Vita Coco Company, Inc. Q3 FY2025 Earnings Call

Hello, and welcome to The Vita Coco Company's Third Quarter 2025 Earnings Conference Call. My name is Daniel, 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'll now hand the call over to John Mills with ICR.

Thank you, and welcome to The Vita Coco Company's Third Quarter 2025 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. Also on the website, there is an accompanying presentation of our commercial and financial performance results. Certain comments made on this call include forward-looking statements, which are subject to the 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. 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. Also during the call, we will use some non-GAAP financial measures as we 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 and are available on our website as well. And with that, it is my pleasure to now turn the call over to Mike Kirban, our Co-Founder and Executive Chairman.

Thanks, John. Good morning, everyone. Thank you for joining us today to discuss our third quarter financial results and our expectations for the balance of 2025. I want to start by thanking all of our colleagues across the globe for our continued strong performance, particularly in a very fluid environment, and for their commitment to The Vita Coco Company and advancing our mission of creating ethical, sustainable, better-for-you beverages that uplift our communities and do right by our planet. Although I'm incredibly pleased with our third quarter performance, I'm even more excited by the underlying momentum in our category and our very high execution levels, which bode well for our future. Coconut water remains one of the fastest-growing categories in the beverage aisle, growing 22% year-to-date in the U.S. and 32% in the U.K. based on Circana data and over 100% in Germany based on Nielsen data. This, coupled with our significantly improved inventory position versus last year, has resulted in very strong retail growth for our brand. Year-to-date, according to our retail data, Vita Coco Coconut Water, excluding our coconut milk-based products like Treats, is growing 21% in retail dollars in the U.S., 32% in the U.K. and over 200% in Germany. This has led to similarly strong global net sales, gross profit, net income and adjusted EBITDA performance for our third quarter. Year-to-date, our international business is accelerating, driven by strong performance in Europe. Our increased investment this year in the U.K., Germany and other select European markets is paying off with healthy growth and brand share wins. The acceleration of the category that we saw in late 2024 has continued through 2025, which, combined with improved inventory and strong execution, is producing exceptional year-to-date results. Looking forward, we expect to maintain strong growth trends as we invest in and develop the coconut water category in our priority markets and our asset-light model and strong cash generation position us well to take advantage of the opportunities ahead. Big picture, I believe that the coconut water category is in the very early stages of gaining mainstream appeal on a global level. Coconut water looks to be transitioning from niche to mainstream, and we are at the forefront of that trend. If we can continue the household penetration and consumption gains that we are seeing, I'm confident that coconut water will one day be as large as some of the major beverage categories in the beverage aisle.

