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spk05: Good day, and thank you for standing by, and welcome to Vital Farms' third 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'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your host today, Matt Silas. You may begin.
spk03: Thank you. Good morning, and welcome to Vital Farms' third quarter 2021 earnings conference call-in webcast. I am pleased to be joined on today's call by Russell Diaz-Coteco, President and Chief Executive Officer, and Bo Meisner, Chief Financial Officer. By now, everyone should have access to the company's third 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 to the company's quarterly report on Form 10-Q for the fiscal quarter ended September 26, 2021, which was 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 and adjusted EBITDA margin, which are non-GAAP financial measures. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for their 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 Vinyl Farms.
spk06: Thanks, Matt, and good morning, everyone. Thanks for joining us today. We hope you're enjoying the cooler temperatures as much as our girls on grass do around this time of year. We had a strong third quarter and are pleased with the momentum we sustained across our business in 2021. We delivered record net revenue for the third quarter and continue to manage our margins despite the extraordinary inflation we are seeing in so many sectors of the global economy. Net revenue was $64.6 million, a 21.1% increase from the prior year period. We grew our network of small family farms to over 250, and we continue to increase retail distribution. Our products are now available in over 18,000 stores. Finally, household penetration remained steady relative to the last quarter at over 5.5 million households, a 5% increase from the same time last year. We're raising our 2021 fiscal year revenue outlook, which reflects our confidence in continuing the positive momentum we've experienced all year. Beau will elaborate more on our detailed guidance in a few minutes. Turning now to updates on the business. A few weeks ago, we hosted our first Investor Day in Springfield, Missouri. As a relatively new public company, and due to the ongoing COVID-19 pandemic, our Investor Day was the first time we were able to meet some of our stockholders and other members of the investment community in person. It was also their first opportunity to tour Egg Central Station, our world-class egg washing and packing facility, and to meet crew members from functions spanning the entire company. We were especially pleased to introduce analysts and investors to our crew members at Egg Central Station. We saw genuine interest and enthusiasm of those who attended our investor day, particularly around the many instances in which they saw our stakeholder model come to life. including the culture we've cultivated among our crew members, our robust network of small family farms, our environmental conservation efforts across our supply chain, and the thoughtful ways we are building loyal relationships with our consumers. We believe in co-creation with our stakeholders. For our crew members, this means we listen and make decisions that benefit their long-term sustainability. We believe that if we prioritize their professional development and financial well-being, they will prosper as will our business. Two topics of particular interest that came up at Investor Day involved our pricing strategy and the desire for greater detail around our marketing strategy. So I want to spend a few minutes discussing these areas. First, on pricing. As I mentioned earlier, we are at a time of extraordinary inflation that has impacted feed, transportation, and labor costs. To date, we have absorbed these incremental costs as we felt most of them were transitory in nature. We have also helped offset these costs within our own supply chain. However, the severity of inflation in recent months across some of our key inputs and the fact that in certain areas it appears to be more sustaining has led us to take a modest price increase across roughly 40% of our product portfolio. This planned price increase will take effect early next year. Recognizing the close partnership we foster with our stakeholders, we communicated this update to our retail customers with significant lead time. We believe they understand that this was a responsible decision made in the best interest of long-term sustainability for our stakeholders. Now, I want to be clear about a couple of points. First, this decision does not deviate from our consistent stance on pricing. We have always said that if and when we feel inflationary pressure is going to last longer than what we've seen in prior instances, we would take action to offset the effects of sustained increased input costs. Second, we have not seen a material impact from the U.S. labor market shortage. While we are not immune to these labor issues, our supply chain has remained nimble, which we believe is a testament to our continued investments in human capital. Now, moving to our marketing strategy. we're often asked how we connect consumers with the multifaceted stories about our brand. In slides 17 through 20 in the investor presentation that we posted this morning, we provided more detail on how we are building a strong brand in eggs and beyond through premium positioning, a breakthrough personality, and consistent point of view. Our storytelling is bold and honest. And while a focus on ethical food is a thread