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spk08: 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.
spk04: 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.
spk03: 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.
spk02: Thank you, Russell, and thank you for the opportunity to talk through the work we're doing to grow the Vital Farms brand. Our brand is an extension of Vital Farms' purpose. In fact, I'm happy to share that Vital Farms was recently named to the Brands That Matter list at Fast Company. Consumers choose us because they believe we're backing up our commitment to improve the lives of people, animals, and the planet through food. The conviction with which we operate, the steadfast adherence to our values, and our uncompromising commitment to stakeholders gives us the credibility and confidence to drive loyalty for our core products and expand into new categories. Last quarter, we spoke about our new marketing campaign, Keeping It Bullshit Free. This year's campaign challenges viewers to rethink widespread practices, including misleading labels like cage-free, hollow corporate initiatives, and poor worker conditions, all with the lighthearted tone and tender expected from Vital Farms. It is the latest in a long-running effort to support Vital Farms' full stakeholder community, including our crew, customers and consumers, suppliers and farmers, stockholders, and the environment. The campaign was rolled out across streaming television, online, and social platforms, including Hulu, YouTube, TikTok, and Insider's Better Capitalism Vertical in late August. All four of our new spots can also be viewed on the Vital Farms website. I encourage each of you to check them out and see the campaign for yourself. We continue to focus our messaging on our core consumers, which today includes 19 million U.S. households. we've seen 34% year over year growth in household penetration on average over the past 11 quarters. And as Russell mentioned earlier, our eggs are in nearly 8 million of these homes today. This speaks to our ability to reach consumers with our uniquely compelling message. And it's reflected in key metrics like brand awareness and brand trust. With that said, there's still significant room for further household penetration and increase brand awareness beyond our core consumers. A key to achieving our long-term potential involves our continued marketing efforts, which we believe contribute to our sales growth. Consumers are attracted to our brand and stay with us because we connect with them through many creative touch points. We do not just market to our core consumers. We build lasting relationships with them. Thanks, everyone, for your time today. I'll now turn the call over to Bill.
spk05: Thank you, Catherine. Hello, everyone, and thank you for joining us today. I will review our financial results for the third quarter ended September 25th, 2022. I will then provide an update on our annual guidance for this fiscal year. As Russell mentioned, we had a record quarter with net revenue of $92 million, an increase of 42.4% compared to the prior year period. The growth in net revenue in the third quarter was due to continued growth in egg-related sales, driven by strong volume increases at our customers, as well as distribution gains at both new and existing retail partners. During the period, our volumes were up 28%, with the remaining growth driven by pricing. Gross profit for the third quarter was $29.5 million, or 32% of net revenue, compared to $19.8 million, or 30.7% of net revenue for the third quarter of 2021. The change in gross profit was primarily driven by higher sales. As to the change in gross margin, increased pricing across our entire portfolio offset some headwinds, including an increase in input costs in both eggs and butter and higher packaging costs. We saw expense leverage on both SG&A and shipping and distribution during the period. SG&A expenses for the third quarter were 20.6 million or 22.3% of net revenues compared to 15.3 million or 23.7% of net revenues 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 and higher marketing expenses. Shipping and distribution expenses in the third quarter were 6.9 million or 7.5% of net revenue, relative to 6.3 million or 9.8% of net revenue in the third quarter of 2021, driven by higher sales volumes and freight rates. This was partially offset by a decline in line haul rate and internal operational efficiency. Adjusted EBITDA for the third quarter was 5.2 million or 5.7% of net revenues compared to 0.2 million or 0.3% of net revenues for the third quarter of 2021. Now an update on our capital structure. As of September 25th, 2022, we had a total balance of cash and cash equivalents and investment securities of 86.9 million, and we had no debt outstanding. As we look to close out fiscal 22, we are reaffirming our guidance of net revenue of more than $340 million representing projected growth of over 30% versus 2021. Turning to our guidance for adjusted EBITDA, we are reaffirming our guidance of more than $13 million in fiscal year 2022. I think it would be helpful to provide some additional color on our expected adjusted EBITDA in the fourth quarter. We continue to feel the impact of higher organic feed and packaging costs, and we're seeing that impact in our supply chain. As Russell mentioned earlier, our farmers are also experiencing inflation across their respective businesses, and we recently made the decision to increase farmer pay to help stabilize their operations through this inflationary period and create more supply chain resiliency. We estimate this change will negatively impact our gross margins in the fourth quarter by roughly 100 basis points. With that said, the decision we made on pricing, which will go into effect in January 2023, should allow us to maintain our current glide path towards gross margins in the low to mid 30% range next year, despite the impact of these higher payments. We are well positioned to expand the household penetration of Vital Farms as the growth trajectory of the brand continues to increase. Thanks for your time and interest today. And with that, we'll now take your questions.
