Vital Farms, Inc. (VITL) Q4 2021 Earnings Report, Transcript and Summary

Good day, and welcome to the Vital Farms, Inc. Fourth Quarter 2021 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] As a reminder, this call maybe recorded. I will 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 the Vital Farms fourth quarter and fiscal year 2021 earnings conference call and webcast. I am pleased to be joined on today's call by Russell Diez-Canseco, President and Chief Executive Officer; and Bo Meissner, Chief Financial Officer. By now, everyone should have access to the company's fourth quarter and fiscal year 2021 earnings press release issued this morning. This is available on the Investor Relations section of Vital Farms Web site at investors.vitalfarms.com. Through the course of this call, management may make forward-looking statements within the meaning of the Federal Securities Laws. These statements are based on management's current expectations and beliefs, and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and to the company's annual report on Form 10-K for the fiscal quarter 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 accordance with GAAP. Please refer to our earnings release for a reconciliation of adjusted EBITDA to its most comparable measure prepared in accordance with GAAP. And now, I'd like to turn the call over to Russell Diez-Canseco, President and Chief Executive Officer of Vital Farms.

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 egg 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 the 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, a 43.4% increase from the same quarter in the prior year, which represents our fifth quarter in are row of sequential revenue improvement, as well as our 12th quarter in a row of year-on-year revenue improvement. And we continue to manage our margins despite inflation and supply chain disruptions impacting the global economy. We grew our net worth of family farms to over 275. And our products are now in over 20,999 stores, which is a 27.4% increase from the prior year. Finally, household penetration increased to over 6.4 million households, representing a 15% sequential increase relative to the over 5.5 million households in 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 reflects 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 egg and butter products in the fourth quarter, as reflected in double-digit growth across net revenue, household penetration, and retail distribution. We saw significant distribution gains across natural and MULO, including gains at Albertsons and Ahold. Among the top 10 egg SKUs by retail dollar sales in the category, Vital Farms has the top two highest performing egg SKUs in terms of dollar velocities over the past 52 weeks. In addition, among the top 10 egg brands by retail dollar sales in the category, Vital Farms is the highest performing egg brand 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 stop of the consumer journey while maintaining the transparent, fun, 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 shell egg products across a variety of digital channels. This includes the Hens Behind the Lens campaign we shared with you last quarter, which launched in the fourth quarter and had a positive impact on 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 Egg Central Station, which we anticipate will be operational by mid-2022. This expansion will double the plant's capacity to over $600 million in annual revenue. Concurrent with the positive growth we saw across the top line of our business, we, like [technical difficulty] are dealing with inflation and global supply chain complexity. We're proactively managing these external factors, which include strengthening our supply chain, as I mentioned earlier, implementing a new system to manager our trade and marketing spend, and increasing efficiencies at Egg Central Station through further technology investment. 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 products lines, organic pasture-raised 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 egg and butter portfolio that will go into effect in May. Increases to organic pasture-raised 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 vote for this premium because they want high-quality products that reflect 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 brand, empowering us to continue to produce the quality products that consumers have come to expect from Vital Farms. Turning now to our long-term growth opportunities, as many of you know, every day when we practice our stakeholder model, we take actions that prioritize what's 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 and 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 food service customers, that they address a consumer needs, and that they can profitably scale. And while the launch of egg bites and breakfast bars provided worthwhile learning opportunities, they fell short of our high expectations. Conversely, this year, we're expanding our shell egg offerings with two new premium products. This includes specialty blue heirloom pasture-raised eggs just in time for Easter, and a regenerative egg 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 scale distribution over time. We plan to launch our regenerative egg product nationally, later this year. Looking ahead, you're going to hear us talk much more about our business in the context of our four strategy pillars, and how we're progressing toward our goals. Our strategy will continue to lean heavily on a combination of growth in household penetration and retail distribution, which we will achieve by marketing to a broader demographic of consumers, 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. We look forward to sharing much more on our progress in the year ahead. Finally, before I turn the call over to Bo, I'm 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, communities, 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'm pleased is a topic of interest across the business community. We've maintained a 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. First, 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. We 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 balance 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 to 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 Egg 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 1, 2 and 3 emissions inventories, our $1 million in product and monetary donations to 31 non-profit organizations, and how we meaningfully support our family farmers and the precious animals they raised. 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 SASB metrics for our 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 it over to Bo.

