Guru Organic Energy Corp

TSX:GURU

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the GURU Organic Energy First Quarter Fiscal 2022 Results Conference Call and Webcast being recorded today, March 15, 2022, at 10:00 a.m. Eastern Time. [Operator Instructions]

GURU's press release, MD&A and financial statements are available in the investor section of its website and on CEDAR. During the call, the company may refer to certain non-GAAP measures. Reconciliations are available in its MD&A. Also note that all financial figures are expressed in Canadian dollars, unless otherwise indicated.

I would also like to remind you that today's presentation may contain forward-looking statements about GURU's current and future plans, expectations and intentions, results, level of activity, performance, goals or achievements or other future events or developments. As such, please take a moment to read the disclaimer on forward-looking statements on Slide 2 of the presentation.

I would now like to turn the call over to Carl Goyette, GURU's Chief Executive Officer.

[Carl Goyette, executive]

Thank you, operator. [Foreign Language] Good morning, everyone, and welcome to our earnings call. Joining me this morning is our CFO, Ingy Sarraf.

In our first quarter of 2022, we generated record Q1 net revenues of $7 million compared to $6.6 million last year, reflecting sales growth in Canada and in the U.S. We continue to build our partnership with our exclusive distributor in Canada, which officially began this past October, and we're [ effectively ] on the planning and execution of our ambitious long-term Canadian growth strategy.

We also made good progress in the U.S., securing new DSD partnerships and new points of sale. Our Q1 performance was achieved despite various Omicron-driven restrictions throughout the quarter, impacting businesses and consumers to varying degrees in the different markets where GURU is present.

In this context, then after a solid start to our brand awareness efforts with our back to university campaign in Q4, we did moderate our Canadian marketing activities during Q1 and in the first half of the second quarter due to the extent of those sanitary restrictions and the lockdown measures as we felt this was a prudent thing to do.

With the majority of sanitary restrictions lifted, we are now ramping up our activities, which we expect will be sustained through to the end of the year, bearing further COVID-19-related interruption and in alignment with our new business model in Canada.

Over the next several quarters, GURU will continue to be squarely focused on driving brand awareness and trial in the Canadian market, markets that together are more than 2x larger than Quebec. This was began in Q4 2021, we slowed down a bit in Q1 due to Omicron and we'll now reaccelerate in support of our truly nationwide distribution.

Planned activities include, but are not limited to, a major national marketing campaign promoting a botanicals-driven SKUs, namely Matcha, Yerba Mate and our latest top-performing innovation, Guayusa Tropical Punch. This campaign, coupled with other activations will be notably supporting the Canada-wide availability of Guayusa a major retailer effective this quarter.

Our exclusive distributor will proceed with its first official large-scale in-store activation for GURU, which will be executed with many major corporate and independent retailers across the country in April. GURU will be the first focus of our exclusive distributor during that period. We also have a series of other planned activities, partnerships and sponsorships to reach our target consumers in key Canadian markets throughout the spring and summer that makes up on brand grassroots and mainstream activation. More to come on this part.

Turning to the U.S. We continue to execute our strategy and experienced improved results quarter-over-quarter with new doors in grocery, drug, natural and independent retail chains. This has been supported by the strengthening of our DSD network in the Western U.S. market.

To that effect, we recently partnered with leading regional DSD distributors, Buffalo Market, DPI Specialty Foods and Pint Size Hawaii, enabling us to significantly increase our point-of-sale by more than 1,500 since the beginning of the year, primarily in California.

Some other notable wins include our full penetration of Whole Foods Market chain, the world's leading natural and organic food retailer with whom we've had a relationship with since 2005 when we first entered the U.S. market. We were already widely available, but now we will be in every store, and we have also expanded our selection with the addition of Yerba Mate in their over 500 locations.

This month, we are also introducing a limited edition variety pack, which will be exclusively available at Sam's Club, a leading leadership warehouse club with over 200 U.S. locations. We expect this new win will have a strong impact on our U.S. sales in Q2. This initiative could also have the potential to generate recurring revenue.

