Earnings Call Transcript - COCO Q2 2025

Operator, Operator

Hello, and welcome to The Vita Coco Company Second Quarter 2025 Earnings Conference Call. My name is Michelle and I will be coordinating your call today. I will now hand the call over to John Mills with ICR. Please go ahead.

John Mills, ICR

Thank you, and welcome to The Vita Coco Company Second 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 second 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 include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Also during the call, we will use some non-GAAP financial measures as we describe 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 Mr. Mike Kirban, our Co-Founder and Executive Chairman.

Michael Kirban, Executive Chairman

Thanks, John, and good morning, everyone. Thank you for joining us today to discuss our second 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 dynamic 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. In the second quarter, we continued to see strong performance against our key initiatives. Coconut water remains one of the fastest-growing categories in the beverage aisle, growing 20% year-to-date in the U.S. and 35% in the U.K. based on Circana data. This, coupled with the acceleration of the emerging German market, has resulted in very strong global net sales performance for our second quarter and similarly, strong reported gross profit, net income, and adjusted EBITDA. Year-to-date, according to Circana, Vita Coco Coconut Water continues to perform very well, growing 16% in retail dollars in the U.S. and growing 39% in the U.K. In 2025, our U.S. commercial initiatives include an emphasis on Vita Coco multipacks, Vita Coco Farmers Organic, and Vita Coco Juice, the expansion of our SKUs in convenience stores, continued investment in our food service efforts, and the national launch of Vita Coco Treats. We're excited about the initial performance of Vita Coco Treats in the U.S. and for the future of innovative coconut milk-based beverages, which create new usage occasions that could offer us yet another path for long-term growth. According to Circana, Vita Coco Treats would have added 4% to the growth rate of Vita Coco Coconut Water in the second quarter U.S. retail scans if reported as a consolidated brand family. This is a good start, but we still have a lot of work to do. Year-to-date, our international business is very healthy and accelerating with 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, and we intend to continue our focused investment in select markets in an effort to drive long-term gain. In our investor presentation on June 4, which is available on our Investor Relations website, we laid out an index for estimated consumption per capita for coconut water in our current major markets. While the U.S. is the most developed market, household penetration is still well below other juices like cranberry juice or orange juice. Our current Vita Coco Coconut Water growth in the U.S. is coming from both growth in households and growth in velocity per household through consumption occasion expansion. We're excited about the current performance and believe that we can at least double the U.S. coconut water category in the coming years. We believe that the coconut water category is still in its infancy in markets outside of the U.S. and that there is significant long-term potential as these markets develop. We're very proud to be the leading brand in our primary markets and the primary driver of this category growth. Over time, we believe our international business will become a larger part of our consolidated growth story, and I expect our European operations could eventually be as large as our Americas business is today. In summary, the acceleration of the category that we saw in late 2024 has continued through the first half of 2025, and with our significantly stronger inventory position, strong retail programming and innovation, and additional production capacity, I believe that we are well positioned to continue our growth, and I'm excited for the remainder of the year. And now I'll turn the call over to our Chief Executive Officer, Martin Roper.

