The Vita Coco Company, Inc. ($COCO)

All right. Good morning, everyone. Thanks again for joining us today. It's a pleasure to introduce our next speaker. With us today is Vita Coco's Co-Founder and Executive Chairman; Michael Kirban as well as Chief Financial Officer, Corey Baker. Mike has served as Executive Chairman since May '22 and as Chairman of the Board since -- or sorry, 2004. Mike also previously served as Chief Executive Officer and Co-Chief Executive Officer of the company. Corey has served as Vita Coco's CFO since 2023, where he joined following a very successful career at PepsiCo. So 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. It just recently posted a very strong Q1 beat and raise, which helped drive the stock over 25% higher. So thank you both for joining today.

Thanks for having us.

Yes, I still can't get over the Q1 results, but let's maybe start with -- the health of the consumer recently. From your vantage point, I imagine your consumer remains pretty healthy, as evidenced, again, by the strong top line growth in the quarter. But maybe talk through for us why does the coconut water consumers seem to be so strong? And does it ultimately skew higher income?

I mean clearly, the consumer is strong. I think year-to-date scans are up almost 30%. So there's a lot of growth there. And -- but if you think about where consumers are spending today, there's not a lot of growth in consumer goods. There's not a lot of growth in beverage. What's growing is in beverage, specifically, the only things growing our protein energy and coconut water being the fastest-growing category in beverage. These are some of the most expensive beverages. So consumers are, I think, whether higher income are not. They're digging deeper than ever before for functionality, for wellness for things that actually make a difference as opposed to just general refreshment.

Yes. And you check the box on the functionality. I think about what's -- why consumers are gravitating. But one thing I wanted to check on is I think about the consumer of your products, you over-index, I believe, to the Hispanic consumer. And there have been a lot of headline concerns of that cohort. So how are you seeing whether it's elasticities or that consumer holding up as it relates to your product?

So I think we've always said we -- as of the last several years, at least, we're growing across all demographics across all regions, specifically in the U.S. We have said historically that we over-index with ethnically diverse consumers, specifically Hispanic, Asian and black consumers. With this type of growth, it's hard to point to 1 specific segment of our consumer base that is maybe buying less because we're growing in all channels also. I mean, C-store is growing tremendously. So across all channels. So again, maybe as Hispanic consumers are potentially spending less. Maybe ours is higher income, but we can't really point to anything specific that's dragging the growth that we're experiencing.

And then let's talk a little bit about the category itself because it's been so strong. It's one of the fastest-growing categories within the beverage aisle. So you are the category leader. So want to understand the steps you're taking to ensure the category stays healthy and strong. And then ultimately, where is this category sourcing from, do you believe?

So historically, the category has sourced from 3 large categories, sources from conventional juice, sources from premium enhanced water. and it sources from [indiscernible]. Together, that's $125 billion global category. So we're not just another 2 or playing in a specific category like energy. We're used across all of these consumer occasions and therefore, we're pulling from all of these 3 categories. As of late, we've seen an acceleration of pull from sport drinks. We think there's really something happening within the consumer globally around everyday hydration. And coconut water has 3.5x the electrolytes of the leading sports drink and it comes from a tree, it super simple, clean ingredients, everything else. So we think that there's really, really something there, and that's where it's pulling from. Now we continue to grow the category through education, why, when, how to drink coconut water, whether it is for that hydration occasion, whether it is mixing it with your cocktails or mixing it with your green powders or in your smoothies or after a workout, whatever it might be. And this, we believe, brings in more and more members of the household as we're gaining household penetration.

Increasing also consumption of patients. And I think you mentioned that the household penetration is low teens. Is that correct?

So we used to quote numerator data. It was something like that. It was brand was low teens, category was 20%, roughly 20%, low 20s. The data set has changed over the past year or so, so we're not really quoting any specific data. But household penetration on coconut water is still very early days. very low as you compare it to -- even if you just look at juices, cranberry juice at 50, orange juice in the 80s to 90. So a long runway of continued growth in terms of household penetration.

And you still, I believe, expect the category to double. I think you had said last year, maybe in the next few years. But given the growth that we've seen, that might happen sooner.

