Sovos Brands, Inc. (SOVO) CEO Todd Lachman on Q2 2022 Results - Earnings Call Transcript

Sovos Brands, Inc. (NASDAQ:SOVO) Q2 2022 Earnings Conference Call August 3, 2022 4:30 PM ET

Company Participants

Joshua Levine - VP, IR

Todd Lachman - Founder, President, CEO & Director

Christopher Hall - CFO

Conference Call Participants

Kenneth Goldman - JPMorgan Chase & Co.

Andrew Lazar - Barclays Bank

Christopher Growe - Stifel, Nicolaus & Company

Jon Andersen - William Blair & Company

Michael Lavery - Piper Sandler & Co.

Peter Galbo - Bank of America Merrill Lynch

Cody Ross - UBS

Robert Moskow - Crédit Suisse

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to Sovos Brands Second Quarter Fiscal Year 2020 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference may be recorded.

I would now like to turn the conference over to your speaker host today, Josh Levine. Please go ahead.

Joshua Levine

Good afternoon, and thank you for joining us on Sovos Brands Second Quarter Fiscal Year 2022 Earnings Conference Call. On the call today are Todd Lachman, President and Chief Executive Officer; and Chris Hall, Chief Financial Officer.

By now, everyone should have access to the earnings release for the period ended June 25, 2022, that went out this afternoon at approximately 4:00 p.m. Eastern Time. The press release as well as supplemental slides can be found on the company's website at ir.sovosbrands.com. And shortly after the conclusion of today's call, a webcast will also be archived and available for replay.

Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties.

If you refer to the company's earnings release as well as it's most recent SEC filings, you will see a discussion of factors that could cause Sovos Brands' actual results to differ materially from these forward-looking statements. Please remember the company undertakes no obligation to update or revise these forward-looking statements in the future.

We will make a number of references to non-GAAP financial measures. We believe that these measures provide investors with useful perspective on the underlying growth trends of the business and have included in our earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measure. Lastly, please note that all consumption data cited on today's call will refer to dollar consumption as of the 13 weeks period ended June 26, 2022, and growth versus the prior year comparable period unless otherwise noted.

With that, I would now like to turn the call over to Todd.

Todd Lachman

Thanks, Josh. I would like to start today's call off by discussing a few highlights on the quarter and then provide an update on the current operating environment before turning it over to Chris Hall for greater detail on our second quarter results as well as our full year outlook.

Looking to our second quarter results, I am very proud of how well our team persevered in today's uncertain consumer environment while managing through continued supply chain headwinds. We delivered robust 22% top line growth with results led by 13% volume and 9% price.

Our core businesses, sauce, yogurt and frozen, which represent 90% of our portfolio delivered strong dollar growth rates. Sauce represented by the Rao's brand, grew dollar consumption over 30%, well ahead of the category. Yogurt, represented by the noosa brand, grew 5%, supported by pricing, which stepped up through the quarter. And finally, frozen, which includes Rao's and Michael Angelo's entrees as well as Birch Benders' waffles grew 6%.

Volume growth continues to be a key driver for us. whereas pricing remains essentially the sole driver of growth for the categories in which we play. Notably, and as expected, our pricing accelerated this quarter compared to the first quarter as our recent pricing actions in a number of categories flowed through to the market.

Net sales growth remained strong for our largest brand, Rao's, as we rapidly progress towards building a $1 billion brand. Rao's continues to be one of the fastest-growing center store brands of scale in the U.S., and represents more than half our portfolio. We grew total Rao's franchise dollar consumption 34%, led by 28% unit growth that was driven by gains in distribution and velocities across our categories. From a household penetration standpoint, total Rao's increased by 260 basis points versus prior year to 14.6% as a result of year-over-year gains across sauce, frozen, soup and pasta.

Specific to sauce, Rao's dollar consumption increased by over 30%. This rate of growth translated into a 170 basis point increase in dollar share versus the prior year as dollars and units were supported by a balanced mix of double-digit distribution and dollar velocity growth.

Additionally, unit growth of 23% was 20 points ahead of the category, leading to unit share gains. Household penetration growth for Rao's sauce was the fastest in the category, increasing by 210 basis points versus the same time last year to 11.9%.

In addition to our success with the Rao's brand and sauce, we continue to see very strong volume-led performance in soup, pasta and frozen entrees, a testament to the strength of the brand and its ability to travel to other categories.

