Hello, and welcome to The Vita Coco Company's Third Quarter 2024 Earnings Conference Call. My name is Steven. I'll be coordinating your call today. Following prepared remarks, we will open the call to your questions with instructions to be given at that time. I'd now like to hand the call over to Alex Liscum with ICR.

Thank you, and welcome to The Vita Coco Company third quarter 2024 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 third 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, there is an accompanying presentation of our commercial and financial performance results. Certain comments made on this call, including 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 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 the website as well. Additionally, please note that within the quarter, the company began using Circana's expanded MULO+ 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. All investor deck exhibits and script references have been updated to reflect the new data set unless otherwise noted. And with that, it is my pleasure to now turn the call over to Mike Kirban, our Co-Founder and Executive Chairman.

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. I want to start by thanking all of our colleagues across the globe for our continued strong performance and for their commitment to The Vita Coco Company and to our mission of creating ethical, sustainable, better-for-you beverages that uplift our communities and do right by our planet. 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. Year-to-date through the end of September, according to Circana, The Vita Coco brand grew 8% in retail dollars in the U.S. 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. 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. For the last four weeks, as visible in our investor deck Slide 5, branded scans quickly rebounded, and we believe this is a sign that the demand for our products and the category as a whole are stronger than ever. 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. We should see our private label coconut water shipment trends improve as we put the supply chain challenges of this summer behind us. Our priorities for growth remain unchanged: adding households, expanding occasions, acceleration of our international businesses, and innovation. Our commercial initiatives around Vita Coco Multipacks, Vita Coco Farmers Organic, and Vita Coco Juice continue to perform very well as seen in U.S. Circana scans that we highlight in our investor deck. One highlight is Vita Coco Juice that is gaining share at retail with 39% growth year-to-date. The introduction of our Vita Coco Coconut one-liter pack into a key convenience store chain this year has been incredibly successful. We believe it is now one of the highest-performing items in their juice store. Our newest innovation, Vita Coco 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. 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. We're excited about the initial reception for Vita Coco Treats and for the future of innovative coconut milk-based beverages, which could offer us another path for long-term growth. Our international business remains healthy with strong performance in Europe led by the UK and Germany. 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 three times the size of our closest competitor. We intend to continue to invest in international markets where we have a strong brand position and can benefit from driving category growth. Despite continued volatility in the global supply chain, we are encouraged by the recovery in our inventory availability that we started seeing in late September and which has continued into October. 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. And now, I'll turn the call over to our Chief Executive Officer, 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. Let me start by providing some color on the ocean freight container availability and costs that we saw during the last six months. 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 and saw significant price increases for those containers. This three-month container shortfall against our actual requirements, which had been for expectations of approximately 10% growth, significantly squeezed our safety stocks in the market, which were already unusually low due to strong performance in the first half of the year. This also reduced inventory at distributors and on retailer shelves. 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 suppliers and to move significantly larger volumes of product to market than in prior months. 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 months period May, June, and July. We also saw container pricing slowly drop from the highs of early August. 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. We have seen container availability at source continue favorably in October, similar to August and September. The East Coast port strike in early October constricted the flow of containers into the East Coast for a couple of weeks, but that backlog is slowly recovering. 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. We expect this situation to improve gradually through the end of the year if consumer purchases continue on their current trajectory. Given we operated most of the quarter with limited inventory, we are pleased with our third quarter performance. Net sales were down 4% in the third quarter, with growth of Vita Coco Coconut Water offset by weakness in private label shipments. 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, which resulted in our stock levels entering the third quarter being significantly depleted. This, coupled with the container shortages, significantly impeded our ability to meet private label demand during the quarter. While it is difficult to triangulate, based on our analysis of the scanned 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. 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 Vita Coco, which we believe reflects the combination of inventory challenges and the reduction of promotional activity. 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. 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. 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. This resulted in a significant decline in dollar sales and an associated increase in pricing in the new expanded Circana Plus data. Although these promotional decisions in aggregate are beneficial to gross margin, they likely resulted in lower net sales and scans for the quarter. 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. The aforementioned reduction in promotional activity together with reduced marketing investment helped us to offset some of the gross margin pressure from increased ocean freight costs. From a cost side, our finished goods costs, excluding ocean transportation costs, year-to-date are in line with our expectations. We currently believe that ocean rates are still at unusually high levels relative to long-term averages. Therefore, we are continuing to not commit to any long-term fixed rate contracts. However, we are exploring additional capacity commitments at floating rates to attempt to insulate us from events such as the capacity constraints we saw this summer. 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. Based on the inventory we have in transit and our confidence in the category and Vita Coco brand trends, we're raising our full-year guidance for net sales and adjusted EBITDA. We believe that the strong category growth is a positive indicator and supportive of our long-term growth algorithm for branded growth. 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. With that, I will turn the call over to Corey Baker, our Chief Financial Officer.

