Vital Farms Inc Aktie

Good day, and thank you for standing by. Welcome to Vital Farms Third Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand it over to your host, Brian Shipman, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Vital Farms Third Quarter 2026 Earnings Conference Call and Webcast. Joining me today are Russell Diez-Canseco, Vital Farms' Executive Chairperson, President and Chief Executive Officer; and Thilo Wrede, the company's Chief Financial Officer. By now, everyone should have access to the company's third quarter 2026 earnings press release issued this morning.

Today's discussion will include forward-looking statements within the meaning of 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. Such risks and uncertainties are described in today's press release and our SEC filings, including the Form 10-Q for the quarter ended September 27, 2026, that we filed earlier today.

During today's call, management will also reference certain non-GAAP measures, including adjusted EBITDA and adjusted EBITDA margin. Please refer to today's press release and presentation, each available on the Investor Relations section of our website for a reconciliation to the most directly comparable GAAP measures. The presentation of these non-GAAP measures is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP.

After our prepared remarks, we'll open the line for questions. As a reminder, please limit yourself to one question, plus one follow-up so that we can hear from as many participants as possible.

Now, I'll turn the call over to Russell.

Thank you, Brian, and good morning, everyone. I'd like to start, as I always do, by thanking our crew and farmers. They are the best in the business, and it is my privilege to work alongside them in our efforts to improve the lives of people, animals and the planet through food.

I'm going to keep my remarks simple today. I'll start with my latest view of the drivers of our performance, then review Q3 results and the factors informing our updated outlook. Finally, I'll touch on the path from here and our long-term priorities. Thilo will then take you through the quarter and our updated outlook.

First, what drove our performance this year. For the better part of 3 years, avian influenza kept conventional eggs scarce and expensive. This compressed our price gaps, creating a lot of additional trial. In 2026, category supply came back. Store-brand egg prices dropped back to pre-avian influenza levels of about $2 a dozen and the gap between our price and the rest of the shelf went back to where it was in mid-2023, the last period when the market was fully supplied.

We believe these market conditions contributed to a decline in purchasing in 2026 by many of the incremental households we attracted due to the compressed price gaps of 2024 and 2025, and that has been the main driver affecting our performance this year. Earlier this year, we talked about targeting a price gap of $1 to $2 to other outdoor-access brands. We now believe that the bulk of this year's drop in velocity versus last year was driven by light buyers trading back down to private label as opposed to increased branded competition attracting our households.

Across the category in MULO+, with the exception of one highly promotional retailer, our premium over outdoor-access brands is about where it was in the third quarter of 2023. Our current pricing strategy is, therefore, no longer focused on narrowing price gaps to branded competitors.

Next, our third quarter progress. With that background, let me talk a bit more about the third quarter and the progress we made against our operating priorities. We said the second quarter would be the trough. Third quarter net revenue was $182.2 million, up 10% from the second quarter. Adjusted EBITDA was $1.5 million against a loss of $26.6 million in the second quarter. Gross margin was 23%, up more than 16 points.

We said that farmer contract amendments would bring supply closer to retail demand. These amendments are in place and the volume we sent to the breaker and wholesale channels fell 59% from the second quarter. That was the single biggest driver of our margin recovery. We said we would take $6 million to $7 million out of our annual SG&A run rate. We did it.

We said we would be at an average of 150 to 160 shell egg TDPs for the full year and 170 to 175 shell egg TDPs in the fourth quarter. Year-to-date through the third quarter, we averaged 152 (sic) [ 162 ] in Circana MULO+ and the latest weekly reading for the week ending October 25 was 176. The distribution we told you about is on the shelf. And with that, we posted a record 7.2% dollar share and a record 2.3% volume share of shell eggs in Circana MULO+ at the end of the third quarter.

Finally, we protected the balance sheet. The Vital Crossroads project is on track to pause once the building is enclosed. This year's capital spending is expected to come in at $70 million to $75 million against the $140 million to $150 million we planned in February.

That said, 3 things changed recently about how we look at the fourth quarter of 2026, and we are, therefore, reducing our full year guidance to about $730 million in net sales. First, seasonality of demand. We planned for the fourth quarter to build the same way as prior years across the egg market, resulting in higher demand for conventional eggs. The first weeks of this quarter have suggested that the pattern might be different this year.

Our orders are not rising the way they usually do at this point in the year, and what we hear about the category suggests the same. That may be because retailers are keeping inventory lean. It may be a change in consumer behavior that we can't see yet. Either way, we are no longer assuming a strong holiday lift.

Second, new distribution. We got the distribution we said we would get, and it is now on the shelf. But some of it arrived a few weeks later than we planned, reducing the number of selling weeks in the quarter and pushing back the growth curve that followed. And as Thilo will discuss, we are taking a more conservative view of the near-term velocity contribution from that newer distribution.

Third, market pricing. In a normal year, conventional egg prices firm up into the holidays, which narrows our price gap with conventional eggs and helps with velocity. We no longer assume that. We are planning for the rest of the market to stay where it is. Together, those changes reduced our fourth quarter revenue expectations. Thilo will take you through how these 3 changes flow through to revenue and adjusted EBITDA.

Now, I want to turn to why we continue to believe in our long-term potential. Last year, narrower price gaps attracted incremental households to our products. Purchasing by those incremental households has declined as price gaps have continued to return to pre-AI norms. Thus, this year's comparison to the prior year period reflects differences in category pricing and household purchasing patterns from last year. A comparison to the third quarter of 2023, the last time the market was unaffected by avian influenza, offers a helpful reference point through which to view our performance.

The third quarter of 2023 was the last third quarter with a normal supply of eggs and the gap between our price and the rest of the shelf was about what it is today. Against that quarter, our net revenue in the third quarter of 2026 is up about 65% from $110 million to $182 million. Our velocities are about the same as they were then on almost 60% more points of distribution. Our dollar share of shell eggs went from 4.7% to 7.2%, and we had 19% more households than we did then.

The brand came out of the 2024 to 2025 market distortion much larger than it went in at the same price premium and with velocity holding. That speaks to the power of the brand we've built. And the category we built is still outgrowing the broader egg market overall. The share of American households buying pasture-raised eggs in any given quarter has roughly doubled since 2022, and it held close to last year's level even as prices across the rest of the category fell.

We are on track to add more than 25 TDPs this year, our biggest gain since the IPO. We expect volumes from that new distribution to continue growing over time. We plan to continue growing the Vital Farms brand sustainably over time by building velocity on the distribution we have, adding distribution where it makes sense and bringing new households to the brand with our unique voice and clear points of differentiation.

Before I hand it to Thilo, I have one more update to share. In light of the impact the evolution of the consumer and category environment has had on our 2026 performance, we are withdrawing our 2030 financial targets. Our view of the size of the opportunity has not changed, and we recognize the importance of a clear long-term road map for investors. For now, our priority is to concentrate on the near term and executing on what I've described today. We expect to revisit long-term targets once we have made more progress on expanding margins and improving profitability.

With that, I'll turn the call over to Thilo to take you through the third quarter and our updated outlook for the remainder of 2026.

Thank you, Russell, and good morning, everybody. Let me go through the financial results for the third quarter. As Russell noted, the third quarter represented a sequential improvement from the second quarter with net revenue of $182.2 million. However, this was a decrease of $16.8 million or 8.4% on a year-over-year basis. The decline was primarily driven by $14.3 million from lower price/mix and $2.2 million from lower volume, excluding breaker and wholesale. Breaker and wholesale channels contributed approximately $0.3 million to the decline as a substantial increase in volume was more than offset by lower pricing.

Gross profit was $42.1 million or 23.1% of net revenue and an improvement of more than 16 points from the second quarter. The sequential improvement primarily reflected lower breaker volumes and associated supply management costs as well as improved retail volume and mix.

SG&A was $38.1 million, down $6.3 million or 14% from the prior year period. Going forward, we continue to expect our May and July efficiency actions to reduce our annualized SG&A run rate by approximately $6 million to $7 million.

Shipping and distribution expense was $11.7 million compared with $9.2 million in the prior year period, primarily reflecting higher fuel rates and unfavorable line haul rates.

Adjusted EBITDA improved to $1.5 million from a loss of $26.6 million in the second quarter, reflecting the sequential improvement in the adjusted EBITDA we expected coming out of Q2.

The significant driver of the sequential improvement was the progress we made in managing supply. The pharma contract amendments we discussed last quarter are in place and are giving us greater control over supply even as industry supply remains elevated. The volume we sent to breaker and wholesale channels declined 59% from Q2.

Turning to capital allocation and our balance sheet. We ended the quarter with cash of $84 million and $117.6 million of outstanding debt on the balance sheet. Capital expenditures were $14.3 million in the quarter and $51.7 million year-to-date.

At Vital Crossroads, we largely completed the work needed to enclose the facility during the third quarter. We expect to halt construction after completing the framed walls and roof to protect the facility against winter weather. This planned pause is reflected in our reaffirmed full year capital expenditure guidance of $70 million to $75 million. We will continue to evaluate the timing of future construction based on our supply needs.

Looking ahead, we are updating our full year guidance to net sales of about $730 million compared with our prior outlook of $775 million to $800 million. As a result of the reduction in our revenue outlook, we are lowering our adjusted EBITDA outlook to about negative $15 million compared to our previous outlook of a $0 to $10 million gain.

We remain focused on the commercial priorities Russell outlined and maintain tight cost control across the organization. We expect a modest sequential gross margin improvement in the fourth quarter, benefiting from lower breaker volumes and associated supply management costs and better volume leverage. Our updated full year outlook reflects a continued sequential improvement in net sales and adjusted EBITDA in the fourth quarter and is grounded in the performance we are seeing today and several specific operating assumptions for the fourth quarter.

First, distribution continues to track in line with our expectations. Based on latest Circana MULO+ data, average selling TDPs are now above 175 compared with our prior expectation of 170 to 175 for the fourth quarter, and we expect them to stay at this level. However, we are taking a more conservative view on velocity contribution from newer distribution.

For the business overall, our outlook assumes shell egg unit velocity of approximately 25.9 EQ units per store per week per item in the fourth quarter compared with 25.3 in the third quarter in Circana MULO+. The modest increase reflects more frequent promotional activity, offset by a full quarter of new distribution that for now is slower turning. On a dollar basis, we assume shell egg retail velocity of approximately $200 per store per week per item compared with approximately $205 in the third quarter, reflecting the impact of that increased promotional activity.

Second, we are assuming promotional performance generally in line with what we have seen from our most recent promotions. Third, we are not assuming a seasonal uptick in velocity or pricing changes. Recent industry indicators, including [ Expana ] commentary, have not shown the seasonal pickup we would typically expect at this point in the year. We're also seeing retailers buying closer to their immediate needs rather than building inventory ahead of the Thanksgiving holiday. Given those signals, we believe it is prudent not to assume a seasonal uptick in the fourth quarter outlook.

Lastly, we are assuming that we will generate $3 million to $4 million from butter net sales in the fourth quarter, selling out the remaining inventory of bulk and finished goods butter. On the supply side, we assume some excess volume will continue to be sold through breaker and wholesale channels, and we are not assuming an improvement in breaker pricing. Taken together, these more conservative operating assumptions provide the basis for our updated outlook.

With that, I will turn the call back to the operator, and Russell and I are happy to take your questions.

[Operator Instructions] Your first question comes from the line of Scott Marks with Jefferies.

First I want to ask about is the comment that you made, Russell, during your prepared remarks talking about maybe changing pricing strategy based on what you've seen some of the light buyers moving to private label as opposed to other premium branded products. Wondering if you can kind of give us a sense for how you're thinking about this new strategy? And what does it mean as we look ahead to the rest of this year and into next year?

Thanks, Scott. Yes. Again, what I think we've learned over the past year, but it's especially clear to us as we have had several months since a normalization of supply in the marketplace is that our pricing is actually not excessively high. Our pricing is actually, again, where it was the last time the market was fully stocked, was fully supplied as measured as a multiple of private label eggs. And with that understanding as well as the understanding of which households and therefore, velocities appear to have left us this year and why and where they went, we have a better understanding of sort of the underlying business when you are able to isolate the impact of bird flu over the last couple of years.

So earlier in the year, when we were still trying to understand why our performance was lower than we had projected, while we were trying to understand why we were facing a year in which our comps were negative in terms of sales and why our velocities were down in a lot of our retailers. We looked at the evidence and the evidence at that time said, well, our price gaps have widened and they've widened to branded competitors. They seem to be sort of losing less of their business and in some cases, in some periods, gaining business. And our assessment was it's a more competitive environment, as I think we heard from many of you over the course of the last several quarters, the questions about seemingly increased competition and more aggressive pricing in the marketplace. And we responded in kind.

What we've since come to understand based on, again, several more months of both scanner data, Circana data and household numerator data, which takes a lot longer to unfold, is that our pricing multiple to private label is again back where it was in the middle of '23 when the market was last fully supplied. And our understanding is that the majority of the volume and households that left us didn't get coached by a direct brand competitor, but rather went back to the private label products they've been buying before bird flu.

So going forward, I think our approach is much more like what we did in a normal environment, which is this is a street-level competitive environment at retail, and we need to be competitive everywhere we play, but we also need to be smart about where investments in promotions and investments in price makes sense for the company and the brand. And we also historically have used promotions not to drive volume as so much of the industry does but rather to drive trial. And so it's really kind of going back to basics of what has worked for so many years in building this brand to the success we've had to this day.

Understood. Appreciate all the color there. Next one for me. Just wanted to ask a little bit about some of these distribution wins. You called out some of them coming maybe a bit later in the quarter than expected, factoring that into your Q4 outlook. Wondering if you can just give us a sense of why those wins got pushed back versus your initial expectations? And how should we be thinking about cadence of continuing distribution opportunities ahead?

Sure. So my understanding is this was nothing more than a not totally uncommon sort of challenge in executing a large number of new placements across a wide variety of stores. It is logistically challenging for all involved. And sometimes they happen again just a few weeks later than we expected. But given the volume of the new distribution, a few weeks mattered. And we try to be conservative in our assumptions. But in this case, it was just a little more challenging throughout the supply chain than we expected. Again, we're past that. We're now fully on those shelves that we expected to be on. And I don't think that it implies anything other than perhaps we should be a bit more conservative in the timing of new committed distribution going forward.

Your next question comes from the line of Jon Andersen with William Blair.

I was wondering if you could talk a little bit more about the guidance revision top and bottom line, about a $55 million reduction in the top line, $20 million in the bottom line. And I'm just trying to understand there how much -- it looks like the majority of that is just the bottom line revision is related to the sales assumptions and adjustments you've made. But is there a component here, which is also related to gross margin or cost of goods? So if you could parse that for us a little bit.

And then on the kind of go forward, as you think about how to compete in this kind of evolving category, I think you've made some decisions and announcements recently around innovation and types or formats. Could you share your thinking around that? And what might be changing in terms of your assortment over time and why and how that might allow you to reach more households over time?

Jon, let me start with your question about guidance, and then I'll let Russell talk about the innovation. On the guidance part, Russell laid out that for the most part, fourth quarter, there are 3 drivers for that, right? Seasonality of demand, we don't see it coming in quite as we have done in prior years. Related to that, but separate is that normally, we would assume a pickup in pricing in the fourth quarter because of seasonality. We're not baking that in anymore given what we are seeing in industry data and in our own quarterly data and then the delayed placement of the new distribution that Russell just talked about.

So those 3 drivers are really what are driving the revenue reduction in fourth quarter. And as you pointed out, that then trickles down to EBITDA. Because this means that we have less volume, there's a bit less volume leverage that we get in gross profit. There is probably a bit more volume that might go to the breaker in the fourth quarter than what we had previously modeled. So in the past, we have talked about wanting to have an exit margin, gross margin that starts with the 3 by the end of Q4, given the lower volume forecast that we now have, that is probably less realistic. But it is really these distinct factors that drive the guidance reduction.

I'll let Russell talk about the portfolio piece.

Yes. Good morning, Jon. So we announced a little over a week ago a very limited pilot of a new product, which is in the free-range egg category. We think there's a lot of room to innovate within free-range to do what we've done with pasture-raised, which is to raise the standards in that part of the egg category. And we look at our sources of growth over time. And while we're just 2.3% of the volume of egg consumption in MULO+, which is a record for us, and we're certainly excited about 2.3%. We see so much more opportunity in front of us.

We also understand that the vast majority of egg purchases in this country are below $5. And so we want to start to create the opportunity to reach an even larger number of households in the country. We believe that this opportunity may add as many as 30-plus million households to our potential market as we look to meet the needs of more and more American households. So again, this is a very limited trial. I certainly don't want to raise expectations about how this might impact our growth trajectory over time. I think it's very consistent with our approach to testing and learning.

[Operator Instructions] Our next question comes from the line of Benjamin Mayhew with BMO Capital Markets.

My first question is around ECS. And just how is it running with the newer third line in place? Could you remind us of the revenue capacity just at that one asset? And how do you think about pacing that revenue growth within that asset? So that's the first part of the question. And then have you been able to right-size your farmer production to meet the slower pace? Or is that -- or is this still a work in progress as we speak?

So thank you, Ben. Great to be with you this morning. ECS is running very well. We've had incredibly high uptime and fill rates over the last several weeks. And I think we've seen that team really come together in a powerful way to both implement, adopt and optimize that third line and how we operate with 3. We've had wonderful improvements this year in retention and average tenure, et cetera. I think that team is really maturing and bringing a new level of sort of consistency and reliability to what they're doing, which has been terrific. And so I think we -- our customers have certainly commented and given us gratitude for the high fill rates and the consistency of our operation, which is always a nice validation.

We've said historically that the run rate capacity of that facility is north of $1 billion in net revenue. We are -- we've taken prices down a few percent this year. So maybe we're a little closer to the $1 billion instead of far north of $1 billion. And the thing to keep in mind about the $1 billion is that is run rate, and we do have some seasonality typically in new distribution that comes in the back half of any given year, which suggests that we would anticipate wanting additional capacity in advance of the back half of the year that exceeds $1 billion run rate, so to speak. So before we hit an annualized $1 billion, we probably need additional capacity is how we think about it.

Yes, we work very hard on the farmer question with our farmers, and they've been wonderful partners throughout this. In fact, it's times like this when our relationship with our farmers strengthens when they see how we treat them at a time when we need fewer eggs versus how the industry overall tends to treat farmers when they need fewer eggs. We've had a remarkable number of calls from banks about opportunities to pick up farmers that others have abandoned, which is, unfortunately, I think, just the status quo in the industry and one of the things that really differentiates how we show up.

And I think the benefit of partnering with farmers instead of walking away from them is the stability and the consistency of our supply chain. As we've seen over the last sort of 3 years, there are boom and bust cycles in the broader egg category as we're building a brand for the long haul, stability and supply chain with the right partner farms is job #1. And so I think our farmers are appreciative that we're being so thoughtful and respectful in honoring our commitments to them.

As for rightsizing production, we have had more than enough farmers accept our amendments to adjust supply to where we would like it to be. Now in any given month, supply may or may not be perfectly aligned with demand because we're watching the scanner data just like you all are. But it's much more closely aligned than it was in Q2, and we've really done the bulk of the work to get where we want to be.

Got it. That's super helpful. And then if I could just ask one more question here, a follow-up. So you had previously extrapolated your fourth quarter EBITDA run rate into fiscal '27. And I fully understand you're not at all providing guidance for '27 today. But with what seems like very conservative implied fourth quarter guidance, how could we -- how could we think about the fourth quarter run rate into '27? Is there any way to think about that and maybe the upside potential, just thinking about EBITDA specifically, I guess, like what could drive upside there? Or what are you thinking maybe falls off after a tough '26?

Good morning, Ben. I think first thing to think about is what are our supply management costs, right? We put into our presentation this morning that breaker was about an $8 million impact to EBITDA this quarter. It was $21 million impact to the second quarter. So you see the progress that we are making there simply by being able to manage more of the oversupply with the contract amendments that you just talked about. That progress is supposed to continue. As Russell and I already mentioned, there might still be breaker volume, excess breaker volume in the fourth quarter, but we intend to make further progress there. So that is one swing factor for next year to think about.

I think the next one is volume leverage. We've had these delayed distribution placements that is bringing down fourth quarter relative to what we thought about before. But the distribution, the velocity for the distribution that should continue to ramp up. So there is -- that should be a positive swing factor for next year. And then we continue to look at our cost structure. We've talked about the $6 million to $7 million run rate improvement in SG&A. We talked in the past about the feed project where we plan to reduce our feed cost by a meaningful amount. That is not benefiting Q4 at all yet. So that will be a positive impact for next year.

And then last one is the butter exit. We still anticipate butter revenue this quarter, butter is very margin dilutive. And so as we should be out of butter by the end of the year, that will then be a further margin improvement for next year. Those would be the puts and takes I would point to right now. We're not in the game of giving guidance yet for next year, but those are puts and takes I would point out.

Your next question comes from the line of Ben Klieve with StoneX.

Just a couple related to cash flows here in the fourth quarter. First of all, I want to confirm here that your expectations for the Indiana facility, the kind of first phase of the Indiana facility, the CapEx associated with that will be fully contained within this fiscal year or if any is going to bleed into next year?

And then second question is around the cash balance of $85 million or so that's on the books today. Certainly, with the elevated CapEx still for Indiana, looking for negative free cash flow in the fourth quarter. But I'm wondering, Thilo, the degree to which that elevated cash balance here is kind of a bias to conservatism and just trying to have as much flexibility as you can on the balance sheet versus an expectation of negative operating cash flows beyond what we're expecting with the CapEx levels.

Yes. So on the first question, Ben, the majority of the CapEx of closing out or enclosing VXR is happening this year. There might be a bit of overflow into next year depending on when we receive the invoices and when the due dates are and so on. So when the cash leaves the door, there might be a bit of a carryover into next year, but it's majority this year.

On the cash balance, I think as we announced on the second quarter call, when we announced this new loan structure, we wanted to make sure that we have a healthy cash balance so that we don't have to have a conversation with banks again in the coming quarters. And so the $80 million that you just referenced is simply a factor of the loan that we took out, the reduced spending that we have this year, but also a reflection of the fact that over the life of this loan, it's a 3-year loan, we might restart construction at VXR, we want to have the flexibility to do that. So this is -- the cash balance right now is more an insurance policy than to signal one direction or the other, how we think about operating cash flow next year or CapEx spending for next year.

Your next question comes from the line of Gerald Pascarelli with Needham & Company.

I just want to go back to the top line. So you've amended your farmer contracts already. It seems like you're kind of assuming status quo in terms of the competitive operating environment. But just looking out to next year, Russell, can you talk about how you maintain flexibility to manage this business, just considering that you're going to have very easy compares? And then in the potential event that price gaps narrow with generic eggs or if there is another long tail event that reduces the industry supply, which we, outside of this year have seen for the past 2 years. So with all that, I'm just trying to think about how you think about your ability to capitalize in the event that market dynamics change.

Thanks, Gerald. Good morning. So the first thing I would say is that if there's one thing that I think this year has taught us, it's to really be intentional about the way we support growth that we see in the marketplace and to really unpack the sources of that growth to make sure that we aren't building out our capacity, our farm network for what may be less than enduring components of our growth. And so that's the main thesis for our remarks today, which was, hey, we had nearly 3 consecutive years of bird flu in this marketplace, which is really unprecedented, at least in the data we could find. Historically, it's typically been one season as we saw in the early '80s in Pennsylvania and then later in 2016, not 3 consecutive years.

After the second consecutive year, we started to incorporate some of that elevated growth into our longer-term plans and expectations. And as we've seen this year, that incremental growth, we were able to start to quantify it as we headed toward this call because we had enough months in a row of some of those light buyer households going back to the private label products they bought before bird flu compressed the prices.

So the first thing I would say is we're going to be much more circumspect before racing to add capacity even when customers are demanding it because we recognize now that some of it may not be enduring. So that's number one. We want to support this company and the growth of our capacity and supply to support the long-term path for our trusted brand. And we've got a much clearer picture of what that underlying very successful and enduring brand delivers.

The second part is those farmer amendments, I want to be clear about what they are and what they aren't. The farmer amendments simply are an agreement that we may adjust with some cost to us, the length of a farmer's flock, the length during which it produces eggs, which gives us some additional precision in adjusting supply down if we want it. And we took advantage of those -- essentially those options to reduce supply this year to much closer to what we're seeing demand come through our orders to retailers and our estimates.

Going forward, those amendments are not coming. So those farmers are still in our network. They're still planning to continue farming with us when they come back into the cycle at our -- consistent with our planning. And we have an added advantage of having those farms available to repopulate with a new flock of birds ahead of schedule if that's what we want to do, again, in line with our long-term growth trajectory. The caution I would offer is that while a bird flu outbreak and the resultant contraction in industry supply may provide a boon to conventional egg producers, we are planning for that. So the upside for us will come in a much more muted way from that potential boom, which is we'll see potentially higher breaker prices for the projectable waste stream of eggs that we create in good times and bad in this category and perhaps a pullback on promotions because they're certainly not needed when there's a shortage of eggs. I would not add a speculative component of capturing upside from a short-term supply contraction.

Got it. That's helpful. And then I just -- I'd like to follow up on CapEx. Assuming that the pause remains in place and then understanding there might be some spillover in CapEx next year, can you provide some color just speak to how we should think about like standard maintenance levels of CapEx, if possible?

Yes. If we're not investing in capacity expansion, I think if you look at years before we started the construction of VXR, that would give you a good idea of what our run rate is. Maintenance CapEx is probably in the low teens plus in there. There are always some smaller projects that we are doing, improvements at ECS, some of the investments that we're making. But the normal run rate when we're not investing in capacity, I would say it's low to mid-teens. Now, for next year, don't bake all of that in yet. We're -- I don't know if this will come across this guidance for next year, but that's kind of the underlying run rate that we have.

Your next question comes from the line of Robert Moskow with TD Cowen.

I found it interesting that you're talking, Russell, about losing some light users who came to the brand. There are a lot of parallels there with Freshpet, which had a similar experience about 1.5 years ago when the CEO is on your Board. So one of the things that they did is that they shifted the marketing strategy to focus on, I guess, what they call MVPs, the idea being that if you can get those really attractive users just to buy more, that might be the best way to like strengthen the user base, so it's more loyal. Is that a strategy that you would consider pursuing? Or is it really different in eggs, it's not the same?

Thanks, Rob. Good morning. So it's interesting. We have over several years, and you've been following us for several years, had a relatively strong conversion rate over time from awareness to trial, trial to repeat, repeat to loyalty. And that speaks to, I think, the quality of the product, the power of the brand, the differentiated experience and the differentiated approach to what we do. In different years with different sort of sources of that new trial, some of the years have been more heavily weighted toward just organic growth through our traditional distribution and awareness generation and trial generation efforts.

Some of the years have been boosted by things like stock-up shopping during COVID and the price compression that's come from bird flu over the last few years. And so there's a -- our understanding is that in those accelerated years, when there's a macro shock, some of that incremental trial can be transitory. And that -- I think that makes common sense. That kind of makes sense to me if you didn't come to us through a journey of discovery, but came to us because we were relatively affordable on the shelf suddenly.

In terms of a strategy to target heavy buyers, we have a record high buy rate in terms of -- for people that buy Vital Farms eggs, and we are at a record for our company in terms of the share of their egg spend that goes to us. And it's not because we've particularly targeted moving people from medium to heavy or heavy to heavy-plus. I think the risk in focusing on that, at least for our brand, might be that, again, we're potentially heating up volume in a short-term way instead of earning it purchase by purchase in a long-term way. So we're certainly flexible and nimble and always learning, but I wouldn't say that we currently have a strategy to shift our focus to heavy buyers. We continue to attract millions of new buyers every year, and that's an important part of our ongoing strategy.

Okay. And a follow-up. I was intrigued by this test you're doing with target with free-range eggs at $5 a dozen. That's obviously a big discount. It's early, but is there any math you have to do internally to figure out if -- what mix are you willing to shift to $5 per dozen compared to your current very high premium prices? At some point, does it become a problem rather than a solution?

Well, I think it would be a problem if you assume the same cost structure at $5 as we have for pasture-raised eggs. This is a different kind of egg, and it actually has different economic, and it has the potential for different economics over time. And so if you assume that it's the same egg and we're just pricing it differently, then certainly, it would be a potential problem as you shifted the mix toward it.

What we're doing at this point is testing consumer reaction to it in a very limited way, in a way that we don't believe will have a material impact on our results in 2027 to prove what consumers want to help us understand, what they want out of and the extent to which they're receptive to our differentiated approach to producing it in the way that they have been to our differentiated approach to producing pasture-raised eggs with more transparency with farms in a more temperate climate and just with a very high level from my perspective of execution and commitment to what we're doing.

If they're receptive, then our job is to continue to evolve the operating model to make those margins very attractive to us. On paper at least, there's no reason the margins can't equal or better the margins of the pasture-raised business at a certain scale with a certain approach. But that's far in the future. What I would say is we wouldn't be exploring it if we didn't think there would be a healthy and attractive business opportunity from it over time.

We have reached the end of the Q&A session. I will now turn the call back to Brian Shipman for closing remarks.

Thanks, everyone, for joining us this morning. We appreciate your questions and your continued support, and we look forward to updating you again next quarter. Have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.

Thank you. Good day, and thank you for standing by. Welcome to Vital Farms' second quarter 2026 earnings conference call and webcast. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I would now like to hand your call over to Brian Shipman, Vice President of Investor Relations.

Keep in mind, today's conference is being recorded. Brian, please go ahead.

Good morning and welcome to Vital Farms second quarter 2026 earnings conference call and webcast. Joining me today are Russell Diaz Canseco, Vital Farms executive chairperson, president and chief executive officer, and Tilo Vreda, the company's chief financial officer. By now, everyone should have access to the company's second quarter 2026 earnings press release issued this morning. During today's call, management may make forward-looking statements within the meaning of 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. Such risks and uncertainties are described in today's press release and our SEC filings, including the Form 10-Q for the quarter ended June 28, 2026 that we filed earlier today. During today's call, management will also reference certain non-GAAP measures, including adjusted EBITDA and adjusted EBITDA margin. please refer to today's press release and presentation, each available on the investor relations section of our website for reconciliation to the most directly comparable gap measures.

The presentation of these non-GAAP measures is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. After our prepared remarks, we'll open the line up for questions. As a reminder, please limit yourself to one question plus one follow-up so that we can hear from as many participants as possible. Now, I'll turn the call over to Russell. Thank you, Brian, and good morning, everyone.

I'd like to start as I always do by thanking our crew and farmers. I believe they're the best in the business and it's my privilege to work alongside them in our effort to improve the lives of people, animals, and the planet through food. I want to emphasize three key messages on today's call. First, while 2026 presented supply dynamics we did not fully anticipate entering the year, we executed decisively to address them, and the early results give us confidence our operational calibration plan is taking hold. Last quarter, we outlined an aggressive plan to fix our price gaps, right-size our supply, and reduce structural costs. I'll walk through each of these work streams in more detail shortly, but the key point is each of them is progressing in the direction we intended. As As a result, we delivered a more than 200 basis point year-over-year gain in retail dollar share of the Shell Egg category during the second quarter.

Second, as we noted last quarter, we believe the second quarter was our financial trough. Our net sales declined 10.1%, but the revenue decline and margin compression we were reporting this quarter are consistent with what we told you to expect on our first quarter call, when we said the greatest impact of the industry's oversupply and our own price gap challenges would be concentrated in the second quarter. That impact was primarily driven by non-structural issues within the broader industry, the price gaps to branded competitors we discussed on last quarter's call, and the identified second quarter supply management and other discrete costs of managing our excess egg supply. Despite the decline in net revenue during the second quarter, the quarter's performance highlights the strength and resilience of our premium brand relative to the severe volatility impacting the broader commodity egg market. Third, we believe we have clear operational momentum as we enter the second half of 2026. Our farmer contract amendments are now live and our corporate overhead is structurally lower following difficult but necessary cost realignment actions we took during the quarter. We took additional actions in mid-July to streamline our processes and strongly believe we're on a path to improved operating results in the second half of 2026.

Distribution is expanding and we believe our momentum should continue while velocity is also starting to show improvement sequentially as we're reducing price gaps to our branded competitors. To understand why we have such high conviction that the turnaround is working, despite the expected challenging second quarter, I'd like to share some of the direct operational evidence of our execution. First, we said we needed to narrow price gaps to branded competitors, and we've made strong progress. Since the last earning calls, our price gaps have come down from an average of approximately $2.51 to branded competitors in the first quarter, to an average of $2.36 in the second. As we mentioned last quarter, we believe the most effective gap range tends to be in the $1 to $2 gap to branded competitors. In the markets where these gaps narrowed, retail volume responded with improved velocity. Additionally, in those same markets where we successfully adjusted our price gaps, household acquisition ticked up as well.

For example, we studied our price gap impact at one of our top 10 retailers, and where we got our price gaps down to an appropriate level, we saw both velocity and incremental new households improve 27% since mid-April. Efforts such as these led to a more than 200 basis point year over year gain in Vital Farms retail dollar share of the Shell Ag category in Moolah Plus during the second quarter, according to Cercana, even as category pricing fell sharply amid industry-wide oversupply. Additionally, and more broadly, by mid-July, Shell Egg units per store per week per item were up 12.5% since our first quarter call, and as of mid-July, reached their highest level since February of 2026, which we believe indicates that our strategy is working. We will continue to broaden these efforts to lower price gaps, which we expect will continue to drive improved results going forward. Second, as we told you last quarter, we have secured several significant distribution gains that should bolster our volume growth throughout the second half of the year and into 2027. As we highlighted on the first quarter earnings call, we anticipate average total distribution points or TDPs between 150 to 160 in 2026, up from 130 in 2025, which would represent our largest yearly gain since our IPO in 2020. We anticipate the majority of these gains will become visible in scanner data throughout the third quarter.

In CERCONA data for MULO+, we were already at 148.7 TDPs year to date through the end of the second quarter. And we continue to believe we are on track to deliver an average of between 170 to 175 TDPs in the fourth quarter of 2026. given the visibility we already have to commitments for new placements. Third, we found ourselves in an oversupply situation earlier this year. We said we needed to amend our farmer contracts to give us flexibility to manage our supply. These contract amendments are now in place. And as we previewed last quarter, we believe the oversupply peaked in the second quarter. That means we're now managing the temporary supply demand imbalance by reducing egg production instead of sending expensive eggs to the low revenue breaker channel.

To be clear, we may still see some excess breaker sales in the coming quarters, but at a much reduced level than what we experienced in the second quarter. The low level of excess breaker sales reflects our intentionally balanced strategy. executing the right number of farmer contract amendments to manage the current supply reduction while maintaining flexibility to meet future expected demand increases. TLO will provide more details in a few minutes. Fourth, we told you in May, we would reduce our cost structure to support our price actions. Since last quarter, we've made significant progress and we completed our planned operational staffing changes at Egg Central Station. In mid-July, we further optimized our organizational structure to improve decision-making speed and reduce overhead, aligning our headcount directly with our core operational priorities. The result is that we've reduced our annualized SG&A run rate by approximately $6 to $7 million.

