Good day, and welcome to the Zevia Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please also note today’s event is being recorded. I would now like to turn the conference over to Reed Anderson with ICR. Please go ahead.

Thank you, and welcome to Zevia’s Second Quarter 2023 Earnings Conference Call and Webcast. On today’s call are Amy Taylor, President and Chief Executive Officer; and Denise Beckles, Chief Financial Officer. By now, everyone should have access to the company’s second quarter 2023 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 the 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 and presentation slides that accompany 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 Amy Taylor.

Thanks, Reed, and good morning, everyone. Welcome to the Q2 2023 earnings call for Zevia PBC. Before we address the supply chain disruptions, I’d like to provide an update on the fundamentals of the Zevia business. Zevia’s brand remains healthy. Demand is strong and accelerating as the brand refresh rolls out and velocity continues to grow at double-digit rates. Our price increase has been well received, reinforcing our premium but accessible positioning and supporting our gross margin improvement. We remain in a strong cash position, even while investing in initiatives to strengthen the brand and the operations for the future. Consumer spending on the brand is up for household and for trip, and our order book reflects demand in keeping with our expectation. And as we preannounced, our net sales for Q2 were materially impacted by interruptions to our customer fulfillment. These interruptions are short-term in nature and are the result of missteps in our supply chain transformation efforts. The transformation of Zevia’s supply chain is a critical initiative to support our continued growth, enhance our customer service and drive efficiency, and ultimately, materially reduce costs as we scale. But that said, we experienced some pain points in the transition from old to new, which I will detail here today with a focus on the actions we are taking to course correct them and the expectations going forward. The main message that I would like for you to take away from today’s call is that Zevia has significant long-term potential and the broader value proposition remains one of the most relevant, in all of beverage, a very exciting category. Zevia’s demand reflected in velocity data via scan, which measured over 21% for the quarter demonstrates that the brand and the product portfolio meet the needs of today’s and tomorrow’s consumers.…

Thank you, Amy, and good morning, everyone. I will begin with an overview of our second quarter financial results, discuss guidance and then open the call for your questions. In the second quarter of 2023, we delivered net sales of $42.2 million, down 7.2% versus same time prior year. We did see positive impact from our strong implementation of our price increase in the quarter, coupled with our price increase from August 2022, which delivered a positive impact of $3.6 million, offset by a decline in volumes of 16.8% or $6.9 million due to the supply chain disruption and lower order fulfillment. But the key fundamentals of our business remain strong, as shown in our gross margins, adjusted EBITDA and cash management in the period, which I will discuss next. Our gross margins continued sequential improvement with our strongest margins yet as a public company at 46.6% for the second quarter of 2023, 4.2 points above the same quarter a year ago, primarily due to the impact of price increases and tailwinds from lower aluminum costs, offset by lower volumes and slightly higher manufacturing costs associated with higher fees as a result of inflationary pressures and labor rates. Gross margin also improved sequentially by 20 basis points versus Q1 2023. Gross profit delivered in the period was $19.7 million, up $0.4 million or 1.9% versus a year ago. Selling and marketing expenses increased 1.4% to $16.1 million, reflecting increases in freight and warehousing rates of $0.69 per unit sold, a 20.8% year-on-year increase in cost primarily due to the supply chain transformation initiative and disruption and additional investment in marketing in the period of $0.2 million. G&A expense was $6.2 million or 14.7% of net sales in the second period of 2023 compared to $9.8 million or 21.6% of net…

[Operator Instructions] Today’s first question comes from Bonnie Herzog with Goldman Sachs.

All right. I had a quick question first on the underlying demand, Amy, that you mentioned to your products. Just wanted to confirm that you saw demand actually accelerate month-to-month in Q2? Or should we think about it more just broadly remaining pretty strong or consistent? And then just curious how demand has trended in July and early days of August so far? And if you could share?

