Hello, and welcome to Zevia Q1 2022 Earnings Call. My name is Elliot and I’ll be coordinating your call today. [Operator Instructions] I would now like to introduce our host, Reed Anderson with ICR. The floor is yours. Please go ahead.

Thank you. And welcome to Zevia's first quarter 2022 earnings conference call and webcast. On today's call are Paddy Spence, Chair and Chief Executive Officer; Amy Taylor, President; and Denise Beckles, Chief Financial Officer. By now, everyone should have access to the company's first quarter 2022 earnings press release and investor presentation filed this morning. This information is available on the Investor Relations section of Zevia's website at investors.zevia.com. Before we begin, please note that all financial information presented on today's call is unaudited. Certain comments made on this call include forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. During the call, we will use some non-GAAP financial measures as we describe business performance. The SEC filings, as well as the earnings press release, presentation slides that accompany today's comments, and reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are all available on our website at investors.zevia.com. Now, I'd like to turn the call over to Padraic Spence, Chair and Chief Executive Officer.

Thanks, Reed. Good morning. And welcome to the first quarter 2022 earnings call for Zevia PBC. Amidst challenging economic times and geopolitical turmoil, consumers are increasingly seeking ways to take control of their health at an affordable price. Zevia offers a compelling solution and a meaningful brand promise of 50% reduction in added sugar in-take with a single platform of products that tastes great and are made with simple plant-based ingredients. In the first quarter of 2022, Zevia continued scaling through increased velocity, new distribution, introduction of innovation items, and channel expansion. Our brand is healthy and we are focused on continuing to bring new households to the Zevia brand while improving unit economics for each can we sell. In the first quarter of 2022, Zevia achieved net sales of $38 million, reflecting 24% growth versus the first quarter of 2021 on the high-end of our guidance range. Our first quarter net sales grew 11% on a sequential basis versus the fourth quarter of 2021 and 69% on a two-year growth basis. Our 24% net sales growth in the quarter was a result of 21% volume growth along with optimized promotional investments. I should note that the pricing actions we took in the fourth quarter of 2021 were not reflected in our first quarter results as we will begin realizing price from these actions in the second quarter. Gross margin of 38% in the first quarter reflected compression of 8% versus the first quarter of 2021. I'll discuss specific inflationary trends, as well as the actions we are taking to mitigate them later on the call. We are reaffirming our net sales guidance of 177 million to 182 million for 2022 were 28% to 32% growth versus 2021 and expect net sales of $41 million to $43 million in the second quarter, reflecting growth of 19% to 25% versus a year earlier. In terms of gross margins, we anticipate returning to historical gross margins in the second half of 2022. And now, I'd like to turn the call over to Amy Taylor, our President to discuss our progress against strategic initiatives in the first quarter of 2022.

Our growth in the first quarter as of the past year was fueled by continued expansion of our consumer base and their household spending. Our brand continues to grow at 2.4x out of CSD in measured channels. For the 12-month period ending March 31, media gained another 1.3 million households, a 22% increase to yield of 5.8% penetration. We achieved gains across all pack sizes with over 500,000 new households homes from the club channel alone. Our growth is also bolstered by an increase in annual spend per household or buy rate of $33.92, up 9% versus the prior twelve months. Translating this into business results, our 24% growth in the first quarter came from a healthy split of 51% from velocity and 49% from new and existing channel distribution growth. I'll speak to these outcomes of our channel strategy now, as well as innovation and unit economics, and then turn it back over to Paddy to provide a deeper dive into financial results, and an outlook for Q2 as our first of two 2022 price increases take effect. In the first quarter, the food channel accounted for more than 40% of total Zevia growth. Food was bolstered by increases in store count adding 643 stores selling and by new distribution on three reformulated citrus flavors six packs. All three flavors are outpacing in growth versus last year and they added almost $0.5 million in sales growth for the quarter with two flavors topping the growth range for Zevia six packs. This speaks well for the velocity impact of flavor improvement within our core portfolio. The food channel also continued expansion in growth on Creamy Root Beer 10 packs with most notable gains in East Coast grocery where the brand penetration lags that of other regions. Creamy Root Beer now…

