Zevia PBC

Greetings, and welcome to the Xevia PBC Q3 2024 earnings call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Reid Anderson from ICR. Please go ahead, Sal.

Thank you, and welcome to Xebia's third quarter 2024 earnings conference call and webcast. On today's call are Amy Taylor, President and Chief Executive Officer, and Girish Satya, Chief Financial Officer. By now, everyone should have access to the company's third quarter 2024 earnings press release and investor presentation made available this morning. This 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.xevia.com. And now I'd like to turn the call over to Amy Taylor.

Thank you for joining our third quarter conference call, particularly on the morning after the highly anticipated election. We are pleased with the vast improvement we delivered in Q3 adjusted EBITDA, illustrating strong execution of our productivity initiative. While Q3 net sales were slightly below our expectations, We anticipate a return to growth in the fourth quarter largely driven by our expansion in the 4,300 Walmart stores nationwide. We're excited about the rollout in Walmart, and we remain confident in our long-term potential. We believe that we are uniquely positioned to capitalize on the growing demand for healthier alternatives to traditional soda. We offer a distinctive blend of great taste, zero sugar, clean label products, and exceptional value. And so to seize this opportunity, we will execute a robust brand marketing strategy, expand our distribution, and drive unparalleled product innovation. Additionally, our progress and cost savings initiatives will enable us to reinvest in our growth while enhancing long-term profitability. Before I provide an update on our strategic plan, I'll share some highlights in the third quarter. As I mentioned, we've made significant strides in our productivity initiatives, improving our adjusted EBITDA loss to $1.5 million, down from $9.1 million in the third quarter of last year. This also marks a substantial improvement in the first half of 2024. We achieved this through enhanced efficiencies, cost savings, and better product costing, which allowed us to deliver a record growth margin of 49%. As a result of our progress, we now expect annual cost savings of $15 million, an increase from our previous estimate of $12 million. With respect to net sales in the third quarter, we came in slightly below our expectations at $36.4 million. The 16% net sales decline versus Q3 of last year was largely a function of the expected reduction in club distribution and at one of our mass customers. And to a lesser degree, our strategic decision to exit the kids and mixers category to focus on soda. As we look forward, we plan to expand distribution in a very intentional way. Our confidence is underpinned by the strong stealth we saw in key strategic channels during the third quarter. For the third quarter, scan data in the grocery channel indicated dollar growth of 8% and unit growth of 9%. For the four weeks ending October 6th, scan data showed dollar growth accelerating to 14% and unit growth at 17%, reflecting the positive impact of our adaptive promotional schedule. We are also making strong progress in our direct store delivery or DSD initiative, focused in the Pacific Northwest. Grocery store scan data reflected stronger performance in the PAC Northwest market versus our other markets, which we attribute to increased service levels and enhanced merchandising. We are also underway in building our presence in the convenience channel, where we have begun distribution in a number of independent outlets and set the stage to expand in the convenience chain with upcoming spring resets. From a brand perspective, we tested new marketing campaigns reflecting a sharpened brand character to the select metros to the summer and into the fall. These elevated campaigns reinforced our differentiated position as a great pacing, zero sugar, clean label soda in a world awash with fake and artificial. We were pleased to see our message resonating with consumers. The 10 key markets where we ran the campaign yielded growth an average of five percentage points higher than that of control markets across 20 weeks. In 2025, we will leverage these insights, along with our recent breakthroughs in taste and flavor innovation, to continue building our brand. And so with that, let's turn our attention to the product portfolio. We are pleased to see that each new Zevia flavor continues to outperform the last, with the success of creamy root beer and vanilla cola, followed by our summer 2024 innovation, Crayon Raspberry, which has become the top media contributor to growth in the natural channel. Most recently, we saw a very strong response to our limited-time e-commerce exclusive salted caramel flavor, which is tracking the sellout well ahead of expectations. Looking ahead, we are optimistic on the path forward. There's a growing movement in Better For You Soda, a category which is expected to go three times faster than CSB over the next five years. And we are at the forefront of that movement. Through amplified marketing, focused distribution expansion, and product innovation, we believe we are well-positioned to be the long-run leader in natural soda. We are building a clear path to both re-accelerate growth and deliver significant improvement in adjusted EBITDA. I will speak to our top line strategies while Giris will speak to margin expansion initiatives. The evolution of our growth strategy is underpinned in building our brand marketing muscle. We have shifted our focus to a more compelling emotionally driven storytelling. Our relatable content inspires brand trust and love with media consumers by owning the real in a never ending battle against the fake. We're building relationships with relevant TikTokers, YouTubers, and podcasters to build reach and relevance. The overhaul of our social content contributed to a 55% sequential increase in engagement versus a second chorus and a more than 500% increase in organic views. We also plan to focus our marketing investments on broad reaching campaigns spanning digital and out of home to drive awareness, our sharp new creative, to be seen across Los Angeles in the company's largest out-of-home campaign yet. We're leaning our marketing strategy toward introducing new consumers to Xevia. And once they try us, we see that they stay and they spend more. Xevia shoppers' brand spend is 57% higher than that of all other better-for-you soda brand spend. And Xevia holds repeat rates at 40%. While we anticipate it'll take time for brand-building investments to support pull-through, Qualitative and quantitative indicators give us confidence that we are on the right path. Our marketing efforts are also expected to help fuel distribution expansion across channels, but we know, again, it'll take time to build that momentum. This week marks an important step forward in strategic distribution gains for the brand. We are rolling out Zevia to over 4,300 Walmart locations this month, thanks to the strong sell-through we experienced in our initial 800 stores. We believe our presence in Walmart will be instrumental in increasing brand awareness nationwide, especially in underpenetrated regions, such as the Southeast, where we are seeing the fastest growth. Additionally, ZVS singles at the value channel retailer Aldi performs well, and 2025 will feature new distribution of ZVS six-pack at several hundred stores. We are well on our way to better penetrating shoppers at all income levels. who have been significantly underserved in better-for-you affordable zero-sugar beverage options. With respect to our DSD or direct-store delivery strategies, we are still in the early stages of execution. We are focused on magnifying our presence in the grocery channel to better placement, and it's working based on improved grocery velocity in the DSD equipment. In the convenience channel, we will look to accelerate brand discovery and increase conversion with singles distribution, and the help of our brand building. We are expanding our DSD footprint into the southwest with Crescent Crown in Arizona on board, and we'll pursue adjacent geographies in the coming months. Touching on products, we've made strides in product development, innovation, and taste evolution. We are creating a more sugar-like taste experience, and this will be evident in the exciting new flavors we are rolling out in spring 2025. In addition to the creamy and indulgent flavors we've become famous for, including root beer, and more recently, the salted caramel, we have an accelerated cola business, from straight cola to caffeine-free cola, to cherry cola, and most recently, vanilla cola, a top growth driver. And now, we will be able to expand the zero-sugar, clean-label grape taste into new major flavor segments. In addition to introducing new flavors, We're also introducing an eight-can variety pack at Walmart this month, and for the first time, a 12-can variety pack across retail in 2025 with a focus on driving trial. Before I turn the call over to Girish, I want to briefly address our near-term revenue expectations. As we have stated in the past, the emerging natural soda business is dynamic, and we have faced channel-specific distribution challenges that have impacted our sales performance. With that recognition, we realigned our strategy with a focus on marketing, on portfolio strength, and on quality sustainable distribution, highly encouraging early signs. We expect that our growth path will be gradual at first as we build sustainable momentum and pave the path to strong profitability. With that, I will turn the call over to Girish.