Q1 2023 The Vita Coco Company Inc Earnings Call
Speaker 1: 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 vital COCO's household penetration in the U.S. to 10.8% for the 52 weeks and in March 31st, 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 grill our households further as total household penetration for the coconut water category is currently only 22%. Compared to penetration for the cranberry juice category at 25%, and over 80% for orange juice, according to numerator. In addition, we believe that there is significant opportunity for increased coconut water consumption occasions.
Speaker 1: and for improved availability of our products, as it remains significant distribution opportunities for our Vitacoco brand in SeaStore, Food Service, and on premise. In addition to our distribution opportunities with our canned coconut juice product, our farmers organic offering, and our shelf stable Vitacoco coconut milk dairy alternative. These opportunities plus our brands over indexing to multicultural households and to younger consumers to just a pathway for multi-year double-digit Vitacoco growth based on demographic tailwinds and distribution opportunities.
Speaker 1: Looking to 2023, I'm happy to announce that our commercial initiatives, which we outlined last quarter, are progressing according to our expectations.
Speaker 1: In our investor deck, we have laid out how the major vitico-co-initiatives are contributing to our retail scan trends.
Speaker 1: 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 packs 500 ml and the expansion of our 12 pack 330 ml distribution.
Speaker 1: Encouragingly, we're seeing relatively limited cannibalization of single serves by the multi-backs.
Speaker 1: Our distribution gains for Vitacocoparmer's organic are providing consumers with a new premium option in the shelf stebelset and adding nicely to our overall scan sales.
Speaker 1: Our expansion of Vitacoco coconut juice and 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.
Speaker 1: Finally, our previously announced collaboration with Diaggio, Vytococos Spite, launched during the quarter. It is too early to read, repeat, purchase rate, but everything appears on track with our and Diaggio's expectations. We believe that this and other opportunities to support Vytococococococon water as an on-premise ver ?? exercise.
Speaker 1: or at-home mixer are important initiatives to generate further trial of coconut water and expand coconut water consumption occasions.
Speaker 1: Beyond these core commercial initiatives, we continue to promote vitico-cocoprest and vitico-cocopin apple 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.
Speaker 1: We're also expanding distribution of Vitacooka coconut milk in the shelf stable non-dairy set and feeding the availability of our Vitacooka barista product to more coffee shops after positive launch with Alfred Coffee on the west coast earlier this first quarter.
Speaker 1: 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,
Speaker 1: You hopefully saw that we released our 2022 impact report last month. We've continued to see great progress in our farm and communities through the Vitacocal 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.
Speaker 1: We remain committed to our environmental initiatives as a core value of the VITACOCO company and we expect to communicate our environmental road map in more detail at a later date once we have validated our goals and timeline for achieving them.
Speaker 1: 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.
Speaker 1: with the talent and commercial capabilities to maintain growth, to innovate new opportunities, and longer term to potentially act as an acquirer of complementary beverage brands that could benefit significantly from our relationships, capabilities, and financial resources.
Speaker 1: 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 task generation.
Speaker 1: And now I'll turn the call over to our Chief Executive Officer, Martin Roper.
Speaker 2: Thanks Mike and good morning everyone. For the first quarter of 2023 we achieved net sales growth of 14% driven by strong Vider Coco coconut water growth of 17% with private label up 7%.
Speaker 2: This performance was achieved against a very strong first quarter last year, where Vita Coca-Cola Coconut Water Nat Gels proved 38%.
Speaker 2: In the Americas, our Baida Coconut Water net sales grew 17% for the quarter, including 15% volume growth, affecting strong consumer demand, single-digit contribution from price increases.
Speaker 2: The impact of our 2023 commercial initiatives and better inventory availability on certain SKUs than this time last year.
Speaker 2: Versus Q4 2022, our retail sales trends have accelerated, with a 22% dollar growth rate in Q1 2023 in the US to counter retail scan data.
Speaker 2: The acceleration is across all track channels and is built on a healthy balance of velocity growth and distribution gain.
Speaker 2: and it's potentially benefiting from our healthy inventory and improved service levels.
Speaker 2: Internationally, we are seeing similar growth of bide-cocococonut water with 16% volume growth for the quarter.
Speaker 2: 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.
Speaker 2: 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.
Speaker 2: During the quarter we were able to stabilize the supply chain and normalize in the tree levels which also helped our growth margin after laughs, causes unusual domestic transportation costs.
