Guru Organic Energy Corp

TSX:GURU

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to the GURU Organic Energy Third Quarter Fiscal 2022 Results Conference Call and Webcast, being recorded today, September 14, 2022, at 10:00 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 that 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. Good morning, everyone, and welcome to our earnings call. Joining me this morning is our CFO, Ingy Sarraf. This past quarter, we continued to execute on our strategy to replicate our success in Quebec across Canada and more selectively, into the United States. At the risk of being cliché, this is a marathon, not a sprint. There's a long process built with hard work, small wins and often, challenges, but we're already starting to make headway.

Consumer scan data in Canada has shown strong year-over-year sales increases of more than 35% for the last few months. In parallel, our retail internal shipments in Canada increased by 12% in the 3 months ended July 31 compared to the same period last year. This 23% gap between consumer purchases in our shipments can be mainly explained by inventory depletion at retail and industry-wide labor and logistics disruption.

We're confident that in the future, growth in shipments will return to similar growth levels as consumer scan data. Despite this growth in shipments, net revenues contracted this quarter versus the same quarter last year as a result of our new distribution and sales model in Canada. We have a strong distribution partner that is committed to Google in Canada and is as confident as ever in our go-to-market plans, our in-store marketing activities and hence, our ability to meet consumer demand. Fortunately, our sector-leading gross margins of over 54% remain steady as we continue our careful supply chain management and prudent pricing practices with no issues from a raw material procurement perspective. In terms of product pricing, these are being accepted by consumers as we keep pace with the category. During Q3, we ran our coast-to-coast good energy for the everyday marketing campaign, our largest Canadian campaign to date.

It featured a strong mix of out-of-home, TV and digital elements. In addition, the campaign included one of our most comprehensive summer sponsorship and sampling program with over 30 events from May to September across Canada to support our rapid and national distribution in retail. We are also an official sponsor of CTV's The Amazing Race, the most watched summer series. As mentioned previously, consumer purchase scan data showed strong year-over-year sales increases of over 35% this summer. Select Canadian retailers outside of Quebec, primarily in urban areas, where our consumers were targeted by our marketing campaigns, are beginning to report increases in market share. Some urban banners are even exceeding 3%, sometimes placing GURU as the #4 energy drink brand. This is consistent with our path to growth in Quebec, which led us today to the #2 position in the leading Quebec grocery banner, reaching over 22% market share.

Out West, our distribution partner is now outstanding forecast, which is a strong indicator of increased brand awareness and conversion, translating into shipments. As with previous campaigns, we ran another round of research, the most significant to date, including a sample of 4,000 consumers in English Canada. Not only are these results positive but also confirm our strategy and the momentum we're starting to see in consumer scan data. In the results, we saw significant improvement in GURU brand conversion in English Canada, reaching 4% consumer share. In our primary consumer segment, we are seeing improved awareness at 31% and a conversion to regular consumption at 6% consumer share. Like in Quebec, the GURU brand in English Canada is growing the [indiscernible] by attracting new consumers to the energy drink industry.

The goal of our marketing efforts has been to communicate the GURU brand's unique positioning for its progressive consumers, and we are pleased to see that the consumer understands our strongly differentiated product and brand positioning. Most importantly, the benefits of the sequential market research reports are that they provide us key insights on drivers of awareness, trial and conversion that will allow us to refine and optimize our marketing investments in the future. After quarter end, we continued our marketing investment. We announced our first major sports partnership and became the exclusive energy drink, for the Canadian Elite Basketball League championship weekend in Ottawa. The partnership included a comprehensive media plan that consisted of advertising and fun-filled activation opportunities.

Then, just this month, we launched our back to reality national marketing campaign, which is aimed at bringing good energy to progressive urban consumers across Canada through the fall. In Quebec, this includes our latest seasonal launch with Occupation DoubleTV reality show, a long-standing sponsorship relationship, which continues to serve us well in this market. U.S. performance held steady during the quarter as we continue to hold the #1 energy drink position in the natural sector in California. According to SPINS, which measures GURU's U.S. consumer scan data, we experienced 23% growth in California in Q3 2022 versus Q3 2021, showing continued strength in the U.S. market. We are also aiming to expand our distribution network in that space as the California lifestyle and progressive value is the perfect match for our brand and target audience. In alignment with this, we are participating in a 12-week Costco California roadshow.