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. For the third quarter 2024, net sales decreased $5 million or 4% year-over-year to $133 million, driven by private label declines of 37%, partially offset by Vita Coco Coconut Water net sales growth of 8%. On a segment basis within the Americas, Vita Coco 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. Vita Coco 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. For the third quarter 2024, our international segment net sales were at 19%, with Vita Coco Coconut Water growth of 31%, where we saw strong growth across our markets. 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. 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. This was down approximately 200 basis points from the 41% reported in Q3 2023. The reduction in gross margin resulted from higher ocean freight costs, partially offset by better branded net pricing and mix effects of private label products. Moving on to operating expenses. Third quarter 2024 SG&A costs decreased 5% to $31 million. The reduction was primarily driven by disciplined marketing spending, as we adjusted our spending in light of reduced product supply. We would expect to increase our investments as we see improved inventory at retail. 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. 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, partially offset by a lower year-on-year gross profit. Our effective tax rate for the third quarter 2024 was 25% versus 21% in the prior year quarter. This represents a year-to-date ETR of 24% versus 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. 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, down from $27 million or 19.5% of net sales in 2023. The decrease was primarily due to the gross profit performance previously discussed, partially offset by lower year-on-year SG&A spending. 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. 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 the year-to-date repurchase of shares valued at $12 million. 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. 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 and in transit to our markets. Based on year-to-date performance, improving inventory levels, and our confidence in the health of our category and our Vita Coco brand, we are raising our full-year guidance for net sales and adjusted EBITDA. We now expect net sales between $505 million to $515 million with expected gross margins for the full year of 37% to 39%, delivering adjusted EBITDA of $80 million to $84 million. 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 the year. Ocean freight costs have come off the high seen in July but remain unusually fluid. 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. Approximately 30% of these costs hit in the third quarter with the balance expected to impact our fourth-quarter performance. We expect disciplined SG&A spending to continue in Q4 with full-year 2024 SG&A flat to slightly down from last year, as we don't expect to restore the full investment in marketing spend mentioned earlier. 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 share buyback activity. 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 at an average share price of $23.97. And 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 and the coconut water category. We are confident in our ability to navigate the current environment and are excited about our key initiatives to drive growth. We have strong brands and a solid balance sheet and we are well-positioned to drive category and brand growth both domestically and internationally. Thank you for joining us today, and thank you for your interest in The Vita Coco Company. That concludes our third quarter prepared remarks, and we will now take your questions.

Our first question comes from Bonnie Herzog of Goldman Sachs.

All right. Thank you. Good morning. I had a question on your new guidance, which implies around 14% top-line growth in Q4, which is certainly a big acceleration and then even a greater acceleration on EBITDA growth in Q4, which suggests 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 the setup for next year in terms of container availability.

Sure, Bonnie. As mentioned in our investor deck, we are observing a recovery in inventory and a return of products to retail shelves. This means we need to replenish our shelves and back rooms, as well as distributor warehouses, which will lead to strong growth as we wrap up the year and as inventory flows into early next year. We will experience higher ocean freight costs in Q4, but the growth in volume will help balance out the year and support our EBITDA guidance. Importantly, the category remains strong, as reflected in the data showing continued double-digit growth, and we hope to catch up to that since we lagged during the quarter. Regarding your second question about future ocean freight, it's quite uncertain. Currently, ocean freight rates are still significantly above historical averages and are higher than they were at the beginning of last year and towards the end of 2023. We may continue to face ocean freight challenges if these rates persist.

