Earnings Call Transcript - VITL Q1 2022

Matt Siler, VP of Investor Relations

Thank you. Good morning and welcome to Vital Farms first 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 first quarter 2022 earnings press release issued this morning. This is available on the Investor Relations section of 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 March 27, 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. And now I'd like to turn the call over to Russell Diez-Canseco, President and Chief Executive Officer of Vital Farms.

Russell Diez-Canseco, CEO

Thanks, Matt, and good morning, everyone. I appreciate you being here today. Today, I'll review our first quarter financial results as well as updates across the business that are contributing to our success as a disruptive force in the food sector. First to the results. In the first quarter, we achieved $77.1 million in net revenue which reflects a 31.6% increase from the prior year period. We had the largest point gain of branded dollar share in the egg category and our household penetration increased to over 6.5 million. Adjusted EBITDA was $0.5 million and gross margin improved relative to our performance in the fourth quarter of last year. Finally, over the latest 52 weeks ended March 20, 2022, Vital Farms has been the fastest growing brand in dollars within the entire egg category. Underpinning our growth, both current and historic, are four factors. First, our stakeholder driven business model. Second, our robust supply chain. Third, our strong brand. And fourth, our world class organization. I'm going to speak briefly on each one of those four elements. First, our stakeholder-driven business model. Vital Farms has always been a brand challenging the norms of how most of the food in our country is produced. We have a stakeholder-driven approach to capitalism that has propelled our growth to be the leading pasture-raised egg brand and second leading egg brand in the United States by retail dollar sales and has enabled us to improve the lives of millions of people, millions of animals and the planet. We believe the historic performance of our business is proof that food can be produced through sustainable human capital, animal welfare and agricultural practices while scaling profitably. A proof point is illustrated in our consistent net revenue growth. In each of the past 13 quarters, we have produced positive net revenue growth with an average growth rate of approximately 36% each quarter. On an annual basis, our net revenue growth CAGR is 37%, stretching 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 is improvement in our profitability. From 2014 through the first half of 2021, our gross margin has doubled from about 17% to the mid-30s. Additionally, our adjusted EBITDA margin moved from flat to low single digits to middle to high single digits over that same timeframe. While there are short-term pressures from time-to-time, as we're experiencing now, we remain focused on improvement over the long-term. Second, our robust supply chain. Our supply chain continues to expand across our network of family farmers and that Egg Central Station, our world-class egg washing and packing facility, to meet the strong demand we're seeing for our products. We have grown our network of family farms to almost 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 36% net revenue CAGR over the past two years is a testament to this fact. We opened the Egg Central Station, our world-class egg washing and packing center in 2017. At the time, our company was generating about $70 million in revenue annually with the goal that Egg Central Station would provide us the capability of generating $300 million in net revenue in the future. We're pleased to announce that consistent with our revenue guidance of at least $340 million in 2022, we substantially completed the expansion of Egg Central Station a few weeks ago and are thrilled to announce the facility opened ahead of schedule and remained on budget throughout the building process. We view the expansion as a significant unlock because it doubles our prior capacity and puts us in a position to support over $650 million in annual revenue on eggs. As this facility expansion opens, we are also pleased to share that 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. Importantly, the Egg Central Station expansion also builds on our environmental, social, and governance progress by creating even more high-quality jobs in Springfield, Missouri, and going further in our commitment to the environment. The expansion enables us to create over 50 high-quality jobs and will be LEED Silver Certified and rely heavily on solar panels, which reduces our reliance on the electrical grid. Next, turning to our strong 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 look similar to 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, the community and the environment, and stockholders. These are reasons that drive loyalty for our core products and give us confidence in our plans to grow through new categories. We have a precise understanding of our core consumer which we believe includes 19 million households in the U.S. On average, we have seen 36% year-on-year growth in household penetration over the past eight quarters. Our multidisciplinary approach to marketing is working. 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. In mid-March, we introduced True Blues, a new premium egg product, at Whole Foods Market locations across the southern Pacific and northeast regions. These beautiful blue eggs are from pasture-raised hens that are raised by family farmers, who practice the same animal welfare and environmental standards we follow for all of our egg products. A minimum of 108 square feet of pasture per hen, year-round outdoor access and freedom for hens to roam on land that rejuvenates naturally without herbicides or pesticides. We've had a lot of fun with the launch of True Blues in the two markets in which they're available. As an example, in Los Angeles, we partnered with Home State, one of our food service customers on a co-branded food truck that served our pasture-raised eggs in their signature breakfast tacos. We parked the food truck at four L.A. area Whole Foods Markets, including our most trafficked Whole Foods location nationally in Glendale, and gave everyone who visited a coupon to try our True Blues eggs. This food truck activation was a first for us, but an example of how we're always testing and learning creative ways to build brand affinity. So far, we've seen a positive response from the launch of True Blues and our unit velocity ramp has exceeded our expectations, even ahead of any significant marketing support or promotion. Shortly after the launch, Whole Foods asked us to expand distribution to Northern California and Florida by August and we have interest from other customers as well. We believe this type of innovation can help our brand attract new households over time. The launch of True Blues complements the positive momentum we're seeing for our core egg and butter products. We saw meaningful gains in market share and retail distribution across both eggs and butter. Notably, we saw significant year-over-year growth in mainstream egg distribution across the northeast, a region where we see tremendous opportunity and one in which we're investing more than we have historically. We enjoyed triple-digit growth across our foodservice segment during the first quarter as we continue to see the benefit of our expansion of distribution center partners bolster our ability to increase sales. We have an early read on the price increase implemented in January to our organic egg and butter products. Since the increases went into effect, the volume performance has been in line with our expectations. Our portfolio-wide increase will be implemented in May. We've had productive conversations with our retail customers through these pricing changes to which they have been receptive. As we look to expand our portfolio of products, we're in the early stages of exploring categories in which we believe the trust and honesty for which our brand is known will resonate. This includes poultry and dairy, where we see an opportunity to apply our stakeholder model which includes support for family farmers, thoughtful animal welfare and environmental practices and a level of transparency that is rare in these categories. We plan to apply what we've learned over the long-term in our egg business to provide the path to sustained success in other traditionally commoditized categories. Finally, our world-class organization. A few words on our people. I believe we've created an organization with some of the best 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 their 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 is especially relevant today as we operate against the backdrop of uncertainty in the world around us, including the near- and long-term implications of inflation. We are hyper-focused on what we can control 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 them and our business. Thanks, everyone, for your time today. I'll now turn the call over to Bo and then we look forward to taking your questions.

