Greetings, and welcome to Zevia PBC Q3 2024 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Reed Anderson from ICR. Please go ahead, sir.

Thank you, and welcome to Zevia's third quarter 2024 earnings conference call and webcast. On today's call are Amy Taylor, President and Chief Executive Officer; and Girish Satya, Chief Financial Officer. By now, everyone should have access to the company's third quarter 2024 earnings press release and investor presentation made available 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, 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.

Thank you for joining our third quarter conference call, particularly on the morning after the highly anticipated election. We are pleased with the vast improvement we delivered in Q3 adjusted EBITDA, illustrating strong execution of our productivity initiatives. While Q3 net sales were slightly below our expectations, we anticipate a return to growth in the fourth quarter, largely driven by our expansion in the 4,300 Walmart stores nationwide. We're excited about the rollout in Walmart, and we remain confident in our long-term potential. We believe that we are uniquely positioned to capitalize on the growing demand for healthier alternatives to traditional soda. We offer a distinctive blend of great taste, zero sugar, clean label products and exceptional value. And so to seize this opportunity, we will execute a robust brand marketing strategy, expand our distribution, and drive unparalleled product innovation. Additionally, our progress and cost savings initiatives will enable us to reinvest in our growth while enhancing long-term profitability. Before I provide an update on our strategic plan, I'll share some highlights from the third quarter. As I mentioned, we've made significant strides in our productivity initiatives, improving our adjusted EBITDA loss to $1.5 million, down from $9.1 million in the third quarter of last year. This also marks a substantial improvement from the first half of 2024. We achieved this through enhanced efficiencies, cost savings, and better product costing, which allowed us to deliver a record gross margin of 49%. As a result of our progress, we now expect annual cost savings of $15 million, an increase from our previous estimate of $12 million. With respect to net sales in the third quarter, we came in slightly below our expectations at $36.4 million. The 16% net sales decline versus Q3 of last year was largely a function of the…

Thank you, Amy. Good morning, everyone and thanks for joining our call today. As Amy discussed, we are excited about the meaningful progress we've made on our productivity initiatives. By realigning our costs across the P&L, we are able to reinvest in growth while strengthening our balance sheet. Zevia is uniquely positioned to win within the fast-growing natural soda category with a great taste, zero sugar, and clean label products at price points significantly below that of other brands. We are confident that the foundational work we are doing now sets us up to capitalize on this tremendous opportunity and deliver long-term profitable growth. As a reminder, our productivity initiative encompasses three pillars; brand maximization, margin enhancement, and improved operational discipline. Since we commenced this initiative in the second quarter of 2024, we have made meaningful progress against our targets. With a focus on driving substantial and sustainable improvements in unit economics, we continue to find significant opportunities to reduce our product costs while maintaining or even enhancing our product quality. We have also implemented cost savings via warehouse consolidation and network optimization. Lastly, we've made progress on eliminating unproductive SG&A spend. From a margin enhancement standpoint, these efforts yielded a 370 basis point improvement in gross margin to 49.1% as well as reduced selling and warehousing expenses as a percentage of sales. We have also seen cash flow improvement from the prior quarter as a result of the changes we have implemented. The progress we have made enabled us to increase our expected annual cost savings target to $15 million from the $12 million we previously provided. We began to see these cost savings in Q2, but expect these savings to be more fully realized through year-end 2025. Lastly, we continue to employ a philosophy that emphasizes returns across…

Thank you, sir. [Operator Instructions]. The first question that we have comes from Bonnie Herzog of Goldman Sachs. Please go ahead.

Hi, thank you. Good morning everyone. I was hoping for a little more color this morning on, I guess, the lost distribution you called out in your club channel and then the one customer in your mass channel. I was wondering if you could give us a sense of maybe the impact from this lost distribution on your top and maybe bottom line and then the expanded distribution that you highlighted, expanded distribution into Walmart, that is, you mentioned you're expanding this month, so I guess I'm trying to reconcile that with your outlook for, I guess, modest 1% to 6% sales growth this quarter? Thanks.

Yes. Thanks, Bonnie. Let me talk a little bit about the retail side. And then when it comes to the impact on top and bottom line and the outlook, I'm going to turn that over to Girish to make a few comments. So the softness in the quarter really came down to the volume impact of reduced store selling in club and a few promotional timing variances. And I'll just note that velocity remains strong. That's across channels, and most especially in key channels like grocery, and accelerated in the last four weeks, which is consistent with our growth expectations and the return to growth for Q4. Specific to club, as we've mentioned in the past and especially for emerging brands, it can be a region-by-region or rotation-by-rotation business. And so we remain engaged with both national club operators, and we're optimistic that we'll make progress in sustainable club distribution for 2025. But in the meantime, as you mentioned, throughout the month of November, we'll be rolling into 4,300 Walmart stores, and that will include a variety pack. Variety pack is what's sold at club. And we're also seeing strong growth in e-commerce. So we're targeting the shopper and making sure that a variety pack is available to continue to drive trial, win new consumers for Zevia across channels. So again, I'll just remind us that velocity is the metric that tells us how demand is faring. And so we expect a return to growth based on our velocity performance in Q4. And I will turn it over to Girish to talk a little bit about the top line and bottom line impact when we think about club and distribution and then the outlook.

