COCO - NASDAQ

Good day, and thank you for standing by. Welcome to the Vita Coco Company First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a Q&A session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand over the conference to your first speaker today, Clay Crumbliss with ICR. Clay, the floor is yours.

Thank you, and welcome to the Vita Coco Company First Quarter 2023 Earnings Results Conference Call. Today's call is being recorded. With us are Mr. Mike Kirban, Executive Chairman; Martin Roper, Chief Executive Officer; and Corey Baker, Chief Financial Officer. By now, everyone should have access to the company's first-quarter earnings release issued earlier today. This information is available on the Investor Relations section of the Vita Circo Company's website at investors.thevitacococompany.com. Also on the website, there is an accompanying presentation to our commercial and financial performance results. Certain comments made on this call include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Also, during the call, we will use some non-GAAP financial measures as we describe business performance. The SEC filings as well as the earnings press release and supplementary earnings presentation provide reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures and are available on our website as well. And with that, it is my pleasure to now turn the call over to Mike Kirban, our Co-Founder and Executive Chairman. Mike?

Thanks, Clay, and good morning, everyone. Thank you for joining us today to discuss our first quarter 2023 financial results. Our commercial plans for 2023 are current expectations for full-year '23 performance and long-term growth. I want to start by thanking all of our colleagues across the globe for their continued commitment to the 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. Before addressing our performance and expectations, I want to reiterate that we believe we have a strong strategic position in the better-for-you functional beverage market, enabled by our category leadership in coconut water. Better for you functional beverages includes, by our definition, juice, sport drinks, and flavored waters, which collectively in U.S. retail represent over a $30 billion addressable opportunity. We believe that we can source consumption from these beverage categories and occasions to fuel future growth for both our Vita Coco brand and a portfolio of adjacent current and future innovations. As the coconut water category leader, our responsibility is also to grow the coconut water category by increasing household penetration and usage occasions and by expanding the availability and visibility of the category while continuing to grow our category share through great execution. I think our success over the last 3 years is a testament to our focus on consumer conversion and retention, supported by the strength of our coconut water supply chain and sales execution. With gross margins and profitability now recovering, we're well positioned to build a better beverage platform with a portfolio of complementary brands, and I believe that our long-term financial goals of mid-teens net sales growth and mid- to high-teens adjusted EBITDA margin remain achievable. I say this each quarter, but as time passes, I become increasingly excited that we are well-positioned to take advantage of the category tailwinds to continue our strong growth trajectory and to improve our margins. We're off to a strong start in 2023. In the first quarter, we saw 17% growth of Vita Coco Coconut Water net sales, driven by branded volume acceleration, supplemented by the ongoing benefit of pricing actions taken last year. In the United States, according to Circana, which was formerly known as IRI in the last 13 weeks retail scans, Vita Coco and the coconut water category are growing faster in retail sales in both dollars and volume than most other major beverage categories. Our Vita Coco Coconut Water retail dollar sales were up 22%, and our market share for the quarter improved to 52%, with the coconut water category growing at 17%. Increasing household penetration remains a key part of our growth strategy. According to Numerator, we grew Vita Coco's household penetration in the U.S. to 10.8% for the 52 weeks ending March 31, 2023. That's up approximately 60 basis points over the last year. While we are pleased with the gains so far, we aren't stopping there. We believe that we have plenty of room to grow our households further as total household penetration for the coconut water category is currently only 22% compared to penetration for the cranberry juice category at 55% and over 80% for orange use according to Numerator. In addition, we believe that there is significant opportunity for increased coconut water consumption occasions and for improved availability