Q2 2021 Vital Farms Inc Earnings Call
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Good day, and thank you for standing by and welcome to the vital farms, Inc. Second quarter 2021 and earnings conference call at the time, all participants on a listen only mode.
And the speaker's presentation, there will be a question and answer session asked the question. During the session you will need the pest star 1 on your telephone if you require any further assistance. Please press star zero and I would now like to hand, the conference over to you speak of today, Matt side of that Vice President of Investor Relations. Please go ahead.
Thank you good morning, and welcome to the vital farms second quarter of 2021 earnings conference call webcast.
And we used to be joined on today's call by rest of the DSP and <unk>, President and Chief Executive Officer, and Bill Meissner Chief Financial Officer.
By now everyone should have access to the company's second quarter 2021 earnings press release issued this morning is available on the Investor Relations section of vital farms. The website at investors day vital farms Dot com.
Through the course of this call management may make forward looking statements within the meaning of the federal Securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described and these forward looking statements.
Please refer to today's press release and the the company's quarterly report on form 10-Q for the fiscal quarter ended June 2007, and 2021, which was filed to the SEC earlier today and other filings with the SEC for detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied and any forward looking for.
Statements made today.
Please note that on today's call management will refer to adjusted EBITDA and adjusted EBITDA margin, which is the non-GAAP financial measure while the company believes this non-GAAP financial measure of provides 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.
And in accordance with GAAP.
Refer to our earnings release for reconciliation of adjusted EBITDA to its most comparable measure prepared in accordance with GAAP.
And now I'd like to turn the call over the rest of the years can take co president and Chief Executive officer of vital parts.
Thanks, Matt Good morning, everyone and thank you for joining our second quarter earnings call, we had a strong quarter and exceeded expectations on several key financial metrics I'm thrilled with the momentum of our business has maintained and quite proud we were able to achieve positive net revenue growth against the toughest comparable period of.
The 2020, when net revenues grew 84% over the prior year period, which was our prior high watermark driven by COVID-19 related pantry loading.
In the second quarter of 2021, our net revenue was a record $63 million.
Of 1.7% increase from the same period last year.
We saw gross margins of 36, 4% above our long term goal in the mid thirties.
And our adjusted EBITDA was $5.1 million BOE will provide more details on our financial performance later.
We continue to demonstrate that the vital farms brand is resonating with families across the country.
Our household penetration is now for 5% for over 5.5 million households, and increased from 4.1% at the end of the first quarter of 2021.
Or a 100 basis points above the prior year continuing the positive trend we've enjoyed both year over year and sequentially since the third quarter of 2019, when we began tracking this with numerator.
We believe this constant growth in the household penetration is driven primarily by investments we're making at every step of the consumer journey, we begin by attracting people through our unique packaging design education, and a positive product experience and work to earn their loyalty through meaningful stakeholder driven content excellent customer service and thoughtful.
Graham it's like the vital farms Kids club vital times newsletter, and our traceability program.
We have a meaningful and disruptive story that resonates and it's been especially gratifying to see the overwhelmingly positive feedback and.
And engagement, we received from our community of every touch point, whether its on our social platforms for through phone calls visits to our traceability site to see where their eggs related or handwritten letters of gratitude central of farmer.
We increased retail distribution and 10% year on year to 17250 stores as of June 27, and we continue to be the second leading AG brand and the U S. By retail dollar sales with 5.6% market share and increase of 90 basis points relative to a 4.7% share at the end of the first quarter.
The most notable gains occurred at Kroger and nationwide and it stop and shop and the northeast.
We believe our collaborative partnerships with retail are part of what makes vital farms of brand that can continue to expand its footprint across the United States.
And foodservice, we continue to add new regional concepts throughout the country, including post restaurant group and Los Angeles.
Creek, and Texas and Blue Plate restaurant company based in Minnesota in this most recent period.
These efforts provide us an opportunity to develop new raving fans of our brand through partnerships with these great establishment of.
Although the business segment as small we continue to refine our strategy and are having fruitful conversations with potential partners to grow the business.
In terms of innovation, we have 2 new products that we're excited to provide the families across the country. Our newest product breakfast bars is now available at Kroger stores nationwide.
We also expect these will be available on whole foods market locations across the country. Later this month and we plan to expand retail distribution either even further in the coming months. These.
And these warm egg based bars are unlike any other and the refrigerated aisle theyre indulgent bite sized comfort food made with high quality recognizable ingredients, including vital farms pasteurized eggs pasture as cheese humanely raised meats and vegetables with no added sugar artificial colors flavors gums fillers or.
