Grove Collaborative Holdings, Inc.

Ladies and gentlemen, and welcome to the Grove Collaborative 2Q22 earnings call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero on your telephone keypad to reach a live operator. At this time, it is my pleasure to turn the floor over to your host, Alexis Tessier. Ma'am, the floor is yours.

Hello, and thank you all for joining us today. With me on today's call are Growth's co-founder and CEO, Stuart Landesberg, and CFO, Sergio Cervantes. Before we get started, I'll quickly cover the forward-looking State Harbor. Some of the statements that we make today are about our future prospects, financial results, business strategy, industry trends, and our ability to successfully respond to business risks may be considered forward-looking. Such statements involve a number of risks and uncertainties that could cause our actual results to differ materially. All of these statements are based on our view of the world and our business as we see it today. As described in our SEC filings, the underlying facts and assumptions for these statements can change as the world and our business changes. For more information, please refer to the risk factors discussed in our most recent filings with the SEC, which are available on our investor relations website at investors.grove.co. During today's call, we will also discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided in our earnings release and supplemental earnings presentation, which are also available on our investor relations website. With that, I'll turn it over to Stu.

Thank you, Alexis, and good afternoon, everyone. I'm excited to speak to you today after our June listing on our first earnings call at the public company. We will share details on our performance in the second quarter, how our results fit within our shareholder value creation plan, and why we believe Grove is positioned for success as we lead the household products industry to transformational change. For those of you newer to the Grove story, let me first provide background on our company and the mission that got us started. At Grove, our vision is that consumer products can be a positive force for human and environmental health. We operate in a massive industry with almost a $1 trillion investment global TAM for home and personal care products, $180 billion TAM in the U.S. alone. Essentially, all of that commerce is wrapped in single-use plastic today. Simply put, the current plastic and carbon footprint of our industry is not sustainable. In 20 years, products in our industry will look different. Change is inevitable, and Grove is leading that transformation. The home and personal care industries historically have a mixed track record for their impact on human health and a terrible track record for their impact on environmental health. One problem, though, in particular, is the tip of the spear both for our industry and for Grove, plastic. The overwhelming majority of consumers, 84% in the U.S., are concerned about plastic waste. Grove is focused on being the market leader in solving that problem. The opportunity at Grove is to transition the products that we all use each day, hand soap, dish soap, laundry detergent, bath tissue, shampoo, face wash, both to be good for us and for the planet. We are building this company to serve the families of tomorrow as consumer-led action on climate change, and more specifically on plastic, is only accelerating. It has been a journey to get here. I started this business in 2012, initially as a direct-to-consumer company offering a curated portfolio of products from the best third-party natural and sustainable brands in home and personal care. Over time, Grove has built a loyal and engaged user base. We have over 1.5 million active customers today on our DTC platform. We leverage the uniquely rich data set and our consumer relationships, along with clear conviction about a more sustainable future. to create our own truly disruptive set of brands. We've spent the last decade gradually but significantly building authentic brands in home and personal care, and notably our flagship Grove Co. brand is number one in zero-waste home care and really leads that category in awareness, in presence, efficacy, and sustainability. The products we launch under Grove Co., as well as other incubator brands, such as Peach Knot Plastic, Super Bloom, and Good Fur, are not only better for consumer health and the health of the environment, but they're highly efficacious. It's worth pausing for a second on efficacy, perhaps the least glamorous of our design pillars, but essential for long-term customer loyalty. If a product doesn't perform as well or better than current market leaders, Grove Co. will not launch it. Grove products work as well or better than the products consumers are used to today. This, along with our strong brand, drives exceptional customer loyalty. We have always sought to also build a big tent around sustainability. That means we need to target the middle of the bell curve consumer and deliver products that are a good value in addition to being truly innovative and efficacious. That intense focus on efficacy, sustainability, and consumer centricity has allowed us to establish a market-leading position, as I mentioned, in the two trends that we think are most important in zero plastic and sustainable home care. I firmly believe that our innovation roadmap for the coming years is far ahead of the rest of the industry. Our DTC routes not only allow us to make more informed product development decisions, but get to market faster and iterate more quickly than traditional peers. In terms of innovation, We just launched our fall seasonal collection, Natureless. It is super