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spk04: 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.
spk08: 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.
spk03: 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.
spk06: Thanks, Amy. We continued our net sales growth in the third quarter of 2021, increasing net sales 22% against the third quarter of 2020, achieving record net sales of $39 million. This is all the more significant considering that net sales had grown 55% in the third quarter last year. This gives us a two-year growth rate of 88% from the third quarter of 2019 to the third quarter of 2021. On a nine-month year-to-date basis, net sales were up 27% over prior year. Third quarter growth margin was 44% of net sales compared with 47% in the third quarter of 2020. This was primarily the result of increased promotional investment to drive sales. On a year-to-date basis, growth margin was 46% this year, the same amount as for the same period last year. Cost of goods sold per equivalized case in the third quarter of 2021 increased by 1.6% versus the same period last year. We believe this reflects lower exposure to inflationary headwinds on commodity ingredients. Zevia is a brand that uses simple plant-based ingredients, contracts for most of our inputs, and as such is less subject to price swings for commodity inputs. As Amy discussed, one area of our cost of goods goal that has been impacted by a combination of inflationary headwinds and supply tightness is aluminum cans, and we remain confident in our opportunity to continue to mitigate these headwinds. Turning to operating costs, selling and marketing expenses were $5.9 million higher than prior year. ZV experienced $2.5 million of increased transportation costs due to overall net sales growth and higher freight costs amid a challenging transportation market in the U.S. and Canada. Marketing expense increased by $2.7 million, reflecting our increased investment in growing the Zivia brand. General and administrative expenses were $2.8 million higher than prior year, primarily from costs associated with being a public company, with our IPO occurring during the third quarter on July 22nd. These costs include increased D&O insurance premiums, increased annual audit expenses in Q3 of this year, and increased staff, equipment, and support services related both to public company operation and to our growth. Adjusted EBITDA loss in the third quarter 2021 was $3.5 million compared with an adjusted EBITDA profit of $3 million in Q3 of 2020. In summary, this reflects the combination of higher sales, promotion, and marketing costs as we increase our investment and growth, the impact of higher freight rates, and increased G&A costs associated with operating as a public company with our IPO in July. On a gap basis, consolidated net loss was $49.8 million in the third quarter of 2021, compared with $2.5 million net profit in the third quarter of 2020. The increase of $45.7 million was primarily driven by non-cash equity-based compensation expense consisting of restricted stock unit awards and phantom stock awards that generally vest as a result of the expiration of the IPO lockup period in January 2022. We disclosed in our second quarter 10Q that we expected to recognize an estimated $57.5 million of non-cash equity-based compensation expense between Q3 and Q4 of this year. Accounting guidance requires us to accelerate an additional $16.6 million of future year non-cash equity-based compensation expense this year, as well as recognize $3.7 million for RSUs and options granted in July, which begin dusting in 2022. The result is we booked $45.7 million non-cash equity-based compensation expense in Q3 and expect to recognize an additional $32 million in Q4. Turning to the balance sheet, Xebia had $78.7 million of cash on hand at the end of the third quarter, post-IPO. Inventory at $24.9 million represents a DIO of 104 days. higher than historic levels as we continue to hold elevated levels of inventory to ensure high service levels in the midst of the North American aluminum can shortage. On the liability side, we had no debt. Looking to the future, we are reaffirming our long-term guidance of 30% net sales growth. For 2021, we anticipate net sales of $140 to $142 million. representing 27% to 29% growth over 2020. For the nine months ended September 30th, net sales were $104 million. By derivation, we anticipate 36 to 38 million net sales for the fourth quarter of 2021, representing 30% to 37% growth from the fourth quarter of 2020. The difference in net sales anticipated for Q4 compared with Q3 is due to seasonality. Generally, we experience greater demand for our products during Q2 and Q3 corresponding to the warmer months of the year and lower demand during the first and fourth quarters of the year. With that, we will conclude our prepared remarks and open the line to questions.
spk00: Thank you. If you would like to ask a question today, please press star followed by the number one on your telephone keypad. If you change your mind, please press star followed by two. Our first question today comes from Bonnie Herzog from Goldman Sachs. Please go ahead, Bonnie. Your line is now open.
