Vital Farms, Inc. (NASDAQ:VITL) Q4 2022 Earnings Call Transcript March 9, 2023
Operator: Good day and thank you for standing by. Welcome to Vital Farms Incorporated Fourth Quarter 2022 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. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Siler, Vice President of Investor Relations. Please, go ahead.
Matt Siler: Thank you. Good morning. And welcome to Vital Farms fourth quarter and fiscal year 2022 earnings conference call and webcast. I am joined on today’s call by Russell Diez-Canseco, President and Chief Executive Officer; Bo Meissner, Chief Financial Officer; and Kathryn McKeon, our Chief Marketing Officer. By now everyone should have accessed to the company’s fourth quarter and fiscal year 2022 earnings press release issued this morning. This is available on the Investor Relations section of the Vital Farms website at investors.vitalfarms.com. During 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 year ended December 25, 2022, which was filed with the SEC earlier today and other filings with the SEC for a detailed discussion of the risks that could cause the 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.
Russell Diez-Canseco: Thanks, Matt. Good morning and thanks, everyone, for your time today. As you’d expect on our fourth quarter call, I’m going to start by sharing updates across the business and how we delivered on our commitments to all of our stakeholders. Kathryn will speak to what makes our brand unique and why it continues to resonate with consumers. Bo will then go into more depth on our quarterly and annual financial results before we take your questions. First, let me turn to our fourth quarter financial results. In the fourth quarter, we achieved $110.1 million in net revenue. This is the highest quarterly result in our company’s history. It reflects a 42.4% increase from the prior year period. Our gross margin expanded almost 500 basis points to 30.3% and our adjusted EBITDA was $6.9 million, up $9 million from last year.
Our household penetration reached a new high at 10.5 million households, which is up 45% over the prior year. Looking at the 13 weeks ended December 25, 2022, the egg category experienced significant retail dollar growth of over 70%, due mostly to price inflation of conventional eggs. Significant changes in pricing over the past six months masked the underlying industry trends. And I believe, given this backdrop, it makes more sense to focus on unit volume when judging overall growth. Despite our portfolio-wide increase in May, we grew our retail volume significantly at over 26% over the 13 weeks ended December 25, 2022, well ahead of the shell egg category, which experienced flat volume growth of 0.1% over the same time period. Looking back over the past four years, Vital Farms rate of volume growth at retail has outpaced the egg category by over 30% on average.
We maintained this level of volume growth, through various changes in prices across the category over the same timeframe, all while maintaining our premium price point. While others may run into challenges caused by certain macro factors including supply chain issues during the pandemic and more recently, the negative impact of Avian influenza on the U.S. egg supply. Vital Farms continues to execute. Given our steady performance during these dynamic economic situations, we’re confident in our plan to maintain strong volume growth relative to the industry, again in 2023. Now, our long-term business model, our focus remains on driving sustainable, consistent results overtime. We’ve been intentional about the choices we’ve made over the past several quarters to navigate the impacts of global forces like inflation.
A testament to this way of operating is that, on an annual basis, our net revenue growth CAGR is 37%, dating all the way back to 2014. Another proof point of our strategy is improvement in our profitability. To reiterate, our gross margin was about 17% in 2014, relative to more recent performance in the low-to-mid-30s range. Additionally, our adjusted EBITDA margin moved from flat-to-low single digits to mid-to-high single digits over this timeframe. While there are short-term pressures from time to time, as we have experienced recently, we remain focused on profitable growth over the long-term. Next, I’m going to turn to our robust supply chain. We continue to strengthen our supply chain, which is a critical component for meeting our growth objectives.
Last year’s expansion of Egg Central Station, our world-class egg washing and packing facility, significantly increased our capacity and puts us in a position to support over $700 million in annual revenue from egg access. We remain confident in our growth trajectory, and we are finalizing site selection on the next Egg Central Station facility, which we believe can take the revenue capacity of our egg business beyond $700 million. As always, we will continue to proactively eliminate bottlenecks in support of our long-term growth plans in service of our primary goal, to further grow Vital Farms household penetration across the United States. We continue to add new family farms to our network of over 300, so that we can achieve our long-term growth objectives.