Speaker 2: We have not yet seen the full benefit of current ocean freight rate, which appear to be to be slowly returning to historic levels on most routes.
Speaker 2: This should be more visible in the second and third quarters as those benefits flow to our PNL.
Speaker 2: 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 a more competitive with spot prices than they are today. We are writing what Mike said. We are confident in our underlying business.
Speaker 2: 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 four-year results than the second and third quarters.
$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 31st 2023.
<unk> operating performance has led to an improvement in cash flow, resulting in total cash on hand of $29 million and know that under a revolving credit facility compared to $20 million of cash and no debt as of December 31 2022.
The increase in net cash primarily driven by net income.
Working capital for the first quarter of 2023 used $1 million of cash as inventory decrease of $20 million were offset by a $21 million increase in accounts receivable to the timing of customer payments.
The inventory decrease was the result of sales volume growth, coupled with a normalization of the global such fly chain, allowing us to more efficiently manage our days on hand and reduce in transit inventory.
We expect inventory to remain in more normal levels in terms of data on hand for the balance of 2023.
As Martin communicated we're confident in our full year plans and are adjusting our guidance for full year 2023, we now expect net sales growth in 2023 of between nine and 12%, which does not assume any further bite of cocoa, a coke and a lot of price increases for the balance of the year.
We believe that the pricing executed at retail in 2022 is sufficient to deliver are 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 is lower ocean freight rates on our branded products sold in our 2022 brand price increases flowed 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.
Reflect our current plans for SG&A, which in total represents higher growth over 20 twenty-two gap reported SG&A then are expected neck sales growth.
The increase in SG&A as to cover planned increase marketing and sales execution costs and higher employee cost which include a 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 a full year ETR to be broadly consistent with our first quarter right.
Given our expectations of improve profitability, we plan to more closely evaluate our capital allocation with the continued focus on prioritizing longterm growth.
Before I move on I wanted to talk about the shelf registration statement on <unk> filed with the SEC. This week S. Three was filed to fulfill our contractual obligations with certain shareholders pursuant to our registration rights in agreement and will also provide flexibility and optionality for the company and our long term shareholders and partners.
To more easily access to capital markets in the future.
It will also allow the company greater flexibility to raise capital investment.
Investment opportunity arrived 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 that vital cocoa overall I'd been extremely impressed with the organization. It is a passionate 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 you have a diverse.
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 icy opportunities for improved efficiency in decision, making through elevated data and analytics supported by improved system.
I have only become more excited to be part of the team as we deliver on the longterm vision like environment of outlines with that I'd like to turn the call back to Martin for his closing remarks.
Thank you Corey.
To close I would like to reiterate our confidence in the long term potential of the bite of cocoa company, our ability to build a better beverage platform and the strength about by the cocoa brand.
We're excited about our key initiatives to drive growth in 2023, and the relief. The recent improvement in Ocean transportation costs and capacity should provide us after a very challenging to ya.
2023, we intend to invest in marketing and sales execution to maintain or accelerate our growth and to continue to build a longterm capabilities.
We have strong brands and a solid balance sheet, and we're well positioned sustain our growth for the long term.
Thank you for joining us today and thank you for your interest in Nevada Cocoa company that concludes the first quarter prepared remarks, and we will now take questions.
Management will now take questions from research analyst, we ask that you. Please limit yourself to one question and when 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 one line on your telephone.
Wait for your name to be announced to withdraw your question. Please press Star One line again, please stand by while we compiled a Q&A roster.
Uhm.
Our first question comes from Bonnie Herzog with Goldman Sachs.
Good morning, everyone.
Regarding the <unk>.
I guess I would like to start off with a question on your gross margin switch where up significantly in the corner. So could you just talk a little further about you know the various cost Spock et cetera, driving the improvement and you know how michelli they've changed recently and then you've indicated that you <unk>.
Gross margin sequential improvement, so maybe a little more color on the phasing that'd.
That'd be expected improvement this year and.
Where you see potential upside or downside race, I guess I'm I'm trying to get a sense of how much visibility you have and what the swing factors might be.
Sure, but first of all as it relates to the first quarter of the <unk>.
Gross margin improvement was driven by a combination of factors primarily improvement in the ocean transportation rates versus.
Prior year, and then also versus will be experiencing you for when thinking about ocean freight rates we secure.
Containers and.
All sorts of markets.
About a month before they arrive in country and then it takes about.
