Vital Farms - Earnings Call - Q2 2025

Executive Summary

• Strong quarter with broad-based beats and a guidance raise: revenue $184.8M (+25.4% y/y), EPS $0.36, gross margin 38.9%, and record Adjusted EBITDA $29.9M; management raised FY25 outlook to at least $770M revenue and at least $110M Adjusted EBITDA. Versus S&P Global consensus, VITL beat on revenue, EPS, and EBITDA for Q2 2025 (see Estimates Context)*.
• Supply constraints eased; inventory rebuild underway heading into peak Q4 demand. Management plans heavier promotions in H2 and flagged tariffs on imported items as a key wildcard (mainly Q4), which are incorporated into guidance.
• Accelerating capacity: ECS third line remains on track for Q4 2025; Seymour, IN build-out expanded to two lines in parallel plus onsite cold storage, lifting expected revenue capacity to >$900M by early 2027. FY25 capex raised to $90–$110M; free cash flow expected to turn negative in 2025 as they “put the balance sheet to work”.
• Brand and demand momentum: aided brand awareness at 31% persists; new “The Bear” campaign supports engagement; farm network surpassed 500 (+~50 q/q) with 9M hens under contract, positioning for sustained growth.

What Went Well and What Went Wrong

What Went Well

• Revenue growth and profitability: “Net revenue grew to $184.8M, up 25.4% y/y… Adjusted EBITDA of $29.9M represents a new quarterly record”.
• Supply/demand balance improving: “Volume growth constraints we faced in the first quarter have begun to ease… we’ve been able to start rebuilding our inventory,” enabling accelerated back-half growth and a FY guide raise.
• Capacity expansion ahead of demand: Seymour accelerated to two lines plus onsite cold storage (> $900M revenue capacity by early 2027) and ECS third line on track for Q4 2025, expanding capacity and efficiency.
• Brand momentum: “record high aided brand awareness of 31%… we know how to turn this increased awareness into purchases,” complemented by a new national campaign around FX’s The Bear.

What Went Wrong

• Slight margin dilution: Gross margin edged down y/y (38.9% vs 39.1%) due to crew investments and less efficient operations as ag supply normalized after an exceptional prior-year quarter.
• Internal controls deficiency: Material weakness (design) in revenue recognition process (lack of automated reconciliation). No revenue inconsistencies found; remediation on track by year-end FY25.
• Near-term margin headwinds: H2 pressures from tariffs (timing/magnitude variable), higher promotions, and back-half-weighted marketing; FY25 FCF to turn negative given capex acceleration.

Transcript

Speaker 3

Good day, and thank you for standing by. Welcome to the Vital Farms second quarter 2025 earnings conference call and webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand it over to our host, John Mills, with ICR.

Speaker 0

Good morning, and welcome to Vital Farms second quarter 2025 earnings conference call and webcast. I am John Mills, Managing Partner at ICR. On the call today are Russell Diez-Canseco, President and Chief Executive Officer, and Thilo Wrede, Chief Financial Officer. By now, everyone should have access to the company's second quarter 2025 earnings press release issued this morning. This is available on the Investor Relations section of Vital Farms' website at investors.vitalfarms.com, and it will be under the news banner. Throughout this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and 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 June 29, 2025, filed with the SEC today, as well as other filings with the SEC 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 today. Please note that on today's call, management will refer to adjusted EBITDA, which is a non-GAAP financial measure. While the company believes this non-GAAP financial measure provides useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to our earnings press release for a reconciliation of adjusted EBITDA to its most comparable measure prepared in accordance with GAAP.

With that, I will now turn the call over to Russell Diez-Canseco, President and Chief Executive Officer of Vital Farms.

Speaker 2

Thank you, John. Good morning, and thank you for your time today. Before talking about the broader business trends, I want to start with a big thank you to the entire Vital Farms crew. We achieved several important milestones since our last earnings call, and these were made possible by the dedication, engagement, and passion of crew across our organization. These milestones include working with more than 500 family farms, an increase of about 50 farms since the first quarter, breaking ground on our Seymour facility, and placing birds on our first accelerator farm. All of these are supply chain milestones that deserve special recognition and support the future growth potential that we see for Vital Farms. Another highlight worth mentioning up front is the appointment of Billy Cyr to Vital Farms' Board of Directors.

As the current CEO of Freshpet, and with his extensive consumer products expertise, Billy brings valuable experience in brand building, retail partnerships, and scaling operations in the CPG space that will be instrumental as we continue our growth journey. We're thrilled to have Billy join our board. With that, let me talk more about the details of the second quarter. Our second quarter performance exceeded our initial top and bottom line expectations. Net revenue grew to $184.8 million, up 25.4% year over year, driven by both volume growth and strategic pricing action. Adjusted EBITDA of $29.9 million represents a new quarterly record for us. I'm pleased to report that the volume growth constraints we faced in the first quarter have begun to ease as we forecasted.

We've been able to start rebuilding our inventory, and we are seeing continued strength in consumer demand and brand loyalty, even as we implemented our recent price increases. These factors position us well for accelerated growth in the back half of the year. With this solid foundation in place, we are raising our 2025 financial outlook, and Thilo will give more details. As I reflect on our second quarter performance, I want to share two key observations that shape our outlook. First, despite the increasingly dynamic macro environment, Vital Farms continues to demonstrate remarkable resilience and growth, outperforming across key metrics. Second, we believe we remain a structurally advantaged business with significant runway for growth in a category with meaningful long-term tailwinds.

