Vita Coco Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 14 speakers on the call.

Operator

Hello, and welcome to the Vida Cocos Company's Second Quarter 2024 Earnings Conference Call. My name is Corinne. I'll be coordinating your call today. Following prepared remarks, we will open the call to your questions with instructions to be given at that time. I'd now like to hand the call over to John Mills with ICR.

Speaker 1

Thank you, and welcome to the Vita Coco Company's 2nd quarter 20 24 Earnings Results Conference Call. Today's call is being recorded. With us are Mr. Mike Kurban, Executive Chairman Martin Roper, Chief Executive Officer and Corey Baker, Chief Financial Officer. By now, everyone should have access to the company's Q2 earnings release issued earlier today.

Speaker 1

This information is available on the Investor Relations section of the Vita Coco Company's website at investors. Thevitacococompany dotcom. Also on the website, there is an accompanying presentation of our commercial and financial performance results. Certain comments made on this call include forward looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward looking statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward looking statements.

Speaker 1

Please refer to today's press release and other filings with the SEC for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today. Also during the call, we will use some non GAAP financial measures as we describe the business performance. The SEC filings as well as the earnings press release and supplementary earnings presentation provide reconciliations of the non GAAP financial measures to the most directly comparable GAAP measures and are available on our website as well. And with that, it is my pleasure to now turn the call over to Mike Curban, our Co Founder and Executive Chairman. Mike?

Speaker 2

Thanks, John, and good morning, everyone. Thank you for joining us today to discuss our Q2 2024 financial results and our performance expectations for the balance of 2024. I want to start by thanking all of our colleagues across the globe for our continued incredible performance and their commitment to the Vita Coco Company and to our mission of creating ethical, sustainable, better for you beverages that uplift our communities and do right by our planet. Our second quarter results reflect that our strategies are working and we believe that our customer relationships are as strong as ever. Our priorities of driving growth in the coconut water category and initiatives to grow our share of the category are visible in the healthy retail scans in our major where coconut water remains one of the fastest growing categories in the beverage aisle delivering double digit volume growth.

Speaker 2

Year to date through end of June according to Surcona, the Vitacocco brand grew 11% in the U. S. And grew 19% in the UK. Importantly, the growth in U. S.

Speaker 2

Scans accelerated in the 2nd quarter with Vitacocco brand growing at 14%. In addition to strong branded retail growth, we experienced strong growth in private label coconut water volume shipments. Our private label strategy allows us to benefit more fully from our category growth initiatives. Our 2nd quarter branded net sales lagged the expectations we had at the beginning of the quarter with shipments impacted by short term delays in product supply due to challenges in the global ocean freight market, which Martin will comment on more fully. We believe our execution at retail was supported by inventory draw downs at distributor and retail explaining why scans are ahead of shipments.

Speaker 2

Our priorities for 2024 remain unchanged, adding households, expanding occasions, acceleration of our international businesses and innovation. Our commercial initiatives around Vitacocco Multipacks, Vitacocco Farmers Organic and Vitacocco Juice continue to perform very well as seen in U. S. Certana scans that we highlight in our investor deck, which was posted to our Investor Relations website today. Vita Coco Juice continued to perform well in convenience stores growing 27% year to date and initial signs at major mass retailers are encouraging.

Speaker 2

Our new innovation, Vita Coco Treats, a delicious and refreshing coconut milk based beverage provided promising results in our initial retail tests. The launch has been limited to date, but the retailer and consumer acceptance has greatly exceeded our expectations. We're currently evaluating our plans for next year as it relates to treats and we'll provide an update when we talk about our 2025 plans. Our international business remains healthy with strong performance in Europe led by the UK and Germany offset by weaker shipments in Asia. Coconut water remains one of the fastest growing beverage categories both in the U.

Speaker 2

S. And the UK and Vita Coco is the number one brand. During the first half of twenty twenty four, we became the number one branded coconut water in German retail scan data. We believe we are well positioned to lead and grow the category in these markets and to grow our share further through a combination of branded and private label growth. Additionally, I see very exciting opportunities in other large international markets and we're working to establish better routes to market and brand strategies to capture these opportunities.

Speaker 2

I believe that we are in a stronger position than we've ever been to accelerate our growth and with inventory improving in the back half of this year, we're setting ourselves up for what I believe will be a very strong 2025. And now, I'll turn the call over to our Chief Executive Officer, Martin Roper.

Speaker 3

Thanks, Mike, and good morning, everyone. We're pleased with our Q2 performance. We achieved net sales growth of 3% in the Q2 of 2024, driven by both Vita Coco coconut water and private label coconut water growth offset by the decrease in private label oil business that we expected and had communicated in prior quarters. The fight of cocococonutwater growth was achieved on top of the very strong 2023 second quarter growth of 23%. Our 2nd quarter gross margins were strong, benefiting from lower finished goods and transportation costs, branded promotional cadence reduced relative to prior years due to inventory constraints and from price mix effects in private label, primarily the decline in the importance of the private label oil business, which has traditionally operated on significantly lower margins.

