Good day and thank you for standing by. Welcome to the Vital Farms' First Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded.

Thank you. Good morning and welcome to Vital Farms first quarter 2024 earnings conference call and webcast. I'm pleased to speak with you all today on my first earnings call as Vice President of Investor Relations. I'm joined on today's call by Russell Diez-Canseco, President and Chief Executive Officer; Thilo Wrede, Chief Financial Officer; and Peter Pappas, Chief Sales Officer. By now, everyone should have access to the company's first quarter 2024 earnings press release issued this morning. This is available on the Investor Relations section of Vital Farms website at investors.vitalfarms.com. Throughout 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 do 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, the company's quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2024, filed with the SEC today, as well as our 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 their most comparable measures prepared in accordance with GAAP. And now I would like to turn the call over to Russell Diez-Canseco, President and Chief Executive Officer of Vital Farms.

Good morning, and thanks for your time today. And Tony, welcome again to Vital Farms. For those who haven't met Tony Bucalo, Tony joined us in April and will be leading Investor Relations at Vital Farms. He's got a background as an analyst at Credit Suisse, Santander and HSBC, and he most recently led investor relations at Nomad Foods. We're grateful you're here, Tony. I'll start today's call with the big headlines from the quarter. We've had some great results to share. I'll then hand it over to our Chief Sales Officer, Peter Pappas, to cover how the relationships we've built with our customers are contributing to continued strong demand. Thilo Wrede, our CFO, will then provide more in-depth information on our first quarter results as well as updated guidance for fiscal year 2024. So let's get to the first piece of big news today, which is that we had a record first quarter with $147.9 million in net revenue and 24% net revenue growth over the prior year period. We delivered $29.1 million of adjusted EBITDA, which is double the first quarter of 2023, along with a 400 basis points gross margin expansion, which is at nearly 40% gross margin. Those numbers would be impressive in any quarter, but they're particularly impressive as we start this year. As you'll remember, we grew 55% in the first quarter of 2023 due in part to the category disruptions from avian influenza. In our fourth quarter call, we projected some headwinds as we lap that result this quarter. Growing 24% over one of the strongest quarters in our history year-over-year reinforces our belief that momentum is building here at Vital Farms. I'm very encouraged by these results. One of the biggest drivers of our growth and these remarkable results this quarter is our incredible team at Egg Central Station in Springfield, Missouri. Over the past year, the team at ECS has redoubled its efforts to recruit and retain a phenomenal workforce, and they've made operational improvements that enable us to more effectively meet customer demand. We're just much better at getting our high-quality eggs packed and shipped, and we were already pretty good to start with. Our ECS crew just secured two big pieces of recognition that I want to call out. First, our quality assurance manager, Robert Clark, on behalf of the entire ECS team received the 2024 Excellence in SQF Practitioner Leadership Award from the Safe Quality Food Institute. This is one of the most prestigious awards in our industry and reflects our commitment to delivering safe, high-quality food. It recognizes Robert's role in promoting food safety and inspiring the next generation of food safety leaders. It was an honor to help celebrate Robert's leadership when this incredible news came through. Our expansion at ECS has also just become a LEED gold certified operation, further validating the investments we've made there in sustainable design. ECS is a remarkable facility. It's visibly different than most of the other food processing facilities you'll see with solar panels in the parking lot, natural grassland surrounding the building and thoughtful design choices that support crew member health and help us run ECS as a zero waste to landfill facility. So we've demonstrated expertise building and running a state-of-the-art facility in Springfield, we have a strong cash position, and we have continued profitable growth along with rising demand for our products. As a result, we have the confidence to make the next major investment that will help propel us to $1 billion in net revenue and beyond, which brings me to our second big piece of news today. We've signed an agreement to purchase land for our next state-of-the-art egg washing and packing facility, which will be in Southern Indiana. This new facility is planned to incorporate similar high-quality design principles as our Egg Central Station facility in Springfield, Missouri. And we anticipate that it will initially be able to support 165 new family farms and employ 150 additional crew members. We expect to break ground in 2025, begin hiring in the summer of 2026, and begin operations shortly thereafter. Our crew members from ECS will lead the way in bringing our new facility to life. They will create an important link to the rigorous standards, deep institutional knowledge, and executional excellence that we've established in Springfield. This will also assist in our training and mentoring of our new workforce in Indiana. We expect to begin generating revenue from this facility in 2027, which will contribute meaningfully to our goal of achieving $1 billion in annual net revenue by 2027. We believe the land for this facility will not only provide significant capacity beginning in 2027, but will also allow for flexibility to add additional capacity in the future as we scale beyond our 2027 targets. We're currently working with local stakeholders in Indiana on a formal announcement, and we'll share the precise location of the new facility in the near future. One last note before I hand it over to Pete. As we talk about investments in our future, I want to call out the new line of butter products that we announced in April. Our team conducted a global search, and that's not an exaggeration, for the best butter supplier we could find. We're now working with family farms in Ireland to deliver a delicious, great-looking product that is 90% grassfed. We've maintained our unwavering commitment to product quality, animal welfare, and support for family farms. We also introduced bold new packaging that reinforces our premium brand identity and really stands out on the shelf. We keep this butter stocked at our house, and my family loves it. I encourage everyone to give it a try. There's a lot of good news here. We're off to a strong start. I remain confident in our ability to sustain this momentum and achieve our ambitious long-term financial targets. It's great to see this business hit on all cylinders, and we're making hay while the sun's shining. This allows us to make smart, long-term investments in our people, brand, and infrastructure, and it gives you a taste of what Vital Farms is capable of. I'll now hand it over to our Chief Sales Officer, Peter Pappas.

