So I'm Robert Moskow. I'm the consumer staples analyst at TD Cowen, and I'm very happy to have Vital Farms with us today. Vital Farms is a fast-growing market leader of the pasture-raised table eggs category, at $600 million in sales and a market cap of almost $2 billion. The shares are on fire, up 100%, over 100% year to date. Here today with me is Thilo Wrede, who is the VP of Finance at Vital. He joined just in 2023 after a successful period at PepsiCo, rising in the ranks in the finance division. That included a stint at CFO of Sabra Hummus and also in Central and South America Foods.
Before that, he was a sell-side analyst at Credit Suisse with me, which is where we met, and we endured plenty of emotional and financial scarring. I can't tell you how happy I am that we're both here-
We're both still alive.
- on the other side.
Yeah.
Yes. So thanks again. So maybe, for investors in the room who are less familiar with the Vital Farms story, maybe give us a little bit of background on the company and the vision of the company's founder, and, you know, how it got started?
Yeah. So as you said, we are primarily an egg company. We specialize in pasture-raised eggs. When you think about eggs, the least expensive commoditized eggs you can find on the shelf, they usually come from hens that live in cages. They can't stand up, they can't turn around, they can't spread their wings. Our hens are kind of the opposite end of that spectrum. They have 108 sq ft to roam around. They go outside every day and actually get to pick their own food out in the pasture. They eat grubs and bugs and grass, whatever they feel like. And that was really the idea behind the company.
Our founder, Matt O'Hayer, met John Mackey from Whole Foods way back when, and learned that the laying hen is the most tortured farm animal in the U.S., and he wanted to do something better. And he figured out a way how we can do pasture-raised eggs at scale and make money in the process. And now we're here 17 years later, with over $500 million in revenue for us, and very steady high growth.
Great. So Vital Farms is a B Corp certified company. So maybe give us a little bit of an explanation, like, how do you balance the stakeholders of your farmers with your owners and the broader mission and with shareholders? Does that pose any challenges?
Yes, it does pose challenges, right? As a certified B Corp and with our own aspiration of wanting to pursue a stakeholder model, it means that in the decisions we make, we factor in all of our stakeholders. It starts with the environment and the animals. It goes to the farmers, it goes to our own employees, and then goes to retailers and consumers and shareholders. The stakeholder model does not mean that there is one stakeholder group that we prefer over others. There's not... We don't always succeed in creating a win-win-win situation where every stakeholder wins, but at least we consider the impact of our decisions on all the stakeholders at any one time.
For us, it means that we run the business much more with a long-term focus than I think what you see in some other companies. We do take pride in the fact that our animal welfare standards are very high, that the farmers that we work with get treated right, and those are manifestations of the stakeholder model.
Great. Okay. So as a shopper, when you, when you shop in the egg category, it's, it's pretty confusing. You know, there's pasture-raised, there's organic, there's cage-free, free-range, is there another?
That exists, yeah.
Okay. And then there's conventional.
Yep.
So, you're the leader in pasture-raised.
Mm-hmm.
So how have you found it difficult to educate the consumer on these differences in raising practices? Or is it that the consumer, it doesn't really matter whether they know all the intricacies, you know, they, they kind of just have a vision of what pasture-raised means?
Yeah, I think if, if you ask the consumer, and it's free-range in the, in the mind of many consumers that we talk to, is actually what they think of when... Sorry, when we like, pasture-raised, where the chickens are outdoors, they, they pick their own grubs and so on. That is what consumers think of-
Mm-hmm.
When they buy free-range eggs.
Okay.
To your point, Rob, it is very confusing.
Yeah.
In addition to all the classifications you just mentioned, there's GMO-free, and there are omega-3 eggs, and you name it, right? The claims on the packaging, it's a lot. I think where we succeed with consumers, with shoppers, it's not so much about, "This says pasture-raised." It's about the brand, what the brand stands for, the trust that the brand has created, the transparency that the brand stands for. If you ask many of our consumers what is different about Vital Farms, they probably couldn't put exactly their finger on it.
Hmm.
They just know that what we say we do is what we actually do, and what we do is the right thing of doing it.
Right.
That trust is what drives this brand.
Yeah, it has a very authentic kind of feel to it. Can you talk about some of the marketing tactics that your company has done to reinforce that positioning?