Thanks, Amy. With Q1 net sales of $38 million, we achieved the upper end of our guidance of $36 million $38 million. Our net sales growth of 24% in Q1 was primarily from unit volume, which increased 21%. Optimized promotional spend accounted for the majority of the balance. In the second quarter of 2022, we are achieving price realization from the actions we’ve previously announced. And in Q3 anticipate realizing price from the pricing action we announced in May. Cost of goods per equivalized case in the first quarter increased by 17 points versus the same period last year. Of this 17 points, 12 points were from inflationary cost inputs, including aluminum and co-pack manufacturing costs, with product mix accounting for most of the balance. First quarter gross margin was 38.4% compared with 46.2% in the first quarter of 2021. Turning to operating costs, selling and marketing expenses in the quarter were $4.8 million higher than in prior year. Zevia experienced $3.8 million of increased transportation of warehousing costs largely due to increases in case volumes, inflation, and higher freight costs, amidst a challenging transportation market in the U.S. and Canada. Marketing expense increased by $0.9 million, reflecting our increased investment in growing the Zevia brand. General and administrative expenses in the quarter were $4.5 million higher than in prior year, primarily from staffing costs to support our growth and costs associated with being a public company. On a GAAP basis, consolidated net loss was $17.5 million in the first quarter of 2022, compared with net income of 0.2 million in Q1 of 2021. Equity based compensation of $8.9 million was a significant factor in the reported loss. Of this, $3.1 million related to restricted stock unit awards and phantom stock awards that vested upon the expiration of the IPO…

Thank you. [Operator Instructions] Our first question today comes from Bonnie Herzog from Goldman Sachs. Your line is open. Please go ahead.

Thanks. Good morning everyone.

Good morning, Bonnie.

I guess my first question is on your guidance. Your top line guidance is, I guess pretty back half weighted with your full-year guidance implying around 34% to 38% growth in the second half, so that's a pretty big acceleration from the first half Paddy and really it's ahead of your historical growth and then your long-term target. So, I just want to really understand how much visibility you have on this that, I guess gives the confidence? I mean, maybe you could help breakdown for us what's going to be driving that? Is it some of the distribution gains? Is it the stronger pricing that you've called out, that would be helpful.

Yes, absolutely. So, I think you're exactly right. It starts with the pricing actions that we announced. That we're realizing in Q2, as well as the incremental pricing action we announced in May for which we anticipate realization in Q3. So, price certainly underpins some of our assumptions, but certainly we also are anticipating acceleration in terms of volume. Amy, maybe you can comment on that further.

Yeah. Bonnie, thanks. It's rooted certainly in price. So, realizing both price increases which are not reflected in Q1, but we also have strong velocity and new distribution trends. And historically, we've seen slight slowdowns in March and April, preceding retailer resets and [indiscernible] summer selling months, but this year, we continue to post double-digit growth week-over-week and expect acceleration as we launch limited time offers as new items and expanded assortment at [time in market] [ph] all within critically the new pricing architecture.

Okay. And then maybe just a follow on that because just thinking about the pricing you announced and I believe you said it's in May, but then, kind of looking at some of the track channel data which I know is not always great, but I think we're still seeing some negative price growth in the data. So, just want to understand the disconnect there and then thinking through the pricing you're implementing, and how confident are you with the elasticities holding, just trying to get an understanding of how you expect your volume to hold up with the stronger pricing that you're putting into the market?

Sure. Fair question and it's very early. So, just few weeks into pricing effect actually on shelf, but we've had a 100% acceptance on the retailer side. Of the increase and we anticipate strong consumer acceptance of the new price points given our brand strength and given obviously category-wide price increases. So, we don't anticipate material pricing impact there. And as we said before, our affordability puts us in a really strong position in a broader inflationary environment. So, when we think about pricing power, we think about strong brand loyalty, we think about strong velocity trends and we think about the fact that we stand in the 35th percentile of affordability from an index standpoint on all non-alcohol beverages. So, a lot of pricing power going forward. We seek to see that showing up in syndicating data in the coming weeks. And we are hand-in-hand optimizing promo spend. So, we saw 12%, as we said in the prepared remarks, a 12 point increase in [Lyft] [ph] while taking spending down by 1 percentage point relative to quarter prior year. So, rolling all of these up together, we don't expect volume impact and negative volume impact on price and have tremendous momentum going into the increase is starting to show up on shelf now.

