Vital Farms, Inc. (VITL) Q3 2026 Earnings Call Transcript

Operator: Good day, and thank you for standing by. Welcome to Vital Farms Third Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand it over to your host, Brian Shipman, Vice President of Investor Relations. Please go ahead.

Brian Shipman: Good morning, and welcome to Vital Farms Third Quarter 2026 Earnings Conference Call and Webcast. Joining me today are Russell Diez-Canseco, Vital Farms' Executive Chairperson, President and Chief Executive Officer; and Thilo Wrede, the company's Chief Financial Officer. By now, everyone should have access to the company's third quarter 2026 earnings press release issued this morning. Today's discussion will include forward-looking statements within the meaning of federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Such risks and uncertainties are described in today's press release and our SEC filings, including the Form 10-Q for the quarter ended September 27, 2026, that we filed earlier today. During today's call, management will also reference certain non-GAAP measures, including adjusted EBITDA and adjusted EBITDA margin. Please refer to today's press release and presentation, each available on the Investor Relations section of our website for a reconciliation to the most directly comparable GAAP measures. The presentation of these non-GAAP measures is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP. After our prepared remarks, we'll open the line for questions. As a reminder, please limit yourself to one question, plus one follow-up so that we can hear from as many participants as possible. Now, I'll turn the call over to Russell.

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. They are the best in the business, and it is my privilege to work alongside them in our efforts to improve the lives of people, animals and the planet through food. I'm going to keep my remarks simple today. I'll start with my latest view of the drivers of our performance, then review Q3 results and the factors informing our updated outlook. Finally, I'll touch on the path from here and our long-term priorities. Thilo will then take you through the quarter and our updated outlook. First, what drove our performance this year. For the better part of 3 years, avian influenza kept conventional eggs scarce and expensive. This compressed our price gaps, creating a lot of additional trial. In 2026, category supply came back. Store-brand egg prices dropped back to pre-avian influenza levels of about $2 a dozen and the gap between our price and the rest of the shelf went back to where it was in mid-2023, the last period when the market was fully supplied. We believe these market conditions contributed to a decline in purchasing in 2026 by many of the incremental households we attracted due to the compressed price gaps of 2024 and 2025, and that has been the main driver affecting our performance this year. Earlier this year, we talked about targeting a price gap of $1 to $2 to other outdoor-access brands. We now believe that the bulk of this year's drop in velocity versus last year was driven by light buyers trading back down to private label as opposed to increased branded competition attracting our households. Across the category in MULO+, with the exception of one highly promotional retailer, our premium over outdoor-access brands is about where it was in the third quarter of 2023. Our current pricing strategy is, therefore, no longer focused on narrowing price gaps to branded competitors. Next, our third quarter progress. With that background, let me talk a bit more about the third quarter and the progress we made against our operating priorities. We said the second quarter would be the trough. Third quarter net revenue was $182.2 million, up 10% from the second quarter. Adjusted EBITDA was $1.5 million against a loss of $26.6 million in the second quarter. Gross margin was 23%, up more than 16 points. We said that farmer contract amendments would bring supply closer to retail demand. These amendments are in place and the volume we sent to the breaker and wholesale channels fell 59% from the second quarter. That was the single biggest driver of our margin recovery. We said we would take $6 million to $7 million out of our annual SG&A run rate. We did it. We said we would be at an average of 150 to 160 shell egg TDPs for the full year and 170 to 175 shell egg TDPs in the fourth quarter. Year-to-date through the third quarter, we averaged 152 (sic) [ 162 ] in Circana MULO+ and the latest weekly reading for the week ending October 25 was 176. The distribution we told you about is on the shelf. And with that, we posted a record 7.2% dollar share and a record 2.3% volume share of shell eggs in Circana MULO+ at the end of the third quarter. Finally, we protected the balance sheet. The Vital Crossroads project is on track to pause once the building is enclosed. This year's capital spending is expected to come in at $70 million to $75 million against the $140 million to $150 million we planned in February. That said, 3 things changed recently about how we look at the fourth quarter of 2026, and we are, therefore, reducing our full year guidance to about $730 million in net sales. First, seasonality of demand. We planned for the fourth quarter to build the same way as prior years across the egg market, resulting in higher demand for conventional eggs. The first weeks of this quarter have suggested that the pattern might be different this year. Our orders are not rising the way they usually do at this point in the year, and what we hear about the category suggests the same. That may be because retailers are keeping inventory lean. It may be a change in consumer behavior that we can't see yet. Either way, we are no longer assuming a strong holiday lift. Second, new distribution. We got the distribution we said we would get, and it is now on the shelf. But some of it arrived a few weeks later than we planned, reducing the number of selling weeks in the quarter and pushing back the growth curve that followed. And as Thilo will discuss, we are taking a more conservative view of the near-term velocity contribution from that newer distribution. Third, market pricing. In a normal year, conventional egg prices firm up into the holidays, which narrows our price gap with conventional eggs and helps with velocity. We no longer assume that. We are planning for the rest of the market to stay where it is. Together, those changes reduced our fourth quarter revenue expectations. Thilo will take you through how these 3 changes flow through to revenue and adjusted EBITDA. Now, I want to turn to why we continue to believe in our long-term potential. Last year, narrower price gaps attracted incremental households to our products. Purchasing by those incremental households has declined as price gaps have continued to return to pre-AI norms. Thus, this year's comparison to the prior year period reflects differences in category pricing and household purchasing patterns from last year. A comparison to the third quarter of 2023, the last time the market was unaffected by avian influenza, offers a helpful reference point through which to view our performance. The third quarter of 2023 was the last third quarter with a normal supply of eggs and the gap between our price and the rest of the shelf was about what it is today. Against that quarter, our net revenue in the third quarter of 2026 is up about 65% from $110 million to $182 million. Our velocities are about the same as they were then on almost 60% more points of distribution. Our dollar share of shell eggs went from 4.7% to 7.2%, and we had 19% more households than we did then. The brand came out of the 2024 to 2025 market distortion much larger than it went in at the same price premium and with velocity holding. That speaks to the power of the brand we've built. And the category we built is still outgrowing the broader egg market overall. The share of American households buying pasture-raised eggs in any given quarter has roughly doubled since 2022, and it held close to last year's level even as prices across the rest of the category fell. We are on track to add more than 25 TDPs this year, our biggest gain since the IPO. We expect volumes from that new distribution to continue growing over time. We plan to continue growing the Vital Farms brand sustainably over time by building velocity on the distribution we have, adding distribution where it makes sense and bringing new households to the brand with our unique voice and clear points of differentiation. Before I hand it to Thilo, I have one more update to share. In light of the impact the evolution of the consumer and category environment has had on our 2026 performance, we are withdrawing our 2030 financial targets. Our view of the size of the opportunity has not changed, and we recognize the importance of a clear long-term road map for investors. For now, our priority is to concentrate on the near term and executing on what I've described today. We expect to revisit long-term targets once we have made more progress on expanding margins and improving profitability. With that, I'll turn the call over to Thilo to take you through the third quarter and our updated outlook for the remainder of 2026.