Furthermore, we intend to pause construction on vital crossroads by the end of 2026, and we believe CapEx is tightly controlled. In short, we expect the second half of 2026 to look fundamentally different than the first half of the year. We believe our strategic actions provide a clear line of sight to improved operating results in the second half and heading into 2027. And Tila will walk through the specific building blocks behind that view in a moment. The expected progression is straightforward. Our narrowed price gaps should continue to accelerate velocity over the coming months and quarters. And our TDPs are on track this year to expand at the fastest rate since our IPO in 2020. We expect to improve cost of goods sold as we are shifting our supply management strategy to farmer contract amendments and away from breaker sales, and we will benefit from the actions we've taken to lower SG&A.

In conclusion, we believe our turnaround plan is working and given our successful execution in navigating the challenges of the second quarter, we are reaffirming our full year guidance today. With that, I will turn the call over to Thilo to take you through the details of our second quarter results.

Thank you, Russell. Let me go through the financial results for the second quarter. Net revenue in the second quarter declined 10.1% to $166 million due to a volume-driven decline of $19.8 million in retail channel sales that is excluding access breaker and wholesale channel sales, partially offset by a price-mix benefit of $1.1 million. Excess sales to breaker and wholesale channels contributed only $0.1 million to net revenue growth, as a large volume increase was almost entirely offset by a price decline. Gross profit was $10.9 million, or 6.6% of net revenue. Gross profit includes a $19.5 million impact from excess breaker sales, $0.8 million from the amortization of farmer contract amendments, and $7.8 million in exit costs associated with our butter wind-down. up for a total of $28.1 million of what we see as supply management and other discrete expenses. Excluding these items, the underlying gross margin is meaningfully more favourable. We expect the gross margin profile to improve as we move into the second half of the year, and we continue to anticipate exiting the fourth quarter at a gross margin run rate of approximately 30%.

SG&A was $40.4 million. While up slightly year over year, this includes $3.3 million of restructuring and severance costs, and $3 million in one-time professional services costs related to our feed cost savings program, for a total of $6.3 million in discrete expenses. Going forward, the combination of our May and July efficiency gains will reduce our annualized SG&A run rate by approximately $6-7 million. Shipping and distribution expenses increased to 6.4% of net revenue in the second quarter of 2026, up from 4.9% a year ago, reflecting the inclusion of $1.5 million of expenses for shipping excess eggs to breaker plants. Adjusted EBITDA was a loss of $26.6 million. This includes an add-back of $7.8 million for butter exit costs and $3.3 million for restructuring and severance costs. Cost for the quarter is a result of the peak intensity supply management costs in Q2, totaling $21.8 million for the quarter, and it also includes $3 million of professional fees incurred during the quarter related to our feed cost savings program for a total of $24.8 million of discrete expenses. expenses that we are not adding back to adjusted EBITDA. Regarding butter exit costs, when we announced the wind down of our butter business last quarter, we expected to convert our remaining bulk butter inventory into a retail product before fully exiting the category.

Since then, we have concluded that operational constraints and meaningfully elevated costs make this approach uneconomical, so we will instead sell the remaining inventory to the melter. This is a change in how we're executing the exit, not in the decision itself. Looking ahead, full-year supply management costs are now modeled in the mid $30 million range versus our initial $32 million estimate, representing a modest increase in breaker sales due to two primary factors. First, slightly lighter second quarter sales meant that we had more surplus volume that we routed to the breaker and wholesale channels. And second, we took a methodical approach to the farmer contract amendments to ensure we preserve upside potential if demand turns more quickly than anticipated. Relying slightly more on the breaker channel gives us the short-term flexibility to react to potentially higher retail demand as price gaps adjustments take hold. Importantly, I want to underscore that the contract amendments that are needed for the year are in place.

Turning to capital allocation and our balance sheet, we have taken aggressive, proactive steps to ensure our liquidity profile remains strong as we emerge from this period of oversupply. ended the quarter with $21.2 million in cash and had drawn $30 million against our previous revolving credit line. To strengthen our cash position, after quarter end, we put in place a new $125 million term loan and a new $60 million asset-based lending facility, replacing our previous revolving facility. Both new facilities have a three-year tenor. We have drawn the entire 125-man long-term loan, repaying the previous revolver. We now have significant financial runway to fund the business for the foreseeable future. More details on these facilities can be found in the current report on Form 8K that we filed this morning. At the very beginning of the second quarter, we executed $50 million of share repurchases at an average price of $13.29 per share.

After the end of the quarter, our board of directors terminated the 2026 stock repurchase plan, consistent with the terms of the new lending facilities. And, as we told you last quarter, we are halting construction of vital crossroads as we prioritize liquidity. We are focused on enclosing the building, which we expect to be completed by the end of fiscal 2026, so that the facility is fully protected against the Indiana winter weather while the indoor build-out is halted. This approach is reflected in our reaffirmed full-year CapEx guidance of $70 to $75 million. Looking ahead to the rest of the year, we are reaffirming our previous guidance, which calls for net revenue of $775 to $800 million and adjusted EBITDA of $0 to $10 million. We expect the distribution gains we are making to contribute to improving revenue performance over the course of the second half of 2026, and into 2027. We would note that Q3 is lapping a strong third quarter in 2025, while Q4 is the easier year over year comparison from a net revenue perspective.

Currently, we expect Q3 of this year to show a sequential improvement in absolute net revenue, while Q4 net revenue growth should reflect the full benefit of the distribution gains we have mentioned during the call today, It is typically our largest quarter of the year due to the seasonality of the business. Additionally, as the majority of our supply management measures are now driven by the contract amendments, the high impact from breaker sales that we experienced in Q2 will be very significantly reduced in the second half. This will directly support our bottom line, and we believe it will position us to deliver improved adjusted EBITDA in the second half of the year. The improvement in adjusted EBITDA from the first half to the second half is driven by three building blocks. First, in the second quarter we successfully right-sized our supply via the contract amendments resulting in much lower supply management costs. Second, increased distribution should benefit retail volume as the second half progresses. resulting in scale benefits. And finally, the structural cost reductions from the organizational streamlining that we conducted in May and July have reduced our annualized SG&A run rate by approximately six to $7 million.

As for the phasing of the recovery, we expect the second half performance to build sequentially. Q3 should mark a sequential improvement in revenue and adjusted EBITDA as breaker volumes abate. And then we anticipate Q4 will reflect the full operational leverage of improved retail volumes running through our streamlined SG&A cost structure. With that, I will turn the call back over to the operator, and Russell and I are happy to take your questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted, please press star 1 again. locally, please remember to unmute your device. Your first question comes from the line of Scott Marks with Jefferies. Scott, your line is open.

Okay, good morning, Russell Thilo. Thanks very much for taking your questions. wanted to ask about is this price gap journey you're on, let's say. Just curious if you can give us a sense of where you are in that journey. How far do you think you have to go? And.

and how deep do you think you have to go? Yes, good morning. Thanks for that. So I think as we discussed in our Q1 call, this is a, changing prices at retail is sometimes a little bit complicated, sometimes can take a little bit of time, and very much has to work for the retailer, as you can imagine, as well as for us. And so the other thing is that we want to be really judicious with how we deploy our capital. And so... Where we are right now is very much on track, we believe, to deliver our full year guidance based on the efforts we've got with specific retailers during specific time periods. And we continue to drive the gap between us and branded competitors on an average basis, closer and closer to that range we said we wanted to achieve. I don't know that on an overall basis for the entire market, we'll get exactly where we wanna be this year, but it reflects the right balance of speed, cost, and seeing a return to positive volume growth as we head into the back half of the year. So I think we're in a good position position again to return to growth with the right with the right cost structure, especially investments in pricing.

And we'll continue to look at what that right balance looks like as we head into 2027.

I appreciate the thoughts there. And then just as a follow-up, I'm wondering if you can give us a little more insight into some of these distribution wins that you've been speaking to. You know, where is it being realized? Is it in new doors? Is it more items on shelf? Is it kind of the core focus?.

for SKUs that you're expanding, just any other color you can provide would be great. Thanks. Yes, we have talked, I think for a few years now about the very clear opportunity to expand our core four items into largely existing doors. And while we've certainly had gains other items. For example, we launched a new SKU, which is a 24 count at Whole Foods and in a few other retailers to come. And a 24 count is actually proving to be really welcomed by the marketplace. We've seen a We've seen some really neat social media response to the 24 count. People are thrilled with that option, but we're also seeing early evidence of velocities that exceed our initial expectations.

And so there are some new products hitting the shelves, that one in particular I would call out, but in general, it's the core four in existing doors and really running that same playbook, which to us demonstrates that we, we have lots of opportunity with our existing portfolio. It doesn't require new innovation. It simply requires, as we set out to do this year, having plenty of supply and the conviction to bring that to our retail partners.

I appreciate it. I'll pass it on. Our next question comes from the line of Matt Smith with Stiefel. Matt, your line is open.

Hi, good morning, Russell and Tilo. Just following up on the price gap evolution, as you think ahead and the exit rate of this year, could you give a little more color on what your expectation is in terms of volume growth versus the pricing headwind associated with the price gap management taking hold?.

Yes, so we have a healthy amount of volume growth in the back half of the year. Tilo may want to add some detail around the composition of our sales growth and sales expectations for the rest of the year. But it's really volume driven from my perspective. And so as we end the year, I believe we'll be in a much healthier place in terms of volume driven growth. And we'll continue to both test and learn and experiment with where we want to lean in more in the portfolio with pricing versus less, where we're getting the best payback. and where we're seeing the best benefits for our retail partners.

as we get into the back end of the year, especially into the fourth quarter, and price gaps come down into the target range that we have, together with the distribution that we just talked about, volume, what should we pick up? So the headwinds that we've seen go today in terms of volume, but also in terms of retail sales pricing, those headwinds will become much easier to pick up. to manage and then in port four, we're dealing with much easier mapping.

and then we'll come up with an experience in the third part. Thank you for that. And the question for you on the feed cost program that you had some professional fees for in the quarter. Can you give a little more detail regarding, you know if you're looking at changing the way feed costs work through the supply chain and the evolution of potential more professional costs as we move through the second half of the year.

Yes, so the primary mechanism will actually be around you know, consolidating our the buying of feed across our network of family farms, across a smaller number of feed mills that have agreed to specific price frameworks for all of them. The savings opportunities don't lie in a change to how we actually procure feed. It'll continue to be the farmers themselves that buy the feed. It doesn't change, it doesn't rely on a change in the formula, the ingredients, that provide the right nutrition for the birds, it simply takes advantage of the scale we've achieved to get some better economics from the overall buy and to make sure that the feed formulas don't have anything in them that we haven't approved that aren't required by the birds. And it's just, I think it's a pretty straightforward exercise in just being better at procurement.

Appreciate that, I'll pass it on. Our next question comes from the line of Ben Cleave with Benchmark. Ben, your line is open.

All right, thanks for taking my questions. And really quick, Kilo, on your last question, you're coming in pretty soft there. as an FYI. My question for you guys is around the breaker channel dynamic. In your 10-K you noted breaker channels represented about 5% of the total. of your 24 and 25 revenues. I'm wondering if you can talk about the I WANT TO ASK YOU ABOUT THE BREAKER CHANNEL LAST YEAR ON A BREAKER CHANNEL LAST YEAR ON A DOLLAR BASIS THOUGH. DOLLAR BASIS THOUGH. EXCUSE ME, IT WAS 5% ON A VOLUME EXCUSE ME, IT WAS 5% ON A VOLUME BASIS. BASIS. CAN YOU TALK ABOUT THE BREAKER CAN YOU TALK ABOUT THE BREAKER CHANNEL REVENUES IN 2025 AND THEN and your revenue expectations for breakers in 2026.

Yes, so let's be set in the prepared for tomorrow. Sorry, Tilo, if you're answering there, I couldn't quite hear you.

is this better? Strictly. We are experiencing a technical difficulty. Please stand by as we resolve the issue. We will pause the broadcast temporarily. Thank you for standing by. We have resumed the call. Speaker, please go ahead.

Hey, Ben, can you hear me now?.

Trevor, can you hear us? Yes, I can hear you. We will temporarily move on to the next question, hoping that will resolve the issue. Ben Cleave, please feel free to rejoin the line. The next question comes from the line of Ben Mayhew with BMO Capital Markets. Ben, your line is open.

Hi, good morning guys. Can you hear me okay? Yes, we can.

OK, great. So I just wanted to ask a question around the new credit facilities and just to Just kind of the space and the buffer that that provides you, especially over the next year as you work to right size your supply levels and reaccelerate profit. If you could just add a little more context about what that does for your business.

for your model over the next year? Yes, what the new credit facilities allow us to do is to make the right decisions for the business in the long term. managing through the current oversupply across the industry and not constantly having to watch our cash balance. That's not to say that we're not not watching costs right now, we're not watching cash right now, we very much are. But with 185 million dollars in debt capacity compared to the 60 million that we had before, and being relatively free of financial covenants, it allows us to operate with the flexibility that we need right now to manage through this oversupply across the industry. We think the $185 million is more than what we need. And it gives us an insurance policy to make sure that we can operate and make the right decisions for the health of the brand and for managing long-term growth opportunities with short-term headwinds.

Thank you for that. And my follow up question has to do with the voluntary farmer contract amendments. I was just wondering if you could add a little context and describe kind of the downstream impacts of how these are going to work. And you know what's the pace at which you expect these actions to right size your internal supplies? I believe you mentioned that you know the eggs to the breaker market are going to be accelerate quite materially starting in third quarter. So if you could just expand upon that and just, you know, let us know how this is going to play out.

Yes, as we put in the press release and the earnings tag, total profit impact from the breaker market in the second quarter was over $20 million. We had a hit to gross profit, we had an additional hit from actually paying for the distribution to the breaker plans. And as we said in the prepared remarks, we're going to manage the oversupply going forward, not by sending expensive X to the breaker where we get literally pennies on the dollar, but by reducing the supply of eggs coming to the cold storage facility in the first place. So we still anticipate having some breaker expenses in Q3, potentially in Q4. That is to ensure that we maintain a bit of flexibility, should demand pick up faster than what we're currently modeling. We certainly want to avoid a situation like we had at the beginning of 25 when we had sold out our Nestron egg inventory and couldn't react to accelerations in the market. So there will still be breaker expenses in Q3, potentially Q4.

But we're talking a much lower range than what we had in Q2. potentially a lower range than what we had in Q1. Great, thank you.

Our next question comes from the line of Eric Delorier with Craig Hallam Capital. Eric, your line is open.

Great. Thank you for taking my questions. Nice job on the stabilization work thus far. One more question for me on price gap dynamics. Just wondering if you can sort of give us some color on what you're seeing from potential sort of retail pricing stabilization from your competitors in the category broadly, and then also Overall, it looks like a bounce in commodity egg prices on the wholesale level in recent weeks. Are you seeing any of that kind of extend to the pasture-raised category as well?.

Yes, thanks for that Craig. So as we have mentioned on prior quarter calls, we look at specialty eggs in relation to our brand as those eggs with outdoor access for the birds. So that would be both pasture raised and free range, for example. And there we've seen overall a fair bit of stabilization for pricing for our competitors, especially the branded competitors over the last four to 13 weeks. You see occasional blips where prices may come up or down on average as certain brands come off of a really hot promotion or maybe implement one. Some of those are planned well in advance. Some of those may be reactions to more temporary supply-demand imbalances. The contrast I would draw to how we're managing through the oversupply we've seen this year is we shifted from sending most of those excess eggs to the breaker to now working with farmers to reduce our supply.

I'm not sure how other producers are handling their oversupply situations. but one uh hypothesis is that when you see um really variable promotional activity pricing on average coming up and then sometimes coming back down for a certain brand it may indicate um that you know, supply demand imbalances that are occurring, that are being managed on the shelf instead of through the breaker channel. So I'm not seeing any particular brand showing a real change in trend other than stable at this point. And we are seeing signs of stabilization for commodity eggs as.

as well. That's really great color, I appreciate that. And then just a follow-up question, you know, retail or order patterns, one of the things that were disrupted as this oversupply became evident. Could you just give a comment on sort of what you're seeing from retail order patterns of those kind of, stabilized or volatility come down along with the more stabilized pricing?.

Yes, that's actually been an area of extreme focus for us. Over the last few years, during an extended period of tight supply in the market, we we haven't invested as much time as we might have in a more normalized environment of working closely with retailers on a week-by-week basis to examine their order quantities and to help ensure that they're not over or under ordering relative to the plans we've got with them to grow. And what we did see earlier this year when in some retailers, you saw velocities below maybe where we expected them to be, or perhaps where the retailer or distributor expected them to be. Sometimes there is a gap between when the, the sell-through at retail started to come down and the orders supporting those sales came down and you started to see some inventory expansion and then contraction, those a bullwhip effect in the supply chain as I think they called it in business school. And we're working much more closely and really focused on making sure that we don't see a resumption of those sort of disruptive patterns. And we're feeling much better about the right levels of inventories at our top customers and our ability to work with them to make sure that we don't see any big swings one way or the other.

All right. Very helpful call. Thank you for taking my questions. Our next question comes from the line of Glenn West with William Blair. Glenn, your line is open.

Hi guys, this is Glenn West stepping in for John Anderson. Just one question. So last quarter, I think we're thinking are talking about 2Q, even though like negative mid to high teams, and it came in, you know, a little higher this quarter. And then I know you laid out kind of the three building blocks to get to the guide that you obviously reaffirmed. But maybe just some more color on what gives you confidence that that swing is going to work and how much of that. that is kind of already locked in versus dependent on things playing out.

Thank you. Yes, I think as it comes to relative to what expectations were, volume to retailers in Q2 was maybe a smidge lighter than what we expected. There was one retailer in particular. where we're switching from shipping through distributor to going to selling directly to the retailer. That transition took a bit longer than we thought. And because of that promotions got pushed back by a few weeks that certainly had an impact on the quarter. And given the oversupply situation that we are in, that is really a double whammy for us then right on one hand we are not getting the revenue from that promotion during the quarter that we expected and therefore not the the gross profit that we expected and then the eggs that we didn't sell to the retailer we now have to send to the breaker and incur additional costs for that so that's a bit of of the variation there. I think the other piece that probably wasn't in most models for second quarter was the one-time expense that we had for the professional service for the feed project. That's a $3 million expense that we all experienced in Q2.

But that's not a repeating expense going forward. When I now think about what are the building blocks that we need to deliver the guidance, it really comes down to the things that we talked about in the prepared remarks. We keep bringing price gaps down that will accelerate velocity. We are getting the distribution gains that they were sold in. We have the visibility to them, the TDPs of 170 to 175 points by Q4. That is something that we have clear line of sight to because the sell-in has already happened. And then we're taking costs out of the system.

We talked about the $6 to $7 million of SG&A reduction. That's 10% of our people-related costs in SG&A. That's 5.5% of last year's SG&A. That's not an insignificant reduction for us. And those are then the drivers to... to get to the guidance. It really comes down to, can we accelerate volume enough? to make sure that we get the leverage in the P&L. And that is where we have confidence that with the price gap measures that we're taking and the distribution gains that we we know are coming, that we will get that leverage to get margins back up again.

Super helpful color. I'll pass it on. Thank you guys.

Our next question comes from the line of Sarong Vora with tag. Sarong, your line is open.

Great, thank you. And good to see stabilization in the back half of the year. My question is around price gaps. You know, as you narrow this price gap to, you know, one to two dollars in general, and kind of keep it over there, given, you know, how the competition has changed in the space. Do you think this has an impact on the structural gross margin level of the company? I know it's coming back to 30% exit towards the fourth quarter, but in the past, we have been talking mid-30s. I'm curious to know if the lowering of the prices or competitive landscape has an impact on the structural gross margin level. Or are there any offsets like feed cost and stuff that can help it go even higher from north of 30? So curious to hear your thought on that.

Yes, thanks for the question. Let me be very clear. I don't think we expect anything north of 30 if you're implying that we should be planning for a 4 handle on our gross margin. What we said in the prepared remarks was that we think we'll have an exit rate in Q4, meaning at the end of Q4. gross margin that starts with a three again volume leverage across ecs and cost of goods sold certainly plays into that and that is assuming that we're bringing the price gaps down uh what will then help us next year is the savings from the feed project that we've talked about um If you recall on the first quarter call, we said that last year feed costs were about $125 million. And we expect to save a decent enough amount of that, more than $1.2 million, in order to make it worth our while. Now, with increasing fertilizer costs, We expect that feed cost will increase for us as we go into the end of the year and then next year. So the feed cost savings that we're getting from this project are are at a minimum offsetting these higher input costs because of fertilizer. But we think there is a structural cost reduction that we can accomplish with this project that ultimately will help us pay for the price gap reductions.

That's helpful. And I had a quick follow-up on the TDP growth. Can you help us understand the TDP growth by channels? Where do you see it's a significant growth? So I'm just curious if you can share, there is an opportunity or volume expansion happening in grocery, mass, natural, just curious if you can share that. and share any more color where you are seeing the DDP growth.

Yes. So the distribution gains that we've been talking about that are coming, they're across the board. I think we have the biggest opportunity in the mass channel. There are certainly doors that we are not in today and our average items carried in the mass channel is lower than in the food channel or natural. But even in natural, where we already have very healthy distribution with a 24 count that Russell had mentioned earlier, there's another opportunity for us to get another SKU on the shelf. And so we expect to get TDP gains across all channels that we're in today, maybe with a bit more focus on mass. because that's where we still have the lowest distribution today. Helpful. Thank you and good luck ahead. Thanks, Tom.

Our next question comes from the line of Jack Cito with Needham & Company. Jack, your line is open.

Hi, guys. This is Jack on for Gerald. I guess, how are you thinking about long-term CapEx post-26? Not looking for guidance or anything, but just trying to understand how flexible you are with growth spend versus maintenance once the foundation of VXR is completed and.

Yes, so VXR, as we said, first quarter call and then repeated again today, VXR, the plan is to halt construction once the outside of the building is basically completed. We will then need about nine to 12 months lead time between deciding that we need the capacity from VXR and actually getting X out of the new facility. And so we're modeling potential demand for the coming years very, very frequently to make sure that we find the right time to restart construction of VXR. Based on how we've talked about CapEx guidance before, how we talk about it today, you can do the math that there's about 80 or 90 more million dollars that we need to spend on VXR once we restart construction. But we will only do that once we have a very clear signal that we will actually need the capacity. Once VXR construction is done, then we'll go back to a time of just maintenance capex. In the past, we've spent, let's call it, $10, $15 million a year on CapEx.

That was a combination of maintenance and some smaller projects that we have been doing at ECS. So once we are through this intense CapEx phase with VXR, expect that CapEx spending will fall back down to somewhere of that range, what we have seen prior.

to starting spending on VXR. Okay, that's helpful. And then as a result of the new deal, can you kind of talk about any updated capital allocation priorities? You obviously announced the termination of the repurchase program, but any more color there would be great. Thanks.

Yes, the capital allocation priorities really haven't changed from how we've talked about in the past, right? First one is keeping lights on. Second one is making sure the brand can grow and we have the capacity. Third one is that we gain efficiencies. And then the fourth one would be to return monies to shareholders. Right now, given the new loans that we have, the ability to return money to shareholders is constrained. That's simply part of the loan agreements that we signed. That doesn't take it away for us in to perpetuity, but for the time being, that is simply not something that we can focus And so that then makes us focus on the first three priorities for capital allocation and ensuring that the brand can continue to grow, that we have the capacity in place, that we have the support for the brand in place.

That's probably the biggest priority that we have right now.

Okay, thank you. Our next question comes from the line of Robert Moscow with TD Cohen. Robert, your line is open.

You said that it's taking some time to get the price gaps back to where you think they should be. with retailers and I was wondering what's more difficult? Is it getting them to adjust your pricing or is it, getting, you know, keeping track of what the competition is doing.

Hey, Rob. Thanks for the question. The competition shows that the just as we do in the scan data every week. So it's relatively straightforward to, keep an eye on that and make some fact-based decisions based on that kind of information. I think, you know, we've got, again, we feel confident that the work we're doing and have already done both on, uh, narrowing price gaps and, um, and expanding distribution this year should deliver the guidance that we've outlined and reaffirmed today. the pace at which we continue to invest in price and how far we go has a lot of has a lot to do with balancing, making sure that we are at a relevant price gap for consumers, especially those who might be trying us for the first time, and also continuing to invest in and protect a really premium brand we've built. That's why, for example, we have favored the breaker channel in the short run to manage through oversupply as opposed to kind of race to the bottom hot promotions as one example. We have a brand that we need to invest in for the long haul as well. So it's really a balancing act across a period of time in working with our partners. the retailers, but also making sure that we're sending the right signals to consumers about the fundamentally different value proposition we offer and making sure we get credit for that.

Okay, thank you. Thanks, Rob. We have reached the end of the Q&A session. I will now turn the call back to Brian Shipman for closing remarks.

Thank you everyone for joining us today. Feel free to reach out directly if you have follow-up questions and we'll talk to you next quarter. Have a great day.

This concludes today's call. Thank you for joining. You may now disconnect.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Good day, and thank you for standing-by. Welcome to Vital Farms First Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand it over to your host, Brian Shipman, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Vital Farms first quarter 2026 earnings conference call and webcast. Joining me today are Russell Diez-Canseco, Vital Farms' Executive Chairperson, President and Chief Executive Officer; and Thilo Wrede, the company's Chief Financial Officer. By now, everyone should have access to the company's first quarter 2026 earnings press release issued this morning.

During today's call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and do involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release, the company's quarterly report on Form 10-Q for the fiscal quarter ended March 29, 2026, that was filed with the SEC today, as well as the company's other SEC filings 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 refer to today's press release and presentation, each available on the Investor Relations section of our website for a reconciliation of the non-GAAP measures referenced in today's call, including adjusted EBITDA and adjusted EBITDA margin to their most directly comparable GAAP 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.

After our prepared remarks, we'll open the line for questions. As a reminder, please limit yourself to 1 question plus 1 follow-up so that we can hear from as many participants as possible.

Now I'll turn the call over to Russell.

Thank you, Brian, and good morning, everyone. I'd like to start, as I always do, by thanking our crew and farmers. I believe they're the best in the business, and it is my privilege to work alongside them in our effort to improve the lives of people, animals and the planet through food.

I want you to take 3 key messages away today. The results we saw in the first quarter and scanner data so far in the second quarter fall short of our expectations, because price gaps reached levels that our brand could not sustain. We believe we're adapting quickly to this new more pressured environment by reducing price gaps, addressing our cost structure and managing cash. To be clear, we believe our brand will support a price premium, just not as much as we've seen over the past few months. Finally, we see this as a reset of our expectations for 2026, but not a reset of our ambitions. The underlying opportunities that have driven our growth for over 15 years and the strengths that Vital Farms brings to the marketplace remain. We believe we can fulfill our purpose and drive profitable growth in both good and bad markets.

Let me start with setting the stage a bit and remind you how we thought about this year going into it. We entered this year armed with the benefits of our work from 2024 and 2025, expanded consumer awareness and the playbook to convert that awareness into profitable growth through household trial and expanded distribution. That work was enabled by our expanded farm network, processing capacity investments at Egg Central Station and the improved workflows and data accessibility from our ERP implementation. We expected commodity egg prices to fall as the industry experienced a much milder avian influenza season and flocks were rebuilt. With that context in place, our strategy going into the first quarter was to increase investments in promotions back to levels appropriate for a market that is well supplied.

So what changed? The outdoor access subcategory in which we compete has continued to command a strong price premium at retail. However, it moved down directionally with the broader market. Against this backdrop, our first quarter promotions proved insufficient, because pricing across the category declined much more than fundamentals would have suggested, price gaps reached levels we hadn't seen in the past, and we found the limits of what our brand could sustain.

We believe this increase in price gaps has driven the sharp reduction in velocities we have seen in many markets. It's important to note that despite these price gaps, our existing base of consumers have remained loyal. However, the rate at which new households are trying us for the first time dropped significantly. In 2024 and 2025, more than 55% of our consumers were households that had not bought us previously. That dropped to just 50% in the first quarter of 2026. This demonstrates our reduced ability to convert growing brand awareness into trial at these price gap levels. In contrast, our consumer data also shows that our existing consumers continue to be loyal and have generally resisted trading down to lower priced alternatives. Buy rates are holding up very well with units per retained household 2% higher in the first quarter than the average for the prior 8 quarters. In other words, the larger-than-expected price gaps have led to a slowdown in new consumer acquisition, which shows up in market data as a slowdown in velocity.

Therefore, our focus now is to reduce price gaps and our data indicates that this will make a difference. Our data shows that in geographies where price gaps to outdoor access competitors have widened the most, volume growth is negative. And where price gaps have remained more moderate, we continue to see healthy growth without needing to race to the bottom on promotions. That means we need to narrow these price gaps in the marketplace in a targeted way, geography by geography and retailer by retailer. That work is underway, and we believe initial efforts show positive results.

For example, we recently addressed price gaps at a top 10 customer, bringing them from about 35% above a group of competing premium branded outdoor access eggs to about 25% and volumes increased by 18% after just 2 weeks compared to the prior 4 weeks. Even with price reductions, we believe we still command a meaningful premium to our most direct competitors and can earn an attractive margin. It will take time to fully align the cost structure with these price levels, but we believe that we can generate the gross margins and EBITDA margins necessary to deliver strong shareholder value.

The other aspect of our strategy going into the year, converting a more adequate supply into distribution gains is playing out as we expected. We're seeing strong distribution momentum with additional placements and resets expected to take effect as we move through the middle and back half of the year. Retailers are highly interested in our brand and the productive conversations with our retail partners that we mentioned on the fourth quarter call a few months ago are bearing fruit.

We've secured an at least 50% TDP increase with a top 3 customer, negotiated direct distribution instead of going through a distributor with a top 10 customer and have been assigned the category captain role for eggs with a banner of another top 3 customer. This is in addition to several distribution wins with customers across all geographies. All-in, we anticipate that we will add 20 to 30 TDPs or 15% to 25% over the course of 2026, and we expect to produce our single best yearly gain in TDP since going public as measured in Circana MULO+ for Shell eggs. Additionally, looking at the quarterly average, we've already ended the first quarter at 149.8 PDPs compared to a fourth quarter 2025 average of 144.8 and 115.8 in the first quarter of 2025 and expect the quarterly average could be between 170 to 175 in the fourth quarter of 2026, given the visibility we already have to commitments for new placements later in the year.

We're also adapting quickly to this new more pressured environment by addressing our cost structure and managing cash expenditures. Narrowing price gaps requires a higher level of investment than we anticipated entering the year, reflecting the lower prices we're seeing in the marketplace. This will compress margins more than we initially forecast at least through the remainder of this year. There is work to do to adapt our cost structure to this environment, and we're pursuing it with rigor. Much of that work across both COGS and SG&A is already underway, but we expect much of the impact will be realized in 2027 and beyond.

As a result, we view 2026 as a low watermark for margins in this cycle with our primary focus this year on returning the top line to volume-driven growth. We view 2027 as the year we will bring the underlying economics of the business back to a level that appropriately reflects the value we create through our brand and differentiated supply chain. Actions we're taking to adapt our cost structure and underlying economics include the following: First, we're right-sizing supply. A big impact on our short-term margins is the cost of oversupply relative to our current rate of retail sales. Because we buy eggs from our farmer partners regardless of the retail sales environment, temporary imbalances between supply and demand can create a costly supply overhang.

In the short run, this results in expanded inventories and then increased low revenue sales to the breaker channel. Since we expect the supply-demand mismatch to persist over the coming months, we're working with some of our farmer partners to manage supply through voluntary amendments to their contracts to cease production from existing blocks or delay placement of future blocks. In return, we make payments to the farmers to compensate them for the foregone profits, but that still represents meaningful savings versus the full cost of buying eggs we don't need. You will see the impacts of this in our results this year. We expect that these actions taken throughout 2026 will bring supply in line with our projections for the rest of the year.

Second, we're reducing COGS. The first action we're taking to reduce COGS is addressing staffing at ECS. We have adjusted our staffing plan at ECS to better match labor costs with processing volume and anticipate this to eliminate approximately $4 million of costs for the year. We're also working on COGS more broadly with feed costs being a promising target. Last year, feed accounted for roughly $125 million in COGS. Work is underway to lower our expenses, and we expect improvements to flow through our P&L in 2027.

Third, we are managing SG&A. This week, we eliminated roles representing approximately 10% of our remote or non-ECS headcount. While these actions are never taken lightly, they are appropriate given the business reality and reflect an ability to capture savings from our ERP implementation and other innovations in our ways of working.

Fourth, we're controlling CapEx. We have slowed our rate of investment in certain growth-related projects to better align them with our current environment. Most critically, we will meaningfully slow the construction of our planned Vital Crossroads facility in Seymour, Indiana, and will reaccelerate only when we have more clarity on the exact timing of the need for incremental capacity. As a reminder, we have over $1 billion in revenue capacity from exit ECS. We've also paused the construction of our accelerator farms. We will continue to operate the 6 farms already built and maximize learnings from them. These 2 actions allow us to reduce projected 2026 CapEx by approximately $75 million, while also maintaining optionality to add back that additional capacity as early as the second half of 2027.

Fifth, we are exiting butter. We have made the decision to exit our butter business, ending shipments toward the end of the year. We expect that this will free up $25 million in cash this year, reduce sales by an estimated $14 million in 2026 and improve gross margin by 150 to 200 basis points starting in 2027. This was not an easy decision, but we believe it's the right one, both for its near-term impact on our economics and because it refocuses human and financial capital to pursue more productive growth opportunities.

The complexity of an international supply chain in a very uncertain global trade backdrop contributed to our conclusion that this was no longer an appealing business for us. All of this means that we need to update our guidance for the year. Our focus now is on restoring strong volume growth. With the need to address pricing in a very strategic fashion in the market, our revenue outlook and our margin expectations have changed. In addition, because especially in the first half of the year, our supply is meaningfully higher than our demand, we are incurring extra costs to reduce our supply.

With that, we are reducing our net sales guidance to a range of $775 million to $800 million for 2026 and adjusted EBITDA to $0 to $10 million. This EBITDA guidance includes the negative impact from an estimated $32 million of supply management costs for this year. The slowdown of the work on Seymour and the pause in the build-out of Accelerator Farms allows us to reduce CapEx guidance to a range of $70 million to $75 million. We assume that we will have to maintain the current level of pricing investments through the balance of the year. Even at these levels, we anticipate underlying gross margin to return to 30% by late Q4 and adjusted EBITDA margin to get back to double digits in 2027.

I also want to be very clear that the underlying opportunities that have driven our growth for over 15 years haven't diminished. We continue to have strong confidence in the opportunities presented by the premium outdoor access egg category and our ability to win over the long term, even in a challenged category and macro environment. There is a continuing secular shift in consumer preferences for clean label whole foods. Consumers continue to vote with their wallet for both premium branded and private label alternatives to the status quo. In fact, adoption is accelerating. Outdoor access eggs have grown from 8% of category volume in 2023 to 15% so far in 2026, even with commodity eggs at their cheapest in years. In fact, year-to-date alone, outdoor access eggs have grown 32% versus prior year in volume compared to mainstream eggs growing only 4% despite the lowest price in years.

