Vita Coco Company, Inc. Q4 FY2024 Earnings Call

Good day, and welcome to The Vita Coco Company Fourth Quarter 2024 Earnings Conference Call. At this time, all participants will be in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. John Mills, Managing Partner with ICR. Please go ahead.

Thank you, and welcome to The Vita Coco Company Fourth Quarter 2024 and Full Year 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 fourth quarter earnings release issued earlier today. This information is available on the Investor Relations section of The Vita Coco Company's website. Also on the website, there's an accompanying presentation of our commercial and financial performance results. Certain comments made on this call include forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press 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 to describe our 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, which are available on our website as well. And with that, it is my pleasure to turn now to the call over to Mr. Mike Kirban, our co-founder and Executive Chairman.

Thanks, John, and good morning, everyone. Thank you for joining us today to discuss our fourth quarter and full year 2024 financial results and our expectations for our performance in calendar year 2025. 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. Coconut water remains one of the fastest-growing categories in the beverage aisle, delivering double-digit volume growth in our major markets, which has resulted in 2024 being another record year for the category and for our company in full-year net sales, net income, and adjusted EBITDA. We believe this reflects the success of our initiatives to drive growth in the category through growing households and increasing occasions. In the U.S., in 2024, we estimate that the coconut water category grew in household adoptions by 9% and household buy rate by over 7% according to Numerator, reflecting very strong consumer interest in the category, which we believe is related to favorable demographic trends, increasing interest in health and wellness, desire for clean ingredients, and growing demand for functional beverages. For the full year 2024, according to Circana, the Vita Coco brand grew 9% in retail dollars in the U.S. and grew 21% in the UK, while the category grew 14% and 19%, respectively. As we've discussed, we were hampered in the summer by significant inventory shortages due to limited ocean container availability, which limited our third-quarter shipments and negatively affected our service levels. We believe this resulted in the slowdown in branded scan growth in the third quarter, which has since strongly rebounded as inventory levels have improved. Both our depletion trends and our scan trends accelerated during the fourth quarter with U.S. Circana showing 9% branded retail dollar growth even though we chose not to repeat a major club promotion from 2023. This acceleration has continued, and even accelerated year to date, with U.S. branded scan growth of 20% for the last thirteen-week period ending February 16, 2025. This strong momentum and a much stronger inventory position than last year lead me to be very optimistic for branded growth in 2025. In addition to the very healthy Vita Coco retail growth, we've seen strong scan growth for private label coconut water. During the fourth quarter, we saw our private label coconut water shipment trends improve as we put the supply chain challenges of last summer behind us. I believe that our private label business remains a strategically important aspect of our business from a supply chain perspective and that it allows us to benefit more fully from our category growth initiatives. In 2024, our commercial initiatives including emphasis behind Vita Coco multipacks, Vita Coco Farmers Organic, and Vita Coco Juice proved to be strong growth drivers. I expect these initiatives to continue to drive growth into 2025. One highlight was that Vita Coco Juice continued to gain share at retail with U.S. scans increasing 42% for the full year, outgrowing the canned segment of the category by 2x. The introduction of our Vita Coco coconut water one-liter pack into a key convenience store chain has also been incredibly successful, and we believe that it is now one of the highest-performing items in that retailer's juice store. We believe the fact that consumers are showing a desire for larger packages for on-the-go consumption is an encouraging sign for a long-term growth trajectory. Vita Coco Treats, a refreshingly sweet and delicious coconut milk-based beverage, is beginning to roll out nationally with very strong retailer distribution commitments, and the addition of a new flavor, orange and cream, to provide a better billboard and more options for consumers in search of a midday treat. We're excited about the initial reception for Vita Coco Treats, and for the future of innovative coconut milk-based beverages, which create an indulgent occasion that could offer us yet another path for long-term growth. In 2025, we'll continue our occasion-based marketing to tap into the versatility of coconut water to drive adoption among new consumers and give existing ones more reasons to stock up on Vita Coco. Our initiatives will continue to focus on key occasions like smoothies, cocktails, and greens, among others. But new for 2025, we expect to place more emphasis on active hydration, attempting to position Vita Coco as the go-to alternative to traditional sports drinks, thanks to its naturally occurring electrolytes. As consumers increasingly prioritize health and clean ingredients, I believe that we are well-positioned to tap into this growing trend to unlock our next phase of consumer growth. Our international business is very healthy with strong performance in Europe led by the UK and Germany. In Germany, the category has grown over 40% over the last year according to Nielsen, and we are now the leading brand in coconut water at three times the size of our closest branded competitor. We believe the growth that we're seeing in our more mature markets like the U.S. and UK is indicative of the long-term potential in our less developed markets. We intend to step up our