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Operator: Good day, and thank you for standing by. Welcome to the Vital Farms First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand over the conference to your speaker today, Matt Siler, Vice President of Investor Relations. Matt, please go ahead.

Matt Siler: Thank you. Good morning, and welcome to Vital Farms First Quarter 2023 Earnings Conference Call and Webcast. I’m joined on today’s call by Russell Diez-Canseco, President and Chief Executive Officer; Thilo Wrede, Chief Financial Officer; and Kathryn McKeon, our Chief Marketing Officer. By now, everyone should have access to the company’s first quarter 2023 earnings press release issued this morning. This is available on the Investor Relations section of Vital Farm’s website at investors.vitalfarms.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 to the company’s quarterly report on Form 10-Q for the fiscal quarter ended March 26, 2023, which will be filed with the SEC 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 and adjusted EBITDA margin to the respective most comparable measures 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.

Thilo Wrede: Thanks, Matt. Good morning, and thanks, everyone, for your time today. I’m going to start by sharing updates on how we delivered on our commitments to all of our stakeholders during the first quarter. Kathryn will provide an update on how our brand continues to resonate with consumers. Finally, I’m happy to introduce our new Chief Financial Officer, Thilo Wrede, who will provide more depth on our quarterly results and our annual guidance before we take your questions. It was a great first quarter. We achieved $119.2 million in net revenue, which represents the highest quarterly result in the history of Vital Farms. It reflects a 54.7% increase from the prior year period and was driven by volume growth of 26%.

Our sales and marketing teams continue their efficient execution despite the dislocations in the marketplace. Our gross margin expanded by over 700 basis points to almost 36%, which is a testament to the work of each stakeholder throughout our supply chain. Finally, we had a record adjusted EBITDA of about $14 million, up significantly versus last year, and we achieved an adjusted EBITDA margin of 11.6%. I think it would be helpful to provide some context on the egg industry as we continue to deal with the ramifications of avian influenza in the marketplace. The industry is still experiencing significant price inflation, which is illustrated in the data. Looking at the 13 weeks ended March 26, 2023, the ad category saw retail dollar growth of about 65% due mostly to price inflation of conventional eggs.

Retail volume in the category saw a 6% decline, which accelerated relative to the flat performance the industry experienced over the prior 2 quarters. As to an update on avian influenza, the size of the land block in the United States has begun its recovery as we had expected, but remained below its average size in recent years during the first quarter. We continue to operate with the assumption that the egg supply in the United States will continue to expand as the year progresses as the size of the U.S. land block recovers, barring another outlook. In terms of our performance, our retail volume grew at over 12% during the 13 weeks ended March 26, 2023, which was well ahead of the category decline. Our volume share expanded by over 50 basis points compared to the same period last year.

Additionally, the elasticities we experienced at retail during the first quarter were in line with our expectations. Demand for Vital Farms products remains robust. We are reiterating our fiscal year 2023 guidance as Thilo will expand upon shortly, which we think is appropriate at this early stage in what will certainly be a dynamic year in the marketplace. Our focus will remain grounded in driving long-term positive outcomes for each of our stakeholders. We’ve been intentional about the choices we’ve made over the past several years to build our business with this as our primary goal. We believe the many decisions we make each day fully consider each of our stakeholders, which contributes to our enduring success. We will maintain our balanced long-term stakeholder focus regardless of what is going on in the external environment.

We’ve demonstrated that we can grow through and following the pandemic. On an annual basis, our net revenue CAGR is 37%, dating all the way back to my arrival in 2014 without a negative year-over-year revenue growth rate as a public company in any quarter. We have guided for at least 25% net revenue growth again this year on top of close to 40% net revenue growth in 2022, and we expect volume growth to play a meaningful part in addition to the impact of price increases. We have multiple proof points that demonstrate our ability to effectively manage our business through changes in pricing and inflationary volatility. We have worked with our farmers to help them navigate a more challenging operating environment and are paying them more for the hard work they do daily.

Despite the higher cost of Vital farm, we’re planning on better gross margin performance in 2023 compared to 2022. We have improved our processes around both inbound and outbound freight. Over the past year, we were able to leverage the external operational capabilities of our third-party logistics providers to deliver significant value in terms of cost and service. The effort of our crew members to manage those stakeholder relationships resulted in better truckload utilization and lower contracted shipping rates. We completed in April 2022, an expansion of Egg Central Station, our world-class egg washing and packing facility on time and on budget and are now in a position to support over $700 million in annual revenue from egg sales. We have maintained our commitments to stakeholders even in the context of serious industry disruptors like avian influenza.

We have purposefully built a network of over 300 family farms that provides resilience against these types of constraints. And as a result, avian influenza has had a minimal impact on our business to date. I want to reiterate my confidence in our ability to operate efficiently throughout this ever-changing environment. Our guidance reflects a reasonable set of assumptions about what may unfold across the economy in the second half of the year. We are in a position of strength with respect to our plans for the remainder of 2023. I’ll now turn the call over to Kathryn to provide an update on our brand.

