Guru Organic Energy Corp

TSX:GURU

Earnings Call Analysis

GURU Organic's Q1 Revenue Soars, Margins Steady

In the first quarter of 2024, GURU Organic Energy Corp achieved a notable revenue increase of 43% to $7.1 million, marking a consistent growth trend. Sales in Canada and the U.S. were up by 35% and 87%, respectively, largely due to strategic online sales optimization and strong retail performance. Gross profit rose to $3.8 million with a marginal gross margin decline to 52.9%, from 53.7% the preceding year. Selling and marketing efforts intensified, particularly through social media, yet operational efficiency was evidenced by a reduced net loss of $1.9 million compared to $2.6 million in the previous year. With a reinforced balance sheet, showing $31.2 million in liquidity, and a focus on innovation and smart investment, GURU Organic is committed to scaling its market share and advancing towards profitability.

Robust Revenue Growth and Market Expansion

The company has reported notable success in its recent performance, with net revenues growing by a significant 43% year-over-year, reaching $7.1 million in Q1. This achievement is highlighted by a 35% growth in Canada attributed to increased sales velocity and an impressive 87% growth in the U.S., thanks to effective online sales and retail expansion. The company's focus on market share is evident in their effort to break through outside of Quebec and disciplined investment in core retail sales channels, online platforms, and wholesale club channels which show potential for considerable uplift in revenue.

Financial Health and Strategic Direction

The company's financial discipline is paying off with a decrease in net loss to $1.9 million from $2.6 million in the same period last year and a lowered adjusted EBITDA loss. This commitment to fiscal responsibility is coupled with a healthy cash, cash equivalents, and short-term investments balance of $31.2 million. Sales and marketing strategies are being refined, with an emphasis on return on investment and urban areas where the brand resonates strongest. Additionally, the introduction of the new Zero Sugar energy drink line and focus punch line reflects a strategic response to consumer insights and industry trends.

Canadian Sales Surge and U.S. Market Prospects

The consolidated sales figures show a precise increment of 28% in Canada, aligning closely with consumption levels. This positive trend is expected to sustain with the company's guidance indicating around 25% growth moving forward. The U.S. market also holds promise, particularly with the initiation of the GURU brand in the Pepsico distribution system, potentially leading the company to a strong future position in North America.

Efficiency in Operations and Cost Control

Operational efficiency remains a top priority, with the company successfully maintaining stable input costs and benefitting from lower shipping expenses. The seasonal nature of their business is likely to further bolster profit margins. A firm grasp on cost management will be critical as the company continues to invest smartly in growth channels while also ensuring that the sales and marketing spend actually sees a net decrease compared to the previous year.

Innovative Product Development and E-Commerce Growth

Innovation is at the forefront of the company's strategy, with the launch of their Zero lineup catering to consumer demand for Zero Sugar products. The newly launched Zero Sugar product line stands out as it does not contain artificial sweeteners, adhering to the company's commitment to 'clean' energy drinks. This product development is expected to resonate well with health-conscious consumers and aligns with the overall industry shift towards more functional beverages. Moreover, e-commerce operations have been enhanced with investments in a new website, and the company has confirmed that e-commerce sales are margin accretive.

Market Momentum and Share Growth

The company is experiencing slight to moderate market share growth in Quebec and continued momentum in other regions of Canada, with most of the progress concentrated in urban areas and significant sales channels such as grocery, drug, mass, and notable wholesale club outlets like Costco and Amazon. While market share varies and January saw a minor slowdown industry-wide, the company's growth outpaced the industry, demonstrating resilience and strategic acumen in the face of market fluctuations.

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to the Guru Organic Energy First Quarter 2024 Results Conference Call and Webcast, being recorded today, March 14, 2024, at 8:30 a.m. Eastern Time.

[Operator Instructions] GURU's press release, MD&A and financial statements are available in the Investors section of its website and on SEDAR+. 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 will now 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.

For those who are following the webcast, you can turn the presentation to Slide 5. GURU has now achieved a fourth consecutive quarter of top line growth with solid retail channel sales in Q1, lifted by strong momentum online and in club wholesale. For comparison, online and wholesale club markets in the U.S. are each the same size as the Canadian energy drink market. They are a growing proportion of GURU's net revenue with a strong potential for future growth.

