The Vita Coco Company, Inc.

Thank you, and welcome to the Vitacoco Company second quarter 2022 earnings results conference call. Today's call is being recorded. With us are Mr. Michael Curbin, Executive Chairman, Martin Roper, Chief Executive Officer, and Kevin Benmusa, Chief Financial Officer of the Vitacoco Company. By now, everyone should have access to the company's second quarter earnings release issued earlier today. This information is available on the investor relations section of the Vitacoco Company's website. at investors.thevitacococompany.com. Also on the website, there is an accompanying presentation of our commercial and financial performance results. Certain comments made on this call include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Also during the call, we will use some non-GAAP financial measures as we describe business performance. The SEC filings, as well as the earnings press release and supplementary earnings presentation, providing reconciliations of the non-GAAP financial measures for the most directly comparable GAAP measures, are available on our website as well. And with that, it is my pleasure to turn the call over to Mike Kerbin, our co-founder and executive chairman. Mike?

Thanks, John. Good morning, everyone. Thank you for joining us today to discuss our second quarter 2022 financial results and full-year guidance. I'll begin my remarks with a brief overview of our performance this quarter. I'll then reiterate our long-term growth strategy as we continue being a driving force in healthy beverages. Martin Roper, our CEO, will then discuss the details of our top-line growth drivers, including our recent and upcoming pricing initiatives, and will provide an update on the supply chain and cost environment. Kevin Ben-Moussa, our CFO, will provide a more detailed discussion on the second quarter results and our outlook for the year. I want to start by taking all of our colleagues across the globe for their continued commitment to the Vitacoco Company and their dedication to our mission, creating ethical, sustainable, better for you beverages that uplift our communities and do right by our planet. The second quarter punctuates a strong first half of the year and reinforces that our strategy and commercial execution are working. Net sales grew 13% year over year to $115 million, with our flagship Vitacoco Coconut Water brand remaining the main driver of growth, increasing 21% over the year-ago period. The Coconut Water category remains healthy, increasing at a 12% pace in IRI measured channels for the last 52 weeks, while Vitacoco grew 29% over the same period. We're pleased that Vitacoco Coconut Water remains the primary driver of retail category expansion, and the brand continues to gain incremental share of the category. Today, We enjoy undisputed category leadership with 51% value share, which is up 7% from a year ago, according to IRI-measured tract channels, MULOC. We're encouraged by the continued strong growth we're seeing this year, and we remain committed to our long-term plan to deepen our household penetration, increase category share, and expand usage occasions to drive velocity of our products. We're pleased to have numerous tailwinds working in our favor, including increasing consumption of coconut beverages, driven in large part by demand from multicultural consumers and by growing consumer preference for natural and functional beverages. Over the years, we've found that our Vitacoco products actively source from the $10 billion isotonic category and from the $11 billion juice category. Our ability to source consumption across beverage categories and occasions is a primary driver of our growing household penetration, and according to Numerator, Vitacoco household penetration currently stands at 11.4% on a 52-week rolling basis. That's up approximately 170 basis points over the last year, meaning that we've added about 2.3 million households versus the prior year. We're extremely proud of this progress, but we're not stopping here. We believe our coconut beverages are still in the early days of becoming a household staple, and there's plenty of runway to add new households and introduce consumption occasions. As a beverage pioneer, we plan to take a leading role in driving innovation in the coconut water and coconut water adjacent categories. Along those lines, we're pleased to enter into a collaboration with Diageo to introduce Vita Coco Spiked in early 2023. It's a delicious ready-to-drink cocktail made with their flagship Captain Morgan rum brand. We think it's not only another way to increase our brand awareness across the beverage landscape, now including alcoholic beverages, but also to increase consumption occasions for coconut water through educating consumers on the great taste of coconut water cocktails. We think it's a natural combination. If it isn't obvious, I'm particularly excited about the future of our business. Vitacoco is one of the most recognized healthy beverage brands in the world, and we're optimistic that we have essentially unlimited headroom to continue translating these many opportunities into category growth, market share gains, and increased household penetration. In summary, we remain confident in our ability to deliver on our long-term algorithm of mid-teens net sales growth. Additionally, we remain committed to our goal of being the industry's better beverage company. one which focuses on providing healthier alternatives as compared to conventional beverages and one that strives to do better for the world in which we live. Before I turn it over to Martin, I want to briefly express my appreciation to our CFO, Kevin Ben Moussa, who will be leaving Vitacoco at the end of this month to pursue an outside opportunity. Kevin has been an excellent business partner and a great friend over the years. I'm especially grateful for his dedication and contribution to our company And we wish you all the best, Kevin. And now I'll turn the call over to our Chief Executive Officer, Martin Roper.

