Vital Farms, Inc. (NASDAQ:VITL) Q4 2023 Earnings Call Transcript
Vital Farms, Inc. (NASDAQ:VITL) Q4 2023 Earnings Call Transcript March 7, 2024
Vital Farms, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Vital Farms' Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Anna Kate Heller, Investor Relations. Please go ahead.
Anna Kate Heller: Thank you. Good morning and welcome to Vital Farms' third quarter and fiscal 2023 earnings conference call and webcast. I'm joined on today's call by Russell Diez-Canseco, President and Chief Executive Officer; Thilo Wrede, Chief Financial Officer; and Kathryn McKeon, Chief Marketing Officer. By now, everyone should have access to the company's fourth quarter and fiscal year 2023 earnings press release issued this morning. This is available on the Investor Relations section of Vital Farms website, 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 result to differ materially from those described in these forward-looking statements.
Please refer to today's press release into the company's annual report on Form 10-K for the fiscal year ended December 31st, 2023 filed with the SEC 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 reconciliation of adjusted EBITDA and adjusted EBITDA margin to their respective most comparable measures prepared in accordance with GAAP. And now, I would like to turn the call over to Russell Diez-Canseco, President and Chief Executive Officer of Vital Farms.
Russell Diez-Canseco: Thanks Anna Kate. Good morning and thanks everyone for your time today. I'll start by sharing how Vital Farms continues to deliver on our commitments to stakeholders, including the commitments we made to our shareholders in September at our 2023 Analyst Day. Then I'll hand it over to our CMO, Kathryn McKeon, to cover how Vital Farms continues to grow our purpose-driven brand and build trusted relationships with consumers. Thilo Wrede, our CFO, will then provide more in-depth information on our fourth quarter and full year results as well as guidance for fiscal year 2024. The headline today is that we had our strongest ever quarter for net revenue and we're on track to meet the ambitious multiyear goals that we laid out at our Analyst Day, including our growth to $1 billion of net revenue by 2027.
We also made significant progress toward our 2027 targets for 35% gross margin and 12% to 14% adjusted EBITDA margin. We entered 2024 with strong momentum and a well-defined roadmap to reach these 2027 targets. Let's get into some of the details, starting with net revenue. We had a record fourth quarter with $135.8 million of net revenue. That's the highest net revenue we've ever achieved in a single quarter and a 23.4% increase over the fourth quarter of 2022. We delivered $13.9 million of adjusted EBITDA or 102.6% growth versus the fourth quarter of 2022. This record quarter was driven by a combination of strong consumer demand, increased distribution, expanded SKUs at existing customers, and a diversified supply chain with over 300 family farms.
We also benefited from a 53rd week of operations in the fourth quarter, which contributed about 7.7% of net revenue growth and 12.7% of adjusted EBITDA growth during the quarter. As we discussed at our Analyst Day, we continue to focus on expanding distribution to new retailers and increasing SKUs at existing retailers, both efforts paid off in the fourth quarter. Our distribution gains during 2023 were considerable. We added close to 2,000 new stores compared to the end of 2022, meaning that our products were available in approximately 24,000 retail locations across the United States at the end of 2023. The majority of our distribution gains in 2023 were from expansion in our mass channel and existing chains as well as regional retailers in the Northeast, California, and the South.
We also increased the average number of SKUs at existing retailers. Our average egg SKUs per store in the food channel was 2.7% for 2023 compared to 2.4 in 2022. We're continuing with our expansion as we already have some key wins in January and February of 2024 that will add even more SKUs in existing stores throughout the year, including at several leading grocery retailers. We believe these incremental wins set us up for continued growth at these retailers in 2024 and beyond, and we expect additional wins throughout the year. We continue to see faster growth in sales of higher price point SKUs, particularly fueled by strong demand for our 18 count packs and organic eggs. The positive trends in the organic category demonstrates the strong reputation and foundation of the Vital Farms brand.