Speaker 3

From our cost side, our finished goods costs excluding transportation costs year to date are in line with expectations. Domestic transportation costs are stable, but the ocean freight market has been volatile, particularly for containers shipped in the back half of the second quarter. We have also seen ocean carriers seeking significant surcharges over previously negotiated rates prior to their providing capacity and cutting frequency and reliability of port calls. We believe rates being quoted by the carriers are temporarily high. Currently, we are negotiating rates monthly on most routes with limited commitments to longer term contracts, where we need to guarantee capacity on certain lanes.

Speaker 3

If we see competitive offers for long term contracts that makes sense to us, we would reconsider our approach. The magnitude increases in ocean freight costs seen in the Q1 did not materially impact our P and L during the Q2. The more recent increases in ocean freight rates starting during the Q2 did not materially impact the P and L as many of these containers were not received during the quarter due to delays as transit times have increased. We expect a more significant impact to our gross margins in the 3rd 4th quarters as containers secured in May, June July are received. Our net sales performance in the quarter was hampered by supply chain challenges, which are creating short term constraints in our ability to meet demand.

Speaker 3

Since our last earnings results, we saw a significant reduction in container availability and service reliability and saw extended transit times create delays in container arrival. For instance, in the period May, June, July, we were only able to obtain containers representing approximately 85% of what we secured in the same period the prior year, even though we had planned for growth and had inventory at supplier ready to ship. Transit times on most lanes have extended 2 to 4 weeks also delaying inventory arrival. Due to these inventory delays, while it is difficult to triangulate, we estimate that we lost between 3% 5% of net sales growth through the 1st two quarters. Through June, we have not seen any material impact at retail as evidenced in our continued strong brand scans.

Speaker 3

But in recent weeks, we have seen some slowing of growth in retail scans, which suggests the inventory tightness is starting to appear on shelf. Our inventory levels as well as those of our distributors are very tight and well below normal levels. The lack of inventory in country is expected to constrain shipments in at least July August. While product is moving, it is not currently at the volumes that will us to rebuild inventories nor provide our expected level of service. Based on conversations with retailers, we believe some competitors may be experiencing similar challenges.

Speaker 3

We have maintained our production levels and have significant inventory at supply ready to ship when container availability improves. And as supply chain flow recovers, our shipments should benefit from retailer and distributor inventory build in the back half of the year. Our full year guidance range on both revenue and adjusted EBITDA is based on July container availability, transit times and ocean freight rates continuing for the balance of the year. We believe the accelerated strong category growth is a positive indicator and supportive of our long term growth algorithm for branded growth. We have secured production Thanks

Speaker 4

Thanks, Martin, and good morning, everyone. I will now provide you with some additional details on the Q2 2024 financial results. I will then provide an update on our outlook for the full year. For the Q2 of 2024, net sales increased $4,000,000 or 3% year over year to $144,000,000 driven by Vita Coco Coconut Water net sales growth of 4% to $98,000,000 while private label decreased 4% to $23,000,000 as we saw the impacts of the transition out of the private label coconut oil relationship that we had previously indicated would happen. VitaCococococococonutwater saw 1% volume increase and a 3% net price mix benefit.

Speaker 4

While private label increased 11% in volume, this was offset by price mix changes due to the coconut oil transition, leading to a net sales decline of 4%. Our Americas Vitacocococococonutwaterscan trends remain very healthy. Our shipment results in the quarter are lagging the scan trends, primarily reflecting the challenges in obtaining ocean freight containers that Martin outlined earlier. For the Q2 2024, our international segment net sales were up 7% with Vitacococococonutwatergrowth of 10%, where strong growth in Europe was partially offset by volume softness in Asia. Private label revenue declined 5%, where strong private label coconut water net sales was more than offset by the transition out of the private label coconut oil relationship we referenced earlier.

Speaker 4

On a quarterly basis, consolidated gross profit was $59,000,000 up $8,000,000 versus the prior year period. On a percentage basis, gross margins were very strong at 41% on the quarter, an improvement of approximately 400 basis points over the 37% reported in Q2 2023. These increases resulted from decreased finished goods and domestic transportation costs, branded pricing and mix effects within private label products. Moving on to operating expenses. 2nd quarter 2024 SG and A cost decreased 5% to $29,000,000 The reduction was driven by the timing of marketing investments, partially offset by higher year on year personnel expenses.

