Vital Farms, Inc.

Good day and thank you for standing by. Welcome to the Vital Farms first quarter 2025 earnings 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. Please be advised that today's conference is being recorded. I would now like to hand it over to your host, John Mills with ICR.

Good morning, and welcome to Vital Farms' first quarter 2025 earnings conference call and webcast. I am John Mills, Managing Partner at ICR. On the call today are Russell Diaz-Conseco, President and Chief Executive Officer, and Tilo Vreda, Chief Financial Officer. By now, everyone should have access to the company's first quarter 2025 earnings press release issued this morning. This is available in the Investor Relations section of Vital Farms' website at investors.vitalfarms.com. Throughout 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 do 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. The company's quarterly report on Form 10-Q for the fiscal quarter ended March 30, 2025, filed with the SEC today, as well as other filings with the SEC for a detailed discussion of the risk 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 press release for a reconciliation of adjusted EBITDA and adjusted EBITDA margin to their most comparable measures prepared in accordance with GAAP. And with that, I will turn the call over to Russell Diaz Conteco, President and Chief Executive Officer of Vinyl Farms. Thank you, John.

Good morning, and thank you for your time today. Our first quarter performance was in line with our expectations. We hit new record levels for first quarter volume and net sales and maintained our momentum in delivering ethical food to the table. With this solid foundation in place, I'm pleased to reaffirm our 2025 financial outlook. Consumer awareness and demand for Vital Farms products continues to grow, confirming the strength of our brand and the relevance of our mission. I'm grateful to all of our stakeholders, our farmers, suppliers, customers, crew members, stockholders, and communities who make our progress possible every day. Net revenue for the first quarter was $162 million, up 10% from last year, and the first quarter marked our 20th consecutive quarter of year-over-year volume and net revenue growth since our IPO in 2020. First quarter net revenue growth was driven primarily by price mixed benefits and volume-related growth. Volume-related growth was below trend due to egg supply constraints and depleted inventory levels. As we previewed last quarter, we entered the first quarter with significantly lower egg inventory relative to the same period last year, which pressured our year-over-year growth rate. We believe the volume growth headwinds we experienced in the first quarter will ease beginning this quarter setting the stage for net revenue growth to reaccelerate as the year progresses. Turning to our butter business, growth continues to be very robust, with first quarter net revenue up 41% year over year. Looking ahead, we expect to deliver sustained growth driven by increasing demand for our products and improving supply as farm expansion initiatives and supply chain investments bear fruit. Let me talk a bit more about each of these drivers, starting with demand. While demand for our egg products has been consistently strong, we've recently not been able to fully keep up with increased orders due to our supply constraints, just as avian influenza disrupted the market and egg prices surged. We are confident that demand for our egg products will continue to grow as a result of two primary factors. First, we have built strong relationships with our consumers based on trust in the brand and a sense of shared values. We believe our strong consumer relationships represent an enormous and sustainable competitive advantage we have earned through years of consistent execution, strong brand building, and our mission-driven culture. Our aided brand awareness continues to improve, reaching 31% by the end of the first quarter, a five-point increase since the beginning of the year. partly attributable to the unusually high level of media attention our industry has received in recent months. Our data indicates that brand awareness has been a strong leading indicator of net revenue growth with a lag of several quarters. Second, we benefit from secular trends as more consumers prefer cleaner labels and want to know where their food comes from and how it is produced. With low levels of market penetration today, we believe we have a long runway for growth in the years ahead as these trends build momentum. We are also encouraged by the increased demand across all segments of consumers as they continue to place more emphasis on the values of companies they buy from. A closer look at the data reinforces our belief that we have only scratched the surface of our market opportunity. Despite strong growth, we are still in only 11.3% of U.S. households. a small fraction of what we believe to be our long-term market opportunity. And as we're landing in the fridges of a growing number of households in the U.S., our consumers are becoming more loyal. As we have doubled our household penetration over the past four years, we've also doubled the number of heavy and ultra-heavy buyers of our brand. In other words, even while we are entering new households, already loyal consumers are becoming even more loyal. This trend has held true in the past, even in years when inflation in the United States outpaced wage growth. Moving to the supply side, we're making strong progress on several of the important initiatives to expand capacity and strengthen our supply chain that we outlined on our last call. And we're on track to deliver our commitments on time. Last year, we added about 125 family farms to our network in the pasture belt. and today we're pleased to share that we added approximately 25 additional farms to our network during the first quarter of 2025. As a result, we are now working with more than 450 of the best family farmers in America, an increase of roughly 50% since the end of 2023, with 8.2 million hens under contract. With a strong pipeline of new family farm candidates, we're confident in our ability to grow our network at a healthy pace over the remainder of the year and beyond. I'd like to take a moment to thank our world-class farm team for their hard work and expertise in explaining the appeal of the Vital Farms model to our family farmer prospects. The network growth we expect to achieve leaves us very well positioned to deliver $1 billion of net revenue by 2027. And we are already above our gross margin target of about 35%. and our adjusted EBITDA margin target of 12 to 14%. In addition to adding new family farms to our network, we are investing in our supply chain infrastructure to increase capacity and support ongoing innovation. As we enter the second quarter, the work to break ground at our new facility in Indiana is progressing as planned, and we remain on schedule for an early 2027 opening. In addition, the construction of our new additional egg grading system at Egg Central Station, or ECS, in Springfield, Missouri remains on schedule for completion in the fourth quarter of this year. We anticipate that this new system will expand ECS capacity by the end of 2025 by 30% from current levels, which will bring us to ECS revenue capacity of more than $1 billion. Finally, our first company-owned accelerator farms are progressing as anticipated. We intend for these farms to allow us to accelerate the pace of innovation and create a flywheel as we share our learnings and encourage the exchange of best practices within our existing farm network. Before I hand it over to Tilo, I want to address one more topic. Just like everyone in our industry, we expect to be affected by the recently announced tariffs. While we believe our consumer to be very loyal and resilient, we're anticipating cost impacts on our business. To offset this anticipated impact and provide us with operating flexibility, we've announced to our retailer partners a modest low double-digit percentage price increase for our shell egg products that will go into effect this month. In summary, we delivered a strong first quarter that leaves us well-positioned to achieve our financial targets. Egg supply remains tight, but we expect it to improve beginning this quarter as farms recently added to our network ramp up production and new farms continue to come online over the course of the year. As a result, we expect to deliver significantly faster year-over-year net revenue growth in the back half of this year, consistent with our 2025 outlook. Over the long term, we expect demand growth to remain healthy as we drive increased market penetration from low levels and target a loyal and resilient consumer. I'm very excited about our future and believe we are on our way to becoming America's most trusted food company. I'm certainly looking forward to it, and I hope you are too. And with that, I'll now turn the call over to Thilo.