For our soup business, the fifth largest brand in the category, dollar consumption was up 30% with units up 26%. Our pasta business grew dollars 62% and units 57%. And finally, Rao's frozen entrees grew dollars 67% and units 52%.

While we grew total frozen entrees dollar consumption by 7% in the quarter behind strong Rao's growth, we experienced significant supply chain headwinds on our frozen business during the quarter. Specifically, as you might recall, last quarter, we shared that our primary pasta supplier to our frozen entrees business was hit by a tornado. This had a material impact on our ability to supply product to the market, causing us to pull nearly all promotional activity to better service our base business. We have reinstated frozen promotional activity in Q3 as inventories are nearly back to target levels.

On our noosa yogurt brand, we grew core spoonable yogurt dollar consumption mid-single digits behind nearly 10% dollar velocity growth with consistent growth across our core 8-ounce, multi-pack and 24-ounce sizes. Gelato continues to increase distribution and our marketing efforts are gaining traction as we see improving trends through the summer.

Lastly, on Birch Benders. The second quarter once again proved challenging as we expected. The declines were driven primarily by lapping the balance of a key customer promotion that similarly impacted us in the first quarter while we continue to see declining trends in keto. Our teams are working to improve performance. However, in light of these recent trends and the brand's underperformance, we took a noncash goodwill impairment that Chris will speak more about later.

Shifting to the supply chain. Disruptions once again impacted our performance during the second quarter even as we put a strong 13% volume growth. We experienced intermittent outages in certain key inputs, including glass, foils, pasta, chicken and eggs, while also being forced to weather the impacts of higher diesel cost and ongoing delays at the ports.

Specifically, Rao's sauce was impacted by shortages of certain shelf sizes, and Sovos' frozen entree business was impacted by outages of dry pasta for a number of weeks, which resulted in gaps on shelves during the quarter and elevated downtime in our plant.

In the quarter, we also realized heightened inflationary pressures, including increased raw materials, packaging, logistics, labor and energy costs. At this point, as we look ahead, we don't see the current challenges abating in a meaningful way in the near term. As you know, in response, we have announced pricing against all of our brands with our second list price increase on Rao's sauce going in the market as we speak.

We are also executing against our full suite of productivity and net revenue management projects, supporting our path to margin recovery. As we've stated in the past, we'll do not hesitate to respond with additional actions if warranted by the market.

In summary, we are pleased with our performance in the first half on the top line and remain confident in the strength of our brands. As a result of our 16% organic sales growth during the first half of the year and confidence in our continued growth momentum, we are raising our sales guidance for the year.

I want to commend our team for how they have responded to the challenges we continue to face and know that we will remain nimble and tenacious, taking action quickly to ensure we continue our growth momentum.

We remain laser-focused on driving household penetration by expanding distribution and awareness, and we will continue to make strategic investments behind sales, marketing, innovation, supply chain and other necessary capabilities to drive future share gains for our one-of-a-kind brands even in the face of a challenging cost environment.

Finally, before I turn it over to Chris, I want to welcome the newest member of our Board of Directors, Mr. Tamer Abuaita. Tamer brings 25 years of supply chain experience and perspective, including nearly 20 years at established CPG companies, including Nestlé, ConAgra, Heinz and SC Johnson. He is currently the SVP of Operations and Chief Supply Chain Officer at Stanley Black & Decker. In today's volatile and challenging supply chain environment and from his long experience in our industry, I have no doubt he will be a great addition to our Board.

I will now hand it over to Chris for more details on the quarter and our updated perspective on the second half of the fiscal year.

Christopher Hall

Thank you, Todd, and good afternoon, everyone. Second quarter total net sales $197.4 million, a $36 million or 22% increase over the prior year period. This growth was entirely organic and was driven by 13.3% volume growth and 8.7% price. We are very pleased by how we have executed our price increases across our portfolio with our volume growth remaining robust.

From a category perspective, our growth was driven by strength in our core category, sauce, yogurt and frozen. And at the brand level, the growth was primarily driven by Rao's and noosa, offset by declines at Birch Benders. Rao's remained the driving force behind our growth, increasing net sales 43.6%, driven by sauce. On a year-to-date basis, sauce sales for the Rao's brand have grown 30%, roughly in line with consumption. When comparing total Rao's net sales growth relative to 2019, this was the third consecutive quarter where we grew at a 55% CAGR, reflecting remarkable strength and consistency considering the brand size of nearly $0.5 billion in net sales.

