Yeah. Well, thanks everyone for joining us today. It's our privilege to have Vita Coco here with us and Martin, the CEO. We can jump right in with some questions. I think just maybe at a high level, would love to hear a little bit first about what's driving, you know, some of the, the top line momentum. If you look at our scanner data update from two or so weeks ago, you guys with Freshpet and Celsius, who are all here, were the three fastest growing and the top line momentum was accelerating. Maybe just give a sense of what some of the key drivers are and how, you know, how to keep that going.
Yeah, sure. So obviously, can't talk to Celsius and Freshpet, but maybe-
Right.
Maybe the animals are drinking energy drink and need coconut water to recover.
Oh, yeah.
So I think, you know, coconut water, the category's been growing pretty healthily the last 2-3 years, ever since, really, 2019. I think what's driving it is increased, household penetration and increased velocity per household, which is a nice combination to have. You know, what's driving that are, I think, Vita Coco pivoted in the 2019-20 time periods, talking about occasions and pushing occasions. Our goal is to grow the category and grow our share within the category. And on the growing the category basis, obviously, that's... And educating people as to why coconut water is such a beneficial product for them and where it fits in their life. And so that's a little bit occasion driven, and we've been doing a lot of occasion work from that sort of perspective.
And then I think from a gain share perspective, retail execution and the addition of multi-packs has helped us enormously. We were the largest player, like, at 40% market share, like three years ago. We're now at 50%-52%. We're the only brand that can really do multi-packs in Food and Mass. And I think we're benefiting from that. And I think what we're seeing is consumers, you know, want a multi-pack in their home. The brand was built in singles, 500 ml Tetra singles, and it's a pretty bad shopping experience when you try and put 6 of them in a basket and try and check them out, particularly when you're self-scanning, as everyone is doing nowadays. So I think multi-packs are helping, and we're seeing that sort of flow through to growth.
And then I think the last thing I'd say is, we have some demographic tailwinds on the category. The category, and Vita Coco, in particular, sort of over-indexed to Asian and African American and Hispanic households. Those are households that are growing, and growing as a percentage of the U.S. population. I think the over-index comes from those households having, you know, older generations having grown up in the tropics and where coconut water was part of their lifestyle. So that's a nice tailwind. And then also, look, we're only 20 years old, right? And so we're actually quite a young brand, and we try and stay young. And we try and emphasize our youth and our humor and our approach to, you know, marketing.
So we over-index to add our households in the younger generations, and I think that just sets us up well for future growth. And so I look at those demographic tailwinds, plus the activation we're doing to feel very comfortable that we can continue this momentum.
No, that's great. So there's a bit there. Let's sort of dig into some of it a little bit more. Your share is, of course, over half the category. That's the U.S. number. What is the upside? You know, do you see some limits to it? You know, how do you think about the competitive set, and you've gained quite a bit of share in the last few years, like you've just mentioned. How sustainable is that?
Yeah, so I'll start off and say, I think the share gains we've made have made are sustainable. I think as you look at the competitive landscape, we're the largest player in the scanned channels. Harmless Harvest, which is owned by Danone, which is in the cold section, is the second largest brand on a dollar basis. And so we're not really competing with them because they're in the cold set. We're a shelf stable. We're completely different price points. They're twice the price per liter than we are. So I would carve that out as a separate, sort of, premium coconut water, fresh coconut water category, and that's around 10%. And then Goya is the next biggest brand. It's in canned, sweeter coconut water liquid, targeted at Hispanic consumers.
It sits in Goya's Hispanic set, or ethnic set, maybe is a better way to put it, which at least in most retailers, it's his own dedicated set of ethnic foodstuffs. So within coconut water, we've got a pretty high share of the Tetra piece. And I wanna say, and you'd have to, you know, don't quote me on this, but maybe it's 70%-80% share of Tetra. But the two places that we don't play are this fresh, premium, organic sort of product, and we're trying to play in that, which is where Harmless Harvest is, and we're trying to play in that area with Farmers Organic, which is shelf stable, so it's not in that cold set, but it's at a premium price point, and we're trying to gain share of that premium set.
