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

Hello, everyone. It's a pleasure to welcome Vita Coco to the CAGNY stage. We're especially pleased as this is Vita Coco's inaugural CAGNY presentation. And so it's my honor to introduce Co-Founder and Executive Chairman, Mike Kirban; CEO, Martin Roper; CFO, Core Baker; and Chief Operating Officer, Jonathan Burth. Now for some of you that aren't aware, Vita Coco is the global leader in the fast-growing coconut water market. The company is an innovator within CPG universe, especially as the company has scaled the coconut water category in the U.S., developing a rich pipeline of coconut water products that fuse functional benefits with authentic better-for-you ingredients while cultivating a loyal base of young urban consumers. It's likely going to be another exciting year for Vita Coco. And with that, I'm going to turn it over to Mike and team to hear more about their efforts. Thanks. [Presentation]

Thank you, Bonnie, for the intro. Thank you, CAGNY, for having us. It's an honor to be here. Speaking in front of a room filled with some of the most sophisticated investors in our space and following companies like L'Oreal and Colgate, massive multinationals was not my destiny, I promise. I am a dyslexic college dropout who 22 years ago, started a business. And when I started that business, I had no business plan, and I had no consumer goods experience whatsoever. But what I did have was a willingness to work hard, a deep competitive spirit. But most importantly, a product that was so popular in so many parts of the world, so highly consumed and just wasn't yet put in a package. That is a rare thing. So it wasn't yet put in a package and wasn't yet brought to the rest of the world. So as we get going -- this is really exciting. If anybody wants to read the disclaimer, I don't know what any of that means. As we get going here, you saw in the video, and I want to talk a little bit further about where this product comes from. Coconut water is so highly consumed in so much of the world. When I went to Brazil back in 2003, 2004, I saw it everywhere, and people were drinking it on the beach and they were buying it at the stands. And it was literally everywhere people were using it for so many things, but it wasn't just on the street. It wasn't just on the beach. Somebody had developed a way to package it. And it was now being sold in stores, and it was flying off store shelves. It was only 1 or 2 years into packaged coconut water really existing. And we saw this opportunity. And then we quickly learned that not only is coconut water so massively popular in Brazil, it's popular all over the tropical world. Massive populations like India, Indonesia, the entire -- most of Latin America, Southeast Asia, most of Africa, people consume coconut water every day in large quantities. And so we had this incredibly popular product that now all we needed to do was package it and bring it to the rest of the world. So as we started doing that, we realized that the #1 reason -- the underlying reason why people in the tropics were drinking coconut water was not only that it tasted great and it was great as a base for all sorts of things, and it was always part of their day. The underlying reason was the functionality. Coconut water has 3.5x the electrolytes of the leading sport drink, and it comes from a tree. That's the beauty of the product that we're dealing with here. So as we -- as we started to think about it and we started to see what was working around the world and then what was working at home, we realized that it's not just meant to be drink because it has 3.5x the electrolytes of a sport drink. It's not just meant to be drink when you get out of the gym or when you're working out. It's incredibly useful as a tool for other products, whether you're making smoothies, obviously, during the workout. It makes great with cocktails. And obviously, it's great for a hangover because of the electrolytes. So all of these things coming together gives coconut water such an opportunity to be in the household for so many different occasions. And because of that, we pull consumers pretty equally, about 1/3 from each flavored water, sport drinks and juice. Together, that's a $125 billion global category from which we pull. And our goal over the next many years is to continue to build on the education, continue to teach consumers about why and when to drink coconut water and take our fair share of that $125 billion category. And this takes time. Like I said, it's been 22 years. Over these 22 years, we've grown double digits. I believe 20 of these 22 years. So it's been a great growth story year after year after year, but it takes time. You're building a category from scratch, something nobody has ever heard of. When we started in 2004, 2005, nobody knew what coconut water was. They didn't know it actually came from a coconut. They didn't know it was functional. They didn't know when to use it or how to use it in their day-to-day. So it's been a long journey of educating consumers outside of the tropical world when and how to drink coconut water. We built a buzz machine using celebrity and using social media to help get that word out there and help educate consumers. We've had to build distribution, and we're in the very early days of doing that. Finally, Martin will talk a little bit today about Walmart. We're finally getting our fair share of space, we believe, in large retailers like Walmart, but we