I would like to end by reiterating some of the key strengths by which I believe Vital Farms will continue to win even in a more competitive environment. We have built a brand on transparency and trust, which are rare and increasingly important to consumers. Our network of farmers and differentiated supply chain, including our own packing plant, have demonstrated real resiliency and neither is easy to replicate. We have a winning track record with our retail partners. We're demonstrating the value of that partnership by expanding our distribution and leaning further into joint business planning to drive long-term growth. And underpinning all of this is our crew. We view their capability and commitment to our purpose and values as a genuine competitive advantage.

In summary, the results we saw in the first quarter and that we have seen so far in scanner data in the second quarter fall short of our expectations because price gaps reached levels that our brand could not sustain. We believe we're adapting quickly to this new more pressured environment by reducing price gaps, addressing our cost structure and managing cash. We see this as a reset of our expectations for 2026, but not a reset of our ambitions. The underlying opportunities that have driven our growth for over 15 years and the strength Vital Farms brings to the marketplace remain.

Now let me turn it over to Thilo to walk you through more detail behind what we've shared today.

Thanks, Russell, and hello, everyone. Let me walk you through our first quarter financial performance, and then I will provide details on our updated outlook for the full year. Net revenue for the first quarter of 2026 was $187.2 million, an increase of 15.4% compared to the prior year period. Revenue growth was driven by volume-related increases of $34.7 million and partially offset by a price/mix decline of $9.7 million. The price/mix decline was primarily driven by a higher-than-anticipated volume contribution from the breaker channel to manage an oversupply of eggs. With breaker prices being as low as $0.10 per dozen during the quarter, price/mix turned negative.

Gross profit was $53 million or 28.3% of net revenue compared to $62.5 million or 38.5% of net revenue last year. The year-over-year decline in gross margin was mainly due to the unfavorable volume mix shift to breaker sales and elevated costs associated with supply management actions, together with the impact of increased promotional activity. Excessive breaker sales reduced gross profit by approximately $4.9 million. We consider excessive breaker sales to manage our oversupply of eggs any volume above the 2024 and 2025 average contribution of breaker volume to overall egg volume, which was 4.9%.

SG&A increased to $44.2 million or 23.6% of net revenue compared with $31.9 million or 19.7% of net revenue last year. The year-over-year growth in SG&A was mainly due to the execution of our planned doubling from a very low base of marketing expenses and the year-over-year increase in headcount and employee-related expenses. Shipping and distribution expenses increased to $11 million or 5.9% of net revenue compared to $8.8 million or 5.4% of net revenue last year.

Net loss for the first quarter of 2026 was $1.5 million compared to net income of $16.9 million in the prior year period. Net loss per diluted share was $0.03 for the first quarter of 2026 compared to net income per diluted share of $0.37 in the prior year period. Adjusted EBITDA for the first quarter of 2026 was $5 million or 2.7% of net revenue compared to $27.5 million or 16.9% of net revenue for the first quarter of 2025. The decrease in adjusted EBITDA was primarily driven by lower gross profit margins and higher operating expenses.

Turning now to our balance sheet. As of March 29, 2026, we had total cash, cash equivalents and marketable securities of $51.4 million with no debt outstanding. The sequential decline in cash, cash equivalents and marketable securities reflects primarily negative cash flow due to an inventory building, the cost of supply management initiatives and continued CapEx investments for the construction of our planned VXR egg washing and packing facility in Seymour, Indiana and accelerator farms. Furthermore, we repurchased over 1 million shares for $20 million under our share repurchase program. And as of March 29, 2026, $80 million remained authorized under the program.

As Russell already mentioned, we are updating our full year 2026 guidance. We now expect net revenue of $775 million to $800 million and adjusted EBITDA of $0 million to $10 million. The EBITDA outlook reflects a negative impact of approximately $32 million from cost to manage the current oversupply of eggs via breaker sales and other low or no revenue channels and the voluntary amendment to farmer contracts to cease production from existing flocks or delay placement of future flocks that Russell had already mentioned.

The updated guidance also assumes the following: First, that outdoor access egg retail prices and breaker prices through the end of the year have stabilized at current levels. Should outdoor access egg retail prices erode further, and we have to invest more than currently planned to reduce price gaps, we will incur additional costs that will reduce revenue and profit.

Second, we have high volume to the breaker channel and other low or no revenue outlets to manage our excess supply of eggs in the second quarter. Going forward, I will collectively refer to these as excess breaker sales.

Third, for volume from revenue-generating channels, we assume negative price/mix for the remainder of the year as we are reducing price counts. As the price actions start to be reflected on shelf, revenue-generating volume growth is expected to turn positive in the third quarter. We assume an acceleration of growth in the fourth quarter as these initiatives fully take hold and we see the full anticipated benefits from distribution gains.

And fourth, we estimate a $14 million net sales reduction compared to our previous guidance due to the wind-down of our butter business. For EBITDA specifically, the guidance reflects an estimated $32 million of incremental expenses to manage our current oversupply of eggs this year. We are incurring costs from sales to low or no revenue channels like the breaker market and other measures we are taking to manage supply. All of these costs are recorded in COGS. It also reflects higher than previously anticipated promotional spending and price investments that we expect will lead to a strong shell egg volume growth recovery. And we expect to incur additional costs in association with our butter exit and addressing our SG&A cost structure. The anticipated adjustable onetime costs from these actions are already reflected in the adjusted EBITDA guidance.

Regarding the expenses to manage the oversupply of eggs, I want to point out that the profit impact of excess breaker sales is recorded in the quarter it is incurred. On the other hand, expenses for the amendments to farmer contracts will flow through the P&L over the next several years. Since they fall under lease accounting, we amortize them over the remaining length of each individual farmers contract. The cash impact is happening more quickly as we're paying farmers in equal installments over the duration they are not producing for us. We will provide an update each quarter on the impact from these costs, and we expect that excess breaker sales will likely be concentrated in the second quarter of 2026 and that farmer contract amendments will drive the majority of supply management costs thereafter.

Regarding our expected cadence for the remainder of 2026, we anticipate an inflection beginning in the third quarter as our pricing actions show effects, our costs related to supply management begins to slow and our distribution gains from retail resets take full effect. Furthermore, we are shifting the intention of our marketing from building brand awareness to driving trial and expect to start seeing results from that by the third quarter as well.

We expect the fourth quarter to show sequential improvement from holiday seasonality, driving stronger consumer demand from the full benefit of distribution gains secured throughout the year and from the cost structure adjustments taking hold across the P&L. That means that we expect the shape of the year will be back half weighted, reflecting the market dynamics we are navigating, the timing of our actions and the nature of the costs we are absorbing in the first half.

We currently anticipate gross margin to return to 30% by late fourth quarter and underlying adjusted EBITDA margin to get back to double-digits in 2027. This assumes no change from the new price levels that we are now targeting with the actions we described today. As more of our cost reduction efforts start to benefit the P&L in 2027, we expect margins would improve from there even at current price levels. And as quarterly supply management costs start to decline, and we are improving scale again, we expect to see a clear path back to the earnings profile implied by our long-term model. Even if pricing in the industry were to temporarily deteriorate further this year, we still view our business model as very appealing with an attractive margin structure.

To round out guidance, we are lowering our CapEx guidance to $70 million to $75 million by pausing construction of additional accelerator farms for the time being and slowing the construction of VXR. We are still very much pursuing the idea of accelerator farms to enable R&D that will lead to better outcomes for all of our family farmers. But as we are focused on limiting our cash outflow this year, pausing the build-out of the accelerator farms is a good lever to pull.

Given the slower than initially expected growth this year, the slowdown of VXR allows us to more closely align future capacity needs with expected demand that will enable us to avoid adding costs to the P&L prematurely and will help with the recovery of our margin structure. With these 2 changes, we still anticipate negative free cash flow this year due to the cost to manage our oversupply, but we currently anticipate being able to fund this with our existing cash and investment position and by relying on our existing credit facility. To be clear, this is not a change to our long-term capacity strategy or our commitment to VXR. We remain fully committed to this project and the critical role it plays in our long-term growth aspirations. We plan to continue to pace the construction of VXR to match market reality and to manage our balance sheet prudently during this transition year.

Let me close with reiterating what Russell shared. Our first quarter results fell short of what we expected to deliver and what we believe this business is capable of achieving. We believe we are addressing the challenges we are facing, and we are confident in our updated commercial plan going forward. We've identified the specific actions that we believe are necessary, and we are moving with urgency to execute against those plans. In addition, we are encouraged by meaningful recent wins, including expanded placement with top-tier customers.

Thank you for your time and your interest today. We are now opening the call to questions.

Your first question from the line of Matt Smith with Stifel.

Russell, you called this reset, a reset of the year, not the ambition. The industry is recovering from a multiyear impact of avian influenza. And as you look at the competitive dynamic today, is this the new normal? And if that's so, is the long-term margin target, is that still relevant for Vital today? You talked about exiting this year at near 35% gross margin and double-digit EBITDA, but there's still some action in the background that could be a longer-term drag on the margin structure from pausing farmer contracts and incurring higher costs down the road. I guess what's the confidence in getting back to that double-digit EBITDA margin even if today's environment becomes the new normal?

As we said in the prepared remarks, we are not assuming or waiting for a pricing recovery in the broader market to support our recovery in gross and EBITDA margins as we head into 2027. We are focused on making sure that we deliver the right economics even at these distressed prices in the market, although historically, they have not been enduring.

And Thilo, as a follow-up on the oversupply of eggs. You called out a $32 million cost associated with excess breaker market sales. Can you talk about the scope of the oversupply initiatives? When you think about the difference between the anticipated supply this year versus your current outlook, how much of the difference there is weighted between what you're sending to the excess breaker volume market versus working with farmers to pause production? Just trying to understand the scope of those 2 initiatives in relation to the supply dynamic.

Yes, great question, Matt. So the excess breaker market -- and to clarify, when we talk about the excess breaker market, we really talk about multiple outlets that are low or no revenue, right? That can be the breaker market, that can be wholesale. We might do donations from time to time. So that market, sending eggs to a market that doesn't really pay us a whole lot for the eggs, that is the fastest, most straightforward way to deal with an oversupply in the moment. Getting farmers to not produce for us is a much more enduring way to manage an oversupply. But it takes a bit of time to get that going. It's individual contract amendments that we sign with each farmer who we are asking not to produce for us.

So the immediate action, the immediate outlet is this excess breaker market. You saw the impact that we had in Q1, that was $4.9 million. We talked about $32 million for the full year. The vast majority of that will hit us in Q2 as we are sending more to the breaker market while we're getting the contract amendments lined up. Once we get through the first half of the year, and we have managed this oversupply that we have in the moment, and we can address it much more thoughtfully with contract amendments for the farmers. The running cost will go down quite a bit from what you will see in the first half. But because of the accounting rules, those are costs that will follow us for several years. But on a -- you asked the question about long-term margins before. On a total margin impact for the year perspective, as we get back to volume growth and the scale that comes with that, the impact on margins in the longer term will be very limited.

Our next question comes from the line of Eric Des Lauriers with Craig-Hallum Capital Group.

Eric, we can't hear you.

Sorry about that. Can you guys hear me now?

Yes, we can.

So I just wondering if you could touch on your source of cash outlook here. So you have $50 million in cash on the balance sheet or so and then plan to spend another $50 million to $55 million in CapEx this year. It looks like you'll likely need to draw down on the debt facility. Could you just remind us what sort of covenants to be aware of here and how discussions with the lenders are going?

Yes. I think your math is right there, Eric. We will start using the revolver. We -- the 2 financial covenants that we are watching is a net leverage ratio, which sits at 3.5x and a fixed charge coverage ratio, which sits at 1.35x. We have been talking to JPMorgan for several weeks now. The process is ongoing. And once we have an update there, we'll provide that.

Our next question comes from the line of Brian Holland with D.A. Davidson.

Can you just maybe help -- and you've provided sort of some broad brushstrokes on the balance of the year where you expect to end, et cetera. It sounds like Q2 will be the bottom. Can you get a little bit tighter on where exactly you expect EBITDA to bottom presumably in Q2, just to help understand the rate of inflection your outlook is sort of presuming for the second half?

Yes, in Q2, we're expecting negative EBITDA. The big impact will be that the majority of the $32 million in supply management costs that we are anticipating -- the big impact will be that the majority of this cost will hit us in Q2. The underlying EBITDA, so if you take out the supply management costs in Q2 will be probably very similar to what we had in Q1. So the shape of Q2 looks similar to Q1, maybe slightly lower revenue because we didn't have the strong performance that we had in January. And then you take the EBITDA without the onetime expenses and you subtract, let's call it, 80% or so of the supply management costs for the year, that gets you to an EBITDA number that's mid- to high teens on the negative side.

Okay. I appreciate that.

And so Brian, just to be clear, it includes about low 20s of supply management costs, right, low $20 million of supply management cost.

Got it. And then maybe just as we think through the balance of the year, obviously, it's been very difficult with industry dynamics to kind of even project your business in the near term. You -- and Russell obviously outlined a number of initiatives that are within your control and particularly on the top line, getting tighter on the price gaps, distribution gains that you seem to have visibility on. Maybe just from a competitive standpoint, to what extent can you or do you have visibility on what the price and promotion dynamics might look like around you to maybe give you confidence that the initiatives that you are implementing or that which is within your control will be kind of sufficient to support the glide back that you're projecting here?

Yes. So we don't have clear visibility into the plans of other players in the marketplace. What we do see is that we've seen historically low pricing for commodity eggs. And to the extent that, that may be impacting the pricing and promotional cadence of other players in the premium egg space, you could imagine that, that influence doesn't become much stronger in terms of adding downward pressure. There's not much more room for commodity eggs to go in that regard.

And the other thing is that historically, we've seen that most players in this space respond to an oversupply dynamic in the way that we are, which is to say you're making some investments in price, you're also making some plans to reduce the supply overhang and get your supply back into balance with your demand. So that's historically how this has all played out over the course of a cycle, and we don't have any reason to believe it will be different this time.

Your next question from the line of Robert Moskow from TD Cowen.

I guess a couple of questions. One is, is the butter business losing money? And what were some of the other options you may have pursued other than just, I guess, just exiting the business? If there's consumers who buy it, is there a licensing arrangements you could have explored? It seems like reducing your presence in the store feels like a bit of a step backward just in terms of brand awareness. So I was just wondering what other options you may have explored.

Yes. I appreciate that, Rob. And this -- as we said in the prepared remarks, this wasn't an easy decision, but it was one that we put a lot of thought into, and we believe it was the right one for the business. We work with our supply chain partners to explore a variety of potential changes to the business to make it sustainable for us and to make it the right area of focus at a time when we have a lot of opportunities for both capital and management focus. And we just felt like at this time, the highest and best use of our capital and management capacity was to focus on the opportunities in the egg business. We've got much more of a competitive advantage there. We've got much more of our own differentiated supply chain there. And so that's where we saw the enduring upside potential for now.

Okay. And then a follow-up. You've been working very hard to expand your farmer network. It's competitive, getting farmers to join your system. And now you're kind of buying them out to reduce production. Does that impact your relationship with these farmers in any way? Like do they view -- you always take care of your farmer network. So do they feel like they're being taken care of right now? Or is there any kind of backlash from these changes?

I think the way we approach those conversations is in the same spirit as we approach our relationship with our stakeholders. This is voluntary on their part. So it's got to meet the market. They have to feel that what we're offering them is still beneficial to them and consistent with what they expected. And I think that only serves to strengthen our relationship with our farmers, treating them in this way, fulfilling our obligations and making that long-term investment in those relationships, I think, serves us well over the long haul.

Your next question from the line of Glenn West with William Blair.

This is Glenn West on for Jon Andersen this morning. Russell, you kind of noted some category metrics just on the outdoor access category. It's grown to 50% volume share, I think you said and up 32% year-over-year. I guess I just -- maybe you could help lay out the category. Is it like private label that's driving a lot of those share gains, more competition from new in surgeon smaller players? Or how is Vital sitting there in terms of share as well?

I'd start by saying that we have seen for more than a decade that countries like the U.K. that are much further ahead in general awareness of food choices and food production systems are well above a majority of eggs being produced from outdoor access flocks. I believe the U.K. is well over 75%, in fact. And so one of the questions we've gotten over the years is, well, how high is that for the U.S. And I think part of what underlies that question is what's the willingness of consumers broadly across the economy to pay up for a better egg in their estimation. And we're seeing growth both in branded and private label.

But most importantly, I think against an increasingly challenged macro backdrop, we're actually seeing an acceleration of adoption of outdoor access eggs on a volume share basis. And that shows up in the accompanying exhibits. And so from that perspective, I think the thesis that there's a real opportunity, an enduring opportunity in premium outdoor access eggs is as strong as it ever was. And we're seeing room for brands and for private label and for us in that group.

Your next question from the line of Benjamin Mayhew with BMO Capital Markets.

My first question has to do with the Vital Crossroads plant. And just thinking about when the industry might be able to adjust production and how long you're going to be able to slow roll the construction of this plant while still making the return economics make sense. If you could just reconcile kind of how you're thinking about that, that would be great.

So our focus now is returning Vital Farms to volume-led growth and we see a clear path to doing that with the pricing actions we're taking. The approach with Vital Crossroads is to pause construction at the point at which we can turn it back on and complete it in less than a year. And that means that we have a relatively short lead time to add that capacity when we have clear visibility to needing that capacity. So we don't see the pause as impacting our medium or long-term growth plans or potential. At the same time, it gives us the ability to pause the investment until we're clear we'll need that capacity. Remember that Egg Central Station has capacity for roughly $1 billion in net revenue even at these new prices that we're investing in this year.

And then for my second question, just more of a big picture look back over the past year as it pertains to the growth in industry supply. So a year ago today, we were in an environment that was very tight. Margins were good. And clearly, the competition rolled into the space at an aggressive rate over the following year period. And I'm just wondering, like when did it become really apparent that market fundamentals were deteriorating at a rate that was surprising to you and your team. I mean just if you could just discuss that -- the journey over the last year and kind of where we are now and what the industry might have to face over the next couple of quarters in order to kind of bring back equilibrium?

Yes. So it's a very fair question. We -- certainly, there's been an intensity of competition and competitive offerings in the premium egg space building for several years. I think that this is -- there's a real sort of secular trade up to premium eggs. That's not new news. And we've certainly faced plenty of outdoor access competition. It preceded us. There were free range eggs before there was Vital Farms. And while we pioneered a pasture space, there are certainly plenty of entries in that premium part of the egg category across virtually all of our top customers. So that's not new news.

And I think that it was not hard to see that with the lighter avian influenza impact that we saw over the last season that we would see a broad industry recovery in supply. Where we saw the impact on our own velocities is when price gaps to other premium branded and private label offerings grew wider than we had experienced historically. We didn't have historical experience at those wider price gaps. And we exceeded a point at which it was -- we were no longer kind of immune to them. We've always been able to command a premium over similarly positioned products. That hasn't changed. What we hadn't done is been able to see with experience price gaps in some markets as extreme as we started to see as other premium branded and private label products started bringing their prices down. So seeing that, reacting to it in scan data, as you've all been able to follow along, we're taking the actions to narrow those gaps to a more sustainable level.

Your next question from the line of Ben Klieve with Benchmark StoneX.

Only one for me, and that's on this excess egg supply dynamic. I know historically, you guys have been kind of resistant to the liquid and hard boiled market just because of the margin structure relative to shell eggs. But I'm wondering in this environment today, the degree to which you view that outlet as more favorable. And if that's something that you're considering, I'm wondering how quickly this could get -- how quickly the supply chain could respond to that pivot and then how quickly the retail network could take additional volume from either of those 2 products?

Yes, I appreciate that, Ben. So we currently do have both hard boiled and liquid products at retail and in foodservice. So that is not a new business for us. I think it's important to balance bringing the right products to market as we build our brand and build the right solutions for both retail and foodservice customers versus the short-term actions we might take to address the supply overhang.

Again, we want to make sure that businesses we're in have the right economics and take advantage of our competitive advantages over the long haul. And so there is a distinction, I think, between the short-term actions we'll take to right-size supply and make it fit with short-term demand, and the things we would do long term to, for example, expand our product portfolio, which I think is a much more kind of intentional path for us because of the brand we've built and the role we play in the market.

Your next question from the line of Scott Marks with Jefferies.

I wanted to touch a bit on some of the retailer negotiations, some of the distribution wins that you've been speaking to. Wondering if you can just help us understand what is the state of negotiations currently? How are retailers thinking about the market? And how are you pushing your product at a time when all of these dynamics are hitting the industry?

So as we mentioned in the prepared remarks, it was always the plan this year to work with our retail partners to expand distribution, benefiting from the work we did over the last couple of years to expand supply and to be in a position to build confidence that we could keep them in good in-stock conditions as we did so. We continue to enjoy category-leading velocities on shelf. The economics of carrying our products and our brands are still critical, we believe, to overall category performance for our customers. We bring a higher price point. We bring gross margin dollars in a category that, as we've all seen, is broadly seeing major price declines across the board.

So the appeal of working with Vital Farms, the brand we've built, our connection with consumers, the loyalty we've built there continues unabated. And so those conversations have been really fruitful. Our current slowdown in velocity because of these widened price gaps hasn't done anything to diminish that. So we're really excited about the impact that those additional points of distribution will bring to us as we come out of the second quarter and as we compound that with what we believe will be growing velocities in the coming months.

Our next question from the line of John Baumgartner with Mizuho Securities.

John, we can't hear you?

Analyst, your line is now open.

Can you hear me?

Yes.

Perfect. Great. Russell, I wanted to follow up. You spoke to your price gaps relative to other premium eggs. But I'm wondering, if you cut the drivers differently in terms of the balance of pressure here, to what extent are you seeing pressure on Vital's buy rate where you need these price adjustments to get folks back into your brand relative to responding to maybe a sharper decline in new households coming into the pasture-raised market to begin with. I guess what's the balance of pressure there right now?

Yes. So our analysis shows that we're not seeing pressure on our existing consumer base, frankly, at all. We're actually seeing buy rate from existing households slightly increase in Q1. So the real focus here is on bridging that gap to help encourage more households to try us for the first time and to join that brand against the backdrop of heated up promotions and lower price alternatives on the shelf. So we haven't given consumers a reason to trade down so much as we haven't given them enough of a reason to trade up to us.

Your next question from the line of Megan Clapp with Morgan Stanley.

I wanted to ask about price gaps again. And on Slide 8 in your presentation, I think it's really helpful for kind of framing the opportunity as you think about closing the price gaps. But I guess even in the tightest gap quartile on the left side, volumes are only growing 7% and presumably, you've got distribution within there. So the velocity is probably more modest. So as you think back -- as you think about kind of this path to volume growth inflecting in the third quarter and more so in the fourth quarter, how much of it is the pricing reset restoring velocity versus just the new TDPs you've secured driving incremental growth? And how do you think about how long it might take for velocities to fully normalize once you've narrowed those gaps?

Yes, I appreciate that. So first of all, the impact -- the early impact of additional distribution across all the markets on that page, I start there. And again, we've got some preview of where we believe TDPs will get by the end of the year. That part is, I think, quite strong and the part that needs to be activated by the increased velocities. So that -- a lot of that distribution starts showing up as we continue through the back half of the year. And I think that's where we'll see the combined impact of both velocities and additional distribution.

And then maybe just a follow-up for Thilo, just back to kind of the shape of the year and the EBITDA outlook. So I think based on what you said, if I heard you correctly, and if I'm doing my math correctly, I think you'll -- you're kind of guiding to a low to mid-single digit type EBITDA margin in the back half of the year. So can you maybe just give us some puts and takes of as we exit the year, kind of what changes as we move into 2027 to get back to double-digits?

Yes. I think it's pretty straightforward, Megan. The -- ultimately, what changes back half of the year and then into 2027 is that some of the benefits from these cost reduction initiatives that Russell had talked about, they will take hold a lot more. Russell had mentioned in the prepared remarks that we're looking at feed costs, for example. As you know, feed flows through our P&L with 1 quarter in arrears. And so anything that we can do on feed by the time we have made changes there, let's say, by the end of Q3, we only start seeing a benefit from it in the P&L by the end of Q4. So there is this lag effect there. The other part then to the improving margin structure is the return to volume-driven growth. With that come scale benefits, we'll get better leverage on SG&A again. And those are the factors that will help us to return back to the margin profile that we had anticipated to begin with.

Your next question from the line of Brian Holland with D.A. Davidson.

I know in recent months, there's been some noise on social media sort of hitting at the brand promise for Vital Farms. Obviously, myriad of moving parts here and which you've gone through in exhaustive detail this morning. I'm just curious if and to what extent you believe that has had any impact. Obviously, you talked about the difficulties in drawing in new households relative to recent periods. So I'm curious if you are able at all to isolate the impact of that on the business? And then also kind of what are you doing? What can you do to refute that social media campaign for lack of a better term?

Sure. Yes, that was frustrating for us to see happen in January. But our survey work and the fact that our existing households continue to buy us and are even increasing their buy rate without any material attrition suggests that the impact has been quite limited. On the margin, it may be a reason for a new household to look elsewhere, but we're seeing a very limited impact from that. Our work actually doesn't change a whole lot. Our approach to the way we operate and the way we talk about our brand has always been rooted in transparency and trust building. We are what we say. We do what we say, we say what we do.

And the social media controversy actually didn't demonstrate any deviation from that. It's simply -- there were simply some players who pointed out things that we do, choices that we've made and talked about very openly. So what we're doing from here is just continuing to do that. It's the reason to choose us because we are transparent. We do tell you exactly what we're doing and why we're doing it. So from that perspective, luckily, I think thankfully, the work is pretty straightforward. It doesn't require any new behaviors from us, but simply continuing to behave the way we have historically.

There are no further questions at this time. I will now turn the call back over to Brian Shipman for closing remarks.

Thank you, and thank you all for joining us and for your interest in Vital Farms. We remain focused on the long term and look forward to updating you on our progress next quarter. That's it, and we'll talk to you soon. Thank you.

This concludes today's call. Thank you for attending. You may now disconnect.

Good day, and thank you for standing by. Welcome to Vital Farms' Fourth Quarter and Full Year 2025 Earnings Conference Call and Webcast.

[Operator Instructions]

Please be advised that today's conference call is being recorded. I would now like to hand it over to your host, Brian Shipman, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Vital Farms Fourth Quarter and Full Year 2025 Earnings Conference Call and Webcast.

Joining me today are Russell Diez-Canseco, Vital Farms' Executive Chairperson, President, and Chief Executive Officer; and Thilo Wrede, the company's Chief Financial Officer.

By now, everyone should have access to the company's fourth quarter and full year 2025 earnings press release issued this morning. During today's call, management may make forward-looking statements within the meaning of the federal securities laws.

These statements are based on management's current expectations and beliefs and do involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements.

Please refer to today's press release, the company's annual report on Form 10-K for the fiscal year ended December 28, 2025, that was filed with the SEC today, as well as the company's other SEC filings 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 refer to today's press release and presentation, each available on the Investor Relations section of our website, for a reconciliation of non-GAAP measures referenced in today's call, including adjusted EBITDA and adjusted EBITDA margin to their most directly comparable GAAP 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.

After our prepared remarks, we'll open the line for questions. As a reminder, please limit yourself to one follow-up so that we can hear from as many participants as possible.

Now I'll turn the call over to Russell.

Thank you, Brian, and good morning, everyone. Before we walk through our record 2025 results, I want to share an important leadership update.

After nearly 20 years of visionary leadership, our founder, Matt O'Hare, has decided to retire as Executive Chairperson and as a member of our Board of Directors.

Matt founded Vital Farms in 2007 with just 20 hands. Beyond building a brand, he pioneered an entirely new category in the grocery aisle based on the belief that we could scale the humane treatment of animals.

Equally important, he was determined to operate Vital Farms as a truly different company, one galvanized by a common purpose of improving the lives of people, animals, and the planet through food and with a focus on positive long-term outcomes for all stakeholders.

It is an honor for me to build on his legacy of vision and leadership over the last 20 years and continue our journey toward becoming America's most trusted food company.

Matt remains our strongest advocate and our single largest shareholder, and I'm thankful to continue to partner with him as an adviser to the rest of our Board and me.

Effective February 24, the Board appointed me to serve as Executive Chairperson and CEO. This unified leadership structure is the most effective way to maintain our strong momentum, drive our 2026 strategic initiatives, and continue progressing toward the targets we set at the Investor Day in December.

I'm also pleased to share that Denny Marie Post will continue to serve as our Lead Independent Director. Denny's extensive experience as a public company CEO and her deep commitment to our stakeholder model provide the oversight and strategic perspective that are vital to our governance structure.

Our Board remains committed to robust independent oversight, and we will continue to maintain high standards of corporate governance as we enter our next phase of growth. I'm grateful to be able to partner with Denny as we look to the future.

I want to start our update where I always do, which is by acknowledging our crew. In 2025, we meaningfully fortified our operational capabilities, and it was the resilience and commitment of our team that made that possible.

As I reflect on 2025, it's clear that Vital Farms has built greater organizational strength while also delivering strong financial results. We didn't just grow, we scaled while staying true to our mission. We're proud to have successfully completed our major 2025 initiatives.

We added a third production line at ECS, implemented a robust new ERP system, and transitioned to a new dedicated cold storage facility less than 1 mile from ECS.

We've also rebuilt our inventory and remediated the previous material weakness in our internal controls, which Thilo will discuss shortly. For the full year 2025, net revenue grew more than 25% to $759.4 million, which was the midpoint of the revised revenue outlook we shared at our Investor Day in December.

Adjusted EBITDA exceeded $100 million for the first time in company history, growing 31.6% to $114 million. Now, let me walk you through several of the milestones that I'm incredibly pleased our team accomplished last year, laying the foundation for our future growth.

First, on the operations side, we successfully rebuilt our egg inventory throughout the year and brought our third ECS production line online in October.

We can now dedicate the first 2 lines to longer production runs of our top 4 SKUs while using the third line for specialty SKUs with lower volumes. This change increases our efficiency, and we're excited to see productivity improve over time with all 3 lines up and running.

We're also building both lines at our Seymour facility concurrently to stay ahead of demand. We believe that by building concurrently, we will accomplish better construction economies as we build toward our $2 billion revenue target.

This reflects our confidence in future demand and our commitment to staying ahead of growth opportunities rather than chasing them.

Second, on the commercial side, this was a record revenue year. As I mentioned, delivering $759.4 million in revenue and $114 million in adjusted EBITDA is a significant accomplishment for us.

Furthermore, our growth consistently outpaced the broader market. In 2025, we gained 25 basis points of volume share within all outlets of MULO+ according to Circana, making us the top share gainer in premium shell egg brands.

According to the same data source, year-to-date through February 15, we gained 35 basis points of volume share, again, positioning us as one of the top share gainers in premium shell egg brands.

These share gains provide further evidence that we have created a strong and growing business built on improving the lives of people, animals, and the planet while at the same time delivering world-class financial results.

Third, our farm network expanded to more than 600 small farms committed to our pasture-ais standards, where hands roam freely on open pastures with year-round outdoor access.

Adding approximately 175 farms in a single year is a testament to the trust we built in the agricultural community around our unwavering commitment to humane animal care.

Farmers want to be a part of what we're building because we offer a path to a sustainable livelihood while being stewards of the land and champions of animal welfare.

Fourth, we successfully completed our ERP implementation with 0 unplanned shipment interruptions, returning to and then exceeding pre-implementation production levels within a month.

And finally, our recent marketing campaigns have driven brand awareness to 34%, an increase of 8 percentage points in 2025, widening the gap between our closest competitors and us.

We are now working closely with our retail partners to convert that brand interest into actual purchases through an expanded shelf footprint and optimized promotional cadence.

As we move into 2026, we are seeing a dynamic consumer environment, and our focus is on driving high-quality household penetration, resulting in profitable velocity so that our brand maintains its premium position in the market as we march toward our 2030 targets.

While we've successfully transitioned from a state of supply allocation to unconstrained capacity, we're managing this pivot with discipline. We're not interested in buying market share through aggressive discounting just because the commodity market is in a glut.

Our current volume pace reflects a deliberate focus on high-quality shelf placements, ensuring that as we fill our expanded capacity, we're doing so with stakeholders that support our long-term goals and uphold our premium brand promise.

At our Investor Day in December, we shared our updated long-term target of $2 billion in net revenue by 2030 with an adjusted EBITDA margin between 15% and 17%. These goals are grounded in the operational capabilities we're building and the market opportunity we see ahead of us.

Our brand still represents only a fraction of the total shell egg market, giving us substantial runway for growth. We serve nearly 16 million households through approximately 24,000 retail locations, but there's so much more opportunity ahead.

The capacity investments we're making, the operational excellence we're demonstrating, and the brand strength we are building create a powerful combination for sustainable growth.

The progress we made in 2025 represents meaningful steps toward that goal, and I'm genuinely excited about what lies ahead.

With that, I'll turn it over to Thilo to walk through the financials.

Thanks, Russell, and hello, everyone. I would also like to share my personal gratitude to Matt. His vision was the catalyst for everything we've built, and I've enjoyed his partnership and constant push to improve in my almost 3 years at Vital Farms.

And Russell, congratulations to you on your new expanded leadership role. I'll now turn to a review of our fourth quarter and full year 2025 performance, and then I will walk through our outlook and cadence for 2026.

Net revenue for the full year 2025 was $759.4 million, up 25.3% year-over-year, and $213.6 million in the fourth quarter. This growth was driven by a balanced contribution from volume and price mix.

Benefits from our May price increase and ongoing shift to the organic portfolio were partially offset by increased promotional activity to drive consumer trial.

Gross profit rose to $285.7 million or 37.6% of net revenue. The modest margin contraction from 37.9% last year was primarily due to higher labor and overhead costs as we scaled our operations.

SG&A expenses were $159.4 million or 21% of net revenue. We demonstrated significant operating leverage here, reducing SG&A as a percentage of sales by over 110 basis points while still increasing marketing investment by $10.4 million.

This discipline, alongside improved shipping efficiencies, which helped offset higher linehaul rates, helped to deliver our record profit. Adjusted EBITDA surpassed $100 million for the first time in our history, reaching $114 million for the full year and $29.2 million for the fourth quarter.

Net income was $66.3 million or $1.44 per diluted share. And finally, CapEx for the year was $82 million, which aligns with the outlook we shared at our December Investor Day.

We ended 2025 with a strong balance sheet. Our cash, cash equivalents, and marketable securities on December 28, 2025, stood at $113.4 million, a decrease of $46.9 million from the end of 2024, reflecting the investments we are making to expand our production capacity. We have no debt outstanding.

Finally, before discussing our outlook, I want to highlight that we have successfully remediated our previously disclosed material weakness in our internal controls.

We're glad to have this important work behind us as we move into the next fiscal year. And just to remind everybody, the material weakness had not resulted in any restatement of our financials.

Now looking ahead to fiscal year 2026, we're introducing a new net revenue guidance range of $900 million to $920 million, representing more than 20% growth, mainly volume-driven at the midpoint of the range.

The revenue growth has us on track towards our 2030 target. While this is a more measured start than our December outlook, we are building a rock-solid foundation in 2026, with stable retail inventory rather than chasing short-term targets that could compromise the quality of our 21% long-term CAGR.

