Sovos Brands, Inc. (SOVO) Q3 2021 Earnings Call Transcript

Sovos Brands, Inc. (SOVO)
Q3 2021 Earnings Call
Nov 09, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and thank you for joining us in Sovos Brands' third quarter 2021 earnings conference call. On the call today are Todd Lachman, president and chief executive officer; and Chris Hall, chief financial officer. Please note that during the call, management may make forward-looking statements based on current expectations and beliefs. Any forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to today's press release and the company's SEC filings for a detailed discussion of risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements we made today. The company undertakes no obligation to revise or update any forward-looking statements except as required by law. Management's remarks today will focus on non-GAAP or adjusted financial measures.

Non-GAAP measures should not be considered as a substitute for financial information presented in accordance with GAAP and can differ from similarly titled non-GAAP measures used by other companies. Please refer to today's earnings release posted on the Investor Relations website, ir.sovosbrands.com, for the reconciliation of our non-GAAP financial measures to the most directly comparable GAAP measures. We have also posted supplemental slides in our Investor Relations website. This call is being webcast, and a replay will be available on our website for the next 30 days.

All consumption data cited on this call refer to download consumption as of the 13-week period ended October 3rd, 2021, and growth versus the prior year unless otherwise noted. Now I'd like to turn the call over to Todd.

Todd Lachman -- President and Chief Executive Officer

Thanks, Christina, and hello, everyone. I am pleased to share our strong third quarter results following our IPO in September and to introduce many of you to the Sovos Brands story. For today's call, I will spend some time sharing why Sovos Brands is one of the most exciting, disruptive, growth-oriented companies in the packaged food sector. I will touch upon a few quarterly highlights that underscore the financial and operational strength of our business.

Following my remarks, Chris will discuss our Q3 financial results in greater detail, as well as provide our outlook for 2021. After that, we will open the call for questions. Let me begin by introducing our company. Sovos Brands is the fastest-growing food company at scale in the United States.

We are a high-growth, purposely built food platform and growth accelerator pioneering a new approach to packaged food with a portfolio of one-of-a-kind brands. Our vision is to build a portfolio of brands that creates joy for consumers by providing absolutely delicious food resulting in growth that outpaces the food industry average. All our brands, Rao's, Michel Angelo's, Noosa, and Birch Benders are built with authenticity at their core using simple, high-quality ingredients providing unforgettable food experiences. Our business model is grounded in acquiring one-of-a-kind brands and leveraging a common infrastructure and shared playbook to drive growth and this significant whitespace for each of these brands supports our algorithm for sustainable, long-term profitable growth.

We have achieved a combination of double-digit growth and profitability. In the last 12 months, we generated $695 million of brand net sales up 25% versus a year ago with an adjusted EBITDA margin in the mid-teens. Our leading net promoter scores underline our strong brand affinities. And with household penetration of 10% or less today, our brands have a significant runway to gain share in $26 billion of addressable market with an exciting pipeline of potential new products to double our TAM to at least $50 billion over the next several years.

Now let's talk about each of our brands. Rao's is the largest and fastest-growing brand in our portfolio offering a selection of pasta and pizza sauces, dried pastas, frozen entrees, and soups. At the core of Rao's is our sauce business representing approximately 48% of sales and the third largest brand in the pasta and pizza sauce category today with market share reaching an all-time high of 13.2% this quarter. Consumption of Rao's sauce is growing 29% compared to category growth of 1% with dollar velocities more than two times the category and distribution growing over 30%.

Rao's homemade sauces are made with naturally ripened whole Italian tomatoes, pure olive oil, and fresh onions. Our sauces are slow simmered in open kettles and made in small batches just like homemade. We are in the early innings of growth with significant distribution opportunities ahead of us. Recent household penetration data for the pasta and pizza sauce category in the last 52-week period ending October 3rd marks an important milestone for Rao's with penetration increasing to 10.3% up three full percentage points versus just one year ago.

Importantly, Rao's still has a substantial runway for growth in the sauce category with household penetration less than one-third of the two market leaders. Rao's top quintile velocity performance and leading net promoter score enable us to further expand national distribution while extending Rao's strong brand equity of authentic Italian cuisine into new categories such as dried pasta, frozen entrees, and soup. Rao's frozen entrees are growing consumption at a triple-digit rate making Rao's the fastest-growing brand in the frozen entrees aisle and a strong complement to our well-established Michael Angelo's brand known for its homemade authentic Italian heritage and unwavering commitment to quality and fresh ingredients. Combined, net sales of our frozen entrees business are growing mid-teens.

And as Rao's leverage is the scale of our Austin manufacturing facility, we expect to generate meaningful operational efficiencies. Noosa is one of the best-tasting brands in the yogurt aisle with products made with high-quality ingredients such as whole milk, real fruit, and 100% pure North American honey. Noosa has outperformed the category in unit sales for 34 straight months and dollar sales are currently growing at twice the category rate. With a strong momentum in our core yogurt business, we are very excited for our plans to expand Noosa into the ice cream category in early 2022 with the launch of the first-ever frozen yogurt gelato.

Feedback from consumers and our retail customers has been very, very strong. Birch Benders, our newest acquisition, differentiates itself through its better for you, diet-friendly, and guilt-free offerings across traditionally high-guilt categories. Birch Benders' clean ingredient breakfast foods and snacks cater to a variety of lifestyles including organic, keto, paleo protein, and plant-based diets. With the No.

