Guru Organic Energy Corp

TSX:GURU

Earnings Call Analysis

GURU's Strategic Focus on Growth and Profitability

In Q3 2024, GURU's net revenue fell to $7.9 million from $8.9 million in Q3 2023 due to challenges in Canada. Despite this, gross margin improved to 55.4% from 51.2%, thanks to better pricing dynamics and lower costs. Efforts to control costs reduced SG&A expenses by 13.2% to $7 million. GURU also narrowed its net loss by 25.8% to $2.2 million. The company remains optimistic about growth in the U.S., especially with the launch of its Zero Sugar line and significant online sales momentum. GURU aims to continue reducing net losses and return to historical profitability by investing strategically in key areas.

Navigating Through Challenges: A Look at GURU's Q3 2024 Performance

In the third quarter of 2024, GURU faced the dual challenges of declining net revenue and shifting market dynamics. The company's net revenue for the quarter was $7.9 million, down from $8.9 million in the same quarter last year. This decline was primarily attributed to difficulties in the Canadian market, particularly reduced shipments and decreased foot traffic in convenience stores. Despite this, GURU's U.S. operations exhibited promise, showcasing a notable 74% sales increase year-over-year in the first nine months of 2024.

Resilience in Gross Margin and Operating Costs

GURU displayed resilience with a gross profit of $4.4 million, translating into a gross margin of 55.4%, a significant improvement from 51.2% a year ago. This increase was particularly influenced by favorable pricing dynamics and reduced input costs. Furthermore, the company effectively reduced its operating expenses, with SG&A expenses decreasing by 13.2% to $7 million, enabling a narrowed net loss of $2.2 million, marking a 25.8% improvement compared to Q3 2023.

Focused Growth Strategy with New Product Launches

Looking ahead, GURU is targeting growth through innovative product launches. The anticipated debut of the Zero Sugar line in the U.S. is poised to tap into the expanding zero-sugar segment, currently representing half of the $20 billion North American energy drink market. GURU Zero's commitment to providing a clean, organic energy drink aligns with health trends and differentiates it in a crowded market. GURU's ongoing efforts, including a 76% growth in online sales during Amazon's Prime Day, underscore the company's robust e-commerce strategy.

Building a Strong Foundation for Future Growth

As of July 31, 2024, GURU had $37.7 million in cash and short-term investments, alongside an unused credit facility. This position not only assures GURU the capacity for strategic investments but also reflects a solid foundation to work towards profitability. GURU's leadership team has been strengthened with several key appointments aimed at reinforcing governance and strategic direction.

Outlook for Q4 and Beyond

For the remainder of 2024, GURU aims to capitalize on its strong market presence, particularly in urban centers like Southern California and Quebec. The company is optimistic about the upcoming Costco promotions and product roadshows that could significantly bolster sales in major retail channels. While GURU does not provide explicit forward guidance, the overall sentiment is positive, indicating potential for revenue recovery in Q4 as they seek to leverage strong brand loyalty and growing demand in favorable market segments.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to the GURU Organic Energy Third Quarter 2024 Results Conference Call and Webcast, being recorded today, September 12, 2024, at 10 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. Please go ahead.

[Carl Goyette, executive]

Thank you, operator. [Foreign Language]. Good morning, everyone, and welcome to or Q3 2024 earnings call. Joining me this morning is our CFO, Ingy Sarraf. Let's turn to Slide 5 for those following on the webcast. This quarter, GURU continued to prioritize its return to profitability by maintaining strict cost controls even in a challenging sales environment. Thanks to favorable market dynamics and reduced input costs, our gross margin increased significantly to 55.4%, up from 51.2% in Q3 of 2023, allowing us to maintain stable gross profit despite a decline in revenue. These efforts have led us to a 50% reduction in our net loss over the last 2 years.

While focusing on profitability, we faced challenges that impacted our net revenue this quarter primarily due to reduced shipments and decreased convenience store traffic. However, year-to-date, our revenue and gross profits have grown by 6.9% and 11.6%, respectively. We continue to see growing demand for our products, particularly in the U.S. market, where sales increased by 74% year-over-year in the last 9 months. We also achieved double-digit retail scan growth in our key channels, including Amazon, Whole Foods and our retail channel in Quebec.

