Good day and thank you for standing by. Welcome to the Vital Farms Incorporated Third Quarter Conference Call. At this time all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Siler. Please go ahead.

Thank you. Good morning. And welcome to Vital Farms third quarter 2022 earnings conference call and webcast. I am joined on today’s call by Russell Diez-Canseco, President and Chief Executive Officer; Bo Meissner, Chief Financial Officer; and for the first time, I am happy to introduce Kathryn McKeon, our Chief Marketing Officer. By now everyone should have accessed to the company’s third quarter 2022 earnings press release issued this morning. This is available on the Investor Relations section of the Vital Farms website at investors.vitalfarms.com. 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 these forward-looking statements. Please refer to today’s press release and to the company’s quarterly report on Form 10-Q for the fiscal quarter ended September 25, 2022, which was 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 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. And now, I’d like to turn the call over to Russell Diez-Canseco, President and Chief Executive Officer of Vital Farms.

Thanks, Matt. Good morning and thanks everyone for your time today. I will review our third quarter financial results and provide updates across the business, that are contributing to our success as a disruptive force in the food sector. Kathryn McKeon, our Chief Marketing Officer, will join us to talk through what makes our brand unique and why it continues to resonate with consumers. Our world-class marketing team is one of our key points of differentiation and I am grateful she’s joining us today. Finally, Bo will conclude our call with additional color on our quarterly financial results before we take your questions. In the third quarter, we achieved $92 million in net revenue. This is the highest quarterly result in our history and it reflects a 42.4% increase from the prior year period, driven by volume gains of 28%. Our gross margin expanded 190 basis points sequentially to 32% despite higher input costs and our adjusted EBITDA was $5.2 million, up over 2,200% versus last year. Our household penetration in the egg category now stands at nearly $8 million, up roughly 40% relative to last year. Looking at the 13 weeks ended September 25, 2022, the egg category has experienced significant retail dollar growth of over 50%, due mostly to inflation of lower-priced eggs. Some believe these higher egg prices will sustain in the coming months given the current operating climate. With this backdrop, I think it makes more sense to focus on unit volume when judging overall growth. Despite our portfolio-wide price increase in May, we grew our retail volume significantly at 25% during the period, well ahead of the shell egg category, which saw volumes decline by 0.5% over the same time frame. Underpinning this growth, both current and historic is our unique stakeholder-driven business model, our…

Thank you, Russell. And thank you for the opportunity to talk through the work we are doing to grow the Vital Farms brand. Our brand is an extension of Vital Farms purpose. In fact, I am happy to share that Vital Farms was recently named to the Brands That Matter list at Fast Company. Consumers choose us because they believe we are backing up our commitment to improve the lives of people, animals and the planet through food. The conviction with which we operate, the steadfast adherence to our values and our uncompromising commitment to stakeholders gives us the credibility and confidence to drive loyalty for our core products and expand into new categories. Last quarter, we spoke about our new marketing campaign, Keeping It Bullsh T-Free. This year’s campaign challenges viewers to rethink widespread practices, including misleading labels like cage-free, hollow corporate initiatives and poor worker conditions, all with the lighthearted tone and tender expected from Vital Farms. It is the latest in a long-running effort to support Vital Farms full stakeholder community, including our crews, customers and consumers, suppliers and farmers, stockholders and the environment. The campaign was rolled out across streaming television, online and social platforms, including Hulu, YouTube, TikTok and Insider’s Better Capitalism vertical in late August. All four of our new spots can also be viewed on the Vital Farms website. I encourage each of you to check them out and see the campaign for yourself. We continue to focus our messaging on our core consumers, which today includes 19 million U.S. households. We have seen 34% year-over-year growth in household penetration on average over the past 11 quarters. And as Russell mentioned earlier, our eggs are in nearly eight million of these homes today. This speaks to our ability to reach consumers with our uniquely compelling message and it’s reflected in key metrics like brand awareness and brand trust. With that said, there is still significant room for further household penetration and increased brand awareness beyond our core consumers. The key to achieving our long-term potential involves our continued marketing efforts, which we believe contribute to our sales growth. Consumers are attractive to our brands and stay with us, because we connect with them through many creative touch points. We do not just market to our core consumers. We build lasting relationships with them. Thanks everyone for your time today. I will now turn the call over to Bo.