Okay. Fair enough. And then, just one quick clarification. Just 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. And just, I guess I'm trying to understand 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 in Q4?

Yes. I think our comment on, how we're dealing with the inventory and then Kari can just talk about the SG&A guidance that we provided. We're still very tight on inventory. There are still SKUs we don't have inventory for. There are still customers who are, I'll use the word upset with us, but they understand the situation, right? But we are still not fully meeting customer demand and therefore consumer demand. We expect that to improve through the quarter. But 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 we don't really know how consumer demand will respond and whether the inventory will build quickly or slowly, et cetera. So we're just going to monitor it and manage it appropriately, and I'll let Kari comment on the guidance.

There's not a large change in the SG&A, Bonnie, as we referenced in the guidance. We're flat to slightly down on a full-year SG&A basis and 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 very strong top-line as we recover inventory, offset by the ocean freight pressures on a gross margin side.

Okay, that's helpful. And then just maybe one quick final one for me, and then I'll pass it on. I just wanted to understand in the quarter if the supply constraints primarily impacted your private label business or was this also an issue for your branded water business? Maybe you could just help us understand the impact on each?

Yes. I would say that it was uniform partly across most of our factories 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 specific factory lane and geographic location and the timing of when those things hit, but it was uniformly across our business. 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 exacerbated by what happened, and that's somewhat because private label had maybe grown faster than our customers expected and we expected in the first half of the year, and we had 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.

Our next question comes from the line of Chris Carey of Wells Fargo Securities.

Hi, good morning. I wanted to ask about the gross margins for Q4 and how they might influence the future. It seems there’s a very broad range for Q4. Based on your comments regarding SG&A, it appears you are likely to be at the higher end of your full year gross margin range. Could you elaborate on that? More importantly, what does this mean for the exit rate on gross margin heading into next year? Should we anticipate Q4 to be a tougher period or a low point? Is it a temporary situation, or does this indicate the level of gross margin we can expect in the first half of next year, with a potential recovery not happening until the latter half? I'm trying to understand how low we are projecting for Q4 and its implications as we move into the first half of next year while aiming to meet profit targets for next year.

Chris, I'll talk to the guidance a little bit and Martin can jump in. 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 a good amount of ocean freight hitting Q4, which will impact gross margins. If you follow the index, which I know you do, you would have seen a spike, quite a strong spike in July that has been coming down. So, as we've talked in the past, that rolls forward about a quarter, so that spike is hitting in Q4. So, we're not providing guidance on next year, but 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.

Yes. Looking ahead, it’s quite challenging to forecast what will unfold. Generally speaking, the ocean freight rates we are observing in October and November may impact Q1. As Corey mentioned, we recommend referring to the indexes for interpretation of the situation. Importantly, the current rates reflected in the indexes and our experiences are significantly higher than long-term historical averages. Rates at the end of 2023 and the beginning of 2024 were closer to those averages. If current rates persist, our gross margins will likely take a hit compared to our previous reporting periods. The duration of this impact hinges on how long the rates remain at their current levels. Rates have been decreasing since early August, varying by route; for instance, Europe to Asia has declined more sharply than routes to the East and West Coast. The reasons for these shifts are not entirely clear, just as the initial rate spike's cause remains uncertain. Additionally, some routes, such as Brazil to the U.S., behave differently, and we lack reliable indexes for those. We are currently paying more than this time last year and more than we did in the first quarter of this year. Continued high rates would adversely affect our gross margins. The peak rates Corey referenced occurred around May to early August and will mostly be felt in Q4. This is a useful framework for modeling but, since this is an external market, we have limited visibility on future rate changes.

Do you have an idea of where you might end up with the full year gross margin? We're seeing a range of hundreds of basis points for Q4. If you prefer not to provide that information, that's understandable. Could you instead discuss the flexibility in your SG&A structure, considering the potential variability in Q4 gross margin and how it might affect your profit objectives that you're raising today? That's all from me.