One to two months to flow through our inventory. So the rates that you see is sort of putting through into a piano in Q1 sort of happened in queue for only two three.
And so what you're seeing there is the benefits of that rate impact. We also saw improvements in domestic transportation's, primarily the reduction in unusual domestic transportation costs that hurt us in queue for them. We highlighted that were related to the very large inventory build that happened in our warehouses.
B as the transit times that you used we just basically loaded we have very high extension into mortgage judges. So those dissipated I think domestic transportation costs.
Other than those items would largely similar to what they were in <unk> also benefitting gross margin in Q1 is the pricing we took a mid two for one branded so that is also also helping and so all of those things contributed to a nice margin improvement, but as we look forward to the to the rest of the year.
Automated since August is based on what we're seeing today and experiencing today and so there's obviously a lot to change from that.
<unk> Sighed and then also jeopardize.
On domestic transportation will fuel costs right, but it's it's based on what we know today, it's based on what we know about all finished goods inflation as we indicated.
Finished goods and placed ignoring the transportation impacts we are seeing inflationary impacts arms manufacturing cost labor costs packaging costs, we are endeavoring to mitigate those through sourcing initiatives efficiencies.
We have an engineering teams and single cool that is very focused on helping.
Partner manufacturing facilities improve efficiencies.
Total guidance is based on everything that we sort of know today and.
Relatively broad range of <unk>, obviously, there's a range of potential outcomes, but we thank you how about this actually based on what we know today as it relates to sequencing, we expect our gross margin to sequentially improve each order wild full year gross margin margins are falling within the range, how we sort of highlighted thanks, you too take.
They can be quite strong because of some certain retailers promotion activity that is not comparable to last year that might have caused the gross margin to be a little.
Less than might otherwise be expected in Dakota.
But I think that's the basis for projecting continued improvement.
Okay. That's super helpful color and then maybe just a quick follow up.
Me is.
Just wanted to get a sense as you know or clarify maybe how much of the potential topline strength and gross margin improvements you plan to reinvest into marketing versus letting it floated the bottom line I think you touched on a little bit of that in your prepared remarks, but.
My sense is you're gonna 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 suggest any comments on that would be helpful. Thanks again.
Sure I think I think it is you think about modeling if we provided EBIT guidance range between take reflects again will be pleased to turn outcome to be and currently we're planning and wants to invest in our brands to basically strengthener opportunities for long term growth. We have plans this summer, particularly issue.
You too thank you three significantly higher than <unk> one.
That are all around you know selling into our peak seven seasons, we're adding promotional activity and and marketing activity.
So we all remaining flexible we obviously.
Marketing spend is not that big a number and therefore.
<unk> ourselves on being disciplined.
[noise] accelerate those and as we see things that don't work, we were all seats discontinue them. So yeah, I think you'll come about flexibility is exactly right.
And based on <unk> and our current plans, which is already with the guidance is solid but I'll see that could change depending on how the business flows and everything else.
Okay. Thank you.
Our next question comes from Brian Spillane with Bank of America.
Brian the floor is yours.
Thank you have Christians enquirer on for Brian <unk>. Thanks for taking our questions I I have a question on <unk>.
<unk>.
Yeah, Hi, Christian 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 have had I had 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 Ya and stock levels.
Yeah, I think as we said last quarter, we finish the year with inventory that was higher than he would've liked <unk> and we provided guidance on a full year basis for that returning to more normal levels.
He took some actions you know.
In late two four basically to stop shipments into the country in order to address those inventory bottlenecks that we created for ourselves because all the inventory wisdom warehouse and that resulted in the drop in the quarter I think he said onto the prepared remarks were currently happy with our days on hand that will probably build through the summer.
And then probably say.
Add on an extra dollar basis rates and we would probably expect to finish the similar days on hand basis, maybe a little bit higher it sort of.
Ending in your industry sort of depends on business trajectory and how much has been <unk> for next year's growth. So we leave ourselves a little bit of wiggle room, there, but we expect it to be lower than it was at the year end.
[noise], Okay got it and then one quick follow up in terms of how should we think about free cash flow for for this fiscal year. It. It looks like you guys have generated positive free cash flow now for three <unk> consecutive quarters should we expect this trend to continue or if not why.
I'll take that so we even provide any guidance on full year castle and it is.
Martin touched on the working capital is.
A bit of a <unk> target.
We run a very efficient operation asset light. So we would expect fairly stable performance and in the piano for balance a year and then that flowing through the cash flow.