1 net promoter score among organic pancake and waffle mix consumers, Birch Benders enjoys consumer brand advocacy and loyalty. Although we are experiencing a challenging lap versus last year COVID surge in the pancake and waffle mix category, we are pleased with the brand's early success in frozen waffle, baking mix, and frosting categories and plan to launch Birch Benders into ready-to-eat cookies, a $9 billion market in the first half of 2022. Consumption of our brands in our three largest categories: sauce, yogurt, and frozen, which represent approximately 90% of our brand net sales increased double digits in the third quarter significantly outpacing their respective categories. Sauce represented by the Rao's brand accounts for approximately 48% of sales and grew consumption by 29% in the third quarter versus 1% for the category.

Yogurt represented by the Noosa brand accounts for approximately 25% of sales and grew consumption of 11%, compared to 5.5% for the category. Finally frozen, which includes Rao's and Michael Angelo's entrees and Birch Benders waffles is our third-largest business at approximately 17% of sales and group consumption by a combined 28%. At first glance, it is easy to find more differences than similarities across our brands but that is far from the truth. Our brands share the same attributes, appeal to a similar consumer demographic, or sold in the same channels and retailers, leverage the same growth playbook, and utilize the same Sovos Brands infrastructure and capabilities.

We are a strategic and valuable partner to retailers as our brands generally drive incremental sales, reinvigorate the categories in which they compete, and attract a highly coveted consumer base with high repeat rates and large basket sizes. Additionally, our premium price points generate higher gross profit per unit for retailers offering a compelling value proposition. We are very proud to have received Vendor of the Year at Target and Supplier of the Year at Whole Foods in 2020 due to our strong brand performance and best-in-class customer service levels. Our strategy is focused on increasing household penetration by increasing distribution, expanding brand awareness, and innovating into new categories.

Our platform is designed to provide a foundation for future growth and to capture material synergies as we scale and add new brands. Our successful brand stewardship makes us an attractive partner for many founders who want to take their brands to the next level. Over time, we expect to continue to acquire one-of-a-kind brands with Sovos Brands attributes and significant growth potential that we can unlock with our playbook. Before I hand it over to Chris, let me touch on our Q3 performance.

We delivered a 31% increase in net sales or a 17% increase in brand net sales which include Birch Benders in both comparable periods. Similar to our top line, adjusted EBITDA also grew 31% resulting in a consistent year-over-year adjusted EBITDA margin of 14.4%. We will continue to invest in our brands to fuel market share gains and increase household penetration, and we expect a strong finish to 2021 with projected full-year growth of mid to high teens for brand net sales and mid-20s growth in adjusted EBITDA. I am confident the disciplined execution of our Sovos Brands playbook will fuel long-term high single-digit net sales growth with expanded margins making our company one of the most exciting players in the packaged food sector today.

With that, let me hand it over to Chris for more details on the quarter and our fiscal year 2021 outlook.

Chris Hall -- Chief Financial Officer

Thank you, Todd. Good morning, everyone, and welcome to our first earnings call. We were pleased to demonstrate our continued momentum in Q3 with healthy double-digit sales and adjusted EBITDA growth in line with our top line. Excluding amortization and acquisition-related costs, initial public offering readiness, non-cash equity-based compensation, and other items detailed in this morning's press release, adjusted diluted EPS were $0.10 per share this quarter.

Third quarter net sales of 178.7 million increased by nearly 42 million or 31% compared to the same period last year. The Birch Benders brand which was acquired in October 2020 and was therefore not included in the results this quarter for the prior year contributed 13.8 million of the increase. The remainder of the net sales increase was primarily attributed to increased shipments with our two largest brands Rao's and Noosa driving the most significant increases. Including Birch Benders Q3 2020 net sales prior to the acquisition, brand net sales increased by 17% in Q3 2021.

Net sales of Rao's increased by 35% this quarter driven by strong consumption and market share gains across sauce, soup, and pasta. Consumption for the total Rao's brand increased 36% driven by strong distribution gains for our core portfolio while unit velocity has continued to grow. Double-digit growth in the consumption of Rao's sauce continue to outpace the category by 28 percentage points consistent with the pre-COVID trend and velocity growth was more than double the category average. Rao's dollar market share in the sauce category reached 13.2%.

In addition, sales from new categories such as soup continue to grow driven by both distribution gain and favorable velocities. Rao's soup is also outpacing the category in terms of dollar growth by 4x and is now the fifth-largest brand in their ready-to-serve soup category. Lastly, Rao's frozen has gained market share with dollar growth outpacing GDP growth combined with Michael Angelo's consumption of our total frozen entree business is up double digits. Net sales of Noosa this quarter increased by 9% benefiting from higher velocity, strong merchandising events, and new distribution gains.

Consumption continued to accelerate in the third quarter with gains in every top 10 account. We remain focused on driving healthy growth for the brand. And going forward, we expect to achieve mid-single-digit growth annually. Finally, Birch Benders contributed 14 million to net sales this quarter while consumption of pancake and waffle mixes has had moderated with challenging COVID-related year-over-year comparison.

On a two-year basis, Birch Benders' brand net sales were up 84% on a year-to-date basis. The brand is finding good success with its new frozen waffles and baking mixes with strong consumption gains in the third quarter demonstrating the brand's ability to travel to new categories. Gross margin was 27.9% of net sales, compared to 33% in the same period last year. The margin decline, which was largely anticipated, was a function of higher logistics cost, inflation, and increased promotional support, particularly when compared to abnormally lower spending levels last year.