Yeah. Yeah, it really starts with transparency and traceability. I think we are the only brand or if there are others, really the biggest brand where you can find on the side of the carton the name of the farm where our eggs come from. And then you can go to our website, and you can see a video of what this farm looks like. For the vast majority of our farms, we took videos of hens roaming around, and you can really see what pasture-raised means, right? So this ability to go back, to really trace back where does your food come from. I think that is the core of this brand. And then we do marketing, you know, traditional consumer marketing on top of that.
We were together with a big German car brand, we were one of two brands to advertise on HBO's Succession for the final season, right? And now, you might argue, well, Succession, that's all about corporate greed. How does that connect to you, right? We have a tagline, and our Chief Marketing Officer is always nervous using in public, but we have a tagline that we are bullshit-free.
Mm-hmm.
We actually... We do what we say we do, and Succession was so much about the opposite of that. It was an interesting juxtaposition, right?
Right.
We have a very strong consumer response team. There are instances where a consumer comes home, drops their shopping bag, all the eggs are shattered. They post it on Instagram or TikTok. We have people who monitor that and then ship them an order of our eggs through, you know, through one of these online services.
Mm-hmm.
Two hours after they post, "Oh, my God, all my eggs are broken," they get two cartons of eggs and two packs of butter. It's this kind of consumer interaction and consumer engagement that really, that resonates with consumers most.
Right. And what I've noticed when I use them is that the coloring of the yolk is much richer and it gives you the sense that the hens are eating grass or eating something healthier than what you would normally get.
I mean, yeah, thank you for doing my job for me.
I can keep going if you like.
The, the-
Yeah.
I mean, the marketing obviously starts with having really high-quality product, right?
Mm-hmm.
Our shells are thicker. We don't have slightly cracked eggs in the carton. The yolks have this really rich color.
Mm-hmm.
When you crack the egg open, the yolk stands up really high, which is a sign of quality, and all of that obviously resonates with the consumer as well.
Right. Okay, good. You know, I think you said you're 80% of pasture-raised, but, you know, the barriers to entry aren't particularly high, and I always, I see some private label versions of pasture-raised on the shelf. So what are the barriers, and what makes you comfortable that you can continue to be the leader in this segment?
Yeah. Yeah, there are private label versions of pasture-raised eggs. There are other brands out there that sell pasture-raised eggs. I think at the end of the day, there is no moat in the sense of we have certain IP around our product.
Right.
I think our moat is that pasture-raised is what we do. It requires a certain mindset to do this day in and day out-
Mm-hmm
... do it consistently well, and do it successfully. So I think that is the first part of our moat, that we have this mindset. And you asked in the beginning about the stakeholder model and how it influences our decision-making. We make our decisions with this, with this mindset that animal welfare matters, the brand matters, right? The other part of the moat, I would argue, is the brand that we have built, the trust that consumers have in the brand, and, protecting this brand and making sure that we don't violate the consumer's trust.
Mm-hmm.
That's obviously a big part of the moat as well.
Okay. So there's been enormous volatility in pricing in the egg category, but not your pricing.
Mm-hmm.
So maybe talk a little bit about, you know, what your price points are at retail, what's going on in Crazy Town in conventional egg pricing with avian flu and everything, and, and why, you know, you're-- it hasn't really affected your, your core-
Yeah
... customer.
Yeah, so, our eggs sell conventional eggs usually around $6.99, $7.99 per dozen, organic eggs for $8.99 or $9.99. They, they tend to be consistently, the most expensive, or at least one of the most expensive brands on the shelf. As you said, the, the category tends to swing quite widely.
Mm-hmm.
We are a branded food company. We are not a commodity company.
Mm-hmm.
We don't adjust our prices up or down depending on supply-demand imbalances. When you think back just over a year ago, beginning of 2023, because of avian influenza, as you said, there was a shortage of eggs. You could go into a store, you couldn't find eggs on the shelf, and many of the conventional producers raised prices as a result. There were times when we were among the cheapest eggs on the shelf. We could have raised our prices and reflected that, but that's not the company we are.
Mm-hmm.
As I said, we want to... we are building this brand for the long term. We are a branded food player. I don't think you see any of your other companies in your coverage universe take prices up or down, depending on supply-demand imbalances. And so we are a branded player, and we want to think, we want consumers to think of us as that.
Mm-hmm.
