Q4 2021 Vital Farms Inc Earnings Call
Good day and welcome to the vital farms, Inc. Fourth quarter 2021 earnings conference call.
At this time, all participants are in listen only mode.
After the Speakers' presentation there'll be a question answer session.
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As a reminder, this call may be recorded I would now like to turn the call over to Matt Siler, Vice President of Investor Relations you may begin.
Thank you good morning, and welcome to vital farms fourth quarter and fiscal year 2021 earnings conference call and webcast.
Please be joined on today's call by Russell DS can say go.
And Chief Executive Officer, and Bob Meissner, Chief Financial Officer.
By now everyone should have access to the company's fourth quarter and fiscal year 2021 earnings press release issued. This morning. This is available on the Investor Relations section of <unk> website at investors Dot vital farms dot 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 the company's annual report on Form 10-K for the fiscal year ended December 26, 2021, 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 it.
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 are you guys can say co president and Chief Executive Officer of Biopharma.
Thanks, Matt.
Good morning, everyone and thanks for joining today I hope everyone has had a healthy and positive start to the year.
We have a lot to cover on today's call I'm going to begin by briefly reviewing our fourth quarter financial results and then share updates related to first the exceptionally strong demand we saw in our AG and butter products during the fourth quarter.
Second how we are proactively managing the business during this climate of sustained inflation.
And third our long term growth opportunities.
I'll also touch on highlights from our inaugural sustainability report, which we published this morning that details, our environmental social and governance progress across each of our stakeholder groups.
Bo will then provide a more detailed look at our fourth quarter and full year 2021 financial highlights as well as our initial 2022 outlook. We then look forward to your questions.
In the fourth quarter, we delivered record net revenue at 77 $4 million up 43, 4% increase from the same quarter in the prior year.
Which represents our fifth quarter in a row of sequential revenue improvement as well as our 12 quarter in a row of year on year revenue improvements.
And we continue to manage our margins despite inflation and supply chain disruption impacting the global economy.
We grew our network of family farms to over 275, and our products are now in over 20900 stores, which is at 27, 4% increase from the prior year.
Finally household penetration increased to over six 4 million households, representing a 15% sequential increase relative to the over $5 5 million households in the third quarter of 2021.
Looking ahead to 2022, we are providing full fiscal year guidance for net revenue growth of more than 30% to $340 million and adjusted EBITDA growth of more than 62% to $13 million.
Which reflect our confidence in continuing the momentum we're seeing across the business.
Bo will elaborate more on our 2021 financial results and initial 2022 guidance in a few minutes.
Turning now to updates throughout the business.
As I mentioned earlier, we saw robust demand for our AG and butter products in the fourth quarter as reflected in double digit growth across net revenue household penetration and retail distribution we.
Significant distribution gains across natural envelope, including gains at Albertsons and awful.
Among the top 10 excuse by retail dollar sales in the category.
Farms has the top two highest performing excuse in terms of dollar velocities over the past 52 weeks.
In addition, among the top 10 brands by retail dollar sales in the category vital farms is the highest performing AG brands in terms of dollar velocities over the past 12 weeks.
We are seeing the results of our disciplined purposeful and nimble approach to marketing.
We think creatively about every step of the consumer journey, while maintaining the transparent.
And refreshingly honest tone that customers and consumers love about our brand.
As part of this strategy in the fourth quarter, leading up to and during the holiday season, we invested more AD spend in paid media highlighting our shallow products across a variety of digital channels. This includes the headwinds behind the lens campaign, we shared with you last quarter, which launched in the fourth quarter and had a positive impact.
Driving brand awareness and purchase intent.
To keep pace with demand, we continue to add capacity by steadily expanding our network of family farmers, which currently stands at over 275 farms.
And through our continued expansion of <unk> Central station, which we anticipate will be operational by mid 2022.
This expansion will double the plants capacity to over $600 million.
Annual revenue.
Concurrent with the positive growth we saw across the topline of our business. We like many branded companies are dealing with inflation and global supply chain complexity.
Proactively managing these external factors, which include strengthening our supply chain as I mentioned earlier implementing a new system to manage our trade and marketing spend and increasing efficiencies at central station through further technology investments.
Once our additional capacity becomes operational we will have doubled the number of robots to almost 20 across the entire facility.
The automation improves the lives of our crew members as it eliminates physically taxing work, while increasing overall productivity.
We also decided to take a portfolio wide price increase.
We've always said, we would be pragmatic about pricing and have taken a methodical approach to these decisions beginning with a modest increase to our second and third largest product lines organic pasteurized eggs and stick butter that went into effect in January .
Based on what we anticipate for the year ahead, we're taking a price increase across our entire Aegean butter portfolio that will go into effect in may.
