GURU Organic Energy Corp.

Welcome to the GURU Organic Energy Third Quarter 2021 Results Conference Call-In Webcast, being recorded today, September 14, 2021, 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 the 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 CDAR. During the call, the company may refer to certain non-IFRS 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 GRU'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 four looking statements on slide two of the presentation. I would now like to turn the call over to Carl Guyot, GRU's Chief Executive Officer.

Thank you, Operator. Bonjour à tous. Good morning, everyone, and welcome to our third quarter earnings call. Joining me this morning is our CFO, Ndi Seraph. This past quarter has been quite active for the GRU team. Since the signing of our game-changing agreement with PepsiCo Beverages Canada and the closing of our $50 million financing, we have been working to successfully transition our Canadian distribution activities to PepsiCo. The process is going very well and will be completed before the agreement takes effect on October 4th. Our existing distribution partners have been extremely collaborative in this process. The feedback from our retailers has been overwhelmingly positive. We feel really good about what's to come. In terms of our financial results, Google keeps growing quarter after quarter despite COVID-19's challenges. We achieved record revenues in Q3, reaching $8 million with a gross margin of 63%. Our 22% increase in revenues versus same quarter last year was primarily driven by sales growth in Canada due to higher velocity and increased points of sale. Online sales continued to grow and perform well as a result of continued investments in consumer acquisition. In Canada, we are in full execution mode, following new doors added in the last months in Ontario, Western Canada, and Atlantic Canada. Our new banners are pleased with the results so far, and we anticipate investing more to grow a Canadian market share over the coming months. Once the PepsiCo agreement takes effect and we reach higher distribution levels, we will significantly increase our upper funnel awareness marketing investments. We have been running digital in-store field marketing and sales activation to drive consumer interaction and brand trials. And these activities are now ramping up and will continue to run throughout the year. We've also been careful with our investments due to ongoing COVID-19 restrictions across Canada this summer. We did nonetheless distribute 350,000 Guru cans over the spring and summer periods as we look to increase brand awareness and convert new customers across Canada with our tried-and-tested liquid-to-lips approach. We are also running our first national Back to University campaign, which includes sampling, event sponsorship, out-of-home advertising, social media contests, and other unique activations on campus at 24 universities across Canada. including eight in Quebec. These activities are in the process of being rolled out, so stay tuned. Turning to distribution, subsequent to Q3, we confirmed two major convenience and gas banners in Canada, representing more than 1,000 additional points of sale. We also have added another 1,000 independent retailers in Canada and in the U.S. These upcoming distribution gains are thanks to the relentless efforts of our sales force and the support of our new distribution partners. We expect to get on the shelves in these new locations during the fall of 2021. Although our sales efforts are year-round, our industry follows a seasonal cycle, with fall being the season during which we are traditionally the most active in terms of soliciting major banners ahead of their annual planogram and product listing decisions for the following year. During the spring, we are then able to start confirming product listings as well as rolling out in-store availability. However, as isn't the case of these last wins, there are always some exceptions to the cycle, and we are really pleased to be able to jump on this opportunity to expand our presence in the CNG channel. While growing our business is our top priority, we remain very much in touch with our social values, which matter to us, our employees, and our consumers. We are always looking for ways to support our communities, protect the environment, and share some good energy. From June to September, the Guru Good crew, comprised of our employees, Guru ambassadors, and volunteers, organized 60 community cleanup initiatives across Canada. From riverbanks to skate parks to hiking and bike trails, the Guru Good crew collected litter and gave a shiny new look to some of our most beloved outdoor playgrounds while sharing the good energy and meeting new consumers. Guru teams across the country have also been supporting frontline workers throughout the summer. In May and June, over 35,000 cans of Guru were donated to frontline workers, including healthcare workers, first responders, and COVID-19 testing and vaccination clinic staff. I'll now turn the call to Inji, who will provide you with a summary of our financial performance for Q3. Inji, over to you.

