Vital Farms Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 11 speakers on the call.

Operator

Thank you for standing by. My name is Kathleen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vital Farms Incorporated Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. And now, I would like to turn the call over to Anthony Bucallo, Vice President of Investor Relations. Please go ahead.

Speaker 1

Good morning, and welcome to Vital Farms' 2nd quarter 2024 earnings conference call and webcast. I am Tony Bucolo, VP of Investor Relations, and I am joined on the call today by Russell Diaz Canseco, President and Chief Executive Officer and Tilo Vreda, Chief Financial Officer. By now, everyone should have access to the company's Q2 2024 earnings press release issued this morning. This is available on the Investor Relations section of Vital Farms' website at investors. Vitalfarms.com.

Speaker 1

Throughout this call, management may make forward looking statements within the meaning of 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 June 30, 2024, filed with the SEC today as well as our 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.

Speaker 1

Please refer to our earnings release for a reconciliation of adjusted EBITDA and adjusted EBITDA margin to their most comparable measures prepared in accordance with GAAP. With that, I will turn the call over to Russell Diaz Canseco, President and Chief Executive Officer of Vital Farms.

Speaker 2

Good morning and thank you for your time today. I'm pleased to announce that our momentum from the Q1 carried into the second. We delivered another great set of top to bottom results. Our performance was driven by growing demand for our premium products and excellent execution from the great people working across Vital Farms. I'd like to thank all of our crew members throughout the organization for these really terrific results.

Speaker 2

Today, I'll start with our key financial headlines and then shift to new developments. I'll then hand it over to Tilo, and he will provide more detail on our Q2 financials and updated guidance for fiscal year 2024. With our strong start to the year, I'm happy to report that we're in a great position to both raise our guidance and accelerate investment in the long term success of our business. We continue to expand our farm network and we're adding a new egg washing and processing facility in Seymour, Indiana. Additionally, we will be stepping up brand marketing investment in the back half of the year, driving our message to consumers as we push to reach 30,000,000 households by 2027.

Speaker 2

Let's get right to the key financial headlines. We had another excellent top line performance with record second quarter net revenue of $147,400,000 up 38.5%. You might remember that we guided for 300 basis points of tailwind for sales in the quarter. This was due to our lapping some negative product ordering dislocations related to Avian Influenza last year. We did enjoy some benefit from this comparison.

Speaker 2

However, we still performed well above our expectations. In the first half of twenty twenty four, our sales grew 31% on top of a first half twenty twenty three comparison of 41%. We delivered another strong gross margin performance this quarter, boosted by sales growth, productivity gains, selective pricing, efficient supply chain execution and a more benign commodity cost environment, gross margin improved 3 62 basis points to 39.1 percent in the quarter and improved 381 basis points to 39.5 percent for the first half. In addition to our strong gross margin performance, we delivered $23,300,000 of adjusted EBITDA, up 105% versus the Q2 of 2023. Year to date, we've delivered $52,300,000 in adjusted EBITDA, up 108% from the first half of last year.

Speaker 2

Our adjusted EBITDA margin for the quarter improved to 15.8%, up 5 12 basis points from last year. Our half year adjusted EBITDA margin improved 6.56 basis points to 17.7%. Strong consumer demand helped drive our top and bottom line success this quarter. We believe we are in a virtuous cycle of higher consumer demand driving expanded distribution and expanded distribution driving further demand. We continue to build our shelf presence in stores where we're already prominent, accelerating our sales performance.

Speaker 2

Year on year, our total distribution points have increased by 19% to 4.53 in the natural channel and by 17% to 2.15% in the food channel. We still have much more room to grow by adding more items to existing shelves at locations where we already have a strong presence. Yes, I'm pleased by our strong sales, distribution and gross margin performance this quarter. I'm also thankful for all of our crew members who helped make that happen. We are well positioned to meet future consumer demand and we continue to invest to make that happen.

Speaker 2

Our brand is at the core of who we are and our brand marketing remains a powerful lever of our success. We're always looking for ways to drive brand awareness in meaningful and culturally relevant moments. This summer, with women's sports viewership on the rise, we have a new campaign that celebrates female farmers and athletes alike. We expect this campaign will deliver more than 350,000,000 advertising impressions across sports networks during games, tournaments and matches. This includes the women's Wimbledon tournament just concluded in July and the National Women's Soccer League and Ladies Professional Golf Association through the fall.

Speaker 2

We also have a few spots running during the Olympics coverage on the USA Network. Joining the women's sports conversation continues to deliver outsized results, resonating with our highly engaged and growing audience. We expect to generate $650,000,000 earned impressions through press coverage that highlights our unique campaign. Furthermore, we have good news about our supply chain this quarter. First, we're happy to announce that we're now working with more than 350 family farms within our network, up from more than 300 at the beginning of the year.

