Thank you for standing by. My name is Kathleen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vital Farms Incorporated Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. And now I would like to turn the call over to Anthony Bucalo, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Vital Farms' second quarter 2024 earnings conference call and webcast. I am Tony Bucalo, VP of Investor Relations. And I'm joining the call today by Russell Diez-Canseco, President and Chief Executive Officer; and Thilo Wrede, Chief Financial Officer. By now, everyone should have access to the company's second 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 this call, management may make forward-looking statements within the meaning of 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 June 30, 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 the most comparable measures prepared in accordance with GAAP. With that, I will turn the call over to Russell Diez-Canseco, President and Chief Executive Officer of Vital Farms.

Good morning and thank you for your time today. I'm pleased to announce that our momentum from the first quarter carried into the second. We delivered another great set of top-to-bottom results. Our performance was driven by growing demand for our premium products and excellent execution from the great people working across Vital Farms. I'd like to thank all of our crew members throughout the organization for these really terrific results. Today, I'll start with our key financial headlines and then shift to new developments. I'll then hand it over to Thilo, and he will provide more detail on our second quarter financials and updated guidance for fiscal year 2024. With our strong start to the year, I'm happy to report that we're in a great position to both raise our guidance and accelerate investment in the long-term success of our business. We continue to expand our farm network, and we're adding a new egg washing and processing facility in Seymour, Indiana. Additionally, we will be stepping up brand marketing investment in the back half of the year, driving our message to consumers as we push to reach 30 million households by 2027. Let's get right to the key financial headlines. We had another excellent top-line performance with record second quarter net revenue of $147.4 million, up 38.5%. You might remember that we guided for 300 basis points of tailwind for sales in the quarter. This was due to our lapping some negative product ordering dislocations related to avian influenza last year. We did enjoy some benefit from this comparison. However, we still performed well above our expectations. In the first half of 2024, our sales grew 31% on top of a first half 2023 comparison of 41%. We delivered another strong gross margin performance this quarter. Boosted by sales growth, productivity gains, selective pricing, efficient supply chain execution, and a more benign commodity cost environment, gross margin improved 362 basis points to 39.1% in the quarter and improved 381 basis points to 39.5% for the first half. In addition to our strong gross margin performance, we delivered $23.3 million of adjusted EBITDA, up 105% versus the second quarter of 2023. Year-to-date, we've delivered $52.3 million in adjusted EBITDA, up 108%, from the first half of last year. Our adjusted EBITDA margin for the quarter improved to 15.8%, up 512 basis points from last year. Our half-year adjusted EBITDA margin improved 656 basis points to 17.7%. Strong consumer demand helped drive our top and bottom line success this quarter. We believe we are in a virtuous cycle of higher consumer demand driving expanded distribution and expanded distribution driving further demand. We continue to build our shelf presence in stores where we're already prominent, accelerating our sales performance. Year-on-year, our total distribution points have increased by 19% to 453 in the natural channel and by 17% to 215 in the food channel. We still have much more room to grow by adding more items to existing shelves at locations where we already have a strong presence. Yes, I'm pleased by our strong sales, distribution, and gross margin performance this quarter. I'm also thankful for all of our crew members who help make that happen. We are well positioned to meet future consumer demand, and we continue to invest to make that happen. Our brand is at the core of who we are and our brand marketing remains a powerful lever of our success. We're always looking for ways to drive brand awareness in meaningful and culturally relevant moments. This summer, with women's sports viewership on the rise, we have a new campaign that celebrates female farmers and athletes alike. We expect this campaign will deliver more than 350 million advertising impressions across sports networks, during games, tournaments, and matches. This includes the women's Wimbledon tournament just concluded in July and the National Women's Soccer League and Ladies Professional Golf Association through the fall. We also have a few spots running during the Olympics coverage on the USA Network. Joining the women's sports conversation continues to deliver outsized results, resonating with our highly engaged and growing audience. We expect to generate $650 million earned impressions through press coverage that highlights our unique campaign. Furthermore, we have good news about our