We incurred higher transportation costs to secure and expedite supply critical for meeting the strong demand for our products and navigate unprecedented port logjams in volatile shipping costs. With our growth-oriented mindset and the momentum in our business, we will continue to make the right decisions and investments to drive the industry-leading growth of the Sovos Brands portfolio and I will discuss our inflation expectations and the actions we are taking in a few moments. Gross margin was also impacted by the acquisition of Birch Benders which will see margin improvement as we implement our full value creation plan as part of its integration. Adjusted operating expenses of 33.9 million declined by 1% over the previous year.

Depreciation and amortization expense increased to 7.2 million from last year. Excluding adjustments of 4.6 million this year and 5.1 million the prior-year period, adjusted operating expenses declined 1% due to lower marketing and general and administrative expenses partially offset by the inclusion of Birch Benders. Despite the incremental cost increases we've incurred to meet consumer demand, I am pleased to report that we delivered adjusted EBITDA growth of 31% to 25.8 million resulting in an adjusted EBITDA margin of 14.4% consistent with the same period last year. Operating income of 11.4 million grew 81% versus the same period in the prior year.

Interest expense of 12.5 million represented an increase of 8.3 million. The increase in interest expense resulted from a higher balance of borrowings outstanding related to our June 2021 shareholder distribution as well as borrowings associated with the Birch Benders acquisition. Income tax of three point million for the 13 weeks ended September 25th, 2021, represented an increase of 3.7 million, compared to the income tax benefit 0.2 million in the prior-year period. The increase in our income tax expense is primarily attributable to an increase in non-deductible expenses for tax purposes.

Third quarter net income was a loss of 4.6 million or a loss of $0.06 per diluted share, compared to a gain of 2.2 million or $0.03 per diluted share in the prior-year period. Adjusted net income was 7.7 million, compared to 9.6 million last year. Adjusted diluted earnings for the quarter were $0.10 per share based on 74.1 million shares on a diluted basis. With the timing of our IPO and the subsequent exercise of the greenshoe, shares outstanding were approximately 101 million shares as of October 5th, 2021.

Now let me touch on a few highlights from our balance sheet and cash flow. At the end of the quarter, we had a cash balance of 43.1 million and total debt was 774.8 million. Our primary use of net IPO in greenshoe proceeds of 302.7 million will reduce debt by 299 million in Q4 as proceeds were received post Q3 close which will also reduce our future interest payments. Operating cash flow for the 39-week period was 18.3 million, compared to 52.8 million for the prior-year period primarily due to higher working capital driven by lower accrued expenses, higher accounts receivable related to net sales growth, and inventory replenishment following the high COVID-19 demand in the previous year.

Now let me discuss our outlook for full year 2021. With our continued momentum, we expect net sales of 710 to 715 million and adjusted EBITDA of 113 to 115 million. We expect a full year adjusted EBITDA margin of approximately 16%. We continue to expect higher inflation including higher distribution costs given the tight global supply chain and we anticipate mid-single-digit inflation to persist near term.

Like other companies, we are seeing cost increases in several raw materials like milk, fruit, resin, and cardboard. Transportation challenges continue due to logistical issues at major ports as well as intermodal and trucking delays which have resulted in long lead times and higher logistics costs. We have and will continue to develop multiple levers to mitigate inflationary pressures on top of the many initiatives that are currently in place. Some of our current levers include automation in our manufacturing facilities, optimization of our co-manufacturing network, packaging value engineering, and further competitive procurement actions.

In addition, we are partnering with our largest supplier, La Regina, and noting a domestic manufacturing facility which will provide sourcing flexibility and lowest landed cost capabilities. We expect this facility to become operational in early 2022. Collectively, these initiatives will reduce our supply chain costs while improving manufacturing efficiency and customer service. Our extensive list of cost reduction initiatives will begin implementation in late Q4 with substantial completion by late Q1 to early Q2 2022.

These actions are expected to mitigate additional inflation, and we expect gross margin trends to improve sequentially from Q3 levels. However, we will remain nimble as we manage our pricing and cost structure and will react accordingly as conditions warrant. While volume gains across our portfolio remain our greatest growth enabler, we will continue to take price as necessary to maximize trade efficiencies with a holistic approach toward net revenue management. We previously announced a list price increase for our largest product line Rao's sauce which takes effect late Q4.

To combat additional inflation we have seen and expect in the coming year, we have announced new list price increases for additional products effective in late Q1 2022. We are also removing our least efficient promotions to drive net price increases and assist in mitigating inflation. We expect our new pricing actions to take hold in the marketplace and become more beneficial beginning next year. Our performance this year has enabled us to lap comparisons from the 2020 COVID surge and grow brand net sales by 72% on a year-to-date basis over the comparable period in 2019.

Long term, we believe our focus against increasing household penetration of our current brands as well as selective TAM expansion via new product innovation will sustain high single-digit sales growth organically. We expect adjusted EBITDA growth in the low double digits with expanding growth and EBITDA margins as they increase productivity and leverage capabilities across our shared organization. And finally, with our robust cash generation, future M&A opportunities will provide additional optionality for growth. To conclude, investing in growth remains our highest priority for capital allocation.

With our operational discipline, we are well-positioned among the high-growth profitable names in the CPG sector with a promising stable of brands that will delight consumers for years to come. With that, let me turn the call back over to Todd for some final remarks.

Todd Lachman -- President and Chief Executive Officer

Thanks, Chris. Before we open the floor up for questions, let me reinforce how pleased we are with our third quarter results. The Sovos team will remain steadfast in our focus on the growth opportunities and synergies across our portfolio. We expect our business to outpace the market as we pursue organic and acquisitive avenues for growth.

