The Vita Coco Company, Inc. (NASDAQ:COCO) Q1 2024 Earnings Call Transcript

The Vita Coco Company, Inc. (NASDAQ:COCO) Q1 2024 Earnings Call Transcript May 1, 2024

The Vita Coco Company, Inc. beats earnings expectations. Reported EPS is $0.2424, expectations were $0.19. COCO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to The Vita Coco Company’s First Quarter 2024 Earnings Conference Call. My name is Steven. 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’d now like to hand the call over to John Mills with ICR.

John Mills: Thank you, and welcome to The Vita Coco Company first quarter 2024 earnings results conference call. Today’s call is being recorded. With us are Mr. Mike Kirban, Executive Chairman; Martin Roper, Chief Executive Officer; and Corey Baker, Chief Financial Officer. By now, everyone should have access to the Company’s first 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 the call, including 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 the 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 the website as well.

And with that, it is my pleasure to turn the call over to Mr. Mike Kirban, our Co-Founder and Executive Chairman.

Michael Kirban: Thanks, John and good morning, everyone. Thank you for joining us today to discuss our first quarter 2024 financial results and our commercial plans and our improved performance expectations for 2024. I want to start by thanking all of our colleagues across the globe for our continued incredible performance and for their commitment to The Vita Coco Company and to our mission of creating ethical, sustainable, better-for-you beverages that uplift our communities and do right by our planet. Our first quarter results reflect that our strategies are working and that our customer relationships are as strong as ever. Our priorities of driving growth in the coconut water category and initiatives to grow our share of the category are visible in the healthy retail scans in our major markets.

In the first quarter, according to Circana, the Vita Coco brand grew 9% in the U.S. and in the U.K., the Vita Coco brand grew 16%. In addition to strong branded retail growth, we’re experiencing strong growth in private label coconut water volume, which validates our strategy in private label and allows us to play in the value space as well as our dominant position in premium coconut water. Our first quarter net sales were in line with our expectations, with the gap of branded shipments to scans due to the timing of promotions and cycling of opportunistic promotional activity in 2023, which Martin will comment more fully. Our priorities for 2024 remain the same as those we communicated in our year-end results. We aim for our coconut water business to grow volume in line with the category growth of mid to high single digits, with the continuing transition out of a key private label oil relationship providing a headwind, offsetting expected strong coconut water growth.

Our commercial initiatives around Vita Coco multi-packs, Vita Coco Farmers Organic and Vita Coco Juice continue to perform very well as seen in U.S. Circana scans that we highlighted in our investor deck, which was posted to our investor relations website today. We have also invested in growing our core business in a way from home, which is an under-penetrated channel for us. We’ve recently assembled the larger, more experienced food service team, which we hope will allow us to deliver greater penetration in this channel. I’m excited about the progress we’re making in new areas to grow our business over the long term. We recently launched PWR LIFT in the New York City area and are happy to see it in our local Bodegas and to be able to sample and promote it in our home market.

This is back to my roots of hustling the streets and I’m reminded of not only how hard it is, but how fun it is and how successful we have been historically with this approach. Our New York team is certainly having fun building this brand the old-fashioned way. We also very recently launched Vita Coco Treats, a delicious and refreshing beverage that is a further exploration of where our brand can go. The launch is initially exclusive to Target and although it is too early to tell what velocity will be, we’re very excited with the early scan results. While these two initiatives are not expected to be material to our 2024 results, the results to date give us confidence that our innovation approach should help us meet our long-term growth algorithm for branded net sales mid-teams percentages building on the long-term health of the coconut water category.

Our international business remains healthy with strong performance in Europe led by the UK, offset by weaker shipments in Asia as in-market inventory levels were drawn down. We intend to increase our investment in Europe, particularly Germany and Benelux regions, to gain share of the category there and to help expand the category growth which is still in its early stages of development. On top of the strong business performance, we just released our third impact report, which we believe does a terrific job of laying out where we are and what we are focused on from a sustainability and social impact perspective. I’m really happy that we are maintaining our momentum and that with the creation of the Vita Coco Community Foundation announced last week, we’ll be able to solicit support from our customers and suppliers to potentially further our efforts in these areas.