Thanks, Mike, and good morning, everyone. We are very happy with our strong first-half performance in 2022, which resulted in a first-half net sales increase of 19% as compared to the prior year period, driven by continued strong consumer demand for our products, namely Vita-Coco coconut oil. In addition, as we will discuss in more detail later, we saw an improvement in the first quarter in our gross margins, reflecting the initial effects of our pricing actions and a stabilization of key transportation costs, partially as a result of our mitigation efforts. In the second quarter of 2022, we increased global net sales by 13% to $150 million, compared to net sales of $102 million in the second quarter of 2021. The growth versus last year was driven by 21% net sales growth of vitacoca coconut water, offset by private label and others. Net sales in the Americas, which comprised 87% of total net sales in the second quarter of 2022, increased 17% to $100 million, compared to $86 million last year. Net sales for our international segment, which comprises the remaining 13% of total net sales, We're down 5% compared to the same year-ago period, primarily driven by a negative lap of opportunistic commodity sales last year, combined with a negative impact of foreign exchange rates caused by the strengthening of the dollar relative to currency in our European markets. Supporting our volume growth within the Americas, year-to-date, we believe that we've gained approximately 11,000 incremental net points of retail distribution provided COCO in the United States. over the second quarter last year, as more set modifications were rolled out and executed against. We were hampered slightly by inventory availability on certain SKUs, but assuming inventory conditions improve, we believe we remain on track to reach our goal of 25,000 net new points of distribution by the end of the year. As we previewed last quarter, we took our planned first phase of frontline price increases during the second quarter. And we have now also communicated to our retail partners our price increases planned to take effect during the fourth quarter of this year. I can confirm what we stated last quarter, that we expect our planned pricing actions, once fully realized on an annual basis in 2023, to offset the current level of elevated costs on a dollar basis. On a consolidated basis, our second quarter benefited from a 3% price mix split, largely driven by a 6% benefit in the Americas, and partially offset by international, where price increases were offset by a negative foreign exchange impact. The price mix benefit in the Americas segment was mainly driven by reduced promotional investment and frontline price increases in our vitacoco coconut water, and price improvements implemented on private label products. while we saw negative impact internationally, mostly driven by lower commodities, opportunistic sales, and foreign exchange impact. To date, as it pertains to demand elasticity, we're not seeing a material negative impact on our volumes, resulting from higher pricing. We are seeing higher growth rates for our larger pack sizes that realize lower net revenue per case equivalent, and this mixed impact has reduced our reported net revenue per case equivalent gains. Going forward, as we expect our net sales mix to move towards larger format SKUs and multi-packs over time, we anticipate some negative mix effect on net pricing for cases of lump from this mix shift, which could partially offset the otherwise positive impacts of our pricing actions in America. We believe this trend on larger packs and formats is indicative of a healthy brand and should result in increased overall consumption as consumers have more coconut water available in their homes. For modeling purposes, we expect a more moderate impact from price mix for the remainder of the year due to timing of our increases and promotional activity, especially in the Americas, where we will lack lower-branded promotional activity. This had a disproportionate impact during the third quarter last year, producing higher reported net revenue per case, which makes for a tougher comparison this year when our promotional cadence is more normalized. We're pleased with our multi-pack initiatives on Vitacoco, as demonstrated by the American SCAM data, and while it is still early in the testing of our Vitacoco juice can offering, the reaction from C-Store retail test partners has been very positive. We expect to roll the canned juice product to more retailers and markets next year. We remain excited about our innovation pipeline for vitacoco coconut water and associated vitacoco product format extensions, as well as for our developing brands. And our intent is that all these initiatives will contribute more to our portfolio in the future. In U.S. scan data for the second quarter, we see private label coconut water growing, but slower