GURU continues to generate strong demand at the U.S. consumer level quarter-over-quarter, as shown in Q1 SPINS data with over -- with a 49% increase in consumer purchases in California and 27% increase in the U.S. overall. While U.S. sales only represent 17% of our sales in Q1, these numbers reflect growing interest in our brand, primarily in California and with minimal marketing spend.

2021 was defined by our listing on the TSX, securing our game-changing Canadian distribution agreement, successfully transitioning to our new Canadian business model by year-end and ensuring we have the capital and resources to execute our ambitious growth plan, all of which were successfully achieved.

Now the rest of 2022 is all about the execution of our expansion plan, just as importantly about establishing our new baseline and what will be our first full year working with an exclusive distributor, a working relationship that continues to grow and strengthen week-by-week. Just a year ago around this time, we had very low distribution and brand awareness in Canada outside of Quebec, markets where we have yet to invest any significant distribution and marketing dollars.

Following our first big marketing push in Q4, our brand got a huge initial boost and great response within key consumer segments. While this momentum was attenuated due to Omicron restriction and lockdown, we are ready for the work ahead of us to move the needle further, which will take time and commitment. We are really motivated by those early indicators to keep moving forward with the execution of our Canadian growth strategy. We are excited to continue to work towards truly breaking through in Canadian markets outside of Quebec, where we have a huge opportunity to conquer market share in an industry ripe for disruption.

I'll now turn the call over to Ingy, who will provide you with more details on our Q1 results. Ingy, over to you.

[Ingy Sarraf, executive]

Thank you, Carl, and good morning, everyone. GURU generated record Q1 net revenue of $7 million compared to $6.6 million last year. The increase is reflected by sales growth in Canada and the U.S., driven by a 22% increase in volume overall as a result of stronger velocities and increased points of sale, partially offset by the cost of the new exclusive Canadian distribution agreement.

Canadian sales in dollars grew 5%, reflecting the change in the company's business model launched on October 1, 2021. U.S. sales, which represents about 17% of net revenue in Q1 2022, grew by 9% in U.S. dollars in Q1 or 7% in Canadian dollars as a result of new doors and increased product demand. We expect the U.S. to continue to perform well in the coming quarters based on the SPINS data mentioned by Carl.

As a reminder, costs associated with our distributor services in Canada are included in net revenue at the top of our income statement. In parallel, Canadian sales-related costs have been reduced, partially offsetting the lower gross margin. The overall impact to our bottom line is minimum. And in the long run, we expect the benefits of our Canadian distribution agreement to greatly outlay these short-term adjustments, which are now fully reflected in our 2022 results. Q1 gross profit totaled $3.8 million compared to $4.1 million a year ago. Gross margin was 55% compared to 51% in Q4 2021 and 62% last year. The decrease in gross margin versus last year is mainly due to the change in our business model in Canada, which includes distribution, selling and merchandising fees.

Gross margin was also slightly impacted by rising product costs driven by higher input and transportation costs. SG&A was $7.1 million compared to $4.7 million, an increase of $2.4 million. $2 million of that represents the ramp-up of our sales and marketing activities in support of the launch of our distribution agreements and the execution of our growth plan as we entered into new markets.

We invested in several targeted and sales marketing campaigns during the quarter. Notably, the fall Quebec marketing campaign with 'Occupation Double' that ended in December 2021, and existing partnerships in which we increased our investment in fiscal 2021 compared to 2020. The start of partnerships with Ski Resorts as well as continued field and trade marketing investments in Ontario, Western and Atlantic Canada. However, due to COVID-19 Omicron varying restrictions and lockdown, the company moderated its marketing activities during the quarter.

Adjusted EBITDA was negative $3 million compared to negative $0.4 million a year ago due to higher sales and marketing expenses. Net loss for the quarter totaled $3.2 million or $0.10 per diluted share compared to a net loss of $0.6 million or $0.02 per diluted share a year ago. As of January 31, 2022, our financial position remained strong at $61.7 million of cash and cash equivalents and unused credit facilities totaling about $10 million. These funds will allow us to invest in our brand in Canada and the U.S. over the coming years in support of our growth objectives.