spk08: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. We will now compile the Q&A roster. Our first question comes from Adam Samuelson with Goldman Sachs. Adam, your line is open.
spk10: Yes, thank you. Good morning, everyone. Morning, Adam. Morning, Adam. Morning. So I guess first question is maybe coming back to the announced price increase in January and then, Beau, you had some comments around kind of increasing the pay rates to your growers and I just was hoping you could maybe try to dimensionalize kind of both of those and help us think about with the growers, just how you, if you felt that that was needed because you were seeing a change in your recruiting of, of incremental growers, or you're trying to just do the right thing by your, by your whole shareholder stakeholder network.
spk05: Yeah. Thanks, Adam. Great question. You know, as we, talked on the call. The impact in Q4 is about 100 basis points on our gross margin, and that's relative to Q3. We did that for exactly the reasons that I talked to. I mean, they are seeing additional inflationary pressures in some of the areas that we don't change from a headline point of view. We obviously account for the soy and corn that we've talked about on a one-quarter lag, but they have other inputs they're also seeing inflation in. And it was the right thing to do for the farmers to make sure that they have a sustainable profit model and help them through this difficult time. As a result, we made the change.
spk03: The pricing that we're taking... Sorry, go ahead, Beau. I was just going to add on when you're done.
spk05: Okay, I was just going to say, the pricing that we're going to take in January will offset that and the other inflationary pressures that we've said, and we'll be back on our long-term trajectory that we've communicated in the mid-30s.
spk03: And Adam, the color I'd add is it's not just altruism. The reality is that we need our farmers to have a sustainable financial model to have our own sustainable supply chain and financial model. So there's certainly a healthy dose of self-interest as we think about the right actions to take to ensure the stability of our farming network.
spk10: That's all very helpful. There wasn't a lot of discussion of this, but you've been evaluating a category expansion and just any additional thoughts, framing, timing that you might have as we think about when that's ready to be revealed and discussed and we can think about the different financial implications thereof.
spk03: Sure. Appreciate that, Adam. As we said on the last call, we have narrowed it down to a category and continue to work through our plans to enter that category uh and we're excited we can't wait to tell you all about it um but but as with everything else we do we're very intentional and and we uh don't want to get in front of uh facts with with our announcements so when uh when we're ready to to share we will and we hope to be able to do that by the end of the year okay great that's all really helpful i'll pass it on thanks thank you adam
spk08: One moment for our next question. Our next question comes from Pamela Kaufman with Morgan Stanley.
spk00: Hi, good morning.
spk08: Hey, Pam.
spk00: Can you talk about just what you're seeing in terms of consumer demand? Obviously, your volumes are very strong despite significant pricing. So how do you think about the factors contributing to that growth? And then I guess with the upcoming price increase in January, how are you thinking about demand elasticity? Thank you.
