Zevia PBC

Welcome to Xebia's third quarter 2021 earnings conference call and webcast. On today's call are Patty Spence, Chair and Chief Executive Officer, Amy Taylor, President, and Bill Beach, Chief Financial Officer. By now, everyone should have access to the company's third quarter earnings press release and investor presentation filed this morning. The information is available on the investor relations section of Xebia's website at investors.xebia.com. Before we begin, please note that all the financial information presented on today's call is unaudited. Certain comments made on this call include forward-looking statements which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subject to a number of 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 detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. 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, presentation slides that accompany today's comments, and reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are all available on our website at investors.gbs.com. And now I'd like to turn the call over to Patty Spence, Chair and Chief Executive Officer.

Thanks, Reed. Good morning and welcome to the third quarter fiscal 2021 earnings call for GBS PDC. ZDM markets great-tasting, zero-sugar, zero-calorie beverages with simple plant-based ingredients that deliver the bubbles, sweetness, and enjoyment of the carbonated soft drink category. We are also dedicated to improving global public health by reducing consumers' intake of sugar, eliminating single-use plastic beverage packaging, and providing better-for-you products that are accessible to households at all income levels. We believe EVIA is an exciting investment opportunity not only because of our $770 billion global market opportunity and the 10-year track record of 32% net sales growth that we've achieved through 2020, but also because of our talented team and execution focus. Execution is this operating team's strength, and the speed at which we are achieving success against our internal initiatives with the new resources and team members we've added in the public company has been encouraging to see. In the third quarter of 2021, we demonstrated continued success in executing against a variety of initiatives that we'll discuss on today's call, including channel expansion, innovation, and supply chain efficiency. Management's priority is executing our long-term strategic plan, And later on today's call, our president, Amy Taylor, will provide additional detail on our long-term initiative. Broadly, we continue to see momentum and growth across a range of channels. And in the third quarter, achieved ongoing double-digit sales gains, expansion into new items and channels, increases in household penetration, and per-household spending gains. These are all key indicators of the health of the ZDF grants. At the same time, our business is experiencing the cost pressure on input that many of our beverage peers are facing. We remain focused on mitigation efforts while continuing to scale. We'll discuss later on the call the extent to which we believe that Zevia is effectively managing these cost pressures. Zevia's net sales momentum is accelerating as we head into the fourth quarter of 2021. As such, we now expect net sales of $36 to $38 million in the fourth quarter, which would reflect growth of 30 to 37% versus the fourth quarter of 2020. This would result in a full-year 2021 net sales expectation of $140 to $142 million, or 27 to 29% net sales growth versus fiscal 2020, in line with our long-term growth algorithm of 30%. In the third quarter of 2021, ZVS continued the double-digit net sales growth we've achieved for the past decade. We delivered a record net sales quarter of $39 million, representing 22% growth versus the third quarter of 2020. This was a combination of 26% volume growth and a 4% investment in price mix, as we invested in trade promotions to drive consumer trial and repeat purchasing, which we believe will support our continued growth. On a sequential basis, we grew net sales 13% versus the record net sales Zedia achieved in the second quarter of 2021. And on a two-year basis, Zedia's net sales grew 88%. The Zedia brand continues to resonate with consumers across North America, as evidenced by this rapid and accelerating growth. In terms of gross profit, we achieved a record $17 million for the quarter, representing a 44% gross margin. The reduction from last year's 47% gross margin can be mainly explained by our investment and trade promotions, as we have effectively managed the cost headwinds that many of our beverage peers are facing. Management actions resulted in COGS per case growing by 1.6% versus the third quarter of 2020. Adjusted EBITDA for the third quarter was negative 3.5 million. Our growth in the third quarter of 2021 was fueled by continued expansion in consumer purchasing metrics. SIN's IRI consumer panel data for the 52 weeks ending October 3, 2021, indicates that media grew our household penetration from 2.4% in the year-ago