Key to our growth are our supply initiatives, where we've made excellent progress expanding our farmer network, which I mentioned earlier, and we now have 9 million hens under contract. With a robust pipeline of prospective family farm partners, we are confident in our ability to continue to grow this network at the necessary pace throughout the remainder of the year and beyond to support our updated guidance. The ongoing farm network expansion reflects the compelling value proposition we offer family farms and the expertise of our world-class farm team in communicating the benefits of our partnership model. This growing network positions us to meet increasing demand while maintaining our high-quality standards. Scaling our farmer network aligns with the strategic infrastructure investments we've been advancing on multiple fronts.

At Egg Central Station, or ECS, in Springfield, our third production line remains on track to be operational in the fourth quarter, which we expect will expand our capacity by 30%. We're also enhancing our distribution capabilities in the coming months by transitioning to an above-ground cold storage facility just one mile from ECS, improving operational efficiency. We're continuing to work with the same warehouse partner, but this expands our shipping capabilities and improves our efficiencies as the facility is now closer to ECS and with a purpose-built design to better handle outbound distribution. Next week, we plan to break ground at our new Seymour, Indiana facility.

After a thorough assessment by our Chief Supply Chain Officer, Joe Holland, who joined us in the third quarter of last year, we revised our Seymour expansion plans and are now working on installing two lines at the same time, instead of the original plan of doing this in two phases. With this updated approach, we expect to have more than $900 million of revenue capacity from the new Seymour facility by early 2027. It's important to point out here that the timing for the new facility to be operational does not meaningfully change with this increased scope. The updated approach also means that we now expect CAPEX spending of $90 million to $110 million this year. Our full plan now includes a cold storage facility adjacent to the Seymour facility that we plan to build but will be operated by our current warehouse partner.

Even with this increased scope, we continue to project $5 of annual revenue capacity for every dollar of CAPEX we're investing in the facility. In other words, our cost per square foot is decreasing compared to the initial plan. It also means that we're anticipating higher CapEx spend next year than previously indicated. The recent jump in brand awareness we've seen this year for Vital Farms Egg and our continued high growth rate indicate to us there is unmet demand that we will have to satisfy in the coming years. After several years of supply and capacity constraints, we want to get ahead and ensure we are well positioned to meet our future demand expectations. Farm recruiting is one piece of this puzzle, and we believe we are currently in a good place there.

Production capacity is the other piece, and by installing two production lines in Seymour simultaneously, we anticipate having sufficient scale for the foreseeable future. While expanding supply is critical, the true cornerstone of our success lies in the strength of our brand and the deep loyalty of our consumers. Time and again, our consumers have demonstrated remarkable commitment to our products because of our mission and what our brand represents. In particular, we've grown household penetration while simultaneously increasing the loyalty of our existing consumers. We continue to see the record-high aided brand awareness of 31% that we hit in the first quarter, and we believe we know how to turn this increased awareness into purchases over time. This is happening across all income groups, particularly among higher-income households who continue to demonstrate strong loyalty to our brand. I think it's important to note that this isn't just brand loyalty.

It's a testament to the authentic relationships we've built with consumers who fundamentally understand and value our mission. We believe they understand how we partner with family farmers, maintain rigorous ethical standards, and consistently deliver superior quality eggs. We believe that our consumers are willing to pay a premium for these practices and for the value our brand represents. We continue to grow brand awareness through meaningful engagement. We recently rolled out a new advertising campaign built around season four of FX's Emmy Award-winning TV show, The Bear, which has already generated positive feedback. The campaign's success demonstrates our ability to connect with consumers through culturally relevant content that resonates with our target demographic. Another good example of our broader engagement strategy is a limited-time promotional campaign that will launch later this month. It will involve products that will only be available through an online giveaway.

They're not for sale, and we want to make it very clear that it's not related to any thinking about a new category. It will just be a fun way to connect with some very critical stakeholders and continue to grow brand awareness. We don't want to spoil the surprise yet, so please stay tuned until later this month. In summary, we exceeded our initial second quarter expectations and believe our business model is uniquely positioned to continue delivering strong results. We have a loyal consumer base, a growing network of family farms delivering improving supply chain stability, and the investments we make in retail penetration and brand awareness are delivering measurable results. Our volumes are improving as we enter the back half of this year with improving supply and what we would consider to be pent-up consumer demand. Finally, all of our expansion plans are tracking as expected.

This momentum enables us to raise our guidance for full year 2025. Over the long term, we see significant potential runway for growth as we capture greater market share from low penetration levels and continue building our loyal, resilient consumer base. I'm very excited about our future and believe we're on our way to becoming America's most trusted food company. I'm certainly looking forward to it, and I hope you are too. Thilo will now provide additional color on our second quarter results and increased guidance for this fiscal year 2025.

Speaker 5

Thank you, Russell. Hello, everyone, and thank you for joining us today. I will now review our financial results for the second quarter ending June 29, 2025, and then provide color on our guidance for fiscal year 2025. Net revenue for the second quarter of 2025 rose to $184.8 million, an increase of 25.4% compared to the prior year period. This was primarily driven by price mix benefits of $15.7 million and volume growth of $21.7 million. We have seen that our second quarter price increase has been well received, which we attribute to the strength of our brand. Gross profit for the second quarter rose to $71.8 million, or 38.9% of net revenue, from $57.7 million, or 39.1% of net revenue last year.