spk02: All right. Thank you. Good morning, everyone. I have a question on your top line. Good morning. While your sales growth was double digits in Q3, it did decelerate sequentially. So could you give us a little more color on the month-to-month trends during the quarter. And, you know, you mentioned sales or your trends that accelerated early in Q4, and then your guiding for the quarter is, you know, quite strong. So I just – I really wanted to make sure I understand, you know, the drivers of this and how much visibility you really have on this. I guess I'm also trying to understand, looking for what's giving you guys the confidence that this is sustainable as we look into next year.
spk08: Absolutely. Maybe I can take the first part of that question and hand it over to Amy to add some color. I think, Bonnie, first, just in terms of comfort with our long-term 30% net sales growth algorithm, Stepping back, that algorithm is really built up from velocity in current channels, fill-in distribution in those current channels, and then new channel expansion. When you look at a rough breakdown for that 30%, we typically look at around 10% velocity, 5% from fill-in in current channels, and then 15% from new channels. From a timing perspective, in Q3, it's not a timing year when we gain a lot of new distribution. in terms of either new doors within a chain or new items within a chain. It really is about velocity gains, which we did achieve in the quarter. I think today we're in some exciting conversations with our existing partners about 2022 and what that looks like in those core at-home consumption channels. What we also did see in the third quarter is the beginning of an expansion into the warehouse club channel, which is as well and at home consumption channel very meaningful for us in terms of that combination of a profitable transaction as well as a trial opportunity. I think the most exciting thing that we see that really bodes well for our ongoing expansion is the incrementality both on the innovation side but from a channel standpoint. Warehouse Club is 58% incremental meaning that 58% of the ZVF buyers in that channel are new to the brand within the last six months. So highly incremental, and that in conjunction with our opportunity to continue to evolve and change into our presence gives us tremendous confidence. But Amy, maybe you could add some color there.
spk03: Yeah, and Bonnie, thanks. On the biggest picture, as you know, I've been with the organization about four months, and when I look at just the simplest math, this is a brand with single-digit household penetration, what we believe to be around 15%. So tremendous upside when you look at the current user base. This is a brand with tremendous loyalty and very strong repeat rate. So repeat rate being 53% and loyalty represented by 44% of share of stomach, which is top notch within all zero calories, everything CSD. So the reason I mention that is that's sort of the map of the upside. We look at the immediate future. We're very excited about expanding from a channel perspective. So as you know, we are going national in one of the major club operators right now as we speak and growing regionally in the other. And as Patty mentioned, when you have more than half of those shoppers as new to the brand over the past six months, that's a tremendous future indicator. We have a lot of opportunity to expand within food. That is happening now both in-store in terms of new points of distribution in-store, cold boxes, incremental permanent second secondary placement as well as display activity and then we have still new stores again that extends into the mass zone as well we're in about a thousand Walmart and we have an opportunity to expand there so the upside is really clear and we're in execution mode right now and you should continue to see those results as we go forward so in the meantime as we expand in club as we look to step change our in-store presence in food, we also make specific investments in equipment. And the equipment, specifically racks and coolers, will allow incremental distribution within the store. And we see tremendous results from these investments in the short run when we're able to get it in retailer equipment, but now taking the capital that we have as a result of becoming a public company and investing that specifically instead of changing our presence. This is the first time and new effort for the company. We haven't made these investments in the past. These investments are hitting as we speak, and we look forward to placing those and driving our presence in store. As we know, most of us here on the call, in-store presence is the number one driver of awareness in beverage. And generally, that's true for most brands. And for us, that's a tremendous opportunity for us to get off the shelf. First of all, on the shelf, we need to be at eye level, and we have the share story, the velocity story, the margin story to support that move. from knee level to eye level to drive the look of a leader. And secondly, we need to penetrate multiple portions of the store. So I hope what I'm doing here is outlining the consumer opportunity, the in-store opportunity where we have distribution, and then the immediate and future new store distribution opportunities that give me tremendous confidence within the immediate future and the long-term future.
spk02: Yes, that was actually really helpful. So it does sound like you guys really do have some good visibility you know, through the end of the year, and then as you just kind of walk through, you know, building this, you know, as we all head into next year. Sounds pretty promising. And then it's just a second question for me, and I'll pass it on. It's just, you know, as it relates to your strategy with pricing, you know, you mentioned, and we found the results, you stepped up promos during the quarter. So I guess I'm trying to understand, you know, you know, maybe why you weren't able to put in a little more pricing on some of maybe your core brands, especially given, you know, the pricing being put in the market by virtually all of the other, you know, beverage companies. So I guess ultimately I'm trying to think through if there's maybe a risk that you're going to have to continue to step up promos to drive, you know, trial or volumes. And, you know, if so, how should we think about this over the next couple of quarters and really your ability to offset some of the inflationary pressures? that you guys mentioned. Thanks.