Speaker 2

Our family farmers are central to what we do in our business. We believe our ability to attract and support new farmers is a critical strength of our company. We continue to add farms to support our growth as we push toward $1,000,000,000 in revenue. Next, in June, we made the formal announcement of the location for our new egg washing and packaging facility. This 72 acre site will be in Seymour, Indiana and when finished will help launch us into our next stage of growth.

Speaker 2

We plan to break ground in 2025 and expect to begin operations there in 2027. Our world class Egg Central Station facility in Springfield, Missouri is still finding ways to improve its already impressive performance. As I remarked last quarter, we're just flat out better at getting our high quality eggs packed and shipped. With Seymour, what's most exciting for us is that the construction and operational plans for the new facility will be built upon our key learnings and successes from Springfield. This includes everything from people development to production.

Speaker 2

Additionally, we expect to have ample room to expand past our 2027 revenue goals. We expect C More will create at least 150 jobs for the local community in its first phase. When finished over the long term, we expect Seymour to support approximately 165 new family farmers and to help generate more than $350,000,000 in additional revenues. This facility will complement Springfield, which we now estimate has $800,000,000 in revenue capacity. Let me briefly elaborate on this last data point.

Speaker 2

Since our ECS Springfield expansion in 2022, we've discussed a revenue capacity of $700,000,000 for this facility. However, we want to give you an up to date estimate. Since 2022, the price mix of our portfolio has evolved and we've become significantly more efficient. We estimate that this combination has given us at least $100,000,000 in estimated additional revenue capacity since our last estimate in 2022. Finally, we are in the planning stages of building a handful of farms ourselves.

Speaker 2

This year, we have purchased $3,000,000 in farmland in Indiana within a short distance of our planned facility in Seymour. This land is where we plan to build these new farms. When up and running, these starter farms will serve 2 purposes. First, building and running a small number of our farms ourselves will allow us to test new ideas and processes without imposing on our existing family farm system. We can then share best practices and learnings across our family farm network.

Speaker 2

2nd, over time, we plan to make these farms available for sale to family farmers looking to join our network. We anticipate these farms will be fully operational, creating a turnkey solution for buyers. These farms will provide the potential for immediate cash flow as well as mitigation of much of the initial startup risk for new farmers and their families. Note that anticipated project costs have been included in our capital expenditure Before I hand it over to Tilo, I want to share a quick update on Butter. As you recall, we relaunched our Butter line in April.

Speaker 2

This was after an extensive global search for a supply source, which we believe best represented our Vital Farms philosophy and mission. We chose a supplier in Ireland as our primary source, and we are now working closely with family farms there to deliver a delicious creamy product that's 90% grass fed. Our choice to import from Ireland is consistent with our commitment to animal welfare and family farm support. Here in the U. S, we reinforced the brand with attractive new packaging, giving the product a premium brand halo that stands out to consumers on the shelf.

Speaker 2

Although it's still early days, I'm happy to report that we're seeing significant progress since the relaunch. Our overall butter business is down so far this year as we're lapping the continuation of our tub butter SKU late last year. However, we expect to return to growth in the second half of the year. Our stick butter business is growing and our velocities have picked up materially where we are present. The future looks good for butter and I'm happy with what we've accomplished in such a short period.

Speaker 2

My advice is to go out and find some for your fridge. We keep it in our house, and it's terrific. I'd like to wrap up with just a few comments. We got off to a great start in the Q1 and that momentum carried into the second. Our business is in great shape and I'm excited for what we've accomplished so far this year.

Speaker 2

It's been exciting to watch our growth while serving our stakeholders and delivering on our financial thinking. We will continue doing the hard work of recruiting new family farms and adding new capacity to achieve our ambitious financial goals. This expansion of capacity runs parallel with the investments we're already making in our people, brand and infrastructure. As a result, we're confident that we are well positioned to meet our updated guidance for the year and our long term financial targets beyond that. And with that, we'll now go to our CFO, kilo Vreda, for further discussion.

Speaker 3

Thank you, Russell. Hello, everyone, and thank you for joining us today. I will now review our financial results for the Q1 ended June 30, 2024, and then provide details on our updated guidance for fiscal year 2024. We followed our record Q1 results with another great performance in the Q2. Our net revenue rose to 147 point $4,000,000 up 38.5 percent versus last year.

Speaker 3

We posted 35.8% volume growth and modest price mix benefit. Consistent with our performance from the Q1, volume growth was driven by strong consumer demand and expansion at both new and existing retailers. This volume performance was in line with our mostly volume driven growth plans for this year. Gross profit for the Q2 of 20 24 rose to $57,700,000 or 39.1 percent of net revenue compared with $37,800,000 or 35.5 percent of net revenue in the Q2 of 2023. Gross profit was boosted by revenue growth, scale benefits and operational efficiencies.

