Guru Organic Energy Corp

TSX:GURU

Earnings Call Transcript 2022-Q4

[Operator]

Welcome to the GURU Organic Energy Fourth Quarter and Full Fiscal Year 2022 Results Conference Call and Webcast being recorded today, January 26, 2023 at 10 a.m. Eastern Time. At this time, all participants are in listen-only mode. Following management's presentation, there will be a question-and-answer session with financial analysts. Instructions will be provided at that time for you to queue up for questions. [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 would now like to turn the call over to Carl Goyette, GURU’s Chief Executive Officer.

[Carl Goyette, executive]

Thank you, operator. [Indiscernible]. 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, we'll now be able to turn the pages of the presentation on your one. Let's now turn to Slide 4. Over the past year, we have done what we set out to do since becoming a public company, which was to launch our Canadian market expansion and invest for the first time in our 20-year history in major national marketing campaigns. This was accomplished with the support of our exclusive Canadian partner, PepsiCo and their national distribution network. These initiatives have led to 2 major accomplishments. First, grow organic energy drinks are now distributed in more than 96% of convenience and gas stores and 70% of grocery drug mass stores across Canada. And second, we achieved a 31% increase in consumer purchases or scanned retail sales in fiscal 2022, which is a true measure of our success. Turning to Slide 5. If these numbers have not translated into top line growth, it's due to the fact that fiscal 2022 was a transition year, and it impacted short-term net revenue in several ways. First, with the change in our business model in Canada that started in Q4 2021 when we signed our exclusive distribution agreement. Since then, our distribution partner takes care not only of distribution but also sales, merchandising and aftersales services in return for a discounted price. This discount had a $5.3 million negative impact on our fiscal 2022 net revenue. While this impact is significant, it is less than we anticipated when we decided to embark into this long-term partnership. Second, this new business model required that our partner make a substantial initial pipeline fee of about $2.7 million in Q4 2021 and the balance, close to $1 million in retail pipeline sale in Q1 of 2022. Third, also upon entering this agreement, we optimize our product portfolio in order to respect other distribution agreements that our partner had in place. This led us to phase out our energy water line at retail, which generated approximately $600,000 in net sales in 2021. Finally, we did not launch a new product in Q4 2022 as we have historically. This was an intentional move to align to a more strategic lead time Q2 launch, which pushed our innovation launch to Q2 of 2023. While the change in our business model and investments made in our expansion activities have had an impact on our financial performance in the short term, we firmly believe it was the right decision and that they will pay off in the long run. We are seeing steady progress in distribution, retail execution, brand awareness and sales velocity, which bodes well for the future. Looking ahead, we expect to adjust our marketing spend as we shift our focus from top of funnel brand awareness marketing efforts, more targeted efforts aimed at converting marketing investments into products sold, which has historically been our focus. Our goal this year is to concentrate on having greater impact on sales velocity instead of brand recognition, building on the baseline in which we invested this past year. For a more specific example, this will entail investing in more point-of-sale marketing like fridges and less spending on broader visibility marketing like billboard outside of stores. We will also be targeting key urban areas where our brand positioning resonates best with consumers and where our marketing spend gained the most traction. Turning to Slide 6. In the U.S., our consumer scan data showed continued growth in our area of focus in California, where we solidified our #1 energy drink position in the natural store sector. According to spin, we experienced 13% growth in California in Q4 2022 versus Q4 2021, showing continued strength in this market. We are working on growing our sales velocity and expanding our distribution network in that state with the ongoing deployment of Guayusa Tropical Punch and targeted banners. The U.S. launch of our top innovation Guayusa, has delivered strong results. It became the #1 SKU in our portfolio in several natural store chains in just the first few weeks after launch. Our online sales segment also continued to show strong top line performance in the fourth quarter and reached record value in the first month of fiscal 2023, driven by Black Friday and Cyber Monday. For 2023, we will continue to focus on profitability instead of volume growth for this segment and adjust investments in marketing. This channel is complementary to our retail presence and distribution, which remains our core focus for growth. I'll now turn the call over to Ingy, who will provide you with more details on our financial results for the fourth quarter. Ingy, over to you.

