Welcome to the GURU Organic Energy first quarter fiscal 2022 results conference call and webcast, being recorded today, March 15, 2022 at 10 A.M. Eastern Time. At this time, all participants are in a 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.
If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. GURU's press release and MD&A and financial statements are available in the Investor 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 two of the presentation. I would now like to turn the call over to Carl Goyette, GURU's Chief Executive Officer.
Thank you, operator. Good morning, everyone, and welcome to our earnings call. Joining me this morning is our CFO, Ingy Sarraf. In our first quarter of 2022, we generated record Q1 net revenues of CAD 7 million, compared to CAD 6.66 million last year, reflecting sales growth in Canada and in the U.S. We continued to build our partnership with our exclusive distributor in Canada, which officially began this past October, and worked actively on the planning and execution of our ambitious long-term Canadian growth strategy.
We also made good progress in the U.S., securing new DSD partnerships and new points of sale. Our Q1 performance was achieved despite various Omicron-driven restrictions throughout the quarter, impacting businesses and consumers to varying degrees in the different markets where GURU is present.
In this context, after a solid start to our brand awareness efforts with our Back to University campaign in Q4, we did moderate our Canadian marketing activities during Q1 and in the first half of the second quarter, due to the extent of those sanitary restrictions and the lockdown measures, as we felt this was a prudent thing to do.
With the majority of sanitary restrictions lifted, we are now ramping up our activities, which we expect will be sustained through to the end of the year, barring further COVID-19 re-related interruptions and in alignment with our new business model in Canada. Over the next several quarters, GURU will continue to be squarely focused on driving brand awareness and trial in the Canadian market. Markets that together are more than two times larger than Quebec.
This work began in Q4 2021, was slowed down a bit in Q1 due to Omicron, and will now re-accelerate in support of our truly nationwide distribution. Planned activities include but are not limited to a major national marketing campaign promoting our botanicals-driven SKUs, namely Matcha, Yerba Mate, and our latest top-performing innovation, Guayusa Tropical Punch.
This campaign, coupled with other activations, will be notably supporting the Canada-wide availability of Guayusa in major retailers effective this quarter. Our exclusive distributor will proceed with its first official large-scale in-store activation for GURU, which will be executed with many major corporate and independent retailers across the country in April. GURU will be the first focus of our exclusive distributor during that period.
We also have a series of other planned activities, partnerships and sponsorships to reach our target consumers in key Canadian markets throughout the spring and summer, with a mix of on-brand grassroots and mainstream activation. More to come on this front. Turning to the U.S., we continue to execute our strategy and experience improved results quarter-over-quarter with new doors in grocery, drug, natural and independent retail chains.
This has been supported by the strengthening of our DSD network in the Western U.S. market. To that effect, we recently partnered with leading regional DSD distributors Popular Market, DPI Specialty Foods, and Pint Size Hawaii, enabling us to significantly increase our points of sale by more than 1,500 since the beginning of the year, primarily in California.
Some other notable wins include our full penetration of Whole Foods Market chain, the world's leading natural and organic food retailer, with whom we've had a relationship with since 2005 when we first entered the U.S. market. We were already widely available, but now we will be in every store, and we have also expanded our selection with the addition of Yerba Mate in their over 500 locations.
This month, we're also introducing a limited edition variety pack, which will be exclusively available at Sam's Club, a leading membership warehouse club with over 200 U.S. locations. We expect this new win will have a strong impact on our U.S. sales in Q2. This initiative could also have the potential to generate recurring revenue.
GURU continues to generate strong demand at the U.S. consumer level quarter-over-quarter, as shown in Q1 SPINS data, with a 49% increase in consumer purchases in California and 27% increase in the U.S. overall. While U.S. sales only represent 17% of our sales in Q1, these numbers reflect growing interest in our brand, primarily in California, and with minimal marketing spend. 2021 was defined by our listing on the TSX, securing our game-changing Canadian distribution agreement, successfully transitioning to our new Canadian business model by year-end, and ensuring we have the capital and resources to execute our ambitious growth plan, all of which was successfully achieved.
