This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good day, and thank you for standing by. Welcome to the Vitacoco Company first quarter 2023 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a Q&A session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand over the conference to your first speaker today, Clay Crumless with ICR. Clay, the floor is yours.
spk11: Thank you. And welcome to the Vitacoco Company first quarter 2023 earnings results conference call. Today's call is being recorded. With us are Mr. Mike Kerbin, Executive Chairman, Martin Roper, Chief Executive Officer, and Corey Baker, Chief Financial Officer. By now, everyone should have access to the company's first quarter earnings release issued earlier today. This information is available on the Investor Relations section of the Vitacoco Company's website at investors.vitacococompany.com. Also on the website, there is an accompanying presentation to 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, provide reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures and are available on our website as well. And with that, it is my pleasure to now turn the call over to Mike Kerbin, our co-founder and executive chairman. Mike?
spk12: Thanks, Clay. Good morning, everyone. Thank you for joining us today to discuss our first quarter 2023 financial results, our commercial plans for 2023, our current expectations for full year 23 performance and long-term growth. I want to start by thanking all of our colleagues across the globe for their continued commitment to the Vitacoco Company. and their dedication to our mission of creating ethical, sustainable, better-for-you beverages that uplift our communities and do right by our planet. Before addressing our performance and expectations, I want to reiterate that we believe we have a strong strategic position in the better-for-you functional beverage market enabled by our category leadership in coconut water. Better-for-you functional beverages includes, by our definition, juice, sport drinks, and flavored waters, which collectively in U.S. retail represent over a $30 billion addressable opportunity. We believe that we can source consumption from these beverage categories and occasions to fuel future growth for both our Vitacoco brand and a portfolio of adjacent current and future innovations. As a coconut water category leader, our responsibility is also to grow the coconut water category by increasing household penetration and usage occasions, and by expanding the availability and visibility of the category, while continuing to grow our category share through great execution. I think our success over the last three years is a testament to our focus on consumer conversion and retention, supported by the strength of our coconut water supply chain and sales execution. With gross margins and profitability now recovering, we're well positioned to build a better beverage platform with a portfolio of complementary brands, And I believe that our long-term financial goals of mid-teens net sales growth and mid to high-teens adjusted EBITDA margin remain achievable. I say this each quarter, but as time passes, I become increasingly excited that we are well-positioned to take advantage of the category tailwinds to continue our strong growth trajectory and to improve our margins. We're off to a strong start in 2023. In the first quarter, we saw 17% growth of Vitacoco Coconut Water net sales, driven by branded volume acceleration, supplemented by the ongoing benefit of pricing actions taken last year. In the United States, according to Sukana, which was formerly known as IRI, in the last 13 weeks retail scans, Vitacoco and the coconut water category are growing faster in retail sales in both dollars and volume than most other major beverage categories. Our Vitacoco coconut water retail dollar sales were up 22%, And our market share for the quarter improved to 52%, with the coconut water category growing at 17%. Increasing household penetration remains a key part of our growth strategy. According to Numerator, we grew Vitacoco's household penetration in the U.S. to 10.8% for the 52 weeks ending March 31, 2023. That's up approximately 60 basis points over the last year. While we are pleased with the gains so far, we aren't stopping there. We believe that we have plenty of room to grow our households further as total household penetration for the coconut water category is currently only 22% compared to penetration for the cranberry juice category of 55% and over 80% for orange juice, according to numerator. In addition, we believe that there's significant opportunity for increased coconut water consumption occasions and for improved availability of our products. as there remain significant distribution opportunities for our Vitacoco brand in C-Store, food service, and on-premise, in addition to our distribution opportunities with our canned coconut juice product, our farmer's organic offering, and our shelf-stable Vitacoco coconut milk dairy alternative. These opportunities, plus our brand's over-indexing to multicultural households and to younger consumers, suggests a pathway for multi-year, double-digit Vitacoco growth based on demographic tailwinds and distribution opportunities. Looking to 2023, I'm happy to announce that our commercial initiatives, which we outlined last quarter, are progressing according to our expectations. In our investor deck, we have laid out how the major Vitacoco initiatives are contributing to our retail scan trends. As you can see, our expansion of multi-pack availability in the United States is driving most of our growth in the relevant channels with strong growth from 4-pack 500 ml and the expansion of our 12-pack 330 ml distribution. Encouragingly, we're seeing relatively limited cannibalization of single serves by the multi-packs. Our distribution gains for Vitacoco Farmer's Organic are providing consumers with a new premium option in the shelf stable set and adding nicely to our overall scan sales. Our expansion of Vitacoco coconut juice in cans to broader convenience store distribution is progressing, and we have planned summer marketing and sales activities to ensure trial and visibility for this initiative. The retail ACV distribution measures show that we still have lots of room for distribution growth on all of these packs. Finally, our previously announced collaboration with Diageo, Vitacoco Spiked, launched during the quarter. It is too early to repeat purchase rates, but everything appears on track with our and DIGO's expectations. We believe that this and other opportunities to support vitacoco coconut water as an on-premise or at-home mixer are important initiatives to generate further trial of coconut water and expand coconut water consumption occasions. Beyond these core commercial initiatives, we continue to promote vitacoco pressed and vitacoco pineapple as attractive entry points for consumers into coconut water, particularly in the central part of the United States, where we under index in household