Todd Lachman, the founder, president, and CEO of Sovos Brands, joins Yahoo Finance Live to break down how his company is expected to offset inflation in consumer goods in the upcoming quarters and how it is withstanding supply chain disruptions.

Video Transcript

- All right. The maker of Rao's pasta sauce and Noosa yogurt, Sovos Brands, is out with its first earnings report since going public in late September. The company saw third quarter sales and adjusted operating profits each rise by 31%. Sovos also said it reached a record market share for that Rao's pasta sauce many folks clearly love.

Todd Lachman is the founder and CEO of Sovos Brands and joins us now. Todd, good to see you again here. Let's start on Rao's pasta sauce. We were joking around a little bit in the break here. What is the pricing now on Rao's sauce? Last time we talked, about $6.99. How much, in terms of price, have you had to take up because of the inflation you're seeing?

TODD LACHMAN: Sure. First off, great to be with you this morning. Good to see you again. You know, I just highlight before we dive right in that couldn't be more pleased with our third quarter results, our first reported quarter as a public company. You know, as you said, 31% increase in net sales, 17% increase in brand net sales, and 31 increase on the bottom line.

And you know, in regards to Rao's, you're right. You know, roughly around that for the average retail price. We did announce list pricing in the summer effective October 25 on Rao's 6% list price increase. That will take effect all that will actually impact the P&L by the end of Q4.

Also as we discussed today, took the pricing in some other categories, announced a few weeks ago. And that will take effect in Q1 of next year. So we've taken pricing now to combat inflation at about 65% of our portfolio. And as we discussed today, that will cover about 100% of the year on year inflation in 2022 with our numerous list of productivity initiatives on top of that, leading to margin accretion in 2022 versus 2021.

- Todd, it's great to see you again. It's Emily here. I'm wondering. You were talking a little bit about the pricing on the consumer side and what they should be expecting. But where are you seeing the most cost pressures for you guys on the input side?

TODD LACHMAN: Sure. So in Q3, as we reported, we had gross margin degradation in line with plan. But honestly, it was really, the highlight I would make, we will make the necessary choices to ensure that we're driving the outsized growth that Sovos, that we're, here for. And that's 17% growth. So we did make the necessary investment.

So on the logistics side, was one area we talked about today, milk, resin, fruit are a few of the areas. But honestly, we've been able to combat those levels of inflation as we've talked today. Q4 gross margin will be above Q3. And then 2022 gross margin will increase ahead of that.

But most importantly, we're making the investments that we need to drive the type of top line growth that we experienced in Q3 and also the type of top line growth that we're going to deliver this year and for the years to come.

- Hey, Todd. It's Julie here. Forgive me for not knowing this, but as you talk about that margin growth, do you guys own your manufacturing? Do you contract it out? How does that process work? And then at a time like this, when input costs are going up, then what kind of levers can you pull there?

TODD LACHMAN: Sure. So we have roughly half our business is self manufactured, so on the Noosa side and our frozen business. And then about half our business, sauce and Birch Benders is co-manufactured.

And we do like to highlight that we're, honestly, agnostic to whether we manufacture or we co-manufacture our products. Because we're really focused out, we say, the front of the windshield on the growth levers versus being beholden to legacy assets, which really does differentiate ourselves versus the competition.

For example, a lot of times people are looking, hey, I've got an asset that just makes canned goods. I just got to launch more canned goods. And we are able to launch new innovation and all sorts of new products because we're agile in regards to how our supply chain is operated.

Now, in regards to your question, we're able to drive productivity initiatives in our factories. We're able to drive productivity initiatives in concert with our co-man partners across our logistics, across procurement. So we have all the levers open to us that other companies do. And we're attacking those levers vigorously, as well as taking the necessary pricing actions to increase our margins as we go forward.

But most importantly, as I'll say, to drive that outsized growth that we're going to deliver. As we said today, we're not providing firm 2022 guidance. We are saying that 2022 will be in line of our financial algorithm for high single digit top line growth and low double digit bottom line growth. And we're very comfortable with that commitment.

- Todd, you've built acquisitions. Anything in the pipeline you can talk about?

TODD LACHMAN: Nothing I can talk about. But we do have a long pipeline of potential acquisitions that we'd like to make. We are basically an acquirer of choice for founders. They can see that their brands will be in the great tender loving hands of Sovos as we've done with Rao's and Noosa, et cetera.

I think, as we talked before, Brian, our founders of the brands that we've acquired are all still very involved with Sovos today. And so I can't comment on the pipeline. But we've averaged one acquisition a year in the past. And we're looking to leverage that lever in our growth playbook going forward.

And as we've said, fastest growing food company of scale in the United States, with the type of growth that we're seeing on Rao's, 29% consumption growth, versus 1% for the category. Noosa, 11% growth in Noosa versus 5.5% for the category.

And that's what we're built for. We're built for driving growth of our brands, which is distancing ourselves from our industry peers.

- Todd Lachman, founder and CEO of Sovos Brands. Good to see you again. And good luck this holiday season.