While it's still early in the program, consumer response and sales have been very positive. In August, we launched our Guayusa Tropical Punch and targeted banners in the U.S., including the Costco roadshow as of last week. Many more banners will be launching next spring, during planogram reset period. These activities are being undertaken to replicate the success of what is today the #1 ranked in 2022 innovations in Quebec. As for online, we continue to show strong sales performance and over 50% growth in the quarter compared to the same period last year. To improve profitability in the segment, we've reduced our investments in consumer acquisition. I will now turn the call to Ingy, who will provide you with more details on our Q3 results. Ingy, over to you.

[Ingy Sarraf, executive]

Thank you, Carl, and good morning, everyone. I'll begin with net revenue for the quarter, which was $7.7 million compared to $8 million for the same 3 months in 2021. Despite the lower revenue, shipment volume for the quarter increased by 14% from the same quarter a year ago due to higher velocity and increased points of sale in Canada. As such, the decline in quarterly revenue is attributed to the change in our business model in Canada as well as industry-wide labor shortages and logistics constraints. For the 9-month period, net revenue increased by 3% to $22.3 million from $21.7 million for the same period in 2021 as overall shipment volume grew by 20%. U.S. sales were $1 million in Q3 2022 compared to $1.1 million in the same quarter in 2021. For the third quarter, gross profit totaled $4.2 million compared to $5 million last year, and gross margin was 54.8% in Q3 2022 compared to 62.6% in Q3 2021.

For the 9-month period, gross profit totaled $12.2 million for 2022 compared to $13.6 million for fiscal 2021. While gross margin for the 9-month period was 54.5% in 2022 compared to 62.5% in 2021. The year-over-year decrease in gross margin was anticipated due to the change in our Canadian distribution, sales and merchandising model and a comp price, distribution, selling and merchandising fee, a portion of which was previously categorized as SG&A expenses. Gross margin was also slightly impacted by higher product costs, driven by inflationary pressures on input and transportation costs. SG&A was $11 million for the third quarter of fiscal 2022 compared to $7.2 million for the same period in fiscal 2021. In Q3 2022, selling and marketing expenses accounted for 76% or $8.5 million of the SG&A.

We will continue to invest in our brands moving forward while optimizing spends based on market research insights mentioned by Carl earlier, to return to profitability. Adjusted EBITDA was a loss of $6.5 million for the quarter compared to a loss of $2 million for the same 3-month period in the previous year. The decline was largely a result of higher selling and marketing expenses and to a lesser extent, lower gross margins as it played above. Net loss for the quarter totaled $6.5 million or $0.20 per share compared to a net loss of $2 million or $0.07 per share for the same period a year ago. The increase in net loss reflects the lower margins and the additional costs associated with the brand, field and trade marketing activities. Just before the end of the quarter, on July 21, we announced our intention to enter a normal course issuer bid. The NCIB began July 25, 2022, and runs for 1 year.

The NCIB allows for the purchase for cancellation of up to 500,000 shares, which represents about 1.5% of our shares outstanding as of July 14, 2022. To date, we've purchased 8,460 shares under the program. While our capital will continue to be primarily aimed at growing our market share to generate sustainable long-term growth, having an NCIB program in place provides us with flexibility to repurchase shares on an opportunistic basis. As of July 31, 2022, our financial condition was very strong with cash and cash equivalents and short-term investments of $48 million and unused credit facilities totaling about $10 million. This will allow us to continue to pursue our growth objectives and the related investments required for our client return to profitability. Carl, back to you for your concluding remarks.

[Carl Goyette, executive]

Thank you, Ingy. While we are enthusiastic by the results we are seeing so far, we recognize more work is required. We do not believe GURU's revenue or sales volume is anywhere close to being normalized. As such, in a transition year for GURU and the current economic concept, we are working very closely with our distribution and retail partners to improve retail availability and execution. With all this in mind, we have great confidence in our game plan and our differentiated brand. These short-term pains do not change our long-term game plan and ambition. Finally, we are proud that GURU is the fastest-growing energy drink brand in Canada for the last 18 consecutive months.

To support that strong position, we, together with our distribution partners, are fully committed to executing well at store level as well as making the right investments in sales and marketing to increase awareness and conversion to drive growth with a clear path to return to profitability. This concludes our formal remarks.

I will now turn the call over to the operator for the Q&A.

[Operator]

[Operator Instructions] And our first question will come from Martin Landry of Stifel.