Thanks, Mike, and good morning, everyone. I'm pleased to report Vita Coco's continued strong performance in the third quarter. Net sales in the quarter were up 37%, driven by growth of Vita Coco Coconut Water of 42%, benefiting from strong growth in the coconut water category and improvements in our available inventory and service levels. Our branded scan results in the United States were very strong, even with a slight drag in our scans created by the changes in the Walmart set late last year, which we estimated was a mid-single-digit drag to our total U.S. branded scans in the third quarter. We are benefiting from strong volume growth and the impact of the two price increases taken in the U.S. this year, the first in mid-May to cover our normal inflationary cost of goods increase and the second in mid-July to cover the dollar impact of the 10% baseline tariffs announced in April. The cumulative effect of these price increases on shelf in the U.S. is best viewed on a two-year basis, which is showing as approximately 7% in the last quarter according to Circana. To date, we think the price elasticity impacts from these increases are within expectations, but we need more time to understand the impact of the July increase and to see competitor moves before thinking about any further price increases to cover the additional tariffs announced in August. Since November last year, we have been in the juice set at Walmart with significantly reduced assortment. We currently expect this juice set to be reset in mid-November. We've been told that our current total points of distribution will grow significantly compared to the current sets and also above levels we had before the move to the juice aisle. We are optimistic that we don't have complete visibility to understand the competitive dynamics of the new set and the actual shelf space allocated for our SKUs beyond the expected distribution gains. The private label business remains strategically important to us with greater uncertainty on costs, particularly due to the announced tariffs and some intermittent service issues from some of our competitors as the category accelerates. There have been more inquiries than normal about our private label services. In addition to the new U.S. private label relationship announced last quarter, we now expect to regain in early 2026 some private label service regions with key retailers that we had previously lost. We view this as a positive signal on our quality, service and pricing and reinforces our belief in the competitive advantage of our supply chain. Other than increasing tariffs and slightly softer ocean freight, our cost of goods has been pretty stable since we last spoke to you. We believe ocean freight rates during the quarter were still elevated relative to historical levels, but we saw rates soften through the quarter and since quarter end. We are operating primarily on spot rates with some fixed price arrangements on certain lanes to secure capacity, which allow any lower rates to benefit our P&L probably early next year, depending on the timing of inventory flows. Corey will cover our outlook for the balance of the year. For 2026, the most difficult element to predict is the applicable U.S. tariffs we'll be operating under. During the quarter, there were signals that the administration is willing to offer exemptions for products related to natural resources not available at scale domestically to meet U.S. demand, which gives us more optimism that coconut water could potentially receive waivers. If we do not receive any waivers and tariffs are uphold, we will continue our mitigation efforts. And ultimately, if significant tariffs remain and other offsets like ocean freight are not sufficient, we will evaluate the potential to take more pricing next year to further mitigate the impact of tariffs. We have a global diversified supply chain, which positions us well to deal with the dynamic U.S. tariff situation. The majority of our supply comes from the Philippines and Brazil, with the remainder principally coming from Thailand, Vietnam, Malaysia and Sri Lanka. Our current weighted average tariff rate on coconut water shipping to the U.S. from source country at the end of the quarter is estimated at a blended rate of approximately 23%, which is before any significant moves to mitigate the 50% tariffs on coconut water from Brazil. We are currently seeing tariffs into the U.S. applied to approximately 60% of our global cost of goods and believe that this is a good approximation for the cost of goods that U.S. tariffs are applied to. We are developing and executing plans to avert some of our Brazil production to Canada and Europe and to cover U.S. demand more completely from Asia, which could help further mitigate our average tariff rate. We have started preparations for this diversion but may choose for service and responsiveness reasons to source some production from the U.S. from Brazil on an ongoing basis. As the applicable tariff rates change in the future, we will adapt our plans. To summarize, our category is very healthy. Our brand is performing well, and our supply chain is supporting very strong growth. Together with potential future pricing, we believe that we'll be able to mitigate the potential tariff impact long-term and to remain very competitive in our markets. We are confident in our team's ability to execute and deliver our plans for the balance of 2025 and 2026, and our confidence in the category and Vita Coco brand trends remains very high. Longer-term, we believe that we will benefit when ocean freight rates return to historical levels and that when all of our tariff mitigation efforts are in place, this should allow us to achieve or beat our long-term financial targets. 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 2025 financial results and our outlook for the full year. Net sales were very strong for the third quarter, increasing $49 million or 37% year-over-year to $182 million. Vita Coco Coconut Water grew 42% and private label grew 6%. Our quarterly results benefited from the continued strong category growth, the restoration of a key club retailer promotion in the U.S. as well as the depressed third quarter reported last year when we were significantly inventory challenged. Please note that the key retailer promotion that ran in late Q3 and early Q4 this year has created unusually healthy scan trends in the U.S., and I would suggest that you look at a 2-year growth rate for an appropriate reading on the underlying momentum. On a segment basis, within the Americas, Vita Coco Coconut Water increased net sales 41% to $132 million and private label decreased 13% to $14 million. Vita Coco Coconut Water saw a 30% volume increase and a price/mix benefit of 8%. The branded price/mix benefit was driven by the cumulative effect of our two price increases in 2025. Our other product category grew 182%, primarily reflecting the national launch of Vita Coco Treats. Our international segment continued to deliver exceptionally strong results in the third quarter with net sales up 48% and Vita Coco Coconut Water growing 47%, driven by strong growth across our major markets. Private label sales increased 70% due to strong sales of private label coconut water within our current customer base. For the quarter, consolidated gross profit was $69 million, an increase of $17 million versus the prior year. On a percentage basis, gross margins finished at 38% for the quarter. This was down approximately 110 basis points from the 39% reported in the third quarter of 2024. This decrease in gross margin resulted from higher year-on-year finished goods product costs and the baseline 10% import tariffs announced in April, plus a very minor impact from the August tariffs that collectively created a $6 million tariff impact in the quarter. This was partially offset by our combined pricing actions and lower year-on-year ocean freight expense as well as the recovery of a reserve for private label packaging. Moving on to operating expenses. SG&A costs increased $10 million to $41 million within the quarter, driven primarily by higher people-related costs and increased marketing expenses. Net income attributable to shareholders for the quarter was $24 million or $0.40 per diluted share compared to $19 million or $0.32 per diluted share for the prior year. Net income benefited from higher gross profit and a lower year-on-year tax rate, partially offset by higher SG&A spending and the lower gain on derivatives than in the prior year. Our effective tax rate for the third quarter of 2025 was 22% versus 25% last year, which is primarily driven by the discrete tax benefits and a favorable geographic mix of pretax profits. Third quarter 2025 adjusted EBITDA was $32 million or 18% of net sales compared to $23 million or 17% of net sales in 2024. The increase in adjusted EBITDA was primarily due to higher net sales and gross profit, partially offset by higher SG&A expenses. Turning to our balance sheet and cash flow. As of September 30, 2025, our balance sheet remained very strong with total cash on hand of $204 million and no debt under our revolving credit facility. We have generated $39 million of cash year-to-date, driven by our strong net income, partially offset by increases in working capital, primarily due to increased accounts receivable. Our updated guidance reflects our current best assumptions on marketplace trends and timing of our shipments as well as the continuation of the U.S. tariff levels announced in August. Based on our current trends, we are raising our full year net sales guidance to between $580 million and $595 million. We expect full year gross margins of approximately 36%, with higher finished good costs, including tariffs relative to last year being partially offset by our increased pricing and slightly lower logistics costs. The impact of U.S. tariffs announced in April and August has increased through the year. For the full year, we expect to see an increase in our cost of goods of between $14 million and $16 million versus the prior year. We expect our average tariff rate on imported U.S. goods to peak at the previously mentioned rate of 23%, and this should start hitting our P&L late in the fourth quarter, depending on actual sales and inventory usage. Our sales expectation is based on a tougher Q4 net sales comparable to last year when we benefited from distributor and retail inventory rebuild. We expect full year SG&A expenses to increase high single digit versus 2024. This, combined with our expected higher net sales, is resulting in a higher adjusted EBITDA guidance of $90 million to $95 million. Our full year SG&A increase is due to increased people investments, including increased incentive and stock compensation and higher year-on-year sales and marketing expenses and other focused investments to support the delivery of our growth objectives as we aim to maintain a strong branded growth momentum into 2026. We look forward to providing additional updates and formal 2026 guidance on our next earnings call. 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 believe that 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 2025 prepared remarks, and we will now take your questions.