of our products as there remains significant distribution opportunities for our Vita Coco brand in C-store, food service, and on-premise. In addition to our distribution opportunities with our canned coconut juice product, our farmers' organic offering and our shelf-stable Vita Coco coconut milk dairy alternative. These opportunities plus our brands over-indexing to multicultural households and to younger consumers, suggests a pathway for multiyear double-digit Vita Coco growth based on demographic tailwinds and distribution opportunities. Looking to 2023, I'm happy to announce that our commercial initiatives, which we outlined last quarter are progressing according to our expectations. In our investor deck, we have laid out how the major Vita Coco initiatives are contributing to our retail scan trends. As you can see, our expansion of multipack availability in the United States is driving most of our growth in the relevant channels with strong growth from 4-pack 500 ml and the expansion of our 12-pack 330 ml distribution. Encouragingly, we're seeing relatively limited cannibalization of single serves by the multi-packs. Our distribution gains for Vita Coco Farmers Organic are providing consumers with a new premium option in the shelf stable set and adding nicely to our overall scan sales. Our expansion of Vita Coco coconut juice in can to broader convenience store distribution is progressing, and we have planned summer marketing and sales activities to ensure trial and visibility for this initiative. The retail ACV distribution measures show that we still have lots of room for distribution growth on all of these packs. Finally, our previously announced collaboration with Diageo, Vita Coco spiked, launched during the quarter. It is too early to repeat purchase rates, but everything appears on track with our and Diageo's expectations. We believe that this and other opportunities to support Vita Coco Coconut Water as an on-premise or at-home mixer are important initiatives to generate further trial of coconut water and expand coconut water consumption occasions. Beyond these core commercial initiatives, we continue to promote Vita Coco Pressed and Vita Coco Pineapple as attractive entry points for consumers into coconut water, particularly in the central part of the United States, where we under-index in household penetration. We're also expanding distribution of Vita Coco coconut milk in the shelf-stable non-dairy set and seeding the availability of our Vita Coco Barista product to more coffee shops after positive launch with Alfred Coffee on the West Coast earlier this first quarter. Our Power List launch in Southern Texas continues to build momentum and support our learning on how to succeed in the enhanced isotonic category. We have dedicated market development teams working hand-in-hand with our DSD partner, KDP, to achieve success in this market. Related to our environmental and social initiatives, you hopefully saw that we released our 2022 impact report last month. We've continued to see great progress in our farm and communities through the Vita Coco project, which with our charitable partners supports building schools and classrooms training more coconut growers on sustainable practices and investing in the distribution and planting of more coconut trees. We believe our efforts to plant coconut seedlings is increasingly important, both to the long-term economics of our farmers, but also to our sustainability goals. So we recently announced our seedlings for sustainability program with the objective to plant over 10 million seedlings. We remain committed to our environmental initiatives as a core value of the Vita Coco Company, and we expect to communicate our environmental roadmap in more detail at a later date once we have validated our goals and timeline for achieving them. Finally, I want to reiterate my excitement that after 2 tough years of very challenging transportation market dynamics, our economics are starting to improve, and we have visibility to a return to more normal gross margins and profitability. We believe that this uniquely positions us as one of the few fast-growing profitable beverage companies of our size with the talent and commercial capabilities to maintain growth, to innovate new opportunities, and longer-term to potentially act as an acquirer of complementary beverage brands that could benefit significantly from our relationships, capabilities and financial resources. As I stated last quarter, we also see 2023 as a year where we expect our net sales growth and gross margin improvement to allow us to invest in a disciplined way against our long-term growth opportunities while still delivering significant improvement in profitability and cash generation. And now I'll turn the call over to our Chief Executive Officer, Martin Roper.