Carl, back to you for concluding remarks.

[Carl Goyette, executive]

Thank you, Ingy. The next month and quarters will be very active for GURU as some major Canadian marketing activities are present to motion.

As mentioned, in the coming weeks, we will be kicking off major marketing campaigns to drive national brand awareness and trial, including the launch of Guayusa across Canada. This product has been a true success in Quebec, generating record sales among all 2021 energy drink innovation, since its official launch last November and currently ranks as the #6 top SKU in convenience stores in Quebec. We are confident that this -- it will be well-received in the rest of Canada as well. Guayusa will also become available in the U.S. by the fall.

Later this summer, our second marketing campaign will be supported by a major media partnership, which will be announced in the next few months. This partnership is expected to deliver major gains in awareness and trial at a moment where our distribution will be fully established and seasonality will be at a peak.

On the product and innovation front, we will be listing our 355 ml 4-pack format in English Canada and introducing a 500 ml format for GURU Original and GURU Lite in Quebec in the coming weeks. These will be our 2 first products in this larger format, which is very popular among energy drink consumers. This initiative will allow us to become even more competitive in the market by providing consumers with a broader range of choices.

On the pricing front, as mentioned in our Q4 call, we reviewed the industry dynamics and decided to take a price increase, which will be effective mid-May. This will help us offset rising input and transportation costs. This price increase is also in line with our pricing strategy and current industry practices.

Just this last week, our distributor in Canada received confirmation of 1,700 new doors from several Canadian grocery and drug retail chain. A full banner and door count update along with weighted distribution data will be provided in the spring.

In conclusion, the current phase of our North American expansion is focused on deploying a significant proportion of our capital and resources to drive brand awareness and trial and ultimately grow our consumer base and velocity in Canada, where GURU has been the fastest-growing energy drink in the last 52 weeks.

Expansion pace is supported by our strong financial position, allowing us to invest in our brand over a sustained period of time for the first time in our history and a new Canadian market. We are also squarely focused on supporting and building our distribution partnership in Canada to ensure long-term success.

With respect to the U.S., we will continue to methodically expand our distribution network with an emphasis on California through DSD distributors and online, which will allow us to be most cost-effective as well as through the launch of innovation to optimize our current product offering.

This concludes our formal remarks. I will now turn the call over to the operator for the Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Martin Landry from Stifel GMP.

[Martin Landry, analyst]

My first question is on the price increase that you just alluded to that you're going to take in mid-May. Can you quantify how much price increase you're going to implement? And is this going to be enough to offset all your inflationary pressures. We're looking at aluminum prices, they're going up quite rapidly, freight labor. Just wondering, is there going to be a transition period where we could see a bit of pressure on your gross margin before the full price increase is reflected?

[Ingy Sarraf, executive]

Carl, I'll take that one, if you're okay.

[Carl Goyette, executive]

Sure, yes.

[Ingy Sarraf, executive]

So on your first point, yes, like you mentioned, we will be taking a price increase in mid-May. For competitive reasons, I'm not going to be talking about the amount right now. However, the price increase, of course, like you've seen in the rest of the industry, there's list price increases, and there's also an opportunity to reduce promotional spend, and we will be looking at both.

From an impact, yes, of course, like you've seen also as well on our gross margin. We've seen already some impact of the COGS increase affecting our gross margin. Specifically for us, really the transport costs, which increased significantly for everybody in this industry because of the oil price increases. So we've seen already that our gross margin was impacted 1.5 points of it by the cost compared to Q4, which was 1 point, and we will continue to see that it might increase by another point in the coming quarter. However, it will be offset by the price increase in mid-May. So until then, yes, we will see some impact in the gross margin. Does that answer your question?

[Martin Landry, analyst]

Yes. That's helpful. And there's -- my second question is on the aluminum can market. There's a globally, a really tight market. Some industry participants have faced shortages in aluminum can. I'm wondering what's your strategy? And is this an issue, we don't hear you talk much about that shortage. So can you help us understand a little bit how you're coping with that situation? And if this could be a concern or not?