Thank you, Kathryn. Hello, everyone, and thank you for joining us today. I will review our financial results for the third quarter ended September 25, 2022. I will then provide an update on our annual guidance for this fiscal year. As Russell mentioned, we had a record quarter with net revenue of $92 million, an increase of 42.4% compared to the prior year period. The growth in net revenue in the third quarter was due to continued growth in egg related sales driven by strong volume increases at our customers, as well as distribution gains at both new and existing retail partners. During the period, our volumes were up 28%, with the remaining growth driven by pricing. Gross profit for the third quarter was $29.5 million or 32% of net revenue, compared to $19.8 million or 30.7% of net revenue for the third quarter of 2021. The change in gross profit was primarily driven by higher sales. As to the change in gross margin, increased pricing across our entire portfolio offset some headwinds, including an increase in input costs in both eggs and butter and higher packaging costs. We saw expense leverage on both SG&A and shipping and distribution during the period. SG&A expenses for the third quarter were $20.6 million or 22.3% of net revenues, compared to $15.3 million or 23.7% of net revenues in the third quarter last year. The increase in SG&A was primarily driven by higher employee related costs as we grew headcount to support our continued growth and higher marketing expenses. Shipping and distribution expenses in the third quarter were $6.9 million or 7.5% of net revenue relative to $6.3 million or 9.8% of net revenue in the third quarter of 2021, driven by higher sales volumes and freight rates. This was partially offset by…

Thank you. [Operator Instructions] Our first question comes from Adam Samuelson with Goldman Sachs. Adam, your line is open.

Yes. Thank you. Good morning, everyone.

Good morning, Adam.

Good morning, Adam.

Good morning. So I guess first question is maybe coming back to the announced price increase in January and then you had some comments around kind of increasing the pay rates to your growers. I just was hoping you could maybe try dimensionalize kind of both of those and help us think about with the growers, just how you -- you felt that that was needed because you were seeing a change in your recruiting of incremental growers or you are trying to just do the right thing by your whole shareholder -- stakeholder network?

Yeah. Thanks, Adam. Great question. As we talked on the call, the impact in Q4 is about 100 basis points on our gross margin and that’s relative to Q3. We did that for exactly the reasons that I talked to. I mean they are seeing additional inflationary pressures in some of the areas that we don’t change from a headline point of view. We obviously account for the soy and corn that we have talked about on a one quarter lag, but they have other inputs they are also seeing inflation in. And it was the right thing to do for the farmers to make sure that they have a sustainable profit model and help them through this difficult time. As a result, we made the change. The pricing that we are taking...

Adam. Sorry, go ahead, Bo. I was just going to add on when you are done.

Okay. I was just going to say, look, the pricing that we are going to take in January will offset that and the other inflationary pressures that we have said and we will be back on our long-term trajectory that we communicated in the mid-30s.

And Adam, the color I’d add is, it’s not just altruism. The reality is that we need our farmers to have a sustainable financial model to have our own sustainable supply chain and financial model. So there’s certainly a healthy dose of self-interest as we think about the right actions to take to ensure the stability of our farming network.

Okay. That’s all very helpful. And then I wanted to -- there wasn’t a lot of discussion of this, but just -- I know you have been kind of evaluating a category expansion and just any additional kind of thoughts framing timing that you might have as we think about when that’s ready to be kind of revealed and discussed, and we can think about the different financial implications thereof?

Sure. I appreciate that, Adam. So as we said on the last call, we have narrowed it down to a category and continue to work through our plans to enter that category. And we are -- I think we can’t wait to tell you all about it. But as with everything else we do, we are very intentional and we don’t want to get in front of facts with our announcement. So when we are ready to share, we will and we hope to be able to do that by the end of the year.

Okay. Great. That’s all really helpful. I will pass it on. Thanks.

Thank you, Adam.

Thanks, Adam.

