Vital Farms Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 11 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Vital Farms First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand over the conference to your speaker today, Matt Seiler, Vice President of Investor Relations.

Operator

Matt, please go ahead.

Speaker 1

Thank you. Good morning, and welcome to Vital Farms' Q1 2023 earnings conference call and webcast. I'm joined on today's call by Russell Diaz Conteco, President and Chief Executive Officer Ivo Vrita, Chief Financial Officer and Catherine McKeon, our Chief Marketing Officer. By now, everyone should have access to the company's Q1 2023 earnings press release issued this morning. This is available on the Investor Relations of Vital Farms' website at investors.

Speaker 1

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 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 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 a reconciliation of adjusted EBITDA and adjusted EBITDA margin to the respective most comparable measures prepared in accordance with GAAP.

Speaker 1

And now I'd like to turn the call over to Russell Diaz Canseco, President and Chief Executive Officer of Vital Farms.

Speaker 2

Thanks, Matt. Good morning, and thanks, everyone, for your time today. I'm going to start by sharing updates on how we delivered on our commitments all of our stakeholders during the Q1, Katherine will provide an update on how our brand continues to resonate with consumers. Finally, I'm happy to introduce our new Chief Financial Officer, Tilo Vrida, who will provide more depth on our quarterly results and our annual guidance before we take your questions. It was a great Q1.

Speaker 2

We achieved 119 point $2,000,000 in net revenue, which represents the highest quarterly result in the history of Vital Farms. It reflects a 54.7% increase from the prior year period and was driven by volume growth of 26%. Our sales and marketing teams continue their efficient execution despite the dislocations in the marketplace. Our gross margin expanded by over 700 basis points to almost 36%, which is a testament to the work of each stakeholder throughout our supply chain. Finally, we had a record adjusted EBITDA of about $14,000,000 up significantly versus last year, And we achieved an adjusted EBITDA margin of 11.6%.

Speaker 2

I think it would be helpful to provide some context on the egg industry As we continue to deal with the ramifications of avian influenza in the marketplace, the industry is still experiencing significant price inflation, which is illustrated in the data. Looking at the 13 weeks ended March 26, 2023, the egg category saw retail dollar growth of about 65%, due mostly to price inflation of conventional eggs. Retail volume in the category saw a 6% decline, which accelerated relative to the flat performance the industry experienced over the prior two quarters. As to an update on avian influenza, The size of the Lang flock in the United States has begun its recovery as we had expected, but remained below its average size in recent years during the Q1. We continue to operate with the assumption that the egg supply in the United States will continue to expand as the year progresses, as the size of the U.

Speaker 2

S. Laying block recovers, barring another outbreak. In terms of our performance, our retail volume grew at over 12% during the 13 weeks ended March 26, 2023, which was well ahead of the category decline. Our volume share expanded by over 50 basis points compared to the same period last year. Additionally, the elasticities we experienced at retail during the Q1 were in line with our expectations.

Speaker 2

Demand for Vital Farms products remains robust. We are reiterating our fiscal year 2023 guidance As Tilo will expand upon shortly, which we think is appropriate at this early stage in what will certainly be a dynamic year in the marketplace. Our focus will remain grounded in driving long term positive outcomes for each of our stakeholders. We've been intentional about the choices we've made over the past several years to build our business with this as our primary goal. We believe the many decisions we make each day fully consider each of our stakeholders, which contributes to our enduring success.

Speaker 2

We will maintain our balanced long term stakeholder focus regardless of what is going on in the external environment. We've demonstrated that we can grow through and following the pandemic. On an annual basis, our net revenue CAGR is 37%, Dating all the way back to my arrival in 2014, without a negative year over year revenue growth rate as a public company in any quarter, We've guided for at least 25% net revenue growth again this year on top of close to 40% net revenue growth in 2022. And we expect volume growth to play a meaningful part in addition to the impact of price increases. We have multiple proof points that demonstrate our ability to effectively manage our business through changes in pricing and inflationary volatility.

