Hello and welcome to Xevia Q1 2022 earnings call. My name is Elliot and I'll be coordinating your call today. If you would like to register a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I would now like to introduce our host, Reid Anderson with ICR. The floor is yours. Please go ahead. Thank you and welcome

to Xevia's first quarter 2022 earnings conference call and webcast. On today's call are Patty 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 Xebia's website at investors.xebia.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 to 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. Now, I'd like to turn the call over to Patty 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, a 50% reduction in added sugar intake with a single platform of products that taste 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 Xevia brand while improving unit economics for each can we sell. In the first quarter of 2022, Xevia 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 to $182 million for 2022, or 28 to 32% growth versus 2021, and expect net sales of $41 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 2.4 times that of CSD and measured channels. For the 12-month period ending March 31st, ZDIA gained another 1.3 million households, a 22% increase, to yield a 5.8% penetration. We achieved gains across all pack sizes, with over 500,000 new households 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 12 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 Patty 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 store selling, and by new distribution on three reformulated citrus flavor six packs. All three flavors are outpacing in growth versus last year, and they added almost a half million dollars in sales growth for the quarter, with two flavors topping the growth ranks for Zevia six packs. This speaks well for the velocity impact

of flavor improvement within our core portfolio.

The Food Channel also continued expansion and growth on creamy root beer 10 packs, with most notable gains in East Coast grocery, where the brand penetration lags at of other regions. Creamy Root Beer now ranks as Zevia's number two selling 10-pack in the channel and was the number one growth skew for the quarter. We also saw significant expansion of top U.S. soda flavors such as Creamy Root Beer and Dr. Zevia in Canadian grocers and strong new distribution of Zevia energy drinks in grocery across Canada. Going forward, we remain bullish on the food channel for Q2. Our summer limited time offer flavors are on display at several thousand U.S. retail outlets. and our single-serve 12-ounce sleek can soda line is rolling out through the quarter. Club accounted for 45% of the growth in the quarter as a new channel. In Q1, almost 250,000 incremental households purchased Zevia in a club store. More than two-thirds of Zevia-buying households were new to purchasing the soda category in the channel, emphasizing Zevia's value to the retailer. Critically, Xevia households and club are also increasing Xevia trips in the food channel as these shoppers quickly become heavier Xevia consumers. Performance in mass was solid in Q1 with the bigger news headlining in April with 13,000 new points of distribution driven largely by moving from five flavors to a brand blocked 12 flavors and moving from six packs to a cardboard-wrapped eight-pack in the CSC aisle of one of the two major players nationwide. A few aisles down, this retailer has also expanded from two to four of our kids' flavors, and the other top mass retailer has also newly taken on four of our kids' flavors, penetrating a new portion of 1,500 stores. Results from these step changes in the mass channel will be forthcoming in Q2 in the balance of year results and will open up further opportunity, as 3,500 mass merchandiser stores have yet to sell Zevia. We await fall resets to open new opportunities there, based on strong velocity in our existing footprint. These channel developments underscore a healthy mix of 49% of growth from new distribution from food, club, and mass, and 51% of growth from velocity. The drivers of velocity are mixed shifts to larger pack sizes, such as 10-packs and 12-packs, and performance from individual improved soda flavors, but also from increased promotional efficiency, which is a good segue into my next topic, unit economics. Improving unit economics is a fundamental focus of the organization, and certainly of new incoming leadership, and a key to our path to profitability. In the midst of rising costs, Xevia took pricing actions that will result in a 6% increase in core soda packages, effective in the second quarter and has communicated an incremental 10% increase across all soda packages in all retail channels and geographies, from which we will begin realizing price in the second half of 2022. A second material initiative in our drive to profitability is enhancing promotional effectiveness, focusing on feature and display activity rather than shelf price promotion. This drove a 12-point improvement in Lyft versus the first quarter of 2021, while our total promotional spend was reduced by over a percentage point across the quarter versus prior year. Finally, I'll speak to cost optimization initiatives. We are optimizing packaging for our variety pack, resulting in a 15% savings on packaging costs per case. This will benefit both club and e-commerce channels. We have multiple initiatives to optimize freight costs. Based on increased volumes with a number of our customers, we are implementing a full truck policy across a larger portion of our business, resulting in savings opportunities of almost $500,000 for the balance of the year. Further, as mentioned in the Q4 call, we will continue to remove freight miles from our supply chain as we scale new product lines, packages, geographies, and customers. We have also launched a new initiative to optimize inventory levels, which will reduce transfer freight and warehousing costs and improve cash flow. The second area to review from our strategic initiatives is product innovation and marketing. January saw the Omnichannel Xevia Live Your Best campaign, which supported new distribution and increased in-store presence without increasing promotional spend. Strong marketing and sales execution flowed through February and March and drove promo performance improvement versus q1 prior year we've launched two new energy drink flavors in the market strawberry kiwi and pineapple paradise with distribution in approximately 4 000 outlets and exceptionally strong performance in e-commerce as mentioned previously our three new and improved flavor profiles in the citrus portfolio orange lemon lime twist and mountain zevia have driven increased skew distribution and velocity across food and mass in the second quarter we began selling ZVS soda in single cans for the first time in a 12 ounce sleek format available cold in several grocery retailers and deli grab-and-go and open air perimeter coolers some of which is shipping now and finally we will introduce new product rotations with one of our club partners this summer an energy variety pack a tea variety pack and a special summer edition mix of soda flavors new products new variety pack mixes and improved existing formulations are all a part of our growth plans going forward and finally regarding our environmental social and governance or social impact priorities we made strides in the first quarter as follows we estimate we eliminated 3 000 metric tons of sugar from our consumers diets in this quarter alone by replacing legacy sugary sodas we eliminated over 48 million plastic bottles from littering our roadways waterways and our communities by selling beverages in aluminum cans And lastly, unlike most better-for-you beverages, our soda is affordable to most American households, priced at the 35th percentile within all non-alcoholic, ready-to-drink beverages. Sevilla is less expensive than 65% of those beverage options and affordable for a broad range of income levels. With that, I'll turn the call back over to Patty for a review of our financial results.