At times, our price gaps vary widely. So far, what we have seen is it makes really... It, it has no impact on our ability to grow market share-
Mm
... because consumers don't buy us for price reasons. They buy us because of the brand and what the brand stands for.
... So who is the core consumer of the Vital Farms brand? Is it higher income, and is that maybe one of the reasons why, you know, sales continue to grow even though, you know, consumer spending is pressured?
Yeah, we define our core consumer, we call them Bridget and Ben.
Right.
That's version two of how we think about our core consumer. They used to be called Abby and Abe. We moved on to Bridget and Ben.
You did?
We did.
Okay.
So we're trying to build this psychographic around the consumer. There are demographic factors like education, like income. They tend to be higher. But there are also other factors that drive the purchase decision, the interest in the provenance of the food-
Mm-hmm
... the care about animal welfare and how farmers in this country get treated.
Mm-hmm.
Yes, we skew higher income, and I think that gives us a bit more resilience for the consumer. But there is a very large component in the consumer purchase decision that is, as I said, not driven by price, but it's values alignment.
Mm-hmm.
Right? Consumers buy us because they want to support what we stand for, and only 50% of our shoppers are actually in this Bridget and Ben category. The other 50% buy us, even though they don't necessarily fit the income level or the education level that Bridget and Ben stand for.
Mm-hmm.
I think that also speaks to the power of the brand.
The other 50, do you think those are lighter users or-
Yeah. They're certainly lighter users.
Right.
They might buy us for a special occasion or for the special cake they're baking for a birthday, right?
Mm-hmm.
It's less everyday purchase.
Okay. Last year, Vital Farms announced kind of its next tranche of growth and-
Mm-hmm
... and set targets for $1 billion in sales by 2027. That implies a CAGR of about 20% a year. So can you talk about what the steps are to get the distribution in the retailer shelves, accelerate that, accelerate household penetration? Like, how do you... You are growing at a fast pace-
Mm-hmm
... but how do you feel confident that the company will keep it going from a marketing and distribution standpoint?
Yeah. We've set ourselves a target to get into 30 million households by 2027. Right now, we're in about 10 million households, so that's, it's a very ambitious target. We think we still have very meaningful distribution opportunities.
Right.
We're in about 24,000 stores across the country right now. There are about 8,000 more stores that carry specialty eggs, that is where we play-
Mm-hmm
... that we are not in right now. So there's one opportunity. The other part is that, we can get more SKUs on existing shelves.
Mm-hmm.
In the food channel, we have on average 2.8 SKUs on the shelf.
Mm-hmm.
In the natural channel, we have 5 SKUs on the shelf, and in one natural retailer, we have 8 or 9 SKUs on the shelf.
Mm-hmm.
Getting more SKUs on the shelf, where we already are selling, that for us, we think is the biggest opportunity.
Mm-hmm.
It allows us. It reduces the likelihood of stockouts on the shelf. Often when you go to a store, at least where I live in Connecticut, later part of the day, we're often out of stock because sorry, the shelf gets restocked once a day.
Mm-hmm.
If you show up six hours later, we're not there anymore.
Mm-hmm.
If we have more SKUs on the shelf, the likelihood of that happening goes down.
Mm-hmm.
Having three or four SKUs on the shelf, now we have this billboard effect, right? So the consumer awareness goes up, which then will translate into household penetration.
Mm-hmm.
Getting that distribution, having the conversations with retailers about having us on the shelf, increases their profitability, increases the velocity on the shelf.
Mm-hmm.
All that is, is supporting that goal to get to $1 billion.
Is your sales force finding it relatively easy to persuade retailers to expand the billboard or that the retailers are, you know, excited for this because of the velocity impact and shelf productivity?
So, in an internal meeting a few weeks ago, I used the word easy when I talked about sales-
Yeah
... and I haven't heard the end of it yet, rightfully so. Because we have a very hardworking sales force, and, and they, they do obviously a phenomenal job. That being said, when we have conversations with retailers, I think we, just these days, we have very strong data to support that adding our SKUs to the shelf, it increases the turns on the shelf, it increases the dollar profit that the retailer generates on eggs.
Mm-hmm.
And so that is what makes it a relatively straightforward conversation with the retailer.
Mm-hmm.