Sure. So we saw strong demand growth year-over-year year-to-date throughout the first half of 2023. And then in the month of July, we saw acceleration -- and so as promotional dollar investment has reduced in part out of necessity, our lift has improved and our velocity has accelerated. And so just looking at July data -- scan data through July 17, we saw, for example, in 7 out of our top 10 retailers posting improvements versus prior period and soda scan sales on materially reduced promotional dollars and all posting accelerated dollar growth. So hopefully, that answers your question, Bonnie.

Yes. No, that was helpful color. And then my second question, I guess, is on your full year guidance, which now calls for quite a bit of top line improvement in Q4 just based on what you kind of shared regarding Q3. So I was hoping to better understand the visibility and confidence you have that you’ll see this type of improvement in Q4. And then I recognize it’s early, but just any thoughts on your top line growth, the acceleration next year and beyond, just thinking about what’s -- what do you think is a realistic growth outlook for your business in light of everything you’ve been working on, whether it’s the brand refresh, the investments you’ve made, et cetera.

Sure. So the fundamentals are obviously in place, and we can see in velocity that the brand health is strong and that the brand refresh is already having an impact with or without incremental marketing dollars spent by simply driving on-shelf visibility and trial, the new consumer trial. And demand throughout the year has remained strong. We haven’t experienced any loss of space at retail with our recent customer fulfillment challenges. So our return to growth is simply a matter of how quickly we can return to normal customer fulfillment levels. And I think that explains our bullishness on Q4, just being able to actually realize the impact on net sales of consumer demand. And our outlook for the future remains bullish. So we are a double-digit growth brand. You can see that in our velocity, and we expect it to return in scan sales, and of course, in our shipments in net sales. And we also expect distribution expansion to support in 2024 such that we’re growing based on a balance between velocity and distribution growth. We’ve also had a strong response to price increases that we’ve put into the market. And so that indicates that we have further room in price as well. So in 2024, we would expect growth in price and then a nice mix between velocity and distribution expansion.

Okay. Just maybe I want to confirm something, and then I’ll pass it on. So to be clear, that’s super helpful. And then just thinking about the supply chain disruption and the work you’re doing to resolve it, we should assume that will be fixed throughout Q3, and that’s really where you’re going to face still some impact. But then by the time we hit Q4, things will accelerate, given the underlying demand, et cetera.

You’re definitely right about the acceleration in Q4. And then just to clarify with regard to the time line on recovery of supply chain back to the fully optimal and really best-in-class fulfillment levels that we’ve sustained in the past, including through COVID and through the aluminum can prices, we’ve always been quite competitive and reliable there. And so we expect the time line there, as we’ve said, to be by or before year-end, so definitely impacting Q3. It will take months and not weeks to fix but we do expect to be in good shape by or before year-end, Bonnie.

Okay. Very helpful.

And our next question comes from Christian Junquera with Bank of America.

You have Christian on for Bryan. Denise, I believe at the end of your prepared remarks, you mentioned how the supply chain transition will negatively impact gross margins and operating expenses for the third quarter. Can you share the magnitude of that impact? Should we expect gross margins to decelerate this upcoming quarter? They’ve been trending in that mid-40% and just the magnitude of the impact on selling and marketing expenses. For instance, it came in higher than we anticipated this quarter. I don’t know if there was a onetime cost this quarter that you could share with us?

Sure. So on gross margins, we expect it to continue to be in the mid-40s. Though we expect to see pressure, we expect it to remain in the mid-40s. On adjusted EBITDA, we expect it to be lumpy. Costs are going to accelerate selling costs primarily in the third and fourth quarter. We anticipate that will happen through the rest of the year, primarily related to what’s happening with supply chain. So we don’t expect it to be at the level we see in Q1 and Q2. However, we do expect that we will see some normalization late in the fourth quarter. Does that give you -- does that answer your question?

Perfect. Yes, that’s very helpful. And then just one quick follow-up for me. Just any early reads from the brand refresh, what are retailers and consumer saying? And just what are some of the internal metrics you guys used to -- that you guys are using to gauge the success of the brand refresh.