Increases to organic pasteurized eggs and stick butter will be incremental to what was recently implemented in January to maintain our appropriate product pricing structure.
In total the price increase represents a low double digit percentage of net revenue.
Our brand has always been priced at a premium and we've seen a growing number of households, a vote for this premium because they want high quality products that reflects their values.
We believe the trust, we've cultivated with our customers and consumers gives us permission to take this action. So that we can continue investing in our business and brands empowering us to continue to produce the quality products that consumers have come to expect from Biopharma.
Turning now to our long term growth opportunities as many of you know every day.
We practice, our stakeholder model, we take actions that prioritize what is sustainable for our business and all of our stakeholders with this mindset. We conducted a strategic review in recent months of the business and have aligned our entire organization around four strategic pillars of our growth strategy, which are first.
Compete to win in our current categories.
Second strengthen our brand.
Third expand our product portfolio and fourth scale a world class organization.
As part of this organization wide alignment, we have defined specific and measurable initiatives that will drive us toward our long term growth targets.
A few updates to share as it relates to these strategic pillars.
First on competing to win in our current categories.
As we looked at the performance of our entire portfolio of egg products, we decided to discontinue our egg bites in breakfast bars products.
We're constantly evaluating our products to ensure that they align with our mission to bring ethical food to the table that they meet our high quality standards that they meet the needs of our retail and foodservice customers.
They address a consumer need and that they can profitably scale and while the launch of egg bites in breakfast bars provided worthwhile learning opportunities they felt short of our high expectations.
Conversely, this year, we're expanding our shelf offerings with two new premium products.
This includes specialty blue heirloom pasteurized eggs just in time for Easter.
And our regenerative AG offering from farms that practice regenerative principles.
The heirloom product branded true blues are beautiful certified humane blue eggs that adhere to our pasture raised standards, we plan to launch them regionally soon and scaled distribution over time.
We plan to launch our regenerative AG product nationally later this year.
Looking ahead youre going to hear us talk much more about our business in the context of our four strategic pillars, and how we are progressing toward our goals.
Our strategy will continue to lean heavily on a combination of growth in household penetration in retail distribution, which we will achieve by marketing to a broader demographic of consumers bill.
Building loyalty through thoughtful initiatives like the traceability feature we have on every egg carton.
Engaging content across all our communication channels and delivering world class customer service.
Look forward to sharing much more on our progress in the year ahead.
Finally, before I turn the call over to Bo I am pleased to share that we just published our inaugural sustainability report.
This report is a comprehensive overview of our environmental social and governance performance with respect to each of our stakeholder groups who include our farmers and suppliers.
Crew members customers and consumers.
<unk> and the environment and stockholders.
While we have not always referred to our stakeholder initiatives in the context of environmental social and governance, which I am pleased as a topic of interest across the business community.
We've maintained our commitment to the areas of ESG and much more since the day vital farms was founded.
The report covers a lot of ground with detail on each of our stakeholder groups here are a few highlights.
Our investments in human capital, including fostering a people first culture that has positively impacted retention and engagement, while advancing diversity equity and inclusion initiatives for our crew members.
Second our board is comprised of four women and five men.
Which puts vital farms among only 8% of companies in the Russell 3000 index with a gender balanced board of directors.
Let me say that again.
Our board is comprised of four women and five men, which puts vital farms among only 8% of companies in the Russell 3000 index with a gender balanced board of directors.
We were pleased to be recognized by 50 50 women on boards for these efforts and hope to inspire the broader business community can make similar investments in a gender balanced board.
Next how we're conserving natural resources like water and energy across our supply chain promoting biodiversity at central station and embracing a circular economy by using post consumer recycled materials for 90% of our packaging.
Our work with greenhouse gas inventory experts to develop our first scope one two and three emissions inventories.
Our $1 million in product and monetary donations to third.
31 nonprofit organizations.
And how we meaningfully support our family farmers in the precious animals day rates.
You'll also see a materiality matrix that identifies the ESG issues that are most impactful to our business and most important to our stakeholders. This matrix will help to guide our sustainability efforts going forward as we work to establish a neat data driven ESG goals. We've also provided relevant SaaS metrics for our <unk>.
Company and operations.
We really hope you have a chance to read the report and look forward to building on this important work in the years ahead.
With that I want to thank everyone for your time today and I'll now turn the call over to Bob.
Thank you Russell Hi, everyone and thank you for joining us today.
I will review our financial results for the fourth quarter and fiscal year ended December 26 2021.
And provide more context around our initial guidance for fiscal year 2022.
As Russell mentioned, we achieved another record quarter with net revenue of $77 4 million, an increase of 43, 4% compared to the prior year period.
