Q2 2022 Zevia PBC Earnings Call

by offering great tasting accessible zero sugar plant-based beverage platform to move us up the road to improved health on a global scale.

Media continues to experience strong and accelerating consumer demand and category-leading dollar and unit growth.

In Q2, we delivered a record net sales of $45.5 million, which represents a 32.5% revenue growth and 30% volume growth.

we are realizing a positive mix shift driven by trade-ups, and we see strong early indicators of consumer acceptance of recent and forthcoming retail price increases.

We have a stable supply chain with strong availability through the network and we do not anticipate any material supply chain risk through the rest of the year.

We continue to realize our mission with a focus on global health for people and planet, removing another 3,700 metric tons of sugar in the diets of our communities this quarter and replacing another 56 million plastic bottles in those communities. We remain affordable now at the 37th index versus all other non-alcoholic beverages from a price standpoint.

In recent months, we've strengthened our leadership team with experienced players and critical CFO , COO, and now Chief Commercial Officer roles, bringing in new capabilities and signaling the opportunity for accelerated improvement in operational efficiency, cost reduction, and sales execution.

And we are paving the path to profitability, with a strong run rate of improvement on the need for saving a lot.

Denise, our CFO since May, will speak about this more in a moment.

I'll now provide some details on the consumer base, drawing from syndicated data, followed by some texture on the business through a portfolio and channel lens.

ZVIA is growing by winning new consumers and intensifying consumption within the base. Household penetration is now at 6.1%, growing 1.4 million households, or 22% in the past 12 months.

Consumption intensification increased among total consumers as average household spend increased again this quarter versus prior year by 4% or $1.22 now to an average of $33.18.

Further, the existing base increased their spend 69% to $55.51 on average. Both of these figures demonstrate we are bringing in new consumers and both existing and new consumers are buying more ZVIA than in the past.

ZVIA's growth doubled out of the broader non-alcoholic beverage category and leads zero-diet CSD by a wide margin, growing 23 percent in measured channels in Q2 according to IRI scan data, while zero-diet CSDs grew a still healthy 16 percent.

Viva brings a highly desirable shopper to our retail partners who is less price sensitive at all income levels. As a better for you multi-pack home stocking brand, shoppers are choosing larger pack sizes and spending more than ever across the portfolio even while overall discretionary spending is under pressure.

The Xevious shopper spent 37% more and made 1.3 times more frequent trips for total beverages than the average US soda category shopper in Q2 according to NuVirator.

In short, ZVIA is growing the consumer base at an accelerating rate, and the base is spending more on the ZVIA brands than in the past.

Breaking down sources of growth, Velocity accounted for 47% of scanned sales growth in Q2, while new store or new item distribution accounted for the other 53%.

New distribution and new item growth was bolstered by the club channel, by expansion of our kids line where we gained 4,800 new food and mass merch channel store selling versus prior year, and by energy drink performance in a natural channel, where new energy drink flavors accounted for 34% of overall brand growth.

The summer limited time opera flavors also bolstered performance in the natural channel as orange cream and fruit punch were the number 3 and 4 selling Zevia items, accounting for an additional 20% of growth in that channel.

The club channel continues to prove highly strategic and incremental to the brand and to retail partners.

Since our launch in the channel and year-to-date in 2022, almost three-quarters of new-to-Zivia shoppers and clubs are also new to the brand, and two-thirds are also purchasing any sodas in the channel for the first time. Zivia club shoppers are highly incremental but also highly valuable across channels as they spend 35% more on Zivia in the food channel over the past six months than the average Zivia shopper. Zivia is one that file as a

Velocity, accounting for 47% of growth, was heavily driven by trade-ups from 6-pack to 8-pack and from 10-pack to 12-pack. Our new 12-pack business has been incremental, accounting for almost half of the food channel growth.

Sales in the e-commerce channel focused on 12- and 24-pack apartments have also reached record levels in the second quarter. The shopper is trading up and stocking at home with a trusted brand.