The increase in gross profit dollars was primarily driven by revenue growth from higher volume and increased pricing across our shell egg portfolio and favorable mix benefits. Gross profit margin declined slightly year over year due to increased investments in crew members to keep pace with expected company growth and less efficient operations due to limited egg supply after an exceptional operating quarter last year. SG&A expenses for the second quarter were $39.0 million, or 21.1% of net revenue, compared with $33.3 million, or 22.6% of net revenue in the second quarter last year. The increase in SG&A in the second quarter was driven primarily by expenses to support the expansion of our business, including marketing expenses, employee-related costs, including stock-based compensation and increased headcount, professional service expenses, technology and software-related expenses, and future farm expansion expenses.

Shipping and distribution expenses for the second quarter of 2025 were $9.0 million, or 4.9% of net revenue, compared to $7.2 million, or 4.9% of net revenue in the second quarter of 2024. The increase was driven by higher sales volume. Net income for the second quarter of 2025 increased 1.8% to $16.6 million, or $0.36 per diluted share, compared to $16.3 million, or $0.36 per diluted share for the second quarter of 2024. The increase in net income was driven by operating profit growth, mostly offset by year-over-year increase in tax provisions. Adjusted EBITDA for the second quarter of 2025 was $29.9 million, or 16.2% of net revenue, compared to $23.3 million, or 15.8% of net revenue for the second quarter of 2024. The increase in adjusted EBITDA was driven by higher revenue and scale benefits, partially offset by higher personnel investments. Turning now to our balance sheet.

As of June 29, 2025, we had total cash, cash equivalents, and marketable securities of $155.0 million, with no debt outstanding. Our digital transformation initiative remains on track, and we continue to target early fall 2025 for the switchover. Before I discuss our guidance, I want to update you on our progress with remediating the material weakness in internal controls previously highlighted in our annual report on Form 10-K for fiscal year 2024. The finding relates to the revenue recognition process. Specifically, we lacked automated reconciliation between purchase orders and sales reporting. Importantly, this was a design deficiency only. No revenue inconsistencies were found, and we do not anticipate any restatements. Our remediation plan is progressing well, and we remain on track to properly correct this by the end of fiscal 2025.

Now looking ahead, given our strong performance in the second quarter, including successful implementation of our price increase, we are raising our full year 2025 guidance. We now expect net revenue of at least $770 million, representing growth of at least 27% versus 2024, an increase from our previous guidance of at least $740 million. This increased outlook reflects the strengths we are seeing in our core business, particularly the positive consumer response to our recent price increase and accelerating volume growth as our newly added farms ramp up production. We are increasing our adjusted EBITDA guidance to at least $110 million from the previous guidance of at least $100 million for the full year 2025. For the remainder of 2025, we continue to expect different margin dynamics between the first and second half of the year.

The first half of the year has benefited from the impact of favorable price mix, our recent price increase, and relatively stable commodity costs. However, in the second half, we anticipate margin pressure from three key sources. First, the impact of U.S. tariffs on imported items. This headwind continues to be challenging to predict in terms of timing and magnitude of the impact, but we currently expect it to mainly affect the fourth quarter. Second, now that our supply constraints have eased, we plan to increase promotional activity in the second half of the year. Third, similar to prior years, we anticipate higher marketing spend as a percent of net sales in the second half compared to the first half of the year. We have factored these headwinds into our guidance and pricing decisions and remain confident in our ability to deliver on our increased full year revenue guidance.

Lastly, we now expect fiscal year 2025 capital expenditures in the range of $90 million to $110 million, pulling forward CapEx spend that was previously planned for later years. This is an increase from our previous guidance of $50 million to $60 million and reflects our strategic decision to construct both production lines at our Seymour, Indiana facility simultaneously, rather than in phases, together with on-site cold storage. We believe this will provide us with needed capacity for future growth and optimize our capital efficiency on a per square foot basis. Once operational, we expect the two lines to have total annual revenue capacity of more than $900 million.

As previously disclosed, we will have elevated CapEx spending in 2025 and 2026 because of the new production line at Egg Central Station in Springfield, construction of our new facility in Seymour, Indiana, the construction of accelerator farms, and our digital transformation project. We expect to fund our current plans for our Seymour facility and all other projects this year with existing cash and operating cash flow. We continue to project that every dollar of CapEx investment at Seymour will generate more than $5 of annual revenue capacity, which we consider a very strong return. This decision to accelerate the Seymour build-out means we are putting our balance sheet to work, and we expect free cash flow to turn negative this year after two very strong positive years.

After the last several quarters, we want to ensure that we have enough capacity in place ahead of expected demand growth and that we optimize the use of capital and the return for all our stakeholders. As always, we continue to evaluate and monitor our capital allocation priorities, and we'll provide updates on this as necessary. The raised financial outlook I've just shared demonstrates the strength of our business model and validates our strategic decisions. We continue to see our loyal consumer base growing, and we believe expansion of our network of over 500 family farms strengthens our supply chain capabilities. Our investments in retail penetration and brand awareness are delivering strong results as we reach new households and deepen new relationships with existing customers.

