Q3 2024 The Vita Coco Co Inc Earnings Call
Stephen: Hello and welcome to the Vyta Coco Company's third quarter 2020-24 earnings conference call. My name is Stephen, I'll be coordinating your call today.
Stephen: Following the prepared remarks, we will open the call to your questions with instructions to be given at that time. I'll now hand the call over to Alex Lyscombe with ICR.
Alex Lyscombe: Thank you and welcome to the Vita Coco Company, third quarter 2024 earnings results conference call.
Alex Lyscombe: Today's call is being recorded.
Speaker Change: with us, our Mr. Mike Kirban, Executive Chairman, Martin Roper, Chief Executive Officer, and Corey Baker, Chief Financial Officer.
Alex Lyscombe: By now, everyone should have access to the company's third quarter earnings release if you're earlier today. This information is available on the investor-relations section of the Bita Cocoa Company's website at investors. The Bita Cocoa Company.com.
Alex Lyscombe: 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 State Harbor provisions of the Product Security's Litigation Reform Act of 1995.
Alex Lyscombe: 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.
Alex Lyscombe: Please refer to today's press releases 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.
Alex Lyscombe: and Clay Crumbliss.
Alex Lyscombe: Also, during the call, we will use some non-GAAP financial measures as we describe the business performance. Our 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.
Alex Lyscombe: All right.
Alex Lyscombe: Additionally, please note that within the quarter, the company began using Circona's expanded MULO Plus retail scanner data, which offers 15% more expanded coverage of the U.S. retail landscape, including greater coverage of retailers with larger private label programs, and results in a reported category size approximately 40% larger than the prior reported data set.
Alex Lyscombe: All Investor Deck exhibits and script references have been updated to reflect the new dataset, unless otherwise noted.
Speaker Change: And with that, it is my pleasure to now turn the call over to Mike Kirban, our co-founder and executive chairman.
Mike Kirban: Thanks, Alex, and good morning, everyone. Thank you for joining us today to discuss our third quarter 2024 financial results and our performance expectations for the balance of 2024.
Mike Kirban: I want to start by thanking all of our colleagues across the globe for our continued strong performance and for their commitment to the VitaCocoa Company and to our mission of creating ethical, sustainable, better-for-you beverages that uplift our communities and do right by our planet.
Mike Kirban: Our priorities of driving growth in the coconut water category are visible in the healthy retail scans in our major markets where coconut water remains one of the fastest growing categories in the beverage aisle delivering double-digit growth.
Speaker Change: and John Roper. Thank you. Thank you.
Speaker Change: Year-to-date through end of September, according to Sertana, the Vitacoco brand grew 8% in retail dollars in the US and grew 19% in the UK. As we previously discussed, we were hampered by significant inventory shortages during the quarter due to limited ocean container availability earlier this summer, which resulted in a slowdown in scan growth.
Speaker Change: Our team, our distributors, and our retail partners did an incredible job weathering this storm, and we are quickly recovering and starting to better fill consumer demand for our products.
Speaker Change: For the last four weeks, as visible in our investor deck slide 5, branded scans quickly rebounded and we believe that this is a sign that demand for our products and the category as a whole are stronger than ever.
Speaker Change: In addition to strong branded retail growth, we've seen strong demand for private label coconut water. Our private label business remains a strategically important aspect of our business and allows us to benefit more fully from our category growth initiatives.
Speaker Change: We should see our private label coconut water shipment trends improve as we put the supply chain challenges of this summer behind us.
Speaker Change: Our priorities for growth remain unchanged. Adding households, expanding occasions, acceleration of our international businesses, and innovation.
Speaker Change: Our commercial initiatives around Vitacoco Multipacks, Vitacoco Farmers Organic, and Vitacoco Juice continue to perform very well as seen in U.S. Zirconia scans that we highlight in our investor deck.
Speaker Change: One highlight is Vitacoco Juice that is gaining share at retail with 39% growth year-to-date.
Speaker Change: The introduction of our VitaCocoa Coconut 1L Pack into a key convenience store chain this year has been incredibly successful. We believe that it is now one of the highest performing items in their juice store.
Speaker Change: Our newest innovation, Vitacoco Treats, a delicious and refreshing coconut milk based beverage, has produced promising results at a key retailer through the summer, despite challenges on supply which are now behind us.
Speaker Change: Given its strong performance, we decided to broaden the availability for 2025 to more retailers and are receiving positive indications of interest from these retailers.
Speaker Change: We're excited about the initial reception for VitaCocoa treats and for the future of innovative coconut milk-based beverages, which could offer us another path for long-term growth.
Speaker Change: Our international business remains healthy with strong performance in Europe led by the UK and Germany.
Speaker Change: In Germany, the category has grown over 50% over the last year, according to Nielsen, and we are now the leading branded coconut water at 3 times the size of our closest competitor.
Speaker Change: We intend to continue to invest in international markets where we have a strong brand position and can benefit from driving category growth.
Speaker Change: Despite continued volatility in the global supply chain, we are encouraged by the recovery in our inventory availability that's that we started seeing in late September and which has continued into October.
Speaker Change: While we still have a lot of work to do, I expect that product on retailer shelves and in distributor warehouses will start returning to normal levels soon, and I'm excited for a strong finish to 2024 and what I believe will be a very exciting 2025.
Speaker Change: And now, I'll turn the call over to our Chief Executive Officer, Martin Roper.
Martin Roper: Thanks, Mike, and good morning, everyone. I'm excited to report another good quarter and to be able to raise guidance based on our expectations for a strong finish to the year. I expect this momentum to continue into 2025.
Martin Roper: Let me start by providing some color on the ocean freight container availability and costs that we saw during the last six months.
Martin Roper: As we discussed at our last earnings call, in May, June, and July, we were only able to obtain approximately 85% of the ocean containers we had obtained in the same period in 2023.
Martin Roper: and saw significant price increases for those containers.
Martin Roper: This three-month container shortfall against our actual requirements, which had been for expectations of approximately 10% growth, significantly squeezed our safety stocks in market, which were already unusually low due to strong performance in the first half of the year.
Martin Roper: This also reduced inventory at distributors and on retailers' shelves.
Martin Roper: Fortunately, in early August, we saw greater availability in containers, although at unusually high prices, which allowed us to start to pull the inventory that had built up at supplier and to move significantly larger volumes of product to market than in prior months.
Martin Roper: Container availability continued improving in September, such that in the two months August and September, we obtained more containers than we had obtained in the previous three-month period, May, June, and July.
Martin Roper: We also saw container pricing slowly drop from their highs of early August.
Martin Roper: While the impact on our in-market inventory lags container shipments due to transit times of four to eight weeks, late in September our shipments to customers began to recover, and our shipments on a weekly basis on most key items started to match or exceed retail scan performance.
Martin Roper: We have seen container availability at source continue favorably in October, similar to August and September.
Martin Roper: The East Coast Port Strike in early October constricted flow of containers into the East Coast for a couple of weeks, but that backlog is slowly recovering.