Turning to Slide 6. In Canada, we continue to build on our strong market presence, especially in Quebec. In this market, our latest innovation, Peach Mango Punch and Zero Wild Berry, driven sales growth and increased our market share by more than 1 percentage point to 18.3% in units over the last 9 months when considering untracked channels.

However, the market was marked by challenges related to the timing and execution of retail promotions, which affected our overall sales performance. Despite this, our strategic focus on key urban centers remains critical to our growth strategy, and we are seeing positive results. Further support our growth and engage consumers in Quebec, we have launched special promotions in grocery stores and Costco. Starting tomorrow, 4 packs of Fruit Punch and Peach Mango Punch will be available at a discounted price in most Quebec grocery stores and 24 packs of GURU original will be offered at $32.99 in main Quebec Costco locations.

In Canada, we will soon conduct our first Costco roadshow featuring our Punch line in prime locations across the country. If successful, this could lead to new opportunities in this major sales channel. Turning to Slide 7. Let's discuss our performance in the U.S. market. Our U.S. operations continue to excel, with sales growing by 10.3% compared to the Q3 of 2023. The growth was fueled by our strong performance on Amazon, where we remain the #1 organic energy drink. We are very excited about the upcoming launch of our Zero Sugar line in the U.S. which will include three popular flavors, Wild Berry, Wild Strawberry Watermelon and Wild Ruby Red. This launch marks a significant lactone as we tapped into the rapidly growing Zero Sugar segment, which now represents 50% of the $20 billion North American energy drink market.

What sets GURU Zero apart is our commitment to offering a better-for-you energy drink experience with a Zero sugar organic energy drink that contains no secrets [ oz ] or aspartame, artificial sweeteners often associated with potential health risks. Moreover, Guru Zero provides the metabolism boost combining natural casing and ECG polyfinols making it the only Zero organic energy drink in the market that aligns with the health-conscious demand of today's consumers. We are confident that these loans will further strengthen our position in the U.S. market now and in the future.

Our ongoing efforts to optimize online sales have been validated by the significant momentum we experienced during the Prime Day event on Amazon.com, where we achieved a remarkable 76% growth over the last over last year's Prime Day performance. This success reinforces our confidence in the upcoming Zero launch and the continued growth of our U.S. operations.

Looking ahead, we see significant opportunity to further expand our success in U.S. urban centers. Our efforts in California have already begun yielding returns particularly in Southern California. This focused approach will allow us to leverage our experience in California to drive growth in additional key urban areas where our target consumers live. I will now turn the call over to Ingy Sarraf, our CFO, to discuss our financial results in more details. Ingy, over to you.

[Ingy Sarraf, executive]

Thank you, Carl, and good morning, everyone. Let's turn to Slide 9. Net revenue for Q3 2024 was $7.9 million, down from $8.9 million in Q3 2023, reflecting challenges in the Canadian market. Gross profit stood at $4.4 million with a gross margin of 55.4%, an improvement from 51.2% last year. This margin improvement was driven by better pricing dynamics and reduced input costs, allowing us to maintain a stable gross profit despite this revenue decline. SG&A expense decreased by 13.2% to $7 million from $8.1 million in Q3 2023, primarily due to streamlined operations and lower marketing spend. These cost control measures helped us narrow our net loss to $2.2 million this quarter, an improvement of 25.8% versus Q3 2023.

As of July 31, 2024, GURU had $37.7 million in cash, cash equivalents and short-term investments, along with unused credit facility. This solid foundation provides us on the resources needed to strategically invest in growth opportunities while staying focused on our goal of returning to profitability. Carl, back to you for concluding remarks.

[Carl Goyette, executive]

Thank you, Ingy. Turning to Slide 11. As we look to the future, our primary focus remains on driving growth, accelerating our return to profitability. We've made significant progress in reducing our net loss, which improved by 18.3% to $6.8 million in the first 9 months of 2024 versus the same period in 2023. It is also worth noting that our net loss reduction initiatives at Beta as we have reduced our year-to-date loss by over 50% in the last 2 years. This demonstrates our strong commitment to cost management and operational efficiency. We expect this net loss reduction to continue in the future as we gradually return to our historical profitability.