Velocity was also supported by a five-point increase in promotional lift, stemming from more feature and display, and thus more effective, promotions, despite spending levels being flat to prior year, and 14 points below that of category levels.

To be clear, 40% of our volume sold is on promotion versus 54% of the category.

So into this healthy environment, we've introduced an additional price increase at a blended 10% across the full SOTA portfolio in all packs, channels, and geographies, which went into effect August 1st.

And finally, we've added a new Chief Commercial Officer to the team, an industry veteran, Greg DeBeaux, bolstering our ability to improve presence and execution at retail, including price execution and promotional effectiveness.

and to accelerate distribution expansion.

In summary, we had a strong Q2 reflecting our increasing organizational capability and thus accelerated execution.

We have a stable supply chain, a healthy and growing consumer base, and a clear indication of pricing power as we execute an August 1st increase across our full photo portfolio. All of our key initiatives are showing solid progress, and we are well positioned to drive growth and significantly improve profitability. And with that, I'll hand it over to Denise.

Thank you, Amy, and good morning, everyone. It's great to be here with you.

I am so thrilled to have joined ZVIA and be a part of this incredible team focusing on growing the business profitably as a key part of our strategic roadmap.

Today, I will begin with an overview of our second quarter financial results and then speak to Guinan for the year.

We will then open the call for your questions.

As Amy previously mentioned, we are pleased with our second quarter results, especially our top line performance.

In addition, we have made sequential progress on improving profitability compared to the first quarter despite significant inflationary headwinds.

Second quarter net sales increased 32.5% to 45.5 million, which was well above the top end of our guidance range of 41 to 43 million.

Volume growth was the primary driver, up 30% on an equivalent case basis, and we also benefited from higher price realization and optimized promotional investments.

Regarding pricing, you may recall that we instituted a price increase of 6% on our six-pack soda packages effective starting Q2, and began seeing the impact of this increase later in the quarter.

The benefit we derived from optimizing promotional spend was above the net sales line, so not visible to you in our reported financials. However, it's an important factor in our overall performance and an area we believe offers further potential for improvement as we continue to grow and scale our business.

Gross profit of $17.4 million was up 1.1 million or 7% versus a year ago, reflecting growth of net sales partially offset by higher cost of goods sold.

Growth margin was 38.1% down from 47.3% a year earlier, primarily due to the impact of inflation on manufacturing costs partially offset by product mix.

On a sequential basis, our gross margin was relatively stable, down 30 basis points, as improvement in aluminum were more than offset by higher other manufacturing costs.

Selling and marketing expense increased 30% to $13.9 million, reflecting higher freight and warehousing costs related to volume growth as well as inflationary pressure, some stemming from a challenging transportation market.

Lower marketing costs provided a partial offset due to a shift in timing and an increased efficiency of certain marketing programs.

G&A expense was $9.8 million or 21.6% of net sales in the second quarter of 2022, compared to $6 million or 17.4% of net sales in the second quarter of 2021.

The increase was attributable to higher employee headcounts to support growth and associated public company costs.

Stock-based compensation, a non-cash expense, was $8 million in the second quarter of 2022, of which $3.8 million of accelerated restricted stock unit rewards were related to the retirement of certain legacy senior management employees.

Net loss was $14.8 million or $0.28 for diluted share of CBA Class A common stock, a 7% sequential improvement compared to the first quarter of this year.

Adjusted EBITDA loss was $6.4 million compared to an adjusted EBITDA loss of $400,000 in the second quarter of 2021.

On a sequential basis, adjusted EBITDA improved by 23% compared to the first quarter of this year.

Our balance sheet remains strong, with $49.6 million in cash-in-cash equivalent and no outstanding debt, as well as an unused credit line of $20 million.

Turning to guidance.

Based on our results and strong consumer metrics, we are reaffirming our 2022 Annual Net Sales Guidance of $177 million to $182 million, an increase of 28 to 32% over 2021, including $46 million to $48 million in Q3 of this year.

