Vital Farms Inc Q2 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Brian Holland - D.A. Davidson - Analyst : I wanted to ask first about the implied step down in margin in the second half and the first half, which looks like it's going from high teens to high single digits. Obviously, Thilo, I think you laid out a lot of it. But just maybe want to get a better sense for how much the marketing investment is going to be up maybe in the year and in the second half and kind of where that would put you on a relative basis to sales on an annualized basis? And maybe where do you see that going forward versus where you've been historically?

Question: Brian Holland - D.A. Davidson - Analyst : Appreciate the color. And then just switching gears to the new egg washing facility. Can you just, for investors, and Russell appreciated the update on Springfield going from $700 million to $800 million, but just within the context of a $1 billion revenue target by 2027, just help us understand the bridge from onboarding that facility and ramping that up. What -- how that plays into the $1 billion, what other considerations or flexibility do you have to make sure that you're from a distribution capacity standpoint supporting that? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 08, 2024 / 12:30PM, VITL.OQ - Q2 2024 Vital Farms Inc Earnings Call And then maybe, Thilo, just in that context, just any thoughts on the CapEx component between now and starting up that facility.

Question: Rob Dickerson - Jefferies - Analyst : I guess, just first question is, let's say, what's the primary -- or what was the primary driver, the nice volume performance in the quarter even relative to your solid expectations coming out of Q1, right? It seems like there was this bump. So clearly, the question now is as well as there's increased distribution, the velocities are great and demand is driving distribution, distribution is driving demand, then why couldn't we see a little bit more of that kind of all going upside as we get through at least Q3?

Question: Rob Dickerson - Jefferies - Analyst : Okay, very clear prudence. Good. And then I guess, just another kind of more technical P&L question. Q1, the gross margin was great. Q2, the gross margin was great. And I think kind of as you put up at least the Q1 number, right, there is kind of walking everybody back a little bit just with respect to kind of go-forward run rate, but you've never really spoken to the business kind of getting into the high 30% gross margin and totally understand that. And I totally understand a lot of the stars have aligned in the first half. All that said, I feel like part of the kind of conservatism as you got where you think through the year was also just around fee cost and input costs. And where we sit today, they're actually better than they were a few months ago, if I'm taking more corn soybeans. So maybe just a couple of comments as to why you couldn't potentially do a gross margin even Q3 that's similar to Q2 maybe? That's all.

Question: Ben Klieve - Lake Street - Analyst : Congratulations on another nice quarter here. A question about the initiative you have around Seymour also you talked about purchasing land for kind of R&D farms. And it sounds like a bit as a BD tool. I'm curious if one you could comment on the degree to which the $3 million you've invested into this initiative so far represents the bulk of this initiative or if that's going to expand in any material fashion. And then if you could kind of characterize this initiative between this kind of R&D farm versus kind of a longer-term business development tool? I would be curious about both of those thoughts.

Question: Ben Klieve - Lake Street - Analyst : Yeah. Thanks, Russell. That was really helpful. Yes. And then, Thilo, any input on the level of investment beyond the $3 million would be great.

Question: Ben Klieve - Lake Street - Analyst : Got it. Very good. All right. Well, I appreciate you both elaborating on that. Congratulations again on the great quarter, and I'll get back in queue.

Question: Rob Moskow - TD Cowen - Analyst : Russell and Thilo, I wanted to ask a little bit more for some color on how you're expanding the talent pool of the organization to handle all of this growth? What kind of headcount increases are you putting in for things like sales, supply chain, logistics, marketing, like running a $1 billion business is a lot different than running a $400 million business. So I wanted to hear about how you're prepping for that? And then secondly, for the new facility in Seymour, is it pretty much like cut and paste, like is the facility in Missouri, like what you've learned from that one? Is it pretty -- is it going to be like very easy to set up a similar process in Indiana like because I've seen in start-up companies that sometimes opening up a new production line could be kind of tricky based on all kinds of things that you didn't anticipate. So that's the question.

Question: Rob Moskow - TD Cowen - Analyst : Okay. And just in terms of like the facility itself that you're building like is every egg washing facility the same? Or are their differences I put this one in place?

Question: Rob Moskow - TD Cowen - Analyst : Okay.

Question: Jon Andersen - William Blair - Analyst : My question, just one, but I guess a two-parter. One of the questions I get asked most frequently is kind of sustainable competitive advantage or moat in the egg business. I think investors, some investors have a hard time getting their arms around that. And what I'd love to hear your kind of refreshes on is thinking around both your brand and supply chain? Because it seems to me that the brand and your relationships with retailers and perhaps ability to have a greater influence and inform out of the shelf in this category is part of the barrier of the moat and then the supply chain in terms of your relationships with farmers, the farmer economics. But if you could tell us a little bit from your perspective at what constitutes the moat that would be very helpful.

Question: Matt Smith - Stifel - Analyst : Thilo I wanted to come back to the second half expectations. Top line looks like it's expected to grow about 20%, including the headwind from lapping the extra week. Is there anything you'd call out in terms of the timing of your expectations for distribution gains, shelf resets, promotional events or any unique comparisons to the prior year, we should keep in mind as we phase the growth across the third and fourth quarter?

Question: Matt Smith - Stifel - Analyst : And just as a follow-up, you talked about reinvesting some of the first half upside to sustain and feed the virtuous cycle through increasing marketing even above where you expected it to increase for the year. Are you also leaning more heavily into promotions behind the egg business to drive additional consumer trial and consumer or household penetration? Or is that upside being focused into marketing investments and less so on the promotion side and always there?

Question: Adam Samuelson - Goldman Sachs - Analyst : So I guess my first question is maybe kind of back to the gross margins in the second quarter and really the first half. And I want to maybe take it from the lens of kind of the supply planning point that you made earlier, Russell. You have to make your own internal supply decisions or how many eggs you have from your farms a year plus in advance. Your volumes in the first half of the year have been very, very good and above the level at which you've kind of, I think, assume long-term revenue growth. So the question is how much -- is there a benefit in the first half gross margins from just utilizing more of that kind of surge kind of internal egg production that's ending up in a pasture-raised brand in form versus having to get sold into other channels, and that's helped your overall gross margins, some also there is some upside to fixed cost absorption in a central station. And as well, relatedly, how much has kind of increases in elevated commodity egg prices and product prices, especially in the second quarter versus last year. How much, if at all, did that help the results?

Question: Adam Samuelson - Goldman Sachs - Analyst : Okay. That's helpful color. If I could just ask a follow-up on some of the farms you're building in Indiana, I think, you talked about $20 million to $30 million of CapEx. And I guess I'm trying to square that appreciating you to buy land, but square that with kind of what I perceive to be the cost for new family farms to get their barn set up and get their farms in place to support your production regularly, just the costs seem a lot higher for what you're building in Indiana versus what I thought your family farmers were actually outlining themselves to join your network.