Speaker 4

Net income attributable to shareholders for the Q2 2024 was $19,000,000 or $0.32 per diluted share compared to $18,000,000 or $0.31 per diluted share for the prior year. Net income for the quarter benefited primarily from increased gross profit and decreased SG and A comp, partially offset by a higher year on year impact from unrealized FX derivatives and higher year on year tax expense. Our effective tax rate for the Q2 2024 was 25% versus 19% in the prior year quarter. This represents a year to date ETR of 23% versus 20% last year. The increase was driven by jurisdictional mix of the pretax profits and impact of higher nondeductible expense this year related to covered employees' compensation compared to last year.

Speaker 4

2nd quarter 2024 adjusted EBITDA, our non GAAP measure, which is defined and reconciled in our press release, was $32,000,000 or 22.4 percent of net sales, up from $24,000,000 or 17.2 percent of net sales in 2023. The increase was primarily due to the gross profit improvements previously discussed. Turning to our balance sheet and cash flow. As of June 30, 2024, we had total cash on hand of $150,000,000 and no debt under our revolving credit facility compared to $133,000,000 of cash and no debt as of December 31, 2023. The increase in the cash position was due to strong net income partially offset by increase of working capital of $22,000,000 and the year to date repurchase of shares valued at $10,000,000 Working capital was driven by a $29,000,000 increase in accounts receivable, which is due to the timing of customer payments.

Speaker 4

Inventory decreased $5,000,000 due to the inventory delays Martin discussed earlier. Based on our year to date performance, our confidence in the health of the category and our Vita Coco brand, we are reaffirming our full year guidance. We expect net sales between $500,000,000 $510,000,000 with expected gross margins for the full year of 37% to 39%, delivering adjusted EBITDA of $76,000,000 to $82,000,000 The guidance reflects our current best assumptions on marketplace trends and our global supply chain costs and assumes a flow of product to our market to the same rate as we are experiencing July.

Speaker 5

While we

Speaker 4

are confident in the underlying strength of our business, we are maintaining the range on net sales and EBITDA guidance to reflect continued uncertainty on the transportation cost side. For the balance of the year, we plan to adjust promotional activity to reflect expected product availability, which will allow us to deliver our gross margin adjusted EBITDA guidance, while absorbing the higher global transportation costs that we are currently seeing, which we estimate in the second half of the year to be approximately $15,000,000 of increased transportation costs on a rate per case equivalent basis over the equivalent first half rate per case equivalent. As Martin mentioned, these higher costs were delayed in reaching our P and L due to the container shipping delays and are now expected to impact our P and L in Q3 with more significant impact in Q4 due to current rate. We expect dismal in SG and A spending with full year 2024 SG and A flat to slightly increasing year on year. We may adjust our SG and A spending if we see improvements in Ocean Freight quicker than expected or if we see productive investment opportunities to strengthen the business for the long term.

Speaker 4

We anticipate our cash balance will remain healthy through the year, allowing us to fund any potential M and A opportunities that emerge, support further share buyback activity and continue to invest in our business for long term growth. And with that, I'd like to turn the call back to Martin for his closing remarks.

Speaker 3

Thank you, Kari. To close, I'd like to reiterate our confidence in the long term potential of Vitacocco company, our ability to build a better beverage platform and the strength of our Vitacocco brand and the coconut water category. We are confident in our ability to navigate the current environment and are excited about our key initiatives to drive growth. We have strong brands and a solid balance sheet, and we are well positioned to compete domestically and internationally. Thank you for joining us today and thank you for your interest in the Vitacoco Company.

Speaker 3

That concludes our Q2 prepared remarks and we will now take your questions.

Operator

Thank you. At this time, we will conduct the question and answer session. Our first question comes from Bonnie Herzog of Goldman Sachs. Your line is now open. Thank you.

Operator

Good morning, everyone.

Speaker 3

Good morning, Bonnie. Good

Speaker 6

morning. I had a question on your guidance. You did maintain the ranges. And I guess on the top line, this implies a slight deceleration in the back half versus the first half. So I guess I'm just trying to understand the drivers or expectations of that, especially in the context of what I would describe as still pretty strong scanner data.

Speaker 6

And then the comments you made about retailers rebuilding inventory levels, other than I guess the impact from the lost coconut oil volume, what's sort of driving this and maybe any color on how fast your business is growing in non tracked versus tracked channels, I guess? Thanks.

Speaker 5

I think the category is working incredibly well. The brand is working well, fastest growing category in the beverage aisle. And we've been driving that. Right now, I think the big question is how fast we could get inventory. It's less of a demand issue and a demand growth issue and more of just speed of inventory getting into the U.

Speaker 5

S. Will help us really determine and achieve the back half of the year.

Speaker 3

Yes. And I think it affects both the U. S. And the UK and Europe, right? And there are two factors, both availability of securing containers and then transit times.

Speaker 3

And we've been hit by both factors the last 3 months of extended transit times and having problems securing containers. So I think our outlook reflects what we currently know, but there's obviously a lot that can happen between now and then.

