The Vita Coco Company, Inc. (NASDAQ:COCO) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good day, and thank you for standing by. Welcome to the Vita Coco Company First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a Q&A session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand over the conference to your first speaker today, Clay Crumbliss with ICR. Clay, the floor is yours.

Clay Crumbliss: Thank you, and welcome to the Vita Coco Company First 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 first-quarter earnings release issued earlier today. This information is available on the Investor Relations section of the Vita Circo Company’s website at investors.thevitacococompany.com. Also on the website, there is an accompanying presentation to 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 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 is my pleasure to now turn the call over to Mike Kirban, our Co-Founder and Executive Chairman. Mike?

Michael Kirban: Thanks, Clay, and good morning, everyone. Thank you for joining us today to discuss our first quarter 2023 financial results. Our commercial plans for 2023 are current expectations for full-year ’23 performance and long-term growth. I want to start by thanking all of our colleagues across the globe for their continued commitment to the Vita Coco Company 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 in the better-for-you functional beverage market, enabled by our category leadership in coconut water.

Better for you functional beverages includes, by our definition, juice, sport drinks, and flavored waters, which collectively in U.S. retail represent over a $30 billion addressable opportunity. We believe that we can source consumption from these beverage categories and occasions to fuel future growth for both our Vita Coco brand and a portfolio of adjacent current and future innovations. As the coconut water category leader, our responsibility is also to grow the coconut water category by increasing household penetration and usage occasions and by expanding the availability and visibility of the category while continuing to grow our category share through great execution. I think our success over the last 3 years is a testament to our focus on consumer conversion and retention, supported by the strength of our coconut water supply chain and sales execution.

With gross margins and profitability now recovering, we’re well positioned to build a better beverage platform with a portfolio of complementary brands, and I believe that our long-term financial goals of mid-teens net sales growth and mid- to high-teens adjusted EBITDA margin remain achievable. I say this each quarter, but as time passes, I become increasingly excited that we are well-positioned to take advantage of the category tailwinds to continue our strong growth trajectory and to improve our margins. We’re off to a strong start in 2023. In the first quarter, we saw 17% growth of Vita Coco Coconut Water net sales, driven by branded volume acceleration, supplemented by the ongoing benefit of pricing actions taken last year. In the United States, according to Circana, which was formerly known as IRI in the last 13 weeks retail scans, Vita Coco and the coconut water category are growing faster in retail sales in both dollars and volume than most other major beverage categories.

Our Vita Coco Coconut Water retail dollar sales were up 22%, and our market share for the quarter improved to 52%, with the coconut water category growing at 17%. Increasing household penetration remains a key part of our growth strategy. According to Numerator, we grew Vita Coco’s household penetration in the U.S. to 10.8% for the 52 weeks ending March 31, 2023. That’s up approximately 60 basis points over the last year. While we are pleased with the gains so far, we aren’t stopping there. We believe that we have plenty of room to grow our households further as total household penetration for the coconut water category is currently only 22% compared to penetration for the cranberry juice category at 55% and over 80% for orange use according to Numerator.

In addition, we believe that there is significant opportunity for increased coconut water consumption occasions and for improved availability of our products as there remains significant distribution opportunities for our Vita Coco brand in C-store, food service, and on-premise. In addition to our distribution opportunities with our canned coconut juice product, our farmers’ organic offering and our shelf-stable Vita Coco coconut milk dairy alternative. These opportunities plus our brands over-indexing to multicultural households and to younger consumers, suggests a pathway for multiyear double-digit Vita Coco growth based on demographic tailwinds and distribution opportunities. Looking to 2023, I’m happy to announce that our commercial initiatives, which we outlined last quarter are progressing according to our expectations.

In our investor deck, we have laid out how the major Vita Coco initiatives are contributing to our retail scan trends. As you can see, our expansion of multipack availability in the United States is driving most of our growth in the relevant channels with strong growth from 4-pack 500 ml and the expansion of our 12-pack 330 ml distribution. Encouragingly, we’re seeing relatively limited cannibalization of single serves by the multi-packs. Our distribution gains for Vita Coco Farmers Organic are providing consumers with a new premium option in the shelf stable set and adding nicely to our overall scan sales. Our expansion of Vita Coco coconut juice in can to broader convenience store distribution is progressing, and we have planned summer marketing and sales activities to ensure trial and visibility for this initiative.

