Vita Coco Company, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are to the same 2022 periods. Amounts below are in millions unless otherwise noted.
Business context and results
Vita Coco develops, markets and distributes coconut water and other beverage products, including branded products and private label. It reports Americas and International segments and relies on third-party manufacturers and co-packers.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $139.6 | $115.3 | $249.4 | $211.8 |
| Gross profit | $51.1 | $29.3 | $84.8 | $48.4 |
| Gross margin | 36.6% | 25.4% | 34.0% | 22.8% |
| Operating income (loss) | $20.8 | $5.0 | $27.5 | $(0.7) |
| Net income | $18.0 | $1.1 | $24.7 | $3.4 |
| Diluted EPS | $0.31 | $0.02 | $0.42 | $0.06 |
| Adjusted EBITDA (non-GAAP) | $24.0 | $7.3 | $33.0 | $4.4 |
Financial position and cash flow
- Cash: $48.0 at June 30, 2023, up from $19.6 at December 31, 2022. Current assets were $223.5 and current liabilities $71.5.
- Cash flow, first half: Operating activities provided $26.1, versus $33.4 used in the prior-year period; investing activities used $0.5 and financing activities provided $2.7. Operating cash flow benefited from higher earnings and working-capital timing; accounts receivable used $46.6 of cash while inventory provided $27.3.
- Debt and liquidity: No borrowings were outstanding on the $60.0 revolving credit facility; vehicle loans were less than $0.1. The facility matures May 2026, and the company reported compliance with financial covenants. Management expects cash, operating cash flows and available facility capacity to cover anticipated needs for at least 12 months.
- Other balance-sheet movements: Inventory declined to $57.2 from $84.1 at year-end; accounts receivable rose to $89.6 from $43.4.
Material changes and management commentary
- Q2 sales increased 21.1%; first-half sales increased 17.8%. Case-equivalent volume rose 17.4% in Q2 and 13.2% in the first half. Management attributed growth to volume, branded pricing actions and an additional promotional period at a key retailer.
- Gross margin expanded about 11 percentage points in both reported comparisons. Management cited strong volume, pricing and lower transportation costs; transportation costs had eased from recent peaks, while other inflationary pressures remained.
- Americas generated $121.3 of Q2 sales and International $18.4. Branded Vita Coco coconut water was the principal product category; “Other” product sales declined.
- SG&A increased 24.7% in Q2 to $30.2, mainly from personnel and marketing costs, plus approximately $1.0 of secondary-offering expenses. The May 2023 offering was a sale of 5.75 million existing shares by a stockholder; the company received no proceeds.
- Management expects to discontinue private label supply to a major customer because retaining the business on proposed terms conflicted with long-term margin targets. Private label sales to that customer are expected to decline significantly over the next 12 months, potentially starting in Q4 2023. Management estimates the lost business could mean a mid-single-digit percentage decrease in 2024 net sales versus 2023, and says branded business with the customer is not expected to be affected. Timing and magnitude remain uncertain; brand growth initiatives are not expected to fully offset the loss.
- Q2 earnings included a $1.0 unrealized derivative gain, compared with a $3.2 loss in Q2 2022; first-half derivative gains were $2.2 versus $5.5 in 2022. These noncash fair-value movements affect comparability. A subsequent event also triggered $0.8 of accelerated stock-compensation expense expected in Q3 2023.
Risks, contingencies and unusual items
- Two customers accounted for 53% of first-half sales and 52% of accounts receivable at June 30. The company reported no credit issues with them. Two suppliers accounted for 35% of first-half purchases.
- Foreign-currency forward contracts had total notional value of $113.0. The filing estimates a 10% strengthening or weakening of the U.S. dollar would result in an approximately $5.6 gain or loss. Derivatives are not designated as accounting hedges.
- International sourcing exposes the business to geopolitical, supply-chain, freight, labor and manufacturing-cost risks. Management said the overall effects of macroeconomic uncertainty could not be determined precisely.
- The company adopted the expected-credit-loss standard in 2023, recording a $1.1 opening retained-earnings adjustment; it said adoption did not materially affect operations or cash flows. No material litigation liabilities were recorded, and management did not expect ordinary-course litigation to materially affect the statements.
- No formal full-year sales or earnings guidance is provided in the supplied filing text. The mid-single-digit 2024 sales decline estimate relates specifically to the expected private label customer exit.
Important facts for investors to verify
- How quickly and to what extent the major-customer private label transition reduces sales, and whether branded sales remain intact.
- Whether volume, pricing and margin gains can persist as transportation costs and broader inflation change.
- Customer and supplier concentration, including receivables collection and exposure to large counterparties.
- Cash conversion and working-capital trends, particularly the sharp rise in receivables and inventory movements.
- The effect of currency movements and derivative fair-value volatility on reported earnings and cash flows.
- Future dilution and compensation expense from stock awards, including the accelerated Q3 charge.