have a long way to go to build out distribution. We used to joke when we started this business, being my co-founder, a, we used to joke, one day, you're going to walk into a bar or a restaurant in L.A. or New York or London or wherever, and the waiter is going to say, would you like still sparkling or cocoa? I really believe that, that day will happen. That's how popular this beverage will become, and that's how -- to me, that just feels obvious. But this takes generations. This is actually a picture of me and my kids at one of our factories. And when my kids were -- when we started, people back then didn't know what coconut water was. My kids and their generation, they at least have heard of it. They know it's good for something. They might know it has potassium. They might know that it's great. They learn in college that it was great for a hangover. This is a multigenerational process that takes time, building a new taste, a new product in markets from scratch. But we think that the opportunity is there, and we think that it's really early days of building this category for the long term. So as the category continues to grow, we are confident that we are the ones that will capitalize the most on the long-term success of the coconut water category. And the reasons are we have a great brand. People seem to love our brand. The packaging is, I think, quite telegraphic of the liquid inside. It's natural, it's clean, it's simple, it's tropical. We also have an incredibly passionate team. And I know not to knock anybody else, the L'Oreal that they have a passionate team too. This team runs through walls. It's a team that is based on this entrepreneurial spirit of trying to show people new things and trying to teach people something new and build a category from scratch and that passionate team is an important part of our culture and what drives the success of this business. But I believe that the biggest reason why we will capitalize on the long-term success of coconut water is our supply chain. Jonathan is going to talk about it a little bit more today, but we have built an incredibly advantaged supply chain that we believe creates a moat around our business and creates massive barriers to scalability as this category grows, and we'll talk about that a little bit more as we go on. Now I would like to introduce my -- our CEO, my partner in crime, somebody I met 6 years ago when the business was doing great, and I felt I needed an adult in the room. And we found an incredible adult with incredible experience actually running a public company, and that's where Martin comes in. Thank you.

Thanks, Mike. Jesus, if I'm the adult in the room, God help us. Yes. I was blessed to meet Mike after I retired from Boston Beer, where I spent 24 years basically drinking and obviously building a wonderful business there. When I look at my career, I've been blessed to work for 2 great founders with 2 great brands in 2 very unique categories. And that's why I get up every morning. It's really been fantastic. When I met Mike and the team back in 2019, I saw similarities to Boston Beer, both in terms of what the potential was for the business, the culture of the business, the entrepreneurial, the street fighting, the sales execution elements of it. And I knew this was a company that I wanted to join. I had been looking for a healthy, better-for-you beverage company with a purpose to sort of make up for my drinking alcohol for 24 years. And that's what I found. I wanted to work with a visionary founder and execute and deliver on that vision, and that's what we've done the last 6 years. And 6 years in, I can truly say that Vita Coco is a very special company. It's special on a number of dimensions, not just the product and the purpose that we live by, we're a public benefit corporation and B Corp certified, but also for what is the infrastructure of the company. We are uniquely positioned in nonalcoholic beverages today for continued success for long-term growth. And there's absolutely no reason that this business can't double or triple from its current size, if not more. It may take a little bit of time, as Mike talked about, multigenerational, but that's the path we're on, and that's the company that we're building. We're blessed with a very experienced team. We're category leaders in our developed markets with a market share that's significantly higher than the next largest player. We -- it's a relatively young category, and I have some slides on that as to where it is in its development from a household penetration perspective. And we have a very attractive consumer profile. They're health oriented, they're younger, they're ethnic. They like to buy better-for-you beverages, and that population is just going to continue to grow. So as I think about this business, we're one of the unique beverages companies that has a clear path to growth through its own actions just in developing the category, and that's obviously what we're trying to do. I am very blessed to work with a very strong team. I was surprised at the strength of the team when I joined Vita Coco. It exceeded my expectations. And with the addition of Corey Baker, our CFO, we've been able to strengthen it. It's a unique team combining years of experience in beverage with years of experience in coconut water and years of experience at mature companies. So we're operating -- we've operated incredibly well as a public company, and it's a true blessing to have this team. We're -- when people