Thilo Wrede: Thank you, Russell, and good morning, everybody. Let me go through the financial results for the third quarter. As Russell noted, the third quarter represented a sequential improvement from the second quarter with net revenue of $182.2 million. However, this was a decrease of $16.8 million or 8.4% on a year-over-year basis. The decline was primarily driven by $14.3 million from lower price/mix and $2.2 million from lower volume, excluding breaker and wholesale. Breaker and wholesale channels contributed approximately $0.3 million to the decline as a substantial increase in volume was more than offset by lower pricing. Gross profit was $42.1 million or 23.1% of net revenue and an improvement of more than 16 points from the second quarter. The sequential improvement primarily reflected lower breaker volumes and associated supply management costs as well as improved retail volume and mix. SG&A was $38.1 million, down $6.3 million or 14% from the prior year period. Going forward, we continue to expect our May and July efficiency actions to reduce our annualized SG&A run rate by approximately $6 million to $7 million. Shipping and distribution expense was $11.7 million compared with $9.2 million in the prior year period, primarily reflecting higher fuel rates and unfavorable line haul rates. Adjusted EBITDA improved to $1.5 million from a loss of $26.6 million in the second quarter, reflecting the sequential improvement in the adjusted EBITDA we expected coming out of Q2. The significant driver of the sequential improvement was the progress we made in managing supply. The pharma contract amendments we discussed last quarter are in place and are giving us greater control over supply even as industry supply remains elevated. The volume we sent to breaker and wholesale channels declined 59% from Q2. Turning to capital allocation and our balance sheet. We ended the quarter with cash of $84 million and $117.6 million of outstanding debt on the balance sheet. Capital expenditures were $14.3 million in the quarter and $51.7 million year-to-date. At Vital Crossroads, we largely completed the work needed to enclose the facility during the third quarter. We expect to halt construction after completing the framed walls and roof to protect the facility against winter weather. This planned pause is reflected in our reaffirmed full year capital expenditure guidance of $70 million to $75 million. We will continue to evaluate the timing of future construction based on our supply needs. Looking ahead, we are updating our full year guidance to net sales of about $730 million compared with our prior outlook of $775 million to $800 million. As a result of the reduction in our revenue outlook, we are lowering our adjusted EBITDA outlook to about negative $15 million compared to our previous outlook of a $0 to $10 million gain. We remain focused on the commercial priorities Russell outlined and maintain tight cost control across the organization. We expect a modest sequential gross margin improvement in the fourth quarter, benefiting from lower breaker volumes and associated supply management costs and better volume leverage. Our updated full year outlook reflects a continued sequential improvement in net sales and adjusted EBITDA in the fourth quarter and is grounded in the performance we are seeing today and several specific operating assumptions for the fourth quarter. First, distribution continues to track in line with our expectations. Based on latest Circana MULO+ data, average selling TDPs are now above 175 compared with our prior expectation of 170 to 175 for the fourth quarter, and we expect them to stay at this level. However, we are taking a more conservative view on velocity contribution from newer distribution. For the business overall, our outlook assumes shell egg unit velocity of approximately 25.9 EQ units per store per week per item in the fourth quarter compared with 25.3 in the third quarter in Circana MULO+. The modest increase reflects more frequent promotional activity, offset by a full quarter of new distribution that for now is slower turning. On a dollar basis, we assume shell egg retail velocity of approximately $200 per store per week per item compared with approximately $205 in the third quarter, reflecting the impact of that increased promotional activity. Second, we are assuming promotional performance generally in line with what we have seen from our most recent promotions. Third, we are not assuming a seasonal uptick in velocity or pricing changes. Recent industry indicators, including [ Expana ] commentary, have not shown the seasonal pickup we would typically expect at this point in the year. We're also seeing retailers buying closer to their immediate needs rather than building inventory ahead of the Thanksgiving holiday. Given those signals, we believe it is prudent not to assume a seasonal uptick in the fourth quarter outlook. Lastly, we are assuming that we will generate $3 million to $4 million from butter net sales in the fourth quarter, selling out the remaining inventory of bulk and finished goods butter. On the supply side, we assume some excess volume will continue to be sold through breaker and wholesale channels, and we are not assuming an improvement in breaker pricing. Taken together, these more conservative operating assumptions provide the basis for our updated outlook. With that, I will turn the call back to the operator, and Russell and I are happy to take your questions.

