Q3 2022 Vita Coco Company Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Yeah.
Hello, and welcome to the Vita Coco Company's third quarter 2022 earnings Conference call. My name is Gigi and 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 now hand, the call over to clay crumbling with ICR.
Yeah.
Thank you and welcome to the Vita Coco Company third quarter 2022 earnings results Conference call.
Today's call is being recorded with US are Mr. Mike carbon co founder and executive Chairman Martin Roper, Chief Executive Officer, and Rowena recall interim Chief Financial Officer of the Vita Coco Company.
By now everyone should have access to the Companys third quarter earnings release issued earlier today. This information is available on the Investor Relations section of the Vita Coco companies' website at investors <unk> Vita Coco company Dot 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 $19 95.
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.
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 all available on our website as well.
And with that it's my pleasure to turn the call over to Mike Hogan, our co founder and executive Chairman Mike.
Thanks, Clay and good morning, everyone. Thank you for joining us today to discuss our third quarter 2022 financial results our expectations for the remainder of the year in our commercial plans for 2023 I want to start by thanking all of our colleagues across the globe for their continued commitment to the vertical company and their dedication to our mission.
Leading ethical sustainable better for you beverages that uplift to our communities and do right by our planet. Our continued robust net sales growth confirms that our strategy and commercial execution are working despite a very challenging environment.
Year to date 2022, consolidated net sales are up 15% year over year to $336 million with our flagship Vita Coco coconut water brands remaining the main driver of growth increasing an impressive 22% over the previous year to date period.
Underlying demand for our flagship Vita Coco coconut water brand remained strong during the third quarter with net revenue growing 14% even against a very strong year ago comparison, despite our third quarter consolidated sales being impacted by out of stocks on certain granted coconut water skus.
Furthermore, the U S retail coconut water category remains healthy increasing at a 12% pace in IRI measured channels for the last 52 weeks, primarily due to <unk> growth of 21% and we remain the undisputed category leader with approximately half of the value share.
Our strategy has not changed and we remain committed to our longer term plan to grow the coconut water category and increase household penetration.
Increased our category share and expand usage occasions to drive velocity of our products. While also innovating in other adjacent categories.
Our coconut water, we believe that our ability to source consumption from multiple beverage categories and occasions will be the primary driver of future household penetration increases.
According to numerator vital Cocos household penetration currently stands at 11, 1% that's up approximately 70 basis points over the last year. So we believe that we have plenty of room to grow we're prepared to invest in marketing and sales execution to achieve this as inventory and supply chains recover further.
Moore, our innovations such as Vita Coco crest vertical milk powerlift and other exciting initiatives expand the categories that we can source from giving us further growth potential.
We also have opportunities international where we have seen strong growth in European coconut water volume display despite supply chain and foreign exchange challenges. These.
These opportunities along with our ability to add new consumers and new usage occasions for coconut water give us confidence in our belief that we are on track to achieve mid teens growth in Vida Coco coconut water net sales in 2023.
Additionally, the softening ocean freight market gives us confidence that supply chain will not supply chain will normalize and that 2023 will be a solid step towards our long term goal to return to gross margins approaching 40% and adjusted EBITDA margins in the high teens.
We are extremely proud of this progress and we firmly believe our coconut beverages are still in the early days of becoming a household staples and there is plenty of runway ahead as we execute our commercial priorities for 2023.
We have been presenting our 2023 commercial initiatives to retailers and distributors to positive reaction briefly summarizing the top initiatives first we have opportunities with the expansion of our multi pack strategy as we attempt to gain share of shelf space or the multipack coconut water business in the food and mass channels.
And increased basket size for our retailers multitasking coconut water, our underdeveloped versus other categories and is the largest brand in the category. We firmly believe we are uniquely positioned to seize this opportunity.
We are optimistic about the broader national rollout of Vita Coco farmers organic which is priced at a premium to our regular skews and offers organic coconut water in an attractive shelf stable package organic coconut water is growing faster than nonorganic and our ACD is only approximately 17% year to date.
As it was just launched nationally this year.
Farmers organic allows us to trade up consumers in price and product specification, yet keep them in our brand family and supports our suppliers development of best in class organic agricultural practices in their farmer communities.
