Zevia PBC (NYSE:ZVIA) Q1 2023 Earnings Call Transcript May 14, 2023

Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Zevia PBC Q1 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Reed Anderson with ICR. Thank you. You may begin.

Reed Anderson: Thank you, and welcome to Zevia’s First 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 first quarter 2023 earnings press release and investor presentation filed this morning. This information is available on the Investor Relations section of Zevia’s website at investors.zevia.com. Before we begin, please note that all 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.zevia.com.

And now I’d like to turn the call over to Amy Taylor.

Amy Taylor: Thanks, Reed, and good morning, everyone. Welcome to the Q1 2023 earnings call for Zevia PBC. Zevia had a strong quarter as we continue our progress toward profitability and drive our focus on distribution and trial. We are demonstrating strong momentum across channels, continuing to increase average spend per household even as we gain new households with increased distribution. We’re seeing strong growth in our new singles business even before we enter traditional immediate consumption channels. We’re realizing price in the market and materially reducing cost in our business, resulting in continuing recovery of our gross margin. Q1 saw the strongest gross margin of any quarter to date as a public company and a 470 basis point improvement over prior year.

And critically, we continue to manage cash effectively, driving improvement on the adjusted EBITDA line. The strategic shift we made at the halfway mark in 2022 to focus on profitable growth are paying off. The team is executing the plan and the brand continues to demonstrate exciting momentum. 2023 is a transformational year for Zevia, and we’re pleased to walk through the results and their indications this morning. Zevia’s mission focuses on global health for people in Planet. And in Q1, we removed another 3,200 metric tons of sugar from the diets of the communities we serve and replaced 47 million plastic bottles in our markets. Zevia is more affordable than 64% of nonalcoholic beverages in North America, even as we realize pricing keeping with the market and continue to focus on taking our better-for-you beverages mainstream, making them available and affordable for consumers across income levels.

In Q1 2023, we delivered net sales of $43.3 million, just ahead of our expectations, resulting in a 13.8% revenue growth over prior year and a 2.7% decline in volume. We realized growth from price and new distribution. We are pleased with the team’s execution and continued retailer and consumer acceptance of our price increases, and we’ve communicated another price increase of 5% here in Q2. We’re seeing strong growth from new item distribution in new and legacy customers, and we go into the spring and summer beverage season from a position of strength. Gross margins continue to improve to mid-40 levels in keeping with our expectations. We’ve demonstrated strong cash management and have delivered a very strong run rate of improvement on the adjusted EBITDA line.

Cost controls, disciplined adaptations to our promotional strategies and strong price increase implementation, so new precedents for Zevia with a focus on quality growth. While we’ve made progress and our brand and unit economics are strong, we do not expect our path to profitability to be entirely linear. We plan to make investments throughout this year in marketing and supply chain to support our brand refresh to support service levels and ultimately to support growth. I’ll go in more detail now with a focus on our consumer base evolution and our learnings from syndicated and panel data from Q1. Zevia’s household penetration is 6.4%, and Zevia’s households increased their brand spend by over 12% in the past 12 months, driven by increases in spend per trip with consistent purchase frequency rates among the larger brand buying base.

We maintained purchase frequency and increased average spend per household even as we added new consumers for the brand. Following the material price increase, these are strong indicators of the health of our brand and our user base across heavy, medium and new light users bolstered by strong new item performance. Zevia grew 7% in Scan dollar sales for the quarter as we cycled last year’s New Year Live Your Best program in favor of this year’s focus on spring and summer. In retail dollar sell-through, Zevia delivered its highest Q1 on record. The same is true in e-commerce. Same-store sales remained robust through a healthy mix of volume and price, and we anticipate continued progress in quality growth driven by the brand refresh, marketing support and strategic retail programming in the coming months.

And data continues to demonstrate that the Zevia shopper is a highly desirable brand, less price sensitive at all income levels. We remain a home stocking brand, which remains a competitive advantage as we simultaneously build a singles business and grow Cola availability. Zevia shoppers proved valuable to retail partners with a remarkable 40% higher beverage spend versus total nonalcoholic beverage shoppers. Our shoppers also make 30% more trips to stores to purchase beverages versus the average shopper. We see similar dynamics in e-commerce where we are the #1 carbonated soft drink and where we continue to grow at pace with retail. As mentioned, the first quarter of 2023 marks a promotional calendar shift for Zevia versus years past, based on the strategic changes we made as a new leadership team for this annual operating plan, focusing less on Q1 and more on peak beverage season in retail activity.

Q1 results were driven largely through new items and new store distribution, which accounted for 78% of our growth, while organic velocity growth accounted for the remaining 22%. We expect this will balance closer to 60-40 in the coming months based on calendar shifts and our focus on the brand refresh. Distribution growth in the quarter was rooted in new packages, our 12-ounce sleek single soda can, our 8 packs in mass and our 12 packs in food. The single can continues to grow in units per store per week doubled when merchandise cold. Singles are becoming a major driver of our business with key natural channel customers. New stores also bolstered distribution growth as we close gaps in the food channel and gain new store selling and warehouse club.