Noosa net sales were up 8.8% in the quarter as pricing flow through to the market, coupled with the initial contribution from gelato.

Adjusted gross profit of $55.2 million increased $5.5 million or 11.1% year-over-year, benefiting from our strong top line results. Adjusted gross margins were 28% of net sales for the quarter, reflecting a 270 basis point decline versus the prior year period and a 200 basis point improvement versus Q1 2022. The year-over-year margin decline was due to the impact of low double-digit inflation with specific pressures observed in our dairy, protein, packaging, logistics and energy costs.

These headwinds were partially offset by the benefits of pricing and productivity in the quarter, each of which sequentially improved versus the last quarter. Adjusted operating expenses of $32.5 million increased by $7.5 million or 30.2% over the prior year period, primarily due to increased spending behind marketing, R&D and G&A as we invested in our brands, talent and capabilities to drive growth for the long term.

For perspective, in the second quarter, we increased our growth investments as defined by marketing plus R&D by 26% versus the prior year. The quarter also included public company costs, which were not present in the prior year period when the company was private.

Adjusted EBITDA of $25.7 million declined $1.6 million or 6% versus Q2 2021, while adjusted EBITDA margin was 13% and versus 16.9% in the prior year period.

Net income for the quarter was a loss of $30.3 million or negative $0.30 per diluted share compared to a loss of $1.3 million or negative $0.02 per diluted share in the prior year period. The loss was primarily related to an impairment of Birch Benders' goodwill. We test our goodwill for impairment at least annually or if circumstances warrant and record annual related impairment loss as an expense. Due to the year-to-date underperformance of Birch Benders, we performed a quantitative assessment, which resulted in a full impairment of Birch Benders' goodwill totaling $42.1 million. We believe this should resolve future impairment risk to the brand.

Adjusted net income was $12.7 million and adjusted EPS was $0.13 per diluted share compared to $13.3 million or $0.17 per diluted share in Q2 2021.

Due to the timing of our IPO in September 2021, I would point out that our fully diluted share count of 101.3 million shares was 31% higher than the prior year period and represented a $0.03 headwind to our Q2 2022 adjusted EPS.

At the end of the second quarter, cash and cash equivalents were $72.6 million and total debt was $482 million, resulting in a net debt to adjusted EBITDA ratio of 3.9x.

I would now like to discuss our updated outlook in some of the underlying assumptions that support it. On the top line, we are raising our fiscal 2022 guidance to $825 million to $835 million, reflecting 15% to 16% growth. This compares to our prior guidance of $800 million to $815 million or 11% to 13% growth.

Our updated guidance reflects 16% organic sales growth year-to-date and confidence in our continued growth momentum through the balance of the year, including the benefit from incremental pricing on our Rao's sauce that just went into effect. Remember that this guidance includes the benefit of the 53rd week in Q4, which equates to an additional 2 points to the top line on a full year basis.

Finally, I want to provide some additional color to our second half sales growth assumptions. First, we expect price in the second half to be generally in line with Q2 as the benefit of the recent Rao's sauce price increase is expected to be offset by the restatement of frozen entrée promotions.

And second, we continue to expect elasticity to normalize during the second half as we enter, but many effects could be more challenging environment for the consumer.

Regarding profitability, we are maintaining our full year adjusted EBITDA range of $116 million to $122 million with guidance at the lower end. We continue to assume we will see benefits from price realization and productivity initiatives as we move through the back half of the year.

We still expect our full year inflation to fall within the low double-digit range. However, our updated expectations reflect slightly higher inflation assumptions through the balance of the year. The primary driver is being higher dairy, glass, logistics and North American third-party manufacturing costs.

Growth remains our top priority, and I want to reiterate that we will continue to invest in the business to enable the multiyear growth opportunity that we see ahead.

From a balance sheet perspective, given our updated outlook, higher interest costs and investments to support our growth, we expect that our leverage will finish the year below 3.5x.

Let me now turn the call back over to Todd for some final remarks.

Todd Lachman

Thanks, Chris. We are very pleased with the first half of 2022 led by our robust top line growth. We continue to invest in our brands, talent, supply chain and capabilities to drive growth well into the future even as we manage against inflationary pressures and supply chain disruptions.

As we have said many times in the past, while sales growth will always be our top priority, we will work tirelessly to combat near-term margin pressures and secure long-term profitability.