Thank you, Carl, and good morning, everyone. In Q3 2021, we generated record revenues of $8 million compared to $6 million last year. The increase reflects sales growth in Canada as a result of velocity growth and increased points of sale. Sales in Canada grew by 32%, including triple-digit growth in Ontario, Western, and Atlantic Canada, while U.S. sales declined by 7% in constant dollars or 18% in Canadian dollars. U.S. sales which represent about 15% of total sales for the first nine months of fiscal 2021, decreased this quarter mainly due to the timing of sales, as our launch in the fresh market was postponed from June to August, and to a stronger 2020 comparative quarter, which saw a spike in sales due to a COVID-19 rebound effect in buying activity after the first wave. We expect our U.S. performance to get back in line in Q4 based on SPIN data showing a 38% growth in retail sales nationally in Q3 2021 versus Q3 2020, as well as an even stronger momentum in California with 54% for that same period. Gross profit totaled $5 million compared to $4.4 million a year ago. Gross margin remained strong at 63%. compared to 66% last year. The decrease in gross margin versus last year was due to increased promotional activities and higher product costs, driven by increased demand for ready-to-drink beverages and higher transportation costs since the onset of the pandemic. SG&E was 7.2 million or 90% of sales compared to 2.7 million or 41% of sales a year ago. The increase is mainly the result of our expansion initiatives which included field and trade marketing investments in Ontario, Western, and Atlantic Canada, expansion plan investments, set-up costs incurred for the national Canadian distribution agreement, as well as additional costs associated with the operations of a public company. Adjusted EBITDA was negative $1.5 million compared to earnings of $1.8 million a year ago due to higher SG&A partially offset by the increase in gross profits. As a result, net loss totaled $2 million or $0.07 per diluted share compared to a net income of $1.2 million or $0.05 per diluted share a year ago. In Q3, the closing of our financing has considerably improved our already solid financial position, which now stands at $68.5 million of cash and cash equivalents and unused credit facilities totaling about $10 million as of July 31, 2021. These funds will allow us to invest in our expansion activities in Canada and in the U.S. over the coming years. Starting next quarter, and as a result of the change in our Canadian distribution and sales model following to the PepsiCo agreement, you will start seeing an adjustment in some of our key metrics, including gross margin, as the costs associated with PepsiCo services will be included in net sales at the top of our income statements. We also expect Canadian sales-related costs to be reduced, which will partially offset the lower growth margins. We expect the impact of these changes to be minimal to our overall bottom line, and that, in the long run, the benefits of our agreement to greatly outweigh these short-term adjustments. These adjustments to our financial statements will begin in the fourth quarter and will be fully reflected in the first quarter of fiscal 2022. As in the previous quarter, we remain prudent in our assessments regarding the impact of COVID-19 on our business going forward. Since the beginning of the pandemic, we have put in place contingency plans and increased our inventory on hand to ensure that our operations run as seamlessly as possible, no matter what the business context. That being said, we remain hopeful that we will return to a more normalized situation in the coming quarters. Carl, back to you to discuss our next steps and outlook for the coming quarters.

Thank you, Angie. We recently reported the key findings of a comprehensive market study conducted with 1,500 energy drink consumers across Quebec, which pegs Guru as the preferred energy drink brand for young adults. The study confirmed that 37% of consumers under 25 consider Guru their number one energy drink brand. Nearly 50% of Guru consumers are women compared to just 27% for other energy drink brands. The next generation is choosing Guru because it uses healthy, better-for-you plant-based ingredients to deliver the desired energy boost. Finally, Guru attracts new and loyal customers primarily by attracting newcomers and by converting existing energy drink consumers from their largest legacy energy drink brands. These findings confirm that we are on the right track in fulfilling our mission of cleaning up the energy drink industry with the next generation of consumers as we look to replicate and adapt our success in Quebec across Canada and California. To give you some context, our current brand awareness in Quebec is very strong, coming in at around 70%, whereas in the rest of Canada, our brand awareness was less than 20% this past spring. Our marketing investments are aimed at closing this gap over the coming years so that we can reach strong brand awareness levels Canada-wide, which will result in market share growth. And of course, we will remain very active in Quebec to maintain our strong brand awareness, from maintaining our successful reality TV partnerships to regular marketing activations with our leading demographic. Thanks to our strong brand and success in Quebec, new partnership with PepsiCo solid financial position and first mover advantage, we now have what it takes to significantly grow our business across Canada and in the U.S., providing a sought-after healthy alternative in our category, delivering good taste and good energy. Let's now have a look at what we have in the works for the rest of the year. We are currently executing our marketing strategy across Canada through various mediums to increase our sales velocity with existing and new banners. As added support, we have retained the services of Sidley, a global creative and brand-building agency, which should give us the added push we need to accelerate our Canadian distribution efforts. Innovation is an important part of our growth strategy. We will be launching a new organic energy drink this fall. This innovation will continue to reinforce the Guru brand story, using plant-based ingredients from Mother Nature instead of chemicals from a lab. The agreements of PepsiCo will bring many advantages over the short term, including a more efficient distribution system through their mega distribution facilities. In addition, we will benefit from the support of their sales and merchandising teams to make Guru available in a larger number of outlets across the country and improve our execution of the point of sale. As for the U.S. market, we are in the process of reallocating resources towards our U.S. sales force. This move will allow us to put more emphasis on the U.S. market without distracting our team from our near-term priority, which is to support PepsiCo in Canada. Our U.S. strategy is threefold. Continue to focus on California, negotiate regional distribution agreements, and continue our expansion and select recognized banners with a regional and national presence. Finally, we will continue to invest in consumer acquisition and our e-commerce platforms to grow our online business. which has grown almost threefold post the onset of the pandemic. We believe that this will continue to be an important channel going forward with the shift to online accelerated by the pandemic expected to remain. This concludes our formal remarks. I will now turn the call over to the operator for the Q&A.