that is woven throughout all communication, we apply our playful, mindful, and savvy tone through diverse storytelling that connects consumers with every aspect of our brand, including family farmers, the girls on grass, and consumers who love cooking with us. A recent example is Hens Behind the Lens, which launched last week. For this new campaign, we wanted to show a day in the life of our girls in the most honest and transparent way possible. So we created a way for the hens to take photos of their life out on the pasture. The result is a series of unedited, beautiful, and at times hilarious photos of life out on the pasture through the eyes of their most honest residents, the hens. This is our first out-of-home campaign, which will be featured on digital billboards and geo-targeted mobile in major markets across the country. The initial consumer response to Hens Behind the Lens has been incredibly positive, and we were pleased to see the campaign recognized as the ad of the day by Adweek magazine. Consistent with our belief in experimentation, we are excited to meet consumers in new places and learn the effectiveness of channels beyond paid social media. We have a thorough understanding of our core consumers and how to reach them in the diverse places to which they are attuned. This includes online video, podcasts, in retail stores, on e-commerce platforms, and across myriad social feeds, as you'll see on slide 19. We know our strategy is working. We've added 2 million net new households to our consumer base in the last two years. We're leading in dollar share requirements among all premium egg brands, and we have the highest brand I trust score among purchasers. Finally, we're pleased that Vital Farms is often recognized for thinking creatively and disruptively about how our brand shows up in the world. Just a few weeks ago, we were recognized by Fast Company as a 2021 Brand That Matters, which is a list of 95 companies and organizations that have achieved relevance through cultural impact, social engagement, and have authentically communicated their mission and ideals. We were thrilled to be listed along so many purpose-driven brands that we admire, including Patagonia, Nike, Sweetgreen, Yeti, and more. Now I'll spend a few minutes reviewing household penetration, retail distribution, food service, and innovation. Our household penetration on eggs stands at over 5.5 million households, or 4.4%. This measure is steady versus last quarter. and is up about 60 basis points from the same period last year. Given we offer an expanding product portfolio, we thought it would be helpful to provide you with our total brand household penetration metric, which currently stands at 5%. This is also higher relative to the prior year. As we've discussed previously, we are focused on gaining share at retail and are happy to report that we gained another 20 basis points of share in Q3 2021, and now command 5.8% of the total ag market. In terms of retail distribution, our products are now available in over 18,000 retail stores nationwide, which represents growth of 10% over this time last year. Looked at another way, our total placements in stores grew over 19% relative to this time last year. We saw strong distribution gains across the country, including further distribution at Whole Foods on certain SKUs. I'm also excited to announce we recently launched the Vital Farms Farm Shop, our first e-commerce storefront featuring 11 of our SKUs, including butter, ghee, and our convenient breakfast offerings. This will make some of our products available to new households across the country and allow us to learn more about today's direct-to-consumer landscape in the process. Now, turning to food service. Since the end of 2020, we have increased the number of food service distribution centers that carry our Vital Farms products by over 175%. We believe the first key step in scaling our food service business is making our products available for distribution in many regions across the country. This is allowing us to expand our presence with new regionally focused food service concepts, including the Unwine Cafe, which has locations across the country. On innovation, as shared on our last earnings call, we recently introduced new products in the convenient breakfast and butter categories. What we've learned about convenient breakfast today, especially from Egg Bites, is that 70% of the volume was incremental to the category, and the remaining purchases come from other existing brands. We're pleased with the response we've seen both from our consumers and retail customers as distribution for our breakfast bars and pasture-raised spreadable tub butter has ramped nationally. We believe our pasture-raised spreadable tub butter will be especially popular on dinner tables this holiday season. Before I turn the call over to Bo, I want to conclude with some remarks I recently shared at the Conscious Capitalism CEO Summit, an annual event that brings together conscious business leaders. I think there's a misconception that conscious capitalism is a trade-off for successful capitalist competition. We believe that it is a better way to produce outsized returns over time. I believe our market leadership and the consistent revenue and penetration growth we've demonstrated within the specialty egg segment and category more broadly is a testament to how fiercely we compete to win. Simply put, if I did not think this was the right way to do business, I wouldn't do it. I'd now like to turn the call over to Beau.