Now, the rest of 2022 is all about the execution of our expansion plans, but just as importantly, about establishing our new baseline in what will be our first full year working with an exclusive distributor, a working relationship that continues to grow and strengthen week by week. Just a year ago, around this time, GURU had very low distribution and brand awareness in Canada outside of Quebec, markets where we have yet to invest any significant distribution and marketing dollars.
Following our first big marketing push in Q4, our brand got a huge initial boost and great response within key consumer segments. While this momentum was attenuated due to Omicron restrictions and lockdown, we are ready for the work ahead of us to move the needle further, which will take time and commitment.
We are really motivated by those early indicators to keep moving forward with the execution of our Canadian growth strategy. We are excited to continue to work towards truly breaking through in Canadian markets outside of Quebec, where we have a huge opportunity to conquer market share in an industry ripe for disruption. I'll now turn the call over to Ingy, who will provide you with more details on our Q1 results. Ingy, over to you.
Thank you, Carl, and good morning, everyone. GURU generated record Q1 net revenue of CAD 7 million compared to CAD 6.6 million last year. The increase is reflected by sales growth in Canada and the U.S., driven by a 22% increase in volume overall as a result of stronger velocities and increased points of sale, partially offset by the cost of the new exclusive Canadian distribution agreement. Canadian sales in dollars grew 5%, reflecting the change in the company's business model launched on October 4, 2021. U.S. sales, which represents about 17% of net revenue in Q1 2022, grew by 9% in U.S. dollars in Q1 or 7% in Canadian dollars as a result of new doors and increased product demand.
We expect the U.S. to continue to perform well in the coming quarters based on the SPINS data mentioned by Carl. As a reminder, costs associated with our distributor services in Canada are included in net revenue at the top of our income statement. In parallel, Canadian sales-related costs have been reduced, partially offsetting the lower gross margin.
The overall impact to our bottom line is minimal, and in the long run, we expect the benefits of our Canadian distribution agreement to greatly outweigh these short-term adjustments, which are now fully reflected in our 2022 results. Q1 gross profit totaled CAD 3.8 million, compared to CAD 4.1 million a year ago. Gross margin was 55%, compared to 51% in Q4 2021 and 62% last year.
The decrease in gross margin versus last year is mainly due to the change in our business model in Canada, which includes distribution, selling, and merchandising fees. Gross margin was also slightly impacted by rising product costs given by higher input and transportation costs. SG&A was CAD 7.1 million compared to CAD 4.7 million, an increase of CAD 2.4 million. CAD 2 million of that represents the ramp-up of our sales and marketing activities in support of the launch of our distribution agreement and the execution of our growth plans as we entered into new markets. We invested in several targeted and sales marketing campaigns during the quarter. Notably, the fall Quebec marketing campaign with Occupation Double that ended in December 2021, an existing partnership in which we increased our investment in fiscal 2021 compared to 2020.
The start of partnerships with ski resorts, as well as continued field and trade marketing investments in Ontario, Western, and Atlantic Canada. However, due to COVID-19 Omicron variant restrictions and lockdowns, the company moderated its marketing activities during the quarter. Adjusted EBITDA was CAD -3 million, compared to CAD -0.4 million a year ago due to higher sales and marketing expenses.
Net loss for the quarter totaled CAD 3.2 million or CAD 0.10 per diluted share, compared to a net loss of CAD 0.6 million or CAD 0.02 per diluted share a year ago. As of January 31, 2022, our financial position remains strong at CAD 61.7 million of cash and cash equivalents and unused credit facilities totaling about CAD 10 million. These funds will allow us to invest in our brand in Canada and the U.S. over the coming years in support of our growth objectives. Carl, back to you for concluding remarks.