than both the category and vitacoco branded revenues. Our private label volumes and net revenue are growing year-to-date despite weakness in the reported second quarter shipments. We expect four-year American private label shipments and net revenue to track our year-to-date trends with the benefits of price increases and new business offsetting some reductions in demand from other customers. Regarding the cost environment, as I alluded earlier, we saw during this quarter a stabilization of the transportation cost increases experienced in prior quarters, as well as some improvement in our own ability to mitigate unplanned expenses, such as detention and demurrage. These improvements showed up in better cost of goods per case equivalent and better margins for the second quarter than our first quarter, and we believe that our total transportation costs peaked during Q4 and Q1. We maintain our supply chain as one of our key competitive advantages. It has continued to perform well with the unprecedented supply chain challenges the world is facing, particularly the unpredictability of ocean shipping container availability and rates, ocean shipping reliability, and challenges at ports with detention and demurrage. During the quarter, our supply chain supported record quarter volumes, but we still experienced out-of-stocks on certain SKUs in certain locations, as achieving balanced inventory across our warehouses continues to be challenging with strong demand and unplanned transit and port delays or skipped sailings affecting our service levels. On ocean container availability, we recently began to be offered additional capacity on certain routes beyond our contracted agreements, but at spot prices typically at or higher than our contracts. We're taking advantage of the best offers to improve our inventory positions in market. Assuming this continues, this should help resolve our inventory challenges by the end of the third quarter. We also believe these offers are a sign of ocean container demand weakening. In transit times remain higher than normal, and at the end of the quarter, approximately half of our finished goods inventory remained in transit prior to receipt in country. On ocean freight costs, as we indicated last quarter, we have tried to limit our entry into new contracts, except where we have to obtain guarantees on capacity to secure our service book. As we near the end of the year, much of our container needs are secured and already in transit. Based on savings to date and our current contractual commitments, only approximately 25% of our ocean freight container capacity needs for the rest of the year are reliant on spot markets. As we negotiate new ocean freight contracts for lanes whose contracts are expiring, we are seeing proposals that still represent an increase in our old contract rates from the prior year contracts. Please see the graphic presented in our investor deck for visualization of this effect. For each proposal, we evaluate whether to enter into a capacity and price contract or to operate past fund needs uncontracted relative to price. We are also evaluating the possibility of shorter duration contracts, given our expectation that rates are more likely to soften than to increase. Currently, we are contracted for approximately 30% of our 2023 container needs, mainly due to the multi-year agreement we entered into last year that expires during 2024. Our financial outlook for 2022 assumes the balance of our needs are priced at the current rates we are being offered. Our primary commercial focus for the balance of the year is navigating the challenging supply chain logistics environment, particularly some challenges in obtaining certain ingredients for our flavored Vita Cocoa Coconut Water SKUs, where we expect some out-of-stocks during the third quarter. Despite this, we are still confident that strong consumer demand, our expected improvements to overall inventory availability, and our planned fourth quarter frontline price increases will help drive top-line growth, and we are maintaining our full-year net revenue outlook. More importantly, as discussed prior, we anticipate that all the pricing action we will take this year will offset the higher costs we are currently experiencing. and even absent any cost improvements are the first step to returning our business closer to our long-term financial algorithm of gross margins approaching 40% and EBITDA margins in the high teens. Next, based on our current assumptions, we remain confident in our ability to achieve our financial targets for 2022. Based on everything we see in the market currently, the worst may be behind us from a margin deterioration perspective. And today we are reaffirming our previous Net Sales and Adjusted EBITDA Guidance, which Kevin will detail for you shortly. With that, I will turn the call over to Kevin Ben-Moussa, our Chief Financial Officer.