Preservatives.
These bars can be heated and the microwave and 60 seconds for convenient snack this reminiscent of classic weekend breakfast dishes like broccoli and Cheddar quiche for sausage casserole.
Equally as exciting last month, we launched a new pasture raised tub butter made with sea salt and avocado oil and the new spreadable tub butter is churn by our sixth generation butter makers using 3 simple ingredients pasture east butter, 100% pure avocado oil and flaky Sea salt.
This minimally processed spreadable butter is premium texture and full of flavor. It's the first product and the nationally distributed tub butter category that is made with pasture east butter and avocado oil and it has 85% butterfat contest the highest fat content of any type of butter and the market.
Spreadable tub butter is now available on the sprouts stores nationwide and we will be and whole foods market locations nationally the beginning in September.
As we've said in the past, we're adding new farms on an ongoing basis and we recently surpassed 225 farm partners and our network.
Looking ahead, we expect the steadily on board New farm partners through the remainder of the year, which is consistent with our supply planning process.
Our expansion of egg Central station is on track for completion as scheduled and should be operational and the middle of 2022. This capital investment will double our current and processing capacity and support of $600 million annual egg business.
Next I would like to touch on the early stages of how we're communicating our work in the context of ESG and sustainability.
Please turn your attention to slide 16 to 19 in the Investor presentation, we posted the head of the call. This morning.
And this includes environmental initiatives are on water conservation energy efficiency, minimizing waste and sustainable land use social initiatives related to our company culture crew member benefits and diversity equity and inclusion and governance initiatives across the supply chain board of directors and senior leadership team.
As we've begun the work of documenting and setting measurable goals, we're learning that our stakeholder driven business model and our role as a certified the corporation and public benefit Corporation and provide a solid foundation for this body of work.
Under the leadership of Joanne ball, our newly appointed head of ESG, We plan to publish and report concrete achievable and measurable goals next year.
And you may have seen and our recent press release, we appointed Stephanie Kuhn as senior Vice President of strategy I believe there is significant potential and the vital farms brand and as a company. We are making investments to ensure we can achieve long term success and bringing ethical food to the table.
And he has had a successful career as both of the consultant and internally at CPG companies driving strategic vision on business development go to market strategy and product innovation.
She will be invaluable as we continue to evolve our growth strategy and I'm excited for what the future of holds for our brand and company.
As I conclude what I hope you'll take away from today's call is that vital farms is thriving and its mission to bring ethically sourced food to millions of families across the country and we continue to exceed our original operational objectives, 1 year into our journey as a public company.
We believe the best use of growth capital is to remain sharply focused on increasing household penetration expanding retail distribution and developing innovative products and growing our foodservice presence each of which contribute to increasing the size of our rate and Kathy.
I would now like to turn the call over to Bill.
Thank you Russell.
Hi, everyone and thank you for joining us today I will review our financial results for the second quarter ended June 27, 2021 and.
And provide an update on our full year outlook.
As Russell mentioned, we achieved record net revenues of $60.3 million and increase of 1.7% compared to the second quarter of 2020.
Our prior record in terms of revenues, which grew 84% relative to the second quarter of 2019.
We achieved the 2 year net revenue CAGR of 36, 7%, which represents 340 basis points of acceleration relative to what we experienced in Q1.2021 on the same metric.
The increase of net revenue. This period was driven by an increase and egg related sales due to higher volume and expanded distribution at new and existing retail partners.
Gross profit for the second quarter was $21.9 million or <unk> 36, 4% of net revenue compared to $22.7 million or 38, 3% of net revenue for the second quarter of 2020.
The gross margin change was mainly attributable to an increase and promotional spending with the return to a more normal cadence of industry activity as we lap COVID-19 related pantry loading from last year.
As you recall the second quarter of last year saw little to no promotional activity, while the industry experienced unprecedented sales across the country.
Margins were also impacted by higher input costs on shell eggs, given the recent moves and commodity inputs.
SG&A for the second quarter was $13.5 million compared to $10 million and the second quarter last year.
The increase in SG&A was driven by public company costs, most of which we did not have and Q2 last year and higher employee related costs as we grow head count to support the continued growth of the business.
Shipping and distribution increased $1.7 million relative to the second quarter of 2020, driven by higher levels of sales volume and higher third party freight rates.
Adjusted EBITDA for the second quarter was $5.1 million compared to $9.3 million for the second quarter of 2020.