This momentum and our robust pipeline of productivity initiatives underpin our confidence in our ability to weather external conditions improve profitability and generate attractive shareholder returns over the long term. I am proud of our ability to keep up with a market demand for our products and want to thank our supply chain and commercial teams for their continued focus on our customers. Sovos Brands is in the early innings of a remarkable growth trajectory, and we are excited to embark on this next stage of growth as a public company. We're now available to take your questions.

Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Michael Lavery of Piper Sandler. Your line is open.

Michael Lavery -- Piper Sandler -- Analyst

Good morning. Thank you.

Todd Lachman -- President and Chief Executive Officer

Hey, Michael.

Michael Lavery -- Piper Sandler -- Analyst

Just curious from a competitive perspective, there's certainly a lot of companies talking about service levels and struggles to fill orders. But certainly, at least the magnitude of your growth suggests that's probably less of a problem. Can you give any sense of if you've been able to drive distribution gains from having a better ability to serve your customers and if that's just helping accelerate slowly or your growth and for distribution.

Todd Lachman -- President and Chief Executive Officer

Sure. Hey, Michael. It's Todd Lachman. Good to be talking to you this morning.

First thing I just want to highlight is again how pleased we are with our third quarter results, first reported quarter as a public company. And while I can't comment on competition, our ability to service our customers has absolutely been a key driver of our ability to increase distribution on our brands. I'd reflect back on -- and you know we've talked about Vendor of the Year at Target and Supplier of the Year at Whole Foods. Those two awards were driven primarily by our ability to keep our products in service during 2020.

Just for example Rao's growth in Q4 versus prior year was up 86% in 2020 versus '19 but we were able to keep our distribution in our own products in stores. If you look at Rao's now growing well at sauce well above 30%. We've got our frozen business growing triple digits. We've got soup, fastest-growing soup business in the entire category, and we are increasing distribution, I mean, our frozen business distribution up 88%; our soup business distribution up 18%; baking mix on Birch Benders basically distribution up significantly as well as Rao's sauce as large as it is.

We've got our sauce business continually growing double digits as you've seen in the data. So absolutely our ability to keep products in supply is driving that distribution. I think you saw also, we're going to make the choices that we need with a growth-oriented mindset to invest in the right levels of cost and investment to ensure that we keep our products in supply and maintain our growth momentum.

Michael Lavery -- Piper Sandler -- Analyst

No. That's great. And sorry I got so excited about the distribution I skipped right over. Congrats on the first quarter and so now --

Todd Lachman -- President and Chief Executive Officer

We get excited about it also, Mike.

Michael Lavery -- Piper Sandler -- Analyst

And a follow-up on the Georgia facility. Obviously, that will help capacity but then can you just give a sense of what if anything it means for costs because you still obviously have ingredients coming from Italy. Is there any shipping savings? What's the right way to think about the margin impact, and will it have the same fixed terms that you currently have in terms of just the predictability of your input cost there too?

Chris Hall -- Chief Financial Officer

Yeah. Hey. Thank you. This is Chris Hall, and so the facility that's still in flight and we anticipate it opening up here early next year.

It will provide a number of advantages for us. One, that type of onshoring provides a second level of redundant capacity that we'll have available for us to meet the near-term marketplace opportunities. We'll be able to lessen our safety stats, shorter lead times, things like that. And in addition, first is it is the same cloth that landed case for cost basis is coming out of Italy that will provide us for arbitrage possibilities against other domestic suppliers that we have in the network today.

So that will drive down our overall cost especially on sauce that we may produce other items at that facility as well that may that will be up and running early next year.

Michael Lavery -- Piper Sandler -- Analyst

OK. Great. Thanks so much, and congrats again.

Chris Hall -- Chief Financial Officer

Thank you.

Todd Lachman -- President and Chief Executive Officer

Thanks a lot, Michael.

Operator

Thank you. Our next question comes from Peter Galbo of Bank of America. Your line is now open.

Peter Galbo -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Good morning. Thanks for taking the questions, and congrats on the quarter.

Todd Lachman -- President and Chief Executive Officer

Thanks, Peter.

Peter Galbo -- Bank of America Merrill Lynch -- Analyst

Todd, maybe if I could just follow up actually on the question. I think that had been delayed a little bit from kind of when we'd spoken previously about opening in Q4. Just curious what the biggest bottleneck is to getting that opened sooner. Is it is a construction materials? Is it ability to hire in a place like Georgia where maybe labor is tight? Just any additional color there would be helpful on what -- why I guess it's not opening sooner.

Todd Lachman -- President and Chief Executive Officer

Absolutely, Peter. Thanks. Great question. And we had originally communicated in October in that will be Q1 2022.

It is absolutely not driven by labor shortages in the area. So that is not the reason. It's really just COVID pandemic delayed completion of some key equipment arriving to Georgia from overseas, government restrictions for travel delayed technicians arrival onsite in Georgia because of travel restrictions for a lot of technicians coming from Italy to install and start it up. But honestly, nearly all of these issues are substantially behind us and we're confident in starting up the facility in Q1.

Peter Galbo -- Bank of America Merrill Lynch -- Analyst

No. That's helpful. Thanks very much, Todd. Just secondly, one of the things I guess we're hearing a lot of now particularly around price increases is that the consumer is maybe starting to push back ever so slightly from an elasticity standpoint and so just with the sauce increase that's gone in [Inaudible] on the call [Inaudible].