The positive consumer response to our brand that we have seen, combined with our operational execution, reinforces our confidence that we are creating sustainable value for all stakeholders as we progress toward our long-term objectives. Once again, we thank you for your time and interest in Vital Farms today and for the confidence that you have placed in us with your investment. With that, we are now happy to take your questions.

Speaker 3

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We request that you limit yourself to one question and one follow-up. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Megan Klatt with Morgan Stanley. Your line is open.

Hi, good morning, Russell, Thilo. Thanks for taking my question. Maybe we could start with the volume performance and then maybe what's changing in the guide. Volumes at mid-teens in the second quarter, a really nice acceleration from last quarter. Maybe you can talk about just how that played out versus your own expectations. It does seem like the pricing going better than expected and the positive consumer response you called out is the primary driver of what's changing in kind of the better second half implied outlook. Maybe, Thilo, you can just unpack a little bit more in terms of how we should think about what's changing in the back half and the cadence of growth 3Q to 4Q. I know there's a lot in there, so thank you.

Speaker 5

All right. Good morning, Megan. I appreciate how you're asking three questions in one. I think the volume over the quarter played out the way we thought it would play out, right? At the first quarter call, we talked about that we wanted to give ourselves a bit of time to watch how retailers are reacting to our price increase from mid-May and then how consumers are reacting to it. I think the price elasticity, similar to previous price increases, was better than what we had assumed. With that, the volume growth, as it played out over the course of the quarter, it played out the way we thought it would, right? Acceleration throughout the quarter. That is what is reflected in the guidance right now, that we continue to accelerate volume growth every quarter. Third quarter higher than second quarter, fourth quarter higher than third.

The year from a volume perspective is pretty much playing out the way we had initially planned it at the beginning of the year. Now we have to benefit from the price increase on top of that, right? That price increase, first quarter, we were hesitant to already put all of that into the guidance because we wanted to first see how the reaction is. With the reaction now in, you know, I would call it positive territory, we feel more confident putting a bit of that price increase into the guidance as well.

Okay, that's helpful. If I could just sneak in a follow-up on that. The promotions, Thilo, that you expect to pressure gross margin in the second half relative to the first half, it seems like those were already in the plan as supply comes online, but maybe you can just clarify that. Are you increasing promotions any more than you had previously expected just given the price increase, or is it mainly similar to what you had planned coming into the year and it's really more about driving trial now that you have supply?

Yeah, it's really similar to what we had planned at the beginning of the year. I think we had talked about it at the beginning of the year as well, right? As supply increases, we are in a much better position to support the lift that we usually get from promotions. Promotions were always back half weighted. There is still a bit of a wildcard out there, which is impact from tariffs, magnitude of tariffs, and so on. We had talked about it on the first quarter call that better supply picture in the back half of the year gives us maybe a bit of flexibility to potentially get more aggressive on promotions if tariffs allow us to do that while we are watching gross margin, right?

The overall picture, the way we think about the back half of the year right now is promotions the way we had always planned them for the year. If there's an opportunity to maybe do a bit more based on where tariffs are landing, then we would be open to doing that.

Okay, great. Thank you. I'll pass it on.

Thanks.

Speaker 3

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

Hey, good morning, guys, and congrats on a good quarter. I wanted to ask on the revenue cadence for the year, you know, the 25% growth you put up in 2Q looks like, you know, we'll accelerate to something in the mid-30% in the back half based on the current guidance. That kind of 10 percentage point step up, I was just wondering if you could give us a sense of how much of that is related to, you know, full benefit of price increase, which I think went in around the middle of 2Q, and how much of that is related to a step up in volume?

Speaker 5

Yeah, good morning, John. Primarily, it is a step up in volume, right? I think we've been talking about the cadence of the year that we'll see an acceleration in growth sequentially every quarter over the course of a year. That continues to hold up. The pricing then is on top of that, right? The acceleration in the back half of the year is primarily driven by the better supply, and then pricing gives us a little bit of a cherry on the top there.

Great. Just a quick follow-up. I'm curious if you could provide a little bit more detail around the decision to commit to two lines right out of the gates in Seymour, and pulling forward that capital spend. What is the benefit of making that decision to do that now? Also, as you pull forward capital spending, does that alter your ability to self-fund that out of your own balance sheet? Thank you.

Speaker 2

Thanks, John. Good morning. As we said in the prepared remarks, so much of that decision is rooted in a desire to kind of catch up to the growth that we've generated with this powerful brand over the last five-plus years. I think we've been, to varying degrees, you know, supply or capacity constrained, which in many respects has been a good problem to have, but the reality is that this is really sort of a secular shift in the way that people look to brands like ours to feed their families, and we need to get closer to really fulfilling that demand.

I think that pulling forward that second line, which is all this is, is pulling forward an investment we plan to make later, gives us a much better chance at sort of catching up to the demand we're creating and really doing an even better job of satisfying the needs of both our retail customers, food service customers, and our consumers. I don't think this in any way affects our ability to fund it ourselves. As you well know, we have a very strong balance sheet. Our operations are cash flow positive, and Thilo can speak in more detail about how that works. We've always said that we, you know, after maintenance CAPEX, growth CAPEX is our number one priority, and I think this is a great example of how we're leveraging our balance sheet to drive accelerated growth in the future.