Across all 3 of our channels and were available, our latest innovations continue to bear fruit. This is led by our expanding punch line, which is very popular with consumers and will be reinforced by updated brand positioning.

As the year progresses, we will keep focusing on 3 sales channels and leverage our innovation pipeline. We will ensure our sales and marketing investments generate the best return on investment, with the right tactics deployed through the right channels. Our 2024 priorities to grow sales and accelerate our return to profitability remain firmly on track. Net revenue has grown 43% this quarter. Net loss continued to decrease for the fifth quarter in a row over the same period a year ago. This is significant progress.

Turning to Slide 6. Last week, we upgraded our online presence with a new and improved transactional GURU Energy website. This site now offers better user functionality with more interactivity and simplicity. These enhancements are expected to increase consumer conversion. The site also showcases our sleek new can design and emphasizes energy-focused brand features, such as improved focus for our punch line and metabolism boost for our new GURU Zero line. We're happy to provide these additional functionalities to our global consumers.

Turning to Slide 7. In the coming weeks, there will be a lot of activity in Canada. First, in retail, we're introducing Peach Mango Punch across Canada supported by in-store activation initiatives and a punchy marketing campaign. Second, we will be launching the innovation we hinted last quarter. This innovation is our Zero Sugar organic energy drink, the first of our new Zero Sugar metabolism boost product lineup. This drink combines metabolism boost from green tea extracts with a delicious wild berry flavor. We firmly believe that our long-awaited Zero Sugar energy drinks will be welcomed by existing and potential consumers alike. The initial launch planned in the coming weeks will be in Quebec at retail locations and online across Canada.

Looking at the wholesale club channel in Canada, we're extremely proud to have achieved permanent status at Costco and Quebec after successful rotational programs. Now our products will be available on a regular basis. This is a meaning foot in the door at Costco in Canada that hopefully will enable us to potentially breakthrough outside of Quebec.

Still on the topic of wholesale and now turning to the U.S. on Slide 8. Q2 started on a strong note with 2 rotational programs at Costco in Los Angeles and in the Midwest. The first is carrying our 12-can variety pack comprised of Tropical Punch and Food Punch; and the other, our 15 pack -- 15-can variety pack and complete punch lineup, including our Peach Mango Punch. At retail, we began rolling out Peach Mango Punch in natural food stores and other retailers in February. Whole Foods Market will list Tropical Punch nationally in over 500 stores starting in April. This channel has shown consistent growth over the last 52 weeks. We believe that these new launches will boost the momentum and contribute to that growth.

Traction on Amazon.com was particularly impressive last quarter, with an 89% increase in sales. This was mainly fueled by Black Friday, our Food Punch launch and Peach Mango Punch launch, including the variety pack. These launches drove repeat customers and helped us reach record levels of new-to-brand customer acquisition in January, surpassing Black Friday month, and we expect this trend to persist going forward.

I will now turn the call to Ingy to discuss our financial results in more details. Ingy, over to you.

[Ingy Sarraf, executive]

Thank you, Carl, and good morning, everyone. Turning to Slide 10. Net revenue in Q1 increased by 43% year-over-year to $7.1 million. That marks the consecutive quarter of net revenue growth versus a year ago. Sales in Canada grew 35% to $5.7 million, driven by increased sales velocity. In the U.S., sales grew 87% to $1.4 million, driven by ongoing online sales optimization and retail cost. Gross profit increased to $3.8 million from $2.7 million in Q1 2023.

Gross margin was 52.9% compared to 53.7% for the same quarter last year, mainly due to increased promotional activity in Canada, offset by less promotional activity in the U.S. SG&A was $6.1 million compared to $5.7 million in Q1 2023 as a percentage of net revenue, decreased to 85% from 113% in Q1 2023. Selling and marketing expenses increased to $3.3 million from $2.9 million in Q1 2023, as we were more active on social media to promote our brand. Net loss for the first quarter decreased to $1.9 million compared to $2.6 million for the first quarter last year. Adjusted EBITDA amounted to a loss of $2 million compared to a loss of $2.6 million for the same period last year.

As of January 31, 2024, GURU had cash, cash equivalents and short-term investments of $31.2 million and unused credit facilities of another $10 million as we continue to exercise prudent financial management.

Carl, back to you for concluding remarks.