Our strong reputation in the farm community which we built by working directly with our farmers toward long-term mutually beneficial outcomes, continues to create a pipeline of new farmers, who want to work with Vital Farms. Next, I’d like to call your attention to two recent announcements related to our foodservice business, that I believe illustrate how we partner with brands who share our values and how we are improving our distribution capabilities across the country. We continue to see strong potential in this segment of our business, and these new partnerships represent important milestones on our journey. We recently teamed up with True Food Kitchen, a restaurant and lifestyle brand with 43 locations across the United States, to serve our pasture-raised eggs on their menus, alongside other intentionally sourced ingredients.
They’re an award-winning restaurant brand and pioneer of wellness-driven dining, that shares our values for improving the lives of people, animals in the planet through food. True Food Kitchen sources intentionally from some of the world’s most responsible and sustainable farmers and producers. We’ve also begun a new relationship with Dot Foods, the largest food industry redistribution company in North America to make our eggs accessible to its network of 5,200 distributors across all 50 states. This marks two firsts for us. We’re the first egg brand Dot Foods has ever stocked and redistributed nationally, and this is the first time our pasture raised eggs are available for national food service distribution. Dot Foods enables suppliers like us to ship to distributors in less than truckload quantities every week, and they provide a bridge between the big distributors and suppliers.
Dot Foods redistribution model will help us reach even more foodservice operators from high-volume brunch spot to smaller regional chains and family-owned restaurants. Next, I’ll share an ESG update. As some of you may have seen, we just published our 2023 impact report. This year’s report recognizes the progress we’ve made embedding impact into our business and define short- and medium-term goals that are grounded in our purpose to improve the lives of people, animals and the planet through food. We see the annual reporting process as an opportunity to illustrate the impact that has always been central to the way we do business. We’re aiming to hit three notable goals over the next five years. First, we’re planning to achieve zero waste to landfill at Ag Central Station by the end of 2023.
Next, we’re working to scale regenerative agriculture practices to all farmers in our network by 2026. And finally, we’re aiming to reduce carbon intensity in our operations by 25% by 2027. Our ESG strategy, like all things at Vital Farms, has grown out of our commitment to creating sustainable positive outcomes for all of our stakeholders. This year’s report calls out some of the important progress we’ve made. And while I encourage everyone to read the report, I’ll call out a few highlights here. We’ve aligned our reporting framework with the task force on climate-related financial disclosures to increase transparency. With advanced diversity, equity and inclusion in the farming community through Vital Farms first inclusive farmer open-house.
And we’ve taken other steps outlined in the report to recoup to prospective farmers from communities that have historically been marginalized in agriculture. We thoughtfully and responsibly doubled our processing capacity this year at Egg Central Station, increasing our water recycling capabilities and adding solar panels. Egg Central Station was awarded Food Processing Magazine’s 2022 Green Plant of the Year for this work. We’re advancing the circular economy with 99% of our products coming in recyclable packaging and introduce a lower impact hybrid carton, transitioning our 18-count away from PET. We fostered a gender-balanced Board of Directors, with women chairing each of our standing board committees and invested in strong female voices on our gender balanced senior leadership team.
We value diverse perspectives, which we believe help drive a more effective organization. We will remain thoughtful in each of our discussions across ESG to ensure they remain financially beneficial, while driving the desired impact for each stakeholder over time. I’ll now turn the call over to Kathryn to discuss some of what makes our brand unique, as well as the progress we’ve made against one of our key goals this past year.
