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DATE

Thursday, Aug. 6, 2026 at 8:30 a.m. ET

CALL PARTICIPANTS

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

TAKEAWAYS

• Net Revenue -- $166.0 million, representing a 10.1% decline reflecting volume-driven decreases in retail channel sales.
• Gross Margin -- 6.6%, a decrease from 38.9% due to higher input costs, production costs, and an unfavorable sales mix.
• Net Loss -- $31.1 million, driven by oversupply of egg inventory and related supply management costs.
• Adjusted EBITDA -- Loss of $26.6 million, including the impact of $24.8 million in pre-tax expenses not added back to the calculation.
• Supply Management and Discrete Expenses -- $28.1 million, comprised of $19.5 million from excess breaker sales, $7.8 million for butter business exit costs, and $0.8 million in farmer contract amendment amortization.
• SG&A Annualized Run Rate Reduction -- $6 million to $7 million, achieved through organizational streamlining and headcount reductions in May and July.
• Retail Dollar Share -- Increased by more than 200 basis points year over year even as total category pricing declined.
• Total Distribution Points (TDP) -- 148.7 year to date, with management targeting an average of 150 to 160 for the full year.
• Fourth Quarter TDP Guidance -- 170 to 175, representing the largest yearly gain for the company since its 2020 initial public offering.
• Price Gaps -- Averaged $2.36 relative to branded competitors in the second quarter, down from $2.51 in the first quarter.
• Credit Capacity -- $185 million, following the replacement of a previous revolving line with a $125 million term loan and a $60 million asset-based lending facility.
• Full Year Net Revenue Guidance -- $775 million to $800 million, assuming a return to positive shell egg volume growth in the second half of the year.
• Full Year Adjusted EBITDA Guidance -- $0 to $10 million, reflecting mid-$30 million in expected oversupply management costs.
• Capital Expenditure Guidance -- $70 million to $75 million, following a decision to halt construction at the Vital Crossroads facility.
• Shell Egg Units per Store per Week -- Increased 12.5% between the first quarter call and mid-July.
• Butter Business Exit Costs -- $7.8 million, including costs to route remaining bulk inventory to melters instead of retail conversion.
• Restructuring and Severance Costs -- $3.3 million, incurred during the second quarter as part of cost realignment actions.
• Professional Fees -- $3.0 million, related to a feed cost savings program focused on procurement scale.
• Retail Channel Net Revenue -- $158.0 million, compared to $176.1 million in the prior-year period.
• Share Repurchases -- $15.0 million during the second quarter before the board terminated the program in August.
• Shipping and Distribution Expenses -- 6.4% of net revenue, up from 4.9% due to $1.5 million in costs for shipping excess eggs to breaker plants.
• Cash and Cash Equivalents -- $21.2 million as of June 28, 2026.
• Inventory Provision -- $8.27 million increase, primarily related to managing surplus egg supply.

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RISKS

• Wrede stated, "full-year supply management costs are now modeled in the mid-$30 million range versus our initial $32 million estimate," attributing the increase to surplus volume from lighter second quarter sales.
• Wrede stated, "we expect that feed cost will increase for us as we go into the end of the year and then next year," citing the impact of higher fertilizer prices on input requirements.

SUMMARY

Management reported that Q2 2026 represented the financial trough for the year, driven by industry-wide oversupply dynamics and retail price gaps. The company implemented a calibration plan involving farmer contract amendments to reduce supply at the source, shifting away from selling excess eggs through low-margin breaker channels. Vital Farms secured $185 million in new credit facilities to enhance liquidity while halting construction on the Vital Crossroads facility. The organization also completed a structural cost reduction of its SG&A run rate and focused on narrowing pricing gaps to branded competitors to drive volume recovery in the second half of the year.

• CEO Diez-Canseco noted that in specific markets where price gaps narrowed to appropriate levels, "we saw both velocity and incremental new households improve 27% since mid-April."
• CFO Wrede confirmed the company anticipates a gross margin recovery by year-end, stating, "we think we'll have an exit rate in Q4, meaning at the end of Q4, gross margin that starts with a 3 again."
• The company modified its butter exit strategy, with Wrede indicating that converting remaining bulk inventory into retail product proved "uneconomical" and the stock will instead be sold to melters.
• Diez-Canseco highlighted the introduction of a 24-count SKU at Whole Foods, stating the product is "proving to be really welcomed by the marketplace" with velocities exceeding initial expectations.
• Management indicated that the new $185 million credit facilities provide an "insurance policy" to manage through industry oversupply without constant cash balance monitoring.
• Vital Farms is halting construction of the Vital Crossroads facility in Indiana by the end of 2026 to prioritize liquidity, with current work focused only on enclosing the building.