We continue to deliver strong volume growth as a primary driver of top-line performance in Q3 and Q4, reflecting accelerated velocity and distribution expansion.

In addition, we have implemented another price increase averaging 10% across the soda category, effective August 1.

That concludes our prepared remarks.

We are now ready to open up the call to your questions.

Operator.

Thank you very much. To register questions or comments, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered or you would like to withdraw a registration, please press 1-3. Again, we do welcome questions or comments. To register, please press the 1 followed by the 4 on your telephone.

Our first question comes from the line of Bonnie Herzog of Goldman Sachs. Please proceed with your question.

All right, thank you. Good morning everyone.

I have a question on your guidance. Your full year guidance implies around I guess mid 40% growth in Q4, which is a pretty big acceleration. So just wanted to better understand what the key drivers. I do not necessarily present theG

of that will be and then just how much visibility you have on that.

Good morning, Bonnie. This is Denise Beckles, and I'm speaking with you. Regarding your question, we believe that because we continue to see such strong velocity and distribution expansion, that our Q4 guidance is more than achievable. We stand by our full year guidance that we provided earlier this year and we provided today. For more information, visit www.q4.com

Okay, and then is it also, as I think about the mix, is the expectation of pricing, maybe improvements in mix as well as we get towards the back end of this year? Is that part of it? Let me hand you the research.

Yes, that is absolutely correct.

Okay, and then maybe a question on the cost pressures that you're facing. Can you just give us a little bit more color on...

you know, really where the severe, I guess, impact is and maybe anything that you're doing to mitigate some of these costs as well as, you know, potentially some of the cost-saving initiatives that you've highlighted in the past and how that's...

you know, potentially get to minimize this going forward.

Yes, I'll put that answer in two ways. One, we did face inflation which contributed about seven points of pressure and aluminum and others three points of pressure but got positive impacts from mix. What we are working on today is we continue to work on cost initiatives on the cost line to mitigate some of that by looking at any of our input costs around raw materials.

that we can affect in the short term. We also know we'll get a positive impact from pricing. As you know, we've taken that 10% on average against the soda category beginning August 1.

From a cost perspective, just on the G&A line and our other costs, that we believe we have strong controls over, we are doing everything to cut those costs. And some of the initiatives we've already put in place, we expect to see through the end of the year. So, on things like our insurance costs and some of our other costs related to consultancy, we have started cutting those costs, and we will see the impact of those.

for the rest of the year.

Okay, maybe just please do a quick follow-up. I know, I find it, sure.

Just wanted to clarify something. Do you hedge at all as we're looking at some of these commodities?

And then in terms of the cost-saving initiatives that you just highlighted, have you quantified those for us?

Or can you?

No, we cannot quantify those for you at this time.

Okay. All right. Thank you so much.

And Bonnie, if I may, it's Amy just to speak to the outlook and the acceleration. I think one thing worth noting is that we're learning our brand is not subject to the negative impact of economic downturn that has on those brands that rely on more away from home consumption. So we don't see a trade down effect that many other brands are seeing. And we are actually seeing similar positive home stocking and spend level trends that we saw in peak COVID error.

along with additional mixed benefits given our recent pack and channel evolutions where we see pack trade-ups. So that in combination with our price increase across soda, all packs, all channels and all geographies, pay into our outlook hand-in-hand with accelerated velocity that we see in the prior month.

Thank you. Our next question comes from the line of Brian Spillane of Bank of America. Please proceed with your question.

Thanks operator. Good morning everyone. I have two questions. And the first one maybe just to follow along I think what Bonnie was getting at in terms of

maybe margin recovery, if we just think about the price increase that I guess is implemented August 1st.

Are you now at a point where you've priced enough to begin to recover margins based on kind of where your cost basket is today or?

will you need to take additional pricing maybe at some point next year in order to recover margin? I'm just trying to understand basically if pricing is caught up to where you are in terms of inflation.

