Zevia PBC (ZVIA) Earnings Call Transcript & Summary

Hi, everyone, and thanks for joining today. We've got our next fireside chat with Zevia, and I'm very excited to welcome them back to our conference again this year. So joining us on stage today is Amy Taylor, CEO, and Girish Satya, CFO. As many of you know, Zevia is an emerging nonalcoholic beverage company that went public about 3 years ago. Zevia's portfolio of products naturally sweetened with Stevia, including carbonated soft drinks, energy drinks, mixers and teas. Now the company is in an exciting crossroad having just announced the first phase of their DSD delivery rollout on their Q1 earnings call last week, which is something we and presumably all of you have been looking forward to. So let's start with our fireside chat. And Girish, not to put you on the spot, but I wanted to start with you. You took over the CFO role in mid-to-late February, I think. So could you talk about your experience thus far? And really what drove you to this role? And then maybe what has surprised you the most in the early days?

Yes, absolutely. So first off, thanks to you and the Goldman Sachs team for hosting us today. We appreciate that. It's actually a question I get asked a lot. So I appreciate you bringing it up. And so I've had the opportunity to be a part of a lot of breakthrough consumer brands across consumer verticals. And what I thought the Zevia business, it shared a lot of the similarities that I've seen with other breakthrough consumer brands. So I think, first, there were clear category tailwinds. Obviously, the sort of health and wellness megatrend has forced consumers to really consider natural, better-for-you alternatives. And so Zevia is well positioned there. And I think more importantly, you saw the growth rates in better-for-you soda far outpacing traditional CSD. I think when I looked at Zevia, I saw a business that had clean natural ingredients. I saw a very clean balance sheet. I saw a very healthy multipack business. But I also saw a company that was sort of at the pivot point for an important sort of strategic and operational change to really sort of break through this next sort of growth barrier. And I thought, bringing my skill set to bear in terms of driving a lot of operational improvement, change management would be helpful in partnering with Amy sort of drive that breakthrough growth. And so I think that's really what sort of drove me to the opportunity. And in terms of what surprised me, I think it's really been an organization that is open to and ready for change. And so I think -- I will probably touch on it later, we've outlined some pretty big strategic shifts over the last 30 to 60 days. And so it's an organization that is really excited for that and open to it and open to new ways of working.

Okay. Great. And then I guess just kind of switching gears a bit. Last week, you reported your Q1 results, which included your initial FY '24 net sales outlook, and that implies sales growth declines of down 5% to flat. So could you break down, Amy, maybe the key drivers of this? And really, ultimately, how much contribution you expect from velocity growth, maybe increased shelf space, I definitely want to touch on that with you and new distribution channels?

Sure. So the guide implies a strong back half, returning to growth, sequential improvement. What gives us confidence in that? There's a couple of things. Number one is, improving scan data. So same-store sales velocity, over the last several periods, sequentially improving, but also now category leading. So when we look at the April read, Zevia grew faster than the category. So carbonated soft drinks as well as faster than the Diet and Zero segment. And so we're excited about current momentum. We're also bolstered by spring resets. Spring resets do a couple of things for us. It resets the in-store conditions to the planogram, which helps us to regain every flavor that should be on shelf, number one. Number two, in a couple of very important key retailers, we actually gained space. And then thirdly, it puts into more stores in America, our top-selling flavors. So that accelerates velocities across the board with fast movers like Creamy Root Beer and Vanilla Cola. But we're also bullish on marketing impact. So we've just started marketing out of store last 4 to 6 weeks. We've seen some early indicators of a positive impact on velocity and in scan data compared to rest of market in control cities. So we're really bullish on the back half of the year accelerating what I would call a back-to-normal growth for Zevia. And with the change in route to market that you mentioned earlier, in combination with the productivity initiatives which frees up investments to drive growth, we're really bullish on setting the back half of the year growing and then really exciting growth in '25 and forward.

Okay. And then you mentioned some retailers that you've gained space, you're probably not going to call them out, but can you give us a sense of the channels or...?

