Hello, and welcome to the Vita Coco Company's fourth quarter 2022 earnings conference call. My name is Catherine. 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 would now like to hand the call over to Clay Crumbles with ICR. Please go ahead.

Thank you, and welcome to the Vita Coco Company fourth quarter and full-year 2022 earnings results conference call. Today's call is being recorded. With us are Mr. Mike Kirban, Executive Chairman; Martin Roper, Chief Executive Officer; and Rowena Ricalde, the current Principal Financial Officer of the Vita Coco Company. With us today is also Corey Baker, who joined the company yesterday, and will be appointed as new Chief Financial Officer after the company files its 10-K. 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 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 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?

Thanks, Clay, and good morning, everyone. Thank you for joining us today to discuss our fourth quarter and full-year 2022 financial results, our commercial plans for 2023, and our 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, and their dedication to our mission of creating ethical, sustainable, better-for-you beverages that uplift our communities and do right by our planet. I would also like to welcome Corey Baker to the team. Corey joins us after 16 years with PepsiCo, bringing very relevant finance leadership experience, and is especially familiar with our industry and its many intricate details. I'm confident that he will strengthen our commercial capabilities and provide important leadership and mentoring to our finance teams. We'll have him say a few words after we discuss our operating performance. Before addressing our performance and expectations, let me reiterate that we believe we have a strong strategic position in the better-for-you beverage market through our leading position in Coconut Water, and we believe we have the ability to source consumption from multiple beverage categories and occasions to fuel future growth. As a Coconut Water category leader, our goal is to grow the category by increasing household penetration and usage occasions, while continuing to grow our category share through innovations and distribution gains for our products. I think our success over the last three years is a testament to our focus on consumer conversion and retention supported by the strength of our Coconut Water supply chain. In the last three years, we've grown our Vita Coco Coconut Water net sales 72% in total, notably much faster than our private label business, which grew 22%. Our Vita Coco Coconut Water now represents 74% of our…

Thanks Mike, and good morning, everyone. For the full-year 2022, we achieved net sales growth of 13%, driven by strong Vita Coco Coconut Water growth of 18%. This total company net sales performance comes on top of a particularly strong 2021, when we grew net sales by 22% versus 2020, and it represents our second consecutive year of double-digit growth. Overall, we have achieved a three-year CAGR of 15% since 2019, which is in line with our long-term mid-teens net sales growth target. Our fourth quarter 2022 net sales were up 6%, with Vita Coco Coconut Water up 4%, and private label up 25%. In the Americas, our Vita Coco Coconut Water net sales grew 19% for the full year, including 17% volume growth, reflecting strong consumer demand and low single-digit contribution from price increases, offset slightly by some mix shift impacts to lower net revenue per case equivalent channels. Importantly, for the full year 2022, we grew some non-track channels faster than track channels, which explains some of the difference in shipment growth versus scans. As we solved the inventory out-of-stock issues that we discussed last quarter, we are seeing an acceleration of our sales trends, as is visible in the 21% year-to-date 2023 retail dollar scan growth rate in the investor deck. While we are back in inventory, our commercial teams and distributors are working hard to rebuild any lost distribution and make sure retail shelves are sold again. Internationally, we are seeing similar strengths of Vita Coco Coconut Water, with 11% volume growth for the full-year, while net sales grew 11% as price increases were offset by foreign exchange impacts on our reported revenue. In the fourth quarter of 2022, our Vita Coco Coconut Water net sales grew 4% versus the very strong performance in the prior…

Thanks, Martin, and hello, everyone. I will now provide you with some additional details on the full-year 2022 financial results. I will then discuss the drivers of our outlook for the 2023 full fiscal year. For the full-year 2022, net sales increased $48 million or 13% year-over-year to $428 million, driven by Vita Coco Coconut Water growth of 18% in net sales, and private label growth of 7%. On a segment basis, within the Americas, Vita Coco Coconut Water increased net sales by $44 million to $276 million, while private label increased $8 million to $88 million. Vita Coco Coconut Water benefited from 17% volume growth and 2% net price mix benefit, while private label declined 2% in volume, which was more than offset by price mix benefits driving full-year net sales growth of 9%. For the full-year, our international segment net sales were down 3%, with Vita Coco Coconut Water up 11%, offset by declines in private label and other. Within the international segment, due to the large currency headwinds during the year, volume is a better indicator of business health in our view. Total international volume growth was up 4%, with Vita Coco Coconut Water showing 11% volume growth, and private label and other case equivalent volume down. For the year, the international segment represented 13% of total company net sales, down from 15% in prior year. On a full-year basis, consolidated gross profit was $103 million, down $10 million versus prior year, and gross margin was 24% down from 30% in prior year. These decreases are mainly due to increased transportation costs, with some offsets from volume and price increases. In 2022, we estimate that on a rate basis, we incurred approximately $67 million in cost increases or inefficiencies above our 2020 levels, with close to $31…

Thank you, Rowena. Before wrapping up, I just wanted to give Corey a chance to say hello. Corey, it'll be great if you could briefly describe your background and what drove you to join our team.