Good morning, Brian . Yes, we believe we've taken a price increase that does exactly that. We expect to realize the price increase through the end of the year. That's the price increase that we put in on the 6% on the six pack earlier this year in second quarter and also the 10% on average in the second half of the year. We believe that that will help us to mitigate inflation.

Okay, that's helpful. Thank you. And then I guess the second question just around household penetration and.

And thank you for sharing the data. It's actually very encouraging to see just the step up in household penetration. I mean, can you maybe do you have any any color or could you give us any sense of as your household penetration is expanding? Is it are you moving into maybe different types of households than what the original or kind of the existing ZVIA base is? And I guess what I'm trying to understand is, is are you beginning to get a sense that it's becoming more mainstream, right? It's not just the health.

with a lot of upside. But when we see more of our growth coming from channels like Mass and Club, which is of course fueled by the macro environment, but for us those are highly incremental so bringing in new households and to your point different types of households. And what's been interesting for us is that we see very limited price sensitivity across all income levels as we bring in households of different income levels through different channels.

So that's a yes with a little bit of backup through a channel lens. All right, great. Thank you.

Thank you. And our next question comes from the line of Dana Telsey.

of Kelsey Advisor Group. Please proceed with your question.

Hi, I thought the data point on promotions was interesting how your 40% in the industry is 54%. How are you planning that going forward and what's the magnitude of promotions? Does it differ at all by channel or by account in terms of how you're planning? And then also can you give any color on the update regarding aluminum costs and availability in terms of what you're seeing there for the back half of the year? Thank you.

Hey, thanks, Dana. I can just speak generally to our promotional strategy and then turn it over to Denise. So you're right, we saw improved effectiveness of our promo investments in Q2 as our spend was flat and our lift increased by points. And we attribute that to our channel specific approach focused on the right packs at the right depth levels through the lens of profitable growth as well as driving trial. And yes, that does vary by channel. I won't speak to that, maybe channel by channel.

or better lift as a result. And we shift across pack and channel as we see the macroeconomic changes driving foot traffic differently across channel. And then to answer your question around aluminum or manufacturing on the whole, I'll turn that over to Denise.

Good morning, Dana. On your question on aluminum, we actually have seen prices come down in aluminum. However, if you think of the way that impacts our business, we will see the positive benefit of that in the second half of the year because it takes – there's a delay or a lag effect of when prices change in the aluminum market that we actually then people through in our actual cost.

So, this is important to note. We do expect to see a benefit if it continues to be stable. Part of it is going to be the stability of aluminum, as you know. Any other question on aluminum?

Nope, that's it.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Ben Bienvenue of Stevens. Please proceed with your question.

Hey, thanks. Good morning.

I want to ask about gross margins from a slightly different angle with respect to cost of goods sold per case. Recognizing that the pricing increase that you took will help with profitability, how should we think about COGS per case? I ask because if we were to keep that measure flat from here.

it does look like your gross profit margin would sequentially improve from the first half to the back half, but it would be down considerably year over year. So I'm just trying to understand the flow through dynamics of that and then maybe where you expect that trend of aluminum costs come down.

So I think your assessment is correct. We believe that our margins will improve from the price increase from certain efficiencies in cost of goods sold and we expect to see that increase through the second half of the year.

Okay, so margins better from the second half versus the first half of maybe still feeling some pressure as you get through these elevated costs that linger.

Yes, I think that is accurately stated. Okay, great. My second question is around marketing spend.

You noted that there was some decreased marketing spend. It sounded like a timing shift, but you also mentioned efficiency of marketing. So wondering what the right rate of spend might look like as you move forward. And also kind of bearing in mind as consumers get more price sensitive, although that doesn't seem to be as acute of an issue for you all as you noted, just given the brand loyalty and the repurchase rates. What marketing...

you expect to lay out for the remainder of this year and then into next year? No, it's a good question. Thank you, Ben. I would say our selling and marketing costs.

