Welcome to the Third Quarter 2021 Earnings Conference Call and Webcast of Zevia PBC. [Operator Instructions] I would now like to introduce Reed Anderson of ICR. Mr. Anderson, you may now begin..

Thank you and welcome to Zevia's third quarter 2021 earnings conference call and webcast. On today's call are Paddy Spence, Chair and Chief Executive Officer, Amy Taylor, President and Bill Beech, Chief Financial Officer.

By now everyone should have access to the company's third quarter earnings press release and investor presentation filed this morning. The information available on 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 in 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 expectation and beliefs and certain future events and are subject to number of risks and uncertainties that could cause actual results to differ materially from those described in any forward-looking statements.

Please refer to today’s press release and other filings with the SEC for a meaningful expression of the risks that could cause actual results to differ materially from those expressed or replied in any forward-looking statements made today. During the call, we will use some non-GAAP financial measures that describe future performance.

The SEC filings as well as the earnings press release, presentation slides accompanying 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 Paddy Spence, Chair and Chief Executive Officer..

Thanks Reed. Good morning and welcome to the third quarter fiscal 2021 earnings call for Zevia PBC. Zevia markets great tasting zero sugar zero calorie beverages with simple plant based ingredients that deliver the bubbles, sweetness and enjoyment of the carbonated soft drink category.

We are also dedicated to improving global public health by reducing consumers intake of sugar, eliminating single use plastic beverage packaging, and providing better for you products that are accessible to households of all income levels.

We believe Zevia is an exciting investment opportunity not only because of our $770 billion global market opportunity, and the 10 year track record of 32% net sales growth that we've achieved through 2020. But also because of our talented team and execution focus.

Execution is this operating team strength and the speed at which we are achieving success against our internal initiatives that the new resources and team members we've added as a public company has been encouraging to see.

In the third quarter of 2021, we demonstrated continued success in executing against a variety of initiatives that we'll discuss on today's call, including channel expansion, innovation, and supply chain efficiency. Management's priority is executing our long-term strategic plan.

And later on today's call, our President Amy Taylor will provide additional detail on our long-term initiatives. Broadly, we continue to see momentum and growth across a range of channels.

And in the third quarter achieved ongoing double-digit sales gains, expansion into new items and channels, increases in household penetration and per household standard gains. These are all key indicators of the health of the Zevia brand.

At the same time, our business is experiencing the cost pressure on inputs that many of our beverage peers are facing. We remain focused on mitigation efforts while continuing to scale. We'll discuss later on the call the extent to which we believe that Zevia is effectively managing these cost pressures.

Zevia's net sales momentum is accelerating as we head into the fourth quarter of 2021. As such, we now expect net sales of $36 million to $38 million in the fourth quarter, which would reflect growth of 30% to 37% versus the fourth quarter of 2020.

This would result in a full year 2021 net sales expectation of $140 million to $142 million or 27% to 29% net sales growth versus fiscal 2020 in line with our long-term growth algorithm of 30%.

In the third quarter of 2021, Zevia continued to double-digit net sales growth we've achieved for the past decade, we delivered a record net sales quarter of $39 million, representing 22% growth versus the third quarter of 2020.

This was a combination of 26% volume growth and a 4% investment in price mix as we invested in trade promotions to drive consumer trial and repeat purchasing, which we believe will support our continued growth. On a sequential basis, we grew net sales 13% versus the record net sales, Zevia achieved in the second quarter of 2021.

And on a two year basis, Zevia's net sales grew 88%. The Zevia brand continues to resonate with consumers across North America, as evidenced by this rapid and accelerating growth.

In terms of gross profit, we achieved a record $17 million for the quarter representing a 44% gross margin, the reduction from last year's 47% gross margin can be mainly explained by our investment and trade promotions as we have effectively managed the cost headwinds that many of our beverage peers are facing.

Management's actions resulted in cost per case growing by 1.6% versus the third quarter of 2020. Adjusted EBITDA for the third quarter was negative $3.5 million. Our growth in the third quarter of 2021 was fueled by continued expansion in consumer purchasing metrics.

SPINS/IRI consumer panel data for the 52 weeks ending October 3 2021 indicates that Zevia grew our household penetration from 2.4% in the year-ago period to 2.6%, an 8% increase. During this period, buying rate for household purchasing Zevia also grew from $33.40 to $38.80, a 14% increase.

We believe these metrics demonstrate that Zevia is both reaching new consumers and increasing purchasing among current Zevia households, which bodes well for our brand health.

In addition, both repeat purchasing rate and loyalty for Zevia soda buyers remain strong, with repeat rate at 53% and loyalty continuing to leave the zero-calorie soft drink category at 44%. Zevia's strong focus on execution gives us conviction regarding the brand's ongoing runway for growth.

We believe that channel expansion and innovation, which expand accessibility and consumption of the brand are two key levers for continued growth and our progress in the third quarter was significant. First, regarding channel expansion, Zevia is expanding to be available nationwide at Sam's Club, as well as in select Costco regions.

The warehouse club channel in which these two retailers are leaders offers the opportunity not only to generate profitable transactions, but also to create significant consumer trial and repeat sale. Similar to the e-commerce channel, where Zevia's Rainbow Pack, Variety Pack of soda is the number one selling soft drink item on amazon.com.

Warehouse club provides consumers the opportunity to try a variety of Zevia flavors. We have seen in our e-commerce data that 50% of Zevia's purchasers on amazon.com also buy our brands in brick and mortar retail outlets. And on average, they spend three times what the average household spends on Zevia.

Warehouse club has similar characteristics, serving both as a transaction and a trial opportunity. For the six months ending September 30 2021, 58% of Zevia's buyers in the warehouse club channel were new to the brands in that period, indicating that this channel is highly incremental to Zevia's current distribution footprint.

We believe that our presence in this channel is complementary to Zevia's current retailers and will continue to drive growth in consumer awareness, trial and repeat purchasing.

Innovation is another key lever fueling Zevia's continued growth, and the performance of our new Creamy Root Beer flavor in the summer of 2021 is a great example of our team's ability to execute rapidly and efficiently.