[Carl Goyette, executive]

Thank you, Ingy. Turning to Slide 12. Our positive momentum is carrying into Q2. To stimulate that momentum, we will continue to invest smartly in our core retail sales channel, but also pay attention to our online and wholesale club channels. These 2 additional growth drivers have remarkable upside potential, have boosted strong sales performance and could become very significant to our revenue. As such, they deserve our attention.

The bulk of our marketing spend will continue to be allocated to retail, in particular, in the urban areas where our brand resonates most. But as previously discussed, we will be extremely disciplined and selective in our investments in this channel by favoring a return on investment. Our innovation pipeline and new release products will also remain a priority for us, such as our focus punch line and our new metabolism boost Zero Sugar energy drink line. By increasing our flavor variety and emphasizing our good energy brand image, we hope to attract and switch more artificial energy drink consumers to the better-for-you GURU brand.

As we are pursuing our growth strategy, we're also working on reducing costs and accelerating our return to profitability in the coming years. In the next few quarters, we will continue to deploy our good energy strategically through actions we think will best connect with our target consumers. This will help us increase our North American market share gradually on our mission to clean up the energy drink industry.

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

[Operator]

[Operator Instructions] The first question comes from Martin Landry from Stifel.

[Martin Landry, analyst]

My first question, I want to talk about your revenues in Canada. There is a bit of noise in your shipments on a year-over-year basis. So I was wondering if we could focus on sales at retail to get a better picture. You gave us your [ scanned data ] for the last 12 months. I think they're up 8% year-over-year in Canada. I was wondering if you could give us the [ scanned data ] for the quarter?

[Carl Goyette, executive]

Yes, I can do that, Martin. If you remember, like we talked on the last call, looking only at [ scanned data ] could be misleading if you will only get the Nielsen because there are some [ untracked ] channels that are growing fast, including Costco, including Dollarama and also online, right? So when we make those calculations, we end up to have growth of consumption over the last quarter of around 25%, 28% in Canada.

[Martin Landry, analyst]

Okay. So what you're saying is if we include your scan in the measured channel, plus your sales in non-measured channels plus online sales, that would amount to an increase of 25% year-over-year in Canada for the quarter?

[Carl Goyette, executive]

Yes. 28%, if you want to be precise. There's obviously a little bit of the calculations here, but you're close to 25%, 28%.

[Martin Landry, analyst]

Okay. Okay. But -- so then the question is, if we normalize your shipments, does that mean that your inventory at PepsiCo has drawn down a little bit? How should we read your inventory levels at PepsiCo?

[Carl Goyette, executive]

Ingy, do you want to take one? I know you made those calculations to normalize everything.

[Ingy Sarraf, executive]

Yes, for the growth of our net revenues, well, it aligns actually very closely and perfectly with the consumption levels. So if you normalize all that, our growth would be around 25%.

[Carl Goyette, executive]

That's for Canada.

[Ingy Sarraf, executive]

Yes. Well for -- yes, total as well.

[Martin Landry, analyst]

So let's just focus on Canada, though, because the Pepsi impact was only in Canada. So...

[Ingy Sarraf, executive]

For the retail part, right.

[Martin Landry, analyst]

Yes. I was -- so I understand that the Nielsen, like the retail sales in Canada, including all channels are up 28%. So I was trying to understand your shipments in Canada when they're normalized.

[Ingy Sarraf, executive]

So if we look just at Canada alone for our net revenues from a retail standpoint, it would be up 20%. And this is where we see -- yes, so this is where we see the promotional activity coming into play. That's being reflected in our gross margin as well, yes.

[Martin Landry, analyst]

Okay. And then spring is usually the period when retailers are doing their planogram reset. Carl, I was wondering if you could talk a little bit about how this new season is looking like for you in terms of shelf space at the retailers that have done their reset?

[Carl Goyette, executive]

And that's specifically to Canada, Martin, or it's both countries?

[Martin Landry, analyst]

Yes. Yes. Yes, we could focus on Canada.

[Carl Goyette, executive]

Okay. Well, in Canada, as you know, the distribution and convenience is fairly complete. Like we're present in all the major grocery banner -- convenience and gas banner. So there's not a lot of room to grow from a -- purely from a new banner point of view, but there's still a lot of room to grow from new innovations that are launching. So gaining phasings, also a lot of room to grow within the store as our reps -- the PepsiCo reps go in and take some more space in the flex space, install displays and install fridges. So it's more about optimization of the execution in convenience and gas.