spk08: Absolutely. I just quickly touch on inflation and the ability to manage that. I think, Bonnie, we drive margins really through three means. It's scale, productivity, and price. We have a 10-year track record of continuing to remove costs from our system through scaling. Productivity, as Amy mentioned, we're seeing some exciting productivity gains in the supply chain on the COG side in terms of the ability to remove labor from our repacking process or variety packs, but also on the transportation side in terms of e-commerce freight. Speaking specifically then to price, we really do view pricing as a lever that we can toggle We can toggle that by channel, by geography, and by packaging type. If you want to clarify here, while we don't intend to take a broad line price increase in 2021, we have been able to use that pricing lever to take price on discrete packaging formats and geographies. As we think about the investment in price in Q3, Really, I think you can think about us investing in display activity, which drives both trial and repeat purchasing. We think that's healthy from a consumer standpoint, particularly in an environment, as you noted, where others are taking price. I do want to be clear, we believe we've got that pricing lever at our disposal. It's in part because of what we've described in the past, and Amy's described, affordable price for the consumer. We're at the 36th percentile in terms of all non-alcoholic or liquid refreshment beverages on price. Great margins for the retailer and a strong margin opportunity for the brand. But, Amy, maybe you can kind of elaborate on our thoughts around price and taking price in that lever.
spk03: Yeah, I mean, promotional activity you see in the market at the moment is all about driving presence. It's all about driving presence. It's display activity in trial, and it's been very effective for us. So we would see a lot of productivity and error mix at the moment. But I think what I would just double down on that Patty just mentioned is there is room for price increasing across packages and in different environments for us based on our brand strength, based on our loyalty rate. So we don't intend to take a broad line price increase this coming year. But going forward, we will always reinforce our premium accessible positioning, whether that be with our future pack designs or with price and price mix. So there's room. But we don't make that plan for this coming year for specific reasons, continuing to reinforce what Patty said, to remain accessible in our pricing and competitive as we step change distribution.
spk02: Okay. Thank you both. I'll pass it on.
spk00: Thank you, Bonnie. Our next question today comes from Peter Gallo. from Bank of America. Please go ahead, Peter. Your line is now open.
spk07: Great. Thank you, operator. Hey, Patty and Amy.
spk08: Thanks very much for taking the questions. Absolutely. Good morning, Pete. Good morning. I guess just maybe to ask Bonnie's question maybe slightly differently, is there anything As a public benefit corp, that prevents you, you know, from taking a more meaningful price increase just as, you know, as your competitors are raising price, particularly in C stores. Like, do you need to maintain a certain gap? Is that a limitation in terms of if you were to take a price increase, kind of how much could go up? Just try to understand, you know, if everything is going up, you still have the ability to take pricing if you want to. It's just you want to maintain a certain, I guess, price gap for that affordability metric. Well, no, so great question, and I would tell you, candidly, no, there's zero about being a public benefit corporation that in any way inhibits us from price realization, okay? And so I want to be very clear about that. We've got a strong revenue management set of levers that we can pull, and so, you know, we're starting from a really phenomenal place. Being at the 36 percentile on price today allows us to be premium to the category leaders, affordable for Americans with all income levels, and still have the ability to price up. Just to clarify and reiterate Amy's comments on price, we are not taking a broad line price increase in calendar 2021. Having said that, with the strongest loyalty in the category at 44% share of stomach and a 53% repeat rate, where there is tremendous opportunity to gain additional consumer trial and repeat. In Q3, we made what we believed were proven investments in terms of display activity accelerate that trial and repeat. We are seeing the benefits of that as we head into Q4 with an accelerated net revenue expectation for the quarter. I do think absolutely we have the ability to take price on an ongoing basis. We aren't planning a broad line price increase in this calendar year 2021, but given the consumer response to our product, the loyalty of our product, and its broad affordability, There is nothing keeping us from exercising that pricing level on a go-forward basis. So hope that's helpful clarification there.
spk07: Yeah, no, thanks very much.
