The Vita Coco Company, Inc. (NASDAQ:COCO) Q4 2023 Earnings Call Transcript February 28, 2024
The Vita Coco Company, Inc. beats earnings expectations. Reported EPS is $0.11, expectations were $0.09. The Vita Coco Company, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by, and welcome to The Vita Coco Company Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentations, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s call is being recorded. I would now like to turn the conference to your host, John Mills, Managing Partner at ICR. Please go ahead.
John Mills: Thank you, and welcome to The Vita Coco Company fourth quarter and full-year 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 fourth 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, 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. Good morning, everyone. Thank you for joining us today to discuss our fourth quarter and full-year 2023 financial results and our commercial plans and performance expectations for 2024. I want to start by thanking all of our colleagues across the globe for the record year they delivered in 2023 and 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. 2024 marks our 20th year in business, and although I’m super proud of all we’ve accomplished in these 20 years, I have never felt more excited and energized for what lies ahead. We’ve solidified our category leadership in coconut water over the last 20 years, which enters 2024 as the fastest growing category in beverages in the U.S. and the U.K. markets.
And although, coconut water is still a nascent category representing just 3% of the sales in the U.S. water aisle, over the last 13 weeks, it has driven 20% of the dollar growth. I believe our recent success is confirmation that our current strategies are working. Our focus on growing the coconut water category and our focus on consumer conversion and retention, supported by the strength of our coconut water supply chain, has grown our overall sales at a 15% CAGR for the last four years, with our Vita Coco Coconut Water net sales growing at a 20% CAGR. In 2023 our flagship Vita Coco Coconut Water remained the major driver of consolidated net sales, producing 14% full-year growth against the prior year. Importantly, this growth was driven by full-year volume growth of 11%, demonstrating that consumer demand for our brand is very healthy.
In the United States, according to Circana, we continued to gain share, finishing the year with 51% value share on a 52-week basis. Total coconut water category retail sales grew 16% in 2023, with Vita Coco growing 19% for the full-year in value and 14% in volume. Our 15% net sales growth in 2023 exceeded our expectations and partially benefited from an extra Vita Coco promotion with a club retailer in the spring, some temporary distribution gains for private label product and some bulk commodity sales that were opportunistic. Even without these effects, our growth was still very strong. Our priorities for 2024 remain very similar to what we prioritized last year and we will double-down on the initiatives that have been driving our growth. Our coconut water business remains very strong and we expect it to grow volume in-line with category growth of mid-to-high-single digits.
We estimate the impact of the previously announced decision on our private label oil business and the non-repeating gains in 2023 that I just mentioned to create a current year drag on our business, which mostly offsets the strong core business health. While we expect to grow net sales at a slower rate in 2024, I remain excited about the EBITDA growth potential and believe that we should return to healthier net sales growth rates in 2025 once these drags to our business performance are behind us. We’re focused on what we can impact to drive category and brand growth, and the primary focus is on expanding occasions for coconut water and the appeal of our Vita Coco brand across all demographics and markets as we continue to expect the category to develop into a household staple across both North America and Western Europe.
Our efforts will focus on consumer education around the many usage occasions for coconut water, whether it be at the breakfast table, after a workout, in a cocktail, or after a few too many cocktails. Coconut water is one of the very few beverages that have such broad and diverse usage occasions. Expanding these occasions should be the main driver of expanding households and increased usage. We will continue to drive our multi-pack strategy, which grew scans 45% in the U.S. in 2023 to gain share of shelf space and increase basket size for our U.S. retailers. Multi-packs in coconut water remain significantly underdeveloped versus other categories. And as the largest brand in the category, we firmly believe we are uniquely positioned to seize this opportunity.
Currently, our top selling multi-packs, our 330ml, 12 and 18 packs, have only reached 55% ACV, which leaves us considerable runway for growth. We also believe that we have a big opportunity to gain share of the coconut water category by improving our share of the canned segment. In 2023, in the U.S. canned coconut water represented approximately 31% of the coconut water category volume in retail track channels, so gaining share in this segment will enable us to further gain share in the broader category. In 2023, we expanded distribution of Vita Coco Coconut Juice in cans with a focus on convenience stores, achieving U.S. ACV in this channel of 24%. In 2024, we intend to continue to gain distribution in convenience, while expanding this product format to select mass and food retailers.
We will also continue to focus on gaining additional distribution for Vita Coco Farmers Organic, which is priced at a premium to our regular SKUs and offers organic coconut water in an attractive shelf-stable package. Farmers Organic allows us to trade up consumers in price while keeping them in our brand family. In 2023, we achieved U.S. ACV distribution in MULO of 50% for Farmers Organic, leaving a significant room to continue driving distribution. Additionally, we see an opportunity to continue gaining share in the private label coconut water segment at new and existing accounts. The 21% revenue growth in private label that we delivered in 2023 highlights the strength of our supply chain to compete in this segment. Although we expect near-term net sales headwinds from the decision affecting our private label oil business, we are confident in the long-term strategic value of private label coconut water to our business.