spk04: Thank you, Russell. Hi, everyone, and thank you for joining us today. I will review our financial results for the third quarter ended September 26, 2021, and provide an update on our full-year outlook. As Russell mentioned, we achieved record quarterly net revenue of $64.6 million, an increase of 21.1% compared to the third quarter of 2020. We achieved a 37.7% two-year net revenue growth CAGR, which represents 100 basis points of acceleration relative to what we experienced in Q2 2021. Growth in net revenue was due to continued growth in egg-related sales, driven by volume increases at our existing customers, as well as distribution gains at both new and existing retail partners, and an increase in butter-related sales. Gross profit for the third quarter was $19.9 million, or 30.7% of net revenue, compared to $18.4 million, or 34.4% of net revenue, for the third quarter of 2020. The change in gross profit was primarily driven by higher sales. The change in gross margin was primarily attributable to an increase in grain input costs, which occurred in the second quarter of 2021, along with higher planned promotional spend as we returned to normalized spend at retailers. SG&A for the third quarter was $15.3 million compared to $12.2 million in the third quarter last year. The increase in SG&A was primarily driven by higher employee-related costs as we grew headcount to support our continued growth, an increase in our marketing spend, and higher broker commission payments based on the increase in our sales volumes. Shipping and distribution increased 68%, or $2.6 million, relative to the third quarter of 2020, driven by higher third-party freight rates and, to a lesser extent, higher levels of sales volumes. Adjusted EBITDA for the third quarter was $0.2 million, compared to $7.1 million for the third quarter of 2020. Now, an update in our capital structure. As of September 26, 2021, we had a total balance of cash and cash equivalents in investment securities of $97.6 million, and we have no long-term debt outstanding. Turning to our forecast for the full year 2021, We are increasing our guidance for net revenue to between $253 million to $256 million, an increase of 18% to 19% over 2020. Finally, we are tightening our expectations on adjusted EBITDA and anticipate it will be in the range of $8 million 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 reiterate our confidence in the current trajectory of our business. Our portfolio of high-quality, ethically produced foods is trusted by millions of households across the country. We remain focused on further laying a strong foundation to propel future growth as both a company and a brand. With that, I'll turn the call back over to Russell.
spk06: Thank you, 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.
spk05: And thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And our first question comes from Pamela Kaufman from Morgan Stanley.
spk00: Hi, good morning.
spk03: Good morning. Good morning.
spk00: Can you elaborate on where your expectations around inflation have changed relative to last quarter and what you see as more structural versus transient previously? And then as a follow-up, do you expect the pricing that you're implementing to fully offset the inflationary pressures next year?
spk04: Sure, Pam. I'd be happy to talk to that. Thanks for the question. I mean, I think as we've been talking, and you can see in the external world, we still see that grain prices have come down but remain elevated. But particularly within transportation costs, we're seeing significant increases versus where we've been, and those don't seem to have come back down. So that's one of the key areas I think we still see pressure on our P&L on. And your question on pricing was?
spk00: The question is, if you expect that the pricing that you've announced, if it should fully offset the inflationary pressures that you anticipate next year?
spk04: Well, it's hard to say in totality because we don't know exactly where transportation is going to go and grain costs are going to go. But we think that we're going to offset a good portion of it. It's difficult to say whether it will be all.
spk00: Thanks. And then I just had a question on your distribution expansion. So you saw good store growth during the quarter that accelerated sequentially. Is there anything that you're doing differently that's contributing to that distribution expansion? And I'm curious about the composition of the store growth, if you're seeing particular growth in a specific region or within existing or new retail customers.