[Ingy Sarraf, executive]

Yes. So rest assured, this is not a concern for us. We're not suffering from any can shortages right now. And it's also because of our strategy. Like you've seen with our buildup, with our inventory, we're getting ready. We also, early on, we've seen that risk, and we dealt with it early on. So we committed early as well to can purchases, to make sure we plan to have for our product launches, for our growth and for the market dynamic that was the. So that's why we're not talking about it much.

[Martin Landry, analyst]

Okay. And maybe last question, wondering if you can update us on your ACV penetration in Canada, if possible?

[Carl Goyette, executive]

Yes, I can take that one, Martin. ACV now is way ahead of where we would have expected, right? As I said in our call just last year, we were barely anywhere, right, in Ontario, west and Atlantic. And now in convenience stores, we're reaching 90% distribution. So really, our exclusive distribution partner has done an outstanding job pushing distribution. That's convenience stores.

Now with the extra doors that we announced today, some are coming over in Grocery Drug Mass. Some are coming over in the next few weeks, few months. The expectation is that, we think will reach around 70% distribution or average weighted distribution in Grocery Drug Mass over the next few months. So 90% in convenience and roughly 70% so on in Grocery Drug Mass.

[Operator]

Our next question comes from the line of Nauman Satti from Laurentian Bank.

[Nauman Satti, analyst]

So my first question is more on the revenue side. You've mentioned in your comments that there was 22% volume growth. When I look at your last year quarterly results, you were still growing your revenue by 23%, 74%, 22%, 38% quarterly. I'm just wondering have you seen any benefits from this new distribution partnership? Or initially, when you went into it, were your expectations that the volume growth would be of this magnitude? Just trying to get a sense of how much improvement have you gotten from this partnership so far?

[Carl Goyette, executive]

Now we're very happy with this distribution partnership Nauman. Obviously, it's a transition year, right? We spoke about it last quarter, and I expect we're going to be talking about this transition year, throughout this first year as we establish our new baseline. This is -- we're learning to work together, but the beauty is we are working very well together. We're making those adjustments. We're lifting a bunch of new stores. And so there's a lot of dynamics happening. But so far, we just supported the ACV gains that we've had, right? We couldn't be happier about that. This was a very first spec in this distribution agreement, right, to make sure that their products will be available.

Now we will be focusing on making sure improving execution at the store level, working with them. We will be doing more trade marketing activity. We will be doing more marketing activities as we said, with many great campaigns coming over the next year. So we have this wonderful foundation for growth that we have built with this partner. So very happy on that.

[Nauman Satti, analyst]

Okay. So essentially, I understand this is like now a transitional period, but once you're over it, we should expect similar growth in your dollar revenue as we had seen previously, right?

[Carl Goyette, executive]

Oh, yes. Over the long term, in fact, over the long term, the growth perspective have never been better, right? But we have to recognize and be transparent with you that this is our first year. This was planned to be a huge change for us going from our previous distribution model to this new distribution model, listing in so many new accounts, investing for the first year in new markets for the first time, real marketing investment, right? And some of the marketing investments we -- as we said, will take some time. It will take some time, and we're building a brand here. I think, as we said. So I don't know, Ingy, you want to add anything, but…

[Ingy Sarraf, executive]

No. I think you said it very well. It's a transition year, and it's the same on all fronts. We're doing weight, but of course, it's a transition for us, a big change.

[Nauman Satti, analyst]

Okay. That's fair. And if I remember for -- in fourth quarter, you had mentioned that there was some pull forward of revenue. Did the first quarter was impacted by that as well. I mean, if there was not that pull forward in Q4, you would have seen higher revenue there that...

[Carl Goyette, executive]

Yes. Again, it relates all this. I think, it's all it relates to your first question, right? This is -- because this is a transition year, we're all adapting our inventory levels. One thing that's for sure in the beginning of the relationship like this, you don't want to be running out of stock, you want to have enough inventory.

