Vital Farms, Inc. (NASDAQ:VITL) Q3 2023 Earnings Call Transcript

Vital Farms, Inc. (NASDAQ:VITL) Q3 2023 Earnings Call Transcript November 4, 2023

Matt Siler: Thank you. Good morning. Welcome to Vital Farms Third Quarter 2023 Earnings Conference Call and Webcast. I’m joined on today’s call by Russell Diez-Canseco, President and Chief Executive Officer, Thilo Wrede, Chief Financial Officer, and Pete Pappas, Chief Sales Officer. By now, everyone should have access to the company’s third quarter 2023 earnings press release issued this morning. This is available on the Investor Relations section of Vital Farms website, 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 result to differ materially from those described in these forward-looking statements.

Please refer to today’s press release into the company’s quarterly report on Form 10-Q for the fiscal quarter ended September 24, 2023 filed with the SEC 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 the financial information presented in accordance with GAAP.

Please refer to our earnings release for reconciliation of adjusted EBITDA and adjusted EBITDA margin to their respective most comparable measures prepared in accordance with GAAP. And now I would like to turn the call over to Russell Diez-Canseco, President and Chief Executive Officer of Vital Farms.

Russell Diez-Canseco: Thanks, Matt. Good morning, and thanks everyone for your time today. I’ll start by sharing updates on how we delivered on our commitments to our stakeholders during the third quarter. Pete will then provide some insight into how we are benefiting from being a trusted partner at retail with a strong brand. Finally, Thilo will provide more in-depth information on our quarterly results and our annual guidance before we take your questions. This was another great quarter at Vital Farms. We achieved $110.4 million in net revenue, which represents a 20% increase from the prior year period. The growth was driven by volume growth of 13% and price mix of about 7%. Our gross margin expanded by over 100 basis points year-over-year to 33.2%.

And we posted another impressive quarter of adjusted EBITDA performance at over $9 million achieving an adjusted EBITDA margin of 8.4%. Our year-to-date adjusted EBITDA is $34.5 million, which is up over 250% versus the $9.4 million produced during the first three quarters of last year. As we’ve discussed in recent quarters, the industry has gone through a dynamic period over the past 12 months. The same can be said about the broader food segment and consumer staples stocks in general. The continuous change across the food industry is unlikely to cease in the near term. For example, you’ve likely heard about GLP-1 medications and the potential impact on both the future eating and spending habits of consumers. We believe Vital Farms is well positioned as a healthy protein and at the core of a healthy diet.

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Q&A Session

Moving more specifically to the egg category, as you’ll recall, our operating plan anticipated what ended up occurring in the industry over the past year. We saw supply shortages impact the price of conventional eggs, and as supply of them has returned to the market and things have gotten back to normal, we’re now in a period of price compression. Looking specifically at the data in the track channels, during the 13 weeks ended September 24, 2023, the egg category experienced a retail dollar decline of over 20%. Additionally, the category saw unit volumes compressed by 1% during that same timeframe. When compared to the same industry data during the same period, Vital Farms grew retail dollar sales by over 21% and our unit volumes expanded by about 5%.

Our dollar share is now well over 8% of the total egg category. We believe our performance offers evidence that our brand resonates with consumers irrespective of what might be happening across the category at any given time. We sold more units than we did at the same point last year, which has not been the case for the egg category across retail overall. Our brand commands premium pricing, which allows us to maintain healthy margins with less variability than some others in the industry. Our supply chain saw minimal disruption in the face of avian influenza while others ran into challenges, which is a result of thoughtful planning, a diversified supply base, our incredible crew members, and the strong relationships we’ve built with our farmers over several years.

While at present, the industry appears to have largely recovered from the latest bout of avian influenza, there are issues that are likely to persist. The cost to produce eggs is higher than it was just a few years ago and our operating plan assumes this will remain the case in the near term. There may be a return of avian influenza which we have proven we can navigate. We believe we’re well positioned to effectively manage through any future changes in the operating environment and have solid plans in place to propel our continued rapid growth, which we have fully incorporated in the guidance we’re providing today. Let me conclude by reiterating that we remain focused on driving long term, positive outcomes for each of our stakeholders including our stockholders.

This has been the goal of our business from the start, and we have been intentional about the choices we have made over the past several years to drive towards this goal. We believe the decisions we make every day fully consider each of our stakeholders which contributes to our enduring success and provides a competitive advantage. As we outlined at our recent analyst day, we have great confidence in the trajectory of our business. This includes our forecast to achieve $1 billion in net revenue by 2027 while producing a gross margin of at least 35% and adjusted EBITDA margin between 12% and 14% over that same timeframe. We have demonstrated the ability to reach or exceed both our financial forecasts and external expectations in our 3 plus years as a public company.

We will continue to focus on doing what we say we are going to do. We plan to achieve these goals by gaining new retail partners and expanding the depth of distribution at our current retail partners. We plan to further increase our household penetration through strategic marketing spent gaining new customers and driving higher spend by the households who are Vital Farms customers. Finally, we plan to support this higher demand by strengthening our supply chain through attracting new farmers while enhancing our packaging and processing capability. And now, I’m happy to hand the call over to our Chief Sales Officer, Pete Pappas, who’ll provide some context around the relationship-based focus of our sales team here at Vital Farms.

Pete Pappas: Thank you, Russell, and good morning, everyone. Our brand is an extension of Vital Farms’ purpose and our consumers, food service and retail partners choose us because they know we are committed to improving the lives of people, animals, and the planet through food. I want to talk a bit about what makes Vital Farms different from others in the industry. We have built a premium brand that is based on trust, which also applies to our retail partners. Through long-term deliberate efforts, we have built strong relationships with our retail partners. This strategy which focuses on collaboration and transparency has helped us differentiate our offering, gain shelf space in recent years, and has laid the groundwork for future gains, which we illustrated in our recent Analyst Day.

One of the ways we partner with retailers is by applying a category-first approach. This is prevalent in other parts of the store and across retail, but it’s new for the egg set. And it’s one example of our differentiated approach to building strong customer relationships. Category-first means we work directly with our retail partners to provide solutions on how they can increases the sales and margin performance across the entire egg category. Alignment on making decisions that drive category growth is not a strategy shared by everyone in the industry. In time, as we’ve re-demonstrated our willingness to look at the business from a macro as well as micro perspective, we gain trust. We also consistently prove that our products outperform many in the set and as a result, we gain additional distribution.