Ladies and gentlemen, thank you for standing by, and welcome to the Vital Farms second quarter 2022 earnings conference call and webcast. At this time, participants are in a listen-only mode. After the speaker's presentation, there will be a question- and- answer session. To ask a question during the session, you will need to press star one one on your telephone. It is now my pleasure to introduce the Vice President of Investor Relations, Matt Siler.
Thank you. Good morning, and welcome to Vital Farms' second quarter 2022 earnings conference call and webcast. I'm pleased to be joined on today's call by Russell Diez-Canseco, President and Chief Executive Officer, and Bo Meissner, Chief Financial Officer. By now, everyone should have access to the company's second- 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. 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 June 26, 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. 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 to everyone for your time today. I'll review our second- quarter financial results and provide some updates across the business that are contributing to our success as a disruptive force in the food sector. Bo will then provide additional color on our quarterly results. I'm pleased to announce that in the second quarter, we achieved $82.9 million in net revenue, the highest quarterly result in our history, which reflects a 37.4% increase from the prior year period. Our gross margin expanded 190 basis points sequentially to over 30%, and our Adjusted EBITDA was $3.7 million. Our household penetration in the egg category now stands at well over 7 million, up over 30% relative to last year.
Looking at the 13 weeks ending June 26, 2022, the egg category has experienced significant dollar growth of over 40%, due mostly to inflation of lower-priced eggs. With that said, I believe the more important metric to focus on, given the environment, is volume, which despite our recent price increase, grew significantly at over 25% during the period compared to the shell egg category, which saw volumes decline 2% over this same timeframe. Underpinning our growth, both current and historic, are four factors that I wanna talk about. One is our unique stakeholder-driven business model. Two is our robust supply chain. Three is the strong brand we've built and continue to build. Four is the world-class organization we've built and continue to build. First, the stakeholder model.
Vital Farms has always been a brand that challenges the norms of how most of the food in our country is produced. We have a unique stakeholder-driven approach to capitalism that has propelled our growth to be the leading pasture-raised egg brand and the second leading egg brand of any type in the U.S. by retail dollar sales, and has enabled us to improve the lives of millions of people and millions of animals. We believe the historic performance of our business is proof that our multi-stakeholder approach to business works. In fact, during each of the last 14 quarters, we have produced positive net revenue growth with an average growth rate of approximately 36% in each quarter. On an annual basis, our net revenue growth CAGR is 37%, dating all the way back to 2014.
Our focus remains on driving sustainable, long-term, consistent results regardless of what is going on in the world outside of our company. Another proof point of our strategy is the improvement in our profitability. Our gross margin was about 17% back in 2014, relative to more recent performance in the low- to mid-30% range. Additionally, our Adjusted EBITDA margin moved from flat to low single digits to mid- to high single digits over that same timeframe. While there are some short-term pressures from time to time, as we're experiencing now, we remain focused on improvement over the long term. Next, our robust supply chain. Our supply chain continues to expand across our network of family farmers, and at Egg Central Station, our world-class egg washing and packing facility, to meet the strong demand we're seeing for our product.
We have grown our network of small family farms to over 300 and continue to add new family farms monthly. Our positive reputation among poultry farmers precedes us, and we invest very little in attracting new farmers because we have a significant list of people already interested in joining us. Our ability to add new farmers while achieving a quarterly 36% net revenue CAGR over the past two years is a testament to this fact. The expansion of Egg Central Station, our world-class egg washing and packing facility, is now fully operational. We believe the completion of this project provides a significant unlock for our company because it doubles our capacity and puts us in a position to support over $650 million in annual revenue on eggs today in service of our goal to further grow Vital Farms' household penetration across the United States.
As this facility expansion is now complete, we have begun the initial work of design and site selection for our next egg packing center as we look ahead to growing our business beyond $650 million. As always, we will continue to proactively eliminate bottlenecks in support of our long-term growth plans. Turning to our brand. We have built a brand that appeals to consumers who share our purpose of improving the lives of people, animals, and the planet through food, and who appreciate our multi-stakeholder approach to conducting business. While the products we sell may seem like others at retail, our superior growth and premium prices suggest that consumers are buying more than just the physical goods we market to them.
