Vital Farms, Inc.

Good day, and thank you for standing by. Welcome to the Vital Farms Incorporated third quarter conference call. At this time, all participants are in 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 11 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Seiler. Please go ahead.

Thank you. Good morning, and welcome to Vital Farms' third quarter 2022 earnings conference call and webcast. I'm joined on today's call by Russell Diaz-Quinceco, President and Chief Executive Officer, Bo Meisner, Chief Financial Officer, and for the first time, I'm happy to introduce Catherine McKeon, our Chief Marketing Officer. By now, everyone should have access to the company's third quarter 2022 earnings press release issued this morning. This is available on the investor relations section of the 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 25, 2022, which was filed to the SEC earlier today, and other filings of 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 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.

Thanks, Matt. Good morning, and thanks, everyone, for your time today. I'll review our third quarter financial results and provide updates across the business that are contributing to our success as a disruptive force in the food sector. Catherine McKeon, our Chief Marketing Officer, will join us to talk through what makes our brand unique and why it continues to resonate with consumers. Our world-class marketing team is one of our key points of differentiation, and I'm grateful she's joining us today. Finally, Beau will conclude our call with additional color on our quarterly financial results before we take your questions. In the third quarter, we achieved $92 million in net revenue. This is the highest quarterly result in our history, and it reflects a 42.4% increase from the prior year period, driven by volume gains of 28%. Our gross margin expanded 190 basis points sequentially to 32% despite higher input costs and our adjusted EBITDA was $5.2 million, up over 2,200% versus last year. Our household penetration in the egg category now stands at nearly 8 million, up roughly 40% relative to last year. Looking at the 13 weeks ended September 25th, 2022, the egg category has experienced significant retail dollar growth of over 50% due mostly to inflation of lower priced eggs, Some believe these higher egg prices will sustain in the coming months given the current operating climate. With this backdrop, I think it makes more sense to focus on unit volume when judging overall growth. Despite our portfolio-wide price increase in May, we grew our retail volume significantly at 25% during the period, well ahead of the shell egg category, which saw volumes decline by half a percent over the same timeframe. Underpinning this growth, both current and historic, is our unique stakeholder-driven business model, our robust supply chain, our world-class organization, and our strong brand. Vital Farms continues to challenge the norms of how most of the food in this country is produced. We have a unique long-term approach to capitalism that has propelled our growth to be the leading pasture-raised egg brand and second-leading egg brand in the United States. by retail dollar sales. It has enabled us to improve the lives of millions of people, millions of animals, and the planet. We see this continued performance as proof that our long-term approach for business works. In fact, during each of the past 15 quarters, we have produced positive net revenue growth with an average growth rate of just over 36% in each quarter. On an annual basis, our net revenue growth CAGR is 37%, dating all the way back to 2014. Our focus remains on driving sustainable, long-term, consistent results, and we've been intentional about the choices we've made over the past several quarters to navigate the impacts of global forces like the pandemic and, more recently, inflation. Another proof point of our strategy is the improvement in our profitability. To reiterate, our gross margin was about 17% back in 2014, relative to more recent performance in the low to mid 30% range. Additionally, our adjusted EBITDA margin moved from flat to low single digits to mid to high single digits over the same timeframe. While there are short-term pressures from time to time, as we've experienced recently, we remain focused on profitable growth over the long term. In the past quarter, we have experienced inflation, which has increased some of our input costs. We recently implemented another round of pricing that will take effect in January of 2023 across our egg portfolio. This decision, which was not taken lightly, will allow us to continue fueling our profitable and sustainable growth. It contributes to the resilience of our supply chain by improving outcomes key stakeholders, including farmers and suppliers. One of the reasons we have the confidence to execute another price increase is the position we've built as a premium brand, which Catherine will talk more about in a minute. We've seen a growing number of households vote to pay this premium because they want high-quality products that reflect their values from companies they can trust. This trend continues despite inflation in food and energy prices, and other noise surrounding the U.S. economic backdrop. We continue to strengthen our supply chain, which is a critical component for meeting our growth objectives. The expansion of Egg Central Station, our world-class egg washing and packing facility, is fully operational and provides us the capacity to meet the strong demand we have for our product. The facility was recently named the 2022 Green Plant of the Year by Food Processing. which validates the emphasis we put on world-class sustainable design. We believe the completion of this project provides a significant unlock for our company because it doubles our capacity and puts us in a position to support over $650 million in annual revenue from ag today in service of our primary goal to further grow Vital Farms household penetration across the United States. We've begun the initial work on design and site selection for our next egg packing center as we look ahead to growing our egg business beyond $650 million. As always, we will continue to proactively eliminate bottlenecks in support of our long-term growth plans. We've grown our network of small family farms to over 300 and continue to add new family farms every month. Our positive reputation among poultry farmers precedes us. we maintain a significant list of farmers already interested in joining us. Our ability to add enough new farmers to achieve a quarterly 36% net revenue CAGR over the past two plus years is a testament to that fact. We've built our reputation in the farming community by working directly with our farmers toward mutually beneficial long-term success. Over the past several months, it's clear that inflation is having an outsized impact on our farmers. We made the recent decision to increase payments to them to provide stability to their operations, create more resiliency in our supply chain, and protect our growth trajectory. Bo will talk more about this and how it impacts our cost structure, as well as how it aligns with the price increase I mentioned earlier. We continue to invest in our culture and in the skill sets that our crew need to drive our growth. This past September, we brought our entire crew together for our first company-wide retreat in Springfield, Missouri, which we called Revitalize. Our crew spent three days volunteering at a local food bank, touring Egg Central Station, visiting small family farms, and acquiring new skills to foster success as a company that is thriving in a remote working environment. On a personal note, it was incredible to see how we've grown and the caliber of crew we've been able to attract. We all left Springfield energized for the work ahead and grateful for the time with one another. We will remain hyper-focused on what we can control as an organization, which includes eliminating pain points, focusing on professional development, and promoting a positive culture for our people, investments that we believe will deliver resilience to our crew and our business. Thanks for your time today. I look forward to your questions later in the call. And with that, I'll now turn the call over to our Chief Marketing Officer, Catherine McKeon.