Growth in net revenue in the fourth 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 over 40% growth in butter related sales driven by incremental promotional efforts, which were successful in generating consumer trial.
Gross profit for the fourth quarter was $19 8 million or 25, 6% of net revenue compared to $17 6 million or 32, 6% of net revenue for the fourth quarter of 2020.
The change in gross profit was primarily driven by higher sales.
On gross margin as expected, we experienced an increase in input costs across both eggs and butter and continued inbound freight inflation.
In addition, we experienced a couple of onetime items in the period, the largest related to our butter business, which involved the write down of both inventory and butter packaging.
We also paid a one time bonus and hired additional temporary workers at <unk> Central station to ensure we had adequate staffing during the peak of omicron to support the exceptional demand we saw in the period.
SG&A for the fourth quarter was $15 8 million compared to $15 6 million in the fourth quarter last year.
The increase in SG&A was primarily driven by higher employee related costs as we grew head count to support our continued growth.
And a planned increase in our marketing spending.
Shipping and distribution increased 95% to $8 2 million or 10, 6% of net revenue.
Relative to $4 2 million or seven 8% of net revenue in the fourth quarter of 2020.
Driven primarily by higher third party freight rates and to a lesser extent higher levels of sales volume.
Adjusted EBITDA for the fourth quarter was a loss of $2 million compared to a loss of <unk> 1 million for the fourth quarter of 2020.
Now turning to our full year results.
For fiscal year 2021, net revenue was $260 9 million up 21, 8% compared to $214 3 million in net revenue in 2020.
Growth in net revenue for 2021 was due to continued growth in acreage weighted sales driven by volume increases at our customers as well as distribution gains at both new and existing retail partners as well as an increase in our butter related sales.
Gross profit was $82 9 million or 31, 8% of net revenue for fiscal year 2021.
Third to $74 5 million or 34, 8% of net revenue for fiscal year 2020.
The $8 4 million increase in gross profit was primarily attributable to an increase in sales.
The 300 point basis point change in gross margin was primarily attributable to an increase in input costs across eggs and butter.
Total operating expenses were $82 8 million or 31, 8% of net revenue compared to $62 3 million or 29, 1% of net revenue last year.
This includes SG&A expenses of $57 9 million, a $10 $5 million increase compared to 2020.
And shipping and distribution expenses of $25 million, which increased $10 1 million year over year.
The increase in SG&A was driven by higher employee related costs due to larger overall head count this quarter operations.
Planned higher marketing spend.
And to a lesser extent public company costs.
The higher level of spending on shipping and distribution expenses was primarily due to higher third party freight rates associated with distribution of our products and to a lesser extent higher volume.
Total income from operations was 52000, this year compared to $12 2 million a year ago.
Net income was $2 4 million or <unk> <unk> per diluted share compared to $8 8 million or <unk> 27 per diluted share in 2020.
Our adjusted EBITDA was $8 million for fiscal year 2021.
Compared to $16 8 million for fiscal year 2020.
The change in adjusted EBITDA was due to increases in input costs higher shipping and distribution expenses.
As well as costs due to additional head count to support growth across the business.
Now an update on our capital structure.
December 26, 2021, we had a total balance of cash and cash equivalents and investment securities of $99 6 million and we have no long term debt outstanding.
Looking ahead to 2022, we are providing guidance of net revenues up more than $340 million representing growth of 30% over 2021.
Turning to our guidance for adjusted EBITDA, We expect adjusted EBITDA of more than $13 million in fiscal year 2022, excluding estimated cost of $1 9 million related to our exit of the convenient breakfast product line.
We expect profitability in the first half of the year will remain subdued ahead of our price increase which is in process in.
And which we expect to impact our entire portfolio beginning in May 2022.
Thanks for your time and interest in vital firms.
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.
Our level of excitement for years the years to come.
With that Russell and I will now take your questions.
As a reminder, task a question. Please press Star then one if your question has been answered and we like to remove yourself from the queue press the pound key.
First question comes from Chris Growe with Stifel. Your line is open.
Hi, good morning.
Good morning, Chris Good morning, Thanks for the time.
I just wanted to get a sense.
The price increase to the larger price increase you're going to take or maybe a call or a second pricing youre going to take.
Do you expect that that would offset inflation in the coming year I don't know if you can give some color around the degree of inflation you expect I know, it's kind of happening across across the business as it is for many companies and then just to what degree this double digit price increase could help offset that.
Great Chris I'll take that.
Yes, we look at our inputs for 2022, we're projecting about a 10% incremental inflation versus 2021 on top of the mid single digit inflation, we saw last year, including commodities and freight costs.
We're continuing to monitor the corn and soybean meal.
Given the global events that are going on today, but we believe that our guidance covers the current outlook for range given what we know today.