I can't comment exactly on whether they're high or low, where they should be. What I can say is they're not necessarily in the right place right now. So we anticipate right sizing our consumer marketing over time by shifting more dollars into pull as we drive the cost savings initiative that Denise has outlined. Speaking specifically to the second quarter, you're right, we saw timing variance. But we also are driving efficiency and effectiveness in marketing right now as we speak. And as an example, we improved digital engagement and impressions versus –

and the organization's been responding very quickly to those. The other thing noteworthy here is that as we discussed on prior calls, we'll have a brand refresh rolling into 2023. And with new visual assets and clear positioning and communication strategies around the brand, we see that as an opportunity to put incremental investments on a dollar standpoint, if not percentage, into the consumer. So into a healthy environment in 2023.

we'll focus on the consumer and we'll do that through a shift in resources within the P&L, if that makes sense. It does. That's great. Thank you.

And again, as a reminder, to register questions or comments, please press the 1 followed by the 4 on your telephone.

Our next question comes from the line of Andrew Strelzik of BMO Capital Markets. Please proceed with your question.

Hey, good morning. Thanks for taking the questions. First, on the cost side, if you could just clarify one question together.

the marketing timing shift that you talked about, are you able to quantify that? Does that come back in the back half of the year, or does it maybe stay lower in anticipation of putting somebody behind the brand refresh in 23, is the first part of that. And then the second on the cost side would be, you know, with some of the, I guess, underlying quantity prices coming down, and I know obviously you have to work through the inventories, what would be the timing to which you think you might be able to start realizing some of those lower prices?

Okay, so I'll unpack the first part of your question and maybe you can repeat the second for me. Good morning, Andrew. So on the first part of your question, marketing, some of it is timing and basically to support the programs that will run in the second half of the year. And some of it is actually from efficiency, so will not come back. And literally it's from making sure our marketing programs are effective and working.

and those dollars are really generating growth for us. That's to explain market. Can you please repeat the second part of your question for me?

Sure. You know, with aluminum, maybe some transportation costs, at least, you know, the spot prices that we look at having.

Come back a little bit and I know you have some contracting and some Inventories to work through but at what point do you think or how long do you think it will take before? If the market cooperates you'd be able to realize some of those lower costs on the P&L.

We actually believe we will start seeing them effective over the whole second half of the year. So, you know, the way we've looked at our business is we're looking to do everything to become more efficient in our costs. So we might not be able to fully control inflation, but any costs we are able to control, we're working to manage those through many of the initiatives we've put in place. So they will come back with improvements in the second half of the year.

Okay. And then my last question, I guess I'm just thinking about the packs that you offer and the home stocking dynamics and.

the potential to enter the C-Store channel and all of those dynamics. I guess how if at all does what you're seeing from your consumer and how they're interacting with the brand in this environment change? Maybe what packs you might offer, how you think about the different channel opportunities. Does anything longer term. crime, ever and ever, we hope that this has something for your customers, a unit, a nectar of enzymes or ex.maybe an eye

impact your decision making. Thanks.

Yeah, thank you. I can talk about that. So we brought on a new chief commercial officer and of course this individual asking similar questions. So meaning that as we look at our PAC mix.

Did we make those decisions? Have we been focusing on the right packs and the right channels in light of an anticipated economic downturn? And the answer to that was no, we actually see a really healthy environment. And we believe that that's really rooted in the nature of our product platform. So a trusted yet, you know, premium yet accessible brand with a better for your product with strong historical multi pack sales and a less price sensitive consumer. We don't we see a lot of opportunity to optimize growth by channel by introducing more multi packs and multi packs oftentimes that are unique to a channel which then

those that have been with us for two years are spending 69% more on ZVIA today they have in the past. And yes, some of that is brand growth, but we believe some of this is simply pack price architecture by channel. So when we look to the future in a changing economic environment, we actually feel that we're either lucky or smart in thinking about our price pack architecture by channel and will continue to drive that. The next opportunity being to expand our immediate consumption business across relevant channels as we've discussed in the past.

Great, really helpful caller, thank you.

And that does conclude today's presentation. We do thank you for your participation and ask that you please disconnect your lines. Have a great rest of your day.