Kathryn McKeon: Thank you, Russell, and thank you for the opportunity to talk to the work we’re doing to grow the Vital Farms brand. I consider it a genuine privilege to tell the Vital Farms story alongside the incredible group of people on the marketing team. As an organization, our thoughtful care for stakeholders is the source of rich and meaningful content, and I’m truly honored to tell the story. Our brand is an extension of Vital Farms purpose. Consumers choose us, because they believe we’re backing up our commitment to improve the lives of people, animals and the planet through a foot. Our major focus in 2022 was investing our marketing dollars to drive increased brand awareness and we plan to further expand the number of consumers aware of Vital Farms moving forward or keeping it Bullshit-Free advertising and robust integrated campaign across touch points throughout the consumer journey, drove a 40% increase in our brand awareness in 2022.
For us, increased awareness leads to increased consideration and consideration leads to purchase. Amplifying awareness played a direct role in the expansion we saw in household penetration last year. In fact, we saw over 45% year-over-year growth in household penetration in 2022. The Vital Farms brand is now in 10.5 million US households. This speaks to our ability to reach consumers with our uniquely compelling message, and it’s reflected in the improvement in key metrics, including our brand awareness, as well as brand trust. As we look ahead, we are energized by the opportunity to continue to grow household penetration and brand awareness. A key to achieving our long-term potential involves our continued marketing efforts, which we believe contributes to our sales growth.
We look forward to keeping it Bullshit-Free free and creating more brand moments by joining culturally relevant conversations, like we recently did with our Valentine’s Day campaign. Consumers are attracted to our brand and stay with us, because we connect with them through many creative touch points. We do not just market to our core consumers. We build lasting relationships with them. Thanks, everyone, for your time today. I’ll now turn the call back over to Russell.
Russell Diez-Canseco: Thanks, Kathryn. As many of you are aware, about a month ago, we announced that Thilo Wrede will be joining us as our new Chief Financial Officer. I’m looking forward to his arrival in the coming weeks. Thilo brings a disciplined leadership approach and a proven ability to create long-term value that will help us continue to deliver for all of our stakeholders. His experience across world-class consumer packaged goods companies and as a former sell-side analyst will serve us well. He will lead Vital Farms accounting, treasury, financial planning and analysis, information technology and investor relations functions. And I look forward to many of you on the call having the opportunity to speak or meet with them soon.
As I’ll turn the call over to Bo to discuss our fourth quarter and fiscal year results in greater detail, I’d like to take some time to thank him again for his contributions to Vital Farms. Bo helped lead Vital Farms through an incredible growth period and its compassionate leadership style has made a lasting difference here. Bo led the creation of our post-IPO finance, accounting, IT and Investor Relations organizations. And he has played an important role, setting us up for success as a public company. In several ways, Bo is leading Vital Farms better than he founded. Bo, thanks for everything you’ve contributed to Vital Farms. I hope you enjoy the time traveling and playing golf with your wonderful family.
Bo Meissner: Thanks for the kind words, Russell. Hello, everyone, and thank you for joining us today. I will review our financial results for the fourth quarter and fiscal year ended December 25, 2022. I will then provide our guidance for fiscal year 2023. As Russell mentioned, we had another record quarter with net revenue of $110.1 million, an increase of 42.2% compared to the prior year period, driven by volume growth of 27%. Growth in net revenue in the fourth quarter was due to continued growth in egg-related sales, driven by strong volume increases at our customers, as well as distribution gains at both new and existing retail partners. Gross profit for the fourth quarter of 2022 was $33.3 million or 30.3% of net revenue, compared to $19.8 million or 25.6% of net revenue for the fourth quarter of 2021.
The change in gross profit was primarily driven by higher sales. As to the change in gross margin, increased pricing across our entire portfolio, offset some headwinds, including an increase in input costs in both eggs and butter, elevated packaging costs and increased payments to our farmers. We saw expense leverage on both SG&A and shipping and distribution during the period. SG&A expenses for the fourth quarter were $22 million or 20% of net revenues, compared to $15.8 million or 20.4% of net revenues 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 higher marketing expenses. Shipping and distribution expenses in the fourth quarter were $7.8 million or 7.1% of net revenue relative to $8.2 million or 10.6% of net revenue in the fourth quarter of 2021.