It's the conviction with which we operate, the steadfast adherence to our values, and uncompromising commitment to our stakeholders, who include our farmers and suppliers, crew members, customers and consumers, communities and the environment, and stockholders. These are values that drive loyalty for our core products and give us confidence in our plans to grow through new categories. We believe we have developed a detailed understanding of our core consumer, a demographic that includes 19 million households in the U.S., according to our consumer insights. These households are generally college-educated and earn at least $60,000 annually. We've seen 33% year-over-year growth in household penetration on average over the past 10 quarters. As I mentioned earlier, our eggs are in well over 7 million households today, which speaks to our ability to reach our consumers with a uniquely compelling message.
With that said, there's still significant room for further household penetration and increased brand awareness. The key to achieving our potential is our continued marketing investment. Consumers are attracted to our brand and stay with us because we connect with them through many creative touchpoints. We do not just market to our core consumers; we build lasting relationships with them. Consistent innovation is one way to continue to attract new households to our brand. We're still focused on this within our egg portfolio, despite our standing as the number two egg brand in the United States. Products like True Blues and our forthcoming restorative product illustrate our focus on meeting the needs of both our consumers and our retail partners as we look to grow our brand. Additionally, we're excited about our new breakthrough marketing campaign, which builds on the award-winning work we've done previously.
We have proven that our brand story is compelling, and our investment in building awareness leads to sales growth. This new campaign shares some of the heart of the Vital Farms difference by showing how we're keeping it bullshit-free in all that we do. The way we treat people, animals, and the planet remains central to our mission, and we will continue to amplify that story with conviction. This new campaign will be supported by a robust media plan across several platforms, including social media, online video, and connected streaming devices. As we look to expand our portfolio of products, we are continuing our thoughtful investigation into our next large-scale opportunity for disruption, where the trust and honesty for which our brand is known will resonate. In fact, we recently chose our next category. For competitive reasons, I will not disclose it today.
We plan to apply what we learned over the long term in our egg business to provide the path to sustained success in this next category, and I should be able to share more details by the end of the year. Now, a few words on our people, with whom I believe we've cultivated the strongest relationships in the industry. This includes our network of family farmers and our crew members. We take a human-first approach to our people, investing in our future with us through competitive pay that reflects their value to us and the food system at large, as well as ongoing guidance and support that is specific to their needs. We have a long-held belief that the best approach to ensuring the long-term success of our business is investing in the skills, resilience, and creative problem-solving of our people.
This could not be more important today as we operate against the backdrop of uncertainty in the world around us, including the near-term and long-term implications of inflation, as well as other general economic concerns. We will remain hyper-focused on what we can control as an organization, which includes eliminating pain points, focusing on professional development, and promoting a positive culture for our people, investments that we believe will deliver resilience to our crew and our business. Thanks again, everyone, for your time today. I'll now turn the call over to Bo. Afterwards, we'll look forward to taking your questions.
Thank you, Russell. Hello, everyone, and thank you for joining us today. I will review our financial results for the second quarter ended June 26, 2022. I will then provide an update to our annual guidance for fiscal year 2022. As Russell mentioned, we had a record quarter, with net revenue of $82.9 million, an increase of 37.4% compared to the prior year period. The growth in net revenue in the second 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. We also saw a 21% growth in butter-related sales. During the period, our volumes were up just over 25%, with remaining growth driven by pricing.