Yes. Chris, we provided also a range of EBITDA, which we think gives us the flexibility to deliver within that range. There is volatility in 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. That's going to be pretty much in line with what we've guided to.

Our next question comes from the line of Eric Serotta of Morgan Stanley.

Great. Thanks. In terms of the top line, can you get a little bit more granular in terms of how you're thinking about next year and kind of plans to continue the momentum that you've had? You've done a great job expanding households and occasions and certainly one of the only categories in NARTD that's experiencing real volume growth here. But sort of other than just kind of doing more of the same, could you give a little bit more granular about how you keep this going in 2025 and beyond?

Yes. For one, we like how it's going. And so, if we can maintain it by doing more of the same, that will be great. But obviously, we're endeavoring to accelerate it and/or maintain it longer than perhaps otherwise would be expected. It starts with the category, which is quite healthy, has been growing double-digits polymetrically in North America for the last five years and doesn't seem to be slowing in any shape or form. 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? And how do we keep it going, right? And you mentioned our priorities are expanding households, increasing velocity for household, increasing availability so that people can buy coconut water on more occasions. On the velocity side, it's very much an occasion-driven messaging. So we're not really changing any of that. We're still pushing the multi-packs into mass and food because there's still opportunities there. We're pushing or we tested Treats this summer with a key retailer, actually a couple of key retailers, one more sort of promotional temporary and one on a semi-permanent basis. We like what we see, so we're offering it to more retailers. We do see an interesting opportunity in coconut milk-based 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. 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, 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 core business, the one-liter Vita Coco Pure, which was in a convenience store this year for the first time, I think surprised us and surprised the retailer, and it looks like there is 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 categories healthy and our goal is to maintain that health and maintain share or grow share to the extent we can.

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 categories in its infancy. When you look at it, 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 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 quite a large category long-term.

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 pulled back on promotions. 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 expect from that kind of normalizing next year and I guess offsetting some of the volume recovery that you're looking for?

So I think we're a little uncomfortable getting that granular. What I would say is that it was a major customer, and if you were doing your store checks, you would have not have seen a major promotion at a major club store, and you can correlate the two data points. Historically, if you were doing store checks, you'd have seen us in that club store over the last year 3x, and then this year it's twice, right? So it's pretty big and pretty material and benefited gross margin this quarter, offsetting the ocean freight. And I think we're just leave it at that, probably get into specific details of size.

Our next question comes from the line of Jon Andersen of William Blair.

Hi, good morning, everybody. 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 what you're seeing there from country-level trends and maybe some of the initiatives that you've been driving internationally through this year and what your expectations are or plans are for that part of the business looking forward as well?

Sure. 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. As households are expanding, and as we're seeing the category again really mainstream in the UK. That's had a nice impact from a solid base, as it's grown quite significantly. I think we spoke about several other markets in the past, but we really like Western Europe. We like the fact that 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 one guy and a very simple strategy, and it started to build, and it started to build pretty quickly. We're seeing it really start to take off now. We don't see why we can't replicate that model in other Western European markets. So that's a big focus for us. We've talked about some decline in Asia, but we're looking at restructuring the route to market there and that's coming along well. And so, we see the opportunity for this category to be quite significant in all of these global markets, and we believe we're the ones that have the opportunity to build that business and build the category.

Thanks. That's helpful. On Slide 11 in the quarterly earnings deck, it looks like you shared some stats around ACV performance, Q3 '24 versus Q3 '23. Just broadly speaking, it kind of looks like ACV levels have kind of plateaued across some of the main product forms. Is that a function of, well, number one, is that a function of some of the supply constraints that you've experienced this year? And/or do you think going forward, at this point, this story is more about maybe average items per location and velocity per location as opposed to ACV growth from here going forward?

I think the ACV numbers perhaps were not as large as we would hope to report. If you look at Slide 5, we sort of report TDPs as an illustration of the potential inventory impact at retail. Obviously, 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 that obviously there was 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 I think it's more of 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.