Speaker 5

Yeah, I think that's exactly right. It's about acceleration of capital expenditures spend. This was always in our five-year plans to spend this capital expenditures. Now we're pulling it forward, and with the $150 million plus of cash and investments that we have on the balance sheet with the operating cash flow that we are generating this year and next year, that is how we are funding this. We will continue to maintain a very healthy cash position just because we like to have that cushion, but there is no need to tap any loans for this. We have the money, and as Russell just put it, right? Now we're putting it to work, and I'm happy to use some of the cash that we've been building up.

Great, thanks so much. Congrats again.

Speaker 3

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

Speaker 2

Hi, thanks, and congratulations. Just a couple of questions. One is, it's great to see, you know, the price elasticity coming out better than you expected. Can you talk also about price gaps versus other pasture-raised competitors? Our data would indicate that those gaps kind of increased a little bit, not a lot. Are you comfortable where they are compared to normal? I had a quick follow-up for you. Thanks, Rob. Good morning. Yeah, as we've seen, I think time and time again, the brand that we've built, I think, resonates with consumers and establishes us as something more than just a producer of a commodity called pasture-raised eggs.

At this point, we're not seeing anything in pricing data or consumption data that would suggest that we're somehow kind of out of whack with meeting the needs of our consumers and customers at the prices at which they value what we're doing. I think the headline would be, yeah, I'm comfortable with where we are. Okay, great. Thilo, just so I'm sure, when you say that the wildcard for the back half of the year is tariffs and it may influence your promotional plans, are you saying that if the tariffs are less than you think, that means you have more money to spend on the promo? Is that what you meant? Or something else?

Speaker 5

Thank you for the follow-up. Just a reminder that we look at pricing as a way to protect gross margin, right? We took pricing at the beginning of the year, or became effective middle of the second quarter in anticipation of higher costs that we would have to offset in the business, and tariffs were a part of that. Obviously, tariffs are still, at least to me, they still feel like a bit of a moving target right now. As we get more clarity on what the tariff levels are for the countries that we are importing from and how quickly they're impacting our business, as we get more clarity on that, we'll have a bit more clarity on how much pricing we need to keep in the market to do this gross margin protection that I just talked about.

As we get more clarity there, we get more clarity on how much could we potentially do, in addition to what we already have planned in terms of promotions.

Speaker 2

Okay, great. Thank you.

Speaker 5

Thanks, Rob.

Speaker 3

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

Speaker 2

Great. Thank you for taking my questions and congrats on a very strong quarter here. I'm wondering if you could elaborate a bit on the decision to add cold storage to both Egg Central Station and adjacent to Seymour. To what extent are you currently utilizing cold storage, and how does this change impact profitability or throughput or otherwise improve your supply chain management?

Thanks. Good morning. At a high level, certainly eggs being a refrigerated product, cold storage is a critical part of our supply chain, bringing eggs in off of farms, bringing them from cold storage to our processing facility in Springfield and then, in the future, Seymour, and ultimately outbound distribution from a cold storage facility. It's very tightly integrated. We do work with a partner in Springfield, same partner 10+ years, which is doing a terrific job for us. The reality is that because that cold storage facility is not co-located with our processing plant, that product has to ride on trucks. A big part of the equation is simply eliminating the need to put product on and pull it back off of trucks to move between the cold storage part of our supply chain and the farms on one end and the packing center on the other end.

Obviously, we'll still need to bring eggs in off of farms, but we eliminate the other half of that by eliminating the trip between the packing center and the cold storage facility. The economics are just really compelling to be able to do that in Seymour. Meanwhile, we also mentioned in the prepared remarks that our partner has been able to construct a new facility that's much closer to Egg Central Station in Springfield, and that already provides us with an opportunity for improved economics as we ship product between the two facilities.

Speaker 5

Eric, let me just clarify one thing. We had always intended to use cold storage in Seymour as well, to Russell's point, right? As we store the eggs before we process them, we need cold storage. As we did more detailed planning on the facility in Seymour, we realized that literally having a shared wall between cold storage and the facility just drives up efficiency. With that, we made the decision to construct cold storage on site so that we make this a process that is as efficient as possible, right? This goes back to how we've been talking about Seymour for a while, that all the learnings that we got from Springfield, we want to apply them to Seymour to make sure that we get the best bang for the buck there.

Speaker 2

That's very helpful. I appreciate that. Just as a follow-up to meeting this increasing demand, nice progress in Q2. We should see further progress in the second half. Can you comment on your ability or perhaps the risks around potentially accelerating family farms coming into the network ahead of initial expectations? You have a very robust pipeline there. It's obviously a lever you can pull to help meet the demand. Help us understand the risks of doing that, either too quickly or too slowly, and how you're thinking about managing that pipeline.

Yeah, great question. I appreciate it. As you've come to know about us, we're pretty darn intentional in everything that we do. The number one risk that we work to manage in every decision is really the trust we built with all of our stakeholders, including the trusted brand we built with consumers and retail partners. The number one risk we would look at when we accelerate something like new farm additions to our network would be, how do we do that without compromising the quality of that farmer, our ability to train and onboard them, and set them up for success to do a great job of caring for the hens and producing a really high-quality product?