One moment for our next question. Our next question comes from Pamela Kaufman with Morgan Stanley.

Hi. Good morning.

Good morning, Pam.

Can you talk about just what you are seeing in terms of consumer demand? Obviously, your volumes are very strong despite significant pricing. So how do you think about the factors contributing to that growth? And then, I guess, with the upcoming price increase in January, how are you thinking about demand elasticity? Thank you.

Thanks, Pam. It’s Russell. I will take the first part of that and I might ask Kathryn to chime in as well since we have the pleasure for her company today on the call. As you look at -- as we look at components of growth, they are -- they continue to be pretty robustly driven across both volume and price and elasticities that we have seen so far are coming in very much consistent with what we expected to be. In fact, I have been honestly pleasantly surprised with how accurate the forecast have been internally given that some of this is pretty unprecedented. What I’d say is that, we are seeing a nice increase in velocities, because we are adding items to existing customers and an increase in doors as well, and so those are both contributing to those volume gains. We continue to add households, as we mentioned in the -- earlier in the call and that’s clearly an important part of our long-term sort of brand first approach to sustainable growth. The -- as we continue to take price, there’s so many brands and private label producers are, it’s certainly not lost on us that we are starting to see prices that, in essence, felt a little unimaginable just a year ago and so we are being even more conservative as we project our growth in 2023 relative to the pricing that we are taking. We still expect to have robust growth, but we are being, typically -- as we always are, typically conservative when it comes to our expected -- the expected impact of pricing. I’d love to have Kathryn talk a little bit more about how she thinks about the impact on our business and consumers of our pricing action.

Thanks, Russell. Good morning, Pam. I want to talk a little bit more about the brand. Russell talked about the fact that we have built a premium brand in the prepared remarks. I want to expand on that a little bit to help explain, because it’s really a key driver to how we think about demand. So we have built that premium brand not on smoke and mirrors, not something that we crafted, but rather on trust, on quality and on our values, and we have done that from day one. So from a trust perspective, we have consistently said what we do, do what we say, say what we do, do what we say, whether that’s our traceability initiative or simply the way that we talk with consumers each and every day on social media and that consistency of transparency is profoundly trust building. We are also delivering a quality product and a very high quality product. Consumers are willing to pay for that. They are especially willing to pay for that and demand more when it comes from a company with values that reflect theirs. Not just a brand that represents anything, but a company with consistent values that has always been there. And so those things have helped us grow through the inflationary time we are already in and the price that we have taken, and as we look to the future, we believe that that will continue to be true.

Thanks. And then can you talk about where you are seeing recent distribution gains? Is it in a particular region and where do you see further opportunity for distribution growth?

So as we mentioned on our last quarterly call, we have made a particular focus on the Northeast region. It’s the area of the country where our historic growth has not been focused. And so we see a big opportunity with points of distribution and ACV in the Northeast and those investments really are paying off in terms of new doors and new items in existing doors. We -- and a big part of that is a team that we have staffed. We have hired some really terrific sales leaders specifically for that region. So it’s a very intentional investment and we are seeing that pay off. More broadly, as you can imagine, we are already the number one egg brand in the natural channel. The growth opportunity over time is a lot in MULO and we are seeing that play out as we continue to earn the right to have more space on shelf with our high velocities and our strong retailer relationships, that model of continuing to kind of beat and raise as it were in terms of our performance with retailers and then getting more space as a result continues to work for us and we continue to grow points of distribution in existing doors.

Great. Thank you.

Thanks, Pam.

One moment for our next question. Our next question comes from Cody Ross with UBS.

Good morning. Thanks for taking our questions.

Hey, Cody.

Whole -- hi, there. Wholesale egg prices have declined and retail prices for conventional eggs are likely to fall as well. There’s a narrative out there that this will significantly reduce your share as your price gap widens. How comfortable are you with your price gaps today and are you concerned about your market share in the event that your price gaps widen further?