Speaker 6

Okay, fair enough. And then maybe another question, I guess.

Operator

Just I guess hoping for

Speaker 6

a little bit more color on the puts and takes of your gross margin expansion in the quarter. I assume we're talking about right now is just the lower inventory levels that you had and the delays possibly had an impact on your margins. And then could you quantify the impact that these rising rates had on margins in Q2 for us to just have some contacts for the impact we're seeing lately? And then I guess finally on that topic, to what extent did you layer on additional forward shipping contracts since your Q1 call? And where do your contract level stand this year versus the prior few years?

Speaker 6

Thank you.

Speaker 4

Yes. I'll take the first part Bonnie on the margins. In the quarter, the shipping costs had no material impact because of that delay in containers. So the spike you saw towards the end of the quarter, which we expected in Q2, had really not a material impact, which is what drove the higher margins in the quarter. And then that will start in Q3 as containers flow in.

Speaker 3

Yes. And I would just comment, when we last spoke, we were looking at a freight spike, ocean freight spike in the Q1, which had diminished rate and that really wasn't material in impact to our P and L in the second quarter. The rates that we started to experience sort of in May or started to see and sort of continued to deteriorate in June will impact Q3 and Q4, we believe, particularly if the current rates continue for a couple of months. We tried to provide some help for everybody by talking in the script on our guidance as to how much excess transportation costs on a rate basis we expect in the second half of the year versus the first half of the year to hit a P and L. We sort of did the calculation based on transportation per case equivalent in the first half and what we are sort of baking into our guidance for the second half based on what we currently see.

Speaker 3

So that I think will help you triangulate that a little bit. And as we talked about on the call, Q3 gross margins were deteriorated and then Q4 will probably represent the worst that it gets based on what we currently see, based on what we currently know.

Speaker 6

No. Yes, that was definitely helpful. But I just want to clarify something. So is there any change in any of the forward shipping contracts that put on versus, I don't know, what you kind of did in Q1? Just trying to understand that.

Speaker 3

Yes. No change in approach. I think we view what's going on in the current shipping world as an aberration and not driven by fundamental long term supply and demand. Everything we read about sort of long term capacity is the carriers are adding ships. These are the ships they purchased with all the money they made during COVID.

Speaker 3

So capacity is expanding. I think I read 1% a month, but I'm not an ocean freight specialist. So please don't quote me. I'm sure somewhere in all of your organizations, you have guys who follow us, right? And it doesn't feel to us to be any fundamental economy economic growth issues going on that would be suggesting that supply should be growing beyond the capacity that exists in ocean freight.

Speaker 3

So we view it as long term excess capacity in the market and that these rates should be temporary. And that's how we viewed it when we spoke to you last and that's how we still view it. We think there's a little bit of profit padding by the major ocean carriers going on. There certainly have been since we last spoke some port delays that maybe are reducing capacity a little bit. But again, that doesn't seem to be a fundamental driver for them.

Speaker 3

So again, they should be temporarily and I think indeed Singapore was one of those ports and that started to ease up. So we look at it as this is temporary aberration. If it goes on for a long period of time, we will think about pricing actions to cover it. But at this point in time, we have an expectation that sometime in the future, it should wane back to more normal historical levels. And because of that view, we have not entered into long term contracts at these elevated rates and wouldn't unless we thought they reflected fair value for the period of time that we were committing.

Speaker 6

All makes sense. Thank you for that color. I'll pass it on.

Speaker 3

Thanks, Mike.

Operator

Thank you. Our next call comes from Chris Carey of Wells Fargo Securities. Your line is now open.

Speaker 7

Good morning, everyone.

Speaker 3

Good morning, Chris.

Speaker 7

So you mentioned the deceleration in consumption data in recent weeks relative to the trends that we saw in Q2. I think you're describing that deceleration to supply. Could you maybe also comment on what you felt the Q2 delivery was helped by warmer weather, hydration categories being stronger in Q2 broadly and whether you're seeing some maybe timing bump in Q2 that's decelerating or is this really all to be seen as you're seeing supply challenges and this high confidence that it's really just that? So just trying to contextualize some of this weather dynamic relative to the supply dynamic.

Speaker 5

It's supply challenges. The demand is strong. I mean, I think what you were seeing in Q2 is and it's not just our brand, it's the category. Category is really mainstreaming. It's hitting a moment and it's really working.

Speaker 5

And so we're working as hard as we can to get product in country and fill the demand.

Speaker 3

Yes. I wouldn't think anything to whether we tend not to use whether as an excuse for a bad trend or a good trend. We're sitting on a category that's healthy, that's growing, and obviously quite unique in the beverage space, as Mike mentioned. And the minor variations in trends Q2 to Q1, I think we think the category accelerated a little bit, but maybe the numbers last year were weaker. We haven't gone back and locked.