Thank you, Martin. First, I'd like to thank Mike, Martin, and the board for the opportunity. I'd also like to thank Rowena for her leadership over the last eight months. I'm really excited to join the Vita Coco company. The team at Vita Coco has built an amazing brand and a great corporate culture. I see this opportunity to build a really special beverage business on top of the base. Briefly, my background is, I've spent the last 16 years at PepsiCo across a wide variety of relevant finance roles. I spent the first 12 years of my career within the North American beverage business, including six years working with PepsiCo's juice businesses in the US and Canada. My final role in North America was CFO of Canada Beverages, where I was responsible for all finance and accounting. For the last four years, I've worked within our global HQ, where I focused on driving accelerated growth for the international beverage business, including Pep’s international franchise bottlers, Sodastream, and the Beyond the Bottle businesses. Functionally, I've built strong global finance teams, with specific focus on driving digital transformation, and I'm excited to bring this experience to Vita Coco to help deliver on our vision. I look forward to working with everyone on this call.

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 strengths of our Vita Coco brand. We are excited about our key initiatives to drive growth in 2023, and the relief that the recent rapid drop in ocean transportation costs should provide us after a very challenging two 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 compete. 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 questions.

[Operator Instructions] Our first question comes from Jon Andersen with William Blair. Your line is open.

Hey, good morning, everybody. Thanks for the question. I wanted to start just asking you a little bit more about the gross margin cadence in 2023, and even thinking a little bit about the opportunity in 2024. So, to what extent do you have visibility at this point and into the sequential improvement that you kind of described in the prepared comments. Is it simply a matter of you rolling into some of the lower cost contracts or spot rates on the transportation side? And as you exit 2023, given where things sit today, what kind of gross margin run rate would you expect? And then kind of a second part to that. I think you've incurred a significant amount of transportation cost over the prior two years, maybe to this tune of $60 million of incremental cost. Is that a cost pool that you think you can more fully recover over the course of, say, a 24-month period? Just any perspective on that would be helpful as well. Thanks.

Yes, Jon, great question. So, I think we said in our prepared remarks that we're currently thinking Q1 gross margin could approach 30%. Obviously, that's a significant improvement over our sort of last year run rate. We have visibility to ocean costs based on what we're buying - securing containers at port for today. Those containers take one to three months depending on route to reach our inventory and to actually sort of show up in our pier in maybe another month. So, there is a lag based on what we see today versus when it shows up in our P&L. So, our Q1 expectation is based on what we were seeing in sort of that December, January time period. Our Q2 expectation is sort of based on what we're seeing today. As we provided guidance for gross margin, it's sort of based on what we're seeing today. We're not sort of projecting improvement or deterioration. We're just saying, based on what we see today, this is how it would flow through. And so, we've provided a full-year sort of gross margin guidance, 32 to 34 based on those facts, with approaching 30% in Q1, sequential improvement in Q2, Q3. If you look at our historical data, Q4 gross margin typically is a little weaker than Q3. So, we haven't really made a commitment on Q4. I think if you model that out, you'll get to what the full-year - you'll get to where the gross margin finishes in Q3, Q4. I think - so that's sort of addressing your first question hopefully. And the second question, in our investor deck, we've sort of said $67 million on a rate basis, across our total business, across our current total volume, is what we absorbed in ‘22 over ‘20 on all…

That's helpful. Thanks, Martin. To follow up on that, the unexpected transportation costs that you incurred in the fourth quarter, could you - how confident are you sitting here today, early March, that those are in the rear view mirror, that those are behind you? What have you seen, I guess, in the business in the first couple months of the year that give you confidence on that?