It is also an acknowledgment of the current macro environment and recent volatile scanner results we've observed so far in January and February. Even though we have already gained healthy volume share year-to-date, as Russell had mentioned earlier, volume growth so far is lagging our initial expectations.

After the previously discussed several weeks of slow shipments following our ERP implementation last year, during the lead-up to the peak holiday period, we are still recapturing shelf space.

At the same time, we're having fruitful conversations with our retail partners about expanding our shelf space over the course of the year, and retailers are excited about our improved supply this year and the role that we continue to play in the set.

In addition, the 2 severe winter storms over the last 4 weeks make retailer orders additionally challenging to calibrate against what we would consider normal demand.

We believe all these fluctuations are more reflective of short-term market disruptions, and we see continued healthy consumer demand, which is supported by our consumer survey data.

We continue to prioritize profitable velocity over simply chasing raw volume growth. Consequently, we are setting adjusted EBITDA guidance to be within a range of $105 million to $115 million this year.

This reflects a margin of 12.0% at the midpoint, which is within the range of our previous 2027 long-term targets and puts us strongly on the path to the new 2030 long-term targets we committed to at the Investor Day.

With the improved supply dynamics also talked about, I want to spend a moment on how to think about cadence for the year. In the first half of 2026, we anticipate some short-term noise in order patterns from recent winter weather events and as our retail partners normalize their inventory levels following our move out of supply allocation.

We view this as healthy stabilization that allows us to enter the back half of the year with a clean runway and high-quality shelf presence. With that, the first quarter of 2026 will likely reflect a more measured growth rate than previously assumed as the retail inventory channel normalizes.

From there, we expect growth to reflect the lapping of last year's quarterly performance. As we operate in a more stable supply environment, we anticipate normal promotional spending this year with a heavier concentration in the middle quarters.

We are intentionally utilizing the tailwinds from our May 2025 price increase to fund the return to a trial and conversion program. This is not defensive price matching. It is an offensive investment in household acquisition and reinvestment of price into penetration.

Consequently, our margins reflect the strategic promotional activity, our continued investment in ECS staffing, and the impact of the volatile Q1 ordering environment.

Finally, we expect CapEx of $140 million to $150 million in 2026. Our CapEx guidance reflects continued investment in long-term capacity and infrastructure, including progress at Vital Crossroads.

At the same time, we remain focused on disciplined capital deployment and free cash flow generation, consistent with our long-term owner-oriented mindset.

While we expect to fund our 2026 projects primarily through existing cash and operating cash flow, we're evaluating the most efficient capital structures for our expansion, including the potential use of our revolver or other ways to optimize our balance sheet.

To be clear on our capital allocation priorities, our primary commitment is the completion of Seymour. But that leaves us with untapped debt capacity, and our Board of Directors authorized a $100 million 2-year share repurchase program.

We're in the unique position of being able to fund our largest-ever growth cycle while simultaneously having the balance sheet flexibility to defend our intrinsic value if market dislocations occur.

Looking forward, we anticipate a meaningful pivot to strong, sustainable free cash flow generation in 2027 and beyond once the heavy spending on VXR is completed.

As mentioned before, we expect each CapEx dollar dedicated to our new facility to generate more than $5 of annual revenue capacity. As these assets come online, we expect to see significant cash flow accretion as we leverage the infrastructure we are building today.

Our long-term guidance remains unchanged. We are targeting $2 billion of net revenue by 2030 with a gross margin of 35% or better and an EBITDA margin of 15% to 17%. This is an exciting time at Vital Farms.

We have highly loyal consumers. We continue to expand and deepen our relationships within our network of more than 600 small 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 with each passing year.

Once again, we thank you for the time and interest in Vital Farms today and for the confidence that you have placed in us with your investment. Now, let me turn it back over to Russell.

Thank you, Thilo. Before we open the call for questions, I want to circle back to where I started with gratitude to Matt for his vision and his leadership, to our crew who executed through our ERP transition and brought our third line in ECS online seamlessly.

To our farmers who expanded their capacity alongside us while maintaining the highest standards of animal welfare, and to our retail partners who continue to believe in our mission. Thank you.

This foundation of trust and collaboration is what gives us such confidence in the growth potential in the years ahead. The capacity investments we're making are about ensuring that when a consumer reaches for Vital Farms, we're there every time at full strength.

The organization's values are as strong as ever, and our crew continues to raise the standards for the Vital Farms brand and to drive the organization forward.

Looking ahead, we believe we remain structurally advantaged with significant long-term opportunity. Our brand still represents only a fraction of the total egg market, and we enter 2026 with unconstrained supply, giving us substantial runway for growth.

Consumer awareness of animal welfare and food sourcing continues to increase, and Vital Farms has established itself as the trusted leader in this space.

Once again, we thank you for your time and your interest in Vital Farms. And with that, we're happy to take your questions.

[Operator Instructions]

Your first question comes from the line of Scott Marks with Jefferies.

Obviously, just wanted to ask a little bit about expectations for the year relative to what was laid out at Investor Day.

Obviously, been some volatility with winter storms and some of the order patterns you mentioned. But maybe what was it that gave you the, I guess, confidence to change the outlook now as opposed to maybe waiting a little bit until later in the year to see if some of this volatility normalizes?

Thanks, Scott. It's Russell. So I'll kick us off, and then we'll ask Thilo to chime in as well.

We've run this place with a lot of intentionality for a lot of years. And this isn't the first time that we've seen some volatility in the broader category, and we've seen some noise from things like winter storms.

We always want to make sure that we're setting ourselves up for success and that we're setting ourselves up to meet and exceed the expectations we set for ourselves and that you all have for us.

And I think this guide gives us the right amount of room and flexibility to, again, build on all the strengths we're coming into the year with while still acknowledging that there's a broader macro environment in which we're operating, and there's a lot of short-term noise in what all the various players are doing to make sure that they can sell all the eggs they're producing.

Yes. Scott, I would just add to that. We called it out in the prepared remarks; it is a bit of a volatile environment right now.

We are clearly gaining share in the category. So we are outperforming the category. But it is a bit of a noisy environment right now. And I think we've built a track record of beating our initial expectations that we set at the beginning of the year, every year since IPO.

We figured rather than going into the year and clawing our way to the initial outlook that we gave. We just set expectations very clearly at the beginning. And then we keep our pattern of beating expectations that we set at the beginning of the year.

Next one for me, just relating to the ERP. I think, as we think back to maybe ahead of ERP implementation, you had spoken about shipping some inventory ahead of the cutover.

And then I think Thilo made a comment in the prepared remarks today about regaining some shelf space that may have been lost during that period.

So, wondering if you can just kind of help us spur away what the actual impact from ERP was, whether it was shelf space or changes in order patterns or anything that can just help us get clarity around what the actual impact was and how we should think about the magnitude of recovery from that?

Yes. So we've talked quite a bit about that short-term dislocation. And as we've come back into a very, I think, advantageous supply situation with rebuilt inventories, the conversations with retailers have been, frankly, terrific.

We've shifted from, hey, can you ship what you're talking about to how can we grow together? And so I'm looking forward to resetting cycles this year based on those early conversations. And we're really talking about making those long-term plans to grow together.

We are clearly a category leader. We're seen as playing that role for our retail partners. And I think we're well on our way to recovering and putting that process behind us.

And your next question comes from the line of Brian Holland with D.A. Davidson.

I wanted to ask about some of the comments that you made around the challenging macro environment and squaring that with your core consumer and some of the behavioral metrics that you described.

Just squaring how or why you would be incrementally concerned over the next, whatever, several months or year about the impact of the macro on your core consumer, just given everything that you've said, and I think historically have been less concerned about competitive dynamics in the category, widening price gaps, et cetera.

So how do we square those 2 things?

Sure. So first of all, we're not seeing evidence of a big change in the confidence or economic reality of our core consumers. That's not a primary source of concern or a change in how we view that.

That said, I think we've all seen and continue to see a category that's going through some disruption, as we've got plenty of players out there with maybe more eggs than they planned to produce or collectively plan to produce.

And we're seeing some more intense action on the shelf as other players, I think, look to move their inventory. While that doesn't mean that we're losing consumers or volume to them, it's certainly competing for attention with retailers and with consumers for ad space and for mind share.

And so in that situation, it doesn't prompt us to change our value equation. It doesn't prompt us to rethink our value proposition to consumers, but it might mean that we have to be a little more patient as we continue to add consumers over the course of the year and convert all that great awareness to trial because we don't want to frankly, waste a bunch of our time and money trying to compete in the short run for the attention of consumers who are looking for a hot price in an ad.

And so we just have to, I think, set ourselves up to continue to take a really measured approach to adding high-quality households and high-quality new placements and let some of this other noise play itself out.

And then playing this forward, outlook this year, I think, is a low 20% range on the top line. That's an algorithm that you would have to hold from here through 2030, I think, to hit that $2 billion of revenue, if I'm not mistaken.

The thought coming into this year was you'd be lapping capacity constraints in 1Q and a little less so in 2Q. 4Q, you would then have the ERP disruption. So "easier compares".

Now we've obviously introduced some volatility, as you referenced, whether that's weather or some other things in the category. So how do we think about the sources of confidence behind maintaining this level of growth, which really demands almost no deceleration from here through 2030?

What are the sources of confidence behind that? And then maybe if I could just ask what flexibility you would have from a capacity standpoint and a build-out standpoint as it pertains to Seymour if the sales decelerated at a greater rate than what you're projecting?

Sure. So again, the consumer value proposition is still very much there. And I start with all the work we did last year to make sure that we took supply chain and supply chain constraints off the table in terms of being a constraint to our continued growth.

So we've got the capacity at ECS. We've got our third line, which gives us the opportunity to lean in both to capacity expansion and efficiency because we can allocate space to the various lines more efficiently.

We're gaining volume share. And that's the thing I would point to as a continued proof point that what we're doing is working. And so as we head into 2026, the setup is we've got a massive gain in awareness, which is the leading indicator for us of trial and ultimately the loyalty, that's there in spades.

And we're very judiciously, as always, using our marketing and commercial resources to convert that awareness into trial. So the capacity is there. The brand awareness is there. The consumer sentiment is there.

And it's a question of, I think, operating and executing at a very high level. And the thing is, we are built for this environment. I believe we've got the best team in the business, the best brand in the business, the best supply chain in the business.

And this is a year in which our ability to execute at a high level will continue to drive our growth.

Brian, I would add to that that, unlike in the last few years. Growth this year is going to be pretty much all volume growth.

Our volume growth is actually at this guidance is actually accelerating year-over-year. And I think that's an important piece to keep in mind. It's a bit more expensive growth because obviously, volume comes with costs associated with it.

But it's high-quality growth.

And your next question comes from the line of Matt Smith with Stifel.

A couple of questions on the EBITDA guidance range. So the midpoint suggests a couple of hundred basis points of margin contraction.

Within that, can you talk about gross margin versus the middle of the P&L investments? I believe the expectation for revenue growth, Thila, that you just mentioned, is mostly volume-led.

So, would you expect price/mix to be positive for the year with carry and pricing funding the promotion normalization? Or is that part of the margin bridge as well?

Yes. Price/mix, I think we said in the prepared remarks that we are reinvesting the price increase from last year back into promotions. I want to be very clear with that.

The promotional comparison, if you look at it year-over-year, is even compared to the last few years. We're actually planning for a different environment this time around than the last few years because in the last years, when you had avian flu, where we had our own supply constraints, in the last few years, there were times every year where promoting didn't make a whole lot of sense for us because we didn't have the supply to support it.

This year, it's a different story. So this is not a step-up in promotions to drive volume. It's really a return to where we should have been promoting for quite a while and weren't able to.

And as Russell said before, this is to convert the awareness that we have generated into trial and ultimately into household penetration, and to keep demonstrating to our retail partners that we are a good partner for them.

We want to move the category forward. So obviously, this has an impact on gross margin. We still expect operating expense leverage. And we expect positive price/mix benefit, but certainly not to the same degree as in previous years.

We keep benefiting from the shift towards organic, but it's not going to be the same price mix benefit that we had in prior years.

And just as a follow-up for clarity around first-quarter expectations. There was some shipment noise both in the fourth quarter, and then you mentioned a couple of factors in the first quarter.

Within the first quarter, do you have a view on whether you expect your shipments to be in line with consumption? Just some clarity there would be helpful.

Yes. I mean, in general, our shipments are roughly in line with consumption. There are always timing differences.

There are differences in how scanner data extrapolates the contribution from different channels. We've always talked about how we have some unmeasured channels, food service, and the wholesale channel in particular.

So there's always going to be a bit of a difference between our reported shipments and what you see in consumption. But directionally, they usually align.

And your next question comes from the line of Robert Moskow with TD Cowen.

This is Jacob Henry on for Rob. I think just one from me. I know you've talked before about building confidence with retailers before getting more shelf space. So on that topic, I'm just curious if you can provide an update on where you feel you stand in that process?

Like, do you have any visibility into any green shoots with retailers where maybe there are plans in place to get that third or fourth SKU, whatever it may be?

Or is this more of a long-term conversation?

Yes. So, without being specific, the conversations are going very well. We are operating at a very high level.

Our service levels have really recovered from a year of being much more constrained in supply, as we've talked about over the last 4 quarters. And so those are very fruitful retail conversations.

We're a powerful tool for a retail category manager to grow their category profitably with our partnership. And so these are welcome conversations. They're fruitful ones, and we're excited to share more as those resets occur.

And your next question comes from the line of Megan Clapp with Morgan Stanley.

Maybe just a follow-up on the first quarter on Matt's question, just to put a finer point on it. I think you said relatively in-line shipments for the scanner.

I think, Thilo, in your prepared remarks, you also said just a more measured start versus what you had previously expected. I think you had previously expected the first half would be stronger than the second half, just given some of the easier laps.

So, is it still fair to assume in 1Q, you would expect, and 2Q, for that matter, you would expect the revenue growth to be above the full year guide?

I think at this point, 1Q, we're a bit more cautious on it than we were before. I think when we look at 2Q and 3Q, there is no change in how we think about them compared to how we thought about them, let's say, 2 months ago.

And then Q4, expectations for Q4 compared to what we had at the Investor Day back in December haven't changed. And so Q4, I think we have, if you want, relatively easy lapping because Q4 post the ERP implementation was a few weeks of slow shipping.

There's just easy lapping that we can catch up on. And so with that, maybe the second half might be a bit stronger than the first half. That's how I would look at it right now.

And then I guess just a follow-up there. Just trying to square why the first quarter is changing and the rest of the year is not, if shipments will be in line with scanner, because that would imply that demand is running a bit weaker than you had expected.

So, as we get into the remainder of the year, are you embedding some sort of recovery in the shelf space? Are you assuming that demand doesn't change in the rest of the year, or that the promotional environment from others that you're seeing gets better? Just trying to understand what changes as we get out of 1Q, understanding there has been a lot of volatility.

Yes. I think there are 2 underlying or maybe spring-loaded drivers of that consistency in that growth.

One is the continued benefit of the consistency with which we're showing up on shelf, regaining that space, some of which is a conversation with the retailer and some of which is simply operational at the store level when you've now got the product back in your back door and you need to cut it back in or make sure you're giving it the space that was allocated to it.

And then having consumers see us back on the shelf. That's an important part of the process. And then the other part is that again, we're having very fruitful conversations with retailers about continuing to expand distribution, expand placements as part of our ongoing long-term strategy for growing with the best retailers in the country.

And so a lot of that has to do with kind of the consistent strategy of expanding those top 4 SKUs and demonstrating the performance that they deliver for our retail partners. We've got the product, and that makes for a great conversation. And that will unfold over the course of the year.

And your next question comes from the line of Jon Andersen with William Blair.

You mentioned in the prepared comments that brand awareness levels are up, I think, 80 basis points year-over-year, which is a significant leap.

I'm wondering if you could talk a little bit about what you see as the key drivers there and that kind of acceleration in brand awareness over the past 12 months.

I guess, peeling the onion a little bit, there's positive awareness and maybe more awareness that might come into beam for more mixed reasons. And I'm just wondering if you could talk a little bit about the equity of the brand and what you're seeing, and maybe some of the panel data in terms of loyalty and repeat at present, and if there are any levers or adjustments you think you need to make from a value proposition standpoint.

Then, if I could just follow up with a second one. You announced the $100 million share repurchase. I'm not sure if you've had a share repurchase authorization historically, but maybe you could talk about the reason for that now and how you might think about utilizing that going forward, the criteria?

Thanks, Jon. I'll take the part about brand equity and household awareness. I'll let Thilo talk about share repurchase.

A key message here and a key reason why I think we saw such a substantial increase in household awareness is that we're pretty consistent in our approach to how we go to market.

At a time when we were constrained on supply last year, we didn't go dark with our marketing because we think about marketing as a way to drive brand awareness over the long term, 12, 18, 24 months out, converting that to demand.

This business is designed and built around the consistency of expanding households, expanding trial, expanding production, and expanding farm count, all very much in line.

The net result of this is that we didn't go dark when we might have simply because we didn't have as many eggs as we would have liked to sell or as much production capacity as we might have liked.

That also means that we're not hitting the gas or wasting money on unproductive marketing efforts in a year when we've got more upside. We're very consistent in our marketing approach.

So it's really a playbook and an approach that we've owned over a lot of years to convert that awareness into trial and repeat, and that's what we're setting about to do this year.

Yes. And then, Jon, on the share repurchases, we did not have a share repurchase authorization before. This is the first buyback program that the Board has authorized since the IPO.

I would say there are 2 factors at play here. One is, look, we're listening to shareholders. We are listening to the buy side, the sell side. And we've gotten a lot of questions over the last 12 months in particular, about how we use our balance sheet.

We have this unused debt capacity. As you know, we are debt-free. We have over $100 million in cash. And we are investing this cash in building out the Senor facility this year, but that still leaves a lot of balance sheet potential there that we've been holding as dry powder, and now is a good time for us to think about what we can do with that dry powder to create shareholder value.

So that is where this decision to create the share repurchase authorization that when there is an opportunity in the market to buy back our stock at attractive levels, we're able to step into that. That is really the reason behind it.

I would look at it as a sign that we're maturing as a company a bit. We're doing the things that we think are the right things for creating long-term shareholder value. And it's a sign that we're listening to the shareholder conversations that we're having.

And your next question comes from the line of Ben Mayhew with BMO Capital Markets.

So my first is related to the aggressive recovery in the industry egg supplies. So that seems to have coincided with more volatile order patterns.

So I'm just wondering, in the past, you have stated that you look forward to supplies recovering because that will give Vital the opportunity to outperform.

So I was just hoping if you could revisit this view and maybe reaffirm your conviction that this will play out if we were to assume the industry supplies will continue to recover.

Yes. Our conviction is as strong as ever. And the #1 thing I'd point to is our continued gain in volume share. That's a great indicator of the health of our brand, the health of our supply chain, and the health of our consumer trust and consumer relationship.

So we are absolutely built for a time and a place where the brand is what's going to matter. We're being differentiated is what's going to matter, and where a strong, trusted relationship with the retailer is what's going to matter.

This is a year in which it's not simply enough to have eggs in a market that will take any egg available. And that's where I think our strengths will really come to bear.

And then my final question is a bit of a segue. Can you just talk about Amazon's move to add roughly 100 additional Whole Foods units and what the incremental opportunity might be for Vital?

I think, first of all, it's certainly exciting for us. Amazon and Whole Foods continue to be our largest retail partner.

I don't think it's a coincidence that some of our largest customers are also the ones that are seeing the most success and the most opportunity to expand their footprint. And we really look forward to continuing that partnership and to grow with them.

So there's an exciting opportunity to continue to grow with partners like Amazon and Whole Foods. And so that is all welcome, almost spring-loaded upside for sure.

And your next question comes from the line of Eric Des Lauriers with Craig-Hallum.

Just wondering if you could provide a bit more color on what you're seeing year-to-date in the pasture-raised category overall.

Then in terms of the second half stabilization or perhaps even, I guess, Q2 stabilization, do you see category stabilization as a prerequisite to your order patterns stabilizing? Or is there something in the conversations you're having with retailers that gives you confidence in that second-half stabilization irrespective of what the category does?

Yes. Thanks for that. So the pasture-raised, and I would say more broadly, the outdoor access category continues to be the strength in the egg category overall, gaining volume share, gaining dollar share against the backdrop of more muted volume growth for eggs overall.

Historically, egg consumption has grown with population growth in volumes. But that's been very different for specialty and branded products and offerings like ours, where we've driven a large share of overall category growth and much outsized relative to our share of the category.

And we're seeing that strength continue. It's pretty exciting because the ability of private label brands to trade up their purchases of more commodity-type eggs into outdoor access private label is also quite strong.

So what we're seeing is evidence of a much broader conversation and a much broader set of households in this country that are becoming conscious of their food choices and are willing to vote with their dollars for something better.

So it's a real validation of what we've been doing for a lot of years, and we see it as a sign of strength.

And your next question comes from the line of Ben Klieve with Stone.

I'm wondering if you guys can help us understand the magnitude of the promotional increase that you have talked about on the call today. We certainly knew there was going to be an increase this year.

But I'm wondering, first of all, if the magnitude of the promotional increase this year is in line with what you had thought it would be historically. And then also the degree to which the EBITDA margin compression this year is in line with what your thoughts would have been around the Investor Day a couple of months ago.

Sure. Thanks, Ben. I wouldn't characterize our promotional cadence or stance as stronger or deeper than we had originally projected.

This is very much a return to a more normal cadence of promotional spend, and that certainly hasn't changed. What's really different for us versus other players in the category is that we're not creating promotions to drive volume in the short run, which we see as maybe a way to rent volume share, but not actually to substantially move the business forward.

We're using promotions to drive trial and begin the process of converting a consumer to our brand. And that continues to be the way we think about it.

Our focus is on building this thing for the long haul and hitting that $2 billion goal that we set out for 2030, which we believe is still very much in our future. And so that hasn't changed.

It's very consistent with what we had planned when we spoke at Investor Day. I'll let Thilo talk a little bit about the evolution of EBITDA over time.

Yes. Ben, just to put what Russell just said differently, the way we are thinking about promotional spending this year is that it won't be different from how we have spent on promotions in the past in specific quarters.

The reason why I put it that way is, as I said before, over the last few years, I don't think there has been a single year where we ran promotions for the full year because there were always some outside events, AI, our own supply constraints that prevented us from running promotions for the full year.

This is going to be a year where we are currently planning to run promotions for the full year. And so the level of promotions for the full year will mirror what we've done in individual quarters in the past. But unlike in prior years, where we've only hit it in 4 specific quarters, we'll hit it for the full year.

That will have an impact on gross margin and on EBITDA margin, and you see that in the guidance. But that impact is not different from how we thought about it at the Investor Day.

And your next question comes from the line of John Baumgartner with Mizuho Securities.

I'd like to ask about the composition of vital buyers. I think at Investor Day, the buy rate for low incomes was up something like 50% over the past 3 years, and that speaks to the breadth of appeal.

But I'm curious about the extent that might now be a drag in '26, given the financial stress in that cohort. As you model this year, are there any specific pressure points you're building in either from low incomes or others, maybe not so much from trade down, but more just limiting the rate of building additional households this year?

Yes. I think that the process of adding additional households doesn't change. The kinds of households that we do attract may change with the benefit of hindsight, and we'll see how that plays out.

But we've got no reason to think that our ability to attract and retain new households this year is off algorithm or outside of our normal growth formula.

And then I apologize if I missed it, but if we think about -- aside from the promotion this year, how do we think about other marketing reinvestment, whether above the line in the middle of the P&L?

Any thoughts on marketing, either magnitude or shifts in delivery versus history?

I think in terms of magnitude, as we've consistently discussed, we have a very measured approach to marketing.

We continue to explore opportunities to find profitable ways to invest as we expand into the 5% to 6% range on marketing. I don't know that, that changes a lot this year. And I think that we've always used some portion of that budget on baseline or more tried and true vehicles.

And then we've always got somewhere we're experimenting and trying new things. Historically, we focused almost entirely on the top of the funnel and adding households growing that awareness.

We now have the benefit of a lot of awareness built. And so we'll have the opportunity to try some things, perhaps we haven't focused on as much in the past, around driving repeat and loyalty. And we'll look forward to seeing how those play out as the year goes on.

Add that we plan to keep increasing our marketing spend in total dollars. We continue to build the brand.

To Russell's point, we've built a lot of brand awareness. There's a lot more that we want to do there. But this year is also a year where we want to convert a lot of that brand awareness into trial.

So if marketing can play a role there, I think that's a push that we need to go after as well.

And your next question comes from the line of Gerald Pascarelli with Needham & Company.

I just have one, and I wanted to go back to one of Brian's previous questions, just on the confidence of the long-term targets, but specifically related to EBITDA.

So, at a 12% expected margin this year, you're 400 basis points below the midpoint of your 2030 targets. I understand that pricing is muted right now, like given some of the compression we're seeing with private label.

But if the market remains volatile and gets increasingly competitive, and then you essentially need to invest more behind your brand, I'm curious if you could just lay out the levers you have to drive operating leverage to achieve those targets. So if you could bridge that for us.

And I guess, specifically, does your target embed a certain range of rate increases in a more normalized environment? Any color there would be great.

So Gerald, let me start with the 12% implied margin. When we gave long-term targets back in 2023 at our Investor Day back then, we had said that by 2027, we want to get to a 12% to 14% EBITDA margin range.

We were above that last year. We'll be in that range this year. So yes, it's a decline year-over-year margin, but I would say we're still very much on track to where we thought we were a few years ago.

And we continue to be on track to the target that we set 2 months ago for 2030. I think as we continue to grow, we continue to get the benefits of scale, especially in operating expenses.

We talked about, and you can see that in our numbers, how our SG&A scaled last year, and will continue to scale this year. This year, because the growth is so much more volume-driven than prior years, there is an impact on gross margin, which flows through.

But overall, in operating expenses, every year, we're getting scale benefits just from the growth that we are generating on the top line and not having to grow operating expenses to the same degree.

There are no further questions at this time. I turn the call back over to Brian Shipman.

Great. Thank you for your time and interest today. Please feel free to contact us with any follow-up questions. Have a great day.

This concludes today's conference call. You may now disconnect.

Good morning, everyone, and welcome. We're really grateful you made the trip to Springfield to be with us today. Before we dive in, please take a moment to review our disclaimer. We got that out of the way. Let's get started. Today, you'll hear a compelling story of our unique brand, our growing farmer network, improving capacity, our trusted and growing retailer relationships and our attractive financial model.

We'll begin today with our President and CEO, Russell Diez-Canseco; followed by other key members of our senior leadership team. After the presentation, we look forward to answering your questions. Then we'll break for lunch before loading buses and touring ECS and our new [ Cold Zone ] facility in the afternoon. So with that, let's hand it over to Russell.

Thanks, Brian Thanks, everybody. I'm so thankful you could all be here with us in Springfield. We've called Springfield home since before 2017 when we grand opened -- when we did the ribbon-cutting at ECS. And it seems like in some ways, a lifetime ago, the ECS you'll see today is completely transformed and multiples of the size of what it was back then. So I'm really glad you could be here to see it in person. It's also been a wonderful place to call home, and hopefully, the travel wasn't too rough for you.

I'm excited today to show you some of the magic behind how we have made Vital Farms into the leading brand in its categories that it is. I'm glad for you to hear it from some of the leaders who are making it happen. And I'm pleased to be able to share with you our vision for the next phase of growth.

Here at Vital Farms, we've built a rare CPG company with a brand based on trust, transparency and a very intentional approach to everything we do. Back in 2007, we didn't just set out to start up an egg company, the unique culture and purpose that drives us to improve the lives of people, animals and the planet through food led us to want to change the system. It just started with getting the birds out of the cages and out on in the pasture. Our way of thinking differently about every aspect of our approach to business is what really makes us such a unique company and so enduring, and I'm excited for you to hear some of those details today.

You're going to hear about our differentiated brand and our really strong enduring relationship with consumers. You're going to hear about our relationships with farmers and how it is that we are able to attract and retain the very best. You're going to see with your own eyes our ability to scale our production capacity and our plans to expand it into a new facility in Indiana starting in 2027. You're going to hear from Pete about our trusted relationships with retailers and the way that we partner with them to create long-term value for both of us, not just to negotiate how we split it up. You're going to hear a little bit from me about our culture and the amazing leadership team we've built. And for me, that's really a subject near and dear to my heart, and I think a critical piece of the puzzle. And you're going to hear more details about the attractive model, business model and the financials behind it.

Our growth has been driven by brand strength, disciplined execution and a really resilient operating model. The farm network and the supply chain scale sustainably as we continue driving growth in our brand. And these foundations give us confidence in our long-term runway. Our purpose, voice and transparency resonate uniquely in food. Vital Farms wins repeat loyalty at high prices, premium prices, and that's rare in this category. And that brand loyalty is the engine of our enduring growth.

Yes, the photo on the lower right is one of our raving fans who did tattoo our cartoon on his arm. No, Joe. I think we have two examples of that actually. Our hands-on pasture-raised model is unmatched in its scale and its consistency. It starts on the farms. We partner with over 575 family farms and treat them each as long-term stakeholders, investing deeply in building trust-based long-term relationships, helping to ensure that we keep raising the standards and that those farmers succeed by working with us that they don't lose at the end of the movie as so often happens in this country. And that, in turn, ensures their resilience and their loyalty.

Owning our own packing capacity is a crucial part of the strategy. In general, it's capital light, but we've chosen to invest specifically in packing capacity, not only to ensure our ability to scale with the growth but also to support the superior quality that's such an important part of our consumer value proposition. This supply chain is a competitive moat.

A growing number of consumers in this country are choosing premium brands with superior animal welfare and high quality. You can see it in the stats. Pasture-raised eggs and grass-fed butter are the fastest-growing segments of the two categories in which we compete. Our portfolio is well positioned where the growth is strongest.

We've consistently outpaced our growth objective since the IPO. Back in 2020, we forecast reaching about $500 million in revenue by 2024. By the end of '22, it seemed we were ahead of schedule, so we offered updated guidance that got us to about $1 billion in revenue by 2027. And again, we're reaching our objectives even more quickly than we said. Since 2020, revenue growth has compounded at nearly 30%. And so it's time to share our vision for the next 5 years.

We see a clear path to $2 billion in revenue by 2030 from existing categories. Our track record since the IPO should give you confidence that we can hit this. Gross margins in the mid-30s, EBITDA in the 15% to 17% range allow us to drive disciplined growth for the long term, investing in scaling our organization and the brand along the way. These goals reflect our confidence in our brand strength and supply chain durability and scalability.

And the key elements are all ones we're well familiar with, continue growing household penetration through awareness and retail expansion; continuing to scale our capacity by adding more world-class farms, expanding our throughput at ECS, adding a second facility in Seymour, Indiana, and continuously improving productivity throughout, continue scaling our world-class organization, attracting and retaining the very best in the business and maintaining disciplined OpEx and CapEx leverage to expand margins over time.

Now you're going to hear about our plans in more detail from some of our exceptional leaders. What I want you to take away today is that this is an integrated strategy built across brand, supply, sales and operations. Taken together, these components create a durable, multiyear growth engine. To get us started, I'm pleased to welcome our Chief Marketing Officer and General Manager of Butter, Kathryn McKeon.

Good morning. I started an exciting career in marketing, working on some pretty iconic food brands. 9 years ago, 9 years, kind of at Vital Farms, because I saw an opportunity to be part of building another iconic food brand. I brought my experience, I brought a pretty ferocious competitive spirit. And I brought a real love of brands. This brand, Vital Farms, it's a special one. Today, I get to tell you why, to tell you why that is. Here's the story I want you to be able to tell about the Vital Farms brand.

We are a brand and it's a special one. Vital Farms is growing awareness. For us, that translates to loyalty. And we know how to choose the right consumers, and they love us. So what's at the heart of this brand? I want to show you Sean, let's play the video.

[Presentation]

Our job at Vital Farms, it's a little different than other marketing jobs. We didn't make a tool called brand to put in our toolkit. The brand is who we are. And the job of Vital Farms is to tell the stories that get credit for who we are. That really is something different. So really fun. It's unique, but it's fun, but how do you fund building this brand.

Okay. I want to tell you the secret sauce of the brand. This is something we actually get asked about a lot. What's the secret sauce? I'm going to tell you the 6 ingredients of the secret sauce of the brand today. Bull**** free is our brand promise. We don't give it. We don't take it. We showcase conviction in our purpose. There is heart and grit in every single thing that we do. Utilizing expertise to always raise the standards. Look no further than the side of every single pack of eggs to see traceability. We figured out how to show you the farm and the hands where your eggs, you're eating for breakfast came from. Extraordinary product experience. We are relentless in ensuring that every single time you're getting consistently high quality in everything a consumer takes home.

Real humans who deeply care, bucking corporate norms. We hire for this, and it shows up in every single thing that we do. Our small, but mighty community management team, for example, has had over 77,000 human-to-human interactions with our consumers this year. That matters. Another example, you have a handwritten note in your welcome bag. I hope you saw that. Our team decided that we wanted you all to have a handwritten note. So the team sat together and wrote notes to each of you, real humans who deeply care.

A strong voice. We have a strong and meaningful voice that shows up every single time in every single touch point. Okay. Here's the real secret of the secret sauce. These are the six ingredients. Only our team knows how to execute this. The actual secret is the people. The people who are the secret sauce to execute these ingredients, it's the people.

So how might it show up in the world? Where do we see it? What are the receipts you might say. So in a lot of places, and I think in many industries, there's kind of norms or even what you consider the rule of how things are done. We just don't buy it. Vital Farms isn't doing that. We have our own way. Let me give you some examples. The rule is that advertising creates the brand. I think that's a generally accepted norm. It's not ours. Advertising amplifies our message, does not create the brand.

Another rule, scale requires compromise, not at Vital Farms. We scale with integrity, no shortcuts. A rule. Animals are a cost to minimize, not at Vital Farms, animals are foundational. And then there's this rule. It's certainly been true everywhere I've ever worked that you're supposed to choose whether you grow with a household penetration strategy or a buy rate strategy that you have to pick and you have to focus. That's not how we're doing it. We're growing with both. We have been year-over-year, and you can count on us to keep doing it. It's part of how we'll get to that $2 billion.

We talked about how special the brand is. Let's turn to how we grow awareness and turn it into loyalty. We chose an awareness strategy, wanted to widen our lead in the category, have a strategic advantage. We also have a really strong conversion funnel. So we believe that if we fill that funnel, we could drive growth. And frankly, we just want people to be thinking about us when they get to the shelf. It's working. Our awareness strategy is working. Let me show you. In early days, we were setting the foundation of the brand, building who we are, getting that right. In 2022, we built an awareness strategy and began to execute. There's a thing at Vital Farms when we decide to do something, we get it done. And that's what happened. We started growing awareness phenomenally. You can see the results. We have a huge lead to our competitive set, and it's a major advantage for us.

Here's where the rubber meets the road. It's translating to more households. When we grow awareness, we grow households. That's not an algorithmic given that doesn't just happen, at Vital Farms as awareness grows, households come in, they buy, that's the brand. But it doesn't just stop there. This chart shows us every year the group of consumers for the last 5 years, the households that came in and started buying Vital Farms. Their purchase frequency goes up very consistently over time. So in 2 years, they're somewhere around doubling even more their purchase frequency. When people go to Vital Farms, no matter what year, they keep buying more and more Vital Farms eggs.

