Hello and welcome to the Vita Coco Company’s First Quarter 2022 Earnings Conference Call. My name is Liz, and I’ll be coordinating your call today. Following prepared remarks, we will open the call for your questions with instructions to be given at that time. I will now hand the call over to John Mills with ICR.

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

Thanks, John, and good afternoon, everyone. Thank you for joining us today to discuss our first quarter 2022 financial results and full year guidance. I’ll begin this afternoon’s call by reiterating our long term growth strategy and discussing our leading position in the fast growing coconut water and coconut water adjacent categories. Martin Roper, our CEO, will then discuss the details of our top line growth drivers, provide an update on our supply chain and outline our pricing plans and initiatives. Kevin Benmoussa our CFO, will finish with a more detailed discussion on the quarter – on the first quarter results and our updated outlook for the year. To start, I want to sincerely thank all of our colleagues all over the world for their continued commitment to The Vita Coco company and their dedication to our mission of creating ethical, sustainable, better for you beverages that uplift our communities and do right by our planet. Our first quarter was another quarter of strong top line growth, validating that our strategic initiatives are working. Net sales grew 28% year over year to $96 million in the quarter with our flagship Vita Coco Coconut Water brand as the main driver of growth increasing 38% over the prior year period. The overall coconut water category continues to show robust growth and according to IRI it is growing at a rate of 13% in US measured channels, with Vita Coco Coconut Water driving most of that growth and taking incremental share of the category. Today, we enjoy undisputed category leadership with 50% share, which is up 7% from a year ago, according to IRI measured tracked channel MULO-C. This rate of growth often leads me to getting asked the question why over the past couple of years has Vita Coco being growing so…

Thanks, Mike. As Mike said earlier in his comment in terms of our top line growth, we are very pleased with our strong start to 2022 in both the first quarter and into the second quarter so far. We remain encouraged by the strong consumer demand for our products and we’re pleased with our supply chains ability to successfully meet most of that demand even in a very challenging transportation environment. In the first quarter of 2022 we increased global net sales by 28% to $96 million compared to net sales of $75 million in the first quarter of 2021. The strong performance versus last year was driven by 38% growth Vita Coco Coconut Water and 17% growth in private label. Net sales in the Americas, which comprised 88% of total net sales in the first quarter of 2022 increased 33% to $85 million, compared to $64 million last year. Net sales for our international segment, which comprises the remaining 12% of total net sales, were roughly flat to the prior year. Within the Americas growth of our branded portfolio is supported by a number of initiatives across all channels and by our decision to prioritize growth and gaining market share over increasing price substantially. In the first quarter of this year, we gained an incremental 3,000 points of retail distribution and we believe we remain on track to gain up to 25,000 new points of distribution as new sets are completed this year. While early into the launch of our Vita Coco juice can offering we have been met with positive reaction from C-store retailers and the first few weeks of scan data are encouraging. In food and mass channels we’ve gained incremental shelf space on our multi-packs for 1 liter, 500 ml Vita Coco Coconut Water, which are…

Thanks, Martin. And hello, everyone. I will now provide you with some details on the first quarter 2022 financial results. I will then discuss our updated outlook for the 2022 fiscal year. Even while we continue to post record breaking sales growth, we are currently navigating through extraordinary times which have had a disproportionate impact on our margins. But our company remains on healthy financial footing as we still anticipate generating meaningful profits on a full-year basis and continue to operate with fairly low leverage and/or liquidity. In Q1, net sales grew 28% to $96 million, an increase of $21 million compared to the first quarter of 2021. The increase was driven by continued strong consumer demand for Vita Coco Coconut Water, with global net sales for its product category up 38%. On the segment basis, within the Americas, Vita Coco Coconut Water grew 40% to $59 million for the first quarter of 2022 as compared to the same period last year. The increase was primarily driven by higher case equivalent volume from continued strong consumer demand, combined with positive price mix benefit. Private label grew 20% to $23 million for the first quarter, driven by a strong book of orders and ample inventories on hand. International segment net sales grew 2% to $12 million in the first quarter of 2022 were driven by higher case equivalent volume in Europe, partially offset by our China market, which was impacted by a return to lockdown and lower opportunistic commodity sales across other APAC markets. Within the international segment, Vita Coco Coconut Water grew 29%, while private label declined 5%. On a constant currency basis, the international segment net sales growth was also impacted by negative forex impact of approximately two percentage points. Consolidated gross profit for the first quarter was $19…