Obviously, going into when we were in Q4, right, going into the winter season, some of those inventories may have seemed a little bit high. Now we're going into high seasonality. As I mentioned, April will be the first focus for April -- for our exclusive distributors. So we expect -- we obviously are very optimistic about the summer and the week to come now that we have established our distribution.

So on that front, this is the same level of entry could mean far less -- far fewer weeks of inventory in the next few weeks, right? So this is all -- I think, it's all under the same theme of making sure that we establish this new baseline throughout the year and learn to work together through this.

[Nauman Satti, analyst]

Okay. No, that's great color. And just one last one for my -- and so your balance sheet is pretty strong. You have over $60 million of cash. If I remember correctly, you had mentioned that you'll be spending about $20 million for advertising this year. Is that still the plan? Or has there been any changes in your advertising budget for this year, given how strong your balance sheet is right now?

[Carl Goyette, executive]

I can take the first part, and then we can complement maybe. The plan hasn't changed. The plan is to invest heavily. We mentioned 3 major marketing campaigns. One is starting in April to support this sales execution that we're doing in Canada. There is some marketing dollars allocated to the U.S. as well, then we're going to be following with an outstanding summer campaign with this media partnership that we mentioned, and then we'll have another campaign in the fall. So 3 campaigns that will obviously cost so many, but we see this as investment in the future as we build our brand. So no change on that strategy. Ingy, anything you want to add?

[Ingy Sarraf, executive]

No. So you had execution on strategy as planned.

[Nauman Satti, analyst]

Okay. Fair enough. And maybe just another one that within your -- I know you don't break that up, but any color if you could provide on growth in the Quebec market, which is where you already have a large market share. So just trying to get a sense if there is some growth happening there as well? Or is it all outside of the Quebec market?

[Carl Goyette, executive]

We changed the -- we're providing you with the 52 weeks that is giving you an indication, right? We just don't want to send these calls with your investment data. But you saw the 52-week number go up a little bit, right? So that's an indication that market share is indeed growing.

[Operator]

Our next question comes from the line of Amr Ezzat from Echelon Partners.

[Amr Ezzat, analyst]

I just want to follow-up on the distribution partner discussion. I mean, last quarter, you guys spoke to expect inventory that can be depleted through Q1. And now the language that I'm hearing is a transition year. I'm just wondering, that excess inventory, is that all behind you now? Or it's hard to tell the inventory levels within your distribution partners' network?

[Carl Goyette, executive]

Yes. There's a portion that in full transparency, it's hard to tell because we don't -- obviously, we don't know exactly what the next weeks will -- because it's our first focus in April, and we have plenty of activity supported by market. We don't know how big the sales are going to be in the next few months. So we know we have enough inventory to go through this, right? Obviously, that's part of the question. Transition year. I think it's more about establishing the baseline Amr, right?

It's about saying what the 2 new baseline. We don't have full visibility on 11 -- PepsiCo has 11 hubs throughout the country with many SKUs, right? And it's a little bit different versus when all this inventory was sitting on our own warehouses, and we knew exactly what we were shipping to every single distributor, right? So that's what we mean by transition year, right? It doesn't mean it's not negative in any way. It's more -- we're learning to work together.

So it's hard to know the level of inventory versus shipments and how many weeks do we have now versus how many weeks we had before, right? Obviously, as we mentioned, Q1 was impacted by Omicron, right? We -- I think if it wasn't Omicron, everybody would agree that we would have had a better quarter if it wasn't for those restrictions. I think that's not a surprise, right? But now these restrictions are lifted. We have outstanding distribution, and we have outstanding market in coming on board, right, which means we think the shipments will be much higher over the next few weeks.

[Amr Ezzat, analyst]

Okay. Now that's very helpful color. And I fully understood. I mean, now here another one that's also hard to quantify that maybe you could give your best estimate on like how much of an impact Omicron has on your 22% year-on-year volume growth?

