Vital Farms, Inc. Price & Performance (VITL)

Good morning, and welcome to Vital Farms' Fourth Quarter and Full Year twenty twenty four Earnings Conference Call and Webcast. I am Tony Bucalo, VP of Investor Relations, and I am joined on the call today by Russell Diaz Canseco, President and Chief Executive Officer. Keila Breida, Chief Financial Officer and Catherine McKeown, Chief Marketing Officer and General Manager butter. By now everyone should have access to the company's fourth quarter and full year 2024 earnings press release issued this morning.

This is available on the Investor Relations section of VitalPharm's website at investors.vitalpharms.com Vital.

Throughout this call, management may make forward looking statements within the meaning of federal [indiscernible] 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 annual report on Form 10 ks for the fiscal year ended 12/29/2024, filed with the SEC today as well as 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 press release for a reconciliation of adjusted EBITDA and adjusted EBITDA margin to their most comparable prepared in accordance with GAAP. With that, I will turn the call over to Russell Diaz Conceico, President and Chief Executive Officer of Vital Farms.

Good morning and thank you for your time today. Vital Farms finished 2024 on another high note. Posting a great set of results in the fourth quarter and surpassing our financial guidance for the year. We achieved this with the help of all of our stakeholders, especially the crew members, and family farmers who once again helped us deliver on our purpose of bringing ethical food to the table. I'm grateful for all of their efforts. This is truly an exciting time for Vital Farms. 2024 was a year of important milestones and great accomplishments for our company. First, we exceeded $600,000,000 in net revenue well ahead of our initial expectations for the year keeping us on track to meet our $1,000,000,000 sales target by 2027. Second, we added more than 125 new family farms, reaching more than four twenty five by year end. When completed, these new farms will expand our egg sourcing capacity by more than 40%. We see this growth in farm count as a testament to the strength of our recruitment team and the appeal of the Vital Farms model for our family farmers. Along with passing these milestones, we also successfully built more groundwork for future growth by investing in brand support and in our fast growing supply chain.

On the marketing side, our efforts drove brand awareness to new heights against our closest competitors. This record brand awareness helped our sales team expand retail distribution for eggs, while simultaneously building higher sales velocity. And I'm very pleased with how we're rebuilding our butter business with butter back in growth and with plenty more ahead. We announced critical expansions of our supply chain in 2024 and expect to continue making such improvements. Last spring, we announced plans to open a new egg washing and packing facility. We expect this new facility will significantly increase our production capacity. Fueling our next leg of growth. Additionally, we announced that we will be adding company owned accelerator farms to our network ahead of our new facility opening in 2027. Importantly, we established dedicated supply chain leadership with the appointment of Joe Holland as our first Chief Supply Chain Officer, bringing his extensive experience to our team. As we look ahead to 2025, this will again be another year of important supply chain investment. In January, we announced that we are adding a new best in class egg grading line at Egg Central Station in Springfield, Missouri. We anticipate this new line will expand our capacity there by 30% by the end of twenty twenty five.

We believe adding this new line is a well timed step in managing our current demand, and building EggCentral Station revenue capacity to more than $1,000,000,000 well past our last capacity estimate of $800,000,000 We also expect to open our first company owned accelerator farms later this year. Providing us with new sources of best practices that we can share with our existing farm network. In recent quarters, we spent a great deal of time highlighting we're strengthening and expanding our supply chain. And there's good reason for that. Our growth is tied directly to how many eggs we can collect, wash and ship. The timing of our supply chain investments in both 2024 and 2025 will be critical in understanding how our 2025 guidance of $740,000,000 in sales and $100,000,000 in adjusted EBITDA will be weighted across this year. It's not news that the egg industry has a supply issue. As avian influenza losses continue to deplete shelves across the country. The industry lost nearly 40,000,000 egg layers in 2024, and we're sure you've seen the tight supply of eggs at your local supermarket and on the news. Industry supply shortages have created extraordinary demand for our products. But have also created supply constraints.

Looking ahead to the first quarter, the supply constraints we experienced at the end of twenty twenty four have continued into the beginning of this year.

Additionally, we are cycling two consecutive years of exceptional first quarter performances. With sales up 55% in the first quarter of twenty twenty three, and 24% in the first quarter of twenty twenty four, from the respective prior year period. In the first quarter of twenty twenty four, we sold through the eggs we produced and we sold through a significant amount of inventory which compounded our sales growth. In the first quarter of twenty twenty five, we are shipping more eggs than we did a year ago.