Bo Meissner, CFO

Thank you, Russell. Hi, everyone, and thank you for joining us today. I will review our financial results for the first quarter ended March 27, 2022 and provide an update to our annual guidance for fiscal year 2022. As Russell mentioned, we had another strong quarter with net revenue of $77.1 million, an increase of 31.6% compared to the prior year period. The growth in net revenue in the first 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 20% growth in butter-related sales. Gross profit for the quarter was $21.7 million or 28.2% of net revenue, compared to $21.3 million or 36.4% of net revenue for the first quarter of 2021. The change in gross profit was primarily driven by higher sales, offset by $1 million in costs related to our exit from the convenience breakfast product line. After the change in gross margin, we experienced an increase in input costs across both eggs and butter. Increased pricing on our organic shell egg and butter business took effect in January, partially offsetting some of the input cost headwinds. SG&A for the first quarter was $17.6 million or 22.9% of revenues, compared to $13.2 million or 22.5% of revenues in the first 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 and $1.2 million in costs related to our exit from the convenience breakfast product line. Shipping and distribution increased 61% to $8.2 million or 10.6% of net revenue relative to $5.1 million or 8.6% of net revenue in the first quarter of 2021, driven primarily by higher third-party freight rates and to a lesser extent, higher levels of sales volume. Adjusted EBITDA for the first quarter was $0.5 million, compared to $4.7 million for the first quarter of 2021. This excludes the $2.3 million of costs associated with the exit of our convenience breakfast product line. Now an update on our capital structure. As of March 27, 2022, we had a total balance of cash and cash equivalents and investment securities of $91.8 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 still expect adjusted EBITDA of more than $13 million in fiscal year 2022, excluding costs related to our exit from the convenience breakfast product line. We still expect profitability in the first half of the year will remain subdued ahead of our upcoming price increase, which we'll expect to impact our entire portfolio beginning in May 2022. Thank you for your time and interest in Vital Farms. Before we move to taking questions, I want to reiterate our confidence in the current state of our business. The demand for our products remains robust, as does our level of excitement for the years to come. With that, Russell and I will now take your questions.