Within six months of introduction Creamy Root Beer has become the number one flavor in our 10 pack packaging format in many of our key accounts. Prior to this launch, Zevia had already established the number two position in zero calorie root beer and the channels in which we compete, which we achieved with a unique flavor profile ginger root beer.

We introduce Creamy Root Beer to target the category leaders nostalgic flavor profile, and we believe Creamy Root Beer outperforms the category leader on taste.

In addition, Creamy Root Beer is highly incremental to the Zevia product line with 31% of Creamy Root Beer purchasers across all channels for the six months ending September 30 being new to the Zevia brand.

The result of our strong execution on this new flavor is the Zevia share within the root beer flavor segment increased to 13% in the 12 weeks ending October 0,3 2021 from a 11% in the year ago period.

As we continue to build the Zevia brand, management is confident that building new doorways to the brand for both channel expansion and innovation, along with our 10-year track record of growing velocity on a same-store basis, will result in increased consumer awareness and ultimately scale.

In the third quarter, we also made gains across a number of key ESG or social impact metrics. Zevia 's primary mission is to benefit global public health by reducing sugar consumption.

In the third quarter of 2021, we estimate that we eliminated over 3000 metric tonnes of sugar from bar consumers’ diet by selling our zero sugar naturally sweetened products and replacing legacy sugary sodas. In our history, we estimate we've eliminated over 50,000 metric tonnes of sugar from the diet to North American consumers.

Replacing single use plastic beverage packaging with more sustainable alternatives is another key area of focus. And in the third quarter of 2021, we estimate that we eliminated over 50 million plastic bottles from littering our roadways or waterways in our communities.

Aluminum cans have the highest recycling rate of any beverage packaging format and the low carbon footprint in the supply chain. Lastly, affordability and providing access to better for you beverages for consumers of all income levels is a critical priority for the Zevia brand. In the third quarter of 2021, U.S.

products were priced at an average retail cost per ounce of $0.07 representing the 36 percentile within all non-alcoholic ready to drink beverages, excluding dairy and non-dairy protein. That means that in this product set Zevia is less expensive than 64% of non-alcoholic beverage options.

I'd now like to turn the call over to Amy Taylor, our President to share Zevia’s continued progress on key strategic initiatives..

Thanks, Paddy. Good morning. Today we are simultaneously executing the Zevia business and transforming the organization as we build a new strategic plan to govern our way forward. I'd like to touch on both short-term and long-term levers that we have to build the brand and to accelerate growth. So first, I'll cover our immediate short-term levers.

Regarding channel expansion in Q3 as Paddy mentioned, we've entered warehouse club and we're learning that the new distribution is already bringing in consumers who are new to the brand. We're expanding to national distribution at [Sam's now] and we will increase household penetration in part because of this step change distribution.

Paddy also spoke about innovation, our confidence in our new products is high and two new energy drink flavors Strawberry Kiwi and Pineapple Paradise are currently receiving very positive feedback on zevia.com. Zevia's energy shoppers spend 83% more than total energy drink shoppers.

So we believe these products will be very well received at retail going forward. Shifting gears to talk about our operation and cost of goods sold. On this the inflationary headwinds that many beverage brands are facing, the Zevia team is focused on cost optimization strategies to free resources to invest in growth.

One of the most significant opportunities we have is in the variety pack segment of our business, which is key to both warehouse club where we're growing rapidly and ecommerce where we remain the number one selling CST brand.

As of late Q3, we have begun in sourcing manual repack processes and therefore less reliant on third party and able to take cost out of the system. At our new Indiana warehouse, which became operational in September, we have already achieved a 25% reduction in repacking costs.

We expect this will carry through to Q4 and beyond with increased impact on COGS as our pack mix and volume expansion of this facility. The next step will be to make further capital investments to insource and automate or semi automate stages of repacking.

We anticipate this will reduce variable repacking costs by additional 25% in the first half of 2022 as we scale up the operation, Notwithstanding the recent spikes and transportation expense in the market, Zevia's increase in scale provides additional opportunities for cost reduction in our supply chain.

In Q3, we made progress on reducing transportation expenses. Through a combination of initiatives, including our new facilities focus on e-commerce fulfilment, we achieved an 18% reduction in e-commerce freight in Q3, which we expect to expand to a 36% reduction in Q4.

And this equates to a $1.5 to $2 million savings for the company on a full-year run rate basis. And finally, on managing costs, I'll touch on aluminum. Given that we exclusively use aluminum cans for our beverage containers. As we discussed on the Q2 call, we diversified our cans sourcing and 2020 in 2021, admits shortages in the aluminum cans market.

We ensured continuity of supply and achieved a greater than 95% in stock level for our customers through the pandemic and this continues. This effort required less efficient sourcing from less favorable points of origin and increased warehousing costs as we build safety dock and protected service levels.

These costs all flow through into COGS, just as aluminum saw record increases. As you may be aware, the London Metal Exchange aluminum price per metric tonne increased by 40% and the Midwest premium rate by over 140% through Q3.

However, over the past few weeks, Eleni pricing has sharply declined and we're seeing Eleni pricing today at the level it was May down 20% that's an all-time high in mid-October. The futures market for aluminum is currently inverted, indicating that the market views for pricing as steady to declining.

We aim to largely offset any anticipated aluminum headwinds with reduced supply chain expenses elsewhere. And we will also continue to monitor hedging opportunities moving forward and believe that Zevia is well positioned to manage the evolving aluminum market and COGS overall as we continue to scale.

So the items I've referenced are all current initiatives. And we have a variety of key growth levers going forward, currently in view based on a new strategic plan to scale. And these include, first, a new marketing mix, with significantly increased investment to drive awareness and trial.

Secondly, a brand Refresh to improve brand communication assets and most visibly package design. Also, continued focus on innovation, including limited time offer flavors, new energy flavors, and strengthening our positioning and course soda flavors. Next, expanding into immediate consumption channels, such as food service, and convenience.

And then finally, of course, continued focus on sustainable packaging, reducing plastic and cost in the supply chain. I'll detail a few of these key long-term drivers. Starting with brand Zevia brand is strong with its current consumer base and well positioned for growth through the consumer today and tomorrow.

