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

All right. Good afternoon, everyone. Thanks for joining us today. So it's a pleasure to introduce our next speaker. With us today is Vita Coco's Chief Executive Officer, Martin Roper. Martin has served as Chief Executive Officer since May 2022 and has been with the company since 2019. 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, including some alcohol innovation, that fuse functional benefits with authentic and better-for-you ingredients, and just recently posted a strong Q1 with a beat and raise. So thank you for joining us today.

So Martin, hoping you could maybe start with a big picture and talk about the health of your consumers recently. On your last earnings call, you mentioned that some consumers are shifting to channels with a higher private label penetration. So curious to hear what you're seeing. Maybe how have elasticities evolved. And then what are you expecting for the consumer as the year progresses as you think about your business?

Sure. So what we see is obviously based on a small company's view of what's going on and just talking about the coconut water category. The category itself seems very healthy with volume up high single digits. And within the category where our brand is healthy, also up roughly the same, but private label is a little healthier on a volume basis. Not necessarily for us on a reported revenue basis because of price changes year-on-year, but on a volume basis, very healthy. So when we look at what's going on, and obviously, we have a little better visibility to the total category than is visible from the scan data, it looks to us like private label is benefiting from a slightly larger price gap to branded than existed this time last year. And then that the sort of channels where private label over-indexes, which for our category are club, ALDI, little-type discounter, and a couple of the major retailers, the private label business is very healthy, and their business is very healthy. And so our assumption is some are maybe channel shifting, going on to more value channels, which I think is also being reported by the retailers, but we don't have hard data on that. So that, I think, is our reference to point to that. And we just view this as sort of a transition year, whereas the price gaps go back to what they were pre-COVID. And we expect the growth rates tend to normalize with brand and private label growing the same unless we can gain share. So that's how we think about it.

Okay. And then as you look at the coconut water category, in general, over the last few years, it's grown considerably, there's no question. So as the category growth leader, what steps are you taking to drive this continued growth over the next, let's say, 5 or 10 years? And hopefully, we're here to talk about it.

Yes. So maybe separating international from the U.S. I think in the U.S. where we're a 50% share of tracked channels, our #1 priority is to grow the category. We look to do that by both bringing new households into the category through education as to the benefits of coconut water and sort of the reasons to drink, but also to increase the occasions for existing consumers who have coconut water in their households. So it's sort of a dual strategy of grow the category and then grow share within it. On the share side, we're trying to expand our distribution, make sure we're appropriately priced and featured, and obviously spending money on marketing our brand and our brand benefits relative to other products. As we look out on the long term, we think the category has some tailwinds behind it from -- just from demographics. We over-index with ethnic households, so African-American, Hispanic, Asian. We also over-index with the younger households where head of households is in the 20s, 30s and 40s. And I suppose that's not really that surprising because the brand was founded in 2004, so it's only 20 years old, and we probably missed out on those folks in their 50s and 60s. But we do have this sort of in-built trial mechanism where a lot of drinkers discovered Coconut Water on Sunday morning at college, post hangover. And I'm seeing some smiles in the audience from those who went to college and had fun, and then not from those -- or anyway. And so our households are staying -- we're maintaining the age of our households by feeding this young, and then we're trying to convert them into more occasions. So a lot of occasion-based marketing, trying to persuade people to trade up to smoothies or use it as a post-workout beverage, or use it in cocktails. And so a lot of our marketing, you'll see, while it talks about functional benefit, it's also talking about the occasions to increase the velocity per household. Internationally, I think it's a little different. The U.S. market is a little more developed. So I think we talked on our quarterly call a little bit about Europe. In Europe, we have a very strong business in the U.K., where we have over 80% share. But the market from a penetration perspective is behind the U.S. So there, it's all about education, and we're obviously not going to gain share as much. But in the rest of Europe, the category is even less developed. And there, there is a category. Actually private label got in very early, and now they really need a brand to come in and invest in the category. So we're trying to fill that role. And we're having some early success, I think, in Germany, but it's got a little bit more of a long-term play. And that, I think, helps us in our long-term view that this business can double at some period of time.

Okay. That definitely makes sense. And thinking about your guidance, you just reported very strong Q1 results, and early in the year you raised your top line growth guidance to 1 -- or by 1 point to 1% to 3%. And that does include Vita Coconut Water and then the private label Coconut Water volume growth this year. So I know you mentioned there was still some of the private label oil business in your Q1 results. So can you maybe provide some, I don't know, rough numbers for us to help us understand the size of this coconut oil business and how much that will impact the full year results moving forward? Because I know that's weighing a lot on the top line growth that you've laid out.

