Vital Farms, Inc. (VITL) Q1 2022 Earnings Call Transcript

Vital Farms, Inc. (VITL -0.75%)
Q1 2022 Earnings Call
May 05, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by and welcome to Vital Farms first quarter 2022 earnings conference call. [Operator instructions] Please be aware that today's call may be recorded. [Operator instructions] I would now like to turn the call over to Matt Siler, VP of investor relations.

Matt Siler -- Vice President, 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 in 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 -- President and Chief Executive Officer

Thanks, Matt, and good morning, everyone. Appreciate you being here 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 half a million dollars 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 time frame. 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 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, 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've 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.

And 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 portfoliowide 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 -- Chief Financial Officer

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 of 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 of the convenient 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 of 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 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.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Chris Growe of Stifel. Your line is open.

Chris Growe -- Stifel Financial Corp. -- Analyst

Hi, good morning.

Russell Diez-Canseco -- President and Chief Executive Officer

Good morning, Chris.

Chris Growe -- Stifel Financial Corp. -- Analyst

Hi. I thought I would just start with just to better understand, like from this point forward with ECF 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 can 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 -- President and Chief Executive Officer

Well, let me take that at a high level, Chris, and then Bo can follow up with 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 -- Chief Financial Officer

Not really a lot to add there, Chris. I mean, the only incremental [Inaudible] 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 have been work. We'll just add incremental variable staffing at ECF 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 -- Stifel Financial Corp. -- Analyst

OK. 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 -- Chief Financial Officer

Yeah, 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.

Chris Growe -- Stifel Financial Corp. -- Analyst

OK. Thank you.

Operator

Thank you. Our next question comes from Brian Holland of Cowen. Please go ahead.

Brian Holland -- Cowen and Company -- Analyst

Yeah, 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 -- President and Chief Executive Officer

Bo, you want to take that one around kind of the updated cadence of --

Bo Meissner -- Chief Financial Officer

Yeah, yes. What we decided to do, Brian, is really shift to looking at that 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 -- Cowen and Company -- Analyst

OK. Understood. And then I wanted to ask kind of about the pricing dynamic in the category. There's potentially a lot of noise out there depending on the timing of when folks have taken their pricing.

It looks like there's, obviously, avian influenza out there. I don't know to what extent that's actually flowing through to the point of sale. Would be great to get your color there. But we have seen that your price gaps versus the category -- I'm thinking about core shell eggs has steadily narrowed.

So I'm wondering how much of your volume lift do you think is that narrowing price gap and whether we can still -- what volume is going to look like once the pricing fully flows through?

Bo Meissner -- Chief Financial Officer

Yeah, a few observations and some of this is colored by our experience. The last time avian influenza affected the U.S. egg supply in such a substantial way. So first of all the impact of avian influenza, as we saw last time, is that it can drastically reduce egg supply in the United States.

And tens of millions of of laying hens all in, in our understanding, large concentrated factory farms environments as opposed to our farming environments, reduces egg supply. And what we've observed is that at retail, retailers can be seen to change prices, especially in very price-sensitive categories like eggs or bread or milk, more slowly than costs are changing to them. And that's what we're seeing at least among the premium eggs at retail today. So what you're seeing is, as you described, a price compression between the cheapest eggs, which are very much coming up, as we're all seeing in the Nielsen data versus ours and other premium eggs.

In our experience, though, we don't get nearly as much cross-shopping between the cheapest egg consumer and consumers of our ultra premium eggs. We tend to have more cross consideration between us and other more highly priced eggs. And so even if what used to be $1.50 is now $2 or $3, it's still a big trade up to our $5.99, $6.99, $7.99. And so I wouldn't attribute -- I wouldn't overestimate the impact of those cheap eggs becoming slightly less cheap over time.

And so the other thing I would say is that the weight is a secondary effect that can create a little bit of a tailwind in that inflated environment for cheap eggs, which is there is a small portion of the eggs that we process every week that aren't good enough, in our estimation, to be put in a carton. And we end up selling those into what's called the breaker plant, which is where eggs like that go to be turned into ingredients -- food products that use pasteurized liquid egg as an ingredient. Well, we're getting paid a lot more for that waste stream than we do in a normal year, because all eggs are worth more this year than they were in years past. So there are a couple of ways in which that can be a tailwind, but I wouldn't attribute our continued, consistent branded product growth to a short-term shock in supply.