Thanks, Mike, and good morning, everyone. For the first quarter of 2023, we achieved net sales growth of 14%, driven by strong Vita Coco Coconut Water growth of 17% with private label up 7%. This performance was achieved against a very strong first quarter last year, where Vita Coco Coconut Water net sales grew 38%. In the Americas, our Vita Coconut water net sales grew 17% for the quarter, including 15% volume growth, affecting strong consumer demand, single-digit contribution from price increases, the impact of our 2023 commercial initiatives and better inventory availability on certain SKUs than this time last year. Versus Q4 2022, our retail sales trends have accelerated with a 22% dollar growth rate in Q1 2023 in the U.S. Circana retail scan data. The acceleration is across all tracked channels and is built on a healthy balance of velocity growth and distribution gains and it's potentially benefiting from our healthy inventory and improved service levels. Internationally, we are seeing similar growth of Vita Coco Coconut Water with 16% volume growth for the quarter. Turning to margins. In the first quarter of 2023, our gross margin was 31%, which represents a significant improvement over the 20% reported in first quarter last year and a sequential improvement over the 24% in the fourth quarter of 2022. This improvement was primarily driven by more favorable ocean freight and domestic transportation costs plus the benefit of branded pricing taken in fourth quarter last year. During the quarter, we were able to stabilize the supply chain and normalized inventory levels, which also helped our gross margin after last quarter's unusual domestic transportation costs. We have not yet seen the full benefit of current ocean freight rates, which appear to be slowly returning to historic levels on most routes. This should be more visible in the second and third quarters as those benefits flow to our P&L. As we've discussed in previous quarters, we remain selective on entering into ocean transportation contracts, except where we need to guarantee capacity and expect to return to our historic approach of contracting for some of our needs once the contract offers are more competitive with spot prices than they are today. Reiterating what Mike said, we are confident in our underlying business, and we believe we are well positioned for a strong 2023 with multiple commercial initiatives to produce strong branded top-line growth while the improving transportation cost environment and product mix between branded and private label, should greatly improve our margin structure, profitability, and cash flow. Our first quarter results were at the high end of our expectations on volume, net revenue, gross margin and adjusted EBITDA. Of course, one good quarter does not make a year, and the first quarter is typically a less important quarter to our full-year results in the second and third quarters. We are adjusting our full-year net sales and non-GAAP adjusted EBITDA guidance to reflect the first quarter and current trends while maintaining our full-year gross margin guidance. We expect full-year Vita Coco Coconut Water growth in the mid-teens, and our private label net sales are now expected to be slightly positive for the full year. We expect a very strong second quarter, driven partially by significant promotion activity for Vita Coco Coconut Water with a key retailer. This incremental promotion could depress our gross margin slightly for the quarter relative to prior expectations. On cost of goods for 2023, we are seeing inflation increases on most non-transportation finished goods cost elements due to general global inflation in packaging, labor and energy costs. We're endeavoring to mitigate these drivers through efficiencies and sourcing optimization initiatives. As Mike mentioned, our full-year plan includes an expected increase in marketing and sales execution investments, reflecting our belief that 2023 is a year to invest in our growth initiatives now that supply chain disruptions are diminishing. As always, we will invest in a disciplined manner where we see the opportunities to build the brand for the long term, and we could adjust our planned spend and our promotions depending on the effectiveness of our programs and how our cost of goods develop. We are very happy that 2023 is off to a great start, and the entire team is fully energized behind the opportunities ahead of us during the peak summer selling season. With that, I will turn the call over to Corey Baker, our Chief Financial Officer.