spk08: And I guess just the second question, kind of more of a modeling base, but within that kind of 4Q sales outlook that you've given, is there any way to quantify kind of the pipeline sales associated with new distribution that's baked into that number? It's not something that we're breaking out, but I think, you know, when you look at our mix here, you know, we're seeing that broad acceleration across each of our channels. So, you know, I want to just clarify with regard to Amy's comments regarding the Warehouse Club channel. You know, that is not a channel in which we are nationwide with either of the operators in Q3. And so we are starting to set those doors in Q4, but we're not seeing kind of a full chain-wide impact in Q4 at all. So we're seeing acceleration in our core channels of food, drug, mass, and natural. We're seeing acceleration in the e-commerce channel, and then we're seeing some incremental business in some of these new channels. Okay, great. Thanks very much, guys. Absolutely. Thank you.
spk00: Thank you, Peter. Our next question comes from Ben Bienvenu from Stevens. Please go ahead, Ben. Your line is now open.
spk07: Hey, thanks so much. Good morning, everybody.
spk08: Good morning, Ben.
spk07: Good morning. I want to ask on the marketing side of the equation, as you continue to ramp up your marketing spend, just the level of effectiveness that you're seeing, any tweaks to the strategy that you see necessitated by kind of the feedback you're getting, and kind of the glide path from here on the marketing front.
spk08: Absolutely. Well, I'll let you address this question. Go ahead.
spk03: Yes. Yeah, thanks, Ben. Thanks, Patty. So quickly, historically, media has invested in largely what I would call push tactics, so retail marketing. And it's quite measurable, and it's quite effective. But I think where it's most effective is continuing to drive 3T purchase among those who have discovered the brand. And what you're going to see going forward is investing in new consumers. So media has planned to develop a marketing mix that focuses on the full tactics ranging from practice marketing to community building, digital marketing, sampling as some examples. We'll continue to use push tactics activated at retail in a more ambitious manner to include several thousand pieces of equipment in the market, largely groceries, to reach new shoppers and drive velocity, but we'll use fundamental evolutions like a brand refresh along with portfolio design and scope going forward. And so the can and the multi-packs are our greatest billboard where the media look and feel can better represent our premium but accessible, flavorful, fun, whimsical, better for you positioning. And again, with 85% of North Americans based on our best insights at the moment unaware of media, there's a ton of upside there. So the short answer to your question is historically retail marketing has been prioritized at relatively low levels of investment. We will continue to focus on retail because we know that retail is the number one driver of awareness. However, we will make incrementally improved, focused, and larger investments in pull tactics that drive consumer awareness and trial and engage what we know as a very well-prepped Gen Z and millennial consumer massively over-investing with our brand versus other versions of zero-calorie carbonated soft drinks. So it's the right environment and the investment will be well fielded.
spk07: Okay, perfect. Thanks for that. My second question is related to the ramp into the club channel. I know you guys have been growing for a long time at an accelerated rate, but I'm curious, the level of, to the extent there is any execution risk associated with ramping into a new channel and growing sales at this rate in a more challenged supply chain environment? And how do you feel about, I think, Matty, you mentioned your ability, your confidence in sustaining those 95% in stock levels and sustaining your fill rates. Maybe any color that you can offer around the operating environment relative to sustaining the growth of the business.
spk08: Yes, absolutely. So, you know, I think broadly, Ben, this is a team that is highly execution focused. You know, amidst a once-in-a-generation aluminum can market in North America over the last 18 months, we've maintained those 95% plus service levels. So we are highly confident in our ability to meet consumer needs and customer needs in the supply chain. I think where our focus is, particularly around that club channel, is on removing cost from the system. You know, what's so fascinating from a brand standpoint about the purchase dynamics in Club is that, as we noticed in our prepared remarks, they mirror very closely the dynamics in e-commerce. And so e-commerce serves as a profitable transaction for the company, but also a trial opportunity. So the variety pack business that we merchandise in the Club channel serves that exact same purpose. We're able to provide a variety of flavors that allow that consumer to get into the GDF franchise And then she goes out and purchases full cases or multi-packs of individual flavors. And so Club is certainly an exciting opportunity in terms of scaling our business. And from an execution standpoint, we are very focused on continuing to remove costs from the supply chain in terms of the variety pack labor associated with that Club business. I guess one other comment I'd make about Club that we like, which is, The supply chain characteristics in terms of transportation are quite favorable. Club is a 100% full truck business. Excuse me. And so we're able to mitigate some of the cost headwinds associated with elevated transportation rates. Amy, perhaps you can just touch on that incrementally in terms of that club opportunity.