spk06: Thanks, Pam. So the first thing I'd call out is, you know, last year, about a year ago, we hired Pete Pappas to lead sales for our organization. And he went to work building not just an organization, but a real strategy around how to focus our team, how to allocate resources, and frankly, The biggest factor I think at play here is we're starting to see that strategy and that team come to life in the results we're seeing. It's frankly, we're just executing at a higher level than we were a year ago in this regard. Beyond that, again, I think it is investments we're making in everything from marketing to category insights. And we work to become trusted partners and thought partners to our retailers and and that also has the effect of helping us continue to build out those relationships in sort of mutually beneficial ways. So there are a lot of factors here, which, again, goes back to that stakeholder model or conscious capitalism that I'm always talking about, but the specific things would be, I think, great execution on the part of our marketing and sales teams and, frankly, a very resilient supply chain despite lots of interesting headwinds across the sector this year.
spk00: Okay. Thank you.
spk06: Thank you.
spk05: And thank you. And ladies and gentlemen, we ask that you have one question and one follow-up. And our next question comes from Adam Samuelson from Goldman Sachs. Your line is open.
spk08: Thank you. Good morning, everyone. Good morning, Adam. Good morning. So I guess my first question is thinking about the distribution expansion, Just to know one of the big pushes this year has been to really increase the total number of placements and items per store in conventional grocery where you're significantly under indexed versus kind of what you can do in the natural channel. Just how do you, any elaboration on progress there? And as you think about shelf resets for 22, any kind of optimism that there's an increasing take rate or is it just a slow, steady build from where we are today.
spk06: Yeah, I appreciate that, Adam, and you're absolutely right. There is a massive opportunity for us in conventional grocery. We already, in many parts of natural, enjoy sort of the number one rank in sales of branded eggs and have been there for quite a while, and we have great relationships there. I think there is an element of a flywheel effect here where sort of the success in natural helped get us into conventional grocery years ago, and as momentum builds there, it makes it easier and easier to open more doors over time. You know, I don't know that I'd call out a particular area within the conventional grocery, although I think it's been very consistent that our biggest opportunity to grow share is in the Northeast, and that is certainly where we've put additional resources. So as I mentioned earlier, the team that we've built out under Pete Pappas' leadership over the last year has really brought additional sales resources. So we've grown the team, and we've really started to play a little more zone in terms of putting great people against great opportunities. And so that's really, I think, what's driving this increased momentum. And, again, while I don't know that I would forecast whether it's accelerating sustainably or whether it's just more of the same, what I would say is, you know, we're not taking our foot off the gas. And this work that we're doing to put the right people against the right opportunities and develop stronger partnerships continues our pace.
spk08: Okay, and then just a quick follow-up on the pricing kind of point. You talked about 40% of the portfolio kind of being subject to price increases. Is that any way to quantify just our helpless frame, just the magnitude of it as we think about where the wholesale price is going?
spk04: Sure, I'd be happy to, Adam. So, again, you're right. We said 40% of the portfolio is We're taking a price increase in the mid-single digits on that portion of the portfolio.
spk08: Okay, great. That's really helpful. I'll pass it on. Thank you.
spk05: And thank you. And our next question comes from Rob Bickerson from Jefferies. Your line is now open.
spk09: Hey, good morning. This is Matt Fishbein on for Rob. Thanks for the question. Hey, Matt. So Q3 household penetration on a percentage basis was 4.4% versus the 4.5 in Q2, and I think households were essentially flat sequentially as well. Maybe we're splitting hairs here, but it's the first quarter since at least 2019 that there wasn't any sequential increase in household penetration. So I wanted to get your take on this, and given the new distribution gains, both in breadth and depth of distribution, How much of that sequentially flat household penetration is owing to the total egg category household penetration unwind as maybe consumers commute a bit more to work rather than cooking breakfast at home? And I guess just to follow up, broader question on it, is household penetration even the best measurement for us to use when we think about brand awareness?
