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spk00: 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.
spk04: 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.
spk07: 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.
spk05: Thank you, Russell. Hi, everyone, and thank you for joining us today. I will review our financial results for the second quarter into June 27, 2021, and provide an update on our full year outlook. As Russell mentioned, we achieved record net revenues of $60.3 million, an increase of 1.7% compared to the second quarter of 2020, our prior record in terms of revenues, which grew 84% relative to the second quarter of 2019. We achieved a two-year net revenue CAGR of 36.7%, which represents 340 basis points of acceleration relative to what we experienced in Q1 2021 on this same metric. The increase in net revenue this period was driven by an increase in ag-related sales due to higher volumes and expanded distribution at new and existing retail partners. Gross profit for the second quarter was $21.9 million, or 36.4 percent of net revenue, compared to $22.7 million, or 38.3 percent of net revenue, for the second quarter of 2020. The gross margin change was mainly attributable to an increase in promotional spending with the return to a more normal cadence of industry activity as we lap COVID-19 related pantry loading from last year. As you recall, the second quarter of last year saw little to no promotional activity while the industry experienced unprecedented sales across the country. Margins were also impacted by higher input costs on shell eggs given recent moves in commodity inputs. SG&A for the second quarter was 13.5 million compared to 10 million in the second quarter last year. The increase in SG&A was driven by public company costs, most of which we did not have in Q2 last year, and higher employee-related costs as we grow headcount to support the continued growth of the business. Shipping and distribution increased 1.7 million relative to the second quarter of 2020, driven by higher levels of sales volume and higher third-party freight rates. Adjusted EBITDA for the second quarter was 5.1 million compared to 9.3 million for the second quarter of 2020. Now, an update on our capital structure. As of June 27th, 2021, we had a total balance of cash, cash equivalents, and investment securities of $106.3 million, and we have no long-term debt outstanding. Turning to our forecast for the full year 2021, we are reaffirming guidance for net revenue between $246 million to $253 million, an increase of 15% to 18% over 2020. We are also reaffirming our expectations that adjusted EBITDA will be in the range of $7 to $9 million for the full year 2021. Thanks for your time and interest in Vital Farms. Before we move to taking questions, I want to reinforce our confidence in the remainder of the year. We have a strong foundation in place for future growth as both a company and brand with a portfolio of high-quality products that millions of households across the country trust for ethically produced food. With that, I'll turn the call back over to Russell.
spk07: I want to thank everyone for your interest in Vital Farms and for your time today. We'd now like to turn it over to the operator to take your questions.
spk01: Thank you. As a reminder to ask a question, you would need to press star then one on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Chris Groh with Stiefel. Your line is now open.
spk06: Hi, good morning. Hey, good morning, Chris. Hi. If I could ask you first, I can get just some perspective on your decision to hold guidance in place for the year. In particular, and I'm looking at sales, where you've had a nice increase in household and distribution It seems like you could see some continued benefit from that growth in those metrics. Any limitations to the second half in that regard? I guess I'll add in there EBITDA as well. Anything we should keep in mind here?
spk05: Yeah. Hi, Chris. Second half revenue is growing, you know, faster than what we expect in the first half if you look at the half-over-half guidance. And we certainly had no constraints in our ability to deliver the guidance that we provided. In terms of EBITDA, I mean, there's a few things that we've talked about in the last call and just what's going on in the world. With the new distribution coming online, mainly in the back half, we're supporting that with increased trade to get new trial and marketing in the second half. So that kicks up in the second half to support that new distribution growth. And that's something that we've been planning throughout the year and I think have talked to before. As well, you know, if you look at EBITDA in the back half, The feed cost, as you know, we adjust the farmers one quarter in arrears. It looks like they peaked in Q2, so you're going to see that pressure come through in Q3 and in Q4 on the gross margin EBITDA lines. And that's where we've shaken out for the year.
spk06: Okay. Thank you. And I guess on that point, I think maybe the first time you said feed costs on the call, and I may have missed it if you did say it, Poe, but... My point being, that was a pretty modest factor, it seems like, in the quarter. I wasn't really excited for the gross margin. It looks like it's going to be a more significant headwind in the second half of the year. Have you given some rough approximation of how much that could weigh on the gross margin of the incremental costs that you expect to bear on the input cost side based on what you see today?
spk05: Yeah, I think it will be in line with the guidance, Chris, that we provided in the S-1 in terms of the change factors associated with commodities. But we don't talk specifically to commodities. to the exact amounts that we have, but certainly you're going to see pressure in Q3 and Q4, just given the trends of what we've seen in the market. The other thing that continues to go on is freight costs and transportation costs continue to remain elevated, and we're projecting those to remain so for the balance of the year.
spk06: Okay, I just wanted to question if I could, and this is in relation to the new products, the breakfast bar, obviously the bites last year. Those are still building in distribution, but still I would call it very modestly. They're not getting out to a larger number of stores, certainly more, but not as many as I would expect. Is that something that you expect for breakfast bars to be, for example, to be a more widely distributed product sort of a year later at this point?