And then on the canned side, we launched Juice, which is a sweet coconut water with pulp, which we've chosen to go into the C -stores initially to build it with, because that's where we think the consumer is. But ultimately, we'd like to gain share of the canned coconut water category. The canned coconut water category is orders of magnitude, 25% by revenue, 30% by volume, and we don't really plan it. So when you talk about can we grow from 52%, I think, yes, because we can grow our share of Tetra. That we can still deliver, but we can also gain share of these other categories that we don't currently play in significantly. So that's the multi-year play. And, you know, how high is up?
Our best market is the U.K., where we're 80% of total coconut water category. I do think, you know, small brands struggle to stay valid in the market. It's a tough supply chain. Can we get 80% in the U.S.? That seems a little more daunting, particularly given we've got these three different places to play in, but I certainly think we can grow from where we are.
No, that's a great way to break it down, and I think it's easy to underappreciate how different some of the subsegments can be from each other. You mentioned you're the one of the only ones or the only one who can really support production of multipacks. Can you talk a little bit more about that and explain how your supply chain is a bit of a competitive advantage?
Sure. So, I said the category was built off singles, which again, was how the category was built, across Food and Mass. Sometime, and look, I only joined the company in 2019, but sometime in the 2014, 2015 timeframe, coconut water started showing up in Club. And Club became a significant destination for coconut water, and that's where coconut water is built in multipacks, like 12 packs or 18 packs. But for whatever reason, that didn't really translate back to Food and Mass from a competitive perspective. So we started to push that. It certainly has been a nice contributor to our growth in the last 12 months.
If you look at our investor deck from Q2, we break out how the growth is happening, and a big part of the growth is in multipacks, but the singles are still growing. So we're able to add multipacks but still have growth in the core, which we think is again evidence of a very healthy brand. Because most of the competing brands, certainly on our shelf, are much, much smaller, it's much, much harder for them to have a multipack and a single. There's just not enough velocity and volume, so that's why we say it's difficult. Could they do it? Of course, they could. But it's much more difficult to hold the shelf space at those velocities. And so we think the addition of multipacks to our assortment on that shelf is improving the billboard.
It's expanding the amount of space available for coconut water, but we're the ones gaining it. We're not giving it up to the long tail, right? And the velocities of the multipacks and the ring for a multipack is a real win for both the retailer from a, you know, margin per transaction perspective. But I think also to the shopper, because of the that shopping experience I described about scanning singles, which is just not fun if you're self-scanning. So no, I think we feel pretty good, and I think that answered the whole question, but I may have missed the last piece of it.
No, I think that's good.
Okay.
Well, the part that we could go into maybe a little further is just some of the way that your supply chain is set up.
Mm-hmm.
As what it seems to be a bit of a competitive advantage.
Yeah, I think we think so. It's a historical advantage that sort of started in the mid-2000s. Originally, the founder found coconut water in Brazil, and there's this infamous story of meeting two Brazilian women in a bar in New York, and then one of the founders following one of the women down to Brazil and then finding coconut water and coming back and launching coconut water, right? Which is, if I ever start a business, I'd love for my business stories to be like that. Anyway, so when they founded the business, initially sourced from Brazil, Brazil had some capability to package coconut water for local consumption, and they were able to bring coconut water into the U.S.
As they started to grow, they outgrew the Brazilians' factories volumes and reliability, so they started looking for other places to source coconuts. Coconuts are grown in the tropics, so around the equator. Major growing areas are Brazil, Indonesia, Philippines, Sri Lanka, Thailand, Vietnam, India, and I believe there's some coconuts in Africa, but I'm not totally clear how much. So they went to the Philippines, and coconut is a very interesting fruit. So the first point is it's fruit, so we sell fruit juice. It's not a nut. The second point is, the coconut itself produces a range of products that are used by the local communities.
So, the flesh, which is used in desiccated coconut for cooking, creates coconut flour. There's cream in the coconut that gets used to make coconut milk. There's oil in there that gets used for beauty products and cooking products. The husk of the coconut gets used as fertilizer or can be converted into activated carbon, or the hairs on the coconut can be converted into insulation materials and mattress pads and stuff. So the coconut itself gets completely used. And you can might imagine. Oh, and the other thing, odd thing about coconuts is that they are largely harvested by hand, and I would say 99.9% harvested by hand, at heights ranging from 20-40 feet in the air. So, and then they're very bulky.