penetration. We're also expanding distribution of vitacoco coconut milk in the shelf-stable non-dairy set and seeding the availability of our vitacoco barista product to more coffee shops after positive launch with Alfred Coffee on the West Coast earlier this first quarter. Our power lift launch in southern Texas continues to build momentum and support our learning on how to succeed in the enhanced isotonic category. We have dedicated market development teams working hand in hand with our DSD partner, KDP, to achieve success in this market. Related to our environmental and social initiatives, you hopefully saw that we released our 2022 impact report last month. We've continued to see great progress in our farming communities through the Vitacoco project, which, with our charitable partners, supports building schools and classrooms, training more coconut growers on sustainable practices, and investing in the distribution and planting of more coconut trees. We believe our efforts to plant coconut seedlings is increasingly important, both to the long-term economics of our farmers, but also to our sustainability goals. So we recently announced our Seedlings for Sustainability program, with the objective to plant over 10 million seedlings. We remain committed to our environmental initiatives as a core value of the Vitacoco company and we expect to communicate our environmental roadmap in more detail at a later date once we have validated our goals and timeline for achieving them. Finally, I want to reiterate my excitement that after two tough years of very challenging transportation market dynamics, our economics are starting to improve and we have visibility to a return to more normal gross margins and profitability. We believe that this uniquely positions us as one of the few fast-growing profitable beverage companies of our size with the talent and commercial capabilities to maintain growth, to innovate new opportunities, and longer term to potentially act as an acquirer of complimentary beverage brands that could benefit significantly from our relationships, capabilities, and financial resources. As I stated last quarter, we also see 2023 as a year where we expect our net sales growth and gross margin improvement to allow us to invest in a disciplined way against our long-term growth opportunities while still delivering significant improvement in profitability and cash generation. And now I'll turn the call over to our Chief Executive Officer, Martin Roper.
spk10: Thanks, Mike, and good morning, everyone. For the first quarter of 2023, we achieved net sales growth of 14%, driven by strong VitaCoco coconut water growth of 17%, with private label up 7%. This performance was achieved against a very strong first quarter last year, where Vitacoco Coconut Water net sales grew 38%. In the Americas, our Vitacoco Coconut Water net sales grew 17% for the quarter, including 15% volume growth, affecting strong consumer demand, single-digit contribution from price increases. The impact of our 2023 commercial initiatives and better inventory availability on certain SKUs than this time last year. Versus Q4 2022, our retail sales trends have accelerated with a 22% dollar growth rate in Q1 2023 in the U.S. Takana retail scan data. The acceleration is across all track channels and is built on a healthy balance of velocity growth and distribution gains. And it's potentially benefiting from our healthy inventory and improved service levels. Internationally, we are seeing similar growth of vitacoco coconut water, with 16% volume growth for the quarter. Turning to margins, in the first quarter of 2023, our gross margin was 31%, which represents a significant improvement over the 20% reported in the first quarter last year, and a sequential improvement over the 24% in the fourth quarter of 2022. This improvement was primarily driven by more favorable ocean freight and domestic transportation costs, plus the benefit of branded pricing taken in fourth quarter last year. During the quarter, we were able to stabilize the supply chain and normalize inventory levels, which also helped our gross margin after last quarter's unusual domestic transportation costs. We have not yet seen the full benefit of current ocean freight rates, which appear to be slowly returning to historic levels on most routes. This should be more visible in the second and third quarters as those benefits flow to our P&L. As we've discussed in previous quarters, we remain selective on entering into ocean transportation contracts except where we need to guarantee capacity and expect to return to our historic approach of contracting for some of our needs once the contract offers are more competitive with spot prices than they are today. Reiterating what Mike said, we are confident in our underlying business, and we believe we are well positioned for a strong 2023 with multiple commercial initiatives to produce strong branded top line growth, while the improving transportation cost environment and product mix between branded and private label should greatly improve our margin structure, profitability, and cash flow. Our first quarter results were at the high end of our expectations on volume, net revenue, gross margin, and adjusted EBITDA. Of course, one good quarter does not make a year, and the first quarter is typically a less important quarter to our full year results than the second and third quarters. We are adjusting our full year net sales and non-GAAP adjusted EBITDA guidance to reflect the first quarter and current trends, while maintaining our full year gross margin guidance. We expect full year of vitacoco coconut water growth in the mid-teens, and our private label net sales are now expected to be slightly positive for the full year. We expect a very strong second quarter driven partially by significant promotion activity for vitacoco coconut water with a key retailer. This incremental promotion could depress our gross margins slightly for the quarter relative to prior expectations. On cost of goods for 2023, we are seeing inflation increases on most non-transportational finished goods cost elements due to general global inflation in packaging, labor, and energy costs. We're endeavoring to mitigate these drivers through efficiencies and sourcing optimization initiatives. As Mike mentioned, our four-year plan includes an expected increase in marketing and sales execution investment reflecting our belief that 2023 is a year to invest in our growth initiatives now that supply chain disruptions are diminishing. As always, we will invest in a disciplined manner where we see the opportunities to build the brand for the long term, and we could adjust our planned spend and our promotions depending on the effectiveness of our programs and how our cost of goods develop. We are very happy that 2023 is off to a great start, The entire team is fully energized behind the opportunities ahead of us during the peak summer selling season. With that, I will turn the call over to Corey Baker, our Chief Financial Officer.