Thanks, Martin, and hello, everyone. I will now provide you with some additional details of the second quarter 2022 financial results. I will then discuss the drivers of our outlook for the 2022 fiscal year. As Martin discussed earlier, we're seeing sequential improvements which we would classify more as a stabilization of transportation cost environments during the second quarter that has extended into the third quarter thus far. Our top-line growth remains strong, and we're on healthy financial footing with relatively low financial leverage and end-fall liquidity. In the second quarter of 2022, net sales grew 13% to 115 million, an increase of 13 million compared to the second quarter of 2021. the increase was driven by continued strong consumer demand for VitaCoco Coconut Water, with global net sales up 21% year-over-year. On a segment basis, within the Americas, VitaCoco Coconut Water grew 23% to 76 million for the second quarter of 2022, compared to the same period last year. The increase was primarily driven by higher case equivalent volume from continued strong consumer demand combined with net positive benefits from price mix, largely driven by higher frontline pricing. Private level declined 3% to 21 million for the second quarter, driven by a decline in case equivalent volume, partly upset by improved pricing. International segment net sales declined 5% to 15 million in the second quarter of 2022, primarily driven by foreign exchange headwinds in our European region, where on a constant currency basis, net sales increased over the prior year period. Additionally, overall net sales decline was impacted by other products as we lacked opportunistic commodity sales for the previous year. Within the international segment, both biomedical coconut water and private label net sales grew 13%. Consolidated gross profit for the second quarter was 29 million, driven by strong case equivalent volume growth, favorable net pricing, and positive makeshift to Viacoco coconut water, which were more than upset by significantly higher transportation costs versus last year. As a result, our consolidated growth margin of 25% was down versus prior year, although it's sequentially improved from Q1 2022 by more than 500 basis points. Our supply chain continues to perform well, and we have seen encouraging signs of stabilization in our transportation costs for the second quarter. Moving on to operating expenses. Our SG&A in the second quarter increased $3 million to $24 million versus the same period last year. The increase was largely due to incremental ongoing costs related to operating a public company, including higher spending personnel-related expenses, insurance, and other professional fees. Net income in the second quarter was negatively impacted by a non-cash mark-to-market loss in fair value on foreign currency hedges of $3 million, whereas we benefited from a gain of $5 million last year. As a result, net income attributable to shareholders was $1 million, or $0.02, per day of each year for the second quarter of 2022, compared to net income of $8 million, or $0.15, per day of each year in the second quarter of 2021. Adjusted EBITDA, which excludes the impact of interest, tax, depreciation, amortization, stock-based compensation expense, and non-cash foreign exchange market to market, in the second quarter was 7 million versus 10 million in the same period last year. The year-over-year decrease was primarily driven by higher transportation costs and SG&E spend, as previously discussed, which was only partially offset by higher case equivalent volume and net pricing action. Now, I would like to provide some updates on our gross margin evolution compared to past quarters. As previously stated, we continue to experience persistent cost pressures from transportation. Though we have seen sequential improvements versus Q1, ocean freight rates remain well above historical levels. As you can see in our earnings presentation, our total cost of goods per case equivalent increased 7% versus prior year period, mostly driven by an increase in our transportation costs, while finished goods slightly benefited from positive rate mix. Looking at our total cost of goods inflation over two years, we estimate that our consolidated gross margin was impacted by over 10 million in Q2 2022 and close to 30 million total in H1 2022 versus the same period in 2020 by this unusual transportation cost effect. Based on our full-year current guidance assumptions, we anticipate this two-year impact to be approximately $60 million on a full-year basis. As you can see, we've experienced improvement in our margins since Q1 and continue to expect significant upside to our gross margin structure once this transitory cost pressure is received, which we remain confident will ultimately happen. Now turning to our balance sheet and cash flow. As of June 30, 2022, we had total cash on hand of $16 million and $22 million of debt under our revolving credit facility, compared to $29 million of cash and no debt as of December 31, 2021. The decrease in net cash was primarily driven by working capital due to significant account receivable increase as per our business seasonality, partially funded by our credit facility. Moving on to our further guidance, and our view on how the second half of the year will take shape. We continue to expect fiscal year 2022 net sales to be between 440 and 455 million, representing growth in the range of 16 to 20% versus 2021, as consumer demand for our products remain robust. While the cost environment continues to be volatile, we are reaffirming our non-GAAP adjusted EBITDA guidance to be in the range of 27 to 32 million. This reflects the increased cost pressure we have faced so far this year and accounts for the incremental mitigating action we have identified across our P&L for the remainder of the year, which we have already started to implement. As it pertains to the second half of the year, we expect our top-line growth in Q3 to be in line with what we've seen in Q2, with stronger growth expected for Q4. On the growth margin side, we expect Q3 to be in line with Q2, with some expansion in Q4 as we anticipate more benefits from net pricing action. On a full year basis, we continue to expect strong case equivalent volume growth in the mid-teen, with a few percentage points of positive price mix lift, mostly driven by the Americas segment as pricing action takes effect. As Martin described earlier, we expect a more moderate impact from price mix for the remainder of the year due to timing, especially in the Americas, as we anticipate lapping lower-branded promotional activities, which had largely materialized in the second half of 2021 and which have had a disproportionate impact on the third quarter. We continue to expect cost of goods sold per case equivalent inflation in Q3 to run into the low double digits versus prior year, which should moderate towards the end of the year as we lap larger cost increases in Q4 2021. As a result, we're modeling our full-year 2022 gross margin to land in the mid-20s, consistent with our prior guidance. Below the line, we expect higher year-over-year operating expenses from increased personal expenses and other costs associated with being a public company. As it pertains to our collaboration with Diageo to introduce Viacoco Spikes, which launches early next year, we expect to treat this as a licensing agreement for accounting purposes and is successful, could contribute meaningfully to our profitability in future years. Lastly, I would like to thank Mike, Martin, and the entire Vallecoco family for the last couple of years we have been working together. This experience has been truly amazing, and as I move on to my next chapter, I will remain a big supporter of the brand and this great company. I wish them all much continued success. And with that, I'd like to turn the call back to Martin for his closing remarks.