supply chain this quarter. First, we're happy to announce that we're now working with more than 350 family farms within our network, up from more than 300 at the beginning of the year. Our family farmers are central to what we do in our business. We believe our ability to attract and support new farmers is a critical strength of our company. We continue to add farms to support our growth as we push toward $1 billion in revenue. Next, in June, we made the formal announcement of the location for our new egg washing and packaging facility. This 72-acre site will be in Seymour, Indiana and when finished, will help launch us into our next stage of growth. We plan to break ground in 2025 and expect to begin operations there in 2027. Our world-class Egg Central Station facility in Springfield, Missouri is still finding ways to improve its already impressive performance. As I remarked last quarter, we’re just flat out better at getting our high-quality eggs packed and shipped. With Seymour, what’s most exciting for us is that the construction and operational plans for the new facility will be built upon our key learnings and successes from Springfield. This includes everything from people development to production. Additionally, we expect to have ample room to expand past our 2027 revenue goals. We expect Seymour will create at least 150 jobs for the local community in its first phase. When finished, over the long term, we expect Seymour to support approximately 165 new family farmers and to help generate more than $350 million in additional revenues. This facility will complement Springfield, which we now estimate has $800 million in revenue capacity. Let me briefly elaborate on this last data point. Since our ECS Springfield expansion in 2022, we've discussed our revenue capacity of $700 million for this facility. However, we want to give you an up-to-date estimate. Since 2022, the price mix of our portfolio has evolved, and we've become significantly more efficient. We estimate that this combination has given us at least $100 million in estimated additional revenue capacity since our last estimate in 2022. Finally, we're in the planning stages of building a handful of farms ourselves. This year, we've purchased $3 million in farmland in Indiana within a short distance of our planned facility in Seymour. This land is where we plan to build these new farms. When up and running, these starter farms will serve two purposes. First, building and running a small number of our farms ourselves will allow us to test new ideas and processes without imposing on our existing family farm system. We can then share best practices and learnings across our family farm network. Second, over time, we plan to make these farms available for sale to family farmers looking to join our network. We anticipate these farms will be fully operational, creating a turnkey solution for buyers. These farms will provide the potential for immediate cash flow as well as mitigation of much of the initial start-up risk for new farmers and their families. Note that anticipated project costs have been included in our capital expenditure guidance. Before I hand it over to Thilo, I want to share a quick update on butter. As you recall, we relaunched our butter line in April. This was after an extensive global search for a supply source, which we believe best represented our Vital Farms philosophy and mission. We chose the supplier in Ireland as our primary source, and we are now working closely with family farms there to deliver a delicious creamy product that's 90% grass-fed. Our choice to import from Ireland is consistent with our commitment to animal welfare and family farm support. Here in the U.S., we reinforced the brand with attractive new packaging, giving the product a premium brand halo that stands out to consumers on the shelf. Although it's still early days, I'm happy to report that we're seeing significant progress since the relaunch. Our overall butter business is down so far this year as we're lapping the discontinuation of our tub butter SKU late last year. However, we expect to return to growth in the second half of the year. Our stick butter business is growing, and our velocities have picked up materially where we are present. The future looks good for butter, and I'm happy with what we've accomplished in such a short period. My advice is to go out and find some for your fridge; we keep it in our house, and it's terrific. I'd like to wrap up with just a few comments. We got off to a great start in the first quarter and that momentum carried into the second. Our business is in great shape, and I'm excited about what we've accomplished so far this year. It's been exciting to watch our growth while serving our stakeholders and delivering on our financial promises. We have big plans for our future, and we know our growth will require investment and long-term thinking. We will continue doing the hard work of recruiting new family farms and adding new capacity to achieve our ambitious financial goals. This expansion of capacity runs parallel with the investments we're already making in our people, brand, and infrastructure. As a result, we're confident that we are well-positioned to meet our updated guidance for the year and our long-term financial targets beyond that. And with that, we'll now go to our CFO, Thilo Wrede, for further discussion.