Thank you, Kevin. To close, I’d like to reiterate our confidence in the long term potential of The Vita Coco brand. We remain excited about our key initiatives to drive growth long term and short term, despite the persistent challenges in the transportation environment we are encouraged by the continued strong consumer demand for our products and are pleased with our supply chains ability to meet that demand while providing a high level of service to our retail partners. The Vita Coco Company has a strong balance sheet and we are well positioned to emerge stronger once transportation costs subside which we firmly believe they will. Thank you for joining us today and thank you for your interest in The Vita Coco Company. That concludes our first quarter earnings prepared remarks and we will now take questions.

[Operator Instructions] Our first question comes from Bonnie Herzog with Goldman Sachs.

Thank you. Hi, everyone.

Hi, Bonnie.

Hi, Bonnie.

Hi. My first question is on your full year EBITDA guidance. I guess it implies a pretty big ramp for the remainder of the year. And given everything you’ve faced in Q1 and what you called out in terms of the continued gross margin pressure. I’m just trying to understand what this assumes for your SG&A expense. I think it’s going to need to be a fair amount below prior year as a percentage of sales. And I just want to make sure I’m understanding that and in the drivers behind that and then certainly what it assumes in terms of your marketing expense versus maybe your prior expectation.

Yes. Hi. Hey, Bonnie. This is Kevin, I’ll take this one. So right so Bonnie, so what you’ve seen reflecting your guidance is essentially reflecting the higher than expected cost environment, right, which is offset by the incremental pricing action and some of the accelerated cost saving initiatives we plan to take for about a year. We plan to increase pricing, that’s starting actually mid to late Q2 and you’ll see that effect also in Q3 and Q4 as well. In term of SG&A spending expected to be fairly smooth across the quarters remaining. We expect marketing spend, to your question, to be in the mid-single digit, I suppose a bit of net sales as opposed to what historically has been in the mid-to-high single-digit. So what this means is on the dollar term will probably be more or less flat to last year in dollar terms, right. So that answers a part of question here and we also identified some efficiency initiative across our fiscal structure right as you think about the rest of the SG&A. So that’s really what makes up our guidance and we feel confident we can achieve that the balance of [indiscernible] execute upon that.

Okay. So just a quick follow-up on that just in terms of marketing growth just seeing now mid-single digits. Just trying to think about that relative to the underlying consumer demand. Is that the right amount as your business continues to grow to kind of pull back on the spending or is it a reflection of you guys becoming a little bit more efficient with your marketing spend potentially?

Hi, Bonnie. It’s Martin, I’ll take that. I think the underlying demand for our branded product remains very strong and we’re certainly from the business front but you’re not currently challenged by a lack of demand and the supply chain challenges, we’ve been able to support the demand but it’s there are sort of some gaps on SKUs and certain costs and it’s not like we need to accelerate demand given what we’re currently dealing with. So we’re very happy with demand. I would point you to our investor deck, which talks about the three years back, you’ll see that the demand remains very robust on a three-year comparison basis. The one year comparison is it’s got some noise in it due to some activity last year, two year stack has some noise in it due to COVID. So the three-year stack we think is probably representative of the health of the business. And as we – I think it’s obvious from our comments that the transportation costs came in higher than we anticipated, certainly than we had anticipated when we last spoke to you. And we basically took the decisions to take aggressive actions on pricing and on SG&A to basically make sure that our model worked in a way that we were comfortable with, given the fact that demand is not currently not appeared to be a major problem.

Okay. No, that’s helpful. And then I guess my second question is on the pricing. I mean, maybe first on your Q1 results and just looking at on, I guess what I’m seeing it’s limited price realization in the quarter, so I just want to make sure to understand the key drivers of that. And then you’ve called out the first front line price increase and I think you guys mentioned a few percentage points, but could you help us understand is that low-single digit, mid-single digit pricing? And I heard the timing being implemented mid-to-late Q2, but give us a sense is that across your portfolio or channel, et cetera., just trying to understand where that’s going to be most effective? Thanks.