spk07: Thanks, Martin, and hello, everyone. Let me provide you with some additional details on the first quarter financial results. I will then discuss the drivers of our outlook for the 2023 full fiscal year. For the first quarter of 2023, net sales increased $13 million of 14% year-over-year to $110 million, driven by Vitacoco coconut water growth of 17% and net sales and private label growth of 7%. On a segment basis within the Americas, continued strong retail performance of Vitacoco coconut water increased net sales by $10 million to $69 million, while private label increased $2 million to $25 million. Vitacoco coconut water benefited from 15% volume growth and 2% net price mix benefit, while private label benefited from a favorable product mix, driving 9% net sales growth on volume declines of minus 3%. I'll remind you that quarterly trends for private label tend to be impacted by timing of orders and shipments, and we would suggest using rolling 12-month trends as a better indication of private label business health. Our international segment had a strong first quarter. Reported net sales were up 10% with constant currency growth of 18%. Growth was led by the Vitacoco Coconut Water up 14%, offset by declines in private label and other. Total international volume growth was 11%, with Vitacoco Coconut Water delivering 16% volume growth, private label and other case equivalent volume down 3%. For the quarter, gross profit was $34 million, up $15 million versus prior year, and gross margin was 31%, up from 20% in prior year. These increases are benefiting from stabilization and global transportation rates, increased supply chain efficiencies, and the benefits of 2022 price increases. Moving on to operating expenses. First quarter 2023 SG&A cost increased by 2 million, which reflects investments in incremental resources to support the growth of the company including increased personnel costs, as well as an increase related to the change in the methodology to estimate current expected credit losses. Net income attributed to shareholders for the first quarter of 2023 was $7 million or $0.12 per diluted share, compared to $2 million or $0.04 per diluted share per prior year. Net income for the quarter benefited from positive net sales and gross margin improvements discussed previously. Partially offset by SG&A costs, In addition, the quarter benefited from a 7 million decrease in the unrealized gain related to derivative instruments, which was partially offset by an increase in tax of 1.2 million, reflecting an ETR of 21.4% on the quarter. Non-GAAP adjusted EBITDA in Q1 2023 was 9 million, up from a loss of 3 million in Q1 2022. The $12 million increase was primarily due to the significant cost of goods per case equivalent decreases and increased volume growth in pricing, partially offset by increased SG&A spending. Turning to our balance sheet and cash flow, as of March 31, 2023, our strong operating performance has led to an improvement in cash flow, resulting in total cash on hand of $29 million and no debt under our revolving credit facility, compared to $20 million of cash and no debt as of December 31, 2022. The increase in net cash was primarily driven by net income. Working capital for the first quarter of 2023 used $1 million of cash as inventory decreases of $20 million were offset by a $21 million increase in accounts receivable due to timing of customer payments. The inventory decrease was the result of sales volume growth coupled with the normalization of the global supply chain allowing us to more efficiently manage our days on hand and reduce in transit inventory. We expect inventory to remain at more normal levels in terms of days on hand for the balance of 2023. As Martin communicated, we are confident in our full year plans and are adjusting our guidance for full year 2023. We now expect next sales growth in 2023 of between 9 and 12%. which does not assume any further vitacoco coconut water price increases for the balance of the year. We believe that the pricing executed at retail in 2022 is sufficient to deliver our targeted results, and we will remain flexible in our approach to pricing as the year unfolds. Our guidance for 2023 full-year gross margins remains between 32% and 34%. We anticipate that our gross margins will benefit as lower ocean freight rates on our branded products sold and our 2022 brand price increases flow through our P&L. And our branded volume growth continues to outperform private label growth. Due to incremental retailer promotions activity in the second quarter, we expect gross margins to gradually increase to the balance of the year. The revised non-GAAP adjusted EBITDA guidance is $54 million to $59 million. This reflects our current plans for SG&A, which in total represents higher growth over 2022 GAAP reported SG&A than our expected next sales growth. The increase in SG&A is to cover planned increased marketing and sales execution costs and higher employee costs, which include bonus and stock compensation. A quick note on items below operating income. Given our strong cash generation, we reviewed our approach to cash management and investment and expect to start seeing the benefit hit our P&L in the second quarter. From a tax perspective, we expect the full-year ETR to be broadly consistent with our first quarter rate. Given our expectations of improved profitability, we plan to more closely evaluate our capital allocation with the continued focus on prioritizing long-term growth. Before I move on, I wanted to talk about the shelf registration statement on Form S3 we filed with the SEC this week. The S3 was filed to fulfill our contractual obligations with certain shareholders, pursuant to our registration rights and agreements, and will also provide flexibility and optionality for the company and our long-term shareholders and partners to more easily access the capital markets in the