The Vita Coco Company, Inc. (NASDAQ:COCO) Q3 2023 Earnings Call Transcript

The Vita Coco Company, Inc. (NASDAQ:COCO) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Hello, and welcome to The Vita Coco Company’s Third Quarter 2023 Earnings Conference Call. My name is Deedee, 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 Clay Crumbliss with ICR.

Clay Crumbliss: Thank you and welcome to the Vita Coco Company's third quarter 2023 earnings results conference call. Today's call is being recorded. With us are Mr. Mike Kirban, Executive Chairman; Martin Roper, Chief Executive Officer; and Corey Baker, Chief Financial Officer. By now, everyone should have access to the company's third quarter earnings release issued earlier today. This information is available on the Investor Relations section of the Vita Coco Company's website at investors.thevitacococompany.com. Also, on the website there is an accompanying presentation of our commercial and financial performance results. Certain comments made on this call include forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

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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 the filings with the SEC for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Also, during the call, we will use some non-GAAP financial measures as we describe business performance. The SEC filings, as well as the earnings press release and supplementary earnings presentation, provide reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures and are available on our website as well.

And with that, it's my pleasure to turn the call over to Mike Kirban, our Co-founder and Executive Chairman. Mike?

Mike Kirban: Thanks, Clay and good morning, everyone. Thank you for joining us today to discuss our third quarter 2023 financial results and our current expectations for full-year 2023 performance. I want to start by thanking all of our colleagues across the globe for their continued commitment to the Vita Coco company. We recently received recognition as one of fast company's brands that matter for 2023. This is a testament to the incredible work by the entire team and their dedication to our mission of creating ethical, sustainable, better-for-you beverages that uplift our communities and do right by our planet. Before addressing our performance and expectations, I want to reiterate that we believe we have a strong strategic position enabled by our category leadership in coconut water within the better-for-you functional beverage category, which in America's track channels is in excess of $30 billion, according to Circana.

We continue to be very happy with our performance in 2023. We believe that our strategy of delivering coconut water growth through increased usage occasions is working and I'm excited about the progress we're making with both our commercial initiatives and our marketing efforts. In the third quarter, we saw consolidated 11% net sales growth against prior year, bringing our year-to-date net sales growth to 15%. We remain very bullish on the coconut water category in the United States, where according to Circana, the category is posting one of the healthiest growth trends in beverages, outperforming major categories like energy, CFDs, sport drinks and bottled water in dollar growth rates, while also being one of the few categories growing in volume and price.

For the quarter, Our Vita Coco coconut water brand is leading the coconut water category growth with U.S. retail dollar sales up 23% with our market share improving to 51% versus the same period last year, while the category is growing 19%. We believe we're benefiting from the success of our multipack focus and our marketing initiatives that are supporting coconut water growth. Our brand has never been stronger and our focus on consumer expansion via occasion-based initiatives has continued throughout the summer. In the quarter, we built on our extremely successful Roblox activation, the Coconut Grove, an immersive experience on Roblox where consumers can farm and harvest virtual coconuts. Over 26 million people visit us in the metaverse, driving over 94 million impressions to-date and introducing a new generation of consumers to our brand.

We also targeted the core hydration occasion this quarter at the U.S. Open, partnering with American Tennis Superstar Chris Eubanks and other players generating over 2.5 million targeted impressions at this prestigious event. Our summer cocktail initiative was very successful in continuing to cement Vita Coco's role as a mixer. We saw over 300 million impressions through PR and social as a result of our outstanding execution with several high-profile Hamptons locations. To capture those that may be enjoyed too many cocktails, we amplified our hangover occasion over Labor Day with a broad influencer activation delivering over 14.6 million impressions of authentic content. Finally, we announced our partnership with Mexican-American award-winning singer, songwriter, actress, and activist, Becky G.

Becky's community-first approach aligns perfectly with our brand values. She has 116 million combined followers on social channels and Spotify and recently came off her first national Mi Casa, Tu Casa Tour. We cannot be more excited to partner with this incredible artist to grow our brand. Before handing the call to Martin, I'd like to provide an update on our private label business. As we indicated during our second quarter earnings call, we had expected to cease to supply a major customer on private label coconut water and private label coconut oil, with the transition potentially happening as early as the fourth quarter of 2023. We also indicated that this customer is important for our branded products, and we expressed our commitment to support a smooth transition.

Since our last update, this customer has requested that we continue our partnership, and we now expect to continue supplying a significant portion of their private label coconut water needs, a decision that we believe is reflective of their valuing our supply chain for its outstanding reliability and quality. This is a significant change to our prior expectations for the private label business with this key customer, and we are excited to continue this partnership and explore ways to further expand it over time. As further evidence that our private label supply chain is one of the best in the world, all of our private label revenue growth in the third quarter versus the same period last year came from accounts outside of this major customer, including the benefits of new retailer relationships around the globe.