ask me about it, we're entrepreneurial, obviously. We're highly competitive. We're driven to win through execution and things that we control, and we tend to drive through the things we can't control. And we do it with a sense of purpose and a preference for giving back to the communities that we operate in. So this team has navigated the disruptions of COVID, which with our global supply chain that you'll learn a little bit about, you can imagine, was very challenging. We navigated tariffs last year. That's all in the rearview mirror. We just put our heads down and we execute and we execute on what we promise both to our shareholders, our Board and in our guidance. So -- and that sort of attitude flows into the teams that we have. Mike mentioned it, we have a very passionate team of 330, 340 people who are out trying to build this category and trying to win in coconut water. And so net-net, 6 years in, I could not be happier. When you think about us, we are the market leader in our major markets with a very significant share, multitudes of magnitude larger than the next largest share. In the U.S., we're at 42% share. That is a growing category, growing 22% of organic growth going on. And there's absolutely no reason that, that can't double, and I'll talk about that when we talk about households. We are -- have 80% share in the U.K., where we have a European team based there that built the U.K. business. That market is growing even faster than the U.S. right now, but it lags behind on household penetration, and I have a slide on that. And then Germany, which is our other emerging major market, we have 40% share from nothing, no share about 3 years ago. That market is growing 126% with the brand growing 200%. We intend to continue to drive the category as the market leader and then maintain or try and grow share in these markets while developing the next markets to come along. We talk about the category being young and in household penetration terms in the U.S., we're half the household penetration of Cranberry Juice and maybe 1/3 of what orange juice is. So there's a lot of room still for household penetration growth. Our growth in the U.S. comes from a combination of growing households and velocity. It's been consistent for the last 5, 6 years that both metrics have been growing, which to me is very unusual in the consumer goods space to see velocity growing and households growing. And so the U.S. still has a long runway to run, and it's certainly feasible to think about the U.S. Americas business doubling in the next 5 to 7 years, and that's certainly what we're trying to execute. What I'm sharing here is per capita consumption data for the other markets, and you'll see that they all lag behind where the U.S. is. We launched in the U.S. in 2004. That's where we've been the longest. We launched in the U.K. around 2013. So we're sort of 10 years behind. We launched in Germany seriously in 2022. So again, that is 10 years behind. There's no reason to believe structural or economic or taste profile that these markets can't match the per capita consumption of the U.S. So when we think about it, not only are we trying to double the U.S. or more, but we're trying to get the U.K. and Germany and other markets to the U.S. penetration levels. And that's an opportunity for Europe as a whole to be as large as our Americas business is today, if not larger. We currently have teams, obviously, in the U.S. and Canada, U.K., Germany and Spain. And we will add teams in other markets as we sequence them for slow, steady profitable growth, which is one of our criteria. I mentioned that we have a very young multicultural consumer. A lot of consumers in the U.S. find us as a Sunday cure to their ailments from Saturday night at college. That is an entry point if you aren't introduced to coconut water by your parents that continues to feed our adult base with new 20-year-old consumers. And we over-index to Gen Z and millennials, but we're holding them as consumers for lifetime value. So again, a solid reason to believe that our U.S. business can double. We're very multicultural. We certainly have opportunities to increase our consumption among nonethnic groups and sort of like the Midwest, the flyover states are opportunities for us where we need to penetrate. But we do have the tailwinds from an ethnic population over-index. We drive trial and adoption through retail execution, social media events and messaging focused on product benefits and occasions and by retail promotions to get impulse purchase and impulse trial, and that seems to work really well for us in driving these numbers. We've also had a history in the category of being a leading innovator from the introduction of Vita Coco just in 500 ml Tetra to adding new flavors like Peach Mango and extra coconut to adding more innovative products like our juice product, which is in cans, our milk product and more recently, our Treats product, which is an indulgent coconut milk-based beverages. We also have a track record of adding pack sizes, adding 1 liter, 330 ml and multipacks, which has increased our shelf space visibility and also increased the ease of shopping of this pack for take home. We use innovation to sort of attract new drinkers, new occasions and also create new news to create interest in our category and get people back to retry it again or try it for the first time. More recently, the most exciting thing in our -- certainly in our America universe is that Walmart in November