However, year on year, we have much less inventory and we're not selling through inventory like we did last year. As a result, we expect a modest step down in our growth rate versus recent throughout the first half of twenty twenty five particularly in the first quarter. However, as our egg supply builds throughout the course of the year, we expect our financial and commercial performance to accelerate as the year goes on. Especially in the second half of the year, when comparisons ease. We've built this into our 2025 guidance Please keep this in mind as you build your models for the year. Just to be clear, new family farms take roughly nine months on average to start egg production. The farms we signed in the early part of last year are now yielding a good supply of egg. By the fourth quarter of the year, more and more of the farms we signed throughout last year will begin providing supply, which we expect will accelerate into the second half of the We anticipate the approximately 125 farms we signed last should be fully up and running by the fourth quarter. Additionally, the new washing and packing line in Missouri will also become fully operational in the fourth quarter.

Taking these two developments together, we project that we will have needed [indiscernible] and should be well positioned to meet our guidance expectations for the year and keep us on the path to $1,000,000,000 by 2020. Protecting animal welfare is at the heart of our company mission. And this recent outbreak of Aiden Influenza is a sad and difficult time for us and our industry. Less than two months into 2025, more than twenty seven million hens have died from avian influenza, along with nearly forty million that were lost in 2024. Egg shortages have created another hardship for American families already impacted by the food inflation of recent years. I'm proud to say that our family farm network and our company farm teams have been highly resilient through this recent outbreak. Going all the way back to 2022, we've had just four positive cases across our four twenty five farms, representing less than one half of one percent of our hens. During this last outbreak. We've only had one outbreak in the trailing twelve months, As a reminder, no one farm represents more than one half of 1% of production capacity. According to even the most favorable estimates, we'll be in this national egg shortage through the end of twenty twenty five.

I can promise that Vital Farms will be working hard to get more eggs to the shelf with expanded supply. Our farm recruitment team continues to perform at an incredible level and I tip my cap to them. At the end of twenty twenty three, we had 5,400,000 laying hens in our At the end of twenty twenty four, we had $7,700,000 with even more to come this year. I'd like to make a few comments about an in We've made to our management structure. We announced in January that Pete Pappas, our Chief Sales Officer, expanded his role to Chief Sales Officer and President of eggs.

Catherine McKeown, our Chief Marketing Officer, now serves as Chief Marketing Officer and General Manager of Butter. Vital Farms is expanding quickly. And we're evolving to meet the demands of that growth. Our net revenue has more than doubled in the last three years and nearly tripled over the last four. The demand for our eggs is at record highs, and our revamped butter business is accelerating. To better manage the demands of our growing organization, empowering Pete and Catherine to focus on maximizing opportunities in our two core segments. Additionally, empowering Pete and Catherine frees me from much of my day to day focus on eggs and butter. Giving me the opportunity to think strategically about what we need to do next to help drive Vital Farms into new phases of growth Pete and Catherine are extraordinary and dedicated executives who know this business back to front. And I look forward to seeing them in action. I'd like to wrap up with a few comments before moving on to Catherine and Tilo. In 2024, we grew beyond our expectations while serving our stakeholders and delivering on our financial promises. We invested in our farm network, and strengthened our supply chain.

We grew our presence at retail and in the mind of the consumer. And I can't say enough about how well our Egg Central Station crew members performed this year. Over delivering on high expectations by a wide margin. And these were great accomplishments. But the thing about milestones is that they can go from goals to ancient history very quickly. We're now focused on delivering the next set of milestones and believe our dynamic supply chain top notch people and great brand will take us there. Industry supply including ours will be tight to start the year due to the continued impact of avian influenza. However, I'm confident that we're well positioned to navigate these choppy waters. We have the right mix of ingredients to help drive us to our goal of becoming America's most trusted food company. I'm certainly looking forward to it and I hope you are too. And with that, we'll go to our Chief Marketing Officer and now Butter, General Manager, [indiscernible] Catherine?

Thank you, Russell. I'd also like to start today by saying a giant thank you to all of the VitalForms crew members who have done such an outstanding job building our business. Especially the hardworking crew at UCS. Who keeps getting us eggs and butter every single day during a period of extraordinary demand. We believe we have the right products, the right brands, and most importantly, the right people to win in the market. I'm also excited and honored to take on the additional role of [indiscernible] Butter had a great performance in 2024. With sales up 11%. With the brand nearly doubling its quarterly sales in Q4, as it picked up steam in the second half of the year. As we build up the butter team, we couldn't be more fired up about the future. We have seen extraordinary demand about just over the past few months. And we believe that demand is sustainable. We expect butter to be an important piece of our growth strategy to meet our long term financial goals. Butter will also be the crucial cornerstone in our portfolio of ethically produced food as we start to become America's most trusted food company. As Russell said in his comments, we had another excellent year connecting with our consumers in both our categories and further building the Vital Farms brand.