Speaker 3

We just feel very good about what's going on. And I think all we're really saying is we're starting to see some signs that our inventory on shelf does not look as good as we would like and that might be starting to show up in scans in the last few weeks. But again, it's still showing growth.

Speaker 7

Okay. Okay, that makes sense. And then just a second question. Can you maybe just give us an update on your multi pack strategy broadly and perhaps just a little bit of color by channel, including club? And just how you see the multi pack strategy in general driving this acceleration or the strength in growth that you're seeing relative to say your base offerings?

Speaker 7

Thanks.

Speaker 3

Yes. I think we've continued to push distribution on March backs. We're still not where we'd like to be. I think we said last quarter that maybe now instead of a 2 year program, this is a 3 year program. We also indicated that some of the shelf sets were sort of delayed.

Speaker 3

So some of the gains that we would like to get haven't come through yet. I think as we think about this long term, we think that some of our other SKUs can also have multi packs. So we're thinking about that potentially for 25, but I'm not getting ready to announce plans and still having preliminary talks with retailers about the suitability for that. But I think our starting point is with 50% share, we're one of the few brands that can have multi packs in food and mass retailers and that this is a pretty normal progression for a beverage to go through to build with a smaller pack size and then add multi packs as drinker velocity increases and drinker household penetration increases. And so that's how we think about it and we think we're well positioned to benefit from it.

Speaker 3

As it relates to the quarter, our multipack business provided some of the growth, but our rest of the SKUs also were still growing. I think they're not quite growing as fast as they were a year ago. In the 1st year, the multi packs appeared to be very incremental, but when maybe now there maybe there's a little bit of cannibalization with the single, but it's still very healthy across the board. And I just point you to our Slide 9 on our investor deck.

Speaker 7

Okay. All right. Thanks so much.

Operator

Thank you. Our next question comes from Michael Lavery of Piper Sandler. Your line is now open.

Speaker 8

Thank you. Good morning.

Speaker 9

Good morning, Michael. Good

Speaker 8

morning. Hey.

Speaker 9

You mentioned that it sounds like how you're not contracting further out for the rest of this year. Obviously, I would assume that applies to 2025 as well. So just coming back to where you said you could price take a pricing action if needed. Can you just speak to some of how you sit with price gaps? And I think my sense is that, you've priced less than some other beverage categories, generally speaking, so that you not only are fairly well positioned versus history that way, but would theoretically have some headroom still for pricing if you needed it.

Speaker 9

But can you put some of that in context and just give us a sense for how you sit there?

Speaker 3

Yes. I think, so over the last 3, 4 years, most of the other beverage categories that are manufactured domestically have taken significant pricing. On the soda side, I think it's 40%, 50% or more cumulatively, it's quite aggressive. We did not see other than the ocean freight issues, we didn't really see the product inflation because of where we're being produced, how we're being produced, how we're growing, the economies of scale we're generating for everybody. We haven't really had that need to.

Speaker 3

So certainly the price gaps to other categories have closed over the last 4 years. We still remain a premium beverage at a premium price point, representing the functionality and sort of lifestyle that we bring to our drinkers. We did take some pricing, what was it in late 2022, early 2023. It didn't really slow down the growth that much, maybe a little bit, but then the growth kept going. So we know we have some pricing power and so we will monitor it.

Speaker 3

Obviously, we've indicated in the balance of the year that we're reducing price promotional activity. So we'll get a feel for how our brand behaves at with a different price cadence and we'll evaluate that. And but I think long term if ocean freight is stable and at historical levels, we're not thinking that we have a need to take consumer pricing up. But if ocean freight were to remain elevated for a period of time that we felt we needed to cover that, then we would. And I think the other element in the price gaps is the price gap to private label and private label will eventually follow what the costs are doing.

Speaker 3

So if ocean freight remains elevated, then private label will eventually move and that will close that gap, which will give us also some flexibility. So I think we feel if these costs stay for a while, we have pricing power, but we don't believe they will stay for a while. So we're currently sitting tight and we'll monitor the effect of our change in price cadence to understand our elasticity.

Speaker 9

Okay, great. That's helpful. And you did some buybacks earlier in the year, but it looks like you called out that there weren't any in the quarter and you're building some cash. So any thoughts on either why a little pause and or what we might expect for the rest of the year?

Speaker 3

So, I would say that we sit down quarterly and we look at what's going on in the business and our potential uses of cash both for organic growth, supporting innovation, building inventory, adding capacity and M and A. And so that's a regular cadence. And then based on that, we decide if we wish to attempt to buy back stock or not and how many dollars. And I don't want to talk about what that approach is for the balance of the year. I just want to tell you that it's a regular quarterly cycle.

Speaker 3

And the net result of that in the last quarter was we didn't buy anything back.

Speaker 9

Okay, thanks. I'll pass it on.