In terms of the price increase.
We took the price increase effective in January on about 35% of our product portfolio. Our next increase will go into effect in may.
And we're going to be taking increases on across the whole portfolio.
In total the price increase represents a low double digit percent of net revenue.
And we factored in some mid to high single digit elasticity. Once it's reflected on the shelf started in may or June .
Thank you.
Yes.
Sorry, if I cut you off there sorry.
No I was just going to say.
So I mean, if you if you go back to our sort of growth algorithm, we still see the base business.
Growing typically at 25%, but now we've taken some pricing of low double digits and we got some volume elasticity built in and that gets into our long term growth algorithm.
Over 30% in revenue for 2022.
That makes sense. Thank you for that I did have one follow up question.
As.
The household penetration growth the increase in number of doors and has really been incredible.
And that's obviously, helping drive that stronger topline growth rate.
I see.
I know you've got to be getting close to I know you are close to your capacity in at ECS. So.
I guess I'll call. It one point, though so do you need to in order for sales to really start to accelerate and absent obviously the pricing do you need that to point out to come on and be on stream ready ready to operate in order to really start to accelerate the revenue growth. So is it more back half loaded kind of volume growth just given capacity constraints.
So.
It's Russell I would offer a couple of thoughts there and I. Appreciate the question Chris first of all you may recall that.
Our the existing plant operates.
At a level to support a $300 million annual run rate.
In addition, we have access to.
Other processing plants operated by other companies that we can certainly look to if we exceed our.
Our capacity at Central station, we don't see.
At Central station, and our internal capacity being any limit to the forecast we have offered and frankly, we're pretty excited about 30% year on year growth. So.
There is certainly room.
For incremental growth above that but that we think thats pretty accelerated.
Yes.
Great. Thank you so much for your time.
Thanks, Thanks, guys.
Yeah.
Our next question comes from Rob Dickerson with Jefferies. Your line is open.
Great. Thanks, so much.
Hey, Ross.
Hey, how are you two questions on my end I guess is preferred.
In terms of the <unk>.
The discontinuation of the premium breakfast offerings.
Vis vis your comments around looking to.
Scale.
On the portfolio.
Just curious as you decided to discontinue those products was it just essentially.
You're seeing it seems like Youre doing a fabulous job on the AG side, and getting distribution seems incrementally easier and it's just the way the organization is structured.
It is easier to scale that business.
The profitability on the other side potentially.
Could take a lot longer so just kind of cut bait now or or what have you. So just any incremental color as to why you decided to do that.
That would be great. Thanks.
Yes, I appreciate that.
We are we pride ourselves on.
Having a really strong focus on.
Profitable and sustainable growth across our portfolio when we do something where all in we do it to our very best ability and.
We're not afraid to confront.
The brutal fact and and continuing.
To reevaluate everything in our portfolio.
In 2021, we took a.
Full we did a full review of our business of our portfolio with an eye toward our growth algorithm and long term growth strategy in this case breakfast.
Breakfast bars and bites.
Fantastic learning opportunity for us.
I think we came out with great products. They were well received in the marketplace, both by retailers and consumers.
We also challenged ourselves in 2021 to look further ahead and to think about our growth in terms of bigger platforms with bigger bets with higher topline and bottomline potential and in categories and product lines that we're really excited about and proud of when we look across all of the criteria we use.
For these decisions, we decided that that bars and bites didn't meet our high standards for business, which we wanted to be in or product line again. So we're excited to free up our own internal capacity for the <unk>.
Bigger bets to come in.
And we are very comfortable with the decision to pull those products for the for the strength of the long term growth of the brand and our company.
Okay fair enough.
And then just second question.
<unk> commented on marketing strategy.
On a go forward.
<unk> demographic of consumers you have a slide.
Included in the presentation.
Kind of where you've been maybe kind of what the incremental could be it looks like a little bit more tilted too.
A bit older piece of the population and the lower income maybe higher percentage women.
Kind of what what drove you to that conclusion and kind of why do you believe you have.
Incremental right to win with a broader set.
<unk> got that thanks.
Yes, thanks for that so so first of all when we look at our existing.
Sort of portfolio of households that have bought into our brand that are that are on a part of our rating fan base, we find a pretty broad set of demographics much broader than the relatively tightly defined group of target consumers that we market to we have to be focused in term.
Our marketing efforts, but we certainly attract a much broader group of consumers than just the ones. We target as we continue to add more and more households, and we continue to review.
Those households.
Whom our brand resonates and we find that we are broadening our appeal and frankly as we scale, we're able to do more we're able to invest in marketing.
Two additional groups of consumers households, and and with additional messages. So again. This this broadening of the demographic simply reflects where we think the puck is headed which is how we've always claimed.