So, that's helpful and then so just to put the two together, I think about your guidance. So, when you think about the back half, with this pricing sticking and being in the marketplace, you're expecting, I don't know mid-single digits, you know, price realization in the back half at minimum to drive the accelerating top line growth, is that how we should think about this?

Yes. So, I think that's correct. And then I think, in addition Bonnie, the one other factor that we have that we touched on briefly in the prepared remarks is optimized promotional spend, which contributes in addition. So, I think when we look at original 6% on Soda, plus the incremental 10% pricing action, plus call it 2 points from optimized promotional spend, I think we're comfortable that we are both out running inflation, but also going to see those accelerations reflected in the top line in the second half.

Okay. That's helpful. And just remind us, in terms of historically, Paddy, has there ever been a time that you put in this much pricing? I know it's unprecedented during this period with inflation, but just curious that, you know historically if you've seen other periods where you’ve been able to pass-through successfully some pricing?

Well, I think what we've seen is historically Bonnie, we've watched retail pricing for Zevia continue to migrate down and we've ticked down from the 37 percentile on affordability two quarters ago to the 35. So, certainly we've seen our affordability improve. As Amy noted, we're seeing category price increases across the board from both category leaders and emerge and brands. And so, I think in an environment where Zevia remains highly affordable at less than a dollar a can, it is an accessible brand for Americans of all income levels. And so, I think we're very comfortable with the pricing power that we retain in the retail market. And we have not seen any volume impact to date. And so, it's still early days as Amy noted, but I think we're very comfortable with our pricing power and the ability to continue to take pricing actions as conditions [indiscernible].

And Bonnie, I might add one more quick factor – a dynamic within Zevia business, I don't want to say entirely unique relative to the rest of business, but certainly strength of ours is that Zevia is a multi-pack business to date as does a home stock brand. So, in the current economic conditions, consumers going out less, spending less discretionary and common impulse channels, you know, negatively impacting those that [indiscernible], our core business is to take home, and we're really well-positioned to [weather] [ph] economic downturn and inflationary impact on consumer spending and this was evident in the early stages of the pandemic as we were actually taking promotion out of the marketplace and had tremendous growth trajectory there. And again, we have really strong velocity, and new distribution, and consumer trade up in the market right now. So, a strong position, I guess relative to broader business, excuse me broader beverage going into, sort of an economic overall downturn. So, we have a lot of pricing power and strong trajectory and positioning going into the next few months.

Okay. That makes sense. Thanks for that. Appreciate it. Our next question comes from Ben Bienvenu from Stephens. Your line is open. Please go ahead.

Hey, thanks good morning.

Good morning, Ben.

The pricing discussion and ASP dynamics, could you talk a little bit about what role if measurable mix is playing in the ASP per case equation? And how does that evolve as we move through this inflationary environment?

Yes, Great question. I can take that Ben. So, I think from a mix perspective, we did see an impact to ASP based on mix in the quarter and largely attributable to the increase in our club business. As Amy noted, I think there's some seasonality to our business in terms of Q1 being pre-reset for conventional food drug mass and natural retailers. So, historically, we see some acceleration in conventional channels with soda multi-packs in the second quarter. So, what I would tell you is, I think we're going to see ASP trends continue to evolve through the year, I think pricing is going to be the biggest driver of that certainly more than mix, if that's helpful.

Makes sense, okay. And then I want to revisit the stock-based compensation. You mentioned that there were some non-recurring dynamics associated with the lock-ups. So, maybe going forward, it sounds like it might be in the $5 million range a quarter, which still seems quite high. So, if you could talk a little bit about what you expect in terms of that settling out to a run rate that would be helpful?