Thank you, Ingy. The next months and quarters will be very active for GURU as some major Canadian marketing activities are put into motion. As mentioned, in the coming weeks, we will be kicking off major marketing campaigns to drive national brand awareness and trial, including the launch of Guayusa across Canada.
This product has been a true success in Quebec, generating record sales among all 2021 energy drink innovations since its official launch last November, and currently ranks as the number six top SKU in convenience stores in Quebec. We are confident that it will be well received in the rest of Canada as well. Guayusa will also become available in the U.S. by the fall. Later this summer, our second marketing campaign will be supported by a major media partnership, which will be announced in the next few months.
This partnership is expected to deliver major gains in awareness and trial at a moment where our distribution will be fully established and seasonality will be at a peak. On the product and innovation front, we will be listing our 355 ml four-pack format in English Canada, and introducing a 500 ml format for GURU Original and GURU Lite in Quebec in the coming weeks.
These will be our two first products in this larger format, which is very popular among energy drink consumers. This initiative will allow us to become even more competitive in the market by providing consumers with a broader range of choices. On the pricing front, as mentioned in our Q4 call, we reviewed the industry dynamics and decided to take a price increase, which will be effective mid-May. This will help us offset rising input and transportation costs.
This price increase is also in line with our pricing strategy and current industry practices. Just this last week, our distributor in Canada received confirmation of 1,700 new doors from several Canadian grocery and drug retail chains. A full banner and door count update, along with weighted distribution data, will be provided in the spring.
In conclusion, the current phase of our North American expansion is focused on deploying a significant proportion of our capital and resources to drive brand awareness and trial, and ultimately grow our consumer base and velocities in Canada, where GURU has been the fastest growing energy drink in the last 52 weeks. This expansion phase is supported by our strong financial position, allowing us to invest in our brand over a sustained period of time for the first time in our history in a new Canadian market.
We are also squarely focused on supporting and building our distribution partnership in Canada to ensure long-term success. With respect to the U.S., we will continue to methodically expand our distribution network with an emphasis on California through DSD distributors and online, which will allow us to be most cost effective, as well as through the launch of innovation to optimize our current product offering. This concludes our formal remarks, and we'll now turn the call over to the operator for the Q&A.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile a Q&A roster. Our first question comes in the line of Martin Landry from Stifel GMP. Your line is now open.
Hi. Good morning, Carl and Ingy.
Good morning.
Good morning.
My first question is on the price increase that you just alluded to that you're gonna take in mid-May. Can you quantify how much a price increase you're gonna implement? Is this gonna be enough to offset all your inflationary pressures? We're looking at aluminum prices, they're going up quite rapidly. Freight, labor. Just wondering, is there gonna be a transition period where we could see a bit of pressure on your gross margin before the full price increase is reflected?
Hi, Martin. Carl, I'll take that one, if you're okay.
Sure. Yes.
On your first point, yes, like you mentioned, we will be taking a price increase in mid-May. For competitive reasons, I'm not gonna be talking about the amounts right now. However, the price increase, of course, like you've seen in the rest of the industry, there's list price increases, and there's also an opportunity to reduce promotional spend, and we will be looking at both.
From an impact, yes, of course, like you've seen also as well, on our gross margin, we've seen already some impact of the COGS increase affecting our gross margin. Specifically for us, really the transport costs, which increased significantly for everybody in this industry because of the oil price increases.
We've seen already that our gross margin was impacted 1.5 points of it by the COGS compared to Q4, which was 1 point, and we will continue to see that. It might increase by another point in the coming quarter. However, it will be offset by the price increase in mid-May. Until then, yes, we will see some impact in the gross margin. Does that answer your question?
Yep, that's helpful. Thank you. you know, there's my second question is on the aluminum can market. There's a global really tight market. Some industry participants have faced shortages in aluminum cans. I'm wondering what's your strategy? Is this an issue? We don't hear you talk much about that shortage. Can you help us understand a little bit how you're coping with that situation and if this could be a concern or not?