Brian Holland -- Cowen and Company -- 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 off line earlier this year, I think you mentioned that the last time the 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 -- Chief Financial Officer

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 -- Cowen and Company -- Analyst

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

Bo Meissner -- Chief Financial Officer

Thank you, Brian.

Operator

[Operator instructions] Our next question comes from the line of Robert Moskow of Credit Suisse. Your line is open.

Robert Moskow -- Credit Suisse -- 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 -- President and Chief Executive Officer

Sure. Thanks, Rob. So the reason we focused on the Northeast is because that is historically where we have been -- we have 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 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 -- Credit Suisse -- Analyst

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

Russell Diez-Canseco -- President and Chief Executive Officer

Yeah. Thanks. So as we've said pretty consistently, we are -- 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 would say that -- 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 -- Credit Suisse -- Analyst

OK. 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? That is -- 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.

Got it. All right. Thank you.

Russell Diez-Canseco -- President and Chief Executive Officer

Thanks, Rob.

Operator

Thank you. Our next question comes from Pamela Kaufman of Morgan Stanley. Your line is open.

Pamela Kaufman -- Morgan Stanley -- Analyst

Hi. Good morning.

Russell Diez-Canseco -- President and Chief Executive Officer

Good morning, Pam.

Pamela Kaufman -- Morgan Stanley -- 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 -- President and Chief Executive Officer

Bo?

Bo Meissner -- Chief Financial Officer

Yeah. 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 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 -- Morgan Stanley -- 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 -- President and Chief Executive Officer

Thanks, Pam. This is Russell. I'll take that one. So as you might imagine, with an ultra premium product and an ultra premium price on the shelf, our demographics tend to skew toward higher income, college-educated families.

And our experience when we look at -- a recent example of when purchasing power sell in general in households, which was the recession of '07, '08, '09, what we found was that people in that demographic experienced less financial hardship or headwind than other households that may be less likely to consume our products. That was -- we saw that in terms of unemployment rates, for example. And secondly, what we found was that even for households and an economy that was challenged economically, what we saw was that the trade away from home toward eating in home outweighed any potential trade down that we saw in terms of premium brands being trade down to private label, meaning the net effect was actually a tailwind for premium brands like ours.

Pamela Kaufman -- Morgan Stanley -- 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 -- Chief Financial Officer

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.

Pamela Kaufman -- Morgan Stanley -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Adam Samuelson of Goldman Sachs. Your line is open.

Adam Samuelson -- Goldman Sachs -- Analyst

Yes, thanks. Good morning, everyone.

Russell Diez-Canseco -- President and Chief Executive Officer

Morning, Adam.

Adam Samuelson -- Goldman Sachs -- Analyst

Morning. Maybe, Bo, Russell, can you hang on that last line of questioning? I just -- as I think about the outlook for the year, which is unchanged, and I presume the price increase that you're putting in in May is not bigger than you would have thought or frame to folks a couple of months ago. Just help us think about kind of how the outlook, the moving pieces within the outlook have changed, because I would look at the the key cost buckets around grain input costs, around logistics, around kind of packaging and other just all broader inflation is -- I mean, I would think has gotten worse and wasn't higher than you would have framed two or three months ago. Maybe on the other side, the egg break or core benefits from from avian flu and what you're getting for your off price eggs, that has become a benefit.

But I'm just trying to think about the moving pieces there, because it -- the world does seem like we're at a higher level of inflation than you would have framed a couple of months ago. I don't think the pricing has gotten that -- is going higher than you thought, so I'm trying to think about the magnitude of those different moving pieces.

Bo Meissner -- Chief Financial Officer

Yeah, well, thanks for that. I gather, 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 increase 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 the proper amount covered and perhaps may have been a little bit conservative there.

But we also have benefits of things like freight costs with everything that's going on with avian flu, any excess eggs or 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 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.

Adam Samuelson -- Goldman Sachs -- Analyst

OK.

Russell Diez-Canseco -- President and Chief Executive Officer

Adam, what I'd add to that is -- man, I wish any of us had that crystal ball about where all those different input costs will go throughout the year. And of course, we all want them to go down. I think the assumption you've got to make here or the bet you've got to make, if you look back at our at our track record, is that we've got the management team, the resilience and just the common sense to make the right management decisions and put the right focus throughout the year to make sure we deliver on that number as we did in Q1. And so, yeah, things -- this is a crazy year, for sure, in the macro environment, as you have pointed out, and were early and prescient in pointing out even last year, and we will do our best to manage through it and deliver on our commitments.