investment in international markets where we have a strong brand position and can benefit from driving category growth. If we're successful, we believe international will become a larger part of our growth story as these markets are significantly underdeveloped relative to the U.S. I'm also pleased to share that we recently extended our current Dr. Pepper distribution agreement. This contract extension will allow us to continue to leverage KDP's strong distribution footprint throughout the U.S. and is a testament to a great partnership and relationship that is fifteen years strong. Our priorities for growth remain unchanged: continuing to add households, expanding occasions, acceleration of our international businesses, and innovation to drive new occasions and attract new customers. I believe that coconut water is becoming a household staple across the globe, and we're very excited and proud to be the leading brand in our primary market and to help drive this growth. Based on the acceleration of the category seen late in 2024, and year to date, and our significantly stronger inventory and additional capacity arriving this year, I believe that we will have an 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 pleased to report a strong quarter to finish the year, and to report record annual net sales, net income, and adjusted EBITDA even with the supply chain challenges of the summer and the loss of the private label coconut oil business that started in the second quarter. Net sales in the quarter were up 20% driven by growth of Vita Coco Coconut Water and private label shipments, which benefited from an acceleration of growth in the coconut water category and improvement in available inventory which allowed us to rebuild distributor and retail inventories from the low levels of the third quarter. As Mike noted, our branded promotional activity during the quarter was reduced relative to last year due to decisions made to better manage our limited inventory. And this resulted in our reported net price improvements. Even so, our fourth-quarter gross margins decreased relative to prior quarters primarily due to more expensive ocean freight flowing through to our P&L. Although slightly weaker than last summer, ocean rates have remained elevated entering 2025. We believe there is the potential for rates to decline as the picture on potential tariffs and the opening of the Suez Canal become clearer as the shippers add new capacity. We believe that current ocean rates are at unusually high levels relative to long-term averages, and therefore, we have only entered into limited twelve-month fixed-rate contracts to secure capacity and service on one lane where the service commitment is important to our reliability of supply. If we see competitive fixed-rate offers for long-term contracts that make sense to us, we would be willing to enter into more expansive fixed-rate agreements to cover more lanes. As we previously highlighted, last year we experienced significant inventory constraints, which led to unacceptable private label service levels that were below our standards. As a result of these challenges, we currently expect to lose some regions with certain private label retailers during 2025. Assuming this occurs, this will initially appear in our second-quarter shipments with deeper impact in subsequent quarters. These assumptions are built into our current forecast for full-year net sales. As Mike mentioned, we remain committed to competing for private label business and believe we have value to offer as a reliable, diversified partner to larger private label programs. And that long-term, we should be able to regain some of these losses. Based on the inventory we have in transit and in-country to start the year, we are confident that we can generate strong growth in 2025 driven by mid to high teen branded growth offset by the expected weakness in private label shipments just mentioned. Capacity freed up should create more opportunities for our branded products in the second half of the year and into 2026. We believe that the strong category growth is a positive indicator and supportive of our long-term algorithm for branded growth. In anticipation of such growth, we have secured production capacity for 2025 and 2026 which should provide greater supply chain flexibility than we had in 2024. The new capacity supports our goal to operate with our expected demand at 80% to 85% of available full-year capacity. We expect to hit this production capacity level in the second half of 2025, which should give us more sourcing flexibility. While our fourth-quarter BrandScan performance in the U.S. strengthened, it was not as strong as we believe it could have been as Walmart reset its stores during the quarter. The location of Vita Coco moved into the conventional shelf-stable juice set with some significant reduction in our SKUs in space, despite Vita Coco exhibiting very strong growth leading into the reset. This initially created mid-teen declines in weekly store sales at Walmart, which has hurt our total reported U.S. scan performance. This has also produced outsized reported retail distribution declines accompanied by an improvement in sales per point of distribution. Long-term, we believe that the Juice Aisle has higher foot traffic than our old location, and that this move should benefit us greatly provided we can get the right SKUs on the shelf. We are currently working closely with Walmart to improve availability and visibility within the Juice Aisle. Approaching the normal reset timing for most retailers this spring, we believe that our initiatives will result in total net distribution improvement despite the short-term challenges at Walmart. Our confidence in the category and Vita Coco brand trends remains very high. We are projecting healthy net sales growth driven by strong branded sales for both international and the U.S., partially offset by the identified losses in private label of both oil and coconut water. We're projecting healthy adjusted EBITDA growth as well even though we expect slightly higher finished goods costs and higher average ocean freight rates for the year relative to 2024, especially in the first quarter of 2025.