Sure. Yes. Over time, the brand refresh’s job is to expand our household penetration is to win new consumers and to build brand health through the lens of image and then -- and brand love and loyalty. And so obviously, far too early to measure success based on this. But early indicators would be our retailers engaging, our retailers seeing that the in-store visibility improvement that comes from the brand refresh, merit increased space, merit increased frequency of display and merit engagement in a category where we’re still fairly new in the game, such as energy. And based on those anecdotals, we’re very happy with the brand refresh. It’s driven a lot of engagement as both retailers and consumers consider the new look and feel to present premium but accessible brand and most of all a relevant brand. Anecdotally, from consumers, be it on social media or reposts or influencers posting Zevia saying Zevia fits my vibe now, we are seeing a lot of positive feedback. But again, it’s early days, and this is very anecdotal. I think one of the more important anecdotes to share is from one particular top retailer where we have been able to maintain in-stock levels for the period because of ample shelf sort of holding power, off-shelf displays and strong execution. And in this particular retailer, growth has been consistent since the beginning of the year, but accelerated to 22% in the period ending July 16 with the brand refresh in store. In the same period of time, we’re reducing our promotional spend by 20%. And so I highlight this just to say, it is our belief that we are selling more Zevia on the merits of the brand post brand refresh and that, that will continue. So we’re very bullish on the brand refresh delivering trial, expanding consumer base, expanding in-store presence and ultimately helping to improve lift efficiency and growth on the merits of the brand. So thanks for the question, Christian.

I’ll pass it along.

And our next question today comes from Jim Salera with Stephens.

Amy, I wanted to ask on the acceleration once the supply chain is kind of reoriented. Is that going to come just from better kind of in-aisle fill rates that having all the products on the shelf and having several SKUs deep? Or is that going to allow for displays and gap displays more visible to consumers outside of the kind of traditional in-aisle product offering?

Jim, you’re doing a great job of breaking down both reasons. So effectively, we know the demand is there. And in fact, if I can give you a little bit more color, if we had filled our on-shelf and display gaps, for the quarter, that fill rate would have bolstered our scan sales at about $4 million, and it would have reflected growth rates from a scan perspective of 17%, so meeting our expectations. So to answer your question, the return to growth -- in other words, to have our net sales reflect what our actual demand is, it will be a product of both things that you mentioned, which is filling depth of shelf to avoid individual flavor and SKU out of stocks on shelf as well as returning to the ability to execute display activity and to drive incremental promotions and to interrupt new shoppers at multiple parts in the store. We’re currently having to back off of that to a degree based on our customer fulfillment issues. So as soon as we’re able to fulfill the demand, we’re able to then also drive in-store presence. So yes, both shelf and display returned to sort of doing their job at Zevia when customer fulfillment comes back online. And both of those executional considerations help to fulfill that underlying demand, and we expect that to further accelerate given the brand refresh positive early indicators. Does that help, Jim?

Yes. Yes, that’s great. And then maybe if I can ask a question on club, too. I know, at least in my area, we have the tea offering in club along with the 30 pack for the SKU. Is there any opportunity for energy in club like multipack for energy or to get team more broadly distributed? I’m not sure how representative my area is relative to kind of the broader club distribution. But do you think that you could run with a soft drink SKU and energy SKU and a tea SKU across club?

We absolutely believe that we can, Jim, and that is our intent. And so soda has positively surprised every regional buyer in club that has chosen to double down on Zevia soda. We’re in the early days of tea rotations as you’ve observed. And again, sometimes doubling expectations, so minimum hurdle rates with tea. And we’re very early in the energy drinks business. We’re seeking to drive energy drinks starting now based upon the brand refresh because we wanted to put the new look and feel, Zevia Energy in front of the consumer in broader brush visibility versus the old look and feel. We feel that the new design materially better represents our position, which is a clean and pure energy option at a premium but accessible price with awesome taste. And this is the feedback that we’re getting. So we believe the club distribution could be an exciting way to continue to reach more consumers with the energy proposition as well. So yes, to the future of tea and club and yes to the future of energy and club as upside.