Our first question comes from Bonnie Herzog with Goldman Sachs. Your line is open.

I had a couple of questions on your guidance. First, you raised your top-line growth guidance, but it does imply a sharp decline of about 15% in Q4 at the midpoint. So I understand you've got a tough comp in the prior year to lap, but I guess I wanted to better understand this expectation. Was there a pull forward of shipments from Q4 into Q3, for instance? Is there anything, I guess, in particular, expected in Q4 as it relates to private label? And then on EBITDA, your new guidance implies a big ramp in growth in Q4. So could you give us some more color on the drivers of that expected acceleration?

From a top-line perspective, we've been focused on the full year. It's quite difficult to predict the results for the third and fourth quarters. We encourage you to examine the two-year stack, as the underlying base business remains very strong. In the latter half of the year and quarter-on-quarter, we are experiencing double-digit growth over a two-year compound annual growth rate in the core business. Currently, the trends in the private label segment have been challenging, especially since Q2 showed a decline in the mid-30s, and we expect that trend to persist. Martin mentioned new private label initiatives expected to start in 2026, but we don't anticipate any immediate impact from that. However, private label timing can be tricky. Overall, we believe there is still a solid growth trend in our underlying business, albeit counterbalanced by private label challenges. From an EBITDA standpoint, we have factored in tariffs at 23%, which we see increasing gradually throughout the quarter, peaking at around 23% by the end of the quarter, along with our current pricing levels.

Okay. And just want to verify, there's nothing that we should think about as it relates to inventory levels in terms of Q3 versus Q4? Nothing to call out there?