spk03: Thanks, Pam. It's Russell. I'll take the first part of that, and I might ask Catherine to chime in as well, since we have the pleasure of her company today on the call. As we look at components of growth, they continue to be pretty robustly driven across both volume and price, and elasticities that we've seen so far are coming in very much consistent with what we expect it to be. In fact, I've been honestly pleasantly surprised with how accurate the forecasts have been internally, given that some of this is pretty unprecedented. What I'd say is that we're seeing a nice increase in velocities because we're adding items to existing customers and an increase in doors as well. And so those are both contributing to those volume gains. We continue to add households, as we mentioned earlier in the call. And that's clearly an important part of our long-term sort of brand-first approach to sustainable growth. You know, as we continue to take price, as so many brands and private label producers are, you know, it's certainly not lost on us that we're starting to see prices that in essence felt a little unimaginable just a year ago. And so we're being even more conservative as we project our growth in 23 relative to the pricing that we're taking. We still expect to have robust growth, but we're being, as we always are, typically conservative when it comes to the expected impact of pricing. I'd love to have Catherine talk a little bit more about how she thinks about the impact on our business and consumers of our pricing action.
spk02: Thanks, Russell. Good morning, Pam. I want to talk a little bit more about the brand. Russell talked about the fact that we've built a premium brand in the prepared remarks. I want to expand on that a little bit to help explain because it's really a key driver to how we think about demand. So we have built that premium brand not on smoke and mirrors, not something that we crafted, but rather on trust, on quality, and on our values, and we've done that from day one. So from a trust perspective, we have consistently said what we do, do what we say, say what we do, do what we say, whether that's our traceability initiative or simply the way that we talk with consumers each and every day on social media, and that consistency of transparency is profoundly trust-building. We're also delivering a quality product and a very high quality product. Consumers are willing to pay for that. They are especially willing to pay for that and demand more when it comes from a company with values that reflect theirs. Not just a brand that represents something, but a company with consistent values that has always been there. And so those things have helped us grow through the inflationary time we are already in. and the price that we've taken. And as we look to the future, we believe that that will continue to be true.
spk00: Thanks. And then can you talk about where you're seeing recent distribution gains? Is it in particular regions? And where do you see further opportunity for distribution growth?
spk03: So as we mentioned on our last quarterly call, we have made a particular focus on the Northeast region. It's the area of the country where our historic growth has not been focused. And so we see a big opportunity with points of distribution and ACV in the Northeast. And those investments really are paying off in terms of new doors and new items in existing doors. And a big part of that is a team that we've staffed We've hired some really terrific sales leaders specifically for that region. So it was a very intentional investment, and we're seeing that pay off. More broadly, as you can imagine, we are already the number one egg brand in the natural channel. The growth opportunity over time is a lot in MULO, and we're seeing that play out as we continue to earn the right to have more space on shelf with our high velocities. and our strong retailer relationships. That model of continuing to kind of beat and raise, as it were, in terms of our performance with retailers and then getting more space as a result continues to work for us and we continue to grow points of distribution in existing doors.
spk00: Great, thank you.
spk08: Thanks, Ben. One moment for our next question. Our next question comes from Cody Ross with UBS.
spk07: Good morning. Thank you for taking our questions.
spk03: Hey, Cody.
spk07: Hey there. Wholesale egg prices have declined, and retail prices for conventional eggs are likely to fall as well. There's a narrative out there that this will significantly reduce your share as your price gap widens. How comfortable are you with your price gaps today, and are you concerned about your market share in the event that your price gaps widen further?
spk03: Yeah, so it's interesting. I wish I had a crystal ball about what happens in any commodity market, including with commodity eggs. I certainly would be doing a different line of work if I had that crystal ball. There are plenty of arguments for tightening of egg supply and egg pricing in the marketplace as we see a return to avian influenza. I read an article about a million bird flock in Iowa being affected just in the last week, for example. It hasn't been widely reported. That said, commodity egg prices aren't typically something that we've seen have an impact on our growth. And I would take you back to a time just a few years ago when there was a pretty big price war, I believe, in the Midwest. where multiple retailers were pricing commodity eggs at well below a dollar. We saw commodity egg prices as low as 47 cents across a big portion of the United States, and yet our growth continued at our historic pace. And so the truth is we are much more focused on the things that Catherine described, building the trust-based brand, and delivering on our commitments to our stakeholders. And that works. Consumers that buy the most expensive eggs on the shelf aren't typically cross-shopping the cheapest eggs on the shelf. And I don't think that has fundamentally changed simply because commodity egg prices have jumped up recently, nor do I think that's a big driver of our growth.