Twenty years after launching Vita Coco, coconut water remains one of the fastest growing beverage categories both in the U.S. and the UK and Vita Coco is the number one brand. We are well-positioned to lead and grow the category in these markets and to grow our share further through a combination of branded and private label growth in addition to the opportunities that we see in less developed markets that have populations that match our consumer profile. I believe that we are in a stronger position than we’ve ever been to accelerate our growth. And now I’ll turn the call over to our Chief Executive Officer, Martin Roper.

Martin Roper: Thanks Mike and good morning everyone. We are very pleased with our strong start to 2024. We achieved net sales growth 2% in the first quarter of 2024 driven by both Vita Coco Coconut Water and private label coconut water growth. This growth was achieved on top of the first quarter of Vita Coco Coconut Water sales growth of 17% reported in 2023, which benefited from some opportunistic brand promotional events. Importantly, the net sales results are in line with our expectations when we laid out our full year guidance. Our first quarter gross margins were exceptional, benefiting from lower transportation costs and branded pricing effects where promotional cadence was reduced relative to prior years. These gross margins also benefited from the decline in the importance of the private label oil business, which traditionally operated on significantly lower margins.

As expected, our net sales performance was hampered slightly as increased transit times for ocean lanes going around Africa, delayed product arrivals and servicing persistent strong private label coconut water demand ahead of retailer forecasts has been challenging. Both these effects have resulted in lower than optimum inventory levels and less than perfect service levels. We are working to rebuild our inventory in market to more normal levels, but given the length of our supply chain, this will not occur until later this year. The strong private label coconut water demand that we are seeing is, we believe, partially driven by the slightly larger price gaps to branded than at this time last year, and by consumers shifting to channels with a higher penetration of private label coconut water availability.

From a cost side, our finished goods are in line with expectations, but we have seen elevated ocean freight rates ahead of 2023 levels, mainly due to the diversion of shipping away from the Gulf. These costs started in ocean shipments early this year, but appear to have already peaked and now be in slow decline. The rates we are seeing today remain within the underlying assumptions provided in our guidance. Our current approach to ocean freight is to negotiate spot rates monthly on most routes, with limited commitments to longer term contracts where we need to guarantee capacity on certain lanes. We are prepared to enter into longer term ocean freight agreements if we see competitive offers. We have entered into new supply contracts and extensions of existing contracts to support our growing capacity needs and our plans for 2025, and are in discussions on potential additional supply as we remain positive about the long-term growth that is in front of us.

With that, I will turn the call over to Corey Baker, the Chief Financial Officer.

Corey Baker: Thanks, Martin, and good morning, everyone. I will now provide you with some additional details on the first quarter 2024 financial results. I will then discuss the drivers of our improved outlook for the 2024 full fiscal year. For the first quarter 2024, net sales increased $2 million, or 2% year-over-year, to $112 million, driven by Vita Coco coconut water growth of 1%, and net sales and private label growth of 6%. On a segment basis, within the Americas, Vita Coco Coconut Water increased net sales by 1% to $70 million, while private label decreased 3% to $24 million, as we have started to see the impact of the transition of private label oil. Vita Coco Coconut Water saw a negative 3% volume decline, offset by 4% net price mix benefit, while private label increased 4% in volume, which was partially offset by price mix changes, driving year to-date net sales decline of 3%.

Our Americas Vita Coco Coconut Water scan trends remain very healthy, and we believe our shipments in the quarter reflect the absence of some promotional activity and untracked channels relative to 2023 same time period, a decrease in DSD inventory levels during the quarter, and timing of shipments to key retailers. For the first quarter 2024, our international segment net sales were up 20%, with Vita Coco Coconut Water growth of 1%, where strong growth in Europe was partially offset by volume softness in Asia. Private label revenue grew 93%, which continues to benefit from new business gains at large European retailers. On a quarterly basis, consolidated gross profit was $47 million, up $40 million versus the prior year period. On a percentage basis, gross margins were a very strong 42% on the quarter, an improvement of approximately 1200 basis points over the 31% reported in Q1, 2023.