Thank you, Kevin. To close, I'd like to reiterate our confidence in the long-term potential of the Vitacoco brand. We remain excited about our key initiatives to drive growth long-term and short-term, both within the Vitacoco brand and our new brand initiative. Despite the persistent challenges in the transportation environment, we are encouraged by the recent improvements to ocean container availability and the softening of ocean freight swap rates. The Vitacoco company has an exceptionally strong brand in Vitacoco with a solid balance sheet, and we are well positioned to emerge even stronger once transportation costs subside further, which we firmly believe they will. Before we take your questions, I want to offer my appreciation to Kevin for his dedication and contribution over the last four years. I especially enjoyed working with him and appreciate his support. Under Kevin's leadership, the company has built a highly qualified finance and accounting team, that I believe is more than capable of supporting the finance and reporting function during our CFO transition. I'm particularly pleased that Rowena Riccardi, our VP Global Accounting and Control, will assume the interim CFO role upon Kevin's departure, and I look forward to working closely with her and her team to ensure we do not miss a beat. While we are actively interviewing, this structure and capability gives us the luxury of being patient to find the best candidate for this exciting opportunity. Thank you for joining us today, and thank you for your interest in the Vitacoco Company. That concludes our second quarter prepared remarks, and we will now take your questions.

Thank you. Ladies and gentlemen, to ask a question, please press star 1 1 on your telephone. Again, that's star 1 1 on your telephone to ask a question. Our first question comes from the line of Bonnie Herzog of Goldman Sachs. Bonnie Herzog? Your line is open.

All right. Thank you. Good morning, everyone. Hi. I had a question, I guess, on the negative mixed impact of the larger pack sizes that you called out. Just hoping you could give us a sense maybe of, you know, what percentage of your business is now larger pack sizes maybe, you know, versus a year ago? And then, you know, how much of a drag could this be in your margins in the second half? I know You know, you mentioned it's going to offset some of the benefits of the pricing you have planned. So I guess I'm also wondering why you might not be considering taking even more pricing now to offset, you know, this issue.