Long before we accelerated the rate at which we brought on new farmers, we accelerated and built out our capability to do so by building out a bigger team, by arming them with better technology, and by actually bringing in a really powerful leader, our sales leader, Peter Pappas, to lead the entire farm support and farm recruiting team. We really started the process of preparing for that acceleration at the beginning of the year. What we're seeing now is the beginnings of the fruition of all those investments. Beyond that, I think our plans are not to have farms in advance of our ability to pack eggs. It's really a process that we plan to be very much in sync and balanced.

As we continue to hit new production records at Egg Central Station every week or so, as we continue to build out the team, do the training, and improve our operations there, we're looking ahead to the Q4, third line coming online in Q4 of this year. Those things are all timed so that we'll have the processing capacity to bring those eggs to market.

Very helpful. Appreciate that, caller.

Thank you.

Speaker 3

Your next question comes from the line of Matt Smith with Telsey Advisory Group. Your line is open.

Hi, good morning. Thanks for taking my question. Russell, I wanted to come back to the demand environment that you're seeing as you exit the supply constraint, more from a retailer perspective. You've talked about the opportunity for growth in the future, expansion of distribution to come from getting more items on shelf versus new retailers. Can you update us on your thoughts there, given the significant growth you've seen in the category and how that informed your decision to expand Seymour? Are you seeing a greater opportunity from new stores, or is it more still about greater items or a greater number of items on shelf? Thank you.

Good morning. Terrific question. We continue to be in well over 20,000 stores. I think different measures have us somewhere between 23,000 and 25,000 stores, but it's in that range. If we did our jobs right over the last 15 years, we're in the right first 24,000 or so stores. The opportunity, I believe, is to continue to build out our portfolio of products and, frankly, shelf space in those really high-performing doors. The fact that we've got entrance into the category of pasture-raised eggs, which really is a process that got started back in 2014, 2015, I think has done a terrific job of growing awareness of different types of eggs and expanding the, you know, the TAM, if you will, for a very premium egg. I don't believe it's come at the expense of our own growth.

Anything we can do to continue to both highlight the availability and benefits of buying a premium egg and, more importantly, to expand the holding power on those shelves of the brand Vital Farms, whether it comes in the form of additional SKUs or simply additional facings of existing SKUs, I think will be an important driver of our growth.

Thank you. Thilo, as a follow-up, price mix came in quite strong, above 10% again this quarter. I know there's, and that was with a partial benefit of the recent price increase. Can you talk about mix over the rest of the year? It sounds like pricing is going to remain somewhat flexible with your promotional step up in the second half with some flexibility reserved there. From a mix standpoint, anything to call out as we move forward? Thank you.

Speaker 5

Yeah, good morning, Matt. From a mix perspective, we continue to have the long-term trend of the business shifting from conventional eggs to organic eggs, so there is a price-per-unit benefit that we get from that. Second quarter, we obviously had roughly half a quarter of the benefit of the price increase. Second half of the year, that will be full quarters, but then partially offset from the increase in promotions that we talked about. The last piece that benefited us in Q2 and that will fade in the second half is the shift from untracked channels to tracked channels. We talked about it on the first quarter call that we were sending fewer eggs to the breaker channel or the wholesale channel because we found more outlets in the retail channel for these eggs. With that, we get a price mix benefit as well.

There was a few points in the second quarter. Given that we are starting to lap this effort to move eggs from the breaker channel to the retail channel, that benefit will be less prevalent in the second half of the year, but it certainly was a positive impact on Q2.

Speaker 2

Thank you. I'll pass it on.

Speaker 3

Your next question comes from the line of Brian Holland with DA Davidson. Your line is open.

Yeah, thanks. Good morning. Most of my questions have been answered, but I did want to ask about the guidance, and maybe it's a bit of a philosophical question, but you typically have not flowed through all of the upside that you are realizing in your current quarter when you've taken guidance up, at least in the recent past. Obviously, there's a number of reasons for that, whether that's reinvestment or what have you. I'm just curious, because again, you've flowed through, again, dangerous doing math, me doing back of the envelope math this morning. I'm curious, if you did indeed flow through all of the upside, it implies kind of second half estimates need to at least stay where they are, come up. What are you seeing specifically to give you that level of confidence and visibility, whether it's with respect to the consumer, competitive landscape, your customers?

Just curious if there's anything you can sort of hone in on there. Thanks.

Speaker 2

Brian, good morning. I'll start. Since you used the word philosophical, that's my love language. We'll let Thilo follow up with the math. Philosophically, as you've come to know, Thilo and I, we're pretty conservative in how we operate and how we think about and forecast the business. At a high level, philosophically, this does not reflect a change in our level of conservatism, our desire to do what we say and say what we do throughout the business. This reflects our perspective on the high level of execution we're seeing as we expand the supply of eggs coming off farms, expand the capacity that we have at Egg Central Station week over week over week.

As we continue to see really high levels of consumer awareness and consistently high levels of conversion through the funnel from awareness all the way through to heavy user, the commercial engine, if you will, remains strong and has been. Our operations are now really substantially catching up to that commercial engine. It's fun to see. It's not always so exciting. It's day-to-day blocking and tackling, but it's great to see our plans come to fruition this year.