Let me just sort of give some color as to sort of what happened. Last year, with the ocean issues, we had a lot of product on the water. We had less inventory in warehouse. And towards the end of the year, the in-transit times suddenly dropped. And that, coupled with a slightly slower shipment than expected in Q4, led to our warehouses being overrun by product. And so, the costs that we experienced were related to that surge of product coming into warehouses, securing extra warehouse cost, space, detention and demurrage, because we weren't unloading the containers, properly - general inefficiencies. And I think that was a little bit of a surprise to us, and obviously wasn't something we were expecting. So, that's what happened, right? I think if you look at our balance sheet, you'll see our accounts payable is down. We basically stopped shipments to sort of debottleneck the system, and that sort of started to happen in January and February. We believe those are behind us right now. And certainly, the supply chain seems to be running sort of smoother today than it was before, and we hope we’re through all of the sort of disruptions that have caused a lot of these issues. So, at this point in time, we feel pretty good, and that's why we sort of said that we believe they're behind us. And again, as the supply chain normalizes and we can rely on shipping, taking a certain amount of time, and as the container rates improve, we can run the supply chain like we used to run it two years ago, and that should deliver some inventory reductions and some domestic logistics efficiencies.

Absolutely. Last one, and I'll pass it on. I'm thinking about the sales outlook for 2023, and you took us through, it was very helpful to hear about the various commercial initiatives from the Multipack opportunity to the rollout of cans more broadly in C-store, what you're doing with the organic, Farmers Organic. It just - it strikes me that it is a very strong year for commercial programs, and you discuss the fact that it makes sense to kind of invest in marketing and sales execution. We've noticed the consumption data's been strong earlier in the year, as you commented. It feels like there are a lot of reasons to feel like the growth outlook for 2023 could be even stronger on the topline. Is there an element of conservatism, or are there some offsets we need to consider as well here in the 9% to 11% sales guidance? Thank you.

I think - if I could start. It’s Mike. We had a little bit of a slower volume quarter in Q4 compared to the last several quarters prior to that. We talked about the fact that there were huge comps Q4 the prior year, but also there were the inventory issues that we were dealing with. And it's been a matter of how fast can we get the inventory back in stock and how fast can we fill some of these holes on shelf and so on and so forth. I would say, we're very encouraged by the IRI scans in the first two months of the year. If you look at on a - year-to-date through February, IRI scans are up 21%, accelerating to 24% in the past four weeks. So, we're excited about it, but this - the 9% to 11% is how we're thinking about the year, coming into the year, and we'll see how things continue to go, but we do have a lot of commercial activity that we've talked about, really excited about, and think that there's an opportunity to continue to expand brand and expand households and expand consumption occasions.

And Jon, just building on what Mike said, I think we feel very good about where the brand is. Certainly, the year-to-date trends appear very encouraging after sort of our sort of lower trends in Q3, Q4. The other point I'd make on total net sales is our guidance on private label. We're guiding private label to be weak in the first half, and then basically flat for the year. And that's not a statement on underlying private label volume growth. It's merely a reflection of the regions we lost last year that we talked about at Q3, that are a drag in Q1 and Q2. And then there's some sort of adjustment in our expectations based on the pricing we've been able to achieve as the cost sort of declined a little bit. So, our pricing sort of adjusts. So, the underlying business is good, but I do think in ‘22 and in ‘23 was sort of impacted by those lost regions. And then this sort of effect of what's going on with private label, where the revenue maybe doesn't grow as fast as the volume grows.

Thanks so much. Appreciate it.

Thank you. One moment. Our next question comes from Chris Carey with Wells Fargo. Your line is open.

Hey, everyone. So, I just wanted to confirm on gross margin and then I'll move on from there, but the outlook for this year, is there a way to frame the benefit that you see from transportation versus price versus mix? It feels almost entirely transportation-driven, but if you could just maybe help close the loop on that. And from a mix standpoint, why would that be accretive specifically if you were pushing Multipacks? So, if you could just help me with those, then a quick follow-up.

Yes. Obviously, the major impact on the projected change in gross margin relates to the transportation costs. We did take pricing last year in Q2 and Q4 on branded. We had also taken pricing on private label. And collectively, I think if you look at the scan data on branded, you'll see 6%, 7% pricing, which, I think is reflective of what we intended to take. Obviously, not all retailers pass it through, et cetera, et cetera. So, there is some benefit of pricing there too. And then within our branded business, the Multipacks are growing very strongly. I think there's a comment about that in the investor deck. And certainly, on a dollar per ounce basis, that's a little diluted. So, that's affecting gross margins as well, but it certainly is a very good tactic for us. Our shelves look good. The bill wood looks great, and we're very happy.

But from a mix perspective, obviously branded is growing faster than private label, which has a positive impact.

Sure.