spk03: Yeah, I mean, you know, club is really exciting for a couple different reasons. Yes, it's a transaction. but it's also a marketing opportunity. As a variety brand, a flavor brand, we find a tremendous opportunity to drive trial among new users. And while this was initially a hypothesis, it's now an insight as 58% of purchases coming from club business is incremental to the brand over the last six months. But specifically to your question about our readiness for growth, it's been exciting to see that both in our core soda business and with our kids' line, we've been able to step in and deliver for our retail partner head club, in particular where our competition hasn't been able to. So as you mentioned in earlier comments, prepared comments, with over 95% fulfillment rate for our customers, we continue to be well prepared for the scaling that we're discussing right now in club and across new customers.
spk07: Okay. Thank you so much, and good luck with the rest of the year.
spk08: Great. Thank you, Ben.
spk00: Thank you, Ben. Our next question comes from Dara Mahovian from Morgan Stanley. Please go ahead, Dara. Your line is now open.
spk05: Hey, guys. So two questions. First, just on gross margins, it did come in in the quarter below what we expected. So maybe what would be helpful is on a year-over-year basis, maybe you can help frame for us what drove the compression, how much of that was related to the incremental promotion in the quarter, you know, versus cost pressures. And maybe as we look out and you think about those factors, which of those factors are more sustainable versus more isolated to E3, that would be helpful.
spk08: Certainly. Bill, I'll take this one. I think just mathematically, we had a 1.6% COGS increase. We had a 4% investment in pricing, specifically promotion and display activity. And so what I would tell you on balance is that in Q3, I think our team did quite a strong job in terms of mitigating the cost headwinds that many of our beverage peers are facing. Having said that, we think that the price investment in Q3 was a prudent one and it's going to continue to drive ongoing consumer trial and repeat. As we mentioned earlier, we view that price investment as a lever that we can toggle. I don't anticipate a steady level of investment in promotional activity and displays at the level that we saw in Q3. But I think to some extent, we're going to take those opportunities when we have drive periods, when there's a lot of display activity at retail, and then we're going to margin up in those periods where there's less merchandising activity at retail. So I hope that's helpful in terms of how we think about that. And then certainly on the cost side, what is our cost optimization strategy? It's around productivity and scale. And then lastly, I think in terms of growth margins, we have the opportunity to selectively take price where we feel it's appropriate. So I think between those various levers, we're very comfortable about our ongoing revenue and margin optimization strategy, as well as being able to do that while we continue to scale this business.
spk05: Okay, that makes sense. And then just on the revenue side, just help me understand The promotion opportunity, obviously promo ramped up. It seems like it was to a greater extent than expected during the quarter. So just trying to understand the change from your perspective and, you know, what specifically drove that ramp up in promotional activity. And do you think you got a near-term volume payback in Q3 from that? Is that more of a longer-term payback? How do you think about that? Because it does seem like there was a change in the promotional strategy in Q3 versus expectations?
spk08: Yeah, and I would say, I'll turn it over to Amy, but I would say broadly, you know, we have a much more sophisticated approach to how we invest in promotion. What do I mean by that? For a decade, this was a brand where promotional activity meant a little shelf tag on the shelf saying a little bit off on ZV. That's a temporary price reduction or a TPR. That certainly drives some trial and repeat purchasing. But display activity is how we step change our in-store presence. And I think you're seeing a much more sophisticated approach to how we approach in-store presence. And, Amy, maybe you can add some follow-up.
spk03: Yeah, quickly I would say we're just now starting to see the evolution of our retail strategy. The more to come as we build, as I mentioned earlier in the comments, the evolution of both our organization as well as our approach to joint business planning and retail partnerships. And critical in that is driving increased presence, and I hate to be a broken record here, but it's just our greatest opportunity, is to interrupt the shopper beyond the shelf. And so as we drive that activity, both for a test and learn for ourselves, as well for demonstration of success with the retailer, we then have equipment coming in in order to place that and scale that across multiple channels such that you can find Zedia at two, three, four places in the store rather than just on the warm shelf. So some of our promotional activity, yes, is for media lift, but some of it is to drive presence for future tests and learning to set a precedent. Secondly, critically, new users. So while we've sold a lot of ZVIA to a small, loyal user base over time, our objective is to drive trial with new users. We have great taste profiles. We have a variety of flavors. We have great proof points in new innovations. And we also have a very attractive shopper. So, for example, in the energy category, ZVIA shoppers in the energy space spent 83% more than energy shoppers across the board. So what we're trying to do here now is partner with retailers to take some of these insights and mutually invest to grow the brand in multiple parts around the store. And then finally, presence, new users, finally, unit volume, unit volume and velocity. This is the storyline that sets us up for improved permanent presence in 2022. The story of Q3 is often a critical selling point for increased presence based on space to share ratios on the shelf. So we feel this is a critical window to drive unit movement, to drive share, and to win new users in this window, not just for the purpose of the quarter, but for precedent setting going forward. So hopefully you're hearing the mix of short-term and long-term objectives met by productive promotions in this window.