Right? You still need to have the conversation if you wanna make space for us, what do you take off the shelf, right? So that it is not an easy job, obviously. But I think we have a lot of strong data on our side to support that, "Don't just put one SKU on the shelf, add the second one, add the third one." Every SKU you add, it's incremental to what you already have there. It's more productive than the other brands that you have on the shelf.
Mm-hmm.
So having these arguments that really speak in our favor, that at the end of the day-
Right
... can make for very productive conversations with retailers.
Right. Got it. What about, in terms of capacity? I think you've announced some plans to investigate a new site-
Mm-hmm
... for a sorting center. Can you talk about Egg Central 1.0 that you have-
Mm-hmm
... right now, and what kind of expansion are you looking to do?
... Yeah, so we, we announced last month that we are in the process of buying land in Southern Indiana to build a new facility. Our current facility, we call it Egg Central Station, or ECS, is in Southwest Missouri. And we have said that we have capacity to process about $700 million worth of eggs there per year. We've taken pricing a few times since then, so the number is probably a bit higher than that these days. But we need the new facility to get to the billion-dollar goal by 2027. We picked Southern Indiana for two reasons, really. We, we want to diversify a bit geographically and have a bit more options. Where do we ship from, from what locations?
But also, we produce our eggs in what we call the Pasture Belt. Pasture Belt means it's not too hot in the summer, not too cold in the winter. There's enough rainfall for vegetation year-round, so that the chickens actually can go outside year-round. The Pasture Belt is moving. It's moving further north, and so we need to make sure that we stay within the Pasture Belt.
Mm-hmm.
That is why we picked Southern Indiana for this facility.
Mm. That's pretty long-term planning.
I told you, we are doing this for the long term. Yeah.
Okay. Makes sense. And in terms of the cost of the facility, I think you said Egg Central was $17 million. Is this another $17 million, or is this like a significant increase because of how big you need it to be or how inflation has happened?
Yeah. We... It's going to be more than 17.
Yeah.
I think what we have said so far is, it will support roughly half the capacity that ECS has right now.
Mm-hmm.
And for every $1 that we invest, we get $5 of revenue capacity out of the facility. So in your Excel model-
You can back into that.
You can back into that.
Mm-hmm.
It's more expensive for two reasons. One is the inflation that you just mentioned, especially since COVID. Construction costs and materials have gone up quite a bit. From a construction cost perspective, I think we're in a more expensive part of the country to begin with.
Mm.
But then, there were also plenty of learnings from ECS that we now want to apply to this new facility.
Mm-hmm.
How we design the layout, how we do the process flow, the equipment that we'll be using, the automation that we're doing from day one, and so on, and that will just bring additional costs as well.
Mm-hmm. Can you talk about the farmer network that you have? I think 300 farmers currently.
Yep.
You're gonna have to expand that pretty significantly. What do you do to qualify these farmers and train them to grow your very specific egg specs?
Yeah. So we... To get a new farmer from the moment that we have the first interaction with the farmer and they apply to become a Vital Farms farmer to the moment that we actually get eggs from their farm, it takes about 12-18 months. So it's a rather long lead time. And in those 12-18 months, the farmers need to build a barn. They need to prepare the land. We need to get the chickens there. And once they start producing, or even before we start producing, we start training them, right? We educate them on our standards. We work with them to make sure that the barn is laid out the way we want it laid out, and so on.
We have a farm support team that visits farmers initially, relatively frequently. Once they are more at steady state, the farm support team visits them on average, once a month, to be there to answer questions, to make sure that whatever best practices we have, they get shared. And so, we make sure that we support the farmers as much as we can. Getting farmers signed up, that's really the first step. And there, you know, we do some marketing around Missouri and Arkansas, but where we get the most farmers from is word of mouth.
Mm.
We ask new farmers, "How have you heard about us?" And the vast majority of them, it's from friends or family.
Mm.
And I think it's that word of mouth, again, it goes back to the brand and the stakeholder model. I think, in general, we have a reputation that we treat farmers fairly, and that's not just about how much do we pay per egg, but also, how do we support them? How do we support them when they run into challenges?
Mm.
Having that reputation, that really helps us recruit new farmers. In Indiana, where the new facility will be, we don't have as much reputation yet. We don't have any farms in Indiana.
Mm.
We have some in surrounding states, so we'll have to step up the efforts there to do farm recruiting.
Mm-hmm.