Yeah.
Alright.
Super Thank you I appreciate it thank you.
Our next question comes from Robert Moscow with Credit Suisse. Your line is open.
Hi, Thank you.
Hey, Rob I want to know about.
What's next for these big platforms.
Handheld and egg bites or are not the idea then.
When will you show us what big Thats Youre going to have and are they going to be incremental as those two were or do you think you'll try to go closer in to to what you are.
To your to your main portfolio right now.
A follow up.
Yes, I appreciate that Rob.
First of all I would say that.
But as I think you can.
You would describe us in other areas of our business.
We're thoughtful we're deliberate and.
Just like the way that our brand.
Connects with consumers and retailers.
We're transparent.
And we do what we say and say we do the same is true for the businesses that we go into when we go into something we wanted to make sure. It makes a whole bunch of really important criteria, including growth opportunity and long term sustainability and profitability.
<unk>.
We're doing the work we feel like we need to do in order to make sure that when we.
When we launched another category.
Got her story straight and we've got a very clear line of sight to success.
That work to look beyond simple product.
Product portfolio expansion and to really think about this as a new business that we will add one or more in the future began in the middle of 2021, and we have a team dedicated to evaluating the opportunities that we.
We are focusing on and in addition to think about how we'll enter those categories, whether it's organic growth or potentially through acquisitions or other means so that.
That work is ongoing I think we'll have more clarity on where were headed beyond eggs and butter. This year, but im not going to give you a date, because frankly I want to make sure we get it right.
Okay.
And kind of a broader question about EBITDA margins and cash flow I mean.
I think it's no secret that.
Early stage growth companies like yourself with high high growth rates, but.
I guess immature margin structure and cash flow had been valued lower by the market.
I wanted to know if that has factored into your thinking at all about.
Where your margin structure needs to be when do you.
Thank you need to demonstrate.
Stronger cash flow outlook.
And whether you've taken a look at your long term financials that you had at the IPO.
And do you feel like Youre still on track with those or do you think that because of the higher cost environment, where you were a year or two behind.
Rob.
He's going to answer this more fully but I want to take.
A quick turn your question, which is fair.
The thing I want to call out is.
If you look at us against the backdrop of other as you said.
Smaller faster growing companies with as you said immature.
P&l's or cost structures.
We're cash flow positive, we're making we're making money, we're hitting our growth targets and so there's a lot of variability and uncertainty amongst a whole lot of companies in our space.
The things that we control.
We're not going to have a partner frankly.
So I would call out that despite the fact that were relatively small and growing fast.
We are cash flow positive.
I think thats an important distinction.
Perhaps in our in our peer set beyond that I would say that.
Theres certainly a lot of.
Fixed cost leverage to be had in years to come which Bo can articulate.
Better I think that our long term growth algorithm has us at the low to mid 30 percents in terms of gross margin, which is absolutely a function of the very strong brand we have built and.
Beyond short term fluctuations in commodity input cost has been achievable for many years and we believe we will continue to be so so personally I don't think theres any change to what we said at the IPO Whats changed is short term events and we're focused on the long term success of the company.
With that I'll ask bill to fill in the detail.
Yes, I'm not sure there's too much to add to that but I think.
As we've talked about price in the past couple of calls, we said were going to be pragmatic.
And now that we see to offset the ongoing inflationary pressures going to be a longer period of time, taking pricing at that price.
And as I said in a setup question, we believe will offset the commodity inflation that we're going to see in the market and get us back on track.
For the fourth.
Short period of time, where we didn't have the pricing in place. So I think by the time, we get to the end of the year, we're going to be back on track from a margin perspective.
To our long term goals and we're still committed to delivering that mid <unk> gross margin that vessel referred to in the low double digit EBITDA margins.
Net we talked to in the IPO.
Okay got.
Got it.
Maybe a follow up on the phasing of EBITDA this year.
Can you get back to breakeven in first quarter or do you think it's going to have to wait until the pricing flows through to get there.
Well, we're only going to have a portion of the pricing in Q1 that.
We've already taken the other thing thats going to impact us in Q1 will be the exit costs for the breakfast <unk>.
Convenient breakfast business, which is about $1 $9 million so.
With that we want to be EBITDA positive in Q1.
Okay alright, thank you.
Thank you.
Our next question comes from Adam Samuelson with Goldman Sachs. Your line is open.
Thank you and good morning, everyone.
And good morning.
So maybe I wanted to come back to thinking about broadening the platform and you talked about.
Kind of some of the kind of work.
Competencies that you think you have around poultry and dairy and I'm trying to think about those in the context of the.
The gross margin structure and the EBITDA margin structure that you are targeting.
If we're talking about maybe bigger bet.
Or how should we calibrate.