future. It will also allow the company greater flexibility to raise capital if the right investment opportunity arrives, although there are no plans to do so at this time. The registration statement has not yet been declared effective and thus no shares may be offered or sold under the yesterday until it becomes effective. Before closing, I'd like to provide some reflections on my first couple of months at Vitacoco. Overall, I've been extremely impressed with the organization. It is a passionate and performance driven team with an incredible knowledge of the business. Their passion for the company and the excitement for the future is infectious. The finance organization is fantastic We have a diverse and highly skilled team that is well positioned to support the organization to the next stage of growth. As we continue to mature as an organization, I see opportunities for improved efficiency and decision-making through elevated data and analytics supported by improved systems. I've only become more excited to be part of the team as we deliver on the long-term vision Mike and Martin have outlined. With that, I'd like to turn the call back to Martin for his closing remarks.
spk10: Thank you, Corey. To close, I'd like to reiterate our confidence in the long-term potential of the Vitacoco Company, our ability to build a better beverage platform, and the strength of our Vitacoco brand. We're excited about our key initiatives to drive growth in 2023 and the relief that the recent improvement in ocean transportation costs and capacity should provide us after a very challenging two years. In 2023, we intend to invest in marketing and sales execution to maintain or accelerate our growth, and to continue to build our long-term capabilities. We have strong brands and a solid balance sheet, and we are well positioned to sustain our growth for the long term. Thank you for joining us today, and thank you for your interest in the Vitacoco Company. That concludes our first quarter prepared remarks, and we will now take questions.
spk01: Management will now take questions from research analysts. We ask that you please limit yourself to one question and one follow-up. If you have additional questions, please re-enter the queue and we will take them as time allows. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from Bonnie Herzog with Goldman Sachs.
spk05: Thank you. Good morning, everyone. Good morning. Hi. I guess I would like to start off with a question on your gross margins, which were up significantly in the quarter. So could you just talk a little further about, you know, the various cost buckets that are driving the improvement and, you know, how materially they've changed recently? And then you've indicated that you expect gross margin sequential improvements, so maybe a little more color on the phasing of expenses. of the expected improvements this year and where you see potential upside or downside risks. I guess I'm trying to get a sense of how much visibility you have and what the swing factors might be.
spk10: Sure, Bonnie. First of all, as it relates to the first quarter, the gross margin improvement was driven by a combination of factors, primarily improvement in the ocean transportation rates versus prior year, and then also versus what we experienced in Q4. When thinking about ocean freight rates, you know, we secure containers in our sourcing markets, you know, about a month before they arrive in country, and then it takes about one to two months to flow through our inventory. So the rate that you see as sort of putting through into our PML in Q1 sort of happened in Q4 or late Q3. And so what you're seeing there is the benefits of that rate impact. We also saw improvements in domestic transportation, primarily the reduction in unusual domestic transportation costs that hurt us in Q4 and that we highlighted, that were related to the very large inventory build that happened at our warehouses as the transit times reduced. We just basically got overloaded. We had very high detention and demoralization charges. So those dissipated. I think domestic transportation costs other than those items were largely similar to what they were in Q4. Also benefiting gross margin in Q1 is the pricing that we took mid Q4 unbranded. So that is also helping. And so all of those things contributed to a nice margin improvement. But as we look forward for the rest of the year, our guidance is based on what we're seeing today and experiencing today. And so there's obviously a lot that could change from that. There's a lot that can change on the oceanfront side and then also as it relates to the economy on domestic transportation or fuel costs, right? But it's based on what we know today. It's based on what we know about our finished goods inflation, as we indicated, finished goods inflation ignoring the transportation impacts. We are seeing inflationary impacts on manufacturing costs, labor costs, packaging costs. We're endeavoring to mitigate those through sourcing initiatives, efficiencies. As we talked before, we have an engineering team in single core that is very focused on helping our partner manufacturing facilities improve efficiencies. And our total guidance is based on everything that we sort of know today. And, you know, it's a relatively broad range, and obviously there's a range of potential outcomes, but we think it covers us adequately based on what we know today. As it relates to sequencing, we expect our gross margin to sequentially improve each quarter, while full-year gross margin falling within the range. We sort of highlight, I think, Q2 is, we think, going to be quite strong because of some certain retailer promotion activity that is not comparable to last year that might cause the gross margin to be a little less than might otherwise be expected in the quarter. But I think that's the basis for, you know, projecting continued improvement.