spk07: Yeah, thanks, Chris. It's Russell. I would answer that with a couple of points. One is, as you can imagine, with any new product that we might launch, we have to balance kind of our ability to scale with our ability to produce with great unit economics. And so just like with Shell Eggs, when we started back in 07, we didn't hit, you know, 16 plus thousand stores on day one. We're really pleased with the distribution gains on bites, and we're really pleased with the initial uptake on bars. So it's scaling as we had hoped it would, but our expectation certainly isn't that we reach our shell egg distribution levels in year one for any of the products.
spk06: Okay. Thank you very much. Thanks, Chris. Thanks, Chris.
spk01: Thank you. Our next question comes from the line of Pamela Kaufman with Morgan Stanley. Your line is now open. Hi, good morning.
spk02: Hey, Pam, good morning.
spk09: So just another question on the guidance. When you provided your guidance last quarter for the full year, you indicated that you had covered the current commodity cost outlook for the balance of the year and that Q2 and Q3 would face the highest commodity cost pressure. Given that Q2 EBITDA was ahead of analyst expectations, I'm curious if it also performed better than you anticipated. And if so, has your outlook for Q3 and Q4 moderated relative to before?
spk05: Thanks for the question, Pam. So we did see a little bit of the commodity impact in Q2, again, where the peak of commodity costs has come in for the year, or at least they appear to have peaked. As we've said, most of that pressure is going to come in Q3 and Q4. So I think, you know, Q2 was essentially in line with what we had believed. We always believed that the back half of the year would have higher sales, but we'd also have higher investments in the back half of the year to support that new distribution and make sure that we're really, you know, converting those consumers and getting the trial.
spk09: Great. And last quarter you talked about not taking pricing to offset higher input costs. But I wanted to see if anything has changed in your pricing plans or if there are other ways that you're managing price realization.
spk05: Well, we're certainly always looking for efficiencies throughout the business, you know, to help offset some of the external cost pressures. But what we've seen to date in the Specialty 8 market is that prices have remained relatively flat. There's been no price movements that we have seen other than a normal price return to promotional cadence that we saw pre-pandemic. We still believe that soy and corn are going to be a little bit more transitory in nature, but if we believe that they're going to turn out to be a medium to long-term impact to our gross margins, we'll certainly reassess what we want to do from a pricing perspective. But for now, we have no current plans.
spk09: Thank you.
spk01: Thank you. Our next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is now open.
spk03: Yes, thanks. Good morning, everyone.
spk07: Good morning, Adam.
spk03: Morning. Maybe, well, actually, that's something you just mentioned in response to the last question, and maybe if you could just clarify or help us understand kind of what you mean so we can monitor it. You said that you think corn and soybean meal inflation proves transitory. How do you, I mean, point taken on pricing kind of has come off the highs and maybe not $8 corn or $7 corn anymore, but what does transitory mean in your eyes as we think about how you would evaluate pricing and the gross margins going forward?
spk05: I think from our perspective, Adam, you know, when we say transitory, right now there are a lot of pressures in the economy with the emergence of the economy from COVID, with China restocking their hog supply, some things that are more short-term in nature. We believe that supply will adjust over time and some of these extraordinary forces that are causing prices to increase will mitigate. But again, if we see that We don't believe that to be the case or something changes in that outlook. We'll certainly look at what we want to do from a pricing and gross margin perspective. But for right now, we're continuing to be focused on growing the top line as quickly as we can and continuing the hyper growth that we've seen for the last three years and getting new consumers into the fold. We believe that's right for the long-term health of the business.
spk03: Got it. Okay. And then maybe switching to that growth piece, With the Egg Central Station expansion slated to come on mid-year, can you help us think about, I mean, how quickly your farmer network can grow into that incremental capacity? How we should be thinking about any startup costs or initial inefficiencies that comes online in 2022? I know you're not giving guidance necessarily, but just trying to frame that. some of the cadence of that increment and maybe some offsetting earnings impacts in the first quarter or two of that startup?
spk05: Sure. In terms of the first part of your question, I mean, as we've talked, we're constantly assessing our supply each and every month. We go through a detailed demand review that we update each month, and then we're looking at the number of farms that we need to continue to add to ensure that we can always continue this growth that we're seeing and want to continue to see. So there's not like an event with ECS opening up that causes us to look at our farms differently. We're adding farms each and every month and going through that process each and every month to make sure that we always have adequate supply to continue the growth. In terms of the second part of the question, yeah, we're not providing any guidance yet for 2022. There's really not a lot to say about ECS and startup costs. I wouldn't anticipate that it's going to have a huge impact on our cost profile, but there will certainly be some.
spk07: One thing I'd add, it's Russell, one thing I'd add there is that's one of the real advantages of the expansion versus a greenfield site is that we can leverage a lot of the infrastructure and staffing we already have in place. and simply add some incremental labor to staff the actual operation of the expansion. So we can scale that pretty well over time.