This was driven by a decline in line haul rates and internal operational efficiency. Adjusted EBITDA for the fourth quarter was $6.9 million or 6.3% of net revenue, compared to a loss of $2 million for the fourth quarter of 2021. Now turning to our fiscal year 2022 results. Net revenue for the year was $362.1 million, an increase of 38.8% compared to fiscal year 2021, driven by volume growth of almost 29% and some benefit from pricing. The growth in net revenue was due to continued growth in ag-related sales, driven by strong volume increases at our customers, as well as distribution gains at both new and existing retail partners. Gross profit for the year was $109.4 million or 30.2% of net revenue, compared to $82.9 million or 31.8% of net revenue for fiscal year 2021.
The change in gross profit was primarily driven by higher sales. As to the change in gross margin, increased pricing across our entire portfolio offset some headwinds, including an increase in input costs for both eggs and butter, higher packaging costs and increased transportation costs. SG&A expenses for the year were $77.2 million or 21.3% of net revenue compared to $57.9 million or 22.2% of net revenues in fiscal year 2021. The increase in SG&A was primarily driven by higher employee related costs as we grew headcount to support our continued growth, as well as higher marketing spend. Shipping and distribution expenses for the year were $30.1 million or 8.3% of net revenue relative to $25 million or 9.6% of net revenue in fiscal year 2021, driven by higher sales volumes and freight rates.
This was partially offset by a decline in line-haul rates and internal operational efficiency. Adjusted EBITDA for the fiscal year 2022 was $16.2 million or 4.5% of net revenue, compared to $8 million or 3.1% of net revenue for fiscal year 2021. Next, an update on our capital structure. As of December 25, 2022, we had a total balance of cash and cash equivalents and investment securities of $78.7 million, and we have no debt outstanding. A few comments on both inventory and accounts receivable. Our inventory grew this past year to support our continued growth as we normalized our inventory levels on hand, particularly in eggs. As for accounts receivable, the majority of the increase is a result of the significant growth in our business. Finally, our cash balance was impacted by our increased payments to farmers, which began in earnest during the fourth quarter.
As we look ahead to fiscal 2023, we are providing guidance of net revenue of more than $450 million. On adjusted EBITDA, we are providing guidance for adjusted EBITDA of more than $30 million in fiscal year 2023. As for the cadence in 2023, we expect stronger year-over-year net revenue growth in the first half of the year, primarily due to the carryover impact of our May 2022 pricing increase. Additionally, we expect gross margins in the first half of the year will be stronger than the second half due to our expectation of fewer promotions and elevated breakthrough prices due to industry supply shortages. We are planning fiscal year 2023 capital expenditures of between $25 million and $30 million. To provide the context on this figure, relative to our expenditures in 2022 of about $10 million, our 2023 figure includes about $7 million of previously planned supply chain spend that was delayed due to some vendor constraints last year as well as some costs for the initial work on our next egg packing facility.
As I conclude, I want to reiterate what a pleasure it has been serving as the CFO of Vital Farms. I’m excited about Thilo’s experience and what he will bring to the organization. And I look forward to working with him through July as we navigate this transition period smoothly. I’m confident that the company is well-positioned to meet all its financial objectives as Vital Farm continues its pursuit of expanding household penetration across the US. Thanks for your time and interest today. And with that, we’ll now be happy to take your questions.
Q&A Session
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Operator: Thank you. One moment for our first question. Our first question comes from the line of Robert Moskow with Credit Suisse. Your line is open.
Robert Moskow: Hi. Thank you and congrats on a great year.
Russell Diez-Canseco: Thanks, Rob. Thank you.
Robert Moskow: Russell and Bo, thanks for all the work and look forward to your next chapter. I’d like to know your latest thoughts on the impact of the broader supply shortages and conventional eggs and how it’s it influences your business first half versus second half. It sounds like your first half loaded. And I couldn’t quite tell if that was related to what you’re thinking on what’s going on in the broader industry or not. And maybe I’ll just start there.