spk05: Okay, that's super helpful, Collin. And then maybe just a quick follow-up from me is, you know, just want to get a sense of, you know, or clarify maybe how much of the potential top-line strength and gross margin improvements you plan to reinvest into marketing versus letting it flow to the bottom line. I think you touched on a little bit of that in your prepared remarks, but my sense is you're going to balance some of this, but it sounds like you want to remain pretty flexible on reinvesting into your business, depending on the strength you may or may not see. So just any comments on that would be helpful. Thanks again.
spk10: Sure. I think as you think about modeling it, we've provided an EBITDA guidance range, which we think reflects Again, what we believe the current outcomes to be, and currently we're planning and want to invest in our brands to basically strengthen our opportunities for long-term growth. We have plans this summer, particularly in Q2 and Q3, significantly higher than in Q1, that are all around selling into our peak selling seasons. We're adding promotional activity and marketing activity. We are remaining flexible. We obviously, you know, our marketing spend is not, you know, that big a number. And therefore, you know, we pride ourselves on being disciplined. Accelerate those. And if we see things that don't work, we will obviously discontinue them. So, yeah, I think your comment about flexibility is exactly right. And based on what we currently know and our current plans, we think our Guidance is solid, but obviously that could change depending on how the business flows and everything else.
spk05: Okay, thank you.
spk01: Our next question comes from Brian Spillane with Bank of America. Brian, the floor is yours.
spk09: You have Christian Junquera on for Brian. Thanks for taking our question. I have a question on...
spk10: Yeah, hi, Christian.
spk09: Okay, perfect. I have a question on inventory. Do you guys still have work to do in terms of rebuilding inventory? Is it correct to assume you guys shipped ahead of consumption this quarter? And are you guys planning on shipping ahead of consumption in the second quarter? And how satisfied are you guys currently with your stock levels?
spk10: Yeah, I think, you know, as we said last quarter, we finished the year with inventory that was higher than we would have liked on a days-on-hand basis. And we provided guidance on a full year basis for that returning to more normal level. We took some actions in late 2004 basically to stop shipments into the country in order to address those inventory bottlenecks that we created for ourselves because all the inventory was in warehouse and that resulted in the drop in the quarter. I think as we said in the prepared remarks, we're currently happy with our days on hand. That will probably build through the summer and then probably stay on an absolute dollar basis, right? And we would probably expect to finish the year on a similar days on hand basis, maybe a little bit higher. The ending year inventory sort of depends on business trajectory and how much inventory we want to have to support next year's growth. So we'll leave ourselves a little bit of wiggle room there, but we would expect it to be lower than it was at the year end.
spk09: Okay, got it. And then one quick follow-up. In terms of How should we think about free cash flow for this fiscal year? It looks like you guys have generated positive free cash flow now for three consecutive quarters. Should we expect this trend to continue, or if not, why?
spk07: I'll take that. So we haven't provided any guidance on full-year cash flow, and as Martin touched on, the working capital is always a bit of a moving target. We run a very efficient operation asset light, so we would expect fairly stable performance in the P&L for balance a year and then that flowing through the cash flow.
spk09: Perfect. Thanks. I'll pass it along. Thanks, guys.
spk10: Thanks. Thanks, Christine.
spk01: Our next question is coming from Michael Levery with Piper Sandler.
spk03: back michael you have the floor thank you good morning good morning michael good morning michael i just wanted to come back to the cans launch i know you touched on it a little bit but um i i believe there's a lot of shelf recess would have just happened in march and april um can you give a sense of how some of the distribution rollout is going against plans, and if the recess that might have just happened came through the way you would have hoped, and just an update on kind of how that's all unfolding.