Our brand awareness is up Our household penetration grew strongly and our buy rate was up double digits. We retain leadership in premium eggs with unmatched retention and loyalty rates during a period of supply disruption and increasing competition in our segment. Our marketing efforts continue to resonate with consumers, and Vital Farms gained more consumer mind space last year. In 2024, aided brand awareness increased to 26%. Up from 23% at the end of twenty twenty three. What is most exciting for us is that our brand awareness is pulling away from our closest competitors.

In 2020, we were clustered with our most relevant competitors in the mid teens. While these same competitors remain in the mid teens, we've grown well into the mid-20s. A significant leap in recognition in the minds of our consumers. We're converting that awareness into more households who buy Vital Farms. In 2024, we grew our household penetration to just over 14,000,000 We added 2,300,000 households to our consumer base, a 20% increase year over year. This brings household penetration to 10.7%. A 1.9 percentage point increase from 2023. We're seeing an acceleration in the consumer brand preference for Vital Farms. This is showing up in key metrics for measuring consumer buying behavior. Our buy rates the purchase frequency multiplied by the spend per trip, reached $36.06 a 12% increase year over year. Our purchase frequency, the average number of trips per household reached 3.7 up 6% versus 2023. Our spend per trip reached $9.84 up 5% from 2023. Finally, our percentage of heavy buyers consumer and two buyers at least eight times a year reached 13%. Up two percentage points versus a year ago. We see significant runway ahead as we make focused marketing investments Finally, I'd like to finish today with a quick word on our newly launched brand campaign titled Good Eggs, No Shortcuts.

Our new campaign celebrates the Vital Firm's commitment to raising the standards and always choosing the right way over the easy way. It leverages documentary style interviews with four real life Vital farms The interviews capture their humorous and authentic responses always highlighting their commitment to animal welfare. We think that Goodx, No Shortcuts is another illustration of Vitalfirm's commitment to being bullshit free and doing right by our stakeholders. Even if that means taking a longer harder road. We live those values every day. We have rolled out good ads, no shortcuts, across linear and streaming television and online and social platforms including Netflix, Hulu, Disney plus, Reddit, Meta, Snapchat, Spotify, and YouTube. We're incredibly proud of this campaign and I strongly encourage you to check it out. With that, I'll pass it over to Tilo. Teela?

Thank you, Catherine. Hello, everyone, and thank you for joining us today.

I will now review our financial results for the year ended 12/29/2024. Then provide details on our new guidance for fiscal year twenty twenty five. 2024 was another great year for Vital Farms. Our net revenue rose 28.5% to $606,300,000 Our fourth quarter revenue rose 22.2% on reported terms rose 30% accounting for the extra week in the fourth quarter of twenty twenty three. In full year 2024, we grew volume 21.8% with additional pricemix benefits driven mostly by our fast growing organic portfolio. Gross profit for the year rose to $229,900,000 or 37.9% of net revenue compared to $162,300,000 or 34.4% of net revenue last year.

Our 2024 adjusted EBITDA grew 79.2% to $86,700,000 or 14.3% of net revenue Our adjusted EBITDA margin rose four zero five basis points versus last year. Our gross profit growth was driven by volume and revenue expansion, boosted by the positive impact of scale and operational efficiencies. Lower conventional commodity and diesel costs contributed to higher margins in the fourth quarter and the full year. This was partially offset by an increase in promotions [indiscernible] maintenance related expenses and overhead costs all intended to keep pace with our growth. SG and A expenses for 2024 were $133,900,000 or 22.1% revenue compared to $101,700,000 or 21.6% of net revenue in 2023. The increase in SG and A as a percentage of net sales was primarily due to marketing related expenses stock based compensation, higher employee headcount, legal and professional service expenses and technology and software related expenses. Marketing expenses as a percentage of sales were 5.3% for 2024. This compares to 5% for 2023 and three point seven percent for 2022. These costs were in line with our expectations and are consistent with our communication to invest in the business in the second half of the year. In 2024, shipping and distribution costs rose in absolute terms but were less as a percentage of net sales.

