Q3 2021 Vital Farms Inc Earnings Call
Okay.
Yeah.
Good day, and thank you for standing by and welcome to the vital farms third quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.
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I'd now like to hand, the conference over to your host today, Matt Fallon you.
You may begin.
Thank you good morning, and welcome to vital farms third quarter 2021 earnings conference call on webcast I am pleased to be joined on today's call by Russell Heiko.
And Chief Executive Officer, and both Meissner Chief Financial Officer.
By now everyone should have access to the company's third quarter 2021 earnings press release issued this morning. This is available on the Investor Relations section of <unk> website at investors Dot vital Barnes 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 in these forward looking statements.
Please refer to today's press release and the company's quarterly report on Form 10-Q for the fiscal quarter ended September 26, 2021, which is filed with the SEC earlier today and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.
Please note that on today's call management will refer to adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures. While the company believes these non-GAAP financial measures provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in <unk>.
With GAAP.
Please refer to our earnings release for a reconciliation of adjusted EBITDA to its most comparable measure prepared in accordance with GAAP.
And now I'd like to turn the call over to Russell to use can Saco, President and Chief Executive officer of vinyl farms.
Thanks, Matt and good morning, everyone. Thanks for joining us today.
We hope you're enjoying the cooler temperatures as much as our growth on grass to around this time of the year.
We had a strong third quarter and are pleased with the momentum we sustained across our business in 2021.
We delivered record net revenues for the third quarter and continue to manage our margins. Despite the extraordinary inflation, we are seeing in so many sectors of the global economy.
Net revenue was $64 6 million or 21, 1% increase from the prior year period.
We grew our network of small family farms to over 250.
And we continued to increase retail distribution.
Our products are now available in over 18000 stores.
Finally household penetration remained steady relative to the last quarter at over $5 5 million households, a 5% increase from the same time last year.
We are raising our 2021 fiscal year revenue outlook, which reflects our confidence in continuing the positive momentum we've experienced all year.
Bo will elaborate more on our detailed guidance in a few minutes.
Turning now to updates on the business.
A few weeks ago, we hosted our first Investor day in Springfield, Missouri.
A relatively new public company and due to the ongoing COVID-19 pandemic, our Investor Day was the first time, we were able to meet some of our stockholders and other members of the investment community in person.
It was also their first opportunity to tour AG Central station, our World Class AG, Washington packing facility and to meet crew members from function spanning the entire company.
We were especially pleased to introduce to analysts and investors to our crew members egg central station.
We saw genuine interest and enthusiasm of those who attended our Investor day, particularly around the many instances in which they saw our stakeholder model come to light.
Including the culture, we've cultivated among our crew members our robust network of small family farms, our environmental conservation efforts across our supply chain.
And the thoughtful ways, we are building loyal relationships with our consumers.
We believe in co creation with our stakeholders.
For our crew members. This means we listen and make decisions that benefit their long term sustainability.
We believe that if we prioritize their professional development and financial wellbeing, They will prosper as will our business.
Two topics of particular interest that came up at Investor day involved our pricing strategy and the desire for greater detail around our marketing strategy. So I want to spend a few minutes discussing these areas.
First on pricing.
As I mentioned earlier, we are at a time of extraordinary inflation that has impacted feed transportation and labor costs.
To date, we have absorbed these incremental costs as we felt most of them were transitory in nature we.
We have also helped to offset these costs within our own supply chain.
However, the severity of inflation in recent months across some of our key inputs and the fact that in certain areas. It appears to be more sustaining has led us to take a modest price increase across roughly 40% of our product portfolio.
This planned price increase will take effect early next year.
Recognizing the close partnership we foster with our stakeholders, we communicated this update to our retail customers with significant lead time, we believe they understand that this is a responsible decision made in the best interest of long term sustainability for our stakeholders.
Now I want to be clear about a couple of points.
This decision does not deviate from our consistent stance on pricing, we have always said that if and when we feel inflationary pressure is going to last longer than what we've seen in prior instances, we would take action to offset the effect of sustained increased input costs.
