Vital Farms, Inc.

Good day, and thank you for standing by. Welcome to the Vital Farms, Inc. Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Matt Seiler, Vice President of Investor Relations. Please go ahead.

Thank you, good morning, and welcome to the Vital Farms second quarter 2021 earnings conference call and webcast. I am pleased to be joined on today's call by Russell Diaz-Conseco, President and Chief Executive Officer, and Beau Meisner, Chief Financial Officer. By now, everyone should have access to the company's second quarter 2021 earnings press release issued this morning. This is available on the investor relations section of Vital Farms website at investors.vitalfarms.com. Through 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 beliefs 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 that the company's quarterly report on Form 10-Q for the fiscal quarter ended June 27, 2021, which was filed to the SEC earlier today. and other filings with the SEC for 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 and adjusted EBITDA margin, 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 reconciliation of adjusted EBITDA to its most comparable measure prepared in accordance with GAAP. 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 our second quarter earnings call. We had a strong quarter and exceeded expectations on several key financial metrics. I'm thrilled with the momentum our business has maintained and quite proud we were able to achieve positive net revenue growth against the toughest comparable period of 2020 when net revenues grew 84% over the prior year period, which was our prior high watermark driven by COVID-19 related pantry loading. In the second quarter of 2021, our net revenue was a record $60.3 million, a 1.7% increase from the same period last year. We saw gross margins of 36.4% above our long-term goal in the mid-30s, and our adjusted EBITDA was $5.1 million, though we'll provide more details on our financial performance later. We continue to demonstrate that the Vital Farms brand is resonating with families across the country. Our household penetration is now 4.5%, or over 5.5 million households. an increase from 4.1% at the end of the first quarter of 2021. We are 100 basis points above the prior year, continuing the positive trend we've enjoyed both year over year and sequentially since the third quarter of 2019 when we began tracking this with Numerator. We believe this constant growth in household penetration is driven primarily by investments we're making at every step of the consumer journey. We begin by attracting people through our unique packaging design, education and a positive product experience and work to earn their loyalty through meaningful stakeholder-driven content, excellent customer service, and thoughtful programs like the Vital Farms Kids Club, Vital Times Newsletter, and our Traceability Program. We have a meaningful and disruptive story that resonates. It's been especially gratifying to see the overwhelmingly positive feedback and engagement we receive from our community at every touchpoint, whether it's on our social platforms or through phone calls or visits to our traceability site to see where their eggs were laid, or handwritten letters of gratitude sent to a farmer. We increased retail distribution 10% year on year to 17,250 stores as of June 27, and we continue to be the second leading egg brand in the U.S. by retail dollar sales with 5.6% market share, an increase of 90 basis points relative to our 4.7% share at the end of the first quarter. The most notable gains occurred at Kroger Nationwide and at Stop and Shop in the Northeast. We believe our collaborative partnerships with retail are part of what makes Vital Farms a brand that can continue to expand its footprint across the United States. In food service, we continue to add new regional concepts throughout the country, including Toast Restaurant Group in Los Angeles, Hat Creek in Texas, and Blue Plate Restaurant Company based in Minnesota in this most recent period. These efforts provide us an opportunity to develop new raving fans of our brand through partnerships with these great establishments. Although the business segment is small, we continue to refine our strategy and are having fruitful conversations with potential partners to grow the business. In terms of innovation, we have two new products that we're excited to provide to families across the country. Our newest product, Breakfast Bars, is now available at Kroger stores nationwide. We also expect these will be available in Whole Foods market locations across the country later this month, and we plan to expand retail distribution even further in the coming months. These warm egg-based bars are unlike any other in the refrigerated aisle. They're indulgent, bite-sized comfort food made with high-quality, recognizable ingredients, including Vital Farms pasture-raised eggs, pasture-raised cheese, humanely-raised meats and vegetables with no added sugar, artificial colors, flavors, gums, fillers, or preservatives. These bars can be heated in the microwave in 60 seconds for a convenient snack that's reminiscent of classic weekend breakfast dishes like broccoli and cheddar quiche or sausage casserole. Equally as exciting, last month we launched a new pasture-raised tub butter made with sea salt and avocado oil. The new spreadable tub butter is churned by our sixth generation butter makers using three simple ingredients, pasture-raised butter, 100% pure avocado oil, and flaky sea salt. This minimally processed spreadable butter is creamy in texture and full of flavor. It's the first product in the nationally distributed tub butter category that is made with pasteurized butter and avocado oil, and it has 85% butterfat content, the highest fat content of any tub butter in the market. Our spreadable tub butter is now available in Sprout stores nationwide and will be in Whole Foods market locations nationally beginning in September. As we've said in the past, we're adding new farms on an ongoing basis, and we recently surpassed 225 farm partners in our network. Looking ahead, we expect to steadily onboard new farm partners through the remainder of the year, which is consistent with our supply planning process. Our expansion of Egg Central Station is on track for completion as scheduled and should be operational in the middle of 2022. This capital investment will double our current egg processing capacity and support a $600 million annual egg visit. Next, I would like to touch on the early stages of how we're communicating our work in the context of ESG and sustainability. Please turn your attention to slides 16 to 19 in the investor presentation we posted ahead of the call this morning. This includes environmental initiatives around water conservation, energy efficiency, minimizing waste, and sustainable land use. Social initiatives related to our company culture, crew member benefits, and diversity, equity, and inclusion. and governance initiatives across our supply chain, board of directors, and senior leadership team. As we have begun the work of documenting and setting measurable goals, we are learning that our stakeholder-driven business model and our role as a certified B Corporation and public benefit corporation provide a solid foundation for this body of work. Under the leadership of Joanne Ball, our newly appointed head of ESG, we plan to publish and report concrete, achievable, and measurable goals next year. As you may have seen in our recent press release, we appointed Stephanie Kuhn as Senior Vice President of Strategy. I believe there is significant potential in the Vital Farms brand, and as a company, we are making investments to ensure we can achieve long-term success in bringing ethical food to the table. Stephanie has had a successful career as both a consultant and internally at CPG companies, driving strategic vision on business development, go-to-market strategy, and product innovation. She will be invaluable as we continue to evolve our growth strategy, and I'm excited for what the future holds for our brand and company. As I conclude, what I hope you'll take away from today's call is that Vital Farms is thriving in its mission to bring ethically sourced food to millions of families across the country, and we continue to exceed our original operational objectives one year into our journey as a public company. We believe the best use of growth capital is to remain sharply focused on increasing household penetration, expanding retail distribution, developing innovative products, and growing our food service presence, each of which contribute to increasing the size of our raving family. I'd now like to turn the call over to Bill.