Thanks, Amy. with Q1 net sales of $38 million, we achieved the upper end of our guidance of $36 to $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 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 the 17 points, 12 points were from inflationary cost inputs, including aluminum and copac manufacturing costs, with product mix accounting for most of the balance. First quarter gross margin was 38.4 percent compared with 46.2 percent 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. Xevia experienced $3.8 million of increased transportation and 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 Azevia 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 lockup period in January 2022, which were non-recurring. Adjusted EBITDA loss in the first quarter 2022 was $8.3 million, compared with an adjusted EBITDA income of $0.5 million in Q1 of 2021. Turning to the balance sheet, Xebia had $58.8 million of cash and cash equivalents in short-term investments at the end of the first quarter and had no debt outstanding. Xevia recently closed on a $20 million asset-based line of credit with Bank of America, expandable to $30 million to add to our available liquidity. Inventory at $32.4 million represents a days of inventory outstanding of 125 days, down from 140 days at the end of 2021 as a result of programs to reduce finished goods inventory. We continue to grow our mission-driven team focused on delivering positive results for our business and impact to the communities we serve. As previously stated, we announced two new executive leaders, Denise Beckles as our Chief Financial Officer and current Xevia Independent Director, Quincy Troop, as our Chief Operating Officer. Both Denise and Quincy bring deep experience across a range of consumer packaged goods and beverage companies and will be instrumental in continuing to drive cost optimization and improvements in unit economics as we scale. Denise began in her new role last Tuesday, May 3rd, and is with us today. Quincy will join the team in a full-time capacity on June 13th. With that, we will conclude our prepared remarks and open the line to questions.

Thank you. For our Q&A, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unleaded locally. 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 this morning 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, Patty. And really, it's ahead of your historical growth and then your long-term targets. So I just want to really understand how much visibility you have on this that, I guess, gives you the confidence. I mean, maybe you could help break down for us what's going to be driving that. Is it, you know, some of the distribution gains? Is it the stronger pricing that you've

called out? That would be helpful. Yeah, absolutely. So, you know, 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 key 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 assortments of time and market, all within, critically, the new pricing architecture.

Okay, and then maybe just to follow up on that, because just thinking about the pricing you announced, and I believe you said it's in May, but then, you know, 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, you know, the pricing you're implementing and, you know, how confident are you with the elasticities holding, you know, just trying to get an understanding of, you know, how you expect your volume to hold up with the stronger pricing that you're putting into the market.

Sure. Fair question. And, you know, it's very early, so just a few weeks into pricing effect actually on shelf. But we've had 100 percent 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-alph beverages. So a lot of pricing power going forward. We seek to see that showing up in syndicated data in the coming weeks. And we are hand-in-hand optimizing promo spend. So we saw a 12%, as we said in the prepared remarks, a 12-point increase in lift while taking spending down by one percentage point relative to quarter prior year. So rolling all of these up together, we don't expect volume impact, a negative volume impact on price, and have tremendous momentum going into the increases starting to show up on shelf now.

So that's helpful. And then so just to put the two together, think about your guides. 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 digit, 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, I think that's correct. And then I think, you know, 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 two points from optimized promotional spend, you know, I think we're comfortable that we are both outrunning inflation, but also going to see those accelerations reflected in the top line in the second half.

And, okay, that's helpful. And just remind us, in terms of historically, Patty, has there ever been a time that you've 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, you know, we've watched retail pricing for Zevia continue to migrate down. And we've ticked down from the 37th percentile on affordability two quarters ago to the 35th. 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 emerging brands. And so, you know, 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 merit.

Yeah. And Bonnie, I might add one more quick factor to a dynamic within Xevia's business. I don't want to say entirely unique relative to the rest of business, but certainly strength of ours is that Xevia is a multi-pack business to date and thus a home stock brand. So in the current economic conditions, consumers going out less, spending less discretionary income and impulse channels, you know, negatively impacting those that play in Fountain and Singles and Seastore. Our core business is a take-home one, and we're really well positioned to weather economic downturns and inflationary impact on consumer spendings. 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 Benvenu from Stevens. Your line is open.