Additionally, I'm very excited about the rollout of Vita Coco coconut Houston or can that performed very well in tests this year.
As of the third quarter can't coconut water represents about 30% of the category and our share of this segment prior to our tests. This year was zero and our test convenient accounts, we saw accelerated by the local brand growth and no meaningful signs of cannibalization, where we're expanding nationally in the convenience channel in 2023, and we believe that this should.
Provide incremental distribution and consumption opportunities with new consumers, who prefer a sweeter tasting canned coconut water with coke.
I am, particularly excited about bringing coconut water to consumers at a mixture in alcoholic beverages. This initiative will kick off with our planned Q1 launch vehicle costs spiked collaboration with Diageo Vita Coco space is a delicious ready to drink cocktails made with <unk> flagship Captain Morgan Rum brand.
And in parallel we are developing plans and partnerships to build on the excitement that this launch should generate and to build opportunities provide a cocoa coconut water as a mixer in alcohol consumption occasions in on premise channel.
So long term this will add more distribution and occasions to the consumption of coconut water both on premise and at home and will introduce more drinkers to our brand as the category leader, we have a responsibility to expand the category and therefore to focus on educating consumers on new.
Assumption occasions and to increase the availability of coconut water to all hydration occasions longer term, we have a big opportunity within broader foodservice, which although growing rapidly currently owned.
We represent less than 3% of our business and we believe it should be significantly larger and offers a large distribution opportunity for us long term.
We're also building our team's capability both as a new public company and also to support our growth and innovation efforts improve our revenue management forecast and planning system and to support our ESG initiatives. This will strengthen our commercial capabilities and should drive future cost efficiencies flexibility and ESG benefits we.
To issue our second annual social impact report in 2023 and based on our work to date, we hope to announce our 2030 environmental and sustainability goals in the second quarter of 'twenty three.
In closing I'm really excited about 2023 and beyond we remain confident in our ability to deliver on our long term goal of mid teens net sales growth and we are steadfast in our vision of being the industry's better beverage company, one which focuses on providing healthier alternatives as compared to conventional.
Brands and when its drive to do better for the world in which we live.
And now I'll turn the call over to our Chief Executive Officer Martin Roper.
Thanks, Mike and good morning, everyone. We achieved record net sales in the quarter driven by strong Vita Coco, Brian growth against a particularly strong year ago quarter, when we grew 33%.
To help minimize some of the noise in last year's sales on a two year basis. We grew our consolidated net revenue by an impressive 42%, which represents an acceleration over the first half of the year driven by strong 58% two year growth of cocoa coconut water highlighting the continued strength of our brands.
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We also saw our gross margins improved sequentially from the second quarter and our balance sheet remains very healthy.
Reiterating what Mike said, we are confident in our underlying business and we are well positioned for a strong 2023 with multiple commercial initiatives in the pipeline to support our top line growth and an improving transportation cost environment to continue benefiting our margin structure.
In the third quarter global net sales increased 7%, including 4% net pricing to $124 million compared to $116 million in the third quarter of 2021.
The growth was last year was driven by 14% net sales growth both by the Coco coconut water, partially offset by declines in private label and our other product categories in part due to timing of orders and shipments and also impacted by a 2 million foreign exchange related to reported revenue in our European business.
Particularly impressive was the health of our comfort brand in the Americas up 14% and shipments even with limited inventory on crest. When lead times are 500 ml and one liter products that resulted in the slowest scan trends and physical out of stocks at retail.
Which we believe resulted in $4 million.
Of lost net sales in the quarter.
Our pure coconut water Skus grew 18% in IRI scan retail sales during the quarter, which breaks down to approximately 13% from volume and 4% from price on top of last year's strong 24% volume growth.
Similarly, our three year growth rate in scanner data has remained strong and stable for the total brand and that same three year growth pure coconut waters et cetera.
Regarding our inventory at the end of the quarter, we had inventory up for most of the affected skus at all three PL warehouses to support our business going forward and we expect the out of stocks at retail steadily improved through the fourth quarter as we recover shelf space.
This shelf space recovery does however, it takes some time and it's immediate.
Our overall distributor inventories are now healthy relative to prior years, especially autopilot Tocopilla Coca Cola.