Shipping and distribution expenses rose to $32,400,000 in the year or 5.3% of net revenue compared to $27,300,000 or 5.8% of net revenue in 02/2023. The increase in shipping and distribution expense was driven by higher sales volumes, partially offset by favorable line haul and fuel rates. Net income for 2024 was $53,400,000 or $1.18 per diluted share compared to $25,600,000 or $0.59 per diluted share [indiscernible] Finally, we had a strong balance sheet performance for the year. Our cash cash equivalents and investment securities on December 29, 2024 stood at $160,300,000 an increase of $43,500,000 from the end of twenty twenty three. We had no debt outstanding. While a great deal of the market's focus has been on our production capacity, I want to quickly highlight how effective our sales and marketing efforts have been in building our brands with consumers.

We believe our ability to consistently build Shellac distribution while increasing velocity speaks to the power of our brand, and our connection with our consumers. We believe it is important for the market to be able to judge our performance on these key metrics. We understand that syndicated scanner data is highly valuable in helping analyze our business from the outside looking in. We are also aware that some data sets in the market are weighted in the manner doesn't fully capture the trends of our business. Additionally, we see instances when retailer scanner data captures retailer price increases that do not benefit us. Creating a mismatch between retail sales and our shipment results. Going forward, we will be providing additional data in our earnings presentation about our commercial performance. To create a consistent data set for ourselves, and for the market, we will be using SIRCONA MUDO plus data both internally and when we speak externally about certain metrics within our business. Especially retail distribution and consumer buying pattern. We believe Moola plus gives us actionable insights a deep data set, a comprehensive view of private label trends, and a long data history to draw upon. [indiscernible] includes food, drug and mass channels, Our total distribution points in 2024 decreased 3% to 189 from 195.

However, this decline in TDPs was driven by our discontinuation of top butter, which was phased out during our supply changeover to Irish sourcing late in 2023. Our Shell AG TDPs increased 7% from 119 to 127. Additionally, butter distribution quickly rebounded After rebasing in the first quarter of twenty twenty four, weather TDPs increased 22% to 54 from 44.

So While TDPs were ex grew strongly, and butter rebounded throughout the year, we saw great improvements in our sales philosophy meaning our sales per store per week throughout 2024.

Our velocity climbed nearly 40% from 124 in 2023 to $171 at the end of twenty twenty four. But some was driven by retailer initiated price increases. Now looking ahead to fiscal year twenty twenty five, we are expecting net revenue of at least $740,000,000 or at least 22% growth was versus 2024. Adjusted EBITDA of at least $100,000,000 or at least 15% growth and CapEx of $50,000,000 to $60,000,000 I want to provide a few additional points on the guidance. For the 2025 sales cadence, we expect Q1 to be our slowest growth quarter of the year for volume and net revenue growth due to supply constraints. After Q1, we expect volumes to accelerate as supply improves. As farms come online, our capacity will increase and we expect volume growth trends to accelerate with each passing quarter. Our 2025 adjusted EBITDA guidance implies a decline in margin for the year. As you model the year, please remember that in the first half of twenty twenty four, we had high margins driven by exceptional operations at ECS. As we highlighted at the time, we do not expect this performance to repeat resulting in a challenging comparison for the first half of twenty twenty five.

Compared to the run rate in the second half of twenty twenty four, we anticipate the adjusted EBITDA margin to improve in 2025. Our CapEx guidance is materially higher than our 2024 CapEx of $28,400,000 This new level of spending reflects investments in our new production line at DCS the groundbreaking and start of construction for our new facility the construction of Accelerator Farms, and our internal digital transformation project. With a new facility we expect elevated CapEx spending over the next few years with the bulk of this in 2025. And especially 2026. [indiscernible] In 2025, we plan to fund new facility construction and all other projects with existing cash and operating cash flow. Our projection is that each CapEx dollar dedicated to our new facility will generate more than $5 of annual revenue capacity which we consider a strong return. As always, we will continue to evaluate and monitor our capital at a and we will provide updates as necessary. Our long term guidance remains unchanged. Are targeting $1,000,000,000 of net revenue by 2027 with a gross margin of at least 35% and an EBITDA margin of 12% to 14%. This is an exciting time at Vital Farms.

We have committed consumers who continue to choose us We continue to add family farms and we remain focused on driving greater retail penetration and raising brand awareness to deliver our eggs and butter to more and more households each passing year. We thank you for your time and interest in BioPharm today and for the confidence that you have placed in us with your investment. With that, we're now happy to take your questions.