Martin F. Roper, CEO

Thanks, Mike, and good morning, everyone. I'm pleased to report Vita Coco's continued strong performance in the second quarter. Net sales in the quarter were up 17%, driven by growth of the Vita Coco Coconut Water up 25%, benefiting from strong growth in the coconut water category and improvements in our own available inventory and service levels. We also saw 102% growth in our other products category, primarily representing the positive impact from Vita Coco Treats. Our branded scan results in the United States were very strong, although slightly behind category growth due to the drag in our scans, primarily created by the changes in the Walmart set late last year. Our Walmart trends improved slightly during the quarter but were still down high single to low double digits, creating an estimated low single-digit drag on our total U.S. branded scan trends in the quarter. We've had preliminary discussions with Walmart about the next potential reset. Based on those discussions, we expect an improvement in distribution with a joint goal of attracting coconut water category shoppers to Walmart. If these plans are implemented, we believe that Walmart will become a growth engine for our brand in 2026 and beyond. The second quarter saw the impact of the private label transition that we expected and referenced in February. The private label business remains strategically important to us, and we continue to bid on select private label opportunities. We believe we are very competitive in these bids and recently secured new private-label business, which will benefit us in 2026. Our gross margins were down in the quarter relative to last year due to a number of inflationary cost factors, including higher ocean freight rates, cost of goods inflation due primarily to the addition of new capacity and the initial impact of the 10% baseline tariff, which started to hit our P&L late in Q2. We believe ocean freight rates are still elevated relative to historical levels, and we are operating primarily on spot rates with some fixed price arrangements on certain lanes to secure capacity. With U.S. tariff outcomes uncertain, we expect short-term volatility in ocean freight rates but believe that rates should decline on average through the balance of the year. 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 to cover more lanes. Entering the third quarter, we have significantly more Vita Coco Coconut Water inventory than at the same time last year and expect a very strong third quarter for our branded business as we lap major service issues and reduced promotional activity from last year. In the second half of the year, we plan to use our improved inventory position to drive consumer trial and to secure incremental promotional opportunities where available. We believe that the strong category growth is a positive indicator for future growth and supportive of our long-term branded growth algorithm. For 2026, we have secured adequate production capacity to support continued branded growth and to support our expected private label relationships. Our planned U.S.-based price increase in May to cover inflationary cost of goods pressures produced an approximately 7% increase at U.S. food retail according to Circana over the quarter. The initial consumer reaction to these increases has been in line with our expectations, but it is too early to fully understand any long-term price elasticity impacts. We're currently assuming that the baseline U.S. tariff rate of 10% continues, which, as we noted last quarter, applies to approximately 60% of our global cost of goods sold. We are currently executing U.S. retail price increases to cover the unmitigated tariff costs of this baseline rate. With our diversified supply chain and the important role of coconut water in our consumers' lifestyles, a healthy category and our brand strength, we believe that we can navigate any additional tariff impacts. Given the uncertainty on the timing and sizing of any additional tariffs above the baseline 10% rate and the uncertainty of the lead time and impact of implementing any mitigating activities, we are not including any such announced tariffs in our outlook. We have a global diversified supply chain sourcing primarily from the Philippines and Brazil with some additional sourcing from Thailand, Vietnam, Sri Lanka, and Malaysia, which gives us flexibility to react to any long-term tariff changes. To summarize, our category is very healthy, our brand is performing, and our supply chain is supporting growth and provides us with flexibility to mitigate the potential tariff impacts long term. We are confident in our team's ability to execute and deliver on our plans. And for the full year 2025, our confidence in the category and Vita Coco brand trends remains very high. We believe that longer term, we will benefit when ocean freight rates return to historical levels, and 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.

Corey Baker, CFO

Thanks, Martin, and good morning, everyone. I will now provide you with some additional details on the second quarter 2025 financial results and our outlook for the full year. For the second quarter of 2025, net sales remained very healthy, increasing $25 million or 17% year-over-year to $169 million. Vita Coco Coconut Water grew 25%, partially offset by private label declines of 25%, where we have begun to see the impact of the private label losses we discussed last quarter. On a segment basis, within the Americas, Vita Coco Coconut Water increased net sales 22% to $120 million and private label decreased 37% to $15 million. Vita Coco Coconut Water saw a 21% volume increase and a slight net price/mix benefit, while private label sales were driven by a 34% decrease in volume and a 3% decrease in price/mix. For the second quarter of 2025, our International segment continued to deliver strong results with net sales up 37% and Vita Coco Coconut Water growing 43%, driven by strong growth across all our major markets. Private label sales increased 29% due to strong sales of private label coconut water. For the quarter, consolidated gross profit was $61 million, an increase of $3 million versus the prior year. On a percentage basis, gross margins finished at 36% for the quarter. This was down approximately 450 basis points from the 41% reported in Q2 2024. This decrease in gross margins resulted from higher year-on-year ocean freight rates, higher finished goods product costs, and the 10% baseline tariff that began to impact our gross margins late in the quarter. This was partially offset by favorable product mix. Moving on to operating expenses. SG&A costs increased $7 million to $36 million in the quarter, driven by increased marketing expenses, higher people-related costs, increased reserves for bad debt, and overlap of rent expense for our new office. Net income attributable to shareholders for the quarter was $23 million or $0.38 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 our larger unrealized gain on derivatives and a lower year-on-year tax rate, partially offset by higher year-on-year SG&A spending. Our effective tax rate for Q2 2025 was 19% versus 25% last year, which is primarily driven by discrete tax benefits and a favorable geographic mix of pretax profits. Q2 2025 adjusted EBITDA was $29 million or 17% of net sales compared to $32 million or 22% of net sales in 2024. The decrease in adjusted EBITDA was primarily due to the higher SG&A expenses, partially offset by higher year-on-year gross profit. Turning to our balance sheet and cash flow. As of June 30, 2025, our balance sheet remained very strong with total cash on hand of $167 million and no debt under our revolving credit facility. Our accounts receivable increased by $39 million versus December 31, 2024, primarily due to increased net sales within the quarter. We exited Q2 with a very strong category in the Americas and Europe, healthy inventory levels, exciting innovation, and confidence in our team's execution and our Vita Coco brand. Our updated guidance reflects our current best assumptions on marketplace trends, competitor price actions, and our expected price elasticity under a 10% baseline tariff environment and an assumption that ocean freight rates will soften through the balance of the year. We are confident in our ability to continue to deliver strong top-line performance and therefore, are raising our full year net sales guidance to between $565 million and $580 million. We expect gross margins at the midpoint of our prior guidance range or approximately 36%, with SG&A growing low- to mid-single digits, resulting in full year adjusted EBITDA of $86 million to $92 million. We are now expecting Vita Coco Coconut Water sales to grow in the high teens with incremental growth coming from Vita Coco Treats, partially offset by the weakness in our private label business. We expect strong Q3 net sales performance as we lap the inventory shortages of last year, with a tougher Q4 net sales comparable due to the benefit of distributor and retail inventory replenishment. We are expecting gross margins for the full year of approximately 36%. We expect gross margins to be sequentially lower in Q3 due to the timing of tariff impacts and mitigating pricing actions as well as temporarily higher ocean freight rates flowing through the P&L, with Q4 gross margin sequentially improving. We expect full year SG&A to increase in the low- to mid-single digits due to increased people investments, including increased incentive and stock compensation and other focused investments to support the delivery of our growth objectives as we aim to maintain our strong branded growth momentum into 2026. And with that, I'd like to turn the call back to Martin for his closing remarks.