Speaker 3

These factors, along with price mix benefits and lower conventional commodity and diesel costs, also contributed to higher margins. This was partially offset by an increase in the promotional rate and an increase in labor and overhead costs to keep up with our growth. SG and A expenses for the Q2 of 2024 were $33,300,000 or 22.6 percent of net revenue compared to $23,900,000 or 22.5 percent of net revenue in the Q2 of last year. The increase in SG and A this quarter was driven primarily by higher professional service expenses, employee related costs, including stock based compensation an overall increase in employee headcount, brokerage and marketing expenses and technology and software related expenses. These costs all reflected the expansion of the business.

Speaker 3

Shipping and distribution costs rose in absolute terms, but declined as a percentage of sales. Shipping and distribution expenses in the 2nd quarter rose to $7,200,000 or 4.9 percent of net revenue compared to $5,900,000 or 5.5 percent of net revenue in the Q2 of 2023. The increase in shipping and distribution distribution expense was driven by higher sales volumes, partially offset by favorable line haul and fuel rates. Net income for the Q2 2024 was $16,300,000 or $0.36 per diluted share compared to $6,700,000 or $0.15 per diluted share for the Q2 of 2023. Adjusted EBITDA for the Q2 of 2024 more than doubled to $23,600,000 or 15.8 percent of net revenue compared to $11,300,000 or 10.7 percent of net revenue for the Q2 of 2023.

Speaker 3

Now a quick update on our capital structure. Our cash, cash equivalents and investment securities increased by $35,900,000 in the Q2. And as of June 30, 2024, we had total cash, cash equivalents and marketable securities of $152,700,000 with no debt outstanding. Now looking ahead, for the full fiscal year 2024, we are now guiding to net revenue of at least $590,000,000 or at least 25% growth compared to our previous expectation of at least $575,000,000 or at least 22% growth. And adjusted EBITDA of at least $75,000,000 or at least 55% growth compared to our previous expectation of at least $70,000,000 or at least 45 percent growth.

Speaker 3

Our CapEx guidance remains unchanged at $35,500,000 Our long term guidance also remains unchanged. We are targeting $1,000,000,000 in net revenue by 20.27 with a gross margin of at least 35% and an EBITDA margin of 12% to 14%. Our updated 2024 guidance reflects a strong performance in the Q2 and good visibility on demand on commodity prices for the second half of the year. In parallel with our increased investment in our supply chain, we will continue to invest in marketing and expand our retail presence to drive awareness and deepen brand loyalty with our consumers. Given our outperformance versus our expectations in Q2, we now expect net revenue to be evenly split between the first and second half of the year.

Speaker 3

We were well above our long term 35% gross margin target in first half of the year and we expect the second half of the year to continue this trend albeit to a lesser degree. We expect adjusted EBITDA margin in the first half of the year to be higher than our adjusted EBITDA margin in the second half. The second half adjusted EBITDA margin outlook reflects our stepped up marketing investment and other investments in the future growth of Vital Farms. We continue to expect fiscal year 2024 capital expenditures in the range of $35,000,000 to $45,000,000 This includes spending on our new facility in Seymour, Indiana, the new farms that Russell mentioned and our ongoing digital transformation project. With the construction of the Seymour facility, we anticipate elevated CapEx spending for the next few years with the bulk of the spending in 20252026.

Speaker 3

We intend to fund the Seymour facility and our other projects with existing cash and operating cash flow, and we project that every dollar of CapEx investment in the new facility will generate more than $5 of annual revenue capacity, which we consider a very strong return. We continue to evaluate or monitor our capital allocation priorities and we will provide updates as necessary. Overall, our first half performance was strong and we are excited to build on this momentum for the rest of 2024 and beyond. We continue to add family farms at a great pace and we have big plans to break ground on our new facility next year. We remain focused on driving greater retail penetration and raising brand awareness to deliver our eggs to more and more households with each passing year.

Speaker 3

Thank you for your time and interest in Vital Farms today and for the confidence that you have placed in us with your investment. With that, we will now be happy to take your questions.

Operator

Thank you. We will now begin the question and answer session. And your first question comes from the line of Brian Holland of D. A. Davidson.

Operator

Please go ahead.

Speaker 4

Yes, thanks. Good morning. I wanted to ask first about the implied step down in margin in the second half than the first half, which looks like it's going from high teens to high single digits. Obviously, Tilo, I think you laid out a lot of it. But just maybe want to get a better sense for how much the marketing investment is going to be up maybe in the year and in the second half, kind of where that would put you on a relative basis to sales on an annualized basis?

Speaker 4

And maybe where you see that going forward versus where you've kind of been historically?

Speaker 3

Yes, great question, Brian. Good morning. Look, marketing investments, last year we did something similar where we concentrated marketing investments in the second half of the year. This year we are planning an even bigger spending on marketing investment second half of the year as a percent of net sales. And it's simply driven by the fact that we have this upside in the first half versus our own plans.