Operator

Thank you. Our next question comes from Kamil Gharalla from Jefferies. Your line is now open.

Speaker 10

Hey, guys. Good morning. Good morning. Here we go chatting about ocean freight again. I guess the most critical question, but hardest to answer is, what are you doing or how do you know that the supply delays won't bend the curve of demand, particularly because it seems like things are inflecting they've been growing fine, but they're growing faster now.

Speaker 10

And whenever you hit these sort of tipping points, supply becomes even more critical than maybe it would be on a normal basis. And so how are you managing that balance? And then just the follow-up on that same point is, how are you thinking about the core of your portfolio versus the contribution of innovation in exactly that sort of context?

Speaker 3

Yes. So a couple of things. We are trying to secure every container we can and even at these elevated prices, right, because we certainly believe we should be fueling the growth of the category and the brand. Because of the location of many of our facilities, we are in sub ports that maybe are a stop for a feeder vessel. And what we've been seeing is the feeder vessels haven't been coming and that we haven't been getting the stops, right?

Speaker 3

And so even if we were willing to pay and obviously we don't advertise that we're willing to pay more than the current market rates, but even if we were willing, the containers just weren't available to us. So we're aggressive in taking the containers we can. I think importantly, we're just going through peak season. We do have a seasonal business. And so these are our peak months.

Speaker 3

And we've managed to, what I would say, stay afloat to use an ocean freight metaphor. And therefore, in the balance of the year, if we're able to maintain the flows, then our situation should recover. So we have some view on the recovery and that gives us confidence in our guidance. But again, as I sort of said at the opening, obviously, we're subject to like if transit times were to get longer, that hurts us. If containers were to become less available than they currently are, that would hurt us.

Speaker 3

Or equally the other way, if transit time shortened and more containers became available, then we would benefit. So we're currently in the business of securing whatever containers we can to move the product. We have, as we indicated on the call, not shut down production because we believe those containers will become available. So production has continued. There is inventory at supplier waiting to ship.

Speaker 3

And as soon as that sort of constriction reduces, there will be a flow of product coming through, which will allow us to maybe accelerate the category, right? Just to be clear, there

Speaker 5

is a flow. It's

Speaker 3

not the flow

Speaker 4

we would like it to be right now.

Speaker 3

Absolutely a flow. Yes. Yes. Yes. And then on your second question, obviously, our priority is growing the core and it's very healthy and it's growing.

Speaker 3

And that will remain the priority in all of our activities. We have some innovation around the core both in potential new multi packs that I mentioned earlier and in things like treats that we talked about last quarter that potentially could help the core or allow Vita Coco brand to expand into adjacent categories. So that would be the 2nd priority with closely followed by things like Power Lift, which are outside of the Vitacocco family. So we're trying to grow them all. We're obviously very happy that the core is very healthy and we're doing everything we can to support that and accelerate category growth.

Speaker 3

I think importantly also on the core, we've got positive trends internationally in Europe, where both our core market, which is the UK is growing healthily, but we're seeing nice green sheets that we talked about last time in Germany, for instance. And so again, that's an area to support growth over the next 5 years where I think we've envisaged that Europe could be as large as the Americas in some point in time in the future. But what a lead coconut water brand has to take the lead in driving that and we're going to try and do it, right? So we're excited by all of that. And then the innovations are obviously secondary, but potentially could provide some value if one of them produces an unlock.

Speaker 10

Got it. And I was going to ask about international, but in the context of with what's going on with the ocean freight network, is it easier to supply those markets and find containers to get there? Or is it the same globally and it's just you get what you get?

Speaker 3

It does. So the container situation varies by lane a little bit, but I would say that Europe has experienced the same sort of issues as the America has. The lane that behaves a little differently is Brazil to America, which is a dedicated America lane. So that can behave just on its own because it's a distinct circular pattern relative to Asia to Europe, Asia to London. So I think all of our markets are experiencing similar things and to greater or lesser degrees depending on exactly where that product comes from.

Speaker 5

This availability issue has not been going on for a long time, right? The availability issue, regardless of cost, started 30, 60 days ago or so.

Speaker 3

Yes, it's stuck in May.

Speaker 5

And we think it is quite temporary and we're excited to see it start to loosen up and that flow that we talked about to accelerate.

Speaker 10

Got it. Thank you.

Operator

Thanks. Thank you. Our next question comes from Eric Sarada of Morgan Stanley. Your line is now open.

Speaker 11

Great. Thanks for taking the question. Just first a housekeeping item. I know Corey mentioned that the guidance implies or the guidance is based upon July container availability and rates. But do you need an increase in the container availability in order to rebuild inventories to your targeted level or more towards your targeted level by year end?

Speaker 11

And then just sort of a bigger picture question for Mike. Clearly, the category is having its moment. What do you think is driving that acceleration that we've seen at a time when just about every other beverage category and many CPG categories really have slowed this spring. What do you think is sort of the differentiator here? How much of a factor do you think that your different demographics are versus other NARTD or CPG categories?