Just what are you hearing from customers in terms of elasticity at this point? Are things still relatively strong? How are you balancing that thinking about next year?

Todd Lachman -- President and Chief Executive Officer

Sure. So, Peter, Todd again. So a couple and let me a step back. So as discussed, our Rao's sauce price increase will be effective in the marketplace in late Q4.

Our retailers have accepted the price increase. And also, as Chris mentioned, we've announced additional pricing actions with effective dates in late Q1 2022. And we're implementing list price increases across about 65% of our portfolio. I will highlight here and I know it'll come up again that we believe the current announced pricing will cover 100% of the expected year-on-year 2022 inflation.

And regardless of elasticity, honestly of what we're seeing is kind of less elasticity than expected. So while we have modeled in normal times elasticity of a one-to-one effect, these are not normal times. With rising prices across the store and I think as I've seen a lot of you kind of reporting and hearing from other companies, the impact on units has been minimal or less than expected. For example data from widely cited that across the store prices going up by mid-single digits with unit declines of only low single digits.

We expect our pricing actions to be in line with categories that we compete and we see no headwind in Rao's ability post pricing to continue to significantly increase household penetration, awareness, dollar share, and distribution. And I want to highlight again all-time record share for Rao's now about 13% and record household penetration above 10%. So we don't see the elasticity being as significant as originally expected.

Peter Galbo -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks so much, guys. I'm looking forward to using my Rao's tonight for dinner. So thanks, and good quarter.

Todd Lachman -- President and Chief Executive Officer

Thanks, Peter.

Operator

Thank you. Our next question comes from Ken Goldman with J.P. Morgan. Your line is open.

Ken Goldman -- J.P. Morgan -- Analyst

Hi. Thanks so much. Todd, I know it's not your biggest brand but Birch Benders I think I know that it has a difficult comparison but I think maybe it's fair to say some of us might have hoped it would have been growing a little bit more now just given some of the distribution gains and some of the new products that are there. So as you analyze what some of the core issues are with Birch Benders -- first of all, are there core issues as you see it? Or is that not something you'd agree with? And second, what do you think some of those and how easy are they that just [Inaudible] your mind? Again, I don't mean to be overly negative on a smaller part of the business but it is -- it's something I'm curious about.

Todd Lachman -- President and Chief Executive Officer

Sure. How are you doing, Ken? Good to talk to you this morning. And so a couple of things on Birch Benders. Number one, we're absolutely thrilled that we've added Birch Benders to the Sovos portfolio, full stop the checks every box of what it takes to be a Sovos Brand.

It's absolutely delicious highest net promoter score among organic consumers, cleaner, better fuel ingredients. I'll emphasize we've only owned Birch Benders now for one year. The full impact of the playbook will be recognized in 2022. We've got a lot of confidence in the business in 2022.

As you some highlights here. We're renovating existing products by launching a new and improved keto pancake waffle mix offering continuing the growth of frozen waffles with Birch Benders as the fastest-growing brand in a category. And we've successfully launched Birch Benders in the baking mix category and in 2022 extending the brand of the 9 billion ready-to-eat cookie category. But the headwind I know behind your question is the performance of Birch Benders in the pancake and waffle mix category.

Does the category -- I'm just like a lot of people making pancakes every morning and during the COVID time and there's a lot of people not making pancakes now in a post-COVID environment and the category is down. We are performing a little bit worse than the category. We get it. But we have the full intention to drive awareness and household penetration of not just that category but as I said fastest-growing frozen waffle business along with baking mix along with the entry into ready-to-eat cookies.

And the last thing I mentioned, Ken, as we talked about Noosa before. When we purchased Noosa, it was declining double digits in dollars and units and we knew it was going to take us a year to really get that brand rocking and now we've got Noosa growing 34 straight months of unit sales greater than the category. We've got dollars growing double the category through implementation of our playbook. So had it for a year and we fully expect with full implementation of the playbook in 2022 we're going to have that business growing and rocking again.

Ken Goldman -- J.P. Morgan -- Analyst

All right. Thanks for that. And then, Todd, obviously M&A is a big part of your strategy. You mentioned it this morning.

I'm just curious in the current environment where so many companies and potentially companies you're trying to acquire are challenged in terms of their supply chains, their ability to service customers. Does that make it -- Does that make them more likely to sell in your view or because they just may throw up their hands and say that's it. Let's give it else. Or does it make them less likely because maybe the EBITDA base is a little bit lower than what they want? I'm just trying to get a sense for how you see the likeness of the M&A environment right now so to speak.

Todd Lachman -- President and Chief Executive Officer

Sure. Yes. So I can't really opine on whether it would make them more or less likely to sell, Ken. What I can say is that I think in an environment like this a company like Sovos is the perfect partner for those type of companies that you just described and we continue to be an acquirer of choice for founder-led companies.

You know we know how to execute M&A. It is a core competency of ours. I know we've talked about this previously. This is not something that we kind of come out of the ground every five or seven years and decide to do a deal.

I mean, we've averaged about one a year. We've got a playbook. We know how to do the diligence. We know how to do the integration.

We've been successful in the businesses we've acquired to date and we've got a long list of potential targets that meet the criteria of what it takes to be a Sovos brand. We will be disciplined. Since our founding, we've looked at over 250 brands. We've executed on four.

We're going to stick to our knitting as we've talked before. But to your question, difficult to say. I think you could argue either sides of the essence of your question. But what I would emphasize is that a company like Sovos with our capabilities, our agile supply chain, our selling capabilities, marketing R&D were just a perfect match for companies that might be looking for that next chapter of growth with Sovos being the perfect partner to take them to that next level.