Thanks, Martin, and good morning, everyone. I will now provide you with some additional details on the record 2024 financial results and our outlook for 2025. For the full year 2024, net sales increased $22 million or 5% year over year to $516 million driven by Vita Coco Coconut Water net sales growth of 10% partially offset by private label declines of 10%. As growth in private label water was offset by the transition of private label oil. On a segment basis, within the Americas, Vita Coco Coconut Water increased net sales by 8% to $343 million and private label decreased 13% to $90 million. Vita Coco Coconut Water saw a 5% volume increase and a 3% net price mix benefit. All private label sales decreased 13% driven by a 2% decrease in volume and an 11% price mix reduction due to the private label coconut oil transition. For the full year, 2024, our international segment net sales were up 16% with Vita Coco Coconut Water growth of 20% where we saw strong growth across our major markets. Private label sales increased 3% as strong sales of private label coconut water were partially offset by the transition out of private label coconut oil. On a full-year basis, consolidated gross profit was $199 million, an increase of $18 million versus the prior year. On a percentage basis, gross margin finished at 39% for the year, up approximately 191 basis points from the 37% reported in 2023. This increase in gross margins resulted from branded coconut water pricing and favorable mix. Moving on to operating expenses, 2024 SG&A costs increased slightly to $125 million driven by increased investments in people and resources focused on driving future growth and expanding our supply footprint. This was mostly offset by reduced marketing spend in light of supply challenges over the summer. Net income attributable to shareholders for the year was $56 million or $0.94 per diluted share, compared to $47 million or $0.79 per diluted share for the prior year. Net income benefited from higher gross profit and increased interest income partially offset by unrealized losses on FX derivatives and higher year-on-year taxes. Our effective tax rate for 2024 was 21%, versus 19% last year. The increase was driven by the jurisdictional mix of pretax profits with higher net state income expense than in the prior year and the impact of higher nondeductible expenses this year related to covered employees' compensation compared to last year. 2024 adjusted EBITDA was $84 million or 16% of net sales, up from $68 million or 14% of net sales in 2023. The increase was primarily due to the increased gross profit previously discussed. Turning to our balance sheet and cash flow, as of December 31, 2024, we had total cash on hand of $165 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 for the year partially offset by the increase of working capital of $34 million and the repurchase of shares valued at $12 million. The working capital increase was driven by an inventory build. Our higher end-inventory is representative of the health of our inventory levels as we enter 2025. We entered 2025 with a very strong category, healthy inventory levels, exciting innovation, and confidence in our team and our Vita Coco brand. While facing some headwinds, we are excited about our ability to continue to deliver strong results. We expect net sales between $555 million and $570 million, expected gross margins for the full year of 35% to 37%, delivering adjusted EBITDA of $86 million to $92 million. We're expecting the category to grow mid-teens this year with the Vita Coco brand tracking broadly with the category. As Martin indicated, we expect some reduction in private label service areas which will partially offset the expected mid-teens brand performance. We expect gross margins to be lower in the first half of the year as we continue to experience elevated ocean freight rates, and that gross margins will improve slightly in the second half as rates improve and they should benefit from the impact of a U.S. branded pricing initiative designed to offset some of the cost inflation we're experiencing. In 2025, we expect the net pricing impact for the full year to be approximately flat as we return to a more normal promotional calendar in the second half of the year. We expect SG&A to increase to low to mid-single digits as we restore marketing reductions from last year and increase investments in people, supporting our continued capacity expansion and the growth opportunity we see, specifically in international markets. This guidance reflects our current best assumptions on marketplace trends and our global supply chain performance. Finally, a word about the potential impact of tariffs. At this point, we have not included any impact from tariffs in our guidance. Obviously, the size of any potential tariffs and the countries to which they apply are critical to quantifying the impact on our business. As we have said before, if product import tariffs were applied to coconut water produced in the countries that we source from for any prolonged length of time, we would take pricing, expecting similar tariffs to impact our competitors and potentially other beverage categories. Our products are primarily sourced from the Philippines and Brazil, with additional sourcing in other Southeast Asian countries and co-packing facilities producing in Canada and Mexico. We believe this diversified network allows us to adjust as the relative economics change, but any adjustments have long lead times.