Second we have not seen a material impact from the U S labor market shortage, while we're not immune to these labor issues. Our supply chain has remained nimble, which we believe is a testament to our continued investments in human capital.
Now moving to our marketing strategy.
We're often asked how we connect consumers with the multifaceted stories about our brand.
In slide 17 through 20 in the Investor presentation that we posted this morning, we provided more detail on how we are building a strong brand in eggs and beyond through premium positioning.
Through personality and consistent point of view.
Our storytelling is bold and honest.
And while our focus on ethical food is a thread that is woven throughout all communication, we apply our playful mindful and savvy tone through diverse storytelling that connects consumers with every aspect of our brand including family farmers the girls on grass and consumers, who love cooking with us.
A recent example is hence behind the lens.
Each launch last week.
For this new campaign, we wanted to show a day in the life of our girls in the most honest and transparent way possible.
So we created a way for the hens to take photos of their life out in the past year.
The result is a series of unedited beautiful and at times hilarious photos of lights out on the pasture through the eyes of their most honest residents Vance.
This is our first out of home campaign, which will be featured on digital Billboards and Geo targeted mobile in major markets across the country. The.
The initial consumer response to hence behind the lens has been incredibly positive.
And we were pleased to see the campaign recognized as the out of the day by Adweek magazine.
Consistent with our belief in experimentation we are excited to meet consumers in new places and learning effectiveness of channels beyond paid social media.
We have a thorough understanding of our core consumers and how to reach them in the diverse places to which they are tuned.
This includes online video podcasts in retail stores.
On e-commerce platforms and across myriad social feeds as Youll see on slide 19.
We know our strategy is working.
<unk> added 2 million net new households to our consumer base in the last two years, we're leading in dollar share requirements. Among all premium brands and we have the highest brand I Trust score among purchasers.
Finally, we're pleased that vital farms is often recognized for thinking creatively and disruptive Lee about how our brand shows up in the world.
Just a few weeks ago, we were recognized by fast company as of 2021 brand that matters, which is a list of 95 companies and organizations that have achieved relevance through cultural impact social engagement and have authentically communicated their mission and ideal.
We're thrilled to be listed along so many purpose driven brands that we admire including Patagonia, Nike Sweet Green Yeti and more.
Now I'll spend a few minutes reviewing household penetration retail distribution foodservice and innovation.
Our household penetration on eggs stands at over $5 5 million households, or four 4%.
This measure is steady versus last quarter and is up about 60 basis points from the same period last year.
Given we offer an expanding product portfolio, we thought it would be helpful to provide you with our total brand household penetration metrics, which currently stands at 5%.
This is also higher relative to the prior year.
As we've discussed previously we are focused on gaining share at retail and are happy to report that we gained another 20 basis points of share in Q3, 2021, and now command five 8% of the total AG market.
In terms of retail distribution our products are now available in over 18000 retail stores nationwide, which represents growth of 10% over this time last year.
Looked at another way our total placements in stores grew over 19% relative to this time last year.
We saw strong distribution gains across the country, including further distribution at whole foods on certain skus.
I'm also excited to announce we recently launched the vital farms farm shop, our first E Commerce storefront, featuring 11 of our skus, including butter D and our convenient breakfast offerings. This.
This will make some of our products available to new households across the country and allow us to learn more about today's direct to consumer landscape in the process.
Now turning to foodservice since the end of 2020, we have increased the number of foodservice distribution centers that carry our vital farms product by over 175%.
We believe the first key step in scaling our foodservice business is making our products available for distribution in many regions across the country.
This is allowing us to expand our presence with new regionally focused foodservice concepts, including the unwind cafe, which has locations across the country.
On innovation.
<unk> on our last earnings call. We recently introduced new products in the convenient breakfast and butter categories.
What we've learned about convenient breakfast to date, especially from egg bites is that 70% of the volume was incremental to the category and the remaining purchases come from other existing brands.
