Zevia PBC (ZVIA) Earnings Call Transcript & Summary

All right. Good morning, everyone. Thanks so much for coming to our conference. Super excited. Full lineup of a lot of speakers today, and our first presenters are from Zevia. And we have Amy Taylor who is the CEO of Zevia and Denise Beckles is the CFO. So as many of you know, Zevia is an emerging nonalcoholic beverage company that went public about 2 years ago. The company generated $165 million in sales in 2022 and has a portfolio of products naturally sweetened with stevia, and the products include carbonated soft drinks, energy drinks, mixers and teas. So with that, I'm going to join the two of them. Thank you so much for joining us again this year.

Thanks for kicking off with us.

Start with the best. So I wanted to kick off our talk today about your very strong quarterly results last week, I can't believe it was just last week. And you reported strong top line. But in the context of that, you maintained your net sales growth guidance of 10% to 16% for the year. So could you break down some of the key drivers of that? And then how much contribution you expect from maybe velocity growth, increased shelf space and then distribution gains? Just trying to help us understand how you're going to hit that guidance.

Sure. Yes, we're really pleased with the first quarter. I think it's demonstrative of what Zevia can do with a faster path to profitability than maybe some had predicted and just reliable double-digit growth. But I think there's a lot of upside beyond where we are today. So to specifically answer your question, I think about the tailwinds that we have at play. We just took a price increase since August of last year, a material price increase of 10%. We're putting another one in the market now and these have been very well received by retailers and consumers alike. We kind of set the new watermark, and our pricing really supports our product positioning, which is premium but accessible. And then the other thing that really supports that positioning is our new brand, refresh, which you know, and I'm sure we'll talk a little bit more about now. So new visual assets to support our positioning, communicating kind of what is table stakes for us, which is taste and zero sugar, but then also our distinctive position, which is that we have clean ingredients, and that's what really, I think, drives our point of view and brings the younger consumer into a category. But for us, driving the rest of the year, the brand refresh is rolling into the market now. So there's tailwinds from that. We're starting to invest in marketing. We've made very light investments in marketing historically, but as we look to the summer and the brand refresh, that brings a tailwind as well. We do expect organic growth from velocity, but then to your point, we continue to gain distribution, both with the traditional portfolio as well as new products and new flavors. Our pack mix is still building out by channel. And then we do expect to continue to see growth from price as it's been really well received in the market. To your point, we're getting reset in store now. So we'll also get some tailwinds in Q2, Q3 and really the balance of the year from gain space at that retail. Moving up off the bottom shelf where Zevia has lived historically at eye level and gaining multiple points of interruption throughout grocery and natural.

Okay. That sounds like a lot going on. So that's great as you execute on that plan. And as we think about longer term, and you touched on this name, but I know you're making conscious effort to shift your company to be much more profitable growth going forward. So in the context of that, can you talk a little bit about how you're executing on that because we did see some of the signs of that in Q1. But if I'm understanding what you laid out last week, we might not see that near term as you invest behind the refresh, but we can expect to see that towards the end of this year or into next year, more profitable growth moving forward.

I think those are fair assumptions. It's one of the reason you won't see that near term is because we are going to spend more in marketing than we've traditionally spent as Amy explained, to support the brand refresh as it goes into market. We're also going through a supply chain optimization initiative that has some onetime impact that we will take each quarter throughout the rest of the year. But there are many other things we've done, in addition to looking at price. We've done -- we've looked at our promotions and strategically figured out what works with our brand at the right time. So that will impact our margins, for example, in a positive way and offset some of the risks that we have to absorb with the changes in supply chain. And in addition to that, we've managed some of our costs below the line just through processes in terms of the selling expenses and in addition to G&A, which you've seen tremendous improvement. We're going to see positive impacts of those things. But because we're doing those 2 investments, we know that we'll have some bumpiness throughout the rest of the year. But profitability we expect to come by at least 2024. This is our trajectory. This is what we're working on. And we see the opportunity to do that.

Okay. And remind me, in the context of that, the larger pack sizes and how that impacts. Certainly, I understand on the top line, but on the bottom line, I assume slightly margin dilutive by gross profit dollars, right? you're increasing. So is that part of the strategy as well? And as I think about that in the context of the consumer, and why that might be resonating in this market, right?