Speaker 5

You know, Brian, I would just add to that. We said after the first quarter call we wanted to give ourselves a bit more time to see the reaction in the market to the price increase. Now that we have had the time, now that we've been able to watch how retailers are reacting, how consumers are reacting, we're just getting more confident that the plans for the second half, to Russell's point, that they're working out the way we thought they would work out. With that, we thought it was the right thing to do to reflect that in the guidance, that we continue to have this strong volume growth that we had planned since the beginning of the year, and that we get some additional benefit from pricing.

I appreciate the color from both of you, and that's, I guess, directionally what I was trying to get at, what you provided in your answer there. I appreciate that. Maybe just kind of double-clicking on that, right? If we just take last year, for instance, you talked about, hey, we're going to reinvest with, we're going to pull forward, you know, hiring of people, advertising, infrastructure, all that good stuff. As we start to look forward, kind of where are we in that process of having people, having infrastructure, relative advertising levels? Are those numbers that you still think you under-index to relative to where you need to be?

Conversely, as we start to look forward, are we getting to a point where we start to see the scale benefit of those investments in over the last 12, 24 months, whatever really flow through the model as you continue to keep up this level of volume throughput? I'll leave it there. Thanks.

Yeah, I would argue, Ron, that we are starting to see scale benefits. I think we have been seeing scale benefits for quite a while now. The acceleration of hiring that we did the second half of last year after we had very strong margins in the first half, that we're starting to lap, right? There is a bit of a benefit there. Remember, we continue to invest in the business, right? I think the change in the CapEx guidance, that's one example of where we are investing in the business to make sure that we continue to deliver the high growth rate that you expect from us. There are a few additional positions that we are creating and filling, maybe a bit ahead of time. It is less of a meaningful acceleration of the hiring than what we had last year.

Given that the year is playing out pretty well, we continue to build out the organization. We have our aspiration to have a world-class organization to drive this business. That continues to require investments. That's not to say that we are reinvesting all the profit that we are generating, right? Obviously, we want to generate margin upside from scale. Margins are also at a level where we are very comfortable with the level that we are at. That gives us, I think, the flexibility to make these investments in the business to ensure that we deliver the next quarter, but we also deliver the next decade.

Speaker 3

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

Hey, good morning, guys. Thanks so much for taking our questions. First thing I wanted to ask about, you had made some commentary around being able to rebuild some of your own internal inventories. I'm wondering if you can just kind of share an update on that in terms of where you are relative to where you think you need to be in order to drive a more smooth growth rate, let's say, going forward.

Speaker 5

Yeah, great question, Scott. With inventory, if you look through the press release, you'd see that we had quite a bit of inventory building in the second quarter. We will have to continue on that path for a little bit longer. With eggs, we are just at over, you know, just over a week of inventory for eggs that come off the farm. We prefer to have two or three weeks of inventory there simply because it gives us a bit of a buffer as we go into the busy season in Q4. It also allows us to run Egg Central Station much more efficiently than the way we run it when we only have a few days of inventory, right? Expect a bit of additional buildup there.

Our butter inventory, the really busy season of the year, the fourth quarter when the country gets to really a lot of baking. We like to build up inventory going into that. We have packaging inventory that, you know, it has to grow with the business. We need to have enough packaging on hand to make sure that we can keep running. Given that we started the year with a very low inventory position, it's important for us to continue to rebuild inventory so that there will be a drain on working capital for the year. Thinking back to the earlier question about how we're funding our CapEx, even with more inventory building, we have the cash flow and we have the cash on hand to ensure that we can fund all of our CapEx projects out of existing cash without having to go to the markets in any way.

Got it. Thanks for that. The last one from me. As we think about maybe the more mainstream part of the egg market, where we've had more avian flu disruption, I know there's been what seems like some signs of normalization of supply there. I know there have been some questions about what that means for kind of, you know, pricing and shelf space and other dynamics in the egg market. I'm wondering if you can just share your updated view on what's happening there and whether or not you are seeing any impacts to your business because of that.

Thanks, Scott. It is our sincere hope that we do not see a return of avian influenza this fall and the mass slaughter of so many laying hens in this country. That's anybody's guess. I don't have any insider information about the likelihood of that returning. I will say that in our experience, the pricing of commodity eggs in the market has a very limited impact on our business, our ability to grow, our ability to attract and retain new households. I think we can all see in the scan data, sequential decreases in egg retails as supply comes back online, as the national flock gets rebuilt, as it were. Still, I think above same time last year, but coming down. That's not appearing to impact consumer demand or retailer demand for our products.

I think we're just playing in a different part of the market and appealing to a different set of consumer needs.

Got it. Thanks so much. I'll pass it on.

Thank you.

Speaker 3

Your next question comes from the line of Ben Klieve with Lake Street Capital Markets. Your line is open.

All right, thanks for taking my questions and congratulations on a good quarter here. Russell, a philosophical question for you. It's really encouraging to see the expanded farm supply network and also really encouraging to see the data point you called out of having kind of eight times the number of folks in the pipeline relative to the number of new farms that you need here in the next year. I'm curious, given the success that you've had in onboarding new folks in that pipeline, if that kind of changes your philosophy around the need for accelerator farms.

Speaker 2

Yeah, thanks, Ben, and appreciate you continuing on the philosophy theme. You know, the intention of accelerator farms, which continue to be, I think, an important part of our long-term strategy, is not as a substantial source of supply for eggs. It is to help make better the performance of, and the profitability of, and the animal welfare of our network of growing family farms. It's to try out new technologies, new techniques, and see on our dime with our CapEx, limited CapEx, what else is possible to help improve the performance of those existing farms. The reality is, if anything, ironically, it makes the work we're doing on those accelerator farms even more important because we're able to leverage the learnings in the future over more and more and more family farms. I certainly don't think it increases the need for additional farms.

