Q3 2020 Vital Farms Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to the vital Farms' third quarter 2020 earnings call.
At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session lots of question during the session need to press star one on your telephone if you require any further assistance. Please press Star then zero Oh no.
Like the shelf. These conference calls is actually the smelter bikes you'd argue maybe get back.
Thank you good morning, and welcome to vital signs third quarter 2020 earnings conference call and webcast.
On today's call Oh, Yes can take 'em, President and Chief Executive Officer, and Jason down Chief Financial Officer, and Chief operating Officer.
By now everyone should have access to the company's third quarter earnings press release filed this morning.
It is available on the Investor Relations section of vital signs its website at investors that vital signs dot com.
Before we begin please note that all the financial information presented on today's call is unaudited and during the course of this call management may make forward looking statements within the meaning of the federal Securities laws.
These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described to notice for looking statements.
Please refer to today's release the company's quarterly report on form 10-Q for the quarter ended September 27 to 2020.
Filed with the EPS <unk> another.
And other filings with the FCC 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 todays call management will refer to adjusted EBITDA, which is a non-GAAP financial measure well.
While the company believes this non-GAAP financial measures provide information for investors, but.
The presentation of this information is not intended to be considered in isolation.
Or as a substitute for financial information presented in accordance with GAAP.
Please refer to our earnings release for a reconciliation of adjusted EBITDA to its most comparable measure prepared in accordance with Graf with gap.
I'd also like to note that we are conducting the call today are respected about location.
As such there may be pretty steadily cross talk or other minor minor technical issues. During this call.
Thank you in advance for your patience and understanding.
I'd now like to turn the call over to Russell, T.S., Canseco, President and Chief Executive Officer vital fun Russell.
Thank you Ashley good morning, everyone and thanks for joining today.
On today's call I will briefly review, our third quarter financial highlights provide an update on progress toward a blade strategy and discuss our continued commitment to serving our stakeholders who as many of you know are the fabric of our business.
Jason will then review our third quarter financial results in more detail as well as our updated outlook for the remainder of this fiscal year.
We then look forward to taking your questions.
We're pleased to report another strong quarter for the.
Third quarter of 2020, net revenue increased 57% to $53.4 million compared to quarter three last year.
We also continue to see positive trends in our key profit metrics gross profit margin increased over 300 basis points year over year, and adjusted EBITDA improved 101% from the third quarter of 2000 $19 million to $3.7 million demonstrating our continued profitability.
In the last 52 weeks ending September 620, 20, we were the number one pasture raised I'd brand with 80% dollar share of the U.S. Pasturing AG market and the number two overall a grid based on retail dollar sales.
Now I'll turn to our growth strategy, which includes one expand household penetration through greater consumer awareness to grow within the retail channel three.
Three expand our product offering through innovation and for extend our footprint across futures with respect to foodservice the headwinds that persisted in the third quarter limited our ability to attract new customers foodservice remains a small segment of our business and we look forward to bringing additional focus to it in the medium to long term.
We believe our continued focus on these areas will position vital farms for long term growth.
We made significant progress on our growth strategy this quarter.
First with regard to household penetration, we continue to see strong engagement both in the number of consumers choosing our products and and repeat purchases as a result, the trends associated with Cove in 19.
Repeat users are converting at a high rate, which we believe demonstrates that our mission to bring ethically produced food to the table is resonating with new consumers.
Our household penetration increased to 3.6% as of September 2020 up from 2.3% as of December 2019, and a 40 basis points on a sequential basis as of June 2020.
During the cobot stocked up period eight weeks ending April 19, 2020, approximately 440000, new buying households purchase fidopharm.
In the following 20 week period, ending September 630% have already become repeat purchasers and 72% of those repeat purchasers purchase vital farm AG multiple times during those 20 weeks.
We believe the strong household penetration metrics demonstrate consumers' willingness to pay a premium for our brand.
We also believe increased demand for natural food and a willingness to pay a premium for brands focused on transparency sustainability and ethical values will continue to be a catalyst for growth.
We believe that vital farms is positioned well to meet consumers, where they prefer to shop, especially given the COVID-19 has accelerated the demand for ecommerce in grocery sales of vital forms products. For example, our online fresh grocery sales at a key retailer have increased 342% over the 24 weeks ending said.
10% compared to the same time period a year ago.
And our click and collect sales at one national brick and mortar retailer has increased.
246% over the 26 weeks ending August 28, compared to the same period last year.
Turning now to our growth within the retail channel.
In the third quarter vital farm store count increased by over 600 to a total of over 16000 stores, primarily comprising growth within the mainstream grocery channel. We also continue to expand the number of idle hands products distributed at key retail customers across the natural mainstream channels.
Despite the year over year extent expanded distribution.
Our total brand velocities in both the mainstream and natural channels remain robust.
This expanded distribution and robust brand velocity growth has led to vital farms, capturing an increased dollar share of the total retail ad category.
And finally, we remain focused on extending our product offerings through innovation in both new and existing categories.
In August we launched egg bites, our new line of single serve refrigerated bites made from ethically sourced ingredients and we have successfully ramped up distribution to over 850 stores.
Now for an update on our leadership team and under and our diversity initiatives both components of our broader commitment to our stakeholders to include our customers and consumers our employees, whom we call crew members, our farmers and suppliers our communities the environment and our stockholders.
First I'm pleased to share an update on talent, we've added to our senior leadership team in late October Peter Pappas joined vital farms as our new Chief sales officer.
With over 30 years of experience, leading sales for both multinational and emerging consumer food and beverage companies Peter brings a deep understanding of our categories and channels and we believe he will play an instrumental role advancing our growth strategy.
As Chief sales officer, Peter will oversee sales of vital fluids products across retail and feature.