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

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

Russell Diez-Canseco: Thanks, Scott. Yes. Again, what I think we've learned over the past year, but it's especially clear to us as we have had several months since a normalization of supply in the marketplace is that our pricing is actually not excessively high. Our pricing is actually, again, where it was the last time the market was fully stocked, was fully supplied as measured as a multiple of private label eggs. And with that understanding as well as the understanding of which households and therefore, velocities appear to have left us this year and why and where they went, we have a better understanding of sort of the underlying business when you are able to isolate the impact of bird flu over the last couple of years. So earlier in the year, when we were still trying to understand why our performance was lower than we had projected, while we were trying to understand why we were facing a year in which our comps were negative in terms of sales and why our velocities were down in a lot of our retailers. We looked at the evidence and the evidence at that time said, well, our price gaps have widened and they've widened to branded competitors. They seem to be sort of losing less of their business and in some cases, in some periods, gaining business. And our assessment was it's a more competitive environment, as I think we heard from many of you over the course of the last several quarters, the questions about seemingly increased competition and more aggressive pricing in the marketplace. And we responded in kind. What we've since come to understand based on, again, several more months of both scanner data, Circana data and household numerator data, which takes a lot longer to unfold, is that our pricing multiple to private label is again back where it was in the middle of '23 when the market was last fully supplied. And our understanding is that the majority of the volume and households that left us didn't get coached by a direct brand competitor, but rather went back to the private label products they've been buying before bird flu. So going forward, I think our approach is much more like what we did in a normal environment, which is this is a street-level competitive environment at retail, and we need to be competitive everywhere we play, but we also need to be smart about where investments in promotions and investments in price makes sense for the company and the brand. And we also historically have used promotions not to drive volume as so much of the industry does but rather to drive trial. And so it's really kind of going back to basics of what has worked for so many years in building this brand to the success we've had to this day.