[Martin Landry, analyst]

So my first question would be on, you're discussing that you've had a couple of out of stock positions during the quarter, I was wondering, when did you realize that your inventory was getting depleted and you had more and more out of stocks? And what actions did you take to resolve the situation during the quarter?

[Carl Goyette, executive]

We started to realize this over the course of beginning of the summer. I would say when seasonality started peaking, that's when we saw this situation is mainly in Quebec, where labor shortages are a more prevalent. We're still very confident that this is going to be corrected. We just had the 2 best shipments week in Canada since the beginning of our partnership with PepsiCo, so this is a very, very good sign. So yes, we started realizing this in the course of the summer, we put corrective action in place. We've received a strong commitment from our distribution partner that this is well under control now.

[Martin Landry, analyst]

Okay. And so have you put like a plan in place to maybe deal with something like that if it reoccurs?

[Carl Goyette, executive]

Absolutely.

[Martin Landry, analyst]

Okay. And you touched on the brand awareness as a result of your survey. I believe I heard 30%. I was wondering if you can give us some context first. I would assume it's aided brand awareness, and how did that evolve versus your last research surveys?

[Carl Goyette, executive]

Yes. Well, yes, it is. It is aided awareness, Martin. The 31% is with 1 of the 3 main segments that we're targeting. What we're seeing, this is the largest research. Remember, pretty much every quarter, since over the last year, we've been doing these sequential research to understand the results of our marketing. This was the largest to date with 4,000. So it's 4,000 consumers. It's a large sample. We are seeing an acceleration in awareness but also in conversions. So what is encouraging is not only awareness is increasing, we're seeing improvements in considerations, in trial, in conversions to regular and loyalty for the GURU brand. So this is what we're seeing. Awareness is increasing mainly with that segment, although all segments are increasing but not to the same magnitude. Where we're seeing the biggest improvement is conversions down the funnel, which is very encouraging because this is also what we're seeing in the scan data.

[Martin Landry, analyst]

Okay. Just to be clear, I may have missed this but what segment are we talking about? And can you give us an order of magnitude of the improvement in the brand awareness?

[Carl Goyette, executive]

Yes. Yes, I can. For competitive reasons, I'm not going to disclose specifics around the segmentations because this is really proprietary. It's really something that we own. But we landed 5 different segments of consumers, 3 of which the GURU brand really resonates well with. So obviously, most of our marketing activities are targeted towards those 3 segments. And the improvements we're seeing are with those 3 segments. In total, for example, in total, the awareness has gone. It's increasing by a few points. I think it was 20% in the beginning, moved to 21%, 22%, 23%, it's moving in the right direction. What I'm saying is that the improvements, for example, we've doubled our consumer share. Our consumer share, the bottom funnel used to be 2%, it is now 4% of consumers that are saying GURU is their regular brand.

So that's in total, that improvement is even more significant with one specific segment, which is the primary target for GURU, where awareness is at 31%, and consumer share is at 6%. So 6% of the consumers in that segment are saying that GURU is now their preferred brand or their regular brand. I think the best news, Martin, about this, there's a lot of information in that research. Yes, there are improvements in conversions but I just want to reinforce how good learnings we're seeing in this. We're really getting to understand better our consumers, what's driving trial, what's driving regular purchases down the funnel so that we can optimize our marketing in the future. I'm not sure if you're still there. I don't see your name, Martin, anymore.

[Operator]

No, he has been removed.

[Carl Goyette, executive]

Okay. Maybe he has some other questions. If he wants to lock back in, please allow him.

[Operator]

And our next question will come from Amr Ezzat of Echelon.

[Amr Ezzat, analyst]

It's Amr from Echelon. Carl and Ingy, so if I could just piggyback on Martin's first question on Canada, if I look at just the quarterly performance quarter-over-quarter to exclude the change of business model or distribution model, you're up 24% versus last quarter. Is there a way for you guys to quantify how much the industry-wide labor and logistic constraints you spoke to had on the numbers? Then the second part of that question is, like you spoke to September being very strong but that issue, did it spill over into August? And should we expect, I guess, that to impact fiscal Q4 results as well?

[Carl Goyette, executive]

Yes. Well, the first part of the question, it's extremely hard and it's extremely hard to quantify. I think we're being very transparent with the fact that labor issues have impacted in-store inventories. I think basically, it's very clear when you're seeing that, for example, scan data is up 35%. So this means that 35% more dollars or consumption of GURU has increased by 35% but shipments in Canada are only up 12%. Clearly, this is an indication that there is inventory reduction. So that's really the first piece. The second piece of your question was, can you remind me Amr with the second [indiscernible].