In the grocery channel and drug, mass, there's still more room to grow. There are some banners that we are listing in. For example, we're listing in new banners. We're optimizing new listings. For example, there are some grocery banners that only have 2 [indiscernible] where we're listing our new innovations from last year to this -- including this year. So I would say that there is more room to grow in grocery, drug, mass purely from a distribution point of view, but there are some optimization and improvements in execution that can be done in both channels for sure.

[Martin Landry, analyst]

Okay. And can you talk a little bit about your all commodity volume and your weighted distribution in the grocery, drug and mass right now? What is it at?

[Carl Goyette, executive]

Yes. So convenience and gas is close to -- it's in the 90s, and grocery, drug, mass is more in the 70%, right? So -- and it varies by SKU and stuff. So there is much more room to grow in grocery, drug, mass.

[Martin Landry, analyst]

Okay. And last question for me. Just on -- you mentioned, Carl, that Q2 seems like the momentum is continuing into Q2. Is this in Canada as well? Or yes, just clarity on that comment.

[Carl Goyette, executive]

Yes, absolutely. Right, spring is always a good period for us. And this is the period we're launching our innovations. And as we spoke in the past, innovations are really driving the growth. Somehow, the fall month or the winter months are always lower for us, not just from a seasonality point of view. We spoke about that last quarter. It seems like our product is a little bit -- or our consumer is a little bit more seasonal and a little bit more occasional. But in the spring and in the summer when our new innovations are coming out, they consume more. So if you look at the past few years, our scanned data or retail sales have been always higher in the spring and summer months. So yes, momentum continues, especially with 2 innovations launching in Quebec, we're very optimistic.

[Operator]

The next question comes from John Zamparo with CIBC.

[John Zamparo, analyst]

I wanted to start on your new SKU. And I wonder, can you talk about the timing of the launch across different channels and across different countries? When are we going to see this in all your various channels in Canada and U.S.?

[Carl Goyette, executive]

Well, I'm going to start by saying it's going to be launching next month in Quebec only, right? The rest is still [ TBD ]. So I can't tell you exactly when. There is negotiations going on right now on when this could be launching, both in the U.S. and in Canada. Obviously, easy to launch online. It's launching online as well. Yes. So more to come on that, John. But it's like I think the bulk of our volume will be in the short term or be in Quebec or it's launching in a Pepsico distribution system.

[John Zamparo, analyst]

Okay. Understood. And I wonder what led to the launch of this SKU? Is there some consumer insights you are looking at that led you to want to deviate a bit from your prior product portfolio? And are you contemplating more SKUs similar to this one?

[Carl Goyette, executive]

Yes. This is the first of our Zero lineup. So yes, we are contemplating more SKUs. There are very clear trends that lead to Zero Sugar products. I think this is across the industry, but also more functionality, right? So this is something that's been in the works for us for a long time. We worked on the R&D and development side to make sure that we could launch a Zero Sugar product that does not contain any artificial sweeteners because that's against our values and against what we do. But we now have a great tasting Zero Sugar product that also has additional functionality. So consumer insights are very, very clear. Category trends are also very, very clear, and it just allows us to dial up energy, dial up flavor, dial up functionality. So it's very much aligned with trends and where our brand is going.

[John Zamparo, analyst]

Okay. That's helpful. I wanted to get to your e-com business. If you want to sustain the pace of growth that you've reached to this point, are there incremental costs you'd need to incur to continue that?

[Ingy Sarraf, executive]

No. It would be ongoing -- continuously ongoing media spend and optimizing our system. But there is no additional fixed costs or anything incremental specifically to be done.

[Carl Goyette, executive]

No. I would just add that we just invested in the new website to optimize that. So that's an investment we've made in the past, which will reap benefit in the future. But go on with your follow-up question, John, for Ingy is our specialist.

[John Zamparo, analyst]

I was going to ask, are we right to assume that those sales are at least margin neutral, if not margin accretive overall?

[Ingy Sarraf, executive]

Yes. You are right.

[John Zamparo, analyst]

Okay. And then lastly, on SG&A, or specifically, I guess, sales and marketing, can you give a range of spending for this year? I mean I think about this in 2 ways, you're trying to spend to spur more growth, but at the same time on previous calls, you talked about finding some efficiencies and focusing more on ROI of sales and marketing spend. So I wonder if you could just give some goalposts of what the net increase might be on a dollar basis this year versus last year?