Thanks, Martin, and hello, everyone. Let me provide you with some additional details on the first quarter financial results. I will then discuss the drivers of our outlook for the 2023 full fiscal year. For the first quarter 2023, net sales increased $13 million, up 14% year-over-year to $110 million, driven by Vita Coco Coconut Water growth of 17% and net sales and private label growth of 7%. On a segment basis, within the Americas, continued strong retail performance of Vita Coco Coconut Water increased net sales by $10 million to $69 million, while private label increased $2 million to $25 million. Vita Coco Coconut Water benefited from 15% volume growth and 2% net price mix benefit. While private label benefited from a favorable product mix, driving 9% net sales growth on volume declines of minus 3%. I'll remind you that quarterly trends for private label tend to be impacted by timing of orders and shipments, and we would suggest using rolling 12-month trends as a better indication of private label business health. Our International segment had a strong first quarter. Reported net sales were up 10% with constant currency growth of 18%. Growth was led by the Vita Coco Coconut Water up 14%, offset by declines in private label and other. Total international volume growth was 11%, with the Vita Coco Coconut Water delivering 16% volume growth, private label and other case equivalent volume down 3%. For the quarter, gross profit was $34 million, up $15 million versus prior year and gross margin was 31%, up from 20% in prior year. These increases are benefiting from stabilization in global transportation rates, increased supply chain efficiencies and the benefits of 2022 price increases. Moving on to operating expenses. First quarter 2023 SG&A costs increased by $2 million, which reflects investments in incremental resources to support the growth of the company, including increased personnel costs as well as an increase related to the change in the methodology to estimate current expected credit losses. Net income attributed to shareholders for the first quarter of 2023 was $7 million or $0.12 per diluted share compared to $2 million or $0.04 per diluted share per prior year. Net income for the quarter benefited from positive net sales and gross margin improvements discussed previously, partially offset by SG&A costs. In addition, the quarter benefited from a $7 million decrease in the unrealized gain related to derivative instruments, which was partially offset by an increase in tax of $1.2 million, reflecting an ETR of 21.4% on the quarter. Non-GAAP adjusted EBITDA in Q1 2023 was $9 million, up from a loss of $3 million in Q1 2022. The $12 million increase was primarily due to the significant cost of goods per case equivalent decreases and increased volume growth and pricing, partially offset by increased SG&A spending. Turning to our balance sheet and cash flow. As of March 31, 2023, our strong operating performance has led to an improvement in cash flow, resulting in total cash on hand of $29 million and no debt under our revolving credit facility compared to $20 million of cash and no debt as of December 31, 2022. The increase in net cash was primarily driven by net income. Working capital for the first quarter 2023 used $1 million of cash as inventory decrease of $20 million were offset by a $21 million increase in accounts receivable due to timing of customer payments. The inventory decrease was the result of sales volume growth, coupled with the normalization of the global supply chain, allowing us to more efficiently manage our days on hand and reduce in-transit inventory. We expect inventory to remain at more normal levels in terms of days on hand for the balance of 2023. As Martin communicated, we are confident in our full-year plans and are adjusting our guidance for full year 2023. We now expect net sales growth in 2023 of between 9% and 12%, which does not assume any further Vita Coco Coconut Water price increases for the balance of the year. We believe that the pricing executed at retail in 2022 is sufficient to deliver our targeted results, and we will remain flexible in our approach to pricing as the year unfolds. Our guidance for 2023 full-year gross margins remains between 32% and 34%. We anticipate that our gross margins will benefit as lower ocean freight rates on our branded products sold and our 2022 brand price increases flow through our P&L, and our branded volume growth continues to outperform private label growth. Due to incremental retailer promotions activity in the second quarter, we expect gross margins to gradually increase to the balance of the year. The revised non-GAAP adjusted EBITDA guidance is $54 million to $59 million. This reflects our current plans for SG&A, which in total represents higher growth over 2022 GAAP reported SG&A than our expected net sales growth. The increase in SG&A is to cover planned increased marketing and sales execution costs and higher employee costs, which include bonus and stock compensation. A quick note on items below operating income. Given our strong cash generation, we reviewed our approach to cash management and investment and expect to start seeing the benefit in our P&L in the second quarter. From a tax perspective, we expect the full-year ETR to be broadly consistent with our first-quarter rate. Given our expectations of improved profitability, we plan to more closely evaluate our capital allocation with a continued focus on prioritizing long-term growth. Before I move on, I wanted to talk about the shelf registration statement on Form S-3 we filed with the SEC this week. The S-3 was filed to fulfill our contractual obligations with certain shareholders pursuant to our registration rights and agreement and will also provide flexibility and optionality for the company and our long-term shareholders and partners to more easily access the capital markets in the future. It will also allow the company greater flexibility to raise capital if the right investment opportunity arises. Although there are no plans to do so at this time, the registration statement has not yet been declared effective and thus, no shares may be offered or sold under the until it becomes effective. Before closing, I'd like to provide some reflections on my first couple of months at Vita Coco. Overall, I've been extremely impressed with the organization. It is a passionate and performance-driven team with an incredible knowledge of the business, their passion for the company and the excitement for the future is infectious. The finance organization is fantastic. We have a diverse and highly skilled team that is well-positioned to support the organization to the next page of growth. As we continue to mature as an organization, I see opportunities for improved efficiency and decision-making through elevated data and analytics supported by improved systems. I've only become more excited to be part of the team as we deliver on the long-term vision Mike and Martin have outlined. With that, I'd like to turn the call back to Martin for his closing remarks.

