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Our brands are outgrowing their categories by 25%: Rao’s parent company CEO

Todd Lachman, Sovos Brands Founder, President and CEO joins Yahoo Finance Live ahead of the company's NASDAQ IPO.

Video Transcript

- For more on Sovos's trading debut on the NASDAQ, we have Todd Lachman, Sovos Brands Founder, President and CEO, with us now. And, Todd, congratulations on the debut. Thank you so much for joining us. First, I want to ask, now, with Sovos being a public company, what are the main priorities for going forward?

TODD LACHMAN: Sure. Nice to meet you all, and great to be on Yahoo Finance. Look, first of all, a very exciting day for Sovos Brands. We're absolutely thrilled for this next chapter as Sovos. And let me take a step back before I, you know, jump forward.

You know, the thesis the underlying insight, behind Sovos after, you know, my 30-year career in CPG, I was struck at how the trend of smaller on-trend brands were growing at the expense of larger brands, and I felt that there was a distinct opportunity to create a company with the culture, the talent, the capabilities, and the infrastructure to build a portfolio of these one-of-a-kind brands, and that's just what we've done. We're the fastest growing food company of scale in the United States. Our brands are outgrowing the categories by 25 percentage points. And, you know, as we look to the future, just a massive whitespace opportunity.

Our four brands are all less than 10% household penetration, so we like to focus getting those into new households. We've already increased the total available market of our brands by 7 billion, going from 19 to 26. For example, launching Rao's.

I know you talked about the Rao's delicious sauce. But taking that into the soup category, we're now the number five soup brand. We've taken our Birch Benders brand into the baking mix aisle with a great keto offering. And lastly, we have averaged about one acquisition a year for the last four years and look to average about that going forward.

- Todd, Brian, here. So when I go to my local supermarket, I am hit over the head with jars of tomato sauce. It is one of the most crowded aisles in a supermarket.

Why do you think you have had success selling $8 bottles of tomato sauce in a crowded industry? Is it the label? Are you using special tomatoes? Is it a bigger bottle? How do you decode that?

TODD LACHMAN: Hey, Brian, that is a great question. I mean, honestly, it starts with the sauce. It's really a completely different sauce. And you're right.

We are selling Rao's for three times the average price of the market leader. But Rao's is handpicked Italian tomatoes, olive oil, fresh onions, garlic, and just a few other simple ingredients, and were slow cooked in open kettles, just like homemade, and put in a jar and sold to consumers. It's really created honestly, a category in and of itself, but that's what we're doing at Sovos, is disrupting these categories.

But, Brian, the sauce is so completely different than mainstream sauce, which is paste, added water, added sugar, canola oil, and you can taste the difference. And consumers are tasting that difference. And that's why Rao's, 2018 to 2020, the fastest growing brand in the entire center store. Just putting pasta sauce aside, the fastest growing brand averaging 45% CAGR.

And even at that price point, we're now the number three brand. We've passed a lot of brands along the way, and we're on the heels of being the number two brand in the sauce category. So consumers can taste the difference. They're willing to pay that premium. But honestly, it's very accessible. You can feed your family of four with a jar of delicious Rao's marinara and penne pasta for about $12.

- Hey, Todd, speaking of price, it's Julie here. I want to ask you about pricing power going forward. Because we have been talking to so many business leaders in consumables, but, really, across the board, prices are going up for you. I'm sure those tomatoes are not cheap to get from Italy and ship over here to the United States to make the sauce. But at that price point already, do you guys have ability to raise price not just with the Rao's products, but across your product portfolio?

TODD LACHMAN: Sure. You know, I think a key area-- and it's fundamental to our business strategy and it is fundamental to the portfolio and the strategy that we deliver, Julie, was that we're specifically looking for brands that are taste superior in their category and that they have strong consumer affinity and also showing an ability to almost create a category in and of themselves. And we're seeing two things with that.

Number one, it creates a competitive moat around that premium price 'cause it's so distinctive. I mean, Noosa is a great example. You have a lot of yogurt competitors. How quickly can I taste out of the yogurt? At Noosa, we're looking at how much taste can we put into the yogurt.

And that competitive moat enables us to deliver an absolutely delicious product at a premium price. We did announce a price increase several months ago on Rao's. It'll go into effect in the end of October. And, you know, basically, we've been able to grow-- Rao's has averaged 40% growth while the market leaders are flat to declining over the past 52 weeks at the premium price, and we foresee that type of growth going forward, you know, for Rao's and the company.

- And, Todd, when you think about growth going forward overall for the company, we saw that net sales rose 66% from 2019 to 2020. Is that growth rate and that kind of growth sustainable? Because we know during the pandemic, people were shopping more frequently at grocery stores, not going out to restaurants to eat. So are you expecting a bit of a slowdown here because of that?

TODD LACHMAN: So we-- you know, we're-- we have averaged-- so LTM to LTM period, $669 million of net sales for the LTM period. Brand net sales through June averaged 31% growth year on year. And importantly, and I'll get to the question, we are profitable. This is not a-- we're not announcing an investment opportunity where we're growing double digits, but we're saying we'll be profitable in five years. We're profitable today at a 16% earnings margin that LTM period.

But you know, we're projecting growth as we've seen in the high single digits, you know? So we do see things tapering a bit. But importantly, you know, that type of growth for Sovos is very clearly differentiated versus our peers.

Clearly, restaurants will be reopening, et cetera. But with our types of brands at that level of taste superiority, strong consumer affinity, a higher propensity to stick in the household after trial versus me to mainstream brands that are easily substitutable with both themselves and with private label, and so, we're seeing that generate into increased sales. And that's why Rao's has increased its household penetration from 5% to 9.6% just in the last two years.

So again, the combination of continuing to grow the businesses of the categories that we're in and launch our brands into new categories. For example, we're launching that thick, velvety, great Noosa yogurt into the ice cream category in Q1 of 2022 with the first-ever frozen yogurt gelato. You know, we see this growth sustainable in the years ahead.

- All right, Todd Lachman, Sovos Brands Founder, President and CEO, thank you so much for joining us.