spk12: Yeah, I mean, it's early in the process, right? Those resets are just happening or have just happened. We picked up quite a few of the large major retailers that we would have wanted and expected So, actual distribution is looking good and we, you know, the C-Store channel is really where we're focusing and we're seeing it really start to work. So, we're excited about it. There's a lot of programming against the CAN specifically this summer. um and uh and additional execution uh teams against making sure that they hit the stores and stamps or shell strokes okay great i would refer you to the acc number that we put in our deck uh you know we're in early innings here okay great that's helpful
spk03: And I just want to follow up on the freight rates and make sure I understand the prepared remarks correctly and how to think about that in the right context. It sounds like the contract rates you have available are above spot and you've been leaning more heavily on the spot rates. And would it be right to assume availability isn't an issue? And then I guess second, is it easy? Do you imagine any trouble pivoting to contract rates? if they were to converge, just so that you could lock in, you know, what's now better rates versus where we've been over the last couple of years?
spk10: Yeah, so on availability, currently on most of the lanes we use, there is good availability. There's, you know, still normal, what I would call normal service issues where boats skip ports, et cetera, that, you know, cause you headaches, but there's normal capacity available. We are entering into, you know, very short-term contracts to secure capacity on lanes where we're looking for service or capacity guarantees. We're currently staying flexible. We're not entering into long-term contracts. I think it's fair to say that there are long-term contracts being offered. They're not at terms that we think are particularly attractive given the current market dynamics and spot rates. So as we look forward, you know, we will continually evaluate that, and as we think the long-term contracts provide us with a good economic outcome and a good hedge on ocean freight. We will probably layer those in, like we've done in the past, but we're not there yet.
spk03: Okay, great. Thanks so much.
spk01: Our next question comes from Chris Carey with Wells Fargo Security.
spk02: Hi, good morning. Can you just comment on the competitive dynamic? You know, your relevant performance to category has been so significant. And, you know, is this just really, you know, that you're just getting so much more support here on the branded side? I realize private label is a little bit lumpier, but, you know, just the competitive dynamic. And then I just have kind of a question on, you know, kind of how this portfolio fits into different macro backdrop things.
spk10: Yeah, so first, obviously, we play in a larger functional beverage category, and I think coconut water and, obviously, Vitacoco are benefiting from very good consumer tailwinds there, both on interest in health and wellness, some of the marketing and occasion work that we've done, obviously, growth in families that over-index in consumption of coconut water. So we're seeing healthy coconut water growth, right? And it's volume and price. It's not just price, which is quite unusual sort of, you know, across all of the beverage categories. So we think there's good underlying momentum on the consumer side entering coconut water. And then within coconut water, our Vita Cocoa brand has been outgrowing the category. We think that's, you know, a combination of the strength of the brand, some of the commercial initiatives like the multi-packs where we're in a position we can offer multi-packs at many of them. smaller brands kind of can't offer. Obviously, our sales and execution capabilities and our supply chain capabilities were benefiting from having good inventory right now versus last year when some items were tight. And so we were able to gain share. So we think the category is healthy and we've been able to gain share. And obviously, we'd like for both of those to keep going. And as the category leader, it's our responsibility to try and drive both of those.
spk02: Okay. Thank you. Just sensitivity, you know, in different macros. It's not, you know, a subcategory. I realize it's, you know, within a broader, you know, overarching category. But, you know, just this portfolio, are you seeing any signs? I know, you know, PaxEye is something you've talked about in the past. But, you know, is this category seen as luxury or do they have similar consumption trends as, you know, overall LRB? Thanks so much.
spk10: Yeah, I think, you know, we regard this as an affordable, you know, functional beverage. It's not, you know, a luxury. And to your point, it's available at multiple price points in multiple packs. And, you know, ranging from, you know, our own muddy packs to obviously private label, you know, plays. And there's a range of sort of price points there. At the high end, you have harmless harvest that is growing strongly at a very premium price. That indicates to us that You know, consumers are coming in and to the category and willing to pay high prices. And then most of the category is growing at all price points. Within our own brand, we're offering multi-packs that provide a better value to the consumer. You'll see in our investor deck, we broke out the IRI or Takana we're going to get. tripped up on that a few times, I'm sure, in the next few cycles. But it's the kind of data we tried to point out how the growth has been driven. I think we've been pleasantly surprised by the strength of the signals with the introduction of the multipack. Obviously, there is cannibalization, but this thing also has held in remarkably well. So we think, at least within the coconut water category, there's a range of different price points and offerings is helping us as the brand and also the categories survive any of the external economic pressures. We see strength in club and mass, but food is still strong, right? hard to know and I can't really point to anything that I would link to some of the economic pressures that some of our consumers may be feeling.
spk12: And I think just to reiterate what Martin said is the volume growth is really impressive, right? If you look at scan data over the period, 15% volume growth with only 6% price, which is quite unique in this industry right now. So we're excited and enthusiastic about volume growth especially. Okay, that's helpful.