Yes, it's quite hard for us. We don't have complete visibility to inventory, which is why we stay focused on the full year. Q3 had the large retailer promotion, so the timing of that may have been a little heavier in Q3. And as we've talked about, we expect improved distribution at Walmart, how that shifts to distributors and exactly when that inventory will pull is hard to call as well. So I would stay focused on the two-year second half trends, and you'll see a very strong growth. I would just add that I think we think distributor inventories at the end of the quarter were healthy and sort of ready to support the Walmart set process. And obviously, how those adjust through the end of the year, as you know, can produce a little bit of noise at the end of the year but we currently think inventory levels are appropriate based on the activity we see in Q4.

Okay. Super helpful. And if I may just squeeze in a quick question on private label because it certainly has been a focus, and you touched on this, hoping for maybe just a little bit more color on what you touched on the recent private label customer wins. How do we think about these wins, meaning offsetting some of the prior losses, if at all? And then as you think about your private label business, how do you believe it's advantaged maybe versus peers? And how do we think about your approach to private label next year and beyond? Is this something you're going to aggressively pursue?

Yes. I think as we've said all along, Bonnie, we view the private label business as one that's complementary to our brand on a number of factors, both on the supply chain side and the retailer relationship side. And so we intend to continue to seek private label business or regain private label business and be competitive in it. As it relates to how we think about our competitive position, we believe that we are uniquely placed to provide large private label programs with diversified supply of private label across multiple countries, multiple factories. And we also believe that some of our sourcing leads to a cost advantage and a service advantage and a quality advantage. Now that doesn't always play out in how those bids are awarded. And so it hasn't all been wins, but we certainly believe that we are strategically well positioned to compete going forward. As it relates to your question, we're obviously not providing any sort of '26 guidance here. What I would say is that we recovered some of the regions that we lost, but not all of them. So we still have some headwinds next year, which may or may not be offset by some of the wins on the new customer front. But it's sort of, you know, we lost regions early in the year, and we're regaining some of them. To us, that shows that our sort of supply position is competitive on a quality, service and price perspective. And it gives us hope that we can recover more, but obviously, there are no guarantees and nor have anything been announced or those are more expectations and hopes over, let's say, a multiple year period as opposed to a single-year period. So I think next year, private label probably will still be a slight drag for us, but obviously, the category on a lost business basis. But the category is very healthy. It's growing. The private label business that is retained is growing because the private label business is healthy, too, similar to the category. So again, I would just say we're optimistic for a good '26, but we're not in a position to provide guidance.

The implied Q4 gross margin, a couple of questions there. So the first is just the Brazil tariffs. Is it reasonable to assume that Q3 did not include much of those, and those will be heavily concentrated in Q4? And so I'd love some perspective on that because Q4 has some seasonality that is lower than Q3, but there's also this new cost factor. So I'd love maybe a bit more detail on how you see that impact. The second thing is how are you thinking about some of the headlines around tariff? What are some of the key markers that you're looking for as it pertains to Brazil? The reason I ask is because at what point do we start thinking that you may need to take some pricing going into the front half of next year? How long will you assess the tariff backdrop before making that decision?

For starters, the headlines are interesting and definitely worth examining. The numbers regarding tariffs as of the end of the quarter could change, and we are currently dealing with the uncertainty around this. Over the weekend, Trump and Brazil's President Lu had a productive meeting and committed to finalizing a trade deal. Brazil has requested relief on the 40% reciprocal tariff, which hasn't been denied or approved yet, but we are hopeful for positive changes regarding Brazil. Additionally, other trade deals are being finalized, like those with Cambodia and Malaysia, where coconuts are excluded from the tariffs, although coconut water is not yet included. We are optimistic about this and are actively working on it. It seems the administration is looking to exclude unavailable natural resources, and we need to ensure that coconut water is recognized in this context. As more trade deals are made with the countries we source from, we hope to see improvement in the tariff numbers we've discussed. But for now, this is our current situation.

And Chris, going back to start of your question, which was did the increased tariffs from early August hit the Q2 P&L? Maybe, Corey, you could take that.

Yes, Chris, it was a small amount. If we think of the tariffs as April and August, the August tariffs had very little impact on Q3, a slight bit at the end, and that will ramp up towards that 23% rate. We anticipate that it will hit late in the quarter, November, December time frame and then be at that steady rate through next year, barring any of these changes we're hopeful for.