Ladies and gentlemen, if you have a question or a comment at this time, please press the star then the one key on your touchtone telephone. If your question has been answered and you wish to move yourself from the queue, please press the pound key. Our first question comes from Martin Landry with Stiefel.

Hi, good morning, Carl and Angie. How are you?

Hi, Martin.

Hi. Very good, thank you. My first question is with regards to your distribution agreement with Pepsi. I was wondering if you can give us more color on the transition between Some of your retail partners hold inventory of Guru's products in their DC. And given that Pepsi will distribute for you, this inventory is not going to be needed anymore. So how does that impact your sell-in near term? And is that offset by increased sell-in into Pepsi to build their inventory?

Hi, Martin. Carl, I'll start on this one. So, yeah, exactly. You said it exactly well, Martin. We do not expect any material really transition issues because, to your point, retailers are starting now to deplete their inventory while PepsiCo is building their inventory. So it's kind of a net neutral.

Yeah, so if you remember, Martin, this is something we had discussed last quarter. So the current distribution system has a level of inventory, and it was difficult to predict. Um, but you know, we're now just 14 days away from the transition. And really what we're seeing is that pretty much the inventory depletion that's happening at the distributor level is going to be offset by the inventory that's being built at, uh, on the PepsiCo side. So really it shouldn't be material, right? It's not going to be exactly the same, but we don't expect this to be a major, a major impact on Q4.

Okay, cool. And, um, Again, with regards to Pepsi, you've mentioned that they have access to more than 25,000 distribution points in Canada. I was wondering, what kind of penetration rate could we expect in the first year and perhaps in the second year, assuming that it all goes according to plan?

Well, first I'd like to say that it's a bit too early to answer this right now, but of course, considering that they have access to hundreds of reps and many more retailers, it will allow us to penetrate the Canadian market much faster. So hopefully it's also giving us less barriers to entry into these outlets because of the great PepsiCo name and the feedback that we're getting from retailers. But it's still a bit too early to say how many retailers we will be in.

The key point, Martin, you're going to see, you're going to see your ACV levels, right? You're going to see your distribution levels go up over the next few months as this distribution agreement starts. And we're going to be reaching levels that justify additional marketing investments. Remember when we were talking about our two-step marketing model back then and saying, you know, at first we focus on generating trial and bottom-up funnel activities. We will really now have a platform where we have enough distribution to go and invest more in marketing to generate awareness for our brand and continue generating trials because we know this works and really grow our market share. So distribution is really going to be significantly increasing over exactly how many, I'm within G, right? Exactly how many of the 25,000 doors we're going to have, we don't know, but expect the needle to move, right?

And we're really excited about it.

Of course.

Okay, and then my last question is, Just wondering if you have some comments on the rollout of your products into the convenience and gas channel in Canada. I know it's the beginning, but still, you have some data points. I'm wondering, are velocities up to your expectations? Are retailers listing most of your SKUs, and have competitors reacted yet?