reset where coconut sat in their juice aisle and added significant space and allocation of inventory holding capacity to the coconut water set. This is, I think, one a big win for us this year as Walmart is adding around 6% to our scan data as Walmart gains share of coconut water, and we benefit from it being the largest player. But I think more importantly, it added inventory holding capacity and visibility within Walmart, which is going to help us sort of continue to serve their customers in a very reliable way because we do need inventory carrying capacity as this brand continues to grow. We personally think that this leading indicator from Walmart of their interest in the coconut water category will result in other retailers following maybe in this upcoming sets, maybe next year, but they will follow because they will see that Walmart is gaining share. So that's very exciting. So sort of in summary, we're in a unique place with a lot of opportunity for growth, and I believe we're going to deliver on that for years to come. Our growth pillars are expanding households and occasions, improving visibility and availability and sort of innovation in the coconut water space to drive the marketing message with a very effective marketing machine around that. That's primarily in the U.S. Internationally, there's the opportunity for international to grow very significantly over the next 5, 10 years and be a much larger part of our business. We are the market leader in those major markets we talked about, and we're driving that category development. I think Germany is the best example of that. Outside of that, we do have the ability to innovate outside of coconut water, and we're open to that, and we do pursue opportunities there. Nothing major to talk about at this meeting, but we're open to it, and we continue to see if we can basically copy the Boston Beer playbook through the innovation of Twisted Tea, Angry Orchard and Truly that I was involved in. Can we do that in the nonalcoholic beverage space. So that's -- we do spend time on it. And when we have something exciting to talk about, we'll share. And then we're also open to M&A in the beverage space, the warm beverage space to where we can create value for our long-term shareholders. So we've been very disciplined. We haven't executed anything in the last 7 years. And we are always looking, and that is our filter of can we do create long-term value for our shareholders. And with that said, it's my pleasure to pass over to Jonathan, who will talk a little bit about the supply chain, which provides us with a cost competitive sourcing and is a competitive moat for us, and he'll talk a little bit about that. Jonathan?

Thanks, Martin. Hello, everyone. Excited to be here. I'm Jonathan. I'm the COO of the company and really excited to tell you a little bit more about the supply chain and the competitive advantage that it has developed into that Mike referenced earlier. When I started 19 years ago, we didn't really have much of a supply chain. We were buying a container here and there. We were figuring out ocean freight on the fly. We learned how to produce coconut water in Brazil on the ground. You see coconut water is a fairly delicate liquid. It's low acid, low pH. So it means it goes bad rather quickly when you extract it from the coconut. So you have to process it quickly, bottle it in a Tetra Pack or another container in order to make it shelf stable. The closest comparison is probably milk. So we realized early on in order to scale this business, we had to invest in the infrastructure ourselves and spend time on the ground. And the key to accomplishing that we're building long-term partnerships and convincing these partners that we found overseas to invest in a business model that is very sustainable, turning a waste product into something value add like coconut water in a packaged format. And then we've done this, we've built as over the last 20 years to scale, which really no other company has done. And to give you a little bit of a taste on what that source looks like, we have a video here that I'll show you which will really show you the scale and the human element involved in our supply chain. [presentation] So 2 things to take away maybe from this video. Maybe first, you see how fast we're moving in the earlier video that Mike has shown, which is a few years old, we were talking about 2.5 million coconuts a day. Now it's already at 4 million. Maybe another one at Corey wouldn't release the funds to rerecord the voice over, so it shows our financial discipline in the company. But more importantly, as you see that footage, right, I think it's important to picture the person climbing the tree harvesting coconuts and picture that on a daily basis across thousands of small family farms in the context of 4 million coconuts a day, right, very manual labor, 4 million coconuts a day. That gives you a real feel for the advantage that Vita Coco and its supply chain have. So fast forward to today, our supply chain is the most unique as it lets us scale very efficiently. It provides huge barriers for anyone to follow, and it derisks our business because it's well diversified, right? We don't just buy a coconut water. We manage a gold standard process from tree to factory to ocean to shelf, defining our quality and our standards. So it doesn't start in a high-tech lab like some other beverages. It starts on those farms with the 4 million coconuts sourced from thousands of family