spk02: Thank you.
spk01: Our next question comes from Robert Otenstein with Evermore ISI.
spk06: Morning.
spk01: Robert, you have the floor.
spk06: Congratulations on a terrific quarter and more so just a great job you've done navigating, you know, really, really tough years. So well done. I want to follow up. I mean, I don't want to be redundant, but just to sort of press some of the other questions around the consumer and the competitive environment and maybe come at it at a slightly different angle. You know, how are you thinking about you know, the price volume equation or price market share equation, you know, it would seem that you could, you know, compared to other categories and beverages, you've taken, you know, generally a little bit less pricing than many. But it would seem, you know, given your strong market share, and your superior service that you could have perhaps taken more. So there's a strategic decision there. So maybe just elaborate a little bit more on how to think about or for how investors should think about your general strategy on pricing and promos going forward and how you look at that equation. Thanks.
spk12: Thanks, Robert. Any big picture? You think about this category over the last several years. First of all, we believe the category is still in its infancy and has a lot of consumers to bring in, giving consumers more occasions to drink the product and so on and so forth. But if you look at the category in pricing historically, we were way on the high end of pricing as you walk down the beverage aisle. um over the last year or two pricing has really caught up to us from other beverage brands and other categories within the beverage aisle so although you see the six percent price increase in iri we have taken price and the price is clearly sticking and volume is growing and accelerating um we think we're better positioned now than we might have been historically from a price perspective as it relates to the rest of the beverage aisle. And this gives us, we believe, the ability to further expand the category and focus on growth while our growth margins are improving. And you're seeing that improvement continue to accelerate. So we feel we're in a pretty good place. Not to say we won't be taking price in the future. We retain the ability and the option to do that. But we think we're in a very good place right now.
spk06: So just to kind of repeat back, just to make sure I understand it, It's more, as the category leader, you're looking to make the category more affordable relative to other categories so that you can continue to grow the category. Is that the right way to think about it?
spk12: More affordable than it historically might have been, the coconut water category. Yes.
spk06: Great. Terrific.
spk10: And to be clear, I think we believe we can do that while still improving our gross margins. And obviously, all of this is subject to what happens in the general economy and competitively. So I think we have the flexibility. We're in a very solid position, and we will continue to monitor it, particularly as everyone's supply chain stabilizes and we see how all the brands interact on shelf.
spk06: Great. It makes a lot of sense. Thank you very much. Thanks.
spk01: Our next question comes from John Anderson with William Blair.
spk04: Hey, congrats on the quarter. Hey, John. Hi. A couple quick ones. I wanted to go back to freight rates for a minute. Two things there. Are there any contracts that you put in place, say, you know, during a period of higher rate environment? that you're still kind of operating under that may roll over at some point and allow you to kind of take another step function forward in terms of lowering your ocean freight. So are you under any contract now that, you know, when would it lapse or roll over? And to what extent could that be a benefit? And then the second question on that is, you mentioned a couple of times that contract rates haven't aligned with spot rates yet. What do you think it will require? Is that just a matter of time, or are there specific catalysts that have driven the convergence of those two in the past? And then I have one quick follow-up.
spk10: Yeah, as it relates to sort of contract rates and sort of, you know, lapping and are we in a bad position sort of as we look forward? I don't think we're in a bad position. I think, you know, as the market changes, some of these relationships allow you to influence the contract rates, which, you know, might otherwise have happened with incremental volume to trade off. So we're working that hard, right? So I don't think from a modeling perspective, I would plan any you know, significant change other than the sequential improvement in gross margins that we've talked about this year. And we haven't provided any guidance yet for next year. I would just plan a sequential improvement in gross margins, which obviously implies a higher gross margin for next year on a four-year basis. And as it relates to how contracts and spot rates might align, I think historically, and I wasn't, I've only been doing this for years, Mike's been doing it much, much longer, so maybe he will want to comment. But there comes a time when contracts sort of get close enough to spot where you go, the premium of the contract is worth it for the hedge. I don't think we've seen that yet. I think that's partly driven by capacity and availability of capacity. Therefore, the spot rates that are being offered are significantly lower than the contract rates that are being proposed. So I think the excess capacity has to ease. That obviously requires increasing demand, but frankly, there's also extra capacity being added given the, one, the number of containers that were built when the supply chains got bogged down means there's an excess of containers around. And then two, we believe, you know, and it's just a belief, but we believe the ocean carriers have been building ships, given the profits they made over the last two years. So it's a little unclear when that's going to change, and obviously it's something we watch pretty closely, and when we think the time is right, we will sort of look to enter into contracts that provide the appropriate hedge.