Okay. So what does that mean for total growth? The dark blue here is retained households. The retained household number is going up because we're bringing people in and keeping them. We're bringing in millions of new households, they stay more retained households. What does that look like for dollars? You can count on us to be bringing in incremental dollars from new households, but this business is driven by loyal dollars. We're bringing households in, we're keeping them. They're spending more over time. The business is driven by loyal dollars.

And let me dispel any possible assumptions. We appeal across all income groups, and all are growing their spending with us over time. That's loyalty. Vital Farms grows awareness that becomes loyalty. Let me tell you how we chose the right consumers and how much they love us. Three years ago, we identified Bridget and Ben. This is our bulls-eye consumer. This is where we're spending our ad dollars because these are the folks we know are most likely to convert and stay. But I want to tell you more than their demographics because actually, what's really interesting that I want you to know about them is it's a mindset. These are folks who are health focused, they're educated foodies. They care about where their food comes and they're looking for brands whose values reflect their own. In a nutshell, we are for them. We chose the right consumer, and we've grown with them. And just as consumers evolve, we will, too. As we've done every few years, next year, we will announce a new target consumer, an expanded group that will help us unlock further growth.

You know we've built awareness. That secret sauce team, the people, they built a one-of-a-kind system to build the awareness to grow. It's a team of social media experts, wildly talented creatives, brilliant portfolio strategists, insights, Pros, PR experts, savvy brand managers and more. The marketing team at Vital Farms is phenomenal. Here's how we go after it. Across paid, owned and earned media, we're getting scale and reach, building trust and driving amplification.

Okay. So what does it look like in the real world? You'll see our platform campaign, Good Eggs, No Shortcuts across all major networks. If you pause your show on Netflix, you'll get an ad from us that thinks farmers because they don't get to pause and an invitation to thank them as well. We're being featured in places like Good Morning America and every foodie influencer is talking about us on their networks.

But we can't stop there. It doesn't stop with media. We got to see it all the way through. We've built the product experience for the consumer, what they experience in home with relentless intention. In fact, there's 52 things that we've identified that are part of that product experience for the consumer. We've defined them. We've set the highest standards, and we've ensured that we can deliver every single time. A couple of the features of that, the beloved Vital Times, the newspaper insert in every carton and our traceability program. Every single carton will show you the farm 360 view. In fact, when you walked in the videos playing on the screen are some of those videos.

Okay. Is it working? We've got our secret sauce, we know what we believe is the magic of the brand and how we do it. Does it land with consumers? Does it resonate for them? We asked a couple of weeks ago, we just asked consumers why do you buy Vital Farms? It's working. And it's not just one thing that works. It's all the things. That's the brand. An actual ethos that means better quality. The package is beautiful. I like knowing where my eggs come from, and I like the newsletter. They make you feel good about purchasing and eating eggs, the brand. You see from our consumers, we've built trust with intention. This is a trusted brand. We're bull**** free. We operate with purpose. We raise the standards. We have an awesome product experience, real humans who care and a strong brand voice every single time.

Now you can feel confident in telling the Vital Farms brand story. We are a brand, a special one. Vital Farms is growing awareness and for us, that's translating to loyalty. We know how to choose the right consumer, and they love us. Before we hear from Pete, I want you to hear one more voice that of our consumer.

[Presentation]

Good morning, everybody. Thanks again for making the trip in. My name is Pete Pappas, I had the pleasure to join the organization about 5 years ago as the Chief Sales Officer. And today, I also have the privilege to serve the organization as the President of eggs. And before I jump into a discussion around our farm network, I want to give you just a little bit of an overview of our egg category and the reason that I am so excited and energized about the future.

I've been in consumer products for a little over 30 years. And I got to be honest with you, I can't remember a time that I've had as much fun or as I have been as energized as I am today about the future of our organization and the opportunities that lie in front of us. And the reason for that are threefold. One, we've got an unbelievably powerful brand. As Kathryn just shared with you. We're well positioned with our farm community, and we're unbelievably well positioned with our retailers.

From a category perspective, eggs are huge, huge and dynamic categories. Incredibly important to our retailers and the role in which we play with those retailers is that of revenue and margin driving, offsetting what has predominantly been a low-revenue, low-margin category. Secondly, Avian influenza continues to impact the category. We believe that, that will continue in the foreseeable future. I'll talk a little bit about that. And then lastly, outdoor access, the segment in which we play, is fast growing and is well positioned as well to continue to grow moving forward. So let me talk a little bit about each three of these.

First, the category. I'm not telling you anything you don't know. category is big and dynamic. It's $16 billion. It's more than doubled in the last 5 years. But what you may not know is the role that we play for our retailers in the category. And that is that we offset what has typically been a low-margin, low-revenue commoditized space. Today, given that we play in the super premium segment of that category, we deliver, as Kathryn shared, high loyalty, high-value consumers that are delivering high revenue, high margin to a category. That is incredibly important to our retailers. It's sticky and these consumers stay with the brand.

Secondly, eggs strengthen loyalty, drive traffic and reinforce the retailers value proposition. They bring feet into the doors said other ways. Just is milk, just as bananas. And in the past, same as soft drinks.

Lastly, as I mentioned before, the critical traffic driving category. Avian influenza, we believe, is going to be here in the foreseeable future. It has reaped havoc on this industry. This is not a secret. You can see the impact it has on the bird population over the past 5 years. But I think what I'd like you to understand is how well positioned we are within our small family farm network and our strong track record of biosecurity to weather this dynamic. We've navigated successfully the past 2 years without any incidents on our farm. And given our commitment to biosecurity, I believe we're well positioned to navigate this into the future as well. As you can see, the population is rebounding, and I'll share a little bit more about this as we talk about our farm network moving forward.

And then lastly, the space within outdoor access in which we play, you can see just as the category has doubled, outdoor access has more than doubled, and we are the driving force within this space. We are well positioned here and I anticipate that this will continue to outpace the category moving forward.

Okay. So we've talked a little bit about the category. Let's get back to what our road map for the story today would be, and that is delivering strong and growing relationships with farmers. I'd like to oversimplify my role in the company, and that is get eggs and sell eggs. When I first joined about 5 years ago, Russell likes to tell a story. In fact, we were sharing it a little bit earlier. I think he got so frustrated with me in my sales role when I just kept saying, I need more eggs. I need more eggs, we're running up against opportunities that we just can't fulfill. That he finally said, great. I'm going to put you responsible for both farms and sales now. So you stop complaining about getting eggs. You have now the responsibility of securing more eggs and then you can go sell them. And as I said, I'm having a blast. I've got the good fortune of working with what I believe is to be the best farm network and farm support team in the business. I'm going to talk a little bit about -- more about that and the best network of farmers in this industry.

So let's talk about this a little bit more. We are investing in these relationships, I believe, more so than we ever have in the past. What does that look like? When we last sat down together 2 years ago, we had a farm network of roughly 300 farms and 5 million birds. It has taken us roughly 16 years to build this network. And you can see the dispersion of farms across the pasture belt. Today, as of 2025, we're roughly 600 farms and almost 10 million birds. And you can see that dispersion as it continues to move east closer to our planned facility in Indiana, which Joe will talk about a little bit later.

Over this last -- in 2025, we have added roughly one farm for every 2 days in the year. That's unbelievable expansion. And what I'm excited to tell you about as well is we've already contracted all the farms that we need in 2026, and we're actually starting to recruit farmers for 2027. We have got a rich, robust pipeline of farmers anxious and willing -- and wanting to do business with us moving forward. Our capacity aligns with our multiyear growth needs, and we scaled responsibly keeping our standards extremely high.

Well, how are we doing that? Kathryn told you about the work that we're doing to recruit and retain fiercely loyal consumers. We do the same thing with our farmers. Now this is an example of a billboard that we have built or utilized right in the middle of the pasture belt. And the reason we do this is just as we do with consumers to drive awareness. This has allowed us to bring potential farmers into our farmer meetings where we have an opportunity to explain to them and outline what it means to be a Vital Farms farmer to provide them everything they need to know about our commitment to small family farming and to allow them to understand how we will prepare them to be a successful farmer. They begin to understand our commitment to perpetuating family farming and to allow them to understand how potentially we can create a generational business for them.

Our value proposition is grounded in long-term outcomes. They can become stewards of their land. You got to understand that many of these folks have this land today. They're farming it in many different ways. How can they continue to expand that economic opportunity on their land. Long-term contracts that provide a better, more meaningful economic model to create stability and alignment. We invest in training, support, relationship building through boots in the dirt on their farms with the best farm support team in the business on the farm supporting them every day. Whatever it is that they need, we are there to help them. Ultimately, farmers choose Vital Farms because they feel set up to succeed, and they trust us. There's that word trust again. Kathryn talked about it in the brand. and that brand carries through in the way that we treat our farmers.

The best way to bring this to life is with another video that we actually share with them in our farmer meetings.

[Presentation]

So after we've recruited our farmers, we retain them and we grow with them. So as we've recruited farmers, I've started to learning from Kathryn write a personal note to each of them. That concludes with welcome to the Vital Farms family. And I'd like to think that they feel that they're part of an extended family. We're in it together. We're excited about growing together. And the numbers don't lie. As you can see here, we have a 95% retention rate with our farmers. 32 of those farmers have opted to building additional barns in the last 2 years, which is a reflection of confidence and satisfaction in our economic model. And 50% of our farmers in 2025 were referred by current farmers, indicating, again, a satisfaction in this model and what we're doing moving forward. So we feel great about where we're headed with our farm network.

So we sometimes get asked, are there really enough farmers to continue to perpetuate your growth? And the answer quite simply is, yes, and the proof is in the numbers. Within the pasture belt, you can see the numbers here, 400,000 small and midsize family farms are scattered throughout the pasture belt, that's less than 0.2% of those farmers are currently with Vital Farms today, less than 0.2%. We have plenty of farmers and the land to go along with it to perpetuate our growth. Our standards and our model are highly attractive to aligned partners with aligned goals. Supply expansion is not the limiting factor for our strategy.

And as you look at land, you can see the same thing, more than 125 million acres of farmland in the pasture belt across all agricultural farm used for crops, pasture, grazing. That's 0.02% of the land occupied by Vital Farms today. And even if you took all of the eggs in the United States that are consumed and assume that they were pasture-raised eggs, it would amount to 1% of the farmland available throughout the pasture belt. So we have plenty of farms. We have plenty of farm land. We have plenty of farmers available to us to continue in this growth trajectory.

So how are we ensuring long-term success for our farmers. I want to give you just two examples of investments that we're making to improve outcomes for farmers, ultimately raising our own standards. First is our accelerator farms. Now these are company-owned farms that we're learning -- that we are using as learning labs, innovation properties to try out new practices that we won't ask farmers to invest on our behalf. Further, our animal welfare, regenerative practices. We are using these locations as opportunities to learn different things about animal behavior regenerative practices on the land, different ventilation and cooling systems and barns. All these different things that we believe will potentially improve the outcome on that or in that barn.

Second opportunity is in the pullet program. Now these pullet programs are contracted farms similar to our lay farms. We do not own these farms. We contract with independent farmers. But the pullet, which is from roughly 1 week to 16 weeks of a bird's life is the most critical period in a bird's life, which will influence the productivity and outcome of that bird. And we are investing in this period of time because we know that outcomes are incredibly important and influenced by the bird's health and well-being between the 1 to 16 weeks of life. So accelerated farms drive innovation and welfare, animal welfare and regeneration, pullets improve the high quality of before laying. Both programs support consistency and long-term cost structures for the business. And only because of our size and our scale are we allowed and able to invest in programs like these moving forward to improve outcomes, not just on our company farms, but on behalf of the independent farmers that we're partnering with.

So when I began, I shared that eggs are a big important dynamic category for retailers, and I gave you a little bit of peak into the role in which we play. We've nearly doubled our supply of farmers and the robust pool of farmers that we have available to us, both in farms, farmers and farm land moving forward. And we're well positioned to continue our growth moving forward. So with that, I'm going to hand it over to Russell, who I believe will now talk a little bit about our capacity expansion and our ability to pack these eggs and bring them to market moving forward.

Thanks, Pete. We -- our Chief Supply Chain Officer, Joe Holland, is with us today. He's a little under the weather. We made the mistake of having sushi on a Monday, which apparently you're not supposed to do. So hopefully, we'll see them later today on the tours of our facility. So I'm going to try to do my best to do justice to his section here. He's actually got the, I think, some of the most fun things to talk about.

So he wanted to share a little bit of just how much money he is having here. I'll let him tell that story when you get to see him personally. But what's exciting here is that the operations are scaling along with the exciting brand and sales story and market opportunity that Pete and Kathryn shared. There's a solid foundation here going back to building Egg Central Station here back in 2017, and there's so much more that we've added and we'll continue to add. There are going to be three key areas we're going to focus on. Our terrific crew; our stakeholder partners, some of whom are in the room with us today; and the physical assets and facilities, there's an awesome combination to support our business.

So after we were founded, it didn't take long before we realized that we needed to own our own destiny by building a world-class packing center here in Springfield. I think it's -- in the early days, we started like so many other start-ups do without the physical assets. We are too small to justify the investment, and we relied on others to do that for us. We found a couple of things wanting in that model. One was that, that excess capacity, we were able to use in other companies' plants tended to get a little tighter in the peak winter season. And so in order to make sure we had enough capacity to support our growth, we needed to build it ourselves. The other is that part of what we're doing is creating a premium superior product. That means, frankly, having a higher standard for what makes it into a carton versus what doesn't. And try as we might, we couldn't always convince other players in the space to filter out what looked to them like perfectly good eggs, but that simply didn't meet our high standards. So again, in order to make sure that happened reliably, consistently, we wanted to build it ourselves.

The next plant under construction now is in Seymour, Indiana, and that will continue to create the capacity we need and also benefit from the learnings we've had over nearly 10 years here in Springfield. And I think we want to show you a video now of just a little bit of what makes our facility here so special.

[Presentation]

So I'm excited for you to see Egg Central Station. And the crew members and leaders there who will walk you through our frankly, so they're just as highly engaged, if not more so, and what we're doing as the wonderful marketers, salespeople and other team members who bring this whole thing to life. Engage with them. I want you to ask them why they do what they do, ask them how long they've been with us. There are some really impressive people on the ground there.

One of the things that I think is really important to know is we run this place like a food facility, not like a farm packing facility. The distinction can be subtle but where it shows up is you'll see it in design. You'll see it in cleanliness. You'll see it in maintenance. You'll see it in engagement of the crew members. There are small differences that, frankly, make a big one to us.

On a farm facility, the standard work rules don't apply. You don't have to pay over time. You don't have to pay worker's comp. You don't have to offer benefits or paid off holidays. We never intended to skirt what we think are critical parts of an employer value proposition. We want great people. We treat them like the professionals they are. So our plant is in the city. In fact, it's right at the end of the runway of the Springfield Airport. We're not hiding it off an Egg land. And you will meet a plant safety leader who is driving some of the best in-state, best in industry safety outcomes for our people as one example. You'll meet a crew full of full-timers who have full benefits. These are just small examples of how we built this place with a different vision in mind of being a world-class and most trusted food company, not just an egg company.

You'll see that we have a long and successful history of growing capacity to support our sales growth. Starting when we opened Egg Central Station, actually back in 2017, but heading into 2020 with about $300 million in revenue, at least of capacity to support about $200 million in revenue, and again, expanding it in '22 into '23, expanding it again this year successfully, that Triple Lindy of adding a packing line, opening a new cold storage facility and doing an ERP transition in the same month, which maybe we can revisit for next time. But as we look ahead to $2 billion by 2030, we've got a clear path to that with Vital Crossroads offering the missing piece to that capacity. And one of the great things about this model is that we've been able to scale to support the revenue as it grows. For example, in Springfield, we didn't start with all the automation you're going to see today because we didn't need it to support the volumes. We've layered in additional staffing and additional automation to support volume as we grow, making the cost structure here a bit more variable than in some food processing facilities.

So Joe likes to talk about the chicken and egg phrase coming with our operations. Is it the crew? Or is it the assets, the automation, the robotics, which is the center of the stage. The reality is that here at Vital Farms, it's all about people. People are what bring this place to life and the assets are there simply to help empower them to get to greater outcomes. If you were here back in 2017, you saw a lot of manual labor. And frankly, you may have seen a few of the folks you're going to see today, some of our long-term crew who have helped us learn along the way and improve along the way and help bring our newer crew members along to help drive even better outcomes. So here are just two examples of the technological investments we've made to help improve productivity and our crew outcomes. We focus our investments on the hardest jobs which has the benefit not only of helping improve throughput on those areas of the plant, but also reducing risk injury and fatigue on our crew.

First, we invested in automated pack lines. Those pack our highest volume SKUs automatically into the master cases, which go on to the pallets. The second is automatic palletizing, which is kind of impressive when you see it. I hadn't seen this before we put it in our own plant. It takes those finished goods, master cases and actually palletizes them for us, which is, frankly, that's that 40-pound lift over your head that's in the job description that I hope to reduce the need for in the future.

And we've invested to improve. We've invested a lot in our talent as well to improve capacity. We have -- I mentioned earlier, we've driven a safety record now that's the envy of the industry and the envy of the state, we've been recognized by the state of Missouri for the incredible safety outcomes we're providing. Our safety leader likes to say that we're not doing that by under reporting. We report near misses, which I guess is a rare occurrence in the food manufacturing. And so having that low an incident rate despite our essentially over reporting is truly remarkable, and I think a reflection of our values.

We've done big investments in training our crew, not just our frontline crew but really the leverage at the manager and supervisor level to help every one of our crew members experience what I've experienced over the years by having a boss who cares about me by having a crew that I want to work with and who are just as dedicated as I am. And again, talk to them, talk to the folks you see on the floor.

So as impressed as I think you're going to find ECS, I think you're also going to be blown away by this new fully dedicated Cold Zone facility that was opened just a few months ago. We've got both John and Christina at the back of the room who are the owners, family owners and leaders of the Erlen Group, which is the owner of the Cold Zone facility. They'll be on hand not only to lead that tour, but also to answer your about what it's like to partner with us and what it's like to run that facility in support of our business. This is a truly integrated part of our supply chain.

And it's only possible because of an enduring 10-plus year relationship, a lot of learning together, a lot of trust and a willingness to make a big bet on Vital and vice versa. The inspiration to build this facility came from our last Investor Day back in 2023. John was in the audience as a stakeholder, and he heard about our plans to get to $1 billion in revenue by 2027. He came back from that meeting and he can tell it better than I can, but realize that this was going places and that if they want to continue scaling as our partner, they needed to start thinking about the next phase of investment, which thankfully open this year right on time.

This facility has several benefits over our prior location for cold storage, which was in the Springfield underground. First, it's bigger. It's 171,000 square feet. It's actually about the same footprint as ECS with three lines in it. It's expandable. It can grow with our growth. It enables us to hold 4 weeks of [ Nestron ] eggs, the one straight off the farm, as well as the week of finished goods, which enables much more efficient longer runs in our facility. Essentially, we produced finished goods at Egg Central Station. We ship them over to Cold Zone, and they're able to pick those products to fulfill orders and ship them out to customers.

We've reduced the drive from the original underground facility to less than a mile from ECS, which will reduce road miles by about $100,000 a year, which is great for cost and environment.

Let's talk about Vital Crossroads. This is the unlock to get to $2 billion. We can get to about $1.2 billion with what we've got in place today to get to [ $2 billion ] Vital Crossroads is up and coming. We purchased land back in June of '24 and announced our next facility. In August of this year, we announced that we're accelerating the build-out because the growth is there and it's unrelenting, thanks to some of the folks up here on the stage. And so we anticipate opening it in 2027. And a couple of the key innovations for this new facility. One, we've now taken that cold storage facility that's now just a mile down the road in Springfield, and we've co-located it with the plant. This is a critical learning from our experience in Springfield, and the benefit there will be in cost, in complexity, in touch points with eggs, which are fragile, as you know. The good news is that our partners at the Cold Zone will operate it for us. That's not the thing we're the best in the world at. They are, but we'll own it and it will be ideally located for our needs from day 1.

The other piece that I think is going to benefit from some of the learnings in Springfield is the way that we're building capacity for two lines at once instead of having to add the building to add that second line. So the two lines will be phased across '27, but the plan is to have them both operational in '27, so that we're -- they're in place well in advance of our need for that capacity and so that we avoid the extra cost of breaking down a wall to expand the building.

So I appreciate you hearing the story. It's going to come to life when you see it. I'm really glad you could be here in Springfield to go see all that action. I think it's pretty exciting. Sometimes when people ask me what they're going to see when they come to Springfield. My simple answer is robots. And there are a few robots, and I think it's kind of cool. I don't know. I'm still a kid at heart, I guess.

So back up next is Pete, who's going to continue talking about his areas of responsibility and the role he plays here.

All right. Thank you. All right. So we've talked about on our journey to -- our journey to $2 billion. We've heard about a strong brand. We've talked about farms. We've talked about our ability to secure eggs. We've talked about our ability to pack those eggs and get them to market. I'll talk about now our ability to sell those eggs through our great partnerships with retailers. And this is the second aspect of my get eggs, sell eggs responsibilities, and that is selling eggs and building trusted partnerships with retailers. So again, a big important category and the role that we play again is revenue margin, bringing in households that are sticky for retailers. I want you just to remember that.

All right. So our approach here is really twofold. One, we have a very, very clear strategy for growth, bringing in valuable shoppers and the impact it has on their categories, retailers understand this, and they value this from Vital Farms. Secondly is the approach that we take in translating insights into action and solving retailer problems. I want to talk about both of these things moving forward.

Our strategy for growth, it's really not that complicated. It's a very, very simple and straightforward flywheel, but in this example, it's obviously very linear. It starts with distribution. That distribution obviously establishes our ability to drive awareness and create velocity. That velocity begets an expansion into more doors or more banners of a retailer. Once we're able to start to spread our wings, expand into more doors, into more banners, that velocity starts to then allow a retailer to understand I need more items. We start to get more items, we start to get more presence on shelf. It drives awareness, that awareness begets more households. Households gets more space. Then we get into this virtuous cycle space, expand SKUs, expands households, that starts to build on itself and creates momentum. And that's the cycle that we're in today.

We're in 23,000 stores, actually, more than 23,000 stores. For the most part, we're in the stores that we want to be in. We don't have a lot of new store opportunities. We probably have some that we should be in. But by and large, we're in the stores where we want to be. The opportunity for us today is expanding SKUs and expanding space. Productivity is the name of the game for us moving forward. So is it working? Again, the proof is in the numbers. Today, we are either the #1 or #2 branded shell egg items sold in 9 of our top 10 customers. Retailers value high velocity, loyal incremental customers. We deliver loyalty and incrementality to the category. The data consistently shows that we drive value in category performance. And then lastly, it earns us more distribution and merchandising support in store. Again, that virtuous cycle.

So let's pressure test the approach. We got four scenarios that I want to walk you through. What's it look like when we're the first mover or what did it look like when we're the first mover. Back in 2017 when we were the first one in the store, and we had competitors coming after us head-to-head when we were first in, and we were going head-to-head with competitors, challenger when we were the second one in and then how does it look in the face of really deep discounting and competitive activity.

So back in -- back in the day when we were the first mover, we have been under siege ever since. We've had a number of competitors who have come after us in this scenario in a big natural retailer where we were the first one in. We've had a manufacturer after manufacturer try to break in. In addition to private label, who has this retailer has introduced private label in a pasture-raised format. But in this particular example, this is about a branded manufacturer who has taken four different swings at introducing branded pasture-raised offerings in an effort to either cut into our share position or displace us. And in this example, through the last 5 years, we have not only been able to continue to grow, our growth has been almost 4x what they have been able to deliver in their entirety.

So the brand is incredibly powerful. The innovation that we have been able to deliver through partnering with this retailer has outperformed the base business in which this competitor has been able deliver. The consistency, the sustained growth is incredibly valuable that we deliver to the category. Velocity, loyalty and consistency are what really drive performance.

In head-to-head in this example, back in 2016, '17, at Kroger, competitor A and Vital Farms both came into the store together, competitor B in this example both came into the store together. Immediately, we outperformed that competitor. We were then able to start to expand into more doors, into more banners, into more geographies. To those -- that expansion led to more items on shelf. That expansion and those velocities actually demonstrated an ability then to scale in a manner that allowed us to innovate with scale for this retailer. To the point to the retailers said, I'm not sure we need to have multiple pasture-raised branded SKUs on the shelf and the competitor was displaced.

And today, you can see that we're experiencing over 30% compounded annual growth with Kroger, who's an outstanding partner of ours moving forward. Superior velocity drove more doors, the flywheel amplifies performance. And ultimately, this competitor is no longer in the store. So in a little bit greater detail, you can see the velocities over time, unlocking more doors increased 16 percentage points from year 1 to year 2 in '16 to '17. And you can see how that growth is perpetuated.

Shortly thereafter, our average item selling has increased consistently. But the real payoff and the value that Kroger sees in what we deliver is 1 million incremental households that we have been able to deliver. And those households stay within the Kroger brand. That's the value that Vital Farms delivers. Feet in the door, incremental high-revenue, high-margin consumers that stay at Kroger. That's why retailers value Vital Farms and the power of the Vital Farms brand. They cannot get that with anybody else in this category.

So as a challenger. And now the reality is there are very, very few places today that -- where we're not in distribution. There are and there are a few -- and there are a handful of places where we want to be and where we need to be and we're not. But in this case, at Publix, we were the second entry back in 2016, 2017. But very quickly, once we got on shelf, again, we were able to demonstrate that we stand for more than just simply price. This brand, as Kathryn shared with you, stands for more. We stand for transparency. We stand for animal welfare. We stand for things that matter to consumers more than just simply a commoditized cheap egg. And that resonates. It resonates in its differentiation. It resonates in its consistency. And again, it resonates in its repeat purchase at the retailer -- is valuable to the retailer. Rapid growth driven by strength and awareness and the category dynamics reward us in strong and trusted performance to the tune of 45% compounded annual growth over the last 6 to 7 years.

Okay. Lastly, and this, I think, is a very, very powerful story that demonstrates what I just said about the resiliency of the brand in the face of deep price -- in the face of price -- discounting or price resiliency. And this is a recent example with our friends at Kroger. And they understand the role that we play again. So in this case, Kroger used their own brand to drive traffic, 18 count at $1.99. They understand our role when we talked about this as we're looking at their strategic approach to the category. They do not want us as a deep discounted item to drive traffic.

That's not the role that we play for them. They'll use a different brand or they're going to use their private label to drive feet in the door. The role that we play, given the velocities that we can maintain is to keep that performance high, we are the offset to deep discounting, where the offset and the balance to revenue and margin. They can use private label to bring feet in the door and will continue to generate high margin, high revenue dollars on a consistent basis over time in the face of these deep discounted items.

Premium pricing does not impair performance. And that's, I think, the power of the brand. We do not see switching. Our consumers stay with the brand. Our consumers are not interested in cheap eggs. And I think that's incredibly valuable to understand. This brand resonates for different reasons. We are not a commodity nor are we interested in renting share or renting volume, not going to see us out-promoting just for the sake of promoting. And nor do retailers want us to do that.

Here's another example, not in the face of a deep discount, but as our price gaps have widened. This is with a natural retailer. And in this example, you can see back in 2021, our average price gap was at about $2. And we enjoyed about a 26% share of performance in the category. Today, we're at a price gap of about $3.40, yet our share is almost at 35. So again, in the face of widening price disparity, we're expanding our share performance. Meaning that consumers are staying with us, and even in this case, coming into the brand at an accelerated rate. The value proposition holds a relatively -- as relative prices shift, brand strength offset the category volatility and shoppers remain loyal because they trust us.

Okay. So we've talked about our strategy for growth. Let's talk a little bit about how we're helping retailers solve their problems. So today, the #1 challenge retailers face is space optimization. The reality is when you walk into a grocery store, retailers are not adding more cold space. They just can't. It's fixed. It's too expensive. They don't have the ability to knock out walls and add more space.

They're simply not adding the space, is too expensive. So how do we make it work harder for them. How do we make it become more efficient for them. So this example might be one of the largest exits that you'll see, probably 20, 24 feet of space. And you can look at this and say, well, that looks pretty good. I look at it and I see chaos. Now I'm pleased because you'll see Vital Farms at eye level, and we have a number of great SKUs.

But when I tear back -- when I peel back the onion and I look at the data, I'm almost 1/3 of the branded dollar sales, I'm 25% of the unit sales but I'm only about 17% of the spacings. I'm underleveraged. I'm underutilized by this retailer. I'm underdelivering from a category perspective. So the opportunity for us is to be working with them to optimize their category performance. And if I can help them drive category performance, the brand will win as well. So space optimization is going to unlock category growth potential. And if I can unlock category growth potential, we're going to unlock branded growth potential as well. Increasing these facings reduces out of stocks because what happens later in the day, and I'll show you, that doesn't provide us with enough holding power given the velocities that I'm generating both in dollars and units. By later in the day, those items for Vital Farms and perhaps in some other categories that get sold down.

Lastly, this isn't a self -- this isn't a proposition that is self-serving. Retailers see this as a win-win proposition as well. If we can rightsize this for them, they win because the category overall performance as well. And we've been able to demonstrate that with retailers in tests that we've executed.

Now here's a second example, probably a more realistic view of most sets that we see, which is about a 6 to 8-foot set in the typical grocery store. You can see what this looks like in the morning. And that's -- typically, in a grocery store, you're going to see kind of a sporadic set of what it might look like. You can see Vital Farms relatively well positioned, but you can see a lot of dead space in that cooler, how do I help the retailer optimize that space. But when you look at what happens at the end of the day at 4:00 p.m. It's completely wiped out. This retailer is out of business in essence.

One of the opportunities that we have is helping them rightsize this limited space, limited optimization basically puts them out of business. It's lost sales, loss performance for both of us. More shelf space, fewer out of stocks, higher turns demonstrates the economic rationale for facing expansion.

So this is where the opportunity sits. As we create more space, more SKU availability, that virtuous circle that we talked about, starts to perpetuate itself. And this is why the opportunity -- this is why our opportunity towards $2 billion, I'm so excited about it moving forward. So when I began the morning, I told you I was excited about where we are and why I'm excited both from a farm perspective as well as from a sales opportunity. Eggs are big and critically important to the retailer.

We've talked about that. We have a clear strategy for growth. I hope you understand how we're demonstrating that with our retailers and how well positioned we are to win. We have a solution mindset in translating our insights into action and well positioned with our retailers moving forward. We have a robust network of farmers, great relationships with them. We're putting down more hens and we're producing more eggs than we ever have, and we have more capacity than we've ever had positioning us to win moving forward. I'm so excited about the future, and I can't wait to see where this takes us.

So we're going to take a short break now for about 15 minutes, and when we come back, we're going to talk a little bit more about our culture, and Thilo is going to wrap us up with a financial overview. So 15 minutes, we'll be back in our chairs. We're running about 5 minutes ahead of schedule. So we will restart the second presentation at 9:55, okay? Start at 9:55 sharp. Thank you.

[Break]

Okay. Good morning again. Let's take our seats, please. We're going to get started right away.

So we're back. I'm back a third time, this time to talk about a subject that's really near and dear to my heart, and that is culture and purpose. Some of these words can get overused, sometimes they can start to feel a little bit squishy. I'm going to talk to you about some of the ways that this really comes to life for us the way that we've intentionally built and fostered it and why I think it's the fuel for everything you've heard about today.

This is our version of a page that you might have on a wall in your office that talks about our purpose, our mission, our values. These were arrived at very intentionally, collaboratively. What's really important is that we start every all-hands meeting reading the whole darn thing. We've operationalized it in the way we do talent reviews. We hire against these values. These values are the leading indicators in my experience of success as a leader at Vital Farms. And essentially, not unlike the way that Kathryn shared the recipe for building this enduring brand, this is the recipe for how we are building and have built an enduring organization. And we're happy to share it. It's easy to read. It's hard to execute, and it's something that we work very hard at and very consistently at. In short, this is our culture on a page, it's our culture and action.

We talk a lot about conscious capitalism, this multi-stakeholder model that focuses on having a higher purpose than just making money and having a stakeholder orientation. And those concepts can sound a little squishy. I tried time and time again in '20, '21, '22 to explain it. People said, let's move on to the numbers, fine. But there's actually something really powerful here. And so what I want to share with you, what I want you to take away when we say conscious capitalism are three things. First, we work with all of our stakeholders, including our good friends at the Erlen Group in the back of the room who operate our cold storage facility.

We work with all of them to grow the pie, not just to negotiate a share of a fixed pie. That's a critical piece of this. We are better off for that partnership. We are getting the better outcomes for that partnership. It's not just about a tough negotiation for a commodity called cold storage space. They're integrated into what we're doing. Two, we make long-term decisions and plans, which we believe create better outcomes, improve resiliency and reduce risk to our business. And three, that higher purpose to improve the lives of people, animals and the planet through food, it's a galvanizing force. It attracts a very special kind of crew member, one who is here for more than just the paycheck. In fact, they demand more of this place than just their paycheck.

And the result is in the attraction and the retention and the engagement, I hear read headline after headline about how engagement has gone by the wayside in the world, and we've got more disengaged employees who are quiet quitting or retiring on whatever the phrase they use is there. They're not engaged and they're not driving the outcomes that their employers want them to drive. These aren't employees to do my bidding. These are people in my span of care. I exist to support them and them in achieving our purpose, our mission and our vision, and it's a privilege to work with them, talk to them. You're not going to find what you might expect in an hourly role in a food packing plant. You're going to find people who actually kind of give a s*** about what they're doing, and they see that we're about more than just making enriching shareholders at their expense. This is something that benefits all stakeholders, including shareholders.

Our strong culture has enabled us to successfully scale. This is a -- this can be a tough thing for a small, fast-growing company like ours to scale our organization size at a 30% CAGR and expand EBITDA per crew member. We're becoming more productive, more efficient even as we're scaling this organization. It's because of the intentionality with which we're doing so. I would argue that part of my role is Chief Culture Officer, and I'm fiercely protective of it. And it's shaped and defined and reinforced by this incredible leadership team many of whom you've heard from today. I feel so lucky to support this incredible team. I would argue this isn't a team you're going to find at just any company that plays in the categories in which we play. This is a special team that's doing so much more than pumping out eggs and butter. I put them up against any in CPG.

And they're not just experienced. Collectively nearly 150 years of CPG experience and about 40 of it at Vital Farms. Hopefully, you've seen today how passionate each one of us are about our purpose, our values and our culture. And these folks are unleashing our potential of this incredible company and brand in ways that I could only have imagined in our founder can only have imagined years ago when we both got involved here.

Next, I want to welcome Thilo this stage to share a little bit more about the numbers and the financial story behind the success.

Thanks, Russell. So I get to bring us home. I got to wrap this all up and turn it into the financial story. But I want to start off with just recapping a little bit what you heard this morning. Russell started us off this morning talking about our purpose, what makes us unique in the packaged food space. He talked about our aspiration to become America's most trusted food company. And why that really matters to us, well, it's important to us, what we're trying to accomplish here by disrupting the American food system. .