[Ingy Sarraf, executive]

Thank you, Carl, and good morning, everyone. Looking at Slide 8. In Q4 2022, consumer can data in Canada showed a 33% year-over-year sales increase over the same period last year, reflecting strong demand at the consumer level. As outlined by Karl, because of the transition year, growth in consumer sales has not yet translated into revenue growth. Net revenue for the first quarter was $6.8 million compared to $8.5 million for the same period in 2021, mainly due to the initial pipeline sales related to the Canadian distribution agreement. Now that we have better visibility on our shipments and inventory, we can quantify it as having a positive impact of about $2.7 million in Q4 2021 versus Q4 2022. Excluding a onetime price discount of $0.4 million to a club wholesaler, the company's U.S. performance held steady during the fourth quarter. With GURU continuing to hold the #1 energy drink position in the natural store sector in California. In Q4 2022, gross profit totaled $3.5 million compared to $4.3 million for Q4 2021. Due to pricing initiatives, gross margin was 52.1% for the fourth quarter in 2022 compared to 51.0% in the same quarter last year, which offset higher product costs, driven by inflationary pressures on input and transportation costs. SG&A was $7.8 million for Q4 2022 compared to $10.3 million for Q4 2021. Selling and marketing expenses accounting for -- accounted for $5.5 million of the $7.8 million in SG&A in Q4 2022 as we continued investing in targeting sales and marketing campaigns, including the back to reality national campaign.In Q4, adjusted EBITDA was negative $4.0 million, a $1.7 million improvement from negative $5.7 million in Q4 2021 due to higher gross margins and lower selling and marketing expenses. Net loss for the fourth quarter was $3.9 million or $0.12 per basic and diluted share compared to a net loss of $6.0 million for the fourth quarter last year or $0.18 per basic and diluted share. The decrease in net loss reflects the stronger margins and the decrease in costs associated with brand field and trade marketing activities.As at October 31, 2022, our financial position remained very strong, reflecting prudent balance sheet management with cash and cash equivalents and short-term investments of $46.3 million and unused credit facilities totaling about $10 million. This both grew in a strong position to continue self-funding our growth with the ability to deploy the right investments aimed at our return to long-term profitability. Carl, back to you for concluding remarks.

[Carl Goyette, executive]

Thank you, Ingy. Turning to Slide 9. We are confident that the return on investment from our new business model and our expansion activities were materialized in the long run as we complete our transition to the new business model in the first quarter of 2022. This planned transformation was essential to set us up for long-term success. We have maintained all year that in order to win market share in this highly competitive industry, our growth strategy was going to be at Marathon. Similar to our path to growth in Quebec, Google's growth strategy will take time and sustained effort. We continue to drive pack each milestone and are proud of the progress we are making. We are increasing the group brand awareness in Canada, which gives credit to our strategy and are excited to bring our next innovation to market this spring. As such, we will continue to utilize the learnings from our national marketing campaign to optimize our marketing spend going forward, while ensuring we remain disciplined in our execution at the retail level. With a world-class partner, a strong differentiated brand and a robust balance sheet, we are in a solid position to pursue our growth strategy and self-fund our marketing efforts for the coming years. This will enable us to meet our objective of cleaning up this industry and for GURU to become the undisputable leader of healthy energy drinks in Canada and in the U.S. This concludes our formal remarks. I will now turn the call over to the operator for the Q&A.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. Today's first question comes from Martin Landry with Stifel GMP.

[Martin Landry, analyst]

My first question is on your SG&A expenses during the quarter. They can be lower than our expectations and also lower than year-over-year. So I was just wondering, did you delay some of your marketing spending into fiscal '23?

[Ingy Sarraf, executive]

So no, we didn't really delay any marketing spend. Rather, what we saw in Q4 is, first of all, we started to adapt our spending to return gradually to profitability and we continue to investing. But in Q3, where you saw the biggest chunk is because we had the amazing rate, all the festival and events and mostly all of the summer activities, right? So that's why you saw the shift in Q4, that's a bit lower. And it goes hand-in-hand with seasonality as well. Does that answer your question?