Ken Goldman -- J.P. Morgan -- Analyst

Great. Thank you.

Todd Lachman -- President and Chief Executive Officer

You got it. Thank you, Ken.

Operator

Our next question comes from Chris Growe of Stifel. Your line is open.

Chris Growe -- Stifel Financial Corp. -- Analyst

Hi. Good morning.

Todd Lachman -- President and Chief Executive Officer

Hey, Chris. Good morning.

Chris Growe -- Stifel Financial Corp. -- Analyst

Hi. Then I'll add my congratulations as well. I want to just first -- I just had two questions. If you think about the inflation environment that's kind of developed here and obviously risen since we last talked is -- should we think about the second quarter of next year as a point where you start to see some of that gross margin stability based on the timing of your price increases? Is that kind of [Inaudible] should -- maybe some margin dollar profit starts to benefit from the pricing in relation to the inflation.

Chris Hall -- Chief Financial Officer

Hey, Chris. This is Chris speaking. Thank you for the question. Great talking to you.

And yeah I think that's a fair assessment. As we put the full suite of our very comprehensive pricing and productivity actions in place, that will definitely ramp up and take hold in Q2. We've talked before Todd mentioned we'll have a list price for 65% of our portfolio. And the other 35%, we will attack across eliminating reducing our at least efficient promotion.

Todd mentioned we will cover 100% of our year-over-year inflation. By the time we have fully implemented that list price increasing which will hit in mid to late Q1. So by Q2, we'll be fully embedded in the marketplace. And on our productivity actions as well, the automation that we're putting into our facilities further optimization of our core manufacturing network packaging, value engineering opportunities that we're exploring right now, the further standardization of Birch Benders, and even the scale we get and the leverage we get from our operation as we continue to grow that high single-digit top line, we should see that and we'll see that stabilization as you mentioned earlier in the year and especially across Q2.

Chris Growe -- Stifel Financial Corp. -- Analyst

And then do you build that normal kind of one-to-one sort of elasticity for my brand. But is that the way you kind of build it and then obviously you've seen it to be lower of late and then just hope it's better. Is that the way to think about the way you're building in next year?

Chris Hall -- Chief Financial Officer

Yeah. That's how we built our projections out. And as you mentioned and like the rest the industry, we would not be a total surprise if we beat that expectation but that is what we have in our model.

Chris Growe -- Stifel Financial Corp. -- Analyst

OK. Maybe just one final question which is just in relation to some of the rebuilding of marketing spending. Have you adjusted to [Inaudible] plans due to supply chain challenges your ability to get product into the store and it's been a real high point for you. But is any that change the way you're approaching some of your marketing plans? And that's my final question.

Thank you.

Todd Lachman -- President and Chief Executive Officer

Yeah. Sure, Chris. So honestly, in 2021 -- well, I mean, I'll reinforce again I think I mentioned before that we have I think the only time we're really was back in Q2 of 2020 at the height of the COVID demand surge. But honestly, since then our supply chain organization sales organization has just done a phenomenal job keeping our customers and service one of our guiding principles is obsessed with the front line.

We'll make the necessary investments that we need. So we have not dialed down marketing or other investments in driving the top line. So I'd say again with our growth-oriented mindset the momentum of our business, we will continue to make the right decisions and investments to drive the industry-leading growth of the Sovos Brands portfolio. So we have not taken the foot off the accelerator on the investments of our brands and that's I think what's driving the fact that I mean I think you said 90% of our portfolio sauce, yogurt, and frozen all of those businesses growing double digits versus prior year regards to consumption.

Chris Growe -- Stifel Financial Corp. -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Robert Moskow of Credit Suisse. Your line is open.

Robert Moskow -- Credit Suisse -- Analyst

Hi, and congratulations again. Just a modeling question. For gross margin in fourth quarter would you expect to be down again another 500 basis points just because the pricing hasn't fully made its way through? Or do you expect it to be a little better? And then on SH&A, I think the run rate now should be 34 million. But I think you said that you're going to have full absorption of your public company costs in the fourth quarter.

So does that mean SG&A would be higher in fourth because you have a full quarter of it, or is it about the same? Thanks.

Chris Hall -- Chief Financial Officer

Yeah. No. Thank you for the question. This is Chris.

Yeah. We -- as we operate across Q3 and as we've mentioned to reinforce our are very strong growth that we continue to see a lot rate across Q3 and our very growth-oriented mindset. We absolutely prioritize growth and profit the momentum in our business. We continue to make the right decisions investments as Todd mentioned to drive that industry-leading growth of the portfolio.

As we operate across Q3, we saw week after week in our consumption reports 30-ish percent got growth in the Rao's brand sauce plus all the products that we've expanded into. And with that expanded demand, we leaned in and ramped up production, expedited freight at a time where Trans-Atlantic ocean freight rates were elevated. And in addition, if you recall back to that Q2 Q3 timeline we saw, New Jersey experienced unprecedented log jam significant congestion which also led to excessive [Inaudible] and even drainage expenses. So we made those investments in Q3.

Fortunately, we were very able to offset that down to EBITDA line in the whole consistent margin year for Q3. As we move into Q4, our inventory is in a very good position. We have a very good flow of supply coming out of Italy and domestically across the portfolio. So we do not anticipate anywhere near that level of cost that we experienced in Q3.