spk08: Yeah, and I think the one thing I would just add to that is the retailer perspective, which is an exciting one. And when you think about the benefits of merchandising this brand, they're really threefold. So it's velocity at the level of the category leader. It's a gross margin to the retailer that significantly exceeds the category average. And then it's also an image enhancer at an affordable price, a better-for-you product that brings that young Gen X or Gen Z and millennial shopper to the store. So from a retailer perspective, what Amy mentioned, you know, is very enticing. And so that's why we've really elevated the conversation to this joint business planning process. And really, we're becoming an important and a strategic part of the profit pool for carbonated soft drinks.
spk05: Thanks, Chris.
spk00: Thank you, Dara. Our next question today comes from Alton Stump from Loop Capital. Please go ahead, Alton. The line is now open.
spk05: Okay, great. Thank you so much, guys, for taking the questions. I hope you all did well. I just wanted to ask, in a competitive environment, was there any impact at all from that on your emotional spending or You know, I think this is, you know, whether it's just you entirely trying to get into the channels and, you know, you have to make sure that you're already putting it into those channels.
spk08: So what I would tell you all is, you know, we really are scaling this brand not in response to what competition is doing. And I think in our prepared remarks, Amy touched on the highly incremental nature of our brand from a demographic standpoint. And what do I mean by that? Well, conventional diet sodas use heavily to Gen X and baby boomer households. And our brand strongly appeals to Gen Z and millennials. So when you look at that CFD aisle, it really is a tale to consumers in terms of who's picking up the ZDF brand. And as such, we're able to make those investments and display activity to drive trial and repeat purchasing competitively. but not in response to competitive activity. And so, you know, candidly, the move of the carbonated soft drink category to zero sugar formulations is an ongoing and sustained shift that we think is a rising tide that blows all of us. And so our proposition is highly incremental. The category leaders are focused on shifting their shopper base to zero sugar formulations for more mature consumers and households, We're really focused on that younger shopper base, and that is a highly incremental proposition. So to directly answer your question, we did our promotional activity. We made those investments in feature display activity to drive trial and repeat, but not in response to the competitive activity. Amy, do you have anything to add there?
spk03: Yes. Really strong point to you on this. I think it's a critical question. Thank you, Alton. First of all, if you look at our convenience in the third quarter and you just look at the precedent setting going forward, the category that's driving carbonated soft drink growth is zero sugar. That, over the last two years, is true, and yet media is growing more than twice the rate of all other zero-calorie options. And I think the generational considerations, which are an indicator of the future, the category is very well outlined by Patty, so I will review that. But a couple, just a fact, I'll draw your attention to, they're in the slides that are uploaded for the call. Our loyalty rate at 44% or share of stomach is stronger than that of all of the other zero-calorie players in our research. So that's our starting point. And then we start to invest in the driving trial. The New Year's is the one that happens in Q3. We have an increase in household penetration. So that's new users. And we have an increase in dollar sales per household. So effective promotions help sell existing consumers and have them stock your product at home. And with new trialists who become light users, then medium users, then heavy users. And this is the path to growth, almost with a blind eye to competition. The goal is to grow our brand as we grow the pie. our piece of the pie and the total pie of zero-calorie options. And we are by far the most attractive for millennials and Gen Z. And we literally see this in the data, and we see this in the results of both increasing purchases among our industry user base and household penetration in the third quarter, and expect more of that to come.
spk05: Okay, great. Thanks, Patty. And anyway, you know, through the seven hours, I'll hop back into you. Thanks so much.
spk00: Thank you, Alton. Our next question today comes from Andrew from BMO. Please go ahead, Andrew. Your line is now open.
spk05: Great, thanks, and good morning. I have two questions.