Now and update on our capital structure.
As of June 27, 2021, we had a total balance of cash cash equivalents and investment securities of $106.3 million and we have no long term debt outstanding.
Turning to our forecast for the full year of 2021, we are reaffirming guidance for net revenue between 246 million to $253 million and increase of 15% to 18% over 2020.
We're also reaffirming our expectations that adjusted EBITDA will be and the range of $7 million to $9 million for the full year of 2021.
Thanks for your time and interest and vital farms.
Before we move to taking questions I want to reinforce our confidence and the remainder of the year.
We have a strong foundation in place for future growth of <unk>.
The company and brand with a portfolio of high quality products, the millions of households across the country Trust for ethylene produced food.
With that I'll turn the call back over to Russell.
I want to thank everyone for your interest and vital farms and for your time today, we'd now like to turn it over to the operator to take your questions.
Thank you.
As a reminder to ask the question you would need the press Star then 1 of your telephone to withdraw your question. Please press the pound key Keystone and viable we compile the Q&A roster.
Our first question comes from the line of Chris Growe with Stifel. Your line is now open.
Hi, good morning.
Hey, good morning, guys.
Hi, just wanted to ask the first of all of goods just some perspective on your decision to hold guidance and place for the year.
The particular.
Net sales, where you've had a nice increase and households, and distribution and it seems like you could see some continued benefit from that growth and those metrics and any limitations for the second half and that in that regard if all of that and their EBITDA as well and then we should keep in mind here.
Yeah, Hi, Chris.
The second half revenue is growing faster than what we expect on the and the first half if you look at the half over half guidance and we certainly have no constraints on our ability to deliver on the guidance that we've provided.
In terms of EBITDA and then there's a few things that we've talked about it and the last call and just what's going on and the world.
With the new distribution coming online.
Mainly in the back half, we're supporting that with increased trade to get new trial, and marketing and the second half for that ticks up and the second half to support that and new distribution growth and.
That's something that we've been planning throughout the year and I think of I've talked to before.
As well if you look at EBITDA and the back half.
The the feed cost as you know we adjust the farmers 1 quarter on arrears and it looks like they peaked in Q2, so youre going to see that pressure come through in Q3 and in Q4 on the gross margin and EBITDA lines.
And that's where we've shaken out for the year.
Okay. Thank you and I guess on that point and I think maybe the first time you said.
And our feed costs on the call and I may have missed it if you did say a po, but the point being that that was a pretty modest the fact that it seems like in the quarter wasn't really side of it for the gross margin.
Most of it is gonna be them for more significant headwind and the second half of the year.
And given some rough approximation of how much of that could weigh on the gross margin of the incremental costs that you expect the Vera on the input cost side based on what you see today.
Yes, I think it will be in line with the guidance, Chris that we provided and the S..1 in terms of the change factors associated with commodity, but we don't talk specifically to.
To the exact amounts that we have but certainly youre going to see pressure.
In Q3, and Q4, just given the trends of what we've seen and the market.
The other thing and that continues to go on as freight costs and transportation costs continue to remain elevated.
And we're projecting those to remain soft for the balance of the year.
Okay and just 1 other question if I could and this is in relation to the new products. The breakfast bar, obviously the price last year.
So those are still building the distribution, but still have of call. It very modestly theyre not getting out to the.
A larger number of stores certainly more of but not as many as I would expect is that something that you would expect for breakfast bar is going to be at for example, the via more widely distributed product that sort of a year later at this point.
Yes, Thanks, Chris It's Russell I would debt.
The answer that with a couple of points..1 is as you can imagine with any new product that we might launch we have to balance.
And of our ability to scale with our ability to produce with great unit economics, and so just like with shell eggs. When we started back in the 7 we didn't hit.
<unk> plus thousands of stores on day 1.
And we're really pleased with the distribution gains on bytes, and we're really pleased with the initial uptake on bars. So it's scaling as we had hoped it would.
But our expectation certainly isn't that we reach our shell egg distribution levels and you won for any of the product.
Okay. Thank you very much.
Thanks, Chris Thanks for that.
Thank you. Our next question comes on the line of Pamela Kaufman with Morgan Stanley. Your line is now open.
Hi, good morning.
Hey, Pat and good morning.
And just another question on the guidance when you provided your guidance last quarter for the full year. You indicated that you had covered the current commodity cost outlook for the balance of the year and that Q2, and Q3 would face the higher commodity cost pressure.