Speaker 3

So we have better profitability first half than what we had expected when we plan for the year. And while we have to let some of that flow to the bottom line, we also want to make sure that we make the appropriate reinvestments while we can to ensure that the growth continues and we continue delivering the upside that we have. And Russell had mentioned on the call that we've started this new advertising program around women's sports, how it connects to female farmers that we work with. There's a huge opportunity for us there. I think the viewership of women's sports is up meaningfully over time.

Speaker 3

And given the propped upside from the first half, we just figured there's an opportunity for us here to continue building awareness and going out for the household penetration that we have. Last year, we spent roughly 5% of our net sales on marketing spending. I would expect a small increase relative to that level this year. And long term, I think the 5% to 6% range is probably the right range for us right now. But we'll continue to evaluate that as we continue to grow.

Speaker 4

Appreciate the color. And then just switching gears to the new egg washing facility. Can you just for investors and Russell appreciated the update on Springfield going from $700,000,000 to $800,000,000 But just within the context of a $1,000,000,000 revenue target by 2027, Just help us understand the bridge from onboarding that facility and ramping that up. How that plays into the $1,000,000,000 What other considerations or flexibility do you have to make sure that you're from a distribution capacity standpoint supporting that? And then maybe, Thilo, just in that context, just any thoughts on kind of the CapEx components between now and starting up that facility?

Speaker 2

Thanks, Brian. Good to be with you today. So as you have learned over time, we're very intentional and planned very well in advance to make sure that we don't face the common constraints on growth here at a fast growing company. For example, we started the site selection for this plant about 2 years ago and made this announcement just in the last quarter. And that's well in advance of us opening the facility.

Speaker 2

Now we believe that we will have that facility up and running by the end of 2026 or the beginning of 2027 and that that will be well timed with our hitting our capacity in Springfield and needing to add capacity. There are other levers that we can pull for short periods of time in case, for example, we have a big upside surprise in volume. There's more space in Springfield that we could potentially leverage to temporarily add capacity if that became necessary. But we've been very deliberate in our growth and we feel pretty confident about the projections we're using that led us to the timing of C More.

Speaker 3

And Brian on your CapEx question, so the cost for the new Springfield facility, we haven't fully talked about it. I think we've talked about the revenue capacity that the new CIMA facility brings us and that we think for every dollar of CapEx that we put in, we get $5 of revenue out of it. That CapEx will be spent in 2025 and 26, the vast majority of it simply we start breaking ground first half next year. And that's when the spending really starts. Russell on the prepared remarks that talked about the starter farms that we are now starting plan for as well with our clients on that there.

Speaker 3

There will be additional CapEx that goes into those starter farms as well. I think in the 10 Q, we talked about $20,000,000 to $30,000,000 of CapEx over the next 12 months. And we'll probably continue to make progress on these data farms beyond those next 12 months. So for the next 2 years, we'll have elevated CapEx spend, elevated compared to our guidance for this year as well. But right now, we feel very good that we can fund all of that out of operating cash flow.

Speaker 3

And don't forget, we have $153,000,000 of cash on the balance sheet. So we have a very, very healthy cash cushion right now.

Speaker 4

Great. We'll leave it there. Thank you.

Operator

Your next question comes from the line of Rob Dickerson of Jefferies. Please go ahead.

Speaker 5

Great. Thanks so much.

Speaker 2

Good morning, guys. I guess just first question

Speaker 5

is, let's say, what's the primary or what was the primary driver of the nice volume performance in the quarter even relative to your solid expectations coming out of Q1, right? It seems like there was this bump. So clearly, the question now is, well, if there's increased distribution, the velocities are great and demand is driving distribution, distribution is driving demand. Then why couldn't we see a little bit more of that cut all going upside as we get through at least Q3? Thanks.

Speaker 3

Yes. Great question, Bob. Good morning. Look, I think on the Q1 call 3 months ago, we had talked about how Q1 was just having an all cylinders, ECS was operating really well, Consumer demand was strong. And I think Q2, we saw a continuation of that theme.

Speaker 3

The switch of cycle that Russell had mentioned in the prepared remarks about distribution driving demand and demand driving distribution that continues, ECS continue to operate really well. So it's really this virtual cycle that we've talked about, it continues to manifest itself. For the back half of the year, we assume that at some point in terms of ECS operating efficiency, we will regress to a mean, this very smooth operation that we had in the first half of the year. We don't necessarily expect that to continue in perpetuity. At some point, the machine will break down unexpectedly and then we'll have to fix it and do some maintenance outside of the planned cycle.

Speaker 3

And so our guidance reflects that ECS at some point will probably run into some hiccups that we just didn't see in the first half. And so we just want to make sure we don't get ahead of our skis there. Consumer demand for us continues to be strong, right? You publish Nielsen reports every 2 weeks. You see the scanner data that continues to be strong.

Speaker 3

But it is more our own cautiousness to make sure that we don't run into a situation where we promised something and then we run into an unforeseen issue at ECS that will prevent us from delivering on that.