As I mentioned earlier, our private label sales were a drag on our consolidated results in the third quarter.
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 year to date trends as a better indication of business sale.
Year to date, our private label business volume was down 5%, while net revenue was up 2%.
Our strategy remains to grow our branded business as a percentage of sales and simultaneously to diversify our private label business, which we expect to grow at a slower rate.
In recent months, we have added some sizable new private label accounts and help to diversify our account base.
At the same time, one of our launch a private label coconut water customers in the U S. Recently changed sourcing strategy and we lost some of that geographic regions. Although we remain the largest supplier on a relationship with them remains very strong.
This is loss is not fully offset yet by our count cadence and will remain a drag on our private label shipments through mid next year.
We believe our ability to continue to add new private label business isn't that could have a supply chain competitive advantage and supply and coconut water to these customers and in our ability to be the preferred supplier for the category.
Generally other than the transition just mentioned our Americas private label business is stable with a more diversified account base.
<unk> business is growing an estimated mid single digit percentage and volume year to date.
For the full year 2023, we expect our private label business towards tonnes crop.
Gross margins improved quarter over quarter benefiting from improved pricing and from the mixed benefit of increased branded business.
We offset by slightly higher container costs in Q3 versus Q2, and slightly higher finished goods cost, mainly driven by mix impacts including sourcing decisions.
Our third quarter cost of ocean containers reflect the prices of contracts and spot rates. This year were higher than last years contracts and also reflect an increase use of spot rates.
We decided earlier this year to plan for more spot rate usage. So that we can benefit when rates started to decline rather than locking ourselves into contracts at elevated rates.
We believe this approach was the right decision and expect a softening late environment benefit significantly in future quarters.
Given we recognize ocean freight costs when the container is received and there is still elevated rate environment into the east coast in Europe , we expect improvement to face and gradually.
Our other cost of goods remained stable as local inflationary cost and packaging increases.
Offset by our increased scale and by the strength of its stock.
We are benefiting from the actions taken early this year to manage domestic transportation costs more effectively although the trucking rates and warehouse costs remain elevated.
As we evaluated how we will finish the year, we do not believe that we are likely to recover the lost sales from last quarters out of stocks I would expect some ongoing impact in the fourth quarter as we recover on shelf.
Our adjustment down of our full year net sales outlook reflects these loss sales.
Steady recovery on flavors brand SKU inventory over the fourth quarter.
Lower impact of price increases planned for the fourth quarter, the private label transitions mentioned previously.
Brand and private label trends against very strong performance last year.
And also potential foreign exchange impact on our reported revenue in the international business.
The adjustment down of our adjusted EBIT outlook, mainly reflects the new net sales range.
How should we now expect better inventory availability.
The future better margins, we intend to turn up our self execution of marketing efforts to build momentum over the next few quarters.
We believe our commercial plans for next year should produce solid net revenue growth through 2023 with final Coco coconut water cross in the mid teens and with private label, where tonnage growth for the full year.
All excluding any impact of foreign currency translation.
We have contracted for only approximately 30% of our 2023 container needs and therefore expect that in 2023, we should see substantial progress back towards our long term targets for gross margin and adjusted EBITA as container rates continue to improve.
We will have a formal cross protection when we talked to you with our full year results in Q1 next year.
On the organizational note we are very happy with the performance of our <unk>, our interim Chief financial Officer, and our accounting and finance teams and providing continuity as we conduct our search for a new CFO .
We are in the middle of a retained search and I'm pleased with the quality of candidates attract to our story given the performance of our team we are comfortable being quite selective and prudent.
Yes.
With that I will turn the call over to <unk>, our interim chief financial.
<unk>.
Yes.
Thanks Mark.
Hello, everyone.
I will now provide you with some additional details on the third quarter 2022 financial results.
I will then discuss the drivers of our outlook for the 2022 full fiscal year.
Martin discussed earlier, our topline growth remains strong and our gross margins are recovering.
We're also unhealthy financial footing based on continued profitability strong cash flows and a strong balance sheet with low debt and ample liquidity.
In the third quarter of 2022, net sales grew 7% to $124 million, an increase of $8 million compared to our very strong third quarter of 2021 results.