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

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

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

Jon Andersen: I was wondering if you could talk a little bit more about the guidance revision top and bottom line, about a $55 million reduction in the top line, $20 million in the bottom line. And I'm just trying to understand there how much -- it looks like the majority of that is just the bottom line revision is related to the sales assumptions and adjustments you've made. But is there a component here, which is also related to gross margin or cost of goods? So if you could parse that for us a little bit. And then on the kind of go forward, as you think about how to compete in this kind of evolving category, I think you've made some decisions and announcements recently around innovation and types or formats. Could you share your thinking around that? And what might be changing in terms of your assortment over time and why and how that might allow you to reach more households over time?

Thilo Wrede: Jon, let me start with your question about guidance, and then I'll let Russell talk about the innovation. On the guidance part, Russell laid out that for the most part, fourth quarter, there are 3 drivers for that, right? Seasonality of demand, we don't see it coming in quite as we have done in prior years. Related to that, but separate is that normally, we would assume a pickup in pricing in the fourth quarter because of seasonality. We're not baking that in anymore given what we are seeing in industry data and in our own quarterly data and then the delayed placement of the new distribution that Russell just talked about. So those 3 drivers are really what are driving the revenue reduction in fourth quarter. And as you pointed out, that then trickles down to EBITDA. Because this means that we have less volume, there's a bit less volume leverage that we get in gross profit. There is probably a bit more volume that might go to the breaker in the fourth quarter than what we had previously modeled. So in the past, we have talked about wanting to have an exit margin, gross margin that starts with the 3 by the end of Q4, given the lower volume forecast that we now have, that is probably less realistic. But it is really these distinct factors that drive the guidance reduction. I'll let Russell talk about the portfolio piece.

Russell Diez-Canseco: Yes. Good morning, Jon. So we announced a little over a week ago a very limited pilot of a new product, which is in the free-range egg category. We think there's a lot of room to innovate within free-range to do what we've done with pasture-raised, which is to raise the standards in that part of the egg category. And we look at our sources of growth over time. And while we're just 2.3% of the volume of egg consumption in MULO+, which is a record for us, and we're certainly excited about 2.3%. We see so much more opportunity in front of us. We also understand that the vast majority of egg purchases in this country are below $5. And so we want to start to create the opportunity to reach an even larger number of households in the country. We believe that this opportunity may add as many as 30-plus million households to our potential market as we look to meet the needs of more and more American households. So again, this is a very limited trial. I certainly don't want to raise expectations about how this might impact our growth trajectory over time. I think it's very consistent with our approach to testing and learning.

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

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

Russell Diez-Canseco: So thank you, Ben. Great to be with you this morning. ECS is running very well. We've had incredibly high uptime and fill rates over the last several weeks. And I think we've seen that team really come together in a powerful way to both implement, adopt and optimize that third line and how we operate with 3. We've had wonderful improvements this year in retention and average tenure, et cetera. I think that team is really maturing and bringing a new level of sort of consistency and reliability to what they're doing, which has been terrific. And so I think we -- our customers have certainly commented and given us gratitude for the high fill rates and the consistency of our operation, which is always a nice validation. We've said historically that the run rate capacity of that facility is north of $1 billion in net revenue. We are -- we've taken prices down a few percent this year. So maybe we're a little closer to the $1 billion instead of far north of $1 billion. And the thing to keep in mind about the $1 billion is that is run rate, and we do have some seasonality typically in new distribution that comes in the back half of any given year, which suggests that we would anticipate wanting additional capacity in advance of the back half of the year that exceeds $1 billion run rate, so to speak. So before we hit an annualized $1 billion, we probably need additional capacity is how we think about it. Yes, we work very hard on the farmer question with our farmers, and they've been wonderful partners throughout this. In fact, it's times like this when our relationship with our farmers strengthens when they see how we treat them at a time when we need fewer eggs versus how the industry overall tends to treat farmers when they need fewer eggs. We've had a remarkable number of calls from banks about opportunities to pick up farmers that others have abandoned, which is, unfortunately, I think, just the status quo in the industry and one of the things that really differentiates how we show up. And I think the benefit of partnering with farmers instead of walking away from them is the stability and the consistency of our supply chain. As we've seen over the last sort of 3 years, there are boom and bust cycles in the broader egg category as we're building a brand for the long haul, stability and supply chain with the right partner farms is job #1. And so I think our farmers are appreciative that we're being so thoughtful and respectful in honoring our commitments to them. As for rightsizing production, we have had more than enough farmers accept our amendments to adjust supply to where we would like it to be. Now in any given month, supply may or may not be perfectly aligned with demand because we're watching the scanner data just like you all are. But it's much more closely aligned than it was in Q2, and we've really done the bulk of the work to get where we want to be.