spk03: All right. That color is appreciated. I'll pass it on. Thanks. Thank you.
spk01: Thank you. Our next question comes from the line of Robert Moscow with Credit Suisse. Your line is now open.
spk02: Hey, two questions. More questions. One is, can you give us a little more color on what you think the next tranche of distribution expansion is going to be for Shell eggs? Is it more depth at certain customers that you expect over the next six to 12 months? Or are there any new retailers that will be bringing on your brand? And then also, you mentioned you're always looking for productivity. I remember hearing about several initiatives during the IPO. Can you give us an update there on where you're at and what kind of productivity savings you should expect for the next year or so?
spk07: Hey, Rob. Good morning. I think I'll take the first part about distribution expansion and let Bo take the second part. So, you know, as you know, we're in most of the large, you know, food retailers in the United States today, certainly the big ones that can really move the needle in terms of incremental growth. That said, we're in roughly half the stores in the United States. So there are an awful lot of additional stores where we believe our brand has a right to play and where we believe the retailers will enjoy great performance from our products. That said, as we announced today, some of our biggest wins in the past quarter have been in retailers where we already have a presence. So we announced some really substantial growth, continued expansion at Kroger. And then in the Northeast, you know, we continue to expand our presence both in terms of number of doors and depth of assortment. And this time that was at Soften Shop. And so, you know, there's still an awful lot of room to play, and I certainly am excited about the growth opportunity we see ahead, especially in that northeast area, which is kind of our final frontier. Great. Bo, you want to talk about efficiencies?
spk05: Yeah, and Rob, was the question about the contract benefit?
spk02: Yeah, the contract benefit and also, I guess, Egg Central maybe remind me, like, as you expand – I believe there's productivity benefits related to that as well. Yeah.
spk05: Great. So first of all, on the contracts, I mean, I think what we've talked to before is that we expect about a 10% reduction in the price of eggs that we pay from now until 2024 as the contracts migrate from some of the initial contracts to the newer contracts, which is about a 5% gross margin expansion. In terms of egg central station efficiencies, I think as Russell appropriately said, given it's an expansion of an existing facility, a lot of the management infrastructure and the fixed costs will remain relatively the same. So there will be a little bit of leverage on those. And that's really the main area that you'd see it, because we're going to be hiring staff to account for the higher production flowing through the facility on a variable basis The majority of that's going to be variable additions in staffing, but we'll get some slight leverage from the management and taxes and things like that for the plant. Got it. Okay, thank you. Thank you.
spk01: Thank you. Our last question comes from the line of Ken Zaslow with Bank of Montreal. Your line is now open. Hey, good morning, guys.
spk07: Good morning. Good morning, Ken.
spk08: You mentioned earlier on, you know, outside of Egg Central that there are some efficiency programs that you're looking to continue to do. Can you talk about where you think there's opportunity to increase efficiency? That's my first question. I have one more as a follow-up. Thank you.
spk05: Yeah, thanks for that, Ken. I mean, I think we're looking at everything all the time. You know, there's opportunities for us to look at things that perhaps we can automate that today we're doing manually within ECS. We are looking at what we can do from a trucking point of view and from a freight point of view as we, you know, continue to grow and get more efficient there. And, you know, looking across P&L and G&A to make sure we're getting the best use out of every dollar that we spend.
spk07: I'll tell you one I'm really excited about, Ken, which is we hired a director of insights in the marketing team earlier this year. And You know, as you know, building our brand and expanding household penetration is such a key component of our growth. And I believe that our ability to analyze how we deploy those resources and how we can better model the behavior of those raving fans that we add to the brand will only increase the effectiveness and efficiency of how we spend that money. And that's a big investment for us. So that's also an area I'd point out as a place for future efficiency.
spk08: Great. And then my second question is, when you go into a Kroger or a Whole Foods, what is the optimal number of SKUs and how under-penetrated are you in your other stores relative to that? How do we kind of frame that opportunity?
spk07: Yeah, I appreciate that. The first thing I call out is we've got 17 SKUs at Whole Foods. At many mainline retailers where we may have been in the stores for a year or two, we might have one or two egg skews and maybe one or two butter skews. Certainly, the right answer is somewhere between those bookends, and it's really retailer specific. I mean, one of the reasons that we believe we have a right to win over time with grocery retailers across the country is that we try to be thought partners to them and not overly salesy. So when we come in, we work with each individual retailer to figure out what the most profitable and productive program for them is. And for some retailers, that might be four SKUs, and for some retailers, that might be 17 SKUs. Throughout every year, we have ongoing conversations with our own boots on the ground at our key customers to talk about what their needs are and how we can best meet them.
spk08: Great. I appreciate it. Thank you guys very much.
spk07: Thanks. Thank you.
spk01: Thank you. There are no further questions. I will now turn the call over to Matt Siler for closing remarks.
spk04: I just want to thank everyone for your participation today. If you have any questions, feel free to reach out. Have a great day. Thanks.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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