Gross profit for the second quarter was $24.9 million, or 30.1% of net revenue, compared to $21.9 million, or 36.4% of net revenue, for the second quarter of 2021. The change in gross profit was primarily driven by higher sales. As to the changes in gross margin, we experienced an increase in input costs in both eggs and butter, and transportation costs. Increased pricing across our entire portfolio took effect in late May, which only impacted one month for the quarter, and partially offset some of the input cost headwinds within this period. SG&A for the second quarter was $17 million or 20.5% of net revenues, compared to $13.5 million or 22.5% of net revenues in the second 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. This was offset by some favorability in marketing spending, as some spending that was originally expected in Q2 will now shift into Q3 as we launch our fresh marketing campaign. Shipping and distribution increased 34.2% to $7.2 million or 8.7% of net revenue relative to $5.4 million or 8.9% of net revenue in the second quarter of 2021, driven by higher sales volumes and freight rates. We are beginning to see freight rates stabilize due to a combination of steady line haul rates and internal operational efficiency. Adjusted EBITDA for the second quarter was $3.7 million, compared to $5.1 million for the second quarter of 2021.
Now, an update on our capital structure. As of June 26, 2022, we had a total balance of cash and cash equivalents and investment securities of $90.3 million, and we have no long-term debt outstanding. Looking at the remainder of 2022, we are maintaining our guidance of net revenue of more than $340 million, representing projected growth of over 30% versus 2021. Turning to our guidance for Adjusted EBITDA, we are still planning for Adjusted EBITDA of more than $13 million in fiscal year 2022. Thanks for your time and interest in Vital Farms. Before we move to taking questions, I want to reiterate our confidence. Demand for our products remains strong, and we are excited about the future growth trajectory of the brand. With that, Russell and I will now take your questions.
Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Pamela Kaufman with Morgan Stanley.
Hi, good morning.
Good morning, Pam.
I was wondering if you can talk about your observations around consumer behavior within eggs. Are you seeing any evidence of trade down within the category? Within your own portfolio, have you seen any shifting between regular and organic eggs or carton sizes?
Thanks, Pam. Great questions. It's really interesting. What we're seeing is what I would describe as bifurcation. What we're seeing is strength at the bottom of the price ladder in eggs and strength at the top end of the price ladder in eggs, and we're at the top. With more challenging growth prospects in the middle. You're definitely seeing trading down to private label from kind of the middle of the pack, but you're also seeing perhaps some trading down from other proteins to the top of the pack, which is us. We're certainly continuing to grow unit share in this inflationary environment, which I think is evidence of that. In terms of trading, it's interesting.
You may recall we put through price increases on a portion of our portfolio in January and then an additional round of price increases covering all of our portfolio that went into effect in May. Organic eggs came first in January, and conventional eggs followed in May. In that period between January and May, we did see some trading down because the price gap between those two items within our portfolio had widened. At least what I'm seeing so far, and it's still early days, is that that has abated now that we've narrowed the price gap with conventional eggs seeing price increases along with organic eggs.
Thanks. That's helpful. I wanted to touch on your expectations for growth margins. Given the moderation in grain prices that we've seen recently, how are you thinking about growth margins into the back half of the year, and how quickly can they recover to your targets for low- to mid-30% growth margins?
Yeah, thanks for that, Pam. I mean, I think, yes, you're right. I think we've seen commodity costs start to moderate a little bit, but the other benefit we'll see in the back half of the year is the full impact of the pricing that we just implemented in May. As you recall, that was implemented in mid to late May, so we only had, you know, a few weeks of that within the quarter. We'll have the full impact of that in Q3 and Q4, you know, which will help gross margins and help offset some of the commodity costs that we've seen over the past 18 months.
Great. Thank you.
Thanks, Pam.
Thank you. Our next question comes from the line of Adam Samuelson with Goldman Sachs.
Yes, thanks. Good morning, everyone.
Morning, Adam.
Good morning, Adam.
Right. I guess first question is, and I know you didn't wanna give specific details for competitive reasons, but as you think about that new category that you're going after and you've identified, without any way to dimensionalize kind of the timing of when you think that would actually become a commercial product and be on shelf, and especially over the course of the next 12-18 months, kind of any rough sense at this juncture, capital costs, incremental operating costs needed to get that business off the ground?