[Ingy Sarraf, executive]

Yes, for sure. So from a net basis, on a total standpoint for the year, it will actually be a decrease versus last year. But of course, between quarters, this is where we'll fluctuate and like Carl had just mentioned, right, we're launching 2 new innovations this quarter. So of course, our Q2, Q3 is where we're launching this and there's also the brand revitalization that's coming into play. This is where you see it a bit peaking. But overall, you'll see a decline. Is that helpful?

[John Zamparo, analyst]

All right, that's helpful. Yes, that's helpful. I'll leave it there.

[Operator]

The next question comes from Sean McGowan with ROTH MKM.

[Sean McGowan, analyst]

Can you add, Carl, any comments on market share in various regions and any trends that you can share with us there?

[Carl Goyette, executive]

Yes. Momentum, I think from -- we're looking at it from -- if you look overall, market share, there's slight growth, moderate growth in Quebec over the last few weeks, few months. Momentum continues in the rest of Canada. But as I said in my remarks, the momentum that we're seeing is mainly in urban areas, and it's driven mainly by grocery, drug, mass. So that's really what we're seeing them as more experience within the Canadian market, especially in English Canada. It's becoming more and more clear that urban area, like Toronto and Vancouver, especially in the grocery, drug, mass is where we're seeing momentum for the right consumer for our brand.

So obviously, when we look at the return on investment, we can expect us to put more focus there. The exciting piece also is the momentum that we're seeing, obviously, with Costco both in Canada and in the U.S., but also what we're seeing on Amazon, right? So there's that, that is exciting for us for the future prospects.

[Sean McGowan, analyst]

Okay. Yes, some of the other energy drink companies that talked to you made this comment and you can even see it in the Nielsen data for U.S., there was maybe a bit of a slowdown in the month of January and picked back up in February. Did you see any of that in your markets?

[Carl Goyette, executive]

Yes. We saw a bit of a slowdown on the industry in January. That's not -- maybe a little bit more than previous year. But January was a better month for us, right? So we grew faster than the industry. For us, we had slower growth, as we discussed last quarter in the fall. Like last year, mainly due to price competition and changes in behaviors around December and November. But now we're confident we're back to growing much faster than the industry.

[Sean McGowan, analyst]

Okay. That's helpful. And Ingy, you commented on the gross margin being impacted by promotional spending, but are there any crosscurrents or tail or headwinds regarding input costs, like you're still getting a benefit from lower shipping? Or are there any offsets to that?

[Ingy Sarraf, executive]

Yes. Exactly, Sean. There's no -- it's actually pretty stable for us from a shipping standpoint and from all the other cost standpoint for now. So that's very good news. And we're also going in to drive season. So even from a transport standpoint, it's even less expensive. So it's a good news overall from a cost standpoint.

[Sean McGowan, analyst]

Okay. Great. And last question I have, what portion of your total sales at this point, can you share is in the wholesale clubs? And are you in clubs other than Costco?

[Carl Goyette, executive]

I don't know that number by heart, Sean. Maybe Ingy has. We've never disclosed this. I would -- in Quebec, it's starting to be significant, right, because we're permanent in Costco, right? So we're starting to be more significant in Quebec. Then obviously, if you look at it -- if you looked at it this month in the U.S. because we're in 2 rotational programs at the same time in the Midwest and L.A., it would be a larger proportion of our sales. But then as you know, this will fluctuate from month to month because obviously, we're confident and hopeful that we will get other rotations. But we could have months in the U.S. where we had zero sales in the club and then have months where we have a few regions altogether, right? So it will fluctuate a lot.

But Ingy, I don't know if you have anything more precise to share.

[Ingy Sarraf, executive]

No, no. It's really in Q1, we had a bit because it's really starting in Q2 with Midwest and L.A. So this is where you see the big bump up in proportion as well. So in Q1, I wouldn't say significant yet. It's really in Q1...

[Sean McGowan, analyst]

And are you in any of the clubs other than Costco?

[Carl Goyette, executive]

No.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Carl Goyette for any closing remarks.

[Carl Goyette, executive]

Thanks, everyone, for attending. Have a great day.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.