Yeah. Rest assured, this is not a concern for us. We're not suffering from any can shortages right now, and it's also because of our strategy. Like you've seen with our build-up with our inventory, we're getting ready. We also early on, we've seen that risk, and we dealt with it early on. We committed early as well to can purchases to make sure we plan to have for our product launches, for our growth, and for the market dynamics that we're seeing. That's why we're not talking about it much.
Okay. Maybe last question, wondering if you can update us on your ACV penetration in Canada, if possible?
Yes, I can take that one, Martin. ACV now is way ahead of where we would have expected, right? As I said in our call just last year we were barely anywhere, right? In Ontario, West, and Atlantic. Now in convenience stores, we're reaching 90% distribution. Really, our exclusive distribution partner has done an outstanding job pushing distribution.
That's convenience stores. Now, with the extra door that we announced today, some are coming over in grocery drug and mass. Some are coming over in the next few weeks, few months. The expectations that we will reach around 70% distribution or average weighted distribution in grocery drug mass over the next few months. 90% in convenience and roughly 70% soon in grocery drug mass.
Cool. Perfect. Okay. Thank you very much. That's it for now.
Thank you, Martin.
Thank you.
Thank you. Our next question comes from the line of Nauman Satti from Laurentian Bank. Your line is now open.
Hi, good morning, everyone.
Good morning.
Hi, Nauman.
My first question is more on the revenue side. You've mentioned in your comments that there was 22% volume growth. When I look at your last year quarterly results, you were still growing your revenue by 23%, 74%, 22%, 38% quarterly. I'm just wondering, have you seen any benefits from this new distribution partnership? Initially when you went into it, were your expectations that the volume growth would be of this magnitude? Just trying to get a sense of how much improvement have you gotten from this partnership so far.
No, we're very happy with this distribution partnership, Nauman. Obviously, it's a transition year, right? We spoke about it last quarter, and I expect we're gonna be talking about this transition year throughout this first year as we establish our new baseline. This is you know, we're learning to work together, but the beauty is we are working very well together. We're making these adjustments, we're listing in a bunch of new stores. There's a lot of dynamics at play.
But so far, we just quoted the ACV gains that we've had, right? We couldn't be happier about that. This was the very first step in this distribution agreement, right? It was to make sure that the products would be available. Now we will be focusing on making sure improving execution at the store level, working with them. We will be doing more trade marketing activities. We will be doing more marketing activities, as we said, with many great campaigns coming over the next year. We have this wonderful foundation for growth that we have built with this partner. Very happy on that.
Okay. Essentially, I understand this is like now a transitional period, but once you're over it, we should expect similar growth in your dollar revenue as we had seen previously, right?
Oh, yeah. Over the long term. In fact, over the long term, the growth perspectives have never been better, right? We have to recognize and be transparent with you that this is our first year, right? This is what.
Mm-hmm.
This was planned to be a huge change for us, going from our previous distribution model to this new distribution model, listing in so many new accounts, investing for the first year in new markets, for the first time, real marketing investments, right? Some of the marketing investments, we, as we said, will take some time, and we're building a brand here.
Okay.
As we said. I don't know if, Ingy, you wanna add anything, but.
No, I think he said it very well. It's a transition year, and it's the same on all fronts. We're doing great, but of course, it's a transition for us, a big change.
Okay, that's fair. If I remember in fourth quarter, you had mentioned that there was some pull forward of revenue. Did the first quarter was impacted by that as well? I mean, if there was not that pull forward in Q4, you would have seen higher revenue there then.
Yes. Again, it relates all this. I think it all relates to your first question, right? This is because this is a transition year, you know, we're all adapting our inventory levels. One thing that's for sure in the beginning of a relationship like this, you don't wanna be running out of stock. You wanna make sure you have enough inventory.