Thank you, Russell. Hello, everyone, and thank you for joining us today. I will now review our financial results for the first quarter ended June 30, 2024, and then provide details on our updated guidance for fiscal year 2024. We followed our record first quarter results with another great performance in the second quarter. Our net revenue rose to $147.4 million, up 38.5% versus last year. We posted 35.8% volume growth and modest price mix benefits. Consistent with our performance from the first quarter, volume growth was driven by strong consumer demand and expansion at both new and existing retailers. This volume performance was in line with our mostly volume-driven growth plans for this year. Gross profit for the second quarter of 2024 rose to $57.7 million or 39.1% of net revenue compared with $37.8 million or 35.5% of net revenue in the second quarter of 2023. Gross profit was boosted by revenue growth, scale benefits, and operational efficiencies. These factors, along with price mix benefits and lower conventional commodity and diesel costs also contributed to higher margins. This was partially offset by an increase in the promotional rate and an increase in labor and overhead costs to keep up with our growth. SG&A expenses for the second quarter of 2024 were $33.3 million or 22.6% of net revenue compared to $23.9 million or 22.5% of net revenue in the second quarter of last year. The increase in SG&A this quarter was driven primarily by higher professional service expenses, employee-related costs, including stock-based compensation, and an overall increase in employee headcount, brokerage and marketing expenses and technology and software-related expenses. These costs all reflected the expansion of the business. Shipping and distribution costs rose in absolute terms but declined as a percentage of sales. Shipping and distribution expenses in the second quarter rose to $7.2 million, or 4.9% of net revenue, compared to $5.9 million, or 5.5% of net revenue, in the second quarter of 2023. The increase in shipping and distribution expense was driven by higher sales volumes, partially offset by favorable line haul and fuel rates. Net income for the second quarter 2024 was $16.3 million, or $0.36 per diluted share, compared to $6.7 million, or $0.15 per diluted share, for the second quarter of 2023. Adjusted EBITDA for the second quarter of 2024 more than doubled to $23.6 million, or 15.8% of net revenue, compared to $11.3 million, or 10.7% of net revenue, for the second quarter of 2023. Now a quick update on our capital structure. Our cash, cash equivalents, and investment securities increased by $35.9 million in the second quarter, and as of June 30, 2024, we had total cash, cash equivalents, and marketable securities of $152.7 million with no debt outstanding. Now looking ahead, for the full fiscal year 2024, we are now guiding to a net revenue of at least $590 million or at least 25% growth compared to our previous expectation of at least $575 million, or at least 22% growth, and adjusted EBITDA of at least $75 million, or at least 55% growth compared to our previous expectation of at least $70 million, or at least 45% growth. Our CapEx guidance remains unchanged at $35.5 million. Our long-term guidance also remains unchanged. We are targeting $1 billion in net revenue by 2027 with a gross margin of at least 35% and an EBITDA margin of 12% to 14%. Our updated 2024 guidance reflects the strong performance in the second quarter and good visibility on demand and commodity prices for the second half of the year. In parallel with our increased investment in our supply chain, we will continue to invest in marketing and expand our retail presence to drive awareness and deepen brand loyalty with our consumers. Given our outperformance versus our expectations in Q2, we now expect net revenue to be evenly split between the first and second half of the year. We were well above our long-term 35% gross margin target in the first half of the year, and we expect the second half of the year to continue this trend, albeit to a lesser degree. We expect adjusted EBITDA margin in the first half of the year to be higher than our adjusted EBITDA margin in the second half. The second half adjusted EBITDA margin outlook reflects our stepped-up marketing investment and other investments in the future growth of Vital Farms. We continue to expect fiscal year 2024 capital expenditures in the range of $35 million to $45 million. This includes spending on our new facility in Seymour, Indiana, the new farms that Russell mentioned, and our ongoing digital transformation project. With the construction of the Seymour facility, we anticipate elevated CapEx spending for the next few years with the bulk of this spending in 2025 and 2026. We intend to fund the Seymour facility and our other projects with existing cash and operating cash flow, and we project that every dollar of CapEx investment in the new facility will generate more than $5 of annual revenue capacity, which we consider a very strong return. We continue to evaluate and monitor our capital allocation priorities, and we will provide updates as necessary. Overall, our first half performance was strong, and we are excited to build on this momentum for the rest of 2024 and beyond. We continue to add family farms at a great pace, and we have big plans to break ground on our new facility next year. We remain focused on driving greater retail penetration and raising brand awareness to deliver our eggs to more and more households with each passing year.

