Welcome to the GURU Organic Energy Q4 and full fiscal year 2022 results conference call and webcast, being recorded today, January 26th, 2023 at 10:00 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, 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. 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.
Thank you, Operator. Good morning, everyone, and welcome to our earnings call. Joining me this morning is our CFO, Ingy Sarraf. For those who are following the webcast, you will now be able to turn the pages of the presentation on your own. Let's now turn to slide four . 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 two major accomplishments. First, GURU Organic Energy drinks are now distributed in more than 96% of convenience and gas stores and 70% of grocery drug mass stores across Canada.
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 five. 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 revenues 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 after-sales services in return for a discounted price. This discount had a CAD 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 fill of about CAD 2.7 million in Q4 2021, and the balance close to CAD 1 million in retail pipeline fill in Q1 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 CAD 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 strategically timed Q2 launch, which pushed our innovation launch to Q2 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 to 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 billboards outside of stores. We will also be targeting key urban areas where our brand positioning resonates best with consumers and where our marketing spend gain the most traction. Turning to slide six. In the U.S., our consumer scan data showed continued growth in our area of focus in California, where we solidified our number one energy drink position in the national store sector. According to SPINS, 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 GURU Guayusa Tropical Punch in targeted banners. The U.S. launch of our top innovation, Guayusa, has delivered strong results.
It became the number one 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 Q4 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 Q4. Ingy, over to you.
Thank you, Carl, and good morning, everyone. Looking at slide eight, in Q4 2022, consumer scan 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 Carl, because of the transition year, growth in consumer sales has not yet translated into revenue growth. Net revenue for the Q4 was CAD 6.8 million compared to CAD 8.5 million for the same period in 2021, mainly due to the initial pipeline fill 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 CAD 2.7 million in Q4 2021 versus Q4 2022.
Excluding a one-time price discount of CAD 0.4 million to a club wholesaler, the company's U.S. performance held steady during the Q4, with GURU continuing to hold the number one energy drink position in the natural store sector in California. In Q4, 2022, gross profit totaled CAD 3.5 million compared to CAD4.3 million for Q4, 2021. Due to pricing initiatives, gross margin was 52.1% for the Q4 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 CAD 7.8 million for Q4, 2022 compared to CAD 10.3 million for Q4, 2021.
Selling and marketing expenses accounted for CAD 5.5 million of the CAD 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 -CAD 4.0 million, a CAD 1.7 million improvement from -CAD 5.7 million in Q4 2021 due to higher gross margins and lower selling and marketing expenses. Net loss for the Q4 was CAD 3.9 million or CAD 0.12 per basic and diluted share, compared to a net loss of CAD 6.0 million for the Q4 last year, or CAD 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 31st, 2022, our financial position remained very strong, reflecting prudent balance sheet management with cash and cash equivalents and short-term investments of CAD 46.3 million and unused credit facilities totaling about CAD 10 million. This puts GURU 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.
Thank you, Ingy. Turning to slide nine. We are confident that the ROI from our new business model and our expansion activities will materialize in the long run as we complete our transition to the new business model in the Q1 of 2023. 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 a marathon. Similar to our path to growth in Quebec, GURU's growth strategy will take time and sustained effort. We continue to drive past each milestone and are proud of the progress we are making. We are increasing the GURU brand awareness in Canada, which gives credence 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 campaigns 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.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Martin Landry with Stifel GMP. Please go ahead.
Hi. Good morning, Cal and Ingy.
Good morning, Martin.
Good morning, Martin.
Good morning. My first question is on your SG&A expenses during the quarter. They came in lower than our expectations and also lower than year-over-year. I was just wondering, did you delay some of your marketing spending into fiscal 23?
Carl, I'll take this one, if it's okay, and you can build right on.
Yeah, go ahead. Yeah, yeah.
Yeah. No, we didn't really delay any marketing spend. Rather, what we saw in Q4 is, first of all, we started to adapt, right, our spending to return gradually to profitability. We continued investing. In Q3, where you saw the biggest chunk is because we had The Amazing Race, all the festival and events, and mostly all of the summer activities, right? That's why you saw the shift in Q4, that's a bit lower. It goes hand in hand with seasonality as well.