Yes. I think -- yes, one, we are transitioning out of the oil business. That transition started in Q1 and will complete in Q2. We are fortunately using up a lot of the packaging materials and the other stuff that's in process. Right? I think when we announced that that business was leaving, we sort of said that we expected branded growth and private label Coconut Water to offset that. And that was how we encourage people to model it. We were very uncomfortable giving a dollar amount because it's 1 specific customer and that, we felt, was inappropriate given our relationship with that customer, to actually tell the world how large their oil business was. So I think it's modelable. I think the analysts have done a great job modeling it. Thank you, Bonnie, and everyone else. And so we're not really going to quantify it, but it will be a drag Q2, Q3, Q4 and Q1 next year from a comparison perspective. And we, certainly, in our full year guidance, believe we can overcome that through growth of the rest of our portfolio. But it's certainly a drag and it's a little bit of a downer for us. But it is what it is. And then the other point I'd make about the oil business. So the oil is a little bit more of a commodity private label play, it's a little more competitive, it's a little easier for the suppliers to compete in, and there are more competitors on it. And so it doesn't quite have the moat that our coconut water supply chain has. And because of that, the margins on it were more commodity-type margins. So on the plus side, one of the benefits of -- not that we ever like to lose business, one of the benefits will be the margins will look a little healthier and the profitability a little healthier and it will be a little cleaner portfolio.

Yes. No, that makes sense. And then I know you highlighted some new customer wins recently. Maybe touch on how much that's helping to provide some offset. And then I'm curious, why are some of these new customers choosing your company? What have they shared with you?

Yes. So I think in the last 2 years we've added a couple of major new customers in the U.S., and then also added, and maybe more visibly in our P&L and the way what was being reported shows up in international private label where there is solid growth. Taking them differently, we have the retail relationships in the U.S. We're the largest supplier of branded coconut water. And every once in a while, someone will come to us and say, "We want to try private label." And we do supply it. And we will typically say, yes, if it counts as a significant size where it's a meaningful business, because we don't want to get into the complexity of [ some odd KUs ]. So that's sort of what's going on. And there's some business in the U.S. we don't have. We did have a win about 18 months ago on a major private label customer, which was helpful. It doesn't necessarily offset the oil business. So it's going to be just murky because the oil business was, I think, as we indicated, it was one of our largest customers. So it wasn't an immaterial piece of business. But I think the margins on that side will be better. In Europe, we basically built a branded business out of the U.K. and initially tried to build the brand into France, Spain and other countries, and struggled a little bit in those countries, but built a very successful business in the U.K. About 3 years ago, we flipped to "Let's try and build a private label business in Europe and then build the branded business off it." And we've had some wins, particularly in Germany, that have allowed us to establish a German team, a commercial team. Put up a German warehouse and actually start to supply that market in a more effective and efficient manner, which improves the margin of the business and allows us to pitch branded. And we've had some bites, right? And so now branded has some authorizations. We still need to go fill them because that's the way it works. But we're actually pretty excited that the German business could be a nice contribution to growth over the next couple of years. And we're trying to work out how to duplicate that success in Benelux and then in France and Spain. So why we can compete. I think supply chain of these products, obviously, they are sourced from the tropics, so it's a very long supply chain with a lot of ocean freight and logistical challenges. They're also largely produced in factories that are quite remote, so it's somewhat hard for the factories to build their own private label sales forces, or even for retailers to necessarily go visit them. But we have people on the ground. We have a team in Singapore that's about 30, 35 people that basically supports the factories from a quality perspective, from a technological perspective, including advising on CapEx and stuff. And then also does all the logistics of moving these hundreds of containers around the globe. And so we're well-positioned to sort of manage that for a retailer. And our view is if that helps our factories by providing them with more business, whether it be oil or coconut water, that's good. And if we can make margin, then that works. And so we're open to it, and we continue to bid on oil business on a global basis and also on private label business on a global basis, because we feel an obligation to try and take as much of this from our suppliers as we can because of these exclusive contracts that we have with them.

Definitely a competitive advantage, and pretty complex, not so easy to replicate.

It's complex and it's hard to get there, and it's a lot of travel.

Okay. Switching gears a bit. I wanted to ask about some of the distribution gains you've seen in some of the opportunities that you foresee in the future. Just any more color on that and how these distribution gains maybe look versus previous years?

Yes. So last year, we had a lot of gains, particularly on the multipacks. And that was a significant driver of growth, as I think you've alluded to in your reports, and we've put in our investor deck. I think this year, we expect to get incremental distribution on those multipacks because they aren't at full distribution, what we call optimized distribution, relative to the singles. But some of the step-change processes seem a little delayed this year with some decision-making delayed, and then the timing of execution of those decisions. So I don't think it's shown up yet, and it's not even necessarily visible to us on exactly what's going to happen. We continue to try and drive distribution in the convenience store channels, pushing the juice product, which is the can product, through those channels. And we also launched juice into fruit and mass. And so that's adding incremental new distribution, but it's a little early to tell how that's going. And then also in North America, we launched Treats, which is a strawberry cream, sweet coconut milk drink that is a Target exclusive. And so that's currently there and we're watching that. Obviously, again, 5 weeks in and hard to tell what's going on. But that -- we're trying to see whether we can take the Vita Coco brand from pure sort of hydration recovery to maybe something a little more, see where we can take it to. And there's certainly an interest among consumers around sweeter, more indulgent type beverages. So it's interesting and we'll see where that goes.