Thanks, Russell. I appreciate the chance to represent our incredible sales team to share some of the success we've had in the marketplace and talk about how we're building trusted relationships with Vital Farms customers. As Russell mentioned, we had a record first quarter. Last November, in our Q3 earnings call, I talked about our category-first approach, where we work with our retail customers to increase sales and margin performance across the entire egg category. We believe this is a real differentiator for Vital Farms. It reinforces our position as a thought leader in the premium brand. Importantly, it's contributing to strong results as we expand availability with new and existing customers. We expanded distribution, increased the number of SKUs at existing stores, and delivered growth with higher price point SKUs. This enabled us to grow sales and unit volume well above the rest of the category in the first quarter. I believe our role in this critical category is to be the driver of overall category performance for our retail customers. That means growing faster than the category and competition. Looking deeper at the data in the tracked channels during the 13 weeks ended March 24, 2024, I'm pleased to say we continue to deliver outsized performance. The egg category experienced a retail dollar decline of 19%, while Vital Farms grew retail dollar sales in comparison by 35% in the same period. Additionally, the category saw unit volumes up 6% during the same 13-week period, while Vital Farms unit volume grew by about 27%. Our conventional 12 count in the black carton is the #1 branded SKU in the food category based on dollar sales. As a reminder, due to the mix shift to 18 count packs, our volume growth in tracked channels tends to be underreported. Much of our growth has come from wins that we locked in during Q3 and Q4 last year, particularly through many of our larger national customers where we're now the #1 or #2 best-selling branded egg by dollars. We're also expanding our footprint with a focus on independent grocers through collaboration with natural and conventional distributors. Many of these gains will be seen in Q2 as spring shelf resets are completed in the next few weeks. Last quarter, we said that we would have a more normalized promotional cadence in 2024 to drive trial and reach new consumers. The approach is working as it has helped us achieve the growth we've seen so far this year. We've built a disciplined strategy and cadence that maintains our premium brand position, supports our category-first approach, and provides our retail partners with the desired impact on their business. Our foodservice business had a strong quarter, and we're pleased with the progress we're making on that front. The strength of the Vital Farms brand is a key strategic advantage, which lends itself to unique partnership opportunities with restaurants and operators. We'll continue to execute our strategy as we align with restaurant concepts that are committed to sourcing ethical, premium ingredients. I want to close with thanks to the Vital Farms sales team, the entire Vital Farms supply chain team, and our farmers for delivering an incredible product. My team has the privilege of representing Vital Farms in the conversations we have with customers, and we deeply appreciate all the work that goes into getting our premium eggs and butter onto shelves each and every week. With that, I'll pass it over to Thilo.