Sure. So where we've -- you know we've been challenged with our supply chain in the last year. And you know that our full year guide is largely reflective of the volume impact of those challenges in supply chain in the first part of this year. And so one of the most important things that the spring resets do is to put our product back on shelf where originally planogrammed. But in a couple of critical instances, with a mainstream conventional retailer with a national footprint, we just learned in the recent weeks of a 33% increase in space. Now that is not demonstrative of every retailer in America. But when you have someone who has Zevia sort of new to their business, additive to their business, growing close to triple digits in same-store sales, say, yes, this makes sense for us to increase space in those stores. It also sets us up to increased stores selling. So you can imagine again, mainstream players, if you think about progress against Kroger, Albertsons, Walmart and the like, that's where we get step-change growth. The natural channel shopper loves Zevia, stocks Zevia at home and buys everything that we sell, who's just discovering Zevia is the mainstream and conventional grocery shopper and we're growing like crazy there. I think I mentioned on the earnings call, 23% growth in food in the last 4 weeks and accelerating every 4-week period in our largest channel. But where the upside is, is it mass and drug and value and then ultimately, in convenience where we can step change the growth of the base through trial.

Right. And then in terms of some of this space, you've seen that actually set already or they've just indicated the space change that they're going to give you?

A little bit of each. The one that I was -- the national footprint, I was mentioning earlier, was 33%. That was just communicated and expect to be set in the coming weeks. So that's why we shared this with you to say much of the volume and net sales impact of some of that step change is realized in the back half of the year.

Okay. And then longer term, you've made strategic shifts to prioritize profitable growth, and we've talked about that a lot, really in an effort to achieve profitability faster. So what does the longer-term top line growth outlook look like for your company, do you think? And is it sort of in the low double-digit range? Is that feasible? And to grow profitably as you accomplish some of the things you just mentioned?

Yes. I mean one of the things that I'm really pleased, to realize with Girish in the seat for like 90 days, is that the foundation of this productivity initiative is, yes, to get to profitability faster, but it's also to rearrange the P&L to invest in growth drivers. So Girish, maybe you could talk a little bit about the outlook?

Yes. So I mean, as Amy mentioned, we're really laser-focused on driving improved unit economics. And as we think about sort of the long-term growth rate, I think we're pretty bullish on the opportunity in C-store and the ability for DSD to improve our execution in our grocery channel. And so I think our perspectives are that long term, we should be in the teens from a growth perspective and be able to deliver consistent profitable growth as we sort of articulated in the last earnings call, in getting to break even, slightly EBITDA positive in 2026 and really using that as sort of the launching point for that mid-teen growth.

Okay. All right. That sounds good. And then I definitely wanted to touch on the DSD that you talked about. And that really was the highlight of Q1 print, just with that announcement. And again, we've talked about that for some time. So you've entered the first phase of the rollout, which is great to see. So curious to hear, why you've chosen a partner with really more than one distributor. And then really what went into that thought process versus maybe trying to find a single national distributor? And is that still a possibility?

Yes. I think, to a degree, anything is possible. But what's important for us is we know DSD will improve our performance in our existing distribution -- in our existing footprint, right, by accelerating volume, by driving incremental display, improving the productivity of our promotions, capturing lost sales by filling our shelves and penetrating more portions of the store. And we could then unleash DSD to go and launch convenience and merchandise singles, which is everything about step-changing our user base. And so why would we roll that regionally? Well, we're thoughtfully partnering with some really best-in-class operators in the form of Columbia Distributing in Washington and Oregon, Hayden Beverage in Idaho and Montana and then Bill's up in Alaska, which mirrors the footprint of some of our critical key account chains. In converting those change to DSD, first grocery and then with a focus in convenience, we can gain tremendous learnings from those executions to then take nationally. And not only to then frame the conversations with the next DSD partner in the next with beneficial terms and a proven case study performance, but we also can communicate with retailers to say, "Hey, with proper in-store penetration, with proper brand presence and with proper promotional support, here is the potential of Zevia beyond the business that you've maintained over the past decade. And here, therefore, why we want a step change in-store presence with the support of DSD." So a staged approach is both supportive of the P&L evolution that Girish described as well as a tremendous case study for us to drive change within retailer footprint based on regional performance.