Chris Growe, Analyst

Hi. I thought I would just start with just to better understand, like from this point forward with ECS 2.0 up and running, kind of what happens from here? So are there like incremental investments that try to build distribution now that you have more capacity available? I sort of get a sense of as we go across the rest of the year, any further investments you have to make? I know you made a mention of some investments in Northeast, for example, to expand distribution.

Russell Diez-Canseco, CEO

Well, let me take that at a high level, Chris, and then Bo can follow up with all the facts. But the headline is the expansion that we just completed is simply in line with our long-term planning. And we won't have a substantially different commercial approach for the rest of the year. It's just our normal growth algorithm that we execute against pretty consistently. Bo?

Bo Meissner, CFO

Not really a lot to add there, Chris. I mean, the only incremental investments we will have, we continue to grow our distribution, as Russell said, which is no different than what we've been doing up to now and the sales teams doesn't work. We'll just add incremental variable staffing at ECS to allow us to pack those eggs at the high-quality that we always do but other than that, nothing different than the playbook we've been executing to-date.

Chris Growe, Analyst

Okay. And then just a quick question about the pricing that'll take effect in the second quarter, the new pricing. We have seen, obviously, even a further increase in input costs. So do you think that will have a point, I guess, like in the second half of the year where pricing would offset inflation in your business?

Bo Meissner, CFO

Yes. I mean, I think as we look at it today and what we see for commodity costs and freight costs. Yes, we believe that the second round of pricing with what we have line of sight to, our input costs, will offset the inflation that we've seen both in 2021 and so far in 2022 based on the current outlooks.

Brian Holland, Analyst

Yes, thanks. Good morning. So I didn't see much in the deck or anything, I guess, in the deck. Forgive me if I missed it, around kind of household penetration update. And I hopped on a little bit late, so my apologies if you addressed this up top. But just any updated metrics on how that trended in the quarter and where we stand today?

Russell Diez-Canseco, CEO

Bo, could you provide an update on the current cadence?

Bo Meissner, CFO

Yes. What we decided to do, Brian, is really shift to looking at that on an annual basis so that the noise that we may have quarter-over-quarter doesn't really distract us from the long-term. So we're going to start to report some of those key metrics that we've been reporting previously on a quarterly basis, just on an annual basis and that's what the plan is going forward.

Brian Holland, Analyst

Okay, I understand. I wanted to ask about the pricing dynamics in the category. There seems to be a lot of variability depending on when companies have adjusted their pricing. It's apparent that Avian influenza is a factor, and it would be helpful to know how much impact that has had on sales. I've noticed that your price gaps compared to the category, particularly for core shell eggs, have consistently decreased. I'm curious about how much of your volume increase can be attributed to this narrowing price gap and what volume might look like once the pricing adjustments are fully realized.

Bo Meissner, CFO

Yes. I have a few observations based on our experience. The last occurrence of Avian influenza had a significant impact on the U.S. egg supply. First, Avian influenza can greatly diminish the egg supply in the United States, particularly affecting tens of millions of layers on large, concentrated factory farms instead of our farming practices. We have noticed that retailers tend to adjust prices more slowly in very price-sensitive categories like eggs, bread, or milk, compared to the rising costs they face. This trend is evident with premium eggs at retail. Currently, there is a price compression happening, where the cost of the cheapest eggs is rising, as indicated by Nielsen data, while maintaining a distinction between those eggs and our ultra-premium offerings. Historically, we have observed less cross-shopping between consumers of the cheapest eggs and those who prefer our premium products. Typically, our ultra-premium eggs remain distinct, even if cheaper eggs increase in price from $1.50 to $2 or $3; it still represents a significant upgrade to our prices of $5.99, $6.99, or $7.99. Therefore, the impact of cheaper eggs becoming slightly less affordable should not be overstated. Additionally, there's a secondary effect involving the weight of eggs that fall short of our quality standards. We sell these to breaker plants to be processed into ingredients, and the compensation for this waste stream is significantly higher than in normal years due to the overall value of eggs being elevated. While there are a few factors contributing to a favorable situation, I would not credit our consistent growth in branded products solely to a temporary supply shock.

Brian Holland, Analyst

Thanks, Russell, and really appreciate all the color there. One quick follow-up around kind of the Avian influenza. I think as we spoke offline earlier this year, I think you mentioned that the last time the category went through this, Vital Farms was not impacted and therefore picked up some shelf space with shortages in the industry. Just curious whether it's too early to see this or know or if there's actually evidence of this? But any signals here yet that you're picking up any incremental distribution to fill gaps on the shelf as a result of shortages on some of the more commoditized competitive set?