On the Q2 EBITDA was ahead of analysts' expectations and I'm curious also performed better than you anticipated and.
So has your outlook for Q3, and Q4 of moderate relative to before.
Thanks for the question, Tim So we did see a little bit of the commodity impact in Q2 of game with where the peak of.
Addity costs have come in for the year of at least they appear to have peaked.
As we've said the most of that pressured and come in Q3 and Q4.
So I think Q2 was essentially in line with what we believe we always believed that the back half of the year would have higher sales, but we also have higher investments and the back half of the year to support that new distribution of it and make sure that we're really.
Converting those consumers and getting the trial.
Great.
And last quarter, you talked about not taking pricing to offset higher input costs, but I wanted to see if anything has changed and your pricing plans or if there are other ways that you are on that Youre managing.
On price.
Well, we're certainly always looking for efficiencies throughout the business.
To help offset some of the external cost pressures.
But what we've seen the date and the specialty AG market is that prices have remained relatively flat. There has been no price movements that we've seen other than the normal return to promotional cadence that we thought pre pandemic.
We still believe that.
Soy and corn and theyre going to be a little bit more transitory in nature, but if we believe that they're going to.
The turn out to be able of medium to long term impact to our gross margins will certainly reassess what we wanted to do from a pricing perspective, but for now we have no.
The current plan.
Thank you.
Thank you.
Our next question comes on the line of Adam Samuelson with Goldman Sachs. Your line is now open.
Yes, thanks, good morning, everyone.
Good morning, Adam.
Good morning.
And maybe that's something you just mentioned in response to the last question and maybe if you could just clarify or help us on.
Understand kind of what you mean, so we can monitor it you said that you think corn and soybean meal inflation proves transitory.
How do you think.
Point taken on pricing kind of has come off the highs and maybe not $8 corn and the or $7 corn anymore, but what is transitory mean and your eyes.
As we think of it how you would evaluate pricing.
And the gross margins going forward.
Okay.
I think from our perspective Adam.
And when we say transitory and right now there are a lot of pressure and the economy with the the emergence of <unk>.
On the economy from Covid with China restocking their hog supply.
Things that are more.
Short term in nature.
The supply will adjust over time and some of the extraordinary forces that are causing price increase will mitigate for the gain if we see the we don't believe that to be the case or something changes on that outlook and we'll certainly look at what we wanted to do from a pricing and the gross margin perspective, but for right now and we're continuing to be focused on.
On growing the top line as quickly as we can and continuing the hyper growth that we've seen for the last 3 years and getting new consumers into the fold.
That's right for the long term health of the business.
Got it Okay and then.
Maybe switching to that growth piece.
With the central station expansion slated to come on.
Mid year can.
Can you help us think about.
I mean, how quickly your farmer network can grow into that is that incremental.
On capacity.
We should be thinking about any of any startup costs or initial inefficiencies as that comes online and to in 'twenty, 2 and nothing and I cannot give any guidance necessarily but just trying to frame some of the cadence of that increment and.
Maybe some offsetting earnings impacts in the in the first quarter or 2 of that of that startup.
Okay.
Sure.
In terms of the first part of your question I mean, as we've talked we're constantly assessing our.
And our supply each and every month and we go through a detailed.
Demand review that we update each month and then we're looking at the number of farms that we need to continue to add to ensure that we can always continue this growth that we're seeing and want to continue to see.
So there's not like and event with ECS the opening up the causes of for look at our farms definitely we're adding farms, each and every month and going through that process and each and every month to make sure that we always have adequate supply to continue the growth.
In terms of the second part of the question.
Yes, we're not providing any guidance yet for for.
2022.
Okay.
For the.
Really not a lot to say about ECS and startup costs I wouldn't anticipate that's going to have a huge impact on our cost profile.
But it will certainly be some.
Yes, 1 thing I'd add.
It's Russell and 1 thing I'd add there is that's 1 of the real advantages of of the expansion versus a greenfield site is that we can leverage a lot of the infrastructure and staffing we already have in place and simply add some incremental.
Labor to staff the the actual operation of the expansion.
And we can scale that pretty well over time.
Alright the.
The color I appreciate it I'll pass it on thanks.
Thank you.
Thank you. Our next question comes from the line of Robert Moskow with Credit Suisse. Your line is now open.
2 more questions.
1 is can you give us a little more color on on what you think the next tranche of distribution expansion is going to be for shell eggs.
Is it more depth at certain customers that you would expect over the next 6 months to 12 months.