Your first question comes from the line of Rob Dickerson with Jefferies. Please go ahead.

Great. Thanks so much. Good quarter, good guide.

So I guess just a couple of questions about the cadence for the year, because clearly that's topical. I think you said in the prepared remarks that some of the farms that you had added in '24, I assume kind of back in kind of Q2 twenty twenty four where where are now producing some eggs for sale for you. While at the same time, hearing and realized that You have capacity constraints and Q1 volumes will be a little bit lighter. I think you said modest step down in growth relative to kind of what you normally do. So could two parts of question. One is just like how many new farms, let's just say, are now up and running already right, out of the one jet of last year selling eggs, And then when you speak to that kind of modest step down in growth in Q1, I guess relative to like the 22% for the year, is that like [indiscernible] is that just a little bit modest because, also seems like there's some price mix coming through. So a lot in there, but want to be comprehensive. Thank you.

I've got Good question and very pertinent question, I think. Of the farms that we signed up in the first half last year, which was roughly 50 pharmacist. So More than half of them are operating at this So we do have volume growth year over year. But keep in mind that last year, we were still sitting on very high equity inventory, right? So the volume that we had last year We were getting the farm plus we were drawing down inventory. So the year over year farm number comparison is not a particularly strong indicator of what our growth potential is. In the short term in the quarter. And so, I think your question about the is a moderate relative to our own performance, moderate relative to the year. It is moderate growth. Keep in mind, we have over the last two years back first quarter twenty three we grew 55% revenue first quarter twenty twenty four. We grew revenue 24% It will be because we have the strong mapping first quarter this year will be meaningfully below last year's first quarter number. And And that's why I'm saying don't look the year over year farm growth it really is about how much did we pull out of inventory last year versus what we can pull out of inventory right now, which is really nothing.

Okay, great. And then that's extremely helpful. And then it does sound like the actual volume number in Q1 year over year?

Would still be positive and second piece where it sounds like there should still be some [indiscernible] Yes. We are still expecting to grow volume this quarter. And similar to prior quarters, we do get some price mix benefits. We continue to have that mix shift towards organic. Plus then compared to first quarter last year, given that we don't have enough [indiscernible] Your next question comes from the line of Robert Moskow with TD Cohen.

Hi.

Tilo and Russell, thanks.

Your pricemix is up like 14% in fourth quarter Is that a good proxy for how you think the year might play out for 2025? [indiscernible] the consumer is really getting hammered by these high egg prices and I'm sure that creates some some difficult decision making for you all. Have you made any decisions internally on what to do with your pricing and just from a list standpoint, And then a quick follow-up. Yes. Rob, just to clarify, in our own reported data, pricemix year over year is actually up only half of the number you just quoted, the 14%. We do have a discrepancy to scanner data right now, simply because some retailers seem to be taking price on our products. It doesn't flow through to us. But our price mix this year sorry, fourth quarter was only about 7% or so And promotional reduction played into that. Mix of played into that. First quarter will be somewhere in the similar ballpark based on what we seeing right now. But I'll let Russell talk about longer term pricing ideas.

Yes. Rob, as you'll recall, when we first started seeing commodity prices go up in 2021, 2022, we don't act on a cost plus price based the way that I think a lot of the industry does. Pricing to us is very much part of that marketing mix. And we're constantly evaluating the trade offs between the appropriate kind of margin structure that we're looking for at any given time and the growth rate that we continue to want to see. So I can't commit to a certain cadence of of price changes if any, but I can't say that we're not currently planning on price being a meaningful contributor to our overall Okay. That's helpful.

And I'll follow-up on the math later. I think we must be treating the fifty third week differently and that's how we got our number for pricemix.

My follow-up is, eggs are in the headlines of news like every day you go to the shelves, you can't find anything, you can't even find Vital Farms.

In your like connections with consumers that you get, like how is that impacting the Vital Farms brand at all, positively or negatively?

Yes, Rob, thank you for asking about that. It's certainly on the minds of consumers and they're thinking about can I get my eggs, what we're seeing is continued brand loyalty? We know that availability is on people's minds When they can find us, they're buying us and they are looking at multiple stores for us. We're still seeing our brand loyalty stay really strong. And In fact, They can't find us. They're switching right now to other breakfast products even over other brands in many cases. So we want to be on shelf. We want to be available to everyone. I believe the brand trust that we go into a situation like this with will also help us get out very quickly and [indiscernible] Next question comes from the line of Ben Klee with Lake Street Capital Markets. Please go ahead.