spk06: Yeah, thanks, Matt, for that. And you sure have eagle eyes to see that, I think, very small sequential change for sure. Look, the headline here is headline, you know, the household penetration continues to grow year on year. And the reality is it's a 52-week look. And so if you think about the prior period, the prior year compare and the sequential compare, we're comparing to Q2 and when likely we had some initial stock-up demand still in the households. And so the reality is between that and this sort of moment-in-time look that this calculation uses, there's inevitably some slight rounding, et cetera, et cetera. We're not too caught up in a 10 basis point change quarter over quarter. The trajectory is very much still up and to the right.
spk09: Cool. Thank you. And just impressions in Q3, I think the figure you called out is a jump since this summer. Anything you can share regarding who these incremental impressions are from, assuming some of these households are already purchasing, but are you able to see the mix of potential new households on the receiving end of your updated messaging?
spk06: You know, it's really early. We definitely have an eye toward experimentation and learning from all the different sort of advertising efforts that we put down, aided by the investment we've made over the last year in the insights team on our marketing team. And so, you know, while we don't have any clear reads to share, I would say that everything we do is intentional and and it is designed to continue to learn and get better over time with how we invest in building our brand and getting our story out there.
spk09: Great. I just want to squeeze a follow-up. Just given the strain across the food distribution landscape, were there any third-party-related one-offs during the quarter that we should keep in mind? Thanks very much.
spk06: Third-party in terms of suppliers to us?
spk09: Distributors. Was there anything – going on in the quarter or this current presently that just for modeling purposes that we should keep in mind.
spk06: Got it. No material one-offs, just inflation and freight rates is the biggest thing that we saw.
spk04: That's correct.
spk09: Great. Thanks very much. I'll pass it on. Thank you, Matt.
spk05: Thank you. And our next question comes from Jacob Navash from Credit Suisse. Your line is now open.
spk07: Hey, morning, guys. Good morning. Just a follow-up here on pricing. You know, to what extent should we think about, you know, I guess, yeah, how should we think about demand elasticity, you know, given the price increase for 40% of the portfolio? Is that something, you know, that you guys see as a risk, I guess, once the pricing does flow through? And then I have a follow-up here.
spk06: You know, I can take that one. So, It's a great question and certainly one that we think about a lot. The reality is that a lot of it has to do with what the rest of the category does. So we're more interested in cross-elasticity of demand than the elasticity of our products specifically because it has to do with the interplay of the shelf. What we're hearing and seeing is some other premium brands also taking price as well. And so we won't know with confidence until we see how it all plays out next year. But that's the beauty of, you know, the decision we're making, which is, you know, we can always adjust as we see how it plays out and what the competition does as well. I believe that since we, frankly, enjoy, I think, really strong margins for this category and enjoy, we believe, the strongest brand in the category, we've got more room to play.
spk07: Gotcha. Okay. Yep. And then just, I guess, a bigger picture on food service. I think you mentioned that food service distribution went up by 175% this quarter. And I'm just trying to think, just longer term, what's the strategy for that side of the business? Where do you see that playing? What kind of role do you see that playing in the business? Do you see that changing, I guess, from initial expectations? Yeah, just any sort of color there.
spk06: It's interesting. If you'd asked me a year or two ago, you know, about food service, I might have said something a little more circumspect. Hey, look, we've got great products and a great brand, and on more of an opportunistic basis, we find these really powerful partnerships with local and regional concepts, and it works really well for both of us. Under Pete Pappas' leadership, we, frankly, are a lot more bullish on food service. Pete is building up that food service team, And as you saw in what we reported, the first step is really building out our distribution network. And once we're in those distribution points, then we can go region by region and really have the conversations with the right concepts, the right food service concepts in the right locations and at the right time. And so, you know, this doesn't happen overnight, but it's definitely a place where we're placing incremental investments and we expect to see some nice returns over time. Gotcha. Perfect.
spk07: All right. Thank you very much. Thanks Jake.
spk05: Thanks. And thank you. And our next question comes from Matt Smith from CFO. Your line is now open.
spk01: Hi, good morning.
spk05: Good morning.
