GURU Organic Energy Corp.

Welcome to the GURU Organic Energy Fourth Quarter and Fiscal 2021 Results Conference Call and Webcast, being recorded today, January 20, 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, MD&A, and financial statements are available in the investor section of its website and on CEDAR. During the call, the company may refer to certain non-GAAP measures Reconciliations are available in its MDNA. 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 will now turn the call over to Carl Goyette, Guru's Chief Executive Officer.

Thank you, Operator. Bonjour à tous.

Good morning, everyone, and welcome to our earnings call. Joining me this morning is our CFO, Indy Seraf. 2021 was a remarkable year for Google. I am so proud of all that we have accomplished as a team and the significant progress we made over such a short period of time, laying the groundwork for our future growth, and all during an ongoing global pandemic. In fiscal 2021, our first full year as a public company, we achieved record annual net revenues, for an eight consecutive year, reaching a record 30 million in net sales revenues, while being highly profitable for most of these years. We made our first meaningful push across Canada and increased our total doors in North America by 59% to almost 24,000 doors as of today. The post Q4 increase from 21,000 to 24,000 doors comes mainly from the convenience and gas channel in Canada, as a result of our PepsiCo agreement, with the potential to increase even more as grocery drug mass retailers in Canada and the U.S. confirm their listings this spring. In addition, we rolled out two new product innovations in 2021, Yerba Mate to kick off our fiscal year and Guayusa Tropical Punch to cap it off. Even more significantly, by Q4 of 2021 and for the first time in Guru's history, we were finally able to really start investing in our brand. This investment is, of course, reflected in our results and will continue to be as we aim to accelerate our growth by driving brand awareness and trial. With over $75 million in available cash and credit, we now have the means to deploy the required marketing efforts to elevate our progressive brand in markets outside of Quebec. That's the plan we went to the market with a little over a year ago, and I'm proud to say we are now executing as promised. Some of the major marketing initiatives executed in Q4, and which you can expect more of through 2020 to include, the distribution of nearly 600,000 cans of Guru across Canada to various in-store and field marketing events, the deployment of our first major English Canada digital and out-of-home media campaign with the help of leading marketing agencies, Sydney, and Brand Momentum as part of our Back to University campaign. Beyond campus sampling, our Back to University campaign included event sponsorships, out-of-home advertising, and social media contests targeting 24 universities across Canada, including eight in Quebec. The Guayusa tropical punch launch in Quebec, supported by a big campaign this past fall on reality TV show Occupation Double, an existing partnership in which we invested more heavily in 2021 than in 2020, and by other trade sampling and out-of-home activations. The results generated by these investments so far have been very promising, and we believe a lot more can be achieved as we continue to build our Guru Nation. In fact, Our most recent market research showed that our brand awareness in the rest of Canada nearly doubled from Q1 2021 to Q4 2021. This increase was mostly driven by one of our key consumer target segments, which increased 17% from 15% to 32%. More recently, we also established unique partnerships with high-profile Canadian key results, namely Whistler, Brumont, and Sutton, which are being activated at the beginning of the calendar year. These types of partnerships are in line with who we are as a brand and will allow us to connect with a captive, active, and health-conscious audience via on-site sampling and various promotional events. You can expect more of these types of on-brand partnerships going forward and as the COVID situation normalizes. We also plan on doing more on the sustainability front Last year, we deployed our first nationwide cleanup programs, and we will accelerate that good energy movement next summer. We grew our team in 2021 to support our long-term growth plan and our increased focus on brand building activities, going from a team of about 40 to almost 70, primarily based in Montreal and California. Notably, Emmanuel Ouimet joined our team in December 21. as an Executive Vice President of Marketing. She has an extensive background and leadership experience in brand building, marketing, and e-commerce. Prior to joining Guru, she held senior leadership positions, including that of CEO at outdoor retailer Lacande. She has also worked with a number of brands in the last 20 years, including the North Face and Thales, and through her agency work at Taxi and Cassette. We are happy to have Emmanuel on board as we ramp up our marketing in Canada. While we have significantly increased our workforce over the last year, we nonetheless remain a nimble and asset-light company that relies on strong partners, from co-packers to distributors. We believe this is the right operating model as we look to accelerate our brand's growth and focus on elevating our brand in support of our expanded distribution. I'll now turn the call to Ingi, who will provide you with more details on our Q4 results. Nidhi, over to you.