Okay.
Does that answer your question?
Yeah. No, it does, it does. Maybe, Cal, 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, you know, objectives in terms of additional doors? You know, you're talking about a new innovation coming to market. Also, you know, what could we expect in terms of, you know, in terms of scan retail sales? You know, 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 wanna give guidance, but, you know, anything you can talk to in terms of what's on deck, what's the outlook, how you see the industry and also given, you know, the macro outlook, it would be super helpful.
Yeah. Okay. Of course. There's several questions into that question, Martin, but I'll start with I guess I'll start with the number of doors. As you heard in my remarks, distribution and convenience and gas in Canada is pretty much complete. I think we're close to almost 100%. There will be a few in convenience, but I think where we're gonna see some more gains is in grocery drug mass, where there are still some room to go. We will be gaining, for example, with 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, around 150 stores. 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, right? There is rooms to improvement in it. For example, improving the planogram, improving cold placement. We've realized over the last year that grocery for us, right, premium grocery mainly, especially cold, is really delivering growth and delivering velocity. This will be one of our focus. I think in a nutshell, from in terms of doors, that's what I would say.
In terms of what we expect for the year, I think it's important that we mention that, you know, 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 I've spoken my remarks about the fact that the pipeline sale continued into Q1 last year, so that's something to be expected. We also saw it was the end of our distribution partner, PepsiCo's 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. We don't expect any further reduction beyond the point we are, where we are there, right. Now, in terms of scan, it's hard to forecast scan data, Martin, right.
If I look at the latest data, December was softer for us. December's 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 multi-packs. 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? 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.
Okay. Maybe just last question. How are you seeing the macro outlook impacting your industry? Are you seeing, you know, volumes in the industry slow down? Or can you talk maybe to?
How's the industry perform in the last recession? Did, you know, did the volumes go down, or is this more resilient than, and less cyclical than others? Any tidbits on that would be helpful.
Yeah. No, the last recession was a long time ago, and the industry was very different. I don't think we're getting any good insights from the previous recession. We're getting insights in terms of indulgences and daily treats, which are resilient through recession, so that's a good indication for energy drink. The best indication is the last few months, last few weeks. I'm sure you saw the same industry data. The energy drink industry is still growing both in volume and in dollars. Obviously, there has been a lot of pricing activity. Yes, the industry is growing roughly at 10% more than in dollar than in volume, right?
If 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 CAD 14-CAD 15 in dollars. That's kind of the pace we are seeing now. What we're starting to see, right, though, is the consumers to be, they seem to be smarter, right? 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. For example, they might purchase a little bit more in bulk. That started, right? For example, multi-packs, like four-pack started growing rapidly during the pandemic, but it's continued lately, right? Mainly in the Christmas period that we just talked about. Multi-pack is something that we're looking at.
Maybe for example, consumers instead of buying single, they're buying in multi-pack to kind of buy their. If they buy in multi-pack, they're basically buying at the price they used to pay when they were buying singles, right? They kind of avoid the price increase by doing so. We're seeing smart behaviors for consumers in their purchase habits. Will that last? It's hard to say. Is that helpful, Martin?
Yeah. Thank you very much. That's it for me.
The next question.
Thank you.
Pardon. The next question comes from Amir Attar with Echelon Capital Markets. Please go ahead.
Hi, Carl. Hi, Ingy.
Good morning.
Hi.
Maybe a two-part question, to piggyback on Martin. On the pace of like selling and marketing, as you mentioned, Ingi, you started to be more selective in your spending. I'm wondering how we should be thinking about 2023, in terms of like CAD budgets. Is it a year where you're still like pretty selective?
Yes. Yeah. I think from for 2023, we still see it as an investment year, that's for sure. Yeah, to your point of selective is we're gonna have much more focused investment. Carl mentioned it in his remarks. We will be spending much more on social, but we'll do fewer billboards, fewer events. That's one thing. The other piece is I think from a cadence standpoint, it's still the same, right? Spring and summer are really our peak periods. We will continue to be investing. You'll see 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.
Understood. Understood.