Speaker 11

Thank you.

Speaker 3

All right. Taking the sort of forward looking one first, our guidance is based on sort of the July availability and pricing and transit times continuing. If that continues, obviously the year end inventory somewhat depends on what happens on the demand side. And so it's very hard to say. As it's been alluded to, if we have product, we sell more and that one's really hard for us to fathom.

Speaker 3

So I think we think that inventories at the end of the year because of the seasonality of our business, inventories at the end of the year should improve. Whether they fully reach an ideal level for next year is obviously quite uncertain, but it certainly will be better than it currently is. And then I think as we've said, we think this is temporary. So we're optimistic that we might see some improvement, but again, who knows. So that's sort of the inventory question.

Speaker 3

The category answer you want to take? Yes.

Speaker 5

I think we've been talking about this for a long time, right? Coconut water is one of the largest beverage categories in a large part of the world, the tropical world, right? And we've always said for the past 20 years that we think we can build this category in North America and eventually other parts of the non tropical world to one day be as big as it is in the tropical world just by creating the availability of the product by educating consumers on the diverse many usage occasions of coconut water and just growing awareness. And so we said for a long time, why can't this category one day be as big as orange juice? And we believe it can and we believe that we're starting to see that unfold as we've been able to really grow awareness of the category from a niche category, which it was just several years ago into a more mainstream category, which it's just starting to become now.

Speaker 3

Great. Thanks. I'll pass it on.

Speaker 5

Thanks.

Operator

Thank you. Our next question comes from Eric De Lores of Craig Hallum Capital Group. Your line is now open.

Speaker 8

Great. Thank you for taking my questions. First one for me is just a bit of a follow-up on the category growth here. So it certainly seems to have hit an inflection point or kind of critical mass here and now really mainstreaming. At a high level strategic standpoint, do you see this time as a time to sort of double down on investing in marketing or category growth?

Speaker 8

Or is this time where you can kind of take the foot off the gas a bit and sort of let this momentum continue? And then just any comments on how that sort of ocean freight is causing any tactical deviation from that strategy or not, would be helpful. Thank you.

Speaker 5

Yes. I think ocean freight is clearly creating a slight deviation from it because we can only spend so much and therefore sell so much. And as we build inventory, which we're confident we're going to do throughout the rest of this year, we think we're in a very good position for 2025 to invest further against the category and really seize this moment and grow this category and further mainstream this category as our demographics continue to grow and come into buying power both by age and demographic. And so we think we're spending appropriately now. We're always looking for opportunities to further invest where we see potential return on investment.

Speaker 5

So we're excited about where we're at. And as we build inventory, we're excited about again continuing to grow this invest in growing this category.

Speaker 8

That's helpful. And then my other question here just on Germany and kind of using Germany as an example of sort of the international opportunity as a whole. I know that you guys have discussed private label sort of almost as getting the sort of foot in the door there that sort of enables you to push the branded sales a bit more. So in Germany with Vitacocco brand now being the number one brand in the scanner data, how should we think about that the growth opportunity at this point now that you've achieved this number one position? I mean, is this kind of like an inflection point and now the opportunities are sort of continuing to open more and more?

Speaker 8

Or is this like a steady Eddie execution opportunity going forward? Just wondering how to sort of think about that and maybe if that's broadly indicative of the international opportunity as a whole, if there's anything unique to Germany to call out. Thank you.

Speaker 5

No, I think that's a good question. And speaking of Germany, I think it's a great example of where we believe we are the brand that leads and drives the category. And I think Germany is a good example where there were several brands, one specifically that had been quite successful in market, owned by a large beverage player. And we went in and we disrupted the market by creating a strong route to market, not using a large distribution partner, but in a way that we felt building a team and going direct to retailers and telling our story, starting the private label and building the brand. And we took that strategy and it's working quite well.

Speaker 5

And it shows us that this theory that we are the number one brand in the U. S, we are the number one brand in the U. K. And we can not only be the number one brand, but really consolidate and drive the category in many of these other international markets. Germany was just the first of what we think will be many and each market will be different.

Speaker 5

Some markets were in discussions with potential large distribution partners. Other markets were going to take this kind of direct approach and build our own teams. And each market will play out differently, but we think there's this opportunity to really grow the category and grow the brand in many of these developed consumer goods markets around the world.

Speaker 8

Great. Thank you so much for taking my questions.

Speaker 3

Yes.

Speaker 5

Thanks.

Operator

Thank you. Our next question comes from Jim Solera of Stephens. Your line is now open.

Speaker 3

Hi, guys. Good morning. Thanks for taking my question. Hi, Jim.