Adam Samuelson -- Goldman Sachs -- Analyst

OK. That's really helpful color. And then maybe a similar kind of line of thinking as I -- going back to the time of the IPO, one of the things that was kind of highlighted was this opportunity to -- as your grower contracts were renewing, there was some of the older contracts that would come up for renewal and have some more favorable terms to you, and that could provide some margin tailwind over time. And I'm wondering, in light of how inflationary the world has been broadly, if that's actually coming to pass, as you would have thought or is it -- just how you think about the relationships with the growers beyond just the grain pass through component? But did you see in growers having to reevaluate or having to reevaluate those grower contracts in ways that maybe aren't quite as -- don't have quite the same terms or the income offer to those growers has to be different than you might have thought of years ago.

Russell Diez-Canseco -- President and Chief Executive Officer

Thank you so much for that question, Adam, because actually we are more 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 are 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 a more consistent and projectable income to the farmer is actually a really critical point of differentiation for us in 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.

Adam Samuelson -- Goldman Sachs -- Analyst

That's a really helpful color. I'll pass it on. Thanks.

Russell Diez-Canseco -- President and Chief Executive Officer

Thanks, Adam.

Operator

Thank you. Our next question comes from the line of Ken Zaslow of BMO. Your line is open.

Ken Zaslow -- BMO Capital Markets -- Analyst

Hey, good morning, everyone.

Russell Diez-Canseco -- President and Chief Executive Officer

Good morning, Ken.

Bo Meissner -- Chief Financial Officer

Hey, Ken.

Ken Zaslow -- BMO Capital Markets -- 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? Is it -- 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 played with as you build EC3?

Russell Diez-Canseco -- President and Chief Executive Officer

Thanks, Ken. Really great question. I appreciate you picking that up. It's really exciting for us to look at the potential range of growth rates over the next several years and to think that we ought to get out in front of designing the next one.

So and certainly we've learned a lot through both the original construction and the expansion. Our approach to any capital project, including the recent expansion, is to really define clear stage dates in the allocation of capital so that we don't spend any faster than we have to but we want to maintain maximum optionality so that when we overachieve our projections, we can quickly support that growth and not have any constraints in our supply chain. So our approach this year is to really simply work on site selection and get started in the -- what's called programing and then design phase of the plant. That's a fraction of the total cost of any new facility, and it enables us to get a head start on -- and create a shorter lead time on the next plant when it's time to build that.

There are definitely some different design choices, to answer a few of your specific questions. It will not be an expansion of the current plant primarily for two reasons. One is we have, with the expansion, used up most of the available land on our existing on our existing site. But second, we definitely want to create a little bit more of insulation for business continuity by having the next one be in a different site.

And so we aren't ready to say what part of the country that will be in. But I will say that we really love the greater Springfield area, both Missouri and Arkansas in which we operate today. So you can imagine we're probably looking pretty closely there. And then beyond that, there will always be a trade-off between the efficiency of building big versus the more careful capital allocation of building incrementally.

What we did by building the first plant and then expanding the second was actually a judicious allocation of capital over time. And you can expect we'll continue to have that lens as we start to plan the next one.

Ken Zaslow -- BMO Capital Markets -- 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 -- President and Chief Executive Officer

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 foodservice channel, which is the first step in then opening new markets. So I've got a small group of sales and marketing people focused solely on the foodservice 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.

Ken Zaslow -- BMO Capital Markets -- Analyst

I appreciate it. Thank you, guys, very much.

Russell Diez-Canseco -- President and Chief Executive Officer

Thank you.

Operator

Thank you. At this time, I'd like to turn the call back over to Matt Siler for any closing remarks. Sir?

Matt Siler -- Vice President, Investor Relations

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

Operator

[Operator signoff]

Duration: 48 minutes

Call participants:

Matt Siler -- Vice President, Investor Relations

Russell Diez-Canseco -- President and Chief Executive Officer

Bo Meissner -- Chief Financial Officer

Chris Growe -- Stifel Financial Corp. -- Analyst

Brian Holland -- Cowen and Company -- Analyst

Robert Moskow -- Credit Suisse -- Analyst

Pamela Kaufman -- Morgan Stanley -- Analyst

Adam Samuelson -- Goldman Sachs -- Analyst

Ken Zaslow -- BMO Capital Markets -- Analyst

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