Changes in your capital intensity it seems like those would be tough to accomplish using co manufacturers.
And how do we think about.
Maybe buying processing plants versus building.
Only using the vital farms brand versus other brands I'm, just trying to think about.
How does it change this changes the investment levels in the company if and when you go down this path.
Yes, that's a great question Theres, obviously, a lot to unpack there and that's a lot of the work that we have a team focused on right now which is whats the growth.
Path and whats the way, we do it with efficient use of capital etcetera, I think if you look to what we did in eggs and then and then where we are with butter theres a theres a very clear path that we follow that we think is is an important part of our own growth algorithm, which is.
We start by identifying the unmet consumer need and boy, there's a lot of disruption and a lot of change that can come to.
Any food category in this country, but certainly.
In dairy and poultry, which is where our thinking is focused.
So the unmet consumer needs are there and frankly, we have the luxury of time trying to winnow, it down to which ones. We want to we want to meet and where we want to disrupt.
Beyond that.
The early stages, absolutely look like.
Leveraging.
Companies that are more experienced in whatever space, we choose to enter.
So that we can manage risk managed capital outlay as a company as a brand or as a product line scales.
Over time as you saw with eggs.
We have become more active in the in the.
And the actual operations in the manufacturer of the product and I think our Ed Central station in Springfield, Missouri is a great example of.
What we do when we believe the business has sufficient scale, which is bringing a world class and disruptive operating operating model to that business. When we believe the time's right. So it's no different than what we anticipated at the IPO, which is there.
There will continue to be a portfolio of <unk>.
More mature still fast growing but higher gross margin products that help fund the.
The ramp up of the new ones, which certainly initially would have lower gross margins and then accrete overtime. When we launch we'll have line of sight and a plan to make sure that the next thing we do will have great capital efficiency and great gross margins.
Okay.
That's helpful and then just in the near term.
Surprise going to the K, just how do we think about risk on avian flu.
The nature of your production practice, where there is outdoor access.
It's mostly spread by migratory birds it would seem like that's not something you could have kind of.
Kind of airtight bio security protocols.
In areas, where you do have.
Grower relationships, how do we think about.
How you mitigate.
Avian flu.
Presence in some of those passenger about areas.
Sure.
Good question.
Avian influenza.
And the last time it hit the United States with any impact on the business was in the 2015 2016 timeframe.
Sure.
There was about.
About $44 million.
<unk> were depopulated in this country related to TVN influenza, none of them were ours.
All of them were in highly intensive.
Highly intensive farming operations, where the birds were kept indoors.
I'll say a couple of things about mitigation one is.
Our 275 small family farms.
Our distributed network and when avian influenza hits a farm it tends to hit a farm in an area not all of the farms in an area.
And so.
We can look back to 2015, 2016, and say actually our farming model, even with outdoor access.
Not prone to any.
Avian influenza.
But even if one of our farms were prone to it.
You can do the simple math, it's less than 1%, it's less than half a percent of our productive capacity. So we have resilient simply in our model of not having a small number of very concentrated farm sites, which once affected effects all of the hands on that site.
And that we follow.
The very best buy a security standards and the business always do that and and have ramped them up just like.
We did back in 2016 to ensure that we're taking every possible precaution to prevent any impact to our business and to our to our network of small family farmers about whom we care deeply finally, what I'd say is.
Yeah.
That.
Again, the concern in the popular press and certainly from the from the Big players in the space is that outdoor access.
It's the big risk here, but but we've always believed the outdoor access is it is an important part of the health of brokered. The birds you can imagine just like with like.
A human virus.
Being confer.
Confined indoors small space.
Without masks might might actually lend itself to a higher transmission rate being outdoors and sunshine with us.
With a salad bar in front of you might actually improve.
The health of the human and animal life and so we're confident in our model. We are confident in how we're managing it and if past results or are any indicator.
We'll be we'll be in good shape this year.
Okay, and if I could just squeeze a clarifying question in response to Rob's question.
Just on the guidance I think you said.
One 9 million of costs in the first quarter related to.
Related to the shutdown of the convenient breakfast items.
The guide the third is that in the $13 million adjusted EBITDA guidance, because I think the language and the pressures would imply that it's not.
Correct. It is not in the guidance so the $13 million excludes the $1 9 million in expenses related to the breakfast <unk> exit.
Got it okay perfect. Thank you.
Okay.
Okay.
Thanks.
Our next question comes from Ken Zaslow with Bank of Montreal. Your line is open.
Hey, good morning, guys.
Good morning, Ken Good morning.
So a couple of Pi.
My follow ups more than anything else.
Can you talk about elasticity with the price increases I get the sense that you have not had elasticity, but I wanted to confirm that are you seeing any.