Speaker 2

We have worked with our farmers to help them navigate a more challenging operating environment and are paying them more for the hard work they do daily. Despite the higher cost of Vital Farms, we're planning on better gross margin performance in 2023 compared to 2022. We have improved our processes around both inbound and outbound freight. Over the past year, we were able to leverage operational capabilities of our 3rd party logistics providers to deliver significant value in terms of cost and service. The effort of our crew members to manage those stakeholder relationships resulted in better truckload utilization and lower contracted shipping rates.

Speaker 2

We completed in April 2022 an expansion of Egg Central Station, our world class egg washing and packing facility on time and on budget and are now in a position to support over $700,000,000 in annual revenue from egg sales. We have maintained our commitments to stakeholders Even in the context of serious industry disruptors like Avian Influenza, we have purposefully built a network of over 300 family farms that provides resilience against these types of constraints. And as a result, Avian Influenza has had a minimal impact on our business to date. I want to reiterate my confidence in our ability to operate efficiently throughout this ever changing environment. Our guidance reflects a reasonable set of assumptions about what may unfold across the economy in the second half of the year.

Speaker 2

We are in a position of strength with respect to our plans for the remainder of 2023. I'll now turn the call over to Catherine to provide an update on our brand.

Speaker 3

Thank you, Russell. As I have said in the past, I consider it a genuine privilege to tell the Vital Farms story alongside the incredible group of people on the marketing team. Our brand is an extension of Vital Farms' purpose and our consumers choose us because they believe we're backing up our commitment to improve the lives of people, animals and the planet through food. We have a strategic focus on raising awareness and increasing household penetration that is driving results. I'm going to focus today on 3 ways we're adding new capabilities that enable us to build relationships with our growing consumer base in service of that strategy.

Speaker 3

First, we are joining culturally relevant conversations that are directly relevant Our most recent campaign was for Valentine's Day, which created a playful entry point into 2 topics that resonated with our consumers, Egg prices and inflation. We built a fully integrated campaign in less than a week that drove over 70,000,000 impressions. We continue to develop this quick turn capability and we're encouraged by the return on this initial effort. 2nd, We are beginning a new relationship with a world class breakthrough advertising creative agency named Gut. They approach advertising with bravery, courage, transparency and intuition, which we believe will fuel the growth of our brands.

Speaker 3

Over the past several years, we have effectively leveraged great brand campaigns to drive consumer awareness, including our award winning Hands Behind the Lens campaign and our most recent campaign that's running now titled Keeping It Bullshit Free. Gut has a reputation for working with bold brands like ours to break through with consumers. They're particularly effective at driving the kind of quick turn culturally relevant work that we're looking to do more. And their first campaign with us with a successful Valentine's Day activation. Finally, we continue looking for new ways to get our message in front of consumers and stay on the leading edge of advertising trends.

Speaker 3

The most recent example is working with HBO Max on a new feature for advertisers, which not only drove exposure with our target growth consumer during programs like Succession, it also generated press coverage Thank you for being a first of its kind collaboration with HBO Max. The marketing team continues to set ambitious goals, push for bold creative work and deliver. I look forward to continuing this discussion on future earnings calls. Thanks everyone for your time today. I'll now turn over to Tilo.

Speaker 4

Thank you, Catherine. Hello, everyone, and thank you for joining us today. I'm honored to serve as Vital Farms' Chief Financial Officer. And while I'm quite early in my tenure, I am impressed with the quality of the team at Vital Farms and excited about the opportunity that lies ahead for this company. With that in mind, I want to thank Beau Meissner for leaving me a house in very good order.

Speaker 4

Following, I will review our financial results for the Q1 ended March 26, 2023. I will then provide some additional color on our guidance for fiscal year 2023. As Russell mentioned earlier, we had another record quarter with net revenue of $119,200,000 an increase of 54.7% compared to the prior year period. This was driven by volume growth of 26% based on strong volume increases across both new and existing retail customers. Gross profit for the Q1 of 2023 was $42,700,000 or 35.8 percent of net revenue compared to $21,700,000 or 28.2 percent of net revenue for the Q1 of 2022.