Speaker 5

Okay. Very clear. Prudence is good. And then I guess just another kind of more tactical P and L question. Q1, the gross margin was great.

Speaker 5

Q2, the gross margin was great. And I think kind of as you put up at least the Q1 number, right, there is kind of walking everybody back a little bit just with respect to kind of go forward run rate. You've never really spoken to the business kind of getting into the high 30% gross margin and totally understand that. And I totally understand a lot of the stars that have aligned in the first half. All that said, I feel like part of the kind of conservatism as you got or you think through the year was also just around feed costs and input costs.

Speaker 5

And where we sit today, they're actually better than they were a few months ago, if I'm thinking more corn and soybeans. So maybe just a couple of comments as to the why you couldn't potentially do a gross margin and even Q3 that's similar to Q2 maybe? That's all. Thanks guys.

Speaker 3

Yes. No, good, fair question. Look, when we look at commodity costs in my estimation, Q2 was probably the biggest year over year benefit and fall off commodity costs. So the margin benefit that we get from that probably peaked in Q2. And look, I'm not in the business of forecasting commodity costs, right?

Speaker 3

If they keep moving around, who knows what happens the rest of the year. We have visibility into the costs that we'll have in Q3. We have a bit of visibility into Q4. Based on that, I would assume that Q2 was the best year over year comparison. We talked in the prepared remarks about the business starting to grow again that will put pressure on gross margin.

Speaker 3

We there's a bit of maintenance that we need to do at ECS that will flow through COGS that will hit gross margin. So that is why we are saying that we still assume that for the year will be for the backup of the year will be about our long term guidance, just not to the same degree that we had in the first half of the year.

Operator

Your next question comes from the line of Ben Klieve from Lake Street. Please go ahead.

Speaker 6

Hi. Thanks for taking my questions. Congratulations on another nice quarter here. A question about the initiative you have around Seymour. Russell, you talked about purchasing land for kind of R and D farms.

Speaker 6

And it sounds like a bit of the BD tool. I'm curious if one you could comment on the degree to which the $3,000,000 you've invested into this initiative so far represents the bulk of this initiative or if that's going to expand in any material fashion. And then if you could kind of characterize this initiative between this kind of R and D farm versus kind of a longer term business development tool, would be curious about both of those thoughts.

Speaker 2

Good morning, Ben. Thanks for being with us and appreciate the questions. Yes, I'm really excited about this initiative. So I'll talk a little bit about the purpose and the goals and then Teela can talk about kind of the capital expenditure roadmap. As we said in the remarks, there are 2 things that I believe will be meaningful to Vital Farms and all of our stakeholders coming out of this initiative.

Speaker 2

The first is that we still have a lot of innovation to try and to incorporate. We've been traveling to Europe almost annually for 10 years And they've been doing things the way we do it for a lot longer. And every time we go there, we learn and we get new ideas and we hear from them what's working. And you can't do everything at once. We want to start to implement more of what we've seen work so well over there, and we want to be able to prove to our network of small family farmers the impact on them, on the health of their birds and on their bottom lines before we ask them to sort of make that investment themselves.

Speaker 2

We're not in the habit of forcing additional CapEx on our farmers within the course of our working relationship. So that's one, which is we get to test and learn. And then the other is, as you well know, adding a farm is a long lead time exercise. It takes as much as a year to go from deciding we want more eggs a year from now and actually having a new farmer with a farm that's operating and actually producing those eggs. And sometimes the year is one issue, but there's also variability, which is another issue, because a lot of the upfront work of finding the right piece of land, getting financing from the bank, finding the right contractor to build the barn, getting in line for the import of equipment with sometimes disrupted ocean freight, etcetera, can create variability.

Speaker 2

And one of the really exciting things about having a handful of these farms right where we want them in Indiana near Seymour is that when we're ready to have farmers producing eggs in Indiana, we have 10, say, more or less farms ready to go, which frankly just puts a lot more accuracy on our estimate of the timeframe. So I think this is an exciting benefit for us and an exciting benefit for the farmers and frankly for the chickens.

Speaker 6

Yes. Thanks Russell. That was really helpful. Yes. And then Tilo, any input on the level of investment beyond the $3,000,000 would be great.

Speaker 3

Yeah. As I said before, in the Q, I think we mentioned that for the next 12 months, we plan to spend $20,000,000 to $30,000,000 on this. The $3,000,000 so far was for land purchase. Now we need to actually construct the barns and put the equipment into the barns and so on. I would assume that we'll continue to invest in this approach past the next 12 months.

Speaker 3

And so there will be continued CapEx spend here. But as Russell said, it's another way for us to ensure that we have the ex supply. We did mention in the prepared remarks that we are now working with 3 50 family farms. So since the beginning of the year, we have grown that by about 50 farms. We continue to have a very good pipeline of farmers.