Yeah. So it’s interesting. I wish I had a crystal ball about what happens in any commodity market, including with commodity eggs, certainly would be doing a different line of work if I had that crystal ball. I -- there are plenty of arguments for tightening of egg supply and egg pricing in the marketplace as we see a return to Avian influenza. I read an article about 1 million birth flock in Iowa being affected just in the last week, for example, it hasn’t been widely reported. That said, commodity egg prices aren’t typically something that we have seen have an impact on our growth. And I would take you back to a time just a few years ago when there was a pretty big price war I believe in the Midwest, where multiple retailers were pricing commodity eggs at well below $1. We saw commodity egg prices as low as $0.47 across a big portion of the United States and yet our growth continued at our historic pace. And so the truth is, we are much more focused on the things that Kathryn described, building the trust-based brand and delivering on our commitments to our stakeholders and that works. Consumers that buy the most expensive eggs on the shelf aren’t typically cross shopping the cheapest eggs on the shelf. And I don’t think that has fundamentally changed simply because commodity egg prices have jumped up recently, nor do I think that’s a big driver of our growth.

That’s helpful. Thank you for that. A big pushback we hear that your buy rate indicates that consumers only purchase your eggs about 3 times to 4 times a year, yet make 18 purchases a year, suggesting there’s not much brand loyalty. How concerned are you about this if the U.S. economy deteriorate? Thank you.

Yeah. Thanks for that. It’s interesting. That -- I definitely see an opportunity to increase our share of whatever you want to call it, stomach or wallet or refrigerator when it comes to egg purchases. That number has been pretty consistent for us over the years. And there are a lot of -- if you think about the idea of market segmentation, there are lots of reasons why different consumers might choose to buy different eggs. We definitely have a segment of consumers with very high brand assistance and we see that through some of the digital order data that we are able to get from some of our retail partners. We have -- my understanding is, the highest rate of consumers who want to buy our eggs and will not accept a substitute. So there’s a group of consumers out there that will only buy our eggs and won’t buy eggs if they can’t find ours. There are also consumers who will buy our eggs primarily, but won’t ignore a hot ad that someone else runs. One of the things we do to ensure that our volume isn’t simply driven by our promotions is we tend to promote less deeply than some of our competitors do, because we want to generate trial, but we don’t necessarily want to drive volume on promotion and that will show up in a metric called what percent of our volume is sold on promotion. And so, the reality is, we believe that, that historic buy rate of 3 times to 4 times, again, hasn’t changed significantly as we have seen changes in macro environments and as we have seen changes in what competitors are doing. There’s still so much growth ahead, adding households at that buy rate and stay tuned, because we are certainly thinking about how we can increase the buy rate as well.

Great. Thanks for that. I will pass it along.

Thank you.

Thanks, Cody.

One moment for our next question. Our next question comes from Brian Holland with Cowen and Company.

Yeah. Thanks. Good morning. I just want to…

Good morning, Brian.

Good morning, Russell. I just want to the reiteration of guidance here quickly as opposed to maybe raising it. So I guess I just want to make sure I understand. You called out the increased payments to farmers. I know marketing was maybe higher in 3Q. So maybe we are leaning into that again in 4Q. Just help us understand, I guess, below the topline, the construct of the guidance 4Q, and what maybe, if anything, you are trying to signal about incremental pressures in 4Q?

Yeah. Thanks for that, Brian. I mean, first off, let me just talk to sort of generally how we are thinking about guidance. I mean we hope that give you levels of net revenue, adjusted EBITDA that we can achieve in or to pass on an annual basis, but remain consistent throughout the year with the performance against the guidance. So we want to move away from ranges and intra-year changes as we focus on the long-term performance of the business. First, on revenue, if you think of where we are in revenue, I think, we are comfortable with where consensus is right now on revenue for Q4, even though we haven’t taken up guidance. But if you think that Q4 profitability, that 100-basis-point gross margin impact versus Q3 for the increased farm repayments is something that will flow through in Q4 and be offset by pricing than in January. We also continue to invest in marketing more strongly than we did in the prior year. So I think on the operating expense line, you are going to continue to see investment there, which is why we haven’t taken our guidance up above the $13 million that we have had. But I think we are also comfortable with the current consensus that’s around $13.7 million.