We gained 2,700 new stores selling soda in the quarter. As we cycle our first year in distribution and warehouse club, we are pleased to see that 64% of shoppers who bought Zevia in club stores were new to brand and half of those new shoppers also bought Zevia in additional channels, spending 67% more on Zevia than the average Zevia shopper. This demonstrates the power of the Zevia brand discovery in Club as it spurs trips and spending in traditional retail channels. We have further opportunities to expand in cloud region selling, and we will be able to share more updates on this in the coming months. Moving on to Velocity. The consumer shift to larger pack sizes continued. Shoppers options are driving growth category-wide and also for Zevia as Apex and larger now account for more than 50% of our business in measured channels.

Velocity growth is driven in part by consumer trade-up as retailers switched from the 10-pack to a more profitable 12-pack, but also by our expansion in the mass channel and the broader trend of home stocking and consumption at home in nonalcoholic beverages. This is a competitive strength for the Zevia brand through food, warehouse club and in e-commerce. E-commerce, some natural channel players and much of warehouse club sit outside of measured channels. Operationally, we’re beginning to make fundamental changes in our supply chain that are expected to contribute to cost reductions, efficiencies and process improvements over time. We also continue to work on reducing selling costs to improve agility and to reduce store level out of stocks for our customers.

These changes will be happening in parallel with the brand refresh and will require continued focus. I’ll wrap with the big picture and turn it over to Denise. Zevia has a very healthy business and continues to experience strong consumer demand, growing the consumer base and simultaneously increasing spend per household on the brand. We are realizing price in the market having announced another 5% increase effective in Q2 and are reducing costs in our business. In the first quarter, we delivered the strongest gross margin ever since becoming a public company in 2021. Critically, we continue to manage cash effectively and drive improvement on the adjusted EBITDA line. We’re headed into the summer from a position of strength. We expect continued double-digit growth on the year, bolstered by an exciting brand refresh and a supply chain and transformation.

Zevia’s brand refresh brings a sharp new logo and brand identity, new modernized and differentiated pack design and radically improved on-shelf visibility, but most of all, increased resonance with new consumers, incremental to our highly engaged base. Thank you, and I’ll hand it over to Denise.

Denise Beckles: Thank you, Amy, and good morning, everyone. I will begin with an overview of our first quarter financial results. We will then open the call for your questions. In the first quarter of 2023, we delivered net sales of $43.3 million, growing 13.8% versus same time prior year. Growth was driven by higher price realization as volume was down 2.7% on an equivalized basis to $3.3 million in the period. Our gross margin continued sequential improvement with our strongest margin yet as a public company at 46.4% for the first quarter of 2023, 4.7 points above same quarter a year ago, primarily due to the impact of pricing, offset by slightly higher manufacturing costs. Gross margin also improved sequentially by 2.1 points versus Q4 2022.

Gross profit delivered in the period was $20.1 million, up $4.2 million to 26.6% versus a year ago, reflecting growth in net sales, driven by pricing and lower promotional spend. Selling and marketing expenses decreased 15.2% to $11.9 million, reflecting lower freight and warehousing costs of $1.3 million, driven primarily by improved freight pricing and efficiencies and a reduction of nonworking marketing costs of $0.9 million. G&A expenses were $8.6 million or 20% of net sales in the first quarter of 2023 compared to $10.1 million or 26.6% of net sales in the first quarter of 2022, a decrease of 6.6 points as a percent of net sales. The year-on-year dollar decrease was attributed to lower employee costs and lower public company expenses. Stock-based compensation and noncash expense was $2.4 million in the first quarter of 2023 as compared to $8.9 million in the same quarter last year.

Net loss was $2.9 million compared to a net loss of $17.5 million in the first quarter of 2022, an improvement of $14.6 million or 83.3% as compared to the first quarter of last year. Loss per share was $0.04 per diluted share of Zevia Class A common stockholders compared to $0.28 in the first quarter of 2022. Adjusted EBITDA loss was $0.5 million compared to an adjusted EBITDA loss of $8.3 million in the first quarter of 2022, a year-on-year improvement of $7.9 million or 94.6%, showing continued progress managing towards profitability and generating cash flow from operations. Our balance sheet remains strong with $56 million in cash and cash equivalents and no outstanding debt as of the end of the first quarter of 2023 as well as our new credit line of $20 million.

We maintained a healthy working capital for the period of $73.3 million. Turning to guidance. Based on our results and strong consumer metrics, we are reaffirming our 2023 annual net sales guidance of $180 million to $190 million, an increase of 10% to 16% over 2022, including $48 million to $51 million, an increase of 5% to 12% in Q2 of this year. In anticipation of the brand refresh, which is being launched in late Q2 phased through the rest of the year, we plan to invest in marketing to support our brand ambitions and continue to anticipate that the brand refresh velocity driving initiatives and our new distribution will support our growth ambitions this year. That concludes our prepared remarks. We will now open the call for your questions.

Operator?

Q&A Session

Operator: [Operator Instructions] Our first question is from Bonnie Herzog with Goldman Sachs.

Operator: Our next question is from Christian Ocera with Bank of America.

Operator: Our next question is from Jim Salera with Stephens.

Operator: Our next question is from Andrew Strelzik with BMO.

Operator: Our next question is from Chris Carey with Wells Fargo.

Operator: Our next question is from Joe Feldman with Telsey.

Operator: Ladies and gentlemen, we have reached the end of the question-and-answer session and are out of time for today’s call. Zevia thanks you for your time and participation. You may disconnect your lines at this time.

Amy Taylor: Thanks, everyone.