Good. Well, I'm not gonna stand at the podium, but. This is oddly dividing. I guess we'll- Good morning! Oh, hello. All right. We're good? Okay. Good morning, everyone. Thank you so much for joining us today. My name is Brian Holland, senior research analyst at D.A. Davidson. I am happy to be joined on the stage this morning by the management team from Vital Farms. I have CEO Russell Diez-Canseco and CFO Thilo Wrede. Vital Farms is a provider of ethically produced foods, specifically pasture-raised eggs. So again, Russell, Thilo, thank you so much for joining us. Maybe just to get started, for those who may be getting introduced to the story for the first time today, Russell, perhaps, if we could start with a brief background of the company. Who is Vital Farms, and what's your mission? Yeah. Good morning, Brian, thanks for having us. So Vital Farms, as you said, is an ethical food company. We are a branded consumer goods company, and you're right, we focus on eggs today. We also have a small butter business. What we do is provide food that we believe to be kind of disruptive to the traditional food system. With eggs, for example, we were the first nationally distributed pasture-raised egg brand, and pasture-raised means basically, the birds get to go outside meaningfully year-round. And that's a fundamentally different lifestyle than what 95% of the birds were living when our founder, Matt O'Hayer, started Vital Farms back in 2007, which was they were living in battery cages. You know, Matt observed that if you allow those birds to exhibit their natural behaviors, you get a different egg. You also get a happier hen, and those two things were important to him, and they went together really well. We've since grown to become the second largest egg brand in America, and we're a super premium brand, so we have typically the most expensive eggs you'll find on the shelf. We're also the fastest growing brand, and the way that those two things kinda go together is, you know, we're very much producing food in a way that more and more Americans want it to be produced. We've built a brand based on trust and transparency that earns us a premium price and a premium margin. This year, we've guided... or for 2023, we guided to at least $465 million in revenue, and $40 million of EBITDA. And so, you know, one of the things that our approach to business in general has allowed us to do is be fast-growing and profitable, with a strong balance sheet, over $90 million of cash. Yeah, we'll unpack a lot of that as we move forward here, a little bit further. But first I wanna ask you about, Vital Farms has a unique supply chain, so can you sort of walk us through how that works? Yeah. One of the values that we hold as highly important to us is the way that we work with all of our stakeholders. So we're fiercely competitive and very much focused on creating shareholder value, but also stakeholder value. So that means that we spend a lot of time elevating the experience of the small family farmer in America. We work with over 300 small family farms. They produce the eggs that we buy from them, and then package and sell at retail and in food service. The basic relationship is the farmer owns his farm or her farm. The farmer owns his or her chickens, feed, all of the inputs. We work with them to select them, train them, help them build out their farm in terms of design advice and equipment selection, and then we give them a fixed-length contract. We buy all the eggs from them. They sell all the eggs only to us, and the price is set when we write the contract, but we do adjust pricing for feed input cost variation, because we don't want commodity price risk to sit on the farmer. It can be really kind of ruinous to their financials, and that, frankly, isn't good for them, and it isn't good for the resilience of our supply chain. You know, if we look at the category, whether it's at the price level or the gross margin, you see this volatility through the cycle. So how does that supply chain keep that work in such a way that your pricing is much more stable than what you would see in the category, and also your margin profile? Yeah, there are a few, I think, distinct advantages to the way our supply chain, our supply chain works relative to the egg category more broadly in the United States. So still, about two-thirds of the eggs that are produced in the U.S. are produced from those hens in cages, and most of the remainder are simply one level above, which is cage-free. Still, a giant factory warehouse full of chickens, just, just not in cages inside that factory warehouse. Those eggs are produced in a way that is meant to minimize the cost of production, and in essence, an egg is an egg. If, if you have a bird that's living in a cage, the egg it produces looks a lot like any other egg coming from a bird in a cage. And those are the cheapest eggs that you'll find in the grocery store, the price of which can vary quite a bit with input cost changes, especially feed costs and diesel, and it can vary a lot with the market. We saw this phenomenon called eggflation in the spring because there was a shortage of eggs due to Avian Influenza, and that sent commodity egg prices skyrocketing. It's very variable. Our prices, on the other hand, are much more consistent, in part because we believe when you're building a premium brand, you don't wanna change the marketing inputs frequently, because you're trying to help consumers build a habit.... but also because those prices with our farmers are much more consistent over time. They do vary with feed costs, but nothing else. So when prices temporarily skyrocket, as they did in the spring, our input costs don't change to that extent. On