Thank you, Corey. To close, I'd like to reiterate our confidence in the long-term potential of the Vita Coco Company, our ability to build a better beverage platform and the strength of our Vita Coco brand. We are excited about our key initiatives to drive growth in 2023 and the recent improvement in ocean transportation costs and capacity should provide us after a very challenging 2 years. In 2023, we intend to invest in marketing and sales execution to maintain or accelerate our growth and to continue to build our long-term capabilities. We have strong brands and a solid balance sheet, and we are well-positioned to sustain our growth for the long term. Thank you for joining us today, and thank you for your interest in the Vita Coco Company. That concludes our first quarter prepared remarks, and we will now take questions.

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

I guess I would like to start off with a question on your gross margins, which were up significantly in the quarter. So could you just talk a little further about the various cost buckets that are driving the improvement? And how materially they've changed recently? And then you've indicated that you expect gross margin sequential improvement. So maybe a little more color on the phasing of the expected improvements this year? And where you see potential upside or downside risk? I'm trying to get a sense of how much visibility you have and what the swing factors might be.

Sure. First of all, as it relates to the first quarter, the gross margin improvement was driven by a combination of factors, primarily improvement in the ocean transportation rates versus prior year and then also versus what we experienced in Q4. When thinking about ocean freight rates, we secure containers in our sourcing markets about a month before they arrive in country, and then it takes about 1-2 months to flow through our inventory. So the rates that you see as putting through into our P&L in Q1 happened in Q4 . And so what you're seeing there is the benefit of that rate impact. We also saw improvements in domestic transportation, primarily the reduction in unusual domestic transportation costs that hurt us in Q4 and that we highlighted that were related to the very large inventory build that happened at our warehouses as the transit times reduced, we just basically got overloaded. We had very high extension into mortgage charges. So those dissipated. I think domestic transportation costs other than those items were largely similar to what they were in Q4. Also benefiting gross margin in Q1 is the pricing that we took mid-Q4 on branded. So that is also helping. And so all of those things contributed to a nice margin improvement. But as we look forward for the rest of the year, our guidance is obviously based on what we're seeing today and experiencing today. And so there's obviously a lot that could change from that. There's a lot that could change [indiscernible] and then also [indiscernible] on domestic transportation or fuel costs. But it's based on what we know today, it's based on what we know about our finished goods inflation as we indicated. We finished goods inflation ignoring these transportation impacts, we are seeing inflationary impacts on manufacturing costs, labor costs, packaging costs. We're endeavoring to mitigate those through sourcing initiatives, efficiencies. As we talked before, we have an engineering team in Singapore that is very focused on helping our partner manufacturing facilities and to improve efficiencies. And our total guidance is based on everything that we could have now today. And it's a relatively broad range. Obviously, there's a range of potential outcomes, but we think it covers us adequately based on what we know today. As it relates to sequencing, we expect our gross margin to sequentially improve each quarter while full-year gross margins are falling within the range. How we highlighted, Q2 is, we think, going to be quite strong because of some certain retailer promotion activity that is not comparable to last year that might cause the gross margin to be a little up less than might otherwise be expected in the quarter. But I think that's the basis for projecting continued improvement.

Okay. That's super helpful color. And then maybe just a quick follow-up from me is just wanted to get a sense or clarify maybe how much of the potential top-line strength and gross margin improvements you plan to reinvest in the marketing versus letting it flow to the bottom line. I think you touched on a little bit of that in your prepared remarks. My sense is you're going to balance some of this, but it sounds like you want to remain pretty flexible on reinvesting into your business, depending on the strength you may or may not see. So just any comments on that would be helpful.

Sure. I think as you think about modeling it, we've provided an EBITDA guidance range, which we reflect, again, what we believe the current outcomes to be. Currently, we're planning and want to invest in our brands to basically strengthen our opportunities for long-term growth. We have plans to sum up, particularly in Q2 and Q3, significantly higher than in Q1 that are all around selling into our peak selling seasons. We're adding promotional activity and marketing activity. So we are remaining flexible. We obviously -- our marketing spend is not that big a number. And therefore, we pride ourselves on being disciplined [indiscernible] accelerate those. And as we see things that don't work, we will obviously discontinue them. So yes, I think your comment that flexibility is exactly right. And based on what we currently know in our current plans, [indiscernible] guidance is solid, but obviously, that could change depending on how the business flows and everything else.

Our next question comes from Bryan Spillane with Bank of America. Bryan, the floor is yours.

You have Christian Junquera on for Bryan. I have a question on inventory. Do you guys still have work to do in terms of rebuilding inventory? Is it correct to assume you guys ship ahead of consumption this quarter? And are you guys planning on shipping ahead of consumption in the second quarter? And how satisfied are you guys currently with your in-stock levels?

Yes. I think as we said last quarter, we finished the year with inventory that was higher than we would have liked on a days-on-hand basis. And we provided guidance on a full-year basis for that returning to more normal level. We took some actions in late Q4 basically to stop shipments into the countries in order to address those inventory bottlenecks that we have created for ourselves because all the inventory was in warehouse, and that resulted in the drop in the quarter. I think as we said on in the prepared remarks, we're currently happy with our days on hand that will probably build through the summer and then probably stay from on an asset-dollar basis. And we would probably expect to finish the year on a similar days on hand basis may be a little bit higher. The depends on business trajectory and how much inventory we want to have to support next year's growth. So we leave ourselves a little bit of wiggle room there, but we would expect it to be lower than it was at the year-end.

Got it. And then one quick follow-up. How should we think about free cash flow for this fiscal year? It looks like you guys have generated positive free cash flow now for 3 consecutive quarters. Should we expect this trend to continue? Or if not, why?