Thank you. We will now begin the question-and-answer session. And your first question comes from the line of Brian Holland of D.A. Davidson. Please go ahead.

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

Yes, great question, Brian. Good morning. Last year, we focused our marketing investments in the latter half of the year, and this year we plan to increase our spending on marketing even further in that same period as a percentage of net sales. This decision is influenced by our stronger-than-expected performance in the first half. We have achieved better profitability than anticipated at the start of the year. While we are pleased to see some of that flow to our bottom line, we also aim to invest appropriately to ensure continued growth and to maintain our positive momentum. Russell mentioned that we have initiated a new advertising program centered around women's sports, connecting with the female farmers we collaborate with. This presents a significant opportunity for us, especially as viewership of women's sports has noticeably increased over time. Considering our profit gains from the first half, we believe there is a chance to raise awareness and enhance our market penetration. Last year, we allocated about 5% of our net sales for marketing expenses; I anticipate a slight increase from that figure this year. Long-term, I believe maintaining the marketing spending in the 5% to 6% range is appropriate for us at this time, though we will keep reassessing this as we grow.

Thank you for the information. Now, regarding the new egg washing facility, could you clarify for investors how the Springfield project, which has increased from $700 million to $800 million, aligns with your $1 billion revenue goal by 2027? Specifically, can you explain how onboarding and ramping up that facility contributes to reaching the $1 billion target? What other factors or flexibility do you have to ensure that your distribution capacity is adequate? Additionally, Thilo, could you share your thoughts on the capital expenditure needed before the facility becomes operational?

Thanks, Brian. Good to be with you today. So as you have learned over time, we're very intentional and plan very well in advance to make sure that we don't face the common constraints on growth here at a fast-growing company. For example, we started the site selection for this plant about two years ago and made this announcement just in the last quarter, and that's well in advance of us opening the facility. Now we believe that we will have that facility up and running by the end of 2026 or the beginning of 2027 and that that will be well-timed with our hitting our capacity in Springfield and needing to add capacity. There are other levers that we can pull for short periods of time. In case, for example, we have a big upside surprise in volume. There's more space in Springfield that we could potentially leverage to temporarily add capacity if that became necessary. But we've been very deliberate in our growth, and we feel pretty confident about the projections we're using that led us to the timing of Seymour.

Brian, on your CapEx question, so the cost for the new Springfield facility, we haven't fully talked about it. I think we've talked about the revenue capacity that the new Seymour facility brings us and that we think for every dollar of CapEx that we put in, we get $5 of revenue out of it. That CapEx will be spent in 2025 and 2026. The vast majority of it will simply, we start breaking ground in the first half next year, and that's when the spending really starts. Russell on the prepared remarks had talked about these starter farms that we are now starting to plan for as well with our clients on that there. There will be additional CapEx that goes into those starter farms as well. I think in the 10-Q, we talked about $20 million to $30 million of CapEx over the next 12 months. And we'll probably continue to make progress on these starter farms beyond those next 12 months. So for the next two years, we'll have elevated CapEx spend elevated compared to our guidance for this year as well. But right now, we feel very good that we can fund all of that out of operating cash flow. And don't forget we have $153 million of cash on the balance sheet. So we have a very, very healthy cash cushion right now.

Great. We'll leave it there. Thank you.

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

Yes. Great question, Rob. Good morning. Let me – I think on the first quarter call, three months ago, we had talked about how first quarter was just humming on all cylinders; ECS was operating really well. Consumer demand was strong. And I think in the second quarter, we saw a continuation of that theme. This virtuous cycle that Russell had mentioned in the prepared remarks about distribution driving demand and demand driving distribution that continues, ECS continues to operate really well. So it's really this virtuous cycle that we've talked about, it continues to manifest itself. For the back half of the year, we assume that at some point, in terms of ECS operating efficiency, we will regress to a mean; this very smooth operation that we had in the first half of the year. We don't necessarily expect that to continue in perpetuity. At some point, the machine will break down unexpectedly. And then we'll have to fix it and do some maintenance outside of the planned cycle. And so our guidance reflects that ECS at some point, will probably run into some hiccup that we just didn't see in the first half. And so we just want to make sure we don't get ahead of our skis there. Consumer demand for us continues to be strong, right? You publish Nielsen reports every two weeks. You see the scanner data that continues to be strong. But it is more our own cautiousness to make sure that that we don't run into the situation where we promise something and then we run into an unforeseen issue at ECS that will prevent us from delivering on that.