[Martin Landry, analyst]

It does. And then maybe, Carl, just to look at the year ahead. Can you tell us a little bit what's on deck for you in 2023? What's your objectives in terms of additional doors? You're talking about a new innovation coming to market. Also, what could we expect in terms of scan retail sales. You had a great year this year. Your scan retail sales were up 31%. Is this a sustainable pace for next year? I know you don't want to give guidance, but anything you can talk to in terms of what's on -- what's the outlook, how you see the industry and also given the macro-outlook, it would be super helpful.

[Carl Goyette, executive]

Okay. Of course. There are several questions into that question, Martin, but I guess I'll start with the number of doors. As you heard in my remarks, distribution in convenience and gas in Canada is pretty much complete and to close to almost 100%. So there will be a few in convenience. But I think where we're going to see some more gains is in grocery drug mass, where there are still some room to go. So we will be gaining, for example, with Dollarama. Dollarama, there's a lot of room to expand there in an inflationary context. We think this is the right place to be. Real Canadian Superstore is another banner we will be adding there, so around 150 stores. So yes, there will be some new banners. There is also some banners, especially in the grocery drug mass, where we are distributed. But last year was our first year. So there is room to improvement in, for example, improving the planogram, improving coal placement. And we've realized over the last year that grocery for us, right, premium grocery mainly, especially coal, is really delivering growth and delivering philosophy. This will be one of our focus. So I think in a nutshell, in terms of doors, that's what I would say. Then in terms of what we expect through the year, I think it's important that we mentioned that we're coming near the end of this transition, but it's not over yet, right? Q1 is also a transition year. So we know that we -- I spoke in my remarks about the fact that the pipeline will continue into Q1 last year. So that's something to be expected. We also saw -- it was the end of our distribution partner, PepsiCo end of fiscal year in December. We saw them reduce a little bit their inventory for the end of their fiscal year, so that impacted December. But we don't expect any further reduction beyond the point where we are there, right? Now in terms of scan, it's hard to forecast scan data, nothing, right? What we -- if I look at the latest data, December was softer for us. December has historically been a little bit softer for us somehow in the Christmas period. Red bull is strong in that period. There was a lot of pricing activity by this market leader in December, especially on multipacks. They historically win the Christmas period, and they were strong. We had activities as well to try and win that period, but this impacted. Now it's too early for January, right? So again, I think it would be on the maximum side, again, it's hard to say, right? If our marketing starts to have more impact, we could be growing at more than 30%. But I think that would be on the optimistic side.

[Martin Landry, analyst]

And maybe just last question. How are you seeing the macro-outlook impacting your industry? Are you seeing volumes in the industry slowed down? Or can you talk maybe to how is the industry performed in the last recession? Did the volumes go down? Or is this more resilient than -- and less cyclical than others? Any debates on that would be helpful.

[Carl Goyette, executive]

No. The last recession was a long time ago and the industry was very different. So I don't think we're getting any good insights from the previous recession. We're getting insight in terms of indulgences and daily treats, which are resilient to recession. So that's a good indication for energy drink. And the best indication is the last few months, last few weeks. I'm sure you saw the same industry data. The industry is still -- the energy drink industry is still growing both in volume and in dollars. Obviously, there has been a lot of pricing activity. So yes, the industry is growing roughly at 10% more than in dollars than in volume, right? So it's the industry, for example, in the U.S., in volume in the last few weeks has been growing at 4% or 5% in volume. It's growing around $14, $15 in. So that's kind of the pace we are seeing now. What we're starting to see now is the consumers to be -- they seem to be smarter, right? So they're taking -- they're smarter in their decision-making. It doesn't seem like they're changing anywhere in any way their consumption habits. But for example, they might purchase a little bit more in bulk. That started, for example, multipacks like Fort started growing rapidly during the pandemic, but it's continued lately, mainly in the Christmas period that we just talked about. So multipack is something that we're looking at. So maybe, for example, consumers instead of buying single, they're buying in multipack to kind of buy.If they buy in multipacks, they're basically buying and the price they used to pay when they were buying singles, right? So they kind of avoid the price increase by doing so. So we're seeing smart behaviors for consumers in their purchase habits. Will that last, it's hard to see. Is that helpful, Martin?