I'll take that. So we haven't provided any guidance on full-year cash flow. And as Martin touched on, the working capital is always a bit of a moving target. But we run a very efficient operation asset light. So we would expect fairly stable performance in the P&L for balance of the year and then that flowing through the cash flow.

Our next question is coming from Michael Lavery with Piper Sandler. Michael, you have the floor.

I just wanted to come back to the cans launch. I know you touched on it a little bit, but I believe there's a lot of shelf resets would have just happened in March and April. Can you give a sense of how some of the distribution rollout is going against plans? And if the resets that might have just happened came through the way you would have hoped? And just an update on how that's all unfolding.

Yes. It's early in the process. Those resets are just happening or have just happened. We picked up quite a few of the large major retailers that we would have wanted and expected. So actual distribution is looking good. The C-store channel is really where we're focusing, and we're seeing it really start to work. So we're excited about it. There's a lot of programming against the cans, specifically this summer and additional execution teams against making sure that they hit the stores and .

I would refer you to the ACV number that we put in our deck. We're an early in .

Great. That's helpful. And I just want to follow up on the freight rates and make sure I understand the prepared remarks correctly and how to think about that in the right context. It sounds like the contract rates you have available are above spot, and you've been leaning more heavily on the spot rates. And would it be right to assume availability isn't an issue? And then second, do you imagine any trouble pivoting to contract rates if they were to converge so that you could lock in what's now better rates versus where we've been over the last couple of years?

Yes. So on availability, currently on most of the lanes we use, there is good availability. There's still normal, I would call normal service issues where both skip ports, et cetera, that, of course, cause you headaches but normal capacity available. We are entering into very short-term contracts to secure capacity on lanes where we're looking for service or capacity guarantees. We're currently staying flexible. We're not entering into long-term contracts. I think it's fair to say that there are long-term contracts being offered. They're not at terms that we think are particularly attractive given the current market dynamics and spot rates. So as we look forward, we will continually evaluate that. And as we think the long-term contracts provide us with a good economic outcome and a good hedge on ocean freight. And we will probably layer those in as we've done in the past, but we're not there yet.

Our next question comes from Chris Carey with Wells Fargo Securities.

Can you just comment on the competitive dynamic? Your relevant performance to category has been so significant. And is this that you're just getting so much more support here on the branded side? I realize private label is a little bit lumpier, but the competitive dynamic and then I have a question on how this portfolio fits into a different macro backdrop.

Yes. So first, obviously, we play in a larger functional beverage category. And I think coconut water and obviously, Vita Coco are benefiting from very good consumer tailwinds there, both on interest and health and wellness. Some of the marketing indicated work that we've done, obviously, growth in families that over-index in consumption of coconut water. So we're seeing healthy coconut water growth. And it's volume and price, it's not just price, which is quite unusual across all of the beverage categories. So we think there's good underlying momentum on the consumer side entering coconut water. And then within coconut water, our Vita Coco brand has been outgrowing the category. We think that's a combination of the strength of brands, some of the commercial initiatives like the multipacks where we're in a position we can offer multipacks and many of the smaller brands can't offer. Obviously, our sales and execution capabilities and our supply chain capabilities. We're benefiting from having good inventory right now versus last year when some items were tight. And so we're able to gain share. So we think the category is healthy, and we've been able to gain share. And obviously, we'd like for both of those to keep going. And as the category leader, it's our responsibility to try and drive both of those.

Okay. Just a sensitivity in different macros, it's not a subcategory I realized. It's within a broader overarching category. But this portfolio, are you seeing any signs? I know pack size is something you've talked about in the past, but is this category luxury? Or do they have similar consumption trends as overall LRB?

Yes. I think we regard this as an affordable functional beverage. It's not a luxury. And to your point, it's available at multiple price points and multiple packs and ranging from our own packs. Obviously, private label plays and then the range of price points there. At the high end, you have harvest that is growing strongly at a very premium price. That indicates to us that consumers are coming into the category and willing to pay high prices. And then most of the category is old price points. Within our own brand, we're offering multipacks that provide a better value to the consumer. You'll see in our investor [indiscernible] the IRI or Circana, we're going to step up on that a few times for sure in the next cycles. But in the Circana data, we tried to point out how the growth has been driven. I think we've been pleasantly surprised by the strength of the signals with the introduction of the multipack. Obviously, there is cannibalization, but the thing we also have held in remarkably well. So we think at least within the covenant work category, there's a range of different price points and offerings is helping us as the brand and also the categories survive any of the external economic pressures. We see strength in club and mass, but food is still strong. So it's hard to know, and I can't really point to anything that I would link to some of the economic pressures that some of our consumers may be feeling.