And finally as our country continues to navigate the COVID-19 pandemic as well as a nationwide reckoning with race we're.
We are committed to supporting our community stakeholders, including those who are vulnerable and marginalized.
This quarter, we commenced a number of initiatives, including partnering with feeding America to donate over 7 million pasteurized eggs to food banks that serve food insecure communities.
Donating to the NAACP legal Defense Fund and boys and Girls Club of America, and partnering with the National IV diversity Council to grow and our knowledge of diversity and our ability to practice empathy for others.
We believe Fidopharm is incredibly well positioned as we remain committed to our values and stakeholders. These principles guide our day to day operations, and we believe help us deliver a more sustainable and successful business.
I'll now turn the call over to Jason who will walk you through our third quarter financials and outlook for the remainder of the year.
Thank you Russell and good morning, everyone.
We're very pleased with our third quarter financial results and what we believe are significant opportunities that.
We've made meaningful investments building a trusted ethical food brand that is poised for long term growth as we increase our penetration in the retail channel in particular.
Net revenue in the quarter was $53.4 million up 57% compared to the third quarter last year.
Strong quarter gives us confidence in our expectation to exceed total net revenue of $210 million for the full year of 2020, representing a growth rate in excess of 49% compared to 2019.
Growth in net revenue for the third quarter of 2020 was driven primarily by an increase in egg and butter sales a high turnover rate of sales to our retail customers and new distribution at new and existing customers some of which resulted from stay at home trends associated with covered 90.
The increase in net revenue was partially offset by sales incentives offered to customers in connection with aging water sales.
Gross profit was $18.4 million or 34% of net revenue for the third quarter of 2020 compared to $10.6 million or 31% of net revenue for the third quarter last year.
The 7.8 million dollar increase in gross profit was primarily due to the increase in net revenue with a portion of the 329 basis point expansion in gross margin attributable to lower material costs for age in butter and volume leverage over our direct labor and overhead costs.
Total income from operations was $2.4 million in the quarter compared to $1.2 million in the third quarter last year.
The $1.2 million a year over year increase was primarily due to the expanded gross margin.
Net income was $1.7 million or four cents per diluted share compared to $2.8 million or two cents per diluted share in the third quarter of 2019.
Total operating expenses were $15.9 million or 30% of net revenue compared to $9.4 million or 28% of net revenue in Q3 last year.
This primarily includes SGN expenses of $12.2 million, a $5.1 million increase compared to Q3 last year and shipping and distribution expenses of $3.8 million, an increase of $1.4 million year over year.
The increase in SG Nay was primarily due to an increase in employee related costs due to increased overall head count to support our operations an increase in professional fees and commercial insurance costs due in part to our status as a newly public company and increased spending on marketing programs and associated expenses.
The increase in shipping and distribution expenses was primarily due to an increase in sales volume, which resulted in increased costs related to third party freight associated with distribution of our products.
Our adjusted EBITDA was $3.7 million for the third quarter of 2020.
Compared to $1.9 million in the third quarter of 2019, which represents a 101% increase.
The improvement in adjusted EBITDA was primarily due to volume increases to our distributors expanded gross margin as well as leverage over fixed operating costs.
The increase was partially offset by an increase in SGN a due to increased overall headcount to support our operations and an increase in professional fees and commercial insurance costs due in part to our status as a newly public company.
With all this in mind, we expect adjusted EBITDA to be in the range of $16 million to $18 million for the full year of 2020.
Now shifting to our capital structure.
At September 27, 2020, we had a cash balance of $112.6 million and total debt outstanding of $7.6 million.
Adjusted net cash from operations was $15 million for the 39 week period ended September 27, 2020, compared to adjusted net cash from operations of point $1 million for the prior year period.
Capex was $6.7 million for the 39 week period ended September 27, 2020, compared to $3 million for the prior year period.
The increase in Capex was primarily driven by purchases of equipment used in ongoing operations as well as our continued expansion of eggs central station.
As we look ahead at what we believe will continue to be a robust market for ethically produced we remain confident in the opportunity bottle farms has to achieve strong results today and for many years ago.
With that now I'll turn the call back over to Russell.
Thanks, Jason.
We remain focused on driving value for shareholders as we stay true to what consumers Trust and expect from our brand.
Commitment the pasture raised ethical food production.
Thanks for joining the call today and your interest in vital farms, we now look forward to taking your questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then the one key on your Touchtone telephone.
There were some we saw from the queue. Please press the pound.
Our first question comes from family Crawford with Morgan Stanley.
Hi.
Hi, good morning.
Good morning, and good morning.
I want to ask about the assumptions embedded in your growth outlook for the fourth quarter on obviously it implies a deceleration relative to the growth that you've seen a year to date.
Just wanted to get a sense for how conservative the outlook is and.
What assumptions you're embedding about the.
Byron into the back half.
Russell you want me to start there yeah that'd be great.
Okay.
So yes, a great question Pam So we can't comp I cant really comment specifically on the quarter, but.
But I think the way that we're looking at it is we we definitely saw a change from Q2 and the peak of what we saw in the midst of the kind of pantry stocking trends, we saw in that quarter.
And so I think as we look forward and that's through the end of the year, where we're kind of just pulling through.
A very similar thing that we saw in Q3 and having not exist throughout Q4, as we closed the year out. So I mean, I think that the range that we're giving you a gives us confidence in that too you know.
To deliver within that range and.
Not be.
I wouldn't say, it's ultra conservative I'd say, we're we're extremely confident about delivering the range, but not a ton of upside there.
Yeah. The only thing I would add to that is if you. If you remember our kind of integrated supply chain, we buy eggs inclusively from our small family from partners and so there's a lead time too.
Changing our volume so in the short run.