Speaker 4

The change in gross profit was primarily driven by higher sales. The 760 basis point gross margin gain benefited from increased pricing across our portfolio, Partially offset by a few headwinds, including higher input costs that includes higher commodity prices across our Shell, Ag and Butter businesses And higher packaging costs. SG and A expenses for the Q1 were $23,900,000 or 20.1 percent of net revenue compared to $17,600,000 or 22.9 percent of net revenue in the Q1 last year. The increase in SG and 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 Q1 were $7,800,000 or 6.6 percent of net revenue relative to $8,200,000 10.6% of net revenue in the Q1 of 2022.

Speaker 4

The decrease in shipping and distribution expenses was driven by a decline in line haul rates And better truckload utilization, which was partially offset by higher volumes. Adjusted EBITDA for the Q1 was $13,900,000 Or 11.6 percent of net revenue compared to $500,000 or 0.7 percent of net revenue for the Q1 of 2022. Next, an update on our capital structure. As of March 26, 2023, we had total cash, Cash equivalents and marketable securities of $83,100,000 and we have no debt outstanding. For the full fiscal year 2023, We are maintaining our guidance of net revenue of more than $450,000,000 and adjusted EBITDA of more than $30,000,000 As previously guided, we continue to expect stronger year over year net revenue growth in the first half of the year, primarily due to the carryover of our May 2022 pricing increase.

Speaker 4

Furthermore, we continue to expect gross margin in the first half of the year to be stronger than the second half, Primarily due to fewer promotions on premium eggs and stronger breaker prices during the Q1. Additionally, We assume ag industry supply and demand will get closer to more balanced levels later in the year. We are also planning slower volume growth in the back half due to tougher comparisons because of industry shortages in Q4 2022. Within SG and A, we continue to anticipate higher marketing spending in the second half of the year compared to First half. Lastly, we're still planning for fiscal year 2023 capital expenditures of between $25,000,000 $30,000,000 assuming no unanticipated supply chain challenges.

Speaker 4

Thanks for your time today and interest in Vital Farms. With that, we will now be happy to take your questions.

Operator

Thank you. At this time, we will conduct a question and answer session. Our first question comes from Adam Samuelson at Goldman Sachs.

Speaker 5

Yes. Thank you. Good morning, everyone.

Speaker 2

Hey, Adam. Hey, Adam.

Speaker 5

Hi. So I appreciate in the quarter, the end market strength and kind of the tailwinds that you have from price increases and still a tight constrained egg price environment. I know it's been only a couple of weeks, but there's been a pretty dramatic change in the wholesale ag market since Easter. Starting to see some of that on shelf, but it's still early days. But Russell, Thilo, any kind of color you can provide about what how you think about The stickiness of your pricing, kind of consumer switching back into lower price conventional eggs as those prices fall and Changes in sales velocity and if we don't have this high price egg shortage environment that we saw for much of the second half of twenty twenty three or twenty twenty two?

Speaker 2

Yes, appreciate that. I appreciate that. I'm going to let Tilo dig into some of the details, if he's become Very well versed in some of the dynamics here. But the headline is, as you well know, we're not competing in the commodity ag market. And Our experience is that our consumers aren't typically cross shopping the most expensive eggs in the shelf with the least expensive eggs on the shelf.

Speaker 2

That said, we certainly have predicted and are seeing what you're seeing in terms of a return to a more typical Supply balance in the rest of the market. And so that's not a surprise to us. And I don't think It changes in any way our sense of how the rest of the year can play out. Tilo, do you want to add some color there?

Speaker 6

Yes. Maybe just to reiterate, right, we provided the guidance at the beginning of the year that we saw in first half of the year would be stronger than second half of the year, that growth rates were stronger first half of the year than second half. And that reflects that we expect the environment to normalize a bit. We had a very strong Q1, obviously. And as we go through the year, the environment will likely change, And that's reflected in our guidance.