spk07: That's helpful. Thank you for that. A big pushback we hear is that your buy rate indicates that consumers only purchase your eggs about three to four times a year, yet make 18 purchases a year, suggesting there's not much brand loyalty. How concerned are you about this if the U.S. economy deteriorates? Thank you.
spk03: Yeah, thanks for that. It's interesting. I definitely see an opportunity to increase our share of whatever you want to call it, stomach or wallet or refrigerator when it comes to egg purchases. That number has been pretty consistent for us over the years. And there are a lot of, if you think about the idea of market segmentation, there are lots of reasons why different consumers might choose to buy different eggs. We definitely have a segment of consumers with very high brand insistence. And we see that through some of the digital order data that we're able to get from some of our retail partners, we have, my understanding is, the highest rate of consumers who want to buy our eggs and will not accept a substitute. So there's a group of consumers out there that will only buy our eggs and won't buy eggs if they can't find ours. There are also consumers who will buy our eggs primarily, won't ignore a hot ad that someone else runs. One of the things we do to ensure that our volume isn't simply driven by our promotions is we tend to promote less deeply than some of our competitors do because we want to generate trial, but we don't necessarily want to drive volume on promotion. And that will show up in a metric called what percent of our volume is sold on promotion. You know, the reality is we believe that that historic buy rate of three to four, again, hasn't changed significantly as we've seen changes in macro environments and as we've seen changes in what competitors are doing. There's still so much growth ahead, adding households at that buy rate and stay tuned because we're certainly thinking about how we can increase the buy rate as well.
spk07: Great. Thank you for that. I'll pass it along.
spk08: Thank you. Thanks, Cody. One moment for our next question. Our next question comes from Brian Holland with Cohen and Company.
spk09: Yeah, thanks. Good morning. Good morning, Brian. I just want to, good morning, Russell. I just wanted to probe the reiteration of guidance here, you know, quickly. you know, as opposed to maybe raising it. So, I guess I just want to make sure I understand. You've called out the increased payments to farmers. I know marketing was maybe higher in 3Q. So, maybe we're leaning into that again in 4Q. Just help us understand, I guess, below the top line, the construct of the guide in 4Q and what may be, if anything, you're trying to signal about incremental pressures in 4Q.
spk05: Yeah, thanks for that, Brian. I mean, first off, let me just talk to sort of generally how we're thinking about guidance. I mean, we hope to give you levels of net revenue adjusted EBITDA that we can achieve and or surpass on an annual basis, but remain consistent throughout the year with the performance against the guidance. So we want to move away from ranges and entry year changes as we focus on the long term performance of the business. First on revenue, if you think of where we are in revenue, I think we're comfortable with where consensus is right now on revenue for Q4, even though we haven't taken up guidance. But if you think of Q4 profitability, that 100 basis point gross margin impact versus Q3 for the increased farm repayments is something that will flow through in Q4 and be offset by pricing then in January. We also continue to invest in marketing more strongly than we did in the prior year. So I think on the operating expense line, you're going to continue to see investment there, which is why we haven't taken our guidance up above the 13 million that we've had. But I think we're also comfortable with the current consensus that's around 13.7. I appreciate that color, Beau. And then...
spk09: I guess this question's been asked a few ways. I'll ask it one other way. Obviously, you've had really nice distribution gains this year. Retailer breadth, if you will, is filling out nicely. I'm just curious how much more room you think you have on stores as a catalyst going forward as you're now over 22,000, I think it is. And whether, you know, if that's less of a tailwind for you or an opportunity going forward that this is more about depth, I guess I appreciate that maybe we'll hear more about new product launches going forward. But is that the right way to think about this, that we're not going to get as much store growth and that, you know, incremental distribution growth, as it were, would be a byproduct of, you know, more SKUs per store?