spk01: Promotional activity is up compared to the prior year, but, but if we take a step back, can you talk about the level of promotional support you currently have in the market? And has the near-term inflation you're facing impacted your ability to achieve your desired level of in-store activity to support trial by new customers?
spk04: Yeah, I think... Go ahead, Russell. Sorry, Russell. Go ahead. Yeah, the level of promotional activity that we've talked to in the past in Q3 and Q4 is we have to support the new distribution is planned distribution. I don't think that the inflationary costs of how to take our foot off the gas there, because we feel it's important to drive that trial. And really, we're just returning to the more normal cadence post a year of COVID, as all other competitors are. And we're seeing rational pricing in the marketplace, both on base and promotional pricing. So no real surprises in that area for us.
spk01: Okay. And then as a follow-up, does the recent pricing action allow you to maintain a more normal promotional calendar next year? Or I guess, do you expect to realize that mid-single-digit price increase on the 40% of your portfolio? Or should we expect there to be some incremental promotional investment taken against that list price increase?
spk06: Yeah. What I'd say to that is because of the way that we communicated it to retailers and because Frankly, we didn't overreach, as reportedly some CPG companies are really reaching as far as they can on pricing. We don't believe we'll see pressure to kind of give it all back in promotional spend, and we'll work very hard to stay disciplined on that.
spk01: Okay, thank you very much. I'll leave it there and pass it on.
spk06: Thank you.
spk05: Thank you. And if you'd like to ask the question, that is star one. And our next question comes from Ken Daslow from Bank of Montreal. Your line is now open.
spk02: Hey, good morning, everyone. Hey, Ken. Just two quick questions. One I think is an easy answer is because of the egg market, you don't get any pre-buying or accelerated buying because ahead of your raising prices, right? They can't stock up on the eggs or anything like that. So there's no change the distribution of your sales? I'm assuming that's right. Is that fair? And then I just have one follow-up.
spk06: Yeah, I think the key factor there, you're right, is that, frankly, it's a very perishable product. So there's a limit to how much a retailer could forward buy. And so while they might be tempted to do it, it'd be very limited.
spk02: Okay. And then the second question is, you know, you talked about how the pricing, you know, may or may not cover the entire inflationary pressures. Can you talk about other opportunities that you have to offset that, what you're doing with the contracts, what you're doing with the distribution center, things like that that may be able to stabilize your margins in 2022? And I appreciate it.
spk06: Yeah, sure thing, Ken. So, you know, we are constantly and continuously focused on eliminating waste And I mean waste in the lean operation sense of it. So a couple of things that I would call out as really exciting opportunities that we've been working on for a while now and will continue to focus on in 22. One has to do with the utilization rate of the trucks on which we ship our products. So just an opportunity to more fully cube out each of those trucks. And our team is really focused on that as a goal in 2022, which can help offset the freight inflation. You know, the price of a truck goes up, but if our utilization of it goes up faster, it can really be a game changer. The second thing I'd call out is, you know, we have this amazing network of over 250 small family farms, and they provide us with an amazingly rich data set about what works well and what works less well in terms of farming practices. And so we have been working, this is a big part of our strategy to have great resources, internal resources and boots on the ground to support those farms, which is helping the ones that aren't achieving the very best results in the network get a little closer to the best. And as we help those farmers become more efficient and effective, we will then in turn have an opportunity to share in that savings. So this is an example where It's better outcomes for the farmer, better outcomes for us, and, frankly, better outcomes for animal welfare and for the environment. So those are two areas I'd call out as ways that we're going to eliminate waste in 2022 that will help offset some of the inflation we're seeing.
spk02: I appreciate it. Thank you, guys.
spk05: Thank you. Thanks, Ken. Thank you. And I'm showing no further questions. I would now like to turn the call back to Matt Seiler for closing remarks.
spk03: Just want to say thanks to everybody for your time today. If you have any questions, please feel free to reach out. Have a great day.
spk05: This concludes today's conference call. Thank you for participating. You may now disconnect.
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