Speaker 6

But as Vasu said, our consumer tends to be A bit more immune to price gaps, a bit more makes decisions not based on price, but makes the purchase Based on what the brand stands for, what the brand value is. And with that, we feel confident about the environment.

Speaker 5

Okay. Now that's all very helpful. So maybe if I could ask you a different way. As you think about where you sit today versus a year ago and Especially as we think about where the second half looks to be versus second half last year, how much can you Frame the gains in distribution that you have in terms of the stores, the number of placements, the items per door, just to think about some of the built in kind of Growth from distribution expansion that you might have kind of locked in incremental in 2023 versus 2022?

Speaker 6

Yes. In the Q1, we had 26% volume growth and New distribution was the smaller part of that volume growth. The growth really comes from getting new SKUs On shelf with existing customers, increasing the velocity with existing consumers, that is where our where the majority of our growth came from. Distribution is obviously part of our growth story and will continue to be part of the growth story for this year and for years to come. I think there's still plenty of white space for us to go after.

Speaker 6

And I think the pricing environment will not change that outlook. We're gaining new doors not because we are competitively priced. We're gaining new doors because the brand stands for something. And it delivers value to consumers and delivers value to retailers.

Speaker 5

Okay. That's all very helpful color. I'll pass it on. Thank you.

Operator

Please hold for our next question.

Speaker 2

Thank you, Adam.

Operator

Our next question comes from Pamela Kaufman at Morgan Stanley.

Speaker 7

Hi, good morning and congrats on the quarter.

Speaker 2

Hey, Pam. Thank you.

Speaker 7

So just given the strong results in Q1, I was hoping you could Explain why you're maintaining your top line and EBITDA outlook for the year. Your revenue in Q1, the growth is Close to half of the implied growth for the year and EBITDA is also close to half of your full year EBITDA guidance. So is your guidance just conservative or are there factors making you more cautious on the balance of the year?

Speaker 6

Thanks for the question. I would say there are really 2 factors to us maintaining the guidance. First one is, As we said in the prepared remarks, it's going to be a dynamic environment this year, right? We are seeing The changes in egg prices after the end of the Q1, there's the uncertainty about What the U. S.

Speaker 6

Economy will do. And while we remain confident in the strength of our consumer, I think it is prudent for us to not charge out of the gates and Aggressively changed how we view the rest of the year. So far, the year is playing out similar to what we have planned at the beginning of the year, And we are sticking with that. The other part is, I'm in the seat now for, I think, 7 weeks. And before I take up guidance for us or propose to the company that we take up guidance, this is not just my decision, I just want to become a bit more comfortable with how the company operates.

Speaker 6

I haven't met any investors yet. And so I just want to give myself a bit more time to understand The business to understand the dynamics in the business and buy myself a bit more time before we make a commitment To increase our guidance and deliver a high number for the year. If we take up guidance, we want to make sure we can deliver it. We are very sure that we can deliver the guidance that we have outlined now. And yes, Q1 was a fantastic quarter.

Speaker 6

We did have some benefits From AI that will probably fall away for the rest of the year. We hope it does because AI is not good for the industry overall. And all that plays into this dynamic environment that we've talked about. So we just want to make sure we have a better handle. And I personally want to make I've got a handle for the full year before we make changes to the guidance.

Speaker 7

Okay. Yes, understood. That makes a lot of sense. And then just a question on sales growth this quarter. Typically, your sales growth matches your retail takeaway pretty closely.

Speaker 7

Think it was up around 40% in the period. So were there any shipment timing shifts or other dynamics to consider that impacted Q1 and will come out of future periods.

Speaker 6

Yes. I think what we've seen, Pamela, is Retailers might have stocked up on inventory ahead of Easter. So there might have been a bit of timing dislocation there. But the other thing to consider is also that the scanner data for us only accounts For part of what we are doing, right? We have a foodservice business, which actually grew rapidly during the quarter.