Zevia appeals to Gen Zers and Millennials versus conventional diet soda which skews the overall household. This distinction helps explain how we are complementary and highly incremental to CST category leaders and this resonates with retailers.

So numerator consumer panel data, for the 52 weeks ending September 30, indicates that purchasers of Zevia cola for example, are 1.8x as likely to be Gen Zers versus purchasers of category leading brands diet coke and diet Pepsi, and 1.4x as likely to be Millennials. And similarly in Root Beer segment.

Zevia purchasers are 2.6x as likely to be Gen Zers as purchasers of diet A&W the category leader and 1.6x as likely to be Millennials. So as category leaders at CSD continue to focus on zero sugar formulation. We believe the category is undergoing a long-term shift in response to changing consumer preferences. More than 80% of U.S.

adults, cutting across age ranges are seeking to reduce sugar. And so conventional diet soda offers a zero sugar have resonated with Gen X'ers and baby boomer households. Similarly, Zevia zero sugar sodas with plant based ingredients are bringing Gen Zers and Millennial shoppers, either back to or to the CSD category for the first time.

Retailers agree this is a win-win proposition. And now I'll speak to marketing briefly. We venture into Zevia's next chapter well-positioned and well-funded to establish a consumer focused marketing mix. Moving beyond the selected retail marketing Zevia has done historically.

We have a focus on new consumers and our plans going forward, investing in new editorial communications partners, new community and ambassador programs, new sampling initiatives, new grassroots marketing campaigns. We will also increase investment in targeted advertising digital with periodic support from television and out of home.

We've tested some of these new 360 campaigns and selected metros to support the launch of Creamy Root Beer in Q3 for example, gathering strong learning and yielding positive returns. Going forward, we will invest in key moments for our target consumers such as the New Year to start of spring, a new product launches.

These poll initiatives will be supported by push tactics in store. As we expand shelf space, augment our promotional calendar, and deploy capital, including the purchase and placement of coolers and racks within our growing retail footprint.

We will be able to share more about the marketing mix, the brand refresh, and expanding our presence at retail on future earnings calls. So with that, I'll turn the call over to Bill Beech, our CFO for a review of our financial results..

Thanks, Amy. We continued our net sales growth in the third quarter of 2021 increasing net sales 22% against the third quarter of 2020, achieving record net sales of $39 million. This is all the more significant considering that net sales had grown 55% in the third quarter last year.

This gives us a two-year growth rate of 88% from the third quarter of 2019 to the third quarter of 2021. On a nine months year-to-date basis, net sales were up 27% over prior-year. Third quarter gross margin was 44% of net sales, compared with 47% in the third quarter of 2020.

This is primarily the result of increased promotional investment to drive sales. On a year-to-date basis, gross margin was 46% this year, the same amount as for the same period last year. Cost of goods sold per equivalent case in the third quarter of 2021 increased by 1.6% versus the same period last year.

We believe this reflects lower exposure to inflationary headwinds on commodity ingredients. Zevia is a brand that uses simple plant based ingredients contracts for most of our inputs, and as such as less subject to price swings the commodity inputs.

As Amy discussed, one area of our cost of goods sold that has been impacted by a combination of inflationary headwinds and supply tightness is aluminum cans, and we remain confident in our opportunity to continue to mitigate these headwinds. Turning to operating costs, selling and marketing expenses were $5.9 million higher than prior-year.

Zevia experienced $2.5 million of increased transportation costs due to overall net sales growth and higher freight costs admitted challenging transportation market in the U.S. and Canada. Marketing expense increased by $2.7 million, reflecting our increased investment in growing the Zevia brand.

General and administrative expenses were $2.8 million higher than prior-year, primarily from costs associated with being a public company with their IPO occurring during the third quarter on July 22.

These costs include increased D&O insurance premiums, increased annual audit expenses in Q3 of this year, and increased staff equipment and support services related both to public company operation and to our growth. Adjusted EBITDA loss in the third quarter 2021 was $3.5 million, compared with an adjusted EBITDA profit of $3 million in Q3 of 2020.

In summary, this reflects a combination of higher sales promotion and marketing costs, as we increased our investment in growth, the impact of higher freight rates and increased G&A cost associated with operating as a public company with our IPO in July.

On a GAAP basis, consolidated net loss was $49.8 million in the third quarter of 2021, compared with $2.5 million net profit in the third quarter of 2020.

The increase of $45.7 million was primarily driven by non-cash equity-based compensation expense, consisting of Restricted Stock Unit awards and Phantom Stock awards that generally vest as a result of the expiration of the IPO lockup period in January 2022.

We disclosed in our second quarter 10-Q that we expected to recognize an estimated $57.5 million of non-cash equity-based compensation expense between Q3 and Q4 of this year.

Accounting guidance requires us to accelerate an additional $16.6 million of future year non-cash equity-based compensation expense this year, as well as recognized $3.7 million for RSUs and options granted in July, which began investing in 2022.

The result as we booked $45.7 million non-cash equity-based compensation expense in Q3 and expect to recognize an additional $32 million in Q4. Turning to the balance sheet. Zevia had $78.7 million of cash on hand at the end of the third quarter post IPO.

Inventory at $24.9 million represents a DIO of 104 days higher than historic levels as we continue to hold elevated levels of inventory to ensure high service levels in the midst of the North American aluminum can shortage. On the liability side, we had no debt. Looking to the future, we are reaffirming our long-term guidance of 30% net sales growth.

For 2021, we anticipate net sales of $140 million to $142 million, representing 27% to 29% growth over 2020. For the nine months ended September 30, net sales were a $104 million. By derivation we anticipate $36 million to $38 million net sales for the fourth quarter of 2021 representing 30% to 37% growth from the fourth quarter of 2020.

The difference in net sales anticipated for Q4 compared with Q3 is due to seasonality. Generally, we experienced greater demand for our products during Q2 and Q3 corresponding to the warmer months of the year and lower demand during the first and fourth quarters of the year.

With that, we will conclude our prepared remarks and open the line to questions..

Thank you. [Operator Instructions]. Our first question today comes from Bonnie Herzog from Goldman Sachs, please go ahead, Bonnie, your line is now open..

All right, thank you. Good morning, everyone..