Please go ahead. Hey, thanks. Good morning. Good morning, Ben. The pricing discussion and ASP dynamics can we 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 yeah great question I can take that then so I think you know from a mix perspective we did see an impact to ASP based on mix in the quarter and, you know, 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, you know, we see some acceleration in conventional channels with soda multipacks 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 lockups. 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, you know, 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 and 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 lockup 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.

Fair enough. Thanks so much.

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 the efficiency initiatives that you talked about and try 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 layer in in the back half versus what's incremental beyond that.

Absolutely. Well, thanks for joining, Andrew. And, you know, I can take that in terms of maybe I can start by just bridging, you know, the gross margin impact that we experienced in the first quarter. So, you know, 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 COPAC 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-2700s. So after a spike to nearly $4,000 per metric ton, we have seen aluminum recede. So that's, I think, the first driver of some of that receding inflation that we anticipate, at least on aluminum. With regard to other opportunities, I think it's really around scale, a mixed 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 costs per case. some inventory reduction initiatives, which provide a tailwind both in terms of the inventory carrying cost 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 repacks. So we're taking costs 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 or 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're obviously not the biggest categories within the portfolio, but longer term would seem to be pretty significant opportunities. And at least in the measure channel data that we've seen, 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 a transition period as you kind 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 they're a tremendous opportunity. Distribution is moderate 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 reach 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 both to trade up existing consumers and to win new ones. And you're right to mention distribution as a key opportunity. So we're marching after new distribution in food, which of course with upcoming resets presents an opportunity opportunity for that to take place in the market and then obviously manifest in the scan data. And then we'll have a 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 that 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, route to market then will 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. Great. That makes sense.

And then just one last quick one here. Sorry to apologize if I missed this. 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? Sure. We anticipate

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

Thank you very much.

Thanks, Andrew.

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

Thanks, operator. Good morning, everyone. Morning, Brian. My question – hey, Patty. So my question is really, you know, we discussed with you and Amy back in March just, you know, the process or the potential for a bit of a refreshing of the brand of the graphics the positioning um can you just update us on kind of where you stand in that process now and you know just just you know just from a timing perspective is that something maybe we'll see over the course of this year does that kind of move us in the next year just just kind of just an update on that that whole

the process. Sure. I appreciate you asking about it. As you know, I'm passionate about this, the most efficient pound-for-pound, dollar-for-dollar way to present a brand in a 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 ZVL along with complementary marketing with a focus on trial and new consumers rolling into the next year, if that's helpful.

And I guess as you, you know, would you contemplate maybe an increase in marketing to support this, you know, 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 away from retail and toward trial out of the marketplace where consumers live, work, and play, we can achieve a lift in our impact from an impressions and cans enhanced 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 with in 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 budget.

All right. Thanks. Thanks, guys.

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

Hi, good morning. Patty, you mentioned that gross margins are expected to return to historical levels in the back half of the year. Can you dimensionalize that? I guess historical levels are more in the mid 40s. That would be, you know, pretty nice acceleration. But I have a specific question on that.

Yes, absolutely. Well, so, Chris, you know, we are not providing specific guidance around those margins, but certainly, you know, despite that recent decline that was driven by inflation, you know, we're going to see that improvement really derived from recent and future pricing actions and ongoing cost optimization. And I should note, you know, 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 Troop is joining us 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 Zivia, 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 growth margins and the work we're doing there. Thanks, Patty.

Thanks, Denise.

Chris a follow-up on that so yeah so I just want a level set of pricing so you had announced you know six percent on soda and so but you're also implying more pricing and so is it six percent plus additional pricing you had noted there's ten percent pricing coming in you know maybe if you could just dimensionalize 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. SOTA six-packs, 8% on our energy and T-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 of the back half. I know mid-singles was thrown out there earlier, but it sounds like it's going to be decidedly double digits in the back half and headed into the front half of 2023. That's correct.

Thanks so much. Absolutely. Thanks, Chris.

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

And good morning. I just wanted to ask about, obviously, it's a big question facing everybody in the consumer space right now. of, you know, obviously there's a strong need to pass you higher pricing, which everybody's doing to offset inflation, but you've also got consumers facing inflation. So how do you balance kind of the, you know, outlook over the rest of the year of, you know, you're 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, you know, enticing them to buy your products when obviously their, you know, of course wallets are being squeezed as well.

Well, yeah, I mean, maybe I can make some, you know, 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, you know, what I would say broadly is I think it's important, Alton, to note where we're starting from, 35th percentile across all non-alcoholic or liquid refreshment beverages, which that's a product set that includes bulk still water. And so at less than a dollar a can, call it low 90 cents 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. You know, this is not at 90 cents 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's 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.

Yeah, 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-pack. So we're a home stocking brand. And so we're really well positioned to weather economic downturns and also just to simply follow the market in price and stay just a tick ahead of inflation. And what we see is 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 benefit from consumer discretionary spending, right, such as a 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 products 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 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 you very much. I think that's all I got. Thanks so much, Patty and Nate.

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 Xevia 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 Xevia Q1 2022 earnings call. We'd like to thank you for your participation. You may now disconnect your lines.