Finally, I'd like to reiterate my excitement for our accomplishments this year and our momentum for the balance of the year and into 2024. We're stepping up investments in our brands and in the long-term health of the business. We believe that we are uniquely positioned as one of the few fast-growing profitable beverage companies of our size with the talent and commercial capabilities to maintain growth, to execute on new opportunities, and to act as an acquirer of complementary beverage brands that could benefit significantly from our relationships, capabilities, and financial resources. And now I'll turn the call over to our Chief Executive Officer, Martin Roper.

Martin Roper: Thanks, Mike, and good morning, everyone. For the third quarter of 2023, we achieved net sales growth of 11% driven by strong Vita Coco coconut water growth of 8%. This performance was achieved against a very strong third quarter last year where Vita Coco coconut water net sales grew 14%. Our strong execution and our consumer engagement efforts continue to produce strong results at retail with a 23% dollar growth rate of Vita Coco coconut water in third quarter 2023 in the U.S. Circana scan data and a 17% volume growth rate. The strong performance is across all track channels as shown in our investor deck with strength in underdeveloped regions that we believe is indicative of future growth potential. As shown in our investor deck, the growth is built on a healthy balance of velocity growth, pricing, and distribution gains.

Internationally, we are seeing strong growth in private label net revenue and continued Vita Coco net revenue growth resulting in 14% international net sales growth for the quarter. We continue to see strong Vita Coco coconut water growth at retail and according to Circana U.K., our retail dollar share of the total coconut water category has risen to over 81% in the most recent four-week period. Turning to margins, in the third quarter of 2023, our gross margin was 41%, which represents a significant improvement over the 26% reported in third quarter last year and an improvement over the 37% in the second quarter of 2023. This increase over last year was driven primarily by reduced transportation costs and improved Vita Coco branded pricing offset slightly by private label mix and pricing.

The increase over the second quarter was due to lower cost of goods with current more normal transportation costs that started earlier this year now fully reflected in this quarter's reported cost of goods along with seasonally higher Vita Coco coconut water pricing. After the significant decrease in spot ocean freight rates in the second-half of last year, and in the first quarter of this year, we have seen a more stable environment for the last six months. At the end of the third quarter, spot rates for most lanes were close to historic pre-COVID levels. Turning to our outlook, building on the very strong year-to-date results, we are raising our 2023 full-year guidance for the third time this year. Based on our expectations for the fourth quarter, which includes the retention of the private label coconut water business that Mike mentioned, the retail scans for Vita Coco being very healthy, and strong private label trends.

We are raising our full-year revenue guidance to growth of 13% to 15% over prior year and adjusted even to $64 million to $67 million. Kori will provide more details on our outlook. We're really happy with our current performance and excited for our long-term future. With that, I will turn the call over to Corey Baker, our Chief Financial Officer.

Corey Baker: Thanks, Martin, and good morning, everyone. I will now provide some additional details on the third quarter financial results and the drivers of our improved outlook for the 2023 full-year. Starting with revenue, we continue to see strong performance in the third quarter with net sales of $138 million, representing an increase of $14 million, or 11% year-over-year. This was driven by Vita Coco coconut water growth of 8% and private label growth of 18%. Within the America segment, Vita Coco coconut water's strong retail performance resulted in $90 million of net sales, an increase of $7 million over the prior year period, while private label increased $3 million to $28 million. The growth of Vita Coco coconut water on the quarter continued to be volume-led, with 7% volume growth and 2% net price mix benefit.

Vita Coco coconut water benefited from strong consumer demand, which is reflected in the 23% retail dollar growth for the quarter. Private label experienced a strong quarter, driving 14% net sales growth on volume growth of 36%. Private label benefited from a combination of new strategic customer wins, expanded distribution and velocity gains in existing stores, with approximately 80% of the volume growth and 100% of the revenue growth and private label occurring outside our largest U.S. customer. Where the strength of our supply chain and quality of our product and service has over the last two years generated new customer wins and expanded distribution opportunities, which are now visible in our reported shipments. We saw underlying private label performance at retail that reflected strong consumer demand for the category and normal elasticity of retail price reductions year-on-year for private label.