Martin Roper: At this time, we believe that inventories both at our warehouses and at distributors and retailers still remain below optimum levels, particularly on some SKUs.
Martin Roper: We expect the situation to improve gradually through the end of the year if consumer purchases continue on that current trajectory.
Martin Roper: Given we operated most of the quarter with limited inventory, we are pleased with our third quarter performance.
Martin Roper: Net sales were down 4% in the third quarter, with growth of Vitacoco Coconut Water offset by weakness in private label shipments.
Martin Roper: The Private Label shipment weakness was due to the decrease in Private Label coconut oil business that we previously communicated, and limitations on our Private Label coconut water inventory as Private Label demand in the first half had exceeded our and our retailer partners' expectations.
Martin Roper: which resulted in our stock levels entering the third quarter being significantly depleted.
Martin Roper: This, coupled with the container shortages, significantly impeded our ability to meet private label demand during the quarter.
Martin Roper: While it is difficult to triangulate based on our analysis of the scan slowdown for brand and private label relative to expected trends, we estimate that we lost between 5% and 10% of net sales growth during the quarter due to the inability to fulfill customer demand.
Speaker Change: As Mike mentioned, and it is highlighted in our investor deck, during the quarter we also saw a decrease in the growth rate for U.S. retail scan sales of Vitacoco, which we believe reflects the combination of inventory challenges and the reduction of promotional activity.
Speaker Change: The impact of the inventory challenges is also visible in TDP trends during this period. In the last 30 days we've seen some improvement in retail scan growth and TDPs which we believe reflects the early signs of recovery of inventory at retail.
Speaker Change: We believe that our third quarter shipments are not reflective of the overall consumer demand for our branded and private label products and that we should see stronger trends as we rebuild customer inventory, restore our promotional cadence, and ensure that there is ample product on retail shelves.
Speaker Change: Additionally, our branded promotional activity during the quarter was significantly reduced relative to last year and included a decision not to participate in a major branded club customer promotion this fall, decisions made due to the inventory constraints.
Speaker Change: This resulted in a significant decline in dollar sales and an associated increase in pricing in the new expanded Sakana Plus data.
Speaker Change: Although these promotional decisions in aggregate are beneficial to gross margin, they likely resulted in lower net sales and scams for the core.
Speaker Change: Our third quarter gross margins were healthy but down versus the first two quarters of the year as the impact of more expensive ocean freight that started in the second quarter began flowing through to our P&L.
Speaker Change: The aforementioned reduction in promotional activity together with reduced marketing investment helps us to offset some of the gross margin pressure from increased ocean freight costs.
Speaker Change: From a cost side, our finished goods costs, excluding ocean transportation costs, year-to-date, are in line with our expectations.
Speaker Change: and Clay Crumbliss.
Speaker Change: We currently believe that ocean rates are still at unusually high levels relative to long-term averages, and therefore we are continuing to not commit to any long-term fixed-rate contracts.
Speaker Change: However, we are exploring additional capacity commitments and floating rates to attempt to insulate us from events such as the capacity constraints we saw this summer.
Speaker Change: If we see competitive fixed-rate offers for long-term contracts that make sense to us, we would be willing to enter into fixed-rate agreements.
Speaker Change: Based on the inventory we have in transit and our confidence in the category and Vitacoco brand trends, we're raising our four-year guidance for net sales and adjusted EBITDA.
Speaker Change: We believe that the strong category growth is a positive indicator and supportive of our long-term growth algorithms for branded growth.
Speaker Change: In anticipation of such growth, we have added production capacity for 2025 and 2026 to provide greater supply chain flexibility than we had this year.
Speaker Change: With that, I will turn the call over to Corey Baker, our Chief Financial Officer.
Corey Baker: Thanks, Martin, and good morning, everyone. I will now provide you with some additional details on the third quarter 2024 financial results. I will then provide an update on our outlook for the full year.
Corey Baker: For the third quarter of 2024, net sales decreased $5 million, or 4% year-over-year, to $133 million, driven by private-label declines of 37%, partially offset by Vitacoco Coconut Water net sales growth of 8%.
Corey Baker: Vitacoco Coconut Water increased net sales by 5% to $94 million, while Private Label decreased 42% to $16 million, as we saw the impact of reduced supply on key Private Label water SKUs and the transition out of the Private Label-Coconut-Oil relationship that we had previously indicated.
Corey Baker: By the cocoa coconut water saw a 3% volume increase and a 2% net price mix benefit, while private label sales declined 42%, driven by a 32% decrease in volume and a 14% price mix reduction due to the coconut oil transition.
Corey Baker: For the third quarter 2024, our international segment net sales were up 19%, with vitacoco coconut water growth of 31%, where we saw strong growth across our markets.
Corey Baker: Private label sales declined 11% due to supply challenges on private label coconut water and the transition out of the private label coconut oil relationship impacted our shipments.
Corey Baker: On a quarterly basis, consolidated gross profit was $52 million, down $5 million versus the prior year period. On a percentage basis, gross margins remained very strong at 39% on the quarter, despite higher ocean freight costs as previously mentioned.
Corey Baker: This was down approximately 200 basis points from the 41% reported in Q3 2023.
Corey Baker: Moving on to operating expenses, third quarter 2024 SG&A cost decreased 5% to $31 million.
Corey Baker: The reduction was primarily driven by disciplined marketing spending as we adjusted our spending in light of reduced product supply.
Corey Baker: We would expect to increase our investments as we see improved inventory at retail.
Corey Baker: Net income attributable to shareholders for the third quarter 2024 was $19 million, or $0.32 per diluted share, compared to $15 million, or $0.26 per diluted share for the prior year.
Corey Baker: Net income for the quarter benefited primarily from an unrealized gain in FX derivatives versus a loss in the prior year and decreased SG&A costs.
Corey Baker: partially offset by a lower year-on-year gross profit.
Corey Baker: Our effective tax rate for the third quarter 2024 was 25%, for a 21% in the prior year quarter.
Corey Baker: This represents a year-to-date ETR of 24%, worth 20% last year. The increase was driven by the jurisdictional mix of the pre-tax profits and the impact of higher non-deductible expenses this year related to covered employees' compensation compared to last year.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Third quarter 2024 adjusted EBITDA, our non-GAAP measure, which is defined and reconciled in our press release, was $23 million, or 17.3% of net sales.
Speaker Change: down from $27 million or 19.5% of net sales in 2023.
Speaker Change: The decrease was primarily due to the gross profit performance previously discussed, partially offset by lower year-on-year SG&A spending.
Speaker Change: Turning to our balance sheet and cash flow, as of September 30, 2024, we had total cash on hand of $157 million and no debt under our revolving credit facility, compared to $133 million of cash and no debt as of December 31, 2023.
Speaker Change: The increase in the cash position was due to the strong net income year-to-date, partially offset by an increase of working capital of $30 million, and a year-to-date repurchase of shares valued at $12 million.
Speaker Change: The working capital increase was driven by a $27 million increase in accounts receivable, which is due to the timing of customer payments and an inventory increase of $14 million.
