Yahoo Finance Vital Farms, Inc. (NASDAQ:VITL) Q1 2024 Earnings Call Transcript
Vital Farms, Inc. (NASDAQ:VITL) Q1 2024 Earnings Call Transcript May 9, 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' First Quarter 2024 Earnings Conference Call. At this time, all participants are in 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 it over to the first speaker today, Anthony Bucalo.
Anthony Bucalo: Thank you. Good morning and welcome to Vital Farms' first quarter 2024 earnings conference call and webcast. I'm pleased to speak with you all today on my first earnings as Vice President of Investor Relations. I’m joined on today's call by Russell Diez-Canseco, President and Chief Executive Officer; Thilo Wrede, Chief Financial Officer; and Pete Pappas, Chief Sales Officer. By now, everyone should have access to the company's first quarter 2024 earnings press release issued this morning. This is available on the Investor Relations section of Vital Farms website, investors.vitalfarms.com. Throughout 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 do 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, the company's quarterly report on Form 10-Q for the fiscal year ended March 31, 2024 filed with the SEC today, as well as our 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 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: Good morning, and thanks for your time today. And Tony, welcome again to Vital Farms. For those who haven't met Tony Bucalo, Tony joined us in April and will be leading vet investor relations at Vital Farms. He's got a background as an analyst at Credit Suisse, Santander, and HSBC, and he most recently led investor relations at Nomad Foods. We're grateful you're here, Tony. I'll start today's call with the big headlines from the quarter. We've had some great results to share. I'll then hand it over to our Chief Sales Officer, Pete Pappas, to cover how the relationships we've built with our customers are contributing to continued strong demand. Thilo Wrede, our CFO, will then provide more in-depth information on our first quarter results, as well as updated guidance for fiscal year 2024.
So let's get to the first piece of big news today, which is that we had a record first quarter with $147.9 million in net revenue and 24% net revenue growth over the prior year period. We delivered $29.1 million of adjusted EBITDA, which is double, double the first quarter of 2023, as well as 400 basis points of gross margin expansion, which is a nearly 40% gross margin. Those numbers would be impressive in any quarter, but they're particularly impressive as we start this year. As you'll remember, we grew 55% in the first quarter of 2023, due in part to the category disruptions from avian influenza. In our fourth quarter call we projected some headwinds as we lapped that result this quarter. Growing 24% over one of the strongest quarters in our history year-over-year reinforces our belief that momentum is building here at Vital Farms.
I'm very encouraged by these results. One of the biggest drivers of our growth and the remarkable results this quarter is our incredible team at Egg Central Station in Springfield, Missouri. Over the past year, the team at ECS has redoubled its efforts to recruit and retain a phenomenal workforce, and they've made operational improvements that enable us to more effectively meet customer demand. We're just flat-out better at getting our high-quality eggs packed and shipped, and we were already pretty good to start with. Our ECS crew just secured two big pieces of recognition that I want to call out. First, our quality assurance manager Robert Clark on behalf of the entire ECS team, received the 2024 Excellence in SQF Practitioner Leadership Award from the Safe Quality Food Institute.
This is one of the most prestigious awards in our industry and reflects our commitment to delivering safe high-quality food. It recognizes Robert's role promoting food safety and inspiring the next generation of food safety leaders. It was an honor to help celebrate Robert's leadership when this incredible news came through. Our expansion at ECS also just became a lead gold certified operation, further validating the investments we've made there in sustainable design. ECS is a remarkable facility. It's visibly different than most of the other food processing facilities you'll see, with solar panels in the parking lot, natural grasslands surrounding the building, and thoughtful design choices that support crew member health and help us run ECS as a zero waste to landfill facility.
So we've demonstrated expertise building and running a state-of-the-art facility in Springfield. We have a strong cash position and we have continued profitable growth along with rising demand for our products. As a result we have the confidence to make the next major investment that will help propel us to $1 billion in net revenue and beyond. Which brings me to our second big piece of news today. We've signed an agreement to purchase land for our next state-of-the-art egg washing and packing facility, which will be in Southern Indiana. This new facility is planned to incorporate similar high-quality design principles as our Egg Central Station facility in Springfield, Missouri, and we anticipate that it will initially be able to support 165 new family farms and employ 150 additional crew members.