These increases resulted from branded pricing, mix effects within private label products, and decreased global transportation costs. Moving on to operating expenses, first quarter 2024 SG&A cost increased 5% to $28 million primarily reflecting increased people expenses. Net income attributable to shareholders for the first quarter 2024 was $14 million or $0.24 per diluted share, compared to $7 million or $0.12 per diluted share for the prior year. Net income for the quarter benefited from increased gross profit, partially offset by increased SG&A cost, a lower year-on-year impact from unrealized FX derivatives, and higher year-on-year tax expense. Our effective tax rate for the first quarter 2024 was 21%, which was flat to the prior year. First quarter 2024 adjusted EBITDA, our non-GAAP measure, which is defined and reconciled in our press release, was $21 million or 19% of net sales, up from $9 million or 8.2% of net sales in 2023.

The increase was primarily due to the gross profit improvements previously discussed. Turning to our balance sheet and cash flow, as of March 31, 2024, we had total cash on hand of $123 million and no debt under our revolving credit facility, compared to $133 million of cash and no debt as of December 31, 2023. The decrease in the cash position was due to the net increase of working capital of $20 million and the purchase of Treasury shares of $10 million, partially offset by strong net income. Working capital was driven by an $8 million increase in accounts receivable, as well as a $4 million decrease in accounts payable and accrued expenses. Both are due to the seasonality of customer and vendor payments. Inventory increased by $6 million as the inventory delays, Mark discussed earlier have resulted in higher inventory in transit to our markets.

Based on our year-to-day performance and our confidence in the health of the category and our Vita Coco brand, we are raising our full-year guidance. We now expect net sales between $500 and $510 million with expected gross margins for the full year of 37% to 39%, delivering a adjusted EBITDA of $76 million to $82 million. The guidance reflects our current best assumptions of the marketplace and our global supply chain costs. While we are confident in the underlying strength of our business, we are providing a wider range on EBITDA to reflect some uncertainty on the transportation cost side. We will actively manage our promotional activity to balance our product supply and our pricing, which will allow us to deliver the gross margin guidance while absorbing higher ocean freight costs, which will begin impacting our P&L in Q2.

We expect disciplined SG&A spending throughout 2024 with full-year SG&A flat to slightly increasing year-on-year. We may adjust our SG&A spending if we see improvements in ocean fright quicker than expected or if we see productive investment opportunities to strengthen the business for the long term. We anticipate our cash balance will remain healthy through the year, allowing us to fund any potential M&A opportunities that emerge, support further share buyback activity, and continue to invest in our business for long term growth. And with that, I’d like to turn the call back to Martin for his closing remarks.

Martin Roper: Thank you, Corey. To close, I would like to reiterate our confidence in the long-term potential of The Vita Coco Company, our ability to build a better average platform, and the strengths of our Vita Coco brand. We are confident in our ability to navigate the current environment and excited about our key initiatives to drive growth. We have strong brands and a solid balance sheet, and we are well-positioned to compete domestically and internationally. 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 your questions.

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Q&A Session

Operator: Thank you. At this time, we will conduct the question and answer session. [Operator Instructions] Our first question comes from the line of Bonnie Herzog of Goldman Sachs. Your line is now open.

Bonnie Herzog: All right. Thank you. Good morning, everyone.

Martin Roper: Hi, Bonnie.

Corey Baker: Hi, Bonnie.

Bonnie Herzog: Hi. I had a question on your guidance. You just highlighted some timing impacts in the quarter on your Vita Coco, you know, the coconut water. So I guess I wanted to first understand if all of these impacts should unwind in Q2. And then for your full year guidance, what does that imply for Vita Coco water? I think, you know, you mentioned you’re growing in line with the category or hopefully above. So does your guidance imply high single digit growth for your branded coconut water for the year?

Martin Roper: Yes. Hi, Bonnie. Great question. Yes, I think we expect the category to grow high single digits and we would certainly hope that the brand would match category growth very closely. First quarter, there are difficult comparisons to last year on branded shipments and sales and those largely relate to some promotional activity last year that was opportunistic. We had inventory retailers had space and we took it and that did not reoccur this year. And then a little bit just related to timing of shipments to where we’re in a retailer direct shipment environment to there. And then also a little bit to we believe DSD inventory in the U.S. probably was flat down during the quarter where typically we’d build. So a couple of difficult comparisons and that sort of explains in our view the shipment growth number on branded versus the scan growth, which remains very healthy.