The increase was driven by continued strong consumer demand for embedded Coco coconut water with global net sales up 14% year over year.
On a segment basis within the Americas Vita Coco coconut white rose, 15% to $83 million.
Increase was primarily driven by higher case equivalent volume and continued strong consumer demand.
With net positive benefits from price mix, largely driven by higher frontline pricing.
Labeled declined 5% to $25 million with a decline in case equivalent volume related to the customer activities that Martin just described.
We offset by increased improved pricing.
International segment net sales increased 4% to 15 million, primarily driven by higher case equivalent volume of 4% and pricing actions with FX headwinds in our European region, reducing revenue year over year by approximately $2 million for foreign currency translation in the quarter.
Primarily due to the strengthening U S dollar against the British pound, who is FX rates have declined approximately 15% versus the third quarter in the prior year.
Within the international segment due to the large currency headwind for the quarter.
<unk> is a better indicator of the continued growth with Vita Coco coconut water driving the majority of the case equivalent volume growth of 5% year over year.
Private label in other case equivalent volume was flat.
This year over year.
Consolidated gross profit for the third quarter was $33 million driven by case equivalent volume growth favorable net pricing and positive mix shift to Vita Coco coconut water, which were more than offset by significantly higher transportation costs versus last year.
As a result.
Consolidated gross margin of 26% was down versus prior year, although it's sequentially improved from Q2 2022 by more than 90 basis points.
Moving onto operating expenses.
Our SG&A in the third quarter increased $3 million to $24 million versus the same period last year. The increase was largely due to increased marketing activities to drive volume growth and incremental ongoing costs related to operating a public company, including higher spending personnel related and.
And as Sharon.
Net income attributable to shareholders was $7 million or 13 cents per diluted share in the third quarter of 2022 compared to net income of $13 million by 'twenty four.
Our diluted share in the third quarter of 2021.
Net income in the third quarter benefited from a non cash mark to market fair value on foreign currency hedges of $1 million versus a loss of $2 million last year.
Adjusted EBITDA, which excludes the impact of interest taxes, depreciation amortization stock based compensation expense and noncash mark to market on FX derivatives.
In the third quarter was $12 million versus 21 million in the same period last year. The year over year decrease was primarily driven by higher transportation costs and SG&A spend as previously discussed which was only partially offset by higher case equivalent volume and net pricing actions.
Transportation costs continued to be a drag on our gross margin and profitability in the quarter. Since Q1, we have seen improvements in domestic transportation costs and reductions on demurrage and detention charges, but the average cost is pushing containers as seen this quarter remained high as Martin explained earlier in his remarks.
As you can see in our earnings presentation, our total cost of goods per case equivalent for the third quarter 2022 increased 15% versus prior year period, mostly driven by an increase in our transportation costs from the significant transportation cost inflation versus 23, one levels, which were already elevated versus 2020 outlook.
Looking at our total cost of goods inflation on our cost per case equivalent basis, we estimate that our consolidated gross profit was reduced by over 7 million in Q3, 2022, and close to a $28 million a year to date versus the same period in 2001 by the unusual transportation.
Cost inflation.
In the third quarter finished goods cost per case equivalent was impacted by negative mix in the quarter for the nine months year to date period finished goods cost per case equivalent an increase in minimum 1% over the comparative period in the prior year and decreased to capture that.
For year 2020 finished goods cost prestige E rate.
Turning to our balance sheet and cash flow.
As of September 32022, we had total cash on hand of $21 million and $10 million of debt.
<unk>.
<unk> compared to $29 million of cash and no debt.
Number 31 2021.
The decrease in net cash was primarily driven by working capital due to significant account receivables increased as high business seasonality, partially funded by our credit facility.
Moving on to full year guidance.
For the nine months into 2022, we are pleased with the 15% net sales growth year over year the consecutive quarterly improvement in the gross margins in 2022, while maintaining similar SG&A leverage for the nine months ended year to date. Despite in a period of inflationary transportation cost two point currency variability.
There are lots of moving pieces that pose uncertainty going into the fourth quarter of 2022, including external impacts out of our control such as foreign currency fluctuations and the risk that retailers or other customers may shift timing of orders for shipments.
As a result.