Sure. So I can start here, Bonnie, here around your question on the price mix benefit we expect, right? So if you recall, when we talked a few weeks ago we discussed about the price mix expected to be mostly in the Americas in the low-single digit with some offsetting impact from international right. So essentially having sort of a limiting impact overall on price mix on a consolidated basis what we expect now is actually some positive mix lift on a consolidated basis right would it be driven by higher impact but positive impact in the Americas due to the pricing action we are taking. So if you think about the positive lift in the remainder of the year it is fair to assume to expect a low single digit price mix benefit that will help our supply and net sales overall.

And as it relates to sort of the lot what’s going to happen Q3, Q4 I think we’re not comfortable giving a number of other than we think it prudent to plan for price increases that on a solid basis would cover our cost of goods increase that we’re currently experiencing. And that will give us flexibility to react either way. If and when those costs decline or if they were to worsen, we could put more in. But I think currently we just want have flexibility. So that’s how we’re thinking about that by the end of the year which we think will set us up for good 2023.

Okay. Thank you for that.

Thanks, Bonnie.

Thanks, Bonnie.

Our next question comes from the Laurent Grandet with Guggenheim.

Hey, good evening, everyone. probably the first question...

Hey Laurent.

Hey, probably the first question is really – more clarification, it’s right – already be talking about 2023. So you said in your press release that gross margins were impacted by increased transportation costs and that the price action you are taking for the remainder of the year should fully offset in 2023 to transportation costs. If so that it mean that gross margins should come back to the level you enjoy or you were planning for 2023 and for 2022 and 2023.

Yeah. Hi, Laurent. Good question. I’ll take that, this is Kevin. So to that Laurent what we’re saying here is, we’re assuming right now at some cost level that after you take into effect all the pricing action we’re doing sequentially in the remainder of the year on an annualized basis that you start next year, you should cover pretty much in dollar terms the inflation we’re seeing this year. What this means is margin we should see expansion next year. So you’re right, though, it will take a little bit of a ramp up to get fully to this record level of the mid-30s we’ve experienced right over the last couple of years. So we should get that couple of points of margin for sure and what we’re saying is we will cover most of the inflation that we’re seeing on dollar terms here.

Okay. Thanks for the clarification. And then, I mean, it’s more about your growth and beyond kind of your core business. You changed few things I mean you moved I mean boosted to energy. You are launching a juice can. You said again, you want to push for coconut milk, but like really to have more colors about those initiatives? I mean, coconut milk, I’m not sure I mean, like to understand how you are sure about it? And it doesn’t show up in panels numbers and your other segment is relatively small still. So especially on those three products so boosted became energy, the juice can and the coconut milk. Thanks.

Yeah. Great question. I think all these initiatives, the ones we’re excited about and they’re all showing promise, but they’re really somewhat small in their current form. So we didn’t choose to elaborate them on our scripts or comment about them fully. I would say that each of them is in it’s their own is interesting, exciting and has significant potential. And rather than spend a lot of time talking about things that aren’t happening, I think our thought was we would raise them as they start to show potential that we can celebrate rather than talking about things that are still pretty small in a new contract.

Okay, fair enough. I’ll pass it on. Thank you very much.

Thank you.

Thank you.

Our next question comes from Brian Stein with Bank of America.

Hey, thanks, Operator. Good afternoon, everyone. So I guess first just a follow up on Bonnie’s question. And I just want to make sure I understood it right. Kevin when you talked about marketing over the balance of the year. Is that a change from what you were expecting before? So you are actually going to be spending less in marketing for this year than what you were originally planning at the start of the year.

Yeah. Yeah, it’s hard to think about it this way. I think we find ways to be efficient with our marketing spend. We review our marketing mix and we will calculate the right one. Even with the efficiency initiative we have identified our brand so that that’s good to assume that we plan on spending a bit less than originally thought.

Okay.

In order to...

And if some of that tied to I think I’ve heard a couple of times there’s maybe some SKUs or there is it’s still not perfect, right, in terms of product availability. So is any of that tied to just, don’t want to overstimulate the consumer because you want to make sure you’ve got enough product on. Is that part of what the factoring was in that decision?

Yes.