[Martin Landry, analyst]

Yes. Thank you very much.

[Operator]

The next question comes from Amr Ezzat with Echelon Partners.

[Amr Ezzat, analyst]

Maybe a 2-part question to piggyback on Martin. On the pace of like selling and marketing, as you mentioned, Ingy, you started to be more selective in your spending. I'm wondering how we should be thinking about 2023 in terms of like dollar budgets? Is it a year where you're still like pretty selective?

[Ingy Sarraf, executive]

Yes. So I think from a -- for 2023, we still see it as an investment year. That's for sure. And yes, to your point of selective is we're going to have much more focused investments. And Carl mentioned it in his remarks, we will be spending much more on social, but we'll do fewer billboards, fewer events. So that's one thing. The other piece is, I think from a cadence standpoint, it's still the same, right? The spring and summer are really our peak period. So we will continue to be investing. You'll see, if you look at the investment, the overall investment that we've made in 2022, you'll see it come down a bit in 2023, but at the same cadence like based on seasonality...

[Amr Ezzat, analyst]

Understood. That's very helpful. Then, I guess, like on that point, like Carl, you spoke to like focus on velocity in '23. But wondering what sort of initiatives you guys are taking in Canada but outside of Quebec to increase brand awareness, -- like are you guys contemplating another national campaign or none of that's like in '23?

[Carl Goyette, executive]

Absolutely. There will be national campaigns. I would say, it's important for us to take the learnings, right? Last year, as we said, it was the first time in our history where we could really truly invest -- we invested a lot in marketing. Obviously, there's a lot of learnings that came with that investment. We did 4 rounds of research, right? So every time we did a marketing campaign, it was followed by the marketing research, not only to understand the results, but also to understand the drivers of performance, drivers of awareness, drivers of consideration, drivers of trial, right? So we use that and we use our long history, right? And what has worked for us in the past to adapt our marketing plans for the future. The reality, Amr, we tried a bunch of things that we had never done last year, right, because we -- it was the right thing to do considering the partnership we were making at PepsiCo. Now we're adapting this, right? And in some ways, we're going back to our roots. We have been very disciplined that in the past, we were always profitable. Going back to what's really working for us, right, and maybe letting go some of the stuff -- that is not necessarily working for us.I think we are using one of many examples. One example, for example, if it would be to put a fridge in a store instead of buying a billboard outside of the store. We feel that's an easy thing to understand, but we know that fridges have more impact on velocity and market share than billboards, right? We now know this. They build voids can play a role, and I'm not saying we're never going to do a build board ever again, right but these are the types of things that we're going to do. We know that POS material in store, for example, is much more effective than billboard. So if we're going to invest in advertising might as well invest at the point of sale. And then I could go on and go on and go on, but then I would give you all my playbook.

[Amr Ezzat, analyst]

No, that's very helpful. And I sort of -- I mean, you see it probably in your research data and so on, but yes, it totally makes sense to me. On the California side, continued great success in the natural channel and I know you've done a bit of club as well. Just wondering how we should be thinking about California or Southern California over the next like 2 or 3 years outside of these channels. Like would you be outside of these channels? Can we see you go into more traditional channels, let's call it?

[Carl Goyette, executive]

Yes, absolutely, but we're going to do this in a methodical way. For example, last year, we also tried something new, right, which was the club channel. There's a lot of learning into this. What we know, right, is also based on our history is that where we focus, we can win, right? But we know we can't focus everywhere. So we had to make choices last year where we decided to focus in California in very specific areas, right? We focused on California. We focused on Whole Foods. We focused on natural, we're focused on online and while we're very focused on gaining distribution for Guayusa, which is already a success, right? So these are times the areas of focus now. At the same time, we know that there is more opportunity in order channels. There is opportunity in premium grocery. There is opportunities in club, right? So we will be making that transition, right, to other channels, but we will be doing this gradually just to make sure we don't defocus ourselves from where we're winning and where we can be also methodical about their growth, right? In the U.S., we've said this many, many times. This is a huge market, has more competition than Canada. We have to be very careful because it could get very expensive very quickly.