Yeah, there's quite a few questions in there, but the good news is retailers are happy. The retailers are happy with our launch. They are listing most of our queues. In general, remember, we focused on our core 355 ml queues. We were able to list also the smaller format to 50 ml in the larger retailers. So it varies depending on the size of the stores, but in general, I'd say it's an average of four queues and and the retailers are happy with our launch. On velocity and market share, we always want more. The reality is I don't think we'll ever be happy until we've replicated the success we have in Quebec. We're starting from a smaller base. It's just the beginning. We never expected this to be instant and easy, but as I said, retailers are happy, and we're starting a distribution partnership with PepsiCo which is really exciting times. This is going to expand distribution, and then we're really going to expand marketing investment to move the needle both on the distribution but also on market share. So it's really, I guess, it's exciting times for us. Perfect.

Thank you.

Thank you, Martin.

Our next question comes from Nam Insati with Larrington Bank. Good morning, Martin.

Good morning, Carl. Morning, Angie. How are you? Very good. Thank you. Good. Thanks. So, yeah, my first question is also about the transition to PepsiCo distribution. I'm just wondering that on the retail level, will that have any impact or is everything sorted out on that front or how does that play out as it shifts from, you know, multiple distributors to, let's say, one PepsiCo distributor itself?

Well, Actually, we've had some really good feedback from our retailers. It's been overwhelmingly positive on that front. So I expect it to actually be better, right? They have more people, big sales force, they're used to the brand. So it's actually a good story.

Okay, that's fair. And if I can add to this, the teams are really working well together. They're meeting retailers together for the transitions. As Indy said, retailers are super positive. It's been impressive for us to hear from the retailers the reputation, the strong reputation that the PepsiCo team has in the market. So it's very reassuring.

So the sense that I'm getting is that during this transition, there's going to be nothing materially changed that's going to happen, right?

No, there's going to be a few exceptions here and there. There's a few retailers who are negotiating with PepsiCo. But as you said, it's not material. Some retailers are used to buy more on deals, have bigger inventory, might be reduced. But overall in the market, we still see this partnership as a very positive thing for Guru, for retailers, but also for PepsiCo. But Ingi, you wanted to add something?

No, I just wanted to add to your point that we're working very closely with PepsiCo for the transition. So to make sure that everything's going well, and it is, right? It's going very well. We're on time. We're according to plan to be able to launch for October 4th. So we're happy about that as well.

Okay, no, that's great. And just you've mentioned, I think, in your MD&A that there are some cost pressures, which is understandable. I think it's an industry-wide problem. But I'm just wondering that as you procure some of your cans, is there any supply pressures there? There may be some pressures on the cost side, but no pressure on sourcing them in time. There's no problem there, right?

No, no, from sourcing them in time, no, because of our proactiveness, right, with our inventory and the fact that we have a flexible supply chain where we work with many co-packers, so all that's going according to plan. No, there's no pressure on that front.

Okay, that's great. And just last one, on the U.S. side, I'm just wondering now you guys have this good, strong balance sheet. how much of a focus or advertising would sort of go towards the U.S. operations? Or is that still the same that the first focus is towards Canada and, you know, once you build the infrastructure in the U.S., then you'll back it up by advertising there?

Yes. Like Carl mentioned, I believe in past calls and, right, we always come back to, you know, starting first with distribution and trial and then moving on to bigger media advertisement and you know, awareness to make sure that when people hear about the brand, they could actually go and find it. So, yes, we're moving with, in Canada, we're going to go much faster to awareness investments because of the, you know, the help of TipsyCo on the distribution side. And in the U.S., we're actually focused now in California much more into distribution and trials to then in the future move into awareness initiatives.

Okay. And this, you know, maybe it's too early to ask, but So, for instance, where you guys right now sit in Canada, outside of Quebec, like the initiatives that you're putting out in support of the brand, when can that same thing happen in the U.S.? Like, is it three, four, five years from now, or is it like two years from now?

No, no, no. Again, if you think back, we've only been public for not even a year now, and we're quite proud of our execution. And so far we've executed what we said. We always said our marketing model was to first, you know, before we go and spend and invest a lot of money in marketing, you need to be building distribution, right? And the first step we always said we were going to do is to expand distribution in the rest of Canada because this was the low-hanging fruit, right? There's still a lot of work that needs to be done, but we have the right partner to do this. So now we're really in a position to expand marketing investments, right? We're going to be looking at doing the same thing in California over the next year or two. It might not be with a strategic just yet. We're starting from a smaller base in the U.S., as you know. But we're going to be expanding distribution significantly in the U.S. And then once that's done, it will justify broader marketing investments. So we start moving the needle on that front. The strategy always remains the same. And we keep focusing on Quebec because Quebec is important and We are executing in the rest of Canada, and California is our focus in the U.S. So expect more to come in California over the next two years.