We're pleased with the response, we've seen both from our consumers and retail customers as distribution for our breakfast bars and pasture raised spreadable tub butter has ramped nationally.
We believe our pasture raised spreadable tub butter will be especially popular on dinner tables. This holiday season.
Before I turn the call over to Bo I want to conclude with some remarks I recently shared at the conscious capitalism CEO summit and.
An annual event that brings together conscious business leaders.
I think there is a misconception.
Conscious capitalism is a trade off for successful capitalist competition.
We believe that it is a better way to produce outsized returns over time.
I believe our market leadership and the consistent revenue and penetration growth we've demonstrated within the specialty AG segment and category more broadly is a testament to how fiercely we compete to win.
Simply put if I did not think this was the right way to do business.
Wouldn't do it.
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 third quarter ended September 26, 2021, and provide an update on our full year outlook.
As Russell mentioned, we achieved record quarterly net revenue of $64 6 million, an increase of 21, 1% compared to the third quarter of 2020.
We achieved a 37, 7% two year net revenue growth CAGR, which represents a 100 basis points of acceleration relative to what we experienced in Q2 2021.
Growth in net revenue was due to continued growth in AG related sales.
Driven by volume increases at our existing customers as well as distribution gains at both new and existing retail partners and an increase in butter related sales.
Gross profit for the third quarter was $19 9 million or 37% of net revenue.
Compared to $18 4 million or 34, 4% of net revenue for the third quarter of 2020.
The change in gross profit was primarily driven by higher sales.
The change in gross margin was primarily attributable to an increase in grain input costs, which occurred in the second quarter of 2021, along with higher planned promotional spend.
As we return to normalized spend at retailers.
SG&A for the third quarter was $15 3 million compared to $12 2 million in the third quarter last year.
The increase in SG&A was primarily driven by higher employee related costs as we grew head count to support our continued growth.
An increase in our marketing spend.
And higher broker commission payments based on the increase in our sales volumes.
Shipping and distribution increased 68% or $2 6 million relative to the third quarter of 2020, driven by higher third party freight rates and to a lesser extent higher levels of sales volume.
Adjusted EBITDA for the third quarter was <unk> 2 million compared to $7 1 million for the third quarter of 2020.
Now an update on our capital structure.
As of September 26, 2021, we had a total balance of cash and cash equivalents and investment securities of $97 6 million and we have no long term debt outstanding.
Turning to our forecast for the full year 2021.
We are increasing our guidance for net revenue to between 253 million to $256 million, an increase of 18% to 19% over 2020.
Finally, we are tightening our expectations on adjusted EBITDA and anticipate it will be in the range of $8 million to $9 million for the full year 2021.
Thanks for your time and interest in vital farms before.
Before we move to taking questions I want to reiterate our confidence in the current trajectory of our business.
Our portfolio of high quality optically produced food is trusted by millions of households across the country.
We remain focused on further laying a strong foundation to propel future growth.
As both the company and the brand.
With that I will turn the call back over to Russell.
Thank you everyone for your interest in vinyl farms and for your time today.
We'd now like to turn it over to the operator to take your questions.
And thank you as a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound key please standby we compile the Q&A roster.
Okay.
In.
Our first question comes from Pamela Kaufman from Morgan Stanley.
Hi, good morning.
Good morning, good morning.
Can you elaborate on where your expectations around the inflation has changed relative to last quarter and what you see as more structural versus transient previously and then as a follow up do you expect the pricing that you are implementing to fully offset the inflationary pressure.
Next year.
Sure be happy to.
To talk to that thanks for the question.
I mean, I think as we've been talking and you can see in the external world, we still see that grain prices have come down but remain elevated but particularly within transportation costs, we're seeing significant <unk>.
Increases versus where we've been and those don't seem to come back down. So thats one of the key areas I think.
We still see pressure on our P&L on.
And your question on pricing was.
Is that correct.
If you expect that the pricing that you've announced to adena.
Okay could fully offset the inflationary pressures that you anticipate next year.