Our supply is pretty darn predictable and there isn't unlimited upside in any given quarter.
Got it that's helpful. And then can you obviously it seems like you added a lot of retailers during the quarter can you talk about your visibility on further distribution gains and what the consumer reception has been like with the new retailers added in the quarter.
Oh, Yeah, how did the velocities and is.
You can't compare I'd have to new customers.
So.
It's early days to see how our how our business is trending in our in our newest doors.
But in terms of kind of our playbook, we've got a pretty successful.
Successful historically successful playbook around launching in new real and new retailers and ensuring that we get off to a good start and it's I can't remember the last time a retailer wasn't.
I'm pleased with the results beyond that in terms of visibility to kind of future retail growth as we as we mentioned in the last quarter.
You know these are.
Digital with the sort of dynamic the dynamic nature of of co bid and the eating trends, resulting from it.
We're having to be a little flexible in terms of.
The portion of our growth that we see from increased velocities and just general household consumption and the and the amount that we see from new doors, and so reflecting that and monitoring that to make sure that we're striking right balance between new doors, and really taking care of our of our trusted retail partners.
Great. Thank you.
Our next question comes from Chris Growe with Stifel.
Hi, good morning.
Morning, Chris onetime I just had a question for you if I could around the new consumers you're talking to the brand and basically how you're hoping to keep those consumers. So you've got this nice repeat rate.
Amongst your these new consumers.
Is there a is it incremental marketing, obviously and I guess related to that did you restart some promotional spending the quarter is that helping you know kind of sustain these new consumers in the franchise.
Yeah. Thanks for that yeah. It was really gratifying frankly to see not just the.
Repeat rate, but then the multiple repeat rates, which to me says at least if my math right that we were able to convert about 20% of those co bid triers at a time when maybe we were one of the few.
Eggs available on the shelf into what looks like potentially oil loyal customers, which I think is a is a healthy conversion rate considering it didnt involve a lot of marketing spend.
And you know.
In the early years of building vital farms brand, we were focused very strongly on education, and helping new consumers understand why they should try something so different.
And as we have continued to grow household penetration we've continued to broaden our marketing efforts to look at every part of that consumer journey from awareness all the way through to loyalty and so I wouldn't say that we are doing a lot different in terms of retaining this particular consumer versus others that we'd want to retain we're focused that.
All points from an education message for a new consumer to the franchise to really fostering great community and giving them great reasons to come back.
It's all rooted in our values and our transparency.
Thank you for that and then just a quick question as I you got your sales guidance going up call it $5 million and EBITDA up about $2 million and others ranges there I do get theres, some variability within that but that incremental margin I'm just from the mid points looks pretty strong I guess I just want to understand is there just to kind of the I guess the costs for that.
Business underneath that is that something thats, a 18 that incremental margin.
And maybe related to that the degree to which you know sort of incremental fixed cost leverage is what's helping drive this better margin for the business on this these incremental sales.
Yes, Great question, Chris I think its two fold I think we're still and we saw this in the quarter right. We are our gross margin while sequentially has come down from what we saw in the peak of Q2 is still higher than I think we had talked about our journey of getting to the mid thirtys would be at this point.
Your time.
Absent a lot of movers like us being able to better monetize offside bags and things like that and just getting throughput efficiencies that at a central station. So I think there's a portion there for sure.
And then from from.
From a fixed cost perspective, yes, I mean, the incremental volume we're getting there. It's just just giving us leverage over those costs.
Okay, and then anything around just input cost. So you mentioned some your input costs were down is that a is that incremental if you will from the third quarter you see in those move down further or just to get a sense of where your overall input cost outlook stance.
Yes, again can't can't give specific to it but we would expect things to look very similar to to to what we're currently doing this quarter okay.
Thanks, so much for your time.
Thank you.
Our next question comes from.
So with Goldman Sachs.
Oh, yes. Thank you good morning, everyone.
Good morning, Adam.
Good morning, So I guess first I was hoping to get to I know, it's early but any kind of early sense on on the traction with the with the AG by product.
And just what your what you've seen with the retailers that you.
Who could be lost with and momentum in terms of putting that is more doors over the next.
Over the next several quarters.
Yes, I think I would call out two things one is that relative to our expectations.
At launch I think the results have been strong we're pleased with the results.
And I recently saw it as a single data point and I'll keep it the skies, but.
At one of our launch customers, we've seen that we are.
In the lead relative to a couple of other products that launched this year as well that appear to be competing.
We've taken a clear lead despite having a premium price point and so the early evidence shows that our.
Our positioning in the market with premium products and a premium price point is resonating in this new product.
Okay. That's.
That's really helpful. And then just going back to sort of detailed as it was in the slide.
The gains.
In household this it has low penetration this year seem to be kind of tracking well ahead of kind of where they had been the last the last couple of years and you talk to the strength and repeat rate post covance stock up and I'm just.
One of them.
Get a sense of if you think about the marketing plan and this and the growth plan in 2021 does.
The.
Does that.
Those kinds of game can continue or you think the look there was this onetime opportunity we capitalize it.
Capitalize on it now now it's a matter of driving the sales velocity in the doors of distribution that we have been driving your products or how I think about the push there in terms of getting people into the brand versus just driving distribution and sales velocity with with the customers.
Got it thanks, Thats terrific Adam I. So my headline would be that acceleration of new households has not changed our stance on the pillars of growth. So we've been on a steady march of increasing household penetration year after year after year and while we may have pulled some of them for.
Word we're going to leverage that and continue to build I mean, we are still in as you've seen low single digit household penetration and there's still so much room ahead of us.
In addition, with the addition of Peter Pappas to lead our.
Our sales function I think we are really in putting even more focus on driving successful retail partnerships growing doors growing.