They also show that consumers are increasingly willing to pay a premium to make sustainable and ethical food choices. Our expanded distribution, increased SKUs at existing stores and growth in higher price point SKUs, enabled us to grow sales and unit volume, while the rest of the category was either flat or down. As of the 24 weeks ended December 31st, 2023, Vital Farms now has the number one branded SKU in the food channel based on dollar sales. Looking specifically at the data in the track channels. During the 13 weeks ended December 24th, 2023, the egg category experienced a retail dollar decline of 31%, while Vital Farms grew retail dollar sales by 13% in the same time period. Additionally, the category saw unit volumes stay flat during the same timeframe, while Vital Farms unit volumes grew by about 1%.
It is worth noting that due to the mix shift to 18 count packs, our volume growth in tracked channels tends to be underreported. Our dollar share is over 8% of the total egg category. Our resilient supply chain, with over 300 family farms and our world-class washing and packing facility at Egg Central Station, are big reasons why we are able to continually meet growing customer demand. Our supply chain model and our ability to execute has also enabled us to successfully navigate potential disruptions like avian influenza without significantly impacting our commitments to customers and consumers. We believe our strong close to 2023 sets us up for another important year on our progress to being a $1 billion company by 2027. We're making a number of investments to support that growth and an important one is our digital transformation, which will enable us to streamline and automate processes, achieve greater efficiency, and control costs.
The centerpiece of this digital transformation is a new ERP system, which we believe will go live in summer of 2025 and enable us to take the next crucial step as a leader in ethical food. We have a comprehensive ERP project plan and with the right external advisers and strong internal team, which will help us continue delivering for our stakeholders over the next year and well into the future. I'm going to close where I started this section. Vital Farms set some really ambitious multiyear goals in 2023, including our growth to $1 billion in net revenue by 2027. We had a great close to 2023, and we're on track for another big year in 2024. I'll now hand it over to our Chief Marketing Officer, Kathryn McKeon, to discuss how we were able to continue growing our brand and deepening relationships with consumers.
Kathryn McKeon: Thank you, Russell. Vital Farms continued to build trusted relationships with our consumers in 2023. We increased brand awareness, purchase frequency, buy rate, and share of wallet, and we were able to do that while shifting our plans throughout the year to capitalize on changing market dynamics. We focused on the long-term growth of the brand, as we always have, and drove over 6 billion impressions through earned media, in-store marketing, and by extending our Bullsh*t Free campaign across streaming television like HBO, social platforms, YouTube, podcast and even billboards. We drove a 10% lift in year-over-year brand awareness in 2023 fueled by continued investment in our Bullsh*t Free brand campaign and timely activations like our holiday campaign, which uniquely reinforced our relationships with family farms on streaming services like Paramount Plus and Peacock.
We ended the year at 23% awareness and reinforced our position as a category leader on this key brand metric. In 2023, we also deepened loyalty with our target consumer, improving purchase frequency, buy rate, and share of wallet. Said primely, our already loyal consumers were even more loyal and spent more with the brand last year. This stands out in the context of the overall category, and we're thrilled, but not surprised that we continue to simultaneously deepen loyalty and increase awareness. We have another big year in store for 2024 as we continue building the Vital Farms brand by increasing awareness and deepening loyalty with our target group of consumers. We will continue investing in our breakthrough Bullsh*t Free campaign. Tapping into cultural conversations that connect to our business, connecting with consumers through our high-touch consumer engagement model, and evolving our shopper marketing program, and we will continue grounding our brand in the authentic stories that come from our commitment to improve the lives of people, animals, and the planet through food.
We are also making two shifts that will help us accelerate progress toward our bold brand awareness goals. We are recalibrating our pricing and promotion strategy to drive trial and reach new consumers and we're deepening our consumer insights expertise, which will help us better target consumers with the right media and messaging. Thank you for your continued confidence in Vital Farms and for your time today. With that, I will pass it over to Thilo.