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

Yes, that's a fair question. When we examine commodity costs, I believe Q2 provided the most significant year-over-year advantage due to falling commodity prices. Therefore, the margin benefit likely peaked in Q2. However, I'm not in the position to predict commodity costs since they can fluctuate unpredictably throughout the year. We have a clear understanding of our costs for Q3 and some insight into Q4. Given this, I would expect that Q2 represented our most favorable year-over-year comparison. We mentioned in the prepared remarks that the butter business is beginning to see growth again, which will apply pressure on our gross margin. Additionally, we have some maintenance occurring at ECS that will impact COGS and subsequently affect gross margin. This is why we anticipate for the remainder of the year that we'll align with our long-term guidance, although not to the same extent as in the first half of the year.

Okay, sounds great. Good job guys.

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

Good morning, Ben. Thanks for being with us and I appreciate the questions. Yes, I'm really excited about this initiative. So I'll talk a little bit about the purpose and the goals and then Thilo can talk about kind of the capital expenditure roadmap. As we said in the remarks, there are two things that I believe will be meaningful to Vital Farms and all of our stakeholders coming out of this initiative. The first is that we still have a lot of innovation to try and to incorporate. We've been traveling to Europe almost annually for 10 years. And they've been doing things the way we do it for a lot longer. And every time we go there, we learn and we get new ideas, and we hear from them what's working, and you can't do everything at once. We want to start to implement more of what we've seen work so well over there, and we want to be able to prove to our network of small family farmers the impact on them, on the health of their birds and on their bottom lines before we ask them to sort of make that investment themselves. We're not in the habit of forcing additional CapEx on our farmers within the course of our working relationship. So that's one, which is we get to test and learn. And then the other is, as you well know, adding a farm is a long lead time exercise. It takes as much as a year to go from deciding we want more eggs a year from now and actually having a new farmer with a farm that's operating and actually producing those eggs. And sometimes the year is one issue. But there's also variability, which is another issue because a lot of the upfront work of finding the right piece of land, getting financing from the bank, finding the right contractor to build the barn, getting in line for the import of equipment with sometimes disrupted ocean freight, etc., can create variability. And one of the really exciting things about having a handful of these farms right where we want them in Indiana near Seymour, is that when we're ready to have farmers producing eggs in Indiana, we have 10 say more or less farms ready to go, which frankly just puts a lot more accuracy on our estimate of the timeframe. So I think this is an exciting benefit for us and an exciting benefit for the farmers and, frankly, for the chickens.

Yes. Thanks, Russell. That was really helpful. Yes. And then Thilo, any input on the level of investment beyond the $3 million would be great.

Yes, as previously mentioned, we plan to invest between $20 million to $30 million over the next year. The $3 million spent so far has gone towards purchasing land. We now need to build the barns and equip them accordingly. I expect that our investments in this strategy will extend beyond the next 12 months, resulting in ongoing capital expenditures. As Russell pointed out, this is another method for us to secure our egg supply. We reported that we are currently partnering with 350 family farms, which is an increase of about 50 since the start of the year. Our pipeline of farmers remains strong, and we are also expanding our presence into a new region, specifically Indiana, where we currently do not have any farms. This expansion will enable us to establish a base in Indiana for future farm construction. From our perspective, this is a promising opportunity to ensure that the egg supply needed for Seymour is already secured by the time we require it.

Got it. Very good. All right, well, I appreciate you both elaborating on that. Congratulations again on the great quarter, and I'll get back in queue.

Hi, thanks and congratulations again. Russell and Thilo, I wanted to get more details on how you're expanding the talent pool to manage all this growth. What kind of increases in headcount are you planning for areas like sales, supply chain, logistics, and marketing? Running a $1 billion business is significantly different from running a $400 million business, so I’d like to hear how you’re preparing for that. Additionally, regarding the new facility in Seymour, will it be similar to the one in Missouri? How easy will it be to establish a comparable process in Indiana? I've seen that sometimes launching a new production line can be challenging due to unforeseen factors.