Well, it's hard to say in totality, because we don't know exactly where transportation that is going to go in grain costs are going to go but we think that we're going to offset.
Good portion of it.
Got to say, whether it will be all.
Thanks.
And then I just had a question on <unk>.
Distribution expansion.
<unk> got a good store growth during the quarter that accelerated sequentially.
There anything that Youre doing differently, that's contributing to that distribution expansion and then I'm curious about the composition of the store growth. If you are seeing particular growth.
I think region or within existing or new retail customers.
Thanks, Pam so the first thing I'd call out is.
<unk>.
Last year about a year ago, we hired Pete path is to lead sales for our organization and he went to work building not just an organization, but a real strategy around how to focus our team how to.
How to allocate resources and frankly.
The biggest the biggest factor I think at play here is we're starting to see that strategy and that team come to life in the results we're seeing.
It's frankly, we're just executing at a higher level than we were a year ago in this regard.
Beyond that again I think it is investments, we're making in everything from marketing to category insights and we work to become trusted.
Partners on thought partners to our retailers.
And that also has the effect of helping us continue to build out those relationships in.
Sort of mutually beneficial ways. So there are a lot of factors here, which again goes back to that stakeholder model or conscious capitalism that I'm always talking about but the specific things would be I think great execution on the part of our marketing and sales teams and frankly, a very resilient supply chain, despite lots of interesting headwinds across the sector.
<unk> this year.
Okay. Thank you.
Thank you.
And thank you.
And ladies and gentlemen, we asked that you guys. One question and one follow up and our next question comes from Adam Samuelson from Goldman Sachs. Your line is open.
Thank you and good morning, everyone.
Good morning, Adam.
Good morning, So I guess my first question is.
Thinking about that.
Distribution expansion.
Just to know one of the big pushes this year has been to really increase the total number of placements in items per store.
In conventional grocery where you're significantly under indexed versus kind of what you can do in the natural channel just how are you.
Any elaboration on progress there and as you think about shelf resets for 'twenty, two any kind of optimism that there is an increasing take rate or is it just a slow steady steady build from from where we are today.
Yes, I appreciate that Adam and Youre, absolutely right. There is a massive opportunity for us in conventional grocery we already in many.
Parts of natural enjoy.
The number one ranking in.
Sales of branded eggs and have been there for quite a while and we have great relationships. There I think there is an element of a flywheel effect here, where sort of the success in natural helped get us into conventional grocery years ago and as momentum builds there.
It makes it easier and easier to open more doors overtime.
I don't know that I'd call out a particular area within conventional grocery although I think it's.
It's been very consistent that our biggest opportunity to grow share is in the northeast and that is certainly where we put additional resources. So as I mentioned earlier.
But the team that we've built out under <unk> leadership over the last year has really brought additional sales resources. So we've grown the team and we've really started to play a little more zone in terms of putting great people against great opportunities and so that's really I think what's driving this increased momentum.
And again I.
I don't know that I would forecast, whether it's accelerating sustainably or whether it's just more of the same what I would say is.
We're not taking our foot off the gas.
This work that we're doing to put the right people against the right opportunities and develop stronger partnerships continues at pace.
Yeah.
Okay, and then just a quick follow up on the on the pricing kind of point, you talked about 40% of the portfolio kind of being subject to.
Price increases.
Is that a.
Any way to quantify just help us frame the magnitude of it.
As we think about where where the wholesale prices going.
Sure I'd be happy to Adam So again, you're right, we said 40% of the portfolio.
We're taking a price increase in the mid single digits on that portion of the portfolio.
Okay, Great that's really helpful.
I'll pass it on thank you.
Okay.
And thank you.
And our next question comes from Rob Baker from Jefferies. Your line is now open.
Hey, Good morning. This is Matt fishbein on for Rob Thanks for the question.
So.
Okay.
So Q3 household penetration on a percentage basis was four 4% versus the $4 five in Q2, and I think households were essentially flat sequentially as well, maybe we're splitting hairs here, but the first quarter. Some of at least 2019 that there wasn't any sequential increase in household penetration.