Perfect. Thanks, I'll pass it along thanks guys. Thanks.
Thanks.
Our next question is coming from Michael Library with Piper Sandler.
Come back like when you're on the floor.
Thank you the morning.
Michael Michael.
Just wanted to come back to the Cannes launch I know you touched on it a little bit but.
I believe that there's a lot of self resets would've just happened in March and April can you give a sense of how some of the distribution rollout is going against plans and then if the the three sets it might've just happened.
Came through the way you would've hoped and just didn't update on kind of help that's all unfolding.
Yeah I mean.
It's early in the process right. Those resets are just happening or have just happened we picked up a quite a few of the large major retailers that we would've wanted and expected.
So actual distribution is is looking good and we you know the.
The C store channel is really what we're focusing and we're seeing it really start to start to work. So we're excited about it and there's a lot of programming against <unk> specifically this summer.
And and additional execution teams against making sure that they get the stores withstands Rochelle stress huh.
Okay great.
Sorry.
The number that we.
Put a note that we're in early innings here.
Okay, Great. That's helpful and I just wanted to follow up on the frequently and make sure I understand the prepared remarks correctly and 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 to imagine any any trouble pivoting to contract rates. If they were to converge is just so that you could log in you know, what's now better rates versus where we've been over the last couple of years.
Yeah. So on availability currently on most of the lanes. We use there is good availability is still normal mobile service issues with boats scapegoats et cetera.
<unk> normal capacity available we are entering into you know very short term contracts to secure your capacity on lanes, where we're looking for service or can I speak M. Ts.
We're currently staying flexible where not entering into longterm contracts I think it's fair to say that they're all longterm contracts being offered that not items that we think are particularly attracted given the current market dynamics and spot right. So as we look forward, we will continually evaluate that and as we think.
The longterm contracts provide us with a good economic outcome and a good hedge on ocean, great. We will probably land O as in mind as we've done in the past, but we're not there yet.
Okay, great. Thanks, so much.
Our next question comes from Chris carry with Wells Fargo Security.
Hi, Good morning can you just comment on.
Competitive dynamic you know your your relative outperformance to category has been so significant.
And you know is this is this just really you know that you're just getting so much more support here on the brand et cetera realize private labels little bit lump your but you know it's just the competitive dynamic managed have kind of a question on you kind of have this portfolio fits into you have different macro backdrop. Thanks.
Yeah. So your first obviously be play in the lodge, a functional beverage category in Racine, coconut water and hopefully by the cocoa benefiting from you know very good consumer sort of Tailwinds there both on interested in health and wellness.
Some of the email communication work that we've done Oh see growth in families that overindex in consumption to talk about what is so we're seeing you know healthy coconut water grow afraid and and it's volume N. In price, it's not just price, which is quite unusual sort of you know across all of the beverage category. So.
We think there's good underlying momentum on the consumer side entering coconut water and then within talk about what <unk> brand has been outgrowing category. We think that's a combination of the strength brand someone's the commercialization David like the Multipacks. We're we're in a position reason off on all tax and many of the smaller brands.
<unk> offer of <unk> sales and execution cable bill capabilities in our supply chain capabilities were benefiting from <unk>.
Having a good inventory right now versus last year, when some items what type and so we were able to <unk>. So we thank the Calgary is healthy and we've been able to gain Sharon oxy, we'd like for both of those to keep going and as the category later, it's our responsibility to try and drive both of those.
Okay. Thank you just a sensitivity you know a different macros. It's it's not you know a subcategory realize it's it's you know within a broader overarching category, but you know just this portfolio or are you seeing any signs I know I know, you're <unk> something you've talked about in the past, but you know.
Is this is this category soon as a luxury or or do they have similar consumption. <unk> says you know overall LRB yep. Thanks, so much.
Yeah, I think we regard this as an affordable you know functional beverage, it's not luxury and to your point, it's available at nominal price points in multiple packs and ranging from auto <unk>, obviously private label place in Missouri.
Range of sort of price point there at the high end do you have homeless.
<unk> that is growing strongly at a very premium price that indicate slots that's <unk>.
Consumers are coming in and to the category and willing to pay high prices and then most of the categories for I'm, an old price point within our own brand, we're offering multipacks provide a better knowledge the consumer you'll see in our invested that'd be broke out the <unk>.