[Amr Ezzat, analyst]

Yes. Would we see like spillover from these issues into your fiscal Q4 results?

[Carl Goyette, executive]

The latest scan data that we have remains very strong. As I said in the beginning of the call, the shipments in the last few weeks have been strong, so this is very reassuring. We're confident that shipments will continue to be strong, so shipments from our main distributor to the retailers will remain very strong towards the end of the year. Seasonality is also not at its peak, so it also helps with making sure that supply can meet demand in the fall. The one thing, Amr, is that without being able to quantify this, like if we would have been in full supply, both the scan data would have been higher in our shipments, it would have been higher. So sales would have been better. That's why we're saying we're all hands on deck on execution and making sure that execution at retail, including shipment is on track, and we expect it to go back. We expect basically shipments to be at least aligned with scan data in the future.

[Amr Ezzat, analyst]

Okay. No, that's very good color, Carl. Then if I turn my attention to the U.S., I do know that last quarter was skewed with Sam's Club program but the $1 million in sales that you guys reported looks pretty sort of flattish relative to the last few quarters, normalizing for Sam's. Can you maybe give us a little detail about what's happening south of the border and what to expect in terms of growth?

[Carl Goyette, executive]

Yes. The reality, Amr, is that we're being methodical. We've been very clear about how focused we would be in California. We are very successful where we are focusing. So where we have focused over the last few months has really been California. It's in the natural channel. And lately, it's been the club channel. And so that's why you mentioned Sam's Club, which had an impact last quarter. We're also doing a new road show in California, which I mentioned in my remarks. So wherever we're focused, the California scan data is up 23%. So there is momentum. Naturally, we're maintaining our #1 position in that channel but with focus, well, the results of focus.

For example, we've had some discussions with some banners where we said, you know what, instead of having national doors, which are unproductive and unprofitable, we are focusing some of those doors with some banners in California to make sure that those are become profitable. We see the velocity increase with those banners by being focused, having store coverage supported by the marketing efforts. Does that help, Amr?

[Amr Ezzat, analyst]

Yes, it helps. We could sort of discuss it more offline but if you'll allow me one more.

[Carl Goyette, executive]

Yes.

[Amr Ezzat, analyst]

There's been a lot of noise on Pepsi's move south of the border with their new partnership in the space. I obviously don't expect you guys to comment on that partnership specifically but as we approach the 1-year anniversary of your partnership, maybe you could sort of update us on how that relationship has been evolving?

[Carl Goyette, executive]

Yes. The relationship is very strong, very healthy. These partnerships that we're hearing just shows, for us, it doesn't change anything. It really doesn't change anything in our plan. It just demonstrates how important this space is for distributors, for retailers, for consumers. Everybody is starting to realize that selling chemicals to consumers is probably not the most sustainable way, so there is an attractive space for better-for-you energy drinks and this is where we play, this is where we're being very focused. Specifically on the PepsiCo relationship, it's strong, it's healthy, it's collaborative. It's a transition year, obviously. So there is a lot of learnings in there but we've been reassured by all the senior people in PepsiCo that this is a partnership that's strong and we have a strong contract with them as well. So there's really no reason for you or investors to worry about that partnership. It's as healthy as ever.

[Operator]

[Operator Instructions] Our next question will come from John Zamparo of CIBC.

[John Zamparo, analyst]

I wanted to start just on a couple of housekeeping items. I may have missed it, so apologies if so. But on the 14% volume growth in the quarter, can you split that between Canada and the U.S? I think you may have mentioned it on the previous answer that Canada was 12% but just wanted to clarify that.

[Carl Goyette, executive]

Yes, Canada was 12%, total 14%.

[John Zamparo, analyst]

Okay. I can do the math on U.S. at that point. The scan data that you shared for Canada, July and August, do you have that for the full quarter?

[Carl Goyette, executive]

Yes, we could have provided roughly the same number. It's a 4-week period. I think August [indiscernible] with 4 periods, I think it was 37%, the month before 35%, I think the month before that, what you're missing is 26% but then the other month before that was 33%. So if you average the last 3 months, if you average the last 4 months, it's around 33%, 34%. Obviously, the last 2 months being the more bigger weighted because they are bigger months but it really is an average of 34%, 33% over the last 4 periods of 4 weeks.