Thanks, Adam. Yeah. We are working toward having a product on the shelf next year, the details of which and the timing of which will be determined in part by the form of the partnership we develop as we head into this next category. More, you know, stay tuned. More to come. I think it's early days to describe kind of what launch costs might look like. I can say that, you know, it certainly isn't my near-term plan to build a big new processing plant for sort of that launch.
If you think back to the way that we evolved our egg business over the years, we started by working with co-packers and contract farmers, both to mitigate risk and to minimize initial capital outlays. Over time, as we scaled, we captured some of the benefits of that scale by doing some things in-house and having our own egg packing plant, which we see as a real competitive strength. You could imagine a similar evolution over time, but I wouldn't expect to break ground on the new plant just yet.
Okay. All right. That's helpful. Going back to the core egg business, I think in the prepared remarks, you alluded to kind of pretty steady gain, kind of low 30% gains in household penetration over the last two, three years. I guess I'm trying to think about gains in household penetration versus purchase frequency amongst your core consumers, and what you think where you think purchase frequency is relative to their overall consumption and purchase frequency of eggs. Do you think there's still a lot of headroom to get your consumers, once they've purchased the brand, to make that their egg that they only buy? If that hasn't necessarily been happening, what are you're kind of doing to change that behavior or work on that behavior?
Terrific question, Adam. What's interesting to me, my read on household penetration and buy rate is that we continue to add households with pretty similar buy rates to historic households. You might have expected, if we had plumbed the depths of our true core consumer, that the next incremental consumer might have a lower buy rate or somehow be a lower, you know, a less profitable consumer. I'm not seeing evidence of that drop-off yet, which I think is really encouraging. I definitely see opportunities to increase buy rate, and over time, we'll start to migrate the conversation toward one about households and buy rate across a portfolio of products. I think, like in many categories, consumers of eggs have a range of behaviors.
Many of them buy multiple brands or SKUs over the course of the year based on a variety of factors, including what's available on the shelf, you know, what's on sale, and the occasion. One example would be, we've got some consumers that love baking special holiday treats with our eggs, but for them, it would be too much of an indulgence to have them as their everyday egg. We've got some consumers who won't buy anything but. We're certainly continually looking at ways to convince our loyal consumers to be even more so.
If I could just maybe add a quick follow-up on there. Given the rise in conventional egg prices that you've seen over the last four or five months, are you seeing any changes in purchase frequency or velocity or consumer behavior that would say that it's making it easier for consumers to trade up into Vital versus kind of conventional or normal cage-free eggs? How is that price gap kind of impacting consumption in your mind?
You know, it's interesting. We have had pretty consistent growth regardless of where conventional egg prices are in the marketplace. As you know, there's a lot more movement up and down with commodity and market forces on at the low end of the egg market than there is at the branded premium end, which is us. So we don't have a habit of moving prices on a regular cadence simply based on a cost-plus basis. The net result of this is that sometimes you see commodity eggs under a bucket dozen, and today you see them for multiple dollars per dozen.
Our consumer and the consumer of, sort of this, specialty eggs more generally, doesn't interact as much with that kind of bottom of the market, which is where all that inflation is really having the biggest impact. What we typically see is that I'm not looking to trade up someone from the cheapest to the most expensive, but often, looking to trade up people who are somewhere in the middle, and that's where we're seeing this bifurcation. We're capturing some of those people in the middle, and, the cheapest eggs are capturing some of the people in the middle. The share of those mid-tier, brands or private label products is, in my estimation, declining, at least on a unit basis.
Okay. That's all, a really helpful color. I'll pass it on. Thanks.
Thank you.
Thank you. Our next question comes from the line of Brian Holland with Cowen.
Yeah, thanks. Good morning.
Good morning, Brian.
Adam, my question about the relative price action with conventional shell eggs. I appreciated your color there, Russell. Bo, quick housekeeping, and forgive me if you said this in your prepared remarks and I missed it. How much marketing shifted out of Q2 to Q3? Did you quantify that? If not, could you?