Good. I’ll pass it along.

And our next question comes from Sarang Vora with Telsey Advisory Group.

Great. Sarang Vora for Dana Telsey. My first question is on the supply chain. It seems like, based on your comments, certain customers had strong sales, certain did not. So can you provide taking a deeper step and can you provide color on was this supply chain impact regional, did it impact certain customers, in particular, brands like tea or cola? Just curious to know a little bit more on how it impacted the current trends.

Yes, Sarang, thank you for the question. I would say, unfortunately, the customer fulfillment dynamic was pretty even across the country from a geographic perspective. And while it did not have an outsized impact on individual customers more than others, in some instances when customers have ordered higher-level stocks in the past, they remained in stock further into our challenge period than others and thus had better performance. In some instances, we’re able to support promotion. So make sure that retailers with promotions remained largely in stock, but that was challenging across the country. So I think the simplest way to answer your question is through the lens of customer category and geography, the impact was relatively equal across the country. And so we’re taking swift action, as I’ve mentioned in the prepared remarks, to fix that, and Bill Williamson, who started with us in mid-July and then full time at the end of July, has brought on 3 new people in key functional areas to drive improvement. He stood up tools and processes necessary to support the team, function during the transition. He’s demonstrated the ability to drive swift decisions with confidence leading the team, understanding their daily tasks and then it’s slowing our exit from some legacy warehouse providers to support our service levels during these changeovers and then it’s just operating with tremendous energy and impact with our team and then with our third-party partners out of the gate. So we’re bullish on returning across geography, customer and category to best-in-class service levels.

That’s great. And just on the brand refresh, at this point, packaging, labeling, has that been done across all of your profiles? Like the -- everybody has been rebranded. Now, the next step is just marketing and distribution. Is that a fair way to think about the brand refresh of steps?

That’s right, Sarang. So everything coming off the line now is new brand Zevia. So everything we’re producing now we fully work through from a production perspective, the old look and feel. And at retail, that will vary in how quickly that sells through because as you know, we’re taking a rolling approach to the launch. And so some customers for the next several months will feature, for example, new and old Zevia tea on shelf at the same time as old sells through. We don’t have any shelf life issues and we can handle that transition through year-end. So I think by the end of the year, we’ll be fully to right. But in many individual customers and in some geographies with faster volumes, we already are fully brand locked with new look and feel on shelf.

No, that’s great.

And our next question today comes from Chris Carey with Wells Fargo Securities.

So I guess it sounds like the supply chain issues are not impacting the support you’re getting at retail. Typically, when you have such situations, you could be put in the penalty box for a certain amount of time and you work your way back in. But I guess what I’m hearing is a lot of bullishness that once the supply chain headwinds ease that none of that really will be a dynamic for Zevia and that you’re actually getting even more support. And so is that like a fair way to characterize the situation? And I guess, if so, why do you think that is? Is it just that the brand performed so well once it’s on shell? So any perspective there would be helpful.

Yes. Thanks, Chris. I really understand your question. And it wouldn’t be accurate to say this misstep is without impact, right? There are 2 factors, I think, that help us sustain relationships and drive initiatives in retailer with minimal interruption. One is that we stand on a legacy of best-in-class service. And as I mentioned before, all through COVID and all through the aluminum can crisis, our fulfillment rates were virtually uninterrupted. So I think we have some credibility in sort of calling the ball on that and charting a course to sustain best-in-class service as soon as we stabilize. But secondly, we’ve just been very transparent. Coming to our retailers, regularly updating them on our outlook, getting at sort of a PO level, giving them to the best of our ability, expectations on when and how we can deliver for them. So we’re doing our best to be a good partner and work together with retailers on mitigation plans in the short-term disruption but also standing on credibility from the past. So I don’t think it would be fair to say we’re without impact, but I don’t anticipate that we’re losing space. And that’s the most important thing is that we protect our space during this period of time. And then we return to expansion and display activity and in-store activation once we’re stabilized. So hopefully, that answers your question, Chris.