Our full year net sales outlook to reflect the loss sales due to out of stock.
A steady recovery on flavored brands SKU inventory over the quarter.
Lower impact of price increases for the fourth quarter than we had planned.
The current trends on private label and branded sales.
The impact of foreign currency International revenue.
We now expect full year fiscal year 2022, net sales to be between 422 and $427 million representing growth in the range of 11% to 12% versus 2021 as consumer demand for our products remains robust.
We expect Q4 gross margin to sequentially improve over Q3.
Primarily from planned brand net pricing actions in the quarter of a similar scale of those taken earlier this year.
First effect of ocean freight rates improving uncertainty remains.
Based on the reduction in net revenue expectations, we are adjusting our non-GAAP adjusted EBITDA guidance to be in the range of $20 million to $22 million.
This reflects improved gross margin from our pricing actions and expected improvements on transportation costs offset by increases in our planned marketing and sales execution consistent with our stronger inventory position and to maintain top line momentum.
Recall, our second wave of price increases will take effect mid fourth quarter and at this time, we have no further price actions planned until we see the full impact of these two increases.
And with that I'd.
I'd like to turn the call back to Martin for his closing remarks.
Thank you.
To close I'd like to reiterate our confidence in the long term potential of the final cocoa company, our ability to build a better beverage platform and the strength of our co brand.
I did about our key initiatives to drive growth in 2023, and look forward to the release of the softening of ocean freight spot rate should provide us off to a very challenging two years, which we believe will allow us to accelerate growth invest prudently and build long term capability.
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 Nevada Cocoa company that concludes our third quarter prepared remarks, and we will now take your questions.
As a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.
Our first question comes from the line of Bonnie Herzog from Goldman Sachs.
Hi, good morning, everyone.
Hi, I just.
I wanted to maybe start with just a couple of questions on your guidance. So.
Maybe just trying to unpack it.
Your new topline growth guidance implies only low single digit to mid single digit growth in Q4, So I just want to.
Understand what's driving this especially given the pricing you've implemented the I assume you're still expecting the auto stock pressures to continue which I think you've called out.
But when you I think tried to quantify that if I understood. It correctly that was just about three points of lost topline growth in Q3.
And then I think you just mentioned that you now expect lower planned pricing in Q4. So is that is it those two items that are driving your expectation now for a little bit lower growth in Q4 on the top line.
Brian It's Mike I think as we think about the balance of the year and into next year and beyond I think we finally have a good understanding of the steady state of where the brand sits as it relates to growth right. So this was the big mix in terms of forecasting and so on we were growing 39%.
Last year this quarter growing 63% last year this quarter over 2020, and so it was understanding what is the steady steady states like if you're growing 3%, 5%, it's much easier to forecast and understand where you might net out a year later or even months later, so I think we finally understands the brand is growing the <unk>.
<unk> is growing mid to high teens.
Private label, which is a very attractive strategic business for us is not where we see significant growth in the true value creation long term. So the branded growth is stable and steady in this kind of high to mid teens.
And Thats off of last year fourth quarter was 63% growth. So that's kind of how we're thinking about.
The business for the fourth quarter, and then moving into next year.
And then just.
Just to add one I just would point out that the investor deck.
<unk> publishes now lives so I apologize if that was not alignment.
And then two we've got some other effects right because the out of stocks that we have some FX effects that are bringing revenue down.
And things like that but I think Mike's description is exactly right the comparisons to last year very hard to estimate.
But the three year stack of the business is very healthy.
<unk> is very healthy and we just think we misread the.
The banks of which we should project growth off of this year. So that's sort of what's going on.
Okay. Okay. That's helpful. Yes, certainly you saw that on a three year stack basis things are accelerating sequentially. So that's encouraging but then are you just being conservative then as I think about the full year or what it implies for Q4 or maybe talk about the lower if I heard you correctly lower plan pricing now in Q4.
So one we wanted to come up with a range that we felt comfortable moving forward obviously.
This is a complicated environment both on the supply chain side, the consumer side the retail side.
And so our range was generated because we would really not like to have this conversation again.
Thanks.
Hey, Ross.
So.
So that was our approach was to.
Say, okay, we need to provide an estimate of what the baseline is and let's do that and let's make sure. It's something that we can.