Yes, it's on course to.

And then in terms of your results, you just reported again very strong Q1 results. it's 37% top line growth. You raised your full year growth guidance to 18% to 21%, including mid- to high-teen growth for Vita coconut water versus I think it was hire was low teens. So again, an acceleration. So curious to again understand the building blocks or drivers of that growth and how you expect to hit that guidance range for the full year?

Well, I mean, obviously, we came out really strong. We think that we're looking at the category growing roughly 20% from a scan perspective for the year. We used to talk about the category growing high single digits to low teens. Over the last year, we started talking about mid-teens, and now it's accelerating even further. So with that acceleration, we feel confident in the guide that we've given. And we think that, that is, if we look at what's happening in the U.S. and the growth in households and the consumption per household growth and then also what we're experiencing on in front with our European markets and now looking at other opportunities around the world, a lot of opportunity to continue to grow the category and therefore, the brand.

And then context to this, thinking about pricing. I know you took 2 of pricing last year, again, to kind of cover some of the inflationary COGS pressure and tariffs. I think it seems like you've held on to a lot of that pricing, right? But help us understand this year, maybe some of the mitigation or where you expect your pricing to go and then maybe your promotional levels?

Yes. We've talked about for this full year in the U.S., low single digit branded pricing. So we're coming into the year with quite a bit high single digits. We expect it will have some increased promotional activity in the back half, which will offset some of the tariff pricing taken last year. And then as we talked about in our guidance, we're expecting a bit more inflation exiting the year, and we'll look at potential price adjustments exiting this year and next year, if that maintains.

So to be clear, yes, you did touch on that, it would be later this year, maybe more price or heading into next year. I did want to also ask a little bit about treat because I think of that being also one of the -- you have it. Great. It's been around for a couple of years now. And the brand really has performed pretty well relative to, I think, your internal expectations. And it's bringing in my assumption is incremental growth. So how do you see that brand moving forward within your broader portfolio? Should we expect to see more innovation?

We like treats. Treats is something that we recognize this trend of consumers using coconut milk as a base for kind of refreshment indulgent beverages. We saw this in Asia, and then we -- you see things like Starbucks PeakTrink and things like that, working here. So we launched this 2 years ago, and then last year, launched it nationally. And it's done well. I think we said it's adding roughly 3% to our scan growth on top of our coconut water scan growth. So it's growing nicely this year. We added 2 new flavors, the Frosted Lemonade on a national distribution and an exclusive with a specific retailer, also a different one. And it's bringing in a younger consumer, even younger than we might have seen historically and a more rural consumer from what we're seeing. So think it's -- and it's bringing in a consumer that wasn't in the family before. So we think it's an opportunity to bring more people into the family -- into the brand family and continue to see them start using coconut water fidration and everything.

How do they interact with some of the other brands in your portfolio? Are you seeing that already at the truth?

We haven't really early seen the data yet, but we believe that that's happening. Once they're coming in and they're drinking Vita Coco, they're.

Wanted to ask about Walmart, always front of mind especially considering you've recovered and then some the previously lost distribution. So could you outline for everyone why you got moved out of the modern soda aisle and then into the conventional shelf stable juice set and then ultimately, why that has been a positive?

Yes. Okay. So for years at Walmart, we were off to the side in a really weird place in the store, not even necessarily always in a beverage aisle. Sometimes it was next to like gravy and cooking products and stuff like that. And we didn't like it. And we wanted to move. And so for years, we've been trying to get into a more higher foot traffic beverage aisle, a more mainstream beverage aisle. And the buyers came to us 2 years ago now and said, look, we're going to build a modern soda set for like Poppy, Olipop, these type of things. And we're going to use that little weird set that you're in today, and that's going to become the modern soda set. So we need to move you somewhere, and we said juice is ideal for us at Walmart. Walmart gets that to side gets a ton of traffic. We felt we could bring in new customers, everything else by going into the juice aisle. So during this kind of really fast-moving thing, they moved us to the juice aisle, but they took most of our SKUs out. They give us a small amount of placement in the juice aisle, took all of our singles out, took a lot of our 12 packs out, these type of things. And so we had very limited distribution throughout the whole course of 2025. But we went to Walmart and we explained, look, this is an aisle that gets a lot of foot traffic. It's not a high-growth aisle. And we think there's a really big opportunity for us to be a growth driver for the juice aisle, and that was a long conversation, and it came to fruition in the November resets where now coconut water has a nice size billboard in the highly foot traffic juice aisle at Walmart, which we think is adding households. We think people are discovering it, walking down the aisle, which is a really good thing for us.