Bonnie Herzog: Right. So I guess just to clarify, so that sounds good. So then, are you already starting to see that improve, you know, now we’re in I guess a month into Q2, so you’re feeling good about the full year and kind of starting to see shipments more or less match what you’re seeing in the scanner data moving forward?

Martin Roper: Yes, what I would say is in how we describe the update of our guidance, it’s based on our year to-date knowledge.

Bonnie Herzog: Okay. All right. And then just maybe a second question from me on gross margins. You know, obviously very strong in Q1 and of course, you mentioned Q2 is expected to be dragged by some of the recent increases in ocean freight, et cetera. So curious if you could maybe just provide a little bit more color in terms of the magnitude of the headwind. I mean, I’m just trying to think about Q2 in the context of maybe even last year. Should we assume gross margins in the second quarter? Will they be below last year’s gross margin or is it just kind of a step back from the really high margins you saw in Q1? Thanks.

Corey Baker: Yes. Bonnie, it’s again, it’s hard to call quarter-to-quarter. We updated the full year guidance on what we expect. Q1 was abnormally high with a combination of low ocean freight, no impact yet, higher branded pricing. So we will see that start to step back in the quarter with the highest ocean freight in the quarter, but the kind of detail quarter-to-quarter is harder to call.

Bonnie Herzog: Okay.

Corey Baker: And then we land in that range for the full year, 37 to 39.

Bonnie Herzog: All right. Thank you. I’ll pass it on.

Operator: All right. Thank you. One moment for our next question. Our next question comes from the line of Christian Junquera of Bank of America. Please go ahead.

Christian Junquera: Good morning, everyone. Yes Christian on for Brian. Thanks for taking our question. U.S. retail sales for the — hey, retail sales for the coconut water category are up 9%, which is very strong. Any details on like, what are you guys doing to support this type of growth, increase advertisements that benefiting from all the work you’ve put into the category already, like introducing multi-packs or you guys sourcing share from other hydration options? Just any color you could provide would be helpful. Thank you.

Michael Kirban: Yes. I think we’ve spoken about before we source from multiple categories, right? And that continues as we source from juice, we source from sport drinks and we source from enhanced waters pretty equally. That continues. We see that continuing and demand is there. We’ve talked about the fact that, you know, coconut water is really mainstreaming and becoming a mainstream category and we think that that is playing out and that’s what we’re seeing happening as the category continues to grow and coconut water continues to be the fastest growing category in the beverage outlay.

Martin Roper: Yes. I would also add, I think we’re seeing a healthy category in most of the major markets that we play in. So the UK is growing, we see growth happening from a smaller base in other countries in Europe. So there’s certainly from our perspective, something going on globally in coconut water, in mature economies. So that’s going on. Obviously, our goal is to gain share and to accelerate that growth. And that’s how we invest our money. We’re very focused on driving a new trial education of consumers and new occasions to sort of both increase household penetration and also increased buy rate. And I think all of those efforts sort of show up in our household data as the results that we want to showing up there, right, increased household increase consumption rates. So we’re just going to keep driving that and hopefully that maintains this great momentum.

Christian Junquera: Very helpful. Thanks, guys.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Jim Salera of Stephens. Please go ahead.

Jim Salera: Hi, guys. Thanks for taking our question. I wanted to first ask about some of the flex on marketing, because I think — if I think about the biggest driver of incremental sales, it probably has to come from increased communication of use occasions. And it sounds like the extended shipping times in the lower inventory levels maybe limits, which you guys can do on the incremental ad spend. Should we think about getting inventories refilled first before you can turn up the volume a little bit more on advertising?

Michael Kirban: Yes. Demand is there. And right now it’s about building inventory and being able to support the demand.

Martin Roper: Yes, Jim, as we think about the full year, like we’re going to modulate both our price and promotional cadence, certainly maybe a little bit of marketing spend on channels which directly generate demand, right, like maybe the commerce channels and stuff like that based on what inventory we have available, either promoting items that we have in stock or pulling back a little bit. But that is certainly something we’re monitoring and our expectation is that our supply sort of constraints will ease sort of towards the middle end of the year, but this is something we’re watching closely.