Yes. So I would just add, as Amy mentioned, most of the change in the outlook was really driven by distribution primarily at the club level, and as noted, the lost distribution at the one incremental mass customer. From a bottom line perspective, really the change in EBITDA is really driven by incremental investments in marketing as we look to drive trial and support the launch at Walmart. So it continues our approach to really balancing for long-term growth -- long-term sustainable growth by mixing -- dropping savings to the bottom line as well as reinvesting into the business.

Alright, thank you for that. And then maybe just a second question, if I may, because as you talk through that, I did also have a question on your marketing spend. So hoping you could give us a sense of what this will be as a percentage of sales over the next few years and I guess I'm asking that in the context of profitability. I mean this has been a key focus for you, and I know you've implemented a lot of different initiatives. And I'm recognizing you're not going to provide guidance next year. But could you maybe help us understand how realistic it might be for you to generate profitability in the next couple of years, given all of the efforts that you've kind of laid out for us? Thank you.

Yes. Yes, of course, and appreciate the question. As noted, we're really focused on building a sustainable, profitable, and consistent grower for the future, and we are really bullish about the long-term growth opportunities ahead. And so I think from our standpoint, we're continued to be focused on driving profitability in 2026 as really as we invest in marketing and brand building to really drive future sales growth. And so I think from our perspective, we're really going to continue to balance the -- dropping savings to the bottom line, but really -- but with more of a focus on reinvesting so that we can drive future sales and future distribution gains, which will, in turn drive higher profit. So I think the -- as we alluded to, we're really focused on hitting that sort of profitability marker in 2026, but continuing to balance until then between continued reduction in losses as well as investment in building this business.

Alright, thank you.

Bonnie, I would just say in closing, on marketing, critical to our ability to invest in marketing is our productivity initiative where we take cost out of operating expenses and put it into marketing. There is room for us to invest more in brand building. We have very strong repeat rates, and we have very high brand spend once consumers enter the funnel. And we must invest in brand and drive awareness to continue that virtuous circle. So that's our expectation, and the productivity initiative gives us a lot of confidence in our ability to execute that accordingly.

Alright, thanks again. I will pass it on.

The next question we have comes from Andrew Strelzik of BMO Capital Markets. Please go ahead.

Hey, good morning. Thanks for taking the questions. I wanted to ask about the gross margins, which were much stronger than we and I believe you anticipated as well. Was there anything kind of one-time or non-recurring in there and maybe what was the biggest deviation relative to kind of what you had thought for the quarter? And I guess as we kind of zoom out, I know you talked about some variability based on DSD and those types of things. But is there any change kind of to the way that you're thinking about the margin potential of the business, given some of the structural improvements you've made?

Yes. Thanks for the question. And I think one of the biggest drivers is really improved inventory management. And really what it comes down to is the biggest driver on a year-over-year basis was the significant reduction in excess and obsolete inventory. You can see that in inventory balances when you look at the balance sheet. But we've made a lot of progress on renegotiating core input costs, rationalizing unproductive SKUs. And so going forward, we do believe we've kind of reset the bar here at a higher clip from a gross margin perspective in that sort of upper -- mid- to upper-40s. And as noted, there will be some variability depending on how quickly we add new DSD partners. And I think there continues to be opportunity to enhance gross margin. I think similarly, we've balanced driving gross margin with also incremental G&A spend, which we've returned to historical levels, inclusive of driving higher margins. So again, we're balanced. We're creating this balancing act across the P&L to really -- really with a focus on how do we drive velocity and how do we drive value.

Okay. That's helpful. And then I wanted to revisit the promotional activity, promotional strategies discussion that you referenced in the press release and then in some of the prepared remarks. Can you talk about exactly what you've been testing, what's been working and kind of what the timing is to which you might settle on kind of how that's going to look and what that means for trade spend over time on a go-forward basis? Thanks.