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 from 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% 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 egg and butter and continued inbound trade inflation. In addition, we experienced a couple of one-time 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 Egg 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 headcount 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 7.8% 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 $0.1 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 continue growth in egg-related 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, compared 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 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 headcount to support our 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 $52,000 this year, compared to $12.2 million a year ago. Net income was $2.4 million or $0.06 per diluted share, compared to $8.8 million or $0.27 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 headcount to support growth across the business. Now, an update on our capital structure, as of 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 of 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 costs 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, and which we expect to impact our entire portfolio beginning in May, 2022. Thanks for your time and interest in Vital Farms. Before we move to taking questions, I want to reiterate our confidence in the current state of our business. The demand for our products remains robust, as does our level of excitement for the years to come. With that, Russell and I will now take your questions.

[Operator Instructions] Our first question comes from Chris Growe with Stifel. Your line is open.

Hi, good morning.

Morning, Chris.

Good morning. Thanks for the time. I just want to get a sense, the price increase -- to the larger price increase you're going to take or maybe call it the second pricing you're 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 the business, as it is for many food companies. And then, just to what degree this double-digit price increase could help offset that?

Great, Chris. I'll take that. Yes, as 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 grains 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, starting in May or June. So --

Okay, thank you for the -- [multiple speakers]…

Yes.

Sorry if I cut you off there. Sorry.

No, I was just going to say, so, I mean if you'll -- if you go back to our sort of growth algorithm, we still see the base business growing to clear 25%, but now we've taken some pricing, of the low double digits, and we've got some volume elasticity built in, that gets it to our long-term sort of growth algorithm, and over 30%, at least for 2022.

Yes, that makes sense. Thank you for that. I did have one follow-up question, and that is the household penetration growth, the increase in number of doors has really been incredible, and that's obviously helping drive this stronger top line growth rate. And, 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 1.0. So, do you need to, in order for sales to really start to accelerate, and obviously the pricing, do you need that 2.0 to come on and be on stream 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. And I would offer a couple of thoughts here, 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 capacity at Egg Central Station. We don't see Egg Central Station and our internal capacity being any limit to the forecast we've offered. And, frankly, we're pretty excited about 30% year-on-year growth. So, there's certainly room for incremental growth above that, but we think that's pretty accelerative.

Yes, I agree. Thank you so much for your time.

Thanks.

Our next question comes from Rob Dickerson with Jefferies. Your line is open.

Great, thanks so much.

Hey, Rob.

Hey, how are you? I have two questions on my end. I guess just the first in terms of the discontinuation of pre-made breakfast offerings kind of vis-à-vis your comments around looking to scale the portfolio? I'm just curious, as you decided to discontinue those products, was it just essentially you seeing -- but it seems like you're doing a fabulous job on the egg side and getting distribution seems incrementally easier and it's just the way the organization is structured, is it -- it's -- that it is easier to scale that business, and the profitability on the other side potentially could take a lot longer. So, just kind of cut bait now or what have you? So, just any incremental color as to kind of why you decide to do that would be great? Thanks.

Yes, I appreciate that. So, we are -- we pride ourselves on having a really strong focus on profitable and sustainable growth across our portfolio. When we do something we're all in, we do it to our very best ability. And we're not afraid to confront the brutal fact, 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 bars and bites were a 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 top line and bottom line potential, and in categories and in product lines that we're really excited about and proud of. And when we looked across all of the criteria we use for these decisions, we decided that bars and bites didn't meet our high standards for businesses we wanted to be in or products we wanted to be in. So, we're excited to free up our own internal capacity for the bigger bets to come. And we're very comfortable in the decision to pull those products for the strength of the long-term growth of the brand and company.

Okay, fair enough. And then just second question, you commented on marketing strategy on the go-forward to a broader demographic of consumers. You have a slide that you've included in the presentation kind of how -- where you've been and then maybe kind of what the incremental could be. It looks like it's a little bit more tilted to a bit older piece of the population and the lower income, maybe higher percentage women. I'm just trying to -- what drove you to that conclusion, and kind of why do you believe you have like an incremental right to win with a broader set of consumers? And that's it. Thanks.