Completion fluids.
Okay.
And then I just wanted to ask second question is on consumer.
Just any color you can share with us on the health of the consumer Lascar, you called out some higher growth for larger pack sizes et cetera, just wanted to understand if you're seeing similar behavior during Q3, and maybe so far in Q4.
Any update on sort of how elasticities are holding and et cetera would be helpful. Thanks.
I'll start I think as we as we look at we look at scan data and you start to pull out the affected skus right. The pineapple skus in the press Skus that we just didn't have any inventory on which which really had a hit on the business last quarter had a significant hit on scans and when you look at scans and you pull that out and you just look at the pure coconut water, which is.
A good indication of the health of the brand and the consumer is really strong and it continues to grow in this in this mid teens growth.
Growth rates are.
All the way through the past several weeks. So we feel really confident about about the consumer demand and where we sit from a growth perspective.
Just sort of building up that Bonnie I think from a portfolio perspective, we have a nice presence in Cogs.
Actually benefiting from consumers looking for sort of better value.
We also.
Pat.
The multi tax strategy and certainly we're seeing the multi practice growing faster than the other pack sizes. So we're well positioned I think to offer the consumer sort of value. If there is a challenge on the consumer front.
Alright, Thank you I'll pass it on thanks, Thanks, Mike.
Thank you.
One moment for our next question.
Our next question comes from the line of Chris <unk> from Wells Fargo.
Hi, good morning, everyone. So.
Just a follow up there then.
Want to ask about your comments on 2020 through.
Margins.
Are you basically saying on Q4.
And just to expect.
Q4 seasonality to return.
Typically.
Over a 20% decline versus Q3 and maybe beforehand.
Really think that that.
That would play out because of underlying momentum in the business.
Just kind of got the comps wrong NOI.
Out of stocks are sort of getting better, but not entirely better but slightly better than our pricing, but it's really just.
Maybe just.
The reality dynamic relative to the year ago comp.
Morris.
Yes.
Change here.
I'm, just trying to understand kind of maybe like underlying confidence thoughtful growth returning and so next year at that mid teens rate.
Okay.
Starting point, just trying to make sure I understand kind of what you guys are saying about Q4, Yeah I think as Mike said Q3, Q4 were unusual and.
I think we built our business based on assumptions, we could grow off that base and that was probably incorrect.
As we look at next year I think clearly cyclically, we have plans to grow branded mid teens, we lay out some of those plans on call and also in the deck. We've presented to retailers. We think the growth that we had this year is going to drive more space and.
And so our sales team is feeling pretty good about all of that.
And so yes, it will build plans based on continuing brand health.
Okay.
Okay.
For 2023 right.
I think you are pretty constructive on margin improvement.
In the press release.
As freight rates.
I think you also noted that yes.
Actually Phil sort of like sequentially during the year, maybe you could because you have more spot exposure.
And to the back half.
So maybe you don't get the full benefit.
Yes, starting with your sales are getting impacted by ocean freight inflation, so let's start.
But I'm just looking at what the stock's doing pre market I'm just trying to frame.
What you mean by significant gross margin expansion next year.
The 40% EBITDA margins in the high teens.
So I wonder maybe if you could just frame.
Maybe what the freight it was this year how much you think you might be able to get back next year just to put some guardrails around.
How much margin improvement you could you could see next year. So we can have an understanding of maybe what the app.
Anchor on EBITDA is right for you guys in the context of what the stock's doing pre market I think that'd be helpful. Thanks.
Sure No I understand I think obviously a return to long term our long term algorithm probably takes a couple of years, so I'm not thinking we're suggesting a.
At 12 months journey.
In our investor deck.
Pointed out that the incremental <unk>.
Transportation costs over last year was $7 million.
And year to date have been $28 million opened last year and collectively thats $49 million 20 on a year to date basis right. So that built up over two years I think you might hope for that to unwind over two years, maybe obviously, that's very hard to forecast and.
Future rates are.
Difficult to predict.
But that's how I might think about it and so hypothetically if we were able to.
While this year's increases next year.
It's obviously a significant driver of EBIT growth next year.
And obviously I think we'd all be happy with that.
Okay. That's helpful. Thank you.