Yeah, I think actually obviously the demand situation I think we described it as being tight right it’s lumpy as in terms of SKU availability and by coast, and overstimulating that demand would likely make it more lumpy. So yeah that’s certainly entered into it and we’re obviously feel pretty good about sort of the consumer demand, the consumer interest the increase of growing household penetration, everything and certainly acquired on the demand side relative to a marketing investment being slightly reduced from what was planned.

Better a lot, but basically flat last year.

Got it. Got it. Got it. Okay, helpful. And then just last one for me is just, I guess is we were looking forward. Right. And Kevin, you did a very nice job laying out the buckets of where the cost pressures are and cost of goods sold on. Are those pretty well locked in at this point? Or, is there a lot of room for variability? And I guess reason why I ask is does, it’s changed, right? On March 9, you reported earnings and you had a view on what costs were. And especially in the first quarter, it was a lot different. Right. So it just seemed like maybe either things moved around or, there were something in terms of the visibility that’s I’m just trying to understand, I guess, as we look forward here, how much more visibility maybe do you have today on that cost pressures than maybe you did on when we spoke on March 9?

Yeah, let me take that Brian. Good question, right. So when we spoke earlier in the year, we have planned assumption that we’re reasonable late Q4 to Q1 as we head into the year. We didn’t fully anticipate the impact of ocean freight in structural domestic objectives. Right. So what I would point you out to the $2 million that I’ve mentioned in my earlier prepared remarks, of course, that were really both unusual and one time in nature, those costs are going to be more specific. They were related to clearing issue at ports with containers, detention demurrage and those costs. We only had visibility on these and frankly, very late in the quarter. So we think those costs will repeat. We have identified them and we have also been placed proper mechanism to prevent other issues like that. So that’s already a big chunk of what we’ve seen in Q1. That was $2 million. And then frankly, we’ve got to use been putting our capability across system forces and teams to get even better visibility as we head into the quarters. Right now, based on what we’re seeing and the anticipated elevated environment we are in, we feel confident we can deliver on the balance of the year and execute upon that. And basically what we’re seeing Brian, is that the continued pressure we have in the customer’s balance of year will be offset by the action we’re taking right, both on the pricing, but also below the line as you think about SG&A and other action items, right. So that’s how we think about the balance for the year and we have a better visibility of that.

Okay. Thank you for that. So basically if we’re kind of thinking about 2023 and again just thinking about margins and profitability and acceleration in gross profit, really we should just be looking at ocean freight, right, I mean that’s effectively like how has that loosens up or moves, that’s going to be the real driver in terms of margin recovery in 2023.

Yeah, so...

I think that’s going to be the biggest driver. There are costs related to potentially demurrage that are tied to port logistical snarls, but ocean freight will be the biggest driver and in fact returns to five-year circle norms and that’s a big unlock.

Okay, perfect.

All right. Thanks, guys.

Thanks.

Our next question comes from Chris Carey with Wells Fargo.

Hi. Thank you. So just following up on that line of questioning. What if your outlook for prosper cases have led tracks ahead of what you’re currently thinking, you’re already going to be spending a little bit less between the lines. Would you look at maybe a little bit more pricing or are you happy just to maintain the market shares and kind of take a little bit more of the pressure on the margin and set yourself up for 2023?

Hi Chris, So let me take that. So I think what we’re seeing, Chris, is we’re actually being more aggressive now, right and I think when you take a step back, first of all, so I want to highlight the fact that we’ve talked about it earlier this year when we came out to Q4. In the last year, we took the strategy in by design not to take too much price, right. So because we realized we’re in a unique time to really push out the competition, gain share and we actually grew a lot. We gained share over 7 points. So we now kept it in obviously 60% share. So the strategy has really worked. I think fast forward where we are today, given the environment we are in, from the cost point of view, we still will have much stronger footing to take more price and that’s what we doing. And we feel that this internal price action will be taken combined with the other cost initiative we have a balance of the year, will fully offset the incremental fresh on cost we’re seeing. So this really is the way you have to think about it and we’ll feel comfortable with the action we’re taking right now from a pricing point of view. Hope that answered your question.

Okay. Okay. Yeah. That’s helpful. And then, just on top of that, right from a distribution potential in the US, clearly, if you track ahead of your long-term algorithm, what prevents you from continuing to do that over time? Are you concerned that growth starts to slow after these really significant market share gains? Or do you feel like you’re in a position to continue on this pretty significant level of top line growth? Thanks.

