The Vita Coco Company, Inc. (COCO) Earnings Call Transcript & Summary

So good morning, everyone. Thanks so much for joining us today. It's a pleasure to introduce our next speakers. So with us today, we have Vita Coco's Co-Founder and Executive Chairman, Michael Kirban; and CFO, Corey Baker, who just joined Vita Coco in March after a 16-year career at Pepsi. Vita Coco was founded back in 2004, and they are the market leader in the attractive and fast-growing coconut water category. They have a full pipeline of products that use functional benefits with authentic and better-for-you ingredients and just recently posted a strong Q1 with the beaten raise. So I'm going to join the queue today. Thank you so much for coming. Looking forward to our chat.

Great.

Thanks.

So let's kick things off with talking about maybe the health of the consumer, especially given that elasticities really seem to have been holding in much better than expected, certainly still a challenging time. But just curious to hear from you both if you've seen any changes in consumer behavior?

I mean we've actually seen our consumer grow, right, in terms of volume is growing. We just -- we had a quarter where volume grew 15%. So it's not just price. And I think we're in a very unique position. We did take price last year, both in Q2 and Q4, I believe. But it wasn't super significant, and it was less than a lot of the rest of the beverage category. I think put us in a unique position within the beverage aisle, where the discrepancy between Vita Coco, which is premium in the beverage aisle and everything else in the beverage aisle is smaller, right? The price difference is smaller. I think we're much more competitive now from a pricing perspective, even though we did take price within the beverage aisle in general. And I think that's one of the factors that is helping us really mainstream this product and expand.

And speaking of pricing, remind me just with your guidance this year, what's implied in that guidance as far as further pricing?

So I think we're happy with the pricing we took. It's ticking quite well, as you can see with the volume increases. And we don't have any immediate plans to take further price this year, but we'll continue to watch and see what's possible and continue to see what we can do over the long term.

Are there any call outs at the next few quarters for you, just given the results you saw in Q1 in terms of phasing of your top line? Is it expected to continue to accelerate? Or I'm just thinking about comps being difficult...

So it's continuing to accelerate. Q2 and Q3 are our best quarters, always. And if you recall, Q3 and Q4 of last year, we had some inventory issues. And so I think the comps actually get a little easier, right? We grew, call it, roughly 25% in scans in Q1, and that is off of -- or 22%, that's off of roughly 25% last year. So we're going against heavy comps in Q1, Q2 also, but then Q3 and Q4, the comps are actually a little bit lighter because of the inventory issues we had last year.

Okay. So that's helpful. And then I definitely wanted to drill down on the category. Just the coconut water category, it's just been very impressive growth that we've seen over the last few years. So maybe touch upon the key drivers of that growth. And then given the -- you're the category leader, in the context of that, what are your plans to continue to drive further household penetration, which will ultimately drive category growth, yes...

Right. Take a step back to when we started this business in 2003, walking around the grocery stores in Brazil, seeing coconut water everywhere. And you would walk into a store and you would see Gatorade packed out, Powerade packed out and the coconut water that just completely destroyed, right? That was what was moving. And consumers were buying it for all these different usage occasions. And coconut water has been an important part of culture in Brazil in the entire tropical world for generations, but now it was in a packaged format. And it was used in all these different usage occasions and now it was kept in the Tetra Pak in people's homes. And we said 20 years ago, maybe 1 day, we can do that in the U.S. and it's finally starting to happen, right? So you're seeing now all these different usage occasions are what's driving the growth of the category and us as the category leader. So it was -- we started selling in yoga studios. It was like that's when you drink coconut water when you're doing yoga. And then it went to after you work out. And then it went to a meal occasion. And then during COVID, it was -- we started really honing in on the smoothie occasion. And that occasion is now, we think, roughly 30% of our consumption is huge. And then the hangover occasion. And now we're focused on the on-premise and mixing with cocktail occasion. So all of these occasions are real legitimate occasions for using coconut water, which is unlike a lot of other beverages. You have all these daypart usage occasions and so on and so forth. So that's been a big driver. We see that continuing to drive the growth of the category as we bring in households.