Thank you, Pete. Hello, everyone, and thank you for joining us today. I will review our financial results for the first quarter ended March 31, 2024, and then provide details on our updated guidance for fiscal year 2024. We kicked off the year with another record quarter. Our net revenue rose to $147.9 million, an increase of 24.1% compared to the prior year period. This was driven by strong volume growth of 18.4% and price/mix of 4.9%. The volume growth was driven by increases at both new and existing retail customers and is in line with our mostly volume-driven growth plans for the year. Gross profit for the first quarter of 2024 was $58.9 million, or 39.8% of net revenue, compared to $42.7 million, or 35.8% of net revenue for the first quarter of 2023. The increase in gross profit was primarily driven by a price/mix benefit, enhanced operational efficiencies, and benefits of scale. Conventional commodities and lower diesel costs contributed to the margin gains. The gross margin upside was partially offset by a return to a normal promotional rate as well as increased investment in our crew members at Egg Central Station and higher overhead costs as we scale our world-class organization. SG&A expenses for the first quarter of 2024 were $27.1 million, or 18.3% of net revenue, compared to $23.9 million, or 20.1% of net revenue in the first quarter of last year. The increase in SG&A was driven primarily by the increased investment in crew members as well as increased marketing investment as we scale. Shipping and distribution expenses in the first quarter were $7.6 million, or 5.1% of net revenue, compared to $7.8 million, or 6.6% of net revenue in the first quarter of 2023. The decrease in shipping and distribution expense was driven by a decline in line-haul rates, lower diesel costs, and internal operational efficiencies. Net income for the first quarter 2024 was $19.0 million, or $0.43 per diluted share, compared to $7.2 million, or $0.16 per diluted share for the first quarter of 2023. Adjusted EBITDA for the first quarter of 2024 was $29.1 million, or 19.7% of net revenue, compared to $13.9 million, or 11.6% of net revenue for the first quarter of 2023. Finally, a quick update on our capital structure. As of March 31, 2024, we had total cash, cash equivalents and marketable securities of $137.5 million with no debt outstanding. Now looking ahead. For the full fiscal year 2024, we are now guiding to net revenue of at least $575 million, or at least 22% growth, compared to our previous expectation of at least $552 million, or at least 17% growth. We are guiding to adjusted EBITDA of at least $70 million, or at least 45% growth, compared to our previous expectation of at least $57 million, or at least 18% growth. This updated guidance reflects the stronger than expected first quarter, increased confidence in our performance for the remainder of the year, and higher conviction and a more favorable commodity outlook. We remain focused on reinvesting in marketing and expanding our retail presence in order to drive awareness, deepen loyalty with consumers, and ultimately drive household penetration on our path to 30 million households by 2027. We continue to expect higher adjusted EBITDA margin in the first half versus the second half of 2024. Given the better-than-expected growth in Q1, we now expect net revenue growth to be relatively evenly split between the first and the second half of the year. Lastly on guidance, we still expect fiscal year 2024 capital expenditures in the range of $35 million to $45 million. Note that this includes the previously highlighted $11 million of timing shift from the CapEx spend that was initially planned for 2023. We anticipate having elevated CapEx spending over the next few years because of the new facility, with the majority of the spending occurring in 2025 and 2026. We believe we have the necessary funds to build the facility and project that every dollar of CapEx investment in this new facility will generate more than $5 of annual revenue capacity, which we consider a really strong return. We continue to evaluate our capital allocation priorities, and if necessary, we'll provide updates on future earnings calls. Overall, the first quarter was a very strong start to the year for Vital Farms, and we are very excited to build on this momentum, especially as we are building plans to break ground on our new facility next year. We remain focused on building greater retail penetration to raise brand awareness and deliver our eggs to more and more households. Before I close, let me also once again welcome Tony Bucalo to the Vital Farms team. I'm very much looking forward to working with him and benefiting from his experience as we continue to build out our investor relations function. Thank you for your time and interest in Vital Farms today and for the confidence that you have placed in us with your investment. With that, we will now be happy to take your questions.

Our first question comes from Brian Holland of D.A. Davidson.

May just to start. So to your point, Russell, first quarter growth, really strong in the context of lapping the previous avian influenza cycle. I think what also continues to be impressive is the balance of distribution and velocity growth in the business. If I just focus on the velocity side, can you frame at all the benefits of increased SKU placements at stores? I know you've moved off a base of closer to two. So thinking about the out-of-stock issues that can happen when you're that lightly represented on shelves. And so actually adding SKUs, rather than cannibalizing your business, it's actually driving greater productivity. So maybe just a comment on that and what you're seeing there.