Yes. No, that’s a good perspective. The only other one would just be, yes, it sounds like there’s not really going to be a trade-off as sales come back that you’re going to be investing behind the sales or get back on gross margin or marketing, said another way, as sales come back, margins remain at this higher level. Just wanted to make sure I understand that piece as well.

I think -- so as Denise said before, we expect margins to remain in the mid-40s. I think similar to the answer to your last question, it would be inaccurate to say we’re unaffected by our challenges in the supply chain, meaning there will be some costs on that. And adjusted EBITDA as a result, reflecting matters like increased selling costs will be lumpy in the outlook to the year. So it would be inaccurate to say we’re unaffected in Q3 from a cost perspective. One thing that we are doing is making some phasing adjustments to optimize our marketing spend in light of the in-stock issues. But we are driving sampling locally close to the point of purchase in 4 markets where stock levels have been largely intact. And then we have to do creative hitting the market in the coming months in the form of geographically targeted omnichannel campaigns to support top funnel and brand building. So we will make investments into the brand, and there will be a cost to stabilizing the supply chain. Let me see if you have a follow-up question there and if Denise can provide color.

I think I’m okay. I got it. So we expect a little bit of lumpiness as you’re going to be digesting some costs, and you’ll be facing marketing, I think I understand.

Okay. Thanks, Chris.

And our next question today comes from Andrew Strelzik with BMO Capital Markets.

This is Daniel Gold on for Andrew Strelzik. How are you thinking about the changes to go to market with the brand refresh? Is it more this year versus next year and some of that shifted? Or is it more about depleting the products with the original packaging?

Sure. The most important thing about the brand refresh is that it impacts in-store visibility and brings brand relevance and pops for the consumer in their hands as well as on shelf and in-store. And dollar for dollar, this is the most efficient investment a brand can make. You can really only do it once, but that’s happening right now and rolling out in-store with impact in 2023. So the brand refresh on its own merit is on schedule and will bring its own impact of lift increased trial, and we expect increased distribution as well, but we will start to ramp up marketing investments against it more in 2024, as I mentioned before, informed by the learnings of some forthcoming omnichannel campaigns in the next few months. These are moderate spend, but we can learn from the tactics used in these omnichannel campaigns in order to inform our marketing plan for next year. So to answer your question, the brand refresh is rolling out now as planned. It supports the brand by driving in-store visibility, trial and pull-through in the interim and then we’ll support it further with marketing activation, light-touch this year and more significantly next.

Got it. And as a follow-up to that, what are the long-term implications now that you’ve got a more favorable shelf space with the brand refresh?

Sure. So shelf -- the #1 driver of awareness for beverage, generally speaking, for most brands, is in store. And the biggest opportunity for Zevia is to drive awareness and trial. So as we expand space, we expect that, that improves awareness, trial and it takes consumers down the funnel to support our net sales. So it is the expansion of shelf space in same-store sales as well as expansion of new store selling and new channels that are fundamental drivers of our growth for several years to come because there’s a lot of opportunity ahead to get closing distribution gaps in the mass channel, be it expanding further in club, being winning in the dollar channel, finishing out drug where we’re growing quickly now and then ultimately cracking into single can sales and impulse purchase throughout convenience and food service. So you can see how expansion is facing same-store selling supports velocity, but we also have a lot of upside in distribution to be gained.

Right. That’s all for me.

And ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to Amy Taylor for any closing remarks.

Thanks very much, everyone. I’ll just close by reminding us all that Zevia’s brand is as healthy as ever, our velocity is very strong, bolstered, as we’ve discussed, by an exciting brand refresh hitting the shelves now, and our gross margin expansion and strong cash position, further indicators, that our fundamentals are in plague. And so we see a clear path returning to our best-in-class service levels in the coming months to support our sustainable and profitable growth. So thank you for spending time with us this morning.

Thank you. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.