exciting. We have two limited edition scents inspired by fall traditions, Mulled Apple and Spiced Pumpkin. I encourage you to check them out while you can. Both are available on our site, app, as well as Target and Target.com. My personal favorite is Mulled Apple, but I certainly respect that Spiced Pumpkin has a big following. While our business was built on DTC, industry-wide, less than 10% of purchases were of home and personal care products are done through direct to consumer. Over 90% of purchases in our category are made through traditional diversified retail. With this in mind, in 2021, we expanded distribution beyond our own DTC platform into brick and mortar retail for the first time through a partnership with Target. We did this to elevate our brand, drive exposure, increase awareness, and meet consumers where they are. We are extremely pleased with our partnership with Target. They have been true partners, providing visibility and helping to educate consumers on how our products solve an environmental problem without compromising on efficacy. Our success at Target has been an excellent proof point of our strategy, helping build momentum in our retail distribution rollout, which I'll discuss in a minute. But before moving on to performance in the quarter, I'd like to point out that Grove is both a certified B Corp and a public benefit corporation. which enables us to balance the interests of all stakeholders and the environment. This is so much more than just an insignia on a page for us. It is entwined with the DNA of the company and how we think about changing the world and how we think about building a durable, long-term, competitive advantage relative to our peers. We believe that an authentic commitment to our mission is critical in attracting and retaining the best talent in the world, securing the best partnerships, with influencers, celebrities, and other brands, and building deep connections that can last for years with our consumers. I'm extremely grateful to all of the Grove team members for their hard work and dedication over the last decade, and I am a firm believer in the fact that great people are what create great and differentiated companies over time. Now, moving on to our performance in the second quarter. Our results represent the beginnings of our effort to eliminate unprofitable revenue and drive improved margins on a sequential basis in order to be profitable in 2024 in line with our shareholder value creation plan. In total, for the second quarter, revenue was $79.3 million, down 20% year-over-year and 12% compared with 1Q22. Adjusted EBITDA was a loss of $21.1 million, essentially in line with last year's loss of $21.0 million, but a significant and notable improvement from the $39.7 billion loss in the first quarter of 2022. These results trended better than our internal expectations. Based on our performance through the first six months and our outlook for the remainder of the year, we are pleased to raise our full-year guidance for both revenue and adjusted EBITDA margins, despite the macro environment. Sergio will walk through the specifics of guidance in a moment. While the year-over-year comparisons certainly reflect the fact that we are giving back some of the pandemic benefit, we believe that sequential comparisons better represent the trends in the business, as well as the decisive steps we have taken to position ourselves for long-term success, including our strategic decision to pull back on our least profitable advertising spend. Of note, we are pleased that gross margins increased in the quarter, and we continue to drive progress there. In the quarter, 60% of Grove Brand's net revenue came from either zero plastic, reusable, or refillable products, all of which meet the company's Beyond Plastic standards. This is up significantly from 47% in the second quarter of 2021. We also improved on a metric we call plastic intensity, pounds of plastic per $100 in revenue. We believe that we are the first in the industry to report on this metric. Sitewide, plastic intensity improved to 1.07 pounds of plastic per $100 in revenue from 1.34 in 2Q21. Across all Grove brands, plastic intensity improved to 0.87 pounds of plastic per $100 in revenue from from 1.18 into Q21. We hope that by disclosing this metric, we can encourage others to do the same, shining a spotlight on the issue of plastic waste and driving the industry to meaningful change. We have put in place a clear and actionable shareholder value creation plan to drive sustainable growth, expanded profit, and strong shareholder returns over the coming years. Our value creation plan consists of four elements. One, improved marketing efficiency. omni-channel expansion, three, net revenue management, and four, OpEx discipline. I'll touch on each, starting with marketing. Like many businesses similar to ours, we grew up on paid social. And like many others, we've seen material and persistent cost inflation in this channel. We have successfully diversified our advertising spend so that paid social is now only approximately 20% of our mix. We've done that by expanding to a full funnel approach to marketing that leverages our omnichannel presence and our further developing tools to drive unpaid traffic. Beyond this, we have made significant progress on upgrading our marketing stack, which has historically been fairly unsophisticated for the scale of our digital business. This year, we will finish a marketing technology implementation, which will materially improve our ability to segment and target on an individual basis. We expect this upgrade to begin having an impact on customer engagement in the third and fourth quarters, and even more so next year. In addition, we continue