Yeah, Bonnie, thanks. I think when you look at the sort of scanned mass and food channels, multi-packs are still a pretty small part of our business. They're obviously a big part of our business and clubs. We're seeing growth in the scan channels, mass, and food of the multipacks that's faster than the singles. And so we do have that mixed effect showing up in the scan data, which depresses sort of the price realization that shows up in the scan data. From a P&L perspective, the same effect will happen. It's not a gushing torrent towards multipacks. So we're just highlighting it that it's going to be a drag in our pricing. We're taking pricing up across the board or across our whole business with the goal for next year to absorb fully the cost of goods increases that we're currently experiencing on a per case dollar basis. And we'll look at the movement into multi-packs and decide if we need to make further pricing actions next year.

Okay, so just to clarify, in terms of the pricing that you had already talked about putting in the market, it's sort of in line with your previous expectations?

The Q2 pricing that we executed is in line with our previous expectations, and we have communicated our Q4 plans, and those are in line with what we previously communicated.

Okay. And then, you know, just as we think about next year, I know it's a bit early, but any thoughts on, you know, continued gross margin recovery for next year? I know you've suggested previously that you do see potential for further margin expansion and just based on you know what you guys just discussed you know just curious to hear latest thoughts on this and you know if this is certainly still possible and just maybe some some more colors on some of the key drivers that you know are going to impact next year thanks um yeah so i think the first point on the gross margin

question is what we said about our pricing which is designed to recover on a dollar basis the current cost environment so that will obviously enhance margins next next year i think we've alluded to the fact we expect u4 margins to be better when that pricing goes in sequentially right so next year's margins should be better than this year's margins based on that pricing all other factors being equal um we haven't provided guidance as to what that does but um we've obviously indicated the size of the pricing so you could model what that would do on the margin basis. We view it as a journey back to sort of high 30s gross margins, which we think is where the business should operate under a normal transportation cost economy environment. So that's a good step. As we think about other impacts on gross margin, obviously the other one is what happens to the transportation environment. And there, I think we're optimistic that we're seeing you know good solid signs of the opening up of that although again you know to be clear it's very challenging versus two years ago we're still at multiples of rates versus two years ago um and so the question is how fast do things return to an equilibrium and it's and i think we believe the equilibrium will be close to where it was two years ago so there's a lot of margin recovery to happen uh and so the question is how fast that happens and We in our contracting are being more cautious in entering into longer term contracts, because obviously they lock us in at current contract rates, and we believe those are likely to decline as time goes on. So we're looking at shorter contracts to take advantage of hopefully those declines as they happen. And so that would be the other impact that could happen. And again, you don't have a crystal ball on that, but we're optimistic that we're on a pathway you know, to recovering our gross margin, you know, against a long-term algorithm. And then I, you know, I think you asked about next year. Obviously, we haven't provided guidance, but obviously the category is healthy and growing. We're driving that. And so, you know, I think we believe that that should continue because it's driven by consumer interest in our brands and in coconut water and all the sort of tailwinds that we have behind our top line.

Okay. Appreciate that. That was helpful. Thank you.

Thank you. Our next question comes from the line of Chris Carey of Wells Fargo. Chris Carey, your line is open.

Hi, good morning. I just wanted to follow up quickly on the pack sizes. You're seeing trade-ups, larger pack sizes. Does that impact at all the confidence levels on the pricing that you're going to be taking into the back half of the year if consumers are searching for more value? in a way that shows some building of elasticity given that big shift. And I just wonder if that's, you know, impacting how you're assessing those pricing actions into the back half of the year that I follow.

Hey Chris, this is Kevin. Let me take that. So just want to clarify here. I think what we said earlier around the shift in that back mix is more like on the longer run. As we think about outlook for H2 and balance of year, we've taken into account some assumptions, but it's really not material, especially for this year. So this is more like providing more color as we think about our longer-term algorithm and how this evolves. But as it relates to our pricing action and what is based in our outlook, everything is fairly in line to what we previously communicated. So we don't anticipate any big meaningful impact from this mix shift.