And then, Chris, relative to your pricing question, we took pricing in July to mitigate the 10% baseline tariff from April on a dollar basis, right? And I think we indicated in the call that that was showing up as like a 7% pricing on Circana on a two-year basis comparison to two years ago is how it's showing up. And that would, I suppose, also include the May. So that's the impact of both pricing. We're still monitoring the impact. There's certainly been a slight volume decline with the pricing, but in line with our expectations, but we want to monitor it. We're also monitoring competitive actions and movements on private label pricing, where we expect private label pricing to follow the tariff's rate because it's a cost-plus business model for our retailers. And so we're monitoring that to see what happens. We don't feel in a rush to sort of mitigate further the tariffs while we wait for that. We're also working on the mitigation strategies, particularly as it relates to Brazil, which is the outlier in our tariff environment at 50%. And those mitigation activities revolve around taking Brazil production to other countries other than the U.S. it's not as simple as just a switch because you have to get packaging in place, you have to get approvals in place. So we're working to be able to do that over the next few months and certainly complete that if the Brazil tariffs stay in place by the end of next year. So we want to see how those mitigation efforts go. You said the tariffs is very fluid. It is obviously very fluid. We don't want to take price if we effectively have to give it back. So we're thinking we'll make pricing decisions in Q1 that might take effect Q2 based on our view on where tariffs are and mitigation actions are in Q1. We're reserving the right to take pricing or not take pricing based on what we see in the marketplace and what we think is right for the brand long-term.

Perfect. A quick follow-up or perhaps not, but international, just give us a sense of where we are in the international journey. I suppose you're going to say early, but it's really starting to come through. So how are you thinking about the growth runway in international? And just remind us on your capacity to service that international market given your supply?

Yes. Let's begin with capacity. Over the past 18 months, we have been increasing capacity due to the accelerating growth in both the U.S. and our key international markets. We are adding capacity to support growth rates in the mid-teens or slightly higher, and this is progressing well. It requires a lot of effort, and I want to acknowledge the team involved. We are adding one to two or more factories each year, and considerable hard work is being done in that area. Therefore, we do not anticipate any capacity issues in supporting this growth over the next few years. Regarding your international question, we see category development in our core international markets, specifically the U.K. and Germany, as still underdeveloped compared to the U.S. Our investor presentation from June provides estimates of consumption per population in different countries, showing that the U.K. is about one-third of the U.S. and Germany is roughly 10% of the U.S., indicating it’s still in the early stages. The U.S. market continues to grow, so we view it as just the beginning. In the bigger picture, as we plan for the next 5, 10, or even 15 years, we want Europe to match the size of the U.S. Is that achievable? Absolutely. The population, demographics, income levels, and health trends are all favorable, so we believe coconut water is still in its early stages in Europe.

And congratulations on another terrific quarter. I want to kind of double or triple click down on international, which just seems super exciting. So just to help us get a little bit more granularity on the business. Can you give us a sense based on what you've learned today, how the international market in terms of Europe, is there a significant difference in terms of the consumer occasions and how they look at the category? How would you compare the competitive intensity in Europe versus the U.S., margin profile? And then just in terms of this quarter, was there anything unusual that perhaps flattered the results?

Sure, I'll cover all of that. The international market is quite promising, particularly in Europe, with the U.K. being a key player. The U.K. was launched around a decade ago, which puts it about ten years behind the U.S. in terms of growth. In the U.K., the category is thriving, and our brand holds over 80% market share. Unlike the U.S., where products are typically sold warm, the stores in the U.K. usually offer cold products. The competition is not particularly strong since we dominate the market; five years ago, Innocent juice had a coconut water brand with about 10% to 20% share, but that has decreased to single digits. We're in a strong position, concentrating on growing both the category and our share. As the category expands, retailers become more interested and introduce new brands, but these are usually minor players, and we don't anticipate a significant impact from this. The rest of Europe has been smaller for us until about two years ago when we appointed a commercial leader in Germany to target the private label market. In many European countries, private label products are major players in coconut water, unlike in the U.K. where they have less influence. Consequently, we focused on establishing retail ties with private label products, which subsequently led to opportunities for us to introduce our brand as coconut water gains traction. We're still in the early stages in Germany, having secured national authorizations. However, getting distribution in retailers requires additional regional approvals and collective efforts at the store level, making our progress gradual. In the next couple of years, our main challenge is to effectively market the national distribution we've obtained at regional and local levels, which will take several years. Interestingly, when we launched Vita Coco in Germany, the category's growth picked up, likely because there are not many strong brands investing in brand awareness. We've managed to capture a notable share of this growth, even as private label products also see an uptick, beneficial for the overall category. Our approach is to learn from different markets, ensuring that we prioritize larger markets like France and Spain while also exploring different strategies in more fragmented regions such as the Benelux, where we are seeing positive growth through distributor partnerships. We're focusing on developing our presence steadily rather than rushing and overextending ourselves. We are optimistic about the international trends, especially in Europe, over the next few years. Regarding margins, we primarily sell directly to retailers without many distributors, which keeps our pricing lower than in the U.S. Margins are good, benefiting from reduced shipping costs from Asia to Europe, allowing for a more competitive pricing structure. Although branded margins might be slightly lower than in the U.S., they remain attractive. I believe I've addressed all your questions, but feel free to ask if I missed anything.