farms. And as we visited those regions the first time, we realized something that completely changed our perspective. See there were already like coconut processors out there in these coconut growing regions. And these are factories that were producing other coconut products such as coconut milk or desiccated coconut that you would find in cereal. So we reached out to them and got into conversations. We're a coconut water company. And finally, we arranged a trip out there to the Philippines to meet with one of the largest coconut processors there. So we went out there, we met with the owners. They invited us to visit the factory, which was another flight down south. So it took a total of 2 days to get to the factory. But it was totally worth it when we walked this factory, first, we saw hundreds of thousands of coconuts at the gate, right? That was already pretty exciting. But as we walked through the factory, we saw this huge river in the middle running through with a waterfall at the end. So we were walking, the owners looked at us and said, well, you know what this is. We were just shaking our heads, not really some kind of wastewater maybe. And they were like, well, this is what you came here for. This is coconut water. We have tons of it. We just don't know what to do with it. We try to process it, but it goes bad quickly. So that was our aha moment. What a huge opportunity to turn a waste product into something value-added and working with them to produce this into our Vita Coco brand, right? Immediately, it would make them more efficient and more profitable, something we're very proud of today to have brought that to our partners overseas. So we added that discovery to our playbook. And it's really a 3-step strategy, which sounds simple, but it's very difficult to execute at scale. So first, we identify large-scale coconut processors like the one we visited, right? There were many more of those. So we identified those. Second, we didn't just buy coconut water. We taught them what to do with it, right? We shared best practices, how to achieve our gold standard, how do you deal with quality and consistency across all these different sourcing regions. How do you process coconut water, what equipment do you need to use? So we provided all of that. And then finally, we secured long-term agreements, multi-decades in sometimes exclusive in exchange for that, right? So we provided the know-how. They gave us the long-term commitments. And this put us in a really good place because it was a true win-win where the factories became more profitable and more sustainable because they were now selling something that they were throwing away before. And for us, it was a way to lock in high-quality, multi-decade supply without any of the CapEx or without owning any of the plantations of factories, right? So it was -- it worked well because both parties basically benefit. Indeed, it worked so well that some of our partners took this and bought another factory and to replicate it, right? And that's exactly what we did. We replicated this model over and over. And today, we have 16 factories in 6 countries, which you can see here, well-diversified network. We believe it's the most diversified in the industry. And the diversification is a big benefit for us relative to our competitors. Some of our competitors tend to source only from one country, sometimes even just one factory. And what happens when multiple companies go and compete for the same coconuts, well, they -- prices go up, right? And it puts supply at risk because if something goes wrong, let's say, a typhoon or flood, their supply is at risk. With 16 factories, we ideally run our network at about 80% capacity to remain flexible to be able to react to those risks, right? What can we do if something goes wrong in, let's say, Southeast Asia, while we can move it over to Brazil. What if it happens in Brazil, while we move it back, right? So that is a really big benefit of our network. And how do we manage that network? Well, it takes a team of 70 supply chain professionals across 5 offices. Approximately half of them are based in Singapore. And so what they are really doing is, I already mentioned the technical services we provide to the factories, but we have quality professionals. We brought in supply planning, demand planning in-house. We basically brought all the major or critical supply chain functions in-house to make sure our supply chain runs on a day-to-day basis. So we are asset-light, but we are control heavy, right? It's very important because we keep control about our quality, our service and process improvements that way. And this service, right? So this scale and service that we can provide this way is also the reason why we're being a partner of choice with our large retail partners, particularly when it comes to our private label business. So to summarize, 4 million coconuts a day, it seems like a lot, and it really is. But we believe only 20% of the coconuts available today are making it into the food processing supply chain. So there's plenty more runway for us to get more coconuts. And we don't think that coconut trees today are a bottleneck to grow this business further, right? Our supply chain is built on 2 decades of hard work of our team, our partners and their communities. And therefore, we believe it's very, very hard to duplicate it because it took a long time to get there and the playbook is very scalable. And with that, I'll pass it on to Corey, our CFO.