Obviously, going into Q4, right, going into the winter season, some of those inventories may have seemed a little bit high. Now we're going into high seasonality. As I mentioned, Q1 April will be the first focus for our exclusive distributors, and we obviously are very optimistic about the summer and the weeks to come now that we have established our distribution.
On that front, you know, this is the same level of inventory could mean far less, far fewer weeks of inventory in the next few weeks, right? This is all. I think it's all under the same theme of making sure that we establish this new baseline throughout the year and learn to work together through this.
Okay. No, that's very clear. Just one last one from my end. Your balance sheet is pretty strong. You have over CAD 60 million of cash. If I remember correctly, you had mentioned that you'll be spending about CAD 20 million for advertising this year. Is that still the plan, or has there been any changes in your advertising budget for this year, given how strong your balance sheet is right now?
I can take it for the first part, and then Ingy can complement maybe.
Mm-hmm.
The plan hasn't changed. The plan is to invest heavily. We mentioned three major marketing campaigns. One is starting in April to support this sales execution that we're doing in Canada. There is some marketing dollars allocated to the U.S. as well. We're gonna be following with an outstanding summer campaign with this media partner partnership that we mentioned. We'll have another campaign in the fall. Three campaigns that will obviously cost some money, but we see this as investment in the future as we build our brand, so no change on that strategy.
Mm-hmm. Yeah.
Ingy, anything you wanna add?
No. We're so you have execution on strategy as planned.
Okay. Fair enough. Maybe just another one. I know you don't break that up, but any color if you could provide on growth in the Quebec market, which is where you already have a large market share. Just trying to get a sense if there is some growth happening there as well, or is it all outside of the Quebec market?
We changed the, we're providing you with the 52 weeks, so it's giving you an indication, right? We don't just we didn't want to spend these calls reviewing Nielsen data. You saw the 52-week number go up a little bit, right? That's an indication that market share is indeed growing.
Okay. Thank you.
Thanks.
Thanks for taking my question.
Thanks, Nauman.
Thank you.
Thank you. Our next question comes from the line of Amr Ezzat from Echelon Wealth Partners. Your line is now open.
Good morning.
Hi, Carl. Hi, Ingy. Good morning.
Hi, Amr.
Good.
I just wanna follow up on the distribution partner discussion. I mean, last quarter, you guys spoke to excess inventory that needed to be depleted through Q1. Now the language that I'm hearing is transition year. I'm just wondering, that excess inventory, is that all behind you now, or it's hard to tell the inventory levels within your distribution partners network?
There's a portion that, in full transparency, it's hard to tell because we don't, you know, obviously, we don't know exactly what the next weeks will. Because it's our first focus in April, and we have plenty of activity supported by market. We don't know how big the sales are gonna be in the next few months. We know we have enough inventory to go through this, right? Obviously, that's part of the question. Transition year, I think it's more about establishing the baseline, Amr, right? It's about saying, you know, what's the true new baseline? We don't have full visibility on 11, you know, PepsiCo has 11 hubs throughout the country with many SKUs, right? It's a little bit different versus when all this inventory was sitting on our own warehouses, and we knew exactly what we were shipping to every single distributor, right? That's what we mean by transition year, right? It doesn't mean it's not negative in any way.
No.
It's more about, again, we're learning to work together. So it's hard to know, you know, the level inventories versus shipments and how many weeks do we have now versus how many weeks we had before, right?
Yeah.
Obviously, you know, as we mentioned, Q1 was impacted by Omicron, right?
Mm-hmm.
I think if it wasn't for Omicron, everybody would agree that we would have had a better quarter if it wasn't for those restrictions. I think that's not a surprise, right? Now these restrictions are lifted, we have outstanding distribution, and we have outstanding marketing coming on board, right? Which means we think the shipments will be much higher over the next few weeks.
Okay. No, that's very helpful color, and I fully understand.
Yeah.
Maybe I'll give you another one that's also hard to quantify, but maybe you could give us your best estimate on, you know, like how much of an impact Omicron had on your 22% year-on-year volume growth.