But I think this day, the benefit that we have now, compared to when we opened ECS back in 2017, is this brand is much more well-known across the country.
Mm.
And so the farm recruiting, it's a flywheel that we are building.
Are you typically converting existing egg farms that it might be, I don't know, free-range, cage-free-
Yep
... or is that the typical target or?
Yeah, we actually prefer not to recruit existing egg farmers-
Oh
... simply because we think it will take us longer for them to unlearn how to do one thing and then learn our thing.
Mm.
It's much faster if they just learn our thing in the first place.
Mm.
We do like to work with farmers that have livestock experience.
Mm.
It's important that they know how to keep animals alive.
Mm-hmm.
It's not a condition that they have to have that, but we prefer that.
Mm.
But in general, we offer farmers often an opportunity to take some marginal land that they have on their farm and generate a profit there, right? The chickens actually like it when there are walnut cropping, so when there are lots of trees.
Mm.
You couldn't necessarily raise livestock there. You couldn't grow row crops there, but as long as you have enough space, flat space, to put a barn there-
Mm.
It's usually pretty good for chickens. And so for farmers, it's an opportunity to add to their income stream.
Right.
That obviously helps with the recruiting.
Interesting. I'll take any questions from the room if, if anyone has, and if not, then I'm gonna keep going here. Oh, yes, please. There's a microphone over there, so.
Is there any difference in the food safety, given, you know, how your farmers are dispersed compared to sort of more centralized operations?
So food safety from a... What's the product that the consumer gets, I think the entire egg industry has to follow standards when it comes to Salmonella and other potential pathogens. I do think where we have an advantage compared to some more concentrated operations is any one farm represents less than 0.5% of our total supply base. And so Avian Influenza has come up a few times. When you read these really shocking headlines of 2 or 3 million chickens on a farm having to get culled because of an Avian Influenza outbreak, if one of our farms gets impacted, that's 20,000 chickens, right? So if one of our farms gets impacted, then and they do get impacted from time to time, we're not wiping out millions of chickens.
We're wiping out, as I said, less than 0.5% of our total supply base. And so having this distributed egg production base, if you want, it certainly is a way for us to mitigate risk in Avian Influenza environments.
Avian influenza, like, a year ago at this time, it seemed conventional egg shortages helped your business-
Mm-hmm.
- because I think retailers were looking for ways to keep the shelves full. A year later, we still have avian influenza. So is there any impact on your business today in terms of incremental distribution that you're getting, or is it not really affecting?
Yeah, we don't see a whole lot of benefit from it right now, simply because shelves are not empty. Right?
Yeah.
What we described from first quarter last year, where you just couldn't find eggs-
Right
... that is not happening right now. So I don't think there is much impact on our order patterns.
Right. Okay. I think the question that we've been asking for several years on Vital Farms is: What are the opportunities to extend the brand into other subcategories? You're in butter, very solidly. There was an attempt to get into handheld, egg snacks-
Mm-hmm
... that didn't work out as well as expected. So where is the company now, and to what extent is that factored into your billion-dollar sales target?
Yeah, the billion-dollar sales target is entirely in existing categories-
Okay
... so eggs and butter. And we think there's plenty of runway of growth beyond the $7 billion.
Mm.
That being said, we are doing the work to determine what could a next category be.
Mm.
We want to make sure, we want to make sure it's a category where we can disrupt the current business model, similar to what we have done with X, with capitalized eggs. So where can we improve current business practices, sourcing practices, that kind of thing? What is a category where our brand can play?
Mm.
How do we make money there? Talking about the stakeholder model, right? Making money is not unimportant.
Mm-hmm.
There are plenty of conversations that are happening internally. There's nothing concrete to talk about. I think this year, we are really focused on making sure that we make solid progress on the path to $1 billion, that we are not losing focus of that, that we maintain our double-digit Adjusted EBITDA margin that we had last year for the first time, and that we just demonstrate that last year was not an outlier. Right?
Mm.
That is now what we are going after.
Mm-hmm.
Steady growth in the, you had mentioned, 20% range, 20+% , and maintaining that double-digit EBITDA margin.
Okay. Let me see if there's any more questions, and if not, I think we're gonna cut it off there. So Thilo, thank you so much for joining me here-
Thanks, again.
... and best of, best of luck to you.
Thank you.
Okay?
Thanks a lot.