period to 2.6%, an 8% increase. During this period, buying rates for households purchasing Zevia also grew from $33.40 to $38.80, a 14% increase. We believe these metrics demonstrate that Zevia is both reaching new consumers and increasing purchasing among current Zevia households, which bodes well for our brand's health. In addition, both repeat purchasing rate and loyalty for Zevia soda buyers remain strong. with repeat rate at 53% and loyalty continuing to lead the zero-calorie soft drink category at 44%. Zedia's strong focus on execution gives us conviction regarding the brand's ongoing runway for growth. We believe that channel expansion and innovation, which expand accessibility and consumption of the brand, are two key levers for continued growth. And our progress in the third quarter was significant. First, regarding channel expansion, the media is expanding to be available nationwide at Sam's Club, as well as in select Costco regions. The Warehouse Club channel, in which these two retailers are leaders, offers the opportunity not only to generate profitable transactions, but also to create significant consumer trial and repeat sales. Similar to the e-commerce channel, Zedia's rainbow pack variety pack of soda is the number one selling soft drink item on Amazon.com. Warehouse Club provides consumers the opportunity to try a variety of Zedia flavors. We have seen in our e-commerce data that 50% of Zedia's purchasers on Amazon.com also buy our brands in brick-and-mortar retail outlets. And on average, they spend three times what the average household spends on Zedia. Warehouse Club has similar characteristics, serving both as a transaction and a trial opportunity. For the six months ending September 30th, 2021, 58% of ZBS buyers in the Warehouse Club channel were new to the brand in that period, indicating that this channel is highly incremental to ZBS' current distribution footprint. We believe that our presence in this channel is complementary to ZBS' current retailers and will continue to drive growth in consumer awareness, trial, and repeat purchasing. Innovation is another key lever fueling Zedia's continued growth, and the performance of our new Creamy Root Beer flavor in the summer of 2021 is a great example of our team's ability to execute rapidly and efficiently. Within six months of introduction, Creamy Root Beer has become the number one flavor in our 10-pack packaging format, in many of our key accounts. Prior to this launch, Xebia had already established the number two position in zero-calorie root beer in the channels in which we compete, which we achieved with a unique flavor profile, ginger root beer. We introduced creamy root beer to target the category leader's nostalgic flavor profile, and we believe creamy root beer outperforms the category leader on taste. In addition, creamy root beer is highly incremental to the Xebia product line. with 31% of creamy root beer purchasers across all channels for the six months ending September 30th being new to the Zedia brand. The result of our strong execution on this new flavor is that Zedia's share within the root beer flavor segment increased to 13% in the 12 weeks ending October 3rd, 2021, from 11% in the year-ago period. As we continue to build the media brand, management is confident that building new doorways to the brand through both channel expansion and innovation, along with our 10-year track record of growing velocity on a chain store basis, will result in increased consumer awareness and ultimately scale. In the third quarter, we also made gains across a number of key ESG or social impact metrics. Zia's primary mission is to benefit global public health by reducing sugar consumption. In the third quarter of 2021, we estimate that we eliminated over 3,000 metric tons of sugar from our consumers' diets by selling our zero-sugar, naturally sweetened products and replacing legacy sugary oats. In our history, we estimate we eliminated over 50,000 metric tons of sugar from the diets of North American consumers. Replacing single-use plastic beverage packaging with more sustainable alternatives is another key area of focus. And in the third quarter of 2021, we estimate that we eliminated over 50 million plastic bottles from littering our roadways, our waterways, and our communities. Aluminum cans have the highest recycling rate of any beverage packaging format and a low carbon footprint in the supply chain. Lastly, affordability and providing access to better-for-you beverages for consumers of all income levels is a critical priority for the Zedia brand. In the third quarter of 2021, Zedia's products were priced at an average retail cost per ounce of $0.07, representing the 36th percentile within all non-alcoholic ready-to-drink beverages, excluding dairy and non-dairy proteins. That means that in this product set, Zevia is less expensive than 64% of non-alcoholic beverage options. I'd now like to turn the call over to Amy Taylor, our president, to share Zevia's continued progress on key strategic initiatives.