Speaker Change: Our Q3 ending inventory increased $20 million from the unusually low levels at the end of Q2, as the recovery we began to see in container availability resulted in more finished goods inventory on the ocean in transit to our markets.
Speaker Change: Based on year-to-date performance, improving inventory levels, and our confidence in the health of our category and our Vitacoco brand, we are raising our full year guidance for net sales and adjusted EBITDA.
Speaker Change: We now expect net sales between $505 million and $515 million, with expected gross margins for the full year of 37% to 39%, delivering adjusted EBITDA of $80 million to $84 million.
Speaker Change: This guidance reflects our current best assumptions on marketplace trends and our global supply chain performance, and assumes a continued improvement in inventory through the balance of year.
Speaker Change: Ocean freight costs have come off the high seen in July, but remain unusually fluid.
Speaker Change: Our latest estimate is that the impact of these elevated ocean freight costs will be approximately $14 million of increased transportation costs on a rate per CE basis in the second half of the year over the equivalent first half rate per case equivalent.
Speaker Change: Approximately 30% of these costs hit in Q3, with a balance expected to impact our Q4 performance.
Speaker Change: We expect disciplined SG&A spending to continue in Q4, with full year 2024 SG&A flat to slightly down to last year, as we don't expect to restore the full investment and marketing spend mentioned earlier.
Speaker Change: We anticipate our cash balance will remain healthy through the balance of the year, allowing us to continue investing in our business for long-term growth, fund any potential M&A opportunities that emerge, and support further shared buyback activity.
Speaker Change: Finally, as of today, the company has purchased 112,702 shares, bringing our total repurchase to 534,246 shares for an aggregate value of $12.8 million and an average share price of $23.97.
Speaker Change: And with that, I'd like to turn the call back to Martin for his closing remarks.
Martin Roper: 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 and the coconut water category.
Martin Roper: We are confident in our ability to navigate the current environment and are excited about our key initiatives to drive growth.
Martin Roper: We have strong brands and a solid balance sheet and we are well positioned to drive category and brand growth both domestically and internationally.
Martin Roper: Thank you for joining us today, and thank you for your interest in the Vitacoco Company.
Martin Roper: That concludes our third quarter prepared remarks and we will now take your questions.
Speaker Change: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Speaker Change: Please stand by while we compile the Q&A roster.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our first question comes from the line of Bonnie Herzog, Goldman Sachs. Your line is now open.
Bonnie Herzog: All right, thank you. Good morning.
Bonnie Herzog: Good morning. I had a question on your new guidance, which implies around 14% top-line growth in Q4, which is
Bonnie Herzog: certainly a big acceleration and then even a greater acceleration on EVA dog growth in Q4, which
Bonnie Herzog: suggest greater leverage. Now, I know you touched on this, but just hoping you could expand on the drivers of each a little further as well as maybe, you know, the setup for next year in terms of container availability. Thanks.
Speaker Change: Sure, Bonnie, so...
Speaker Change: The growth as we talk about in the script and the investor deck, we are seeing recovery of inventory.
Speaker Change: and we're starting to see at retail recovery on shelf of product.
Speaker Change: So there's a flow, a backward flow where we've got to fill the shelves up and we've got to fill the back rooms and the distributor warehouses. So that's going to result in very strong growth as we finish the year and depending on the flow of inventory into early next year.
Speaker Change: And then that, you know, will deliver, we will see higher ocean freight in Q4, but the volume growth will deliver leverage through balance a year to support the EBITDA guidance.
Speaker Change: And I think importantly, the category remains healthy, as you can sort of see in the scans, you know, still growing, double digits.
Speaker Change: And, you know, we're going to hopefully catch up to that because obviously we lagged that during the quarter.
Speaker Change: I think the second part of your question was related to, you know, ocean freight going forward, obviously highly uncertain. Ocean freight rates today, as you can see in the indexes, are still, let's say, a factor of two above historical long-term averages.
Speaker Change: and are still way above what they were in the first quarter last year and at the end of 2023. So we still have a ocean freight headwind if these rates remain sticky.
Speaker Change: Okay, fair enough. And then just one quick clarification, so just
Speaker Change: The EBITDA leverage also, I assume, has to do with what you called out, meaning the pullback on SG&A or maybe getting greater leverage on that or efficiencies. I imagine that's part of it. I guess I'm trying to understand.
Speaker Change: If you pull back on marketing spend, do you foresee, as you get the containers availability in Q4, do you think you'll step up a little bit more in spending?
Speaker Change: I think, you know, our comment on how we're dealing with the inventory, and then Corey can just talk about the SG&A guidance that we provided.
Speaker Change: You know, we're still, you know, very, you know, tight on inventory. There are still SKUs we don't have inventory for. There are still customers who are, you know, I use the word upset with us, but they understand the situation. Right? But we are still not fully meeting, you know, customer demand and therefore consumer demand.
Speaker Change: We expect that.
Speaker Change: to improve through the quarter.
Speaker Change: But, you know, given that, I'm not sure we will turn on any significant marketing activity in the balance of the quarter. Obviously, there are some things we're committed to do that we have to do, but that's how we're thinking about it. And we will obviously monitor it because.
Speaker Change: We don't really know how consumer demand will respond and whether the inventory will build quickly or slowly, etc. So we're just going to monitor it and manage it appropriately. And I'll let Corey comment on the guidance.
Corey Baker: There's not a large change in the SCNA, Bonnie, as we referenced in the guidance.
Corey Baker: You know, we're flat to slightly down on a full year at CNA basis, and you know, we're down year-to-date So it's not a huge change from where we've been Assumed in our guidance. It's very much related to a very strong top line as we recover inventory
Corey Baker: offset by the ocean trade pressures on a gross margin side.
Speaker Change: Okay, that's helpful. And then just maybe one quick final one for me and then I'll pass it on.
Speaker Change: I also wanted to understand, you know, in the quarter, if the supply constraints primarily impacted your private label business or was this also an issue for your branded water business? You know, maybe you could just help us understand the impact on each. Thanks.
Speaker Change: Yeah, so I would say that it was uniformly across most of our factories.
Speaker Change: that we were unable to obtain containers that we needed to support both our branded and our private label business. Now obviously there's a little bit of differences by you know specific factory lane and geographic location and the timing of when those things hit but it was uniformly across
Speaker Change: of Business.
Speaker Change: And certainly our branded growth was a little better than our private label declines, which was more, I think, a function that private label inventories were very tight entering the quarter and then were exasperated by what happened. And that's somewhat because private label had.
Speaker Change: you know, maybe grown faster than our customers expected, and we expected in the first half of the year, and we've benefited from that, and so that caused some problems. But uniformly, the ocean freight containers affected us across the board, and the reported results really more reflect our inventory position entering the quarter.
Speaker Change: All right, thank you so much. I'll pass it on. Thanks Bonnie. Thanks.
Speaker Change: Thank you. Our next question comes from the line of Chris Carey, Wells Fargo Securities. Your line is now open.