So what happens is you build a coconut processing facility surrounded by coconut farms or small village of farms. They're not large plantations. It's not like palm oil. A little bit in Brazil, it's plantation driven, but mostly it's still small family farms. And then you bring the coconuts in, and then you break the coconut apart, and you make it into as many things as you can, right? And so when the founders went to the Philippines looking for coconut water, they contacted the coconut processing facilities and said, "Can we come visit?" And they went visit, and Mike tells this delightful story of walking through one of the largest coconut processing factories in the world, and flowing through it was this sort of river of water, sort of very decorative, had a little fountain and a waterfall and stuff.
And he said, "Why do you have this?" And they go, "Well, what else do you do with coconut water?" Right? And it was going to drain. And it's the challenge in those markets was the technology wasn't there to package it, and the local demand wasn't there because if you wanted coconut water, you just picked a coconut up off the street, right? You didn't have to go buy coconut water. And so at that point in time, they, the founders, the operations guy said, "Hey, if we could sell this coconut water for you, would you offer us, you know, exclusive contracts for North America to take the coconut water and sell it?" And the answer was obviously yes. This became what I would call the icing of the cake of the coconut water processing facilities.
The company took the technology that it has been exposed to in Brazil and brought it to the Philippines and incrementally added factories where we entered into long-term agreements... great relationships with factory owners, you know. One of the best, you know, roast pork dinners I've ever had was the whole pork in the Philippines in Mindanao, you know, last April. So these are personal relationships. These are family facilities, and we add a lot of value to their facilities by monetizing the coconut water. We're obviously taking coconut water from the tropics to the developed world, where consumers will pay a premium for it. So, you know, when my kids ask me what do I do?
I ship water from the tropics to North America, which, you know, doesn't sound like a hugely value-adding proposition, but it is obviously with a brand and a price point and a product benefit. So that's us on supply chain. We're in, I think it's over 10 countries, so we're pretty diversified. Primary supplier in Brazil, Philippines, Indonesia, and Sri Lanka, but also supply from Thailand. And we're diversified across factories, too. So we deal with things like political risk, like Sri Lanka, you know, had some unrest about 18 months ago, and our factory shut down for a week, and then it was open again. But we were totally fine because we have these, we've said, "Okay, we'll deal with this from here," right?
And so we have diversified geographic risk, weather risk, political risk, economic risk. And we have access to coconut water. So we're still not packaging all the coconut water that the factories we work with dump. So we still have excess, excess coconut water, but. So we still have room to grow, and we can add factories and or, you know, Tetra lines, and we don't. So we're also asset light, which from us means we're not investing in facilities, so we don't have capital tied up in other people's facilities. We do carry a fair amount of inventory, as you know, because you follow us, right? Because the inventory is on the water, and then you obviously run with a little bit of inventory in country.
During COVID, that ballooned a little bit because transit times were 12 weeks, and it was stuck in ports forever and stuck outside Long Beach forever and, but now it's sort of more normalized. We believe that supply chain, with its diversification of factories, countries, and relationships, gives us a superior competitive advantage, both from a branded side, but also from a private label side.
Well, I was just about to touch on that. The exclusivity of a lot of the supply obviously allows you to support private label and the brand of business, and it can strengthen your relationship with retailers. But you also didn't renew a contract for one of your larger customers for private label. What was some of the strategic rationale there, and how should investors think about, you know, that decision?
Yeah. So we like the private label business. We believe it gives us scale with our partners, and it sort of... You know, our relationship with our supply partners is, we're trying to take as much coconut water as we can. So implicit in that, we're going to try and sell as much as we can. We obviously think there are acceptable margins for private label and then some margins that are perhaps less, like, less acceptable or unacceptable. So we like the business. We—as you mentioned, we recently announced that, and indeed, it was literally days before our Q2 earnings release, that one of our largest private label customers had indicated a desire, and it was really agreed, that they would transition the business.
So the nature of those relationships is obviously a pricing relationship and a long-term... You know, there's a combination of quality, service, and price, and you need to reach alignment on all of those things. I think from a supplier perspective, you know, you're dealing with a retailer who has a fair amount of power, and you need to know what your walk away is, right? I liken it, you got to know when you're going to walk away. And so you will have to walk away when you reach your walk away, and your walk away is some amount of acceptable gross margin that you think values the service you provide. And we certainly think that we have a competitive advantage on the supply chain side.