I think that's always underestimated. The distribution placement and to your...

And I think we've said it's adding 5% -- it's roughly 5% of our scan growth adding 5% of scale growth. Yes.

And then just in terms of the inventory fill that took place, I guess, at Walmart. I just want to make sure I understand about it from a sequencing of top line growth this year, refresh my memory of how that should transpire it about the timing.

Sure. So Walmart reset occurred in November. So we were shipping in distributors in Q3, early in Q4. So there's some timing there through balance of the year. the more impactful we talked about is at the end of the year, we saw distributor inventory grow worth about $7 million. So on a full year basis, it's not a huge impact. But on the Q4 and the second half, it has a bit more impact in the U.S. growth.

And then it sounds like, again, you're happy with the new placement Walmart. Do you see further expansion opportunities within Walmart a conversation already that?

Obviously, we have an innovation pipeline. So we're constantly sharing that with retailers an opportunity to continue to bring in new consumers. And but we also -- we believe that the Walmart set, I was talking about this back at the IPO 5 years ago, I was talking about the fact that Vita Coco had at the time 2 or 3 or 4 facing in a grocery aisle and cranberry juice and apple juice, have these massive sets, and that's where we wanted to be one day. That's what we were looking to achieve. And now you're starting to see that. And you're seeing it play out not at just any old retailer, you're seeing it play out at the largest retailer. And so we think that's an opportunity to take that visual and bring it to other retailers and see that type of distribution -- those type of distribution gains over time.

And then I suppose success you've had within Walmart, you can -- like you kind of touched on show other retailers highlights look what you can do for yourself and for us. So I assume that's happening exactly.

And bring growth to leverage the [indiscernible].

Even in Walmart. There's still -- there's a very big set they carry. There's still thousands of stores that can move to that.

So to that point, Corey, what percentage then of Walmart did you say?

Less than half have this kind of did some of the same where we see 20 SKUs of idacoco. I think we're averaging probably sub-10. So there's -- you could still double at Walmart.

You touched on innovation. So I'd love to hear a little bit more on your innovation and how that plays a role in your growth playbook over the medium to long term. Honestly, as I think about it, relative to maybe some energy drink category where it's like just nonstop innovation. You've done some but maybe not as much as I would expect. But help me understand that. Is that because you still see so much upside from distribution gains, et cetera. How do you think about innovation?

So we've always innovated. We've always brought new flavors, new products and so on. But if you think about energy, it's a really good example. think about the 20, 30 years that Red Bull built the category would like 2 SKUs. Building a category you want to bring people into the category and we have a power SKU. It's our -- the blue one, right? And it comes in multiple flavors -- I'm sorry, multiple sizes and multiple pack formats. but that is the general driver of growth. And we think that for the next many years to come, as the category goes from really niche to mainstream, which we're starting to see that take place. not only in the U.S. but globally. The pure coconut water will be the driver of that. Over time, all sorts of additional innovation will start to play a role. I mean our pineapple, we've always said is kind of like the gateway drug. It's like what people start with because they don't -- they're afraid of the flavor of coconut water. and then they eventually graduate to the blue one. And so -- and this one is a really good example of the Extra coconut, another example of that. But as we think about the near term from an innovation perspective, think about pack format and also flavors as it relates to bringing people into the category. I think probably the biggest barrier to consumers coming into the category is still taste or even perception of taste, and that's something that we continually try to overcome. And it's overcome through innovation, flavors, flavor innovation and time building a category from scratch, especially something so new to the consumer and a new case profile and everything else, just takes time. And it's been it's been a generation already. I mean it's like a new generation of consumer whose parents started maybe like learning about coconut water in a yoga studio 20 years ago are now buying it.