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

Thilo Wrede: Good morning, Ben. I think first thing to think about is what are our supply management costs, right? We put into our presentation this morning that breaker was about an $8 million impact to EBITDA this quarter. It was $21 million impact to the second quarter. So you see the progress that we are making there simply by being able to manage more of the oversupply with the contract amendments that you just talked about. That progress is supposed to continue. As Russell and I already mentioned, there might still be breaker volume, excess breaker volume in the fourth quarter, but we intend to make further progress there. So that is one swing factor for next year to think about. I think the next one is volume leverage. We've had these delayed distribution placements that is bringing down fourth quarter relative to what we thought about before. But the distribution, the velocity for the distribution that should continue to ramp up. So there is -- that should be a positive swing factor for next year. And then we continue to look at our cost structure. We've talked about the $6 million to $7 million run rate improvement in SG&A. We talked in the past about the feed project where we plan to reduce our feed cost by a meaningful amount. That is not benefiting Q4 at all yet. So that will be a positive impact for next year. And then last one is the butter exit. We still anticipate butter revenue this quarter, butter is very margin dilutive. And so as we should be out of butter by the end of the year, that will then be a further margin improvement for next year. Those would be the puts and takes I would point to right now. We're not in the game of giving guidance yet for next year, but those are puts and takes I would point out.

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

Benjamin Klieve: Just a couple related to cash flows here in the fourth quarter. First of all, I want to confirm here that your expectations for the Indiana facility, the kind of first phase of the Indiana facility, the CapEx associated with that will be fully contained within this fiscal year or if any is going to bleed into next year? And then second question is around the cash balance of $85 million or so that's on the books today. Certainly, with the elevated CapEx still for Indiana, looking for negative free cash flow in the fourth quarter. But I'm wondering, Thilo, the degree to which that elevated cash balance here is kind of a bias to conservatism and just trying to have as much flexibility as you can on the balance sheet versus an expectation of negative operating cash flows beyond what we're expecting with the CapEx levels.

Thilo Wrede: Yes. So on the first question, Ben, the majority of the CapEx of closing out or enclosing VXR is happening this year. There might be a bit of overflow into next year depending on when we receive the invoices and when the due dates are and so on. So when the cash leaves the door, there might be a bit of a carryover into next year, but it's majority this year. On the cash balance, I think as we announced on the second quarter call, when we announced this new loan structure, we wanted to make sure that we have a healthy cash balance so that we don't have to have a conversation with banks again in the coming quarters. And so the $80 million that you just referenced is simply a factor of the loan that we took out, the reduced spending that we have this year, but also a reflection of the fact that over the life of this loan, it's a 3-year loan, we might restart construction at VXR, we want to have the flexibility to do that. So this is -- the cash balance right now is more an insurance policy than to signal one direction or the other, how we think about operating cash flow next year or CapEx spending for next year.