So when we, you know, get into negotiations that we think are squeezing that value down, we need to walk away. Over the last two years, we've won private label customers. We've added new private label customers, relatively significant one. I think the one we've talked about is in Germany, where we don't really have branded presence. So we know we're competitive, and we know we're in the game. Like, it's not like we're not in the game, and actually, the one in Germany has allowed our brand to be put into that retailer, which is a huge win and hopefully provides long-term growth for us in Europe. So we know we're competitive, and so you got to know when to walk away. And so when you issue a walk away, then you've got to walk away. Otherwise, it's not a walk away.
Right.
Right? And we also think that what we do is very hard to duplicate. And you might say, "Well, okay, then how does someone walk away from you?" Right? And the answer, I think, is they think they can do it. And I think we were pretty honest on the call, that if anyone can do it, they can do it. They're, you know, and we haven't named the customer, but they are very good at what they do. We have an enormous amount of respect for them. We love them as a customer, and we hope to be a, that they will be a customer in the future. If anyone can do it, they can do it.
We've just said, "Look, this is where the walk away is, and we will support this transition so that you guys aren't hurt, and we're here to support that transition. Because we don't want this to fail because of us, but we, you know, told you that we don't think it's tough," right? Let's see. I think we're in that process of seeing, right? And we're not updating what we said on the call, which is the transition is, you know, happening as early as Q4, and we will see what happens. But again, I think if you have an approach to private label, you need to have some number that you walk away, because for future negotiations on private label, that's enormously helpful.
Yeah.
Right? If people know that there is a walk away, then the negotiations are a little more friendly.
Yeah.
So, you know, this is, you know, we're in this for the long term. We're not saying we, we don't like private label, we're not... And we certainly love this customer, and they're a big supporter of our brand, and so we appreciate it. But we're also clearly saying that there are certain terms under which we can't continue.
So you've mentioned, at the beginning, some of the usage occasion, increases as ways to drive the category growth and share. Let's talk about the Vita Coco Spike. If I understand it all correctly, it's technically Diageo's product, but it's got the licensing for the brand, and then you sell the coconut water as an ingredient.
Mm-hmm.
There still is nice economics for you, but it certainly helps build awareness of a cocktail mixing occasion. What's the latest on that, and what are you seeing in terms of, you know, impact on awareness or, you know, how the marketing is progressing, and what's the latest there?
Yeah, I think, you know, one, we're obviously pleased that we're with, you know, the number one rum brand and the number one spirits brand in the country, right? And they've spent a fair amount of money this summer, sort of promoting Captain Morgan Spiked with Vita Coco Spiked with Captain Morgan. And from that perspective, we're very happy because the knowledge of mixing coconut water with alcohol is greatly increased across consumer groups, right? And one of the things we like about coconut water is it works in the morning for breakfast, either as a hangover cure, although as I look around the room, no one here looks like they need hangover cures recently, but either as a hangover cure or a smoothie, right?
It's a huge breakfast occasion, but it's also consumed during the day, after workouts, at lunch, with lunch, as a pick-me-up in the afternoon or in the evening as alcohol. When we look at all those occasions, the one that we think we can amplify is the alcohol occasion. We would like for you to have a liter of Vita Coco at home to mix with your tequila or with your scotch, right? Or to make dedicated ice cubes for your scotch production, right? We'd like that. That is where the real money is. So I think from our perspective, the partnership with Diageo has generated that awareness, and Diageo appears committed to, you know, continuing that spend this year, and then also looks like they may continue that spend for next year.
From an impact to our P&L perspective, you're right, it was a licensing deal. I think we said its impacts on our P&L will be pretty marginal. Even the coconut water sales is not gonna be that material to our P&L. So for us, it was always the amplification or the publication of, "This is okay to mix with alcohol," that was way more important. And what we're starting to see is bars picking, you know, showing up with coconut water as a mixer. So we did do some events at some key bars on Long Island, in the Hamptons, some very, you know, select stuff that you'd expect to be influencer sort of stuff this summer, and you're starting to see bars picking up, cocktails. Again, that's an on-premise business.
It will be nice, but the real benefit would be if people took the coconut water in their fridges and mixed it in the evening. So I encourage everyone to do that tonight. Yeah.
You mentioned the launch of cans and how it's kind of a white space in C-stores. What's the latest there, and how has that been progressing? And maybe describe a little bit how that product is also differentiated versus the core.