Martin F. Roper, CEO

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 a strong brand 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 second quarter 2025 prepared remarks, and we will now take your questions.

Operator, Operator

Our first question is from Kaumil Gajrawala with Jefferies.

Kaumil S. Gajrawala, Analyst

I have a couple of questions. First, regarding revenue, it's doing extremely well. Can you clarify how much of that is related to inventory rebuilding now that supply is in a favorable position, compared to trends that are similar to same-store sales? Also, regarding Treats going national, is that already in progress or has it been implemented? Are there any specific details in the figures related to that contribution that we should know about?

Martin F. Roper, CEO

Sure. On the retail scan side, it's clear that we have a healthy inventory. However, we also had a healthy inventory in Q2 of last year, so I wouldn't say the scan trend data reflects easy comparables. We will see that in Q3, but not in Q2. Regarding Treats, we launched it nationally towards the end of Q1 in the U.S., and it was also introduced in the U.K. We have good coverage, although we didn't achieve complete retailer authorizations everywhere. For a first step, that was very good. The shipments you see are primarily due to the Q1 launch, which benefited from inventory fill. Q2 is likely more indicative of ongoing performance, but until we see repeat purchases, we can't determine the ongoing sales rate. We are pleased with our progress, and as we mentioned, it has contributed positively to our total branded scan volumes in Circana in the U.S. It's important to note that Circana, depending on the purchasing method, may only report Coconut Water, so Treats, being a coconut milk-based beverage, might not be included in the visible trends of the Vita Coco brand based on the available data.

Michael Kirban, Executive Chairman

Just to add a couple of things. I think in terms of growth, household and consumption per household are growing really fast, and that is probably the biggest driver of the growth as the categories mean streaming. And then in terms of Treats, like Martin mentioned, yes, we had a national rollout, but it was with specific retailers. So there's a lot of distribution to be had, which will be pitched coming up in the next month or 2 for next resets, which would be next March. So a lot of opportunity to still build distribution on it.

Corey Baker, CFO

The one thing I'd add on the top line growth, Kaumil, is the international business is very, very strong, growing over 40% in the quarter and not really impacted at all by any out of stock, small amount. It is mostly consumer growth in the U.K. and Germany.

Kaumil S. Gajrawala, Analyst

Okay. That brings up another question about how we should be thinking about scale, mix effect, and margin. I noticed that your SG&A has increased, alongside significant investments in the brands. Are you spending in anticipation of growth, or are you aiming to catch up, given the substantial growth and the need for a higher base of investment? How are you approaching this in both domestic and international markets?