I appreciate that color, Bo. And then, I guess, this question has been asked a few ways, I will ask it one other way. Obviously, you have had really nice distribution gains this year, retailer breadth, if you will is filling out nicely. I am just curious how much more room you think you have on stores as a catalyst going forward as you are now over 22,000, I think, it is? And whether -- if that’s less of a tailwind for you or an opportunity going forward that this is more about depth, I guess, I appreciate that maybe we will hear more about new product launches going forward. But is that the right way to think about this that we are not going to get as much store growth and that incremental distribution growth as it were, would be a byproduct of more SKUs per store?

Thanks, Brian. Yeah. I think we have been pretty consistent over the last several calls that those are -- they are both opportunities, new doors and items per door. But as you have pointed out, as we continue to grow doors, and certainly, if we have been doing our jobs right, we are focused on the highest quality or potentially productive doors, then the opportunity continues to shift toward more items per door. We have got a really well-worn playbook, if you look at some of our earliest customers, including Whole Foods, which I believe has 19 retail SKUs of ours that we tend to by investing in marketing and by being great partners and by executing reasonably well, we tend to earn the right to add more products over time. We have really productive SKUs, and it’s not a hard conversation to show our retail partners how we can help improve their ability to meet their goals with more of the items that we produce. And so there’s a natural path from two and three and four items on a shelf to five and six and seven and that’s to me provides an awful lot of tailwind and runway in front of us.

Thanks Russell. Best of luck.

Thank you.

Thanks, Brian.

One moment for our next question. Our next question comes from Robert Dickerson with Jefferies.

Great. Thanks so much. Good morning.

Good morning, Rob.

I guess -- hey. How are you? Maybe just first question just around the next round of pricing, I don’t know if you are willing to provide any more color kind of depth on that pricing is just around, let’s say, is it similar, you think kind of the magnitude relative to the prior rounds, maybe how much of the portfolio you would expect to price, et cetera?

Yeah. Thanks for that, Rob. The price increase we are taking in January is more similar to the one that we took in May of this year and it’s just on the eggs business at this point, no further pricing involved.

Okay. Got it. Thanks. And then I feel like I always have to ask just around Avian flu, but it doesn’t seem like it’s been much of an impact. Things seem to be fairly contained on your end. So just kind of update on any kind of risk what you are seeing on your flock? And then, is there anything kind of around Avian that would also or could also increase kind of near-term cost to bring the birds in and what have you? That’s all.

Thanks, Rob. So it’s interesting, we have, I believe, one of the most resilient supply chains in eggs today and that’s largely driven by the fact that, we have a distributed network of small family farms, over 300 of them and so any of those individual farms is likely well under 1% of our total supply. So even if we were to have a farm affected by Avian influenza, it represents a small portion of our overall supply. That said, we follow and often exceed industry standards and best practices around protecting the birds and protecting our farms and our small family farm partners from the impacts of Avian influenza. We have never had an outbreak of Avian influenza on any of our farms and we work really hard to keep it that way. So from a risk perspective, look, it’s out there and I am not going to say never. But the reality is our track record is really good here and we work really hard to keep it that way. On the flip side, what we saw back in 2016 is that, when Avian influenza starts to hit those big mega farms like we saw last week in Iowa with 1 million bird farm being affected, it starts to affect supply on the shelf and I have read a lot recently about continued kind of low service levels or low fill rates on retail shelves as being a reason why we continue to see strong price increases, strong pricing. And that -- if you believe Avian influenza is an issue, I think, the more likely impact is you are going to start to see more holes on the egg shelf. The biggest risk for us is that it actually cleans us out of eggs, right? It can be pretty good for sales if you have eggs and there aren’t as many as consumers would like. What we want to do is ensure that our loyal consumers can have our eggs and that we simply aren’t the default choice because there aren’t any others on the shelf as we sometimes saw back in 2016.