We are confident that our disciplined approach to cost management combined with our strategic investments in key growth areas will position us well for sustained success. We have also strengthened our leadership team with the addition of three new independent board members. Jeff Church, Anne-Marie Laberge, and Tyler Ricks and the appointment of Shingly Lee as Vice President of Marketing. These strategic additions bring a wealth of experience and will play a critical role in driving our growth and entering robust governance as we move forward. Our innovation pipeline remains a key component of our growth strategy. The upcoming launch launches in the U.S., along with our packaging and messaging revitalization will further solidify our position in this market, and we are excited about the potential these new products bring.

We are adapting our marketing strategy based on new insights that have further clarified the GURU target consumer and the brand narrative that resonates with them. We remain steadfast in our mission to clean up the energy drink industry, and we are energized by the opportunities that lie ahead. 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 today is from Martin Landry with Stifel.

[Martin Landry, analyst]

My first question, there's a lot of dynamics actually. During the quarter, there are some retail channels that are seeing some soft traffic patterns and there's others that are doing well. And I was wondering if we could look at it on an aggregate basis, and it would be interesting if you could share with us your retail sales in Canada during the quarter, all channels combined. So measured channels, nonmeasured channels and online, if possible.

[Carl Goyette, executive]

Yes, I can certainly give you that number and cover around it because I think it is these channel shifts mainly driven by inflation and the consumers' wallets being squeezed. We've been talking about this for quite some time, right? And I think the consumers are increasing the smart and they're finding ways to save -- they're smart and they're finding ways to save money when they are very loyal to their GURU brand. And there's some channel shifts that are happening. So the overall number you're looking for when you're looking at tracked and untracked for Canada for the quarter, and I think it's minus 1. So there was a small decline in Canada in this quarter. It's growing in Quebec, but there's a small decline in Canada. And if you want to like more color around that number, I'm happy to give you a lot more on what's happening from a retail dynamic plan view.

[Martin Landry, analyst]

Okay. Yes. Well, that would be great. I mean, it's the first time that your retail sales declined in a little bit. So yes, any color would be helpful.

[Carl Goyette, executive]

Yes. So I'll start with our biggest market in Quebec, right? I think in Quebec, we're growing. We're still growing, but there's an interesting dynamic. What we're seeing is really small declines in the premium, what I would call premium retail banners, right? So that would include Costa, Petro-Canada, IGA and Metro, where we're seeing some declines there, right? Obviously, this is offset by some really strong growth in Costco, growth in Dollarama and in Walmart.

But overall, this has impacted our growth, right? So that's the Quebec dynamic still growing but not at the pace that we have been growing in the past because Costco with Dollarama and Walmart are not growing fast enough to completely offset the declines we're seeing in some of the premium banners.

In rest of Canada, it's a little bit different, right? Some of the declines are driven by -- there's one chain where that has been struggling more, right, for us and it's Petro-Canada since last year. They had some system -- IT system breach, and they were hacked last year and since then, we've seen our sales start to decline, and it's by far the biggest offender. So there's something specific that we're fixing with Petro-Canada. They stop our promotions after this, and they've changed their planograms to National planograms.

Anyway, without going into all the details, this impacted a lot our sales and the independent channel, right? So there is the independent convenience stores in rest of Canada that have been really struggling with the consumer dynamics that we have seen.

The difference with rest of Canada, though, is that we don't have a strong presence in discount grocer in Dollarama, we're not in Costco and Dollarama in the rest of Canada. So we don't have that kind of discount channel to capture some of the outflows coming from premium retailers. So we're seeing a little bit more decline, obviously, in rest of Canada that we are seeing. And we're still seeing some growth, although a smaller growth in Quebec with these dynamics.

[Martin Landry, analyst]

Great. That's very helpful. Thank you for the color here.

[Carl Goyette, executive]

I think it's important, Martin, maybe to -- because this is -- obviously, we're reacting to this. So we're improving our -- we spoke about our discount in Costco that are coming up, road shows in Costco. We're just starting a new program with four pack. So we're changing for tax strategy, launching new four packs in September. So these are all things that we're doing to kind of put in place to try and capture more of that consumer who is increasingly smarter, making the decisions to buy in bulk or buy discount closer. So we want to make sure we dial up our presence and these types of retailers to capture the group consumers in these channels.

[Martin Landry, analyst]

Okay. And maybe -- you've talked about having a strong performance online. You've talked about Prime Day with Amazon. I was wondering if there's into [ bips ] that you could share with us. I don't know, perhaps on new customers to the brand online with -- at Amazon or repeat rates or any other metric that can help us better understand your performance there.