Thank you, Carl, and good morning, everyone. Bonjour à tous. In Q4 2021, Guru generated record revenues of $8.5 million compared to $6.1 million last year, a growth of 38%. The increase was mainly driven by sales velocity growth and increased points of sale in Canada as we continue to execute our growth plan. Sales in Canada grew 39% as a result of higher volume in Quebec and high triple-digit growth in Ontario, Western and Atlantic Canada, mainly due to the large initial order from PepsiCo in Q4 2021 to kick off our partnership, which is partially offset by distributor product returns as a result of this exclusive agreement with PepsiCo coming into effect. U.S. sales which represent about 14% of net revenue on an annual basis, grew by 43% in U.S. dollars in Q4, or 37% 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 quarter based on SPINS data showing us 32% growth in retail sales nationally in Q4 2021 versus Q4 2020, as well as strong momentum in California, with 42% for the same period. As previously discussed, with this new Canadian distribution and sales model and the significant ramp-up of our marketing activities to execute our growth strategy, there has been an adjustment in some of our key metrics, namely on the gross margin and SG&E front, as anticipated. As a reminder, costs associated with PepsiCo services are included in our net revenues, at the top of our income statement. In parallel, Canadian sales-related costs have also been reduced, partially offsetting this lower gross margin. The overall impact to our bottom line is minimal, and in the long run, we expect the benefits of this PepsiCo agreement to greatly outweigh these short-term adjustments, which started in Q4 and will be fully reflected in our 2022 results. Q4 gross profit totaled 4.3 million compared to 3.7 million a year ago. Gross margin was 51% compared to 61% last year. As mentioned, this decrease in gross margin was mainly due to the change in our business model in Canada as a result of the PepsiCo agreement effective on October 4th. It includes distribution, selling, and merchandising fees. Gross margin was also slightly impacted by increased promotional activities and higher product costs driven by higher input and transportation costs. SG&E was $10.3 million compared to $4.2 million, an increase of $6.1 million. $5.4 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 plan as we entered into new markets. We made investments in several targeted marketing and advertising campaigns during the quarter. including the Back to University media campaign in Western Canada and Ontario, an out-of-home and digital campaign, the launch of a Quebec-specific marketing campaign this past fall with reality TV show Occupation Double, an existing partnership in which we increased our investment in fiscal 2021 compared to 2020, as well as supporting ongoing field and trade marketing investments, notably in California, and continued investments in our online sales platform. Note that the increased quarterly marketing spend in Q4 2021 is more indicative of what we can anticipate going forward as we aim to sustain our brand awareness and trial activities, although it is expected to fluctuate from quarter to quarter due to timing of certain investments and seasonality. Driving brand awareness over the coming quarters in support of our national distribution campaign and national distribution in Canada is key to our success. as we aim to grow our Canadian market share while also sustaining our leadership position in Quebec. Now, back to our results. Adjusted EBITDA was negative 5.7 million compared to negative 0.4 million a year ago due to higher SG&A partially offset by an increase in gross profit. Net loss for the quarter totaled 6 million or 18 cents per diluted share compared to a net loss of 3.1 million or $0.11 per diluted share, a year ago. In Q3, the closing of our financing has considerably enhanced our already strong financial position, which now stands at $67 million of cash and equivalent, and unused credit facilities totaling about $10 million as of October 31, 2021. These funds will allow us to make significant and meaningful investments in our brand in Canada and in the U.S., over the coming years in support of our growth objectives. We remain prudent in the context of COVID-19 and the Omicron variant, which has resulted in another round of restrictions and lockdowns in various regions, including restrictions on gathering and pushing back the reopening of on-campus learning in many regions of Canada, among many other measures. Obviously, this isn't ideal for us, considering our core consumer base. But the important thing is, that any near-term impact on sales or our ability to execute certain marketing activations will be transitory and really a question of timing. On the operational front, we also continue to have contingency plans in place and are holding higher inventory levels to ensure that our operations run as seamlessly as possible in the context of ongoing supply chain and logistic pressures. Carl, back to you to discuss our next steps and outlook for 2022.