Yeah.
Understood. That's very helpful. I guess like on that point, like Carl, you spoke to like focus on velocity in 2023, 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 2023?
Oh, absolutely. There will be national campaigns. I would say it's important for us to take the learnings, right?
Mm.
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 four rounds of research, right? Every time we did a marketing campaign, it was followed by a 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? 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 next for the future. The reality, Amir, is 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 with PepsiCo. Now we're adapting this, right? In some ways, we're going back to our roots. We have been very disciplined. As you know, in the past, we were always profitable. Going back to what's really working for us, right? Maybe letting go some of the stuff that is not necessarily working for us, right? I think we're using one of many example. One example, for example, if it would be to put a fridge in a store instead of buying a billboard outside of a 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. The billboards can play a role, and I'm not saying we're never gonna do a billboard ever again, right?
These are the types of things that we're gonna do. We know that POS material in store, for example, is much more effective than billboards. If we're gonna invest in advertising, might as well invest at the point of sale. Then I could go on and go on and go on, but then I would give you all my playbook.
No.
I think.
Yeah. No, that's very helpful. I sort of, I mean, you see it probably in your research data and so on, totally makes sense to me. On the California side, continued great success in the natural channel. 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. You know, like, would you be outside of these channels? Can we see you go into more traditional channels, let's call it?
Yes, absolutely. We're gonna do this in a methodical way, right? 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? We know we can't focus everywhere. We had to make choices last year where we decided to focus in California on very specific areas, right? We focused on California, we focused on Whole Foods, we focused on natural, we're focused on online. While we're very focused on gaining distribution for Guayusa, which is already a success, right? These are the areas of focus now. At the same time, we know that there is more opportunity in other channels. There is opportunity in premium grocery, there is opportunities in club, right?
We will be making that transition, right, to other channels. We will be doing this gradually, right, just to make sure we don't defocus ourselves from where we're winning and where we can be also methodical about our growth, right? 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 'cause it could get very expensive very quickly, right?
Okay, 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.
No, you could. You could. Again, the reset period is, you know, we're waiting for some news and some banners. You know, you could see us in this, but this is not gonna be a transformational thing for next year, right? I think, you know, we're optimistic about some more action into the club channel, but we have nothing to announce yet. 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.
Okay. That's really good color. Maybe one last one, and I'll pass the line. I'm a little surprised with the Guayusa success in the U.S. Ike you guys mentioned, 1 SKU, ahead of your Original as well. What do you guys think is driving that? Can you remind us in Canada where does Guayusa sort of ranks relative to your other SKUs?
Yeah. I'll start with Canada. Guayusa was extremely successful. Like we said, we've repeated this all year. It's, it's an extremely well-performing SKU. Consumers love the taste. Obviously, the yellow can is bright. It stands out on the shelves. I think the loyal Guru consumers are looking for innovation. They want something different. It gives them a chance to try. 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 taste compared, for example, to Matcha, right? This is one. In Canada, it's doing extremely well. In Quebec, it's ranking in the top, up 10 SKUs overall, right?
Mm-hmm.
At some point, it reached 3.5% market share. In Quebec, it's the number one innovation in terms of energy drinks. It's the number one flavored energy drink. If you remove the traditional legacy flavors, like if, for example, a Red Bull Original or a Monster Original or GURU Original, Guayusa is the top flavored SKU in Quebec. It's doing extremely well. Yes, we have big expectations for this in the U.S. 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 GURU SKUs. What we need to really see over the midterm is how many new consumers we're getting into this.
Then can you remind us, like, what's the lineup of SKUs you have, like, in California? like, do you have, the original, the lights, Guayusa?
Yerba. Yeah, Yerba Mate and Matcha.
Matcha. Everything's there. That's great color. I'll pass the line. Thanks, guys.
Thank you.
Thank you.
The next question comes from Monica Lutz with CIBC Capital Markets. Please go ahead.
Good morning. Thanks for taking my questions. 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 or input costs are over the next few quarters.
Yes, sure. Nice to meet you on the line, Monica. It's Ingy.
Yeah. Thank you.