spk03: Thanks, Brian. Yeah, I think we've been pretty consistent over the last several calls that they're both opportunities, new doors and items per door. But as you've pointed out, as we continue to grow doors, and certainly if we've been doing our jobs right, we're focused on the highest quality or potentially productive doors, then the opportunity continues to shift toward more items per door. We've got a really well-worn playbook if you look at some of our earliest customers, including Whole Foods, which I believe has 19 retail SKUs of ours, that we tend to, by investing in marketing and by being great partners and by executing reasonably well, we tend to earn the right to add more products over time. We have really productive SKUs, and it's not a hard conversation to show our retail partners how we can help improve their ability to meet their goals with more of the items that we produce. And so there's a natural path from two and three and four items on a shelf to five and six and seven. And that, to me, provides an awful lot of tailwind and runway in front of us.
spk09: Thanks, Russell. Best of luck.
spk08: Thank you. Thanks, Brian. One moment for our next question. Our next question comes from Robert Dickerson with Jefferies.
spk06: Great. Thanks so much. Good morning.
spk08: Good morning, Rob.
spk06: Hey, how are you? This is the first question just around the next round of pricing. I don't know if you're willing to provide any more color kind of depth on that pricing just around Let's say, you know, is it similar, you'd think, kind of in magnitude relative to the prior rounds? Maybe how, you know, much of the portfolio you'd expect the price, et cetera.
spk05: Yeah, thanks for that, Rob. The price increase we're taking in January is more similar to the one that we took in May of this year, and it's just on the age business at this point, no further pricing involved. Okay, got it. Thanks.
spk06: And then I feel like you always have to ask just around avian flu. It doesn't seem like it's been much of an impact. Things seem to be fairly contained on your end. So just kind of update on any kind of risks, what you're seeing on your flock. And then, you know, is there anything kind of around avian that, you know, would also or could also increase kind of near-term costs if you bring the birds in, what have you? Thanks. That's all.
spk03: Thanks, Rob. So it's interesting. We have, I believe, one of the most resilient supply chains in eggs today. And that's largely driven by the fact that we have a distributed network of small family farms, over 300 of them. And so any of those individual farms is likely well under 1% of our total supply. So even if we were to have a farm affected by avian influenza represents a small portion of our overall supply. That said, we follow and often exceed industry standards and best practices around protecting the birds and protecting our farms and our small family farm partners from the impacts of avian influenza. We've never had an outbreak of avian influenza on any of our farms, and we work really hard to keep it that way. So from a risk perspective, look, it's out there, and I'm not going to say never, but the reality is our track record is really good here, and we work really hard to keep it that way. On the flip side, what we saw back in 2016 is that when avian influenza starts to hit those big mega farms like we saw last week in Iowa with a million bird farm being affected, it starts to affect supply on the shelf. And I've read a lot recently about continued kind of low service levels or low fill rates on retail shelves as being a reason why we continue to see strong price increases, strong pricing. And that, you know, if you believe avian influenza is an issue, I think the more likely impact is you're going to start to see more holes on the egg shelf. The biggest risk for us is that it actually cleans us out of eggs. It can be pretty good for sales if you have eggs and there aren't as many as consumers would like. What we want to do is ensure that our loyal consumers can have our eggs and that we simply aren't the default choice because there aren't any others on the shelf, as we sometimes saw back in 2016.
spk06: Okay, that's helpful. Maybe just a quick follow-up. You know, Russell, you said earlier the way maybe restaurants revenues are coming in kind of pricing volume it's fairly close to kind of what you forecasted um yeah then you later on i guess a bit of an avian impact that could potentially come by causing some holes from other players on the shelf uh but i mean obviously i would assume with kind of egg central station you know kind of the agreements you have with your farmers inclusive of you know the incremental cost you pay those farmers make them happy that there doesn't seem to be any near-term issue with capacity despite the strong volume that we're seeing. Thank you.