Good morning..

I just mentioned on your top line, good morning, why your sales growth was double-digits in Q3, it did decelerate sequentially. So could you give us a little more color on the month-to-month trends during the quarter? And you mentioned sales or your trends have accelerated early in Q4, and then your guiding for the quarter is quite strong.

So I just, I really wanted to make sure I understand, the drivers of this, and how much visibility you really have on this.

I guess I'm also trying to understand, looking forward what's giving you guys the confidence that this is sustainable especially as we look into next year?.

Absolutely, well so, maybe I can take the first part of that question, then hand it over to Amy to add some color.

So I think by first just in terms of comfort with our long-term 30% net sales growth algorithm, stepping back that that algorithm is really built up from velocity in current channels, fill in distribution in those current channels, and then new channel expansion.

And so when you look at a rough breakdown for that 30%, we typically look at around 10% velocity, 5% from fill-in in current channels, and then 15% from new channels. So, from a timing perspective in Q3, it's not a time in the year when we gain a lot of new distribution, in terms of either new doors within a chain or new items within a chain.

So it really is about velocity gains, which we did achieve in the quarter. And I think today, we're in some exciting conversations with our existing partners about 2022.

And what that looks like in those core at home consumption channels, what we also did see in the third quarter, is the beginning of an expansion into the warehouse club channel, which is as well and at home consumption channel very meaningful for us in terms of that combination of a profitable transaction, as well as a trial opportunity.

And I think the most exciting thing that we see, that really bodes well for our ongoing expansion is the incrementality both on the innovation side but from a channel standpoint, warehouse club is 58% incremental meaning that 58% of the Zevia buyers in that channel are new to the brand within the last six months, so highly incremental.

And that in conjunction with our opportunity to continue to evolve and change in store presence gives us tremendous confidence. But Amy, maybe you could add some color there..

Yes, Paddy and Bonnie thanks on the biggest picture. I mean, as you know, I've been with the organization about four months, and when I look at just the simplest mass is a brand with single digit household penetration, what we believe to be around 15% awareness.

So tremendous upside, we look at the current user base, this is a brand with tremendous loyalty and very strong repeat rate. So repeat rate being 53% and loyalty represented by 44% of share of stomach, which is top notch within all zero calorie beverage and CST. So the reason I mentioned that is that's sort of the mass of the upside.

We look at the immediate future, we're very excited about expanding from a channel perspective.

So as you know, we are going national in one of the major club operators right now as we speak, and growing regionally and the other and as Paddy mentioned, when you have more than half of those shoppers as new to the brand over the past six months, that's a tremendous future indicator, we have a lot of opportunity to expand within food that is happening now both in store in terms of new points of distribution in store cold box, incremental permanent secondary placements as well as display activity.

And then we have still new stores to gain that extends into the mass zone as well, we're in about 1000 Walmart's and we have an opportunity to expand there. So the upside is really clear. And we're in execution mode right now and you should continue to see those results as we go forward.

So in the meantime, as we expand in club, as we look to step change our in store presence in food, we also make specific investments in equipment and the equipment, specifically wrapped in coolers or allow incremental distribution within the store.

And we see tremendous results from these investments in the short run, when we're able to get it in retailer equipment, but now making taking the capital that we have as a result of becoming a public company, and investing that specifically in step changing our presence, this is the first time and new effort for the company, we haven't made these investments in the past, these investments are shifting as we speak.

And we look forward to placing those and driving our presence in store. As we know most of us here on the call in store presence is the number one driver of awareness in beverage. And generally, that's true for most brands. And for us, that's a tremendous opportunity for us to get off the shelf. First of all on the shelf, we need to be at eye level.

And we have the share story, the velocity story, the margin story to support that move from new level to high levels to drive the look of the leader. And secondly, we need to penetrate multiple portions of the store.

So I hope what I'm doing here is outlining the consumer opportunity, in store opportunity where we have distribution, and then the immediate and future new store distribution opportunities that give me tremendous confidence both in the immediate future and the long-term future..

Yes, that was actually really helpful. So it does sound like you guys really do have some good visibility through the end of the year, and then as you just kind of walk through building this, as we all head into next year, sounds pretty promising. And then just a second question for me, and I'll pass it on.

But just as it relates to your strategy with pricing, you mentioned and we saw the results, you've stepped up promos during the quarter.

So I guess I'm trying to understand maybe why you weren't able to put in a little more pricing on some of maybe your core brands, especially given the pricing being put in the market by virtually all the other beverage companies.

So I guess ultimately, I'm trying to think through if there's maybe a risk that you're going to have to continue to step up promos to drive trial or volumes and if so how should we think about this over the next couple of quarters, and really your ability to offset some of the inflationary pressures that you guys mentioned? Thanks..

Absolutely, well so, why don't I just quickly touch on inflation and the ability to manage that, I think Bonnie, we drive margins really through three means, it's scale, productivity and price.

And so scale, we have a 10 year track record of continuing to remove costs from our system through scaling, productivity, as Amy mentioned, we're seeing some exciting productivity gains in the supply chain on the COGS side in terms of the ability to remove labor from our repacking process for variety packs.

But also on the transportation side in terms of e-commerce freight. But speaking specifically, then to price, we really do view pricing as a lever that we can toggle. We can toggle that by channel, by geography and by packaging type.

And so I do want to clarify here, while we don't intend to take a broad line price increase in 2021, we have been able to use that pricing lever to take price on discreet packaging formats and geographies.

And so, as we think about the investment in price in Q3, really, I think you can think about us investing in display activity, which drives both trial and repeat purchasing.

And so we think that's healthy from a consumer standpoint, particularly in an environment, as you noted, where others are taking price, but I do want to be clear, we believe we've got that pricing lever at our disposal, and it's in part because of what we've described in the past. And Amy's described affordable price for the consumer.

We're at the 36th percentile in terms of all non-alcoholic or liquid refreshment beverages on price, great margins for the retailer and a strong margin opportunity for the brand.

But Amy maybe you can kind of elaborate on our thoughts around price and taking price in that lever?.

Yes, I mean promotional activity you see in the market at the moment is all about driving presence. It's all about driving presence, it's display activity and trial. And it's been very effective for us. So we will see a lot of productive dynamics at the moment.

