Vital Farms, Inc.

Q2 2022 Earnings Conference Call

8/4/2022

spk01: I think in the prepared remarks you alluded to kind of pretty steady gains, kind of low 30% gains in household penetration over the last two, three years. And I guess I'm trying to think about gains in household penetration versus purchase frequency amongst your core consumers and what you think, where you think purchase frequency is relative to their overall consumption and purchase frequency of eggs. And do you think there's still a lot of headroom to get your consumers once they've purchased the brand to make that their egg that they only buy? And if that hasn't necessarily been happening, what you're doing to change that behavior or work on that behavior?
spk05: Terrific question, Adam. So what's interesting to me, my read on household penetration and buy rate is that we continue to add households with pretty similar buy rates to historic households. So you might have expected, if we had plumbed the depths of our true core consumer, that the next incremental consumer might have a lower buy rate or somehow be a less profitable consumer. Not seeing evidence of that drop off yet, which I think is really encouraging. I definitely see opportunities to increase buy rate. And over time, we'll start to migrate the conversation toward one about households and buy rate across a portfolio of products. But yes, I think like in many categories, consumers of eggs have a range of behaviors. Many of them by multiple brands or skews over the course of the year based on a variety of factors, including what's available on the shelf, what's on sale, and the occasion. One example would be we've got some consumers that love baking special holiday treats with our eggs, but for them it would be too much of an indulgence to have them as their everyday egg. And we've got some consumers that won't buy anything but. So we're certainly continually looking at ways to convince our loyal consumers to be even more so.
spk01: And if I could just maybe add a quick follow-up on there, given the rise in conventional egg prices that you've seen over the last four or five months, are you seeing any changes in purchase frequency or velocity or consumer behavior that would say that it's making it easier for consumers to trade up into vital versus kind of conventional or normal cage-free eggs? Or how is that price gap kind of impacting consumption in your mind?
spk05: You know, it's interesting. We have had pretty consistent growth regardless of where conventional egg prices are in the marketplace. As you know, there's a lot more movement up and down with commodity and market forces at the low end of the egg market than there is at the branded premium end, which is us. So we don't have a habit of moving prices on a regular cadence simply based on a cost plus basis. The net result of which is that sometimes you see commodity eggs under a buck a dozen, and today you see them for multiple dollars per dozen. Our consumer and the consumer of sort of this specialty eggs more generally doesn't interact as much with that kind of bottom of of the market, which is where all that inflation is really having the biggest impact. What we typically see is that I'm not looking to trade up someone from the cheapest to the most expensive, but often looking to trade up people who are somewhere in the middle. And that's where we're seeing this bifurcation. We're capturing some of those people in the middle and the cheapest eggs are capturing some of the people in the middle and the share of those mid-tier brands or private label products is, in my estimation, declining, at least on a unit basis.
spk01: Okay. That's all a really helpful caller. I'll pass it on. Thanks. Thank you.
spk06: Thank you. And our next question comes from the line of Brian Holland with Cowan.
spk04: Yeah, thanks. Good morning. Good morning, Brian. I have so much question about the relative price action with conventional shellac. So I appreciated your color there, Russell. Bo, quick housekeeping, and forgive me if you said this in your prepared remarks and I missed it. How much marketing shifted out of Q2 to Q3? Did you quantify that? And if not, could you?
spk07: We didn't quantify it, but I mean, it's less than a million dollars, Brian, in that range.
spk04: Okay, very helpful. So then as we think about flowing through to the second half, you know, shipping and distribution costs were obviously up year on year, but down sequentially, and I think you made reference to, you know, rates improving there. How do we think about that over the second half of the year, kind of on a sequential basis? You know, can you give us a little bit of framework there for what that looks like?
spk07: Yeah, sure. No, great question. I mean, I think, you know, as we talk to the decline that we've seen in distribution rates as apprentice center sales is really driven by two things. The market has started to stabilize and freight rates have started to stabilize, but we're also doing a lot bunch of internal initiatives with our 3PL provider to maximize truck efficiencies, to get multiple bids on routes. And I think we've seen the fruits of that in the quarter. I mean, our distribution rates will continue to grow at the rate of our volume. I think as a percent of sales, where we are today, we've achieved a lot of the savings that we would anticipate. I would think of something more along those lines as we go forward.
spk04: That's helpful, Beau. Thank you. That is, you know, that's it for me for now. I'll hop back into Q. Thanks, and best of luck.
spk07: Thanks, Brian. Thanks, Brian.
spk06: Thank you. And our next question comes from the line of Chris Groh with Stiefel.
spk00: Hi, good morning. Morning, Chris. Hi. I just had a quick question. We have seen input costs back off a little bit. Is that something we should see start to flow through in the third quarter? And I guess I'm just trying to get a sense around the – Maybe the faster ability for you to overcome input cost inflation if we see a little bit of a reprieve from the really high levels we saw take hold in the second quarter. Is that more something that would happen more so in 4Q?
spk07: Yeah, thanks for the question, Chris. I mean, one of the things to remember is that the way that we compensate farmers for feed costs is one quarter in arrears. So I think we started to see, you know, some of the feed costs start to stabilize. But you're going to see that on a one-quarter delay. So I'd expect the majority of that to show up, you know, in late, late 22 or early 23.
spk05: But I think it's important to call out, Chris, that, you know, there are lots of puts and takes here across a wide product portfolio. And so, you know, while what we pay farmers for eggs is a pretty big component, of our total cost structure, lots of other moving parts in the economy moving in different directions.