Penetration of our products in existing and new retailer. So it's we've got our foot firmly placed on the gas pedal in both areas.
Okay, and if I could just squeeze one last one then it's been a pretty notable went up in freight cost and LTL.
LTL truck pricing over the last several.
Several months and just wanted to just get a sense on any sensitivity or or or step up in the shipping and distribution costs that we should be mindful of.
[noise] Yeah. That's a great question, Adam Yeah, we haven't seen anything that would be outsized that specifically impacted us that we would call out.
Again, as we continue to look at putting together our plans for next year, we'll certainly be mindful of that and communicate anything as we speak so secret.
Great I appreciate the color I'll pass it on thank you Ben.
Our next question comes from Robert Moskow with Credit Suisse.
Hi, Thanks, I had a couple of questions run.
Regarding the the repeat rates can you repeat that the timeframe.
That you measured repeat or activity because I am when I look at repeat rates. They tend to go higher the longer the timeframe that you're measuring so six months the repeat rate is higher because you have more time to two.
Capture capture.
Capture a repeat sales from from the people who initially tried you.
It seems that your data is around 30%, which is pretty consistent with what you had in June. So I wanted to know if you if your job.
It's a different timeframe that over a longer timeframe that you're measuring or not.
So that that if the stock up sort of the repeat rate that we presented today is based on first a new buyer in the eight weeks ending April 19th and then the 30% repeat and the 72% of those who made multiple is in a 20 week period or a five month period ended.
In September six 2020.
Okay.
Does it because I I believe you did a similar measurement back in June the number was around 30% X.X. I think you said, 36% back then.
It is are you in your analysis of this repeat data that this is pretty typical or.
Am I wrong in that that maybe post stock up it could be higher because you just do you have a more of a chance to get those households to repeat again.
Yes, I think your logic makes sense in terms of an extended period of time I think.
We don't have enough data.
Historically in order to make.
Meaningful comparison between people that try to us.
For the first time during coven and people to try this for the first time, a year or two or three earlier I'm.
By focuses simply on the fact that we retained.
It appears to be.
As much as 20% of those tires with the frankly very limited investment in attracting them to the franchise and sue.
I think that in essence this was.
This was a little bit of a tailwind in terms of reaching new consumers and will take it and we're going to fight like hell to hold onto them.
Okay and then my other question is can you just give us an update on on your new CFO I believe that there's there's there was mention of that a couple of months ago.
Absolutely so boom Eisner join.
He joined US believed back in August and that with the intent that he would transition to CFO at the beginning of 2021 that plant is still on track he is performing well.
And we're excited to have him take on that role and allow Jason Dale to focus specifically on the COO portion of his role. So everything is on track and more to come on that as we get closer to the new year.
Great. Okay. Thank you.
Thank you.
Our next question comes from 10 settlement with bank of Montreal.
[music].
Hi, good morning, everyone.
Okay.
Just a couple of questions. One is how quickly can you increase your egg production for 2021 do you have any constraints. It sounds like just what you said.
Earlier that you were limited in this quarter by and I might Miss heard but can you talk about that.
Yes, so our.
We've talked about this previously the lead time to put down new supply for us comfortably is about a year.
We can we can definitely speed that up a little bit closer to the eight month timeframe, but again 12 months, it's comfortable for us and so we have actively been working.
As we always do on me looking forward and.
Measuring what we think we need to have down in terms of growth to support.
The demand profile that we see in the business ahead of us.
Again, I mean as you remember previously we have to be very mindful about how we do that because of the long lead time and forecasting out what that demand looks like in the future. We don't get in a situation, where we end up too long or too short and so yes. We are we're doing that work kind of every week every month.
Looking out beyond the year end planning about what farms, we need to put down.
Would you think that given the household penetration increasing higher would you think about.
Increasing what you would have thought your initial plans would have been for the net over eight months. It seems reasonable to believe that would there not be a reason to believe that on our side as well.
Well I think so again if you just do if you just do the timeline on that lead time that it takes us I think a lot of what we're seeing in that growth rate. We can start to put some of that down in 21 and support that but most of that will actually start to come to fruition in 2000.
Me too.
Okay. My next question is given the volume increases.
How sustainable is the margin given the volume.
Leverage in the operating leverage versus how much is short term in nature. It seems like if the volume stays at these levels and you are able to grow into it.
Your margin structure should be more sustainable if it's operating leverage if it's not the operating leverage maybe at the left as well can you talk about the sustainability of your margin structure and I'll leave it there. Thank you very much.
You bet.
So again I think we directionally talked about our long term goals for gross margin for the for the business and for the brand was in the in the mid 30 range we.
We are hovering around that range I think you know we are we certainly are still getting some tailwinds of from from the leverage side I would say, that's probably a smaller portion of it.
But we also still have some.
Some noise just in promotional spend and things like that just because of the COVID-19 environment and what's happening out in the in the retail space.
So I I think it's it's sustainable within a range, it's not dramatically different than than what we're seeing where we're at today.
Great. Thank you very much they pick up in Q.
You too.
And I'm not showing any further questions describe what sort of the club Dr. Russell for any closing remarks.
Well, thanks, everybody for joining us today vital farms embark on a mission to bring ethical food to the table 13 years ago at our core has always been a commitment to our stakeholders. We wholeheartedly believe that treating our stakeholders as partners delivers positive outcomes for everyone, whether it's our small family pharma partners our crew member.
As consumers the community or shareholders I appreciate your interest in our business and your belief and ethical food.
Finally, as we approach the end of this extraordinary year I wish you all good health and happiness, we look forward to speaking to you again soon.
Ladies and gentlemen. This concludes today's presentation you may now disconnect and have a wonderful day.