spk08: My first one, I'm curious what you're seeing with regard to the e-commerce momentum as you've expanded to additional platforms there. The operating environment or consumer environment is kind of evolving. How that's shaping up and just generally on the strategy on the e-commerce side. Is that a priority to continue expanding across platforms or more so that you can engage in a way that already has a presence. Yeah, so I can make some opening comments and hand it off to Amy. I think, you know, broadly, Andrew, we are in the very early innings in terms of e-commerce, not just for our brand, but broadly we feel for the food and beverage industry. And what do I mean by that? You know, the success in package food e-commerce to date has largely come from pure play e-commerce players. But we are seeing the strong emergence of brick-and-click players, and every grocery chain in America has a physical infrastructure that's well-suited to that brick-and-click business. And so we've built our e-commerce business with category-leading items on the largest e-commerce platform, Amazon.com, only just begun expanding into the number two player, Walmart.com, and tremendous runway in e-commerce. just from a strategy standpoint, and then I'll turn it over to Amy, as we've discussed, we think it's an exciting opportunity because it is a transaction as well as a trial. And so when you think about a variety pack on an e-commerce site, whether that be our own site, gb.com, or a third-party site, really we are seeding the market. We're sampling various flavors to that consumer, and she is going out and purchasing full cases or full multi-packs of those flavors both in brick and mortar and in e-commerce. So that is a really exciting dynamic in terms of both expanding household penetration, expanding buying rate, and expanding cross-purchasing across flavors. And as I said, we're in the early innings there. Amy, some additional color on that topic?
spk03: Yeah, to a degree, we are channel agnostic. And what do I mean? I mean that we want media at arm's reach availability to every consumer, however they choose to shop. Now, we have a more digitally savvy consumer, and we're a flavor and variety brand. And those two things alone make us a little bit more well-suited, let's say, to thrive in the e-commerce environment. So our attitude towards e-commerce is to drive growth there. As Patty mentioned, we are partly the number one beverage in carbonated soft drinks on Amazon.com. But there's tremendous upside there, both through optimizing our product mix, bringing new flavors, test and learn and innovation, and through continuing to optimize our promotions. So strong upside still on the worldwide of e-commerce. marketplace, we are brand new to the number two player. And then the third thing I'll mention in upside is brick and click, because that is just one of many growth levers available to us in traditional retail, and we're driving that as more retailers, more and more, are starting to think of that as just another arm of their beverage buyers' growth opportunity to leverage suppliers. So what I would say to it is that the e-commerce has continued growth, tremendous upside in all three of those buckets, number one marketplace, Walmart.com, and all of brick and click. However, we don't aim to grow e-commerce by a measure of our mix. We just aim to grow it on space. And I would expect that other channels have tremendous upside as well. And where e-commerce lands in our mix is sort of to be determined by the consumer.
spk05: Yes, that makes perfect sense. And my second question, I saw the LCO flavors kind of strategy you mentioned was interesting. Do you view that as more of a,
spk08: a new customer acquisition tool or a, you know, existing customer friend, a spend tool, just, you know, on the new customer side, you know, how you think about if that's driving the purchase, how you think about integrating that new customer then to the brand from that LTO flavor, for example.
spk03: Yeah. Great question. Thank you. I'll be quick. What we expect from LTO, we expect great execution at retail, so interrupting displays. What will that do for us? It will bring new consumers in based on exciting new flavor. Maybe someone who's never noticed Zevia before because an in-store, attractive in-store display is a prompt for purchase. But it also invites a consumer who enjoys switching around the Zevia franchise to stick with our option versus going to a competition. So it's a retention tool as well. So after an LTO purchase, and what we do is we look at the success of those flavors and consider what may augment the portfolio long-term to retain the consumers that we gain through that effort.
spk08: And I would just add to that, you know, a recent example that we have discussed is Creamy Root Beer. And I think, you know, Creamy Root Beer has generated tremendous excitement among both existing consumers becoming our number one flavor in the 10-pack format in many of our key accounts, but it's also 31% incremental to the brand. And so it's a great example of how a game-changingly great-tasting product can excite both existing users and bring new users into the beauty brand.
spk00: Thank you, Andrew. Our next question today comes from Dana Taladry. from Telsy Advisory Group. Please go ahead. Your line is now open.
spk03: Good morning, everyone. A couple of follow-ups. Given that you reiterated the long-term sales targets of 30% and you have the opportunities of expanding at the warehouse clubs, existing distribution, and new product and sales, is there anything like manufacturing logistics constraints that could cap that sales performance at 30% next year?
spk02: If the demand from customers stays stronger than planned, could you accommodate and cater to those trends?