Speaker 6

That's volume that you don't see in the scanner data. And we had a mix shift, Right. Consumers are buying more 18 count cartons rather than 12 count cartons. So there's volume growth there that doesn't necessarily show up in unit data that you see in this kind of data.

Speaker 7

Okay. Thank you.

Speaker 6

Thanks, ma'am.

Operator

Please standby for our next question. Our next question comes from Cody Ross at UBS.

Speaker 8

Good morning. Thank you for taking our questions. I want to piggyback on Pam's questions A little bit, come at it from a little bit of a different angle. Normally, your 1Q sales dollars are the low point of the year and they build sequentially. So you delivered $119,000,000 in the Q1.

Speaker 8

If you run rate that, it would suggest at least $480,000,000 in sales, But I know you talked about why you want to hold guidance right now. Can you just help us understand and quantify how much of the 1Q sales growth or sales dollars In the Q1, we're transitory in nature and perhaps maybe give us a little bit of an idea of how to think about the cadence for the rest of the year Because like I said, normally you build throughout the year.

Speaker 6

Hey, Cory, let me start with the cadence throughout the year. Just a reminder, what we've been saying since the beginning of the year was that we think the first half will be Higher growth in the second half. And there are really two factors at play there. 1 is we did have a Artificial upside, if you want, from Avian Influenza in the Q1. We also had a bit of upside Q4 last year, right?

Speaker 6

So as you think Through lapping, we certainly have much more challenging lapping in the second half of the year. And we have this Bruce from Avian Influenza in the Q1. The benefit that we think we have from Avian Influenza 1st quarter was Probably high single digit, low double digit volume benefit, plus a few extra points From a pricing environment that was higher than what we would have normally expected. So that's how I would think about it.

Speaker 9

That's really helpful. Really appreciate it.

Speaker 8

And then I just want to talk about your gross margin EBITDA, because I think you previously guided your gross margin expansion in the 150 basis points to 170 basis points for the year. Just given the magnitude of the gross margin in the quarter, how should we think about your expectations for gross margin now for the rest of the year? And how that impacts your thoughts on EBITDA? Thank you.

Speaker 6

Yes. Gross margin is similar The overall revenue growth guidance, gross margin, we had expected from since the beginning of the year To be higher first half than second half of the year. There's probably going to be a step down as we go through the year. And I would not expect that the results that we had in Q1 that they will repeat. As the diesel environment and the supply environment, I think, gets back to a more normalized balance, There might be some additional comps that we will incur.

Speaker 6

And with that, our gross margin We'll probably not stay at the current level.

Speaker 8

Thank you. I'll pass it on.

Speaker 6

Thanks, Cody.

Operator

Please stand by for our next question. Our next question comes from Matt McGinley from Needham.

Speaker 2

Thank you. Good morning. My first question is on the shipping and distribution cost. You noted the improvements in inbound freight that Shipping and distro overall had about a 4 point improvement in rate. How much of that was driven by network and efficiency improvements relative to I should Compared to declining fuel costs in the quarter, because I think the one would clearly be sticky and the other obviously would float with the commodity costs.

Speaker 6

Yes. I would say it's a bit of both. Rates certainly helped us out. But As our volume grows, we are able to ship more efficiently. We can fill trucks more than we have in the past, and so That drives benefits.

Speaker 6

And then the relationship on both outbound and inbound freight, the new contractual relationships that we have, They've just allowed us to negotiate better rates and distribute our the outbound freight more efficiently than we have in the past.

Speaker 2

Great. And on the distribution gains, maybe this is more of a theoretical one, but for years you've made gains in retail distribution in the number of items that are And compared to the commodity egg shell egg producers, you took less price over the last year than they would have, which on the margin Might have provided less of an incentive for a merchant to take new distribution or to carry more items. As those commodity egg prices begin to drop at retail, are you seeing more opportunity for As merchants try to maintain those category dollars, which I think frankly they will find difficulty in doing without carrying more Branded or premium products like you produce, like a big picture, I mean, with egg prices coming down, do you feel like there's a more of an opportunity for distribution gains in both Breadth and depth this year. Yes. Thanks for that.