the flip side, when commodity egg prices may fall precipitously when in a time of excess, we're still paying the farmer the agreed-upon price. There's reliability and consistency in both directions. The other example of the resiliency from our supply chain is we've got over 300 small family farms, and so there is this thing called avian influenza, which occasionally will affect a flock of birds. In a large egg producer, that could be millions of birds on one farm. For us, each farm is less than 1% of our supply, typically a third of a percent. So while we have had a couple of instances on some of our farms, it's hasn't had an impact on our supply. Yeah, I think there's been some bias from investors, naturally, who would look at this and say, "You're selling a premiumized version of a commoditized product," so basically when price gaps are narrow, you'll gain share. When they're wider, you won't. The data clearly refutes that your two-year sales stack on a trailing 52-week basis has been among the most consistent of any food company that I study. How do you debunk that narrative? Apparently, I have some work to do in that regard. But, you know, the story... I mean, it's funny, it can look a lot like we're selling a commodity, and in a sense, the product you buy from us, in many respects is a commodity. We were the first nationally distributed pasture-raised egg, but there are lots of others on the shelf now. There are private label versions of that commodity, there are branded versions of that commodity, and almost universally, they're much less expensive than ours, and they're growing more slowly than ours, and we have a higher share of the market than they. So the question is, well, what is it about your version of that commodity that justifies higher price, higher margin, faster growth, et cetera? And the answer is that it's not the commodity necessarily that differentiates us. It's maybe it did when we were a first mover 15 years ago, but not anymore. It's the brand and relationships we've built with consumers. It's the values with which we operate, it's the transparency with which we operate. An example of which is, on our cartons of eggs, you can actually look up the name of the farm from which those eggs came, and then go online on our website and see a video of that farm. Well, that's really hard to do in the egg industry more broadly, because a lot of eggs are sold on wholesale markets, and 'cause companies don't necessarily know which farm or what part of the country the eggs came from. They're just sort of a commoditized pallet of product, whereas ours represent a supply chain rooted in a relationship with a specific farmer, and that is meaningful to consumers. I do think the authenticity angle is often underappreciated with disruptive businesses, and, you know, the impact that it has on adoption and incursion within a broader category. Maybe just a little bit to that angle, I think one of the hardest things for investors to get comfortable with when they see first movers or disruptors within a category is believing in the unseen. Mm-hmm. So Russell, is there any proxy you would point to for either the pasture-raised segment in general or Vital Farms in particular, that might sort of contextualize this opportunity as you frame it? Yeah, I think, you know, when we think about the path ahead, we can look at a backward-looking and a forward-looking proxy. The forward-looking proxy is actually the U.K., and Europe more broadly, but specifically the U.K. U.K. was maybe 20 years ahead of the U.S. in terms of adopting something other than caged production, which really came to dominate in both countries after World War II. In the U.K., the last time I looked, which was actually a few years back, over 70% of the volume of eggs sold in the U.K. were from birds that could go outside. They call them free-range there. It's a similar standard we have. Ours is a bit more stringent, has, we believe, a higher standard, but you can think of it as a premium egg that costs more than the cheapest, and from birds that go outside. So that's the majority. That's become the majority type of egg sold in the U.K. In the U.S., outdoor access eggs, free-range, pasture-raised, et cetera, is a much smaller percent. It perhaps... I actually don't know the latest numbers, but maybe 10%-15%, much less than 72%. But you can see that trend. We're, our segment of the market is growing much faster than egg sales overall. We're growing much faster than even our segment of the market, and so we can draw a line to that U.K. outcome at 72%. We can also look backwards at the experience in, the, the natural grocery space. So we got our start in the natural channel places like Whole Foods and Sprouts and smaller independents, where we often typically are the largest egg brand sold. In places like Sprouts or Whole Foods, we're approaching 50% dollar share of eggs in the entire store. And we've typically got high single-digit SKU count of eggs in stores like Whole Foods and Sprouts. In more conventional grocers, like a Kroger or a Publix or an Albertsons, Safeway, where we've been present for fewer years and we've got fewer SKUs on the shelf, we might be the strong number 2 egg brand, but we might have a ways to go to get to number 1. And we might have 2, 3, 4 SKUs instead of 7, 8, 9. So you can see that there's a path as these accounts age, where we, over time, get more items, get higher velocities, and you can draw that path from our experience in natural into where we see the future going in conventional. States are enacting legislation around cage-free birds. Several relevant food retailers and food service providers have set goals to be exclusively cage-free. Cal-Maine