Kathryn came up and talked about really in -- I think, in an extraordinary way, how we -- how our brand is so unique. How our relationship with consumers is so special. The brand is at the core of what we do. The brand is at the core of what makes us successful. Without this brand without protecting the brand, this business wouldn't work. And I think Kathryn gave some very good examples of all the work that we put in to make sure that the brand stays as strong as powerful as trustworthy as it is. The brand is our moat. We operate in a commoditized category. We are very aware of that. But the brand is the moat that gives us this advantage in this category.

Pete then talked about in his first role about what we are doing with the farming community. Obviously, in order to keep the growth going, we need to keep recruiting farms. And the relationships that we have with farmers, the relationships that we have built in the farming communities and the pasture belt, they're crucial to maintain this growth. And similar to consumers, the brand is a very important piece here. The brand that we have in the pasture belt is one of trust, is one of collaboration. And that sets us apart when we are going out and recruiting farmers.

Joe would have talked about it, but Russell stepped in for him, what we do with all the extra come off the farm. Obviously, we want to put them in a carton with our brand on it. And that's where we're putting a lot of money right now into scaling our supply chain. And I'm excited for all of you to see ECS later this afternoon and the new cold storage facility.

Pete then talked about our relationships with retailers and the virtuous cycle that we have built with them. Similar to the brand promise with consumers, the relationship with retailers is one built on trust, one build on transparency. And the strong retailer relationships are obviously very important for us, right? Retailers are the conduit that get our farms ECS to the consumer fridge. And the relationship that we have with retailers, the ability to grow velocity and distribution at the same time, that is an important differentiator for us.

And then Russell just talked about our culture, the leadership, the values that we have. To me, that is one of the other moat that we have. I don't think you'll find many egg companies that have this kind of cultural promise, and that is what makes us special in this space.

So with this tour of Vital Farms almost complete. My job is now to wrap this up with all the financial implications. Before we do that, though, I just want to address some of the news from this morning. And then we can focus hopefully on the long-term story that we are trying to tell you here. I know you have all seen in the press release that we put out this morning. All the questions I got this morning already were about these new numbers. So I'm just going to address them upfront. We updated our net sales guidance for this year 2025 to a new range of $755 million to $765 million.

It's a result of a longer-than-anticipated return to normal order patterns after our ERP implementation at the beginning of Q4. This return to normal order patterns, we are now back to it. This was a temporary disruption. And so we are now moving forward again. That is why we are providing also an initial outlook for 2026 net sales of $930 million to $950 million. That's 24% net sales growth that we are aiming for next year. This is not official guidance yet. It's an initial outlook. We'll provide guidance as we always do on the fourth quarter call in February. But we want to give you the confidence because we have the confidence that this business continues to be in excellent shape.

With the guidance update this morning, we also reconfirmed our adjusted EBITDA guidance of $115 million as a minimum. And with a few more weeks of spending under our belt since we updated our guidance on the third quarter call, we are now narrowing our CapEx guidance to $80 million to $90 million. It's simply a reflection of the timing for the spending for Vital Crossroads. There's no other explanation behind that. It's a timing question.

I want to talk about these order patterns that I just mentioned a little bit more. As you know, we implemented our ERP system at the beginning of Q4, September 29. We continue to be damn proud of that implementation. We were the rare exception where we implemented an ERP system, and we didn't stop shipping because of it, but shipments were slow in the beginning. ECS had to learn a whole new process of producing eggs. And because of that, production was slow for the first few weeks after the ERP implementation. And so as a result, retail takeaway, this is retailer data or scanner data from Circana, as a result, for 6 weeks, retail takeaway was below what you would consider the normal seasonal pattern. Production actually was back to pre-ERP levels, the week of October 20. That's in the middle of this highlighted period here. It just took a little bit longer for retail consumption to pick up again, to go back to what we would consider as the normal seasonal pattern.

Important to point out here the last 3 weeks of scanner data that we have from Circana, we are now above what the patterns were from last year. And so in fact, our retail volume, the number of EQ units that we are selling for the last 3 weeks, we're at well above the levels that we were at prior to the ERP go-live. Growth rates have recovered, so we are now in the mid- to high 20s again. And so with that, this temporary disruption from the ERP implementation. We are through that. We are behind that. I'm sure you saw in the press release as well that we have exited the hypercare phase of the ERP implementation. This ERP implement -- sorry, this ERP implementation is done, and now we're moving forward.

So with that, let me step back and now focus on the long term. You saw the numbers this morning. We're establishing a $2 billion net revenue target for 2030. We're also establishing a 15% to 17% adjusted EBITDA target for 2030. And we are maintaining our gross margin target of at least 35% for the next 5 years. The gross margin target is the same target that we've had so far. We think that is the right level for us where we generate enough gross profit to fund the rest of the business. The adjusted EBITDA margin target is a 3-point improvement relative to the targets that we set for ourselves at our last Analyst Day in 2023. We're confident that we can deliver these targets because of everything that you have heard this morning. We have this unique differentiated brand that's trusted by consumers. I find it amazing how steady the trusted brand metric is going back for the last 4 years.

Because it is such a trusted brand, we have done, I think, a very healthy improvement in our ability to retain new households. Over the last 5 years, we have increased that by 5 points. And because we have such a trusted brand, we are able to expand consumer interest in Vital Farms and consumer loyalty. Over the last 5 years, we have doubled our aided brand awareness. Over the last 5 years, we have doubled our household penetration. And we have done all of that while increasing buy rate by 70%. To me, that means we are far from acquiring the marginal consumer. There's plenty of growth with consumers left out there.

That then translates into success with the retailer that Pete talked about. Over the last 5 years, our average items carried in the grocery store in the U.S. has increased more than 40%. While the velocity on the shelf of the items that are there has increased almost 70%. Again, to me, that means that we are far from putting the marginal product on the shelf or acquiring the next marginal retailers. We are still very much in the hypergrowth phase of this business.

And so with these metrics, it shouldn't be a surprise that our growth at retail over the last 5 years has predominantly been volume driven. It's been a great mix between velocity and distribution gains. And distribution gains really predominantly by putting more SKUs on existing shelves. We've had a healthy contribution from mix improvement. It's a shift from conventional to organic gig, so we have been talking about for quite a while now. Price and promotions are actually a very small part of our retail growth.

Going forward, we anticipate that this distribution will roughly hold up. The growth is supposed to be volume driven. It's going to be a combination of velocity and distribution. Not every year will look exactly the same. But over time, this contribution, almost 3/4 of the growth coming from volume gains that should hold up.

And so with this growth outlook, we are very confident that we can follow up the 29% revenue CAGR that we've had since the IPO with a 21% CAGR over the next 5 years. I would challenge you to find many other consumer companies that can put up this kind of growth 5 to 10 years after the IPO.

Let me round out to the financial picture by just highlighting a few things from the rest of the P&L. First one is, since the IPO, we have grown our gross profit faster than net revenue, 31% CAGR, and we have we've improved our gross margin by almost 3 points. Gross margin, obviously already ahead of the targets where we want to be, the 35% level that I laid out a minute ago. With the growth that we have had, we've also had economies of scale. So we have been able to grow adjusted EBITDA actually at a much faster rate than revenue and gross profit. We've put a 47% CAGR and we have almost doubled our adjusted EBITDA margin. We anticipate that for this year, we'll be at the bottom end of our new target range, still leaving room for further margin improvement over the last -- over the next 5 years.

And then the last piece I want to point out is our operating cash flow. Very healthy growth here as well. You see that for the last 4 quarters, operating cash flow has dipped a little bit compared to where we were in 2024. That's simply a reflection of our decision to rebuild our nest run inventory, meaning the eggs that come off the farm. If we have better nest run inventory, ECS can operate more efficiently. And so this was a conscious decision by us to rebuild that inventory.

As I just mentioned, gross margin is already at the level where we think we are in the right smart. So we don't see a whole lot of further upside to gross margin, partially because pretty much all of our cost of goods sold is variable. As we grow, our cost of goods sold growth in tandem. And given that we are already at the 35-plus percent level, don't put too much gross margin expansion into your models.

Operating expense is a different story. About 60% of our operating expenses are fixed. So over time, we should be able to get economies of scale there. And we have mentioned this before, we need to continue to reinvest in the business. There are capabilities that we need to build out. There are functions that we need to build out. So not all of the economies of scale that we anticipate to get will flow to the bottom line, but there is certainly an opportunity to further expand EBITDA margin over the next 5 years.

And then the last piece of the financial summary I want to give is this terrible eye chart. I'm not going to talk about every number here. I just want to highlight a few. The first one is, at the end of Q3, we had $145 million of cash, cash equivalents and securities on the balance sheet. And just importantly, we had no debt on the balance sheet. In fact, we haven't had any debt on the balance sheet since the IPO. When you look at the PP&E line here, you can see the growth that we have had in our assets, that is all capacity investments that we have made without having to go to the markets. This was all self-funded out of operating cash flow, and we have been able to increase our cash balance in the process. And I think that speaks to the return on invested capital that we are driving.

This is an asset-light business model. We had almost 20% ROIC so far this year. It's bit of a reduction from last year given the investments that we are now making about our Vital Crossroads. But I think this puts us in the upper echelon in the consumer product space with this kind of return on invested capital.

Talking about assets. I just want to remind you what our capital allocation priorities are. Most important priority, obviously, is to keep the business running. We anticipate over the next 12 months, we'll put about $7 million in just operating necessity. The biggest bucket that we have on here is scaling the business. Over the next 12 months, we'll put $140 million into Vital Crossroads and into the accelerator farms that we are building out. And that's our capital spending outlook. There isn't any money earmarked right now to pay dividends or to pay -- to buy back shares. We see so many growth opportunities ahead of us. That is where we want to put our money.

So that's a quick rundown of the financials. I know there's a lot of interest in Q&A, but let me just summarize why I think Vital Farms is a great investment. First, it's a differentiated consumer brand that generates really strong consumer loyalty. Kathryn took you through all the work that we are doing to accomplish this. With the marketing that she and her team are doing, we're attracting more households while we are driving buy rate. That's a rare combination. And we win with consumers independent of market dynamics. Those are all the case studies that Pete took us through.

To support the demand that we are building, we're scaling our supply chain. Pete talked about the ample availability of farmers and farmland in the U.S. or in the pasture belt, in particular. And with the investments that we are making in Vital Crossroads in Indiana, by 2027, we'll have $2 billion of revenue -- over $2 billion of revenue capacity. That now allows us to have strong relationships with retailers. Pete talked about the virtuous cycle that we have there and the ability to drive distribution while we drive velocity on the shelf. Again, really rare combination to have both at the same time.

Underlying all of this is the strong culture and the purpose and the values that we have that Russell talked about, the leadership that is leading this company. And all that translates into an attractive business model, strong financials, very robust performance track record.

I wasn't going to go through all these bullet points. They will be in the deck that you'll find on our Investor Relations website. But that really concludes the prepared remarks that we had for this morning. So I want to ask Russell up here to join me in Q&A. We have plenty of time for that.

Thank you, Thilo. [Operator Instructions] Matt?

Matt Smith with Stifel. I think you talked a little bit about targeting a new consumer group going forward. Can you remind us of what the existing consumer group is. I think I have 30 million households in my head. And what the learnings were to look at an expanded consumer group, given the economic conditions we're in today. And I think one of the factors that stood out on the slides was an increasing buy rate across different income demographics, if you can talk about what you're seeing there, both on the high end of the consumer as well as the low end.

Thanks, Matt. I think it's safe to say. I should call out Kathryn to help out with that one.

Thanks, Matt. I think there's three parts of an answer to your question. Let's start with our current group of $34 million, Bridget and Ben. I talked about that being the bulls-eye of where we're focused. About half of our consumers are coming from that group. I feel great about that. That we got a bull's eye. That's not our only group. We appeal to a much broader group. Part two is where will we go? It will be an expanded group of consumers. We're working on that now. I don't have the number for you yet. It will be an expanded group. And what will that group look like? We're learning. So it's really a best practice and certainly something we want to do to go out and talk to consumers what's motivating their purchases, how are they choosing what they choose, what's meaningful for them. And as you point out, a lot of changes around us, a lot happening in our categories. And so we're staying smart. We're staying evolving with the consumer. The great news here is, frankly, if we did nothing, our consumer target would grow because who we are fundamentally what we have always been is where consumers are moving. And so we can grow very naturally. We'll also make some really intentional choices about what that will be. And next year, we'll talk about that group and how we chose them and what's true about them, too.

So Matt, just to reinforce what Kathryn just said, right? This decision to redefine our consumer target consumer. It's not a reaction to economic environment to the consumer potentially being weaker. It's an exercise that we do every 3 to 4 years. As our brand grows, the target consumer that we appeal to really keeps evolving. And so we need to make sure that we study ahead of the consumer so that we capture the consumers as the consumers are evolving, right? When you think about generational change in the U.S., when you think about gen where are we now, Z and millennials now becoming a much bigger power of the consumer environment. That is what Kathryn's work is about. It's not a -- "Oh my God the consumer is weakening." It's the opposite of that. The consumer is evolving and we want to stay ahead of that.

We've got one right here, Scott.

Scott Marks at Jefferies. Question for you is around the competitive dynamic. So there was a chart that I think Pete showed, showing market share relative to price gaps over the past 5 years. And no doubt, your business has been the category leaders.

But as we look toward the current year, we saw the price gap continuing to widen a little bit, but the share dipped a little bit. And I know there's a lot of investor questions around competitors pushing into pasture-raised along with some of the price gap dynamics relative to the economic backdrop. So just wondering if you can kind of help us understand what's going on with the competitive dynamic and how you're feeling about positioning relative to those folks?

I'll offer a couple of high-level observations about that slide. And then I'm going to ask Pete to come talk about the competitive dynamic because he's clearly the expert in the room. So first of all, I want to remind everybody that chart was a volume chart, not a dollar chart. So all of that growth in share was volume driven. It wasn't just a benefit of our price gap increasing. .

Second thing to keep in mind is, up until just a few months ago, we had a really strong constraint on our supply, and we were really struggling to fill our orders. And so unfortunately, one way that shows up is in our ability to continue growing volume share. We had a real constraint on our ability to ship, and I think you saw that impact in volume share growth flattening. I have no reason to believe that that's a permanent condition nor based on history, do I believe that's a reflection of the price gap. But Pete, do you want to talk a little bit more about the competitive dynamics you're seeing out in the field and what these apparent entrants are... .

Sure. Thank you for the question. I think the -- look, I have a healthy respect for all of our competitors. But I don't have a concern if that makes sense. The reality is we've got competitors that are consistently nipping at our heels and continue to try to take shots at us through price, because that's the weapon that they know, and that's what they try to use. And I think what you've seen is that, that is probably the one weapon that we are resistant to. We're not going to -- our consumers do not react nor do they leave us for price. We stand for something more than price. So if our competitors want to continue to try to encroach on our success utilizing promotions and utilizing price. I think they're fishing in the wrong pond quite honestly.

Our approach and the aligned approach that we have with retailers is that, that strategy is a great strategy for the retailer if they want to use those manufacturers to drive traffic, to build a different approach for the category. It's not something that we particularly are concerned by. We're watching. And I'm always concerned about price gaps as I am about absolute price points. I think today, on average, we're probably in that [ $7.99 to $8.99 ] price point, which I think is appropriate given where the market is today.

And price gaps, full transparency, 343, what you showed there, probably on the high end of where we should be. But we use that example to just demonstrate the fact that even at the highest point, we're still expanding our share position, and we're resistant and resilient. So we're going to continue to see manufacturers try to take space, try to take share. I think that we've been able to demonstrate that in face -- in the face of that competition, we continue to perform very, very well, and I anticipate that we will continue to perform very, very well. I hope that answers your question.

I would actually add something to that. I think I'm correct in saying that we're not seeing other brands or private label versions of pasture-raised eggs, pull consumers away from our brand. We've carved this brand out of private label 15 years ago. And I think what we are seeing is that where we're seeing growth in other versions of this thing called pasture-raised, which we love because we think it's better for the animals, we're seeing trading up within brands.

We're seeing private label pasture-raised offerings, trading consumers up from other versions of our private label product. We're seeing other branded premium pasture-raised eggs, trading consumers of that brand up from lower price point items within that portfolio. We're seeing very little cross-shop between our consumers and consumers of other versions of the commodity egg that we produce.

I think another good example of that, and I'll sit down, is we saw a large national branded competitor introduced a pasture-raised item this year, and they've quickly withdrawn that product from the market. It just hasn't resonated with the brand. And I think that kind of speaks to the stickiness of the brand itself. When you have a brand that resonates with a consumer or stands with -- for something with a consumer and try to take that brand and then ask for it to play as something else. It's very, very difficult. And it hasn't worked for them. And subsequently, that line extension has now exited the market.

Okay. Next question from Jon.

Jon Andersen, William Blair. So I have two questions. I'll just state them both. You talked a lot about some of the innovative ways you're looking to make enhancements to the farmer network and further differentiate the brand, I guess, one was accelerator farms and the other was a greater involvement in pullet production.

Are there -- can you talk a little bit about what you've learned so far to the -- on either the time frame you think is associated with implementing some of the learnings from those programs? And if you're able to kind of quantify the benefits, I suppose there could be quality benefits, productivity benefits, cost benefits. But just some more color around that, I think, would be helpful. And then maybe for Thilo, on the long-term outlook, are there -- is there any detail you can provide around maybe cadence of things like gross margin and EBITDA. There are a lot of puts and takes between now and 2030, including the startup of a second facility. What are we calling it Crossroads, yes. And just trying to understand if there's going to be a year where you -- as you're starting something new up or that will impact margins and trying to get a better sense of how that gets kind of parsed out year by year.

Jon, I know you love Pete. We all do. I'm going to steal a little bit of the thunder and give a start to the answer to the first part of your questions, and let Pete chime in with some of the details. So the headline for accelerator farms, which is really something that's near and dear to my heart, we're finally at a scale where we can invest in improving outcomes for all of our farms.

But those insights are going to come over a multiyear cycle because we're seeing the outcomes over the course of 1.5 years long flock within a laying house. So some of the insights we expect, we hope to see over time are how do the birds behave differently when you arrange the outdoor environment differently, more doors versus less because we want to encourage more outdoor access. And then when the birds go outside more frequently for longer periods of time, what kind of impact does that have on things like their stress levels, which can then improve when their stress is reduced, improve things like their lay rate, how much they eat, their feed conversion.

Stress eating isn't just a human thing. It's a bird thing. And we're all about reducing the stress on the birds by helping them exhibit their natural behaviors with the theory at least, and there is some science behind it, that will actually get better outcomes, not just for the health of the birds, but for the economics of the farm as well. We want to prove that out in an environment that we control. And that's like that's one big example. How does different staffing models, how do different -- showing up on that farm at different times of day and doing different activities both for the care of the birds, but also, say, the preventative maintenance in the barn. How does that affect bird outcomes?

There are so many design choices. You heard the farmer in the video say we don't micromanage the farms. That's really important to our independent farms, and we never want to take away that sense of ownership. But with 575 of them, there are some best practices that start to emerge, and we want to be able to more confidently assert some of the things that we think are kind of no regrets choices for them to make. We want to be able to quantify them in our farm. We need at least the first flock to really have some documented results that we can then bring with the courage of our convictions to our -- back to our farmers.

The pullet program is one that has been on my sort of wish list probably since 2015 when we first started working with small family farms directly because the pullets have such an impact on their success. A pullet -- we have standards for how we want those pullets to be raised, but there are so many variables in that -- on those pullet farms that can impact the health of those birds, the behaviors of those birds, a small example. We have -- on our accelerator farms, we can now observe it directly. We've had one flock delivered from a farm that's under our span of care, a pullet farm that we organize and that we're working directly with. And we've had two delivered from third-party pullet farms.

And what's interesting is that the first one that we got from a Vital Farms managed house or at least a supported house had a much lower incidence of what are called floor eggs. It's nerdy details, but basically, it was much easier to train the birds to find their -- the nesting boxes where we want them to lay their eggs, which improves quality, reduces the labor for the farmer. And it has everything to do with whether they got shown that part of the barn proactively when they were being raised as pullets. It's a huge benefit to the farmer. It doesn't make a difference to the pullet farmer. So our ability to help influence those activities just have such an impact on those small family farms. Those would just be a couple of examples of our motivation here. What are you saying? What are you hoping [indiscernible]

What he said. Yes. No, I think that's exactly right. I think at the end of the day, what we're trying to influence is yield, right? We're trying to help that farmer make sure that, that hen can produce as many eggs per hen housed as possible. And all of this investment is intended to help that farmer understand how we can help them optimize that production. And I'm a little bit closer to the pullet program than I am the accelerator program. But that's exactly right. That pullet program is doing just what Russell said.

I mean the learning that we're getting from different equipment, the training of that bird and how they behave in that equipment and what it means then to the lay farmer as they're building new barns and that utilization of Aviary versus Nest Flat, some of that -- the inside baseball type of distinctions that are happening inside the barn gives us such an advantage that we can help consult with that independent farmer as they're thinking through just as that one farmer said, I don't know anything about chickens. So as we can come in and help them from ground zero, this is the best way to run a business, gives us such a great advantage to help them get started and then to be productive moving forward.

Ideally, we have a great team, fantastic team. But ideally, what we want to do is stand up independent farmers -- to be independent farmers. I don't want to be their everyday handholding, nor do they want me there every day handholding. That's not what they want. They want us to help them stand up a business and then let them run a business. That's exactly what they want. That's why they're getting into business to be independent business people. And this is all part of that journey. We're going to support them. We're going to equip them. We're going to help them be as smart about this as they can. This is just 2 steps in where we can help them do that.

One thing Peter shared with me is that one of the most frequent bits of feedback we get from our farmers is that our pullets are a point of differentiation. They all want pullets from our farms as soon as they can get them. And we've had some say that's why they joined us was because they hear how high quality those pullets are.

It's kind of funny that we're spending way too much time on this, and I'm sorry, but...

We're excited.

Yes, it is. It's actually kind of funny because you see the excitement I talked about earlier. It's funny because when we first started, most of our farmers just thought, I don't care. I mean I got three options that you've approved your own and two other suppliers. I'll just -- whichever. That's fine. Just send me a pullet. And now they're starting to see the difference. Now they're starting to see the difference in the behavior of the birds and the yield of the birds and the health of the birds, the consistency of that bird and its weight, in its coat, in its feathers, in its walking. So there is a difference. There's no question that there is a difference. And I'm so proud of this team that in 18 months' time that since we started, maybe a little closer to 24 months' time, by the end of 2026, we'll be close to being able to provide just about all of our needs internally. And they've done some fantastic job, and we continue to learn. We're doing a great job.

Margin cadence. I can't give you a concrete answer on that one. I think what I can point out to you is you alluded to setting up a new facility and impact that might have on margin. As I showed on the page, 90% of our cost of goods sold is variable. It's really the expenses for getting the eggs of the farm, putting eggs in the carton, shipping the cartons and so on. Well, shipping is SG&A. But -- so the vast majority of our cost of goods sold is variable.

So the investments that we're making in Seymour right now, opening up Seymour will have a little bit of an impact on gross margin as we add the depreciation, but it's going to be negligible. So really, the margin cadence, it comes down to how much of the economies of scale that we're getting in operating expenses. How much of that do we decide to reinvest back into growth and into the business in any 1 year? I don't think there is a straight-line answer for you there. It really will depend year-by-year.

Right now, I think we're at a point where if I had to choose, I would choose to reinvest in the business to ensure that we continue to deliver this 25% plus growth that we are talking about, 20% growth over the next 5 years. But not every year, there will be enough opportunity for reinvestment, right? And so I don't try to sound evasive, John, but it will really depend year-by-year what the opportunities are that we have.

Next question is from Brian Holland, D.A. Davidson.

Near-term question and long-term question. First, on the near term, maintaining the EBITDA while bringing the net revenue down for the year. How much, if any, of that is tied to maybe pulling back promo against the ERP disruption? And if indeed, that's -- what's behind that? Have we been able to turn that back on here now with that disruption behind us?

Yes. Promotions in the fourth quarter are running exactly the way we have planned them at the beginning of the quarter. So the -- maintaining the EBITDA guidance, I would call it prudent cost management. There were some things that we pushed into first quarter next year, not promotions, just general spending overall. We're not cutting promotions because of this plan. We've talked about all year that by Q4, we wanted to promote again to convert the brand awareness that Kathryn had built into actual household penetration. We have the supply. We have the production capacity now. So we're not sacrificing the long term just for the short-term benefit. It's just cost management and operating expenses for the most part.

And then looking out to 2030, can you just maybe talk a little bit about the levers that have been built into your long-term outlook to account for any changes in the backdrop versus what we've seen over the last 5 years? I think the market's general perception is that there has been some tailwinds for the business, pull forward and adoption trial, et cetera, maybe on influenza. Obviously, we don't know what that looks like year-to-year. But I think the market bias, generally speaking, has been -- and I think you had a slide here earlier showing that egg supply was increasing off of a trough level. So if we have more egg supply, if price gaps widen, just talk about the levers that you have to maintain that 20% growth algorithm at the margin profile that you're describing.

First, I want to offer -- there was a chart in there, which I think is worth reminding everybody about. And that was the portion of our business that's driven by those repeat and increasingly loyal consumers. The business growth is driven by the existing consumer much more so than the new one. We're constantly adding, but that growth is driven on an outsized basis by maturing consumer relationships. And those exist against the backdrop of high and low prices, plentiful and tight supply.

We've had year, after year, after year of disruption. The backdrop has not been consistent. But what has been consistent is the way that a consumer ramps consumption year, after year, after year, there was that chart and the way in which our mix of consumers, it remains very consistent in terms of heavy users versus light, which is a reflection of the way that this brand builds on a consumer relationship irrespective of that backdrop. So let's start there.

In terms of levers?

Yes. Brian, we've had, to Russell's point, right, we have had avian flu disruptions the last several years. This guidance doesn't assume that avian flu will continue into perpetuity. Frankly, I think we want avian flu not to continue because it's better for the birds if they don't get sick. I think that's pretty obvious. The levers that we have, it's really -- it's about everything that you've heard today. It's about we will continue to build the brand. We will continue to scale the supply chain.

When avian flu hits, there's always the assumption, oh, yes, Vital Farms benefits because of that. Reality is when avian flu hits, yes, we dial back on promotions because we will be subsidizing existing sales. But when avian flu hits, it's not like we can jump on the volume opportunity. The reality is, given the lead time that we have to increase our egg supply that takes 12 to 18 months. So whatever eggs, additional eggs that I sell today because there's an egg shortage in the countries, those are eggs that I won't be able to sell 9 months from now. The number of eggs I can sell over the next 12 months is a fixed number.

And we have to decide how many of those do we sell this month versus next month versus the month after that. And so the algorithm that we put out here is an algorithm that's built on where we see consumer demand going. It's built on what Kathryn talked about, continue to expand our definition of a target consumer. It's built on where we see the distribution and velocity opportunities with retailers.

Okay. Our next question is from Ben.

Ben Klieve with Benchmark Stone. A question around the dynamics here within the fourth quarter. Curious, Thilo, if you can elaborate a bit on kind of the reasoning for that kind of a 6-week lag in retailers getting back to the kind of normal order patterns. Was that a function of those retailers having to kind of work through supply that they source from other providers while you were operating at subnormal levels or something else?

And then a follow-up question is, can you confirm that the volume that ordinarily would have gone through your system was just sitting in cold storage and is going to be recognized in 2026. There's no inventory lost in that period.

Yes. So the -- I would have to speculate why it took longer for retail sales to recover relative to our production. Obviously, there is a component of inventory build of consumer shifting temporarily, right? When you have to bake your Thanksgiving pie and you need eggs for that, you're not going to wait for Vital Farms to be on the shelf again the week after Thanksgiving, right? The pie opportunity is gone. And so we might have lost consumers for a week or two. But I think the numbers -- the scanner data numbers also show you those consumers are back now, right?

The retail takeaway is now higher than where we were pre-ERP go-live. The growth rates are back to where we wanted them to be. We've lost sales for 6 weeks because at times, we had stock outs and those were sales that we won't be able to recover. But the consumer demand continues to be strong. And now we are back in the situation where we can supply the demand. The eggs you talked about cold storage. The guidance change, it implies that we lost about a week of sales in Q4 compared to what we had planned. Those are eggs that are now sitting in Cold Zone on and those are eggs that we can sell in 2026, and that's part of their growth algorithm for next year.

Okay. Next question from Megan.

Megan Clapp, Morgan Stanley. So more of a long-term question. Kathryn, you talked about how your goal is to expand both household penetration and buy rate, and that's key to getting that $2 billion in revenue. You admitted it yourself a bit that often food brands can perhaps see buy rates compress as penetration broadens to that more occasional user. So can you just maybe anyone who wants to take it kind of walk us through what's structurally different about Vital Farms, where you are in the household penetration and buy rate journey that gives you confidence that you can expand both simultaneously?

I think you got it right. Let's have Kathryn come up and take that one.

Thanks, Megan. Proof is in the data, right? So what I was always taught was it was one or the other that you just had to pick that the way it was taught to me it was impossible to do both. And it feels pretty good to prove that it is totally possible and not just for a moment in time, year, after year, after year. And so my answer to you really is we've been doing it. I see no reason to slow. We're bringing in new households while the loyal households get so much more loyal that the buy rate can keep growing.

The traditional thinking is if you bring in a bunch of new people, they only buy one in their first year, that dilutes. We just have so many loyal households and arguably, that just keeps building that the math shifts for us. And I don't see any reason that's slowing down. We're seeing -- we're doing the right things to bring people in. We're seeing it through with the right product experience so they stay. And it doesn't show signs of slowing. I'm confident.

Megan, I would add to that. Kathryn had this page in her section that showed consumer cohorts going back 5 years and how their purchase behavior evolved over 8 quarters, very consistently, whether it was consumer who bought us first in 2020 or consumer who bought us first in ’24, the growth of consumption was very consistent. And so I think that tells you that the consumer that we are acquiring today is still very much the high engagement, really future loyal consumer.

We're not at the marginal consumer yet. The work that Kathryn is doing goes back to an earlier question. The work that Kathryn is doing to understand, who is our target consumer, what motivates them, what drives them, what's the connection to the brand that we have. That work -- that allows us to grow household penetration and environment at the same time, right? So there's a lot of consumer insights work behind this to make sure that we're capturing the right consumer.

And what I would add to that, I'm thinking back to that page because that's -- I think that's a really cool page is, think about all the different macro backdrops across those 4 years represented on that slide. We got a slug of trial during the stock-up weeks of 2020. And the people that joined us then had the same likelihood of getting to the same place on average 5 years later as the people who joined us in 2022 or 2023 for some totally different reason.

Whether you joined us because we were the only egg on the shelf or whether you joined us because of word of mouth, the pattern is very similar and arguably creates some preloading of that future growth because a lot of the consumers that will drive the next 5 years are already in-house. So I think that's an important one to keep in mind as well. This notion that, well, there's a shortage on the shelf, and so we can just sell a lot more eggs and didn't we get lucky. Thilo said, we don't have a lot of extra eggs sitting around. And Kathryn showed you how the real lever for growth is the ones who have already tried us, not the ones that just came in opportunistically.

Okay. We have a question here.

Joe Feldman from Telsey Advisory Group. I wanted to ask another related question of that because what are those tactics though to kind of drive that repeat? If I've tried the eggs every once in a while, I'll buy 2, 3 times a year. How do you get me to buy 5, 6x? Like what are the marketing tactics you're using, I guess, is what my question is. And then sort of an unrelated question. You didn't talk much about new categories today like butter and other areas. Maybe you could share some thoughts on that.

I'm going to try that repeat to loyalty question because it's one I asked when I first got here, how -- my MBA non-marketing expert head thought, well, all the action, your best customer is your existing customer, we should be focused on driving everybody a heavy user. That's where the action is. And the answer I kept getting back was actually, there's so much opportunity to focus on the top of the funnel. And interestingly, as you saw in that chart, once we get you aware and to try, the journey is actually pretty consistent without a lot of specific focus on pushing you along. There's no loyalty program. There's no frequent buyer card. It's I want you to understand who we are and what we're about, make your own choice to try us out.

And then there are all these built-in aspects of the brand and the product that help educate you and bring you in even more tightly. For example, you pick up the carton, there's some learning to be had just on the carton. Kathryn mentioned the traceability that's on the end of that carton. Hey, look at this, this is -- you don't see this every day. I can actually see the farm where the eggs came from. There's a newsletter, which is both humorous and educational and might direct you if you're so inclined to come to our website to learn more. So there are lots of ways in which you can continue down that consumer journey once you've tried us.

The real proof is in the eating experience. There's nothing like cracking into our egg compared to the one you tried last time and saying holy smokes. This is different. This is better. That's perhaps the most powerful lever that we've got. So it all adds up, but it's much less about an active effort and more about letting the brand promise come to life for you on that journey once you've tried it.

Did I do a decent job? Okay, Kathryn says I did it. Okay. In terms of next category, we get this question occasionally, and I appreciate you asking it. Our mission is to create America's most trusted food company. We very purposely didn't say most trusted egg company, although I think most trusted egg company precedes most trusted food company just given where we are today. And we are in butter. We didn't talk a lot about butter today. It's still a pretty small piece of what we do.

And just as with eggs back when it was a relatively small business, there's lots of evolving our approach, especially on the supply side. The demand is there. We've got great butter. Consumers love it. It shows up in a different part of that refrigerator set. But it's actually a little hard to find really great butter that meets our high standards in the U.S. dairy system just because of the way it's structured. We actually had to pivot last year to Ireland to go find enough of the good stuff. And it's -- consumers have really embraced it. The quality is great. But we're still kind of learning a little bit about how to reliably and profitably deliver that high-quality butter to the consumers who love it so much.

That's a key part of, I think, demonstrating that, one, we're not just a single category player. That many of the consumers who love our butter, actually, they're not coming in as egg consumers first. In fact, I believe half our butter consumers don't buy our eggs. The butter stands on its own. That said, the reality is that there's so much runway in front of us at an 8% dollar share at retail of eggs, but only a 3% volume share today, right? We're a very small share of eggs and the growth rate ahead of us, that opportunity to get to $2 billion, that's high return to labor, high return to management capacity, high return to capital growth in front of us in those existing categories. And shame on us if we don't really put some more fuel into that fire first before we get too spread apart. But I think there are plenty of opportunities ahead of us beyond eggs.

There's a question from the back of the room.

Eric Des Lauriers with Craig-Hallum. Thanks for having us today. So you mentioned that for the most part, Pete, you're in the doors that you want to be in. Path forward for growth is really velocities, new SKUs and expanded shelf space, a lot of opportunity around expanded shelf space. What are the hurdles there to increasing shelf space? What kind of pushback do you get from retailers? And then given you're sort of towards the high end of the appropriate range on price gaps, how should we think about potential responses if the price of conventional eggs decreases and gaps widen?

Come on up, Pete?

Yes. So Russell mentioned earlier, the barrier, quite honestly, is us. We've been challenged from a supply standpoint when we had capacity. And then when we had supply, we didn't have capacity. For the first time in probably 4 years, 3 or 4 years, we have both supply and capacity. And as Thilo just mentioned, for the past 4, 5 weeks, we've actually started to really see a nice ramp-up in consumption to where we really feel confident in our ability to continue that moving forward. The challenge that we've had with retailers is we've been filling orders in some instances at 50% to 60%, and we've been allocating our orders.