Just pulling back to this year in the more immediate time, I think you know, last year, the category in North America grew in the mid-teens, which is slightly ahead of what I just said. And actually, in the last thirteen weeks, it accelerated to the low twenties. And so we currently think we're seeing an acceleration of the category, whether that lasts for the full year or not is very difficult to say. I think in our assumptions for mid-teen branded growth, we're assuming that the category maintains a good solid mid-teen branded growth. But as I said, the category is currently accelerated ahead of that. And then when we talk about that, treats are sort of outside that because it's sort of a coconut milk-based product. So that's potentially incremental for our brand. As we look at international, we're trying to grow share in growing markets and we're trying to accelerate those markets and we're trying to add markets. So our hope would be that international would grow faster than our North American business. And then as it relates to your last question, you know, we're very much focused on growing the category, which is about education and trial, and then growing our households, which is about branded share gains and trying to make our brand more appealing than the other brands that are around us. And we do that through some of our social media marketing and innovation, and then obviously retail execution is a very important driver of share and also of trial. And so that's what we're trying to do. And I think you know, what we've seen, you know, over the last five years is the category at least in North America where we have reasonable data through Numerator we've seen household growth rates that are pretty healthy and household buy rates that are pretty healthy that collectively, you know, combine to accomplish our growth rates in the last five years. And there's no reason why those can't continue. Household penetration, we believe, is still way less than other uses. Our household buy rate is still relatively low. And certainly, you have the old eighty-twenty rule where a lot of volume is drunk by twenty percent of your consumers. So there's a lot of opportunity to increase volume. So no. We feel very good about the category and very good about our brand prospects.

And one moment for our next question. And that will come from the line of Eric Serotta with Morgan Stanley. Your line is open.

Great. Thanks, guys. Hoping you could give some colors to the current state of inventories at various points in the channel. With the fourth quarter replenishment are you at targeted levels? Do you expect further benefit from replenishing, or do you expect further benefit from replenishment in the first half. And then in terms of the U.S. price increase, can you give us an idea of the order of magnitude there? Have you started discussions with retailers on that? And how's it being received in an environment where most categories are having a tough time on getting incremental pricing. Thank you.

Morning, Eric. To start with the inventory levels, as you can see from financials, we ended the year with very healthy inventory levels overall. A good chunk of that is still in transit, so we're in a significantly better place to start the year, and we feel good where we are in the year. We would like to see still more in our warehouses close to the markets, which we expect to happen in Q1. We're currently not seeing any shipping challenges, so we feel good overall. But still a little bit more in transit than we would like due to the shipping delays we've been seeing. And then in terms of pricing, those letters will be making their way out to the customers now through Q1, and the sales teams are working with the customers on market execution, which will begin in the summer as we talked about from a guidance perspective. And as we look at the promotional activity we're cycling in the second half, we don't expect any financial impact versus 2024. But that will start to make its way to the market starting in the summer. And just on the pricing, we have a pretty good story. Obviously, ocean freight is higher now than it was a year ago significantly. Other cost inflation is starting to work its way through on finished goods. We have a good story. And then but the category is also growing really healthily so it's a pretty good story and at least I'm not aware of any current pushback, but obviously, there can always be pushback. Just coming back to your inventory question, you know, we started adding capacity a year ago. We have good inventory. We will provide good service with the category accelerating.