[music].
[music].
Ladies and gentlemen, thanks first anybody walking to the bottom.
Third quarter 2020 earnings call.
At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session last a question during the session to get the press star one on your telephone if your acquired he further assistance. Please press Star then zero.
I like to do shelters Congress Congress actually do some ultramax yard you may begin.
Thank you good morning, and welcome to vital Farms' third quarter 2020 earnings conference call and webcast.
On today's call I'll still deals can take 'em, President and Chief Executive Officer, and Jason Dell, Chief Financial Officer, and Chief operating Officer.
By now everyone should have access to the Companys third quarter earnings press release filed this morning.
This is available on the Investor Relations section of vital signs its website at investor <unk> vital farms Dot com.
Before we begin please note that all the financial information presented on today's call is unaudited and during the course of this call management may make forward looking statements within the meaning of the federal Securities laws.
These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in those forward looking statements.
Please refer to the D., it's really the company's quarterly report on form 10-Q for the quarter ended September 27 to 2020.
Oh I see another.
And other filings with the FCC 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 todays call management will refer to adjusted EBITDA, which is a non-GAAP financial measure.
While the company believes this non-GAAP financial measure a black hole information for investors.
The presentation of this information is not intended to be considered in isolation.
Or as a substitute for financial information presented in accordance with GAAP.
Please refer to our earnings release for a reconciliation of adjusted EBITDA to its most comparable measure prepared in accordance with GAAP with GAAP.
I'd also like to note that we are conducting our call today from our respect for patients as.
As such there may be brief delays cross talk or other minor minor technical issues. During this call. We thank you in advance for your patience and understanding.
I'd now like to turn the call over to Russell Diaz, Canseco, President and Chief Executive Officer of Fidopharm Russell.
Thank you Ashley good morning, everyone and thanks for joining today.
On today's call I will briefly review, our third quarter financial highlights provide an update on progress toward our growth strategy and discuss our continued commitment to serving our stakeholders, who as many of you know our the fabric of our business.
Jason will then review our third quarter financial results in more detail as well as our updated outlook for the remainder of this fiscal year.
We then look forward to taking your questions.
We're pleased to report another strong quarter.
For the third quarter of 2020, net revenue increased 57% to $53.4 million compared to quarter three last year.
We also continue to see positive trends in our key profit metrics gross profit margin increased over 300 basis points year over year, and adjusted EBITDA improved 101%.
From the third quarter of 2000 $19 million to $3.7 million, demonstrating our continued profitability.
In the last 52 weeks ending September 620, 20, we were the number one pasture raised I'd brands that 80% dollar share of the U.S. Pasturing AG market and the number two overall a grid based on retail dollar sales.
Now I'll turn to our growth strategy, which includes one expand household penetration through greater consumer awareness to grow within the retail channel three.
Three expand our product offering through innovation and for extend our footprint across users with respect to foodservice the headwinds that persisted in the third quarter limited our ability to attract new customers foodservice remains a small segment of our business and we look forward to bringing additional focus to it in the medium to long term.
We believe our continued focus on these areas will position vital farms for long term growth.
We made significant progress on our growth strategy this quarter first.
First with regard to household penetration, we continue to see strong engagement both in the number of consumers choosing our products and and repeat purchases as a result of trends associated with Carbonite.
Repeat users are converting at a high rate, which we believe demonstrates that our mission to bring ethically produced food to the table is resonating with new consumers or.
Our household penetration increased to 3.6% as of September 2020 up from 2.3% as of December 2019, and up 40 basis points on a sequential basis as of June 2020.
During the Covance stocked up period eight weeks ending April 19, 2020, approximately 440000, new buying households purchase fidopharm.
In the following 20 week period, ending September 630% have already become repeat purchasers and 72% of those repeat purchasers purchase vital farm AG multiple times during those 20 weeks.
We believe these strong household penetration metrics demonstrate consumers' willingness to pay a premium for our brands.
We also believe increased demand for natural food and a willingness to pay a premium for brands focused on transparency sustainability and ethical values will continue to be a catalyst for growth.
We believe that battle farms is positioned well to meet consumers, where they prefer to shop, especially given the COVID-19 has accelerated demand for E commerce in grocery sales of vital forms products.
For example, our online fresh grocery sales at a key retailer have increased 342% over the 24 weeks ending September compared.
Compared to the same time period a year ago.
And our click and collect sales at one national brick and mortar retailer has increased.
246% over the 26 weeks ending August 28, compared to the same period last year.
Turning now to our growth within the retail channel.
In the third quarter vital farm store count increased by over 600 to a total of over 16000 stores, primarily comprising growth within the mainstream grocery cattle. We also continue to expand the number of idle farms products distributed at key retail customers across the natural mainstream channels.
Despite the year over year extent expanded distribution.
Our total brand velocities in both the mainstream and natural channels remain robust this expanded distribution and robust brand velocity growth has led to vital farms, capturing an increased dollar share of the total retail ad category.
And finally, we remain focused on extending our product offerings through innovation in both new and existing categories.
In August we launched egg bites, our new line of single serve refrigerated bites made from ethically sourced ingredients and we have successfully ramped up distribution to over 800 stores.
Now for an update on our leadership team and I've ever and our diversity initiatives.
Both components of our broader commitment to our stakeholders will include our customers and consumers our employees, whom we call crew members our.
Our farmers in supplier our communities the environment and our stockholders.
First im pleased to share an update on talent, we've added to our senior leadership team.
In late October Peter Pappas joined vital farms, as our new Chief sales officer.
Over 30 years of experience, leading sales for both multinational and emerging consumer food and beverage companies Peter brings a deep understanding of our categories and channels and we believe it will play an instrumental role advancing our growth strategy.
