Vital Farms, Inc.

fourth quarter 2020 earnings conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star 1 on your telephone. I would now like to hand the conference over to your speaker today, Mr. Matt Seiler, Vice President of Investor Relations. Please go ahead, sir.

Thank you, good morning, and welcome to Vital Farms' fourth quarter and fiscal year 2020 earnings conference call and webcast. I'm pleased to be speaking with you today during my first earnings call on board as Vice President of Investor Relations at Vital Farms. On today's call are Russell Diaz-Conseco, President, Chief Executive Officer, and Bill Meissner, Chief Financial Officer, who is also speaking on his first earnings call as CFO this morning. By now, everyone should have access to the company's fourth quarter and fiscal year 2020 earnings press release filed this morning. This is available on the investor relations section of Vital Farms website at investors.vitalfarms.com. During the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and belief and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and the company's annual report on Form 10-K for the fiscal year ended December 27, 2020, each filed with the SEC earlier today and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note that on today's call, management will refer to adjusted EBITDA, which is a non-GAAP financial measure, While the company believes this non-GAAP financial measure provides useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to our earnings release for a reconciliation of adjusted EBITDA to its most comparable measure prepared in accordance with GAAP. I'd also like to note that we are conducting our call today from our respective remote locations. As such, there may be brief delays, crosstalk, or other minor technical issues during this call. We thank you in advance for your patience and understanding. And now, I'd like to turn the call over to Russell Diaz-Conseco, President and Chief Executive Officer of Vital Farms.

Russell Diaz- Thanks, Matt. Good morning, everyone, and thank you for joining today. I'd like to welcome Bo and Matt to their first earnings call with Vital Farms. As many of you know, Bo joined us last July. and officially transitioned to Chief Financial Officer on December 28, 2020. Matt joined us earlier this month and will be leading our communications with the investment community. On today's call, I will briefly review our fourth quarter and full fiscal year 2020 financial highlights and provide an update on each pillar of our growth strategy. Bo will then review our 2020 financials in more detail and provide our outlook for 2021. We then look forward to answering your questions. We reported record performance in 2020, our first year as a public company. Net revenue for the full fiscal year increased 52% to $214.3 million. In the fourth quarter, net revenue was $54 million, a 30% increase compared to the fourth quarter of fiscal year 2019. Vital Farms is the leading pasture-raised egg brand with over 80% dollar share of the U.S. pasture-raised egg market, the second largest egg brand based on retail dollar sales, and the largest contributor to category growth by retail dollar sales in 2020, contributing almost half of total egg category growth. Our products are sold in over 16,000 stores, and in 2020, 5 million households purchased our high-quality, ethically produced eggs. Our continued track record of growth prior to and throughout 2020 is reflective of the mission and values that distinguish Vital Farms within our category and help us cultivate longstanding trust and loyalty amongst our consumers. We operate the business through the lens of conscious capitalism, maintaining a belief that a business can only be sustainable over time if it's sustainable for all stakeholders. Since the day we were founded, we have prioritized our stakeholders, farmers, suppliers, employees, whom we call crew members, customers, consumers, communities, the environment, and stockholders, and treated them as true co-creators of the business. Our model guides us far beyond producing pasture-raised foods and challenges us to consider how we can improve the lives of people, animals, and the planet in everything we do. Our designations as a certified B Corporation and public benefit corporation are natural extensions of the purpose-driven business we built from the beginning. In January 2021, we published our first stakeholder summary, a review of how we served our stakeholders throughout 2020. I'd like to share a few highlights that felt especially meaningful and reflective of the trusted ethical food brand we're building. Specifically, as we've expanded our farmer network to over 200 farms. Nearly 2.5 million hens enjoy a meaningfully better life than the confinement they would face in the industrialized food system. Over 6,000 acres of land are able to rejuvenate naturally without herbicides or pesticides. In 2020, we donated 15 million eggs to food banks across the country, saved 25,000 trees by transitioning our egg cartons to a carbon-neutral lid, and donated to 43 nonprofits that advocate