Yeah. It's hard to put the.
Okay.
The number on this, right? It's hard to put a number, but we know that wasn't. For example, we know we're the number one brand with the 18-25-
Mm-hmm.
In Quebec, right? In our strongest market. We know that those, you know, most of those people, they're going to school, right? They stop going to school. They're studying from their basement. There was no Christmas party. There was no end of year university party. There was no
Yeah.
Real celebration throughout the year. There was no going back to university in January. That's just one example, right? Of an impact. If you think of all the restrictions which are kind of going against the occasions where you normally would expect someone to consume an energy drink, you say, well, yes, that's an impact on it. It's more impactful for us because we're.
Mm.
We're targeting a different consumer, right? Our consumer is white-collar, typically working from home or studying in university. It's not the typical blue-collar working on construction sites or working outside of home. We know that this has a bigger impact on us, but it's hard to just to really tell you, well, what would our growth would have been if it wasn't for that. I wish I could, but I just can't.
Right.
Well, I mean another way to look at it is maybe or to imply that number is if we look at like Quebec sales, excluding Guayusa, you know, and I assume that year-on-year number is probably, you know, lower than what you typically report, and I know you don't disclose this data, but.
Yeah. It would be one way to look at this. At the same time, you know, Guayusa has done so well, right? We know that there. We gained market share with Guayusa, but we also have a plenty of GURU consumers, right, who tried Guayusa for the first time and actually loving it, right? There is a portion of cannibalization within Guayusa.
Mm-hmm.
We also saw an outstanding like as expected, right? We wouldn't expect to launch a new GURU product and not have any GURU consumers like the new product, right? Some people are actually loving the Guayusa more than the other ones, which is fine, right? Which is totally fine. It's overall very positive for the brand.
There was a huge halo effect from that marketing campaign on the brand overall, all pointing towards the right direction. Yeah, it's one way to look at it, but I don't think it would be necessarily the best way to look at it in full transparency to say, okay, how do we grow our sales excluding Guayusa? Guayusa also would have done even better if it wasn't for Omicron.
Mm-hmm.
Mm-hmm.
We would have done more samplings. We would have more activities. There would have been more word of mouth in universities and during activities. Not the ideal situation for us, but.
No, no. Your point's well taken, and that's fair. Maybe on Guayusa, I'm not sure if you've got a market share number to share with us like you shared the December one. You guys have data post-December, and I know there was a big halo effect like you mentioned. You know, like, for the Guayusa launch in the rest of Canada, is there a Guayusa-specific marketing campaign or the strategy there is for the rest of Canada just to support the overall brand?
Yeah. There's two questions. What we're giving you in terms of Guayusa, we're giving you the ranking rank, which is outstanding. Guayusa is still ranking as the number six SKU in the total category, which is very high. We decided we gave you the number last quarter at 3.5%. Again, we don't want to be spending all our time giving you specific Nielsen data by SKU, so we're not giving you that, but it's still ranking very high, and it still has a big market share. That's one, right? Now, the second part of your question around the support, the marketing support. The marketing support will be different. It will feature Guayusa at the forefront, but it's more of a. That's what we call the botanical campaign, right? It's a campaign that's gonna.
The theme is Made with Plants . It's gonna be putting more emphasis on our botanical SKUs, right? This is what I mentioned in the call, the Matcha, the Yerba Mate, and the Guayusa. Guayusa will be at the forefront. This is more of a total brand campaign, right? To make sure that consumers outside of Quebec understand that like really the product USP, which is about making sure that people understand that GURU is organic, made with plant-based ingredients, healthy, better for you, really as a foundation for our brand. Before we move on to more of the lifestyle, marketing and the values of the brand, we first need to solidify the foundation, that this is a better for you plant-based product. Using our botanical SKUs for this is the right approach, right, in the beginning.