But I think what I would just double down on what Paddy just mentioned is, there is room for price increasing across packages and in different environments for us based on our brand strength, based on our loyalty rate. So we don't intend to take a broad line price increase this coming year.

But going forward, we will always reinforce our premium accessible positioning, whether that be with our future pack designs, or with price and price mix.

So there's room but we don't make that plan for this coming year, for specific reasons, continuing to reinforce what Paddy said to remain accessible in our pricing and competitive as we step change distribution..

Okay, thank you both. I'll pass it on..

Thank you, Bonnie. Our next question today comes from Peter Galbo from Bank of America. Please go ahead, Peter. Your line is now open..

Great, thank you, operator. Hey, Paddy and Amy, thanks very much for taking the questions..

Absolutely, good morning, Pete..

Good morning, I guess just maybe to ask Bonnie's question, maybe slightly differently.

Is there anything as a public benefit corp that prevents from taking a more meaningful price increase, just as your competitors are rising price particularly in fee stores like do you need to maintain a certain gap, is that a limitation in terms of if you were to take a price increase kind of how much could go up, just trying to understand, if everything is going up, you still have the ability to take pricing, if you want to, it's just you want to maintain a certain, I guess price gap for that affordability metric?.

Well, no, so great question. And I would tell you candidly, no, there's zero about being a public benefit corporation that in any way inhibits us from price realization. Okay, and so want to be very clear about that. We've got a strong revenue management set of levers that we can pull.

And so we're starting from a really phenomenal place, being at the 36th percentile on price today allows us to be premium to the category leaders affordable for Americans of all income levels, and still have the ability to price them.

So just to clarify and reiterate Amy's comments on price, we are not taking a broad line price increase in calendar 2021. Having said that, with the strongest loyalty in the category at 44%, share of stomach and a 53% repeat rate where there is tremendous opportunity to gain additional consumer trial and repeat.

And so in Q3, we made what we believed were prudent investments in terms of display activity, to accelerate that trial and repeat, we are seeing the benefits of that, as we head into Q4 with an accelerated net revenue expectation for the quarter.

So I do think absolutely, we have the ability to take price on an ongoing basis, we aren’t planning a broad line price increase in this calendar year 2021 but given kind of the consumer response to our products, the loyalty of our product, and its broad affordability, there is nothing keeping us from exercising that pricing lever on a go forward basis.

So hope that's helpful clarification there..

Yes, no, thanks very much.

And I guess just the second question, kind of more of a modeling base, but within that kind of that 4Q sales outlook, that you've given just, is there any way to quantify kind of the pipeline sales associated with new distribution, that that's baked into that number?.

So that's something that we're breaking out. But I think, when you look at our mix, Peter, we are seeing that broad acceleration across each of our channels. So, I want to just clarify with regard to Amy's comments regarding the warehouse club channel that is not a channel in which we are nationwide with either of the operators in Q3.

And so, we are starting to set those stores in Q4. But we're not seeing kind of a full chain wide impact in Q4 at all. So we're seeing acceleration in our core channels of Food, Drug mass and natural. We're seeing acceleration in the e-commerce channel, and then we're seeing some incremental business in some of these new channels..

Okay, great. Thanks very much, guys..

Absolutely, thank you..

Thank you, Peter. Our next question comes from Ben Bienvenu from Stephens. Please go ahead. Ben, your line is now open..

Hi, thanks so much. Good morning, everybody..

Good morning, Ben..

I want to ask, good morning.

I want to ask on the marketing side of the equation as you continue to ramp up your marketing spend just the level of effectiveness that you're seeing any tweaks to the strategy that you see necessitated by kind of the feedback you're getting and kind of the glide path from here on the marketing front?.

Absolutely, well I'll let Amy address this question. Go ahead..

Yes, thanks Ben. Thanks, Paddy. So quickly, historically, Zevia has invested in largely what I would call push tactics. So retail marketing, and it's quite measurable, and it's quite effective.

But I think where it's most effective is continuing to drive repeat purchase among those who discovered the brand and what you're going to see going forward is investing in new consumers.

So Zevia has plans to develop a marketing mix that focuses on the pull tactics ranging from grassroots marketing to community building, digital marketing sampling as some examples, we'll continue to use push tactics activated at retail in a more ambitious manner to include several thousand pieces of equipment in the market largely in grocery to reach new shoppers and drive velocity.

But we'll use fundamental evolutions like a brand refresh, along with portfolio design in scope going forward.

And so the can and the multipacks are our greatest Billboard, and where the video look and feel can better represent our premium, but accessible flavorful, fun, whimsical better for you positioning, and again with 85% of North Americans based on our best insights at the moment. Unaware of media, there's a tonne of upside there.

So the short answer to your question is historically, retail marketing has been prioritized at relatively low levels of investment. We will continue focus on retail because we know that retail is the number one driver of awareness.

However, we will make incrementally improved, focused and larger investments in pull tactics that drive consumer awareness and trial and engage what we know as a very well prepped Gen Z and Millennial consumer massively over indexing with our brand versus other versions of zero calorie carbonated soft drinks.

So it's a ripe environment and the investment will be well fielded..

Okay, perfect. Thanks for that. My second question is related to the ramp into the club channel. I know you guys have been growing for a long time at an accelerated rate.

But I'm curious, the level of extent there is any execution risk associated with ramping into a new channel and growing sales at this rate in a more challenged supply chain environment? And how do you feel about I think, Paddy, you mentioned your ability, your confidence and sustaining those 95% in stock levels and sustaining your bill rates, maybe any color that you can offer around the operating environment relative to sustaining the growth of the business..

Yes, absolutely. So I think broadly then, this is a team that is highly execution focused and you know amidst a once in a generation, aluminum can market in North America over the last 18 months, we've maintained those 95% plus service levels. So we are highly confident in our ability to meet consumer needs and customer needs.

In the supply chain, I think where our focuses particularly around that club channel is on removing costs from the system. What is so fascinating and from a brand standpoint about the purchase dynamics and club is that as we noted in our prepared remarks, they mirror very closely the dynamics in e-commerce.