So it's very fair to say we do anticipate higher margins in Q4 than you saw in Q3. And as we mentioned previously, as we lead into 2022, we'll continue to see expanded margins across the year. And as I mentioned earlier really full stabilization in Q2 and beyond. On the SG&A side, absolutely.

We will incur and absorb in Q4 that whole suite of public company cost, the hirings we have, all the [Inaudible] that we will be putting in and that will carry on through 2022. That as well as operating into our planning if they can for 2022. But you will see higher SG&A costs as you mentioned within that line as well as we rebuild marketing as I just discussed to that five and a half to 6% of net sales range.

Robert Moskow -- Credit Suisse -- Analyst

I'm sorry. Can you maybe refresh our memory as to what those ongoing public costs are? How much should you have in the third quarter and how much more would you have in fourth?

Chris Hall -- Chief Financial Officer

We -- the hirings that we have put in place, the roles that we have now, for instance, investor relation into a lot of things like that as well as things like listing fees on Nasdaq, public market, insurance, that whole suite. We sell million and a half to 2 million a quarter depending on the quarter. That's what we will experience in Q4 and across 2022.

Robert Moskow -- Credit Suisse -- Analyst

Got it. Thank you. We're going to need that in Q3 or not really?

Chris Hall -- Chief Financial Officer

Yeah. There was a smaller amount in Q3. We didn't take on any of those public market expenses until Q4 but we did have some of those hirings in place in Q3.

Robert Moskow -- Credit Suisse -- Analyst

Right. I heard the whispering so I figured I'd ask it since it was discussed. Sorry. Thank you.

Chris Hall -- Chief Financial Officer

All right. Thank you.

Operator

Thank you. Our next question comes from Brian Holland of Cowen and Company. Your line is open.

Brian Holland -- Cowen and Company -- Analyst

Yeah. Thanks. Good morning. Question on the innovation pipeline.

I guess twofold. One, we've obviously seen through COVID relatively no assortments on shelves, etc. You have a long innovation pipeline. Have you had any issues getting new products, or do you anticipate any issues getting new products into stores? And maybe this is less of an issue for you given service levels, etc., but just kind of curious your view then.

And then secondly, what do you expect -- Do you have a framework for what innovation could contribute on an annualized basis going forward either as a percentage of growth or overall revenue, etc.?

Todd Lachman -- President and Chief Executive Officer

Sure. Brian, how are you doing? Good morning. It's Todd Lachman. So on the -- a couple things on the innovation side.

I think to the first part of your question, we have had no difficulty getting our innovation to shelf. Obviously, it's a core competency of ours. The rapid distribution that we got even going back to soup, we got 50% ACV in 90 days of our soup business. Now the No.

5 soup brand basically in that category only launching in 2019 fastest-growing soup brand at even as the No. 5 level ahead of all competitors growing distribution dollar velocities. But so number one, we've not had problem getting innovation to shelf the type of brands that we -- the type of products and brands that we're bringing the market are those types that are disruptive for the category. They're not me too mainstream offerings.

I'll give you an example, frozen Noosa gelato that we're launching in Q1. Couldn't be more excited about that launch of extending the Noosa brand known for its absolutely delicious indulgent yogurt and now expanding that into the 7-plus billion dollar ice cream category with frozen yogurt a lot of sort of permissible offering in the ice cream category that honestly tastes as good if not better than any ice cream out there. So that's an example and that's one that's gotten acceptance across the board so far. We're very excited about the potential of that.

But those are the type of innovations that we're bringing to the category, frozen -- Rao's frozen that -- and the Michael Angelo's offerings that are super premium in nature and very differentiated versus what's out there. If we look at our frozen business last 13 weeks ended 10 3 growing 227%, distribution up 88%, velocity 77%, again providing consumers and retailers with a super premium restaurant-quality meal. You've got Birch Benders baking mix again offering consumers that down the baking aisle with the keto offering growing 65% last 13 weeks gaining distribution 114% versus a year ago of CPGs. And what I'd say in regards to modeling as a percentage, we do not have innovation as a percentage of sales kind of going forward.

So we really look at it as we said our number one lever is driving our core sauce business and our yogurt business driving household penetration of those brands. And so that's number one as we've talked about. And if you look at the sauce, frozen, yogurt businesses, 90% all of those businesses grew above double digits in consumption last year. And so as we go forward, we'll continue to drive TAM expansion.

We've added $7 billion of TAM but we don't really have a formula or an algorithm that says x percent needs to be from core and x percent needs to be through innovation. We're just looking to drive distribution and awareness and ultimately household penetration of our brands and driving that type of growth that we showed in Q3 and Q4 and for this year and the next year.

Brian Holland -- Cowen and Company -- Analyst

Appreciate the color. Second question, I wanted to probe the idea of Sovos as sort of an advantage to acquire with founder-led businesses. I think typically when we hear about -- we hear acquirer of choice, it's generally category specific and you're talking about founder-led businesses. So I'm curious how that manifested itself, right? I mean, does that mean that founder-led businesses are calling you and maybe they're less competitive bids? Or are you able to get assets cheaper because you're going to stick to the brand ethos in a way that maybe other competitors are promising? Or can you bid more aggressively because you're confident in the ability to generate the synergies? So however that evolves, just really curious to hear how Sovos has an advantage with founder-led brands.

Todd Lachman -- President and Chief Executive Officer

Sure. So, yeah, I'm not going to catch on but when I get the essence of your question. I'm not going to touch on whether the bidding or etc. What I will get into a minute, having discussions -- having had discussions with the founders of the business that we've acquired and those that they haven't, if you remember, we take a step back.