Kept up on that a few times I'm sure in the next two cycles, but this account of data we tried to point out how the grossest being ribbon mistake, we've been pleasantly surprised by the strength of the St. Louis with the introduction to the amount of the Multipacks you know obviously, the there is kind of motivation, but this and you'll also have held in Vermont.
Well, so we think at least within the coconut water category. This 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 clubs and mass, but food is still strong.
Right. So it's 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.
I think just to reiterate what <unk> said is the volume growth is really impressive right. If you look at scan data over the period 15 per cent volume growth with only six per cent price, which is quite unique in this industry right. Now so we're excited and enthusiastic about long grocery specialist.
Okay. Okay. That's helpful. Thank you.
Alright next question comes from Robert <unk>.
<unk> with ever more ISI.
Good morning, Robert.
Evercore congratulations on a terrific quarter and more so just the great job you've done navigating you know really really tough years, so so well done and.
I I wanted to follow up I mean, I I don't want to be redundant, but just to sort of depressed some of the other questions around the consumer in the competitive environment.
And and.
Maybe come out at a slightly different angle.
You know how how are you thinking about you know the the the price volume equation or price market share equation, you know it would seem that you could.
Compared to other categories and beverages, you you've taken you know.
Generally a little bit less pricing than than many but it would seem you know give me your strong Martha cheer and your you know superior service that you could have perhaps taken more you know so there's a strategic decision there so maybe just.
A <unk> a little bit more on on how to think about.
Or for how investors should think about your your general strategy on pricing and promos going forward and and how you look at that equation. Thanks.
Thanks for any big picture, you think about this category over the last several years first of all we believe the categories. The limits infancy and has a lot of consumers to bring in giving consumers more occasions to drink the product and so on and so forth. So.
But if you look at a category in pricing historically, we were way on the high end of pricing as you'd walk down every child over the last year or two pricing is really caught up to us from other beverage brands in other categories within the beverage aisle. So although you see the 6% price increase.
In <unk>, we have taken price and the price is clearly sticking in volume is growing and accelerating we think we're better position now than we might have been historically from a price perspective as it relates to the rest of the beverage aisle and get it and get in this gives us we believe the ability to further expand category and focus.
On growth, while our gross margins are improving you're seeing that improvements continue to celebrate so we feel we're in a pretty good place not to say we'll never.
Won't be taking price and future, we retain the ability and the option to do that but we think we're in a very good place right now.
So sorry, if I just if just to kind of repeat back just to make sure I understand it.
It's it's more as the category leader, you're looking to make a category more affordable relative to to other categories. So that you know you can continue to grow the categories that that's the right way to think about it.
More affordable more affordable than it historically might have been the captain Kangaroo, yes.
Great.
And to be clear I think we believe we can do that well still improving our gross margins and I'll see all of this is subject to what happens you know the general economy and competitively. So I think we have the flexibility.
Or a solid position and we will continue to monitor it, particularly as everyone's supply chain stabilized let me see how all the branch interact on shelf Mmm great.
<unk> makes a lotta sense. Thank you very much.
Our next question comes from John Anderson with William Blair.
Congrats on the quarter.
Hey, Georgia.
Alright, a couple of 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.
You know during a period of a higher rate environment.
You're still kind of operating under that May rollover some point.
It allows you to kind of take another step.
Function forward in terms of lowering your your ocean freight. So <unk> are you under any contract now that you know when it <unk> when would it laps or rollover and and and 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 are are not having a language spot rates yet.
What's the sink it will require or 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.
Yep as it relates to sort of contract rates and sort of.
Laughing and how we in a bad position sort of cause we look for anything we're in a bad position I think.
As the market changes.
These relationships allow you to influence the contract rates, which might otherwise it's happened with incremental volume to trade off. So we're working at hot right. So I don't think from a modeling perspective, I would plan any significant change other than the sequential improvement and gross margins that we've talked about this year and.
You haven't tried any guidance yet so next year, but I would just sign a sequential improvement gross margins, which obviously implies a higher gross margin for next year an affiliate basis.
And as it relates to how contracts and spot rates might a line I think historically and I wasn't I've only been doing this for years might've been doing it much much longer maybe he would want one comment.
You know there comes a time when contracts.
Get close enough to spot will you go the premium of the contract is worth it for the hedge Uhm I don't think we've seen that yet I think that's partly driven by capacity an availability of capacity and therefore the spot rates that are being offered is significantly lower than the contract rates that are being proposed so I think the excess capacity.
Is to ease that on C requires increasing demand, but it made but frankly, there's also extra capacity being added uhm given the.