That's what we're doing over the next few weeks to months. Does that answer your question?
Yes. Yes. It answers both my questions. Maybe one last housekeeping one for you. On the marketing spend, you mentioned in your MD&A, in the prepared remarks that it was obviously tempered for the quarter with Omicron. Is it fair to assume going forward your Q4 level of SG&A, which was CAD 10 million, that'd be a good number to use?
Sorry. You cut. Sorry. What were you saying?
S-s-sorry.
Is that a fair number to use?
$10-ish million , which is what you guys spent in your fiscal Q4.
Yes. Well, yeah, because we spent a bit less in Q1. Like we said, the overall full year media spend, right? Yeah.
Yeah.
It's gonna be more spent in Q2.
Fantastic. Okay, I'll pass the line. Thanks.
Thank you.
Thank you.
Thank you.
Our next question comes from the line of John Zamparo from CIBC. Your line is now open.
Good morning, John.
Thank you. Good morning. Thanks. Good morning.
Hi, John.
I wanted to start on fuel prices, and we've all seen the change over the past few weeks, and I wonder if you've seen any impact looking at your C stores that offer fuel versus C stores that don't. Have you seen any change in sales velocity over the past month or so?
Yeah.
Do you wanna take that?
Do you want me to take this one? Yeah.
Go ahead.
Okay, I will. No, we haven't actually seen any change in traffic. Actually, traffic is back to same period last year level. We are seeing people starting to go back to the office. It's not impacting us in a negative standpoint right now.
Yeah. I would add that, you know, talking to some industry experts over the last week, you know, they're obviously the convenience channel is looking at this even more than we are looking at this.
Mm-hmm.
We are looking at this more as the weeks ahead being the strongest, you know, the months ahead strongest from a seasonality point of view. There was an article in the Convenience Store Association yesterday about the time change, which increases the consumption of energy drinks and caffeine because people lose an hour of sleep.
Then there was also an industry expert saying that historically, in periods of inflation, recession, higher fuel prices, convenience stores have done well because the consumers are actually buying themselves a little treat, right? They're cutting back on the bigger ticket items. The articles or the products you can find in convenience stores are kind of the little rewards of the everyday, which don't tend to suffer in those periods. Was that helpful, John?
Yeah, that's helpful. Thanks. I wanted to move back to the commodity side and, in particular, on aluminum. I appreciate the commentary on availability, but I wonder when this might impact your margins. I mean, the commodity is up 60% year-over-year, so I can understand if you
Mm-hmm
If you've hedged to this point. I wonder.
Mm-hmm
Is there some reason it won't become a cost headwind at some point? Can you quantify what % of your cost of goods are aluminum costs?
Yeah. Like you said in the beginning and for now, for us, it's not impacting our COGS too much, the aluminum cost increase, because of the way we work with our co-packers, because of the variety of co-packers we have and the agreements we have in place. However, it's true that at some point it will impact us.
If product cost continues to rise and aluminum cost continues to rise, it will at some point. Not in the next few months, but of course, later on, it might. For now, what's mostly impacting us, like we said, is really transport. This is what we're seeing because this is something that's like, you know, punctual and that happens right away, impacts us right away. That's what we're seeing. Like I mentioned before, what we're seeing is the COGS as part of the gross margin decline. We see that it's now 1.5 points versus 1 point in the previous quarter. It could potentially be hit by an incremental 1 point in the coming quarters as well.
Right. Okay. Are you able to say
Maybe, John, we can get back to you at some point on this. I don't know the answer top of mind, what's the actual percentage of the aluminum cost in our COGS. We have that number somewhere, but it's not a big proportion. Like, it's not the.
Mm-hmm.
It's not the biggest proportion. As Indy said, what's impacting us more now is transportation. Obviously, if aluminum costs keep going up, it could
Mm-hmm
It could have an impact at some point, but it's not over the next few weeks, few months, right? It's more over the long term. We can get back to you if we can be more precise on the percentage of COGS related to the actual cost of the can. Right?