Speaker Change: Thanks for tuning in.
Chris Carey: Hey, good morning, guys. I wanted to ask about Q4 gross margins.
Chris Carey: And kind of like, you know, it's about Q4, but really on the go forward.
Chris Carey: So, it's just, it's an incredibly, incredibly wide range that you could see for Q4.
Speaker Change: I think just given your comments on SG&A, it certainly seems like you're going to be at the high end of your full-year gross margin range. Maybe you can comment on that.
Speaker Change: And then, maybe more importantly, what does this entail for the exit rate on gross margin going into next year? Should we view Q4 as...
Speaker Change: a worst, you know, kind of quarter, trough, you know, this is a point in time or...
Speaker Change: It's this, you know, this sort of gross margin that you're going to be looking at as we get to the front half of next year.
Speaker Change: and you're really not going to be able to start seeing some sequential recovery into the back half. So really just trying to contextualize how well we're talking in Q4 and what it means as you go into the front half of next year as you look to deliver on profit objectives for next year. Thanks.
Speaker Change: and Clay Crumbliss.
Speaker Change: So Chris, I'll talk to the guidance a little bit and Martin can jump in.
Speaker Change: There is an incredible amount of fluidity in the ocean freight market, the container flow, and that combination of cost and top line we indicated in the script.
Speaker Change: You know, a good amount of ocean freight hitting Q4, which will impact gross margins.
Speaker Change: If you follow the index, which I know you do, you would have seen a spike.
Speaker Change: quite a strong spike in July that has been coming down.
Speaker Change: So, as we've talked in the past, that rolls forward about a quarter, so that spike is hitting in Q4.
Speaker Change: So, we're not providing guidance on next year, but you would, you would see a kind of the high point of ocean freight, at least in the near term in Q4, coming down as we go into next year, but lots of variables still going on in the market.
Speaker Change: Yeah, and looking forward, obviously, it's very hard to predict what's going to happen, but loosely speaking, the ocean freight rates that we're experiencing in October, November, maybe September, October, November will hit Q1.
Speaker Change: Right. And so to Corey's point.
Speaker Change: We would just refer you to the indexes to sort of interpret what's going on, but the point we would make is the current rates that you're seeing in the indexes and that we're experiencing, and again, we don't say we're experiencing the index rates, are still orders of magnitude double or more of the long-term historical averages.
Speaker Change: And if you look back to the rates that were being seen in the end of 23 and the start of 24,
Speaker Change: which were closer to historical averages.
Speaker Change: So, certainly, as we lap
Speaker Change: those rates, if you assume the current rates continue as they are, our gross margins will be negatively affected versus the periods we reported.
Speaker Change: And so, and then how long that goes on for obviously is dependent on how long the rates, you know, stay where they are now. With all that said, the rates have been dropping since, I think, the first week of August.
Speaker Change: and they've been dropping in different ways by different lanes.
Speaker Change: Asia to Europe has dropped faster than Asia to East and West Coast. We're not totally sure why, much like we're not totally sure why the rate spiked in the first place.
Speaker Change: And then, you know, the other point we have is that some of our lanes are Brazil to the U.S., which just behaves differently, and there isn't any real good index we can refer to you on that.
Speaker Change: So we're looking at it, and we're certainly paying higher than we paid this time last year, and higher than we paid in the first quarter this year, and if that were to continue, that would, you know, be a negative impact on gross margins.
Speaker Change: The peak rates that Corey referred to were the sort of May, June, July, early August rates. Those were largely hit in Q4.
Speaker Change: So that's the sort of, I suppose, the way to think about modeling it, but obviously, since this is an external, you know, market, we don't really have great visibility for what's going to happen, you know, next week, or even this week when those rates get reported tomorrow.
Speaker Change: Okay, then just one follow-up, then I'll get back into the queue.
Speaker Change: So do you have a sense of where you might be landing on the full-year gross margin? I mean, we're talking about hundreds of basis points of range in Q4, and if not, which is fine if you don't want to go there.
Speaker Change: Can you just talk about the flexibility that you would have in the SG&A structure if there is that much variability in the Q4 gross margin such that you'd be delivering on the profit objectives that you're raising today? That's it for me.
Speaker Change: Yeah, so Chris, we provided also a range of EBITDA, which we think gives us the flexibility to deliver within that range. You know, so there's volatility in the
Speaker Change: the gross margin line, but we think we can manage that within the EBITDA range. SG&A, there's always some flexibility, but not a ton, right? Especially within this point of the year. So that's gonna be pretty much in line with what we've guided to.
Chris Carey: Okay. Thanks. Thanks a lot.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Eric Serrato from Morgan Stanley. Your line is now open.
Eric Serrato: Great, thanks. In terms of the top line, can you get a little bit more granular in terms of...
Eric Serrato: how you're thinking about next year and, you know, kind of plans to continue the momentum that you've had. You've done a great job expanding households and occasions and certainly
Eric Serrato: one of the only categories in NARTV that's experiencing real volume growth here. But, you know, sort of other than just kind of doing more of the same, could you get a little bit more granular about, you know, how you keep this going in 2025 and beyond?
Speaker Change: Yeah, so for one, you know, we like how it's going. And so if we can maintain it by doing more of the same, that would be great. But obviously, we're endeavoring to accelerate it and or maintain it longer than perhaps otherwise would be expected.
Speaker Change: It starts with the category, which is quite healthy, has been growing, you know, double digit volumetrically in North America for the last
Speaker Change: you know, five years and doesn't seem to be slowing in any shape or form.
Speaker Change: And that is sort of the grounding for all of our planning for next year. How do we maintain that? How do we get our fair share of that?
Speaker Change: And how do we, how do we keep it going? Right? And you mentioned, you know, our priorities are expanding households, increasing velocity per household, increasing availability, so that people can buy coconut water and more more occasions. And and on the velocity side, it's very much an occasion driven messaging. So we're not really changing any of that.
Speaker Change: We're still pushing the multi-packs into mass and food because there's still opportunities there.
Speaker Change: pushing, or we tested treats this summer with a key retailer, actually a couple of key retailers.
Speaker Change: one more sort of promotional, temporary, and one on a semi-permanent basis.
Speaker Change: We like what we see, so we're offering it to more retailers. We do see an interesting opportunity in coconut milk-based.
Speaker Change: sort of beverages that we'd like to play in, and it's too early to tell whether the retailers will jump at that, but certainly we like the results we saw at the retailer. We continue to push our canned juice product.
Speaker Change: This year we expanded it to a couple of mass retailers and a couple of food retailers. It's performed well at certain retailers where the demographic works. So we're trying to expand that. And we're also trying to in the convenience stores where it's been now for like 18 months.
Speaker Change: We have plans to upgrade the offering in the convenience store to maybe enhance velocity a little bit, but it's sticking, right? And then, sort of finally, in the sort of core business,
Speaker Change: the one liter Vitacoco Pure, which was in a convenience store this year for the first time, I think surprised us, surprised the world.