Speaker 3

But we're also expanding into a new part of the country, right. We don't have any farms in Indiana right now. And this will allow us to basically prime the pump in Indiana for farms that we want to construct there. And so from our viewpoint, it's a great view it's a great way to ensure that the supply for Seymour, once we need it, will actually be in place already. The supply for Seymour once we need it will actually be in place already.

Speaker 3

Got it. Very good. All right. Well, I appreciate

Speaker 6

you both elaborating on that. Congratulations again on a great quarter and

Speaker 3

I'll get back in queue.

Speaker 2

Thanks, Matt.

Operator

Your next question comes from the line of Rob Moskow from TD Cowen. Please go ahead.

Speaker 7

Hi, thanks. Congratulations again. Russell and Tilo, I wanted to ask a little bit more for some color on how you're expanding the talent pool of the organization to handle all of this growth? What kind of headcount increases are you putting in for things like sales, supply chain, logistics, marketing? You know like running a $1,000,000,000 business is a lot different than running a $400,000,000 business.

Speaker 7

So wanted to hear about how you're prepping for that. And then secondly, for the new facility in Seymour, is it pretty much like cut and paste? Like is the facility in Missouri like what you've learned from that one? Is it pretty is it going to be like very easy to set up a similar process in Indiana? Like because I've seen in startup companies that sometimes opening up a new production line could be kind of tricky based on all kinds of things that you didn't anticipate.

Speaker 7

So that's the question.

Speaker 2

Thanks, Rob. Good morning. Great questions, because I think it is so common for companies at our stage of growth, still in hyper growth mode and looking ahead to $1,000,000,000 and beyond. It's so common for their top line to get ahead of their ability to service that top line. And you've known us for years now and hopefully you've gotten used to my refrain about planning for our capacity and capability expansion well in advance of the need, so that we don't run into those somewhat predictable roadblocks that I believe predictable is preventable.

Speaker 2

So for example, we've talked about the digital transformation effort that is currently underway to make sure that we have the right systems in place to scale from our current revenue level to $1,000,000,000 and beyond. When it comes to adding talent, one of the really cool things about Vital Farms is we really do have and a lot of people say it, we really do have a pretty darn distinct culture and we attract really outstanding crew members in every function. And in my experience, other great people like to work with teams of great people. And so we don't struggle to hire, and we're very thoughtful in the short and long run about making sure we have a talent roadmap in order to make sure that we're well ahead of the demands of the business. As for the actual numbers that we're planning, I don't think we've sort of guided to that.

Speaker 2

Maybe Tilo has some insights that he wants to share. But my commitment to you is that frankly a big part of my job is simply after setting the strategy is ensuring that we have all the resources we need to execute really well.

Speaker 7

Okay. Thanks. And just in terms of like the facility itself that you're building, like is every egg washing facility the same or are there differences

Speaker 4

to put this one in place?

Speaker 2

If you've seen our facility, you'll know not every egg washing facility is the

Speaker 7

same. Okay.

Speaker 2

But what's cool about Seymour is, it is advantaged because it benefits from the learnings of working for 7 years in Springfield. And so, yes, the basic operation, the washing, inspecting and packing of eggs is the same. The machine will be from the same manufacturer. We're well familiar with it. We've got the advantage of the ability to train up the entire new crew in our currently operating facility over time.

Speaker 2

And our Vice President of Operations, who is deeply embedded in Springfield today, is also the person overseeing the construction and standing up of the new facility. So we feel great about continuity. We feel great about our understanding how to run one of these places really well. And of course, the start up never goes perfectly as planned, but this is about as close to what we're already doing as I could imagine.

Speaker 7

Okay, great. Thank you.

Speaker 2

Thanks.

Operator

Your next question comes from the line of John Anderson of William Blair. Please go ahead.

Speaker 8

Hey, good morning, everybody. Congratulations.

Speaker 2

Thank you.

Speaker 8

My question, just one, but I guess a 2 parter. One of the questions I get asked most frequently is kind of sustainable competitive advantage or moat in the Ag business? I think investors some investors have a hard time getting their arms around that. And what I'd love to hear your kind of refreshes on is thinking around both your brand and supply chain, because it seems to me that the brand and your relationships with retailers and perhaps ability to have a greater influence and inform kind of the shelf in this category is part of the barrier for the moat. And then the supply chain in terms of your relationships with farmers, the farmer economics.

Speaker 8

But if you can tell a little bit from your perspective on that, what constitutes the moat, that would be very helpful.

Speaker 2

Thanks, John. Very fair question and one that we're not unfamiliar with. If you'd asked me that question 3 years ago, I would have somewhat flippantly said there is no moat. And arguably, there isn't one around the production of eggs. But what there is a moat around is what we think we're really differentiating and that is selling food with a level of transparency and with a level of trust in the way we do that, that's hard to come by in this country.