Thanks, Brian. I appreciate the question. I think it's an important one for us at this point in our growth, and it's a really interesting phenomenon. So first of all, what we've seen in early days when we got our first SKU on the shelf with a new retail partner was that sometimes it was a little hard to stand out on a shelf. There are an awful lot of SKUs in the egg set. The egg set is pretty tight as it is, and it's crammed with all this variety. So it's really hard to get anybody's attention with one facing of our little carton of eggs. Even if you knew to look for us, it might be hard to find us. The second facing, even if our velocities justify the second facing of that first SKU, typically would be another item. What we often found was there was zero cannibalization of the first with the second. In fact, in many cases, we saw an interesting pattern, which was that our maybe daily or even sometimes weekly revenue from that slot was about exactly one case worth of product, meaning we basically sold out and then waited for replenishment. As we were supporting this brand, we're very strong in terms of conveying the value to consumers and building brand loyalty. The demand's there, and the question is, can we support it on the shelf? The additional SKUs have two impacts. One is potentially addressing a different household need, whether it's with a larger pack size, for example, or an organic versus a non-organic product. But it's also simply more holding power on the shelf and visibility for our brand. We see that when we add the second, third, and fourth SKUs. There's both leaning into growing consumer demand and supplying existing demand that happens when we add SKUs to the shelf, and it's a powerful combination.

Appreciate all that color, Russell. And then maybe just focusing below the top line now. You guys have targeted a 12% to 14% EBITDA margin long term, 35% gross margin. Obviously, we're looking at a 40% gross margin this morning and closer to 20% EBITDA margin. I understand there's moving parts, commodity tailwinds and such. But you've also highlighted operational efficiency, scale benefits, et cetera. So I just wonder, as we look forward, is it too early? Or to what extent does first quarter results here sort of lead to thinking about maybe a higher margin profile on this business long term?

Yes. Thanks, Brian. I appreciate where you're going, and I think we all like to dream a little. I'd caution against thinking about a fundamentally different business profile here. I think we've been very intentional with that long-term guidance for some important reasons. You could imagine a couple of things that are helping us support our profitability, our profit profile right now that may or may not be true in the future. One is, as I think many of you are seeing, we have had some nice, sort of temporary, potentially transitory benefits from some changes in commodity costs. We're not immune to changes in commodity costs, although we've done an admirable job of making sure we're insulated from really big swings. That's a little bit of a tailwind right now, to be frank. Another is that we're at a moment in time when I think we've built a lot of great distribution in the last year and added a lot of high-quality households that are having a nice conversion to more loyal households, and that's been a wonderful tailwind. We've got a lot of what we've been saying around here— we are really firing on all cylinders. We have a lot of things going right. I'm someone who likes to hope for the best but plan for the worst. I love the results we're seeing, and I don't have a reason to say we won't have similarly strong results throughout the year. I think the guidance we've given for our long-term targets is an appropriate place to be anchored.

And our next question comes from Matt Smith with Stifel.

I wanted to ask a question about the phasing of revenue growth. You mentioned a more equal phasing between the first and second half. You started the first quarter very strongly, which suggests a bit of a slowdown in the second quarter before a reacceleration in the second half. Just wanted to make sure I was understanding that correctly. And if you could talk about some of the dynamics in the second quarter. I believe you have a bit of a tailwind coming off of AI benefits where on-shelf availability returned very healthily for the rest of the category.

Yes. Good question, Matt. I think when we started the year, we didn't expect Q1 to be this strong. And so with that, we thought growth in the second half would be bigger than in the first half, given how the first quarter came in. We're now thinking growth is going to be much more evenly split between the first and second half. You're right to point out that last year, we had a probably weaker than expected second quarter after the first quarter tailwinds from AI. The order patterns by retailers took a bit to catch up to new demand patterns. Orders last year's second quarter were a bit slower than what we had expected. So now we need to lap that. It creates a headwind for us this year in the second quarter. Our thinking now comes out that first and second half of the year will be relatively similar in overall growth. Second quarter should have better growth than the first quarter despite the headwinds I just talked about, simply given that we had this massive lapping from the first quarter last year. There's a lot at play, but so far, what we're seeing is healthy order patterns.

And just one follow-up for me. Can you talk about your ability to continue to meet the volume demand? The volume demand obviously started the year very strongly, above your expectations. Have you been able to keep pace with new farm additions and confident in your ability to service the demand if it stays at this elevated level through the year?