Corey Baker, CFO

From an SG&A perspective, we are investing a bit ahead of the curve and making strategic investments. We've discussed Germany with increased SG&A and marketing as we plan to expand, but we're not overdoing it. This isn't a matter of catching up. To support the growth we're experiencing in both markets, we've also been investing in supply chain resources to ensure we have the right supply, quality, and factories. So, SG&A is growing in the mid-single digits, investing ahead of the curve, but nothing overly excessive.

Bonnie Lee Herzog, Analyst

I had a couple of questions on your guidance. First, you raised your top line growth and essentially narrowed your gross margin guidance, but maintained your EBITDA guidance, which I guess, implies less leverage. So just trying to understand maybe what changed there? And then second, your full year EBITDA guidance does imply a lot faster growth in the second half of about, I think it's 22% versus the decline you saw in the first half. So I realize the year-over-year compares are easier in the back half, but just hoping you could give us just a little bit more color on the drivers of this expected acceleration.

Martin F. Roper, CEO

Sure. Well, let me take it and then maybe Corey can cover for what I might miss. I think we obviously feel very good about our branded top line, and I think that's driving the increase in our guidance as we look out on the back of the year. Certainly, in the second half of the year, we're going to benefit from very easy comparisons in Q3 relative to the out of stocks that we had last year and then a little bit of a swing back in Q4 where Q4 last year, we benefited from replenishing the inventory. But we have some pretty easy comparisons. So we feel pretty good. I think on the gross margin side, frankly, we struggle with guidance. We're saying it's approximately 36% and we're pretty obviously comfortable with that. Obviously, that's a tightening, I suppose, from 35% to 37%, but I don't think we really wanted to do 35.5% to 36.5%. It felt sort of silly. But what I would say on the cost side is we've got a number of factors going on. There's obviously some higher ocean freight that we experienced in Q2 from the spike that occurred in the indexes that will obviously flow through into our P&L in the second half of the year. That was unexpected when we last talked to you. We now have a little better clarity on the timing of the tariff impact relative to mitigating actions, and there's a little bit of a lag on the mitigation actions. So that's also a headwind on the cost of goods side. So that's pulling cost of goods higher, I suppose, than perhaps we would have anticipated, and that's how the whole thing sort of fell together. And Corey if I missed anything?

Corey Baker, CFO

Maybe just 2 things. One, we talked about in the prepared remarks, the pricing is starting to hit the market, but there's some factors and some mix that drove it a little bit later than expected, which pressures the Q3 margins a bit. And then our SG&A we talked about last quarter is a bit more aligned with our sales curve throughout the year. And part as we look into the back year, we do see some increased incentive comp and stock comp that drives a little bit of variance. But overall, that's how the guidance came together.

Bonnie Lee Herzog, Analyst

It sounds like you’re feeling optimistic about the revenue and the momentum you have planned for the second half of the year. However, there seems to be some cautiousness due to the declining freight rates and other cost challenges that you're encountering. Is that the right way to interpret your outlook?

Corey Baker, CFO

Yes. With what Martin was saying, there was higher ocean freight earlier in the summer that will flow through in Q3. So our ability to manage freight rates continues to drop, much of that will flow into next year at this point. So we don't see as much ocean freight tailwind as maybe you would think this year.

Christian Junquera, Analyst

You have Christian for Pete. First, how would potentially higher tariffs above the 10% baseline figure affect EBITDA this year and possibly next year? How confident are you that you will see 10% tariffs?

Martin F. Roper, CEO

So I think what we would say on tariffs is, obviously, there's a lot of uncertainty. We're currently operating under a 10% baseline tariff environment. And that is included in our guidance. Last quarter, we discussed how the tariffs would apply to our U.S.-based product cost. And we provided, I think, the estimate that you wanted to back into it, you took 6% of our global cost of goods dollars, and that would approximate to the dollar cost that we think the tariffs would equate to. And that's sort of how you back into an estimate of tariff impact, let's say, at a 10% rate, you would come up with a number. Also last quarter, we said if the retaliatory rates were applied, we expected the tariffs based on our current sourcing to be in the low 20s as a percentage rate. Now obviously, since then, the announcements that have been happening haven't really aligned with retaliatory. So that's why we're not really talking about that. Many of the announcements that have happened have been announced frameworks for trade agreements that we haven't seen details yet. And because we haven't seen details yet, and we don't really know what's happening on August 1, we're just not including it in any forward-looking statements. On the positive side, obviously, everyone's talking and deals are being negotiated that potentially are lower than the retaliatory rates. Also on a positive side, there has been anecdotal comments that maybe commodities and agricultural goods that aren't available in the U.S. might be treated differently. But it's all hypothetical, and there is no specifics. And so very hard to comment on other than to say that we're operating the business and focusing on growth and assuming that once we know what the long-term impact on our business is, we can then make long-term plans to deal with it and to mitigate it to the best of our ability. So that's how we're thinking about it. And right now, we have as good as information as everyone else does in the market.