Speaker 2

It's Russell. I'd offer a couple of thoughts there. We certainly when eggs are short, everybody wants eggs. And so there were certainly plenty of opportunities for what you might describe as more transactional New distribution opportunities that may or may not have been transitory. We don't make it a practice of taking advantage of those in the same way that we don't Take advantage of the opportunity to raise prices above what makes sense for us long term because we're building this to be a long term brand.

Speaker 2

And A big part of that is long term, sort of value added relationships, consultative relationships with our retail partners. So Well, what you described may impact the truth, the reality is that we have a very intentional multiyear growth strategy with our retail partners That isn't clearly affected by short term disruptions or variations in supply or pricing dynamics For the rest of the market, our goal is to be the right partner to them in good times and in bad, the right partner to them in inflationary times and not, The right partner for them in times of company and in times of shortage. And so we don't expect that to change this year. Great. Thank you very much.

Operator

Please stand by for our next question. Our next question comes from Robert Dickerson at Jefferies.

Speaker 9

Great. Thanks so much. Russell, maybe this one might be for you. So clearly, why the question here is kind of why is guidance is not being raised. And I'm sure kind of maybe a thought process is So we kind of feeling peak because you've got all this kind of maybe one time demand that's come through via Avian.

Speaker 9

I kind of want to give you an opportunity to maybe talk about As you think over the next 12 months, let's say, given the bump that you've got in ABN, right, which is Clearly, there's a need for supply, but then there's also flow through on the demand side. How do you kind of Tweak the strategy in any way to potentially be able to now capture more of that trial and repeat, right? Because As we said before, like part of the strategy is to increase distribution. I mean, the big strategy is to get trial and repeat going forward to build the brand. I know you've had some temporary lift in trial.

Speaker 9

So like as you think through the back half of the year, like egg prices come down a little bit, Is there an opportunity to maybe like promote a little bit more or like you said marketing going up in the back half of the year? Is there an opportunity to kind of Maybe reinvest back some of the upside that you've already experienced to be able to continue the repeat off of the bump in trial, Put it that way.

Speaker 2

Great. Thanks so much, Rob. And you know us well, and so there's a lot of great In that question, you're right. If you look at over the last few years, we've presented we've been presented with a few Time periods where we've had sort of outsized growth, transitory growth that has brought us a bunch of trial That maybe we hadn't planned on or that we didn't drive directly with our great marketing and promotional efforts. And we've been pretty darn good at retaining those People who try us for the first time and moving them through the continuum from trial to repeat and eventually to loyalty.

Speaker 2

And so it would certainly be consistent with our pattern that we'd hold on to some of those new households that we Picked up even if the initial trial was generated by a shortage in the market. We saw the exact same thing happen in the stock up period in 2020 When we sold a lot more eggs than we might have otherwise expected to and we retained a bunch of new households. So I think that's a very fair assertion. It wouldn't surprise me to see that Happened again this time around. Our approach to marketing spend, our approach to promotional spend, Again, it's very much driven in that long term strategy of building healthy growth, Healthy partnerships with retailers.

Speaker 2

So, I wouldn't necessarily think about a short term tweak to that strategy based on whether we had a great Quarter to say have a different change in our stance toward marketing and promotions, You better believe that we're continuing to focus on attracting and retaining the right households, attracting and retaining the right Points of distribution, and that strategy seems to be working pretty well for us in good times and bad.

Speaker 9

Yes. And maybe just a quick follow-up on that question. I mean, look, egg prices come down, It's hard for me to imagine that someone said, hey, I was buying traditional eggs. I was buying a store brand kind of lower value egg. And then there were some shortage.