to work hard to make it easier for customers to try and to repurchase from Grove. We're doing so by lowering the barriers and improving the customer experience on our direct-to-consumer platform. This includes creating more non-subscription ways to shop Grove, which we believe will lower tax, increase order conversion, and drive higher retention. Lastly, and perhaps most importantly, we're continuing to focus on building our awareness. We launched an exceptional partnership with Drew Barrymore in May, who joined Grove both as an investor and as our sustainability and brand advocate. Together, we launched Grove's first multi-channel brand campaign, Wish Cycling, which focused on debunking the myth that recycling is the solution to the plastic crisis. Since announcing the partnership in May, we have secured media coverage and social posts, garnering hundreds of millions of impressions and engagements today. Switching now to number two, omni-channel expansion. As I mentioned earlier, We are only a little over a year into our strategy of driving omnichannel expansion, and our results at Target are helping us build momentum in this channel. We were the number one launch in hand, dish, and cleaners in 2021. According to May Nielsen data, we also achieved top 10 brand status at Target in hand and dish, including all conventional and national brands, within our first year. Last month, we announced that we more than doubled our product assortment in Target stores and on Target.com with their shelf reset in April. We did this to include a broader selection of scents, room spray concentrates, laundry detergent sheets, and reusable dishcloths. An incredible endorsement of our products and our brand's ability to bring in new customers. In fact, 30% of Groveco shoppers at Target were new to the category, as shown by numerator data. In addition, we added more than 700 doors in the second quarter across three new retailers, Kohl's, Giant Eagle, and Meijer, as previously announced. While still too early to comment on performance, all of the stores have end caps and beautiful merchandising. We continue to have discussions with additional retail partners and expect to grow our points of distribution in 2022 by just over 300% year over year, with opportunity for upside. There is a $250,000 addressable market in the US, and we have about 400 SKUs we can take to retail distribution. This opportunity is enormous. In addition to physical retail, Grove is making strong but early progress on Amazon, where our flywheel is beginning to accelerate off a small base. Teach Not Plastic, our zero-plastic bar format personal care brand, is seeing strength on Amazon, with consumers loving the brand's shampoo, conditioner, and body wash. While still quite small, we've doubled the business in the last six months and are excited to continue to expand our offering and learnings at Amazon. Omnichannel growth is significantly more capital efficient than DTC growth, And we believe the balance of the two will allow us to drive durable top-line growth with material bottom-line expansion. The third element of our value creation plan is systemic net revenue management processes, which are embedded in all functions across all categories. We see material upside to capture here from initiatives including strategic pricing, maximizing the category mix, and enhancing promotional sell-through. Many of these initiatives are already underway, and we look forward to updating you on our progress on future earnings calls. Lastly, we are working to right-size our operating expenses to achieve sustainable and profitable growth. On top of the 17% reduction in force that we implemented at the end of the first quarter, we see opportunities to operate more efficiently across the board while reallocating resources to the highest ROI initiatives. We have a full vendor audit underway and are evaluating ways to reduce fixed expenses like real estate, and have significantly reduced hiring plans for the balance of 2022 and 2023. While we are proud of the progress we are making, we have so much more to do, and we will continue to focus on executing against our shareholder value creation plan while advancing our goal of becoming 100% plastic-free by 2025. We have a clear vision of the growth that emerges on the other side, though, having successfully executed against this value creation plan. It is a disruptive, high-margin brand in a massive town with market leadership and differentiation around long-term sustainability trends. We will still have enormous white space for omni-channel distribution expansion that will allow us to grow at multiple times the industry average, and we will continue to have strong gross margins helping to drive EBITDA profitability inside the forecast periods. And our value creation plan puts the elements of this success in our own hands to the fullest extent possible. We are hungry to continue our execution here every day. Overall, the success of our mission and shareholder value creation at Grove are highly aligned. We are confident and we are driven to continue to drive progress on both fronts. Before I turn the call over to Sergio to take you through our financial results and outlook in more detail, I want to end by saying how excited I am to have him on the team. Sergio joined in April as CFO, brings significant financial executive experience in global consumer products, including 18 years with Unilever and four at Gillette. At Unilever, he was most recently the CFO of Murad for six years, where he successfully implemented operational and financial efficiencies that drove both sales growth and profit impact. He is a huge asset to growth and is already making an impact. Take it away, Sergio.