profit of $2.4 million or gross margin of 7.6% of net sales in the second quarter of last year.

The increase in gross margin was primarily due to decreases in certain raw material costs and productivity and efficiency improvements at the Bolingbrook plant.

Adjusted gross profit during the quarter was $10 million, reflecting an adjusted gross margin of 28.2% of net sales as compared to $6.8 million or 22% of net sales in the second quarter of last year. Productivity initiatives and lower commodity prices contributed to the year-over-year increase in margins.

Although adjusted gross margins in the first half of 2023 have averaged higher than our guidance range for the full year, we’re maintaining our adjusted gross margin guidance for 2023 of at least 24%.

Several factors are contributing to this implied sequential moderation in adjusted gross margins, including negative product mix, seasonally higher costs for certain key inputs and higher levels of above-the-line brand support like slotting fees to support growth.

On a reported basis, gross margins are expected to increase substantially in the second half, driven primarily by lower labor and overhead costs. Looking ahead to 2023 and beyond, we have a long runway of future productivity savings that will drive incremental margin expansion.

Total operating expenses were $15.5 million in the second quarter as compared to $12.2 million in the second quarter of last year. Adjusted operating expenses increased by approximately $4.1 million to $13.5 million in the second quarter as compared to $9.4 million in the second quarter of last year.

The increase in operating expenses was driven primarily by the increase in research and development costs to support the strong new product pipeline in 2023. R&D costs tend to be lumpy on a quarterly basis depending on the level of new product activity as well as the timing and scale of commercialization.

Adjusted EBITDA totaled a loss of $1.9 million in the second quarter as compared to a loss of $3.3 million in the second quarter of last year. This was generally in line with our expectations.

Cash burn in the second quarter improved sequentially but was still relatively high, owing to the plants being significantly underutilized for most of the quarter. Utilization rates improved towards the end of the quarter and we were cash flow breakeven during that period.

We also continue to invest in inventory to support the significant acceleration in growth expected in 3Q 2023 and beyond.

We have strong visibility and the significant inflection in our sales growth starting in the third quarter, which should result in significant fixed cost leverage across our plant network and in G&A propelling us to positive cash earnings. Following the end of the second quarter, we announced an amendment to our credit facility.

We are pleased with this agreement, which further enhanced our liquidity position and will provide us with access to nondilutive capital to fund our growth and transition to positive cash generation. As such, we have ample liquidity to fund our current needs and execute the plan we have laid out. Now turning to our outlook for 2023.

In 2023, we’re reiterating our expectations for net sales of at least $200 million, adjusted gross margins of at least 24%, adjusted EBITDA in the mid- to high single-digit range. And as for cash flow, we expect to transition to positive cash earnings in the second half of 2023.

Long term, we continue to expect net sales of approximately $500 million, adjusted gross margins of 35% and adjusted EBITDA margins 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?.

[Operator Instructions] Our first question comes from the line of Jon Andersen with William Blair. Please proceed with your question..

Good morning. Thanks for the question. I wanted to ask first about the sales guidance. You’ve kind of reiterated the outlook for the full year.

At a high level, is the right way to think about that, that you’re seeing better performance or expectations in the second half in the nonmeasured channel, but this is offset a little bit by what sounds like maybe later distribution or late quarter shelf resets in the measured channels? So is there a bit of a trade-off there between nonmeasured and measured this year that’s kind of leading you to kind of reiterate the full year sales outlook?.

Yes, I think that’s directionally accurate. And you can kind of see that shape when you look at what we’re guiding towards for Q3 and Q4. So unmeasured is really making up for some of the lateness in terms of those additional 30,000 TPDs [sic] [TDPs] we see coming in, in the back half.

Look, we’re still really impressed by the velocities we’re seeing with our items today..

Yes, that was kind of my next question.

So where you have seen the new products get to shelf in the measured channels? Can you talk about that, like where you’ve seen which products, which customers represent, I think, the 25,000 incremental TDPs you’ve already seen? And what’s still to come the incremental 30 in the back half of the year? And then also perhaps like are you – is it too early? Or are you able to say anything about the kind of the velocities you are seeing on some of the newer items like breaded poultry, I think, at a large mass customer?.

Sure. The quality of the TPDs [sic] [TDPs] is really far better than our base, and it’s being driven by our global multiserve entrees and obviously, our breaded poultry. That’s a long-winded way of saying we see anywhere from 2 to 5 YAG our base products in terms of velocity.