Or are there any new retailers that will be bringing on your brand and then also you mentioned you're always looking for productivity.
I remember hearing about several initiatives during the IPO.
Can you give us an update there on.
And where you are at and what kind of productivity savings we should expect.
For the next year or so.
Hey, Rob good morning.
I think I'll take the first part about distribution expansion and let Bo take the second part.
So.
As you know we are in most of the large.
And.
Food retailers in the United States today, certainly with the big ones that can really move the needle in terms of incremental growth that said, we're in roughly half the stores and the United States and said there are an awful lot of additional stores, where we believe our brand has the right to play and where we believe the retailers will enjoy great performance from.
Our products.
That said as we announced today.
Some of our biggest wins in the past quarter have been and retailers, where we already have a presence. So we announced some really substantial growth and continued expansion at Kroger and then in the northeast we continue to expand our presence both in terms of the number of doors and depths of depth of assortment.
And this time and that was that stop and shop and so.
No.
Yeah.
Phil and awful lot of room to play and I, certainly and excited about the growth opportunity, we see ahead, especially and that northeast area, which is our our kind of our final frontier.
Great book do you want to talk about efficiencies.
Yeah, and Rob was the question about the contract benefit.
Yes on the contract benefit and also I guess and central.
And remind me like as you expand.
I believe there is productivity benefits related to that as well.
Yeah.
Great.
First of all on on the contracts I mean, I think we've talked to before is that we.
We expect of about a 10% reduction and the price of the eggs that we pay for now until 2024 and the contracts migrate from some of the initial contract for the newer contracts, which is about a 5% gross margin expansion.
In terms of AG Central station efficiencies I think of Russell appropriately set of given it's a.
The expansion of an existing fertility of lot of the the management infrastructure and the fixed costs will remain relatively the same so there'll be a little bit of leverage on the vote.
And that's really the the main area of that you'd see it.
Because we're going to be hiring staff too.
The account for the higher production flow into the facility so on the variable basis.
And the majority of that can be variable addition, and.
And staffing, but we'll get some slight leverage from the management and taxes and things like that for the plant.
Got it okay. Thank you.
Thank you.
Thank you. Our last question comes from the line of Ken Zaslow with bank of Montreal Youre on.
And is now open.
Hey, good morning, guys.
Good morning, good morning, Ken.
You mentioned earlier on.
Outside of the egg central the there are some efficiency programs that you are looking to continue to do can you talk about where you think there is opportunity to increase efficiency. That's my first question and 1 more as a follow up thank you.
Yes, thanks for that kind of and I think we're looking at.
And everything all the time.
Opportunities for us to look at things that perhaps we can automate the today, we're doing manually.
Within ECS.
We are looking at what we can do from a trucking point of view and from a freight point of view as we.
<unk> continued to grow and get more efficient there.
And looking across the piece.
And G&A to make sure we're getting the best use out of every dollar that we spend.
I'll tell you what I'm really excited about Ken which is.
And we hired a director of insights and the marketing team.
Earlier this year and.
As you know building our brand and expanding household penetration of such a key component of our growth and I believe that our ability to analyze how we deploy those resources and how we can better model of the behavior of those raving fans that we add for the brand will only increase.
The effectiveness and efficiency of how we spend that money and that's the big investment for US. So that's also an area of I'd point out is a place for future efficiency.
Great and then my second question is when you go into of Kroger and whole foods, what is the opt on number of Skus and how Underpenetrated and are you in your other stores relative to that how do we kind of frame that that opportunity.
Yes, I appreciate that the first thing I'd call out is we've got 17 skus that whole foods at many mainline retailers, where we may have been and the source for a year or 2 we might have 1 or 2 like skus and maybe 1 or 2 butter skus and certainly the right answer is somewhere between those bookends and its really retailers specific I mean.
1 of the reasons that we believe we have a right to win over time with grocery retailers across the country is that we try to be thought partners to them and not overly sales. So when we come in and we work with each individual retailer to figure out what the most profitable and productive program for them and for some retailers.
That might be for Skus and for some retailers that might be 17 skus.
Every every throughout every year, we have ongoing conversations.
Conversations with our own boots on the ground at our key customers to talk about what their needs are and how we can best and beat them.
Okay I appreciate it thank you guys very much.
Thank you. Thank you.
Thank you there are no further questions I will now turn the call over to Matt <unk> for closing remarks.
Just wanted to thank everyone for your participation today and I have any questions feel free to reach out of a.
Great day. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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