Speaker Change: the retailer, and it looks like there's a real opportunity for one liter in convenience store for coconut water, and so we're going to try and execute on that. So that's sort of what we're thinking, but our final plans aren't really firm, and we certainly haven't heard back from retailers yet, and until we do, we can't commit to anything. But I think it all starts with the category's healthy, and our goal is to maintain that health and maintain share or grow share to the extent we can.
Speaker Change: If I could just add, the opposite of granular, I think big picture, and we've talked about this many times before, is that we really believe the category is in its infancy.
Speaker Change: When you look at it, it's a it's a fraction of the size of other juice categories like cranberry and orange and so on and we think that the category is just mainstreaming and there's an opportunity to continue to build it out.
Speaker Change: and one day get to the size of some of those other larger juice categories as we build this. We don't see any reason why we can't. So, we think we're in the early days of building something that we think could be...
Speaker Change: quite a large category long term.
Speaker Change: Great, and then just following up in terms of housekeeping on gross margin, I know a lot of questions on that already. You guys called out that you
Speaker Change: you know, pull back on promotions.
Speaker Change: I think you called out the club promotion that you didn't do this year. Can you give us an idea of the kind of order of magnitude that things like that, the reduced promos, had on gross margins or price mix this year and this quarter, and sort of the impact that you...
Speaker Change: Expect from that kind of normalizing next year and you know I guess offsetting some of the some of the volume recovery that you're looking for
Speaker Change: So, I think we're a little uncomfortable getting that granular. What I would say is that it was a major, you know, major customer, and if you were doing your store checks, you would not have seen a major promotion at a major club store, and you can correlate the two data points.
Speaker Change: Historically, if you were doing store checks, you'd have seen us in that club.
Speaker Change: Store, you know the over the last you know, like last year three times and then this year it's twice right so it's pretty big
Speaker Change: and pretty material and benefited gross margin this quarter offsetting the ocean freight. And I think we'll just leave it at that rather than get into specific details of size.
Speaker Change: Thanks again, I'll pass it on.
Speaker Change: Yep.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of John Anderson of William Blair. Please go ahead.
John Anderson: Hi, good morning, everybody. Thanks for the question.
John Anderson: and Clay Crumbliss.
Speaker Change: Good morning.
John Anderson: Year to date, the international business has been powering forward, despite some slower growth in the Americas. Could you just talk a little bit about, you know,
John Anderson: what you're seeing there from a...
John Anderson: you know, country-level trends and maybe some of the initiatives that you've been driving, you know, internationally through about this year and what your expectations are or plans are, you know, for that part of the business, you know, looking forward as well.
Speaker Change: Sure, so you know the UK business has been a business we've been operating for quite a long time now and it's done well. It's really started to accelerate the last year and a half or so.
Speaker Change: as households are expanding and as we're seeing the category again really mainstream in the UK. So that's had a nice impact from from a solid base as it's grown quite quite significantly.
Speaker Change: I think we spoke about several other markets in the past but we really like Western Europe. We like the fact that, you know, the consumer is there, the category is becoming more global, awareness around coconut water is becoming more global, and as we look at some of these markets, Germany was one of the first ones that we entered just a few years ago with, you know, one guy and and, you know, a very simple strategy.
Speaker Change: And it started to build, and it started to build pretty quickly, and we're seeing it really start to...
Speaker Change: take off now.
Speaker Change: and we don't see why we can't replicate that model in other Western European markets, so that's a big focus for us.
Speaker Change: as we're entering some of these other markets, we'd like to see Germany continue to expand, one day be as large or larger than the UK, and then see these other.
Speaker Change: Western European markets catch up quite quickly so that's that's
Speaker Change: That's a real focus for us.
Speaker Change: You know, we've talked about some decline in Asia, but we're looking at, you know, restructuring the route to market there, and that's coming along well. And so we see the opportunity for this category to be, you know, quite significant in all of these global markets. And we believe we're the ones that have the opportunity to.
Speaker Change: to build that business and build the category.
Speaker Change: Thanks, that's helpful. You know, on slide 11 in the...
Speaker Change: The quarterly earnings deck, it looks, you share some stats around ACV performance.
Speaker Change: 3rd Quarter 24 versus 3rd Quarter 23. Just broadly speaking, it kind of looks like ACV levels have kind of plateaued across some of the main
Speaker Change: product forms. Is that a function of
Speaker Change: Thank you.
Speaker Change: Well, number one, is that a function of some of the supply constraints?
Speaker Change: that you've experienced this year and or you know do you think going forward you know at this point this story is more about maybe average items per location and and and velocity per location as opposed to ACV growth from from here going forward
Speaker Change: Yeah, it's a great question. I think the ACV numbers perhaps were not as large as we would hope to report. If you look at
Speaker Change: Slide 5, we sort of report TDPs.
Speaker Change: As an illustration of the potential inventory impact at retail, I'll see now it's hard to say this direct causation, but you see it on the scan numbers and you see it on the TDP numbers.
Speaker Change: that obviously there was...
Speaker Change: reported distribution loss. We don't think we lost shelf space because the shelf space is still there, it's just the product isn't on it on a daily basis. So...
Speaker Change: So I think it's more than that. I think we feel pretty good about our ACV coverage and our progress and the momentum on our key initiatives, but certainly given the impact of inventory this quarter, the growth impact of those initiatives, both in volume and in maybe moving the ACV needle a little bit, weren't as good as we would have liked.
Speaker Change: Okay, last one for me.
Speaker Change: as you think about 2025 and Martin I think you referenced kind of confidence in the in the long-term algorithm
Speaker Change: kind of remind us.
Speaker Change: you know, how you're thinking about the long-term alga for the branded side of the business. And then when you referenced additional production capacity coming online for 2025 and 2026, how much, you know, incremental capacity are you expecting to bring online, you know, to support growth in 2025 and 2026? Thanks.
Speaker Change: Yeah, so like our long-term, you know, algorithmal goal for branded growth is mid-teens.
Speaker Change: I think we believe we can get there based on a category growing low teams in North America and internationally growing faster, right? So that's how we think about it. Maybe North America grows a little faster earlier in that long term and international contributes more growth later in that sort of long term algorithm.
Speaker Change: We entered this year with the capacity that we thought we needed given some of the discussions we had had last year about potentially losing a large private label coconut water customer.
Speaker Change: And as a result of which, we had less capacity than would be optimal and everything ran pretty fully. I think we normally like to run at like, eighty to eighty five percent of capacity and that's not where we have been running this year. And then it was obviously impacted by sort of the squeezing on the container freight side, both on a cost and availability side this summer. So this year has been particularly tight.
Speaker Change: Back in, I think, March-April, we clearly communicated that we were going to add capacity and we continue to do so.
Speaker Change: We're trying to get back to that 80-85%.
Speaker Change: Obviously, that's based on our expected growth rate, so whether we actually get there will be a function of does the category grow slower or faster, and are we able to add all that capacity in the time frame?
Speaker Change: And I think this quarter we talked about 26 because we're planning 26, right? And I think we're merely signaling that we're confident and comfortable with planning for that growth and putting capacity in place to support it.