And so the majority of our new points of distribution are those 2 platforms in the measured channel. And that’s why you see the growth in our guidance outpace on a percentage basis, the growth of our points of distribution. You asked about specific velocity reads. It’s not too early to provide some guidance on that.

And what we’re seeing is the velocity of those 2 platforms are really coming in where we expected. And what I would say is that is really impressing us is in some customers, we’ve gone from 1 item in the breaded poultry category to 3, and they’re really not cannibalizing each other.

The incremental 2 additional items in that door are actually complementing the volume we’re getting out of that door, which is impressive. And it just is a reflection of the size of the category and the velocity of that door or of that category that we’re able to do that..

That’s great. One more on – you mentioned, I guess, this quarter, and I think last that timing of promotions has had an impact on sales – the sales comparison, I should say, promotion last year that didn’t repeat this year.

Can you talk about the cadence of any events you’re planning this year to activate consumers now that this distribution is getting into place? I guess what I’m getting at is, do you – you’ve kind of been forced to absorb a bit of a headwind with respect to promo timing in the first half.

Does that reverse in the second half?.

Sure. So to recap, I mean we’re lapping 93% growth, right, in the measured channel. But when you look at – when I think about just our brand health, our baseline velocity was up 8%. And so that’s really healthy. We’ll – once we get the point of distribution on shelf, then of course, we’ll invest against them and make sure that folks see us on shelf.

We’ll do that through some trade, but our plan is not to really increase our trade spend from historic level..

And how about on the club side, the nonmeasured.

Anything there with respect to kind of year-over-year comparison promotion?.

What I will say is we’ll have national distribution with our appetizer platform, our breaded poultry platform and our entree platform in the frozen section in the back half. And the volume we will be promoting. However, the volume is so significant from – on a percent revenue basis, we don’t really see our gross to net changing from historic levels..

Great. Thanks so much..

Thanks, Jon..

Our next question comes from the line of JP Wollam with ROTH MKM. Please proceed with your question..

Great. Good morning and thanks for taking the questions.

Maybe if we could just start – could you just refresh my memory on kind of some of the move into the refrigerated state? And I just want to make sure, has that been rolled out on shelves already for some time? And if so, could you just kind of give us a rundown on how that’s looking and if not then for another day?.

Sure, JP. We launched our handheld platform in the refrigerated section in the unmeasured channel a couple of quarters ago. And we – the success and the velocity of the item has exceeded my expectations. And so that’s what’s really driving additional distribution growth.

Today, if I were to guess, our handheld platform in the unmeasured channel and one customer is probably – and this is a guess probably in the 60% or 70% range already. And so that’s been a great tailwind for the company.

And now that we’ve proven it out, you’ll start to see us go up in the measured channel in the back half of this year in the refrigerated section. And we think that, that could be a growth driver in 2024 and beyond..

Got it. And then I forget exactly what the quote was. I think you touched in the prepared remarks on kind of some weakness in either one or all of the frozen category. And you alluded to something along price that had been taken by some of your competitors and that may be kind of a tailwind for you.

And I’m just curious, especially with your high velocity categories, could you just remind us kind of where your price stacks up versus competitors? And perhaps what that means as you think about price going forward?.

Sure. So from a category dynamic perspective, frozen has declined. The growth has declined from approximately 7%, down to 1%, and you see this in the headlines. You see unit sales decline and we think that’s a lot due to the significant – due to significant price increases that they took.

And we’re talking about price increases stacked up close to 20% in the category. That – we’re not seeing that with our products, and that’s because – and here’s the key point, JP, the health and wellness industry continues to grow at 7%. In fact, in the latest 4 weeks, it’s up 7%, and that’s where we source our consumers from.

So while others sort of the commoditized frozen food business, you see unit sales declines and deceleration in growth down to only 1%, we’re not seeing that in our platform because we’re a health and wellness brand. And with regard to the pricing strategy, we aim to be somewhere in the 10% to 15% premium to conventional products.

And we’re able to do that because of the investments we’ve made in our plants and our – what we’ve done to scale the business and provide a health and wellness frozen food item without overly high conversion rates..

Great. That makes sense. And one last quick one, if I could. Just on household penetration. I think there was a comment that you might expect to see it move higher in the back half of the year. And correct me if I misheard that.

But just curious, as you kind of look where you’re at now and where you’d like to be, what really is the big item you need to drive that higher or big few items that you think will really drive that sort of step function change in household penetration?.

Sure. It’s distribution. We’re calling for at least 35%, 40% growth in the measured channel. So that will necessarily – that’s just in the third quarter. And so that necessarily means we will grow our household penetration. And so we’re looking forward to pulling that data this time next quarter. So really, JP, is distribution.