Thanks, Patty. Good morning. Today, we are simultaneously executing the Zevia business and transforming the organization as we build a new strategic plan to govern our way forward. I'd like to touch on both short-term and long-term levers that we have to build the brand and to accelerate growth. So first, I'll cover our immediate short-term levers. Regarding channel expansion in Q3, as Patty mentioned, we've entered warehouse club, and we're learning that the new distribution is already bringing in consumers who are new to the brand. We're expanding to national distribution at SAMS now, and we will increase household penetration in part because of this step change distribution. Patty also spoke about innovation. Our confidence in our new product is high, and two new energy drink flavors, Strawberry Huey and Pineapple Paradise, are currently receiving very positive feedback on Zevia.com. Zevia energy shoppers spend 83% more than total energy drink shoppers, so we believe these products will be very well received at retail going forward. Shifting gears to talk about our operations and cost of goods sold. Amidst the inflationary headwinds that many beverage brands are facing, The Xebia team is focused on cost optimization strategies to free resources to invest in growth. One of the most significant opportunities we have is in the variety pack segment of our business, which is key to both warehouse clubs, where we're growing rapidly, and e-commerce, where we remain the number one selling CSE brand. As of late Q3, we have begun insourcing manual repack processes and therefore are less reliant on third parties and able to take cost out of the system. At our new Indiana warehouse, which became operational in September, we have already achieved a 25% reduction in repacking costs. We expect this will carry through to Q4 and beyond, with increased impact on COGS as our pack mix and volume expand through this facility. The next step will be to make further capital investments to insource and automate or semi-automate stages of repacking. We anticipate this will reduce variable repacking costs by an additional 25%, in the first half of 2022 as we scale up the operation. Notwithstanding the recent spike in transportation expense in the market, this increase in scale provides additional opportunities for cost reduction in our supply chain. In Q3, we made progress on reducing transportation expenses. Through a combination of initiatives, including our new facilities focused on e-commerce fulfillment, we achieved an 18% reduction in e-commerce rate in Q3, which we expect to expand to a 36% reduction in Q4, and this equates to a $1.5 to $2 million savings for the company on a full-year run rate basis. And finally, on managing costs, I'll touch on aluminum, given that we exclusively use aluminum cans for our beverage containers. As we discussed on the Q2 call, we diversified our can sourcing in 2020 and 2021 amidst shortages in the aluminum can market. We ensure continuity of supply and achieve a greater than 95% in-stock level for our customers through the pandemic, and this continues. This effort required less efficient sourcing, less favorable points of origin, and increased warehousing costs as we built safety stock and protected service levels. These costs all flowed through to cost just as aluminum saw record increases. And you may be aware, the London Metals Exchange aluminum price per metric ton increased by 40%. the Midwest premium rate by over 140% through Q3. However, over the past few weeks, L&E pricing has sharply declined, and we're seeing L&E pricing today at the level it was in May, down 20% since the all-time high in October. The futures market for aluminum is currently in burst, indicating that the market views forward pricing as steady to declining. We aim to largely offset any anticipated aluminum headwinds with reduced supply chain expenses elsewhere. And we will also continue to monitor hedging opportunities moving forward and believe that Zedia is well positioned to manage the evolving aluminum market and COGS overall as we continue to scale. So the items I've referenced are all current initiatives, and we have a variety of key growth levers going forward currently in view based on the new strategic plan to scale. And these include, first, the new marketing mix. with significantly increased investment to drive awareness and trial. Secondly, a brand refresh to improve brand communication assets and most visibly, pack design. Also, continued focus on innovation, including limited time offer flavors, new energy flavors, and strengthening our positioning in core soda flavors. Next. expanding into immediate consumption channels, such as food service and convenience, and then finally, of course, continued focus on sustainable packaging, reducing plastic, and cost in the supply chain. I'll detail a few of these key long-term drivers, starting with brand. The Zevia brand is strong with its current consumer base and well-positioned for growth through the consumer of today and tomorrow. Zevia appealed to Gen Z and millennials versus conventional diet soda, which fused over households. This distinction helps explain how we are complementary and highly incremental to CSD category leaders, and this resonates with retailers. The numerator consumer panel data for the 52 weeks ending September 30th indicates that purchasers of Viviacola, for example, are 1.8 times as likely to be Gen Z versus purchasers of category-leading brands Diet Coke and Diet Pepsi, and 1.4 times as likely to be millennials. And similarly in root beer segment, ZDF purchasers are 2.6 times as likely to be Gen Z as purchasers of Diet A and W, the category leader, and 1.6 times as likely to be millennials. So as category leaders in CSD continue to focus on zero sugar formulations, we believe the category is undergoing a long-term shift in response to change in consumer preferences. More than 80% of U.S. adults cutting across age ranges are seeking to reduce sugar. And so conventional diet soda offerings with zero sugar have resonated with Gen X and baby boomer households. Similarly, devia zero sugar sodas with plant-based ingredients are bringing Gen Z and millennial shoppers either back to or to the CFD category for the first time. Retailers agree. This is a win-win proposition. And now I'll speak to marketing briefly. We venture into ZPF's next chapter well-positioned and well-funded to establish a consumer-focused marketing mix, moving beyond the selected retail marketing ZPF has done historically. We have a focus on new consumers in our plans going forward, investing in new editorial communications partners, new community and ambassador programs, new sampling initiatives, new grassroots marketing campaigns. We will also increase investment in targeted advertising, digital with periodic support from television and out of home. We've tested some of these new 360 campaigns and selected metros to support the launch of creamy root beer and tea free, for example, gathering strong learning and yielding positive returns. Going forward, we will invest in key moments for our target consumers, such as the new year, the start of spring, and new product launches. These pull initiatives will be supported by push tactics in store, as we expand shelf space, augment our promotional calendar, and deploy capital, including the purchase and placement of coolers and racks within our growing retail footprint. We will be able to share more about the marketing mix, the brand refresh, and expanding our presence at retail on future earnings calls. So with that, I will turn the call over to Bill Beach, our CFO, for a review of our financial results.