Russell Diez-Canseco: Thanks, Rob. I appreciate the question and very much, I’m sure top of mind for a lot of folks as it is for us as we think about the year ahead. So I’d start by saying that, as we’ve looked historically at the impact of the pricing of commodity eggs in the marketplace in comparison to ours, what we found is that there’s not a very strong correlation in terms of our ability to maintain the price premium that our brand, we believe, deserves, nor has there been a big impact in our growth rates or our volumes or velocities, when there are big changes in — there have been historically big changes in the pricing at the bottom kind of bottom of the shelf, so to speak. And the example, I’d go back to is coming out of Avian Influenza back in the 2016 period, when there was a shortage of supply throughout the industry as we’ve seen over the last six to eight months.
And then there was a little bit of a boom. There was almost an oversupply in many regards, where you saw not only full shelves, but really some very strong promotional activity that drove some very low prices at the bottom of the market. What we found was that it didn’t affect our growth rates. It didn’t affect our pricing. It didn’t force us, for example, to promote more heavily in response. And we think that’s because it’s primarily a different consumer that’s focused on selecting an egg or a product like ours at the high end of the market versus the ones that are attracted by the cheapest one available on the shelf. So let me start by saying that as an underlying assumption that we have going into the year. Now the reason why we believe that what’s happening in the broader market might have an impact in our year-on-year growth rates first half versus second half has to do more with the shortages that we have all seen on the shelf, particularly in the fourth quarter of 2022.
The reality is that we’re going to be lapping that in the fourth quarter of 2023. And in part, there was, I believe, some impact on everybody’s sales simply by there being a shortage on the part of some producers. The bigger impact for us, though, is that right now, we’ve eliminated virtually all promotions and all promotional activity. And that’s true in the first half of this year, I think you’re going to see very limited activity on our part. I have less confident in my ability to project what that will look like in the back half of the year. We don’t think we’ll see necessarily a full return to normal promotional activity in the back half of the year, but it’s a little less predictable. And so for those two reasons, I think we’re projecting that year-on-year growth will be stronger in the first half than the second half.
If you look at a two or three year stack, two things I’d point out. One is much more consistent growth between first and second half; and two, actually this year, an acceleration of two and three year growth rates versus 2022. So it’s still a great story overall. I’m not projecting a weakness in the back half, to be clear.
Robert Moskow: All right. That makes sense. My follow-up, on the Dot Foods deal, is there any kind of minimum volume that is part of this deal? And the 5,200 distributors sounds like a big number. But how does it work? And how do you project how much incremental volume this will provide
Russell Diez-Canseco: Thanks. So what’s exciting about this is it in essence, like every other distribution channel that we’ve opened up in foodservice, the distribution, in turn, opens up the opportunity to serve more of the right kind of foodservice accounts. I believe that what’s great about the Dot Foods model is, they’re consolidating in a sense, products from a variety of producers like us however, not pasture egg producers apparently and bringing them to a wide variety of food service distributors who then distribute to the accounts. And so I don’t believe this then becomes a minimum volume story, nor does it become the — nor does it become a key customer per se, so much as it opens up the opportunity to serve more of the kinds of customers we want to get to in the end.
So it’s a means to an end, they’re really a terrific partner to be working with. They’ve got amazing distribution facilities and amazing values actually. We’re excited to work with them to co-create what the future of our foodservice business could look like.
Robert Moskow: Okay. Thank you.
Russell Diez-Canseco: Thank you.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Pamela Kaufman with Morgan Stanley.
Pamela Kaufman: Hi. Good morning. Congrats on a strong year.
Russell Diez-Canseco: Good morning.
Pamela Kaufman: Good morning and good luck to Bo in your next steps.
Bo Meissner: Thank you.
Pamela Kaufman: Just a question on the 2023 guidance. It points to another strong year for top line growth of 25%. What assumptions are you making about the contribution from price versus volumes? And how are you thinking about growth in household penetration and distribution growth?
