Zevia PBC (NYSE:ZVIA) Q3 2023 Earnings Call Transcript

Zevia PBC (NYSE:ZVIA) Q3 2023 Earnings Call Transcript November 13, 2023

Operator: Greetings and welcome to Zevia PBC Q3 2023 earnings call. [Operator Instructions] It is now my pleasure to introduce your host Reed Anderson, Managing Director ICR. Thank you Mr. Anderson. You may begin.

Reed Anderson: Thank you, and welcome to Zevia’s third quarter 2023 earnings conference call and webcast. On today’s call are Amy Taylor, President and Chief Executive Officer; and Florence Neubauer, Interim Chief Financial Officer. By now everyone should have access to the company’s third 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 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 also available on our website at investors.zevia.com.

Now I would like to turn the call over to Amy Taylor.

Amy Taylor: Thanks, Reid and good morning, everyone. Welcome to the Q3 2023 earnings call for Zevia PBC. I will leave by sharing that the plans we articulated on our Q2 call to stabilize our supply chain and restore service levels are progressing as expected in Q3 and this continued now in November. Zevia’s brand remains healthy and demand continues to accelerate, supported by the brand refresh, the improved on-shelf visibility that it delivers and velocity continues to grow at double-digit rates. Consumer spending is up on the brand for household and per trip. Our pricing remained strong with limited elasticity, exceeding our expectations and supporting our continued gross margin improvements. Zevia continues to have tremendous long-term potential, as it gained distribution, invest in brand building and win new consumers.

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Q&A Session

Broader value proposition remains one of the most relevant in all beverage. There is more attention on better-for-you beverage than ever. Zevia’s demand is reflected in dollar velocity growth, which measures sales per point of distribution and was up over 16% for the quarter, demonstrating that the brand and product portfolio meet the needs of today and tomorrow’s consumers. Our initiatives continue to bolster margin and set us up to improve profitability reflecting the exciting potential in the years to come. The customer consumer challenges that impacted net sales and costs in the back half of the year are short-term and we expect supply chain to be stabilized by year-end and optimize for 2024. I will detail this as well as cover consumer data and strategic data by category and by channel on today’s call.

Zevia’s mission focuses on global health for people and for the planet. And in Q3, we removed another 3,200 metric tons of sugar from consumer diet never having sold a plastic bottle. Zevia’s more affordable and 64% of non-alcoholic beverages in America. Our continued focus is taking our better-for-you beverages mainstream making them available and affordable for consumers across all income levels. I’ll walk us through third quarter results and then speak to our focus now and going forward. We delivered net sales of $43.1 million just above expectations for the quarter. Velocities were strong, despite production promotion given low stock levels and our order book is at or above expectations for all three months of the quarter. Gross margins are strong and continue to improve year-over-year.

We are realizing the benefit of improved promotional strategies, promising innovation performance, strong sustained pricing and reduce cost of goods sold. These evolutions along with a fully realize supply chain transformation our input to our continuing improvements in gross margin in the future and proof points of the strength of our business model. I’ll speak to our consumer based evolution and retail indicators via panel and scan data insights and then I’ll walk us through updates against the plan to address customer fulfillment and put the supply chain transformation back on track. Households increased our brand spend by 13% and their spend per trip also by 13% over the past 12 months. Both of which were also up versus prior period was consistent purchase frequency rates further indication of brand and consumer health.

The Zevia’s shopper is a highly desirable one less price sensitive at all income levels. We’re a home stocking brand, which remains a competitive advantage as we simultaneously build our single business and grow cold availability. Zevia shoppers spends 38% more on beverages versus total non-alcoholic beverage shoppers. Our shoppers also makes 30% more trips to purchase beverages. Zevia shoppers continue to differentiate themselves even further from average beverage shoppers, including high-growth specialty beverage shoppers as they continue to spend more on brand and overall. The most important scan matter of a quarter is velocity dollars per point of distribution. Zevia grew velocity 16.2% in the quarter despite a 26% reduction in promotions.

Base velocity per point of distribution was plus 21.5% versus prior year measuring growth without distribution or promotional impact. Our healthy-based business is a strong indicator for our long-term potential and our return to double-digit growth in the future. I’d like to provide a few channel and category insights before moving on to address some of our operational initiatives. Our growth for the quarter was led by exciting progress with the world’s largest retailer who has doubled Zevia space converted from 6-pack to 8-pack. It continues to test the brand’s performance in the mainstream carbonated soft aisle. The test is outperforming expectations and bodes well for the future expansion. Zevia’s soda is up triple digits in the chain in same-store sales.

This partner also started distributing three Zevia energy drink flavors in selected stores for the first time at the close of the quarter. These moves in conventional retailers are great examples of the impact of our brand refresh as we take our brand mainstream and of our total opportunity to lead the exciting growth of better-for-you beverages. In the food channel, Zevia energy drinks are new distributed in three additional large regional chains and off to a strong start in October. Energy drinks represents an exciting future growth opportunity. Our soda portfolio also represents tremendous upside as innovation performed very well across core channels. Creamy Root Beer and Vanilla Cola are number one and number two in terms of contribution to Zevia dollar growth across the quarter and both have ample room to expand distribution further the comparison to our legacy soda flavors.

Those are in top five velocity drivers among Zevia flavors and critically we continue to compete on taste with clean ingredients within the zero sugar space. Our new and improved cola taste tests well among passionate cola consumers and is rolling out into the market now. Each new soda item we’ve introduce into our portfolio performs better than the last. Further, 12-pack continue to contribute to growth and support improved profitability. And sleek single soda cans today sold in natural food and selectively foodservice are also top drivers of growth within the portfolio and key strategic drivers of trial among new users. And finally in the convenience channel, the new look brand made its debut at the National Association of Convenience Stores tradeshow in October.

We have augmented merchandising and selling horsepower with a new third-party resource to support route market and initial regional convenience engagements for 2024 spring resets are off to a good start. I will now provide an update on supply chain. The transformation in Zevia’s supply chain is a critical initiative to support our continued growth, enhance our customer service and drive efficiency and ultimately to materially reduce costs as we scale short-term missteps in its execution had a material impact on net sales for Q2 and the balance of the year. As we consolidate our warehouse network from 27 locations now to nine we encountered challenges which impacted inventory management transfers and the accuracy and timeliness of customer delivery and ultimately our ability to deliver on demand.

So last quarter, we discussed the following elements of our plan to course correct and I’ll provide an update on each one. One is that we have a new leadership team in place across supply chain. With new talent and processes including new ways of working with third parties and across departments are paying dividends as is evidenced in our fill rate which improves each month. We expect to return to optimal on-time and in-full deliveries this quarter. Two we re-phased transition plans for our warehouse network leveraging legacy providers for support through the transition with ample days of supply across all key schemes. This has been critical to stabilize the network and to address customer fulfillment as customer orders continue to come in strong.

But it also has a temporary impact on our adjusted EBITDA due to the higher transportation and storage costs associated with our investment in inventory redundancy to ensure the right product in the right locations. We expect our inventory balance to be lower at the end of Q4 versus Q3 as the pacing of inventory purchases normalize. Thirdly, we changed our approach to freight to improve service levels and reduce costs. And finally, in Q3 we sold our company-owned warehouse, embracing an efficient third-party network model. In summary, plans to address the short-term issues in logistics and customer fulfillment are working. It has acquired organizational changes, supply chain transformation adaptation, and short-term investments. But the plan is on track and we expect a return to normal by year-end with a more efficient supply chain going forward.