Okay, sounds good. And then can you just expand a bit on the Spike launch and what you're seeing, and how big you think that can become over the course of this year, and just what you're embedding in the outlook from that? Apologies if I missed it. Thanks.

Yes, no, it's really exciting. Launched just - I think just over a month ago, and it's going well. We're getting good feedback. Got some big retailers, and it's exciting. There is - we're not baking anything into the plan for this year. We think it is - obviously, it's an opportunity to obviously build potential significant profitability from it over time in future years. But this year, it's about getting the product out and investing back in marketing. The big key with this launch for us is, the product is now available in many retail outlets that it never existed in before. So, it's more brand visibility and we think helping to get consumers starting to think about Coconut Water for additional occasions. So, they're seeing the brand more. There's more awareness, and now there's more occasions to drink, such as mixing with cocktails, which we think is a big opportunity for consumption expansion.

Okay. Thank you.

Thank you. Our next question comes from Kaumil Gajrawala with Credit Suisse. Your line is open.

Hi. thanks for taking the call. Good morning, everyone. I guess the first question on Multipack, which you commented on in the opening, can you maybe just give maybe some context? What's the incremental contribution? What are you seeing there? We're hearing something similar around variety packs and other categories, or even the variety packs at Multipacks at Frito. So, could you just maybe talk about what it's offering in terms of lift? And then similarly, what's your capacity to keep offering or growing that piece of your business?

Yes. So, let me address the capacity first. Obviously, we had planned for Multipacks to contribute a reasonable portion of our growth this year. So, we think we're in good shape, but we're probably adjusting those production plans up a little bit with the supply chain lead time of two to three months. The way we deal with that would be to hand pack in-country if we needed to. So, we think we're fine, but again, it depends on how the growth continues. I think what we're seeing is, when you look at the sort of IRI scan data, that the Multipacks are contributing a reasonable part of the growth. It sort of varies by retailer, depending on which Multipacks we put into the retailer, but it probably varies between 50% and 75% of the growth, where the Multipack is driving the growth. But I think we're also seeing the singles still being healthy. And by healthy, I mean flat to up, right? So, we're not getting - the brand is underlyingly healthy, and I think we're seeing some benefit from the consumers buying a four-pack instead of three singles. And it's obviously more convenient to shop. It's more convenient to take home. It's more convenient to store. And there's a little bit of a price value proposition there too for the consumers, and we're seeing that play out, but it’s not sort of, at least in most retailers, cannibalizing the singles to a negative growth rate.

Big picture, Multipacks are growing and doing better than we had expected and continue to accelerate. And most importantly, this is how we build out our distribution at retail, right? So, we've had this conversation before, talking about brands like Ocean Spray, where our velocity is as good as theirs, and therefore times our size. But if you look at the points of distribution, they're significant and they stand out on the shelf, and that's part of this strategy. So, we think that the Multipacks are creating a better billboard. They're driving more people into the category. People are buying more now because they're buying larger sizes, but it's also making the singles more visible on shelf as you're expanding the shelf space and expanding the billboard when you walk in the grocery store. So, really excited about the performance and really excited about the upside that it brings to the brand over the next couple of years.

Okay, great. And then on inventory and supply chain, you mentioned the benefits in January. Should we be expecting some sort of notable step-up around shelf resets now that you're kind of fully back in play versus what you've been dealing with over the course of the last year?

Yes.

So, I think you're seeing year-to-date better presentation of the brand on shelf, because we have inventory of most of the SKUs we need, and we're out executing and promoting.

Okay. Thank you.

Thank you. We have a question from Bryan Spillane from Bank of America. Your line is open.

Thanks, operator. Good morning, everyone. Hey, Michael, I guess wanted to follow up on the point you were just making about in response to Kaumil’s question about Multipacks, and just simple question, right? They stack easier, easier for the retailer to handle. So, as you're thinking about incremental distribution points, even within your existing store footprint, should we expect to start seeing more out-of-isle display, wing displays? Just, I think it makes it a lot easier to actually do more display. And so, just curious if that's part of what you were describing and would we expect to see some of that as we move through this year?

Yes, 100%. That's a big focus and like I said, it's twofold. One is expanding the billboard on shelf in our set, and yes, it's much easier to get off-shelf and stack and promote and so on. So, these are great items. We've been doing this 18, 19, 20 years. I don't even remember. And we've kind of figured out how the beverage aisle really works now, and this is - it's just constant expanding of shelf space through new sizes, new pack formats, really drives additional volume.

So, is that - do you have more display activity actually like lined up for this year than you would've had last year?