for causes including animal welfare, environmental conservation, children's health, and addressing systemic racism. Now I will provide an update on each pillar of our growth strategy. First, increasing household penetration. Second, expanding retail distribution. Third, growing our food service footprint. And fourth, innovating new ethical food products within existing and new categories. starting with household penetration. We ended 2020 with 3.9% household penetration for Vital Farms eggs, which represents 5 million households that purchased our shell eggs, a 50% increase over the prior year. New purchasers, defined as households who purchased Vital Farms in 2020 and not in 2019, increased 55%, and retained households, defined as households that purchased Vital Farms in 2020 and 2019, increased 38% versus the prior year. We retained 50% of the households that purchased our eggs in the initial eight-week stock-up period between March and April 2020, with 61% of those consumers making two or more repeat purchases. We believe our strong household penetration and conversion is driven by the strength of our brand, our trusted high-quality products, and a secular shift toward consumers being more conscious of their food choices and wanting to feel more confident in where their food is from and how it's produced. We plan to invest in attracting additional new households, as well as continually engaging loyal consumers through strategic marketing that educates consumers about our brand, values, and the premium quality of our pasture-raised products. In January, we launched our newest brand campaign, titled Where Honest Food is Raised. This new campaign, the first that features all of our products, stars a crew member from our farmer support team, and humorous storytellers who highlight the attributes that define our egg, butter, and egg bites products. Humanely treated hens and cows that have the freedom to roam outdoors on pasture year-round, raised by family farmers. The campaign includes digital videos that appear across a wide variety of digital, social, and streaming television platforms. This is just one example. of how we're continuously investing to build our brand, from increasing awareness by educating consumers on our values to driving loyalty with a multiple product and digital touch points like the monthly Vital Times newsletter that comes in each carton or our thoughtful and personal interactions with consumers on social media. Now to expanding our retail footprint. As of December 2020, our products are sold in more than 16,000 stores, a 12% increase from the prior year. Following a significant increase in store count that we saw in the third quarter, our fourth quarter count remained relatively flat, as most retailers do not perform shelf resets during this time of year. We continue to see faster growth in the mainstream versus the natural channel. For the full year 2020, natural channel retailers represented 46% of retail dollar sales compared to 49% in 2019. Mainstream channel retailers represented 54% of retail dollar sales compared to 49% in 2019. Additionally, we have significantly expanded the number of placements in each channel, with 46% two-year CAGR in mainstream and 27% two-year CAGR in natural. We believe mainstream channel sales representing a slightly higher percentage of our overall consumption dollars demonstrates the growing consumer demand and preference for high-quality, ethically produced foods. We also believe there are several opportunities for growth ahead of us, including incremental growth and distribution across existing channels, building on current momentum, and expanding to new channels. We're also seeing increased demand for free-range and pasture-raised eggs, which we refer to as outdoor access eggs, across the entire category. In 2020, demand for outdoor access eggs in the mainstream channel increased 33% versus one year ago, representing a 10% share of total eggs sold. In the natural channel, demand for outdoor access eggs increased 20%, representing 59% of total eggs sold. Across both channels, Our dollar share of the outdoor access segment increased to 27% as of December 2020, and we contributed 55% of the growth in the outdoor access segment versus one year ago. From 2019 to 2020, our share of the outdoor access egg segment increased 480 basis points. The growing demand for outdoor access eggs across both channels, combined with our strong growth within the outdoor access category, speaks to our potential to further penetrate both channels. We see significant opportunity in the mainstream channel. The 10% share for outdoor access eggs is relatively small, though steadily growing. And we believe our brand and products will enable us to expand distribution within existing and new mainstream customers. Additionally, recognizing the accelerated demand in online grocery, we invested in marketing initiatives with existing customers, including Target and Kroger, as well as third-party delivery companies such as Amazon Fresh, where we are the second-ranked egg brand by retail dollar sales. We expect online grocery to