[Carl Goyette, executive]

Yes. It's hard to put number on this, right? It's hard to put a number, but we know that wasn't -- for example, we know we're the #1 brand with the 18 to 25 in Quebec right, in our strongest market. And we know that most of those people, they're going to school, right? And they stop going to school, they're studying from their basement. There was no Christmas party. There was no end of year university parties. There was no real celebration throughout the year. There was no going back to University in January.

That's just one example, right, of an impact. So if you think of all the restrictions with our kind of going against the occasions where you normally would expect someone to consume an energy drink. You say, well, yes, that's impactful and it's more impactful for us because we're targeting a different consumer, right? Our consumer is white-collar, typically working from home or studying in university. It's not the typical blue-collar working on construction sites or working outside of home. So we know that this has a bigger impact on us, but it's hard to really tell you, well, what would our growth would have been if it wasn't for that. I wish I could. I just can't.

[Amr Ezzat, analyst]

Well, I mean another way to look at it is maybe or to imply that number, if we look at Quebec sales, excluding Guayusa and I assume that year-on-year number is probably like lower than what you typically report. And I know you don't disclose this data much.

[Carl Goyette, executive]

Yes. It would be one way to look at this. At the same time, Guayusa has done so well, right? We know that we gained market share with Guayusa, but we also have plenty of green consumers, right? We tried to use the first time and actually loving it. Because there is a portion of cannibalization in Guayusa, but we also sought an outstanding like as expected, right, we wouldn't expect to launch a new GURU product and not have any GURU consumers like the new products, right? Some people are actually loving the GURU's more than the other one, which is fine, right, which is perfect. But it's overall, very positive for the brand.

There was a huge halo effect from that marketing campaign on the brand overall, also pointing towards the right direction. But yes. It's one way to look at it, but I don't think it would be necessarily the best way to look at it in [ full transparency ], say, okay, how do we incur your sales excluding Guayusa and Guayusa also would have done even better if it wasn't for Omicron. We would have done more samplings. We would have more activities, there would have been more word of mouth in universities and during activities. So [ that’s another ] situation for us, but...

[Amr Ezzat, analyst]

No, no, your point well-taken, and that's fair. Then maybe on Guayusa, I'm not sure if you've got a market share number to share with us like you shared that December 1, you guys have data post December, and I know there was a big halo effect like you mentioned, then like for the Guayusa launch in the rest of Canada, is there a Guayusa specific marketing campaign with the strategy there for the rest of Canada to support the overall brand?

[Carl Goyette, executive]

Yes. So there's 2 questions. What we're giving you in terms of Guayusa, we're giving you the ranking, right, which is outstanding, Guayusa is still ranking as the #6 SKU in the total category, which is very high. We decided -- we gave you the number last quarter at 3.5%. Again, we don't want to be spending all our time giving you specific Nielsen data by SKU. So we're not giving you that, but it's still ranking very high and it still has a big market share. That's one, right?

Now the second part of your question around the support -- the marketing support, the marketing support will be different. It will feature Guayusa on the forefront. But it's more of a -- that's what we call the botanical campaign, right? It's a campaign that's seen as maiden plan. It's going to be putting more emphasis on our botanical SKU, right?

So this is what I mentioned in the call, the Matcha, the Yerba Mate and the Guayusa, Guayusa will be at the forefront. But this is more of a total brand campaign, right, to make sure that consumers outside the Quebec understand that like really the product USP, which is about making sure that people understand that GURU is organic, made with plant-based ingredients, healthy, better for you, really have the foundation for our brand.

Before we move on to more of the lifestyle marketing and the values of the brand, we first need to solidify the foundation that this is a better-for-you plant-based product. And using our botanical SKUs, so this is the right approach, right in the beginning. So that's what we're doing over the next few weeks, 2 months. Does that answer your question?

[Amr Ezzat, analyst]

Yes, yes. It answers both of my questions. Maybe one last housekeeping one for Ingy. On the marketing spend, you mentioned in your MD&A in your prepared remarks, but it was obviously tempered what you call with Omicron. So is it fair to assume going forward your Q4 level of SG&A, which was $10-ish million that would be a good number to use?