Sure. And then you touched on the packaging. How do you see that evolving? And specifically, I know we've talked about this before, but also in the convenience store, how will your package innovation evolve?

So in convenience, it's really funny. We thought we needed different packaging to really work in convenience. And we way over indexed in convenience, we way -- our ACV was always lower in convenience than, for example, large format. Over the last year or 2, we've taken, I think, our ACV in convenience from mid-50s to mid-60s. We think that we can easily get this to mid-80s over time. However, what we've seen is that what really works for us is the tetrapack. We have cans that work okay. They do fine. and they've expanded our shelf space. We tried a PET that we're no longer doing it because we thought that was the way to break through at C store, but it's just a matter of building the category and creating the demand and our C-store business is on fire. and it's tetrapack that's driving it.

And remind me what percentage of C stores you're currently in, when you think about the [indiscernible] now?

Yes. The absolute number is probably a little because we're in the -- we're very well at the chain -- it's that long tail of [indiscernible] 80,000, 90,000.

Okay. And then thinking about channels, distribution gains, shelf space. Maybe a little more color on where gaining distribution. I know we talked about Walmart, but other channels that you can touch on, whether it's C stores, et cetera? And how do these distribution gains compared to kind of previous years? It feels like it's been elevated.

Yes. So talking again just about the U.S. for a second. And as we think about the opportunity from a distribution perspective, we feel that there's not only a ton of white space when you think about food service and all of the opportunity that exists there. and you think about the fact that we're in 65 ACV and C-store and should be like most beverages, 85. We think there's also a lot of room for point of distribution gain. And we're seeing that at C-store play out from where 2 years ago, we had 1 facing in most C-stores, sometimes 2. Now we have a full show. And we continue to build on that over time is the distribution opportunity. Grocery what we've seen at Walmart, like Corey was mentioning, we could continue to expand that at Walmart, but then taking the Walmart success and bringing it to large-format grocery and other mass. So there's a big distribution opportunity, but the #1 thing that we believe will continue to drive this business is household penetration. Getting new consumers into the category. We're seeing it. They're coming in at a really fast pace. We think we can continue that for a long time to come. And so that is -- that comes with distribution as we continue to build.

And in terms of your distribution, you're still happy with your distribution partner and getting you into some of these new channels, et cetera, or further?

Yes. So we have a partnership with KDP. We have -- about half of our business is direct. Half of our business is of the DSD. Of the DSD, KDP is our largest. And they've been a great partner for us for many years now. They are I think, doing a better job this year and over the last year of driving some of those distribution opportunities, specifically at C-store. They get there. They're there. And now we're becoming part of their programs and all these other things starting to gain more of those independency store chains.

So as you think about the resets that happen some are still going on. But have you quantified what percentage increase you might have gained?

We haven't because when we did a few years ago, every call you would ask get your number.

Okay. So let me ask it differently, you didn't meet your internal expectations -- look at it [indiscernible] .

As you know, most of the resets across food and drug and C-store happen around this time of year, so like April, May, and we're seeing some really nice gains. of multipack still have a long way to go from a distribution perspective. And so we're seeing some really nice gains. And one leader in C-store is becoming a single serve, which is really interesting.

It's a tweener apparently I've been told. Yes. go figure. But yes, Yes. Okay. So you've been pleased and that's exceeded or happy with the space gains. Switching gears to private label. I feel like ups and downs. You've lost some private label business on a few occasions and subsequently won some a bit back. Maybe help us understand why a particular retailer would opt to kind of lever take that business away and then kind of come back? Where does that business have private label business stand for you? And how do you think about it as a strategic priority?

We've always talked about private label as the private label business as being somewhat lumpy. I think private label retailers bid out the private label regularly, specifically when there's disruption in supply chain or so on, whether it be pricing, whether it be tariffs, whether it be ocean freight, whatever it is. We believe that we have the best supply chain for coconut water. We believe it is our biggest competitive advantage. We have a diversified -- geographically diverse supply chain that offers the best all around pricing, the most scale quality. And so we think that even as somebody might come in cheaper sometimes, we think we eventually get the business back because we continue to be consistent and are able to deliver what we say we're [indiscernible].