Wanted to get your take on this and given the new distribution gains both in breadth and depth of distribution, how much of that sequentially flat household penetration.
Yes.
Is is owing to.
Total AG category household penetration unwind as maybe consumers commute a bit more work rather than cooking breakfast at home.
And I guess, just a follow up broader question on it.
As household penetration even in the best measurement for us to use when we think about brand awareness.
Yes, thanks for that and you sure have equalized to see that.
I think very small sequential change for sure look.
The headline here is headline the household penetration continues to grow year on year and the.
The reality is it's a 52 week look.
And so if you think about the prior period the prior year compare and the sequential compare.
We are comparing to Q2.
When likely we had some some initial stock up demand still in the households, and so the reality is between that and this sort of.
The moment in time and look that this calculation uses.
There is inevitably some some slight rounding et cetera et cetera, we're not too caught up in a 10 basis point change quarter over quarter. The trajectory is very much still up into the right.
Thank you.
Just impressions in Q3, I think the figure you called out is it jumps since the summer anything you can share regarding who the incremental impressions are from assuming some of these households are already purchasing but are you able to see the mix of potential new households on the receiving end of your updated messaging.
It's really early.
We definitely have.
Hi toward experimentation and learning from all the different.
Sort of advertising efforts that we put down.
Aided by the investment we've made over the last year in in the insights on our marketing team and so while we don't have any.
Clear reads to share I would say that everything we do is intentional and it is designed to continue to learn and get better over time with how we invest in building our brand and getting our story out there.
Great just wanted to squeeze a follow up and just given the strain across the food distribution landscape, where there any third party related one offs during the quarter that we should keep in mind, thanks very much.
Third party in terms of suppliers to us or distributors was there anything.
Going on in the quarter.
This current presently that.
Just for modeling purposes that we should keep in mind.
Got it no no no no material one offs just inflation in freight.
Freight rates is the biggest thing that.
We saw yes that's.
That's correct.
Thanks, very much I'll pass it on.
Thank you.
Thank you and our next.
Our next question comes from Jacob <unk> from Credit Suisse. Your line is now open.
Hey, good morning, guys.
Good morning.
Just a follow up here on pricing to what extent should we think about I guess, how should we think about demand elasticity given the pricing price increase for 40% of the portfolio is that something that.
Did you guys see as a risk I guess, what's the pricing does flow through and then I have a follow up here.
Yes.
I can take that one so it's a great question and certainly one that we think about a lot. The reality is that a lot of it has to do with what the rest of the category does so we're more interested in cross elasticity of demand than the elasticity of our products.
Specifically because it has to do with the interplay of the shelf, what we're hearing and seeing is some other premium brands also taking price as well and so we won't know with confidence until we see how it all plays out next year.
But thats the beauty of.
The decision, we're making which is we can always adjust as we see how it plays out.
And what the competition does as well I believe.
We.
Frankly enjoy.
I think really strong margins for this category and enjoy we believe the strongest brand in the category.
We've got more room to play.
Yes.
Got you, Okay, and then just I guess, a bigger picture on foodservice I think you mentioned that foodservice distribution went up.
By 175% this quarter and I'm, just trying to think longer term, what's the what's the strategy for that side of the business, where do you see that playing what kind of role do you see that playing in the business is that.
Do you see that changing I guess from initial expectations, just any sort of color there.
It's interesting if you'd asked me a year or two ago about foodservice I Might've said.
Something a little more circumspect, Hey, look we've got great products and a great brand and on a more of an opportunistic basis. We find these really powerful partnerships with local and regional concepts and it works really well for both of us.
<unk> leadership, we frankly are a lot more bullish on foodservice Pete.
Is building up that foodservice team.
And we're and as you saw and what we reported the first step is really building out our distribution network and once we're in those distribution points. Then we can go region by region and really have the conversations with the right concepts the right food service concepts in the right locations and at the right time and so.