As Chief sales officer, Peter will oversee sales of vital farms products across retail and E.
And finally as our country continues to navigate the COVID-19 pandemic as well as a nationwide reckoning with race.
We are committed to supporting our community stakeholders, including those who are vulnerable and marginalized.
This quarter, we commenced a number of initiatives, including partnering with feeding America to donate over 7 million pasteurized eggs to food banks that serve food insecure communities don't.
Donating to the NAACP legal Defense Fund and boys and Girls Club of America, and partnering with a nationally diversity council to grow and our knowledge of diversity and our ability to practice empathy for others.
We believe Fidopharm is incredibly well positioned as we remain committed to our values and stakeholders. These principles guide our day to day operations, and we believe help us deliver a more sustainable and successful business.
I'll now turn the call over to Jason who will walk you through our third quarter financials and outlook for the remainder of the year.
Thank you Russell and good morning, everyone.
We're very pleased with our third quarter financial results and what we believe are significant opportunities that we.
We've made meaningful investments building a trusted ethical food brand that is poised for long term growth as we increase our penetration in the retail channel in particular.
Net revenue in the quarter was $53.4 million up 57% compared to the third quarter last year.
Our strong quarter gives us confidence in our expectation to exceed total net revenue of $210 million for the full year of 2020, representing a growth rate in excess of 49% compared to 2019.
Growth in net revenue for the third quarter of 2020 was driven primarily by an increase in AG and butter sales high turnover rate of sales to our retail customers and new distribution at new and existing customers some of which resulted from stay at home trends associated with covered 90 the.
The increase in net revenue was partially offset by sales incentives offered to customers in connection with aging water sales.
Gross profit was $18.4 million or 34% of net revenue for the third quarter of 2020 compared to $10.6 million or 31% of net revenue for the third quarter last year.
The 7.8 million dollar increase in gross profit was primarily due to the increase in net revenue with a portion of the 329 basis point expansion in gross margin attributable to lower material costs for age and butter and volume leverage over our direct labor and overhead costs.
Total income from operations was $2.4 million in the quarter compared to $1.2 million in the third quarter last year.
The 1.2 million dollar year over year increase was primarily due to the expanded gross margin.
Net income was $1.7 million or four cents per diluted share compared $2.8 million or two cents per diluted share in the third quarter of 2019.
Total operating expenses were $15.9 million or 30% of net revenue compared to $9.4 million or 28% of net revenue in Q3 last year.
This primarily includes SGN expenses of $12.2 million, a $5.1 million increase compared to Q3 last year and shipping and distribution expenses of $3.8 million, an increase of $1.4 million year over year.
The increase in SG and it was primarily due to an increase in employee related costs due to increased overall headcount to support our operations an increase in professional fees and commercial insurance costs due in part to our status as a newly public company and increased spending on marketing programs and associated expenses.
The increase in shipping and distribution expenses was primarily due to an increase in sales volume, which resulted in increased costs related to third party freight associated with distribution of our products.
Our adjusted EBITDA was $3.7 million for the third quarter of 2020.
Compared to $1.9 million in the third quarter of 2009, which represents a 101% increase.
The improvement in adjusted EBITDA was primarily due to volume increases to our distributors expanded gross margin as well as leverage over fixed operating costs.
The increase was partially offset by an increase in SGN a due to increased overall headcount to support our operations and an increase in professional fees and commercial insurance costs due in part to our status as a newly public company.
With all this in mind, we expect adjusted EBITDA to be in the range of $16 million to $18 million for the full year of 2020.
Now shifting to our capital structure.
At September 27, 2020, we had a cash balance of $112.6 million and total debt outstanding of $7.6 million.
Adjusted net cash from operations was $15 million for the 39 week period ended September 27, 2020, compared to adjusted net cash from operations of point $1 million for the prior year period.
Capex was $6.7 million for the 39 week period ended September 27, 2020, compared to $3 million for the prior year period the.
The increase in Capex was primarily driven by purchases of equipment used in ongoing operations as well as our continued expansion of bags central station.
As we look ahead at what we believe will continue to be a robust market ethically produced.
We remain confident in the opportunity bottle farms has to achieve strong results today and for many years ago.
With that now I'll turn the call back over to Russell.
Thanks, Jason.
We remain focused on driving value for shareholders as we stay true to what consumers Trust and expect from our brands.
Commitment the patch raise ethical food production.
Thanks for joining the call today and your interest in vital farms, we now look forward to taking your questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press. The Star then the one key on your Touchtone telephone.
There were some yourself from the queue. Please press the pound.
Our first question comes from femoral across from Morgan Stanley.
Hi.
Hi, good morning.
Good morning, and good morning.
I wanted to ask about the assumptions embedded in your growth outlook for the fourth quarter on obviously it implies a deceleration relative to the growth that you've seen.
Year to date.
Just wanted to get a sense, where how conservative the outlook is and.
What assumptions you're embedding about the.
Hi, Ryan.
Into the back half.
Right. So you want me to start there yeah that'd be great.
Okay.
So yes, great question, Pam So we can't comp I cant really comment specifically on the quarter, but.
But I think the way that we're looking at it is we we definitely saw a change from Q2 in the peak of what we saw in the midst of the kind of pantry stocking trends, we saw in that quarter.
And so I think as we look forward and through the end of the year, where we're kind of just pulling through.
Very similar thing that we saw in Q3 and having not exist.
Well Q4, as we closed the year out so I mean, I think that the range that we're giving it gives us confidence in that too.
To deliver within that range and.
Not be I Wouldnt say its ultra conservative I'd say, we're we're extremely confident about delivering the range but.
Not not a ton of upside there.
