Zevia PBC (ZVIA) Earnings Call Transcript & Summary

All right. Good morning, everyone. My name is Andrew Strelzik. I'm BMO's Beverage and Restaurants analyst, and I'm pleased to introduce our next company, Zevia. Zevia is a fast-growing beverage company offering a range of zero sugar, zero calorie, plant-based beverages across a number of categories, including soda, energy drinks and organic tea. Zevia has an impressive track record of growth over time and a number of exciting opportunities on the horizon. So, we're excited to have with us today from Zevia, CEO, Paddy Spence and President, Amy Taylor. Welcome, and thank you both for spending the time with us today.

Morning.

This is going to be a fireside chat. But before we get into the Q&A, I just want to hand it over to Paddy, quickly, for some opening comments. Go ahead, Paddy.

Fantastic. Well, thank you so much, Andrew, for having us. And I wanted to just give a couple of background slides on the Zevia opportunity. Next slide, please. So, when you look at the combination of attributes that Zevia provides, just quickly recapping, it really starts with great taste and winning on taste, but we're in a pretty unique position, because we've got a portfolio of zero calorie, zero sugar products, all made with simple plant-based ingredients. Not only that, but they're packaged in sustainable packaging, aluminum cans, which have the highest recycling rate of any beverage package. And they're also priced affordably today, at the 34th percentile of all nonalcoholic or liquid refreshment beverages in the United States. Next slide, please. So, our market is a $770 billion global TAM across soda, energy drinks, tea, mixers and kids' drinks. And it's almost the perfect market for disruption because it's a market where 99% of American households purchase our categories. And yet, so many Americans just don't love or even trust the ingredients that are in many of these products. So, we've created a cohesive platform brand with an offering for every family member, time of day in usage occasion, from the moment you wake up til the time you go to sleep. Next slide, please. A couple of new things we're doing this year. For the first time, we're doubling down on marketing taste. So, we have some significant advancements in taste in our orange, lemon lime twist and mountain Zevia citrus items. We'll be marketing that this summer. In addition, we're expanding our energy drink portfolio, adding pineapple paradise and strawberry kiwi to this high-volume, high-velocity line. Next line -- slide, please. And for the first time, we're introducing single-serve 12-ounce sleek soda, offering consumers the opportunity to try the Zevia brand for less than $2. And finally, leveraging the excitement of our brand, we'll have, for the first time, limited time-only flavors. Fruit punch and orange cream, available to consumers in 12-ounce cans throughout the summer. So, as you can see here, we've got a long-term growth algorithm of 30%. Really, it starts with 10% coming from velocity, and that's expanding our space in current channels with equipment and new packaging formats. 5% from incremental distribution, both from existing customers, new outlets and stores, as well as custom packs. And then 15% from those white space or new distribution channels. That's warehouse club, in terms of at-home consumption, convenience and food service in immediate consumption, and the longer-term, international and other new geographies. So, that's just a quick overview of some of the things that we're doing at Zevia. And Andrew, with that, we'd love to kick it off with any of your questions.

Great. That was really helpful. And I guess, I wanted to start where you ended, which is on the 30%-plus growth algorithm. And just your confidence in that -- in achieving that over time. It's obviously a very big number, something that's consistent with your historical track record, but your confidence level and continuing to do that into the future and why those 15%, 10% and 5%, why that's the right level for us to think about the...

Absolutely. Well, so, as I noted, 30%, really, is made up of that 10% velocity gains, and that's something that we've achieved year in, year out over a 10-year period. 5% of incremental distribution in our core channels of food, drug, mass, natural and e-commerce. And so, for us, that's more flavors at a chain like Target, which only has a handful of flavors or more stores at a chain like Walmart. So, lastly then, it's that 15% of incremental distribution in new channels. Both at-home consumption, warehouse club, immediate consumption, convenience and food service. So, for us, a big driver of our ability to continue and even accelerate those growth rates is the new resources we have as a public company. And so, we really can leverage those to enhance our shelf positioning, but also create excitement at retail. One of the things we know, Andrew, is that the greatest driver of awareness is in-store. And so, enhancing our shelf positioning, adding equipment to enhance inventory, both racks for the dry shelf and coolers for immediate consumption are enablers that will allow us to unlock continued velocity gains. So, for us, it's really all about establishing our shelf presence, enhancing that, and continuing to drive in-store awareness to unlock those velocity gains.