And is part of it also the package innovation that you've brought to the market also driving a lot of that? Because you mentioned Tetra Pak and then the evolution...

Yes. So that's been a big part of our growth the last couple of years is we started -- I would say, 3 years ago, you go into grocery store, and there was like 5 single-serve Vita Cocos. And then in a convenience store, there was maybe one if we were in the convenience store, one facing. And then we started adding new flavors and new sizes and new shapes. Now we've got all these different multipacks and we have the canned juice, which is now expanding the C-store shelf. But the multipacks in general, are driving more consumption per household, more family members are now getting into the category because it's in the home instead of whoever shopping, buying 2 or 3 units, they're buying 12 or 4, whatever it might be. And so I think that, that is helping us a lot not only just move more volume, but bring in actual new consumers and usage occasions.

And then do you think -- as you think about recruiting new users, do you still see a barrier for the consumer with this category, meaning do they understand it? Is it just once you get them to try it, you get a conversion? What is the perception of this category? Has that evolved for the consumer?

So when we started, it was tough. It's like what is this? Why is it a liquid that's clear, that [ suite ] with a little bit of a texture doesn't really taste like coconut. And so it's been a 20-year grind in trying to communicate to consumers what it is, why and when to drink it. I think now people are drinking it in so many occasions, a great one, which is growing really fast for us is mixing with powdered greens, right? Athletic greens and all these type of brands that are really taking off. It cuts the flavor. It adds a little bit of a sweetness, that's becoming a big usage occasion. And so I think people who might not have grabbed a coconut water with their sandwich at the [ deli ] 3, 4, 5 years ago might now be putting in a smoothie, might be mixing it with their tequila as a cocktail in the evening, might be mixing it with their greens in the morning. So that's kind of the key to, I think, growing consumption in households.

That definitely makes sense. And is another driver, and I know you've touched on this on your earnings call is stepped up marketing spend and that's again trying to drive awareness. Maybe touch on that a little bit just in terms of how you plan to execute on that this year, maybe quantify, if you can, the acceleration expected?

Yes. I mean if you -- for anybody who's been following our business the last couple of years have been really tough, just from a cost perspective for everyone. But our product is all imported. We're dealing with ocean freight and ocean freight rates skyrocketed, as we know. And it changed the entire economics of our business. So over the last couple of years, we've actually scaled back on marketing, we've scaled back wherever we could, and we still, in 3 years, doubled the branded business, even by scaling back on marketing specifically. This year, ocean freight rates have started to normalize. We're seeing, I think, what is playing out is one of the best margin recovery stories on the street, right? It's really great to see. And that not only helps us start to add real profitability back into the business and real cash generation back to the business, but allows us to go from really playing defense to playing offense. So we have the resources now to reinvest back into the business the way we might have 7 years ago or 5 years ago or whatever it is. But now the category is mainstreaming. So it's things like, for example, we used to have a massive summer sales execution program, where we put 50 additional people in the streets, in stores, just building displays on top of our 150 people that are already doing that. Last year, we had a policy no displays. So we had the sales guys, literally were not allowed to build displays and that hurt them. They were like, that's what they do. So now we have inventory. We have -- they're able to go out there and do these types of things. That's just the sales execution. On top of that, significantly more spent in marketing, specifically against the key usage occasions and growing those usage occasions.

And that's all already started or stepped up?

It really starts Q2 building from that...

Yes, hit the key summer season.

Yes, right.

And hit the different occasions and the different product lines.

Yes. And that's so critical. Maybe before we move into that a little bit, let's stick with the gross margin expansion in Q1. I mean it was very impressive, up year-over-year, 11 points. So maybe give us a little more color on the phasing of your gross margin improvement this year? And then I'd love to hear ultimately where you see the potential and any potential upside to gross margins or downside risk that could be.