[John Zamparo, analyst]

Okay. Understood. The press release referenced more work on execution and marketing. And you mentioned spending less on customer acquisitions. But I wonder if you can drill down a bit more on that and give some examples of where you'd like to see improvements in the coming quarters?

[Carl Goyette, executive]

Just to make sure we're clear on consumer acquisition was related to online e-commerce specifically, it is not at all to retail. What we mean by execution is, really, we think that in order to be successful in the beverage industry, you need to be doing great marketing, but you also need to make sure that you're available in stores and well executed in stores. And those 2 things need to work at the same time. So now we're seeing good indications that our marketing is working, both from a scan data perspective but also from the research that we mentioned earlier. We are also recognizing that we can execute better at the store level. We think that we need to make sure that we're always in stock, absolutely well executed. And in that sense, this is where we want to put our efforts, and this is where we're working with our partners to make sure that we're as well executed at retail as we are executing in the marketing side.

[John Zamparo, analyst]

Okay. And just to better understand that, is all of that within your control though or is much of that the responsibility of distribution partners or retailers? I'm just trying to get a sense of how much you can control that dynamic.

[Carl Goyette, executive]

Yes. We can certainly influence this. And this is a partnership and we play a role. In this transition year, we're establishing the ways of working. As I was mentioning, this partnership is solid. We are learning to work together, learning to dance together. And obviously, this is complementary. There is some portions that were outside of our control. The labor shortages that impacted the Quebec market were outside of our control but we are very confident that this is going to come back to normality. We have the strong partners. We have everything to succeed, so it's a bump in the road in a transition year.

[John Zamparo, analyst]

Okay. Fair enough. On the SG&A side, can you give a sense of what the cadence will be in sales and marketing spend? I mean, presumably, this quarter is not a run rate in perpetuity. And I would think Q4 would have some pretty healthy spending. But just would like to get a sense of when we're going to see peaks and troughs in sales and marketing, anything you could quantify would be helpful as well?

[Ingy Sarraf, executive]

I'll answer that one. For sales and marketing, like we said from the beginning, 2022 was really a transition year where we were going to invest much more in sales and marketing, get some learnings and that's exactly what we're doing. But of course, in 2023, we will be rebalancing that spend to make sure that it's based on learnings and it's optimized as well. So in other words, what I'm trying to tell you is, like you said, this Q3 and Q4, which is the end of the summer campaign and the fall campaign are really exceptional quarters. Does that help?

[John Zamparo, analyst]

Yes, should we interpret that as '23 will be lower than '22 on sales and marketing or roughly in line?

[Ingy Sarraf, executive]

Yes, your initial interpretation makes sense.

[John Zamparo, analyst]

Okay. And then last one on the U.S. I just want to better understand the prior answer because when we look at scan data versus booked revenue, scan data has exceeded revenue growth pretty materially for all but 1 quarter over the past 1.5 years. I just would have thought at some point, we'd start to see this reverse. So is it that retailers or distributors are just permanently running with lower inventories? I know there's some puts and takes on the U.S. business that's different from Canada but just if there's any commentary you can add would be helpful?

[Carl Goyette, executive]

This is exactly yes. Clearly, in the beverage industry, if you look, typically, growing brands will have shipments that are somewhat at least aligned with the scan data. You're absolutely right. What we've seen in the last quarter is scan data is exceeding shipments. We expect this to correct, it is a consequence of many things. The biggest one is obviously a transition from a broad line wholesale model to a DSD model where inventory at retail is less, it's a different model, but also the impact of labor shortages that accelerate or increase that difference. But in the future, as I said, we expect that scan data and shipments should be aligned. It's just normal. At some point, if people are drinking the beverage, if they're drinking GURU, you'll be shipping the cans.

[John Zamparo, analyst]

And if I could just sneak in one more. The labor issues you're referring to, are those unique to Canada or are you seeing that in the U.S. as well?

[Carl Goyette, executive]

It's been mainly felt in Quebec, which is our biggest market.

[Operator]

And I'm showing no further questions from our phone lines. I would now like to turn the call back to Carl Goyette for closing remarks.

[Carl Goyette, executive]

Thank you, operator, and to all the analysts and the listeners. Thank you for joining us this morning, Mercy, [indiscernible].