[Amr Ezzat, analyst]

So we wouldn't see you in like the big grocery store like Safeway, Ralphs and all of these. It's probably a bit too early.

[Carl Goyette, executive]

You could. Again, the recent period is we're waiting for some news on some banners. You could see us in this, but this is not going to be a transformational thing for next year, right? I think we're optimistic about some more actions into the club channel, but we have nothing to announce yet, but that could be one online will continue growing for sure, right? Natural, there's still a lot of room to grow for us in California and elsewhere, especially with innovation.

[Amr Ezzat, analyst]

That's really good color. Then maybe one last one, and I'll pass the line. I'm a little surprised with the Guayusa success in the U.S., like you guys mentioned #1 ahead of your original as well. Like what do you guys think is driving that? Then can you remind us in Canada where does use that sort of rank relative to your other SKUs?

[Carl Goyette, executive]

Yes. I'll start with Canada. Guayusa was extremely successful, right? We've said we've repeated this a year. It's an extremely well-performing SKU. Consumers love the taste. Obviously, the yellow can is bright. It stands out on the shelf. I think the run the low-yield consumers are looking for innovation. They want something different and it gives them a chance to try, but it also was attractive for some people who necessarily didn't like the taste of more plant-based products, right? This one has a very, very mainstream things compared, for example, to matcha, right? So this is one.In Canada, it's doing extremely well. In Quebec, it's ranking in the [Indiscernible] overall, right? At some point, it reached 3.5% market share in Quebec. It's the #1 innovation in terms of energy drinks. It's the #1 flavor that in drink. So if you remove the traditional -- if you release the traditional legacy flavors, like, for example, a Red Bull original or Monster original or Google original what you said is the tough flavor SKU in Quebec. So it's doing extremely well. So yes, we have big expectations for this in the U.S. And we just put it on the shelf and it starts selling, right? Now obviously, it's very new. It's only been in the market for a few weeks. There's always a little bit of cannibalization from other gross. So what we need to really see over the midterm is how many new consumers were getting into this.

[Amr Ezzat, analyst]

And then can you remind us like what's the lineup of SKUs you have like in California, like you have the original delight Guayusa, I'm not sure if you heard about...

[Carl Goyette, executive]

Yerba and Meta and Matcha.

[Amr Ezzat, analyst]

Okay. So everything is good. That's great color. I'll pass the line.

[Operator]

The next question comes from Monica Lutz with CIBC Capital Markets.

[Monica Lutz, analyst]

Most of them have been answered already, but I was just wondering if maybe you could give some color on what your expectations for commodities and input costs are over the next few quarters?

[Ingy Sarraf, executive]

Nice to meet you on the line Monica, it’s Ingy. So what we've been seeing from that standpoint is 2 of the positive things is we're seeing the transport craze is coming down a bit. Of course, the price of oil is still high, but we're still seeing come down from a supply and demand standpoint. Same thing with capacity. However, sugar prices, as you know, have been going up and that we've been seeing that since 2020. However, the good news for us is this is -- this risk is moderate because most of our SKUs are very low in sugar. And even our original SKU has half the sugar of our competitors. So the impact is mitigated as well what we do since we have multiple suppliers is we also have agreements in place. So that's what helps us. Same thing with aluminum. So aluminum, what we've seen is price go up in 2022 and now being stabilized. Of course, with what's going on in Europe with the war and inflation and all that, we're seeing increases there. But we always balance rider production because we work with seller co-packers and cans to make sure that we optimize on that. So very manageable risk on that standpoint for us.

[Monica Lutz, analyst]

Great. Appreciate the color, and that's all for me.

[Operator]

The next question comes from Sean McGowan of Roth Capital Partners.

[Sean McGowan, analyst]

A couple of questions. I wanted to turn back to some cost questions. First, just to clarify, would the cost of refrigerators, would that be in marketing or in G&A?