Thank you one moment for our next question.
Our next question comes from the line of Michael <unk> from Piper Sandler.
Thank you good morning.
Hey, good morning.
Just wanted to come back to the consumer first.
You mentioned the value proposition for club packs and multi packs, but.
How does private label fit into that it's a little interesting with the inflation pressure that consumers already had.
<unk> sort of stable.
Piece of the business seems to be maybe down a little bit of distribution impact but.
Growing strongly on the branded side. So I guess, one just have you seen the consumer a little more radisson and if so how do you think about the way private label plays into that as well.
Okay.
I think we're seeing the consumer be more restaurants to me what's important is price gaps in the category.
And private label given the structure the pricing at retail move up.
Towards the branded early earlier, yes.
Then obviously all Brandon we moved in Q2 and since we began in Q4, so I think the price gaps the most important and I think that's how we're thinking about it it's very hard to CLS disappear when you've got price gaps moving in our stock. So that's how we're thinking about it.
Think.
That some consumers are potentially moving to private label, but private label as well.
As we said the private label customers, we have that <unk> had year on year, but sort of showing mid single digit volume volume growth.
On private label sort of thing so and obviously the branded growth is much faster than that.
So we think the Brian just healthy.
Brand is obviously performing well if the price gaps we currently have.
And as we look forward to its very hard to predict what will happen next year.
<unk> said, we don't have any more planned price increases beyond the Q4 price increase and we're obviously monitor the performance of the brand and the competitive activity as we think about promotional activity next year.
Yes.
And then just coming back to freight it's obviously a huge part of the equation here.
I think it's pretty clear the upside potential is significant can you can you just unpack a little bit more you mentioned I think 30% of two.
<unk> 2003 as contracted already.
I guess, maybe two parts of it is just.
Is it would that all be sort of mostly <unk> first half skewed is there any longer in terms of pacing is that the right way to think about it and then as far as what you've locked in.
Is that more recent debt still relatively favorable rates or was it longer term that youre stuck with some of the pain from earlier in the year, how do we think about what that 30% looks like yes. It's a great question, Michael I'd point you to.
Page 12 in our investor deck that has Ah.
Diagram, which is designed to be indicative of how this works without being prescriptive right.
And.
When you look at how that's laid out the contract commitments. We have that are 23 related largely relates to a contract we entered into.
Last year in the August September time period.
A multiyear deal price.
At the rates that existed that we thought was very attractive and protecting us from the sort of ocean freight spike we saw it coming right.
That's a long term rates.
It's <unk>.
We have the ability to sort of get out of it if we don't get out of it we pay a penalty spot rates. So there is some negotiation from there but it is a contract we did enter into a contract on a certain lane in the August time frame. That's the typical timeframe, we would enter into on that lane, but we chose to only entered.
To four months because the.
The pricing offered we felt was not representative of what the pricing would be next year. So we certainly enter next year with significantly less covered on a contract basis.
And the contract we have with the one that I mentioned.
Yes.
We think that was a good deal when we entered it and we have some ability to benefit.
<unk> continue to fall.
Okay. Thanks, I'll pass it on.
Thank you one moment for our next question.
Our next question comes from the line of Robert Alton sign from Evercore ISI.
Hey, everyone. This is actually Greg on for Robert just a quick question on SG&A expectations can you talk about how that's evolved in terms of your expectation for one this year and then two how youre thinking about it for next year I know you guys talked about a higher spend behind new innovation, So maybe just which innovation you see that going behind.
Yeah.
The initial thoughts on how it's going to compare as a percentage of sales basis versus this year. Thanks, yeah.
I'll, let Brian take that but before I think it's additional spend against innovation, but also against the brand that we saw significant out of stocks and low gross margins on this year. So it's an opportunity to I think expand even further potential opportunity for growth of the brand.
Using some of that gross margin improvement, perhaps you want to go into some of the details.
Yeah, So Jamie.
And SG&A perspective.
We have absorbed.
Public company ongoing cost.
Or is that that we were expanding capabilities.
With respect to.
I would say from a leverage perspective, we have maintained actually.
Year over year.
Low level, considering how much movement.
Yes.