Christian Junquera, Analyst

Okay, I understand. I have one more question. A recurring theme in consumer packaged goods company earnings this year has been that Hispanic shoppers are spending less, which is creating challenges for companies. I know your company has a significant presence among Hispanic consumers, yet you continue to achieve strong sales growth. Could you share any insights on the Hispanic consumer or explain why you seem to be unaffected by this trend? That's all from me.

Martin F. Roper, CEO

So I don't think our consumer insights are robust enough to sort of pull it all apart. But what we would say is our convenience store trends are very strong. And I think that's visible in the available scan data. And to us, if there was weakness in the Hispanic consumer as it relates to our brand, that's probably where it would show up. I think that's where it's showing up on the beer side for those guys who are talking about it. So we don't see it. I think for us, our consumers, while we do over-index to Hispanic, Asian, and African-American, we also tend to over-index to what I would call average wealth to above-average wealth households or income households. So we probably are a little less exposed to the lower income brackets where maybe that is occurring. But that's, again, just a guess. We don't have good data on it. And frankly, given our trends, we're just focused on continuing them.

Eric Des Lauriers, Analyst

Congrats on continued very strong top line results here. First one for me on private label. Just trying to help kind of just square the outlook here. So we had some lost regions that impacted Q2. I think I heard from Martin that you perhaps won some additional private label contracts recently. I guess just kind of from these levels in Q2 seasonally adjusted, should we expect modest growth going forward? I guess just overall, how to think about potential volatility in private label in the coming quarters?

Martin F. Roper, CEO

Yes, that's a great question, Eric. As we mentioned earlier this year, we encountered some losses in various regions across multiple retailers, which first became apparent in Q2. Looking ahead, the situation is quite complicated. For example, in Q3 of last year, we faced inventory challenges related to private label, making year-over-year shipment comparisons much easier. I anticipate that the remainder of the year will be quite volatile on a comparable basis. Q2 reflects all the known losses we are aware of and likely serves as a good indicator for what future trends may be. However, private label is currently performing well, showing growth in that category. Additionally, we have secured another piece of business that we are excited about, though it won't have an impact until 2026. So, for your modeling, it's a complicated situation with some uncertainty year-over-year, but we do have news of a new contract that will benefit us in 2026.

Eric Des Lauriers, Analyst

No, that's all very helpful, and I appreciate that. And just a quick one on Walmart. Remind us the timing around shelf resets here and when you may have clarity on if Walmart will go through with these expanded distribution plans?

Michael Kirban, Executive Chairman

The timing is in October, specifically in the fall.

Martin F. Roper, CEO

If they stick to last year's timing, right? Last year's timing was sort of November-ish. And if they stick to an annual cadence, then we would hope to make progress on this in early Q4.

Eric Des Lauriers, Analyst

Great. And then just last one for me on Treats and kind of innovation as a whole. So very nice contribution from Treats early on, that's rolling out nationally. Can you just kind of comment on how you see the potential for the coconut milk-based beverages kind of as a category? As you guys kind of look at this, I mean, would this mostly be something similar to the Treats where it's a bit of a sweetener like indulgent option as opposed to some of the better-for-you aspects of Coconut Water? And I guess just overall, I mean, should we kind of be thinking of a shift in focus from you guys on the innovation front towards more coconut milk beverages and away from perhaps isotonics and energy drinks?

Michael Kirban, Executive Chairman

We are definitely not moving away from our core offerings. Our focus remains on coconut water as an excellent sports drink and a refreshing option that serves many purposes, from hangover remedies to cocktail mixers to smoothies. When it comes to coconut milk-based beverages, this is somewhat of a new venture for us and for the U.S. market. It's a rapidly growing trend that has gained significant traction in other regions, particularly in Asia, where coconut milk serves as a base for various indulgent treats found in coffee shops. The best-selling items usually include coconut milk-based refreshments. We believe this trend will continue to flourish in North America, Western Europe, and globally, and we aim to play a significant role in that expansion. This presents another growth avenue without detracting from our core product, Vita Coco Coconut Water, which still has substantial growth potential as a hydration option.