This doesn't happen overnight, but it's definitely a place where we're.
We are placing incremental investments and we expect to see some nice returns over time.
Got you perfect alright, thank you very much.
Thanks Jake.
And thank you and our next question comes from Matt Smith from Stifel. Your line is now open.
Hi, good morning.
Good morning.
Promotional activity is up compared to the prior year, but but if we take a step back can you talk about the level of promotional support you currently have in the market and has it has the near term inflation, you're facing impacted your ability to achieve your desired level of in store activity just support trial by new customers.
Yes, I think.
Go ahead Bob.
Sorry go.
Go ahead.
Yes, the level of promotional activity that we've talked to in the past in Q3 and Q4, we had to support the new distribution is planned distribution I don't think that the inflationary costs.
How does take our foot off the gas there because we feel it's important to drive that trial.
And really we're just returning to the more normal.
<unk>.
Post.
A year of Covid as all other competitors are and we're seeing rational pricing in the marketplace.
Both on based on promotional pricing, so no real surprises in that area for us.
Okay, and then as a follow up does the recent pricing actions allow you to maintain a more normal promotional calendar next year or.
Do you do you expect to realize that mid single digit price increase on the 40% of your portfolio.
Should we expect there to be some incremental promotional investment taken against that list price increase.
Yes, what I'd say.
That is because of the way that we communicated it to retailers and because frankly, we didn't overreach.
Reportedly some some CPG companies are really reaching as far as they can on pricing. We don't believe we will see pressure to kind of give it all back in promotional spend and we will work very hard to stay disciplined on that.
Okay. Thank you very much I'll leave it there and pass it on.
Thank you.
Thank you.
And if you'd like to ask the question that is star one and our next question comes from Ken Zaslow from Bank of Montreal.
Line is now open.
Hey, good morning, everyone.
Good morning, Ken.
Just two quick questions. One I think is an easy answer is.
Because of the AG market, you don't get any pre buying or accelerated buying because ahead of you're raising prices.
Popped up on the AG or anything like that so there is no change to the distribution of your sales.
Is that I'm assuming that.
Is that fair and then I just have one.
I think the key factor there youre right is that frankly, it's a very perishable products. So theres a limit to how much a retailer could forward buy.
And so while they might be tempted to do it it would be very limited.
Okay and then the second question is.
You talked about how the pricing may or may not cover the entire.
Inflationary pressures can you talk about other opportunities that you have to offset that what youre doing with the contracts that youre doing with.
The distribution center or things like that that may be able to stabilize your margins in 2022 and I appreciate it.
Yes sure thing Ken So we are constantly and continuously focused on eliminating waste in our system and I mean waste in the lean operation sense of it. So a couple of things that I would call out as really exciting opportunities that we've been working on for a while now and we will continue to.
On a 22, one has to do with the utilization rate.
The trucks on which we ship our products. So just an opportunity more fully cube out each of those trucks and our team is really focused on that as a goal in 2022, which can help offset the freight inflation.
Price of a truck goes up but our utilization of it goes up faster.
Can really be a game changer.
Thing I'd call out is we have this amazing network of over 250 small family farms and they provide us with an amazingly rich dataset about what works well and what works less well in terms of farming practices and so we have been working this is a big part of our strategy to have.
Right resources internal resources and boots on the ground to support those farms, which is helping the ones that aren't achieving the very best results in the networks get a little closer to the best and as we help those farmers become more efficient and effective we will then in turn have an opportunity to share in that.
Savings. So this is an example, where it's better outcomes for the farmer better outcomes for us and frankly better outcomes for animal welfare and for the environment. So those are two areas I would call out as ways that we're going to eliminate waste in 'twenty two that will help offset some of the inflation we're seeing.
I appreciate it thank you guys.
Thank you thanks, Ken.
Thank you and I'm showing no further questions I would now like to turn the call back to Matt Siler for closing remarks.
Just wanted to say thanks to everybody for your time today. If you have any questions. Please feel free to reach out.
Great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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