Russell Diez-Canseco: Bo, do you want to talk a little bit about price versus volume? And then maybe Catherine can talk a bit about the drivers of growth.
Bo Meissner: Thanks, Pam. So what we have still in 2023 is some of the carryover pricing from the price increase we took across the portfolio in May of last year. So we have that carryover coming into the first half of this year. And then we’re not plan that in the back half. But as well, we have announced the low double-digit price increase that we took in January. So those two components are somewhere between low double-digits to mid double-digits in pricing included in our 2023 results. The balance is volume growth.
Pamela Kaufman: That’s helpful.
Kathryn McKeon: And Pam, on household penetration. You saw last year, we added over 3 million households. We think about that total household number in two ways. One is the new households. The underlying that is retained households. So we are both thinking about our ability to build awareness and bring in new households, which we’ve done really well over the last year, but also looking at retention in the short term, but more importantly, in the long-term year-over-year. And we’re seeing both of those groups grow in proportion to each other, which tells me that we’ve got a really strong balance across our household penetration. And this year, we expect to continue to grow those — both of those numbers across the year.
Pamela Kaufman: Great. Thank you. And then my second question is just on how to think about the impact from the moderation in feed costs expected for this year. How does that influence your pricing strategy? And would there be a scenario where you could lower prices because of that? And then I guess, how should we think about that translating into your gross margin outlook?
Russell Diez-Canseco: Yeah. Thanks, Pam. I mean I think there’s a lot of things still going on in the P&L. Although feed prices have moderated, they’re still above the historical levels that we have seen. The pricing that we announced in January actually took into account what we saw as the forward-looking projection of feed prices at the time as well as things that were going on with packaging and other costs that are influencing now are different. So for right now, the pricing that we have in the market reflects accurately as best we can project what we see as outlook for inflation to get us again back to our long-term margin targets for gross margin of the low to mid-30s.
Pamela Kaufman: Thank you
Kathryn McKeon: Thank you
Russell Diez-Canseco: Thank you. Thank you.
Operator: And our next question comes from the line of Cody Ross with UBS. Your line is now open.
Cody Ross: Good morning. Thank you for taking our question, and congratulations on your next steps. I just wanted to talk about gross margin a little bit. Your gross margin came in roughly 100 basis points below your guidance for the quarter. What drove the shortfall in the quarter?
Bo Meissner: Well, the quarter came in as we would have expected on the majority of the expense items. But what we did see in the fourth quarter is a difference in the lift that we had on promotions versus what we had expected, it what was going on with Avian flu and some of the shortages on the shelf. So we were seeing some higher lift on some of those promotions, which drove up the investment in trade versus the expectations that we had going into the quarter.
Cody Ross: Got it. That’s helpful. And then I just wanted to dig in a little bit to your comments on CapEx and just understand it a little bit more. I think you said the growth in CapEx this year is driven by some supply chain costs moving into 2023 and then early costs related to a new egg facility. Can you just provide more detail there? And then also, I thought I heard last earnings call that you guys would provide more details on a new category that you would be expanding into. So does your CapEx guidance this year include that in it? Thank you.
Bo Meissner: So the CapEx guidance, Cody, there was about $7 million that was planned for last year for a couple of things that ECS some things that we’re planning to do there that didn’t get completed that flowed into this year as well as some cost savings opportunities. We are planning to start ECS III this year. So two of the $2 million that’s flown into this year was just really the acquisition of land for ECS III that we had thought we would complete within last fiscal year. The balance is to start the development of the plans, the site plans and building plans for the facility. That’s what the ECS III is. And the balance is just growth CapEx as we continue to grow we buy more acres to shift pigs back and forth from facilities and just general maintenance. I’ll let Russell address the CapEx.
Russell Diez-Canseco: Yes. To answer the second part of the question, no. There is not CapEx in that plan related to a new category. And I would love to share more about the work we’re doing around the new category. We decided that it’s actually a little bit premature given just competitive — the competitive nature of the business we’re in and our need to be just a little bit further in our development before we announce what we’re doing. So stay tuned. I’d love to be sharing all kinds of interesting information, but the reality is it’s just not the right thing from a competitive perspective at this time.