Thilo Wrede: Thank you, Kathryn. Hello everyone and thank you for joining us today. I will review our financial results for the fourth quarter and fiscal year ended December 31st, 2023. I will then provide details on our guidance for fiscal year 2024. As a reminder, in 2023, our results benefited from a 53rd week of operations in the fourth quarter compared to the standard 52-week fiscal year in 2022 and 2024. As you have already heard on this call, the fourth quarter was strong with a record net revenue of $135.8 million. That is an increase of 23.4% compared to the prior year period. This was driven by shipment volume growth of 11.6% and higher price/mix. The volume growth was driven by an increase in both new and existing retail customers.
The extra week in the fourth quarter of 2023 contributed $8.5 million to net revenue or 7.7% to growth. Excluding the extra week in the fourth quarter of 2023, net revenue increased 15.7%. Gross profit for the fourth quarter of 2023 was $45.2 million or 33.3% of net revenue compared to $33.3 million or 30.3% of net revenue for the fourth quarter of 2022. Gross profit dollars benefited mainly from higher sales. The 300 basis point gross margin expansion was driven by price increases across our entire Shellac portfolio in January 2023, a moderate promotional environment and moderating commodity and logistics costs, which were partially offset by higher packaging and labor costs. SG&A expenses for the fourth quarter of 2023 were $28.8 million or 21.2% of net revenue compared to $22.0 million or 20.0% of net revenue in the fourth quarter last year.
The increase in SG&A was driven by higher marketing expense accompanied by increased employee-related costs as we added headcount to support our continued growth. Shipping and distribution expenses in the fourth quarter were $7.3 million or 5.4% of net revenue compared to $7.8 million or 7.1% of net revenue in the fourth quarter of 2022. The decrease in shipping and distribution expenses was driven by a decline in line haul rates and internal efficiencies as we continue to grow our shipment volume. Net income for the fourth quarter 2023 was $7.2 million or $0.17 per diluted share compared to $1.9 million or $0.04 per diluted share for the fourth quarter 2022. Adjusted EBITDA for the fourth quarter of 2023 was $13.9 million or 10.2% of net revenue compared to $6.9 million or 6.2% of net revenue for the fourth quarter of 2022.
The extra week in the fourth quarter of 2023 contributed $900,000. Now, turning to our fiscal 2023 results. Net revenue for the year was $471.9 million. That is a 30.3% increase compared to fiscal 2022, driven by volume gains of 13.9% and higher prices and better mix across the Shellac portfolio. The volume growth was primarily driven by increases at both new and existing customers. The extra week in fiscal year 2023 contributed $8.5 million of net revenue or 2.3% to growth. Excluding the extra week, net revenue increased 28.0% in fiscal 2023. Excluding both the extra week in fiscal 2023 and the impact of avian influenza in the first quarter of 2023, net revenue increased 25.9% in fiscal 2023. Gross profit for the year was $162.3 million or 34.4% of net revenue compared to $109.4 million or 30.2% of net revenue in fiscal 2022.
The change in gross profit was primarily driven by higher sales. Our gross margin benefited from increased pricing across the company's portfolio, partially offset by headwinds that included higher input costs, including commodity impacts across the Shellac business, as well as higher packaging costs. SG&A expenses for the year were $101.7 million or 21.6% of net revenue compared to $77.2 million or 21.3% of net revenue in fiscal 2022. The increase in full year SG&A was driven by increased marketing spending to support the initiatives Kathryn talked about a minute ago. Excluding marketing spend, SG&A as a percent of net sales declined by more than a point, demonstrating the scale leverage we are achieving. Shipping and distribution expenses for the year were $27.3 million or 5.8% of net revenue compared to $30.1 million or 8.3% of net revenue in fiscal year 2022.
The decrease in costs was driven by favorable freight rates and internal operating efficiencies, partially offset by higher sales volumes. Net income for the year was $25.6 million or $0.59 per diluted share compared to $1.2 million or $0.03 per diluted share in fiscal year 2022. Adjusted EBITDA for the year was $48.3 million or 10.2% of net revenue compared to $16.2 million or 4.5% of net revenue in fiscal 2022. The growth in adjusted EBITDA and meaningful improvement in our adjusted EBITDA margin reflects the growing scale of our business, and we believe puts us on the right path to deliver our long-term targets. This marks the first full fiscal year since our IPO with double-digit adjusted EBITDA margin, demonstrating the benefits of our growing scale, and this is an achievement we're very proud of.