Okay. That’s helpful. Maybe just a quick follow-up. Russell, you said earlier the way maybe revenues are coming in kind of pricing volume is fairly close to kind of what you forecasted then you layer on, I guess, a bit of an Avian impact that could potentially come by causing some holes from other players in the shelf. But I mean, obviously, I would assume with kind of Egg Central Station kind of the agreements you have with your farmers inclusive of the incremental cost you pay those farmers to make them happy that there doesn’t seem to be any near-term issue with capacity despite the strong volume growth we are seeing? Thank you.

Yeah. I appreciate you calling that out, Rob. We expanded Egg Central Station on time and on budget earlier this year in advance of us needing the extra capacity. And so we actually are using some of that extra capacity to meet our current order volume, but we were very intentional on the timing to ensure that we would have no production bottlenecks and we do not. We have capacity to exceed a $650 million egg business today and we are already doing the site selection work for the next plant as we look ahead to building a business beyond $650 million. So I sure appreciate that question.

Super. Thanks guys.

Thanks, Rob.

One moment for our next question. Our next question is from Chris Growe with Stifel.

Hi. Good morning. Thank you.

Hey, Chris.

Good morning.

Hi. I just had a quick follow-on on the fourth quarter and the gross margin. I guess I just want to get a sense, if -- could that still be up sequentially, and I guess, as I think about you have this higher payment coming through, you should have a little less inflation sort of lap some of the increases from the prior year on grains in the quarter and with that strong pricing coming through, I just want to get a sense of how to look at the fourth quarter gross margin around those dynamics?

Yeah. Thanks for that, Chris. Yeah. It’s certainly going to be up year-over-year, but not sequentially. There’s conventional grains where you look at the CME, they are coming down, but we are also seeing an impact from our farms and seasonals that base is going up in the background, offsetting some of the things you are seeing in the headlines. But we also have organic feed prices going up and we have packaging going up. So there’s a little bit of a lag in how that all flows through as well. And so that’s why you may be looking at corn and soy coming down, but with based just on organic and packaging, we have some offsets there. So I think our gross margins will be flat to down sequentially and we will make up for that in the pricing in Q1.

Okay. That’s helpful. Thank you. And then just one other quick question around you are holding a decent amount of cash and I am just curious about those -- the uses of that cash going forward, would you expect and we kind of hold back a reserve for capital around a new product, for example, any other capital projects worth noting. And I am curious if you buy your stock back, I mean your fundamentals have been very strong and the stock has been not moving up here commensurate with that increase in fundamentals?

I will let Bo…

Okay.

… address the current plans and then I will talk philosophically about buyback. How about that?

Sure. Okay. Well, I think, Chris, if you look at how we manage that, we are looking to use that capital to accelerate our long-term growth and for things to accelerate our growth. So we talked about in the past, investing in cost-saving opportunities that we can then reinvest that money back in the business. We could use that money if we were to look at new categories to enter as you said and there’s different ways to get into those categories again to accelerate our growth. So I think we are being very, very prudent and very thoughtful about how we use that capital. I think we have sufficient capital to allow us to do many things to continue on the long-term growth trajectory that we believe that we can deliver. I will let Russell talk to the stock buyback piece.

Yeah. It’s so interesting. It would be tempting, right? Because we agree, I don’t think the, our stock price reflects the performance and the potential of our company and it feels cheap, so why wouldn’t you buy low, right? That said, as Bo alluded to, gosh, there’s so much growth ahead of us and we certainly appreciate having that dry powder, that flexibility to pursue growth opportunities that make sense financially for us. But the thing -- other thing I would add is, the stock seems cheap, but it sure seems like cash for high growth companies is at a premium as well. And so I see that as a very rare gift that we have that strong balance sheet in a time of such uncertainty that just gives us the confidence of our convictions to continue to pursue our long-term goals. It gives confidence to our crew members. It gives confidence to our farmers. It gives confidence to our retailers that we will continue to deliver as we always have. And so shame on me, if I took the opportunity opportunistically to buy back some shares and send a bullish signal to the marketplace, but reduce the resilience of our company in the process. So I would be very low to do something like that in the short-term.

Okay. Thank you for that perspective.

Thanks, Chris.

At this time, I would like to turn it back to Matt for further comments.

Thanks everybody for your time and interest in Vital Farms today. Have a good one.

Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.