Absolutely. So, as I think we noted in the prepared remarks, the equity based compensation that we recorded in 2021 was largely related to vesting associated with our 2021 IPO, and so many of those vesting events were one-time in nature. In the first quarter, I think we experienced some remaining IPO related vesting. We are not providing a specific forecast for equity based compensation as it is dependent upon some events departing and incoming employees that are outside of our control, but I do see that expense moderating over time as we get past that IPO lock-up and the vesting that was associated with that 2021 transaction. So, hope that's helpful, although we can't provide a crisp forward-looking forecast on equity based comp.

Okay, fair enough. Thanks so much. Best of luck

Thanks, Ben.

Our next question comes from Andrew Strelzik from BMO Capital Markets. Your line is open. Please go ahead.

Hey, good morning. I wanted to start on some of efficiency initiatives that you talked about and trying to understand the expectations you have for the contribution in the back half of the year in terms of the margin recovery that you talked about, just trying to get a better sense for, kind of how and when those layering in in the back half versus what's incremental beyond that?

Absolutely. Well, thanks for joining Andrew. And I can take that. In terms of maybe I can start by just bridging the gross margin impact that we experienced in the first quarter. So, what I would tell you is, it was driven first and foremost by aluminum inflation and aluminum pricing accounted for slightly more than half of our gross margin impact in the first quarter. Additional COGS items, including labor and co-pack fees accounted for approximately an incremental 300 basis points of gross margin impact. And then mix accounted for approximately 300 basis points. Now, offsetting these was approximately 250 basis points from optimization of promotional spend. So, I think that backdrop is important in terms of understanding our go forward opportunities. And let's start with aluminum. In the first quarter, we paid slightly above $3,000 per metric ton for aluminum. The aluminum market today as reflected by pricing on the London Metal Exchange is currently in the mid-2,700s. So, after a spike to nearly $4,000 per metric ton, we have seen aluminum [received] [ph]. So, that's I think the first driver of some of that receiving inflation that we anticipate at least on aluminum. With regard to other opportunities, I think it's really around scale, a mix shift to higher margin innovation items, and then cost optimization throughout the supply chain, particularly as regards freight initiatives, which we are achieving through a full truck utilization policy to ensure that we're shipping full trucks and reducing freight cost per case. Some inventory reduction initiatives, which provide a tailwind both in terms of inventory carrying costs, or warehouse expense, but also internal transfer freight. And then finally, continued optimization of our variety pack business, which currently has slightly decretive margins because of additional labor associated with those re-packs. So, we're taking cost out the system in a variety of different ways in addition to the pricing actions that we discussed, the promo optimization and the continued scale benefits. So, I think those things in combination give us confidence that we'll see that acceleration as well as enhanced recovery on margins to historical levels in the back half of 2022.

Okay, great. That color was really helpful. And then I also wanted to ask about the tea and energy drink categories generally, for Zevia, I mean I know they are obviously not the biggest categories within the portfolio, but longer-term would seem to be pretty significant opportunity. And at least in the measured [indiscernible] it's been lagging. So, I'm just curious how you think about the positioning of Zevia in those categories? Is this kind of just as transition period as you of think about the go to market strategy and anything just broader thoughts about those categories longer-term with the aspirations there?

Sure. I can comment on that briefly. So you're right to say there a tremendous opportunity. Distribution is modern at best on both categories right now, so that's our greatest opportunity because where we have distribution we have good performance. And I would mention particularly in e-commerce, which is a trial ground for us and then upcoming in club with some rotations to read new consumers with both of those categories. Particularly in energy, obviously an exploding category, we have a really relevant proposition to be a clean energy drink, zero calories, all plant-based ingredients same five simple categories of ingredients as with our soda proposition. And so there's an opportunity book to trade up existing consumers into win new ones and your right to mention distribution as a key opportunity. So, we're marching afternoon distribution in food, which, of course with upcoming resets presents an opportunity for that to take place in the market and then obviously may manifest in the Scan Data. And then we'll have clear opportunity as I mentioned in club. And then most of all, as these are our single serve cold available categories that we play in today now complemented by our sleek 12-ounce single soda for the first time in the market. We have a portfolio of three categories in immediate consumption proposition that we're taking to the market in mass. And so, we're supporting with cold equipment as we've discussed before, but we should also see those in really strong lineup in the natural channel and then increasingly in conventional food. And so, as you mentioned, we’re out to market then we’ll layer on the next opportunity in the fall and going forward when we think about more broad immediate consumption channels such as convenience. So, each of those represent an opportunity for us from a distribution perspective. The products are really strong. And it reaches a new consumer for us at a complementary margin.