The core grounding thesis of why we created Sovos was that you have these one-of-a-kind brands. If you looked at that hundred largest center store brands. At this period of time going back five years, but I think it's still relevant, you've got these large center store brands declining and what's growing at their expense It is a smaller one of a kind brand. Some of the brands that whether they're better for you or they taste delicious but they're offering something differentiated to the consumer.

Those were growing the most rapid and I felt like there was an opportunity to create a company that had the capabilities and the infrastructure to focus on acquiring, integrating, and growing those one-of-a-kind brands because large CPG does a great job building billion-dollar brands. But when it when it comes to these brands, let's just say roughly 50 to $100 million in net sales trying to acquire those that might sound good on day one but then they just got to get lost in the morass of the large CPG entity and rebuilt Sovos to basically be the company that could acquire these brands that share similar attributes regardless of temperature state were highly delicious premium authentic heritage leading brand affinity as measured by net promoter score disrupting categories like the first -- that basically a homemade whole tomato sauce or the keto offerings of Birch Benders sharing the same consumer base the same playbook. And when we talk to founders, they're like, well, my brand is going to have a great home and your company. You're going to give it the tender loving care that it deserves and I'm confident that you're going to take it to the next chapter of growth and that's why all the founders of the four businesses that we acquired have been or continue to be very involved in our business.

I think that's the differentiating aspect, and they can see versus maybe a large CPG player, their brand or company might get lost in the tentacles of that company versus it's really going to get the focus of our senior management team and our capabilities here at Sovos. And our capabilities are very specific to those types of brands. There's brands we're not going to buy but the Sovos Brands the type of we've talked about are the ones that we will acquire.

Brian Holland -- Cowen and Company -- Analyst

Thanks again. Best of luck.

Todd Lachman -- President and Chief Executive Officer

You got it. Thank you.

Operator

Thank you. And for our last question, it's from Andrew Lazar of Barclays. Your line is open.

Andrew Lazar -- Barclays -- Analyst

Great. Thanks very much. I guess I know you're not giving sort of detailed guidance yet for next year but based on some of your comments around pricing that will be in place your comments around gross margin being up in '22, it sort of sounds like at this stage you would anticipate to sort of beyond algorithm next year in terms of sales and EBITDA growth even with some of the let's say incremental investments that you're having to make to supply your customers the way you want to. Is that a fair assessment, or are we missing something?

Chris Hall -- Chief Financial Officer

No. Thank you. This is Chris, and great question. And today, we're not providing formal '22 guidance.

We will as we progress into our Q4 conference call in March but we can say that we expect 2022 net sales and EBITDA growth in line with our long time -- long-term guidance of high single-digit top-line growth and low double-digit EBITDA growth. As we discussed, we see this massive growth potential across our brand continue to outperform our categories. As Todd mentioned, increasing awareness and distribution of the brands and that growth and momentum which we're going to close this year there are significant whitespace opportunity really for all of our brands [Inaudible] 2022. 90% of our businesses as Todd mentioned growing double-digit consumption here as we progressed across Q3.

And on the margin side, yeah. It'll be -- It's going to be uneven across the year as we discussed earlier. We'll see that that pricing take further hold Q1 and Q2 those productivity initiatives into Q2 and beyond and we'll really realize those benefits across the back part of the year. So we'll be a little uneven across the area remembering that we did grow 41% this year in Q1.

Part of that as a result that was really the last quarter of stay-at-home mandates. So we had explosive growth here in Q1 of this year that will be overlapping and that commodity inflation some of the shipping higher costs we've seen really start taking hold Q2, Q3, and beyond. So we'll roll out that as well across H1 and H2 next year. It will be slightly uneven.

But for the full year, we should be able to deliver against that for all our longer-term guidance.

Andrew Lazar -- Barclays -- Analyst

Thanks for that. Then just one quick clarification. I think you'd mentioned originally that the Rao's price increase was effective I think it was October 25th. I think today you mentioned the pricing would kick in in sort of late Q4 and maybe I'm just splitting hairs but I want to make sure there was no sort of a change in sort of the timing on how that pricing came through and if there was kind of why would that be.

Thanks a lot.

Todd Lachman -- President and Chief Executive Officer

Hey, Andrew. It's Todd. No change. You played it back perfectly.

Andrew Lazar -- Barclays -- Analyst

OK. Thanks very much.

Todd Lachman -- President and Chief Executive Officer

You got it. Thank you.

Operator

Thank you. Ladies and gentlemen, I'd like to turn the call back over to Todd Lachman for any closing remarks.

Todd Lachman -- President and Chief Executive Officer

Fantastic. Thank you very much. Well, thanks, everybody, for your participation. I want to thank our employees, our board, our investors, and the people who supported us throughout the process of becoming a public company.

Very exciting times. It's been enormously gratifying to lead Sovos through this journey. We're absolutely thrilled about what we've created so far but the best is yet to come. I look forward to speaking with all of you again in March when we report our fourth quarter earnings.

Have a great day.

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

Todd Lachman -- President and Chief Executive Officer

Chris Hall -- Chief Financial Officer

Michael Lavery -- Piper Sandler -- Analyst

Peter Galbo -- Bank of America Merrill Lynch -- Analyst

Ken Goldman -- J.P. Morgan -- Analyst

Chris Growe -- Stifel Financial Corp. -- Analyst

Robert Moskow -- Credit Suisse -- Analyst

Brian Holland -- Cowen and Company -- Analyst

Andrew Lazar -- Barclays -- Analyst

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