Outside of the coconut water category, we’re very excited about expanding the availability of PWR LIFT, our protein infused isotonic to include the New York area, where our distributor relationships and street activation strength should allow us to make significant progress in validating this opportunity. In 2023, we began to see real progress in our strategy to grow our international business. Our net sales increased 17% on the year, which was led by strong growth in Europe. In our largest market, the U.K, we reached over 80% share of the coconut water category according to Circana and grew retail scans 23% on a year. The team across Europe has done an amazing job driving growth of the category in the U.K. and growing our business into Western Europe.
I recently had the opportunity to spend time with the team in the market and I was blown away by the strength of the brand and the consumer reaction that I saw, which highlighted the opportunity that we have. I asked myself, why can’t the coconut water category and the Vita Coco brand be as big across Western Europe as it is in North America in five years? We believe that the category is underdeveloped in Europe, but has real momentum, giving us an opportunity to accelerate our growth. I believe with the right investments, we can deliver meaningful growth to the organization through our international businesses. Related to our environmental and social initiatives, we recently updated our investor web pages with greater detail on all of our ESG initiatives, and we’re proud of the progress so far.
We’ve continued to see great progress in our farming communities where we support building schools and classrooms, training more coconut growers on sustainable practices and investing in the distribution and planting of coconut trees. We’re in the process of registering the Vita Coco Community Project as a charitable organization, which will allow us to involve more partners and accelerate our impact more than ever before. It is hard to believe that in this, our 20th year, that coconut water is the fastest growing category in beverage, growing volume 12% in a beverage category that is declining and growing approximately twice as fast as the energy drink category. I’m more excited than ever and believe that we are well-positioned to take advantage of coconut water category tailwinds to continue our strong branded growth and to deliver on our long-term targets.
We have stepped up investments in our brands and in the long-term health of our business, and 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. I believe that we are in stronger position than we’ve ever been to accelerate our growth. And now, I will turn the call over to our Chief Executive Officer, Martin Roper.
Martin Roper: Thanks, Mike, and good morning, everyone. I’d like to start by thanking our team across the globe for an outstanding year in 2023. I’m very pleased with the performance we delivered this year and the momentum we carry into 2024. We achieved net sales growth of 15% in 2023, driven by strong Vita Coco Coconut Water, which grew 14%. This total company net sales performance represents our third consecutive year of double-digit growth. Overall, we have achieved 74% net sales growth since 2019. Our fourth quarter 2023 net sales were up 15% with Vita Coco Coconut Water up 8% and private label up 36%. In 2023, we delivered strong growth in both the Americas where Vita Coco Coconut Water net sales grew 15% for the full-year with 12% volume growth, reflecting strong consumer demand and internationally where our net sales grew 17%, benefiting from the branded growth in Europe and some key private label wins, partially offset by some volume softness in Asia.
In the fourth quarter of 2023, our Vita Coco Coconut Water net sales grew 8% versus Q4 of 2022, slower than our full-year trend, which benefited from an incremental branded promotion at a customer in the spring. We also saw an acceleration of private label coconut water sales, driven by a combination of distribution gains, soft prior year performance and consumer shifting resulting from lower year-on-year private label pricing. We continue to see strong overall consumer demand for our category. We believe the strong functional benefits of coconut water combined with our marketing efforts communicating the numerous usage occasions for our products is leading to this growth. Within the growth, we have seen similar consumer behavior that other CPG companies have talked about.
There is a segment of consumers who are seeking value either through value in multi-packs or private label, while another segment is less impacted and is still willing to pay for premium brands and functionality. We believe our dual pronged strategy of being a strong premium brand with expanding multi-pack availability and being a major private label supplier positions us well to benefit from both effects. Moving on to margins, gross margins maintained the improvement seen in prime quarters as transportation costs normalized during the year and our supply chain operated efficiently and effectively. This is perhaps also best seen by our year-end inventory levels, which were significantly down versus year-end 2022 as the supply chain operated largely without disruption in 2023, which was not true in 2022.
It was a great year for revenue, margins and cash flow, driven by improved profitability and the inventory correction. We believe that our year-end inventory levels were slightly lower than optimum, partially due to stronger sales finish to the year than we expected. We are working to build inventory to acceptable levels to support our key summer selling and promotional periods. Reiterating what Mike said, we are confident in our underlying business and we believe we are well-positioned for a strong 2024 despite the headwinds we face, with multiple commercial initiatives to reduce strong branded topline growth and improve profitability and a long time commitment to grow the category and our share. Year-to-date in Circana U. S. scan data, our Vita Coco brand is up 9% in retail sales dollars through February 18, 2024, demonstrating that we are starting the year with good momentum.