And so, I guess in that context, the performance over the last couple of quarters has been a touch below. There's obviously compares and environment is kind of wacky and inconsistent over time. But just in the context of the algorithm, can you talk about the performance over the last couple of quarters? And what needs to happen to reaccelerate the momentum back into and above the range that you talked about?

Absolutely. I think, seasonality and timing really accounts for some of this. So, seasonally, typically, the second half of the year for Zevia sees fewer distribution gains, as retailers typically are setting their shelves in the spring to prepare for the summer beverage season. So, as such, we saw Zevia lag in Q3 on that portion of the algorithm associated with incremental distribution in existing channels. On velocity, we track to the algorithm. And then on new distribution channels, those white space channels, we are expanding into the warehouse club channel, which consumer data indicates is highly incremental for our brands. So, it's an exciting channel. That accounts for the greatest portion of that new distribution bucket in the algorithm. We're showing very positive results there, but we did lag in terms of starting to get into that channel in terms of timing in Q3. So, just to recap, there was some seasonality in terms of the incremental distribution in existing channels, strong velocity characteristics and then we're tiptoeing into that club channel, but we did lag that portion of the algorithm somewhat in Q3.

And so, I guess just more, kind of, holistically and more broadly, the company is growing, is scaling and you brought on some new human capital since you've gone public as well or just prior to that. The conversations with the retailers, more generally, in terms of things like shelf space and placements, how has that been evolving? It's obviously a very positive story that Zevia has to tell, but I'm curious what the feedback has been like? What the retailers are looking from you guys, as a company? Any commentary around those conversations and how that's evolving would be really helpful.

Yes. Andrew, I can jump in on that. Well, you're right. We're super bullish on both the immediate and long-term opportunities with the retail partners because they know, as we do, that 80% of shoppers -- in fact, just over 80% of shoppers are looking to reduce their sugar and that's all year long, not just now in January. And more than 60% and increasingly so, shoppers are looking to avoid artificial sweeteners. So, with these drivers and bearing in mind that our brand meets those criteria and is profitable, we're super bullish on the ability to gain space in the short term as well as to grow our strategic partnerships with our existing retailers and step change our presence with some of our newer partners. Zero calorie segment of soda is driving CSD growth, and then Zevia doubles to triples that as the leader, and as I mentioned, more profitably so. So, we see shelf gains coming in the typical March, April reset season of this year. And then, we're rapidly expanding new packaging formats, incremental flavors, as Paddy mentioned earlier, including limited time-only products to drive excitement and steps change display activity during critical beverage windows, not only in our core channels, but also in some new outlets across the U.S. and Canada. So, a really positive momentum on a newly public company with a lot of new resources to drive growth across the retail footprint as well as e-commerce.

One of the -- obviously, the distribution gains in one of the initiatives that has been underway, you mentioned tiptoeing into the warehouse club channel. I'm curious, how is that going so far? How is the brand being received? I know, by and large, those are a lot of new customers in that channel. And have you been able to map, I guess, retention of those customers? I know it's not a lot of time. So, still relatively newer. But are you able to see repeat and kind of track those customers through the channels and things like that? I'm curious for any comments on how that's going so far.

Yes. Well-framed, because those are important questions for us. And last time we spoke, we were able to really share publicly, in Q3, we're just stepping into that channel with limited data at the time. So, club results are really exciting to us, both qualitatively and quantitatively. We just launched in Costco Canada and -- these last 2 weeks. And there's a lot of excitement there in Canada, both for accessibility to variety packs for existing shoppers as well as discovery of the brand through trial for new shoppers. And in the U.S., the early results in club show that 58% of shoppers haven't had a Zevia before. They're new to Zevia. So, this makes club a very strategic channel for us, not just in driving incremental volume, but also driving trial and supporting growth in other channels, such as grocery. So, you discover a new flavor in club but you buy the 10 pack or the 12 pack in the grocery channel, stock that at home. And so, as you mentioned, it's really early to track repeat among those same shoppers. But what we can say is that, indicative of repeat purchase in those channels and the ability to win new users at a lighter user level is our expansion in club itself. So, as we hit hurdle rates, we continue to expand geographically with each individual operator, and those are good indicators of repeat. So, more to come on that when we have a richer data set.

I disconnected there. I'm hoping that you can hear me again.