Just was there anything in this quarter on the international that flattered results in any way?

Just strong demand.

Yes.

Just a quick clarification question. Just the tariff impact for 2025, did you guys say $14 million to $16 million? And if so, that implies a blended tariff rate for this year about like 6% to 7%. And then the expectation or what you guys are expecting is it jumps to 23% in 2026. Did we catch that correctly?

The $14 million to $16 million is accurate. The 23% refers to the applicable finished goods amount, which we estimate to be around 60% of our total cost of goods. So I'm not certain about the math you used for 6%.

So you have to remember that the tariffs were imposed initially in April, first week of April at a 10% rate. And what hits our P&L is delayed by when those tariffs flow through our inventory. So as an example, a 10% tariff applied on April 7 to a container leaving Asia wouldn't arrive in the U.S. until maybe early June and then wouldn't get sold out of our inventory probably until July. So our tariff impact in Q2 didn't really warrant talking about. So we didn't talk about it in Q2 as a dollar amount. We talked about a $6 million impact in Q3, which would largely reflect the 10% baseline tariff imposed in April because that would be the inventory flowing through our P&L in Q3. And as Corey indicated, the blended tariff rate based on our current sourcing at the end of the quarter is 23% of containers shipping at the end of the quarter from source. That rate will which is the rate that effectively was put in place in early August, flows into our P&L in mid-late Q4, but is the rate that is applicable for next year. So that's the reason that the $14 million, $16 million looks small to you because effectively, it's on half year and effectively, at least half of that year is only at 10%. Does that make sense?

Thank you for the clarification; that’s very helpful. Can we discuss the strategies you have to offset the higher tariff rate for next year? The increased pricing you implemented this year will carry over, and it seems like ocean freight rates are declining based on the chart. What are your expectations for ocean freight next year? Am I overlooking any other strategies you might have?

I mean that's the biggest benefit. That is the biggest benefit for the offset ocean freight...

We're talking to suppliers and trying to work out things that we can do, but this isn't a particularly large margin business for them. Obviously, we're asking whether their governments can help as well, right? We're trying to optimize our sourcing to take advantage of the different tariff rates. But really that means trying to avoid Brazil, if we can, right? And the base pricing we took in July that was, again, incremental to our May pricing was designed to cover the dollar impact of the 10% baseline. Obviously, we're evaluating the impact of that. And if we think we have to take more pricing and it's prudent given the competitive environment and our brand trends and everything else and all our mitigation efforts, then we will consider it. But we're a little reluctant to rush into pricing if indeed some of these tariffs may be waived under the trade agreements that Mike was talking about. We obviously have the Supreme Court case coming up next week, which may or may not also declare that the tariffs don't apply. So we're a little reluctant to rush into pricing until we get a better feel for all these impacts.

I have a couple of questions. We've discussed the challenges posed by ocean freight tariffs, but I want to delve a bit deeper into ocean freight. It appears that rates have halved year-over-year, starting this decline earlier this year, particularly around mid-year. It seems you are currently dealing with a lot of spot market situations. While I don't know the exact breakdown of your cost of goods, it appears that freight is a significant component of those costs. If freight costs have dropped to that extent, it seems likely to have a greater impact than the tariffs. So, I'm curious about your gross margin outlook for '26. How do you view this situation?

One way to approach this is to consider that tariffs affect 60% of our global cost structure. If you calculate 23% of that, it translates to about 13% of our revenue being attributed to tariffs, which is significant. In 2022, when ocean freight costs surged, we estimated the total transportation impact to be $65 million, with two-thirds of that attributed to ocean freight. You can derive ocean freight costs from that $65 million figure, particularly when rates were $10,000, $12,000, or $14,000. While ocean freight is a crucial component of our costs, it's important not to overestimate its impact and to refer to the data points we've shared. Corey, did we include a percentage of transportation costs in one of our investor presentations?