So pack mix overall is a positive. I think that's important to mention. So there's a couple of different ways in which it's a positive. It was a tailwind in the first quarter, and it will continue to contribute to top line and bottom line the balance of the year and going forward. And the reason for that is, #1, consumers continue to trade up as we've talked about a lot. So we have 6 packs and 12 packs in grocery. We sell 8 packs in mass, and then we sell 24 and 30 packs in e-commerce and in club. And these are all opportunities for consumers to go for value, which is really important right now. So more units of a better-for-you products stocked in the home. And all of that for us from a net sales perspective as well as household penetration and intensifying consumption have been tailwinds. But the other thing that's happening in parallel is we're starting to grow our singles business. And so this is margin supportive net-net, so for the long term, we expect to have the channel segmentation that helps to grow the base and intensify consumption while supporting margins. Our single business is just getting started. It's less than 10% of the business today. It's the fastest-growing part of the business. It's margin supportive. And right now, we're selling cold singles in natural, which sometimes operates like a grocery or like a deli for that shopper, different from conventional grocery. We're starting to sell in conventional grocery. And as you know, the massive upside for us is immediate consumption, so convenience and food service. So the pack mix net-net is a positive, and we're really pleased that even in the midst of economic headwinds, we're seeing consumers to continue to trade up and stock this better-for-you product at home because it suits all different usage occasions with different family members and different dayparts. And yet it's good for you. So we talk about it being kind of limitless enjoyment across all the family members.

And something else you talked about is just -- and you touched on this, is the brand's relative value proposition. When you look at where it's priced relative to competition, it's still quite affordable yet premium.

Yes. That's what we're looking to strike. So we've taken -- we've done the brand refresh. So we now look as good as we taste, but we should also be priced accordingly. So premium but accessible. So we are priced north of traditional sodas, right, but just south of functional beverages and significantly south of most better-for-you beverages. If we could just talk about this on a societal level for one second, a challenge that we see is that better-for-you products are made for rich people. And so we want to make better-for-you products with zero sugar and clean ingredients for a broader population for almost all income levels. And so as we grow distribution in mass and club, as we focus on the value channel, as we look to get into convenience and as we continue to grow as the #1 e-commerce carbonated soft drink that's a part of our mission is to make these better-for-you products affordable for more of the population.

That absolutely makes sense. How do you trade off then when you think about the potential for incremental pricing, your ability to pass that through and then thinking about the impact on volumes. So far, velocities have held in quite well. But how are you evaluating that in the future for further pricing?

Sure. Well, maybe I can just talk about the sort of indices relative to other products and how we measure that and then maybe Denise can talk about expectations on price going forward. So to your point, we don't have a lot of history of taking prices as a company. So we don't have backward-looking elasticity studies to lean on. And we've been very pleased to see that it has been at least in keeping with our expectations. I think it's a reflection of the strength of the brand. But what we do is we measure how affordable is Zevia relative to all other nonalcoholic beverages. And we land right about the 36th or 37th percentile, meaning about 64% and of non-alc beverages in America, sold single-serve are more expensive than Zevia. And as we've taken price, that has maintained, so net-net-net, what it tells us is that we've really been taking pricing, keeping with the market and keeping our same relative position from an affordability perspective. Anything else on price?

Yes. We actually plan to take another price increase this year. We've actually -- it's been rolled into the market already. It's 5%. We consider that pretty -- given that the first one we took was 10%. This is quite modest. But again, we know that it's not going to move our -- the pricing, where we are in percentile significantly. And we felt that this -- the brand is supported by both the look and feel of the brand, the fact that we consider a premium approachable and affordable brand. And in many ways, it keeps us still in line with what's happening with the category as a whole. And one of the reasons we looked at this is that we saw that last year -- for the last 1.5 years that everyone is taking a price increase each quarter. We haven't -- we've not taken anything as Amy said, we've not taken a price increase before the 10%. We've taken one increase on the 6-pack, but that is it. It's not been part of our history. And you see that our volumes are down about 2.7%, but our net sales are still significantly up double digit. For us, we know that volume is going to eventually come back. We know with some of the work we're doing around the brand refresh and repositioning it for the rest of the year is going to bring volumes back. But we also expect to get upside from net sales -- in net sales from price and for that, it's important to us to do that.

