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DATE

Thursday, May 7, 2026 at 8:30 a.m. ET

CALL PARTICIPANTS

• Executive Chairperson, President, and Chief Executive Officer — Russell Diez-Canseco
• Chief Financial Officer — Thilo Wrede
• Senior Vice President, Investor Relations — Brian S. Shipman

TAKEAWAYS

• Net Revenue -- $187.2 million, up 15.4% year over year, driven by volume gains of $34.7 million, partially offset by a $9.7 million decline in price/mix.
• Gross Profit -- $53 million, representing 28.3% of net revenue, compared to $62.5 million and 38.5% margin last year; the margin decrease reflects unfavorable breaker mix, elevated supply management costs, and increased promotional activity.
• Excess Breaker Sales Impact -- $4.9 million reduction in gross profit, with excess breaker volume defined as any amount above the 4.9% average contribution to overall egg volume seen in 2024 and 2025.
• SG&A Expenses -- $44.2 million, or 23.6% of net revenue, up from $31.9 million and 19.7% last year, predominantly due to increased marketing and higher head count.
• Shipping and Distribution Expenses -- $11 million, or 5.9% of net revenue, compared to $8.8 million and 5.4% previously, reflecting higher transportation and logistics spend.
• Net Loss -- $1.5 million, a reversal from net income of $16.9 million in the same quarter last year; diluted EPS was negative $0.03 versus positive $0.37.
• Adjusted EBITDA -- $5 million, or 2.7% of net revenue, down from $27.5 million and 16.9% last year, primarily due to lower margins and higher operating costs.
• Cash, Cash Equivalents, and Marketable Securities -- $51.4 million as of quarter-end, with no debt outstanding; the sequential decline was due to inventory buildup, supply management costs, and ongoing CapEx for the Seymour, Indiana facility and accelerator farms.
• Share Repurchases -- Over 1 million shares were bought back for $20 million during the quarter, leaving $80 million authorized under the existing program.
• 2026 Guidance Update -- Net revenue now expected in the $775 million–$800 million range, with adjusted EBITDA of $0 million–$10 million, incorporating a $32 million supply management cost.
• CapEx Guidance -- Reduced to $70 million–$75 million for 2026 due to pausing construction on both the Seymour facility and new accelerator farms.
• Butter Business Exit -- Decision made to fully exit the butter business by year-end, expected to free up $25 million in cash, reduce 2026 sales by $14 million, and improve gross margin by 150–200 bps starting in 2027.
• Distribution Metrics -- TDP increased to 149.8 by quarter-end (up from 144.8 last quarter and 115.8 a year ago), with management anticipating a further gain of 15%–25% through 2026.
• Farmer Contract Amendments -- Actions taken to manage oversupply will entail payments to farmers to temporarily cease or delay production, with expenses amortized over future periods per lease accounting rules.
• Staff Reductions -- Approximately 10% of remote or non-Egg Central Station head count eliminated to support cost management objectives.
• Outdoor Access Category Growth -- The category reached 15% of total egg volume (up from 8% in 2023) and grew 32% in volume year over year, versus mainstream eggs at 4%.

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RISKS

• Management expects 2026 to serve as a "low watermark for margins" due to compressed gross and adjusted EBITDA margins from price investments, supply management costs, and ongoing oversupply.
• Guidance explicitly warns, "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."
• $32 million in projected costs to address excess egg supply will impact profitability this year, with the majority realized in Q2 and longer-term expense trailing through contract amortization.
• Exiting the butter business will reduce sales by an estimated $14 million in 2026, impacting top-line expectations.

SUMMARY

Vital Farms (VITL +0.45%) management lowered full-year revenue and adjusted EBITDA guidance following a quarter of compressed margins attributed to industry-wide price declines and oversupply. Executives confirmed immediate EBITDA pressures from $32 million in supply management costs, largely tied to breaker channel sales and voluntary farmer contract amendments. The company will exit the butter segment and slow significant CapEx projects to preserve cash, expecting the majority of margin recovery to materialize in 2027 as distribution gains activate. The outdoor access egg category remains a key growth area, despite current retail price and new customer acquisition headwinds.

• Management is prioritizing targeted price gap reduction and distribution expansion, exemplified by an 18% volume lift at a top 10 customer after adjusting price premiums to 25% from 35% above competitors.
• Inventory and excess supply management are driving immediate negative free cash flow but are expected to stabilize through a mix of contract changes and increased breaker sales concentration in early quarters.
• CFO Thilo Wrede stated future margin improvements will depend on "volume-driven growth" and delayed cost reductions, particularly feed costs and SG&A leverage, beginning to flow through the P&L late in the year.
• Share repurchases and a sizable cash reserve position the company to self-fund near-term capital needs even while drawing on an undrawn credit facility, with financial covenants under review with JPMorgan.

INDUSTRY GLOSSARY

• TDP (Total Distribution Points): Aggregated measure of product availability across stores, reflecting both breadth and depth of retail placement within a given category.
• PDPs (Points of Distribution/Product Distribution Points): Number of unique retail locations or product listings carrying a specific item, used as a distribution reach benchmark.
• Breaker Channel: Secondary market channel where surplus eggs are sold at low prices for industrial processing, rather than as branded shell eggs at retail.
• Egg Central Station (ECS): Vital Farms' primary processing and packing facility supporting scale, distribution, and product quality control.
• Accelerator Farms: Company-operated model farms designed to test innovations and improve production practices across the partner network.
• Outdoor Access Eggs: Eggs laid by hens with verified access to outdoor pasture, representing a premium subcategory often subject to differentiated pricing and consumer demand shifts.
• VXR (Vital Crossroads): Planned egg washing and packing facility in Seymour, Indiana, representing a major future capacity expansion project.

Full Conference Call Transcript

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.

Russell Diez-Canseco: 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 head count.

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.

Thilo Wrede: 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 head count 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.

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

Matthew Smith: 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?

Russell Diez-Canseco: 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.

Matthew Smith: 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.

Thilo Wrede: 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.

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

Russell Diez-Canseco: Eric, we can't hear you.

Eric Des Lauriers: Sorry about that. Can you guys hear me now?

Russell Diez-Canseco: Yes, we can.

Eric Des Lauriers: 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?

Russell Diez-Canseco: 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.

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

Brian Holland: 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?

Thilo Wrede: 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.

Brian Holland: Okay. I appreciate that.

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

Brian Holland: 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?

Russell Diez-Canseco: 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.

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

Robert Moskow: 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.

Russell Diez-Canseco: 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.

Robert Moskow: 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?

Russell Diez-Canseco: 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.

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

Glenn West: 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?

Russell Diez-Canseco: 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.

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

Benjamin Mayhew: 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.

Russell Diez-Canseco: 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.

Benjamin Mayhew: 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?

Russell Diez-Canseco: 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.

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

Benjamin Klieve: 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?

Russell Diez-Canseco: 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.

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

Scott Marks: 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?

Russell Diez-Canseco: 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.

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

Russell Diez-Canseco: John, we can't hear you?

Operator: Analyst, your line is now open.

John Baumgartner: Can you hear me?

Russell Diez-Canseco: Yes.

John Baumgartner: 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?

Russell Diez-Canseco: 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.

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

Megan Christine Alexander: 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?

Russell Diez-Canseco: 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.

Megan Christine Alexander: 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?

Thilo Wrede: 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.

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

Brian Holland: 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?

Russell Diez-Canseco: 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.

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

Brian S. Shipman: 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.

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