A few times in the years, we have in the range of one-third, but it varies up and down.

Up and down based on ocean freight...

I think I noted that ocean freight makes up about 30% to 35% of our cost of goods sold. Is that a reasonable way to look at it, with the remainder being finished goods?

I believe that number is transportation and logistics. So it's warehousing, drayage, ocean freight, internal transportation, distribution, et cetera; ocean freight is a subset of that number.

A component of that one-third of COGS or so. The other question I had was about the guidance. The guidance suggests fourth-quarter sales of around $105 million, which compared to $182 million in the third quarter represents about a 42% to 43% sequential decline in sales from the third to the fourth quarter. We haven't observed a decline of that magnitude seasonally or otherwise in the past. While there is some seasonality, a 45% drop is significant. I just want to ensure I understand what is causing that.

Jon, I don't see those levels of declines year-on-year, but maybe we're...

So Q3 was very big. We benefited from the major promotion that we skipped last year, right?

And it erodes from the out of stock.

There are many factors at play here. When looking at the decline in 2023, it's important to consider it in the context of the promotional activity from that year. Additionally, we prefer to analyze the private label decline in Q2 rather than Q3. This makes forecasting Q4 challenging, and we are doing our best to provide an accurate perspective. There is also some uncertainty regarding how private label sales will trend as we approach the end of this year and into the next. This uncertainty is part of the reason for me providing a range in our projections.

That feels like maybe the bottom or below the guidance range. Is that so we can follow up?

Yes.

Just wanted to touch on capital allocation. You mentioned now your cash balance over $200 million. I know in almost the same breath, you point out the share buyback authorization, though it's a small piece of that even if, of course, you always reauthorize more. But what's the expectations for use of cash? I know you've always had M&A on your kind of to-do list, but it hasn't been a big factor ostensibly because there hasn't been something interesting or at the right price. But how do we think about what the cash is meant to go for?

So I think our priorities haven't really changed. And the first one is growth of the core business. I would say that with the growth we're seeing and our planning for next year, we'll probably be building inventory as we finish this year into next year. And obviously, we're a pretty inventory-intensive business given so much of it sits on the water. And so I would just draw your attention to that, while also recognizing that $200 million is a very healthy cash balance for a company of our size. So our next sort of priority is innovation and supporting our innovation efforts. Third priority is M&A for something that will deliver value to our shareholders. And I think we've talked about M&A a lot in the 3, 4 years we've been public and obviously haven't done anything. So we're prudent, and we're not looking to do M&A for M&A's sake. That's certainly not part of our mission statement. And then as we look at what's going on in all those 3 areas: growth, innovation and M&A, if we believe we have excess cash, then our intentions would be to apply it to share buyback at stock prices that we think are fair for our long-term shareholders. So that's how we think about it. And I don't think anything has really changed. And certainly, as the cash builds, it becomes more of a conversation, but I don't expect us to change our approach to it.

Okay. And just on Treats, a follow-up there. It seems like it would be a pretty nicely incremental part of the portfolio. Is that a fair characterization? And even if so, do you find it can be sort of a gateway to the coconut water part of the portfolio too? Or are you seeing any interplay there that it might be attracting new users who then also switch to the coconut water side of the business?

Yes. I mean we're seeing a lot of consumers coming into the brand through Treats, which is really nice to see. So exactly what you mentioned, they're coming into the family. And then kind of like what we've seen over the years with our pineapple flavor and our extra coconut flavor, those are kind of the entries for the category, and then the hope is that they stay within the brand. And you see a lot of people then move to the original pure coconut water, the blue one. So Treats, it's early, but we aren't seeing cannibalization. We are seeing a lot of new consumers coming into the brand through Treats. So that is the idea. Hopefully, they stay with coconut water and drink it for different occasions in different flavors and formats.

I want to make a few points about how Treats is reported. On a shipment basis, Treats is included in other categories, so the reporting for coconut water does not account for Treats, which reflects the overall health of the category. According to Nielsen and Circana data, Treats may be categorized not directly under coconut water but rather alongside milk-based products due to its coconut milk composition. Therefore, I advise you to clarify whether Treats is included in our Circana data, as it does not fall within the coconut water definition that we analyze. For context, Treats would have added approximately 4 percentage points to our Circana growth rate, although this growth isn't reflected in our investor deck, which only presents coconut water growth rates excluding Treats.