All makes sense. Let's talk more about the brand refresh because it is quite exciting. How is it going so far? I know it's still early, but relative to your expectations. And then I'd love to hear a little more color on some of the creative that you have planned for the brand refresh and maybe how you're leveraging social media, if at all?

Sure. Yes, absolutely. Yes. So I have with me a couple of props on the webcast, you can see them. But for what it's worth, Zevia has, I'm going to say, leverage the familiar in the past? And what have we meant by that? We've looked a little bit more like a private label brand and looked like whatever it was that we were sitting next to and from old management from an entrepreneurial perspective, that actually made sense. With limited marketing dollars to kind of come into the market, and be a better-for-you similar product or better solution, if you will, to legacy players and category leaders made sense. But look, the first rule of marketing is distinction. So we have to take pride in our brand, position ourselves as premium but accessible. And we've done that with a new logo and a new far more modern, clean and premium look and the reason I brought this 6-pack with me here today is just to demonstrate the kind of billboard effect of this. So these stacked across eye level in a grocery player with multiple flavors. It just looks delicious, but it also looks like it stands for what we stand for, which is better-for-you clean ingredients. So we're really excited about the brand refresh. The only thing that I can tell you about how well is it received so far is how retailers are reacting because it's too early for the consumer. We're just rolling out. But it is a unilaterally positive reception at retail. And so in soda, we've been able to gain space at the expense of competition across multiple major retailers just on the back of the brand refresh. As an example, we've gone from a 6-pack with plastic rings to now this cardboard over-wrap. So again, the billboard effect, acting as a beacon for a growing category. But the other thing it's done with retail is the brand refresh has introduced discussions around our energy drink line, which is tiny. I mean we effectively are kind of the energy drink of the natural channel right now. But we've had significant conversations now with those that have maybe not taken the energy drink proposition from Zevia too seriously in the past. So that's going to open a lot doors for us. In terms of marketing, hey, this is great. These are visual assets, but we now have to bring it to life. And our marketing has historically been focused on product. So if you look at our social or whatever, there's pack shots and maybe some recipes. And what we need is an emotional trigger. We need to be a part of the conversation in what I call the [indiscernible] and so as we overhaul Zevia messaging hand-in-hand with visual assets, we, yes, have on the ground sampling, but we're also starting to work with ambassadors that make sense for our brand. Their messaging coming to life through social and through editorial. As you know, I spent 20 years in marketing for Red Bull. So it's a sweet spot for me to get close to the consumer into the culture, find really those flashpoints, both those individuals and communities that resonate with our brand and turn their voice on and sort of as each one tells five, bring more people into the franchise. So you'll see our website will go live, our new website, towards the end of June. Social media will follow shortly thereafter and below the line of selective advertising campaigns on a metro-by-metro basis to both gain learnings to inform 2024, where we expect significant expansion for this brand as well as to support the business for the balance of this year and some of the ways that Denise described. So happy to talk more about the different components of the marketing mix, but in short, sampling, social, editorial selected geographically specific advertising and, of course, retail.

And that all starts very soon, right, in June, July, this summer?

Yes, end of June, you'll see the first local sampling initiatives across selected cities that has come hand-in-hand with our social media getting turned on and our new website. And then starting later in the summer, so July and August is when we turn on advertising in selected metros.

You mentioned earlier that you're actually taking space from competition, which is it in some of those, calorie or...

It really varies. Yes, in some cases, we do fit next to traditional category leaders in CFD and will gobble up space across those portfolios, whether it's weaker performing SKUs, in some cases, full sugar, in some cases zero. In other cases, for example, in natural, there's so much fragmentation in beverage these days. So of all the either functional or better-for-you products that have come online over the last couple of years and really not made it at retail. We bring a data set to demonstrate what the slow movers are and how Zevia can benefit the retailer from both a profitability and velocity perspective. Our -- interestingly, our source of volume is full-sugar soda, diet and zero-sugar soda, energy drinks, isotonics and even just sparkling water as people get flavor fatigued from flavored waters. So we invite people to something a little bit more fun, which is soda with limitless enjoyment, no trade-offs with clean ingredients.