And so e-commerce serves as a profitable transaction for the company but also a trial opportunity.

And so the variety pack business that we merchandise in the club channel serves that exact same purpose we're able to provide a variety of flavors that allow that consumer to get into the Zevia franchise and then she goes out and purchases full cases or more tight packs of individual flavors, and so club is certainly an exciting opportunity in terms of scaling our business.

And from an execution standpoint, we are very focused on continuing to remove costs from the supply chain in terms of the variety pack labor associated with that club business. I guess one other comment I'd make about club that, you know, that we like, which is the supply chain characteristics in terms of transportation are quite favorable.

Club is a 100% full truck business. Excuse me. And so we're able to mitigate some of the cost headwinds associated with elevated transportation rates. Amy, perhaps you can just touch on that incrementally in terms of that club opportunity..

Yes, I mean, club is really exciting for us for a couple different reasons. Yes, it's a transaction. But it's also marketing opportunity as a variety brand, the flavor brand, we find a tremendous opportunity to drive trial among new users.

And while this was initially a hypothesis, it's now an insight, as 58% of purchases coming from club business is incremental to the brand over the last six months. But specifically to your question about our readiness for growth.

It's been exciting to see that both in our core soda and with our kids line, we've been able to step in and deliver for our retail partners and club in particular, where our competition hasn't been able to.

So as we mentioned in earlier comments, prepare comments with over 95% fulfilment, right for our customers, we continue to be well prepared for the scaling that we're discussing right now in club and across new customers..

Okay, thank you so much, and good luck with the rest of the year..

Great. Thank you, Ben..

Thanks so much, Ben..

Thank you, Ben. Our next question comes from Dara Mohsenian from Morgan Stanley. Please go ahead, Dara. Your line is now open..

Hi, guys, so two questions. First, just on gross margins did come in in the quarter below what we expected. So maybe we'll be helpful is on a year-over-year basis, maybe you can help frame for us what drove the compression.

How much of that was related to the incremental promotion in the quarter versus cost pressures, and maybe as we look out, and you think about those factors, which of those factors are more sustainable versus more isolated Q3, that'd be helpful..

Certainly, I think….

Bill, I'll take this one. I think just mathematically, we had a 1.6% COGS increase. We had a 4% investment in pricing, specifically promotion and display activity. And so, what I would tell you on balance is that in Q3, I think our team did a quite a strong job in terms of mitigating the cost headwinds that many of our beverage peers are facing.

Having said that, we think that the price investment in Q3 was a prudent one. And it's going to continue to drive ongoing consumer trial and repeat. As we mentioned earlier, we view that price investment as a lever that we can toggle.

And so I don't anticipate a steady level of investment in promotional activity and displays in at the level that we saw in Q3.

But I think, to some extent, we're going to take those opportunities when we have drive periods, when there is a lot of display activity at retail, and then we're going to margin up in those periods where there's less merchandising activity at retail. So I hope that's helpful in terms of how we think about that.

And then certainly on the cost side, what is our cost optimization strategy? It's around productivity and scale. And then lastly, I think in terms of gross margins, we have that opportunity to selectively take price, where we feel it's appropriate.

So I think between those various levers were very comfortable about our ongoing revenue and margin optimization strategy, as well as being able to do that while we continue to scale this business..

Okay, that makes sense. And then just on the revenue side just helped me understand the promotion opportunity. Obviously, promo ramped up, it seems like it was to a greater extent than expected during the quarter.

So just trying to understand that the change from your perspective and what specifically drove that ramp up and promotional activity? And do you think you got a near term volume pay back in Q3 from that, is that more of a longer term payback? How do you think about that? Because it does seem like there was a change in the promotional strategy of that Q3 versus expectations?.

Yes, and I would say, I'll turn it over to Amy. But I would say broadly, we have a much more sophisticated approach to how we invest in promotions. And what do I mean by that, for a decade, this was a brand where promotional activity meant a little shelf tag on the shelf saying a little bit off on Zevia. That's a temporary price reduction or a TPR.

That certainly drives some trial and repeat purchasing. But display activity is how we step change or in store presence. And I think you're seeing a much more sophisticated approach to how we approach in store presence, and Amy, maybe you could add some color there..

Yes. Quickly, I would say, we're just now starting to see the evolution of our retail strategy. So more to come as we build, as I mentioned earlier in the comments, the evolution of both our organization as well as our approach to joint business planning and retail partnerships. And critical in that is driving increased presence.

And I hate to be a broken record here, but it's just our greatest opportunity is to interrupt the shopper beyond the shelf. And so as we drive that activity, both for test and learn for ourselves, as well for demonstration of success with the retailer.

We then have equipment coming in order to place that and scale that across multiple channels, such that you can find Zevia at 2, 3, 4 places in the store rather than just on the warm shelf. So some of our promotional activity, yes is for immediate lift. But some of it’s to drive presence for future tests and learn and to set a precedent.

Secondly, critically new users. So while we sold a lot of Zevia to a small loyal user base over time, our objective is to drive trial with new users. We have great taste profiles. We have a variety of flavors. We have great proof points and new innovation. And we also have a very attractive shopper.

So for example, in the energy category Zevia shoppers in the energy space spend 83% more than energy shoppers across the board. So what we're trying to do here now is partner with retailers to take some of these insights and mutually invest to grow the brand and multiple ports around the store. And then finally, present new users.

Finally unit volume, unit volume and philosophy. This is the storyline that sets up for improved permanent presence in 2022. The story's Q3 is often a critical selling point for increase precedence based on unit distance -- based on space to share ratios on the shelf.

So we see all this in a critical window to drive unit movement to drive share, and to win new users in this window, not just for the purpose of the quarter, but for precedent setting going forward. So hopefully you're hearing a mix of short-term and long-term objectives met by productive promotions in this window..

Yes, I think the one thing I would just add to that is the retailer perspective, which is an exciting one. And when you think about the benefits of merchandising this brand, they're really threefold. So it's velocity at the level of the category leaders.

It's a gross margin for the retail customer, the retailer that significantly exceeds the category average. And then it's also an image enhancer at an affordable price a better for you product that brings that young Gen Z and Millennial shopper at the store. So from a retailer perspective, what Amy mentioned is very enticing.