Sort of elasticity or anything in your pricing.
Thanks, Ken and that's certainly a question that we're seeing asked.
Many companies in our space as many are taking price.
To date amongst the products.
That have already put through a price increase.
Not seeing any elasticity is in fact, we can growth continues to accelerate and we continue to take share in the categories in which we play.
That's not to say, we're immune and in the guidance. We've offered we have done a lot of work to model.
The city's could mean in terms of volume reductions and both can give the specifics, but that's all baked in.
To our to our guidance, so never say never but so far we're not seeing any impact from price increases that have already gone through.
And as I said earlier.
Factored in mid to high single digit elasticities once the pricing is reflected on the shelf in may and June across the portfolio.
Great.
You mentioned in your.
Central that you had some labor that you had to bring in extra labor are you done with that you have that you know working.
Efficiently and not bring any labor or was there more labor constraints and how long do you think that a lot.
So I think Ken we trials to be prudent to protect the business and that's why we took the step of actually bringing in additional labor in Q4 during the peak of on the crime.
So I think now that <unk> is behind us starting to pare that back so that we can.
Getting back to a more normal level of operation.
And not feeling the same practices that we did but we wanted to ensure that we were doing everything in our power.
That omicron would not impact our ability to produce to the strong demand that youre seeing in the quarter.
And what I would add to that.
<unk>, let me, let me just build on that a little bit and I. Appreciate the question very much.
US doing that is one more example.
Why our company Hasnt had challenges.
On the supply side Hasnt had challenges with.
Covid affecting our ability to have people work and deliver our products on time or expand our capacity.
<unk> been operating uninterrupted.
For our entire history, but certainly throughout this period of Covid and some incremental labor is just part of the recipe that delivers that uninterrupted growth and our ability to execute at a very high level.
Great.
And my last question is you touched on it but I didnt crystallize. It in my head. So I apologize what was the learning that you've had from.
The breakfast.
Segment.
How will you apply going forward was it.
Was there an execution was at a consumer was it not the right timing was it not enough cash to support it.
How do you look at that and really take away. What you will do differently going forward to ensure success and how do you think about that.
I know you touched a little bit on it I just was trying to pinpoint a little bit harder because I think it's honestly fantastic. Thank you.
Cut bait right away and you didn't drag it honestly I could give you a party I just curious on what the next step from the learnings would be.
So Ken Thanks for that question and I appreciate the acknowledgement, but we didn't let it continue.
We are very.
Sort of analytical in our approach and we've created a culture at vital farms that is focused on.
Sort of.
We call it conducting autopsies without bringing this notion that we can continually look at our business.
And solve problems and improve.
In a very collaborative way in this case there were many things we learned in many things that led to this decision. So it's hard to pinpoint just one or two but a few that I'd say.
I'll answer the question in terms of the approach, we're taking going forward.
So a few things that we're focused on one is whatever we do.
We want to make sure that it is meaningful for all of our stakeholders, including financially.
So when we think about.
Egg bites in breakfast bars those were.
Always.
A product that would be an incremental part of our AG portfolio. So when we talk today about the we mentioned in the call earlier that we're going to be launching a couple of additional AG products. This year, the the true blues regenerative SKU.
Those are also incremental line.
The line extensions or portfolio expansion opportunities with an egg.
When we think today and when we think about the opportunities in front of us to expand into new categories.
We're not taking simply a portfolio expansion approach, we're thinking holistically about getting into a new business and.
And that's a different approach than we had before.
This this next category or multiple categories that we enter are being driven by a strategy and finance function. In addition to our marketing and sales function. Historically, we relied on our marketing team to develop consumer insights and then we got excited and would launch additional products.
What we are doing differently now is thinking holistically thinking further into the future and frankly dreaming a lot bigger.
Great I really appreciate it thank you guys.
Thank you Kevin.
Thanks, Ken.
Our next question comes from Brian Holland with Cowen Your line is open.
Yes. Thanks, good morning, most of my questions have been answered.
Just a couple quick ones here.
On the store expansion, obviously a nice.
Year over year and sequential uptick in number of stores I was just curious what's the catalyst for that is that coming from sort of a pipeline.
And through Covid, but where maybe it was harder to get product.
The new stores or what other factors and then also what what's the composition of these stores are these conventional grocery stores.
Natural channel or some other.
Okay.
Thanks, a lot of great questions in there I'll try to do than just us.
I wouldn't describe the continued growth in in distribution as a function of sort of pent up demand from Covid. Frankly. This is simply the natural progression of our growth strategy, which is building a powerful brand that appeals to an expanding.
Group of households, and building a world class I would argue best in class.
Sales team to.
To go out and build long term relationships with retailers. The fact is our products perform really well for our retail partners and they generate incredible demand by consumers and so the cell story.