The retail ACV distribution measures show that we still have lots of room for distribution growth on all of these packs. Finally, our previously announced collaboration with Diageo, Vita Coco spiked, launched during the quarter. It is too early to repeat purchase rates, but everything appears on track with our and Diageo’s expectations. We believe that this and other opportunities to support Vita Coco Coconut Water as an on-premise or at-home mixer are important initiatives to generate further trial of coconut water and expand coconut water consumption occasions. Beyond these core commercial initiatives, we continue to promote Vita Coco Pressed and Vita Coco Pineapple as attractive entry points for consumers into coconut water, particularly in the central part of the United States, where we under-index in household penetration.

We’re also expanding distribution of Vita Coco coconut milk in the shelf-stable non-dairy set and seeding the availability of our Vita Coco Barista product to more coffee shops after positive launch with Alfred Coffee on the West Coast earlier this first quarter. Our Power List launch in Southern Texas continues to build momentum and support our learning on how to succeed in the enhanced isotonic category. We have dedicated market development teams working hand-in-hand with our DSD partner, KDP, to achieve success in this market. Related to our environmental and social initiatives, you hopefully saw that we released our 2022 impact report last month. We’ve continued to see great progress in our farm and communities through the Vita Coco project, which with our charitable partners supports building schools and classrooms training more coconut growers on sustainable practices and investing in the distribution and planting of more coconut trees.

We believe our efforts to plant coconut seedlings is increasingly important, both to the long-term economics of our farmers, but also to our sustainability goals. So we recently announced our seedlings for sustainability program with the objective to plant over 10 million seedlings. We remain committed to our environmental initiatives as a core value of the Vita Coco Company, and we expect to communicate our environmental roadmap in more detail at a later date once we have validated our goals and timeline for achieving them. Finally, I want to reiterate my excitement that after 2 tough years of very challenging transportation market dynamics, our economics are starting to improve, and we have visibility to a return to more normal gross margins and profitability.

We believe that this uniquely positions us as one of the few fast-growing profitable beverage companies of our size with the talent and commercial capabilities to maintain growth, to innovate new opportunities, and longer-term to potentially act as an acquirer of complementary beverage brands that could benefit significantly from our relationships, capabilities and financial resources. As I stated last quarter, we also see 2023 as a year where we expect our net sales growth and gross margin improvement to allow us to invest in a disciplined way against our long-term growth opportunities while still delivering significant improvement in profitability and cash generation. 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 first quarter of 2023, we achieved net sales growth of 14%, driven by strong Vita Coco Coconut Water growth of 17% with private label up 7%. This performance was achieved against a very strong first quarter last year, where Vita Coco Coconut Water net sales grew 38%. In the Americas, our Vita Coconut water net sales grew 17% for the quarter, including 15% volume growth, affecting strong consumer demand, single-digit contribution from price increases, the impact of our 2023 commercial initiatives and better inventory availability on certain SKUs than this time last year. Versus Q4 2022, our retail sales trends have accelerated with a 22% dollar growth rate in Q1 2023 in the U.S. Circana retail scan data.

The acceleration is across all tracked channels and is built on a healthy balance of velocity growth and distribution gains and it’s potentially benefiting from our healthy inventory and improved service levels. Internationally, we are seeing similar growth of Vita Coco Coconut Water with 16% volume growth for the quarter. Turning to margins. In the first quarter of 2023, our gross margin was 31%, which represents a significant improvement over the 20% reported in first quarter last year and a sequential improvement over the 24% in the fourth quarter of 2022. This improvement was primarily driven by more favorable ocean freight and domestic transportation costs plus the benefit of branded pricing taken in fourth quarter last year. During the quarter, we were able to stabilize the supply chain and normalized inventory levels, which also helped our gross margin after last quarter’s unusual domestic transportation costs.

We have not yet seen the full benefit of current ocean freight rates, which appear to be slowly returning to historic levels on most routes. This should be more visible in the second and third quarters as those benefits flow to our P&L. As we’ve discussed in previous quarters, we remain selective on entering into ocean transportation contracts, except where we need to guarantee capacity and expect to return to our historic approach of contracting for some of our needs once the contract offers are more competitive with spot prices than they are today. Reiterating what Mike said, we are confident in our underlying business, and we believe we are well positioned for a strong 2023 with multiple commercial initiatives to produce strong branded top-line growth while the improving transportation cost environment and product mix between branded and private label, should greatly improve our margin structure, profitability, and cash flow.