The extra week in fiscal year 2023 contributed $0.9 million to adjusted EBITDA. A quick update on our capital structure. As of December 31st, 2023, we had total cash, cash equivalents, and marketable securities of $116.8 million. We had no debt outstanding. In the fiscal 2023, we generated $39 million of free cash flow. And lastly, I will note that our capital expenditures for the year came in at $11.5 million, which is near the bottom of our previously guided range and well below our initial guidance for the year. In the fourth quarter, we delayed CapEx spend for our new egg processing facility that was previously expected in Q4. This spend has been shifted to 2024. Compared to our initial CapEx guidance for the year, we also adjusted the timing of the previously mentioned digital transformation to ensure that we are fully set up for success.
Now, looking ahead, for the full fiscal year 2024, we are guiding to net revenue of at least $552 million or at least 17% growth and adjusted EBITDA of at least $57 million or at least 18% growth. A couple of callouts on our net revenue cadence. It is worth noting that in the first quarter of 2023, we had a volume benefit from avian influenza, lapping this benefit in the first quarter of 2024 will be a headwind of 11 points of net revenue growth and 8 points of volume growth. On the other hand, in the second quarter of 2023, demand was lower as order patents from retailers were out of sync, which we expect will be a tailwind of 3 points for net revenue growth in the second quarter of 2024. In addition, due to an industry-wide shortage of eggs in the first half of 2023, we reduced our trade spending, which we now need to lap, creating another point of net revenue growth headwind in the first half of 2024.
Additionally, in the fourth quarter of 2024, we will face a headwind from the extra week in 2023 as we are operating a standard 52-week calendar this year. Note that in 2024, we expect a normalized promotional cadence. Let me add one more housekeeping item to the revenue guidance. We regularly review our product portfolio and in the process decided to discontinue four SKUs of ghee and tub butter at the end of 2023 in order to concentrate our focus on stick butter. Combined, these SKUs generated $2.6 million in net sales for us in 2023. We anticipate that increased stick butter sales in 2024 will more than offset the rationalization and we expect growth in our butter category compared to 2023. Next, let me touch on our adjusted EBITDA guidance.
Within our adjusted EBITDA guidance, we expect marketing spend to be up a few million dollars compared to 2023 as we are increasing spend on awareness focused media and tactics. We expect more of the marketing spend to occur in the second half of the year and higher adjusted EBITDA margin in the first half of the year. Additionally, the cost to produce eggs remains higher than it was just a few years ago and our operating plan assumes this will remain the case in the near-term. We don't expect any contribution to net sales growth and price/mix improvements. We increased prices for organic shell eggs while low double-digits at the beginning of January 2024, while keeping the price of conventional eggs constant and supporting them with the previously mentioned higher trade spend.
We anticipate benefits from lower feed costs, mostly offset by higher butter costs, packaging costs, trade spend, labor cost, and shipping rates. Lastly on guidance, we expect fiscal year 2024 capital expenditures in the range of $35 million to $45 million. Note that this includes $11 million of timing shipped from the CapEx spend that was initially planned in 2023. We continue to evaluate our capital allocation priorities and if necessary, we'll provide updates on future earnings calls. Overall, 2023 was a strong year for Vital Farms as we navigated some challenging industry dynamics and still delivered a record year for the business with healthy growth and profitability. We are excited to carry this momentum into 2024, built on our double-digit EBITDA margin, and we are focused on increasing retail penetration to raise brand awareness and deliver our eggs to more and more households.
Thank you for your time and interest in Vital Farms. We appreciate the confidence that you place in us with your investment. And with that, we will gladly take your questions.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Brian Holland with D.A. Davidson. Your line is now open.
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