I think our promotional cadence is maybe a little heavier because we have inventory and we pulled back on that last year. And then with that, last year when we didn't have inventory, display activity was sort of hard to deliver. I think one additional comment I would make is, for us, I don't think we've price-promoted Multipacks that much. So, part of this learning experience on Multipacks is to understand whether we can get displays on Multipack full price. It's already a reasonable consumer price proposition. So, we're going to look at that this year and see what works and test some things. But Mike's absolutely right, you should expect us to execute displays at a higher level this year.

All right, terrific. Thanks, guys.

Thank you. And our next question comes from Michael Lavery with Piper Sandler. Your line is open.

Thank you, and good morning. I want to come back to cans. If I understand it right, it’s primarily sort of focused on better penetration in C-stores, but it's - so it's a little bit of a different channel, but it's obviously a different pack type, but also a different product, if I'm reading this correctly, just juice as opposed to more water. And so, how much room does that have to move beyond C-store or even potentially be in a different pack type? How flexible can it be if - it seems like it could broaden the appeal just by being a little bit differentiated versus your current offering? How much can you - is that the right way to understand it, and how much can you leverage that?

Yes, I think the focus for this year is expanding C-store. We think that that's obviously the biggest channel for this item. However, mass is also a very significant channel for canned Coconut Juice, and that'll come next. But we think really getting it out there, getting trial on it, single-serve trial at C-store, is the way to go. And then eventually it starts to go into mass and grocery and so on. And then eventually after that, it starts to go into different packs, Multipacks, different formats and so on and so forth. So, that's kind of the build of this item over time. But like we said, we launched it last year with a couple of C-stores in a couple of regions. It's done very well, and now it is launching nationally across C-store. Really excited about that. And then the next stage will be mass and then grocery.

Okay. Thank you. No, that's great color. And just one follow-up on Spike. You touched on this a little bit, but can you give a sense of how much it could live on premise or just sort of plant the flag at least in terms of how consumers think about the product and drive at-home consumption with mixers or on premise. How could it evolve beyond just the current way that it's launching now?

Well, like we said, it's launching in outlets that we didn't exist in before, which is both liquor stores and on-premise. There's quite a bit of on-premise distribution that's going on right now. So, again, it starts to get people to - we think it starts to get people to think about mixing Coconut Water with spirits. At the same time, we're following up with that, with starting to put teams against actually selling Vita Coco into on-premise accounts to further expand on that potential consumer occasion.

Okay. Great. Thanks so much.

Thank you. And we also have a question from Gregory Porter with Evercore ISI. Your line is open.

Hey, guys, thanks for taking the call. As you think about the channel and demographic opportunity from here to keep growing household penetration, maybe if you could just talk about those two areas, kind of where you're focusing in promo, where you're going to focus marketing and kind of like where you see that penetration opportunity most. Thanks, guys.

Yep. So, we obviously have significant penetration opportunities relative to both our brand, relative to the category, and then the category relative to other juice categories. We're trying to increase occasions and increase our appeal across demographic groups. Obviously, the juice product that I just talked about is an example of that. Our promotional cadence is largely singles to try and drive impulse purchase. As we get inventory back, we're going to be fighting for presence in the cold checkout outdoors for impulse purchase as well, right, which is distribution that was hard to maintain through COVID. And so, there's just lots of opportunities to grow households. I think we're also increasing our marketing this year to support some of those in initiatives. I think from a demographic perspective, we over-index with Asian, African-American and Hispanic consumers, all of which are growing demographic groups that should provide a sort of healthy tailwind. We also over-index with sort of young adults and young families, which again, is a healthy tailwind for us because they're at the early stage of their healthy beverage lifecycle. So, we think there's tailwinds there, but obviously as the category leader, our goal is to try and accelerate that.

Cool. And then maybe just one quick follow-up, unrelated, but as you think about freight, you talked about the typical timing of kind of what your vision is, is sort of a couple months out. So, as we look to 2024, I know you're not going to give guidance, but if freight rates stay where they are, should we expect some further material ramp from freight cost rolling off, or is that going to be mostly a 2023 thing for you guys?

It's so hard to tell, right? In the first quarter, obviously, we're still using inventory that came in at higher rate. So, there's definitely going to be some benefit in ‘24, but exactly how large it is going to be, is very hard to tell at this point in time.

Fair enough. Thank you.

Thank you. I would now like to turn the call back to Martin Roper for any closure remarks.

Thanks, Catherine. Thanks, everybody, for joining us for Q4 earnings call and we look forward to talking to you again after Q1. Cheers.

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