And I think just to reiterate what Martin said, is the volume growth is really impressive. If you look at ScanData over the period, 15% volume growth was only 6% price, which is quite unique in this industry right now. So we're excited and enthusiastic about volume growth especially.

Our next question comes from Robert Ottenstein with Evercore ISI. Robert, you have the floor.

Congratulations on a terrific quarter and more so just the great job you've done navigating really, really tough years. So well done. I want to follow up. I don't want to be redundant, but just to press some of the other questions around the consumer and the competitive environment and maybe come at it slightly different angle. How are you thinking about the price volume equation or price market share equation, it would seem that you could compare to other categories and beverages, you've taken generally a little bit less pricing than many. But it would seem, given your strong market share and your superior service that you could have perhaps taken more. So there's a strategic decision there. So maybe just elaborate a little bit more on how to think about or for how investors should think about your general strategy on pricing and promos going forward and how you'd look at that equation.

Any big picture. You think about this category over the last several years. First of all, we believe the category is still in its infancy and has a lot of consumers to bring in giving consumers more occasions to drink the product and so on and so forth. But if you look at the category and pricing historically, we were way on the high end of pricing as you walk down the beverage aisle. Over the last year or 2, pricing has really caught up to us from other beverage brands and other categories within the beverage aisle. So although you see the 6% price increase in IRI, we have taken price and the price is clearly sticking and volume is growing and accelerating. We think we're better positioned now than we might have been historically from a price perspective as it relates to the rest of the beverage aisle. And this gives us – we believe, the ability to further expand the category and focus on growth while our gross margins are improving, and you're seeing that improvement continue to accelerate. So we feel we're in a pretty good place, not to say we'll never -- we won't be taking price in the future. We retain the ability and the option to do that, but we think we're in a very good place right now.

So just to repeat back, to make sure I understand it, it's more as the category leader, you're looking to make the category more affordable relative to other categories so that you can continue to grow the category. Is that the right way to think about it?

More affordable than it historically might have been in the coconut water category. And to be clear, I think we believe we can do that while still improving our gross margins. And obviously, all of this is subject to what happens in the general economy and competitively. So I think we have the flexibility. We're in a very solid position, and we will continue to monitor it, particularly as everyone's supply chain stabilized and we see how all the brands interact on shelf.

Our next question comes from Jon Andersen with William Blair.

Congrats on the quarter. A couple of quick ones. So I wanted to go back to freight rates for a minute. Two things there. Are there any contracts that you put in place during a period of a higher rate environment that you're still operating under that may roll over at some point and allow you to take another step function forward in terms of lowering your ocean freight? So are you under any contract now that -- when would it lapse or rollover? And to what extent could that be a benefit? And then the second question on that is, you mentioned a couple of times that contract rates haven't aligned with spot rates yet. What do you think it will require? Is that just a matter of time? Or are there specific catalysts that have driven the convergence of those 2 in the past? And then I have one quick follow-up.

Yes. As it relates to contract rates and lapping and are we in a bad position as we look forward, I don't think we're in a back position. I think as the market changes, some of these relationships allow you to influence the contract rates, which might otherwise have happened with incremental volumes to trade-off. So we're working that hard. So I don't think from a modeling perspective, I would plan any significant change other than the sequential improvement in gross margins that we've talked about this year, and we haven't provided any guidance yet for next year. But I would just plan a sequential improvement in gross margins, which obviously implies a higher gross margin for next year on a full-year basis. As it relates to how contracts and spot rates might align, I think historically, and I wasn't -- I have been only doing this 4 years, Mike has been doing it much, much longer, so maybe he'd want to comment. But there comes a time when contracts get close enough to spot where you go, the premium of the contract is worth it for the hedge. I don't think we've seen that yet. I think that's partly driven by capacity and availability of capacity. And therefore, the spot rates that are being offered are significantly lower than the contract rates that have been proposed. So I think the excess capacity has to ease. That obviously requires increasing demand, but frankly, there's also extra capacity being added, given the -- one, the number of containers that were built when the supply chains got bugged out. This means there's an excess of containers around. And then two, it's just a belief, but we believe the ocean carriers have been building ships given the profits they made over the last 2 years. So it's a little unclear when that's going to change. And obviously, it's something we watch pretty closely. And when we think the time is right, we will look to enter into contracts that provide the appropriate hedge.