We didn't quantify it, but I mean, it's less than $1 million, Brian, in that range.
Okay. Very helpful. As we think about flow through to the second half, you know, shipping and distribution costs were obviously up year-over-year, but down sequentially, and I think you made reference to, you know, rates improving there. How do we think about that over the second half of the year, kind of on a sequential basis? You know, can you give us a little bit of framework there for what that looks like?
Yeah, sure. No, great question. I mean, I think, you know, as we talked to the decline that we've seen in distribution rates as a percent of sales is really driven by two things. The market has started to stabilize, and freight rates have started to stabilize. We're also doing a bunch of internal initiatives with our 3PL provider to maximize truck efficiencies to get multiple bids on routes. I think we've seen the fruits of that in the quarter. I mean, our distribution rates will continue to grow at the rate of our volume. I think, as a percentage of sales where we are today, we've achieved a lot of the savings that we would anticipate. I would think of something more along those lines as we go forward.
That's helpful, Bo. Thank you. You know what? That's it for me for now. I'll hop back in the queue. Thanks. Best of luck.
Thanks, Brian.
Thanks, Brian.
Thank you. Our next question comes from the line of Chris Growe with Stifel.
Hi, good morning.
Morning, Chris.
Hi. I just had a quick question. We have seen input costs back off a little bit. Is that something we should see start to flow through in the third quarter? I guess I'm just trying to get a sense around the, you know, the maybe the faster ability for you to overcome input cost inflation if we see a little bit of a reprieve from the really high levels we saw take hold in the second quarter. Is that more something that would happen more so in 4Q?
Yeah. Thanks for the question, Chris. I mean, one of the things to remember is that the way that we compensate farmers for feed costs is one quarter in arrears. I think we started to see, you know, some of the feed costs start to stabilize, but you're gonna see that on a one-quarter delay. I'd expect the majority of that to show up, you know, in late 2022 or early 2023, assuming that the rates remain where they are.
I think it's important to call out, Chris, that you know, there are lots of puts and takes here across a wide product portfolio. You know, while what we pay farmers for eggs is a pretty big component of our total cost structure, lots of other moving parts in the economy are moving in different directions.
That's a good point. It looks like you saw some, for example, so a little better shipping rates and some efficiencies there that obviously can help with your overall cost structure in the quarter, so. I had a second question in relation to, you know, new distribution and I guess just to get a sense of how that's phasing, if you will, and then how that's helping you fill up ECS 2.0. I guess I would be curious what sort of utilization you have of 2.0 right now, just to give us a sense of the full utilization of the facility, and then you mentioned how, you know, bringing on new farmers, you know, as we move ahead, is that in line with the expectation for incremental distribution that you've won or you're getting as well, if that makes sense.
Yeah, absolutely. First, on the question about ECS2 or the expansion, the physical expansion is at full capacity. It's been built, and the combined facility now supports, at current prices, about a $650 million egg business. The only thing that has to scale as we use more of that capacity is labor. From that perspective, you know, the facility is there, the capacity is there. Our growth and the volumes that we're processing at Egg Central Station are very much in line with our forecasts, you know. You may recall that we have to plan our egg supply about a year to 18 months in advance. You could imagine that, you know, we're living with the forecast we built back then. I think things look very balanced with good service levels and good in-stock levels. We're feeling pretty good about the balance right now, for sure.
Just to be clear on that, Russell, you would expect continued incremental distribution for your product. You're bringing on new farmers, and you have this capacity; it sounds like you've got a nice steady stream of new distribution coming on. Is that correct?
Yeah. There are three components to that volume growth. One is absolutely new doors. Two new items in the existing doors. If you look at the comparison between the number of items you have at some of our natural and organic channel customers or even just thinking about it in terms of our longest term customers, we've got, you know, let's call it low double-digit SKUs in some of those chains, whereas we have low to mid-single- digit SKUs in some of our newer accounts. There's a natural progression in items per door. Then, finally, there's simply the increased consumer awareness and the household penetration, which is helping to drive velocities in those doors. All three are moving in the right direction. They continue to move in the right direction and are contributing to our continued growth.