Speaker 2

And so and the way I would maybe prove that assertion or at least some evidence that I think indicates it is in our top 10 customers, we're not the only brand of pasture raised eggs on the shelf. And if you believe that's a commodity in need of a moat, interestingly, we have the highest price version of that kind of egg. And yet we're growing the fastest and have the highest market share year after year after year. And so you have to begin to wonder, are we selling a commodity ag inefficiently or are we perhaps doing something more than that? And you mentioned brand.

Speaker 2

It is absolutely my assertion that we have a brand that actually creates value for consumers. It's not just a pile of advertising on a commodity. We bring consumers and retailers into what we're doing and how we're doing it in a way that's fun and educational in a confusing So that would be So that would be my first thought that the moat is a way of operating and the way that you can maybe quantify that is around the brand and the value of the brand. You can see it in gross margins and you can see it in revenue growth. You also mentioned our network of farms and we have invested very thoughtfully and perhaps in an outsized way over a lot of years to develop what I believe is the network of the best farmers in this country.

Speaker 2

I think we've got really great farmers and they stay with us and we spend a lot of time and energy with them helping them be successful and helping bring them the kind of education and resources that they ask us for, because that's something that scales really well. You can hire 1 expert veterinarian to speak to a whole group of farmers rather than leaving that to them, for example. So, that's a very hard thing to replicate. And I would have said 2 years ago, well, gosh, anybody could go partner with some small family farmers if they wanted to introduce a product line called Pasteurised Eggs. But increasingly what we're finding is that part of our accelerating and superior growth versus other branded and non branded versions of the commodity we produce is that we're just a little bit better, I think, at growing our supply in line with our business plans and attracting and retaining great farmers.

Speaker 2

And it turns out that farmers have long memories and they know how you treated them last year and they know what you did when times were tough and they know what you did when you didn't have to do it. And that's a very rare thing in agriculture in this country to actually treat farmers the way they deserve to be treated. But we do that. And that means we have the right to grow our network in a way that maybe some others don't.

Speaker 8

Great. Thank you.

Speaker 2

Thanks, John.

Operator

Your next question comes from the line of Matt Smith from Stifel. Please go ahead.

Speaker 9

Hi, good morning. Tila, I wanted to come back to the second half expectations. Top line looks like it's expected to grow about 20%, including the headwind from lapping the extra week. Is there anything you'd call out in terms of the timing of your expectations for distribution gains, shelf resets, promotional events or any unique comparisons to the prior year we should keep in mind as we face the growth across the 3rd Q4?

Speaker 3

Good morning, Matt. Good question. We've laid out the puts and takes for the year. I think we talked about it at the beginning of the year. We had a lot more puts and takes first half of the year than second half.

Speaker 3

Really for the second half, the biggest the biggest piece to keep in mind is the 53rd week that we had last year. Other than that, we mentioned our TDP gains in the prepared remarks. I think you can we talked about the items number of SKUs on shelf in the prepared remarks. So it's not so much about there's going to be this day x when shelf resets happen and all of a sudden our TDPs jump up. It's an ongoing continuous process, right?

Speaker 3

I think we have had TDP gains in X pretty much every month of the year. If you look at overall scanner data for us, it might look a bit different because we have year over year distribution losses in butter that we're hoping to capture back in the second half of the year. But it's really an ongoing process that will build on itself month after month rather than one particular date when everything will change. So the growth over the second half of the year, Don't expect that there's going to be some major inflection point there. It's really an ongoing process.

Speaker 3

And the 53rd week is that one big event out there lapping that one that will reduce 4th quarter growth relative to the 2nd Q3 growth probably.

Speaker 9

Thank you for that. And just as a follow-up, you talked about reinvesting some of the first half upside to sustain and feed the virtuous cycle through increasing marketing even above where you expected it to increase for the year. Are you also leaning more heavily into promotions behind the egg business to drive additional consumer trial and consumer household penetration? Or is that upside being focused into marketing investments and less so on the promotion side? And I'll leave it there.

Speaker 9

Thank you.

Speaker 3

Yes. So the reinvestment is really into marketing spending and capabilities. We did increase promotions in the first half of the year relative to last year, simply because last year we didn't spend we really couldn't spend because of the dislocations on shelves because of avian influenza, right? There was no point in us subsidizing existing sales. And so we pulled back on trade promotions, we put that back on first half this year.

Speaker 3

Second half of the year, trade promotions are at the previously planned levels, I would say. So the investment goes to marketing and it goes to capability building, right? 1 of your peers had asked a question about investments in headcount, for example. We have the ability to maybe accelerate some headcount growth in order to get capabilities in house that we have planned for to get them in house next year. So we're bringing them in now because we can, because we can we are able to afford it and it actually allows us to get ahead of our plan growth curve already.

Speaker 3

This is not about promotion spending, right. Our promotion spend is to drive trial in order to then convert trial into repeat spend or repeat purchases and drive household penetration that way. That's a plan that we build well in advance and that's not something that we change on the dime if we don't have to. So it's really about capability building that.