[Ingy Sarraf, executive]

Yes. Sure, Martin. I'll start, and Carl, if you want, you could add on. We're -- actually, we're very happy with what's going on Amazon. As you -- Carl just mentioned, right, we saw a movement towards discount. But online, what we're seeing are backed, strips are growing. So from a repeat rate, we have outstanding repeat rates of around 60%. And from new customers, what we're seeing is they're doubling as well our new to brand that are coming in. So very encouraging and very happy to launch the Zero line as well this week on Amazon in the U.S.

[Martin Landry, analyst]

Okay. And when you say new customers doubling, you're seeing doubling on a year-over-year basis?

[Ingy Sarraf, executive]

Yes, year-over-year, our new to brand are doubling there.

[Carl Goyette, executive]

Yes. So this is really a case of loyal consumers repeating a lot, right, and bringing the consumers. So there's something with a broader assortment on Amazon with more aggressive offers, marketing spend that's really affected and the team dining of the pricing strategy without going into detail, but there's something that's working there and it's been working quarter after quarter. So to a point where we're the #1 organic energy drink brand on Amazon, and we think there is a lot of potential to grow [indiscernible] channel. So we're very excited about this one.

[Martin Landry, analyst]

Ingy, your gross margin expanded a lot this quarter. I think they're up by 425 bps the largest expansion we've seen in a while. I was wondering, you did touch on some items, but I was wondering if you could quantify -- give us a bridge on the main markets that explain this year-over-year margin expansion.

[Ingy Sarraf, executive]

Yes, for sure. We're very happy with this improvement, of course. So of course, I'm ready to give you a bridge. It's -- when we look at the gross margin improvement for the quarter, we say that 1/3 of that is really due to our input cost improvement and 2/3 of it are really due to the pricing dynamics in the market and between the channels. Well, this is how we bridge it.

[Martin Landry, analyst]

Sorry, not too sure if I understand when you say market price dynamic.

[Ingy Sarraf, executive]

Okay. It's really more the mix -- well, between the pricing between the channels, so online and retail and as well within each of these channels, pricing dynamics, i.e., the trade spend that we're doing. So pricing of our goods versus the promotions that we're doing. So that was beneficial this quarter.

[Martin Landry, analyst]

Okay. And then so which China is more profitable for you? Is it retail or online?

[Ingy Sarraf, executive]

From a gross margin standpoint, we see that online is a bit more profitable than the retail channel. However, there's costs then come in later on. But from a gross margin standpoint, yes, it is. And from a year-to-date standpoint, really what's outstanding is really most of the uptick there, so improvement in the gross margin is really due to our input cost improvement. So that's something that we expect [indiscernible].

[Martin Landry, analyst]

When you say input costs, what -- which -- can you be a little more precise? Is it your cans? Is it your...

[Ingy Sarraf, executive]

Yes. It's more of our raw material. And of course, transport as well was good, but it's really more driven from the input to raw materials themselves.

[Martin Landry, analyst]

Okay. And then maybe just last question looking forward. I was wondering if you could comment a little bit on what you're seeing so far in Q4. I understand there's some channel shift that are that don't seem to be changing in the convenience store channel. But is it -- could we see you guys return to revenue growth on a year-over-year basis in Q4?

[Carl Goyette, executive]

As you know, Martin, [indiscernible] we don't have a go forward guidance, but there's a lot of good things that we put in place, right? I think I just spoke from a retail point of view, I just spoke about what we're putting in place. We're right -- we're starting this week a first focus period with PepsiCo. So we are going to see a lot of activities, both in Quebec and in Rest of Canada to try and finish the year very strong. So that's from a retail point of view and activity on 4 packs, roadshows in Costco. I think that's the retail piece. We also shared some information on the momentum we're seeing in some banners in the U.S. So hopefully, there's no reason why this would stop. So I think this is very positive. And then from an online perspective, maybe, Ingy, you want to jump in on the -- it's only a few days, but you want to jump is performing so far?

[Ingy Sarraf, executive]

So we just launched Zero on Amazon in the U.S., and we're seeing -- well, it's just been a couple of days. So of course, it's anecdotal, but we're seeing great pull like Zero performance so far in beating our previous innovation sales in a month towards in 3 days. So we have great hopes and ambitions for this Zero lineup

[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]

Well, thanks, everyone, for attending, and wish you a great day.

[Operator]

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