Yes, the only thing I would add to that is if you remember our kind of integrated supply chain, we buy eggs exclusively from our small family from partners and so there's a lead time too.
Changing our volume so in the short run.
Our supply is pretty darn predictable and there isn't unlimited upside in any given quarter.
Got it that's helpful.
Then can you obviously it seems like you've added a lot of retailers during the quarter can you talk about your visibility on further distribution gains and what the consumer reception has been like with the new retailers added in the quarter.
Yeah, how did the velocities and is.
Ah you can't compare at the new customers.
So.
It's early days to see how our.
Our business is trending in our in our newest doors.
But in terms of kind of our playbook, we've got a pretty.
Successful historically successful playbook around launching a new real and new retailers and ensuring that we get off to a good start and it's I can't remember the last time a retailer wasnt.
Pleased with the results.
Beyond that in terms of visibility to kind of future retail growth as we as we mentioned in the last quarter.
These are there.
With the sort of dynamic.
The dynamic nature of Covance, and the eating trends, resulting from it.
We're having to be a little flexible in terms of.
The portion of our growth that we see from increased velocities and just general household consumption and the and the amount that we see from new doors, and so reflecting that in monitoring that to make sure that we're striking right balance between new doors, and we're really taking care of our of our trusted retail partners.
Great. Thank you.
Our next question comes from Chris Growe with Stifel.
Hi, good morning.
Morning, Chris Laurentide I just had a question for you if I could around the new consumers, you're attracting to the brand and basically how you're hoping to keep those consumers. So you've got this nice repeat rate.
Amongst your these new consumers.
Have you is there or is it incremental marketing, obviously and I guess related to that youve restart some promotional spending the quarter is that helping you know kind of sustain these new consumers in the franchise.
Yes, thanks for that yes, it was really gratifying frankly to see not just the.
Repeat rate, but then the multiple repeat rates, which to me says at least if my math right that we were able to convert about 20% of those co bid triers at a time when maybe we were one of the few.
It is available on the shelf into what looks like potentially oil loyal customers, which I think is.
Healthy conversion rate considering it didnt involve a lot of marketing spend.
And.
In the early years of building the vital farms brand, we were focused very strongly on education, and helping new consumers understand why they should try something so different.
And as we have continued to grow household penetration we've continued to broaden our marketing efforts to look at every part of that consumer journey from awareness all the way through to loyalty and so I wouldn't say that we are doing a lot different in terms of retaining this particular consumer versus others that we'd want to retain we're focused that.
At all points from an education message for a new consumer to the franchise to really fostering great community and giving them great reasons to come back.
It's all rooted in our values and our transparency.
Thank you for that and then just a quick question as I you got your sales guidance going up call it $5 million and EBITDA up about $2 million I know this range is there I do get there is some variability within that but that incremental margin.
Just from the mid points looks pretty strong I guess I just want to understand is there just kind of the I guess the cost for the business underneath that is that something thats 18 that incremental margin.
And maybe related to that the degree to which you know sort of incremental fixed cost leverage is what's helping drive this better margin for the business on this these incremental sales.
Yes, Great question, Chris I think its twofold I think we're still I mean, you saw this in the quarter right. We are gross margin while sequentially has come down from what we saw in the peak of Q2 is still higher than I think we had talked about our journey of getting to the mid thirtys would be at this time.
In time.
Absent a lot of movers like us being able to better monetize offside bags and things like that and just getting throughput efficiencies that headaches central station. So I think there is a portion there for sure.
And then from from.
From a fixed cost perspective, yes, I mean, the incremental volume were getting there. It's just just giving us leverage over those costs.
Okay, and then anything around just input cost. So you mentioned some of your input costs were down is that is that.
Incremental if you will from the third quarter you see in those move down further or just to get a sense of where your overall input cost outlook stance, yes.
Yes, again can't can't give specific to it but we would expect things to look very similar to two so what we're currently doing this quarter.
Okay.
Thanks, so much for your time.
Thank you.
Our next question comes from segments of Goldman Sachs.
Hi, yes. Thank you good morning, everyone.
Good morning, Adam.
Good morning, So I guess first I was hoping to get to I know, it's early but any kind of early sense on on the traction with the AG byproduct.
Just what your what you've seen with the retailers that you have.
He will be lost with and momentum in terms of putting that in more doors over the next.
Over the next several quarters.
Yes, I think I would call out two things one is that relative to our expectations.
Launch I think the results have been strong we're pleased with the results.
And I recently saw and it's a single data point I'll keep it the skies, but.
At one of our launch customers, we've seen that we are.
In the lead relative to a couple of other products that launched this year as well that appear to be competing.
We've taken a clear lead despite having a premium price point and so the early evidence shows that our.
Our positioning in the market with premium products and a premium price point is resonating in this new product.
Okay. That's.
That's really helpful. And then just going back to some of that until the slide.
The gains.
In household just in household penetration this year seem to be kind of tracking well ahead of kind of where they had been in the last couple of years and you talk to the strength and repeat rate post covance stock up and I'm just.
One of them.
Get a sense of.
But the marketing plan and this and the growth plan in 2021.
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The.
Does that.
Those kinds of game can continue or you think that there was one time opportunity to capitalize it.
Capitalize on it now now it's a matter of driving the sales velocity in the stores and distribution that we have and driving new products or how do we think about the push there in terms of getting people into the brand versus just driving distribution and sales velocity with with the customers.
Got it thanks, Thats terrific Adam So my headline would be that acceleration of new households has not changed our stance on the pillars of growth. So we've been on a steady march of increasing household penetration year after year after year and while we may have pulled some of them for.
Forward, we're going to leverage that and continue to build I mean, we are still in as you've seen low single digit household penetration and there is still so much room ahead of us.
In addition, with the addition of Peter Pappas to lead.