And I think as you look at next year, our goal is to try and deliver SG&A leverage but some of the costs that are we in a request to the public company costs and the capabilities to build.
What we need to operate as a public company. We're faced in this year. So there's still some impacts next year just from a phasing perspective to reflect full year costs.
That makes sense and then just a quick follow up on the on the lineup you have new products for next year, maybe if you could talk about you know kind of which ones you're most excited about in a bit more detail the phasing of launch with Diageo and kind of when you see that getting Nash.
National launch two it would be helpful. Yes.
Yes, I think product was really excited about Vita Coco coconut juice in a can.
<unk>.
Great results this year and that's going to be launching national next year across the store. So really excited about that I think it's a big opportunity to play.
Segment of the category that we've never really played in.
We don't we haven't talked much about it but power lift is showing some really nice initial signs and we are going to expanding distribution on it into a couple of territories next year further expanding the test its not a national rollout.
And I think.
As you think about the <unk> opportunity.
That will be launching national in Q1.
It's going to be a big launch we're excited about it.
The majority of.
The profit against that is going back into marketing that that concept in that brand.
And then we think that it's a real opportunity to help us like I spoke about.
<unk> remarks to help us really start to talk to consumers about using token of orders a mixture and bringing vita Coco on premise like you go to a bar or restaurant anywhere. These days, there's no coconut water, yes, theres coconut water pretty much everywhere else that you might go to at retail. So we think it's a real opportunity to bring coconut water on premise.
And we think it's a it's a really good new consumer occasions for us that's the real objective there.
Great. Thanks, guys.
Thank you as a reminder to ask a question you will need to press star one one on your telephone.
Our next question comes from the line of Bryan Spillane from Bank of America.
Thanks, operator, and good morning, everyone.
I just had one question.
Well you could could I hope its more of a detailed question, but on slide 15, you go through the.
Lifting the components of the changes in the revenue guide for this year. So I think it's a $23 million reduction at the midpoint can you just quantify like how much is FX how much is out of stock how much is private label just I'm just trying to get a sense of the magnitude of the pieces. If you could help us with that please.
Okay.
Sure and I think.
The biggest impact is basically our estimate of growth over last year's which numbers, which were obviously very big but if I was.
Compacts that stuff that we could put dollar amounts around.
$4 million estimated lost sales out of out of stocks in Q3 with some residual impact in Q4, probably lesser we've got foreign exchange impacts on revenue of $2 million in Q3 with potential for similar in Q4, if exchange rates.
Remain where they are.
The private label business is obviously reported that we think the year to date numbers property will represent the full year numbers.
And probably are a little slower than we anticipated in terms of.
I think we expected a bigger impact from the gained accounts versus the lost regions, we probably cut back a little wrong, but thats sort of a lesser impact.
And I'm trying to think if I'm missing anything in the stack I think that's the big the Big thing is like we said, we grew 63% Vita Coco coconut water last fourth quarter over.
Over the prior year.
And really starting to now understand what the steady state looks like and what the brand growth looks like which is the mid to high teens.
Alright, and just so as we're kind of thinking about that stack going into next year. Some of the like the foreign exchange is going to sort of continue to be a headwind at least for the first half, but the other pieces I guess as we're thinking about how they kind of tack to the color you gave this morning at <unk>.
Sounds like.
Maybe the private label piece may linger, a little bit in the next year, but if you've kind of right size the growth off of this space.
And the out of stocks get better it just seems like somebody. Please these headwinds in the stacks begin to kind of minimize that is trying to get at is just what are the risk factors might be as we're thinking about the pieces that build into the revenue guide that you gave I think thats right.
Headwind from the stack start to minimize yet.
Yes, Okay, alright, thanks, guys. Thanks.
Thank you at this time I am showing no further questions I would like to turn the conference back over to management for closing remarks.
Thanks, everybody for joining us today, and obviously look forward to working with you over the next quarter and obviously look forward to speaking again next year when we have full year results.
We will hopefully have better visibility.
Full year volume growth, but also the potential significant benefit to the gross margin and EBITDA lines from the normalization of the transportation costs. So we're excited about 'twenty three and look forward to having a greater insight into that next time, we speak. Thank you very much.
This concludes today's conference call. Thank you for participating you may now disconnect.
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