That's helpful. And one on the sales side. You came out very strong in the quarter with good consumption growth rates that's reflected in your shipment growth. It sounds like you're going to be leaning into marketing and promotion this summer, next couple of quarters. I'm just wondering which could drive some acceleration, it sounds like, at least in Q2, as you discussed. Is there an element -- given that, combined with the commercial initiatives as you've outlined, I'm struggling a little bit with the 9% to 12% full-year view in the context of the strength of Q1, your ability to lean into marketing and promotion now with your inventory and service levels back and just the breadth of the commercial initiatives. Is there something else we need to be considering about the back half of the year, perhaps?

Yes. So great question. I think, first of all, we laid out commercial plans, and we projected a year and certainly the first quarter was perhaps a little stronger than we anticipated, but we're not yet ready to change what we expect the outcome for the year to be based on that other than the adjustments we made to guidance. I think over the last 2 years, there's been lots of noise on the demand side due to inventories out of stocks, competitive positions, price movement. It's really hard for us to model this on a quarterly basis. It's incredibly difficult. And so I think we're quite confident. We love the demand trends. We love the consumer strength we're seeing. We like but the resilience we're seeing and with potential economic uncertainty, we obviously – as we indicated, a lot of the gross margin improvement, we're benefiting on the brand side from -- it's a little unclear on full-year demand, exactly how private label volume reacts to their pricing, private label tends to work on more of a cost pass-through basis in some situations. So we may see some private label volume growth there, but lower revenues. And it's very hard to model, it's way too early in the cycle to put together concrete model on that. So I would just say we're not ready to reflect your excitement as to what you see in the numbers, but we obviously feel good about the quarter and I think will set up well for the year.

Our next question comes from Eric Des Lauriers with Craig-Hallum Capital Group.

So I was hoping you could provide some more color on the inventory supply chain dynamics. It sounds like these bottlenecks are basically fully behind us now. Martin, you just mentioned the noise that you've seen in demand in past years. Do you see any of the impressive year-to-date retail strength as due to the unwinding of this inventory? And should we expect that to normalize in the remainder of the year?

I think we benefited in the quarter from being in stock versus Q1 last year when we had some inventory challenges on some items. I think if you look at even more recent scans that are publicly available, you'll see that the scan business remains strong. So I don't think we're expecting it to decrease certainly based on what we've seen so far. But no, I think the challenge is, as you look at our historical data, there's lots of noise and timing issues related to the comparison. So the comparisons are hard, and we would love to have a great year this year of full inventory, perfect execution, so we have a solid baseline for panel.

But I would say, if you think about fourth quarter last year, IRI scan sales grew 22% in this quarter, but that was against 25% growth in scans last year same quarter. So we did have a good year last year also on a multiyear stack. It's quite impressive growth that we're excited about.

Yes. To Mike's point, we published [indiscernible] stacks in our Investor Day. I think we're now after 4 years that we avoided the COVID years. So we apologize for that. But 2019 is at least a base year from which we can actually measure sequential improvement. And as we look at that, those numbers continue to accelerate, so we took it.

No, that's great to hear. And then last one for me. With respect to potential M&A, some comments on expanding the better-for-you beverage platform that you guys currently have. Just wondering how you're thinking about timing with respect to potential M&A. Is this something where you're waiting to see how different brands and consumers fare in this uncertain macro environment? Are you waiting to build up more balance sheet strength? Or is it no real targeted time frame and you're just going to be opportunistic?

Yes. There's no targeted time frame. We are most focused on the core, and the in-house innovation and the new projects that we've launched and that we're working against. And we're looking at things. We're always looking at things. We think over time, M&A should play a role in the development of this business, but it is -- there's nothing imminent and there's no pressure for timing whatsoever in terms of doing any sort of deal.

Yes. As Mike said, we prioritize organic growth and innovation.

Yes. Certainly, lots to be excited about on that front.

I would now like to pass the call back to management for closing remarks.

Great. Well, thank you for joining us on the call. We very much appreciate the interest, and we look forward to talking to everyone again after our second quarter or if not before, if we bump into you in about. Everyone, have a great day.