Yes. I think it's another terrific question. It's the other side of the supply and demand question. The short answer is yes. We absolutely have the supply of eggs and capacity to deliver on our plan and our guidance this year and then some. That's generally how we operate. We always try to have some cushion, some additional capacity in order to meet maybe unexpectedly high demand or, frankly, to meet the growing demand that we're seeing from consumers and retailers. That continues to be a source of strength for us. Great farm relations and a wonderful ability to build a pipeline of excited new growers. I think it's important to remember how we are very intentional in our planning. We try to make sure we eliminate any bottlenecks to our growth proactively. Part of our news today is choosing a site and buying land for our next egg packing plant. Even though we won't actually start packing eggs there for a few years, we want to make sure that when we need it, it's there reliably.

And Matt, let me just add one point from the—basically just reiterating some of the prepared remarks. We have the supply of eggs. We have the pipeline of farms to come online over time. But we also, over the last 12 months, have made a lot of changes at ECS to ensure that we can process our supply of eggs, put them in cartons, and get the cartons out the door. These operational improvements at ECS are a big part of why we are able to grow volume this way.

And our next question comes from Ben with Lake Street Capital Markets.

Just kind of one high-level strategic question for me here, given the success that you guys have seen here, especially accelerating over the last few quarters. And that's—to what extent does your recent success impact your growth strategy? Does it make you less inclined to pursue new adjacent markets? Does it make you want to expand the scope of your new facility? Or is your long-term vision really unchanged in the context of your recent results?

Thanks, Ben. It's Russell. I'll take that and see if Thilo has anything to add. The short answer is it doesn't affect our confidence in this brand and its ability to grow to be the most trusted food brand in this country. That could mean being in more categories beyond the ones we're already in. The reality is that I think the risk that companies face perhaps at this phase in their growth is that they can get distracted. A lot of what helped us get to this place and sustain such momentum here is our intense focus on scaling a world-class organization and scaling systems and capabilities to support the incredible growth that we're driving. Job #1 is to not take our eyes off the ball as we explore the incredible interest in demand from consumers and retailers, and, frankly, even from our farmers. Entering new categories and bringing even more solutions to households in this country and to retailers in this country—it's not an either/or, it's an and. My focus is on making sure that as we do both of those things, we do them both really well. So that's a windy answer to the question of whether it affects our timing or focus— not at all. There is a future for Vital Farms that expands beyond primarily eggs, and we will get there when we are confident that we can do it well. We're still exploring our full potential in the egg business, and we haven't found a limit to it at this point.

Got it. Very helpful. Plenty more to talk about, but I'll leave it there. Congratulations on a great quarter, and I'll jump back in queue.

Our next question comes from Robert Dickerson of Jefferies.

Had a couple of questions. Maybe just one core question on gross margin. Apologies, I jumped on the call a little late. Clearly, gross margin, very impressive in Q1. It seems like what's implied is that margin steps down maybe as we get through the year, just given how you guided to EBITDA. So I guess, one, maybe just kind of speak to like why that might not be sustainable. But also in the context of the longer-term kind of outlook and goal to get to like a mid-30s gross margin because it seems like we're there, right? So maybe, Russell, too, if you could just spend a minute speaking to maybe what the new potential could be because I feel like you kind of hit the target.

Yes, Rob, let me take this one. This is Thilo. So gross margin—clearly, we were ahead of our long-term target this quarter. I think we had a few benefits that we don't necessarily expect to repeat quarter after quarter. This was a quarter where everything went right. We had no disruptions, no weather events. The crew did an incredible job at ECS. We had a benefit from commodities. At the beginning of the quarter, we didn't see any price elasticity impact on that one that wasn't expected and so on. With that, the margin was a bit better than what we expected. We don't foresee that happening every quarter from here on out. We don't expect that to be the case when we get to 2027. The mid-30s target that we laid out for 2027 is still what we are aiming for. What this quarter allows us to do is to do a bit of reinvestment in the business, putting a bit more money into marketing than we had previously planned, maybe accelerating some of the hiring to build capabilities, and to Russ's earlier answer, to scale this world-class organization that's been part of our growth algorithm. That is why the EBITDA margin that's pretty much implied in the guidance—we don't expect the EBITDA margin from the first quarter to carry through for the rest of the year. A couple of these are reinvestments, but these reinvestments align with how we think about the business. We plan for the long-term. We invest for the long-term. We make the investments before we need them. Hiring crew maybe a bit earlier than necessary to allow us to get up to speed and grow faster, investing in marketing when we can to ensure we get to that household penetration number that we need for the $1 billion in revenue by 2027—this is what this quarter allows us to do. That is why we expect the EBITDA margin for the year to come in where the guidance implies it.