So it's very difficult for my sales organization to go to a retailer to say, hey, look at all these great velocities, we really need more space on the shelf. Our retailers immediate response is, I don't disagree with you, but you can't fill what you already have. So now with our ability to fill orders, we have to demonstrate a consistency in our ability to fill orders first and foremost. Once we can do that, then my team has a little bit of a firmer foundation to stand under by which we can now say to them, okay, we've answered your question about the consistency in our ability to fill. Now we can start to talk about the expansion of SKUs that we've all wanted to take advantage of, let's start to put that into motion. So that's number one.

Number two, from a price standpoint, you're absolutely right. There is this potential risk in the potential whipsaw if Avian influenza does not materialize to the degree that it has in the past, I suppose there's this risk that the market is flooded with eggs. And if the market gets flooded with eggs, theoretically, we'll have a glut and there'll be a -- in the commodity side of the business. And there'll be $0.99 dozens eggs that's kind of what we talked about before. And I think what you saw here, and that's one of the reasons that we use this example is the brand performs very, very well in light of that dynamic.

So the immediate reaction might be we've got to start to take action to become competitive. That is an easy button type of response. Not something that we're inclined to do. The brand does not need to do that. We constantly are monitoring. I don't want you to believe that we're so arrogant that we just believe we'll -- we can price at $8.99 and just leave it be. When I first got here, we were priced at $5.99 a dozen. That's what our price point was for 5 years ago. And we thought at $5.99, weren't sure if we really had much room to move.

But as the market has risen, we've continued to rise with it, and consumers have continued to grow, and retailers have been surprised along with that. And we've been able to say consumers will move. Consumers are loyal. They're going to move with the brand, and we've demonstrated that. I believe, as this moves, retailers are going to be reluctant to see us take pricing down because of the role that we play. They don't want us to move down with commodities. Again, it's really important to understand the role that we play. Retailers value what we bring and the consumer that we bring to this category for them.

The other thing I would add to this is we've seen this movie before, coming out of avian influenza 2015 to '16 and then again with a slight resumption to full supply '21 into '22. And you see those hot deals on the commodity eggs. One interesting aspect of this industry, like any commodity industry, those cheap white eggs is that you don't live in the glut for very long. What happens is they just start killing chickens, right? It's not hard to reduce supply. If you're not making your marginal cost, you reduce your supply. That's not an issue we have faced in the recent sort of fluctuations in and out of avian influenza over the last couple of years. But the reality is that there is not a history of enduring ruinous low prices in this industry. The operators are, I think, much too sophisticated to let that last for very long. It's just -- I don't think it's the enduring issue that people are making it out to be.

Another question in the back of the room.

Andrew Strelzik, BMO. A related question to the last one. Can you help us think about or can you frame the SKU opportunity where you are today? You had a metric, I think it was up 50% or 70% over the last 5 years. Where are you today? How does that compare across retail channels and maybe as you think about kind of those incremental SKUs, the receptivity of some of those relative to the base.

If you take out Whole Foods, which is our largest customer, with whom we've been partnering the longest, not unlike those consumer charts, we've added SKUs over the years, and we're now at an average of 9 egg SKUs per door at Whole Foods. That's an outlier. Interestingly, we've grown even in recent years, to about half the dollar value of egg sales at Whole Foods, which is a remarkable achievement. At the IPO, we were about 1/3 of their egg sales, and I'm not sure I would have predicted getting to half. So the upside continues to be there. If you take those out, we're at just under 2 items per door in all the other channels and all the other retailers.

And there's some variability there, but it comes out to just under 2. 80-plus percent of our revenue comes from our top 4 SKUs. It's conventional and organic 12 and 18 count, top 4, high-volume, long-run time SKUs, SKUs that are well in our supply chain planning. And so there's a ton of upside simply in continuing to add both space for existing SKUs and to get to those top 4 in more and more and more of those doors over time. So much of our growth is spring loaded with those existing items that are well honed in our supply chain and don't require new product innovation, new portfolio planning. Pete, do you want to add some color to that?

Yes, I was just going to say, I mean, you can see that -- you can see the data in Nielsen, Circana. So -- if you look at average ACV of our top-selling SKUs, you'll see that we're very, very underpenetrated outside of our top 12 count item. And part of that is the reason I just explained. We've been challenged from a supply -- I'll just call it a supply standpoint, be it either having eggs or having capacity. And this is going to be really the first year that we're coming into it knowing that we will have a full year of unconstrained supply. Yes, I'm not -- yes, knock on wood, God forbid, something happens. So I'm incredibly optimistic, incredibly optimistic.

Now when you look at Circana and MULO or MULOl+, you're going to get into a lot of noise because that MULO+ is going to start to talk about a universe that is much, much larger. right? They'll start to -- start about drug stores and convenience and channels of business that, quite honestly, we don't play in nor will we ever probably be playing in, at least in the portfolio as it exists today. So if you really think about food, if you think about natural and if you think about mass, specifically Walmart, Target, however you want to describe Meijer and even in Club, to some degree, Club we just have not -- we purposely have not played in Club. We just haven't had the capacity to do so. Those are the spaces that are really a sweet spot for us. And that's where I'd ask you to really think about the upside opportunity of where we want to go.

Okay. Do we have any more questions? Matt, we have a follow-up question.

Matt Smith, Stifel. Maybe Pete and Thilo question for you. As you move out of a period of being capacity constrained and towards certainly a level of incremental capacity in 2026. As you think about the growth in 2026, we've been tethered to projecting volume growth based on farm additions over time. And you have a nice farm count increase that rolls into 2026. Are your expectations for volumes to keep pace with that? Or is there more flexibility in the supply chain as you go forward to adjust the level of eggs coming off of the existing base to help absorb some of the phasing of consumption growth?

Yes. Obviously, the number of farms, the number of chickens that we have that lay eggs, that is the upper limit of how much volume growth we can get. We have the opportunity to store eggs for a certain amount of time. We have mentioned our partners at Cold Zone a few times. That allows us to smooth out peaks and troughs over the course of the year. There is a bit of a seasonality to the business. And we have the opportunity to accelerate or slow down how quickly we renew flocks on the farm, right?

When you think about a flock on the farm, they lay eggs for about year and a quarter something like that. And then there's a break in between 2 flocks. The barn gets cleaned out, gets sanitized and new flock comes in. Just by extending or shortening the gap between 2 flocks, we can manage within the year how many eggs we're getting off the farm. Reality is, once the chicken starts laying eggs, they don't stop, right? They lay eggs the next, call it, 60 weeks. So once the chicken start laying, those eggs are coming off the farm, and that's when we want to find a home for them in a carton. But we can influence a little bit how many eggs we get off the farm month by month. But longer term, the farm growth that we have, the hens and the contract, as we call them, that is the leading indicator for where the growth is going.

Another question in the middle of the room here.

Jose Perez from Agave Holdings. I guess a question for Kathryn and Thilo. But on marketing investments specifically. So I think this year, we started providing deep in the notes, just a little more segment reporting. And one of the items there is marketing investments, where it seems that there is a pattern, maybe it's -- we only have 2 years' worth of data, I guess, but they start lower kind of in 1Q and then they kind of step up in 2Q and 3Q. Just wanted to understand a little bit better. Is that a pattern? Or is that simply -- is that how the business works? Or is that simply we have 2 years of data and just happen -- to happen that way? And then related to that, if you could talk about whether -- are those mostly lower funnel performance marketing investments? Or is this really the -- where we're seeing the awareness investment? Or is it a mix?

It's your shot.

Yes, [indiscernible] about marketing. There is a pattern there, Jose. The -- I think in Q1, everybody is so focused on other things that talking a whole lot about how great our eggs are, it's a message that gets lost over the summer and into Q3, and to back-to-school, I think consumers are a bit more receptive to that. As you get into Q4, you start to get drowned out again by all the other food ads around the holidays. And so that's why we'd like to focus the marketing spend more on the middle of the year. I think that I got that right?

Okay. On where does the spend go? I think Kathryn laid it out pretty well, right? There is an always-on component to our marketing spend. There are campaigns, TV and social media, we advertise on -- if you play on the New York Times website, Wordle that kind of thing. Our ad can pop up. So that's the always-on part. And then we support that with additional spending around particular events over the course of the year. So you think back third quarter, we have talked about these dog treats that we created. There was a marketing spend that was entirely focused on Q3.

It was an opportunity to highlight that a lot of our farmers have dogs on the farm that actually sounds odd, but they are working dogs that protect their chickens. And so we want to highlight that this happens. And so we created this limited edition of dog treats. So those are the more experimental, not always on parts of the marketing spend that happen over the course of the year. And we try to pick the parts of the year where we think consumers are more receptive to those and more open to hearing about those.

Marketing spend overall for us, I think last year, we were at about 5.3% of net sales. This year, we've said we would be in a similar range. It might go up a little bit further from here as a percent of net sales. But as the business grows, right, when you have net revenue growth, 25%, 30%, and you keep your marketing spend as a percent of net sales constant, there's a very healthy growth in our marketing budget. And the whole point of the marketing spend is that we drive awareness, that we fill the top of the funnel that Kathryn talked about.

So the marketing spend is driving awareness for the brand. It's not even explaining to consumers what is different about pasture-raised, right? I think when you have 30 seconds in a spot, it's really hard to explain all the different decisions that we make. It's simply about making consumers aware that there is a brand out there that does eggs differently. If the consumer really wants to understand all the different details, we have it all on our website, right? We are not trying to hide any of this. I think we are extremely transparent around that. And then we capture the consumer that is now aware of the product and of the brand, we capture the consumer with promotions on the shelf. That is the moment of truth where a consumer makes the actual purchase decision.

And having that yellow or orange tag on the shelf, that's a visual disruption that consumer needs to then grab the carton for the first time. And given the capacity supply constraints that we talked about, we have had periods in the last 2, 3 years where for several quarters in a row, we didn't run a whole lot of promotions because we simply didn't have the supply to support it. Now that we are in a much better supply and capacity situation, the plan is to run promotions for the entire year next year and convert this awareness that Kathryn has created, convert into household penetration.

Yes. I would just again, bring us back to the role that marketing plays. It's all about driving awareness, and that's a relatively long lead time translation into sales. So we're at the opposite extreme of, say, a direct-to-consumer model where you're using marketing spend to drive revenue, to drive volume immediately. It's not what we're doing. And that's a great example of why while during this time of having fewer eggs, we pulled back on promotions. We didn't pull back on marketing because marketing isn't driving current revenue. Marketing is driving awareness, which will eventually be translated into trial and then repeat and get the consumers on that journey toward being heavy users. And we never want to go dark there, one because it's super inefficient to turn the lights back on; and two, because we -- our long-term algorithm requires us to continue spreading the word and attracting that next generation of trial in the future.

Any -- we have one more question and a follow-up from Jon.

Another quick 2-parter. So I guess the dollar increase in your sales the past couple of years, you've added, I think, $150 million or so per year. And the forecast going forward calls for closer to $250 million per year to hit your $2 billion target by 2030. And I'm just trying to understand what kind of accelerates there. Is it this average items going from somewhat less than 2 to 4, so 100% increase over the next 5 years versus, I think, what you projected as a 50% increase in items, the prior 5. Because just trying to understand the -- some of the drivers underpinning that acceleration in the dollar add as you look out relative to prior years. And then, Thilo, you mentioned that the '26 sales that you provided this morning isn't guidance. What's the difference? And how much is the margin for error at this point with respect to guidance?

So a couple of thoughts on this question about how you accelerate the dollar volume. First, so much of what we put up in terms of numbers over the last 5 years was driven by choices we made about how quickly to scale the business. Choices we made about striking the right balance between judicious use of growth capital and executing at a really high -- at a high level, adding farms but not so fast that you compromise quality, growing the organization but not so fast you compromise quality. So part of it is we have shifted the sort of the slope of our growth planning. It starts there.

We are enabling us to capture more of the growth that was underpinning the business and the category that we simply weren't capturing because of the pace at which we decide to grow. We're better at scaling farms, as Pete showed. Frankly, Pete has helped unlock a lot of wonderful on-farm performance. He's just a very capable general manager in that sense beyond being a great sales leader. So that's one. We're just -- we've chosen to expand at a faster pace.

Second thing I'd point to is the base of households on which we're planning that growth. As we've shown, those households are sticky. They grow demand over time. We're working with a bigger base. So those would be 2 kind of high-level observations about why we're confident that, that growth is there. But maybe Thilo can get into some more of the detail.

To put that differently, John, right? Pete talked about the flywheel that we have, right? We got consumer demand in response, retailers expand our shelf space, which creates more awareness, creates more consumer demand and so on. This flywheel has been stuttering in the last 3 years because we didn't have the supply or the capacity to always fully supply it. So Russell is fine, right? We have consciously decided to accelerate our growth for egg supply and processing capacity. So it's fine, we can really start flying now.

And so I think that is part of why we are so confident that we can accelerate the dollar addition of revenue per year. On your question about why do we differentiate between the initial outlook versus guidance? Look, we're all creatures of habit. I don't want to create the habit that we provide guidance for next year in December. I thought it would be prudent given how we talk about guidance for this year to put it in the right context. I don't want you to expect that next year in December, we put out guidance for the following year. I want to maintain the pattern of we do guidance on the fourth quarter call. That's why I make that distinction in the semantics.

Any final questions? All right. Just a couple of quick logistical items before I turn it back to Russell to say thank you. We've got -- we're a little ahead of schedule, 12 minutes, I'd say. So we're going to have a quick 12-minute break. Lunch will open at 11:30. We're ready. We're ready for lunch. So if you're hungry, dig in. You've got till 12:30, and then the buses will pick everyone up at 12:30 to go start the tours. All right. So thank you. Russell?

Thanks, Brian. I just want to take a quick second again to thank you sincerely for making the trip. Your time is valuable. Travel isn't so easy, especially this time of year. So thankful we have the opportunity to share this story with you and some of the magic that happens behind the scenes today. I think it really helps bring the story to life, and I'm thankful you could see it today. Thanks again.

All right. Good morning, everyone. Just a quick disclaimer before we start. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. Any questions, reach out to your Morgan Stanley sales rep.

So welcome, everyone. Day 2 of the Morgan Stanley 2025 Global Consumer and Retail Conference, I'm the Megan Clapp, U.S. food analyst here at Morgan Stanley. Really pleased to be here this morning, kicking off the day with Vital Farms and the company's President and CEO, Russell Diez-Canseco; and CFO, Thilo Wrede. I hope I got that right?

Very nice.

Vital Farms maybe needs some introduction, but very briefly, a leading U.S. supplier of pasture-raised eggs, ethical products. They have a unique strategy partnering with family farms, focused on animal welfare, transparency and premium sustainable food offerings.

Russell, maybe we can start with you. You can do a much better job of explaining the story than me, but...

You got it.

Just maybe for those that are newer to the story, either in the room on the webcast, maybe you can just start with a bit of a high-level overview of the business, the core egg portfolio, your pasture-raised differentiation, the farm network, the Egg Central Station and what you think sets Vital Farms apart in today's staples and food landscape?

All that, which one I have. Thank you for having us, Megan, and great to be here today. Yes. So Vital Farms is a premium brand, largely known as a premium brand of pasture-raised eggs. We also have a small butter business.

What I think differentiates us at the front end is that we're really driven by a purpose of improving the lives of people, animals and the planet through food. And we are all galvanized around a goal, a mission of being America's most trusted food company. Now most trusted in any survey is a function of both level of trust and size. And so there's a lot of growth that has to come to be recognized in that way. But we operate that way. And I think that really informs a lot of the choices we make. So you're right, we are the biggest brand of pasture-raised eggs in America. We're the second biggest brand of eggs, period, in America. And for many of our top 10 customers, we're now the #1 egg brand in places as varied as Whole Foods and Kroger.

So what we've come to understand is that in a very simple way, we've created a premium brand that's based on some of the things you mentioned, great animal welfare, high levels of transparency, a resilient supply chain. And we've turned that into strong growth, strong EBITDA, a strong return on invested capital. But another way to think about it is we're doing it in such a different way from the traditional ag industry then I think when people choose our brand, they're choosing more than just a premium egg, they're buying into a different way of bringing food to their table, which I think is happening in more and more categories around the store as people are looking for higher-quality food and food they can trust.

So one point of distinction. We don't own our integrated supply chain the way that I think the industry historically has. We own a packing plant in Springfield, Missouri, where we take eggs from over 575 small family farms, with whom we have exclusive contracts. And we pack those eggs in that single location. We're now building a second location in Indiana, and we ship them to stores nationwide. We're in over 23,000 stores, and we're primarily a retail brand. We have a small foodservice business.

At those stores, we are almost universally the most expensive egg. And if any of you have our eggs in your fridge, you probably have had that conversation with whoever you make your food buying decisions with about, whether it's really worth this big premium. But increasingly, consumers are saying, yes, not just for great features and benefits, great, high-quality product, but because we are transparent in how we brought that to them. We -- and we are irreverent in our marketing and our -- and the humor we bring to something that starts to feel like a pretty serious topic, which is what food should I feed our families.

And the proof is in the pudding. We continue to deliver hyper growth, 20 to 30 -- in the 20s and 30s year after year. We've expanded our profitability, strong EBITDA and an ROIC that starts with the 2, all things that I think are pretty rare and a fast-growing company.

It's a good secular to my next question, which is as we think about 2025, in particular, you mentioned you delivered another year of strong growth. This year, you've talked about three priorities: rebuilding supply, expanding capacity, strengthening the brand. As you look back to 2025, almost gotten at this point and the growth you've delivered, what's gone particularly well against those priorities that gives you confidence you can sustain that momentum and deliver another strong year in 2026.

I was talking to Paul in the audience who was a leader on the team that underwrote the IPO. And the answer that I might give you today probably sounds a lot like the answer I would have given him back in 2019, 2020. This business works really well when we grow households, shelf space, egg supply from farms and packing capacity in line. When those things get out of balance, that's when things don't go quite as well. What we found in the back half of last year and then heading into early part of this year, we had -- because of avian influenza, it hasn't affected our farms, but it had taken so much supply out of the market more broadly that we saw really stronger demand in the back half of '24 than we anticipated. And we shipped the relatively modest amounts of inventory that we typically build to carry us through the winter months when we have seasonally high demand.

And so what that resulted in was tight supplies in Q4 '24, Q1 '25. And so a priority for us was rebalancing that supply growth to go with our continued growth in both households and shelves, but also in the growth of egg supply. So we've -- and frankly, we've accelerated all of the above this year. So we've got -- we've added more than 100 farms this year. What's the number? 150?

150.

150 farms so far this year. We're now at over 575. No sign of a challenge in adding new farms. We successfully opened a third production line at our plant in Springfield, which, frankly, if you'd asked me 2 years ago, if that was possible, I would have said no, that we keep hiring really strong people who have really great out-of-the-box ideas. And so we were able to fit another one in. That opens us up to over $1.2 billion of revenue capacity in Springfield in 2026.

And the households that continue to be attracted to the brand even as we see varied price premiums to conventional eggs prove that the value proposition is strong for more and more American households. So I would say that all of the above has gone as well as we hoped it would. And frankly, we just keep learning and getting a little bit better every day. I don't know that I can point to one thing that's been particularly disappointing.

You touched on it a little bit, but I wondered if we could just talk about the value proposition and price gaps to conventional eggs have widened. I think gets the question a lot from investors still to this day is how can eggs be a branded product and your market share has accelerated, household penetration has accelerated even as these price gaps has widened. So maybe spend some time talking about the value proposition as you see it, what you're seeing from the household you're acquiring repeat rates that's kind of driving that strength even as price gaps widened.

It's funny. Thilo and I have bonded over the fact that we're two recovering MBAs. And if we had been graduating business school, around the same time, gotten together to do a startup, and we've done a screen of all the grocery categories in the store. I'm pretty sure eggs would have been at the absolute bottom of the let's start something in that category place, right? It's hugely private label. Over 95% of the hens back when this company was started, I think, 99% were in cages, which was producing the absolute lowest cost of eggs with 0 points of differentiation. Huge capital intensity, everything from the farm to the plant feed and chicks. It's a vertically integrated industry dominated by asset-heavy incumbents. It's got like the dynamics of any high capital cost business, think airlines. It's got bouts of ruinous price competition. It's got hugely variable margins. I mean it's just an ugly category.

And yet a founder who wasn't thinking about NPV, but was thinking about animal welfare, decided that it was time to let the chickens out of the cages. And when he did it, he thought that the eggs were better. And that's all he needed to think that there was an opportunity there. So thankfully, we weren't left to be the founders because this thing wouldn't exist. And here we are 20 years later or so.

And I think what we found in those early days, like any first mover, we saw some early success because we were meeting an unmet need in the marketplace there were people who already knew they wanted a better quality protein, a better quality egg. They were going to the farmers market back then. I was going to the farmers market back then. And suddenly, I could find this high-quality egg with the right attributes and the right levels of animal welfare at the grocery store, perfect.

And then the joke was back then that we found everybody who was willing to spend $5 a dozen on eggs, now what we're going to do. We're going to have to drop our price to $4 or $3 or $2 to keep growing volume. And that was about the time 2015, 2016, when we actually started building our marketing team. We hired our first basically Chief Marketing Officer, who explained to us that we were the first mover in the new commodity and we better talk about why we have a unique right to win with consumers or we will simply be stuck in a new commodity segment with lots of entrants as you might predictably expect from Business School 101. And as we did that work, that ethnography work, which was 2016, 2017, what we found time and time again was that people that were choosing to pay more for anything in the commodity category, people who are paying more for milk versus the cheapest milk, more for eggs, more for an organic vegetable versus the cheapest.

So they were voting with their dollars for something better because they understood that it could be more valuable to them that there was value in paying that premium for something. It could be better animal welfare aligned with their values. It could be less likelihood of pesticides in an organic version of a fruit or vegetable. It could be simply higher quality in some way, higher bricks level or some other element of their eating experience.

And -- but the other thing we found, which was crucial was that they're very skittish, consumers time and time again, keep getting disappointed that what they were paying more for didn't turn out to be true. And there are so many articles that they would hear and read about organic grain imported from some other country that wasn't organic when it left the port in Romania, but suddenly was organic when it got to America with the right paperwork. Or the organic dairy whose cows are supposed to go outside in the Washington Post reports a few years back that there's no evidence in the milk of the CLA chemical that would be present in the milk if the cows are eating grass. How do they go outside and not eat the grass.

And so consumers feel ripped off. And that's actually the basis for our first big egg campaign, which was bull**** free. These are the birds that go outside. They're called pasture-raised. More than half of you back then buying cage-free eggs, think that your birds go outside, but they don't. And so if you feel duped by that, come try our eggs, they're what you think you've been getting all along.

And so the insight wasn't we need more orange jokes or a thicker shell. That's just the cost of doing business. The insight was there are very few brands in this country that people can trust to feed their families. And when they find one, they become remarkably loyal to it. And so that's really where the seeming immunity to price gaps, the saving immunity to the challenged consumer and the K-shaped economy year after year after year high inflation, COVID shortages, all the rest, because the thing that we have that's a scarce commodity isn't an egg, it's a trusted brand. And that's the thing that we -- that's our true north. That's where we're focused.

Great. Maybe a bit more shifting to the near term. You raised your guide again on the third quarter call last -- about a month ago, implied an acceleration in volumes here in the fourth quarter. You talked about ERP transition would create some noise in the scanner data. But now that we're through most of November, at least from what folks can see in scanner data, can you just talk about has the volume performance you've seen in the scanner data been in line with your expectations as you think about what's implied in the 4Q guide?

Yes. We started off the quarter with, as you said, Megan, with the ERP implementation that went remarkably well. We avoided the pitfall of so many ERP implementations that we couldn't ship for, pick a number of weeks. We did have a slowdown at ECS in our production. That was to be expected. Crew there had to learn a whole new way of processing the eggs, using new technology, using new systems. And that lasted about 2 weeks. By week 3, we were back at pre-ERP implementation production levels, by week 4, we were above pre-ERP implementation production levels.

Because of that, shipments to retailers were a bit slow at the beginning of the quarter. That's what we highlighted on the call. Since then, in the scanner data that we see, we use one of the two data providers and the latest reading through, I think it was November 23. Volumes were now at retail, higher than where we were at the end of September. That recovery maybe took a week or 2 longer than I thought it would take at the retail level. But at our own production and shipment level, the recovery was as we anticipated it to happen. And I would be -- I would really be speculating if I would try to figure out why it showed up on the shelf a little bit later than we thought. But ultimately, what we care about is what we're shipping to retailers and that continues to be very strong.

Right. So from a shipment perspective, in line with your expectations. Got it. Helpful.

Maybe looking ahead, this year, we talked about getting supply back online to meet the demand that you knew was there was a big priority. Now that supply has caught up. As you look out to 2026, what are the primary drivers of growth in your mind? You obviously still have some of those easier compares, especially in 1Q, but should we think about growth being first half weighted? And how do you think about lapping this strong second half growth next year?

It's funny. And Thilo will chime in. We're much more used to managing expectations about supply actually being enough regardless of where we set our bogey for demand. And it's true story, I've got this incredible -- we have this incredible sales leader called Pete Pappas. Pete joined us in 2020. And every year, Pete would put up a budget that we thought was very reasonable and had similar to the strong growth we put up year after year. And every year, when it came time to write the next year's budget, he would say, when will we finally get to a point where we have enough eggs. And the answer was, well, we have as many eggs as you told us to have. It takes about a year to add new supply. We wrote a budget a year ago. You got everything you said you needed, but you're frustrated that you're short in customers. I said, maybe we'll have enough eggs when you tell us the right number, when you give us a fair projection.

So I finally got tired of having this conversation between him and the ops team. And finally, a year ago, I asked him to take on the role of recruiting new farmers. So that he could have that conversation with them himself. You don't have enough eggs, go get more eggs, self-served. And so I say that not trying to be flippant, but the reality is that I want to be really clear about something. We talk about adding capacity at our plant. We talk about adding farms. I can't promise you it will be enough. Because the reality is every time we think we're leaning in, it's still not enough. So that would be the first thing I would say. The underlying consumer trends, the strength of our marketing team and our commercial capabilities are really good.

We have really well-honed commercial capabilities in this company, the ability to add and retain a household, the ability to get the right product on the right shelf because we've got trusted relationships with retailers. And so we're excited about the opportunities in 2026. But the reality is I'm much more concerned that we could have done even more than I am about whether or not we'll have a home for all these eggs and bring online. So I'll start there.

Answer is #1, 2 and 3 are simply, it starts with maintaining high service levels to retailers. We maintain high service levels to retailers, and that product flows through to the shelf. Now we get an accurate view of the retailer's ability to maintain that shelf. What we saw in years when we had much better in-stock conditions than we did earlier this year was that even with great service levels, we often find periods of the day when our top customers are out of our product on the shelf. Typically, we don't have our fair share of space on the shelf. We have very high-performing SKUs. Our top 1, 2, 3 products in a retailer are typically their top 1, 2 or 3 are certainly in their top 5. And there's, I would argue, a long tail of underperforming products in most egg category SKUs -- egg category sets and retailers.

Once we are doing our part of keeping them in stock, we can have real talk with them about what they need to do to keep themselves in stock for their own benefit. And that it starts a wonderful fact-based conversation around space allocation, around stocking practices, et cetera, all to their benefit. We have terrific gross margins, both pennies and percentages for our retail partners, and I'm not trying to compete that away. I don't want to take that from them. I want them to rely on us to drive their economics. We want them to want to do better with our products. And universally, they do.

So step number one is simply doing our part to keep them full so that we can talk to them about allocating more space and adding more SKUs to their sets. That's a flywheel with sort of spring loaded growth for quite a while to come, I think.

Helpful. Maybe we can talk about just supply in the industry broadly. There's been discussion, and you can see in the data, not just yourselves, but more supply coming online in the pasture raised and premium segments...

Isn't it great. So glad that these birds are getting out of the cages.

And as a consumer, I think you can see more of it in the store, too, with a new brand. So maybe you can just talk a little bit about the competitive environment, what you're seeing from new brands, distribution, what you're hearing from the retailers and how you think about Vital's positioning kind of within the premium set in general? Is this more competition good because the retailers expanding the space for premium eggs? And just kind of how do you think about that?

If I back up what I think we're seeing and we saw it early with retailers like Whole Foods and Sprouts years ago is they're shifting space allocation toward the premium end of the set. Whether it's a free-range egg, an organic egg, a pasture-raised egg, we are part of that. We aren't the only kind of egg in that part of the set. They're shifting the whole thing up. They're premiumizing the category, which is an exciting opportunity, I think, for the hand and for people in that part of the industry.

It's interesting, we get the question a lot, what about all these new competitors entering the market. And I'm not seeing a lot of evidence of new competitors. I've seen some relaunches, which we can talk about. So our biggest customers launched private label versions of our eggs about 10 years ago. So Whole Foods launched private label pasture-raised eggs in 2017. H-E-B back then was our second biggest customer, H-E-B launched private label pasture-raised eggs about the same time, perhaps not coincidentally, our two big customers, launched pasture-raised, private label products earlier. But every one of our top 10 customers has a private label and multiple examples of branded premium eggs, including pasture-raised eggs.

I'm not seeing more. I don't know what I'm seeing a lot of big new entrants into that space. I know one question I get is, what about Pete & Gerry's, they're having lots of conversations with people at a conference like this, and they're talking about their pasture-raised egg. But maybe what they're not sharing is that they had a pasture-raised egg before we were a company. It was called Carol's pasture-raised eggs. Carol, I think, was an aunt or an uncle of Jesse Laflamme, who was the owner back then. And it didn't do very well. And so I think about 5 or 6 years, they relaunched it as a second pasture-raised brand called Consider Pastures. They actually said pasture in the name. The Consider Pastures is at Whole Foods. There's a lot of big retailers. It didn't do very well. And so what Pete & Gerry's did, I think, about 1.5 years, 2 years ago was they relaunched pasture-raised eggs for a third time as Pete and Gerry's pasture-raised eggs.

And that might look like new competition entering. But actually, it was the incumbent, who's still trying to figure out what we're doing so differently. When I joined Vital Farms, Pete & Gerry's was 10x our size, and they had a Super Bowl ad. They were the big kahuna that we had in our sight Sunday, if we can only be as big as Pete & Gerry's, maybe we too could have a Super Bowl ad. We're now much larger than they are. I think we're about the size of the next 3 brands combined in the specialty egg space. And they're just trying new things.

Cal-Maine, biggest egg company in the world. They launched pasture-raised eggs in 2017, under the Born Free brand. It failed. They killed it. They relaunched it last year as Eggland's Best. And they actually copied our carton, which was very flattering for the biggest egg company in the world, if you look at our carton next to theirs, it looks an awful lot like ours and totally different from any of their other cartons. It doesn't seem to be doing very well.

And so I think this question about competition, they're launching products that have similar claims and features and benefits as our cartons do. Products that have that to be true, have been on the shelf next to ours for over a decade. But what is much harder for them to copy is the trust we built with consumers, the transparency we bring. It's really hard to be transparent about your millions of caged hens. Consumers are savvy to that. We're a one-trick pony. We just have this wonderful high level of animal welfare in our products.

And then if you want to think about other potential moats, it's really hard to duplicate a network of 575 small family farms. We have a lot of practice at selecting them and onboarding them and helping set them up for success. And so I just think that, one, the competition isn't new. And two, we've got a ton of examples of how it doesn't impinge our success.

Got it. Helpful. Then we can talk about the network. You just bought up. It's been a good year for farm recruitment. I think you said 150 so far this year. I think you have more than 10 million hens under contract now. How would you just -- you mentioned too, the question is, are we doing enough? So how would you describe, I guess, as you look ahead, the health of your farm pipeline and how you think about the ability to continue to scale it from here?

So we have -- we do have a very strong reputation in the farming community as a partner that they can trust, again, this notion of a trusted brand, our brand is for all stakeholders, not just consumers. We build relationships for the long term. Most of our farm pipeline is word of mouth. Word of mouth, not unlike you might think about recruiting employees for your company. Our farmers -- many of our farmers are here longer than our average employee tenure. So we think about who to add, and how to vet them and how to set them up for success just as intensely, if not more so, than the way we think about hiring and onboarding a great new crew member. I'm not seeing any sign of abatement of interest from small family farmers of which there are millions in this country, who are looking for a fair shake, a fair deal and opportunity to convert their hard work into some cash flow for their families.

Our job is to make sure the cash flow is there. And so we've got great sort of our own modeling of what the profitability for these farmers can be. We want to make sure that the opportunity is real. There are regional bankers from whom they borrow to build their farms, they want to know the opportunity is real. That's another example of a moat we've got where the bankers in the Ozarks and in the pasture belt, where we build these farms or where our farmers build their farms, they've worked with us for years, and they know we pay our bills on time. They know how to convert all the sales paraphernalia they get from us and competitors into real numbers that they can bank on. And they very consistently nudge a farmer toward us because we're very reliable and trustworthy.

Got it. Let me just kind of wrap everything up on the top line. So you added a third line at the Egg Central Station this year. That was a nice surprise to start the year. Seymour remains on track to open early 2027, and I think combined, they represent around $2 billion in annual egg revenue capacity. So how should investors think about the cadence and pace of filling that capacity and what that kind of means for your volume out over the next couple of years?

Do you want to tackle that one?

Yes. I don't want to get ahead on providing guidance. But when you think about that since our IPO in 2020, we've grown at a CAGR of 29%, 30%, pretty consistently year after year, actually. Given the farm recruiting that we're doing, given the jump in brand awareness that we have seen this year, we were at 25% aided brand awareness at the end of last year. We're at 33% now. Usually, brand awareness is a leading indicator for us for household penetration. So we see a lot of pent-up demand. We see the supply growing for us. You just mentioned the capacity expansion. So there's really no reason to think that the growth CAGR will change meaningfully. Obviously, it's growing of larger and larger numbers. That's what we have seen for the last 5 years, and we've been able to maintain that CAGR.

At some point, the percentage growth will slow, right? So obviously, by the time we opened Seymour in early '27, and we have the $2 billion in capacity. I don't know if I would still bank on the 30% growth rate at that point. But Seymour, it will probably fill up over a few years. And then we have to start thinking about do we need a third facility. I think for the time being, we are focused on getting Seymour opened. We're focused on capturing the opportunity in '26. And based on the brand awareness on the supply, on the retailer conversations that we have, all those growth ideas, I think they're all on the right track.

Great. Thilo, maybe we can stick with you and talk about gross margin, which has been very strong this year, well above your 35% long-term target. As we look to 2026, what are the key puts and takes just to keep in mind for gross margin? Obviously, you want to drive more promotions, what should investors think about as being more structural this year versus maybe more temporary?

Yes. So our long-term target is to be at, we call it, 35-plus percent gross margin. I would probably put that somewhere in the 35% to 37% range. As you said, we have been above that year-to-date. We took pricing in the middle of the second quarter in anticipation of increased costs because of tariffs that hasn't fully played out yet. The tariff impact is milder than what we anticipated. And so we have a bit of excess margin right now.