So do you think about that still as a big growth driver for your business, you're going to continue to push forward on private label. Help me -- so yes, there's growth but then the margin differential? How do you manage?

So we like private label when it works within our business model. We like private label when it's with large private label customers. We're not going to do private label for a small regional grocery chain that might not be worth it. And we think it grows over a period of time as the category grows, but there's a limit to how much private label. I mean if you think about some of the grocery retailers and things that do private label, it's like, call it, 15% of the category. In general, overall, it's low 20s percent of the category. Most of the large retailers that private label are now in it or will be by the end of this year throughout the course of this year. And -- so over time, the brand will grow faster than private label for sure. But if you want to talk a little bit about how we think about the margins, even though we don't discuss the actual merger.

Yes. As we've said, they're lower than branded, but because of the supply chain advantages, the difficulty of the category compared to what you might see is other private label, their advantage, we would say. And there's a little complexity to it for us. We ship direct to retailers. It's more of a supply chain-led business. So it works quite nicely within our algorithm.

And -- so Mike, did you just allude to that there are some customers or retailers that are going to move more into private label this year that you're signing up?

Yes. So we announced last year that there's a large U.S. retailer that will be starting doing private label that we're going to be doing their private label for them, and I think that starts to flow through should be this quarter. As you know, the accounting is a little tricky, but it should be in Q2.

Okay. All right. Maybe I want to switch back to sports and hydration because you touched on that, and you do, I believe, have plans to expand more into that area as such customers or your sourcing -- customers turn or strength. So can you maybe provide a little bit more color on how you plan to expand more meaningfully into sports and hydration category?

Yes. So the big thing is the messaging. We started -- we did the work, and we got the data and coconut water has 3.5x the electrolytes [indiscernible]. And being able to say that and have that as part of our messaging, it's everywhere. It's in our point-of-sale material, it's in our displays. It's in all of our communication and digital and social. And that is translating to real growth in that hydration segment for us. We're doing a lot of programs with youth sports partnerships with all sorts of smaller leagues, not really focused on -- we're not going after the NFL [indiscernible] can have that's they're saying -- but what we're recognizing is that consumers, in general, want every day hydration, not only when they're on the field, when they're working out when they want to stay hydrated. they're drinking more water. They understand the benefit. of daily hydration, and we think we play really well into that.

Should we expect to see more innovation as well?

Potentially.

This year?

We're working on that.

Okay. Okay. All right. It makes sense listening to you. Yes. All right. right. So I definitely want to touch on international. But maybe before we go there, let's talk about never-ending COGS pressures that all companies are facing. However, your Q1 gross margins were much better than expected. I assume given the leverage that you guys have in the impressive top line growth. But despite that you did maintain your margin guidance -- gross margin guidance for the year. So can you talk through some of the puts and takes of the gross margins and the phasing for the rest of the year that we should expect?

Sure. So we were 40% in Q1. We've indicated Q2 should be similar to Q1. Our full year guidance is 38%. So we are -- there's factors coming into the year, we took pricing for tariffs. The tariffs have gone away. That was a big -- a fairly big number. So that's supporting margins and we have not adjusted pricing at this point. That will happen later in the year. We do see some level of inflation impacting the business in the back half through the impacts of energy. The biggest one being packaging costs are increasing. through TETRA plastic caps, corrugated and factory energy use. It's very, very, very manageable. And then in domestic logistics and fuel related distribution expenses are increasing. So we see that pressure impacting the back half of the year. That combines with what we've talked about is stronger private label growth, having some mix impact, stronger international growth, having some mix impact. And as we've said, we're we'll evaluate how long this is it sustained? And we'll manage pricing accordingly, exiting the year into next year, if we see margin pressures.

And I don't know if you haven't necessarily touched on this, but understand short term. But how should we think about your gross margins maybe over the long term? I mean, you've already kind of reached that upper 30 percentage that we talked about some years ago?