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

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

Russell Diez-Canseco: Thanks, Gerald. Good morning. So the first thing I would say is that if there's one thing that I think this year has taught us, it's to really be intentional about the way we support growth that we see in the marketplace and to really unpack the sources of that growth to make sure that we aren't building out our capacity, our farm network for what may be less than enduring components of our growth. And so that's the main thesis for our remarks today, which was, hey, we had nearly 3 consecutive years of bird flu in this marketplace, which is really unprecedented, at least in the data we could find. Historically, it's typically been one season as we saw in the early '80s in Pennsylvania and then later in 2016, not 3 consecutive years. After the second consecutive year, we started to incorporate some of that elevated growth into our longer-term plans and expectations. And as we've seen this year, that incremental growth, we were able to start to quantify it as we headed toward this call because we had enough months in a row of some of those light buyer households going back to the private label products they bought before bird flu compressed the prices. So the first thing I would say is we're going to be much more circumspect before racing to add capacity even when customers are demanding it because we recognize now that some of it may not be enduring. So that's number one. We want to support this company and the growth of our capacity and supply to support the long-term path for our trusted brand. And we've got a much clearer picture of what that underlying very successful and enduring brand delivers. The second part is those farmer amendments, I want to be clear about what they are and what they aren't. The farmer amendments simply are an agreement that we may adjust with some cost to us, the length of a farmer's flock, the length during which it produces eggs, which gives us some additional precision in adjusting supply down if we want it. And we took advantage of those -- essentially those options to reduce supply this year to much closer to what we're seeing demand come through our orders to retailers and our estimates. Going forward, those amendments are not coming. So those farmers are still in our network. They're still planning to continue farming with us when they come back into the cycle at our -- consistent with our planning. And we have an added advantage of having those farms available to repopulate with a new flock of birds ahead of schedule if that's what we want to do, again, in line with our long-term growth trajectory. The caution I would offer is that while a bird flu outbreak and the resultant contraction in industry supply may provide a boon to conventional egg producers, we are planning for that. So the upside for us will come in a much more muted way from that potential boom, which is we'll see potentially higher breaker prices for the projectable waste stream of eggs that we create in good times and bad in this category and perhaps a pullback on promotions because they're certainly not needed when there's a shortage of eggs. I would not add a speculative component of capturing upside from a short-term supply contraction.

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

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

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

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

Russell Diez-Canseco: Thanks, Rob. Good morning. So it's interesting. We have over several years, and you've been following us for several years, had a relatively strong conversion rate over time from awareness to trial, trial to repeat, repeat to loyalty. And that speaks to, I think, the quality of the product, the power of the brand, the differentiated experience and the differentiated approach to what we do. In different years with different sort of sources of that new trial, some of the years have been more heavily weighted toward just organic growth through our traditional distribution and awareness generation and trial generation efforts. Some of the years have been boosted by things like stock-up shopping during COVID and the price compression that's come from bird flu over the last few years. And so there's a -- our understanding is that in those accelerated years, when there's a macro shock, some of that incremental trial can be transitory. And that -- I think that makes common sense. That kind of makes sense to me if you didn't come to us through a journey of discovery, but came to us because we were relatively affordable on the shelf suddenly. In terms of a strategy to target heavy buyers, we have a record high buy rate in terms of -- for people that buy Vital Farms eggs, and we are at a record for our company in terms of the share of their egg spend that goes to us. And it's not because we've particularly targeted moving people from medium to heavy or heavy to heavy-plus. I think the risk in focusing on that, at least for our brand, might be that, again, we're potentially heating up volume in a short-term way instead of earning it purchase by purchase in a long-term way. So we're certainly flexible and nimble and always learning, but I wouldn't say that we currently have a strategy to shift our focus to heavy buyers. We continue to attract millions of new buyers every year, and that's an important part of our ongoing strategy.

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

Russell Diez-Canseco: Well, I think it would be a problem if you assume the same cost structure at $5 as we have for pasture-raised eggs. This is a different kind of egg, and it actually has different economic, and it has the potential for different economics over time. And so if you assume that it's the same egg and we're just pricing it differently, then certainly, it would be a potential problem as you shifted the mix toward it. What we're doing at this point is testing consumer reaction to it in a very limited way, in a way that we don't believe will have a material impact on our results in 2027 to prove what consumers want to help us understand, what they want out of and the extent to which they're receptive to our differentiated approach to producing it in the way that they have been to our differentiated approach to producing pasture-raised eggs with more transparency with farms in a more temperate climate and just with a very high level from my perspective of execution and commitment to what we're doing. If they're receptive, then our job is to continue to evolve the operating model to make those margins very attractive to us. On paper at least, there's no reason the margins can't equal or better the margins of the pasture-raised business at a certain scale with a certain approach. But that's far in the future. What I would say is we wouldn't be exploring it if we didn't think there would be a healthy and attractive business opportunity from it over time.

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

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