Then obviously that's challenging because it might it's accelerating maybe faster than we thought, but that's good. And the extra capacity that is coming online would help our second half. So we're looking forward to getting through June with our current plans and then having inventory available for more opportunistic endeavors. Got it. But just to follow up on that, any read as to where customer and distributor inventories are? I know they were clearly below target for last summer. Just sort of wondering know, should we think of you guys shipping ahead of consumption in the first half as you further rebuild the pipeline inventories or has consumption accelerated such that, you know, shipping ahead of consumption isn't really isn't really know, possible or or practical. And that would be a good problem to have or a high-class problem to have. But just just looking to sort of get where where your customers and retailers' inventories are to see if there's further replenishment ahead.

Yeah. Well, first of all, I like your comment. It would be a good problem to have, although it's always painful. Right? But back to year-end inventories, I think we felt we had largely replenished retail and distributor. We are working with our distributors to try and build inventory going into the summer. And that may affect a little bit of timing on the quarters. If that actually is possible. But sometimes that's possible, sometimes it isn't, but we'd love to add an for a week of inventory to enter that May, June, July, summer selling period just because it makes everything flow much easier if you're not responding to fires. But I think it's fair to say that we're very comfortable with where inventories were at the end of the year. So in most degrees, we're back to a normal cadence unless again something changes.

And one moment for our next question. And that will come from the line of Chris Carey with Wells Fargo. Your line is open.

Hey, good morning, guys. I wanted to start on gross margins. You know, from a phasing perspective, obviously, exiting the year lower than where you're gonna end the year think Corey made a comment about you know, back half modestly improving or or something of a sort relative to front half of the year. In a way, I kinda read that as we should start to see a pretty notable sequential uptick into the front half for all the to the Q4 exit rate. You know, in general, can you just contextualize the shape of gross margins you know, through the year as you kinda strive towards this full-year target. It just connected to that you know, freight rates are certainly up year over year, but they they are they are declining. And so may maybe just, you know, talk to the the trend in freight rate know, that that we might be seeing as we get to the back half year and the into 2026, like some level of, like, normalization or are we are we talking about, you know, at least right now, higher durable rates as you look over the next two years? Thanks.

So Mark, Chris, there's a few things in there from a guidance and a gross margin we are focused on the full year and the quarters, as you know, to get a little difficult. But the biggest item and why we expect second half to be stronger than the first half is that curve of ocean freight. We entered the year with more inventory than last year, so in the range of four months. So there's this delay of carryover of the higher ocean freight last year. Coming into the first half. So that big spike we saw in the summer of last year is is flowing through in Q4 into Q1. And then we have an expectation of ocean freight rates dropping through the year that will improve the margin with some partial offset to less pricing, you know, and and some underlying inflation. But it's really that curve from a modeling perspective. The biggest item with, you know, bits of timing in there is that curve of ocean freight and through the back half, and we have an assumption growing through the year that ocean freight will get closer, and I'll let Martin comment more on rates closer to historic levels, but not all the way to historical levels at this point.

Yeah. Chris, to your point, we're still paying above what we were paying last year and still what we would regard as unusually high. I think, you know, we for the full year, we expect our average rate of ocean container cost to be higher than last year. Right? So let's start off with that. That's baked into our assumptions. It's being driven by the inventory carryover that Corey indicated. And certainly, in January and early February, the rates really didn't move down that much. As we think about the rates and we develop guidance, we expect that to be some downward movement partly because of the uncertainty around tariffs is I don't know whether it's to move the bottom of uncertainty, but there was a fair amount of inventory build prior to the new administration and that should, you know, decrease demand for ocean freight. Allow us both to invest in brand and grow the business and also to support our business in a better way. And so we think the long-term outlook is very good. Just when it happens in the next twelve months, you know, we're guessing just like you're guessing.

And one moment for our next question. And that will come from the line of Michael Lavery with Piper Sandler. Your line is open.

Thank you. Good morning. You mentioned in prepared remarks how you're pivoting a little bit to to emphasize hydration messaging more clearly or strongly. Can you unpack a little bit what that might look like and and where there may be disconnects in in consumers' understanding or or you know, is that a is that a component of the product that that isn't really appreciated maybe as well as I would imagine that to be, or how do you fight that out in in your marketing?