We got you, Andrew. We covered it all for you.

I next wanted to ask about awareness. I believe the -- Okay, great. Perfect. Great. I wanted to next talk about awareness and brand building. I think, the last number that you guys have provided publicly was 15% awareness. I don't know if there's an update to that, but there's a lot that you guys are pivoting towards in terms of continuing to build the brand. And I'm curious, what you see as kind of the keys to breaking through on that front, specifically within the strategic pivot and even more generally, I mean, what's it been like trying to achieve brand building and awareness gains in this type of environment and how that's impacted the strategy?

Yes. Again, well-framed, strategic question. Because when we think about marketing and awareness overall, so top of funnel, the Zevia learnings actually come from the past 10 years, in combination with the past 2. And what I mean by that is, we've got a few nuggets to our advantage, if you will, during the last couple of unique years in consumer packaged goods. Zevia's, historically, invested very little in consumer marketing. The organization has been spending against innovation, which is really a super power, and winning and activating new distribution at retail. And in the last 2 years, our advantage as a better-for-you product line and brand that consumers trust during a period of time when shoppers are doing more homework about their health and shopping rooted in their health objectives more than ever before. And as a digital brand, the best-selling among all CSD, on Amazon, for example, and continue to grow in other digital platforms, these have made our push tactics even more effective. So organically, the current environment over the last couple of years have been to the Zevia advantage, given Zevia's historical strategy. But our opportunity now is to move beyond these, what I'll call, push tactics and into pull tactics, to drive awareness and trial, not just where consumers shop, but also where they live, work and play. So, that shows up in the form of trial-driving tactics like sampling that shows up in grassroots marketing and sponsorship and affiliations and then, in activating our very passionate user base that we already have today. And all of those, organic and convinced influencers and users that love Zevia, raising their voice through digital means, as well as in grassroot means through local events. So, we're excited to move beyond the push tactics that have benefited us, historically, and especially in the last 2 years into pull tactics and focusing on and investing in the consumer.

And so, I guess, I want to wrap into that. Some commentary on the competitive landscape. And what you see going on there as the environment continues to evolve, it feels like on a daily, weekly basis. So, how do you perceive the competitive landscape have you seen any changes? And how is it shaping your go-to-market strategy in the way that you just discussed?

Yes, absolutely. Well, I think, Andrew, one of the fascinating things about this brand is the competitive position that we're in. And by that, I mean, where we source our volume. One of the interesting things about this brand is, because we offer the bubble sweetness and enjoyment of a classic CSD, but with simple plant-based ingredients that the consumer trusts, because of that, so much of our volume is incremental. In other words, someone buys that 6-pack of Zevia, and they feel really good about drinking 1, 2, 4 or even 6 cans. And so, folks who switched to Zevia generally increase their category purchases. So, much of our volume is incremental, and that's very exciting, not just for us but for the retailer. But we also source volume from soda drinkers, both diet soda drinkers and full sugar soda drinkers, full calorie drinkers, who are looking for cleaner ingredients. We also source from drinkers of sugary beverages in a range of adjacent categories, whether that's energy, juice or tea as well as sparkling water. So, a lot of times, sparkling water drinkers are missing what sweetened beverages provide. So, our consumer metrics with the highest loyalty rate and zero calorie CSD provide quantitative support, for what we see anecdotally, that once consumers discover this brand, their purchasing expands throughout the household as they discover new flavors and new product lines. So, today, as we noted at the outset, we've got a product for every household member, every usage occasion in every day part and all of those products have the same zero sugar, simple plant-based ingredients. So, for our brand, it's really about ensuring consumers are exposed to that full assortment of great tasting flavors and categories. And so, really drilling down to retail, route to market and merchandising, how do we do that? Well, one of the things we're seeing is that increasingly, retailers are merchandising Zevia flavors and products together. And so, you'll see a display with soda, energy, tea, kids and mixers. What's exciting about that is, we know, quantitatively, as folks pick up those second and third product lines, we see their household spend increase exponentially. And so, it starts with that quantitative insight about where we're sourcing volume, which candidly is everywhere, but then, driving that to retail with merchandising that supports that cross-purchasing phenomenon.

Helpful. And there's a couple more top line things I want to discuss, but I want to make sure we have some time for the margin side. So, shifting to cost for a second. The company has done a very nice job on the per case cost of goods increases despite all the supply chain stuff that's going on. So, can you give us an update, what you're seeing in terms of the supply chain, ingredient availability, those types of things? And any types of commentary about the progression on the margin side, here, going forward would be helpful as well.