Yes, absolutely. So I think we historically or over the last several years, the company has reduced G&A spend pretty dramatically. And so we've really been testing a variety of new strategies really around frequency, depth, and breadth of promotion. And so as we've continued to sort of hone and refine these tests over the last several quarters, I think what we've really dialed in is the highest ROI spend and that mix of depth and frequency. And so I think we will be really settling in, I'd say, in the first quarter of 2025, particularly as we learn with the nationwide Walmart launch and testing a few new promotional strategies as well that we have yet to -- that we haven't tried in the past. And so we'll -- we believe we've kind of settled from a dollar perspective on the appropriate amount, and I think we will be able to really dial that in by the first quarter of next year.

And Andrew, just note that we saw, as mentioned in prepared remarks, a 15 percentage point increase in lift across all of grocery for the period, and we did that concurrently with significant improvements in margin. So it builds our confidence in the efficacy of our promotional strategies based on what we're learning and what Girish just described is driving hand-in-hand with improving the path to profitability.

Makes sense. Thank you very much for the color. Appreciate it.

Thank you. [Operator Instructions]. The next question we have comes from Jim Salera of Stephens Inc. Please go ahead.

Hi guys, good morning. Thanks for taking our questions. I maybe wanted to start on the Salted Caramel LTO and just see, do you guys have any insight if that's driving frequency among existing customers or trial with new customers? And if I can maybe make that a two-part question. Just in this new world of advertising that's more and more digital, just any learnings that you guys have from engagement on some of the digital ad spend and how that converts to whether it's frequency or trial.

Yes. So to directly -- thanks, Jim. To directly answer your question, it is too early for us to sort of disaggregate the excitement around Salted Caramel and tell you exactly whether that's coming from our existing base or from new consumers. But directionally, we could tell you both. Because what we're seeing is that the reach that we have been able to extend through our scaled now influencer network on third-party channels. So now we're speaking to people that are not on Zevia channels, has been very effective and very engaging, far more so than the past. So we see our marketing initiatives outperforming marketing initiatives of the past, and I think Salted Caramel is just an example of exactly that. But it's also in driving engagement within our existing base. So our expectation is that Salted Caramel and other brand buzz-building initiatives does both things for us: continues to engage our highly engaged base and reaches new consumers. And to your point on digital, our distinctive brand identity can be seen and heard across really an overhauled social media channels through new brand ambassadors at scale that I mentioned, through supported events and partnerships, and then most recently, through some of our new out-of-home advertising, complementing the digital campaigns that we piloted in several cities. Reminder that the digital campaigns we piloted across a 20-week period drove a 5 percentage point increase in sales in those markets relative to the rest of market. So these -- our brand marketing spends have been insufficient to support this brand. And now what we see, especially over the summer and early fall in very limited and targeted initiatives are green shoots of what we need to scale going forward. And why are we confident that we're going to be able to do that? Because our productivity initiative is there to be able to fund it in a self-sufficient way. So I would mark Salted Caramel campaign as an example of what good looks like for Zevia in both engaging our base as well as reaching new consumers and driving trial.

That's great. And then maybe as a follow-up to that, can you give us an update on the DSD network in Pacific Northwest and I would imagine there's probably kind of a similar visibility dynamic with some of the in-store activation. If you guys can give any updates on like branded cooler placements but really what I'm curious about is have you seen any noticeable difference in those markets relative to kind of the broader footprint?

Yes. Yes, that's a very important consideration, Jim. Thank you. So we're pleased with the impact of DSD, so direct store delivery. The service levels have had an impact on velocity in our base business in the footprint where DSD is activated, so the Pacific Northwest. And specifically, grocery across all chains in that footprint outperforms the rest of market in the period of time where DSD has been active. So grocery outperforming rest of market, thanks to DSD. DSD partners have also started to penetrate independent convenience outlets and I outlined independent because, of course, chains are reset next spring. So we're partnering with DSD operators to be ready for that kind of next big moment in convenience rollout, which would be the spring. So that's sort of early take on the impact of DSD in the Northwest. And then as mentioned in prepared remarks, our next target being the Southwest, we've signed with Crescent Crown in Arizona, and adjacent geographies should follow up in the coming months. And we expect a similar result, again, increased velocities in core channels and then being enabled to start to drive distribution for convenience, which drives against our most important initiative, which is singles trial to expand the base hand-in-hand with our brand building.

Great, I will just hop back in queue.

Thank you. Ladies and gentlemen, that concludes the question-and-answer session of the call. I will now turn it back to Amy Taylor for closing remarks. Please go ahead.

Yes, thank you. We appreciate everyone joining the call today. And as you can hear, we're confident that Zevia is well positioned within the growing natural soda category. And our productivity initiative, which we've mentioned several times, sets us up well to capitalize on this opportunity while putting us on what we see as a very clear path to profitability. So we look forward to providing you an update on our progress on the fourth quarter call. Thank you very much, everyone.

Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.