Speaker 9

I mean, for the past year, I walked into a grocery store, it wasn't as if the egg shelf was empty and you were the only option, right? Consumers still had a decent option. And then they just jumped all the way up to the pass through price point. Now prices come down, are they going to jump all the way back down? So like Maybe just a quick comment on kind of how you think kind of consumer behavior could change as those egg prices come down, like Some might trade back down, but so far what you've seen in the data set, like would you Expect there to be kind of a material expected step down due to trade down As you get through the year or I mean assuming the economic backdrop stays the same?

Speaker 9

And then a quick follow-up.

Speaker 2

Yes, that's a big question and certainly one that I'm sure is on

Speaker 4

a lot of people's

Speaker 2

minds Across lots of categories, right? Well, if the economy is headed to a tough place in the back half of the year and maybe unemployment is going to go up and All these headwinds to people buying anything, might they want a cheaper version of that thing. So I point out a couple of things with regard to what we experienced in Q1 And then I'd point more broadly to what we think we would expect in a time of challenged economic environment. With regard to Q1, Yes. I mean, I think we've been pretty clear some portion of the growth in Q1, looking going back to Cody's question about normally it's this pattern and Why are you suggesting it's not going to be that pattern?

Speaker 2

Yes, there was definitely some additional growth in Q1 that was related to a shortage of other kinds of eggs in the shell. That said, we feel very good about the growth we saw In addition to that, maybe a little extra that we got in Q1. So the first thing I'd say is, it's not like we got to hold on to a bunch of people That bought us in Q1 for the first time because they couldn't find another egg. And if we don't, then we're not going to grow. It's quite the opposite.

Speaker 2

We feel great about the underlying business. We feel great about the strategy we're running both in terms of marketing and sales activities in order to continue to build on our long term I go back to other times when consumers have been economically challenged. We'll go back to Some data, not necessarily our individual company data, but other data on premium brands during the Great Recession, And more recently as inflation has crept in, what you see is a bunch of trends which add up to actually is still very positive story for us. There's the trend of shifting from away from home to at home. There's the trend of expensive proteins shifting to more affordable proteins.

Speaker 2

And while we are an expensive premium egg, we're an expensive premium egg and eggs are a very affordable protein. It's a great food and it's still super affordable as the core of a healthy meal. And so the net of all that we think and we've experienced historically It's actually a tailwind for us and we have no reason to think that won't be the case this year.

Speaker 9

All right. Awesome. Fair enough. And then One last question. Again, Russell, I feel like kind of the conversation around Other kind of categories and acquisitive potentials kind of died down a little bit, but I don't necessarily think that's Clearly off the table.

Speaker 9

So maybe any just kind of update or commentary you're willing to provide, just kind of how you're thinking about that in the current environment?

Speaker 2

Yes, I appreciate that, Rob. It's a very fair question. You've been with us the whole time and you know we've been working on this. It's certainly An area of focus for us. What I'd say as we've said historically is like everything else we do, we're very intentional with our approach to this And maybe especially in a time of, as we've been talking about, economic uncertainty, as we've been talking about a rising interest rate, rising inflation environment, Those are certainly factors in our thinking both about category and timing and strategy.

Speaker 2

And so look, we're really excited to Have a very good focus on a very healthy by growth and strongly performing egg and butter business. And the new thing, if and when we have some exciting news to share, will be the product of a very appropriate Thoughtful appropriately thoughtful process, especially in light of economic uncertainty all around us.

Speaker 1

Great. Thanks, Russell. Appreciate it.

Operator

Our next question comes from Matt Smith at Stifel.

Speaker 8

Hi, good morning.

Speaker 2

Hey, Matt.

Speaker 8

Let me ask a follow-up question. Hello. Can you hear me?

Speaker 6

Yes, we hear it fine. Thanks. Yes.

Speaker 2

Sure.

Speaker 8

I want to ask a follow-up question to the AI benefit to distribution As commodity ag supply was disruption, but I want to approach it from a slightly different angle. Can you talk about if retailers are viewing the profit Potential of the egg category differently given the strong performance from both your brand and overall specialty eggs. The incremental SKU existing retailers has been a significant opportunity for your growth, especially in the conventional channel. And Are you in a better position to pursue that today with retailers perhaps more accepting to give you more facings given the profit you bring to the category overall?

