Zevia PBC

Good day and welcome to the ZVS second quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. And in the interest of time, we do ask that you limit yourself to one question and a single follow-up. Please also note today's event is being recorded. I would now like to turn the conference over to Reed Anderson with ICR. Please go ahead.

Thank you, and welcome to Xebia's second quarter 2023 earnings conference call and webcast. On today's call are Amy Taylor, President and Chief Executive Officer, and Denise Beckles, Chief Financial Officer. By now, everyone should have access to the company's second quarter 2023 earnings press release and investor presentation filed this morning. This information is available on the investor relations section of ZVIA's website at investors.zvia.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 and 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.xevia.com. And now I'd like to turn the call over to Amy Taylor.

Thanks, Reed, and good morning, everyone. Welcome to the Q2 2023 earnings call for XeviaPBC. Before we address the supply chain disruptions, I'd like to provide an update on the fundamentals of the Xevia business. Xevia's brand remains healthy. Demand is strong and accelerating as the brand refresh rolls out and velocity continues to grow at double digit rates. Our price increase has been well received, reinforcing our premium but accessible positioning and supporting our gross margin improvement. We remain in a strong cash position even while investing in initiatives to strengthen the brand and the operations for the future. Consumer spending on the brand is up for household and for trip, and our order book reflects demand in keeping with our expectations. And as we preannounced, our net sales for Q2 were materially impacted by interruptions to our customer fulfillment. These interruptions are short-term in nature and are the result of missteps in our supply chain transformation efforts. The transformation of Zevia's supply chain is a critical initiative to support our continued growth. enhance our customer service and drive efficiency, and ultimately materially reduce costs as we scale. But that said, we experienced some pain points in the transition from old to new, which I will detail here today with a focus on the actions we are taking to course correct them and the expectations going forward. So the main message I would like for you to take away from today's call is that Xebia has significant long-term potential and the broader value proposition remains one of the most relevant in all of beverage, a very exciting category. Xevia's demand, reflected in velocity data via scan, which measured over 21% for the quarter, demonstrates that the brand and the product portfolio meet the needs of today's and tomorrow's consumers. The steps we are taking continue to bolster margins and improve profitability, reflecting the exciting potential in the years to come. Customer fulfillment challenges are short-term, and the supply chain will be stabilized by year-end and optimized for 2024. Vivia's mission focuses on global health for people on the planet, and in Q2, we removed another 3.1 thousand metric tons of sugar from consumers' diets and never having sold a plastic bottle. Vivia is more affordable than 65% of non-alcoholic beverages in North America, even as we realize price in keeping with the market. Our continued focus is taking better-for-you beverages mainstream, making them available and affordable for consumers across all income levels. So I will walk us through second quarter results and then speak to our focus now and going forward. We delivered net sales of $42.2 million below expectations for the quarter. Velocities were strong and bolstered by the brand refresh, and double-digit retail sales growth was sustained where service levels were not interrupted. as is clear in select customers and across the market in our scan data. Our order book was at or above expectations across the quarter. Growth margins continue to improve. We've demonstrated strong cash management, disciplined adaptations to our promotional strategy, and price increase implementation with a strengthened key accounts team as we've moved from a field sales model to a national account focus this year. We've realized immediate benefit from the strong brand refresh. And we believe collectively these initiatives will reinforce our foundation and position us to deliver on our ambition of sustainable, profitable growth. I'll speak to our consumer-based evolution and retail indicators via panel and scan data insights, and then I'll walk us through the measures we are putting in place to address customer fulfillment. Xevious household penetration remains above 6%, and Xevious households increased their brand spend by 6% once again. driven by another 9% increase in spend per trip with consistent purchase frequency rates. These are strong indicators of the health of our brand and our user base. We also saw strong new item performance in the form of vanilla cola, single can soda sales, and 12 facts. The most important scan metric of the quarter is velocity, sales per point of distribution. Xebia