spk08: Yes, and so the simple answer to your question, Dana, is yes. One of the things I think that really reflects the strong execution focus of this team is our ability to continue matching supply with demand. We've maintained that 95% service level throughout the pandemic. And as we continue to scale with new resources we've gained as a public company, we are not only scaling our operations to accommodate additional growth, but we're also removing costs from the system. And so I think it's hard to overstate the increase in sophistication that Amy specifically brought to our team in terms of how we operate in the supply chain. And what I can tell you is our planning process as we head into 2022 gives this management team tremendous confidence in our ability to continue meeting consumer and customer needs even amidst accelerated growth. Amy, anything you want to add there?
spk03: Yeah, I'm tremendously confident here, and I've been very impressed with the agility of the organization in my short four months here. In addition to that, decisions we've made in the last few months and then implement it such as a new warehouse we purchased in the middle of the country, not only takes cost out of the system for us, but allows us to be more agile and to be more sort of on the spot for our customers going forward. And so we take the learning from that and continue to deploy capital in similar ways to increase our agility going forward. So the actions that we're taking in the supply chain increase our agility and remove costs. and they make us a better supplier for our retailers, and I have little to no concerns going forward in our ability to fulfill demand and to be ready to go beyond that.
spk02: Got it.
spk03: And then just on the aluminum can shortage, anything to note there, what you're seeing in terms of pricing and availability of cans and when normalization may occur?
spk08: Yeah, great question on aluminum cans. And I think as we've discussed in the Q2 call, you know, we've taken a number of strong actions to protect supply during the aluminum can tightness. That involves both stockpiling aluminum cans and also bringing cans in from outside of North America, which has freight associated with those. So we see a tailwind heading into 2022 as we reduce those inventory levels and sort U.S. manufactured cans. Having said that, we're certainly seeing some headwinds in terms of the aluminum commodity market. I want to take a moment to just touch on that. The aluminum commodity price is really determined for US customers like us by the combination of the London Metal Exchange price for aluminum, as well as the Midwest premium associated with transporting that aluminum to the Midwest of the United States. LME pricing peaked at around $3,200 per metric ton. has now ticked down to around 2600. We've seen some reduced pricing in aluminum. Currently, the futures market is inverted, signaling that the market expects stable to declining pricing going forward. Similarly, the Midwest premium has come down from its record high in July. Currently, I believe around 27 cents a pound versus the 30 cents that we saw in the July period. We've seen some down ticks in that aluminum market, but what I can tell you Dana is we feel very confident in our ability to continue managing those aluminum costs as we've done historically and I think we've done quite a good job in both protecting supply as well as protecting margin amidst really a once in a generation aluminum can shortage.
spk03: Thank you.
spk01: Absolutely.
spk00: Thank you Donna. Next question comes, next and final question comes from Chris Terry from Wells Fargo. Please go ahead, Chris. Your line is now open.
spk07: Hi, good morning. Just on the aluminum, the tailwind comment, it does deal with supply, and I know that there's a lot of supply chain initiatives in place. I guess it's pricing for aluminum today through the forecast period for 2022. and core don't play out and page five runs flat, I guess, is your initiative prepared for that? Do you think the supply chain initiative has offset that or do you think that you'd have to get a little bit more aggressive on pricing from any perspective there? Would be helpful.
spk08: Well, absolutely. And I think, you know, first, just to reiterate what we mentioned earlier, Chris, you know, we do have that pricing level and we have the ability to take price. So we are at a fantastic point in terms of affordability and have the ability to take price. Having said that, so the tailwinds that I mentioned are specifically associated with both reduction of those unprecedented inventory levels we have. And so not only did we add to our finished goods inventory level to protect supply, we also stockpiled empty cans. So the carrying costs associated with that empty can inventory, as we drain that inventory, will provide a tailwind on costs. In addition, as I mentioned, the ability to source U.S. manufactured cans versus cans from outside of North America is going to be a tailwind. We anticipate that we'll be able to mitigate any potential cost increases in the aluminum commodity market with both tailwinds that I just mentioned, as well as the ongoing productivity gains we're seeing throughout our supply chain. So I think we're quite comfortable with our ability to mitigate those ongoing increases and certainly are going to be keeping a close eye on the aluminum market to monitor future opportunities for hedging. You know, I would just say in conclusion, we are excited about the continued opportunity to scale the media business. Our products are great tasting, they're on trend with consumer preferences, and they resonate with the shopper of today and tomorrow. We're changing global public health one can at a time, and we're excited for you to join us on this journey. Thank you.
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