Speaker Change: So it's really, this year, it's just been about ocean freight availability. Capacity hasn't been the challenge there.
Speaker Change: I think when you're running, let's say, in the 90s of capacity, then, you know, if there's any disruption, you don't have the flexibility to react. And so I don't think how we, well, we're very happy with all our supplier relationships and how we ran this year. We would like to have spare capacity normally in the system, so we're going to try and get back to that.
Speaker Change: Makes sense. Thank you so much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Jim Salero, Stevens. Your line is now open.
Speaker Change: Hi guys, good morning. Thanks for taking our question.
Speaker Change: Morning, Jim. I wanted to ask maybe a handful more questions on inventory. If I just look at the balance sheet on a dollar basis.
Speaker Change: I think inventory is up like 40%.
Speaker Change: quarter over quarter, but presumably, and Martin, I think you touched on this in your prepared remarks, that that's because it has a higher unit cost that we elevated.
Speaker Change: We've got some additional containers available.
Speaker Change: Can you give any color on a unit basis, how much the inventory is up quarter over quarter and if you can offer a split in like North American inventory versus international?
Martin Roper: So, Jim, the primary driver...
Speaker Change: and you don't really need the underlying details as it's on the water so we view it as a positive sign that the inventory production that we've had over the summer is coming it just didn't reach so it is a 20 million dollars quarter on quarter so it's a big number but it's in in transit from Asia into the operating markets.
Speaker Change: Okay, and then I guess if we...
Speaker Change: follow that through? Is it safe to say that
Speaker Change: While inventory will improve in 4Q, it's not going to be quite where you want it at the end of 4Q, so we should still see incremental inventory build in the first half of 2025, such that shipments should probably outpace consumption in both 4Q and then some period in one half 25.
Speaker Change: So I think that's true of our sort of inventory available to ship, but not necessarily true of our total inventory on the balance sheet.
Speaker Change: If that makes sense. Okay.
Speaker Change: So right now, as Corey alluded to, at the end of Q3, we have an unusually large amount on the water because of the number of containers we were able to obtain in August and September. So, most of those containers are on the water. And those will move into market and be available to shipping in Q4. And.
Speaker Change: it all depends on how fast that flows out and what our end numbers are as to where it is but we would expect the on-water amount to return to more normal levels sort of by the end of the year and hopefully that means our in-market inventory is better but maybe hopefully it means it isn't because demand is so good that we can't keep that you know we're still you know not struggling to keep up but what we don't catch up right so again we don't really know but that's the dynamics here for the modeling
Speaker Change: Okay, that's helpful. And maybe if I could squeeze in one more on just the promotion. You guys called out the club promo that you kind of had to forego because of the inventory levels.
Speaker Change: Is that something that would just be seasonal, and so basically you just miss it this year and it'll be back on next year? Or is it possible that if inventory's in a better spot, you could potentially run that promo in the first half of 25? Or does that kind of mess with the cadence of other stuff you have going on?
Speaker Change: So...
Speaker Change: this particular, you know, retailer who we would like, you know, like to call a partner, I suppose, you know, runs promos, you know, periodically, let's say quarterly for argument's sake, but it might be more frequent or whatever, right? And in order to meet that demand,
Speaker Change: We need six to nine months planning because it is a very large opportunity. Again, you know, it's not like we're carrying that inventory in inventory on the off chance that they want to run something.
Speaker Change: Thank you everyone.
Speaker Change: So, the answer to your question is,
Speaker Change: know it's unlikely to pop up unexpectedly, right, but we engage in planning with them on potential timings, and we would certainly hope to be considered for the same time slots that we received in twenty three and twenty five.
Speaker Change: which would be an incremental time slot to what we what we agreed to in 24. And it was a joint discussion. You know, we saw what was going on. And we just said, look, we can't support this. It would be foolish to run.
Speaker Change: Got it. Perfect. I appreciate all the color guys. I'll back in a few.
Speaker Change: Thanks, Jim.
Speaker Change: Thank you. Our next question comes from the line of Eric DeLoyer of Craig Hollum Capital Group. Please go ahead.
Eric DeLoyer: Great, thank you for taking my questions.
Eric DeLoyer: First one from me, just another question on international dynamics, so obviously both UK and Germany.
Eric DeLoyer: remaining very strong.
Eric DeLoyer: How should we think of, I guess, what inning the German and UK markets are?
Eric DeLoyer: compared to the U.S.
Eric DeLoyer: And then in terms of other Western European markets, you know, you mentioned you started in Germany a few years ago. Should we think of other Western European markets as being a few years away from having a significant impact, or are there perhaps...
Eric DeLoyer: some others that are, you know, a bit further along than just, you know, very beginning stages here. Just wondering how to think about, you know, the sort of prospects for other Western European markets in the quarters and years ahead.
Speaker Change: Consumption per consumer is growing in the UK, and I think that's adding a lot of the growth there, but the distribution is quite developed.
Speaker Change: As we look at other markets,
Speaker Change: The other markets we've been, you know, if you think about some of the other Western European large countries, large consumer markets, we've been developing those over the last 12 to 18 months, so laying a foundation.
Speaker Change: And everything is just happening a little faster these days because I think of where the category is just.
Speaker Change: from an awareness level on a global level. And so we see these markets starting to potentially have more of an impact quicker than they would have a few years ago.
Speaker Change: So, we're excited about the opportunity and we think that over the next couple of years, the international growth will have more and more of an impact on the PNL as they start to develop quicker.
Speaker Change: All right, that's very helpful.
Speaker Change: And then just last question from me.
Speaker Change: Just kind of zooming in on the acceleration in revenue growth expected in Q4, obviously there's replenishing of inventory levels.
Speaker Change: Is it fair to assume a stronger rebound in private label sales quarter over quarter versus branded sales due to that sort of...
Speaker Change: tighter inventory or are both private label and branded inventories kind of increasing at a similar rate and thus we should expect private label inventory levels to, I guess, just take a bit longer to replenish.
Speaker Change: What I would say, that's really hard to model. It depends on a whole bunch of things, not least of, you know, one of them, which we haven't mentioned in the Q&A yet, which is transit times, which are unusually long. And what happens on transit times, because some of the private labor was produced.
Speaker Change: certain locations, and so it all depends on on those lanes. So I think we would hope for inventory recovery across the board. We're certainly not prioritizing, you know, production or anything.
Speaker Change: You know, we're trying to take care of all of our customers is how I would put it, and that would hopefully involve some recovery in private label shipments relative to the trends we saw Q3, but exactly how that plays out relative to brand item.
Speaker Change: All right, that's helpful. Thank you for taking my questions.
Speaker Change: Awesome. Thanks. Thank you.
Speaker Change: Thank you. Our next question comes from the line of Michael Lavery of Piper Sandler. Your line is now open.
Michael Lavery: Thank you. Good morning.
Michael Lavery: Good morning. Just looking at slide 5, obviously the category outperformed in the period where you had the inventory headwinds.