grew velocity 21.3% in the quarter, demonstrating that when in stock, Zevia remains a double-digit growth brand. The Zevia shopper is a highly desirable one, less price sensitive at all income levels. We remain a home stocking brand, which remains a competitive advantage as we simultaneously build our singles business and grow cold availability, which are key to driving brand trial. Zevia shoppers spend 40% more on beverage versus total non-alcoholic beverage shoppers. Our shoppers also make 32% more trips to stores to purchase beverages. CVS shoppers continue to differentiate themselves even further from average beverage shoppers as they continue to spend more on the brand and overall. Our promotional effectiveness continues to increase, which supports profitability, but also informs our retail strategies going forward. We had 25% fewer dollars sold on promotion in the second quarter versus prior year. and continued to improve lift. In other words, we sell more Zevia on the merits of the brand to new and existing consumers. We continue to grow in legacy natural channel retailers and expand in mainstream channels. We've established incremental cold distribution with our single sodas across natural, now our fastest growing pack format there, growing trial with new shoppers. We're gaining single soda distribution in conventional grocery as well. And we have new energy drink distribution in West, Midwest, and East regional chains. One of the country's top three drug chains is moving Zevia to the carbonated soft drink aisle nationwide starting in September. And finally, we have very strong performance in the carbonated soft drink aisle in test stores in the world's largest retailer. And we anticipate continued expansion in that chain with resets in 2024. Xevia has performed at or above expectations with each expansion into mainstream channels, which bodes well for future customer and channel expansion. So I will now direct our attention to our broader operational efforts and address customer fulfillment. In the past year, we have redefined the Xevia brand through new positioning and packaging. We've entered the new singles business, expanded distribution, launched top performing flavors and formats, built a professionalized key accounts team, successfully taken three price increases in keeping with the category, and have step-changed cost management and cash management. At the end of Q1, we also endeavored a supply chain transformation to deliver a streamlined, efficient, and effective supply chain built for scale. This is the right initiative for Xevia and will deliver strong results when complete. We have experienced short-term missteps in its execution, however. with material impact on net sales for Q2 that we expect to continue in Q3. As we consolidate our warehouse network from 27 locations to seven, partnering with two capable and proven partners, we encountered challenges which impacted inventory management at a skew level, inventory transfers, and then accuracy and timeliness customer deliveries. And we have taken the following steps to course correct. Firstly, We've hired a new SVP of operations and chief supply chain officer in Bill Williamson, who joined us in July from Monster Energy. Bill has also hired already three new experienced supply chain manager level contributors to step change in-house operations. Secondly, we've rephased transition plans for our warehouse network, leveraging legacy providers for support through the transition with ample days of supply across all SKUs. Thirdly, we established new practices for customer mapping and customer ordering to support fulfillment, effectiveness, and efficiency. Fourthly, we changed our approach to freight to improve service levels and reduce costs. And then finally, we sold our company-owned warehouse to the best of the mixed model and embraced our efficient third-party network. This transaction closed in early Q3. As evidenced in our velocity data via scan, demand remains strong. Our raw materials and finished goods supply and forecasting capabilities are strong. The short-term issues centered around logistics and customer fulfillment and the steps required to fix it are clear and are in place. We have a long history of strong customer fulfillment with our retail partners and are providing a high level of transparency through this transition to them, protect distribution, and support future expansion with our retail partners. I'll wrap with a big picture and turn it over to Denise. Devia has a very healthy brand and business model and continues to experience strong consumer demand, increasing spending per household on the brand. We are realizing price in the market with strong consumer acceptance, and we continue to grow velocity in legacy retail partners and in new distribution, and we are delivering strong and improving gross margins. And our number one priority in the meantime is to stabilize our supply chain, returning to our best-in-class service levels and putting the network transformation back on track so that it delivers our long-term objectives of driving sustainable, profitable growth. Thank you, and I'll hand it over to Denise.