Okay. Great. That makes sense. And then just one last quick one here. Did – you said [indiscernible] did you or can you quantify the delta on the marketing investments and how should we think about that evolving through the rest of the year? Thanks.

Sure. We anticipate continuity and marketing spend balancing year as it relates to percent of net sales. So, if we didn't mention that before, that's really clear in our plan.

Okay. Thank you very much.

Thanks, Andrew.

Our next question comes from Bryan Spillane from Bank of America. Your line is open. Please go ahead.

Thanks, operator. Good morning, everyone.

Good morning, Bryan.

Hey, Paddy. So, my question is really, we discussed with you and Amy back in March, just the process or the potential for a bit of a refreshing of the brand of the graphics, the positioning, can you just update us on, kind of where you stand in that process now and just from a timing perspective, is that something maybe we'll see over the course of this year or does that kind of move us in the next year? Just an update on that whole process.

Sure. Appreciate you asking about it. As you know, I'm passionate about this, the most efficient pound per pound, dollar for dollar way to present the brand in the stronger way to new consumers. So, we are excited that our retailers will be the first to see the new look and feel Zevia and we would be talking about that with them in what I'll call this year's CMA season. So, late summer and fall, and speaking about 2023, and then you'll see a new look and feel Zevia along with complementary marketing with a focus on trial and new consumers rolling into the next year. That's helpful.

And I guess as you, as – would you contemplate maybe an increase in marketing to support this once you get into the market?

I think what we're anticipating is a shift in how we spend. So, as we continue to improve promotional effectiveness and as we continue to shift our marketing dollars for – away from retail and toward trial out in the marketplace where consumers live work and play, we can achieve a lift in our impact from an impressions and cans enhance perspective without increasing our net percentage spend on sales and marketing. And that's in our calculus for the balance of the year from a plan perspective and it's certainly a principle that we're operating within our build of the plan for 2023. So net, net, yes, we will spend more on consumer marketing, but it will come from within the sales and marketing budgets.

Alright. Thanks. Thanks guys.

Our next question comes from Chris Carey from Wells Fargo Securities. Your line is open. Please go ahead.

Hi, good morning. Paddy, you mentioned that gross margins are expected to return to historical levels in the back half of the year, can you dimensional that? I guess, historical levels are more in the mid-40s, that would be pretty nice acceleration? Then I have a specific question on that?

Yes, absolutely. Well, so, Chris, we are not providing specific guidance around those margins, but certainly that recent decline that was driven by inflation. We're going to see that improvement, really it's derived from recent and future pricing actions and ongoing cost optimization. And I should note cost optimization is a huge opportunity and I think it's an important reason that both Denise Beckles has joined us as CFO and Quincy Troupe is joining as COO, and Denise maybe you can just kind of touch on your perspective on that cost optimization piece.

Yes. Good morning, everyone. So, I want to say, I'm super excited about the opportunity with Zevia, not just because of the company's rapid net sales growth, but also for the opportunity to drive profitability through improvements in unit economics and also on cost optimization initiatives. For me, the opportunity is clear. And I think this supports very much looking at our gross margins and the work we're doing there. Thanks, Paddy.

Thanks, Denise. Chris a follow-up on that?

Yeah. So, I just want to level set up pricing, so you had announced 6% on Soda, and so, but you're also implying more pricing. And so is it 6% plus additional pricing, you had noted there's 10% percent pricing coming in, maybe if you could just dimensional, you know, the various rounds of pricing and also to what level those are going to be coming in at and when that would be helpful?