spk04: Thank you. That's helpful. And one on the sales side, you came out very strong in the quarter with good consumption growth rates that's reflected in your shipment growth. You know, it sounds like you're going to be leaning in to marketing and promotion, you know, this summer, next couple of quarters. You know, I'm just wondering, which could drive some acceleration, it sounds like, at least in Q2, as you discussed. You know, is there an element, you know, given that, Given that, combined with the commercial initiatives as you've outlined, you know, I'm struggling a little bit with kind of the 9% to 12% full year view in the context of the strength of 2.1, your ability to lean into marketing and promotion now with your inventory and service levels back, and just the breadth of the commercial initiatives. Is there something else we need to be considering about, you know, the back half of the year, perhaps? Yeah.
spk10: Yeah, so great question. I think first of all, you know, we laid out commercial plans and we projected a year and certainly the first quarter was perhaps a little stronger than we anticipated. But we're not, you know, sort of yet ready to change what we expect the outcome for the year to be, you know, based on that other than the sort of adjustments we made to guidance. I think, you know, over the last two years, there's been lots of noise on the demand side due to inventories, out of stocks, competitive positions, It's really hard for us to sort of model this on a quarterly basis. It's incredibly difficult. And so I think we're quite confident. We love the demand trends. We love the consumer strength we're seeing. We love the resilience we're seeing. And with potential economic uncertainty, we obviously, as we indicated, love the gross margin improvement that we're benefiting on the brand side from. It's a little unclear on four-year demand exactly how private label volume reacts to their pricing. Private label tends to work on more of a cost-pass-through basis in some situations, so we may see some private label. volume growth there but at lower revenues and and it's very hard to model it's way too early in the cycle to sort of put together concrete models on that so i would just say we're not ready to to reflect your you know excitement uh as to what you see in the numbers uh but we obviously feel good about the quarter and think we'll set up well for the year understood thanks a lot great
spk01: Our next question comes from Eric Delorier with Craig Holland Capital Group.
spk08: Thank you for taking my question. Congrats on the strong quarter. Thanks.
spk10: Thank you.
spk08: So I was hoping you could provide some more color just on the inventory supply chain dynamics. It sounds like these bottlenecks are basically fully behind us now. Martin, you just mentioned the noise that you've seen in demand in past years. Do you see any of the impressive year-to-date retail strength as due to the unwinding of this inventory and should we expect that to normalize in the remainder of the year?
spk10: I think we benefited in the quarter from being in stock versus Q1 last year when we had some inventory challenges on some items. I think if you look at sort of the more recent scans that are publicly available, you'll see that the scan business remains strong. So I don't think we're expecting it to decrease, certainly based on what we've seen so far. But no, I think the challenge is, as you look at our historical data, there's lots of noise and timing issues related to the comparisons. So the comparisons are hard. We would love to have a great year this year of full inventory, perfect execution, so we have a solid baseline to plan on.
spk12: But I would say, if you think about first quarter last year, you know, IRI scan sales grew 22% in this quarter, but that was against 25% growth in scans last year, same quarter. So we did have a good year last year also on the multi-year stack. It's quite impressive growth.
spk10: Yeah, to Mike's point, we published some RDS stacks in our investor deck. I think we're now out to four years, so we avoid the COVID years. So we apologize for that. But, you know, 2019 is sort of at least a base year from which we can actually, you know, measure sequential improvement. And as we look at that, those numbers continue to accelerate. So we feel good.
spk08: That's great to hear. And then this last one from me. With respect to potential M&A, you know, some comments on expanding the Better For You Beverage platform that you guys currently have. Just wondering how you're thinking about timing with respect to potential M&A. I mean, is this something where you're kind of waiting to see how different brands and consumers fare in this uncertain macro environment? Are you kind of waiting to build up more balance sheet strength or is it no real kind of targeted timeframe and you're just gonna be opportunistic?
spk12: Yeah, there's no targeted timeframe. We are most focused on the core, right? And the in-house innovation and the new projects that we've launched that we're working against. And we're looking at things. We're always looking at things. We think, you know, over time, M&A, you know, should play a role in the development of this business. But it is, there's nothing imminent and there's no pressure for timing whatsoever in terms of doing any sort of deal.
spk10: Yeah, as Mike said, we prioritize organic growth and innovation.
spk08: Yeah, certainly lots to be excited about on that front. Appreciate the call. Thank you.
spk10: Thanks, Graydon.
spk01: I would now like to pass the call back to management for closing remarks.
spk10: Great, well thank you for joining us on the call. We very much appreciate the interest and we look forward to talking to everyone again after our second quarter, or if not before, if we bump into you in a bar. Everyone have a great day.
spk00: Thank you.
spk01: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Disclaimer