We believe that America's net sales performance on the quarter was negatively impacted by timing of customer orders and shifts in inventory levels out of our distributors. We believe that year-to-date performance remains a better proxy of our underlying consumer trends for both our branded and private label businesses. Year-to-date net sales of our branded portfolio has grown 16%, versus private label growth of 13%. Our international segment continued to perform very well. Reported net sales were up 14%. Growth was led by private label up 42%, with growth led by new distribution with strategic retailers in Western Europe. Vita Coco coconut water also had a strong quarter growing net sales 7%, led by strength in the U.K., whereas Martin mentioned, we continue to gain share at retail.

For the third quarter, consolidated gross profit was $56 million, up $24 million versus the prior year quarter, and gross margin was 41%, up from 26% in prior year, as our pricing remains strong and our global supply chain continued to operate at a high level of efficiency and benefit from transportation cost improvements relative to the unusual spike of the last two years. Moving on to operating expenses, third quarter 2023 SG&A costs increased by $9 million over the prior year to $33 million, which reflects investments in marketing and increased people costs. As previously indicated, our full-year plan includes an expected increase in marketing and sales execution investments as we invest versus the lower spending in 2022, when we were margin pressured.

In the third quarter, we have begun to see an acceleration of expenses as our initiatives land in the market with the year-to-date SG&A spending now slightly ahead of revenue. We are very pleased with the consumer response to our investments, which we plan to continue through the balance of year. We expect to see a continued elevated rate of spending relative to our growth in net sales in Q4 as we complete our planned marketing and an organizational investments. Net income attributable to shareholders for the third quarter of 2023 was $15 million, or $0.26 per diluted share, compared to $7 million, or $0.13 per diluted share for the prior year period. Net income for the quarter benefited from positive net sales and gross margin improvements discussed previously, partially offset by increased SG&A costs and a net $5 million unrealized loss related to derivative instruments, and an increase in tax of $2 million reflecting an ETR of 20.9% on the quarter.

Non-GAAP adjusted EBITDA in Q3 2023 was $27 million, up from $12 million in Q3 2022. The $15 million increase was primarily due to a year-over-year reduction in the cost of goods per case equivalent and increased volume growth and pricing partially offset by increased SG&A spending. Turning to our balance sheet and cash flow, as of September 30, 2023, our strong operating performance year-to-date has led to an improvement in cash flow, resulting in total cash on hand of $95 million, compared to $20 million on hand as of December 31, 2022. The increase in net cash was driven by net income and reductions in inventory. Working capital year-to-date in total has provided $19 million of cash as inventory decreases of $34 million and accounts payable increases of $18 million were offset by a $37 million increase in accounts receivable, due to timing of customer payments and the normal seasonality of our business.

The inventory decrease was the result of sales volume growth, coupled with a normalization of the global supply chain, allowing us to more efficiently manage our days on hand and reduce overall inventory. Our inventory ended Q3 at the low end of our targeted range. We expect inventory days on hand to increase by the end of the year. Looking now to the balance of 2023, despite more difficult multi-year comps, we remain confident in our business, which is allowing us to raise our full-year net sales guidance to growth of plus 13% to plus 15% based on our expectation of continued strong consumer demand for our branded business leading to full-year mid-teen branded growth and their current expectation of our private label business, which as we have said is benefiting from new relationships and the change in plans for the transition that we disclosed last quarter.

Our gross margin guidance for the full-year remains unchanged at 35% to 37%. The retention of the private label relationship and its mixed impact on our business is expected to reduce Q4 margins sequentially from the Q3 peak. Our revised non-GAAP adjusted EBITDA guidance is $64 million to $67 million. This reflects continued prudent investment in SG&A, leading to full-year adjusted EBITDA growth above our net sales growth. As we look forward to 2024, we remain confident in the strength of our business and remain excited by our business momentum and the growth prospects for our brand. While still very early in our 2024 planning with lots of moving pieces, we want to update the estimated negative net revenue impact of the private label transition that we talked about last quarter.

In our preliminary modeling, we now believe that 2024 net revenue should grow low-single-digit percentages, with gross margin percentage expected to be approximately flat versus full-year 2023, which collectively should produce mid-teens growth of adjusted EBITDA over our current 2023 guidance. As we have done in the past, we will provide our first full-year 2024 guidance when we report our full-year 2023 numbers. Finally, as noted in our earnings release, on October 30, 2023, the company's board of directors approved a share repurchase program authorizing the company to repurchase up to $40 million of the company's common stock. The authorization gives us increased flexibility to strategically deploy capital on behalf of our shareholders. I will now turn it over to Martin for his closing remarks.

Martin Roper: 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. Thank you for joining us today and thank you for your interest in the Vita Coco Company. That concludes our third quarter prepared remarks and we will now take questions.

Operator: Thank you. Management will now take questions from research analysts. [Operator Instructions] Our first question comes from Jon Andersen of William Blair.

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