has talked about, which is the largest egg producer and distributor in the U.S., they've talked about the capital intensity required to sort of be compliant with all of that and getting to a tripling of the compliant laying flock specifically in order to support those retailer and state targets. Are you seeing any benefit from this at this point? And to what extent does that backdrop bolster your competitive advantage? Well, you know, philosophically, I think the advantage certainly goes to the birds. Getting them out of those cages is the big impetus for why Matt O'Hayer started this business in the first place. It's not a great way to live, we think. Beyond that, you know, the cage-free standard is still so much less stringent than ours, that it's far from a mandate to buy our eggs. Let me be clear about that. But I would say that there's a benefit to getting the conversation started in those places that adopt a standard like that, around the fact that there are different ways of producing eggs or other animal proteins, that animal welfare is important, and that it might be worth paying more for. So when voters in a state vote, even as they did in California years ago, simply to make sure the cages were a little bigger, right? So Prop 2, back in 2014, 2015, didn't say cage-free originally, it said: "More room to flap your wings." The new rule is simply the expansion and clarification that, "No, no, no, we actually meant cage-free, we just weren't clear enough about it back in 2014." That conversation is relevant because when people start to get curious and realize that there's something more that they can vote for with their dollars, we're then a part of the answer to the questions that start getting asked. Avian influenzas provided some boost to Vital Farms' sales growth back in 2021, early 2022. With bird flu cases on the rise again, can you just talk about what you learned from the last cycle? Specifically, how did your supply chain hold up? Mm. And how did retailers and consumers respond? Yeah, I think it was actually at this show. It may have been on this stage, when I gave my prognostication for how 2023 would play out. Basically, what happened was, in the fall of 2022, birds started to be killed by the government, actually, as they came down with avian influenza. Basically, what happens is, birds get sick. To stop the spread, the population on that farm is depopulated. That's the more friendly version of that term. So that we can prevent further spread of the disease. We saw this happen back in 2015, 2016, and we actually saw this happen. I wasn't part of the business back then, but the industry saw it happen back in 1982, 1983 in Pennsylvania, specifically. And there's a very predictable boom and bust cycle that happens. As birds are removed from production, prices in commodity eggs are very sensitive to supply and demand imbalances, and so you see prices skyrocket. And that's where we saw those news reports about eggflation and the late-night comedy jokes about eggflation, and maybe we could, you know, start using eggs as currency and other things like that. And then producers see those high prices and say, "Gosh, this is great. Let's boost production. Let's get more chickens." And inevitably, that happens with a lag, and what happens is they overshoot. Then you've got a period of oversupply and ruinous price competition, and it takes a while before the market shakes out to a historically more normal supply-demand balance and price. And so that's kind of what we predicted in January, and it played out pretty consistently with the way we described it, which was: we had high prices in January, we came back to a supply-demand balance by the summer. We saw some hot ads, loss-leading ads on the front page of newspaper circulars throughout the summer, as I think retailers tried to regain credibility that they weren't gouging in the spring. There were some accusations. And I think as retailers, after a big run of inflation across the store, looked for items that they could really point to as being price leaders. And since, we've seen a more of a normalization back to historically normal levels of promotion and pricing, and, you know, things seem to be stabilizing. What we learned from the experience were a few things. One is, don't get too caught up in the short-term pricing moves. It was very tempting, and I think a lot of CPG companies followed that increased promotional cycle in the summer and kinda raced to the bottom in some respects. And so, that led to a big fear, I think, amongst investors, that, the back half of 2023 and 2024 would see a reversion to the mean in pricing, maybe a compression of margins, and frankly, it can set up a tough cycle of training consumers to only buy when you're on sale. Well, our premium brand is built on attracting households to the brand, not on driving volume in a way that... I like how Thilo says it: "We don't try to rent market share with a promotion. We're trying to add a consumer to the franchise." And so we did return to a normal promotional cadence, but for us, that's not about driving volume on eggs, it's about driving trial through ads. And so there were a few months there where there were a lot of ads on the front page, and maybe it's hard to get attention for our little sticker when there's another one with a big discount on it, and we just had to be patient with that... and, I think that was the right approach, and that's what we did, and we kind of, we saw that play out with continued strong dollar growth and unit growth throughout the year. That's a great color. Appreciate it, Russell. Thilo, exiting third quarter results in early November, you reaffirmed fiscal 2023 net sales of