Thank you, Rob. Good morning. That's a great question. It's common for companies like ours, which are still in a phase of rapid growth and aiming for $1 billion and more, to experience a situation where their revenue outpaces their capacity to support that growth. As you know, I often emphasize the importance of planning for both our capacity and capability expansion well before it's needed to avoid foreseeable challenges. For instance, we have discussed our ongoing digital transformation initiative aimed at ensuring we have the right systems in place to scale from our current revenue to $1 billion and beyond. Regarding talent acquisition, Vital Farms has a unique culture that truly attracts exceptional team members across all roles. In my experience, top talent prefers to collaborate with other talented individuals, which means we don't struggle to hire. We are also deliberate in both the short and long term about our talent roadmap to ensure we are prepared for the business's demands. While we haven’t provided specific numbers for planning, perhaps Thilo has additional insights to share. My main commitment is to ensure that, after establishing our strategy, we have all the necessary resources to execute effectively.

Okay, thanks. And just in terms of like the facility itself that you're building, like is every egg washing facility the same? Or are there differences I put this one in place?

Oh, no. If you've seen our facility, you'll know not every egg washing facility is the same. But what was cool about Seymour is it is advantaged because it benefits from the learnings of working for seven years in Springfield. And so yes, the basic operation, the washing, inspecting, and packing of eggs is the same. The machine will be from the same manufacturer; we're well familiar with it. We've got the advantage of the ability to train up the entire new crew in our currently operating facility over time. And our Vice President of Operations, who's deeply embedded in Springfield today, is also the person overseeing the construction and standing up of the new facility. So we feel great about continuity. We feel great about our understanding of how to run one of these places really well. And of course, the start-up never goes perfectly as planned. But this is about as close to what we're already doing, as I can imagine.

Okay, great. All right, thank you.

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

Thanks, Jon. That's a valid question and one we're accustomed to addressing. If you had asked me this three years ago, I might have jokingly said there is no moat. While it's true that there's no moat around egg production, what we do have is a differentiation in how we sell food, focusing on transparency and trust, which is hard to find in this country. To support my point, among our top 10 customers, we're not the only brand of pasture-raised eggs available, but interestingly, we sell the highest-priced version of that product and yet continue to grow the fastest with the highest market share year after year. This raises the question of whether we are selling a commodity egg inefficiently or if we are offering something beyond that. I firmly believe that our brand adds value for consumers. It’s not just about advertising on a commodity; we engage consumers and retailers in a fun and educational manner within a complex grocery segment, helping them appreciate our attention to detail. So, my main point is that our way of operating creates a moat, which can be measured through our brand value, reflected in our gross margins and revenue growth. We have also invested significantly over the years to build what I consider the best network of farmers in the country. We have excellent farmers who remain with us, and we invest time and energy to support their success, providing them with education and resources they need. This is a model that scales effectively; for instance, one expert veterinarian can help many farmers instead of relying solely on individual support. Two years ago, I might have thought that anyone could partner with small family farmers to start a pasture-raised egg product line. However, we are increasingly finding that our superior growth compared to other branded and non-branded competitors stems from our ability to align our supply with our business plans and our success in attracting and retaining great farmers. Farmers remember how they were treated in the past, especially during tough times, and it is rare in agriculture to treat them as they deserve to be treated. We make that our priority, allowing us to grow our network in ways that others may not be able to.

Great, thank you.

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

Good morning, Matt. That’s a great question. We outlined the factors influencing our performance for the year at the beginning. There were more challenges in the first half than in the second half. One important aspect to remember for the second half is the 53rd week we had last year. Aside from that, we mentioned all the gains in TDP in our prepared remarks and discussed the number of SKUs on shelves. It’s important to note that our TDPs won’t just suddenly jump on a specific day; it’s an ongoing process. We’ve seen TDP gains in eggs nearly every month this year. However, the overall scanner data might show differently due to year-over-year distribution losses in butter that we aim to recover in the second half. This is a continuous process that builds month by month, rather than depending on a single turning point. Therefore, we shouldn't expect a drastic change in growth during the second half; it's a gradual process. The 53rd week is the main event impacting fourth-quarter growth relative to the third quarter.