Okay. Yep, that works. Getting back to Guayusa, do you have a way of measuring incrementality? Do you think the bigger benefit is frequency among existing consumers or you know, catching the eye of new consumers and introducing them to the brand?
What we know is every innovation is important in this industry, right? There are several elements why, right? We spoke a lot about the halo effect. For us, that's the biggest benefit. Every time we launch a new innovation, it tells the story of the brand, and it tells the story that we make these products with plant-based organic ingredients. That's number one. Every time we launch an innovation, it benefits the whole brand. That's number one, right?
Second, there's obviously shelf presence. There's no doubt that more SKUs gives you more shelf presence, which in turn grabs more of the consumer's attention, right? Especially if you're launching a really bright yellow, orangey can that stands out, right? It does help. It allows you to implement new promotions.
It gives you a reason to talk about your brand. It allows you to build more displays because you have new things. There's side benefits to that as well, right? Now, the whole thing around incrementality takes time. It really does take time, and it's more than a few weeks, few months, because you really have to look at, okay, you basically need to go down and dive into consumer data, not scan data, but consumer data and say, okay, which portion of the Guayusa consumers are actually ex-GURU Original or GURU Lite consumers, and which portion is actually ex-Red Bull and Monster consumers, or which ones are new to brand, right? It takes time to do this.
You can't look at this in the first few weeks and say, "Oh, because so many people are trying it in the beginning." It really is over time that you realize if your innovations are working or not, right? So far, we've been very good at this. If you look at our track record, our last three innovations have done extremely well, which means we have this great platform for innovation that works and supports the whole brand instead of just introducing a new strawberry or cotton candy flavor, right? Which is not what we do.
Right. Okay.
And.
Go ahead.
No, I was just gonna add a small thing that of course flavor is, was also key. For me, I know Carl knows, but Guayusa is my new favorite. For sure, I'm introducing it to new people. I believe that it will be a great success.
Yeah. That, you know, I agree with that. Like, I think the biggest success is to make those products with plant-based organic ingredients. Products that actually taste great, right? That's probably the big thing with GURU is that consumers are overwhelmingly telling us that the product tastes fantastic.
There is strong repeat rates. They not only love the brand, they love the story, they love the ingredients, but they also fall in love with the taste, which is, you know, it's a key driver. Whenever we do consumer research, taste is always coming up in the first criteria for selection of an energy drink, right? I don't wanna underplay flavor. I wanna say there has to be. There has to be more than just a new flavor, right? There's some other brands are doing this much more than we do, and they're launching a new flavor every week, and that's not what we do. Right?
Got it. Okay. That's all helpful. One last one. If you take a step back, what have you learned or what are you learning from the PepsiCo deal that you hadn't expected, now that you're a few months into it?
We learned that they can be much faster in distribution than we expected, right? I would not have expected to be on the verge of hitting 90%, 90% ACV and 70% grocery, drug, mass if you would have asked me a few months ago, right? Which is outstanding. Everything else was planned. The margin reduction, which might be received as important to many of you and for us also important, was expected and planned, and we did that for the good reasons. We're saving a lot of costs on the other side, right? We don't have to have the same level of sales force. We don't have to have the fleet. We don't have to have the same warehousing, right?
We're confident that this was the right, very much the right thing to do. Now this distribution gain, it just puts emphasis even more on why we need to invest in marketing to support this outstanding opportunity that we have now to transform this distribution and gain velocity and market share with those new points of sales, right? That's the key focus right now. It's marketing to grow these points of sales and grow the sales there.
Okay, great. That's helpful. That's all for me. Thank you.
Thank you, John.
Thank you.
Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Carl Goyette for closing remarks.
Well, I just wanna thank everyone for attending. This has been a great call and looking forward to talk to you again soon. Have a great day.
This concludes today's conference call. Thank you for participating. You may now disconnect.