James Ronald Salera, Analyst

Corey, I have a quick housekeeping question. You mentioned that the gross margin for the fourth quarter is expected to improve sequentially from the third quarter. Should we anticipate that it will still be lower than the second quarter level? Could you please clarify that for us?

Corey Baker, CFO

We haven't provided the quarterly expectation in Q4, especially given the size is generally lower year-on-year throughout the year than us because of the size of the volume within the quarter and some of the fixed investments driving higher cost. But what we do see in the more short term is that impact of tariffs at the beginning of Q3 with the delay of pricing, driving it down from Q1. And then you get to the overall approximately 36% for the year based on the remainder of the year.

James Ronald Salera, Analyst

I understand that forecasting can be challenging due to the changing news and tariff rates. From what has been announced, the negotiated rate for the Philippines seems to be 19%. So, if we start with a 10% baseline in your guidance and the deal for the Philippines goes through as reported, it’s likely that the projected 36% gross margin for the full year might be a bit lower if we account for the 19% tariff on the Philippines, not considering what happens with Brazil.

Michael Kirban, Executive Chairman

I would say that, yes, the 19% has been announced. But yesterday, Commerce Secretary, Howard Lutnick on Squawk Box said that President Trump has agreed to set 0 tariffs for those natural resources that are not grown in the U.S. in trade deals. So we don't know. But if we're looking at 19% from the Philippines and if our average goes from 10% to 19% or 20% or whatever it is, we feel that we can manage that between margin mix in '26 with more branded and branded growth. Ocean freight rates declining, which we see happening and continuing to happen and potentially some additional pricing. We think that if that does happen, we can manage the business accordingly.

Martin F. Roper, CEO

Our guidance is based on a 10% ongoing assumption and does not include any other factors. Once we have clarity on the guidelines or rules, we can take necessary actions. However, there will be some delay in understanding these details. We believe that in the long term, we will be fine. In the medium term, we should avoid making hasty decisions based on announcements that may not affect us, as we still lack important specifics. Our main focus is to continue driving top-line growth, which will ensure our success.

James Ronald Salera, Analyst

Great. And then maybe just one quick follow-up on U.S. private label sales. I think in the quarter, they were just shy of $15 million. Is that a good dollar run rate to think about just kind of for the remainder of the year as we progress forward, kind of in that $15 million range or any incremental upside, downside to that?

Corey Baker, CFO

The 2 pieces, what Martin said, Q2 is somewhat representative of the ongoing business. As we talked in the past, private label is hard to capture because the revenue is recorded a little bit differently. But we do see growth in the category overall and faster growth in private label across the category, plus the incremental business coming that Martin referenced in '26. So we would hope that, that number continues to grow from a baseline.

Robert Ottenstein, Analyst

Congratulations on your continued success. I would like to delve deeper into that success and gain insights into your marketing and category development efforts in the U.S. What specific demographics are you targeting to increase household penetration, if that is indeed your goal? Which categories are you aiming to capture more from, or perhaps which occasions are you focusing on? It seems that four or five years ago, your competition was primarily with juice and water, but now it might be more about sports drinks. Is this trend occurring? I'm also interested in understanding more about your brand-building marketing strategies, especially since you are expanding into convenience stores and seeing positive results.

Michael Kirban, Executive Chairman

Yes. I think it's a lot of what we've been doing the last several years and continuing to do that. So if we think about where we're pulling from, it remains pretty equal from 3 major categories, right? It's sport drinks, it's enhanced bottled water, and juice. And that continues. We are, from a marketing perspective for the first time in a few years, really focusing a little bit heavier than we might have historically on the sports drink aspect, both through our marketing and our communication, and that seems to be working, and we're excited about that. And then in terms of demographics, we're growing across all demographics. We're focusing our marketing efforts on young multicultural more urban consumers, but it is spreading across all demographics. We're seeing significant growth in truck stops in the middle of the country. I mean the category just seems to be working very well everywhere, which is exciting, but the focus of our marketing efforts remains the same that it's been in the past couple of years. Pretty similar. I mean, there are regional nuances in terms of focus periods, whether it be Ramadan in the U.K. and these type of things that might be different focuses to Hispanic consumers in the U.S. during certain periods. But for the most part, it is the same. It is targeting young multicultural consumers.