With that, Chris and I are now available to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. Now first question coming from the line of Ken Goldman with JPMorgan.

Kenneth Goldman

Chris, I wanted to follow up on a bit of guidance that was issued last quarter about the gross margin. It was supposed to be on path to I think be up modestly year-on-year as you exit the year. I just wanted to get a little bit more color. How do we think about the third quarter gross margin in light of 2Q coming in 200 basis points above 1Q. So I just wanted to get some color there, and I know there was some promotional pullback. And then I just wanted to get a little bit of sense of how you still see the gross margin exiting the year if you have a little more clarity on that at this point.

Christopher Hall

Yes, sure. Thank you. We -- so we're pleased with the sequential improvement we saw in Q2 on the gross margin line. And I recall that we did expect coming out of our last call. And we see continued gross margin improvement as we go across the back half of the year, moderate expansion Q3 and Q4.

We do see incremental inflation versus where we were last time that we spoke. Areas like dairy and glass and freight remain high, and in some cases, have elevated since our Q1 call. So we do see more inflation in the back half of the year. We're pleased with the level of pricing we have in the marketplace here as it flowed through in Q2, and we're pleased with the progress we're making on our productivity initiatives. As we mentioned, that would also be more heavily weighted in the back half of the year.

So that combination of higher inflation, still low double digits in total for the year. Pricing flow through the elasticity that we've experienced in Q2, the productivity we see back half of the year, we do see that moderate gross margin expansion, though in Q4, we do seek landing slightly below where we landed last year. So in our previous call, we hope to get back to that Q4 level, given this higher level of inflation in Q4, some uncertainty we see in a couple of areas, we are de-risking that Q4 gross margin a little bit.

Kenneth Goldman

Got it. If I could just ask a quick follow-up, and then I'll pass it along. I thought that guidance previously was for maybe the gross margin to be up modestly year-on-year kind of as you exit the year, so maybe in the last month of the year. I just wanted to make sure that -- I'm probably being too nitpicky here, but I just wanted to make sure that as you talk about that expansion landing slightly below where you were last year. Is that for that same period, sort of the end of the quarter? Is it for the whole fourth quarter? Again, I just want to make sure I'm hearing you correctly so we can think about it right.

Christopher Hall

Yes, that will be for the entirety of Q4 year-over-year. It will be improved versus Q3 of this year, but below Q4 of 2021. Okay. Thank you.

Todd Lachman

Thanks, Ken.

Operator

Thank you. And our next question coming from the line of Andrew Lazar with Barclays.

Andrew Lazar

I guess, first off, I think it was last quarter where you mentioned some of the supply chain challenges you faced maybe kind of curbed overall sales growth by maybe it was low single-digit sort of impact to the top line. Do you have an estimate of around even directionally what it might have held back sales by this quarter?

Christopher Hall

Yes, as we talked in Q1, we expected and did realize $3 million to $5 million of business move out of Q1 into Q2. So we did realize that in Q2.

As we operated in Q2, we still did see some sporadic supply chain challenges, notably a couple of sizes of our glass jars for Rao's sauce, not our main 24-ounce, but like a 22-ounce and 40-ounce. And importantly, we had supply chain challenges in our frozen entrée business. You may recall we talked about a tornado that had hit our third-party pasta manufacturer, which we had to build then and find a secondary supplier for that. So we lost some time at the plant as well there. So we did have those challenges in Q2 on frozen entrée. Fortunately, as we're closing the quarter, we're closing in a much better position in getting that the inventory re-bounce back into the marketplace.

We did cancel the vast majority of our promotions in Q2 against our frozen business, and we will be reinstating that as well here in the back half of the year. So we don't think -- we think it was a very marginal impact at all as we exited Q2 on any volume that will be shifting over into Q3.

Todd Lachman

Just to build on that one point. Hey, Andrew, it's Todd. Our service levels now on frozen and sauce are very close to target levels with those inventories back, and we're back promoting frozen Folon as we enter -- as we're into Q3.

Andrew Lazar

Great. And then, Todd, what are you seeing on elasticity right now? I realize you're planning for it to be more going forward, which is prudent, but trying to get a sense of what you're seeing now and sort of how the dynamic is playing out maybe in your key brand between any trading down that you're seeing versus trading in to at-home eating, even to some premiums brands like yours, given it's still a much better value obviously than eating out.