And so that's why we've really elevated the conversation to this joint business planning process. And really, we're becoming an important and strategic part of the profit pool for carbonated soft drinks..

Thanks, guys..

Thank you, Dara. Our next question today comes from Alton stump from Loop Capital. Please go ahead. Alton, your line is now open..

Okay, great. Thank you so much guys for taking the questions. They hope they'll do well. I just want to ask out a competitive environment.

Was there any impact at all from that on your trip emotional spending or I think that just do entirely, obviously, trying to get into channels and to make sure that you're on the right footing as you enter into those channels?.

So what I would tell you, Alton is, we really are scaling this brand, not in response to what competition is doing. And I think in our prepared remarks, Amy touched on the highly incremental nature of our brand from a demographic standpoint.

And what do I mean by that? Well, conventional diet soda skews heavily to Gen X and baby boomer households, and our brand strongly appeals to Gen Z and Millennials. So when you look at that CSD aisle, it really is it tale of two consumers in terms of who is picking up the Zevia brand.

And as such, we're able to make those investments in display activity to drive trial and repeat purchasing, but not in response to competitive activity. And so candidly, the move of the carbonated soft drink category to zero sugar formulations is an ongoing and sustained shift that we think is a rising tide that floats all boats.

And so our proposition is highly incremental, the category leaders are focused on shifting their shopper base to zero sugar formulations for more mature consumer consumers and households, were really focused on that younger shopper base. And that is a highly incremental proposition.

So to directly answer your question, we did our promotional activity, we made those investments and feature display activity to drive trial and repeat, but not in response to competitive activity.

Amy, do you have anything to add there?.

Yes, actually a really strong point of view on this. I think its critical question. Thank you, Alton. First of all, if you look at our activities in the third quarter, and you just look at the precedent setting going forward. The category that's driving carbonated soft drink growth is zero sugar. That of the last two years is true.

And yet Zevia is growing more than twice the rate of all other zero calorie options. And I think the generational considerations, which are an indicator of the future, the categories very well out like I Paddy, so I won't review that. But a couple just facts I'll draw your attention to there in the slides that are uploaded for the call.

Our loyalty rates at 44% or share of stomach is stronger than that of all of the other neuro calorie players in carbonated soft drinks. So that's our starting point. And then we start to invest into driving trial with new users and what happens in Q3, we have an increase in household penetration. So that's new users.

And we have an increase in dollar sales per household. So effective promotions, upsell existing consumers and have them stock your product at home. And when new trial is to become light users and medium users and end users, and this is the path to growth, almost with a blind eye to competition, the goal is to grow our brand as we grow the pie.

Our piece of the pie tends the total pie of zero calorie options. And we are by far the most attractive for Millennials and Gen Zers and we literally see this in the data. And we see this in the results of both increasing purchases and on our existing user base and household penetration in the third quarter and expect more of that to come..

Okay, great. Thanks, Paddy, Amy and Bill. I mean, to the top of the hour. So I'll hop back in the queue. Thanks so much..

Thank you. Our next question today comes from Andrew Strelzik from BMO. Please go ahead. Andrew, your line is now open..

Great, thanks, and good morning. I have two questions. My first one, I'm curious what you're seeing with regard to the e-commerce momentum.

As you've expanded traditional platforms there, the operating environment or consumer environments is kind of evolving, how that's shaping up and just generally on the strategy on the e-commerce side as a priority to continue expanding across platforms or more so to deepen engagement where Zevia has already as a presence?.

Yes, so I can make some opening comments and hand it off to Amy. I think broadly, Andrew, we are in the very early innings in terms of e-commerce, not just for our brand, but broadly we feel for the food and beverage industry.

And what do I mean by that, the success in packaged goods e-commerce to-date has largely come from pure play e-commerce players. But we are seeing the strong emergence of brick and click players and every grocery chain in America has a physical infrastructure that's well suited to that brick and click business.

And so we built our e-commerce business with category leading items on the largest e-commerce platform amazon.com only just begun expanding into the number two player walmart.com and tremendous runway in e-commerce just from a strategy standpoint.

And then I'll turn it over to Amy, as we've discussed, we think it's an exciting opportunity because it is a transaction as well as a trial. And so when you think about a variety pack on an e-commerce site, whether that be our own site zevia.com or a third-party site. Really we are seeding the market.

We're sampling various flavors to that consumer and if she is going out and purchasing full cases or full multi-packs of those flavors both in brick and mortar and an e-commerce. So that is a really exciting dynamic in terms of both expanding household penetration, and expanding buying rate and expanding cross purchasing across flavors.

And as I said, we're in the early innings there. Amy some additional color on that topic..

Yes, to a degree we are channel agnostic, and what do I mean. I mean that we want Zevia at arm's reach availability to every consumer, however they choose to shop now. We have a more digitally savvy consumer.

And we're flavor and variety brand and those two things alone make us a little bit more well suited, let's say the thrive in e-commerce environment. So our attitude toward e-commerce is to drive growth there. As Paddy mentioned, we are finally the number one beverage in carbonated soft drinks on amazon.com.

But there's tremendous upside there both through optimizing our product mix, bringing the flavors, test and learning innovation, and through continuing to optimize our promotions. So strong upside still on the world's largest e-commerce marketplace. We are brand new to the number two player.

And then the third-thing I mentioned in upside is freaking click, because that is just one of many growth levers available to us in traditional retail and we're driving that as more retailers, more and more are starting to think of that as just another arms of their beverage buyers growth opportunities to leverage with suppliers.

So what I would say to the e-commerce's continued growth tremendous upside in all three of those buckets, number one marketplace walmart.com and all the brick and click. However, we don't aim to grow e-commerce by a measure of our mix. We just aim to grow it on its base. And I would expect that other channels have tremendous upside as well.

And where e-commerce lines and our mix is sort of to be determined by the consumer..

That makes perfect sense. And my second question I just thought the LTO flavors kind of strategy that you mentioned was interesting. Do you view that as more of a new customer acquisition tool or existing customer friend spend tool. And just on the new customer side, how you think about if that's driving the purchase.

How you think about integrating that new customer then to the brand from that LTO flavor for example? Thank you..