Our sales function I think we are really putting even more focus on driving successful retail partnerships growing doors growing.
Penetration of our products in existing and new retailer. So it's we've got our foot firmly placed on the gas pedal in both areas.
Okay, and if I could just squeeze one last one then it's been a pretty notable went up in freight cost and.
LTL truck pricing over the last several.
Several months and just wanted to just get a sense on any sensitivity or or or step up in the shipping and distribution costs that we should be mindful of.
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Yes, Thats a great question, Adam Yes, we haven't seen anything that would be outsized that specifically impacted us that we would call out.
Again, as we continue to look at putting together our plans for next year, we'll certainly be mindful of that and communicate anything as we see fit.
Great I appreciate the color I'll pass it on thank you bet.
Your next question comes from Robert Moskow with Credit Suisse.
Hi, Thanks, I had a couple of questions.
Regarding the.
The repeat rates can you repeat that.
The timeframe.
That you measure repeat.
Activity, because I and then I must repeat rates they tend to go higher the longer the timeframe that you're measuring so six months. The repeat rate is higher because you just have more time to to capture.
Capture repeat sales from from the people, who initially tried you.
It seems that your data is around 30%, which is pretty consistent with what you had in June. So I wanted to know if you if your job.
It's a different timeframe or a longer timeframe that you're measuring or not.
So that that if the stock up sort of the repeat rate that we presented today is based on first.
A new buyer in the eight weeks ending April 19th and then the 30% repeat and the 72% of those who made multiple is in a 20 week period or a five month period ending September six 2020.
Okay.
Does it because I believe you had a similar question at back in June the number was around 30% X.X. I think you said, 36% back then.
Are you in your analysis of this repeat data that this is pretty typical or.
Am I wrong that that maybe post stock up it could be higher because you just you have a more of a chance to get those households to repeat again.
Yes, I think your logic makes sense in terms of an extended period of time I think.
We don't have enough data.
Historically in order to make.
Meaningful comparison between people that try to us for the first time during coven and people that try to us for the first time, a year or two or three earlier I'm.
By focuses simply on the fact that we retained.
It appears to be.
As much as 20% of those tires with the frankly very limited investment in attracting them to the franchise and so I.
I think that in essence this was.
This was a little bit of a tailwind in terms of reaching new consumers and we'll take it we're going to fight like hell to hold onto them.
Okay and then my other question is can you just give us an update on.
On your new CFO I believe that there's there's there was mention of that a couple of months ago.
Absolutely so bow meissner join.
Joined US believed back in August and that would the intense that he would transition to CFO at the beginning of 2021 that plan is still on track he is performing well.
And we're excited to have him take on that role and allow Jason Dale to focus specifically on the COO portion as well so everything is on track and more to come on that as we get closer to the new year.
Great. Okay. Thank you.
Thank you.
Our next question comes from 10 cents lower federal Montreal.
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Hi, good morning, everyone.
Good morning, just a couple of questions. One is how quickly can you increase your AG production for 2021 do you have any constraints. It sounds like just what you said.
Earlier that you were limited in this quarter by and I might have missed heard but can you talk about that.
Yes, so our.
We've talked about this previously the lead time to put down new supply for us comfortably is about a year.
We can we can definitely speed that up a little bit closer to the eight months timeframe, but again 12 months is comfortable for us and so we have actively been working.
As we always do on me looking forward and measuring what we think we need to have down in terms of growth to support.
The demand profile that we see in the business ahead of us.
Again, I mean as you remember previously we have to be very mindful about how we do that because of the long lead time.
Forecasting out what that demand looks like in the future. We don't get in a situation, where we end up too long or too short and so yes. We are we're doing that work kind of every week every month looking out.
Beyond the year end planning about what farms, we need to put down.
Would you think that given the household penetration increasing higher would you think about.
Increasing what you would have thought your initial plans would have been for the net over eight months. It seems reasonable to believe that would there not be a reason to believe that on our side as well.
Well I think so again if you just do if you just do the timeline on that lead time that it takes us I think a lot of what we're see in that growth rate. We can start to put some of that down in 21 and support that but most of that will actually start to come to fruition in htwo.
Many too.
Okay. My next question is given the volume increase is how sustainable is the margin given the.
The volume leverage and the operating leverage versus how much is short term in nature. It seems like if the volume stays at these levels and you are able to grow into it.
Your margin structure should be more sustainable if it's operating leverage if it's not the operating leverage maybe at the left as well can you talk about the sustainability of your margin structure and I'll leave it there. Thank you very much.
You bet.
So again I think we directionally talked about our long term goals for gross margin for the for the business for the brand will send them in the mid 30 range.
We're hovering around that range.
I think we are we certainly are still getting some tailwinds from from the leverage side I would say, that's probably a smaller portion of it.
But we also still have some.
Some noise just in promotional spend and things like that just because of the COVID-19 environment and what's happening out in the.
In the retail space.
So I think it's it's sustainable within a range its.
It's not dramatically different than than what we're see where we're at today.
Great. Thank you very much.
Thank you.
You too.
And I'm not showing any further questions described what sort of a club dr. Russell for any closing remarks.
Well, thanks, everybody for joining us today vital farms embarked on a mission to bring ethical food to the table 13 years ago at our core has always been a commitment to our stakeholders. We wholeheartedly believe that treating our stakeholders as partners delivers positive outcomes for everyone, whether it's our small family pharma partners. Our crew members can.
Rumours that community or shareholders I appreciate your interest in our business and your belief in ethical food.
Finally, as we approach the end of this extraordinary year I wish you all good health and happiness, we look forward to speaking with you again soon.
Ladies and gentlemen. This concludes today's presentation you may now disconnect and have a wonderful day.