Kathryn McKeon: Thank you, Russell. As I have said in the past, I consider a genuine privilege to tell the Vital Farms story alongside the incredible group of people on the marketing team. Our brand is an extension of Vital Farms purpose and our consumers choose us because they believe we’re backing up our commitment to improve the lives of people, animals and the planet through food. We have a strategic focus on raising awareness and increasing household penetration that is driving results. I’m going to focus today on 3 ways we’re adding new capabilities that enable us to build lasting relationships with our growing consumer base in service of that strategy. First, we are joining culturally relevant conversations that are directly relevant to our business, our purpose and our consumers.

We’re doing this to meet our consumers where they are, build trust and raise awareness. Our most recent campaign was for Valentine’s Day, which created a playful entry point into 2 topics that resonated with our consumers. Egg prices and inflation. We built a fully integrated campaign in less than a week that drove over 70 million impressions. We continue to develop this quick-turn capability, and we’re encouraged by the return on this initial effort. Second, we are beginning a new relationship with a world-class breakthrough advertising creative agency named Scott. They approach advertising with bravery, courage, transparency and intuition, which we believe will fuel the growth of our brand. Over the past several years, we have effectively leveraged great brand campaigns to drive consumer awareness, including our award-winning hence behind the [indiscernible] campaign and our most recent campaign that’s running now titled keeping it full ship free.

Scott has a reputation for working with bold brands like ours to break through with consumers. They’re particularly effective at driving the kind of quick trend culturally relevant work that we’re looking to do more. And our first campaign with us was a successful Valentine’s Day activation. Finally, we continue looking for new ways to get our message in front of consumers and stay on the leading edge of advertising trends. The most recent example is working with HBO Max on a new feature for advertisers, which not only drove exposure with our target growth consumer during programs like succession, it also generated press coverage for being a first of its kind collaboration with HBO Max. The marketing team continues to set ambitious goals, push for bull creative work and deliver.

I look forward to continuing this discussion on future earnings calls. Thanks, everyone, for your time today. I’ll now turn it over to Thilo.

Thilo Wrede: Thank you, Kathryn. Hello, everyone, and thank you for joining us today. I’m honored to surface Vital Farms Chief Financial Officer. And while I’m quite early in my tenure, I am impressed with the quality of the team at Vital Farms and excited about the opportunities that lies ahead for this company. With that in mind, I want to thank Bo Meissner for leaving me a house in very good order. Following, I will review our financial results for the first quarter ended March 26, 2023. I will then provide some additional color on our guidance for fiscal year 2023. As Russell mentioned earlier, we had another record quarter with net revenue of $119.2 million, an increase of 54.7% compared to the prior year period. This was driven by volume growth of 26% based on strong volume increases across both new and existing retail customers.

Gross profit for the first quarter of 2023 was $42.7 million or 35.8% of net revenue compared to $21.7 million or 28.2% of net revenue for the first quarter of 2022. The change in gross profit was primarily driven by higher sales. The 760-basis point gross margin gain benefited from increased pricing across our portfolio, partially offset by a few headwinds, including higher input costs that includes higher commodity prices across our shell egg and butter businesses and higher packaging costs. SG&A expenses for the first quarter were $23.9 million or 20.1% of net revenue compared to $17.6 million or 22.9% of net revenue in the first 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 first quarter were $7.8 million or 6.6% of net revenue relative to $8.2 million or 10.6% of net revenue in the first quarter of 2022. The decrease in shipping and distribution expenses was driven by a decline in line haul rates and better truckload utilization, which was partly offset by higher volumes. Adjusted EBITDA for the first quarter was $13.9 million or 11.6% of net revenue compared to $0.5 million or 0.7% of net revenue for the first quarter of 2022. Next, an update on our capital structure. As of March 26, 2023, we had total cash, cash equivalents and marketable securities of $83.1 million, and we had no debt outstanding. For the fourth fiscal year 2023, we are maintaining our guidance of net revenue of more than $450 million and adjusted EBITDA of more than $30 million.

As previously guided, we continue to expect stronger year-over-year net revenue growth in the first half of the year, primarily due to the carryover of our May 2022 pricing increase. Furthermore, we continue to expect gross margin in the first half of the year to be stronger than the second half primarily due to fewer promotions of premium X and stronger breaker prices during the first quarter. Additionally, we assume egg industry supply and demand will get closer to more balanced levels later in the year. We are also planning slower volume growth in the back half due to tougher comparisons because of industry shortages in Q4 2022. Within SG&A, we continue to anticipate higher marketing spending in the second half of the year compared to the first half.

Lastly, we’re still planning for fiscal year 2023 capital expenditures of between $25 million and $30 million, assuming no unanticipated supply chain challenges. Thanks for your time today and interest in Vital Farms. With that, we will now be happy to take your questions.

Operator: Thank you. At this time, we’ll conduct the question-and-answer session. [Operator Instructions] Our first question comes from Adam Samuelson at Goldman Sachs.

Operator: Our next question comes from Pamela Kaufman at Morgan Stanley.

Operator: Our next question comes from Cody Ross at UBS.

Operator: Our next question comes from Matt McGinley from Needham.

Operator: Our next question comes from Robert Dickerson at Jefferies.

Operator: Our next question comes from Matt Smith at Stifel.

Operator: Our next question comes from Ben Klieve at Lake Street Capital Markets.

Operator: Thank you for your questions. At this time, I would like to turn it over to Matt Siler, VP of Investor Relations for closing remarks.

Matt Siler: Thanks, everybody, for your time and interest in Vital Farms today, may the [indiscernible] be with you.

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