Speaker 2

Yes, great question. I think we are, but I wouldn't refer to it As maybe a bounce back or echo from the very recent sort of transitory supply shock that we've seen over the last 6 months. I think what we try to do and I learned that from Pete Pappas, especially our sales leader, is that Our goal, our job is to be the very best partner we can be to our retail customers, to our retail stakeholders. And that looks like a lot of different things. That looks like having fast growing having a fast growing brand that we're investing meaningfully behind.

Speaker 2

That looks like having great unit economics for them and helping them achieve their goals and different retailers have different goals. That looks like delivering, right? That looks like being super transparent in a time of disrupted supply about what we can and can't do And not going after the distribution that they may support, but we may not be able to supply.

Speaker 6

Okay. Yes. So I think where Russell was going with this one is, our retail customers, they pick us For more than just unit economics, there's a long term growth story there. There is a long term brand story there. And So the environment during AI, I don't think AI was a reason for us to gain distribution.

Speaker 6

We are gaining distribution because we have a brand that stands. So for something, we bring a certain consumer profile generally to the store. And that is the reason why our retail stakeholders work with us.

Speaker 8

Okay. Thank you for that. I'll leave it there and pass it on.

Operator

Please hold for our next question. Our next question comes from Ben Klieve at Lake Street Capital Markets.

Speaker 10

All right. Thanks for taking my questions and congratulations on a great quarter. My first question, Tilo, you noted strength in the foodservice category. I'm wondering if you can And if foodservice growth outpaced retail in the quarter?

Speaker 6

Yes. Foodservice is Has really been a focus for us for several quarters now, and we have seen very significant gains there. I think where Foodservice is working for us is it allows us to work With specific partners that value the purpose and what the brand stands for. It also allows us to work with partners that have slightly different product needs than what a retail customer has, right? Majority of our eggs in retail, we're selling large eggs.

Speaker 6

Foodservice often is an opportunity for us to sell some Automated voice messaging system. Okay. Ben, I hope you're still there.

Speaker 10

Yes, that was weird. Sorry, I'm still here.

Speaker 6

Sorry, modern technology. Yes, so foodservice allows us to sell some eggs that don't necessarily make it into the retail channel. And so With this different customer profile, if you want, it has allowed us to grow foodservice in triple digit numbers. And so it's been a not insignificant contributor to our growth this quarter.

Speaker 10

Very helpful. Thank you. And one other question kind of around the macro environment that everybody touched on. I'm wondering if you can comment

Speaker 2

On how

Speaker 10

the stage in the Shell egg cycle has Affected your relationships with farmer partners, both in your kind of ability to retain those farmer Partners here as Shell egg prices are coming down. And then also how you're thinking about onboarding additional Partners here kind of for the balance of the year, is that changing at all amid where we are in the cycle?

Speaker 2

Great question. Thanks Russell. I'll I'll speak about that. So I'd start by saying that We work really hard, not unlike the discussion about retail partnerships, to be the partner of choice with Our small family farm partners and that looks like a lot of things including paying them appropriately for the great work they do, Supporting them technically and in other ways. And so I don't think that the recent changes affect that positively or negatively.

Speaker 2

That said, when egg prices for commodity eggs are highly elevated, That can certainly be appealing to some farmers who might be considering who they want to partner with. And I'm pleased to say that even when the Looked very appealing in the farming community. We were still a partner of choice to them. So I don't see any change in our ability to attract and retain the very best farmer partners in the industry. And That certainly shouldn't be an issue for us going forward.

Speaker 10

Very good. Well, I appreciate the comments on both of those

Operator

Thank you for your questions. At this time, I would like to turn it over to Matt Seiler, VP of Investor Relations, for closing remarks.

Speaker 1

Thanks everybody for your time and interest in Vital Farms today. May the 4th be with you.

Operator

Thank you for your participation in today's

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Earnings Conference Call
Vital Farms Q1 2023
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