I would add, though, also that this has been a trend we've seen for a while now. We don't think it's necessarily people looking for value. They're drinking more of the product. They're buying more of the product. They're keeping more of the product at home, which is why they're buying more multi-packs, we believe.

And I think for us, as we talked about last quarter, it's strategic that we are the brand that can have multi-packs on the shelf because we're the largest brand. And so it's a strategic move for us. It protects shelf space. It increases share. And so we view it as, you know, the long-term positive.

Okay, perfect. And then, you know, the follow-up is just around. Martin, I think you mentioned that ocean freight rates contractually – would still imply inflation year over year. But you also mentioned that pricing actions should offset inflation through 2023. If those contracted rates, if you were to sign those contracted rates that you see right now, would that pricing comment still hold through 2023 or would you have to take incremental pricing?

So the pricing comment holds on the sort of costs that we're currently experiencing and, you know, sort of as we look at the balance of the year. So that's what we're currently modeling for pricing is a good place to set pricing for next year, and then we can obviously take a little more if we need to, or we can promote off from that.

Okay, perfect. Thanks for both of those.

Thank you. Our next question comes from the line of Michael Lavery, Piper Sandler. Michael Lavery, your line is open.

Thank you. Good morning.

I just wanted to come back to Spike. You touched on the arrangement having the licensing component, which, of course, would be great margins, but would it also include selling product as an ingredient, and would that offset how we should think about the margins in total?

Yeah, I mean, we're not disclosing financial terms of the agreement with Diageo. You know, we think that over time it could have a significant impact on our profit, but we don't expect something in the very near future as we're investing and getting the business going in 2023.

Okay, and that was also one of the pieces I wasn't able to understand. It's just that you're sharing in some of the marketing investments for that as well, obviously. It's part of the structure of the financial terms, yeah. And just wanted to follow up on the distribution. You talked about the 25,000 new points of distribution target for the year that you're almost halfway through. It's obviously skewed to the second half if you hit that. What's the runway there? Do you have visibility on, are you on track to hit that for the end of this year?

Yes, we believe so. Obviously, we're happy with the 11,000 that we've delivered to date, but we've been hampered a little bit by specific SKU sort of inventory challenges that we alluded to in the script. And that's caused some voids in our tracking that we would have expected normally to be filled. So yeah, we believe we're on track for the 25,000, assuming the inventory sort of situation resolved itself during the third quarter.

Okay, great. Thanks so much.

Thank you. Our next question comes from Robert Ottenstein of Evercore ISI. Robert Ottenstein, your line is open.

Great. Thank you very much, and congratulations on strong results. Thanks, Robert. So you've got 700 basis points of value share, which is remarkable. Looking back at that, and I know we've talked about this in the past, but just want to get your updated views. How much of that value share gain do you think is attributable to price increases from competitors or out of stocks from competitors? And you know, do you expect that you'll give up some of that when you execute your full pricing? So I'm just trying to get a sense of what, you know, the dynamics there and where things are likely to end up on the market share side. Thank you.

Well, I think, you know, we believe that it's, you know, been a sort of retail execution and the strength of the brand. And that's what's driven share. It's really hard to pass out know the causes of that related to other brands um the other brands sort of started taking pricing sort of maybe earlier this year so you know the share games were happening before that um and so certainly some of it could be just are better available in execution but we're translating that also into more shelf space now and squeezing out these players so we're trying to lock in those games and i think we feel pretty good about that um but it's really hard to pass

I think if I could add, just remember, we're larger than our next roughly call it 10 competitors combined. So there's a long tail or there historically was a long tail of small brands in this category. And we think that as we continue to gain share and execute really well at retail, we've pushed some of these brands out to the point where they're not coming back because they were very small and the economics just don't work for them at that size and that scale. So we think we're in a really good position to continue to gain market share over time.

So this kind of 50% plus is not, in your view, an aberration, but a relatively steady state and you can grow from here? Yes. Okay, that's terrific. And is there any way to quantify shelf space gains or your progress in terms of building out the sea store penetration? I know you mentioned some some data about increased number of stores. I wasn't sure exactly what that referred to.