Thanks, Jonathan. Good morning, everyone. I'm Corey, the CFO, the new guy on the team. This is me at one of our schools in Sri Lanka. So it's amazing to see the work we do out in the field and the good we provide to the communities. I spent many years at was affectionately referred to in the video today as one of the sugar water overloads. So I'm thinking about rerecording that video maybe for next year. And I'm excited to cover a bit first, to start with 2025. You've heard all week, this is a tough time for CPG, and we are performing incredibly well. In the year, we delivered 18% overall net sales growth, led by the brand, which grew 26% globally. And within that growth, the international business grew almost 40% and delivered 25% of the overall growth of the company. And this gives us a lot of excitement about the impact the international business can have as we look forward. And then at the bottom line, despite absorbing $14 million of tariffs in the year, we were able to deliver EPS growth of 27%, resulting in EBITDA just under $100 million, which is really strong performance and something we're really happy with despite all the volatility we saw this year. And then this isn't a 1-year phenomenon. If you look back since IPO in 2021, we've delivered net sales growth at a 13% CAGR, most of that growth coming out of our branded business. And due to what you heard today with our disciplined spending and our focused investments, we've been able to deliver the growth and then grow our adjusted EBITDA at 2x our rate of sales. This has resulted in EBITDA just under $100 million or 2.5x what we were at when we went public in '21. And when we kind of combine this to what you've heard from Jonathan and the team, we have what we think is a very nice balance sheet. We've ended the year with $197 million of cash. We have no debt, and we are very asset light. From a property, plant and equipment, we're sub-$10 million. It's really kind of irrelevant to the business. Our real investment we make is in our supply chain. We're carrying about $100 million of inventory and supporting those coconuts from the farm to the shelf is our core capital investment, but that turns rather quickly. So this allows us to deliver a very nice return on invested capital to our shareholders at approximately 50% over the last year. And then this cash is growing. We have started to return cash to shareholders through repurchases. We've authorized $65 million with the Board. We've executed $24 million. And we will continue to look at the market quarterly, work with a subset of our Board and continue to return cash through share repurchases. And then we balance that with M&A. As Martin talked about, we think we have the organization and the culture and the team to bring and benefit smaller brands and bring them to the portfolio or to leverage our global supply chain and expand our footprint, leveraging the coconut and the strength of Jonathan's team. As we look forward, we're expecting another record year in 2026. From a net sales perspective, we're guiding to low to mid-teens growth on the top line. And then as tariffs have subsided and went away for us, we believe we can return gross margins to the targeted range of high 30s, approaching 40s. We'll deliver continued SG&A leverage of about 1 point, resulting in EBITDA around $125 million at the midpoint. This is built on a few key assumptions. One, the U.S. category continuing to grow mid-teens. Year-to-date, as many of you know, we're growing in the low 20s. So this makes us very comfortable with our full year target of mid-teens. The Vita Coco brand growing low to mid-teens and then within the U.S., delivering low single-digit pricing. And finally, private label, which was a headwind for us in '25 will become a tailwind and we will grow the U.S. private label business 20% to 25% to support the overall P&L. If we combine that with what we're trying to deliver long term, our target is to deliver branded net sales growth of mid-teens and adjusted EBITDA margins of the high teens. If we look at the results we've driven from '21 through '26, we're delivering on these objectives. The branded business has grown at a 15% CAGR over the 5 years. And based on the midpoint of our '26 guidance, we're delivering an 18% EBITDA margin. It might be time to think about a new target. So we're delivering very, very well on our long-term objectives. So to wrap up, you've heard today from the team, this is a really special company. It's built on an exceptional brand with strong share across the market. We've got a scrappy entrepreneurial team, a truly advantaged supply chain that is a competitive advantage and a moat for our business. A nascent category, but one that is growing quite quickly, which has multigenerational macro and demographic trends as tailwinds. And then combined with our solid financial performance, this is why we believe the future is very, very bright. And with that, I thank you for your time. We are tighter on time, so we'll probably move to Q&A in the breakout room and take any questions there. Thank you.