[Ingy Sarraf, executive]

You mean the coolers in store?

[Sean McGowan, analyst]

Yes.

[Ingy Sarraf, executive]

That would be in sales and marketing.

[Sean McGowan, analyst]

But on the G&A line there, that was not only lower than I expected, but it was lower than the fourth quarter of last year and I think lower than every quarter since the second quarter of fiscal '21. So is this dollar level? Is this like a new normal or were there some offsets in the fourth quarter that make it look lower than the sustained rate will actually be going forward?

[Ingy Sarraf, executive]

So yes, there were some offset in the fourth quarter, of course. On that standpoint, yes, there were some offsets with the bonus payouts and all that to [Indiscernible] G&A. And other than that, I think what we're -- the message here is more it's going to be more stable throughout the future. So we're on that stable line. So there was a bit more of an offset in Q4.

[Sean McGowan, analyst]

Okay. When I met offsets, I mean, were there like benefits that you would see in the quarter. Like is the underlying sustained rate of G&A were actually higher than what we see reported on that line for the fourth quarter. Or is this a pretty good level to use going forward?

[Ingy Sarraf, executive]

The total SG&A or you're talking more about G&A?

[Sean McGowan, analyst]

I'm talking about G&A, excluding sales and marketing.

[Ingy Sarraf, executive]

Yes. Excluding sales and marketing, you'll see it as -- yes, that could be the basis moving forward. It could be a bit higher in some quarters just because -- yes, it's actually we're out of good. The only thing that I'm saying is we're putting in place, right, a new ERP. So that's why you're seeing sometimes some quarters increase, and we're getting to the end of that, hopefully, with the great new implementation in the coming quarter, but other than that it's pretty stable.

[Sean McGowan, analyst]

Okay. Helpful. Another financial question. So there was a bit of a share buyback in the quarter from a cash flow standpoint. Was that like a onetime thing? Or is that going to be ongoing?

[Carl Goyette, executive]

No, this is ongoing. As we discussed when we launched the NCIB, whenever there is the right opportunity, we will use it. This is not going to -- we don't expect this to be very significant, but we want to have this in place and if the right opportunities present themselves, either to block or whatever, we will be using the NCIB. We think there's great return for all investors.

[Sean McGowan, analyst]

Carl, are you willing at this point to say when the company might cross into positive EBITDA.

[Carl Goyette, executive]

No, we can say this. One thing for sure is that what we said 2023 as an investment year, Sean. I think the key point to remember is that this business was always profitable prior to going public. Obviously, you just spoke about SG&A. SG&A is higher, becoming public but Ingy is keeping us lean and mean on that front. So we're keeping that to a minimum. As the sales and marketing are going to remain hot, right? Sales and marketing is going to remain high, and we will invest the cash that we have in the bank account in order to grow this brand outside of Quebec and in California, right? So we expect us to invest this money over the coming years, but don't expect us to run out of money. I think that's the key message. We will not be running out of money. We will take this business back to profitability before we run out of cash.

[Sean McGowan, analyst]

The last question for me then. The scan data, the retail consumption suggests that inventories at retail are in pretty good shape. Is that what your data is showing that you're not over inventoried or dramatically under inventory at retail?

[Carl Goyette, executive]

No, I think at retail, we're in good shape now, right? We mentioned over the summer, we had out of stock. At retail, we're at a decent level. As I mentioned, there was a bit of an adjustment on the PepsiCo side in December. They shipped a lot more than they ordered. That's going to be impacting Q1. We expect this to be around $750,000 or something like that, right? So we of inventory, that's going to have an impact on Q1. But I think we're in the right place at retail. We're in the right place at PepsiCo. We have plenty of inventory for -- so we're ready to sell and get back to growth, right, get back to growth in Q2 in Canada and in Q3 in the U.S.

[Operator]

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

[Carl Goyette, executive]

I just want to thank everyone, all the analysts and all the investors who have ended the call. Have a great day.

[Operator]

The conference has now concluded. Thank you for your participation. You may now disconnect.