We know that the product that we have are performing well from a velocity basis on a store-by-store level. We just are excited to see the distribution finally get on shelf, and that will drive household penetration..

Makes sense. I really appreciate the time, guys..

Our next question comes from the line of Bill Chappell with Truist. Please proceed with your question..

Thanks. Good morning..

Good morning..

Just wanted to start, I appreciate the top line kind of cadence for 3Q and 4Q, but I just want to understand how much, I guess, variability.

Could it happen because it seems like there’s a fair amount that’s driven by distribution gains and didn’t know if you’re expecting a fair – that distribution gains happen to start this quarter or if they can fall between September and October, and so there could be any change? Just kind of how confident you are on that cadence would be great..

Yes, Bill, what I’ll say at a high level is the fact that we did kind of a onetime quarterly guidance thing, I think, reflects our strong conviction of the cadence. And look, we’re at a point in the year where we think we have really good visibility for the remainder of the year.

But with that, I’d like to throw it over to Akshay and get his comments on your as well..

Bill, so good question. I know you are asking this in the context of the noise that happened last year – late last year.

So we’ve been very – can you guys hear me?.

Yes..

So we’ve been very deliberate about the guidance, right? We would not be providing – going out on a limb and providing this guidance if we didn’t have the confidence, especially in light of what happened late last year, right? So we feel very confident about the numbers and because a lot of it is distribution based and that distribution is already secured.

There’s a limited downside risk to that. And on the velocity, it’s important to note that most of these items have been in distribution now for a while. So we’re not like truly guessing on any velocity either.

So there can always be some changes, but order of magnitude, we’re doubling our quarterly run rate on revenue as we thought that we really want to call out and basically validate. So that’s why we’ve done this one-off guidance change so that you guys have confidence that we’re going to hit these numbers..

Okay. No, that helps. And then just kind of a more of a bigger picture question.

You cite the household penetration numbers, and I understand Numerator is not a perfect vehicle, but how am I supposed to look at 8.4% household penetration, but only kind of a $200 million revenue run rate? Because it would seem like in the greater frozen and fresh categories, if you’ve got that kind of household penetration or that kind of market share, we’re talking in the billions.

So I just – how you look at that? Is that the opportunity? Is that – and how focused should we be on it? I mean if you go to 15% household penetration, but you’re only at a $300 million run rate does that imply that the opportunity is not as good? I’m just trying to figure out what makes sense as I look at that number..

Yes, for sure. I mean, we do look at it as a leading indicator. And it’s just – what it’s telling us is our brand position is resonating with one in 12 U.S. households. But to your point, with that kind of household penetration, we should be a much larger business. And I think the reason for that, Bill, is we’re still really young.

This is just the beginning. And now you see us literally what we’re saying is we’re going to double this business going into the back half. And what we need to do to really drive that – the revenue is getting more items in the same stores. So where we’ve been in the past because we’re such a young company is we don’t have enough items in the store.

I’ll remind you, we have on average, we had about 9 items per store versus Amy’s, which has 40 to 50. And so we were – with that low number of items in store, we’re not able to drive the amount of revenue that, that household penetration would imply. So in summary, what it’s telling is, is our brand position is resonating.

Our job is to get more items, more dayparts, more usage occasions to those same users that want our brand. And that’s what we’re in the middle of doing right now..

Just to add to that. Yes. So just the numbers around that, you know this better than I do, Bill, but the health and wellness brands that 15 or so that we compare ourselves to, an average household spend $50 annually on that brand, right, and average household does. So if you just apply that math, you can get to those larger numbers on the $10 million.

What’s interesting is we’re adding new consumers at a very high rate, right? So as Bryan mentioned, it’s really a leading indicator. So we doubled our household penetration over the last 12 months.

In the first half, if you just take our revenue numbers, the household who’s spending $10 an household annually on us and now the second half is pointing to $30, right? So we’ve got this distribution gain. And so that’s how the numbers are going to play out.

But the first step is to get those households to try our products, to like them and then give them opportunities to buy more and more. So we think it’s the most important brand health integrator. And personally, I think this metric is the most positive data point for our brand period..

No, that’s great. Thanks so much for the color..

Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question..

Great. Thanks so much. Good morning. So I guess just in terms of top line, we’re – talked about this acceleration in the back half. I get it. At the same time it sounds like distribution should be kind of, I guess, gradually or increasingly ramping as you get through year-end. Clearly, not looking for ‘24 revenue guide number.