Cody Ross: Understood. And if I can sneak in one last question here. Just given the CapEx related to ECS III, you guys put up a slide that your current capacity is for over $700 million in sales. Why is now the right time to begin making more investments rather than growing some of your profitability and cash flow? And then I’ll pass it on. Thank you.
A Russell Diez-Canseco: Yes. Thanks, Cody. That gets back to the kind of intentionality with which we run this business for the long term. One of the things that I think served us very well, perhaps in contrast to some of the other high-growth companies as we weathered all of the external challenges of 2020, 2021, 2022 and beyond, supply chain-related, labor related, et cetera, is that we — we have a little bit of a belt and suspenders approach to ensuring resilience and stability in our supply chain. And we work really hard to plan and refine plans over time to make sure that we eliminate bottlenecks to our growth proactively. So in this case, you’re right. Our analysis shows that our current infrastructure can support an egg business of at least $700 million in revenue.
And we’ve clearly guided to a number south of that this year. So there’s room to grow, a lot of room to grow. And yes, there are long lead times as a lot of companies saw during COVID. There are long lead times to construction. There are long lead times to staffing. And so we’re taking an approach that ensures that we have maximum optionality throughout the process of planning and executing the next plant. In this case, what we’ve said is, look, we can do site selection work. We can do programming, which is the step before you actually draw blueprints. We can do all that work without actually putting a shovel in dirt yet. And that’s a fraction of the total project cost. So why wouldn’t we get out in front of that work, so that we’ve got the optionality to move quickly when we decide the time is right to build the next plant.
The reality is this could be a two- or three-year lead time project at the minimum to do it right, to do it the Vital Farms way. And so we think it’s prudent to be at this — in the early stages of that project right now.
Cody Ross: Thank you. I’ll pass it on.
A Russell Diez-Canseco: Thank you.
Operator: Thank you. And our next question comes from Adam Samuelson with Goldman Sachs. Your line is now open.
Q Unidentified Analyst: It’s — good morning, everyone. Thank you for taking my questions
A Russell Diez-Canseco: Good morning.
Q Unidentified Analyst: This is actually Guillermo stepping in for Adam. It looks like most of the ground has been covered already. So I would like to ask a follow-up on the capital expenditure program for this year? And what would be your expected returns on that capital.
Bo Meissner: Well as talk — a portion of that capital is for the new facility that we’re planning. So in the prudent way that Russell described in terms of how we’re planning for the business. Another large portion of that capital is for growth and as the business grows and we add farms and volumes, we buy egg trays and things like that to allow us to shift the product back and forth from our new farms. But any cost saving return CapEx that we’re planning, our expectations is that we have an IRR on those projects, but significantly above cost of capital. And looking for somewhere in the double-digit range of returns on those cost saving CapEx investments?
Q Unidentified Analyst: That’s very helpful. And just another follow-up on the revenue guidance. You guys mentioned pricing somewhere in the double-digit range for the first half of the year, if I got that correct — with the remaining being volume growth? And what was that for the second part of the year? Pricing
Bo Meissner: Yes. So, we have carryover pricing. We took a low double-digit price increase in May of last year. So, up until May, we’ll be cycling that price increase in January of this year, we’ve taken a similar price increase across the portfolio of low double-digits. And so we’ll have that in effect for essentially 11 months of the year.
Q Unidentified Analyst: That’s very helpful. I’ll leave it there. Thanks.
Operator: Thank you. And our next question comes from Brian Holland with Cowen. Your line is now open.
Brian Holland: Yes, thanks. Good morning and let me add my congratulations and best wishes to Bo. If I could just — I think a lot of investors were expecting to hear something about a new product platform by today or — today. I think on the Q3 call, Russell, you sort of teased maybe by year-end or something like that. So, I’m just curious if there’s anything to discern from the fact that we haven’t been ready to announce that, is there an issue with either supply or getting that together. Just sort of wanted to understand — I understand why you don’t want to talk specifically about what that’s going to be until you’re ready to launch it. I’m just curious if you can shed a little light behind the timeline here?