One the number of containers that were built when the supply chain got bogged down my niece is in excess of containers around and then two we believe you know <unk>.
Just to believe what we believe the ocean carriers had been building shifts given the profits. They made a philosophy is so it's a little unclear when that's gonna change and obviously, it's something we want it pretty closely and when we think the time is right. We will sort of look to enter into contracts to provide the appropriate heche.
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.
This summer next couple of quarters.
I'm, just wondering which could drive some acceleration it sounds like at least in queue to discuss.
<unk>.
Is there an element you know given given that combined with the commercial initiatives of you out as you've outlined.
I'm struggling a little bit with kind of the 9% to 12% full year view in the context of the strength of two one.
Your ability to lean into marketing and promotion now with your inventory and service levels back and just the breath of the commercial initiatives.
<unk>, we need to be considering about you know the back half of the year perhaps.
Yeah. So great question I think first of all we laid out commercial plans and we projected ear and certainly the first corridor was perhaps a little stronger than we anticipated, but who knows.
Sort of get ready to change will expect the outcome for the year to be based on that other than the sort of adjustments. We made the guidance I think you know over the last two years has been lots of noise on the demand side cheetah inventories out of stocks competitive positions price movements, it's really hard for us to.
So the model of this on a quarterly basis, it's incredibly difficult and so I think.
Quite a confidence we loved the demand trends, we'd love the consumers strength with seeing your life, but the resilience was saying in with potential economic uncertainty. We obviously as we indicated love the gross margin improvements we're benefiting on the brand side from it's a little unclear on for your demands exactly how.
<unk> you know private label body reacts to their price saving private label tends to work on more of a cost half rose systems of situations. So we may see some private label volume growth there, but at lower revenues and it's very hot Somalia, That's way too early in the cycle to sort of put together concrete models on that so I.
Just say, we're not ready to to reflect your excitement as to what you see in the numbers.
But we also you feel good about a quarter and <unk> set up well for the year.
Understood. Thanks, a lot.
Great.
Our next question comes from Eric and Lori with Craig Helen Capital Group.
Thank you for taking my question.
Thanks, Thank you.
So I was hoping you can provide some more color does on the inventory of supply chain dynamics yeah. It sounds like these bottlenecks are you know 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 Dave retail strength as due to be unwise.
Think of this inventory and should we expect that to normalize and the remainder of the year.
I think we've benefited Dakota from being in stock right. Bush is Q1 last year. When we had some inventory challenges on some items I think if you look at sort of the more recent scans at a publicly available you'll see that on the scanner business remained strong so I.
I don't think we're expecting it to decrease certainly based on what we've seen so far but no I think.
Meet the challenges as you look at on historical data, there's lots of noise and timing issues related to the comparison. So it makes it so the comparisons of <unk> and we would love to have a great year. This year of full inventory perfect execution. So we have a solid baseline to power, but I would say if you think about this order last year.
There you go alright scam sales grew 22% in this quarter, but that was against 25 per cent growth and scans last year.
So we did have a good year last year also multiyears package, it's quite impressive growth.
Yeah, I said to my point, we publish the <unk> general invested deck I think what I have now after four years. So we avoid the COVID-19. She is so we apologize for that but you know 2019 is sort of us at least the base here from which we can actually measure sequential improvement tennis, we looked at that those numbers continues to accelerate so we feel good.
Mhm.
That's great to hear and then this last one for me with respect to potential M&A you know some comments on expanding the better for your beverage platform that you guys. Currently have just wondering how you're thinking about timing with respect to potential M&A. I mean is there something where you are.
Waiting to see how different brands of consumers fair in this uncertain Macroenvironment are you kind of waiting to build up more balance sheet strength or is it no real kind of targeted time frame and you're just gonna be opportunistic.
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 in that we're working against and we're looking at things. We're always looking at things, we think over time M&A should play a role.
Oh and the development of this business, but it is there's nothing imminent and and there's no pressure for tiny whatsoever in terms of doing any sort of deal. Yeah. It is my said, we prioritize organic growth and innovation.
Yeah, certainly lots to be excited about on that front appreciate the caller. Thank you that's great.
I would now like to pass the call back to management for closing remarks.
Great well, thank you for joining us on the cool we very much appreciate the interest and we look forward to talking to everyone again, after our second quarter or if not before we bumped into your inbox.
Everyone have a great day.
Okay.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Mmm.
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