Yeah. So, canned coconut water tends to show up sweeter and also can show up with chunks of coconut flesh, so with pulp in it, in it. And historically, we have not played in the canned coconut water category. Last year, we launched what we call our juice product, which is a sweeter coconut water with pulp in it, in a mango flavour and a pure flavour, into some regions 7-Eleven. i can say it now because 7-Eleven, because it was, it's old history, and it's worked pretty well. So this year we tried to roll it out through C-stores. I think at the end of Q2, our ACV on that was like 17, 18 or 19, order of magnitude.
So some progress, but not where our Tetra is up in the fifties, so there's still a lot of room to go. I think we're seeing, you know, velocities there that we think should be appealing to the convenience stores, however, haven't taken this in yet. So I would expect that to build over time. We are focusing on convenience stores because we think it's an easier competitive play for us relative to the cans of coconut water that exist there. If we get traction there, we'll then go to mass and and food. So that would be the second, second play. So I, I'd say right now it's going how I would have expected.
Just building distribution in the C- stores for a company like us, you know, the first 5%, 10%, 20% comes easy, and the next 5 comes less easy, and then it becomes really hard. So we're going through that. So it's a multi-year support, but I think we like the velocities we see, where we are spending a fair amount of money on trial, right? With COVID, getting a product to lips was very hard other than on-price promotion. So this summer now you can do intercepts and you can try, and while also doing BOGOs and stuff like that in the convenience store. So it looks like velocities are good, so we feel pretty good about it, and again, it's part of our strategy of gaining share, so it will play out, but it's a multi-year play.
No, it sounds good. Just one last one on margins. You've mentioned the steep rate that most of, you know, the US food and beverage companies don't have to deal with. Those costs obviously were a huge burden, but then it rolled over. Can you just give a sense of how you sit today and specifically thinking of just, you know, you contract some of that, it has to flow through inventory. There's a bit of a lag of the benefit. You know, how much maybe is left, where do you sit now, and how do you think about looking ahead as far as, you know, are freight costs at the bottom? Have they come up a bit? What's kind of down the road?
Yep. So obviously, we were happy with our Q2 gross margins. I think we indicated we expect Q3 to Q4 to incrementally improve over Q2 while still, you know, falling within, you know, producing an end range within our guidance. I'm not today gonna update that. I think if you look at ocean freight, you'll see that the based on the indexes, which tend to follow major ocean freight lanes from China to the U.S. or, or et cetera, so they follow major lanes, which isn't necessarily the lanes we're in, have sort of bottomed out this summer. The major ocean freight carriers tried to take ocean freight up in the June time period, but you're starting to see that wane again. So what I would say, it's bouncing around the bottom, right? It's probably where it is.
To your point, that takes 2-3 months to flow through our P&L. So that's pretty exciting. Last year we talked about from a total transportation rate basis, it was $67 million that we absorbed. Some of that was domestic transportation, some of it was ocean. I think we said roughly 2/3 was ocean and 1/3 domestic. On the domestic side, so the ocean side is now bouncing around close to historical levels. And we are choosing to participate primarily from spot. The contract rates that we see are typically several hundred dollars below the spot, so we're like, why would we bother?
Our reading of sort of the global dynamics, the strength of the Chinese economy, what's likely to happen for American economy, economy, particularly for discretionary items that come in, imported items, we think is probably likely to be weak. So we're just sitting on the side because we expect it to be weak for a while, and there's no point entering contracts at a higher price point. That's how we think about it. On the domestic, quickly, because we're out of time, on the domestic transportation side, there are different pieces to it, but there's port fees, detention demurrage, which was huge during COVID because the ports were a mess, and then warehousing costs, which were also huge in Q4 because everyone had inventory that they, that they'd overestimated they needed, right?
Anyway, so those things will take a little while to sort out. Certainly, the warehouse costs and then the domestic logistics costs, which are driven by fuel and trucker wages, will take a little while to return to pre-COVID levels. So there's a little bit of a drag, but we still think ultimately it will largely return to pre-COVID levels. So we're hopeful that a lot of that will come back to us. Some of it we will give back to private label as price concessions because it's sort of cost-plus driven, but some, a lot of it will flow through to our P&L.
Great update. Thank you so much for being here-
Nope.
And, and-
Thank you for the invite. Thank you for the time. Yep.