Speaker 2

And one thing I'd add to Thibault's excellent remarks on that topic is that we just in case it wasn't obvious, we don't use promotions to rent market share. And I'm stealing that quote from our sales leader, Pete Pappas. That's not how we grow this business.

Operator

Okay. Your next question comes from the line of Adam Samuelson of Goldman Sachs. Please go ahead.

Speaker 10

Yes. Thank you. Good morning, everyone. So I guess my first question is maybe coming back to the gross margins in the second quarter and really the first half and wanted to maybe take it from the lens of kind of the supply planning point that you made earlier, Russell. You have to make your own internal supply decisions or how many eggs you have from your farms year plus in advance.

Speaker 10

Your volumes in the first half

Speaker 8

of the year

Speaker 10

have been very, very good and above the level at which you kind of, I think, assume long term revenue growth. So the question is how much is there a benefit in the first half gross margins from just utilizing more of that kind of surge kind of egg internal egg production that's ending up in a pasture raised branded form versus having to get sold into other channels and that's helped your overall gross margins. I assume also there's some upside to fixed cost absorption in Egg Central Station. And as well, relatedly, how much has kind of increases in elevated commodity egg prices and egg product prices, especially in the Q2 versus last year? How much, if at all, did that help the results?

Speaker 2

Thanks, Adam. Good morning. Great questions. So the first one related to, are we just I think the question was, are we just doing a better job of selling all of our eggs at maybe the branded shelf price as opposed to selling them into a wholesale channel? As you know, there is a small, call it, low single digit percent of the eggs that we bring off our farms that do not meet our high quality standards.

Speaker 2

And those get sold to a wholesale channel to be broken, pasteurized and used as an ingredient in somebody else's product. The benefit of higher commodity egg prices shows up there because that higher commodity egg price flows through to the price the breaker plant is willing to pay for that small amount of our eggs. It's not a profit driver. We're not actively selling into the hotel channel. It's just the place where the channel.

Speaker 2

It's just the place where the eggs we don't want to use go. But we have not for many years now spent eggs that could go on the shelf that met our high quality standards. We haven't sent measurable quantities of them to the breaker plant. Occasionally, if the mix of different egg sizes is not perfectly in line with the order pattern, for example, in the summer, birds produce more medium eggs. And so we don't necessarily we aren't necessarily able to sell all of them in line with that change in production in retail.

Speaker 2

We may have some small transitory amounts of eggs that we sell to the wholesale channel. But no, it actually the economics of what we're doing in our gross margin got a little bit of tailwind again from that elevated commodity egg cost. It did not impact our price mix. That's our own strategy that's completely separate from what's going on in the broader market. And we're not seeing and historically we have not seen big changes in the trajectory of our growth or our gross margins relative to what's going on in the broader commodity category.

Speaker 2

We don't respond to commodity price changes in the moment. We took price historically to protect margin, nothing more, nothing less. And we believe that continues to be true this year.

Speaker 10

Okay. That's helpful color. If I could just ask a follow-up on some of the farms you're building in Indiana, I think talk about $20,000,000 to $30,000,000 of CapEx. And I guess I'm trying to square that, appreciating you to buy land, but square that with kind of what I perceive to be the cost for new family farms to get their barn set up and get their farms in place to support your production regularly, just the cost seem a lot higher for what you're building in Indiana versus what I thought your family farmers were actually outlying themselves to join your network?

Speaker 2

Yes, it's a fair question. And I think historically we've seen numbers for a small family farmer in the range of $1,200,000 to $1,500,000 Pila may have a more recent number, but that's my understanding. And if you did the math as you did on the number of farms we expect to build versus the dollars, we're planning on spending more. And that doesn't mean we will. But as I mentioned in the opening comments and in my response to one of your peers' questions, we're really excited to try some new things on these There is lots of innovation.

Speaker 2

I won't bore you with all the details on this call, but There is lots of innovation. I won't bore you with all the details on this call, but some of those things are capital expenditures and we wanted to make sure very conservatively that we carved out and previewed for you, I would describe it as the maximum spend. One example, I know there are a lot of ways to finance them, but one example that we're excited to try is putting solar panels in the field, in the pasture, because the birds want some shade and they want a windbreak and solar panels do that and they also generate electricity. Well, we're not sure how the financing will all work out. So in our brand of conservatism, we just assume that will be our CapEx and hopefully we don't spend quite as much as we guided.

Speaker 10

All right. That's very helpful color. I'll pass it on. Thank you.

Speaker 1

Thanks.

Operator

That concludes our Q and A session. I will now turn the conference back over to Anthony Bucallo for closing remarks.

Speaker 1

Thank you again everyone for your support of Vital Farms. Have a good day.

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Earnings Conference Call
Vital Farms Q2 2024
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