Okay. Last one for me. As you think about 2025, and Martin, I think you referenced kind of confidence in the long-term algorithm for the branded business. Can you just kind of remind us how you're thinking about the long-term outlook for the branded side of the business? And then, when you referenced additional production capacity coming online for '25 and '26, how much incremental capacity are you expecting to bring online to support growth in '25 and '26?

Yes. Our long-term algorithm or goal for branded growth is mid-teens. I think we believe we can get there based on a category growing low-teens in North America and internationally growing faster, right? That's how we think about it. Maybe North America rose a little faster earlier in that long-term, and international contributes more growth later in that sort of long-term algorithm. We entered this year with the capacity that we thought we needed, given some of the discussions we had last year about potentially losing a large private label coconut water customer. 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 80% to 85% 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. This year has been particularly tight. Back in, I think, March, April, we clearly communicated that we were going to add capacity, and we continue to do so. We're trying to get back to that 80%, 85%. 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 timeframe? 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.

So it's really this year, it's just been about ocean freight availability. Capacity hasn't been the challenge there?

I think when you're running, let's say, in the 90s of capacity, then, if there's any disruption, you don't have the capacity then if there's any disruption, you don't have the flexibility to react. And so I don't think how we while 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.

Our next question comes from the line of Jim Salera of Stephens.

Hi, good morning. Thank you for the question. I wanted to follow up on inventory. If I look at the balance sheet, it seems that inventory has increased around 40% quarter-over-quarter. Martin, you mentioned in your remarks that this is likely due to higher unit costs because we have more containers available now. Can you provide more details on the unit increase in inventory quarter-over-quarter and a breakdown between North American and international inventory?

Jim, the primary driver, you don't really need the underlying details, is, 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. It is up $20 million quarter-on-quarter. So it's a big number, but it's in transit from Asia into the operating markets.

Okay. And then I guess if we follow that through, is it safe to say that 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?

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, if that makes sense.

Okay.

At the end of Q3, we have a significantly high amount of inventory on the water due to the number of containers we secured in August and September. Most of those containers are currently on their way and will be available for shipping in Q4. The timing of their release and our final figures will determine the situation, but we expect the inventory on the water to return to more typical levels by the end of the year. Ideally, this would improve our end market inventory, although it could mean that demand is so strong that we are still unable to catch up. Therefore, we are uncertain about the situation, but this outlines the dynamics we are considering for our projections.

That's helpful. And then maybe if I could squeeze in one more on just a promotion. You guys called out the club promo that you kind of had to forego because of the inventory levels. Is that something that would just be seasonal and so basically you just missed it this year, and it'll be back on next year, or is it possible that if inventory is 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?

So, this particular retailer who we would like to just call a partner, I suppose, runs promotions periodically, let's say quarterly for argument's sake, but it might be more frequent or whatever, right? And in order to meet their demand, we need 6 to 9 months planning because it is a very large opportunity. Again, it's not like we're carrying that inventory in inventory on the off chance that they want to run something. So the answer to your question is, no, 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 '23 and '25, which would be an incremental time slot to what we agreed to in 2024. And it was a joint discussion. We saw what was going on and we just said, look, we can't support this. It would be foolish to run.

Our next question comes from the line of Eric Des Lauriers of Craig-Hallum Capital Group.

Great. Thank you for taking my questions. First one for me, just another question on international dynamics. So obviously both UK and Germany remaining very strong. How should we think of, I guess, what inning the German and UK markets are, compared to the U.S.? And then in terms of other Western European markets, 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 some others that are a bit further along than just very beginning stages here? Just wondering how to think about the sort of prospects for other Western European markets in the quarter’s years ahead?

Yes. So I think the UK is quite developed, and so distribution is quite developed in the UK. Consumer and 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. As we look at other markets, the other markets we've been, 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. And everything is just happening a little faster these days, because I think of where the category is just 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. 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 P&L as they start to develop quicker.

All right. That's very helpful. And then, just last question from me. Just kind of zooming in on the acceleration in revenue growth expected in Q4, obviously there's replenishing of inventory levels. Is it fair to assume a stronger rebound in private label sales quarter-over-quarter versus branded sales due to that sort of 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?