Frankly isn't that challenging and it's not just one or two products.
Excuse me that perform really well, it's the third and the fourth and the fifth and the sixth and seventh so there is a very natural I would argue almost.
Momentum that's built we start with a few skus at a retailer and then the conversation is man that went really well how many mortgage one you want to start with do you want to add to your portfolio. Now you asked kind of what kind of stores. They are.
It's very broad in terms of what retailers, we're adding but I would say that we are much further along in.
In the natural channel, where our market share is somewhere above 35%.
And therefore, a lot of our distribution growth is coming in Lula, where conventional grocery stores, where our market share is somewhere around three 5% to 4%. So we look at natural and say man, we've kind of got that shown up in so many of those retailers. We are the number one brand in their stores.
And over time, we expect the seem to be true in Lula, where we already are the number one or number two brand in many retailers across the country. So it's not a pent up demand, it's not a short term trend in our estimation, we've consistently grown distribution and thats simply.
Because what we're doing is working.
I appreciate the color Russell.
Quickly on household penetration.
Growing at least as much in 2021 after.
Uptick COVID-19 driven in 2020.
But you are growing as much post COVID-19 as you were pre COVID-19 .
Which I presume is a factor of your marketing spend.
But I'm just curious.
If it's possible either quantitatively or qualitatively to help us understand to what extent, you're seeing maybe consumer acquisition cost come down.
E. As you build awareness for that brand and as you get more distribution, it's actually getting a little bit easier right now to bring in new household.
I appreciate that and I know part of the story for fast growing brands like us is trying to understand.
Covid help or hurt.
Does this brand grow when there isn't that big shift in consumer behavior, we've been a hyper growth company before COVID-19 during COVID-19 and coming out of Covid and I think there's no better indication that we werent simply a COVID-19 story than the acceleration of our share gains post <unk> post.
Work from home.
And so that growth story has been very consistent regardless of the sort of the background of what's going on in the macro environment.
Interestingly you asked about consumer acquisition costs.
We don't disclose marketing spend.
And that may be something we want to disclose in the future because the reality is in our benchmarking.
We are about the most efficient user of advertising dollars youre going to encounter.
And so.
The reality is our acquisition costs are very small we do an incredible job of adding consumers with frankly, a pretty darn small budget because that's how we roll we are very efficient allocators of capital to drive the growth that we're driving and still show the positive EBITDA that we're driving so we'll continue to.
To do that but frankly I'm excited about the potential to accelerate our investment of marketing to accelerate our growth because we're pretty good at turning marketing dollars into into households in Bahrain.
Thanks for all the last one for me long term financial goals revenue growth of 25 of over 25%.
Im curious within the construct of that.
Given sort of the conversation today about line extensions.
Do you have anything embedded in that number or for future new product extensions or is this.
Is this algorithm comprise just sort of solely off of what we've got and what we know today.
Consistent with our.
Transparent and I would argue conservative approach to what we commit to and then what we deliver on.
Theres, not frothiness and irrational exuberance in the in the numbers we offer.
At the IPO and today.
That guidance around but long term growth algorithm only consists of things that we have actively happening in the business. There is no future acquisition built into that there is no future.
Moon shot in there that all comes on top and the fact is despite being the number two AG brand in America, and despite having the fastest share gainer of anybody in the space.
We're still only in the mid single digits in terms of market share and there's so much white space just in the stuff that we really know.
So theres some theres a lot more to come.
But when we offer that sort of 25% plus growth growth guidance. That's just on the stuff we know.
I appreciate it thanks best of luck.
Yes, Thank you Brian .
Our next question is a follow up from Robert Moskow with Credit Suisse. Your line is open.
Just very quickly the gross margin pressure on a percentage basis in the fourth quarter.
Is that a function of.
Packaging is it also a function of labor.
Is it a function of grain as well can you maybe I didn't quite get it from the call.
Yes, we saw in Q4, we saw a couple of hundred basis points of pressure from input costs, both in commodities and other input costs and the butter and AG.
We saw.
<unk> 50 to 100 basis points due to higher inbound freight continued pressure on inbound freight.
And then we had some discrete items we had.
Some write offs related to the butter business in terms of some inventory is around 150 basis points.
And then finally, the COVID-19 bonus and additional temporary workers that we brought in to make sure we can sustain.
The supply.
Was about 50 basis points.
So some other small positive and negatives, but those accounts for the majority of the change that you saw.
Yeah.
There are no further questions I'd like to turn the call back over to Matt <unk> for closing remarks.
Yes.
Thanks again, everybody for your time today.
Have a good one.
Thank you.
This concludes the program you may now disconnect everyone have a great day.
Okay.
Okay.
Okay.
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