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

Yes. So, the reinvestment is really into marketing spending and capabilities. We did increase promotions in the first half of the year relative to last year, simply because last year, we didn’t really spend because of the dislocations on shelf because of avian influenza. There was no point in us subsidizing existing sales. And so, we pulled back on trade promotions. We put that back on in the first half this year. Second half of the year, trade promotions are, yes, at the previously planned levels I would say. So, the investment goes to marketing, and it goes to capability building, right? One of your peers had asked a question about investments in headcount, for example. We have the ability to maybe accelerate some headcount growth in order to get capabilities in-house that we have planned for to get them in-house next year. So, we’re bringing them in now because we can. Because we can, we are able to afford it, and it actually allows us to get ahead of our planned growth curve already. This is not about promotion spending, right? Our promotion spend is to drive trial in order to then convert trial into repeat spend or repeat purchases and drive also penetration that way. That’s a plan that we build well in advance, and that’s not something that we change on a dime if we don’t have to. So, it’s really about capability building.

And one thing I’d add to Thilo’s excellent remarks on that topic is that we, just in case it wasn’t obvious, we don’t use promotions to rent market share, and I’m stealing that quote from our sales leader, Pete Pappas. That’s not how we grow this business.

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

Thanks, Adam. Good morning. Great questions. So, the first one related to are we just – I think the question was, are we just doing a better job of selling all of our eggs at maybe the branded shelf price as opposed to selling them into a wholesale channel. As you know, there is a small, call it, low single-digit percent of the eggs that we bring off our farms that do not meet our high-quality standards. And those get sold to a wholesale channel to be broken, pasteurized and used as an ingredient in somebody else’s product. The benefit of higher commodity egg prices shows up there because that higher commodity egg price flows through to the price the breaker plant is willing to pay for that small amount of our eggs. It’s not a profit driver. We’re not actively selling into the wholesale channel. It’s just the place where the ends we don’t want to use go. But we have not, for many years now, spent eggs that could go on the shelf that met our high-quality standards. We haven’t sent measurable quantities of them to the breaker plant. Occasionally, if the mix of different egg sizes is not perfectly in line with the order pattern, for example, in the summer, birds produce more medium eggs. And so, we don’t necessarily – we aren’t necessarily able to sell all of them in line with that change in production in retail. We may have some small transitory amounts of eggs that we sell to the wholesale channel. But no, it actually – the economics of what we’re doing in our gross margin got a little bit of tailwind again from that elevated commodity egg costs. It did not impact our price mix. That’s our own strategy that’s completely separate from what’s going on in the broader market. And we’re not seeing – and historically, we have not seen big changes in the trajectory of our growth or our gross margins relative to what’s going on in the broader commodity category. We don’t respond to commodity price changes in the moment. We took price historically to protect margin, nothing more, nothing less. And we believe that continues to be true this year.

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

Yes, it’s a fair question. And I think historically, we’ve seen numbers for a small family farmer in the range of $1.2 million to $1.5 million. Thilo may have a more recent number, but that’s my understanding. And if you did the math as you did on the number of farms we expect to build versus the dollars, we’re planning on spending more. And that doesn’t mean we will. But as I mentioned in the opening comments and in my response to one of your peers’ questions, we’re really excited to try some new things on these forms. And those new things may involve some CapEx beyond what our network of small family farms normally does as part of their contract with us. There is lots of innovation. I won’t bore you with all the details on this call. But some of those things are capital expenditures, and we wanted to make sure very conservatively that we carved out and previewed for you, I would describe it as the maximum spend. One example, and I know there are a lot of ways to finance them, but one example that we’re excited to try is putting solar panels in the field in the pasture because the birds want some shade and they want a windbreak, and solar panels do that, and they also generate electricity. Well, we’re not sure how the financing will work out. So, in our brand of conservatism, we just assume that will be our CapEx. And hopefully, we don’t spend quite as much as we guided.

Okay. Alright, that’s very helpful color. I’ll pass it on. Thank you.

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

This concludes today’s call. You may now disconnect.