Michael Lavery: I guess, can you just help us understand, it would seem, if you're attributing your deceleration and softness to the inventory availability.
Michael Lavery: What did the rest of the category do differently that put them in a better position to maintain the growth rate that you show there?
Speaker Change: So obviously we don't have, you know, great visibility, but, you know, one at, you know, 45% share, 50% share on the old data set, you know, our slowdown would pull the category down. So that's what's pulling the category down.
Speaker Change #100: It looks to us like initially some of our competitors had more inventory entering this period of time when they should have seen similar things to what we saw, whether they saw them to the degree we saw, you know, obviously, it's impossible to know what their arrangements are.
Speaker Change #100: But I would say towards the end of the quarter, you're starting to see some of them struggle, either on the, you know, supplying private label SKUs to
Speaker Change #100: to retailers or on the branded side, so you're starting to see that. And so my hunch would be, and it's a hunch as opposed to...
Speaker Change #100: Fact.
Speaker Change #100: is they started with better inventory, and then as they probably suffered some of the same issues, it starts to show up. I think as we have been clear, we started with inventories unusually low, and it flowed through very quickly for us.
Speaker Change #101: That's helpful and makes sense but I guess you also touched on how you haven't been doing as much or almost any longer-term contracts.
Speaker Change #102: Does that impact availability and could that be a difference? And then I'd love to understand a little bit too, you mentioned how for next year you're looking at more, some flex rate options that seems like it might secure the availability better.
Speaker Change #102: but not quite be the same as a long-term contract. Can you just maybe help us understand exactly how that works and also what the cost implications of that might be?
Speaker Change #103: Yeah, so obviously we don't know how, you know, competitors, either on the branded side or the private label supply, you know, how they deal with, you know, contracts. I think historically.
Speaker Change #103: fixed price contracts for 75-80% of the lane.
Speaker Change #103: and that sort of guaranteed capacity, right, or at least locked it in, and we thought that was a sensible approach.
Speaker Change #103: When the rates went crazy, we stopped entering into fixed rates agreements while still trying to preserve some commitments on capacity. I think it's fair to say that in the May, June, July period, while some of those commitments were met, some of them were rolled, and we didn't get the commitments. So we've had discussions with the carriers.
Speaker Change #103: you know, as to how can we make these commitments firmer. And we're also talking internally as to whether we should commit for more than 75-80% of the capacity on these lanes.
Speaker Change #103: What's the downside? What's the penalties? If there are penalties, can we can we roll those commitments, etc.? So we're having all of those discussions and we're just merely trying to indicate I think that
Speaker Change #103: We're trying to, through the relationships of the carriers, get firmer commitments on capacity so that squeeze doesn't happen. We're trying to plan to build inventory and market to more normal levels, maybe raising inventory on key SKUs.
Speaker Change #103: But to actually get there will probably take six months, seven months, because it doesn't happen overnight. And we're also still talking to carriers about potential fixed rates agreements. You know, if those rate agreements are at the current rates, we still think they're unusually high. So we're not that excited about entering into them.
Speaker Change #103: So that's sort of how we're thinking about it.
Speaker Change #104: Okay, yeah, thanks for that. And then just quickly on the private label, can you give us a sense, you know, the 1 and 2Q volumes were up more modestly, you know, not too significantly, but then of course down significantly. Can you give us any sense of how much...
Speaker Change #104: It's from the discontinuation of the oil in the quarter versus the inventory headwinds to try to understand sort of a, you know, x oil volume decline.
Speaker Change #105: Yeah, we're a little reluctant to quantify it because it relates to one customer and we think that would be, you know, unfair to that relationship. I think I would point you to what we said last year in Q2 and Q3 when we sort of quantified losing
Speaker Change #105: all that customer's business and then just the oil business, right? And that's how to back into what it might be. I think importantly, we continue to ship oil to them through Q1.
Speaker Change #105: So we will lap that number starting Q2 next year, but until then, that is a drag.
Speaker Change #105: And then as it relates to.
Speaker Change #105: of the private label Coconut Water on the private label revenue side. So that's how I would sort of think about it. And yeah, we're just unwilling to quantify the number beyond what we said because it's a single customer.
Speaker Change #106: No, thanks for that. Yeah, we can kind of do the math you're talking about, but it's obviously quite lumpy and there's a few moving parts, so just...
Speaker Change #107: trying to get a sense maybe could you could you just
Speaker Change #108: Talk about, well you mentioned 2Q, you shipped some oil, if we're trying to think of how to model 4 and 1Q now to kind of round out the lap, any call outs on pacing or timing of just how to think about what the history would be that you'd be going against there?
Speaker Change #109: Thank you.
Speaker Change #110: So a couple things, Michael. First, to go back, in my prepared remarks, I referenced a 30% decrease in volume on private label, and as we've talked about, the volume is much more driven by the water than the oil because of the weight and price.
Speaker Change #111: And so that should give, and then the bulk of the oil was sold only in Q1. There's very little private label oil post Q1 in the financials. To that customer. To that customer, yeah. Okay, great.
Speaker Change #111: So it should be more steady. Yeah. Dropped off. No it didn't.
Michael Lavery: That's a really helpful clarification. Okay, thanks, I'll pass it on.
Michael Lavery: Thanks, Michael.
Speaker Change #112: Thank you. Our next question comes from the line of Brian Spillane of Bank of America. Your line is now open.
Brian Spillane: Thanks, Operator, and good morning, everyone. I guess there's three topics. Hey, guys, there's three topics I wanted you guys to give us some color on. One is...
Brian Spillane: and Michael Weiss. I think there's a lot of visibility on all of this with freight and boats and availability and the third, if we should be considering tariffs at all. So maybe the first one, Michael, just on Vitacoco Spiked.
Brian Spillane: Can you give us now where you think that brand stands, what the potential is?
Brian Spillane: Is the VitaCoco brand really extendable into ready-to-drink alcohol? Just kind of, you know, your thoughts on it now as we kind of think into next year.
Michael Weiss: Yeah, no we, you know, we did this, what was it, almost two years ago now and we had, we think it was a really great kickoff to our communication around mixing alcohol and coconut water.
Michael Weiss: It helped us, there was a large marketing push, quite a few dollars spent on our partners part in terms of marketing.
Michael Weiss: spiked in marketing this concept of coconut water and spirits.
Michael Weiss: We coupled that with a large communication push about cocktail mixing and obviously quite a bit of on-premise.
Michael Weiss: sales and marketing that we've done since.
Michael Weiss: We've seen coconut water and cocktails become a large usage occasion over the last two years for us and we think is driving quite a bit of our bit of our growth these days so we're excited about that.
Speaker Change #115: The actual product, Bite A Cocoa Spice, has not been incredibly successful.
Speaker Change #115: It was a licensing deal and it hasn't been incredibly successful. The category is very crowded. Not to say that a ready-to-drink version of Bite of Cocoa with Spirits can't work. This one has not been an incredible success.
Speaker Change #115: but we think it helped us really get this concept and this use education off the ground. So we think it might be for us it's been successful but the product itself that has not been a huge.