But I am kind of curious as you talk about this kind of 2x and what’s implied in kind of revenues in the back half of this year relative to the back half of ‘22.

It doesn’t sound like there’s anything clearly that would prevent you from taking that trajectory through at least the first half of ‘24, right, as I’m sure there’s some seasonal dynamics, maybe there’s some promotional plans that could change.

But kind of just very broadly speaking, everything else being equal year-over-year, if you can kind of 2x it in the back half you should probably seem like you should 2x it as well in the first half of ‘24.

Is that logic makes sense?.

Yes, I agree. I mean, I think the run rate is something that would sort of be the baseline for the next year. But what’s more important is that those run rates, this is a positive cash flow business that is profitable. And that’s really what the team is focused on.

And with that kind of volume and plant utilization, Rob, that’s really what is the inflection point for the company and why we felt it was important to provide on a onetime basis, some quarterly guidance for you..

Okay. Okay. Cool. And then I just wanted to clarify kind of back half gross margin language, sincere apologies for not following everything clearly. I heard Jerry kind of make one comment, and then there were some comments made by Akshay as well.

Clearly, just to your point, right, with volume coming through the velocities, plant utilization, overhead and SG&A leverage.

I mean if you could just kind of maybe remind me kind of concisely kind of like where should we be thinking gross margin could be in some range as we get through the back half because you still hold the 24% or greater gross margin guidance. But everything I’m hearing, it’s like clearly better than 24%.

So I’m just trying to get kind of like best worse case..

You know what, I’m going to throw that over to Akshay..

I take full credit for causing the confusion. So let me try to unwind that. So I think the consensus numbers are calling for about 25% adjusted gross margins. That is a sequential decline or deceleration from – decline from where we ended first half.

And there’s good reason for that, right? So number one, we’ve made some investments above the line to drive growth, right? Slotting is a great example, and that’s back half weighted. Number two, certain commodities like cheese and bacon are seasonally much higher in the second half than they are in the first half.

Number three, some of the items that are coming on shelf in a big way in the back half are newer items and to start off with, they have lower gross margin than the more established items.

So those are reasons for why the margins would be sequentially lower on an adjusted basis, okay? And there’s – we are also being appropriately conservative because we buy a lot of stuff on spot. Many things can happen. But I think where the consensus numbers are feels right to me.

And the more important thing that we keep pointing out is reported margins are going to inflect significantly. You’re going to see reported margins converge with adjusted margins because our plants are going to be utilized, right? So we make one adjustment just to show you and investors like what the underlying earnings are of this business is.

So when we’re 80% utilized, that adjustment is nothing more or close to it. So we’re going to see solid in the 20 sort of reported margins. And that’s going to allow us to generate cash.

So did I confuse you more? Or did this help?.

No, it helps. But we have a follow-up, so I can clarify later again. And I guess, just lastly, maybe Bryan, you want to take this one.

There’s a slide in there, I guess, around the study you did for breaded chicken, you have the 2 circles of the overlap, it seems like there’s kind of limited overlap so far with another huge, massive brand, while at the same time, customer acceptance has been positive, right, incremental with the category.

Do you believe kind of longer term, especially as you get this new distribution in mass, as you get through the back half of the year, that maybe there actually could be more conversion, right? I mean it’s clearly a positive for the category if you’re incremental from a retailer perspective, but it also would be like really positive for you if you could get incrementality plus more overlap such that you could actually convert some of those consumers to your brand.

That’s it..

I follow your line of reasoning there, Rob, and what you’re saying makes sense. But what I would say to that is this number is kind of shocking to me. That only 3.5% of those who bought our breaded poultry, those households bought the nation’s largest brand in the prior 52 weeks. So does it go from 3.5% overlap to 7% or 8%, maybe.

But it still is a huge win for our retailer partners. It also shows and demonstrates that we’re sourcing users from the health and wellness category that weren’t participating in the category before, and that is growing faster than frozen. So it’s really a shocking number to me and it’s incredibly positive.

And it gives us permission to grow our distribution with retailers. And it also kind of makes us sort of in the safe harbor scenario within frozen food. So one of the most positive things that I could think of when I think about long-term growth and maintaining and growing distribution in the years to come..

Yes, perfect. Thank you. Appreciate it..

Thank you. We have no further questions at this time. Mr. Freeman, I would now like to turn the floor back over to you for closing comments..

Well, thank you for joining us on our second quarter call, and we look forward to doing this again in 80 to 90 more days. Thank you..

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day..