We expect to break ground in 2025, begin hiring in the summer of 2026, and begin operations shortly thereafter. Our crew members from ECS are going to lead the way in bringing our new facility to life. They will create an important link to the rigorous standards, deep institutional knowledge, and executional excellence that we've established in Springfield. This will also help in our training and mentoring of our new workforce in Indiana. We expect to begin generating revenue from this facility in 2027, which will contribute meaningfully to our goal of achieving $1 billion in annual net revenue by 2027. We believe the land for this facility will not only provide significant capacity beginning in 2027, but will also allow for flexibility to add additional capacity in the future as we scale beyond our 2027 targets.
We're now working with local stakeholders in Indiana on a formal announcement and we'll share the precise location of the new facility in the near future. One last note before I hand it over to Pete. As we talk about investments in our future, I want to call out the new line of butter products that we announced in April. Our team conducted a global search, and that's not an exaggeration, for the best butter supplier we could find. We're now working with family farms in Ireland to deliver a delicious, great looking product that is 90% grass fed. We've maintained our unwavering commitment to product quality, animal welfare, and support for family farms. We also introduced bold new packaging that reinforces our premium brand identity and really stands out on the shelf.
We keep this butter stocked at our house and my family loves it. I encourage everyone to give it a try. There's a lot of good news here. We're off to a strong start. I remain confident in our ability to sustain this momentum and achieve our ambitious long-term financial targets. It's great to see this business hit on all cylinders, and we're making hay while the sun's shining. This allows us to make smart long-term investments in our people, brand, and infrastructure. And it gives you a taste of what Vital Farms is capable of. I'll now hand it over to our Chief Sales Officer, Pete Pappas.
Pete Pappas: Thanks, Russell. I appreciate the chance to represent our incredible sales team, share some of the success we've had in the marketplace, and talk about how we're building trusted relationships with Vital Farms customers. As Russell mentioned, we had a record first quarter. Last November in our Q3 earnings call, I talked about our category first approach where we work with our retail customers to increase sales and margin performance across the entire egg category. We believe this is a real differentiator for Vital Farms. It reinforces our position as a thought leader and premium brand. And importantly, it's contributing to strong results as we expand availability with new and existing customers. We expanded distribution, increased the number of SKUs at existing stores and delivered growth with higher price point SKUs. This enabled us to grow sales and unit volume well above the rest of the category in the first quarter.
I believe our role in this critical category is to be the driver of overall category performance for our retail customers. That means growing faster than the category and competition. Looking deeper at the data in the track channels during the 13-weeks ended March 24, 2024, I'm pleased to say we continued to deliver outsize performance. The egg category experienced a retail dollar decline of 19%, while Vital Farms grew retail dollar sales in comparison by 35% in the same period. Additionally, the category saw unit volumes up 6% during the same 13-week period, while Vital Farms unit volume grew by about 27%. Our conventional 12 count in the black carton is the number one branded SKU in the food category based on dollar sales. As a reminder, due to the mixed shift to 18 count packs, our volume growth in track channels tends to be under reported.
Much of our growth has come from wins that we locked in during Q3 and Q4 last year, particularly through many of our larger national customers, where we're now the number one or number two best-selling branded egg by dollars. We're also expanding our footprint with a focus on independent grocers through collaboration with natural and conventional distributors. Many of these gains will be seen in Q2 as spring shelf resets are completed in the next few weeks. Last quarter we said that we would have a more normalized promotional cadence in 2024 to drive trial and reach new consumers. The approach is working as it has helped us achieve the growth we've seen so far this year. We've built a disciplined strategy and cadence that maintains our premium brand position, supports our category-first approach, and provides our retail partners with the desired impact to their business.
Our food service business had a strong quarter and we're pleased with the progress we're making on that front. The strength of the Vital Farms brand is a key strategic advantage, which lends itself to unique partnership opportunities with restaurants and operators. We'll continue to execute our strategy as we align with restaurant concepts that are committed to sourcing ethical premium ingredients. I want to close with thanks to the Vital Farm sales team, the entire Vital Farm supply chain team, and our farmers for delivering an incredible product. My team has the privilege of representing Vital Farms in the conversations we have with customers, and we deeply appreciate all the work that goes into getting our premium eggs and butter onto shelves each and every week.