Yes, thanks for that. So, first of all, when we look at our existing sort of portfolio of households that have bought into our brand, that are on a part of our raving fan base, we find a pretty broad set of demographics, much broader than the relatively tightly defined [group of] [Ph] target consumers that we market to. We have to be focused in terms of 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 for whom our brand resonates, we find that we are broadening our appeal. And thankfully, as we scale we're able to do more. We're able to invest in marketing to additional groups of consumers, to households, and with additional messages. So, again, this broadening of the demographic simply reflects where we think the puck is headed, which is how we've always played.

All right.

Super.

Thank you, appreciate it.

Thank you.

Thanks.

Our next question comes from Robert Moskow with Credit Suisse. Your line is open.

Hi, thank you.

Hey, Rob.

I wanted to know about what's next for these big platforms, if handheld and egg bites are not the idea, then what -- when will you show us what big bets you're going to have? And are they going to be as incremental as those two were or do you think you'll try to go closer in to what you -- to your main portfolio right now? And I have a follow-up.

Yes, appreciate that, Rob. So, first of all, I would say that as I think 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, in the sense that we're transparent and we do what we say and say what we do, the same is true for the businesses that we go into. When we go into something we want to make sure it meets a whole bunch of really important criteria, including growth opportunity and long-term sustainability and profitability. So, we are doing the work we feel like we need to do in order to make sure that when we launch another category we've got our story straight, and we've got a very clear line of sight to success. That work to look beyond simple 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 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 work is ongoing. I think we'll have more clarity on where we're headed, beyond eggs and butter, this year. But I'm not going to give you a date because, frankly, I want to make sure we get it right.

Okay. And kind of 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 growth rates but, I guess, immature margin structure and cash flow have 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 think you need to demonstrate a 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 you're still on track with those or do you think that, because of the higher cost environment where you are a year or two behind?

Rob, Bo is going to answer this more fully, but I want to take a quick turn on 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&Ls or cost structures; we're cash flow positive. 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. Amongst the things that we control, we are knocking it out of the park, frankly. So, I would call out that despite the fact that we're relatively small and growing fast, we're cash flow positive. And I think that's an important distinction for us in our peer set. Beyond that, I would say that there's certainly a lot of fixed cost leverage to be had in the years to come, which Bo can articulate better. I think that our long-term growth algorithm has us at the low-to-mid 30s in terms of gross margin, which is absolutely a function of the very strong brand we've built, and beyond short-term fluctuations in commodity input costs, this has been achievable for many years, and we believe we'll continue to be so. So, personally, I don't think there's any change to what we said at the IPO. What's changed is short-term events, and we're focused on the long-term success of the company. But with that, I'll ask Bo to fill in the details.

Yes, I'm not sure there's too much to add to that. But I think, as we've talked about pricing in the past couple of calls, we said that we're going to be pragmatic. And now that we see ongoing inflationary pressure is going to be there for a longer period of time, and taking pricing, [indiscernible] 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 -- or period of time where we didn't having the pricing in place. So, I think by the time you 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 delivery that mid-30 gross margin that Russell referred to, and the low double-digit EBITDA margins that we talked to in the IPO.

Okay, got it. And maybe a follow-up, Bo, on the phasing of EBITDA this year, can you get back to breakeven in first quarter or do you think it's going to -- you have to wait till 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 that's going to impact us in Q1 will be the exit costs for the breakfast -- convenient breakfast business, which is about $1.9 million. So, with that we won't be EBITDA positive in Q1.

Okay. All right, thank you.

Thank you.

Our next question comes from Adam Samuelson with Goldman Sachs. Your line is open.

Yes, thank you. Good morning, everyone.

Hey, Adam, good morning.

Hi. So, maybe I wanted to come back to the thinking about broadening the platform. And you talked about kind of some of the -- kind of what competencies that you think you have around poultry and dairy. And I'm trying to think about those in the context of the gross margin structure and the EBITDA margin structure that you're targeting. If we're talking about maybe bigger bets, how should we calibrate changes in your capital intensity? It seems like those would be tough 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 the change -- this changes the investment and the levels in the company if and when you go down this path?