Okay, thank you.
Thanks a lot.
Thank you. Our next question comes from the line of Rob Dickerson with Jefferies.
Great. Thanks so much.
Morning, Rob.
Hey, how are you? Two quick questions. I guess in the second half, I'm just trying to think through this, that, you know, implied revenues are obviously supposed to be higher relative to first half, and then gross margin is supposed to be a little bit higher relative to the first half. Kind of get close to the low end of your guide, let's say. I mean, if you do EBITDA almost in a similar rate relative to Q2, you know, you're kind of there. I'm just curious, is there anything that might be inflating or accelerating on the SG&A side, maybe away from shipping and distribution that we need to know about, just given your comments on puts and takes? Do you feel like, you know, you're just pretty well positioned to hit the guide higher than 13, just to be succinct?
Yeah. Thanks, Rob. I think, yeah, we feel comfortable that we can hit the guide. One of the things that, you know, Russell talked to is our new marketing campaign. Our marketing is back-end loaded a little bit this year, because of this new campaign that we're launching. You're gonna see, you know, as we talked to earlier, an increase in gross margin, a little bit because of the price increase that we have the full effect of in Q3 and Q4, but we're making a higher investment in marketing in the back half than we did in the front, which gets us back to the guidance that we provided.
Okay. Perfect. Thank you. Maybe just a broader question kind of around cash usage. You know, Russell, I fully respect that you're not speaking to this next category at this time. Whatever that category is whether you would purchase a grassroots build-up process will require some cash. While at the same time, you know, you're already speaking to kind of the next Egg Central Station. How do we kind of think about those two in tandem? You know, is this a, you know, at some point, yes, we will have, you know, additional CapEx being allocated to another Egg Central Station to, you know, support additional capacity of demand for eggs. You know, as we kind of, you know, work our way into this other category, obviously, you've already thought about those cash needs. Just kind of whatever color you can provide to that question. Thanks.
Sure. The line of sight to CapEx to support the shell egg business is certainly clearer to us because we've got some more experience and history there. What the way I would describe it as is this: as we've said, the current plant, the expanded Egg Central Station, can support about a $650 million shell egg business at today's prices. If you know.
Of course, we like to get way out in front on the planning for capacity so that it's never a bottleneck for us. We're right now in the design and site selection phase for the next plant. That's a relatively minor investment, and it doesn't. It can be shelved and then picked back up whenever we decide to have construction. I would say that we're gonna need to tie to the household growth, and we continue to monitor our sales plans. If we see that, you know, the two-to-three- year forecast shows us hitting that next sort of tier of growth, then we can start building out the next plant.
Perfect. Thank you.
Thanks, Rob.
Thanks, Rob.
Thank you. Our next question comes from Robert Moskow with TD Cowen.
Hi, thanks. I wanted to know,
Hey, Rob.
Good morning. I wanted to know if you're gonna get some gross margin mentioned in the back half of the year, and you mentioned your commitment to the long-term gross margin targets. Is it fair to say that if conditions stay the way they are today, your gross margins in the back half could most likely be similar in the first half of next year? Or are there any, like, incremental costs into 2023 that we should think about? Thanks.
Yeah. Thanks, Rob. Yeah, I mean, I think we know that the pricing will be in full effect. It comes down to the outlook for commodities. I would anticipate that, based on what we see right now, the gross margins in the first half of next year may be in line with what we see in the back half. You know, commodities are still moving around. The forecast, obviously.
Okay. Great. That's my question. Thank you.
Thank you. I'm showing no further questions at this time. With that, I'll hand the call back over to Vice President Matt Siler for any closing remarks.
Just wanna thank everyone for their time today and their interest in Vital Farms. Have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.