Speaker Change #116: So, is there a chance to actually reboot more as a mixer, you know, getting bartenders to craft cocktails with it?
Speaker Change #117: You know, rather than go the ready-to-drink approach, is there a thought behind, you know, actually having it more as a potential of base for a mixer line?
Speaker Change #118: That's exactly what we've done and we've been quite successful with it and it's growing and we have a team against it now And it's starting to show up in more and more bars on more and more cocktail menus and mocktail menus
Speaker Change #118: and that's become a big focus for the organization. And like I said, I think we believe a big usage occasion for Vitacoco. So, yeah.
Speaker Change #119: And then I guess as we're thinking about, there's been a lot of discussion about boats and freight rates today, probably more than you all would like to talk about. But I think Marty, you might have made mentioned at some point earlier.
Speaker Change #119: you know, that you're not quite sure.
Speaker Change #119: Why rates have moved up the way they have and I know just the whole thing just seems a little bit
Speaker Change #119: shrouded, I guess. So I guess with that in mind, just as we're thinking about your marketing and merchandising plans for next year, are you having to caveat it or you know put some sort of pause around things because of that uncertainty?
Speaker Change #119: I guess trying to get an understanding of retailers, you know, willingness to...
Speaker Change #119: lean into any kind of promotions or merchandising programs if we're still sort of dealing with, you know, product availability.
Speaker Change #120: So I think you know we hope that next year we'll be able to return to more normal promotional cadence.
Speaker Change #121: Our view on ocean freight is that the long-term averages seem to us to be more reasonable assumptions for long-term business.
Speaker Change #121: There's a lot of capacity being built by the carriers as a result of their very rich profits during COVID.
Speaker Change #121: as it relates to the recent rate spike that the primary impact of that other than affecting us and other customers seems to have been to enrich the profitability of the carriers.
Speaker Change #121: But it sure looks like everyone expects that to be short term. So, for our long term planning, that's how we're thinking about it. Obviously, in the short term,
Speaker Change #121: If rates remain high, we'll have to look at what to do, including taking pricing to cover it if we think it's more than prominent.
Speaker Change #121: at the current point in time, as you'll see in the indexes, the rates continue to draw.
Speaker Change #121: The rates to Europe have dropped faster than the rates to the U.S. We don't know why.
Speaker Change #121: And, you know, we sort of expect the rates to the U.S. to continue to drop, but we can't bet on that. So it's something we're monitoring closely and trying to build plans for next year that give us some flexibility to react to whatever is going on, including potentially taking price.
Speaker Change #122: Is it fair to say that the lack of visibility is more around cost than it is availability as we're right now and as we're looking at the next year?
Speaker Change #123: Yes, availability has gotten much better and is much less of an issue already and becoming less and less of an issue for us.
Speaker Change #124: The price remains elevated compared to, like Martin mentioned, historical levels and compared to where we were a year ago, but availability is coming back on. That was a short-term thing, lasted a couple of months.
Speaker Change #124: clearly messed us up and put us in a tough situation, but we've weathered it, gotten through it, and we feel we're now building inventory and getting back into a much better position. Okay, so you know you're gonna have both, like you're gonna have product and be able to merchandise. Really, the question next year is gonna be more around.
Speaker Change #125: what the margin might be, and I don't want to put words in your mouth, but...
Speaker Change #126: you wanna prioritize filling customers' orders and consumer demand. And if there's some margin volatility, while it's not perfect, the trade-off is gonna be, I think, right? To service the demand versus holding back because of.
Speaker Change #127: Freak Off!
Speaker Change #128: Yeah, I think we're very focused on trying to maintain category growth and consumer interest. And again, our long-term view is that the cost side should resolve itself.
Speaker Change #129: And the last one, just on tariffs, just because it's been topical, or at least in the news cycle.
Speaker Change #129: anything that you are thinking about in terms of contingencies or you know I know in the event that there's a blanket tariff
Speaker Change #130: You know, just what are your thoughts about how you'd...
Speaker Change #130: Handle that.
Speaker Change #130: If there's a coconut terrace...
Speaker Change #131: Yeah, I mean, you know, we're we would we would take price or, you know, operate, you know, the business a bit differently. But we think that we we're not really planning on anything right now. We would watch it. And if the coconut tariff comes into effect, we would likely take price. Yeah. Yeah. We would we would have a very justifiable reason to take price and we would.
Speaker Change #131: Be able to move that into the market and it would in fact obviously many other category. Yeah Thanks guys
Brian Spillane: Thanks, Brian. Thanks.
Speaker Change #132: Thank you. As a reminder to ask a question you'll need to press star 1 1. Our next question comes from the line of Robert Odenstein of Evercore ICI. Your line is now open.
Robert Odenstein: Great, thank you very much. Two questions. First...
Robert Odenstein: We're hearing that Walmart and Target are doing pretty big shuffling of their beverage aisles and shelf space next year. So in that context,
Robert Odenstein: I'm wondering if you could talk about whether the coconut...
Robert Odenstein: Water space, the coconut area, overall do you expect to gain
Robert Odenstein: to for that for that category to gain.
Robert Odenstein: shelf space next year.
Robert Odenstein: And, you know, obviously, particularly, you know, whether you expect to gain more than others, more of your fair share of shelf space. And then the second question is, we subtle, you know, a lot of attention and excitement about PowerLift at NAX.
Robert Odenstein: Love to kind of get a little bit more sense of the commercial plans there, how big a push that's going to be, how big that can be. Thank you.
Robert Odenstein: Thank you. Bye.
Speaker Change #134: Yeah, so on shelf space, you know, we've had some, you know, preliminary communication from some of the retailers as to what they're thinking.
Speaker Change #134: But until they finalize those and execute, it's really hard to tell. So, I think we have a really good story on the health of the category, and the growth of the category, and the growth of multipax.
Speaker Change #134: There's some discussion in some retailers maybe that coconut water moves to a different set which would probably be better for us from a volume foot traffic perspective but might result in less singles being on serve.
Speaker Change #134: which, as long as we preserve some singles, we'll probably be fine. So there's lots of moving pieces there. And until those get resolved, as you say, these things take time. It's really hard to talk about. But I think, generally, we feel good about the conversations we've had with retailers about shelf space.
Speaker Change #135: Thank you.
Speaker Change #135: And then PowerLift, still like it. I'm still drinking lots of it. And we like where it is. We haven't announced plans for next year yet. I don't think it will be probably material to our P&L Outlook when we talk to you in the next quarter. But we continue to work, and there's something in protein and beverages, and we're determined to try and unlock it.
Speaker Change #135: and John Roper. Thank you. Thank you.
Speaker Change #135: All right. Thank you.
Speaker Change #136: I'm showing no further questions at this time. I would now like to turn it back to Martin Roper for closing remarks.
Martin Roper: All right, Stephen, well, thank you for hosting. Thank you everyone for joining us and we look forward to talking again next quarter. Cheers.
Speaker Change #137: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.