Yes, and then that's a great question, and there's obviously a lot to unpack there. And that's a lot of the work what we have team focused on right now, which is what's the growth path and what's the way we do it with efficient use of capital, et cetera. I think if you look to what we did in eggs and then where we are with butter. There's a very clear path that we followed that, that we think 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 fruit category in this country, but certainly, in dairy and in poultry, which is where our thinking is focused. So, the unmet consumer needs are there is frankly, we have the luxury of trying to, try 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 manage 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 actual operations in the manufacture of the products. And I think our Egg Central Station in Springfield, Missouri, is a great example of what we do when we believe the business has sufficiently scaled, which is bring a world class and disruptive 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 will continue to be a portfolio of more mature still fast growing, but higher gross margin products that help fund the ramp up of the new ones, which certainly initially would have lower gross margins and then accrete over time. When we launch, we will 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, just surprised, going to the K, just how we think about risk on avian flu is just the nature of your production practice where there is outdoor access and it's mostly spread by migratory birds, it would seem like that's not something you could have kind of airtight biosecurity protocols. It's in areas where you do have grower relationships, how do we think about, how you mitigate avian flu with its present in some of those pasture built areas?

Sure, very fair question. Avian influenza is a thing, and the last time it hit the United States with any impact on the business was in the 2015-2016 timeframe, where there was about 44 million birds were depopulated in this country related to avian influenza. None of them were ours. All of them were in highly intensive farming operations where the birds were kept indoors. So, I'll say a couple of things about mitigation. One is our 275 small family farms are a distributed network. And when avian influenza hits a farm, it tends to hit a farm in an area, not all the farms in an area and so we can look back to 2015 and 2016 and say actually, our farming model, even with outdoor access, wasn't prone to any avian influenza. But even if one of our farms were prone to it, as 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 resilience simply in our model of not having a small number of very concentrated farm sites, which once affected, affects all of the hens on that site. Beyond that, we follow the very best biosecurity standards in the business, always do that, 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 network of small family farmers about whom we care deeply. Finally, what I'd say is that again, the concern in the popular press and certainly from the big players in the space is that outdoor access is the big risk here, but we've always believed that outdoor access is an important part of the health and welfare of the birds. You can imagine, just like with a human virus being confined indoors, small space, without masks might actually lend itself to a higher transmission rate. Being outdoors, in sunshine, with a salad bar in front of you might actually improve the health of a human or an animal life and so we're confident our model, we're confident in how we're managing it. And if past results are or any indicator, 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 $1.9 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 length of the question is sort of implied, but 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 bar exit.

Got it. Okay, perfect. Thank you.

Thanks.

Our next question comes from Ken Zaslow with Bank of Montreal. Your line is open.

Hey, good morning, guys.

Good morning Ken.

Hi, Ken. Good morning.

So, a couple of tight follow-up with anything else, can you talk about elasticity with the price increases. I guess the sense that you have not had a lot to see, but I wanted to confirm that and are you seeing any sort of elasticity or easing in your pricing?

Thanks, Ken. And that's certainly a question that we're seeing asks of many companies in our space. As many are taking price. To date, amongst the products that have already put through a price increase. We're not seeing any unless this is in fact, we can -- our 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 then the guidance we've offered we have done a lot of work to model what elasticities could mean in terms of volume reductions and both can give the specifics, but that's all baked in to our guidance. So, never say never, but so far we're not seeing any impact from some price increases that have already gone through.

And as I said earlier, we factored in mid to high single digit elasticities once the pricing is reflected on the shelf and remain in June across the portfolio.

Great. You mentioned in your Egg Center that you had to labor, that you had to bring in extra labor. Are you done with that? You have that, are you now working efficiently and not bringing any labor or was there more labor constraints? And how long do you think that'll last?

I think, Ken, we try 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 Omicron. So, I think now that Omicron is behind us. We started to pare that back, so that we're getting back to a more normal level of operation and not feeling the same thing 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 we are seeing in the quarter.

And let me just build on that a little bit. And I appreciate the question very much, us doing that is one more example of why our company hasn't had challenges on the supply side, hasn't had challenges with COVID affecting our ability to have people work and deliver our products on time or expand our capacity. We've 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 very high level.

Great. And my last question is, you touched on it, but I didn't crystallize it in my head. So, I apologize. What were the learnings that you had from the breakfast segment and how will you apply going forward? Was it -- was there an execution? Was it a consumer? Was it not the right timing? Was it not enough cash to support it? Like, 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? And I know you touched a little bit on it. I just was trying to pinpoint a little bit harder because I think it's obviously fantastic that you cut bait right away and you didn't drag it on. And so, I actually do a apology, I'm just curious on what the next step from the learnings will be?