INDUSTRY GLOSSARY

• Breaker channel: A secondary market where eggs are sold to be processed into liquid, frozen, or dried egg products, typically at lower prices than retail shell eggs.
• Total Distribution Points (TDP): A metric representing the sum of the distribution percentages for each product in a brand's portfolio across retail locations.
• ECS (Egg Central Station): The company's primary egg washing and packing facility located in Springfield, Missouri.
• VXR (Vital Crossroads): The company's second egg processing facility currently under construction in Indiana.
• MULO+: A retail data category from Circana representing Multi-Outlet retailers plus additional channels like convenience stores.
• Nest run eggs: Eggs that are delivered from the farm to the processing facility in their natural state, prior to washing, grading, and packing.

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to Vital Farms' second quarter 2026 earnings conference call and webcast. [Operator Instructions] 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.

Brian Shipman: Good morning and welcome to Vital Farms' second 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 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 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 the financial information presented in accordance with GAAP.

After our prepared remarks, we'll open the line up for questions. [Operator Instructions] 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'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 3 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 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 earnings call, 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 egg category in MULO+ during the second quarter, according to Circana, 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 Circana 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. A 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. Thilo 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 million 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.

Thilo Wrede: 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 million to $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'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 2 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. 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 3-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 8-K 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 million to $75 million.

Looking ahead to the rest of the year, we are reaffirming our previous guidance, which calls for net revenue of $775 million 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. 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 3 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 million 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.

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

Scott Marks: 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?

Russell Diez-Canseco: 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 want to 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 again to return to growth 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.

Scott Marks: 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 4 SKUs that you're expanding, just any other color you can provide would be great.

Russell Diez-Canseco: Yes, we have talked, I think for a few years now about the very clear opportunity to expand our core 4 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. And 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 4 in existing doors 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.

Operator: Our next question comes from the line of Matt Smith with Stifel.

Matthew Smith: 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?

Russell Diez-Canseco: Yes, so we have a healthy amount of volume growth in the back half of the year. Thilo 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.

Thilo Wrede: As we get into the back end of the year, especially into the fourth quarter, and as price gaps come down into the target that we have, together with the distribution that we just talked about, volume, what should we pick up? So the headwinds that we're seeing year-to-date in terms of volume, but also in terms of retail sales pricing, those headwinds will become much easier to manage, and then in fourth quarter, we're dealing with much easier lapping than what we had experience in the third quarter.

Matthew Smith: Thank you for that. And a 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 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?

Russell Diez-Canseco: Yes, so the primary mechanism will actually be around 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.

Operator: Our next question comes from the line of Ben Mayhew with BMO Capital Markets.

Benjamin Mayhew: Can you hear me okay?

Russell Diez-Canseco: Yes, we can.

Benjamin Mayhew: Great. So I just wanted to ask a question around the new credit facilities and just the space and the buffer 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?

Thilo Wrede: 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 watching costs right now, we're 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.

Benjamin Mayhew: 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 what's the pace at which you expect these actions to right-size your internal supplies? I believe you mentioned that the eggs to the breaker market are going to accelerate 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.

Thilo Wrede: Yes, as we put in the press release and 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 a hit -- an additional hit from actually paying for the distribution to the breaker plants. 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.

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

Eric Des Lauriers: 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?

Russell Diez-Canseco: 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 4 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 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 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.

Eric Des Lauriers: 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 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?

Russell Diez-Canseco: 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 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 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.

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

Glenn West: Hi guys, this is Glenn West stepping in for Jon Andersen. Just one question. So last quarter, I think we're thinking or talking about 2Q, even though like negative mid to high teens, and it came in a little higher this quarter. And then I know you laid out kind of the 3 building blocks to get to the guide that you obviously reaffirmed. But maybe just some more color on what gives you confidence that swing is going to work and how much of that is kind of already locked in versus dependent on things playing out.

Thilo Wrede: 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 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, right? 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. And then we're taking costs out of the system. We talked about the $6 million 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 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 know are coming, that we will get that leverage to get margins back up again.

Operator: Our next question comes from the line of Sarang Vora with TAG.

Sarang Vora: Good to see stabilization in the back half of the year. My question is around price gaps. As you narrow this price gap to, $1 to $2 in general, and kind of keep it over there, given, 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 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.

Thilo Wrede: 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 3 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. What will then help us next year is the savings from the feed project that we've 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 million or $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 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.

Sarang Vora: 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 any more color on where you are seeing the TDP growth by channel.

Thilo Wrede: 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.

Operator: Our next question comes from the line of Jack Siedow with Needham & Company.

Jack Siedow: 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.

Thilo Wrede: 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 12 months -- 9 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 million 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 million, $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.

Jack Siedow: 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.

Thilo Wrede: 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 into perpetuity, but for the time being, that is simply not something that we can focus on.

And so that then makes us focus on the first 3 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.

Operator: Our next question comes from the line of Robert Moskow with TD Cowen.

Robert Moskow: 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 unit pricing or is it getting -- keeping track of what the competition is doing?

Russell Diez-Canseco: Hey, Rob. Thanks for the question. The 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, we've got, again, we feel confident that the work we're doing and have already done both on narrowing price gaps 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 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 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.

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

Brian Shipman: 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.

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