[Ingy Sarraf, executive]

Sorry, you cut -- sorry, what were you saying?

[Amr Ezzat, analyst]

Sorry.

[Ingy Sarraf, executive]

Would it be a fair number to use?

[Amr Ezzat, analyst]

$10-ish million, which is what you guys spent in your fiscal Q4?

[Ingy Sarraf, executive]

Yes. Yes, because we spent a bit less in Q1. Like we said the overall full year makes sense, right?

[Amr Ezzat, analyst]

Yes.

[Ingy Sarraf, executive]

So yes, it will be more spent in Q2.

[Operator]

Our next question comes from the line of John Zamparo from CIBC.

[John Zamparo, analyst]

I wanted to start on fuel prices. And we've all seen the change over the past few weeks. And I wonder if you've seen any impact looking at your C-stores that offer fuel versus C-stores that don't, have you seen any change in sales velocity over the past month or so?

[Ingy Sarraf, executive]

Yes. Do you want me to take this one?

[Carl Goyette, executive]

Yes. Do you want to take that?

[Ingy Sarraf, executive]

Yes, yes.

[Carl Goyette, executive]

Go ahead.

[Ingy Sarraf, executive]

Okay. I will. So no, we haven't actually seen any change in -- actually, traffic is back to same period last year level. So we are seeing people going -- starting to go back to the office. So it's not impacting us in a negative standpoint right now.

[Carl Goyette, executive]

Yes. I would add that talking to some industry experts over the last week, there obviously, the convenience channel is looking at this even more than we are looking at it. We are looking at this more as the weeks ahead being the strongest. The month ahead strongest from a seasonality point of view. Even there was an article in the convenience store association yesterday about the time change, which increases the consumption of energy drinks and capping because people lose an hour of sleep. And then there was also an industry expert saying that historically, in periods of inflation, recession, higher fuel prices, convenience stores have done well. I think the consumers are actually buying themselves a little treat, right? And they're getting on the bigger ticket items. But the article for the products you can find in convenience stores are kind of the middle bars of the everyday, which don't tend to suffer in those periods. Is that helpful, John?

[John Zamparo, analyst]

Yes, that's helpful. I wanted to move back to the commodity side and in particular on aluminum. So I appreciate the commentary on availability, but I wonder when this might impact your margins. I mean the commodity is up 60% year-over-year. So I can understand if you can get hedged to this point. But I wonder, is there some reason it won't become a cost headwind at some point? And can you quantify what percent of your cost of goods are aluminum costs?

[Ingy Sarraf, executive]

Yes. So like you said in the beginning and for now, for us, it's not impacting our COGS too much the aluminum cost increase because of the way we work with our co-packers because of the variety of co-packers we have and the agreements we have in place. However, it's true that at some point, it will impact -- if the product cost continues to rise and aluminum cost continues to rise, it will at some point, not in the next few months. But of course, later on, it might.

Now what's mostly impacting us, like we said, is really transport. And this is what we're seeing because this is something that like punctual and that happened right away, impacts us right away. So that's what we're seeing. And like I mentioned before, what we're seeing is the COGS as part of the gross margin decline, we see that it's now 1.5 points versus one in the previous quarter, and it could potentially hit by an incremental 1 point in the coming quarters as well.

[John Zamparo, analyst]

Right. Okay. And…

[Carl Goyette, executive]

Maybe John, we can get back to you at some point on -- I don't know this answer top of my mind like what's the actual percentage of the aluminum cost in our COGS. We have that number somewhere, but it's not a big proportion, like, it's not the biggest proportion. As Ingy said, what's impacting is more now is transportation. Obviously if aluminum costs keep going up, it could have an impact at some point, but it's not over the next few weeks, few months, right? It's more over the long term. We can get back to you if we can be more precise on the percentage of COGS related to the actual cost of the can.