So, Ken, thanks for that question. And I appreciate the acknowledgement, but we didn't let it continue and that 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 blame, 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 and 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 and breakfast bars, those were always a product that would be an incremental part of our egg 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 egg products this year, the true blues and regenerative SKU. Those are also incremental line extensions or portfolio expansion opportunities within eggs. When we think today and when we think about the opportunities in front of us to expand and new categories, we're not taking simply a portfolio extension approach. We're thinking holistically about getting into a new business. And that's a different approach than we had before. This next category or multiple categories that we enter are being driven by a strategy and finance function, in addition to a marketing and sales function. Historically, we relied on our marketing team to develop consumer insights and then we got excited and was launched additional products. What we're 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, Ken.

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'm just curious, what's the catalyst for that? Is that coming from sort of a pipeline through COVID that more maybe it was harder to get products into new stores? Or what other factors maybe and then also what was the composition of these stores of these? Are these conventional grocery stores, natural channel or some other?

Thanks, a lot of great questions in there. I'll try to do them justice. I wouldn't describe the continued growth 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 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 sell 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 or the seventh. So, there's 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 more do you want -- you want to start with? What do you want to add to your portfolio? Now, you ask kind of what kind of stores they are. It's very broad in terms of what retailers were adding. But I would say that we were much further along in the natural channel where our market share is somewhere above 35%. And therefore a lot of our distribution growth is coming in new low or conventional grocery stores where our market share is somewhere around three and a half to 4%. So, we look at natural and say, "Man, we've kind of got that sewn up and so many of those retailers we are the number one brand in their stores." And over time, we expect the same to be true and new low. 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 that's simply accelerating because what we're doing is working.

I appreciate the color Russell. Quickly on household penetration, I mean, you're growing at least as much in 2021 after uptick COVID-driven in 2020, but you're growing as much post COVID as you were pre-COVID, which I presume is a factor of your marketing spent. So, I'm curious, if it's possible, either quantitatively or qualitatively to help us understand to what extent you're seeing maybe consumer acquisition costs come down, i.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, just trying to understand, we get COVID Help or did COVID hurt and does this brand grow when there isn't that big shift in consumer behavior? We've been a hyper growth company before COVID, during COVID and coming out at COVID. And I think there's no better indication that we weren't simply a COVID story than the acceleration of our share gains post Omicron, right, 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're about the most efficient user of advertising dollars you're going to encounter. And so, the reality is our acquisition costs are very small. We do an incredible job of adding consumers with a -- 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 then still show the positive EBITDA that we're driving. So, we'll continue 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 households and by race.

Thanks, Russell. Last one from me. Long-term financial goals revenue growth of over 25%, I'm curious within the construct of that, given sort of the conversation today about line extensions, do you have anything is embedded in that number for future new product extensions, or is this algorithm comprised just to sort of solely off of what we've gotten 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. There's not frothiness and irrational exuberance in the numbers we offer at the IPO. And today, that guidance around long-term growth algorithm only consists of things that we have actively happening in the business. There's no future acquisition built into that. There's no future, moonshot in there, that all comes on top. And the fact is, despite being the number two egg brand in America, and despite having the fastest share gain of anybody in the space, we're still only in the mid-single digits in terms of market share. And there's so much whitespace just in the stuff that we've really nailed. So, there's a lot more to come. But when we offer that sort of 25% plus growth guidance, not just on the stuff we know.

I appreciate it. Thanks, best of luck.

Yes, thank you. Thanks.

Thanks.

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, Bo, is that a function of packaging? Is it also a function of labor? Is it a function of grain as well? Can --- maybe I didn't quite get it from the call.

Yes, in Q4 we saw a couple of hundred basis points of pressure from input costs both from commodities and other input costs in butter and egg. We saw 50 to 100 basis points due to higher inbound freight, continued pressure on inbound freight. And then, we had two discrete items. We had some laid off related to the butter business in terms of some inventory. It's around 150 basis points. And then finally, the COVID bonus and the additional temporary workers that we brought in to make sure we could sustain the supply, was about 50 basis points. So, some other small positives and negatives, but those account for the majority of the change that we saw.

There are no further questions. I will turn the call back over to Matt Siler for closing remarks.

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.