Martin F. Roper, CEO

Yes. And I think one slight difference in Europe is the category is underdeveloped relative to the U.S. And I think that's a huge opportunity for us. So there's a lot more category building and education we have to drive in Europe. And certainly, that message is being received pretty well because the growth rates are very healthy. And it's very early in category development phase.

Michael Lavery, Analyst

I wanted to discuss freight rates. You mentioned you expect them to ease later in the year. Can you provide some insight into how much you are contracting or securing for 2026? In recent quarters, you seemed to be more exposed to spot rates, and the contracted levels weren't as favorable. Has that situation changed? What is your current forward position?

Martin F. Roper, CEO

Yes. Looking ahead, we don't have significant visibility on ocean freight rates. We still believe they are currently above long-term averages, with more downward pressure than upward pressure due to increased capacity and rising demand. The situation remains quite volatile, but we feel that we can manage this volatility within our profit and loss. Consequently, we prefer to rely primarily on spot rates rather than entering into forward contracts because of the observed downward pressures. A major change in the ocean freight landscape would occur if the Suez Canal route were to reopen for Asia to Europe and Asia to the East Coast. This route remains closed, despite earlier expectations of its reopening. However, we maintain that it will eventually open, which could lead to a decrease in rates as additional capacity is generated by shorter transit times. We are currently on the sidelines regarding this situation, which we are comfortable with, and while we believe we can manage the volatility in our P&L, it could still impact our gross margins from quarter to quarter if that volatility persists. I think we're pleased with the increased Annual Contract Value, but we are concerned about the rate at which it's growing. In the convenience store sector, there are a few major accounts that contribute significantly to reaching the 20 ACV mark, but much of the business comes from independent decision-makers with smaller, fragmented decisions. We are making progress. The positive aspect is that our sales narrative and our growth rates are strong, and where we've secured incremental distribution, like with 7-Eleven, it has been successful and represents a valuable product in that location. This is a message we can communicate to the broader community. Overall, we are currently comfortable with the situation, but we recognize there is still work to do to sustain momentum. However, we feel very optimistic about our current performance in the convenience store sector and the positive trends we are seeing.

Glenn West, Analyst

This is Glenn West on for Jon Andersen. You guys have hit on a lot. So maybe if I could just ask a couple of clarifying points on what you've talked about related to private label and then the Walmart situation. So on private label, you talked about the new business coming in 2026. I'm just curious if that business is largely going to offset the losses we've seen and maybe we can expect to see kind of a substantial rebound in that segment? Or maybe how we can think about how that segment is going to perform kind of in 2026?

Martin F. Roper, CEO

We haven't shared specifics about the size of the business. What I can say is that it's a large customer, but we won't truly understand the volumes until they actually occur, as this is a potential new program for them. We are planning to support a variety of outcomes. Regarding whether it would replace existing business, it's tough to say. It's a significant customer, and there are many possible scenarios. So, we can't really confirm if it will replace anything. It would certainly be a positive outcome for us if we could maintain private label in the U.S. at least at a flat level next year, or even see growth. This growth could stem from new accounts and ongoing expansion in the private label sector. However, it's too early to make any predictions, and given the complexities involved, especially since private label decisions can be unpredictable, I prefer not to provide any forward-looking guidance on that.

Glenn West, Analyst

Okay. Worth a shot. And then on Walmart, do you guys have any early reads kind of on the velocity of the SKUs you have in that new juice aisle? Because I know you frequently said it's higher foot traffic. So are those SKUs that you have kind of turning much faster or any sort of insight you have there?

Corey Baker, CFO

Yes. Our foot traffic and velocities at Walmart have increased by over 50 percent. It's a bit challenging to assess traffic levels due to a significant reduction in SKUs, but we are pleased with the performance of the SKUs that remain in the stores. Overall, we are satisfied with Walmart's performance, especially in light of the distribution challenges. In the locations where we have maintained distribution, our brand continues to excel. We are optimistic about Walmart's future.

Michael Kirban, Executive Chairman

And the potential expanded distribution in that aisle with higher velocities.

Martin F. Roper, CEO

Thank you, Michelle. I'd just like to thank everyone for joining our quarterly earnings call today and look forward to talking to you again in 3 months. Everyone, have a great day. Thanks.

Operator, Operator

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