Well, I think, first of all, the category is very healthy. Right. And it’s growing sort of double digits. I think we’re positioned to help that category grow and we still have plenty of distribution options. We’ve talked historically about the opportunities in C-store, which the juice can product which is going to unlock. Reminding of that, that is currently just in a couple of regions and it’s not a national launch and hasn’t been offered to the major retailers yet. So we feel pretty comfortable with our long-term algorithm. Yes, we seem to be currently ahead of it. But, and hopefully we can stay ahead of it maybe with the supply chains returning to normal and costs returning to normal, that would allow us to accelerate that. But we don’t see an end of this runway, I suppose, for at least a couple of years.

Yeah. I think I spoke a little bit about that in my remarks also. And I think it’s the – one of the key things we continue to add households indications and we believe that we can continue to do that with the category is still in its infancy and that we continue to drive category growth as the clear category leader. So that’s the objective.

Okay. Thank you.

[Operator Instructions] Our next question comes from Rob Ottenstein with Evercore.

Great. Thank you very much. I was wondering if you can talk a little bit about the competitive dynamics that are going on, presumably given the supply chain issues that are in the market, your – the other players are probably having just as bad if not worse issues, so are you are you seeing significant out of stocks from competitors? How are they reacting? And to what extent has that enabled you to gain market share in shelf space? Thank you.

Yeah. I think we’ve seen the smaller competitors taking price much earlier than the bigger competitors and that sort of gives us some confidence that price can be taken here and there’s less promotional activity at the low end of the category. We have benefit – we probably- we believe we have benefited, right. And that’s allowed us to gain more shelf space and actually reduce the shelf space of our competitors. So, we hope that that is a long-term of range of our strategy, and we also believe that the fact that the competitors are having same cost structure and supply chain pressures, as we all should help us as we start to take price and hopefully continue to gain share and see them.

Remember also there’s...

Yeah, go ahead.

No, I’m sorry.

I was just going to say, remember, also there’s a long tail in this category. There’s not significant number two and number three players, being larger than the next ten competitors combined. It’s hard to really track, what the competitors and what the sector having, they’re all quite small in comparison.

But I guess my thought is, is that given the sort of pressures that you are facing and given your scale advantages, that it would be hard to believe that most of your competitors are making any money at this point.

That’s right. It’s got to be worse for them.

Okay. Thank you very much.

Thanks.

Our next question comes from Jon Anderson with William Blair.

Hi. This is David Shakno stepping in for John. I’ve a two part question. The first is how COVID lockdown measures in Asia affected current production, as well as your ability to bring on more capacity. And second, going off with that, I understand you have a distribution partner in China. How have those lockdown measures, if at all, affected your and your partner’s operations there and ability to add new points of distribution?

Yeah. So the COVID shutdowns, which seem to be mainly limited to China right now, have not affected our production capabilities or our partners’ production capabilities. We do not have production in China. Our production is mostly the Philippines and Sri Lanka and Brazil. And so from a production point of view, it hasn’t been. What China shutdown has done is thrown a sort of disruption into the global supply chain on the ocean carrier side. And it’s made that sort of deterioration of capacity with more ships idled and shut down. So that’s the biggest challenge for us, but no impacts on production. And in China, from a demand perspective, China is our third largest market. But we’ve seen some reduction in the cities where they have been shut down that started sort of mid-March with Shanghai being the biggest impact. And obviously, it’s very uncertain what’s going to happen then, both in China from a shutdown perspective. But we don’t think that let’s say worst case, that shutdown was to continue for another six months, it would not have a material impact on our finances. So I would like to say if it happens, we feel very sorry for our friends there and we would navigate our way through.

Got it. Great. Thank you very much.

I’m showing no further questions in queue at this time. I’d like to turn the call back to Mike Kirban for closing remarks.

Thanks guys. I just want to say thank you. Thanks for your time again. And we’ll be talking...

Three months

...in three months.

We look forward to have a great summer and stay hydrated.

Thanks, everyone.

Thanks, everybody.

Take care. Bye.

This concludes today’s conference call. Thank you for participating. You may now disconnect.