Vital Farms, Inc.

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 on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. 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.

Thank you. Good morning and welcome to Vital Farms' fourth quarter and fiscal year 2023 earnings conference call and webcast. I'm joined on today's call by Russell Diaz-Conseco, President and Chief Executive Officer, Tilo Vrida, Chief Financial Officer, and Katherine 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 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 a forward-looking statement. Please refer to today's press release and to the company's annual report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC today and other filings with the SEC for a detailed discussion of the risks that can 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 Diaz-Conseco, President and Chief Executive Officer of Vital Farms.

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, Catherine McKeon, to cover how Vital Farms continues to grow our purpose-driven brand and build trusted relationships with consumers. Tito Lobreda, 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 multi-year goals that we laid out at our analyst day, including our growth to a billion dollars 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 percent increase over the fourth quarter of 2022. We delivered $13.9 million of adjusted EBITDA, or 102.6 percent 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 skews 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 skews 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 demonstrate 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 skews at existing stores, and growth in higher price point skews 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 egg skew in the food channel based on dollar sales. Looking specifically at the data in the track channel, 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 tract 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 advisors and strong internal teams, 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 multi-year goals in 2023, including our growth to a billion dollars 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, Catherine McKeon, to discuss how we were able to continue growing our brand and deepening relationships with consumers.