Our first quarter results were at the high end of our expectations on volume, net revenue, gross margin and adjusted EBITDA. Of course, one good quarter does not make a year, and the first quarter is typically a less important quarter to our full-year results in the second and third quarters. We are adjusting our full-year net sales and non-GAAP adjusted EBITDA guidance to reflect the first quarter and current trends while maintaining our full-year gross margin guidance. We expect full-year Vita Coco Coconut Water growth in the mid-teens, and our private label net sales are now expected to be slightly positive for the full year. We expect a very strong second quarter, driven partially by significant promotion activity for Vita Coco Coconut Water with a key retailer.

This incremental promotion could depress our gross margin slightly for the quarter relative to prior expectations. On cost of goods for 2023, we are seeing inflation increases on most non-transportation finished goods cost elements due to general global inflation in packaging, labor and energy costs. We’re endeavoring to mitigate these drivers through efficiencies and sourcing optimization initiatives. As Mike mentioned, our full-year plan includes an expected increase in marketing and sales execution investments, reflecting our belief that 2023 is a year to invest in our growth initiatives now that supply chain disruptions are diminishing. As always, we will invest in a disciplined manner where we see the opportunities to build the brand for the long term, and we could adjust our planned spend and our promotions depending on the effectiveness of our programs and how our cost of goods develop.

We are very happy that 2023 is off to a great start, and the entire team is fully energized behind the opportunities ahead of us during the peak summer selling season. With that, I will turn the call over to Corey Baker, our Chief Financial Officer.

Corey Baker: Thanks, Martin, and hello, everyone. Let me provide you with some additional details on the first quarter financial results. I will then discuss the drivers of our outlook for the 2023 full fiscal year. For the first quarter 2023, net sales increased $13 million, up 14% year-over-year to $110 million, driven by Vita Coco Coconut Water growth of 17% and net sales and private label growth of 7%. On a segment basis, within the Americas, continued strong retail performance of Vita Coco Coconut Water increased net sales by $10 million to $69 million, while private label increased $2 million to $25 million. Vita Coco Coconut Water benefited from 15% volume growth and 2% net price mix benefit. While private label benefited from a favorable product mix, driving 9% net sales growth on volume declines of minus 3%.

I’ll remind you that quarterly trends for private label tend to be impacted by timing of orders and shipments, and we would suggest using rolling 12-month trends as a better indication of private label business health. Our International segment had a strong first quarter. Reported net sales were up 10% with constant currency growth of 18%. Growth was led by the Vita Coco Coconut Water up 14%, offset by declines in private label and other. Total international volume growth was 11%, with the Vita Coco Coconut Water delivering 16% volume growth, private label and other case equivalent volume down 3%. For the quarter, gross profit was $34 million, up $15 million versus prior year and gross margin was 31%, up from 20% in prior year. These increases are benefiting from stabilization in global transportation rates, increased supply chain efficiencies and the benefits of 2022 price increases.

Moving on to operating expenses. First quarter 2023 SG&A costs increased by $2 million, which reflects investments in incremental resources to support the growth of the company, including increased personnel costs as well as an increase related to the change in the methodology to estimate current expected credit losses. Net income attributed to shareholders for the first quarter of 2023 was $7 million or $0.12 per diluted share compared to $2 million or $0.04 per diluted share per prior year. Net income for the quarter benefited from positive net sales and gross margin improvements discussed previously, partially offset by SG&A costs. In addition, the quarter benefited from a $7 million decrease in the unrealized gain related to derivative instruments, which was partially offset by an increase in tax of $1.2 million, reflecting an ETR of 21.4% on the quarter.

Non-GAAP adjusted EBITDA in Q1 2023 was $9 million, up from a loss of $3 million in Q1 2022. The $12 million increase was primarily due to the significant cost of goods per case equivalent decreases and increased volume growth and pricing, partially offset by increased SG&A spending. Turning to our balance sheet and cash flow. As of March 31, 2023, our strong operating performance has led to an improvement in cash flow, resulting in total cash on hand of $29 million and no debt under our revolving credit facility compared to $20 million of cash and no debt as of December 31, 2022. The increase in net cash was primarily driven by net income. Working capital for the first quarter 2023 used $1 million of cash as inventory decrease of $20 million were offset by a $21 million increase in accounts receivable due to timing of customer payments.