All right. Thanks for taking my questions and congratulations on a good end of the year here. A couple of questions on the $25,000,000 outlook. First of all, regarding the The introduction of the Ag grading machinery that you talked about in ECS. Do you expect that that will be a pretty seamless construction and integration? Or do you think there's going to be any time where capacity comes offline for a matter of days or weeks as you are introducing that? Hey, Ben.

That's a terrific question. I actually was up at ECS this week actually viewing the work already underway to enable that expansion. And I'm so impressed with the leadership team there, many of whom have joined us in the last year The way that they're proactively addressing the layout of that facility, flow of goods in that facility and the way that we will handle outbound freight from that expanded capacity I anticipate while nothing is nothing is totally predictable, I would say that we're doing everything I could imagine doing to make sure that there's a smooth transition to this added capacity and that we don't skip a beat. Okay.

That's great. And then current [indiscernible] this winter. Russell, you noted in your prepared remarks that on a TTM basis, you've only had one outbreak on your several hundred farm network. It doesn't look like any of the recent outbreaks in the last few months could have possibly been from one of your farms. Did that outbreak happen in the prior prior to the kind of start of of this one or is that a event from the last several months?

Yes, Ben, great question. We've had zero outbreaks in 2025 against the backdrop of nearly 30,000,000 birds as far as I know being depopulated just since the beginning of the year. It's It's absolutely devastating and certainly a big driver of the costs we're seeing in the marketplace. But none of it's happening on our watch or those of our wonderful a network of small family farmers. Your next question comes from the line of John Anderson with William Blair.

Hey, good morning, everybody. Thanks for the questions and congrats on a strong year. I wonder if we're all sold and one for Tilo.

Russell, just sticking with the AI line of questioning, Understand that you work with this close network of of many family farms that mitigates risk in your supply chain in and of itself, but it seems like The metrics suggest that just your farmers farms are doing a better job of kind of staying at staying away from this. Is there anything that use to help kind of explain that is a question I get a lot like [indiscernible] Lytle Farms perhaps as affected even on a like for like basis, relative to what we're seeing in other Other operations. Thanks. Yes, I appreciate the question. And it is true on a like for like basis, over the last since this latest outbreak began in 2022, think we've had a total of four, maybe five incidents, which represents less than half, it's four, Tila just confirmed for me less than one half of one percent of all of our production against the backdrop of well over 12% maybe approaching 15%, 20%. Of all the birds in America. So something different is happening on our farm. I honestly don't go to anybody else's farm. So I can't tell you what's happening there, but I did find it very interesting to read our new Secretary of Agriculture's Op Ed in the Wall Street Journal where she outlined the Trump administration's approach to fighting AIDS influenza.

And I'm so thankful that this is a focus because obviously we're all about animal welfare and to see so many frankly, hundreds of millions of birds being killed because of this outbreak is hard for us to take and I know it's hard on all those farmers whose birds are being depopulated. One thing I found very interesting in that Op Ed was that the industry is allocating $500,000,000 to fund repairs and improvements in biosecurity on those farms, including fixing the actual physical structure of the farm to prevent pests from entering them. And I can tell you, we spend an awful lot of time on our own farms and I've never seen a farm in our network that had a problem with holes in the walls allowing pest And so it does make me wonder, [indiscernible] We may be a little more vigilant in making sure that the physical infrastructure on our small family farms is intact. And is doing its part in maintaining biosecurity. It's a shame I think, that the government has to intercede to fix farms, but if that's what it takes to protect this nation's birds then then that's what it takes. I'd like to think that American farmers are better than that.

That's helpful. Thank you. And for Tilo, just to follow-up on the 25 outlook.

You've stepped in stepping up marketing both in dollars and the rate. Relative to sales, are at this kind of mid-five level [indiscernible] Do you see that as a a good sustainable level or opportunity to continue to take that up over time. And then second part to that, I know you incurred some maintenance costs throughout 2024.

In order to continue to push capacity bounds on ECS. Do you anticipate a similar level of maintenance costs in 2025, lower, higher, just kind of a general trend around that? Thanks.