Yeah. Hey, Mike. It's Mike. If you think about how we started this business and marketing coconut water, it was all about kind of nature sport drink. Right? And that that was the beginning of the business. Over the last few years, a lot of the growth has come from marketing specific use education. So we've talked, you know, several times about you know, whether it's in smoothies or in a cocktail or for the hangover or in greens, you know, powdered greens, all of these type of things. And that's become a real big focus for us. I think it's been a growth driver. But getting back to our roots a little bit and really starting to market the product as a natural alternative to sport drinks, we think, is a huge opportunity to further expand usage and households. And so we're ready to start doing that. We're starting to invest against it. You know, in our typical way of investing in marketing, whether it's digital and social and all these type things, but we think that that's an opportunity to really go after more consumers.

Is there a packaging or is there an opportunity to even you know, maybe I don't know. Maybe even a in a PET bottle or something, get into the sports drink aisle next to some of those guys or have you considered that? How do you think about maybe even just a sort of more obviously parallel or, you know, mirrored you know, extension or packaging form.

Yeah. I think in terms of packaging, you know, we have the PET, we have the Tetra. I don't think packaging changes are really in the mix for this, like a sports cap or something like that. I think in terms of placement in the store, we like where we're at, and very often, we are adjacent to sport drinks and enhanced waters and so on. I think it's more about the marketing communication and getting people to realize that, you know, Coconut water has three times the electrolytes of the sport drink. So, you know, and it's natural and it's from a tree. And so we think there's a real opportunity there, and that's that's that's the real focus. It's really communications opportunity communication opportunity.

And one moment for our next question. And that will come from the line of Eric Des Lauriers with Craig Hallum. Your line is open.

Great. Thank you for taking my questions and congrats on the strong quarter here.

Sure. Thank you, sir. If you could morning. I wonder if you could expand on the commentary on additional production capacity that you've secured for 2025. I think you mentioned that should help improve flexibility. Should we think of that as any sort of new geographies and expand on that helping to improve some of the ocean freight availability. Just wondering if you could new capacity and how it helps improve flexibility.

Yeah. I think, as we talked about last year, we were sort of basically selling every case we could make and get into the country. And that wasn't a very comfortable place to be, particularly in the third quarter. And so we ran production at full capacity through the Q4 to build inventories, and that's why we feel much better about our inventory situation. Started talking last April about adding capacity to get ahead of what we can see to we've perceived to be a very healthy category and to rectify this problem. Capacity takes anywhere from nine, twelve months to even eighteen months to come online. And the capacity that we talked about or that we alluded to last April is now coming online and that production will then flow into the U.S. starting in June, July, which is right to my comments about our second half product capacity or product availability being much stronger than our first even though we start the year with very good inventory.

So we are adding facilities and and you'll see that the facility account, I think, in our 10-K has changed and probably will continue to change through as we get when we get to next year.

From a diversification, it's a lot easier to add, you know, factories in markets you are familiar with, which partners who are. So we're still concentrated we're not concentrated, but we're still sourcing mainly from our from the countries that we currently partner with. But we're actively looking to open up other countries. Most of them are in Asia. Most of them rely on Asia Ocean Brake. To the East Coast and West Coast. So while the reliance on some of the feeder networks from some of the islands would change, if we open that capacity. We would still be, you know, the hooves to the Asia East Coast, West Coast major major lane. So yes, on the local market basis, our goal is to be more to add some diversification in the next twelve months. We probably haven't done so in the last twelve months, but the goal is to add some in the next twelve months. But it won't diversify, obviously, our dependence on ocean freight on those long lanes.

That's very helpful. Appreciate that color. And then on the increased points of distribution with upcoming shelf reset, could you just comment on how we should think about the timing of that impact? I'm guessing at second half, but any color you could share would be great.

Yeah. No. It's typically March, April time period. Yeah. I think Q2.

Okay. That's helpful. And then just last one for me. Just looking for an update on the food service channel. You know, obviously, much smaller than than, you know, food and mass for you guys. But I think that's been a recent focus or, you know, an opportunity for you guys to take share. I'm just wondering, if you could give an update there.