I think the number that we planned, roughly 15 accelerator farms, will give us learnings that we can leverage over more and more and more family farms and improve outcomes for those farmers, for the hens, and for the quality of the products we bring to market.

Very good. I appreciate that. All right, thanks for taking the questions. I'll get back with you.

Thank you.

Speaker 3

Your next question comes from the line of Ben Klieve with Lake Street Capital Markets. Your line is open.

Hey, good morning, guys, and congratulations on a strong result. A lot has been asked already, but I would like to just focus on maybe the health of the consumer and what you guys are seeing in your data specific to Vital Farms, but also the larger food category. You mentioned that there's an opportunity with unmet demand. I was just hoping that you could maybe unpack that a little bit more as it relates to Vital Farms. Thanks.

Speaker 2

Yeah, great, great questions. We certainly see a lot of headlines and a lot of discussion in your world around the health of the consumer. I think the reality is that while there are certainly potentially macro headwinds out there, I don't know that it's having a big impact on our ability to create and communicate the value of our brand to our current and potential consumers. I think that's the critical point here. This is not a big sort of capital purchase for households. This is an under $10 in most cases, consumption item that is in reach for a lot of American households. The important part is whether we're creating and communicating enough value to warrant, to justify them spending their precious dollars on our products. That's the job at hand.

While American consumers may be facing a different set of choices about how they spend their money, our job is simply to make sure that we're one of the choices they do make. I think we've proven our ability to continue to do that regardless of the macro backdrop. What gives us confidence that there's unmet demand, besides the fact that the orders that come in from retailers aren't always getting met in full week to week, but we're getting better, is the fact that we have driven a substantial increase in consumer awareness of our brand this year. The historic relationship between consumer awareness as a preview of trial and new household penetration, that there's been a gap that's formed there, where we've driven a lot more awareness than we've captured in households. I think that's driven by our limited supply in the first half of the year.

The growth in the back half, in large part, simply satisfies the need of the households we've reached but aren't fully supplying yet.

Thank you. That's very clear. I'll hop back in the queue.

Thanks.

Speaker 3

Your next question comes from the line of John Baumgartner with Mizuho Securities. Your line is open.

Good morning. Thanks for the question.

Speaker 2

Maybe building on that, good morning. Maybe building on that theme with consumption, but looking more at met demand rather than unmet demand. When you segment your buyers by frequency, the light, the medium, the heavy, over the past few years, the proportion across those buckets hasn't really changed. I understand that as new buyers come in with household growth, that naturally keeps that light buyer portion on the heavier end. I'm curious how you think about your ability to actively migrate a larger share of buyers up that frequency curve from, you know, one unit a year to more regular purchases. Are there other non-economic factors or levers that you can address to accelerate conversion? Are there certain geographies or demos that are underpenetrated that could be naturally heavier buyers right out of the gate?

Is it more so just, you know, sort of waiting for the market to develop on its own?

Yeah, you know, it's interesting. I actually view that statistic, the fact that the proportion of light, medium, heavy, extra heavy over time has remained consistent, remarkably consistent, even as we have grown the number of households, as a real positive. I think that there's a very natural and, in essence, predictable migration over time. The number of extra heavy and heavy using households has grown in proportion to total households, year after year after year. What we found is that our primary objective is actually to continue to drive the top of the funnel, awareness and new households, because there's, again, a very natural progression from trial all the way to heavy user. You know, when I first started at Vital Farms, I kept asking that same question.

You know, surely our existing customers are our best customer, and why aren't we doing more to drive that migration to heavy use? I've learned over time that actually adding households over time is the highest and best use of our commercial dollars. We haven't come close to hitting the point at which we need to shift focus from new households to simply improving the profitability or buy rate of the existing ones.

Thank you.

Thank you.

Speaker 3

Your next question comes from the line of Sarang Vora with Telsey Advisory Group. Your line is open.

Great. Congrats on a great quarter and guidance. My question is on Seymour, Indiana. You're accelerating the production line, set up two lines, $900 million revenue. Back of the envelope, Matt suggests you need another 500 farms, roughly, to support this lineup of $900 million. Curious to know how is the curve of the family farm ramp you expect over the next two years? Is this like 2026 and 2027 could be a massive ramp of roughly 500 farms, or it could be a little longer curve over the farms and then the production line? Just curious to know how you're thinking of the Seymour, Indiana curve. Thank you.

Yeah, I appreciate that. Good morning. I do think that previewing the curve of new farm ramp-ups is, in some senses, a preview of longer-term guide. We're not quite prepared to do that. What I would say is that our current plans are to continue our current pace of adding new family farms. As we continue through this year and perhaps into next year, we may be in a better position to update further out goals for the brand and for the company.

Great. Thank you.

I will turn the call back over to John Mills for closing remarks.

Great. Thank you. Thank you for participating on the Vital Farms second quarter call today. We have a number of investor events that we will be attending in the next few months and look forward to seeing hopefully each of you there. We also look forward to updating you on our business progress during the third quarter call, which will take place in November. Thanks, everyone, and have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.