Todd Lachman

Absolutely. So let me hit a couple of those points. So first just hitting right on the elasticity. To date, look, we've seen lower elasticities to our sauce pricing than we expected. And even at the category level, pricing sensitivities remain below historical levels like through Q2. So the sauce in our volume, and we see our volume growth is very, very strong on the Rao's sauce brand, up 23% unit consumption, unit velocity is up 7%. Now as we implement the second LPI, given elevated gas prices, double-digit inflation across all more -- major areas of spending, we're being cautious as we assume elasticities will revert to normal.

Let me just hit yogurt, then I'll talk about the trade down point. On yogurt, the brand has grown net sales of 8% to 9%, consumption consistently mid-single digit. So we have seen the category continue to evolve with an increasing number of pricing actions ourselves included.

As we look at the LPI that went to market, the list price increase went in the market in May, we believe we're seeing elasticities on par with our initial projection. So a little bit different on yogurt. And we've basically been conservative as we've seen them through the balance of the year.

And to get to your question on trade down, the first area, as you said, and it's line with -- as we read all of our peers, I mean we are seeing all the data that what consumers are cutting back on is out-of-home eating and therefore, those dollars are going towards in-home. And we've seen historically notably on a brand like Rao's, which provides restaurant quality premium taste and food that -- therefore, that's helping continue to grow the brand as you see in the dollar consumption.

And I'm just quoting now some Kantar research, in June, 42% of consumers have intentionally decided to eat out less often, 48% of consumers are uncomfortable spending money to eat out, 49% expect to cut back or stop spending on food away from home.

I'd also quote recent source of volume data both Rao's and noosa, we have sourced volume from private label versus private label sourcing from us. So though private label is growing, private label is sourcing as it traditionally does for mainstream brands. So private label is usually an analog to a mainstream brand, not a premium brand like a Rao's or a noosa. So maybe slowing down a little bit, but Rao's really consistent growth as we're seeing. So I have a ramble there, but try to hit all the points that were embedded in your question.

Operator

And our next question coming from the line of Chris Growe with Stifel.

Christopher Growe

I just had a quick question for you and a bit of a follow-on. I guess to be clear, with this increase in cost inflation you expect in the second half or a slightly higher level of increase, given your pricing is in place and has been announced already, do you expect pricing, I guess, and productivity savings to offset cost inflation in the second half of the year?

Christopher Hall

Chris, we -- as we see this inflation continue to rise in these areas that we mentioned, we continue to pursue the other pricing actions that we put in the marketplace through now, including the Rao's second LPI, which is originally in the marketplace just now as we see. And as we mentioned, our productivity initiatives will be more back half weighted, and we're seeing that as well. So as we move across H2, we will see still a lag on our pricing and productivity versus the inflation that we are seeing. So we -- as I mentioned previously, we don't anticipate getting back to the Q4 prior year margins as we exit the year. So we're not covering 100% of that inflation that we're projecting into Q4 as we exit the year.

Christopher Growe

Okay. And then just I had a question, you had a pretty aggressive increase in marketing, R&D, and that flowed through SG&A. And that was obviously very encouraging for the future growth of the brands. I just want to get a sense, is that something you expect to continue? Any kind of framework, how to think about it for the year? And maybe then from a high level kind of where that's directed kind of where you're focusing a lot of those dollars.

Christopher Hall

Yes. No, very good. Well, as we've mentioned, really all of our calls, the top line growth is our #1 priority. And we've seen the results of that, and we are benefiting from the investments that we have and continue to make throughout Q2. We actually saw our marketing and R&D investments build up by 20% year-over-year.

As we move across the back half of the year, we expect to continue to make those investments. In fact, we will actually spend -- put more investment into the marketplace in the back half of the year than we did in the first half of the year on that combination of marketing and R&D. While the growth rate may not be as much as it was year-over-year, it will be incremental dollars going into the marketplace for the back half of the year versus the first half of the year. So we are committed to making those investments. We're committed to reaping the top line momentum we see ahead of us.

Operator

Our next question coming from the line of Robert Moskow with Crédit Suisse.

Robert Moskow

Maybe just a couple of questions. Chris, can you just remind us like how to quantify the productivity benefit of Alma opening up and how that will help your back half because it is a very steep ramp of EBITDA growth required to still hit your guidance in the back half? So what's the unlock there?

And then secondly, on Birch Benders, does writing down this brand impact at all your long-term growth algorithm that you provided during the IPO?