The inventory decrease was the result of sales volume growth, coupled with the normalization of the global supply chain, allowing us to more efficiently manage our days on hand and reduce in-transit inventory. We expect inventory to remain at more normal levels in terms of days on hand for the balance of 2023. As Martin communicated, we are confident in our full-year plans and are adjusting our guidance for full year 2023. We now expect net sales growth in 2023 of between 9% and 12%, which does not assume any further Vita Coco Coconut Water price increases for the balance of the year. We believe that the pricing executed at retail in 2022 is sufficient to deliver our targeted results, and we will remain flexible in our approach to pricing as the year unfolds.

Our guidance for 2023 full-year gross margins remains between 32% and 34%. We anticipate that our gross margins will benefit as lower ocean freight rates on our branded products sold and our 2022 brand price increases flow through our P&L, and our branded volume growth continues to outperform private label growth. Due to incremental retailer promotions activity in the second quarter, we expect gross margins to gradually increase to the balance of the year. The revised non-GAAP adjusted EBITDA guidance is $54 million to $59 million. This reflects our current plans for SG&A, which in total represents higher growth over 2022 GAAP reported SG&A than our expected net sales growth. The increase in SG&A is to cover planned increased marketing and sales execution costs and higher employee costs, which include bonus and stock compensation.

A quick note on items below operating income. Given our strong cash generation, we reviewed our approach to cash management and investment and expect to start seeing the benefit in our P&L in the second quarter. From a tax perspective, we expect the full-year ETR to be broadly consistent with our first-quarter rate. Given our expectations of improved profitability, we plan to more closely evaluate our capital allocation with a continued focus on prioritizing long-term growth. Before I move on, I wanted to talk about the shelf registration statement on Form S-3 we filed with the SEC this week. The S-3 was filed to fulfill our contractual obligations with certain shareholders pursuant to our registration rights and agreement and will also provide flexibility and optionality for the company and our long-term shareholders and partners to more easily access the capital markets in the future.

It will also allow the company greater flexibility to raise capital if the right investment opportunity arises. Although there are no plans to do so at this time, the registration statement has not yet been declared effective and thus, no shares may be offered or sold under the until it becomes effective. Before closing, I’d like to provide some reflections on my first couple of months at Vita Coco. Overall, I’ve been extremely impressed with the organization. It is a passionate and performance-driven team with an incredible knowledge of the business, their passion for the company and the excitement for the future is infectious. The finance organization is fantastic. We have a diverse and highly skilled team that is well-positioned to support the organization to the next page of growth.

As we continue to mature as an organization, I see opportunities for improved efficiency and decision-making through elevated data and analytics supported by improved systems. I’ve only become more excited to be part of the team as we deliver on the long-term vision Mike and Martin have outlined. With that, I’d like to turn the call back 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. We are excited about our key initiatives to drive growth in 2023 and the recent improvement in ocean transportation costs and capacity should provide us after a very challenging 2 years. In 2023, we intend to invest in marketing and sales execution to maintain or accelerate our growth and to continue to build our long-term capabilities. We have strong brands and a solid balance sheet, and we are well-positioned to sustain our growth for the long term. Thank you for joining us today, and thank you for your interest in the Vita Coco Company. That concludes our first quarter prepared remarks, and we will now take questions.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from Bonnie Herzog with Goldman Sachs.

Operator: Our next question comes from Bryan Spillane with Bank of America. Bryan, the floor is yours.

Operator: Our next question is coming from Michael Lavery with Piper Sandler. Michael, you have the floor.

Operator: Our next question comes from Chris Carey with Wells Fargo Securities.

Operator: Our next question comes from Robert Ottenstein with Evercore ISI. Robert, you have the floor.

Operator: Our next question comes from Jon Andersen with William Blair.

Operator: Our next question comes from Eric Des Lauriers with Craig-Hallum Capital Group.

Operator: I would now like to pass the call back to management for closing remarks.

Martin Roper: Great. Well, thank you for joining us on the call. We very much appreciate the interest, and we look forward to talking to everyone again after our second quarter or if not before, if we bump into you in about. Everyone, have a great day.

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