With that I'll pass it over to Thilo.
Thilo Wrede: Thank you, Pete. Hello everyone and thank you for joining us today. I will review our financial results for the first quarter ended March 31, 2024, and then provide details on our updated guidance for fiscal year 2024. We kicked off the year with another record quarter. Our net revenue rose to $147.9 million, an increase of 24.1%, compared to the prior year period. This was driven by strong volume growth of 18.4% and price mix of 4.9%. The volume growth was driven by increases at both new and existing retail customers and is in line with our mostly volume-driven growth plans for the year. Gross profit for the first quarter of 2024 was $58.9 million, or 39.8% of net revenue, compared to $42.7 million, or 35.8% of net revenue, for the first quarter of 2023.
The increase in gross profit was primarily driven by a price mix benefit, enhanced operational efficiencies, and benefits of scale. Conventional commodities and lower diesel costs contributed to the margin gains. The gross margin upside was partially offset by a return to a normal promotional rate, as well as increased investment in our crew members at Egg Central Station and higher overhead costs as we scale our world-class organization. SG&A expenses for the first quarter of 2024 were $27.1 million, or 18.3% of net revenue, compared to $23.9 million, or 20.1% of net revenue in the first quarter of last year. The increase in SG&A was driven primarily by the increased investment in crew members, as well as increased marketing investment as we scale.
Shipping and distribution expenses in the first quarter were $7.6 million, or 5.1% of net revenue, compared to $7.8 million or 6.6% of net revenue in the first quarter of 2023. The decrease in shipping and distribution expense was driven by a decline in line haul rates, lower diesel costs, and internal operational efficiencies. Net income for the first quarter of 2024 was $19.0 million or $0.43 per diluted share, compared to $7.2 million or $0.16 per diluted share for the first quarter of 2023. Adjusted EBITDA for the first quarter of 2024 was $29.1 million or 19.7% of net revenue, compared to $13.9 million or 11.6% of net revenue for the first quarter of 2023. Finally, a quick update on our capital structure. As of March 31, 2024, we had total cash, cash equivalents and marketable securities of $137.5 million with no debt outstanding.
Now looking ahead, for the full fiscal year 2024, we are now guiding to net revenue of at least $575 million or at least 22% growth, compared to our previous expectation of at least $552 million or at least 17% growth. And we're guiding to adjusted EBITDA of at least $70 million or at least 45% growth, compared to our previous expectation of at least $57 million or at least 18% growth. This updated guidance reflects the stronger-than-expected first quarter, increased confidence in our performance for the remainder of the year, and higher conviction in a more favorable commodity outlook. We remain focused on reinvesting in marketing and expanding our retail presence in order to drive awareness, deepen loyalty with consumers, and ultimately drive household penetration on our path to 30 million households by 2027.
We continue to expect higher adjusted EBITDA margin in the first-half versus the second-half of 2024. Given the better-than-expected growth in Q1, we now expect net revenue growth to be relatively evenly split between the first and the second-half of the year. Lastly on guidance, we still expect fiscal year 2024 capital expenditures in the range of $35 million to $45 million. Note that this includes the previously highlighted $11 million of timing shift from the CapEx spend that was initially planned for 2023. We anticipate having elevated CapEx spending over the next few years, because of the new facility, with the majority of the spending occurring in 2025 and 2026. We believe we have the necessary funds to build the facility and project that every dollar of CapEx investment in this new facility will generate more than $5 of annual revenue capacity, which we consider a really strong return.
We continue to evaluate our capital allocation priorities and, if necessary, will provide updates on future earnings calls. Overall, the first quarter was a very strong start to the year for Vital Farms. And we are very excited to build on this momentum, especially as we are building plans to break ground on our new facility next year. We remain focused on building greater retail penetration to raise brand awareness and deliver our eggs to more and more households. Before I close, let me also once again welcome Tony Bucalo to the Vital Farms team. I'm very much looking forward to working with him and benefiting from his experience as we continue to build out our investor relations function. Thank you for your time and interest in Vital Farms today and for the confidence that you have placed in us with your investment.
With that, we will now be happy to take your questions.
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