So 2 follow-up questions speaking of that and thinking about household penetration for you, which is still quite low. I think it's 6.4%. So still a massive opportunity and runway for growth. So in the context of that, what else are you doing to kind of increase awareness for the product? Is this the activation, the brand refresh, all the creative and the media or the marketing behind this.

Yes to all of that plus distribution because the #1 driver of awareness for beverage, generally speaking, for most brands is in store. And so for us to look better and build a billboard at retail is critical. But historically, the only marketing Zevia has then done is at the point of purchase to support retail. It's what I'll call push marketing. What will be critical for us from an awareness standpoint is to drive pull. So to get out in the market where consumers live, work and play and start to interrupt that target consumer with messaging, whether it's editorial, social or advertising. Again, we're not talking huge dollars here. It's just an increase versus historical spend in a very targeted manner. I'm also a believer in test cells, so if we do something in Tampa and not in Orlando, if we do something in Charlotte and not in Raleigh and study what happens, you start to figure out your marketing mix effectiveness and scale what works. And so it's a tremendous opportunity for us to get out of the niche into the mainstream in just one quick basket data point that's helped to inform marketing. It might surprise you in terms of who is our consumer. So on a 12-month span, if you look at the basket of a Zevia shopper, 70% of the shoppers have purchased Oreos and 68% Doritos. And what I'm saying is -- these are just normal folks yes, just normal people. Our shopper is a normal consumer who's trying to do a little bit better. So for a family to switch from traditional sodas to Zevia, they cut their sugar consumption in half. So it's just regular shoppers, no wonder we're growing like crazy in the mass channel and in conventional grocery as we start to gain that distribution. We start to penetrate more households and to your question, gain awareness outside of natural where we've kind of built our business to start.

What's a realistic goal for household penetration for your target? Do you have something in mind? Is it doubling in the next -- is it possible in the next year?

It's more than that. Yes, I don't know about the next year exactly because as you've referred to, this is somewhat of a transformational year for us at Zevia, we're doing -- we're changing supply chain. We're just now rolling out the brand refresh. We're very focused on incrementality and distribution with big upside in immediate consumption. That takes time. But from a household penetration perspective, I don't imagine that we're a branded 95% of households, right? I don't think we are for everyone, but we could be 20%, 30% and 40% households. We can be. And I think the receptivity to the taste profile that we're now bringing to the market is really the future indicator to say, as we said, these are just normal households, normal folks that stuck so to for limitless enjoyment with clean ingredients and no reason not to drink more. So there's a lot of upside. I can't say household penetration will double in the next year because so much of that will depend upon expanded distribution. But as we look at North America and the massive upside of closing out distribution gaps in food, winning over the rest of mass where we have less than 40% ACV in the mass channel, turning over more clubs, closing out drug and then finally, launching in convenience. These are really the step changes to household penetration, right?

And that's just also trying to drive trial also. And that's the singles is probably helping to do that. And as you place them in more even you said traditional, it's helping.

Absolutely. Having singles cold at arm's reach is the #1 most important driver of trial for us. But I'll give you an incredible little factoid from a surprise channel, club, which you think of as a volume channel and a home stocking channel. 65% of consumers who bought Zevia at club in the last 12 months had never had Zevia before. So it's a massive trial driver for us. And these same shoppers spend more on Zevia outside of the club channel than our traditional Zevia -- our typical Zevia shopper. So club has massive upside for us on trial as well as repeat.

I was just going to ask. So trial is great. Can you track? And have you seen how the repeat has been?

We can. Yes. So the club for whatever reason, the shopper that discovers Zevia Club is a stickier shopper. So what we've learned is the shopper that enters Zevia through club spends more at grocery than the typical Zevia shopper and the typical Zevia shopper spends 40% more on beverage than the average beverage shopper. So that's an amazing pipeline for us when you talk about building awareness and driving trial.

Okay. So longer term, we're sitting here next year, what are you hoping for in terms of the brand refresh and how will you ultimately gauge the success of this brand refresh?