Yes, absolutely. So, as you noted, the initial pricing action was beginning to be realized in the beginning of Q2 and that was 6% on U.S. Soda six packs, 8% on our energy and tea lines. We then announced an incremental pricing action, which we anticipate realizing in Q3, that's an incremental 10% on Soda across all packaging types and geographies. In addition to those two pricing actions, as noted, we anticipate continued promo optimization, which we anticipate contributing an incremental two points in the back half of the year. So, when you take that initial 6% soda action, 8% energy and tea, plus the 10% incremental soda price increase, plus the 2% anticipated optimization of promotional spend in addition to the cost optimization strategies that we've outlined, I think we're quite comfortable with the opportunity for those gross margins to return to historical levels in the second half.

That's very helpful. So, basically pricing is going to be tracking more in the double digits in the back half and our mid-singles was [indiscernible] earlier, but it sounds like it's going to be decidedly double-digits in the back half and headed to the front half of 2023.

That's correct.

Understood. Thanks so much.

Absolutely. Thanks Chris.

Our final question comes from Alton Stump from Loop Capital. Your line is open. Please go ahead.

Great. Thank you. Hi, good morning. Just wanted to ask about, obviously, it's a big question facing everybody in the consumer space right now, obviously there's a strong need to pass you higher pricing, which everybody doing offset inflation, but you've also got consumers facing inflation. So, how do you balance kind of the outlook over the rest of the year of, you are obviously raising pricing that's what you're doing, but then also trying to be promotional, particularly for lower end consumers to make sure that you are still enticing them to buy your products when after their [indiscernible] as well?

Yeah. I mean, maybe I can make some broad, kind of comments on our view on the inflationary environment Alton and Amy, I don't know if you have anything you want to jump in on, but what I would say broadly is, I think it's important Alton to know where we're starting from. [35 percentile] [ph] across all non-alcoholic or liquid refreshment beverages, which that's a product set that includes bulk [water] [ph]. And so, at less than a dollar a can, call it low $0.90 per can, this is a brand that is affordable for Americans of all income levels. And I think it's quite different than the inflationary impact we're seeing on hard goods, whether that's automobiles or household appliances. This is not at $0.90 a can, a splurge for consumers. It's an affordable luxury with premium simple plant-based ingredients. And so, tremendous value with the brand promise of reducing your family sugar by 50% overnight with a zero sugar simple plant-based ingredient brand. So, I think there's a really strong value perception for this brand among consumers. We have significant pricing power and as such, I think we're anticipating continued response notwithstanding these pricing actions. So, Amy, I don't know if you have anything to add there.

Alton, I think the other thing is, I mentioned this at the top of the call, but our core business is in take home multi packs. So, we're a home talking brand. And so, we're really well-positioned to weather economic downturns and also just to simply follow the market in price. Hence, there is a tick ahead of inflation. And what we see is, when, if and when retailers have taken price up, we see very little volume response and thus consumer resistance to rising prices. That's just the environment we're operating in. And then incrementally advantaged is Zevia because we're not reliant upon selling environments that are – that benefit from consumer discretionary spending, right. Such as fountain in a restaurant environment or QSR or such as convenience. Now, those food service and convenience are strategic opportunities for us in the future, as we put the right product in there at the right price point, the right merchandising strategy. That is a test and learn environment for us in the near-term. But the vast majority of our volume sits in take home and home stocking business and we, the growth trends at the start of the pandemic gave us a number of learnings that we will carry into this period of time with tremendous confidence about our consumers response to price, and to our price. I hope that's helpful.

Yes. Thank very much. I think it’s all I got. Thanks so much Paddy and Amy.

Absolutely. Thanks for joining, Alton.

We have no further questions. I'll now hand back to Paddy Spence for closing remarks.

Thank you. Well, I want to thank you all for joining the first quarter 2022 earnings call for Zevia PBC. We continue to execute on our long-term plan to create shareholder value by disrupting the global beverage industry, while changing the world one can at a time. Thank you for joining, and we look forward to further conversations.

That concludes the Zevia Q1 2022 earnings call. We like to thank you for your participation. You may now disconnect your lines.