Yes. Great question. Thank you, I'll be quick. What we expect from LTO, we expect great execution at retail. So interrupting displays, what will that do for us, it will bring new consumers in based on exciting new flavor. Maybe someone who's never noticed Zevia before, because an in-store attracting and storage display is a prompt for purchase.

But it also invites a consumer who enjoys switching around the Zevia franchise to stick with our option versus going to competition. So it's a retention tool as well.

So after an LTO wanes, and what we do is we look at the success of those flavors and consider what may augment the portfolio long-term to retain the consumers that we gained through that effort..

And I would just add to that. A recent example that we have discussed is Creamy Root Beer. And I think Creamy Root Beer has generated tremendous excitement among both existing consumers becoming our number one flavor in the 10-pack format and many of our key accounts, but it's also 31% incremental to the brand.

And so it's a great example of how a game changing the great tasting product can excite both existing users and bring new users into the Zevia brand..

Thank you, Andrew. Our next question today comes from Dana Telsey from Telsey Advisory Group. Please go ahead. Your line is now open..

Good morning, everyone. Couple follow-ups. Given that you reiterated the long-term sales targets of 30%. And you have the opportunities of expanding it the warehouse clubs existing distribution in new products and sales.

Is there anything like manufacturing logistics constraints that could cap that sales performance at 30% next year? If the demand from customers stay stronger than plan? Could you accommodate and cater to those trends?.

Yes. And so the simple answer to your question Dana is, yes. One of the things I think that really reflects the strong execution focus of this team is our ability to continue matching supply with demand. We've maintained that 95% service level throughout the pandemic.

And as we continue to scale with the new resources we've gained as a public company, we are not only at scaling our operation to accommodate additional growth, but we're also removing costs from the system.

And so I think it's hard to overstate the increase in sophistication that that Amy specifically is brought to our team in terms of how we operate in the supply chain.

And what I can tell you is our planning process as we head into 2022 gives this management team tremendous confidence in our ability to continue meeting consumer and customer needs, even amidst accelerated growth.

Amy, anything you want to add there?.

So Dana, I'm tremendously confident here. And I've been very impressed with the agility of the organization in my short four months here, in addition to that decisions we've made in the last few months.

And then implemented such as a new warehouse in the middle of the country, not only takes costs out of the system for us, but allows us to be more agile, and to be more sort of on the spot for our customers going forward. And so we take the learning from that and continue to deploy capital in similar ways to increase our agility going forward.

So the actions that we're taking in the supply chain, increase our agility and remove costs, and they make us a better supplier for our retailers and I have little to no concerns going forward in our ability to fill demand and to be ready to go beyond that..

Got it.

And then just on the aluminum cans shortage, anything to note there what you're seeing in terms of pricing and availability of cans and when normalization may occur?.

Yes, great question on aluminum cans. And I think as we discussed in the Q2 call, we've taken a number of strong actions to protect supply during the aluminum can tightness that involve both stockpiling aluminum cans and also bringing cans in from outside of North America, which had great associated with those.

So we see a tailwind heading into 2022 as we reduce those inventory levels and source U.S. manufacturer cans. Having said that, we're certainly seeing some headwinds in terms of the aluminum commodity market. So I want to take a moment to just touch on that. The aluminum commodity prices really determined for U.S.

customers like us by the combination of the London Metals Exchange price for aluminum, as well as the Midwest Premium associated with transporting that aluminum to the Midwest in the United States. LME pricing peaked at around $3,200 per metric tonne has now ticked down to around $2,600. So we've seen some reduced pricing in aluminum.

Currently the futures market is inverted signaling that we expect or the market expects stable to declining pricing going forward. Similarly, the Midwest Premium has come down from its record high in July. It's currently I believe around $0.27 a pound versus the $0.30 that we saw in the July period.

So we've seen some down ticks in that aluminum market, but what I can tell you, Dana is we feel very confident. Our ability to continue managing those aluminum costs, as we've done historically, and I think we've done quite a good job in both protecting supply as well as protecting margin amidst really a once in a generation aluminum can shortage..

Thank you..

Absolutely..

Thank you, Dana. The next question comes -- the next and final question comes from Chris Carey from Wells Fargo. Please go ahead, Chris. Your line is now open..

Hi, good morning. So just on the aluminum to the tail end comment. Is that associated with supply? And I know that a lot of supply chain initiatives in place trying to offset some of these incremental headwinds, I guess.

If pricing for aluminum stays where it is today through the forecast period between 2022 and forwards don't play out and safe spot runs flat.

I guess if your prepared for that it can be supply chain initiatives to offset that or do you think that you'd be happy to get a little bit more aggressive on pricing? So any perspective there would be helpful..

Well, absolutely, and I think you know, first just to reiterate what we mentioned earlier, Chris. We do have that pricing lever and we have the ability to take price. So we are at a fantastic point in terms of affordability and have the ability to take price.

Having said that, so the tailwinds that I mentioned, are specifically associated with both reduction of those and unprecedented inventory levels we had. And so not only did we add to our finished goods inventory level to protect supply, we also spark stockpiled empty cans.

So the carrying cost associated with that empty can inventory as we drain that inventory will provide a tailwind on cost. In addition, as I mentioned, the ability to source U.S. manufactured cans versus cans from outside of North America is going to be a tailwind.

We anticipate that we'll be able to mitigate any potential cost increases in the aluminum commodity market with both tailwinds that I just mentioned as well as the ongoing productivity gains we're seeing throughout our supply chain.

So I think we're quite comfortable with our ability to mitigate those ongoing increases and certainly are going to be keeping a close eye on the aluminum market to monitor future opportunities for hedging..

Okay. Thanks a lot..

Thank you..

We have now no further questions. So I'll hand the call back to Reed Anderson..

I can take that. Thank you. And I'm just going to quickly conclude. And I would just say in conclusion, we are excited about the continued opportunity to scale the Zevia business. Our products are great tasting. They're on trend with consumer preferences, and they resonate with the shopper of today and tomorrow.

We're changing global public health one candidate time, and we're excited for you to join us on this journey. Thank you..

This concludes today's call. You may now disconnect your lines..