Absolutely. For our brand, kind of key cost inputs include cans, flavor, stevia sweetener and then co-packing, as well as other cardboard packaging. And so, broadly, I'd say, we're seeing pressure on commodity inputs like cardboard overwraps, less so for our brand on the contracted premium ingredients we use. And so, whether it's citric acid or our stevia sweetener, we contract for those premium ingredients and as such, are not subject to commodity inflation swings. The aluminum market, which certainly determines aluminum can pricing, as measured by the London Metal Exchange and the Midwest premium, has come down from its recent highs, but does remain elevated. So, when we look at that futures market for aluminum, mildly inverted. When we look at diesel pricing, we're certainly seeing the market anticipating some declines there. So, as we think about managing those cost pressures, Andrew, I would say, at the outset, we're less subject to commodity inflation pressures than many of our peers. On the margin and unit economics, protection and enhancement side, in addition to price realization, we've got opportunities with scale and productivity benefits as well as continued mix shifts to continue to improve our unit economics.

So, on the price side, there, I guess, you've been more explicit recently about your willingness to take price and the ability to take price here in '22. Philosophically though, how do you think about that as a lever within the construct of margin management and have you made a decision on what that's going to look like going forward? When is the timing that we might hear more about that? Just curious on the pricing philosophy.

Sure. I can talk about that through lens of unit economics, but also through the lens of the consumer and the brand's positioning. So, our brand has tremendous loyalty and our premium positioning will always be reinforced by the right price. And I think, importantly, there's room across categories and significant room in some of our categories as well as across channels and selected geographies and packs for us to move up to those right price points. And so, we're confident in our ability to improve unit economics and also, drive toward our long-term margin targets with pricing actions going forward. Notably, Zevia took a price increase in Q3 on 10 packs, but hasn't taken a broad price increase since it's been established truly as a national brand so for years. And we can talk about this in more detail at upcoming key milestones. But as a brand which is more affordable than 64% of single-serve beverages on the shelf and available to consumers and yet still premium and better for you, we see price as a key lever to drive revenue growth, profitability, but also to reinforce our positioning in 2022 and then going forward.

And so, as you think about your longer-term margin targets, the confidence there, I mean, I know there's a number of different drivers that you've discussed. There's some cost saving things underway as well. Just curious, the confidence level in that and how we build towards that. Has the timing changed at all in your mind given the environment?

No. And what I would say, Andrew is, Amy kind of hit on it, it starts with pricing actions and price realization. And so, in 2022, we'll see that price realization take hold throughout the year. We are continuing to see mix shift towards higher-priced and higher-margin innovation items. And then, I think the productivity and scale benefits, the ongoing operating leverage we receive via increased scale is really quite meaningful. And so, we've talked about this in the past, but when you're an emerging brand and you're shipping a single pallet, even short distances, that could cost you $2 or $3, full truck, 22 pallets is more like $0.30 a case. And so, those productivity benefits from increased scale, as well as the opportunity to continue removing costs from our system in areas like variety packs through automation, through in-sourcing of company-owned facilities like a warehouse, those are things that continue to bolster our margins. And so, when we look at price realization, continued mix shift, productivity and scale, I think we feel quite confident in our ability to continue working toward that long-term margin target. I think as you noted, supply chain disruptions are certainly challenging, there are some short-term cost spikes. But I think, when you look at the long-term trajectory for this brand, we've got a really fantastic opportunity, and we're continuing to iterate towards that.

And when you think bigger picture about the portfolio, I mean, obviously, a number of different lines and categories that you guys are competing within the space. How do you think about where the portfolio sits today and what it looks like today versus what it's going to look like in, I don't know, 3 or 5 years? Are there areas that need an extra push [indiscernible]? As you think about it more as a brand and kind of, altogether, in the way you're going to go to market in that way as well. But just curious about growing the portfolio and the different pieces of it and where that sits in mind?