Okay, perfect. That's it from my end, and congrats on the good quarter. Thanks.

Thank you.

Thank you.

Our next question comes from Amir Azad with Echelon. Good morning, Amir.

Good morning. Hi. Hi. So a couple of questions. Can you give me a bit more color on the U.S. performance? You mentioned engineer-prepared remarks. There was obviously pent-up demand, which helped last year's quarter, as well as a launch delay at fresh markets. But if I'm comparing your U.S. revenues to last quarter, you're sort of down 5-ish percent. I know it could be rock and roll quarter to quarter when it's a small base, but wondering what is driving that decrease there. anything special there, or am I reading too much into it?

Yeah, it's mostly, really, it's more about the first nine months of the year, and if we look at the first nine months of the year, because like you say, you know, it's really from quarter to quarter, it's a timing thing. If you look at the first nine months of the year, in constant US dollars, we are up 13%, and when you're very intelligent, it's five, but we are up, and it's really going well, actually. Like I had mentioned in the call, and it's about spins data, right? So us retail sales, and this is where we're seeing really good growth, right? So at the consumer level, so 38% nationally quarter to three 2021 versus same period last year, and 54% in California. So okay,

I'm reading too much into what is the short answer, I guess.

Yeah, the reality is it's going well. You know, we expected questions on this, and, you know, I guess we don't like that either, but it's really a timing of order. There was lots of noise last year, remember, of COVID bump and all that, right, which kind of changed a few things for distributors and retailers. But overall, you said it right. Don't read too much into it.

Okay. Then maybe like on the U.S. side again, like Guru Yerba Mate launched June 1st, I believe. Any sort of early performance read-throughs that you could share with us?

No, I wish I had only anecdotal stuff. From an anecdotal point of view, it's way too early. But anecdotally, retailers are really supportive. We're getting great feedback. We're seeing some great things on social media as well. But too early to give you any sort of reading from a sales point of view. Okay, I'll bug you next quarter.

I'll remember that. You don't split it this way, but maybe you could – I'm not sure if you're willing to – Give us, like, a high-level sort of split of how much of your sales and marketing dollars are going into the U.S. versus Canada. Angie, what do you think?

Oh, you want me to take it?

Okay. Yeah. Just a high-level split, like, percentage, range. It doesn't have to be exact.

I'm just – Yeah, we don't really – like you said, we don't disclose this information, but – Of course, with everything that's going on now with the rest of Canada and being set up with PepsiCo, you know, it's fantastic. We're investing much more into marketing. And like Carl said, soon in the awareness part, so with big campaigns, you see that cost will be much heavier there, right, in the short period. So I could give you that.

Maybe we can come back to you at some point. I think it's a fair question to ask, right? The reality is I don't have the details top of mind. We obviously have that information. Maybe we can come back to you. But I think strategically, the more we have distribution, the more we invest in marketing. It just makes more sense because your marketing dollars are more productive. We've always been very, if you look at our track record, we've done a lot with very small marketing budgets in the past, right? So now we have a lot more, but we're still being careful on how we invest it, and we don't want to waste marketing dollars in areas where distribution is not optimal yet.

Fantastic. Carl, the brand awareness stats you gave were interesting at the end of the call. Like you said, 20% in Canada. outside of Quebec. I'm not sure if you have that stat, but how does that number sort of compare to a year ago or two years ago?

Yeah, no, we're going to be tracking this, obviously, because this is going to be a key measure for us as we look at the effectiveness of our marketing investment. But we don't have those numbers just yet. They come from consumer research. These are done through consumer surveys and Again, being careful with our spend, we're not running these types of surveys every month, right? So we did one in the spring. We are now implementing significant marketing investments. We will be measuring marketing awareness growth over the coming months to really measure the effectiveness of our marketing. But I don't have that data yet.

Great. Thanks. That's all I had for you. I'll pass the line. Thank you.

Thank you.

And I'm not showing any further questions at this time. I'd like to turn the call back over to our host for any closing remarks.

Well, thank you, operator. I just want to take the time to thank you for all. Thank you, everyone, for joining this morning. Have a great day.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.