Okay. And as you look at the different channels and maybe where you're under-indexed, is it still within the C store channel? Would you argue, Martin, is that an opportunity still that you foresee?

Yes.

If so, where are you at in that?

Well, I think our ACV is 50%. I don't have the numbers in front of me, but that's the number that brings to my mind. And on our can juice product, it's only like 17%. So obviously, that's a big opportunity. Now the convenience store channel is -- it's a subset of the total channel, so I don't know whether it's 15%, 20%. I know that you cover this channel, I don't have expertise in this. So I'm going to guess that's roughly what it is, of grocery, right? So there are obviously opportunities there. As you get into a convenience store and you go down, you hit the large ones like 7-Eleven, for which we have a great relationship with. They just took our 1-liter product, which is exciting, to have a 1 liter convenience store, which we probably would never have imagined. But it's there and it's pulling. But as you go down through all the convenience stores, you get to lots of some cool points. So it is hard work, and as you put it in, some of those, it works, and in some of those that it doesn't, like obviously, there are different demographics and economics of the consumers depending on the marketplace. So I think we're in that period where our first push on convenience has sort of landed and now it's grinded out. Had some, lose some a little bit maybe because of the -- had some, lose some, so that's where we are. And we're trying to push it, but it's a multiyear process to close those gaps. But there's opportunity there, and there's certainly, if it is 15% of grocery, there's another, what, 7 percentage points there to get. And so that would be nice to get over a few years.

And then with the spring resets, you touched on this, that they do seem to be happening a little later this year than previous years. Has that been your experience as well with your business?

I think historically pre-COVID, we thought most of the sets happened in March and April. And during COVID, nothing much happened. Frankly, it was who has product, right? So it was everything sort of ground to a halt. Now post-COVID, people are getting back into the swing of things. I think also some beverage retailers are thinking about how they structure their beverage set and does it make any sense? There was a period of time where that bottled water just took over a whole aisle and maybe that's too much, maybe it's too little. Maybe they need more premium products, maybe they should expand the set that we're in. Maybe they should move it back with the beverages, because they got moved away when water expanded. So all of these things, I think, are up in the air a little bit for some of the major retailers. And because of that, I think some of the decisions are taking a little longer, because they may be more complicated. It's not as easy as yes, you should obviously get another multipack in, okay, yes, we all agree. Now is it in this set or is it in that set, and what does it mean? I think those things are delaying things a little bit. And I must admit, I think if we get -- as we get into the summer, I think it's unlikely that maybe some of the sets actually take place because, again, you would know this well, when you get into the summer, the distributors are so busy just trying to get product into the store that no one has time for resets. So we might be moving this year to a September, in which case maybe it sticks at September or maybe it skips a year. I don't know. It's just what we hope to get at the start of the year perhaps isn't what we're currently seeing happening, not because it's not going to happen, but because it's delayed. With all that said, as you said, we raised guidance. So we still feel good about the business. It's just -- it's just messy out there.

And so just the visibility that you may have, whether it's indications, you feel good about the space gains being up this year for your business in terms of shelf space versus prior year, right?

Yes. I think when you look at our category deck that we presented to retailers, I think you'd have to be sort of living on a different planet not to believe that you should give us more space, right? You do the same analysis that we do and, obviously, we're in sales mode and you're doing it from an analytical point of view. But we think we have a very good argument for more shelf space, particularly on the multipacks. And sometimes the set decisions don't get made on time frame that you would like. And that's not -- nothing bad about anyone. Everyone's busy, everyone has different priorities. But we think it will happen. It will happen over the next couple of years. And that opportunity is there for us to gain share in the category and also help category growth by having broader availability.

And remind everyone, in terms of the category growth expectations you have for Coconut Water, is it high single digit realistically?

Yes, I think we said mid- to high single digits, so we've given ourselves a range, right? I think if you look back at it historically, it seems to be on that growth rate over the last 10 years. There was certainly a period of time when it didn't look like that in scan data, but the growth was happening in non-scan channels. And during that time period, club and the discounters like ALDI and little Trader Joe's built pretty significant coconut water businesses. As we sit, we see it all. So our view is that the category has been growing every year for the last, I don't know, 8 years at that 5% to 10% volume growth rate. And then there was a period of time there was some pricing, too. And so it feels very solid. And it feels driven by underlying consumer growth and household penetration and everything else. And it's happening in a way that is sort of repetitive, predictable, et cetera. Obviously, can't predict the future, so I don't want to get ahead, but it just feels like it's not [ booms flat ]. And it feels like it's part of people's lifestyles and adoption and is fueling off genuine desire for natural product, natural hydration and people incorporating coconut water into their daily lives.