[John Zamparo, analyst]

Okay. Yes, that works. And getting back to Guayusa, do you have a way of measuring incrementality and do you think the bigger benefit is frequency among existing consumers or catching the eye of new consumers and introducing them to the brand?

[Carl Goyette, executive]

I don't know what the -- what we know is that innovation is important in this industry, right? And there are several elements why, right? We spoke a lot about the halo effect. For us, that's the biggest benefit. Every time we launch a new innovation, it tells the story of the brand. Maybe it tells the story that we make these products with plant-based organic energy. That's the #1. And every time we launch an innovation, it benefits the whole brand. So that's #1, right?

Second, there's obviously shelf presence. Like, there's no doubt that more SKUs gives you more shelf presence, which in turn grabs more of the consumers' attention, right, especially if you're launching bright, yellow, orangy can that stands out, right, it does help. It allows you to implement new promotions, it gives you a reason to talk about your brand. It allows you to build more displays because you have a new thing. So there is slight benefits to that as well, right?

Now the whole thing around incrementality takes time. It really does take time, and it's more than a few weeks, 3 months because we really have to look at, okay, you basically need to go down and dive into consumer data, not scanned data, but consumer data and say, okay, which portion of the Guayusa consumers are actually ex-GURU Original or GURU Lite consumers and which portion is actually ex-Redbull and Monster consumers or which ones are new to brand, right? And it takes time to do this. You can't look at this in the first few weeks and say, "Oh, because so many people are trying it in the beginning." But it really -- it's over time that you realize if your innovations are working or not, right?

And so far, we've been very good at this. If you look at our track record. Our last 3 innovations have done extremely well, which means we have this great platform for innovation that works and supports the whole brand instead of just introducing a new strawberry or cotton candy flavor, right, which is not what we do.

[John Zamparo, analyst]

Right. Okay. Go ahead.

[Ingy Sarraf, executive]

I was just going to add a small thing that, of course, flavor was also key. And for me, I know Carl knows, but Guayusa is my new favorite. So for sure introducing it to new people. So I believe that it will be a great success.

[Carl Goyette, executive]

Yes. Okay. So that -- I agree with that. I think the one -- I think the biggest success is to make those products with plant-based organic ingredients, but products that actually tastes great, right? And that's probably the big thing that Guayusa, that the really consumers are overwhelmingly telling us that the product tastes fantastic. So there is a strong repeat base.

So they -- not only do they love the brand, they love the story, they love the ingredient, but they also fall in love with the taste, which is a key driver whenever we do consumer research. Taste is always coming up in the first criteria for selection of an energy drink, right? So I don't want to underplay flavor, but I want to say there has to be more than just a new flavor, right? There are some other brands are doing this much more than we do and they're launching a new flavor every week, and that's not what we do, right?

[John Zamparo, analyst]

Got it. Okay. That's all helpful. And then one last one. If you take a step back, what have you learned or what are you learning from the PepsiCo deal that you hadn't expected now that you're a few months into it?

[Carl Goyette, executive]

We learned that they can be much faster in distribution than we expected, right? I mean, I would not have expected to be on the verge of hitting 90%, 90% ACV and 70% Grocery Drug Mass, if you would have asked me a few months ago, right? So which is outstanding. Now what we need -- everything else was planned, the margin reduction, which might be perceived as important to many of you and for us, also important, was expected and planned, and we did that for the good reason. We're saving a lot of cost on the other side, right? We don't have to have the same level of sales force. We don't have to have a fleet. We don't have to have the same warehousing, right? So we're confident that this was the right -- very much the right thing to do.

Now this distribution gain, we need to -- it just puts emphasis even more and why we need to invest in marketing to support this outstanding opportunity that we have now to transform this distribution and gain velocity and market share with those new points of sales, right? So that's the key focus right now. It's marketing to grow these points of sales and grow the sales there.

[Operator]

At this time, I'm showing no further questions. I would like to turn the call back over to Carl Goyette for closing remarks.

[Carl Goyette, executive]

Well, I just want to thank everyone for attending. It's been a great call, and looking forward to talk to you again soon. Have a great day.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.