Speaker 12

I wanted to ask about some of the promotional cadence once inventory levels kind of get back to normal. It seems like in the near term, obviously gross margin headwinds from the ocean freight rate, but maybe a little bit of a benefit from lower promotion. I would assume that as inventory gets restocked up, it's at a lower gross margin just given the transport costs. Would you anticipate turning promo on as soon as you get the inventory back in to kind of maintain the healthy consumption trends? Or do you expect maybe a gas between

Speaker 3

the inventory goal and then Mike says yes, we will take a balanced approach based on what makes sense in the marketplace. But I think if you let's say we're talking about next year, right? We believe that a sensible price promotional cadence is part of giving consumers a reason to revisit the category and or try the product. So it's an important part of growing the category, as well as also helping our retailer relationships and helping us secure more space and etcetera, etcetera. So we certainly think that price promotional cadence will return to more normal levels once inventory is in good shape.

Speaker 3

Obviously, the inventory is going to be there before you have those discussions. Otherwise, you get yourself into big trouble by promoting with no inventory. So maybe there's a lag, but certainly next year, we our expectation is we'll be in a more normal price promotional cadence.

Speaker 12

Okay, great. And then if I take the assumptions that's baked in

Speaker 4

for the back half of

Speaker 12

the year, July availability and July rates, If we see ocean freight rates go up from where they are at the end of July, would that primarily be a 2025 impact or could we see that creep into 4Q as well still?

Speaker 3

So a little bit dependent on transit times. Currently, they're extended. And so let's say, an August container, depending on which lane it was on, probably wouldn't arrive much before end of October, November. And so if rates go were it to change up or down, that's the sort of timing of impact. There are some issues around whether it's recognized as PPV or whether it gets capitalized, etcetera, at the end of the year type issues.

Speaker 3

But those are the sorts of things that we would worry about or try and model if we were trying to model all this. Frankly, we're not trying to model it. We modeled continuation of current because it made life a lot easier.

Speaker 12

Yes. Okay. So really unless the impact is like next week it spikes, it probably isn't until 2025 just to time that off?

Speaker 4

Yes. Tim, there's a little bit more time, right, to Martin's point. So you're at November, but not a ton. And then the year ends quickly.

Speaker 3

If transit times were to flow up, then maybe there could be an impact, right? And if transit times were to shorten, then you suddenly get more containers than you anticipate all coming in at once. And that has some issues in a quarter, right? So I suppose the quarters could be noisy depending on what happens is what I would say. We've obviously tried to provide our guidance as best we can, but all of these effects we believe are temporary based on our understanding of ocean freight supply and demand dynamics in the long term.

Speaker 12

Okay, great.

Speaker 3

Thanks for the color guys. I'll hop back in the queue.

Speaker 4

Thanks. Thank you.

Operator

Thank you. Our next question comes from Robert Ottenstein of Evercore ISI. Your line is now open.

Speaker 13

Great. Thank you very much. A few questions. 1 and you kind of touched on it a little bit. I mean, you don't see it in the numbers, which are terrific.

Speaker 13

But obviously a lot of companies are talking about the 2nd calendar quarter being weaker than the first in terms of the consumer. Do you see any signs of that in your consumer base? So that's number 1. Number 2, no. Okay.

Speaker 3

Nothing in the data that we have visibility to.

Speaker 13

Okay. Okay.

Speaker 9

And then maybe the

Speaker 4

question came

Speaker 8

to us. Yes. Number 2,

Speaker 13

C Stores has been a weak channel. It's an area that you've targeted. Love to get kind of an update on how that's played out. And then 3rd, do you have any metrics or numbers that you can share with us in terms of increasing household penetration outside of your core demographics? Thank you.

Speaker 4

So I can maybe touch on C store. Our C store business has been very, very strong year to date and it's been one of the highlights. If you look at the measured channel, you will see that growth. And then part of that is we've expanded our package portfolio into C store and we've launched a 1 liter in some customers, which is offering a slight value, but a bigger consumer occasion and we've really seen that too well. It makes us super excited about the demand for the products in the category.

Speaker 4

So we feel really good about C store and haven't seen again connected to the consumer any real weakness in the consumer.

Speaker 3

And then from a household penetration perspective or household building households, I don't think we've seen any change to what we've previously talked about, right? Obviously, our focus is on growing households and through trial and then also growing household velocity through occasions and multipacks. And I think we're just seeing a continuation of those same trends. So there's nothing there changing that I would call out.

Speaker 13

Terrific. Thank you.

Operator

Thank you. I am showing no further questions at this time. I would now like to turn it back to Martin Roper for closing remarks.

Speaker 3

Thanks, everybody. Thanks for joining us today and thanks for participating and we look forward to doing this again in about 3 months. Everyone have a great August.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Remove Ads
Powered by Quartr
Earnings Conference Call
Vita Coco Q2 2024
00:00 / 00:00
Remove Ads