Yeah. So what we've been seeing from that standpoint is, two of the positive things is we're seeing, the transport craze, it's calming down a bit. Of course, the price of oil is still high, but, we're still seeing a calm 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 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. As well, what we do, since we have multiple suppliers, is we also have agreements in place. That's what helps us.
Same thing with aluminum. 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, we always balance, right, our production because we work with several co-packers, and cans, to make sure that we optimize on that. Very manageable risk on that standpoint for us.
Okay, great. Appreciate, appreciate the color. That's all for me.
Thank you.
The next question.
Thank you, Monica.
The next question comes from Sean McGowan of Roth Capital Partners. Please go ahead.
Hi, Carl. Hi, Ingy. How you doing?
Very good.
Hi, Sean.
Thank you, Sean.
Good. Good. A couple of questions. I wanted to turn back to some cost questions. First, just to clarify, would the cost of refrigerators be in marketing or in G&A?
The, you mean the coolers in store?
Right.
Yeah, that would be in sales and marketing.
Sales and marketing. Okay.
Yeah.
On the G&A line there, that was not only lower than I expected, but it was lower than the Q4 of last year, and I think lower than every quarter since the Q2 of fiscal 2021. Is this, you know, dollar level, is this like a new normal or were there some offsets in the Q4 that make it look lower than the sustained rate will actually be going forward?
Yeah. Yes, there were some offsets in the Q4, of course, on that standpoint. Yeah, there was some offsets with the bonus payouts and all that. You'll see that in the G&A. Other than that, I think the message here is more it's gonna be more stable throughout the future. We're on that stable line. There was a bit more of offsets in Q4.
Yeah. okay. When I meant offsets, I mean, were there, like, benefits that you would see in the quarter? Like, is the underlying sustained rate of G&A, is it actually higher than what we see reported on that line for the Q4?
Yeah.
Is this a pretty good level to use going forward?
The total SG&A, or you're talking more about G&A?
I'm talking about G&A excluding sales and marketing.
Yeah. Excluding sales and marketing, you'll see it as, yeah, that could be the basis moving forward.
Oh, okay.
Could be a bit higher some quarters just because. Yeah, yeah, it's actually we're out of it. The only thing that I'm saying is we're putting in place, right, a new ERP. That's why you're seeing sometimes some quarters increase, and we're getting to the end of that, hopefully with a great new implementation in the coming quarter. Other than that, it's pretty stable. Yeah.
Okay. Helpful. Another financial question. There was a bit of a share buyback in the quarter from a cash flow standpoint. Is that like a one-time thing or is that gonna be ongoing?
No, this is ongoing. We, as we discussed when we launched the NCIB, whenever there is the right opportunity, we will use it. This is not gonna. We don't expect this to be very significant, but we want to have this in place. If the right opportunities present themselves either through blocks or whatever, we will be using the NCIB. We think there's great return for all investors.
Okay. Carl, are you willing at this point to say when the company might cross into positive EBITDA?
No, we can't say this. One thing for sure is that, you know, we what we said is that
One can always ask.
2023 is an investment year, Sean. I think what 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 since becoming public, Ingy's keeping us lean and mean on that front. You know, we're keeping that to a minimum. As the sales and marketings are gonna remain high, right? Sales and marketing is gonna 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? 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.
Yeah, I like that message.
Okay. Last question from me then. The scan data, you know, the retail consumption suggests that inventories at retail are in pretty good shape. Is that what your data is showing? You know, that you're not over-inventoried or dramatically under-inventoried at retail?
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 decent level. As I mentioned, there was a bit of an adjustment on the PepsiCo side in December, right. They shipped a lot more than they ordered. That's gonna be impacting Q1, right. We expect this to be around CAD 750,000 or something like that, right. Three weeks of inventory. That's gonna have an impact on Q1. 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.
Great. Okay. Thank you very much.
Thank you, Sean.
Thank you, Sean.
This concludes our question and answer session. I would now like to turn the call back over to Carl Goyette for closing remarks.
Thank you. No, I just wanna thank everyone, all the analysts and all the investors who have entered the call. Have a great day.
The conference has now concluded. Thank you for your participation. You may now disconnect.