Bo Meissner, CFO

That's a great question. And we certainly get calls from nervous egg buyers who see those holes on their shelves. That's precisely the distribution opportunity that we don't want because we understand that it can be transactional and it can be transitory. And we certainly don't want to do all the work to get on somebody's shelf, only to lose that space when the industry returns to a normal supply situation. So where we tend to focus our gains is simply in driving velocity in our existing customers and making sure that we're in a great position to supply them well and continue building the strong relationships we have.

Brian Holland, Analyst

I'll leave it there. Appreciate the time. Best of luck.

Robert Moskow, Analyst

Hi. Thanks for the question. I was hoping, Russell. Could you give us a little more color on the distribution expansion you're getting in the Northeast like what kind of retailers? And is it the new retailers or is it expanding with existing ones? And then, secondly, I was hoping for an update on the work you're doing to think about where to extend the brand next outside of eggs and butter or is that still a work in progress? Thanks.

Russell Diez-Canseco, CEO

Sure. Thanks, Rob. So the reason we focused on the Northeast is because that is historically where we had less distribution gains over time at least, less easy distribution gains. And we had a very purposeful strategy over the years of helping to build out what's become the second biggest egg brand in America so that the Northeast retailers would be more interested in carrying us. And that strategy is working. We are now, as we continue to gain distribution and ACV across the country, we're now able to put incremental resources in the Northeast. What that mostly looks like it's actually boots on the ground. So we've filled out a small single-digit person team that's really focused on the Northeast specifically because we see so much opportunity there, both in grocery, retail and in foodservice. So I wouldn't say we're showing up with big checks to right to buy our way onto stores so much as we're just putting increased focus there. The fact is we're already in most of the big grocery retailers in the country. The real opportunity from my perspective is to expand our offerings at those retailers beyond the first or second SKU we might put on the shelf. And we're seeing a lot of success building on those initial beachheads we've made over the years.

Robert Moskow, Analyst

Okay. And then the follow up was about the work you're doing internally about where to extend the brand mix.

Russell Diez-Canseco, CEO

Yes. Thanks. So as we've said pretty consistently, we have quite a bit of focus on this question of where to go next and where we have the right to play and where, most importantly, we see the biggest opportunity for disruption. And as we've communicated pretty clearly and consistently, we've been focused primarily on the opportunities within dairy and the opportunities within chicken, within poultry. And I just think I can offer a couple of bits of color, but the headline is we're still doing that work and we're definitely getting closer to the right answer and we're definitely at the level of even starting to explore potential partnerships in those sectors to try to understand how we might start to test and learn in a capital-light and really efficient way. But I can't go further than that at this point because, frankly, we're still learning. And as with everything else we do, we try to do it in a very intentional and efficient way.

Robert Moskow, Analyst

Okay. And if I can summarize your comments about the Northeast. You said you're already in the big retailers, but there's an opportunity to expand with deeper distribution within those existing retailers in the Northeast, is that how to summarize it?

Russell Diez-Canseco, CEO

With the exception of a separate channel that I would describe more as small retailers, mom and pop shops in New York, they might call them bodegas. There's an opportunity there as well. That's a lot more about boots on the ground and leveraging some great broker relationships. But in general, yes. In the big retailers, we're predominantly in them already, but we see a big opportunity to expand the points of distribution within them.

Pamela Kaufman, Analyst

Can you give us a sense for how much your price and volumes were up in the quarter? And then can you quantify how much additional pricing is expected to go into effect in May? Do you anticipate needing additional rounds of price increases over the course of the year?

Russell Diez-Canseco, CEO

Bo?

Bo Meissner, CFO

Yes. So within quarter, volumes were up 31.6% about 1.6% of that was related to price. The price that we implemented on organic eggs and on butter and the balance was volume. And the price increase that we're taking in that will be effective starting in the next couple of weeks, in May, is in the mid double digits and we anticipate based on the outlook we can see right now for commodities and other input costs that this price increase will probably cover the inflation that we've seen to-date and forecast for the balance of the year.

Pamela Kaufman, Analyst

Great. That's helpful. And then, can you discuss the demographic profile of your core customer and what your view is around their price sensitivity in light of increasing inflation across packaged food?