Todd Lachman

Rob, it's Todd. I'll let Birch Benders, pass it to Chris on the other question. So the answer is no. We're writing down the Birch Benders in no way, shape or form affects our long-term algorithm in regards to growth. So I just leave it at that.

Christopher Hall

Okay. Yes. Thanks. And specific to Alma. So Alma is open and operational, and we continue to ramp up production as is fully commissioned, making thoughts that really matches the high-quality stocks we're making in Italy as well, and we're building supplies right now, building inventory on both jars and Italian tomatoes in Alma.

We talked before about some of the major benefits of the U.S. operation are -- include balance sheet. It does allow us to have a much shorter order to fulfillment time line that allows us to take advantage of short-term marketplace opportunities, and we won't need to maintain as much inventory as have previously as much safety stock when it was all coming out of Italy.

Now on the productivity front versus -- we currently source roughly 20% of our Rao's sauce domestically, Alfredo and pasta sauce predominantly from other domestic suppliers that then will shift into the Alma operation, and we will see productivity there that the Alma operation will be less costly than the other domestic suppliers that we have. So we will see productivity there.

But we have a whole other slate of productivity initiatives really hitting in the back half of the year. We mentioned previously that we had seen delays in productivity coming out of the first half of the year.

As we were having delays in getting equipment and even engineers into our plants, we talked a lot about the automation we're putting into our Austin frozen entrée plant. Well, now that is the 2 lines that we're automating, one is now up and operational. The second one will come here as we exit Q3 because that will be in place down in Austin and up in our Bellevue, Colorado plant, making new sauce we've in-housed our fruit preparation -- our puree preparation, and we will see that, those cost savings remain at in-house in the back half of the year as well.

So really that back half, which gives us confidence in the sequential improvement of margins is the full flow-through of pricing and that more heavily weighted productivity in the back part of the year, Alma and the other initiatives that we have in place.

Robert Moskow

I think you've quantified some of the dollars of those productivity savings in the past, is there any way to give us a rough range?

Christopher Hall

In total for the year, we'll see a 2% to 2.5% of our total cost of sales productivity, very heavily weighted to the back half of the year. 60% to 70% of that or more will be in the back half of the year.

Operator

Our next question coming from the line of Peter Galbo with Bank of America.

Peter Galbo

Todd, I just wanted to maybe expand on your comments around the port congestion issues. There's been some stories, I think, about more ramp and congestion in the Southeast. And I just want to know, are you having more issues, I guess, getting finished product imported into parts of the country. Or is it really, hey, we can't get raw materials in, through Savannah or Charleston to get it over to Alma for production on Rao's? Just any greater detail there would be helpful.

Todd Lachman

Yes. I would say a keyword is intermittent and effects. As we talk about it, it's really the finished goods that are coming over from Italy here. I mean there's also effects of other elements. But I wouldn't say it's affecting any one the Southeast port more than the Northeast that we use. There was an example of foils that occurred in Q2 on noosa, et cetera. But it's a little bit hit or miss, and it's affected us, but I would say it's more intermittent, Peter, versus something that's long standing.

And very importantly, honestly, our supply chain has done an absolutely phenomenal job managing through that congestion. We have just a great supply chain team, logistics team, et cetera, and they've been able to fly through the turbulence and make sure that we're able to get all the supplies that we need in light of the -- fly through the turbulence and make sure that we're able to get all the supplies that we need in light of the very unprecedented operating environment that we're in today.

I would also, I guess the last thing I'd say, too, is that we do have expanded utilization of our West Coast DC, which will diversify our volume between the east and west, which will be a longer-term benefit for us as well.

Peter Galbo

Okay. No, that's helpful. And Chris, maybe just on the increase in marketing and R&D in the second half, just any way to help us quantify that sequentially? How much of a step-up in dollar terms we might see?

Christopher Hall

On a year-over-year basis, it will be up double digits, essentially, exactly how much could be at double digits, not as much as the 26% that we put in Q2.

And within the year, we typically will see, I call it, 40%, 60% split, 40% H1, 60% H2. I think we'll give you a good range to -- you'll actually see in the marketplace.

Operator

And our next question coming from the line of Cody Ross with UBS.

Cody Ross

You raised your full year sales guidance. However, your 2H guidance is pretty much in line with, the Street, suggesting a modest slowdown across your portfolio from what you just posted. Just want to get a sense, is that more conservatism from your end? Or have you actually began to see a bit of a slowdown from your recent price increases?