Thank you, Angie. In 2022, our focus is on the execution of our marketing and selling strategy to increase Guru's brand awareness, to stimulate product trial, and ultimately our sales in Canada as well as in the U.S. with a focus in California. As we move forward and as reflected in our fourth quarter results, we will continue to invest in our brand. These types of investments are a prerequisite to compete on a bigger scale and make sense now that we have a strong partner and high levels of national distribution in place in Canada. With a strong cash position, we can now compete more effectively with larger brands and increase our brand awareness as we solidify our leadership as the national energy drink market disrupter. Based on recent and ongoing surveys and field assessments, which confirmed our number one brand status with the 18 to 25 age group in Quebec, We know we are on the right track to attract the next generation of energy drinks consumers, whether they are existing energy drink consumers or new to the category. We aim to achieve this by leveraging and adapting our learnings and key success factors in Quebec and to deploy these across Canada and California while continuing to reinforce our position in Quebec. The first few months of the current calendar year will be critical. This is when retailers make their annual planogram and product listing decision for the next 12 months. Given that this is our first year of our partnership with PepsiCo, we expect the coming weeks to be very busy as we continue to receive product listing confirmation. From a timing perspective, a lot of those decisions are expected to be confirmed in Q2. So we can expect some seasonality impacts in Q1 on account of that timing and given PepsiCo's sizable initial order in Q4. In Canada, we anticipate that in addition to our partnership with PepsiCo, the positive impact of our fall brand marketing campaign will support an increase in the number of doors in 2022. The latest numbers provided by PepsiCo are showing significant distribution gains in Western Canada and Ontario, reaching over 85% weighted distribution in the CNG channel this past December. Our number of doors is moving rapidly every day, now reaching almost 24,000 doors. We will provide a full update on the door count after the review period next spring. For now, the weighted distribution gains we are experiencing reflect impressive ramp-up in Canada since the adoption of our new distribution model on October 4th. On the product and innovation front, we will be introducing a new larger 500ml format for Guru Original and Guru Lite starting in Quebec this spring. To compete against the leading brands, as 45% of the Quebec energy drink volume is consumed in 473 ml formats. This will bring more choice to consumers. We will also be launching Gulu Guayusa Tropical Punch across Canada in the spring, which has been a true success in Quebec, already generating record sales among all 2021 innovations in the industry since its official marketing launch last November. Specifically, Guayusa's market share jumped to 3.5% of the overall market and made the top 10 selling skews over a four-week period in December 2021. A record among all 2021 industry innovations, which is an even stronger performance than the Yerba Mate launch a year earlier. New product innovations like Yerba Mate and Guayusa Tropical Punch continue to be an important part of our growth strategy and will continue to diversify our product offering in the future. In the U.S., we continue to make inroads in California with increased product demand and the signing of additional banners, independent retailers, as well as regional distributors, which will result in an increase in doors in 2022. Our U.S. strategy remains threefold. Continue to focus on California, negotiate regional distribution agreements and continue our expansion in select recognized banners with a regional and national presence. Online activities also continue to show solid results, having grown threefold since the onset of the pandemic. Our strategy for this sales channel will remain the same, meaning continue investing in consumer acquisition and our e-commerce platforms. This concludes our formal remarks. I will now turn the call over to the operator for the Q&A.

Thank you. And as a reminder, to ask a question, simply press star 1 on your telephone. To withdraw the question, press the pound or hash key. Again, that is star 1 if you have a question. Our first question is from the line of Martin Landry with Stifel. Your line is open. Please go ahead.

Hi. Good morning, Cal and NG. Salut, Martin. Good morning. Hello. My first question, I want to touch on your gross margin. I was wondering if it'd be possible to get a bit more color on the change on a year-over-year basis. It eroded by roughly 1,000 bps, and you talk about promotional activities being One of the reasons you talk about higher input costs and Pepsi and just trying to understand a little bit how much of the change goes into each bucket.

Yeah, for sure. I'll take this one if it's okay with you, Carl.

Sure, go ahead.

Okay, so as expected, our gross margins were lower in Q4. And I'll break out the 10%, you know, the 10-point decline there from 61% to 61%. So if we look at it, 80% of it is really due to this change in new business model in Canada. Of course, a portion of which is being recovered lower in the financial statements, right? The sales expenses, the clients. The other, another 1% or one point you could say is due to the promotional activities. And that will vary from quarter to quarter. And the last one is really due to the higher cost and transportation. So as you can see, the majority of it is really due to the change in business model. And we expect this really to be the lowest it's going to get from a gross margin standpoint. So it should be getting better. And of course, this will vary based on cost pressures, pricing opportunities in the market, and the promotional environment.

Okay. That's a very good answer. If I may add, this was all expected, obviously, when we negotiated this agreement. We knew this was coming, and when we looked at our business model, we really thought it was worth it. If you look at the gains in distribution that we have made over the last few months, going from, let's say, in April last year, going from roughly a 30% distribution in convenience stores to 85% now, If you compare the cost of those margins versus what the cost would have been for us to do this ourselves, it's just compared. It would have taken years for the Guru Salesforce to get to those levels of distribution. So it was all planned and we're very happy with this decision.

Okay, that's helpful. And I just want to touch a bit on the promotional activity. You know, In their analyst's day last week, Monster indicated that they were doing less promotional activity given the inflationary pressure on costs and that this was kind of acting as a similar way to a price increase. I'm just wondering, what are you seeing here in Canada? Are you seeing less promotional activity versus last year?

You can go ahead, Angie, and I'll jump in. Okay, perfect. Yeah, so we're seeing competitors doing that type of behavior in two different modes, right? So one of our competitors is taking price increases while the other may be reducing promotional spend to protect themselves from these increases in cost. So as you mentioned, like you heard on the call, so both strategies are coming up to say that, yes, there is less promotional activities or pressures. And we are seeing these opportunities, and I want you to be assured that You know, we will remain on strategy from a price positioning standpoint. And we are evaluating this, so we will not be leaving any money on the table. We just don't want to do it, you know, well.