What I would say, that's really hard to model. It depends on a whole bunch of things, not least 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 label is produced at certain locations, and so it all depends on those lanes. So I think we would hope for inventory recovery across the board. We're certainly not prioritizing production or anything. We're trying to take care of all 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 in Q3, but exactly how that plays out relative to brand item.

Our next question comes from the line of Michael Lavery of Piper Sandler.

Thank you. Good morning. Just looking at Slide 5. Obviously, the category outperformed in the period where you had the inventory headwinds. I guess, can you just help us understand, it would seem if you're attributing your deceleration and softness to the inventory availability? What did the rest of the category do differently that put them in a better position to maintain the growth rate that you showed there?

Obviously, we don't have great visibility, but one at 45% share, 50% share on the old data set, our slowdown would pull the category down. That's what's pulling the category down. 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. Obviously, it's impossible to know what their arrangements are. But I would say, towards the end of the quarter, you're starting to see some of them struggle, either on the supplying private label SKUs to retailers or on the branded side. You're starting to see that. And so, my hunch would be, and it's a hunch as opposed to fact, 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.

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. 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, but have 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?

Yes. Obviously, we don't know how competitors either on the branded side or the private label supply, how they deal with contracts. I think historically, we had entered in these total fixed-price contracts for 75%, 80% of the lane, and that sort of guaranteed capacity, or at least locked it in and we thought that was a sensible approach. When the rates went crazy, we stopped entering into fixed-rate 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 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. Obviously, what's the downside, what's the penalties, or if there are penalties, can we roll those commitments, et cetera. So we're having all of those discussions, and we're just merely trying to indicate, I think, that we're trying to through the relationships with the carriers, get firmer commitments on capacity so the squeeze doesn't happen. We're trying to plan to build inventory in the market to more normal levels, maybe raising inventory on key SKUs. But to actually get there will probably take six months, seven months because it doesn't happen overnight. We're also still talking to carriers about potential fixed-rate agreements. If those rate agreements are at the current rates, we still think they're unusually high. We're not that excited about entering into them. That's sort of how we're thinking about it, yes.

Okay. Yes. Thanks for that. And then, just quickly on private label, can you give us a sense, the 1Q and 2Q volumes were up more modestly, not too significantly, but then of course down significantly. Can you just give us any sense of how much is from the discontinuation of the oil in the quarter versus the inventory headwinds to try to understand sort of ex oil volume decline?

Yes. We're a little reluctant to quantify it, as it relates to one customer, and we think that would be 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 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. So we will lap that number starting Q2 next year, but until then, that is a drag. And then as it relates to, if you look at our Q2 shipments, that number reflects largely private label coconut water with a little bit of oil business to other customers. That's sort of a baseline. And then you see what we did in Q3, which is related to the availability of inventory, primarily of the private label coconut water on the private label revenue side. So that's how I would sort of think about it. Yes, we're just unwilling to quantify the number beyond what we said because it's a single customer.

I'll answer that. Yes, 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 trying to get a sense maybe could you just talk about when you mentioned 2Q, you shipped some oil, if we're trying to think of how to model four in 1Q now to kind of round out the lap. Any callouts on pacing or timing of just how to think about what the history would be that you'd be going against there?

So a couple of 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. And so that should give and then the bulk of the oil was sold only in Q1. There was very little private label oil post-Q1 in the financials.

To that customer. To that customer base, it should be more steady.

Our next question comes from the line of Bryan Spillane of Bank of America.

Thanks, operator, and good morning, everyone. I guess there's three topics I wanted you guys to get some give us some color on. One is Vita Coco spiked, the other is just visibility on all of this with freight and boats and availability. And the third, if we should be considering tariffs at all. But so maybe the first one, Michael, just on Vita Coco spiked, can you give us now kind of where you think that brand stands? What the potential is? Is the Vita Coco brand really extendable into ready-to-drink alcohol? Just kind of your thoughts on it now as we kind of think into next year?