Christopher Hall

Yes. So we're very, very pleased with the growth that we've seen in the first half of the year, 16% net sales through the first half, 12% volume growth. And then like as you mentioned that pricing really taking over in Q2 and into the second half of the year.

And we have -- obviously, we have a lot of confidence in the back half of the year, taking that full year guidance up to roughly 15% to 16% from the prior 11% to 13%. We will see that growth in the back half of the year more weighted towards pricing versus what we saw in the first half for volume. That's especially true in Q3, where there are a couple of key individual customer events that we ran last year that we are not repeating this year. So our volume growth in Q3 will be a little muted versus what we've seen year-to-date.

And then importantly, we've modeled into our projections for the back half of the year that elasticities normalize. We mentioned the second Rao's LPI going to the marketplace right now. So we felt it prudent to assume we would see more historical level of elasticity here in the back half of the year.

And then with just the uncertainties going on in the world, in the U.S., especially today, do we see the pressure on the consumable? Will we see return in general to the elasticities that we have expected to see and have seen historically? So it's really that return to normal elasticity that has landed where we have the back half projections.

Cody Ross

Great. That's helpful. And I just want to clarify some of your comments on pricing because I think some of it was helpful, but I am a little confused. You did 8.7% roughly price mix this year -- this quarter. Some of it was benefited by not having promotions on your frozen business, and you expect price mix to largely be in line with what we saw from the -- from this quarter, so call it 8%, 9%. But yet you expect price to be the bigger contributor in the back half -- I believe your back half guidance is for roughly 15%, 16% growth. So that would be roughly 50-50. So how do I square these?

Christopher Hall

Yes. So we, again, we talked all year about -- we knew our growth will be more volume driven in the first half of the year and price driven in the back half of the year. As I mentioned, Q3, specifically, we will see muted volume growth due to the overlapping a couple of events we ran last year, promotional events.

So that is the back half, while it feels like that, call it, 9% pricing, we do then, therefore, see volume more than 5% to 6% range in the back half to get to that 15%. So that's where we see that more heavily weighted pricing in the back half of the year.

Operator

And our next question coming from the line of Michael Lavery with Piper Sandler.

Michael Lavery

You talked about some of the capacity constraints and how that impacted promotional activity. Did that also have any impact on distribution expansion momentum or innovation launches or anything that may now give a little bit of a volume lift in the second half once you've got some other relief there?

Todd Lachman

Michael, it's Todd. So the direct answer is no. Didn't affect any really new distribution at all. We are -- I mean, but look, it did affect in Q2 our ability to service notably frozen secondarily, some key sizes on sauce. And those results didn't affect new distribution opportunities, and they did not affect any new launches.

That said, as Chris highlighted before, we are now fully promoting frozen in Q3 when we pretty much went dark on promoting frozen in Q2. So that -- and as retailer inventories get restocked, et cetera, it will have a beneficial impact in Q3, but nothing on new products or new distribution per se, except for retail pipeline fill.

Michael Lavery

Okay. That's helpful. And just wondering if you can give the latest on how you're thinking about any further M&A. You mentioned you expect to finish with 3.5x net leverage, which presumably means excluding M&A, but does it mean that you also are planning not to have any between now and then?

Todd Lachman

No, I'm going to let Chris talk to the -- I'll let Chris talk to the leverage side. Look, strategically, M&A will play the same role going forward as it has historically. But the first thing I will highlight -- that I have highlighted on the last several calls is that we are primarily focused right now on growing our core categories. I think you said 22% net sales growth driven by volume. I mean I'd be remiss, I didn't highlight right now, this is our -- sorry, Michael, I'm shameless, and I'm still here on your question. The highlight is our fourth quarter as a public company, 4 quarters in a row, double-digit top line growth, 4 quarters in a row double-digit growth led by volume, 4 quarters in a row that volume driven by our core categories of sauce, yogurt and frozen.

And as we've talked about, the distribution opportunities across those 3, notably sauce, which is the largest percentage of our portfolio are massive. So we are focused on driving those volume gains. We're focused on driving distribution.

I'd also say, as I highlighted before, we have driven double-digit distribution growth on Rao's every quarter since we have acquired that brand, which is rapidly on track to grow to $1 billion.