And remind us of the rollout, the phasing, because I know I'm also curious to ultimately understand the timing where you'll be more fully penetrated do you think, into the C-store channel ultimately?

We're focused first where we have the highest brand development index. So I think what we indicated on the call or maybe in the Q&A discussion was that we see a potential West to East type rollout. We do imagine executing in the back half of the year with more DSD regional partners than we have today. So I would imagine the possibility of adding another 1 to 2 regions based upon the early learnings from the Northwest. But right now, we're just laser-focused on executing in the Northwest and on getting marketing rolling to drive pull and really build brand heat and brand momentum, which is really at the center of success for singles as well.

And then -- but if you think about it, it's still predominantly in some of the existing channels that you're in, this DSD and then ultimately, the C-store channel would be, right?

Well, in parallel, in the Northwest, we expect our distributor partners to impact our existing distribution in grocery, as you just described, and roll out independent convenience and selected chain convenience in this footprint. We are listed now in 4 regional convenience chains, and we'll get tremendous learnings from different merchandising strategies, different price points, different promotional support. And in the case that those footprints overlap with DSD, then also through the benefit of DSD.

Okay. And then what about the investment necessary, right, on your end, really to support this? And how much -- can you quantify the initial investment? And how do we think about that flowing through the P&L?

Yes. So I mean, I think it will flow through in a variety of ways. Obviously, there's the initial sort of gross margin hit, if you will, from shifting our grocery channel to DSD. There will be some increased marketing expense as we support the local markets and local market activations. And then there's a small amount of, what I'll call, incremental CapEx as we buy coolers and other sort of small pieces of equipment. All of that is sort of contemplated in our current business model and our current cost base. And so we think we've sufficiently budgeted and planned for the necessary amounts to make it profitable and work in our markets.

All right. So that's helpful. And Consumer Insights, certainly remains quite a challenging environment. So hoping you could touch a little bit high level on what you're seeing from the consumer and really ultimately what the consumer is looking for today. In terms of your business, what's performing well, maybe what surprised you that didn't perform as well as what you had expected with some of the innovation that you've rolled out?

Sure. Yes. So let's start macro, maybe. I look through a couple of different things to understand both our opportunity and then the current health of our brand. From an opportunity perspective, there is a macro sea change away from sugar. I think we can all agree to that. The younger consumer is also expecting a clean label product. We have the fewest ingredients of any natural soda ingredients that you can pronounce. Naturally delicious is how we think about and talk about our product because at the end of the day, the tension in carbonated soft drink category is between health and taste. And Zevia sort of unlocked the idea that you don't have to choose. So it's really limitless enjoyment across usage occasions and family members, and that's the foundation of really a sea change in consumer preference, and we're leaning right into that and very well positioned accordingly. There's also tremendous category tailwinds now. So natural soda is growing. There's new brands on the scene, spending a lot of money to demonstrate to consumers that indeed, soda could be better for you. And we're the most well-established and visible business but also affordable in this environment. So we taste great, we're affordable and we're relevant across the usage occasions. These are some of the ways in which we capitalized on some of the macro trends that we're seeing. When we think about the health of our brand and business in light of some of those more broad consumer trends, I'm really excited that in the last 2 reads, we're growing, not only sequentially improvement, not only then leading the category in dollars, but also in units. And so why do I mention this? We've taken now 4 price increases over the last 1.5 years. We're largely a fast follower. We remain less expensive than 64% of beverages in America in the nonalc set. So we really believe that better-for-you products are not just for rich people, although as a society, we have really sold better-for-you products exclusively to rich people. So we're making this idea of a clean label zero sugar soda available to just about everybody. And the fact that we've taken price increases in keeping with the market and are growing now in units overall and ahead of the category. I think it's just a tremendous foundation of brand health going into what some, in the Staples conversation, believe are tougher economic times. Our consumer is less price sensitive at all income levels. They are prone to home stocking, because a better-for-you product is a home stocking product, if you think about the household buyer and thinking about kids and adults across usage occasions. And so we think we're really well suited to weather sort of fluctuations of macroeconomics as well as lead in the growth of the category.