We believe our commercial plans for this year should produce net sales in 2024 between $495 million and $505 million with expected Vita Coco Coconut Water growth in the high-single-digits and strong private label coconut water net sales expected to offset the drags Mike spoke about, that collectively represent a 6 percentage point to 8 percentage point revenue headwind. On 2024 cost of goods, outside of transportation, we are confident in our ability to manage our inflation through scale and productivity as we have done in recent years. On the transportation front, we entered the year with some contract coverage on key lanes, but significantly lower levels of commitment than prior years, as the contract rates that we were offered was significantly higher than spot rates available to us.
Starting around the New Year, we saw some spot cost increases for all ocean freight rates from Asia and then more significant cost increases when carriers started to route away from the Suez Canal. We intend to monitor how spot rates move relative to any contract offers that we receive and enter into contracts only when we think the offers make sense for us. As of today, rates remain elevated, but remain significantly below those that we experienced in 2021 and 2022. Obviously, the disruption to ocean freight markets as it relates to shipments from Asia to Europe and East Coast of America is quite recent, and that’s still evolving. Based on rates we are currently being charged and our assumptions on the duration of this disruption, we are comfortable we can manage this pressure with a combination of market pricing and cost discipline and deliver on the full-year guidance that, Corey, will detail.
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 you with some additional details on the full-year 2023 financial results. I will then discuss the drivers of our outlook for the 2024 full fiscal year. For the full-year 2023, net sales increased $66 million or 15% year-over-year to $494 million driven by Vita Coco Coconut Water growth of 14% and net sales and private label growth of 21%. On a segment basis within the Americas, Vita Coco Coconut Water’s strong performance at retail increased net sales 15% to $317 million, while private label increased 17% to $103 million. Vita Coco Coconut Water benefited from 12% volume growth and 3% net price mix benefit, while private label increased 25% of volume, which was partially offset by price mix changes driving full-year net sales growth of 17%.
For the full-year, our International segment net sales were up 17% with Vita Coco Coconut Water growth of 8%, where strong growth in Europe was partially offset by volume softness in Asia. Private label revenue grew 46%, which is a result of new business gains at large European retailers. For the year, the International segment represented 13% of total company net sales, which was flat to prior year. On a full-year basis, consolidated gross profit was $181 million up $77 million versus prior year. On a percentage basis, gross margins were 37% on the full-year, an improvement of approximately 1,300 basis points over the 24% reported in full-year 2022. The increase resulted mainly from decreased global transportation costs, increased volumes and improved branded pricing, which was partially offset by price mix effects within private label products.
Gross margins in the fourth quarter were 37.5% versus 24.4% in the prior year quarter. The quarter performance is representative of an improvement of global transportation cost and branded pricing we’ve seen throughout the year. Moving on to operating expenses. Full-year 2023 SG&A cost increased 24% to $124 million primarily reflecting investments in sales and marketing expenses and increased people expenses, including incentive compensation. Net income attributable to shareholders for the full-year 2023 was $47 million or $0.79 per diluted share compared to $8 million or $0.14 per diluted share for the prior year. Net income for the year benefited from increased gross profit, partially offset by SG&A costs for the full-year, a lower year-on-year impact from unrealized FX derivatives and higher year-on-year tax expense, our effective tax rate for 2023 was 19.5% versus 28% for the prior year.
Full-year adjusted EBITDA, our non-GAAP measure, which is defined and reconciled in our press release, was $68 million or 13.8% of net sales in 2023, up from $20 million or 4.7% of net sales in 2022. The increase was primarily due to the gross profit improvements previously discussed, partially offset by the planned investments in SG&A. Turning to our balance sheet and cash flow. As of December 31, 2023, we had total cash on hand of $133 million and no debt under our revolving credit facility compared to $20 million of cash and no debt as of December 31, 2022. The strong cash generation in the year was driven by the increased net income of $47 million in the year and strong working capital management but provided [$50 million] (ph) primarily from reduced inventory, which Martin discussed earlier.
Late in December, we began a share repurchase program in connection with the previously announced $40 million authorization. As of December 31, 2023, we had repurchased 30,000 shares for $773,000 As of February 28, 2024, the Company has repurchased a total of 421,544 shares under the program for an aggregate value of approximately $10 million. As we turn to 2024, we expect net sales between $495 million $505 million which is based on category growth of mid-to-high-single-digits with our coconut water business growing in-line with the category, partially offset by the impact of the previously announced decision on our private label oil business and the cycling of temporary private label distribution and the opportunistic commodity sales. We are continuing to build additional commercial initiatives to improve our topline performance.
We expect gross margins on the full-year 36% to 38% based on our current best assumptions for ocean freight costs, reflecting margin improvement over 2023, offset slightly by the impact of the current ocean freight market, which would begin impacting our P&L in Q2. We expect disciplined SG&A spending throughout 2024 with SG&A roughly flat to slightly declining year-on-year, reducing our guidance of adjusted EBITDA of $74 million to $78 million. We may adjust our SG&A spending if we see improvements in ocean freight 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, fund further share buyback activity or to invest in our business for the 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’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 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 fourth quarter prepared remarks and we will now take your questions.
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