It's where we like to be. I think right now, our focus is growth. And as we continue to expand Corey touched on. Some of the international markets are slightly lower gross margins. As those markets grow, there's a mix effect. But that kind of approaching 40% is where we like to operate the business and we think we will continue to operate the business. We do feel, however, that as we continue to grow, we'll continue to see leverage on the bottom line and potentially EBITDA over time becomes a larger percentage of net sales.

And then before we move off of gross, I just want to touch on the ocean freight because you touched on this a couple of weeks ago on your Q1 call that base rates really haven't moved all that much, want to maybe understand that? And is there a risk that they could given the situation that they could increase? Or do you feel pretty good about?

Ocean freight rate, they go up when there's a spike in consumer demand. and when there's less availability and capacity, there's a lot of capacity right now. There's not a huge increase in demand in markets like the U.S. and in Europe and so on. So ocean freight rates are at more historical norms. We've been doing this now 22 years. They're now at the norm that they've been, call it, 20 of those 22 years. We saw a couple of years of crazy spikes when -- with COVID creating incredible consumer demand. There wasn't enough inventory and capacity on the ocean freight side. So we feel quite confident that this is where ocean freight rates are and will remain the fuel surcharges are quite manageable as it relates to the big picture of our cost of goods.

I guess that's encouraging. All right. So want to touch on international because you mentioned a couple of weeks ago that growth internationally has exceeded your expectations, and you did reiterate your goal of having international to be as large as your U.S. segment. when could that [indiscernible] I know -- is that -- or help us understand sort of the building blocks again and the growth drivers of your international business and where you see the most upside?

Yes. So big picture, early days of the development of the international business. If you think about the category in the U.K., which I think is growing 60% or something like that -- the U.K. high 30s scans in the quarter were significantly higher than that. But as the U.K. business is growing and doing so well and so on, consumption per capita is still 1/3 of that of the U.S. Germany is our second fastest-growing market and consumption per capita is 10% of the U.S. So there's a long runway in the few markets that we're already developing that are becoming more meaningful to our P&L. So I think those markets continue to develop and continue to grow faster than our U.S. business. At the same time, we're starting to see signs of growth in some of the other European markets and looking at some opportunities in Latin America and in Asia, where we think we can grow the coconut water category. So something is happening where the category is working on a global level. We think somewhat the communication that we're doing, the education that we're doing through digital and social is not only seen in the U.S., it's seen on a global level, and we think that the category has a real opportunity to be a major category globally.

And so as you think about that lot to unpack because would it be a prior to then to go deeper in some of the existing markets you're in, or and/or are you expecting to kind of open new markets and just help me understand your infrastructure to do this.

So I think a little bit of both. We are -- as you know, we took our Chief Sales Officer from the U.S. and made him gave him a global role, and he is now on an airplane nonstop. And he's doing both, working with the teams in the markets that we're already in, figuring out how to gain distribution because we're still very limited distribution in these markets with great velocity, and figuring out how to double down on those while looking at new distribution partnership opportunities and all of these other things in other markets.

That's just very early. Okay. Maybe one final question topic. I have many others, but I did want to ask you about M&A because you do have quite a bit of cash on your balance sheet to fund potential. And I know we've talked about this over the years. But is M&A is still a priority for you? And if so, what are some of the potential targets? Would it be capabilities? Would it be another platform within beverages?, How do you think about potential M&A?

So yes, I mean, we're generating a lot of cash with our asset-light model. We have no debt on the business, $200-something million in cash. So M&A feels like an obvious, right? We look at a lot of things. We want to stay within products that we think -- or brands that we think we could really add value to, whether there are synergies on the sales side or on the supply chain side or whatever it is, as close to what we do as possible would be good, whether that's shelf-stable beverages that play in health and wellness and functionality I think where we could really add value. So we look at things all the time. We have conversations with entrepreneurs who are in the beverage space. We're being very patient. There's no reason to rush. We have a core business that is growing really well that we want to continue to invest again -- against -- we don't want to be distracted. So I don't think you're going to see us do anything transformational. But the objective is to continue to add on to the business, things that we think we could really drive value.

Okay. That all makes sense. Thank you so much for your time. Appreciate it. Great having you here again.

Appreciate it.

Thank you.