Yes. Good question, John. Think on marketing, in that 5% to 6% of net sales range, think that's where we feel comfortable right now. I'm sure if I gave Katherine the amount of money she would find very, very smart things to do with it. But we are also we want to build brand awareness in very measured way because we need to take a very measured way to build our supply, right? [indiscernible] Don't want to get ahead of our skis. And so therefore, planning our marketing spend and building the brand awareness in a very deliberate fashion. Is part of not getting ahead of our skis. So the level of where we are right now, I think that's a level where we are very comfortable. And Catherine in her prepared remarks talked about the gains in brand awareness that we we got from it. I think the spending that we're doing is showing the results we expected to do On the maintenance, I think we learned an important lesson last year that we need to do maintenance on a very continuous basis that we need to focus on preventative maintenance rather than reactive maintenance. And given the supply constraints that we have right now, they gave us a bit of time to do a bit more maintenance than we or do a bit more in-depth maintenance than we have done otherwise.

And so from a maintenance perspective, I think we are in a really good shape right now. We Russell had just mentioned a new leadership that we have in our operations. And I think they're bringing very disciplined view to doing maintenance on time on schedule, on budget. So that we don't run into the situation that we ran into last year, where for the first half of the year, we ran full throttle 20 fourseven for six months and then we paid the price for it in the third quarter. So that's something that we'll avoid this year. And with that maintenance, I think overall, over the course of the year, we'll be will be at the same level that we had last year. But just spread out across the entire year so that we don't have peaks and valleys. Thanks, Tila. Thanks, Russell. Congrats on a great quarter and a guidance. I have two questions. First is on the guidance. Can you help us on the factors that impact like your gross margin profile for 2025, any callouts that you had last year? It seems like commodity is staying relatively stable, pricing maybe favorable with less promotions. So just any puts and takes on the on the gross margin outlook for 2025 would be helpful.

Yes, it's Ryan. First of all, welcome to the On gross margin, cadence, I think first half last year, and I'll just mentioned it, right, we really had a exceptional operations at ECS. That was combined with falling commodity prices and with pricing that we took on the organic portfolio at the beginning of the year. And that led to really healthy gross margin first half of the year, well above what our long term targets are. That won't repeat this year, right? We are not anticipating that ECS will run as exceptionally as it did last year. For example, we've already had a few days of interruptions at ECS because of weather. Missouri got, I showed several inches of snow and so trucks just couldn't pull up to ECS. Our crew couldn't come to ECS safely. And so that impacted operations. It's also when you're running supply constraint, scheduling scheduling production just becomes less efficient. And so that is impacting gross margin as well at the moment. And then lastly, commodity cost sequentially, corn prices have actually picked up quite a bit since the low in November or December. I think they're up 18% from the bottom in Q4.

That was not impacting what we have to pay farmers in Q2. We are adjusting our the pay to farmers one quarter in arrears. And so that will also then impact gross margin in the second quarter. So I think those are some of the the most relevant puts and takes as we think about the year. It's really a on a comparison basis, Year over year, the first half this year will probably look a bit different from what we had last year. Second half much more in line with what we had last year.

Year. That's very helpful. Thank you so much. And I have a question on accelerator farms. It seems like the first farm is going to be up and running this year. Can you help us a little bit on what is the expectation there? How big is the farm? Anything different you are doing with the farm than your typical farm? Any lab testing facility, any color you can give on that upcoming opening of the first farm And then you almost have over 1,000 acres of farmland over there. So just curious on the thought process on how the build out happens over the next couple of quarters So that would be helpful. Thank you. Thanks so much for the question about our accelerator farms. This is a real point of pride for us. I'm so excited about our ability to invest in the future of our farming and invest in the success of our small family farmers. This really is in a sense our first R and D lab. And the R and D that we want to do is trying out new equipment that's available from the best mines around animal welfare, around the productivity of of hens in service of helping our farmers be more successful in helping improve the lives of our birds and frankly the quality of our eggs for our consumers.

So, you're absolutely right. This is a big deal for us. It will not be a substantial amount of new eggs to the system because we're building 10 to 15 new farms we've said no more than low single digit percent of total production. So it's not about adding substantial volume it's about giving us a place where we can try new ways to improve the productivity of our farms without asking our existing farmers to make a capital investments or take risks on experiments that may or may not immediately provide them with better outcomes. I'm so thrilled. In fact, small team of us will be heading to Europe next month to visit with equipment manufacturers and innovators who are really focused on the very best of outdoor access farming models and equipment, so that we can bring back the very best of their thinking to our farms and farmers. And stay tuned, it's going to be terrific.

Thank you and good luck. Pass it on. Thank you.