Sure. So, to durably answer one of your questions out of the gates, we really don't have any dogs. So, when we think about managing the portfolio and oftentimes, beverage companies think about their long tail, what do they need to prune to rationalize the portfolio, we're not in a position where we have any flavors within any individual categories that are concerning to us. But we're constantly innovating. And when I joined the Zevia organization just 6 months ago, this is one of the things that really struck me as a superpower, is the ability to continuously improve on existing flavors, but also, in parallel, develop new ones. So, for example, we're bringing new energy drink flavors to the market as we speak. We're bringing, tested in small environments, but successful limited time only soda flavors to the market this summer with a vision of growing the portfolio over time, with the strongest taste. And then, we're always fine-tuning in our fairly new categories of tea or kids, so, doubling down on the most successful flavors and expanding on what we learn about what different flavor profiles are right for those consumers. We have tremendous incrementality across each of our categories. So, if we can get it right in tea, we're bringing new consumers into the total Zevia franchise. And as you mentioned, we operate as a platform brand. So, what we're building on is trust in the Zevia name. And as new shoppers come into the categories based upon positive experience with trough or new flavors, and bring them in to try and move across categories. So, soda continues to be our focus. It continues to grow, and there's opportunity to bring new flavors, nostalgic flavors to that category and to grow that piece of business. But on a smaller basis, we also have tremendous growth in our adjacent categories. And there, we have the opportunity to rationalize slightly if 1 or 2 improvements can be made, but most of all to add. So, we have a lot of room to grow in flavors for tea, for energy drinks, for kids and ultimately, for mixers as well. So, you'll see an innovation pipeline that's both steady as well as surprising to the consumer, with periodic limited time offers or special retailer partnerships so that we can build excitement across geographies and channels and continue to bring new news from the portfolio.

I really want to get an ESG question in here, quickly, because I know that, that's, to me, at least an important piece of this. We only have 1 minute, so going to do it as quickly as I possibly can. Obviously, you've talked a lot about sugar consumption and the environmental elements within the ESG. But can you guys talk about a little bit of what you're doing on the S and the G side where that maybe just doesn't get as much focus?

Sure. No, I appreciate the question, because you're right. Environmental gets a lot of attention. And every year, we're measuring, literally, how many plastic bottles we're taking out of roadways and waterways by replacing them with aluminum cans. And the other intent that we have is to create a broader social pressure such that selling plastic bottles just becomes unacceptable. But our organization's focus is also on what we think is a tremendous issue around income inequality and accessibility to better-for-you foods. So, while we're talking about price increases or we're talking about inflation and the rising tide takes prices up for everyone, we remain relatively affordable, relative to the single-serve price of beverages on average, especially as compared to better-for-you products. So, accessibility as sort of a social mandate is critical for us in the framework of ESG, remaining affordable. So, it's great that there's lots of better-for-you products out there and lots to sort of Instagram brands that are popping on to health food shelves at the price of $4 and $5 and $6 for a single-serve. But for less than $0.80 a can, we remain available to families to stock flavorful better-for-you, better tasting beverages in their fridge and in their pantry year round. So, for us, inequality is something that we look to address with better-for-you beverages. If a family is looking to reduce their sugar, which is a tremendous step forward in health for a family, one of the simplest and fastest ways that they can do that is to reduce sugar in their diet. And the fastest way they can do that is to make the change in beverage. So, when we think about affordability and we think about global health, this is a lot of our S. And when we think about governance, we really think about how do we govern ourselves as an organization, how do we show up, disruptively, in the workplace. And so, we think about not just diversity, equity and inclusion. Yes, those are table stakes, but true representation, whether it's our Board, our leadership team, or all throughout our organization, we want to be representative of the consumer we serve. And we just about are today, and we will continue to actively improve to ensure that we always will be. And we operate, from a governance perspective, with a principal of transparency. Its transparency in our company culture, its transparency of DE&I and representation, it's transparency in our product, with our ingredients, our route to market, both the sustainability and environmental considerations as well as health and price, and transparency, literally, in our clear product. So, we're clear and clean and we aim to continue to be that way as an organization as well. And we look around to our peers that are world-class in the E, world-class in the S, world-class in the G, and that becomes our constant aspiration to drive continuous improvement day-over-day. So, I appreciate you asking about that. We are very passionate about the E, the S and the G. And we've got a long way to go to be world-class by each metric, but that's certainly our objective.

And that was a really great answer. I really appreciate that. And we'll have to call it there. We're out of time, but thank you both for the time and joining us today. I look forward to talking to you again soon.

Thank you so much, Andrew.

Good to see you.

Thank you.