We've also been in the situation where because of our own supply constraints and increased demand because of avian flu, we haven't promoted for 4 quarters, right? From the middle of '24 to the middle of this year, we really dialed back on promotions. That's now coming back. And so with pricing maybe being a bit ahead of schedule because tariffs didn't play out the way we thought, we got this excess margin. Some of that will now dial back again because promotions are coming again. We are promoting much more in our regular schedule in Q4, to convert this brand awareness that we've generated into household penetration. Next year, we -- right now, we would plan to promote for the full year, so that will put pressure -- downward pressure on margins compared to this year.

And then with pricing maybe a bit ahead of schedule, we need to let cost catch up with pricing. The reason why we set this 35-plus percent margin target is, we think at that level, we obviously generate enough gross margin to cover our fixed costs and SG&A. And we don't have to price so much a consumer doesn't think anymore, they got a surplus, right? We want the consumer to know that they're actually getting a really good deal for what they're paying. And that's why we feel comfortable with that 35% target number. We don't necessarily want to go much above that because at some point, we get to a level where the consumer feels like, maybe this is getting a bit expensive, and I'm not getting as much upside anymore as I'm used to.

And so with that, for next year, I would expect a bit of margin pressure on gross margin.

I want to just double-click on that for a moment. There's a certain discipline that comes with staying out loud to everybody, including my own team that going far above 35% is not a win. I don't want our economic success to come on the gross margin line. I would much rather have it come on the bottom line and come through the leverage we get of our SG&A.

It's easy to raise price. It's been easy to raise price for years. And arguably, and I think retailers showed us this in Q1 of this year when they took price without us taking price. There is consumer surplus. There is consumer willingness to pay beyond what they're being charged today. That's what makes them sticky. That's the secret to the loyalty. That's the secret to the lower priced competitor, not simply a trading away our consumers to an egg that on paper looks a lot like egg. There's a discipline about not jumping to the price button as the way to drive growth. We don't need it. And it makes us work just a little bit harder to make sure that we're being disciplined on the other lines of cost.

Great. We've got a little over 5 minutes left. I want to open up to the room to see if there are any questions in the room. No? Okay.

Hello. I am [indiscernible]. I'm kind of curious, I know that from experience that you guys have better eggs than basically anyone in terms of quality. But I'm curious how you're going to -- or how you're thinking about educating people on that, right? Because a lot of people are kind of thinking, well, premiumization, other brands are kind of ramping up. I'm just looking at a cage-free egg, another pasture raised, organic. How are you thinking about educating people trying to go forward? And how is that going to manifest in the financials?

That's a great question. When I first got here, we thought we had to educate every new consumer on all of the, I would say, sort of nerdy features and benefits of our production system, this thing called pasture raised, nobody knew what it meant. A lot of people thought we were free range. So we had to talk about land allocation and how many waters and feed lines and space in the barn and the type of bird and the kind of, I mean, there's a book that describes our standard that we give our farmers. And it turns out that consumers don't have the mind share to dive into all those nerdy details. What they want is a brand that they can trust to have made the right choices on their behalf.

So the first step is as much as it was tempting in the early days to shout from the rooftops, our birds go outside and look at the picture of the pasture. Consumers, they don't have time. They don't have mind share. And so what we're really focused on is helping them understand why they can trust us.

And a great example of that is traceability. Our cartons of eggs have the name of the farm those eggs came from on that -- printed on the end of the carton. It's live printed by an inkjet printer when the product gets dated as well. And it is through our unique supply chain that we can actually trace the eggs back to that specific farm.

And then if you put that farm name and enter it into our website, unless it's a farm that's been added in the last few months, in which case we might not have gotten around to filming that farm yet. Most farms have a video where you can actually see the real farm where that those eggs came from. You don't see that on the shelf in America. Some companies don't have the ability to do it. Some companies don't want to show you a video of the farm those eggs came from. That's the education.

So you can always go on our website, and there are some consumers who we have a wonderful top-of-the-funnel focused consumer awareness and household attraction sort of machine that helps raise awareness of who we are and then a yellow tag for a promotion that maybe gets your eye, it catches your eye at the store and get you to try us for the first time. But then you go and you look at that package. You enjoy the egg and maybe you get pleasantly surprised by the eating experience. So you check out the package. And all of a sudden, maybe you're looking at a video, maybe you're reading our newsletter. We have ways to pull you through that education simply through you having become aware of us, tried us, purchased us, and now you're on the website. If you are so inclined to learn anything you want about what we do because we're so transparent about it.

I'll give you a small example of the level to which we take this trust so seriously. Occasionally, during times of avian influenza, a state or local veterinarian and a government employee will identify an outbreak on some farm and then advise strongly encourage area farmers to keep their hands indoors until they've declared the area free from avian influence. Now there's a whole debate about whether going outside is actually a contributor because all the birds getting killed are indoors, right? But that's another story.

We don't tell our farmers that they have to ignore that recommendation. And so some of our farmers here that state vet in a place like Arkansas or Missouri, say, keep your birds inside, and they keep them inside.

Now a big part of our brand is the birds go outside. So we want to make sure consumers know that occasionally, the birds are inside for their health. Not only do we say on our website and a social media, hey, our birds are inside or some of our birds are inside. But we did it to the point where it's a pop-up that you have to acknowledge before you can get to our website. This percent of our birds are inside this week. It's just a small example of that's actually what we're educating on. Trust us is the education message, not outdoor access, not feed, not all the nerdy attributes of our animal welfare standards. It's trust us.

We're kind of closed up. On AI, you just brought it up. So I just wanted to ask about it. Started to see [indiscernible] egg prices maybe pick up a bit. Can you just kind of give a state of the union on what you're seeing as it relates to AI?

Yes. So historically, if AI is going to hit heavy, it hits heavy in February, March, April. And so I think if you look at this fall of '25 compared to fall of '24, fall of '23, we've actually seen it hit earlier this year than it did in prior years. A lot of turkey farms and other poultry farms and some shell egg farms. It's too early to tell whether it's going to be a big or a little thing. We are seeing some tick up -- a wholesale price tick up, very minor retail price pickup, but it's probably as much seasonality than anything else. And I think we'll know by February or March, whether it's a big or a little deal this year.

Okay. In the last 30 seconds to host Investor Day in 2 weeks. Any -- can we just talk about kind of what the goal is for the Investor Day.

It's been a little over 2 years since we've had an Investor Day. A lot has changed in our business. We've talked about the third production line. We've talked about the ERP system. So it was time for us to renew investor knowledge about what we're doing. We -- 2 years ago, we set long-term targets for 2027. That's almost around the corner. It doesn't feel quite like it, but it's almost around the corner. So we need to update our long-term thinking.

What were those targets?

We had said that by 2027, we would get to $1 billion in net sales, 35-plus percent gross margin, 12% to 14% EBITDA margin.

How is it coming?

Thank you. We are ahead of schedule, I would argue on revenue. We are above the margin targets. And so it's time to update those.

Great. Well, thanks, Russell and Thilo for being here, and thanks, everyone, for joining. I hope everyone has a great holiday.

Thanks, Megan.

Good day, and thank you for standing by. Welcome to Vital Farms Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand it over to your host, Brian Shipman, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Vital Farms Third Quarter 2025 Earnings Conference Call and Webcast.

Joining me today are Russell Diez-Canseco, Vital Farms' President and Chief Executive Officer; and Thilo Wrede, the company's Chief Financial Officer. By now, everyone should have access to the company's third quarter 2025 earnings press release issued this morning.

During today's call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and do involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release, the company's quarterly report on Form 10-Q for the fiscal quarter ended September 28, 2025, that was filed with the SEC today as well as the company's other SEC filings 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.

Note that on today's call, management will refer to certain non-GAAP financial measures. Please refer to the appendix in today's press release [indiscernible] presentation for a reconciliation of our non-GAAP measures to the most directly comparable GAAP measures. That presentation and today's press release are both available on the Investor Relations section of our website.

After our prepared remarks, we'll open the line for questions. [Operator Instructions]

Now I'll turn the call over to Russell.

Thank you, Brian, and good morning, everyone.

Before we get into results, I want to officially welcome you as our new Vice President of Investor Relations. We're excited to have you on the team. For those of you joining us today, I know you will all enjoy working with Brian. I'd also like to thank the entire Vital Farms crew. Over the past 3 months, we've delivered a very strong quarter with record financial results, advanced our supply chain and set the company up for continued growth in 2026 and beyond. All of these great accomplishments took every one of our crew to make happen from the team at Egg Central Station in Springfield to our farm support and remote workforce.

I just came back from an all-hands meeting with our remote crew and the energy and commitment in that room was truly inspirational. Our crew is energized to drive strong growth into the future in service of our purpose to improve the lives of people, animals and the planet through food. And I'm honored to have the opportunity to lead this great organization. As we entered the back half of 2025, we told you our focus would be on rebuilding supply, meeting strong retail demand and positioning the business for sustainable growth into 2026. We've delivered on all 3.

Let's start with this quarter's results. Net revenue was $198.9 million, a new record for any quarter and was up 37.2% from the prior-year period on the back of the incredible ramp-up in the supply of eggs our crew has been able to deliver. Gross margin came in at 37.7%, which remains above our long-term target of 35%. And adjusted EBITDA was $27.4 million, and increased 81.3% compared to the prior-year period as we benefited from price mix and scale efficiencies.

Next, we made meaningful progress expanding supply, adding processing capacity at Egg Central Station and completing a major systems upgrade. We added approximately 75 new family farms during the last quarter, bringing our total to 575 family farms. That's approximately 150 new farms year-to-date. We now have more than 10 million hens under contract, which is a reflection of the trust and partnership we've built with farmers in the pasture belt. Our third production line at Egg Central Station in Springfield came online in October, expanding capacity to about $1.2 billion in annual egg revenue and positioning us to meet growing consumer demand.

Our Seymour facility remains on track to open in early 2027. With 2 production lines, we estimate the Seymour facility will add $900 million in annual revenue capacity. Also, at the beginning of the fourth quarter, we went live with our digital transformation project, a critical milestone that enhances our operational capabilities and underpins our ability to scale efficiently. More on that from Thilo in a few minutes.

Finally, we continue building our trusted brand and making progress on our long-term aspiration to grow Vital Farms into America's most trusted food company. This increases our confidence that we have positioned the business well for long-term growth. We added another 2 percentage points of aided brand awareness, which now stands at 33%. Brand awareness is now up 8 percentage points since the third quarter of last year, demonstrating that our message is clearly winning with consumers. Through compelling authentic work like our Good Eggs. No Shortcuts brand campaign and our ads that aired alongside FX's award-winning series, The Bear, our stories continue to attract strong interest from the media and the public.

We also launched limited edition dog treats made with Vital Farms eggs in August. This fun brand moment was featured in top-tier media outlets like Good Morning America and generated over 550 million impressions across press, paid media and social media.

In summary, this was another great quarter for Vital Farms. We're executing well in the near term while laying the foundation for long-term growth. The investments we're making will continue to set Vital Farms up for long-term success. Given the strong execution across our operations, our farm network and our brand, we're raising full year guidance for fiscal 2025, which Thilo will cover in detail.

Thilo, over to you.

Thanks, Russell, and hello, everyone.

I'll review our third quarter financial results and then discuss our updated full year outlook. Let me start, though, by also welcoming Brian to Vital Farms. Brian, it's great to have you here, and I'm excited about what you are bringing to the company.

Now for the results. Net revenue for the third quarter of 2025 rose to $198.9 million, an increase of more than 37% compared to the prior-year period. Revenue growth was driven by continued volume growth and favorable price mix. Gross profit rose to $75.0 million or 37.7% of net revenue from $53.5 million or 36.9% of net revenue last year. The increase in gross profit dollars was primarily driven by revenue growth from higher volume and increased pricing across our shell egg portfolio and favorable mix benefits. Gross profit margin increased year-over-year primarily due to favorable price mix, partially offset by increased overhead costs.

SG&A increased to $44.4 million or 22.3% of net revenue compared with $36.1 million or 24.9% of net revenue last year. Shipping and distribution expenses were $9.2 million or 4.6% of net revenue compared to $8.1 million or 5.6% of net revenue last year. The dollar increase was driven by higher ship volume.

Net income for the third quarter of 2025 increased 121% to $16.4 million or $0.36 per diluted share compared to $7.4 million or $0.16 per diluted share for the third quarter of 2024. The increase in net income was driven by operating profit growth, partially offset by year-over-year increases in tax provisions. Adjusted EBITDA for the third quarter of 2025 was $27.4 million or 13.8% of net revenue compared to $15.2 million or 10.5% of net revenue for the third quarter of 2024.

Turning now to our balance sheet. As of September 28, 2025, we had total cash, cash equivalents and marketable securities of $145.1 million with no debt outstanding. The sequential decline in cash, cash equivalents and marketable securities reflects ongoing growth investments, including the new ERP system, the third production line at ECS in Springfield, Missouri, the construction of our new egg processing facility in Seymour, Indiana and our investment in accelerator farms. This was partially offset by strong operating cash flow of $27.9 million for the quarter. Our balance sheet remains strong and provides significant flexibility as we execute our growth investments.

Before discussing guidance, I'll provide a brief update on our internal control remediation. We continue to make good progress addressing the material weakness in our revenue recognition process identified in our 2024 annual report. Importantly, this was a design efficiency only with no impact on our financial statements, and we remain on track to complete remediation by year-end, subject to the ongoing enhancements of controls in the recently implemented ERP system.

On to guidance. Given our strong performance in the third quarter, we are raising our full year 2025 net revenue guidance to at least $775 million, representing growth of at least 28% versus 2024. I would like to point out that we did see a small amount of revenue pull forward into the third quarter from the fourth quarter ahead of our planned ERP go-live date. We had announced the go-live date to the trade so that they could plan ahead for it.

We're also raising our adjusted EBITDA guidance to at least $115 million for the full year 2025, an increase from our previous guidance of at least $110 million. As we move into the fourth quarter and have good visibility for the remainder of the year, we now expect a bit less margin pressure in the second half of the year from tariffs and promotion. While the tariff situation remains fluid, we are seeing more modest impacts than we had originally expected. Additionally, our increased promotional activity is going as planned now that supply constraints have largely been resolved.

Finally, we now expect fiscal 2025 capital expenditures of $80 million to $100 million. We continue to construct both production lines at our Seymour facility simultaneously, along with on-site cold storage. The $10 million reduction versus previous guidance reflects some timing updates for the Seymour facility and some postponed projects at ECS in Springfield in order to focus on the digital transformation go-live. As previously indicated, we will have elevated CapEx spend in 2025 and 2026 because of construction of our new facility in Seymour, Indiana, the newly installed production line at ECS, Springfield, the construction of accelerator farms and our digital transformation project. We expect to fund our current plans with existing cash and operating cash flow and continue to project that every dollar of CapEx investment in the Seymour facility will generate $5 of annual revenue capacity.

Let me also touch a bit more on the ERP implementation. We turned on our new ERP system at the beginning of the fourth quarter on September 29. As planned, the new system is working very well. We put a great internal team in place at a realistic time line with multiple test iterations and partner with the right implementation vendor. As is common with any system implementation of this complexity, we are now in a planned hypercare period in the fourth quarter. During this hypercare period, we budgeted additional resources to support operations at ECS and address any issues as they arise.

That said, given that ECS had to learn to operate using new processes and software tools, the ERP start-up slowed down production for the first 2 weeks of the fourth quarter, but that was always part of our plan and therefore, has had no impact on our guidance for the full year. However, you can see the impact in the most recent scanner data. Following this expected temporary slowdown, the business has quickly bounced back, and we are now operating at pre-go-live shipment levels.

Before I hand the call back to Russell, I would like to mention that we will hold an Investor Day on December 16 in Springfield, Missouri. In addition to an update from management, we will tour ECS, including the third production line and showcase the new cold storage facility. We hope that you can join us. And if you're interested in attending, please reach out to Brian Shipman.

Now let me turn the call back to Russell.

Thank you, Thilo.

With strong fundamentals, a resilient supply chain and expanding brand reach, we're confident in our trajectory into 2026. As I mentioned at the start of the call, I just returned from an all-hands meeting, and I'm always so energized by being with the entire crew in person. The organization's values are as strong as ever, and our crew continues to raise the standards for the Vital Farms brand and to drive the organization forward.

Looking ahead, we believe we remain structurally advantaged with significant long-term opportunity. Our brand of eggs still represent a small fraction of the total egg market, giving us substantial runway for growth. Consumer awareness of animal welfare and food sourcing continues to increase, and Vital Farms has established itself as the trusted leader in this space.

The capacity investments we're making, the operational excellence we're demonstrating and the brand strength we're building create a powerful combination. We're building a durable, scalable business model that can deliver consistent results for the long term. Every decision we make and every investment we prioritize is in service of our mission to become America's most trusted food company. The progress we're making in 2025 represents meaningful steps toward that goal.

Once again, we thank you for your time and your interest in Vital Farms and for the confidence you've placed in us with your investment. We look forward to seeing many of you at our Investor Day in December.

With that, we're happy to take your questions.

[Operator Instructions] Your first question comes from the line of Robert Moskow from TD Cowen.

Welcome to Brian. I wanted to know if you could get -- dive a little deeper, Thilo, into the volume in the quarter, up 19%. How much of that is from like filling up inventory at customers? And how much of that would you consider like sustainable demand growth from a consumer standpoint? And then also on the price/mix, which was a lot higher than I thought. Is there a mix component to that, that's unusual that you might want to dig into?

Yes. Rob, thanks for the question. So on the volume, I would argue this is all sustainable volume growth. This is not about filling retailer inventory. There might have been maybe a bit at the beginning of the quarter. But keep in mind that first half of the year, our volume growth was constrained just by our limited supply of eggs. And the demand was always there. Now we are in a much better position to fill the demand. And the way we've talked about growth progression sequentially throughout the year that every quarter, we would have higher growth in the previous quarter, higher volume than the previous quarter. We continue to see that. And so with that, this is all sustainable growth and driven by demand and not filling retailer channels.

On the price/mix question, yes, it was slightly better than what we had initially planned for the quarter. It was really a function of channel mix, SKU mix for us. We dialed back promotions a bit in September. We didn't want to have a lot of promotions out in the market as we went into the ERP implementation at the end of September. We knew ECS would start up slowly afterwards. And so we were dialing back promotions that helped a bit. And so for -- looking forward next quarter, price/mix should probably play a slightly smaller role than it did this quarter, but volume growth will continue to improve.

Okay. But just to clarify, volume up 19%. The retail tracking data doesn't show it quite so high. So as we look forward to 2026, is -- that's the reason I'm asking is like is high teens volume growth still conceivable in '26 based on what you see?

Yes. I don't want to get into guiding '26 already. But the growth algorithm that we have built for ourselves, it assumes continued healthy volume growth. Keep in mind, we are less than 3% of the volume of the entire egg industry in the U.S. I think we have plenty of room to continue to grow. We are putting the capacity in place. Russell talked about the number of farms that we recruited in the quarter, approximately 75 farms that we added. And so with that, we're putting all the pieces in place to continue volume growth at a very healthy level. I don't want to commit yet to a number, but I would argue third quarter was not an outlier.

Your next question comes from the line of Jon Andersen, William Blair.

Congratulations and welcome, Brian. I guess I wanted to ask about the additions in the -- farmer additions in the quarter. You kind of stepped up farmer adds sequentially through the year from 25 to 50 last quarter to 75. And I'm just trying to kind of get a sense for to what extent that is just kind of serendipity in terms of farmer availability versus deliberate as you kind of now have the third line installed in ECS and are looking to kind of enter '26 with increased supply capabilities?

Jon, great question. So yes, we had a really strong quarter in terms of adding new farmers. And I think it speaks to the success that our network of farmers is having working with us, the strong reputation we have in the marketplace. And as we described earlier this year, sort of our increased capacity to vet and add great new farmers. The number is going to -- the number of farms we add each quarter will see some fluctuation quarter-to-quarter based on timing, various inputs to timing. But in general, we continue to scale over a long period of time relative to the growth that we anticipate in the months and years to come.

Okay. And as a follow-up, we noticed that your TDP growth distribution growth picked up nicely in the September quarter. I'm assuming there are multiple factors, obviously, that go into that, your supply situation, ability to sell in more items to your retail customers. But it still looks like there's a long way for you to go to, let's say, establish an assortment at your big retail customers that's maybe comparable to some other brands in the category. Could you just talk a little bit about your selling efforts, what you experienced with resets this fall and how you're thinking about distribution opportunities in '26 as well given the better supply situation?

Thanks, Jon. Yes, I think very consistent with our approach to so many things, we're really intentional and transparent in our relationship with our retail partners. And so as you mentioned, we have, for the last year or so, planned on this expanded level of egg production and processing capacity that we're now seeing come to fruition. And so that's enabled us to work with our retail partners about expanding distribution where it makes sense for them based on our increased availability of the products that they want for their sets. So it is gratifying to see that show up in expanding points of distribution. And we'll continue to be, I think, very measured in our approach so that we continue to do our best to match growing supply with growing placements and growing velocities. And as we continue to invest in the brand, there's strong pull-through, as you can see in our velocities, which continues to ensure that this is an important part of a retail exit.

Your next question comes from the line of Megan Clapp at Morgan Stanley.

I wanted to follow up on Rob's question on the fourth quarter. So based on the guide and your comments, it does seem to imply that you're expecting just a bit of an underlying acceleration in volumes if we account for that pull forward, Thilo, you mentioned and your comments that price/mix maybe decelerate a bit. Obviously, the scanner data was helpful commentary in terms of what we've seen more recently. But could you just help us frame your expectations for volumes and what's driving that underlying acceleration implied in the fourth quarter?

Yes. Fair question, Megan. It really is a function of what Russell just talked about, right, great [indiscernible], great partnership with retailers, continued strong demand from consumers. And then on top of that, we just have better supply, the farm recruiting that we did last year at the beginning of this year that is now -- those eggs are now available to us to sell. The third line that came online at the beginning of October that increases the capacity that we have at ECS. And so we are now getting to a point where we have the egg supply, we have the processing capacity and the demand is there. So now we can fulfill more of that demand. And those are the conversations that we have with our retail partners that we see demand out there that we want to fulfill that demand, and that allows us to then have very constructive conversations about selling.

Awesome. Helpful. And then just a follow-up on pricing. I wondered if you could comment on what you're seeing in terms of price gaps and elasticity. I think last quarter, you said that price gaps had widened, but were within an acceptable range. It does seem like there's been some reports of avian flu, though it seems more contained and maybe gaps are widening a bit as that's kind of playing out. But as we look at the scanner data, your volume share gains are also accelerating. So just wondered if you could just talk about the dynamic and kind of what it's telling you about elasticity and consumer behavior.

Yes. We keep watching price gaps and this answer won't be very different from what we've said in the past, right? We keep watching price gaps. We want to make sure that we know where other players in the industry are. But ultimately, consumers who buy our products, they probably don't make much of a price decision. It's about the values that the brand stands for and that those consumers identify with. And so price gaps, yes, they have widened a bit probably even since we last talked a quarter ago. Yes, we are seeing signs of avian flu, especially in the northern parts of the country. I don't think so far, it has really impacted retail prices. We'll keep watching them. But ultimately, what drives our growth is not price gaps, but it is -- I think a big part of it is like the tailwinds with consumers caring more where their food comes from and how it's being produced. And that ultimately is a tailwind that benefits us, and it's not really driven by price gaps widening or narrowing.

Your next question comes from the line of Scott Marks from Jefferies.

Congrats on a nice quarter. I wanted to just come back to the question of distribution that's been discussed already. I know in the past, you've talked about how the business is already in so many doors and you kind of see more of the growth from here coming from getting that extra item, that extra SKU on shelf. So just wondering if you can give us an update on how you're thinking about that as we head into '26 in terms of the split between new doors versus new items on shelf.

Thanks. Great to be with you today. I think our stance is very consistent with where we've been throughout the year, which is we are in about 24,000 doors and are largely in some of the highest-performing retailers in the U.S. And our path to growing is largely with them, partnering with them and continuing to help them meet their goals for their consumers and for their brands. And you're right, there's still a lot of room to continue to add products to their doors, which we do at a judicious pace based on our expectations for the ability to service that business. So I wouldn't expect new doors to be the primary driver. I think it's additional items in each door that will be our growth opportunity as well as just general pull-through, the velocity from existing items.

Appreciate that. And then next question would be your shipping and distribution expense, although it came in a little bit higher year-over-year, I think still came in below what some folks were looking for. So just wondering if you can help us understand maybe what was the driver of that and how we should be thinking about that expense item moving forward?

Yes. I think the biggest driver there is rates. So as we are all watching the macro environment and backdrop, and we're seeing some slowdown in some parts of the economy, that is creating a surplus of trucking availability, which is working to our benefit at least for the moment.

And Scott, let me just add to that, just a heads up that fourth quarter tends to be the highest unit cost for us for shipping and distribution simply because freight rates go up in the fourth quarter around the holidays. So sequentially, I would assume that there is an increase in distribution expenses. This year might be a bit of an outlier to what I just said that fourth quarter is the highest unit rate because of first quarter volume being unusually low for us. Shipping was a bit less efficient back then. So fourth quarter might come in higher than where we were Q3 on a per unit basis, but still better than what we had first quarter.

Your next question comes from the line of John Baumgartner from Mizuho Securities.

Russ, you noted in the past a very long conceivable runway for growth from the pool of potential new farmers that's out there. And I'm curious, given the volatility and uncertainty in the farming community year-to-date between tariffs, exports, low prices for row crops, I'm curious what you're seeing in terms of these conditions maybe enhancing the interest among farmers or accelerating the adoption of pasture raised production given better visibility into a domestic market, higher returns versus current operations. I mean has that been a factor at all in the year-to-date farmer pickups you're seeing? Or could it be a factor in 2026?

Yes. It's always been important to us that we're creating meaningful economic opportunities for small family farmers in this country. And as you're alluding to, they often lose at the end of the movie. It's not -- it's definitely not easy to work and the economics of farming seem to be getting tougher every year. So we are really, I think, centered on that value proposition. It's really important to us that our farmers win when they work with us and they do their part. It continues to be an important part of the value proposition for them. I can't say that I'm seeing an acceleration of interest. We've talked in past about there being plenty of interest and a strong pipeline of prospective small family farmers, and that continues to be true. And our job is just to make sure that we have a pipeline of really great farmers in the right part of the country who really believe in what we're doing and want to be a part of it, and we continue to see strong interest.

And then to follow up on the distribution growth and the velocities. The TDP growth has accelerated nicely throughout the year with the increase in supply. But I think more recently, the volume velocity has inflected positive since maybe like the middle of the summer. And I'm wondering if you could delve into that a bit more, this inflection in velocity. Is that largely reflective of a shift favoring more medium or heavy buyers? Is it more reflective of a change in business mix between retailers and channels? Just any thoughts there.

Yes. The first thing I'd call out is, as we've been discussing, we've been bringing on meaningful expansion of both egg supply from farms and processing capacity at Egg Central Station. In Q3, we didn't just go live with our new ERP system as part of the broader digital transformation effort. We added a significant number of new farms, and we added and brought online the third production line at Egg Central Station. And so a lot of what you're seeing in the data is our increased ability to meet the existing needs of our consumers and retail partners. And that's an exciting place to be.

Your next question comes from the line of Matt Smith from Stifel.

Thilo, the fourth quarter guide or the implied fourth quarter guidance suggests margins still nicely above the 2027 target despite some hypercare spending as you called it. Is the level of promotional support and marketing at appropriate levels as you exit this year? Is there an opportunity to flex that higher as you see strong household penetration and awareness gains? And one other consideration, as you fill the new production line at Springfield, should that be a headwind to margin exiting the year? Or is that going to achieve a throughput that mitigates that?

Yes. Great questions, Matt. So on promotional and marketing spending, we have said, I think, for a few quarters now that promotional spend, meaning trade spend would be highest in Q4. That continues to be the case. That continues how we plan the year. And it's simply a function of fourth quarter, we don't worry about the ERP implementation anymore. The third line is online and so on. We have the supply to support promotions. And with that, we're really focusing promotions in Q4.

Marketing spend, we're probably year-to-date at a very appropriate level for us. Year-to-date, marketing spend was about 5% of net sales. Maybe Q4 will take it up a little bit. But we have talked about that marketing spend for the full year will be roughly comparable to last year, where it was 5.3% for the full year. So that would imply that maybe marketing spend in Q4 is going to increase a bit compared to the first 3 quarters of the year, but not by any dramatic amount.

And then the question on third production line, is it going to put pressure on margins or not? I would argue, Matt, that we have been staffing up for that line throughout Q2 and Q3. We wanted to bring people in early in order to make sure that by the time the line comes online, they're trained and they know what they are doing. So now we have the crew in place and now we can actually get the volume off the line. And so if anything, the third production line should be margin enhancing for us in the fourth quarter compared to what we have seen in the third quarter.

And as a follow-up to your comments about incremental items in existing doors. In the past, you've talked about some of these incremental items being a mix tailwind as you get more premium items on the shelf. Is that still the case today? Or has the assortment changed as we think about some of the 6 counts of medium eggs and other items that you've introduced in the past?

Yes. I think the biggest trend that continues to be true is that our organic products are growing faster. And that's, I think, largely driven by the fact that they are a more recent addition and therefore, earlier in the growth curve in so many of our mainstream retail partner shelves. So that's a nice tailwind, I think, from a mix perspective. It also increases our average item price, which is supportive of the revenue capacity from our infrastructure.

Your next question comes from the line of Eric Des Lauriers from Craig-Hallum.

Congrats on another very impressive quarter here. Just one question for me, looking to drill down a bit more into consumer behavior these widening price gaps. So great to see the continued strength in demand. It's clear your existing customers are very loyal. The journey from trial to repeat to heavy user is consistent. But I'm wondering if you're seeing any impact on trial as a result of the widening price gaps?

Thank you. At this point, no, although as we've said, we continue to bring on more capacity and more supply. And so I think that only enables more trial and enables us to kind of catch up to that continued increase in awareness that we're driving with our marketing efforts. But in general, what we've learned is that consumers don't just buy our eggs, they buy into what we stand for. And yes, there's some uncertainty in the broader environment and maybe with price gaps on the shelf, but our business is growing because people want to know where their food comes from and that trust and loyalty has kept our demand incredibly steady.

And Eric, I would add to that, we've always talked about that we use marketing dollars to drive brand awareness, and we have obviously seen some very great results there over the last 12 months with brand awareness improving by 8 points. And then we use promotional dollars to drive trial, right? We like that promotion on the shelf because we get that big yellow sticker on the shelf that then catches the consumer's eye. And that's often when the consumer tries us for the first time. So when I earlier talked about that we will increase promotional spend in the fourth quarter, that is really to drive trial. We now have the supply to Russell's point, we have the brand awareness. And now we want to use promotions to drive trial to get new households into the brand. So if over the next 3 months, you see an increase in our promotional spend, it's not a reaction to price gaps moving one way or the other. It really is a function of us having the supply and now the ability to get new consumers to try the brand for the first time and then turn them into repeat customers.

Your next question comes from the line of Ben Mayhew from BMO Capital Markets.

Welcome, Brian. I guess I'll start with, can you talk about the impact of high competing protein prices? And do you see that driving more demand into eggs, which are relatively more affordable on a per serving basis?

Yes. I think that's an open question, and we've certainly seen some reports that as consumers are looking for -- to stretch their grocery dollar, they're looking at more affordable sources of nutritious food. And eggs have always been a very affordable whole food that's packed with protein and the things that consumers want. That said, we don't have any unique insights into trade down, and we're not seeing strong evidence of that being an important driver of our growth at this moment.

Okay. That's fair. And then on Slide 12 in your deck, your average items sold has once again surpassed your average weekly dollars. Can you explain why this may be an important indicator of your volume-led strategy and ability to manage supply versus demand over time?

Sorry, Ben, I'm processing the question right now. I think the short answer there is we continue to drive distribution at retail by getting more SKUs on the shelf. And as we do that, we continue to increase the velocity of the items on the shelf, right? So we are not at the point yet where we're adding a marginal SKU that dilutes our velocity on the shelf. It's not a linear expansion on those metrics. There -- you'll see some peaks and bumps there. But over time, I think the statement I just made that we're driving both velocity and average items distributed, I think that holds true.

So if you look at the chart in the deck, the page you referred to, third quarter average items sold maybe grew a bit faster than dollars per average items sold. But I would chalk that up to just -- as I said, it's not a linear path that we are on. But over time, both metrics grow at the same time. Sometimes one grows faster than the other. But I think the statement of we can grow both at the same time, we are not adding the marginal product yet, I think that holds true.

And what I might add to that is that -- and we've talked about this on prior calls, in many of our retail partners, we are what we would describe as underspaced. We've got terrific high-performing products and often the amount of space we've got in their set is smaller -- we have a smaller share of space than we do share of revenue from their egg set. And so when we add an item, it is also an opportunity to provide more supply and presence of product on the shelf to meet the growing demand for our brand. And there's a lot of runway in that regard.

Your next question comes from the line of Sarang Vora from Telsey Advisory Group.

It's actually Joe Feldman on for Sarang today. I had a quick question about CapEx. I think, Thilo, you mentioned that there would be a little bit of a -- I guess, because of timing, there would be a little lower this year. And I'm wondering, does that just get made up next year and how you guys are initially thinking about CapEx for 2026?

Yes, Joe, good to have you on the call. Yes, it is just a timing shift from this year into next year. We took the guidance down by $10 million. And what we talked about was that work in Seymour, there's a bit of groundwork that we have to do that is slowing down the construction phase by a few weeks. And then the other part is there's a project at ECS that we put on hold. We didn't want to overtax ECS with changes around the ERP go-live and the third line coming online. So we wanted to reduce the amount of change that we're doing at a single point of time at ECS. And so with that, we delayed this project at ECS into next year.

In other words, the CapEx spend that we have planned over a 2-year period for '25 and '26 is unchanged. We're just moving a little bit more into next year. But it's not any reflection other than that. It's no reflection on how we think about projects or importance of projects.

Got it. That's helpful. And then this might be a little bit more of a technical question. But with the ECS, and I guess we may see it at the analyst event. But I'm just curious, how does the division of the work or the labor happen among the 3 lines? Like is one line dedicated to just, I don't know, regular eggs versus organic eggs? Or like how does -- I guess, how do you run the different lines? And how -- I understand how it increases capacity, but how does that all kind of happen, I guess, is my question?

That's a great question, and we look forward to showing you it live at our Analyst Day. But the thing that's exciting about this third machine, it is a slightly smaller machine than the first 2, which is why our reported revenue capacity doesn't grow by 50%. And what that means is that, that machine is great for a shorter run time product. Essentially, it allows us to dedicate the first 2 machines to longer run time product lines, our main top 4 SKUs. And then we can use the new machine to focus primarily on our specialty SKUs, which have lower volumes. That really increases our efficiency, and we're excited to see that sort of productivity improvement over time as we work our way into having all 3 up and running.

That concludes the question-and-answer session. I'd now like to turn the call back over to Brian Shipman for closing remarks.

Thank you, and thanks again, everyone, for joining us today and for your continued support. Please reach out directly with any follow-ups or if you'd like to attend our Investor Day in December. With that, have a great day.