Next question comes from the line of Matt Smith with Stifel. Please go ahead. Good morning. Thank you for taking my question. Russell, just a question, a follow-up question around the [indiscernible] Products. Where that's occurring? Are you seeing retailers take prices higher kind of across the category for brands including Vital that that have been less sensitive to more regular price increases. And how do you think that plays out from here? It would seem like one hand, you could argue Vitals leaving some pricing on the table if the retailer is capturing it, but On the other hand, it may be more near term related to the supplydemand imbalance and retailers trying to balance how much eggs are being sold through?

Yes, I appreciate the question. And I got to say, I'm not we're certainly not trying to to try to explain the macro environment for egg prices with the comments. All we're saying is that in the scan data, we are seeing a disconnect between the contribution pricing is making to our sales growth and what we're seeing in our own sales data to our retail partners. I have no insight or a commentary on their pricing approach. That's totally part of their strategy. Or in terms of whether they're doing it across lots of products or just on ours. So we're just trying to bring clarity to the data you're using to understand our growth. Not commenting on why we think egg prices are where they are.

Understood. And I think second question, a follow-up to the we've talked a lot about avian influenza on supply demand, but wanted to ask if you're seeing an avian influenza impact on the timeline or cost for farms coming online, if there's been any disruption to pulp placement or anything along those lines. It seems like that's not the case given you're still seeing kind of a nine month timeline for those new farms coming on board. Yes, it's interesting. And again, YouTube exactly where the differences occur, but we're not seeing an impact to the hatcheries that produce the chicks for our farms. We're not seeing an impact to the pull it farms that our farmers use to source their birds I'm sure a lot of it is luck. We've have been very lucky, knock on wood, But no, we're not seeing any material change to our ability to bring lots of new farms online to support our growing demand.

Thanks, Russell. That's all. Your next question comes from the line of Eric Neloyers with Craig Hallum Capital Group. Please go ahead.

Great. Thank you for taking my question and congrats on the strong results. My question relates to the new production line coming online in Q4.

Should we expect that to deliver kind of a step function impact to revenues or will that be more gradual as you sort of methodically ramp production Of course, that coincides with many of these family farms coming online. So understood Q4 will see growth acceleration either way, just kind of wondering about plans for utilization on day one, so to speak? [indiscernible] to you as well, welcome to the Bonafounds call. I think you've the your question, there's like a two part answer to it, right? It will bring a step function in our capacity, but it will not necessarily bring a step function in our revenue. And reason for that is we need the X to put on the machine. And our egg supply that is a it's a steady relatively predictable growth rate. And so as the eggs are coming off the farm, that is really determining how much of a step function we'll have. I think if you look at our historic data, you won't see many step functions. Maybe the first few months of COVID were one of the rare exceptions, but there was four extraordinary circumstances. Really, the objective that we have is to to grow the business at a very healthy, high growth rate but very steady without many step functions in it.

That makes sense. Very helpful. My follow-up is on the pace of Family Farm additions for 2025.

A nice growth of 125 Family Farms last year.

How should we think about that pace for 2025? And then just in terms of the accelerator farms, understanding that will remain a very small percentage of overall production, but how might that impact gross margins or OpEx this year? Yes, the farm recruiting will have to continue at a very healthy clip. I'm not going to sit here and say it's going to be X number of farms this year and X number of farms the year after. If you do the math for us to get from the guidance that we have and the numbers that we have in 2024 to get to the long term guidance of $1,000,000,000 by 2027. We need to keep adding farms And once the new facility comes online, at the beginning of 2027, we need to have more farms than that geographic area as well, simply because it makes for more efficient shipping. Right? So farm recruiting will continue. It will continue at a relatively similar clip to what we've had so far. But I'm not going to yet talk about how how many farms will they have this year. Accelerator farms, what we have said in the past is that we are looking at I think we've called it a handful of accelerator farms, call it fifteen, twenty farms or so.

That number is not really supposed to increase, right? We want have, I think Russell just called it, our R and D lab for farm operations We want to have a meaningful number of farms to try a few things in parallel, maybe do some AB testing but not to really supplement our our volume coming off our own farms, right? So when you think about even at the high end 20 farms out of four twenty five family owned farms right now it's a very small number. And as we keep growing the family farm network, as a percentage of our total supply, that will continue to [indiscernible] Cost us a few dollars extra, The impact on gross margin from that is really negligible. And if anything, in the long term, it might actually lead to margin improvement because what we are trying to do is, for example, get more production out of the hands that we have and that ultimately will lead to lower costs in the long term. Very helpful. Thank you for taking my questions.

I will turn the call back to Anthony Bucalo for closing remarks. You everyone for your support of Vital Farms.

Have a good day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.