at least $465 million, raised adjusted EBITDA to at least $40 million. Can we assume that outlook still holds today? That outlook still holds today. We're still in the process of closing the books for last year, but no change to that outlook right now. Flipping back to the 3Q earnings call, you made some comments within the context of guidance for the balance of the year around uncertainty with the holiday promotional backdrop, also the volatile commodity environment. Any updates on how those played out? Yeah, I think the promotional environment played out like a normal year, if you want, right? After all these disruptions from avian influenza that Russell just talked about, we were really back in a normal cycle. Fourth quarter might be a bit more promotional than other quarters, given it's the holiday baking season, and people use eggs for that. But that played out as planned. Commodities, you know, corn has come down, still above pre-COVID levels, soybean meal, a bit more volatile. That is where we see a bit more of the uncertainty for us. But overall, fourth quarter played out pretty much as we expected it. Got it. And, looking out to fiscal 2024, there's obviously a few moving parts here. We discussed avian influenza. Feed costs are lower, as you mentioned specifically with corn, but I know you've talked about increased advertising to continue growing awareness and obviously, you know, commodities, there can be a lot of volatility as we go throughout the year. So just help us think about, if you could, Thilo, the puts and takes for next year. Yeah, I'm, you know, I'm not promising guidance right now—that's a bit too early for us. But the focus in 2024 will be get more SKUs on existing shelves, get into some existing doors, keep the growth going. Focus much more on volume growth than we've had the last few years. There are a few lapping comparisons that we need to deal with. In 2023, we had a very strong first quarter because of avian influenza that we need to get over. We had a slightly slower second quarter because order patterns from retailers were a bit out of sync as supply came back. And then, in 2023, we had a 53rd week. That happens for us every five or six years. That won't be lapping this year. Those are some of the headwinds that we need to factor in. But really, the focus is on volume growth, getting more SKUs on shelves, getting more awareness with households, and increasing our household penetration. I think Russell alluded to this earlier, but you know, the cost to produce eggs is higher today than it was a few years ago. Mm-hmm. How does that impact the pricing structure of this category? So, you know, there's a little bit of TBD on that because, you know, my perception right now is that pricing is closer to pre-COVID pricing than I would have expected, given that, input costs on the feed side are still very much elevated versus four years ago. So there is disinflation in corn and soy, for example, versus a year ago, but, they're still 40+% higher than they were four years ago. So I don't think prices today at the commodity egg level fully reflect the true cost to produce versus a few years back. So we might see a floor that's even a little higher than we see now, but, that's still not strongly relevant to us because our shoppers don't cross-shop the cheapest eggs on the shelf. So while we may see, you know, our, the cheapest eggs rise or fall based on a variety of factors, that's less of what we're focused on. Beyond that, I think that, when you go above the cheapest into premium eggs, any given producer on any given week may be pricing based on their supply and demand dynamics. But overall, I think we've seen a more stable pricing environment. Thilo, in the last minute or so that we have, we'll test your efficiency here by packing in a few questions, right? So what are your long-term financial targets, and what are the primary drivers underpinning that? I also want to talk about just... if you could briefly touch on your capital allocation strategy. I think it gets a bit underlooked here, the profitability of this story, at this stage of growth, which I think is unique in the growth space. Go. All right, one minute. Yeah. So targets for 2027 is $1 billion in revenue, more than doubling the business where we are right now. 35%, in that range, gross margin, and 12%-14% EBITDA margin. We'll get there by increasing our household penetration, keep putting more SKUs on the shelf, creating brand blocks on the shelf, which raises awareness, which creates more, more household penetration, and so on, getting into a few doors. So all these, these guidance numbers, that's within existing categories. Capital allocation will play into that. The way we think about it is, first investment priority is investing in growth. That means capacity, that means marketing, that means signing up new farms. After that, we would invest in productivity to make sure we get to the margin targets and create this flywheel to keep reinvesting in the business. After that, we would think about what other categories can we get into, right? It's other investment opportunities that way. And if there was money left over, and I'm not promising anything at all, we would think about returning money to shareholders. But I think we are really still very much in high growth mode, and so I wouldn't expect returning any money to shareholders via buybacks or dividends anytime soon. Appreciate that. That was a bit more than a minute. Yeah. Russell, Thilo, thank you so much. Just to point out to everyone, we have their breakout session begins in just a few moments in Palazzo C. Thank you, everyone, for joining us. Have a great day. Thanks, Brian. Thank you. Thank you.