Okay. Well said. And then I guess maybe just a broader question around demand. Look, you clearly continue to grow volumes very nicely. If we listen to a lot of different food companies or read the news, what have you, there's ongoing pressure, especially on the low-end consumer. Some people would say, wow, those eggs are expensive. But at the same time, eggs on a per-serving basis aren't that expensive as an alternative form of great protein. So I'm just curious kind of like what your feel is around your own given demand and kind of demographic focus vis-a-vis the broader consumer landscape and kind of how eggs fit into that. So a lot in there, but an important question.

Yes. I think you're right. We continue to see that bifurcation within our category as consumers migrate to value as well as the premium. We're obviously very well positioned. We're pleased because we've been able to maintain our discipline from a promotional standpoint. We see a very strong performance in our base volume. We're not getting a disproportionate amount of our growth in promotion. We're seeing extremely strong performance in our base velocity, which I'm really proud of. I don't anticipate that changing at all throughout the balance of this year. We've been disciplined as we've talked about in the past. We will continue to be disciplined about that. Fortunately, the brand stands for something, and I think consumers recognize that. Despite what we're seeing within the market, we continue to grow households, expand our distribution, and grow our presence on the shelf. We have a significant opportunity to continue to grow in those respective areas, which I'm really excited about, to be quite honest with you.

Rob, let me add one thing to that. For me, what's about this quarter is that we previously talked about taking pricing on the organic portfolio at low double digits at the beginning of the quarter. We haven't really seen any impact on demand or orders. The consumer we're selling to is still very much willing to pay for the quality and for the trust that we stand for. I truly believe there is a portion of the consumer segment that's getting weaker, but that is not our core consumer. And so with that, we feel very confident in our consumer to continue to show strong demand.

Our next question comes from Adam with Goldman Sachs.

So I guess the first question is, obviously very strong growth in the period, and you can see that in the scanner data. Wondering if you were seeing a more meaningful divergence in performance in the natural channel versus mass. I would think that more elevated commodity egg prices and some of the potential supply issues associated with that would become more evident on the mass side and that might have unlocked new placings or items and distribution opportunities for you. But is that actually part of the story this quarter? Or was the growth and sales acceleration more broad-based across channels?

Thanks for the question. I think we're seeing very balanced growth. I'm pleased with that. The AI impact thus far has really been restricted to organic eggs. We haven't seen a significant impact in that regard. Some of the impact you're talking about has been isolated to the West Coast. Again, our performance there has been very strong and isolated to a handful of retailers. In those retailers, our performance has been quite strong. I would say we've reinforced our position. I don't think it has been disproportionate in that regard. Our performance in the natural channel has been consistent. Our share performance continues to be strong. We're far and away the leader in natural, and our performance within food and mass continues to grow disproportionately as we talked about in our opening statement. I think what you're seeing is a little bit of how high is high. Without any outside influence—because we did not have any of the interference we've experienced in some past quarters—you can truly see what we're capable of when we can execute without some of those outside forces. Given the opportunities in front of us and the partnerships we're establishing with world-class retailers, I'm very excited about the future.

Okay. That's very helpful. And then a clarification question, just going through the Q, and you disclosed your revenue from the retail channel, which if you compare that to the total revenues, it looks like your sales in the non-retail channel were actually down year-on-year. So I just wanted to be clear, is that some of the egg products and non-core items? Or is that the actual decline in food service and maybe bridge that a little bit?

Yes. That's a great observation, Adam. It really is a function of the first quarter last year. When AI hit, there were no eggs available. At times, we were the least expensive offering for the food service channel, and we had a bit of outsized demand in the food service channel last year that came back down to earth. Once AI's impact passed, we returned to a more normal pattern. So on a year-over-year basis, food service sales for us were down. They're still an overall growing part of the business. It's just that last year our volumes spiked versus the previous year.

And there's one other piece of the non-retail sales, Adam, which we've discussed in quarters past. This small percentage of our eggs—low single-digit percentage—that don't make it into a carton and go into the wholesale processing channel. We don't price to capitalize on short-term market disruptions. The prices for those wholesale eggs are based on market prices. A year ago, those prices spiked just as they were spiking on the shelf, and we were the taker of those prices. So there was a temporary increase in the price we got for our non-branded kind of wholesale eggs as well.