remain an attractive, convenient option, even after widespread vaccinations against COVID-19, and we will continue to invest, test, and expand our e-commerce capabilities to meet consumers where and how they prefer to shop. As we expand our retail distribution throughout the year, our total brand velocities remain strong, outpacing our top five competitors in both channels. Finally, we fulfilled the heightened demand across all channels without any significant disruption to our supply chain, and we continue to invest in our future growth. We're on track with our facility expansion, which will nearly double our current square footage and increase our capacity to manage increased distribution. We expect to complete this facility expansion by mid-2022. On to increasing food service distributions. We maintain this segment of the business with flat performance in 2020, given the unfortunate and understandable headwinds the restaurant sector faced as a result of the pandemic and significantly reduced diner traffic. We launched two regional concepts in 2020 with Cafe Pavichu, a breakfast and lunch restaurant with five locations in the Indianapolis area, and King David Tacos, a brand that specializes in Austin-style breakfast tacos based in Brooklyn with additional points of distribution across New York City. We see significant opportunity for medium to long-term growth across the food service channel. In January, we launched a new partnership with Acosta Food Service, a U.S. food service sales and marketing agency that specializes in the consumer packaged goods industry. Acosta is our first national sales and marketing agency for food service. and will focus on increasing broad-line distribution and expanding into more national and regional restaurant chains. We invested in this partnership because we believe we'll substantially expand our food service footprint by partnering with values-driven operators who source our high-quality products and believe our brand will resonate with their diners. Our brand has a differentiated value proposition, and we believe the same trends that attract consumers to our pasture-raised products at the grocery shelf will influence diners eating outside of their home as they continue to seek food selections they can trust. Now, an update on innovation, where we're investing to expand our product offerings in new and existing categories. The success we've seen with our core products confirms our belief that a growing number of consumers are interested in more pasture-raised and ethically produced foods from vital farms. As we look beyond our existing categories, We continue to research and test offerings that adhere to the ethical standards consumers know and trust from us. This includes convenience snacking products, building off the egg bites launch in August 2020, where we have steadily increased distribution to 1,310 retail stores, and as of December 2020, are the leading egg bite brand in the natural channel. We plan to launch our next product innovation later this year. Finally, a word on what we're seeing at this point in 2021. In the first couple of months of 2021, we're seeing consumption patterns consistent with, or in some cases outpacing, those we observed in the fourth quarter of 2020. Now, before I turn the call over to Beau, I want to be very clear in our belief that Vital Farms is uniquely positioned to address a substantial market opportunity. I also want to address any questions about our ability to sustain the growth we saw in 2020 in the post-pandemic era. First, we demonstrated significant growth in net revenue, retail distribution, and household penetration prior to the pandemic. We believe this growth was largely driven by the growing number of consumers seeking ethically produced foods, as well as the trust, honesty, and transparency that's inherent in our brand. Second, like many food companies, we did see an acceleration of growth due to stay-at-home trends in 2020. But I want to emphasize the number of households who stayed with us throughout 2020 when presumably they had more options at the shelf once the initial pantry stocking period ended in April. Both prior to the beginning of the pandemic and throughout 2020, we have demonstrated that our high-quality products and trusted brand inspire loyalty. We attracted households in a shorter period of time than we expected as a result of the pandemic, and we believe that we'll retain these households. and continue to attract new consumers to our brand in the months and years to come. Third, we're investing millions in our future across every pillar of our growth strategy. This includes growing our network of farm partners, which is now over 200 farms, doubling our capacity at Egg Central Station, our world-class egg washing and packing facility, launching a national food service partnership with Acosta, and attracting talented and experienced crew members and board members to expand the breadth and depth of our competencies. I am confident that Vital Farms is well positioned for continued growth and success in 2021 and beyond. I'll now turn the call over to Beau.