So if you think of what Mike talked about the history, from 2020 to 2022, there was $67 million of ocean freight that hit the P&L to a staggering amount. That is starting to normalize. We generally run 2- to 3-month lag before that flows through the P&L, but we're seeing favorable rates out in the market. We've talked about it sequentially improving over balance of year. We were at about 31% in Q1. In Q1, we also talked about incremental retailer activity in Q2 that will drive strong sales in Q2, but a little bit less gross margin improvement. So you'll see that top line benefit in Q2 at a little bit less gross margin, and that will sequentially improve balance of the year. When we think about the guidance we gave on the full year margin of 32% to 34%, that range gives us some flexibility for upside and downside, but we try to give the best estimate where we think we can land. And with a stable ocean freight environment, we think we are a little bit more accurate than maybe previous last couple of years.

And I know it's early, but any visibility on next year in terms of I don't think you're locked in as much as you used to be as part of it. But any thoughts on where gross margins could trend in the next 1 or 2 years?

So we haven't provided guidance on next year, and we don't really have a good view other than we see ocean freight being stable at this point. We'll see how the market develops. But our longer term are to get closer to 40% on the gross margin line not next year, but over time, we think we can get there.

That's still doable. Yes, there's a leverage from the top line.

Yes, there's a leverage from the top line. There's continued sequential improvement on gross margin just from ocean freight, right? Because like Q1, we were selling product that we imported in Q3, Q4. So it's still getting better and better and better throughout the year, even into next year as we start to lap Q1 and Q2 of this year. In addition to that, I think one of the big drivers is the growth of the branded business as compared to the private label business. When we went public, the private label business was high 20% of our total revenue. And over time, we see that coming down significantly, not that private label isn't growing, it is, but the brand is just growing so much faster and the gross margins are obviously better on the branded business.

Right. Yes. And then just thinking about the supply chain, and I know you've normalized the inventory levels, but just wanted to verify there are no call-outs or potential risk there? And what does the inventory look like ahead of the important summer selling season?

It's -- I mean we're in a really good place, better than we've been in years. I think you saw that we had quite a lot of inventory coming into the year. There are no major supply chain issues now or in the foreseeable future. It would...

I know [ it's going that way ].

And -- but certain items are selling faster than other items. So there's always the chance that one item is challenged for week or weeks while we're repacking or whatever it is or shipping and product. But we're in a really good position for the summer.

Team is very excited to have inventory and marketing and sales execution.

Yes, we haven't had everything firing like it's like we're really -- yes.

Okay. And then just sticking maybe with the summer and the pricing comments that you made earlier. Are there any thought as to stepped-up promos in terms of sort of the reinvestments that you touched on? Is that a form of also driving...

Yes. I think we'll be promoting at historical levels, slightly more than last year, possibly because we have the inventory to do so. But nothing crazy. I think you'll still see the pricing price flowing through throughout the year over last year. And we expect to see volumes continue to improve and increase.

Okay. And then you already talked about the marketing spend. But I believe you've called out SG&A growth to outpace your sales this year. So can you give us a sense of the expected magnitude and then maybe the cadence of that spend? I'm thinking about some of the innovation, maybe coinciding with that, if that's logical.

Yes, there's a few drivers, but sales and marketing spending are the biggest and the people associated with driving the incremental growth. And we said it will grow faster than the top line. The phasing will depend on when that lands in the market. So we haven't provided guidance on that, but it will grow full year ahead of the top line.

Okay. And innovation, I know [ of some is there ] anything that you haven't announced that you have plans to roll out this year? Or have you...