spk00: That's a good point. It looks like you saw some, for example, a little better shipping rates and some efficiencies there that obviously can help with your overall cost structure in the quarter. And I had a second question in relation to new distribution. And I guess just to get a sense of how that's phasing, if you will, and then how that's helping you fill up ECS 2.0. I guess I would be curious what sort of utilization you have of 2.0 right now, just to give us a sense of the facility. And then you mentioned bringing on new farmers as we move ahead. Is that in line with the expectation for incremental distribution that you've won or you're getting as well, if that makes sense?
spk05: Yeah, absolutely. So first on the question about ECS 2 or the expansion, The physical expansion is at full capacity. It's been built, and it supports, the combined facility now supports, at current prices, about a $650 million exit. The only thing that has to scale as we use more of that capacity is labor. So from that perspective, the facility's there, the capacity's there. And our growth and the volumes that we're processing at Egg Central Station are very much in line with our, you know, with our forecasts. You may recall that we have to plan our egg supply about a year to 18 months in advance. And so you could imagine that, you know, we're living with the forecast we built back then. And I think things look very balanced with good service levels and good in-stock levels. So we're we're feeling pretty good about the balance right now for sure.
spk00: And just to be clear on that, Russell, you would expect continued incremental distribution for your product. To the degree you're bringing on new farmers and you have this capacity, it sounds like you've got a nice steady stream of new distribution coming on. Is that correct?
spk05: Yeah, there are three components to that volume growth. One is absolutely new doors. Two is new items in existing doors. If you look at the comparison between the number of items you have at some of our natural and organic channel customers, or even just thinking about it in terms of our longest term customers, we've got, you know, let's call it low double digit SKUs in some of those chains, whereas we have low to mid single digit SKUs in some of our newer accounts. There's a natural progression in items per door. And then finally, there's simply the increased consumer awareness and the household penetration, which is helping to drive velocities in those doors. So all three are moving in the right direction. They continue to move in the right direction and are contributing to our continued growth.
spk00: Okay. Thank you.
spk05: Thanks a lot.
spk06: Thank you. And our next question comes from the line of Robert Dickerson with Jefferies.
spk02: Great. Thanks so much. Morning, Robert. Hey, how are you? Two quick questions. I guess in the second half, I'm just trying to think through this, that, you know, implied revenues are obviously supposed to be higher relative to the first half, and then gross margin is supposed to be a little bit higher relative to the first half. Kind of get close to the low end of your guy, let's say. I mean, if you do EBITDA almost at a similar rate relative to Q2, you know, you're kind of there. So I'm just curious, is there anything that might be inflating or accelerating on the SG&A side, maybe away from shipping and distribution that we need to know about, just given your comments on puts and takes? Or do you feel like, you know, you're just pretty well positioned to hit the guide higher than 13, just to be succinct?
spk07: Yeah, thanks, Rob. Yeah, we feel comfortable that we can hit the guide. One of the things that, you know, Russell talked to is our new marketing campaign. So our marketing is back-end loaded a little bit this year because of this new campaign that we're launching. So you're going to see, you know, as we talked to earlier, an increase in gross margin a little bit because of the price increase that we have the full effect of in Q3 and Q4. And we're making a higher investment in marketing in the back half than we did in the plus. which gets us back to the guidance that we provided. Okay, perfect. Thank you.
spk02: And then maybe just a broader question kind of around cash usage. You know, Russell, I fully respect that you're not speaking to this next category at this time, but whatever that category is, it's whether you would purchase a grassroots buildup process will require some cash. Well, at the same time, you know, you're already speaking to kind of the next egg central station. So, how do we kind of think about those 2 in tandem? You know, is this a. You know, at some point, yes, we will have additional capex being allocated into another egg central station to support additional capacity off demand for eggs. And then, you know, as we kind of work our way into this other category. Obviously, you've already thought about those cash needs. So just kind of whatever color you can provide to that question. Thanks.
spk05: Sure. So the line of sight to CapEx to support the shell egg business is certainly clearer to us because we've got some more experience and history there. And the way I would describe it is this. As we've said, the current plant, the expanded Egg Central Station can support about a $650 million shell egg business at today's prices. And of course, we like to get way out in front on the planning for capacity so that it's never a bottleneck for us. So we're right now in the design and site selection phase for the next plant. That's a relatively minor investment and It doesn't, and it can be shelved and then picked back up whenever we decide we have construction. I would say that we're going to need to in the fall of the household growth and we continue to monitor our sales plans, if we see that, you know, the two to three year forecast shows us hitting that next sort of tier of growth, then we can start building out the next plan.
spk07: Perfect. Thank you.
spk06: Thanks, Rob.
spk07: Thanks, Rob.
spk06: Thank you. And our next question comes from Ron over in Moscow with Credit Suisse.
spk03: Hi, thanks. I wanted to know... Good morning. I wanted to know, you're going to get some gross margin mentioned in the back half of the year, and you mentioned your commitment to the long-term gross margin targets. Is it fair to say that if conditions stay the way they are today, that your gross margins in the back half could most likely be similar in the first half of next year? Or are there any like incremental costs into 2023 that we should think about? Thanks.
spk07: Yeah, thanks, Rob. Yeah, I mean, I think we know that the pricing will be in full effect. I think it comes down to the outlook for commodities. I would anticipate that based on what we see right now, that the gross margins in the first half of next year may be in line with what we see in the back half, but commodities are still moving around. Okay.
spk03: Great. That's my question. Thank you.
spk06: Thank you. I'm showing no further questions at this time. So, with that, I'll hand the call back over to Victor.
spk03: I just want to thank everyone for their time today and their interest in Vital Farms. Have a good day.
spk06: Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.
spk03: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1-1.
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