Yeah. No. It's been a big focus for us. We've got a team against it, and we're making really good progress. The biggest opportunities are in hotels, hospitals, college campuses, schools, all of these type of things, and opening up the broad line food distributor network and really managing that network. And it's coming along really well. We've, you know, continued to to get wins in that space, and we think it'll be a a big piece of our business moving forward. We're we're we're underdeveloped there. Right? I think for the big players, I'm gonna guess it's ten percent of the business and we'll wait below that. So that that just helps you quantify that there is an opportunity there. That's how much incremental it is, but think as we've said, it's a multiyear place for us to build. Build up to that level. Because those big guys have been working on it forever, and a long time, they had exclusivity contracts that blocked us out, but now know, they don't have coconut water. So we can start to play and it's just a long-term build.

And one moment for our next question. And that will come from the line of James Salera with Stephens. Your line is open.

Hey, guys. Good morning. Thanks for taking my question. I wanted to ask you. Now I apologize if you guys touched on this already, but you talked about successful introduction of the one liter in convenience. And if I'm looking at the the chart on on slide ten, it looks like there's a modest ACV step down for the five hundred ml in convenience. Is part of that the one l is is swapping in where the five hundred ml used to be. Or you just had any color on on what's going on there?

Yeah. The one liter sort of test or, you know, app, but it's been so successful, I wouldn't really quote out a test. Actually, it was incremental point of distribution. I think that marginal change in ACV is more related to inventory flowing over for you know, so the inventory challenges in Q3 would have probably resulted in some loss distribution, at least execution, and then it takes a little while to remember where you were selling it in Q2 and build it back. So it's just sort of that sort of thing. Okay. Great. And then I wonder if we can get an update on PowerLift, particularly, you know, Mike talking about the focusing on hydration and obviously protein content is is very important for consumers right now. So just thinking about you know, the opportunity to to scale power lift and and where we are on that right now.

Yeah. Good question. We we didn't really talk about it too much in our prepared remarks. I think we basically have a nice healthy online business, and we've struggled to develop to get pull on shelf even with good retail partners and execution and and people in market. So for this year, we said, okay. Focus on the online and let's continue to build that and let's take the learnings, do the the research, and understand how to get the message of the product to communicate and work on shelf because otherwise, we're just putting it on shelf and it's too expensive to keep it there. So we're still pretty excited about the category. Obviously, you know, protein beverage is still a very interesting category. I think drinkable protein is a very interesting category. I'm still drinking two a day. So, you know, mainly for lunch. Right? So I still like it. So but we haven't a good It looks great. And I look great. Yeah. Yeah. It's great. Look. I look great. So so we remain interested. There's something there and there will be something there. And if and if there's anything I know my history is you don't throw good ideas out when they don't work and so we're gonna continue to to iterate it. I would guess I would hope that know, if you ask the same question this time next year that we've grown the online community and found a way with the packaging and the brand messaging to to increase the pool so we can push again because the product is definitely drinkable. Very it's very popular among our investor community when we talk to them. But maybe our best marketing is these calls and that's not affected. Oh, Mitco. Help gotta help us all. Maybe if I could sneak in one more on treats. Do you do you have a sense for the the customer that's buying treats? Is it incremental purchase and they're already engaging with Vita Coco and and other four masters? Or do you find that it's a new household and they're engaging with that that treat cross sell them into the product and not with the other products in the portfolio, and there's a chance to kinda you know, the wider range of of, excuse me, you offer.

Yeah. From what we could see so far, it's it's a good mix of new and current customers, but it's also skewing quite young. Probably younger than our average even younger than our average customer. Which is interesting, and we think is a really good opportunity to bring new continue to bring new consumers into the franchise. Great. Appreciate the color, guys. I'll hop back in queue.

Thank you. I'm showing no further questions in queue at this time. I would now like to turn the call back over to management for any closing remarks.

Just like to thank everyone joining us this morning. I know it's a busy morning across a number of people reporting, but we very much appreciate listening in, and we look forward to talking to some of you in the next few days.

Thank you. This concludes today's program. Thank you all for participating. You may now disconnect.