Russell Diez-Canseco, CEO

Thanks, Pam. This is Russell. I'll take that one. With our ultra-premium product and its corresponding high price, our customers typically come from higher income, college-educated families. During the recession of '07, '08, and '09, we noticed that this demographic faced less financial difficulty compared to households that might consume our products less frequently. This was evident in the lower unemployment rates among them. Additionally, even in a struggling economy, the shift from dining out to eating at home was greater than any decrease in demand for premium brands in favor of private labels, resulting in a positive impact for premium brands like ours.

Pamela Kaufman, Analyst

Great. That's helpful. And maybe one last question. Can you break down the components of the gross margin pressure in the quarter and how you're thinking about gross margin cadence over the course of the year, given your inflation expectations and pricing coming through?

Bo Meissner, CFO

Yes, certainly. I mean, within the quarter, I mean, it's still about commodities. Soy and corn are still high and they're the key part that has impacted our gross margins in the quarter, partially offset by the pricing that we talked to a little bit earlier. As you think of the margin progression for the year, there's a couple of things going on. One, Q2 have a full impact of the Q1 pricing, which was on 30% to 40% of the portfolio. And then, we've got the implementation of the second pricing round in Q2. So you'll see some margin improvement in Q2, but it won't be until Q3 and Q4, where you see the full impact of that in the quarter. So you can expect margins to increase quarter-over-quarter as we go through the year.

Adam Samuelson, Analyst

Bo and Russell, could you elaborate on the last question? Considering the unchanged outlook for the year, it seems the price increase planned for May isn't larger than what you anticipated a couple of months ago. Can you clarify how the components of the outlook have shifted? I'm particularly concerned about key cost categories such as grain input costs, logistics, packaging, and overall inflation, which appear to have worsened compared to what was projected two or three months ago. Additionally, while the benefits from Avian flu related to egg break or off-price eggs have improved, I’m trying to understand how all these factors interact, especially since inflation seems to be higher now than previously indicated. I don't believe pricing will exceed your earlier expectations, so I'm interested in the significance of these changing elements.

Bo Meissner, CFO

Yes. Well, thanks for that. As you said, commodity costs and soy and corn have continued to increase versus the last time that we spoke. But there's a lot of puts and takes within the P&L, a couple of which you called out. And we have internal initiatives that we have that we've spoken to previously, particularly in distribution, which has been one of the biggest increases in line items in our P&L versus the beginning of '21. But there's things that we're doing within distribution to drive those costs down, working with our new 3PL, getting a lot more bids and consolidating some things there. I think that market is also softening up. As we built our budget, it was a little bit unknown and we built our outlook and consensus, our guidance. So we tried to make sure that we had the proper amount covered and perhaps may have been a little bit conservative there. But we also have benefits of things like breaker costs with everything that's going on with Avian flu, any excess eggs or restricted eggs that we sell there, there's a pickup there. So there's lots of puts and takes in the P&L. And we have a companywide initiative that we're looking at waste everywhere in the P&L. So that's what gives us confidence with the puts and takes that we have in the P&L and the initiatives that we have underway that we'll still deliver the guidance for the year.

Russell Diez-Canseco, CEO

Adam, I wish any of us had a clear idea of where all those different input costs will trend over the year. Naturally, we hope they decrease. The key assumption here, based on our track record, is that we have the management team, the resilience, and the common sense to make informed decisions and maintain our focus throughout the year to achieve our targets, as we did in Q1. This is definitely a challenging year in the macro environment, as you've noted, and we will strive to navigate it effectively and fulfill our commitments.

Adam Samuelson, Analyst

Thank you for the insights. I’d like to revisit a point from the time of the IPO regarding the opportunity that arose during the renewal of grower contracts. As some of the older contracts came up for renewal, there was potential for more favorable terms that could enhance our margins over time. Given the current inflationary pressures, I’m curious if this expectation has materialized as anticipated. How do you view your relationships with growers beyond the grain pass-through component? Have growers had to reassess their contracts, and do you find that the terms or compensation being offered to them differ from what you expected years ago?