That said, we've used M&A as a lever in the past. So we continue to see a steady flow of M&A opportunities. At any given moment, we're evaluating a number of targets to maintain a long list of potential companies that meet the criteria, and so that's a lever that we'll continue to look at as we grow in the future. But right now, we're really focused on continuing to drive our business organically, notably in our core categories.

And I'll pass it to Chris just for a second on the leverage question, Michael.

Christopher Hall

Yes. Sure. So we -- any M&A deal that we would do would obviously have to make outstanding economics as well as business sense. And we have strict guidelines for what we'll consider as an acquisition. We've done 4 over the 5-plus years of our existence.

We definitely are modeling the impact of even potential interest rate increases in our M&A work. And ultimately, what's important to us is that we have -- we can comfortably service whatever debt we do take on and ensure we can pay down that debt to a comfortable level and a short amount of time.

And we don't really solve the particular leverage, we saw for how quickly we can delever down to a normal state of leverage following an acquisition. So cash flow generation is definitely something we scrutinize. We've had a history of very solid cash flow, robust generation and the ability to pay down debt once we do -- go to the credit markets, we do pay down that debt faster than our underwriting would have suggested.

So we're -- we like the range that we're in now for leverage. We're right under 4, and we may go above that for an acquisition. But again, the key is quickly delever and get back into that range we've spoken of the 4 -- under 4, 4.5, a little 4 on a pro forma basis.

Operator

[Operator Instructions]. Our next question coming from the line of Jon Andersen with William Blair.

Jon Andersen

I want to get a sense for how things are progressing with the new noosa launch in Gelato. I know it's early but you're moving that brand into a multibillion dollar ice cream category, and would just love to hear your view on how it's going so far, sell-in, sell-through and maybe your kind of expectations for that going forward?

Todd Lachman

Sure. John, Todd Lachman here. As we -- what we can really highlight is it's exceeding our expectations in selling, so better than expected to sell into the new frozen yogurt Gelato. Have you've been able to taste it, Jon?

Jon Andersen

I tasted it in Expo West.

Todd Lachman

Okay. Fantastic. Anyway absolutely delicious, we're selling is better than expected, and velocity continues to build as a result of national marketing promotions across the board, big in-store promotional push. So that's really what we can say on gelato. I mean we really just, we're in the middle of the summer season. We're really bullish on the loss -- on the launch of gelato, but selling better than expected.

Jon Andersen

Okay. I'll stay tuned for more updates in the future. The second question is in frozen, you have 2 brands that play there. And I'm wondering, you didn't talk too much about Michael Angelo's in the prepared comments. I'm wondering if you could discuss a little bit about the interaction between Rao's and Michael Angelo's in frozen. Are they both -- what role they play? Can they coexist? Is that how you kind of see those 2 brands kind of developing in that particular category as you go forward?

Todd Lachman

Absolutely. No, they can absolutely coexist. Michael Angelo's is premium priced for the category. Rao's is super premium priced for the category. Look, Rao's is newer. So it's growing at a much higher rate than Michael Angelo's. So our total frozen business, dollar consumption grew 7% in the quarter.

But I will say, as we discussed, we had supply issues that impacted our entire frozen business. And so therefore, whereas consumption, Michael Angelo's is down a little bit a for the brand were up. I mean you'll see that through in light of the supply chain constraints. We did need to make a priority call. We prioritized Rao's a bit over Michael Angelo's. So that was a little bit of a tweak that affected Michael Angelo's for the quarter. Michael Angelo's has a very loyal following. It's been a consistent contributor to our portfolio since we acquired it in January of 2017. And what we have seen is 2 brands are able to coexist very well where they're both in distribution together.

There's also some unique items that Michael Angelo's has, for example, eggplant parmesan that we don't have on Rao's, and that Rao's has such as frozen meatballs that's not offered by Michael Angelo's. So -- and those are just a couple of different examples. So some unique items, some premium ingredients at Rao's that justifies the premium price. And as we said, our total frozen business, we're very bullish on, and we're driving both of those brands. But the priority of the 2 is Rao's as we are really driving Rao's to that $1 billion sales goal that we're well on track for.

Operator

And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Todd Lachman for any closing remarks.

Todd Lachman

Awesome. Look, thanks again, everybody, for joining us and showing an interest in our story. I look forward to engaging with many of you in the coming weeks, please feel free to reach out to Josh to follow up on discussions. Until then, have a great evening and take care. Thanks a lot.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.