Great. My first question is about pricing. I understand you are waiting for more information on pricing to evaluate the competitive landscape. What have you observed regarding competitors' pricing as we approach the end of October, considering you adjusted your pricing in early August? I know some competitors have followed different pricing patterns over the years. So, what is your current perspective on competitors' pricing? Also, regarding Treats, what does the repeat purchase rate look like? It appears to have contributed positively this year; do you anticipate it will continue to grow next year, or will it be a more challenging comparison due to this year's launch?

Let me address the pricing first, and then Martin can discuss the performance of Treats. In terms of pricing, we rely on Circana as an indicator of market trends. We are observing a range of strategies among competitors. Some have increased their prices significantly early on and have kept them stable without adjusting for tariffs. Others have only raised prices once or twice, while we've seen some recent increases in private label products following a second tariff. Additionally, some competitors have not adjusted their prices at all. This indicates a variety of approaches in the market. Clearly, we lead the market by a considerable margin and have adjusted our prices, so we will continue to keep a close watch on any further changes.

Yes, we are also keeping an eye on the potential tariffs. There are still many uncertainties regarding trade deals with Brazil, and we have a lot of questions that need to be addressed.

That's quite hard.

Yes. Due to the timing of the August tariffs, we haven't seen anyone making significant moves in response. However, we anticipate that there will be movement, especially in the private label sector. This gives us reason to be cautious. Regarding Treats, as Mike mentioned, it's creating a new entry point for consumers into the brand, which is promising. We're observing acceptable, if not encouraging, repeat purchase rates, but our focus is on increasing trial and enhancing brand visibility. This will likely require additional investment, which we're planning for next year. In terms of projections for next year, it's challenging, but we believe we will gain some distribution for Treats. Although we performed well with Treats this year, we did not secure placements in Walmart, which we expect to achieve during the resets and in other locations next year. Thus, we foresee another year of growth for Treats, primarily from the launch before seeing distribution growth, and we aim to drive further adoption alongside that, making it look promising for next year.

I first wanted to ask on just the kind of composition of the growth this year. If I look at the slide deck, it looks like multipacks have been kind of the biggest incremental driver, which I would kind of read as a proxy for increased purchase with existing households. Please correct me if you think that that's a wrong read there. But with the inclusion in modern hydration upcoming, do you view that as an opportunity to really introduce the brand to new households if it's more visible on shelf? Or is that a way to maybe pick up some laps opportunity with people that were buying it, but then it gets shuffled around in the store and they kind of lose track of it and don't follow up with.

So we view the multipack strategy as a way of increasing value to our customer while also increasing velocity and potentially putting more product in their pantries, right, which potentially increases their own consumption. And I think that's what we're seeing. Some of the multipack strength is also a little bit driven by multipacks are much more predominant in club type environments. And so if club is strong as a channel, which it obviously is in the current economic environment, you are seeing some growth from multipacks from that point side. As it relates to how is that all filling into total growth, we still see our growth as a nice balance of new households and increasing velocity per household. Our rough approximation is half of the growth is coming from new households, and half is coming from increased consumption per household. And so that's what we think is currently going on. Obviously, numbers in this area are available, but messy.

Could you also clarify your thoughts on how you view your competitive positioning, particularly in Europe? You mentioned you've been gaining share in that international segment. Can you elaborate on that?

Sure. We still consider ourselves an early player, and we want to maintain our leading shares. Our growth is predicated on us continuing to maintain high quality and service levels, particularly in competitive environments. Europe has seen a mix of private label and branded, but we are seeing a growth in our share as we work directly with key retailers. Our focus is to continue gaining customer loyalty through effective pricing and product strategies.

Just one last quick question on Treats. In your early read on the sales performance, what has been the consumer feedback on the product so far?

I think overall, it has been very positive feedback. Consumers enjoy the taste and the versatility of the product, and we are excited about integrating Treats into more of our marketing and promotional efforts.

This concludes the question-and-answer session. I would now like to turn it back to Martin Roper for closing remarks.

Thank you, everyone, for joining the call today, and we very much appreciate your interest in The Vita Coco Company, and we look forward to talking to you again in 2026. Cheers.

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