We're doing a lot. So you've seen, we've talked a lot about Farmers Organic, which is our organic line, which is now rolling out across grocery, specifically and NSF, doing really well, and that's actually margin accretive, right? And then our canned coconut juice, which we launched in C-store in a test last year now rolling out nationally this year, is a game changer from a visibility standpoint in C-store. I was in L.A. last week and just walking around looking at stores going from C-store to C-store to C-store. And historically, you go into C-stores, and we had 1 maybe 2 facings. Now everywhere I went, we had 3/4 of a shelf, if not a full shelf. And so it's really changing our ability to get more and more space, which just drives visibility and therefore, drives volume. And then those are 2 of the big ones. Powerlift is something that we're working on. We're really excited about. It is a protein infused water that we're -- if you think about somewhere between sport drink and a protein shake. So it's like a chuggable protein shake. We're really excited about it. It's in Texas. It's doing really well with KDP. And then we have a lot of other little things we're testing here and there. And we're excited about the fact that we have this core brand that's working really well and we can continue to expand off of the core with size of shapes and formats like multipacks with other products like Farmers Organic playing in the premium segment, cans playing in more of the value segment. And then other things around the coconut, which is exciting.

Yes. And you touched on it and I wanted to ask about is KDP, the relationship and the distribution. Maybe talk a little bit more about that and how important that's been, as you've mentioned, especially in the C-store channel. And some of the distribution gains that you've seen have been great, but where do you still see opportunity?

Yes. So if you think about it -- so the KDP partnership is great. We've been partners for over 10 years. I would say over the last few years, since [ Keurig ] merged with DPS, it's been a game changer in terms of just the partnership. And yes, it's a total change, real difference. And it's working well. We brought them all of our new items, and we're getting them to market. So if you think about the can juice we were talking about, I think we've -- it's early days. I think we're at 17% ACV or something like that. It's just launched over the last months. Multipacks, we're getting them into grocery, but still we're only at roughly 40% ACV on the 12 pack and the 1-liter 4 pack. So these items have a long way to go as we continue to build them out over the years ahead. But the partnership has been great, and they continue to execute. And I've been talking a lot lately about Ocean Spray. Ocean Spray as a brand, you walk into the grocery store, and you see this block of so many different flavors, sizes, shapes, formats, and they just have this whole block in the grocery store. This is a brand that has 4x the distribution we have in grocery, and they are 4x the size we are. There is no reason over time by continuing to bring these new type of sizes and formats and flavors and everything else the market, we can't create a block like that for coconut water. And that's the objective, and we think that we can get there, and we're just continuing to just chip away at it.

That makes sense. And then what about just sticking on the shelf and the [ cooler spring ] resets that have happened? How did you guys make out in the spring resets. Did you gain incremental...

A lot of incremental space.

Quantify? Or can you...

So we talked about a number last year. And every call, you would ask, how are we tracking to that number, and we actually beat that number last year. It was 25,000 new points of distribution, and we actually exceeded it. I'm challenging the team this year to exceed last year's growth, even on a percentage basis, and I'm pretty confident we'll get there.

That's great. And then multipacks, definitely a big driver of your growth. They sound incremental. So give us a sense of the impact you're seeing from multipacks on your business? And then I think you've already talked about this, but I just want to hear if you've seen any cannibalization on singles.

Yes. I think we're finally growing up and becoming a real beverage company, like amazing. They actually sell multipacks at grocery stores. This is something, again, we didn't -- we've been building a business with single serves on the shelf in the middle of the Center Store Grocery, beverage aisle. And over the last couple of years, expanding multipacks has given us the ability to operate like a real beverage company. You try to get the single serves and the cooler in the front of the store, some single-serve options in the mainline aisle, but the volume in grocery comes from multipacks for beverage companies, whereas the on-the-go consumption, C-store, food service, whatever it might be, is more single serves. So we've actually seen little cannibalization on single serve, surprisingly, and incredible growth on multipacks. We really think that it's driving significant additional consumption because every grocery item in the store, you buy 6, 12, 18, 24, whatever it is, and people were buying 2 or 3 Vita Cocos. And now they're buying 12, and they're just -- it's in your home and they move. I see it in my own home, like, it's like...

It's there...

Yes. You've got a couple of them. It's like to go and then you go, oh, I'll get it next time I go to the grocery store. Now at the same time period, you're moving through 12.