And then in terms of driving increased household penetration, do you have a sense right now where your household penetration levels are today? And then maybe how that compares to last year? And how much better?

Yes. So this is a brand -- carbonated soft drinks are in 90-something percent of households, right? And an American family can cut their sugar in half by switching from normal soda to Zevia. And so with that, we may not have a 90% household penetration, but we can have 10% and 20% and 30% and 40% in time, just to demonstrate the opportunity. Zevia's been stuck around 5 or 6 points household penetration. And there's a couple of deferent things holding us back, all of which are addressed in our plan. One is singles distribution. So we're 90-10 multipacks to singles. Most beverage brands, certainly the growth ones that are coming out and capturing attention are the other way around. 90% singles driving trial and then 10% multipack trading up. So our opportunity is to get cold singles within arm's reach of the consumer supported by DSD, so you can compete there and then supported by marketing, and the reason I pointed the CFO when I talked about marketing is, it is the productivity initiative that frees the resources to be able to make material investments in marketing. So if we go back to early stages in our conversation, expecting DSD to be faster, expecting the singles business to carry growth sooner. It really comes down to readiness within the P&L, to go to DSD and invest in marketing. And this is why we believe we're at an inflection point because we can now enable those critical drivers of our business from here forward.

No. And that's encouraging. And I think ultimately, too, just having the right brand. And I know you've spent a fair amount of time reformulating, repackaging and you feel like the brand is ready, right?

Ready. That is the language that I would use. We've got a great taste profile. Each product that we introduce performs better than the last. So our fastest growers are our most recent entrants. A consumer research would indicate high levels of satisfaction of our proposition as well as our product. And then early-stage entrants into very mainstream categories are performing well. We're back to unit growth. We're driving dollar growth. It's really the perfect environment for us to step on the gas.

All right. Circling back, it sounds great. Let's circle back a little bit just to the spring shelf reset. Your shipments in Q1 -- I'm thinking about your shipments in Q2 are expected to be a little bit pressured, which you called out. So how do we think about that in the context of the spring resets this year? And some of what you just mentioned earlier about some of the gains. How do I contextualize that?

And reconcile that. Yes. So I mean, I think some of our peers have been talking about resets being a little bit later this year. First, we thought it was just us. We've learned that indeed, resets have been rolling a little bit later this year. With those, as I mentioned before, it allows us to gain back the intended planogram assortment. It will accelerate the presence and growth of our fastest-growing SKUs, and it will help us, frankly, gain share and capitalize on the tailwinds within the category today. The reality is, though in net sales, that manifests in the back half of the year. So softer Q2 guide in light of all of the things in transition and in light of the outsized volume impact of the slower recovery of supply chain and on-shelf presence that kind of burdened us in the first half of the year. But everything from marketing, to velocities, to unit growth, and the spring resets all coincide to generate kind of the back to normal in the back half of the year and then exciting growth for the years to come.

Yes. And as I'm thinking about the space and you taking more space? And is it, in general, exceeded your expectations or kind of in line with what you were hoping for this year? Even though that has not all happened?

There's a couple of wins and a couple of losses. So I would say that the net of it all was as we've expected. We have maintained space in our home turf of the natural channel. And importantly, we've grown space in conventional grocery. And I think these are the sort of the bellwethers of the future opportunities to continue to grow space in conventional channels and reach a mainstream shopper.

And when you mentioned growing space in conventional, where are you taking the space from?

Sure. I mean, it comes from a long tail of the hodgepodge that is craft specialty, natural and all the cats and dogs that retailers don't exactly know what to do with. And so one of our opportunities is to take a category captain's mindset to help retailers organize this onslaught of better-for-you products into a way that puts Beacon brands at eye level such that the rising tide floats all boats. And that new shelf set of a better-for-you set within mainstream CSD is a massive opportunity to gain a younger shopper, a shopper that spends 40% more than your average shopper and then the brands associated with those and ultimately the retailer.