And our next question comes from Jon Andersen with William Blair.

Two quick ones. I was wondering if you could talk a little bit about what you're seeing demand-wise across the portfolio. And what I'm getting at here is the growth that you're seeing for the conventional 12 count relative to maybe some of the higher price point SKUs, 18 count, organics, and blues, just to get a sense for your ability to continue to attract that consumer at higher price points. And then second question, just around resets and distribution gains in 2024. If there's any way to kind of characterize where you are in that spring reset process. What percent perhaps is complete? What's still to come and where that distribution is coming from?

Sure. Thanks for the question. This is Pete. We're seeing very, very healthy growth in our core portfolio across both segments of natural and our food business. We are seeing migration into 18 count, the value proposition in large pack sizes, as you can see across the entire food segment. It does exist in the egg category and within our portfolio. We're also experiencing solid growth within our portfolio on the core black box item across the food segment. Within natural, we have a disproportionate mix within organic. The organic 12 count product is a larger selling item in the natural segment of business. To your second question, around the percentages of retailers in the midst of resets—it's a bit difficult to answer. We're probably about 50% to 60% complete. Typically, these decisions are made in March, and those resets are being actively completed now. We should start seeing some benefits flow through in the next two reporting cycles as a result of these efforts.

That's super helpful. If I can squeeze one more in. I know your 2027 plan calls for household penetration gains. I'm wondering if there's another part to the story here that contributes to growth, which is increasing your share of requirements with existing households, so buy-rate. If you could comment on loyalty and the repeat activity you're seeing for the brand and how that stacks up relative to food overall, any color around that would be helpful.

Jon, so hitting the 2027 targets, as you pointed out, depends on household penetration. It also depends on us increasing our buy rate. At our Analyst Day back in September, we had pages in our deck that showed buy rate growth. In 2023, buy rates went from $28 to $34 per household. However, households are buying a whole lot more than $34 of eggs over the course of the year. So we are only a fraction of household purchases for eggs. Gaining loyalty from consumers is part of our path to the $1 billion in revenue by 2027. We're on a great path there. The loyalty we get from consumers is reflected in our growth of 18 count, which is part of that expression. It's not just that consumers are looking for a lower cost per egg, but when they buy an 18 count, we take away how the purchase occasion they normally have. We are already locked in with them. Consumers are willing to pay the premium because they're willing to lock us in. Consumer loyalty is a really big part of what we're going after. That means we keep selling our marketing methods, focusing on quality, and ensuring we can stock the shelf with retailers. All these intentions are aimed at increasing household penetration and buy rate.

Our next question comes from Robert Moskow with TD Cowen.

Congratulations on some great results. Maybe you do this annually, but do you have any update on overall awareness, consumer awareness of the Vital brand name, like top of mind awareness, and if that continues to move in the right direction? I'm sure it does. Have you done any thinking around tipping points where you get to a certain amount of awareness, a certain presence on shelf? Some brands, I remember Freshpet used to talk about some kind of parabolic effect where you hit this tipping point, and the growth accelerates because of that—probably because of the pickup in awareness. So maybe that's jumping ahead too far, but wanted to ask.

So Rob, the awareness—we're tracking it. It's not a metric that we discuss every quarter, but we are making progress on awareness. We're on track to where we want to be this year. I don't think I can say we are experiencing a parabolic effect, and I wouldn't want to borrow from Freshpet. But I think what we've seen is that increased distribution leads to more awareness. As Russell mentioned in one of the first questions, when we have one facing on the shelf with the black carton, we can get lost among the various offerings. When we have three or four SKUs on the shelf with one or two facings per SKU, we create a brand block. The consumer realizes there's a significant portion of the shelf that's Vital Farms. Even if a consumer had never heard of us before, when they see a brand block in the refrigerated shelf at the retailer, they pick up on that. Increasing awareness should accelerate over time.

I think it's important—Rob, it's a great question. The only thing I would add to that is, even with a brand like ours with a wonderful community of really loyal repeat consumers, a big percentage of the purchase choice still happens at the shelf, and we have to get their attention. We can't take for granted that simply being on the shelf is enough. We've got to be on the shelf and compelling at the shelf. And so that's an everyday challenge. But I think we've got the right people in that fight.

Thank you. This concludes the question-and-answer session. I would now like to turn it back over to Anthony Bucalo.

Thank you again, everyone, for your support of Vital Farms. Have a great day.

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