Russell Diez-Canseco, CEO

Thank you so much for that question, Adam, because actually we are more confident that we've struck the right contracts with our growers than ever. So first, let me walk you through the first part of the question, which was, weren't you counting on better terms from your farmers? Actually, what changed was that we adjusted the farming model to help our farmers be more productive and profitable, which allowed us to reduce the price we were paying for our eggs. As you may recall, in our early days, we had a big risk premium attached to working with Vital Farms because in essence we were a start-up. And banks and experienced farmers knew that it was a risky thing to do work and invest their own capital in working with a start-up. So we had to pay a pretty big risk premium, just as you might in the early rounds of raising capital for a start-up. As we matured and established credibility and trust that we were honest brokers, that we were the preferred brand with which you would work if you were a high-quality farmer in this country, we found that farmers and bankers that were lending to them had less expectations for a big risk premium to be able to justify working with us. Those new contracts primarily reflect that risk premium reduction, not that we're gouging the farmers or expecting them to take a lower margin to work with us. That's number one and it reflects our ongoing, continuous and frequent approach to improving outcomes for all of our stakeholders. Second, actually, our commitment to escalating and de-escalating, to changing the price we pay for the eggs to help give a more consistent and projectable income to the farmer is actually a really critical point of differentiation for us in creating a really robust supply chain. We don't want to bankrupt farmers on the back of high corn and soy prices. We were invited not that many weeks ago to visit with another egg company in this country that said, 'Hey, we need a cash infusion because our contract prices aren't changing with corn and soy prices and we're upside down and we're running out of cash.' Well, think about it. If my farmers couldn't afford to farm with me, they could do one or two things. They could just go out of business, or they could start selling to somebody that would pay them more. And we purposely created contracts that would not create that pressure. So I take that as a point of pride and not a weakness.

Ken Zaslow, Analyst

Just as you start to think about Egg Central 3, how do you scope that out? What are you thinking about, is it going to be an addition? Is it something that is a couple of years out? How do you kind of frame that? I know it's a little bit further out but you kind of mentioned it, so I'm trying to figure out what the framework is. Is it going to be the same size? And my last question with that is, what are the key learnings that you learned with EC2 that you will apply as you build EC3?

Russell Diez-Canseco, CEO

Thanks, Ken. That’s a really great question. I appreciate you bringing it up. It's exciting for us to consider the potential growth rates over the next several years and to proactively design the next facility. We've learned a lot from the original construction and the expansion. Our strategy for any capital project, including the recent expansion, is to establish clear timelines for capital allocation to avoid unnecessary spending while maximizing flexibility to support growth without supply chain constraints. This year, we are focusing on site selection and moving into the programming and design phases of the new plant, which represents a small fraction of the total cost of any new facility, allowing us to get a head start and reduce the lead time for its construction. In response to your specific questions, this will not be an expansion of the current plant for two main reasons. First, the expansion has utilized most of the available land at our existing site. Second, we want to enhance business continuity by situating the next facility at a different location. We’re not ready to specify which part of the country it will be in yet, but we do have a preference for the greater Springfield area in both Missouri and Arkansas, where we currently operate. So, it’s likely we’ll be focusing our attention there. Additionally, there will always be a balance between the efficiency of building large versus the careful capital allocation of incremental building. Our approach of constructing the first plant followed by the second expansion was a prudent use of capital over time, and we will maintain that perspective as we plan the next facility.

Ken Zaslow, Analyst

Great. I appreciate. Just one small question. In terms of the food service side, if we're getting back to the more normal levels of people returning to food service. Will you be accelerating that strategy? Is that part of the lever or is really distribution in retail the primary? And if you've got good service rate, but you're not as much focused on that?

Russell Diez-Canseco, CEO

So for the people in the food service part of our business, they're probably even more focused. There is absolutely a very strong, focused effort on food service this year. But as you well know, from our past conversations, we're starting from a pretty small base, so low single digits percent of total. But the fact is that on a percentage growth basis, it's growing a lot faster right now. And in fact, we've more than doubled our district points of distribution, meaning the distribution centers or warehouses from which our products are distributed to the food service channel, which is the first step and then opening new markets. So I've got a small group of sales and marketing people focused solely on the food service opportunity. And there are lots of wins as they work their plans toward more and more ubiquity. This will be the year where we really see how high is up and how we can execute against that plan. And I'm excited to share more toward the end of the year about how we did and whether we'll continue to expand our investment there as a result.

Matt Siler, VP of Investor Relations

Thank you, everybody, for your time today. Have a good one.

Operator, Operator

No this concludes today’s conference call. Thank you for participating. You may now disconnect.