Russell Diez-Canseco: Yes, good to hear from you this morning and a very fair question. The first thing I’d say is like this is — our egg business is performing exceptionally well, I believe. The growth rate is there, it’s healthy growth. We’re seeing things like not only strong addition of new households, but strong household buy rates and consumption that would suggest that the new households we’re adding are really high-quality households. We’re retaining a lot of households. We’re adding new doors and the new doors are high-quality doors. We’re doing this with a lot of intentionality and the results are really so consistently coming through in a very strong way as evidenced by the wonderful comments we’ve gotten so far this morning.
So, I want to start there and say that one of the reasons we’re not rushing to announce something perhaps prematurely or before it’s fully baked, so to speak, is that we don’t need that next thing to happen fast to compensate for slowing growth in a mature business. In fact, if you look on a two or three-year stack basis, our core business is accelerating its growth. And the first thing I would say there is — that’s not accidental. We believe that that’s because of how intentionally we do everything around here, including thinking about what’s next planning for it and then executing it at a very high level. And so, while I know it’s frustrating to not have exciting news to share about the new thing, I don’t want to detract from how exciting the news is on the existing thing.
But beyond that, look, it’s just — I think it’s very much on brand and on message for us to say, yes, we’re just not quite ready yet, and that’s okay, and that doesn’t mean anything’s wrong. That means that we’re doing what we’ve always done, which is we’ll share news when we’ve got news, and we’re not quite ready to share that news yet.
Brian Holland: I appreciate the color, Russell. I’ll leave it there. Thank you.
Russell Diez-Canseco: Thank you.
Operator: Thank you. And our next question comes from the line of Chris Growe with Stifel. Your line is now open.
Chris Growe: Hi. Good morning. And I’ll let my congratulations to Bo.
Russell Diez-Canseco: Good morning.
Bo Meissner: Good morning.
Chris Growe: And wish you well.
Bo Meissner: Thank you.
Chris Growe: I just wanted to ask just a couple of kind of quick follow-up questions. Could you say how much cost inflation was in the fourth quarter? Did pricing offset the cost inflation? And then could you give us some kind of estimate for 2023 cost inflation? If you gave that I missed it, sorry.
Bo Meissner: Yes. For 2023, we have projected about 10% cost inflation, driven by an increase in farmer pay, increases in packaging and some in commodities, not all commodities are going in the same direction, particularly organic at the time. And in Q4, we did offset the majority of the increases that were coming through other than the late-breaking farmer increases that we had, which is another reason for the January price increase. And we offset the majority of it, but the decline in gross margin in Q4 was really driven by, what I referred to earlier in an earlier question, the lift on the promo is just being so much stronger given some of the outages on shelf and some of our competition.
Chris Growe: Okay. Thank you. And then just a follow-up on the payments to farmers. Was that about a 100 basis point drag on the fourth quarter gross margin, does that continue in 2023? And maybe related to that, just do you have — I assume you do because the volume growth that plan to have more farmers added through the year that would come in at those, call it, higher terms then?
Russell Diez-Canseco: Yes. We’re continually adding farmers, and they will come in at the new pricing for the farms. And for Q4, it’s fair assumption about 100 basis points, all of that is factored into our 2023 guidance.
Chris Growe: And just to be clear, that rate from the fourth quarter that would roughly continue through at least the first three quarters of 2023, correct?
Russell Diez-Canseco: Correct.
Chris Growe: Okay. That’s all I have. I appreciate your time. Thank you.
Operator: Thank you. And I’m currently showing no further questions at this time. I’d like to hand the conference back over to Mr. Matt Siler for closing remarks.
Matt Siler: Thanks everybody, for your time and interest today. Have a good day.
Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.