Yes, we initiated this nearly two years ago and believe it was a great start to our campaign promoting the combination of alcohol and coconut water. It involved a significant marketing investment from our partners to promote this idea of coconut water and spirits. We complemented this with a strong communication effort about cocktail mixing, along with extensive on-premise sales and marketing that we've executed since then. Over the last two years, we've witnessed coconut water and cocktails become a significant usage occasion for us, which we believe is contributing substantially to our current growth. We're enthusiastic about this. However, the actual product, Vita Coco Spikes, has not been very successful. It was part of a licensing agreement, and unfortunately, it hasn't performed well. The market is quite saturated. That said, a ready-to-drink version of Vita Coco with spirits could still find success. While this particular product has not thrived, we feel it has played an important role in helping establish this concept and usage occasion. So, from our perspective, it has been successful in that regard, even if the specific product has not seen significant success.

So is there a chance to actually reboot more as a mixer, getting bartenders to craft cocktails with it? And rather than go the ready-to-drink approach, is there a thought behind actually having it more as a potential base for a mixer line?

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. And that's become a big focus for the organization. Like I said, I think we believe a big usage occasion for Vita Coco.

There has been a lot of discussion about boats and freight rates today, possibly more than anyone would prefer. Martin, you previously mentioned that you're uncertain why rates have increased in this manner, which adds to the confusion. Considering that, as we look at your marketing and merchandising plans for next year, are you having to adjust or pause certain aspects due to this uncertainty? I'm trying to understand retailers' willingness to engage in promotions or merchandising programs while we are still facing product availability issues.

We hope that next year we can return to a more normal promotional schedule. We believe that the long-term averages for ocean freight provide reasonable assumptions for our business planning. Carriers are building a lot of capacity due to their significant profits during COVID. Regarding the recent spike in rates, it seems to have primarily profitied the carriers, affecting us and other customers. However, this appears to be a short-term issue. For our long-term planning, that's our perspective. If rates stay high in the short term, we will need to consider our options, including raising prices if we believe the situation is not temporary. Currently, rates are continuing to fall, with European rates decreasing faster than those to the U.S., though we don't know why. We expect U.S. rates to continue to drop, but we cannot guarantee that. We are closely monitoring the situation and working on plans for next year that will allow us to remain flexible and respond accordingly, which may include adjusting prices.

So is it fair to say that the lack of visibility is more around cost than it is availability right now and as we're looking into next year?

Yes. Availability has gotten much better and is much less of an issue already and becoming less and less of an issue for us. 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 that lasted a couple of months, barely 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're going to have both, like, you're going to have product and be able to merchandise really the question next year is going to be more around what the margin might be, and I don't want to put words in your mouth, but you want to prioritize filling customers' orders and consumer demand. If there's some margin volatility, while it's not perfect, the tradeoff is going to be, I think, right, to service the demand versus holding back because of freight costs?

Yes. I think we're very focused on trying to maintain category growth and consumer interest. Again, our long-term view is that the cost side should resolve itself.

Okay. And the last one, just on tariffs, just because it's been topical or at least in the news cycle. So just anything that you are thinking about in terms of contingencies, or I don't know in the event that there's a blanket tariff, just what are your thoughts about how you'd handle that?

If there's a coconut tariff, yes, I mean, we would take price or operate the business a bit differently, but we think that 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.

Yes. We would have a very justifiable reason to take price, and we would be able to move that into the market, and it would affect obviously many other categories and other categories.

Our next question comes from the line of Robert Ottenstein of Evercore ISI.

Thank you very much. I have two questions. First, we're hearing that Walmart and Target are planning significant changes to their beverage aisles and shelf space next year. In that context, could you discuss your expectations for the coconut water category? Do you anticipate it will gain shelf space next year, and do you believe that your share will increase in comparison to others? The second question pertains to the attention and excitement around Power Lift at NACS. I'd like to get a better understanding of your commercial plans for it and how substantial the push will be. Thank you.

Yes. On shelf space, we've had some preliminary communication from some of the retailers as to what they're thinking. 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 multipacks. 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, which as long as we preserve some singles, we'll probably be fine. 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. And then Power Lift, 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.

I'm showing no further questions at this time. I would now like to turn it back to Martin Roper for closing remarks.

All right, Steven. Thank you for hosting. Thank you, everyone, for joining us, and we look forward to talking again next quarter. Cheers.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.