spk03: Yeah, I appreciate you calling that out, Rob. We expanded Egg Central Station on time and on budget earlier this year in advance of us needing the extra capacity. And so we actually are using some of that extra capacity to meet our current order volume. But we were very intentional in the timing to ensure that we would have no production bottlenecks, and we do not. We have capacity to exceed a $650 million egg business today, and we're already doing the site selection work for the next plant as we look ahead to building a business beyond $650 million. So I sure appreciate that question.
spk06: Super. Thanks, guys. Thanks, Rob.
spk08: One moment for our next question. Our next question is from Chris Groh with Stifel.
spk01: Hi, good morning. Thank you. Hey, Fred. Hi. I just had a quick follow-on on the fourth quarter and the gross margin. I guess I just want to get a sense, could that still be up sequentially? And I guess as I think about you have this higher payment coming through, you should have a little less inflation starting to lapse some of the increases from the prior year on grains in the quarter. And with that strong pricing coming through, I just want to get a sense of how to look at the fourth quarter gross margin around those dynamics.
spk05: Yeah, thanks for that, Chris. Yeah, it's certainly going to be up year over year, but not sequentially. There's conventional grains where you look at the CME, they're coming down, but we're also seeing an impact from our farms and seed mills that basis going up in the background, offsetting some of the things you're seeing in the headline. But we also have organic feed prices going up and we have packaging going up. So there's a little bit of a lag in how that all flows through as well. And so that's why, you know, you may be looking at corn and soy and say it's coming down, but with basis and organic and packaging, we have some offsets there. So I think our gross margins will be flat to down sequentially, and we'll make up for that with the pricing in Q1. Okay.
spk01: That's helpful. Thank you. And then just one other quick question around You're holding a decent amount of cash, and I'm just curious about the uses of that cash going forward. Would you expect and kind of hold back a reserve for capital around a new product, for example? Any other capital projects worth noting? And I'm curious if you'd buy your stock back. I mean, your fundamentals have been very strong, and the stock has been not moving up here commensurate with that increase in fundamentals.
spk03: I'll let Beau address the current plans, and then I'll talk philosophically about a buyback. How about that?
spk05: Sure. Perfect. Well, I think, Chris, if you look at how we manage that, we are looking to use that capital to accelerate our long-term growth and for things to accelerate our growth. So we talked about in the past investing in cost-saving opportunities that we can then reinvest that money back in the business. We could use that money if we were to look at new categories to enter, as you said, and there's different ways that we can enter those categories, again, to accelerate our growth. So I think we're being very prudent and very thoughtful about how we use that capital. I think we have sufficient capital to allow us to do many things to continue on the long-term growth trajectory that we believe that we can deliver. I'll let Russell talk to the stock buyback piece.
spk03: Yeah, it's so interesting. It would be tempting, right? Because, you know, we agree. I don't think our stock price reflects the performance and the potential of our company. And it feels cheap, so why wouldn't you buy low, right? That said, as Beau alluded to, gosh, there's so much growth ahead of us, and we certainly... appreciate having that dry powder, that flexibility to pursue growth opportunities that make sense financially for us. But the other thing I would add is the stock seems cheap, but it sure seems like cash for high growth companies is at a premium as well. And so I see that as a very rare gift that we have that strong balance sheet in a time of such uncertainty and that just gives us the confidence of our convictions to continue to pursue our long-term goals. It gives confidence to our crew members. It gives confidence to our farmers. It gives confidence to our retailers that we'll continue to deliver as we always have. And so shame on me if I took the opportunity opportunistically to buy back some shares and send a bullish signal to the marketplace, but reduce the resilience of our company in the process. So I would be very loathe to do something like that in the short term. Okay, thank you for the perspectives.
spk01: Thanks, Chris.
spk08: At this time, I would like to turn it back to Matt for further comments.
spk04: Thanks, everybody, for your time and interest in vital farms today. Have a good one.
spk08: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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