Yeah, I think I was answering the question on, you know, we communicated earlier this year that we were going to try and deliver 25,000 net new points of distribution across our universe. We used sort of depletion tracking data for that, sort of VIP types of data. And we're on track for that. I think previously we maybe communicated that that If we got that, that represented, I think, six, eight percent total points of distribution growth. That would help you quantify it. That's net new points. We've got some legacy innovations that, you know, we're losing distribution on because we've decided not to support them, and we're delivering that, you know, through the initiatives that we talked about. That's net new points. We've got some legacy innovations that, you know, we're losing distribution on because we've decided not to support them and we're delivering that you know on you know through the initiatives that we talked about with the sea stores being the primary driver where we have the juice product contest right and i guess the question of that and then i'll i'll move on is um the is the move to sea stores or the increased presence in sea stores enough to

have a noticeable impact on your price mix?

So great question. I don't think the sort of trends between see-saw mass and food, where obviously you have very healthy trends in both places, is sufficient to drive something at the price realization of the company level that you would be able to detect. We are, you know, as part of our test on juice, we're testing different price points, and certainly, you know, if juice became very big, that might have a bigger effect on mix, but we're not yet, have not yet decided what our strategy is there, so can't comment.

Great. Thank you very much. Thanks.

Thank you. Again, to ask a question, please press star 11 on your telephone. Again, that's star 11. on your telephone to ask a question. Our next question comes from the line of Brian Spillane of Bank of America. Brian Spillane, your line is open.

I had two questions. The first one, as we're looking at price elasticity and cross elasticity, you know, what's kind of hard to see in the Nielsen data is because of the mix effect, I guess, it's driving price mix down as we're looking at Vitacoco. But we're looking at like Isotonix where pricing has been up mid-teens. You know, it looks like the price gap, if you will, between Vitacoco and Isotonix has actually widened. And that actually maybe creates some opportunity and some headroom, I guess, for your price increases. So just, again, it's kind of hard for us to see it in the Nielsen data. So I just wanted to see if that's actually accurate, that, you know, isotonics have moved more on pricing than you have so far, and that gives you a little bit of headroom, I guess, as you're thinking about cross-elasticities and sourcing from isotonics.

Yeah, I think importantly today, we have not taken material front-line pricing. We took some in Q2, but Q4 plans are more material. We've seen other beverage categories. You mentioned isotonics, but it true across most non-alcoholic beverage categories. They've taken 10 to 15. We think that has created room for us to move, you know, and given our current sort of demand is, you know, as big as our supply, if not bigger, given our sort of inventory issues, we're pretty comfortable we have room to move.

Okay. And then follow-up question is just, or second question is really just the, the, the, you know, the move into alcohol for Vitacoco, for the brand, can you just talk about how you thought about being positioned as a health and wellness brand and also actually as a health and wellness company, how that reconciles with moving into alcohol, which, you know, is distinctly not a health and wellness category. So just how you're going to sort of navigate making sure that that doesn't, the move into alcohol doesn't dilute, you know, the image of the company, but also just the kind of the positioning of the brand?

Yeah. Well, in general, I think we look at our consumers as health conscious and health aware and looking for functional beverages, but they're not necessarily my body is my temple and I won't put anything into my body. And so a lot of our consumers, you know, do consume alcohol on occasion, you know, and they're balanced. And, you know, if you've ever traveled around the tropical world, coconut water is one of the most consumed mixers with alcohol. It's just a natural effect, a natural mixer. And we believe that there's a real consumption occasion here beyond just our ready to drink cocktails with Diageo. We think there's a real opportunity to open up an entirely new consumption occasion, which is as a mixer with spirits. especially as consumers are looking for healthier alternatives, not only to their daily beverages that they drink, like Vita Cocos compared to traditional sports drinks, for example, but also in what they're mixing in their spirits and in their alcohol. So we're excited about the opportunity to open up an entirely new occasion.

Okay, thanks. Thank you. At this time, I'd like to turn the call back over to CEO Martin Roper for closing remarks. Sir?

Yeah, thanks, everybody, and we look forward to talking to you again in three months.

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