Vital Farms, Inc.

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 Thilo 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 excess 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. 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 favorable. 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. The loss 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 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 are 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. Thank you very much. Relying slightly more on the breaker channel gives us the short-term flexibility to react to potentially higher retail demand as price gap 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. We 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 million 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, Thank you very much. Thank you very much. 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, 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, and 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 $6 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 locally, please remember to unmute your device. Your first question comes from the line of Scott Marks with Jefferies. Scott, your line is open.

Hey, good morning, Russell, Thilo. Thanks very much for taking your questions. First thing I 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 how deep do you think you have to go? Yeah, good morning. Thanks for that.

So I think as we discussed in our Q1 call, 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 retailers, 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 Thank you so much for joining us. with the right cost structure, especially investments and 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. Where is it being realized? Is it in new doors? Is it More items on shelf. Is it kind of the core four SKUs that you're expanding? Just any other color you can provide would be great. Thanks.

Yeah, 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 in 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. A 24 count is actually proving to be really welcomed by the marketplace. 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 products. and really running that same playbook, which to us demonstrates that 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.

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 Thilo. 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 those The Price Gap Management Taking Hold

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 paybacks and where we're seeing the best benefits for our retail partners.

So the headwinds that we've seen here today in terms of volume, but also in terms of retail sales pricing, those headwinds will become much easier to manage. And then in port core, we're dealing with much easier lapping than what we've experienced in the third part.

Thank you for that. 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?

Yeah, so the primary mechanism will actually be around consolidating 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. These 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 The feed formulas don't have anything in them that we haven't approved that aren't required by the birds. And 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, Thilo, 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 10K, you noted breaker channels represented about 5% of your 24 and 25 revenues. I'm wondering if you can talk about the breaker channel last year on a dollar basis. though, excuse me, it was 5% on a volume basis. Can you talk about the breaker channel revenues in 2025 and then your revenue expectations for breakers in 2026?

Sorry, Thilo, if you're answering there, I couldn't quite hear you.

We are experiencing a technical difficulty. Please stand by as we resolve the issue. We will pause the broadcast temporarily.

Ben, can you hear me?

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.

Okay, great. So I just wanted to ask a question around the new credit facilities and 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 model over the next year.

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 watching costs right now or not watching cash right now. We very much are. But with $185 million 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 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 decelerate quite materially starting in third quarter. So if you could just expand upon that and just Let us know how this is going to play out.

As we put in the press release and in the earnings deck, 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 eggs 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 nest run 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 all 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 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?

Yeah, 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 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 hypothesis is that when you see really variable promotional activity, pricing on average coming up and then sometimes coming back down for a certain brand, it may indicate, 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 well.

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

Yeah, 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 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 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 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 that are 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, Collin. 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 or 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 Thank you.

Yeah, 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 that was 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. On one hand, we are not getting the revenue from that promotion during the quarter that we expected. and therefore not 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 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're 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. We're taking costs out of the system. We talked about the $6-7 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. Those are then the drivers to get to the guidance. It really comes down to, can we accelerate volume enough? to make sure that we get the leverage and 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 know are coming, that we will get that leverage to get margins back up again.

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

Our next question comes from the line of Sauron Vora with TAG. Sauron, 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, $1 to $2 in general, and kind of keep it over there given, you know, how the competition has changed in this space. Do you think like this has an impact on the structural gross margin level of the company? I know it's coming back to like 30% exit towards the fourth quarter, but like, you know, in the past we have been talking like mid-30s. So I'm curious to know if the lowering of the prices or competitive landscape has an impact on the structural gross margin, or are there any offsets like, you know, feed cost and stuff that can help it go even higher from, you know, North of 30. So curious to hear your thought on that.

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 four handle on our gross margins. 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 of 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 are bringing the price gaps down. What will then help us next year is the savings from the feed project that we have talked about. 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 $1.02 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 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, you know, I had a quick follow up on the TDP growth. Can you help us understand that, you know, the TDP growth by channels? Like, where do you see, you know, it's a significant growth. So I'm just curious if you can share there is an opportunity or volume expansion happening in the grocery, mass, natural. Just curious if you can share any more color where you are seeing the TDP growth by channels.

Yeah, so the distribution gains that we've been talking about that are coming, they're really 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 the 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 insulated. Thanks.

Yeah, so VXR, as we said, first quarter call and then repeated it 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 eggs 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, I expect that CAPEX spending will fall back down to somewhere off 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.

The capital allocation priorities really haven't changed from how we've talked about in the past. 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 money to shareholders. Right now, given the new loans that we have, Thank you very much. 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 Moskow with TD Cohen. Robert, your line is open. Hey, thanks.

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 the pricing, or is it keeping track of what the competition is doing?

Hey, Rob. Thanks for the question. Competition shows up 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 narrowing price gaps and 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 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 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 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.

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.