Yeah, nothing to add.

Okay. Okay, and then maybe my last question is on Guayusa. The launch seems to have been very successful. And I'm wondering, now that you have a bigger portfolio, you probably are seeing an impact on your velocity. And I was wondering if you can discuss high level, how has your velocity gone up in Quebec since the launch of both the Yerba Madre product and Guayuza?

Yes, I don't have the exact numbers in front of me, but the velocities of Guayusa, obviously with 3.5% market share, you know, 3.5% market share is reflective of very high velocities, obviously. It's been, you know, Guayusa exceeded our expectations for sure. There's no doubt. Obviously, when you launch a new product, there's always a little bit of cannibalization. You're launching a new, there's a big campaign going on. A lot of our Google consumers are also trying the new innovation. But overall, this is all very positive for the brand. There's a positive upside in total velocities and market share for the brand. Now we need to wait a few more months to see how many new consumers are really new to the brand versus just changing and switching skews within the family. But overall, we're very happy with not only the execution of the marketing plan, the distribution gains we made with Guaissa when we launched it, but also making the list of the top 10 selling SKUs in Quebec in December is quite an achievement for a new innovation. Obviously, a very big success.

Okay, that's it for me. Thank you. Thank you, Martin.

Thank you. Our next question comes from Norman Sati with Laurentian Bank. Your question, please.

Hi. Good morning, everyone.

Good morning.

Hi, Norman. Hi. So, yeah, my first question is I think in your prepared remarks you've mentioned that there was a large PepsiCo order. So I'm just wondering if there was – some sort of pull forward from that order, and you may see some light first quarter. So if you could share some color, how much of it would be, like how big that order was, and if the first quarter would see that impact.

Do you want to go ahead or do you want me? No, I can start. I can start this. There is, you know, we're, this is, we're all, we're learning to dance with classical, right? So this is a transition period. We started in October 4th, as you know, which was the end of our fiscal year. At that time, it was very difficult to forecast for both our teams and the PepsiCo team exactly what the amount of inventory we would need. There were so many new doors we were going in. It was high velocity. We were launching Guayusa. So they placed orders. And over the course of the quarter, we realized, well, there's some inventory readjustments that need to be made. So they started the quarter with some higher levels of inventory that needs to be depleted through the Q1. That's all we're going to say for now is just transitory adjustments in the new relationship, but overall it's all positive.

Okay, now that's fair. And just maybe, I think you mentioned it, that this is probably the bottom off. gross profit margins and they're going to improve I'm just wondering how gradual that process would be like is it every quarter a few basis points or is it like after one year that we can see some you know substantial improvement like what's the pace going to look like for that yeah well I'll go back right to the basis right that of course there's a change in business model so

there's an impact on the gross margin that will remain some of it, right? Because don't forget, we went from just moving the product at the gross margin level where now they're also doing moving, selling, and merchandising the product. However, like we said, this is the lowest because we are seeing some – the trade spend is less than originally anticipated. So we are seeing some advantages there. But, of course, it's going to vary based on pricing opportunities, promo, like I said, and cost pressures. So we will see some improvements. And I believe that, yeah, we'll see a couple of points improvements coming throughout the year. And, again, it's going to be re-evaluated every quarter. Of course, you know we're learning to dance, like Carl said, right? So it's a first year, it's a setup year, it's a transition year, all four really making sure that we're well set up doing the groundwork for future growth.

Okay, no, that's great, Keller. And maybe just one last one from my end. So if I – heard that correctly, so for next year, we should expect advertising and marketing budget in the range of 2021 million?

We don't really give guidance on these things, but you can expect, you know, we went public to make sure that we accelerate our growth, and by accelerating our growth, we need to invest in our brands, right? And this is what we promised we would do, and that's exactly what we're doing. We will continue to invest in our brands.

So, yeah.

That's what I think. I don't know if you want to add.

I know I want to add on this to say, you know, if you look at, as we often discuss, we went public and we raised money to invest in marketing. So this is, again, all very much planned and we're executing, as promised, the marketing plan that we said we would execute. Now, if you look, the SG&A, you're going to see the SG&A. You've seen in the last quarter the SG&A increase. But what we can say about this is 85% of DSG&A increase is indeed sales and marketing, right? So this is really money going towards building our brand and making sure that we build this foundation for growth for the future. So yes, you will be seeing continued investment in our brand for the next quarters. And I don't think you should see the investment we made in our brand in Q4 as exceptional. We want to be continuing to invest in our brand over the next few years, right? So this is why we have money that we raise to invest, and I'm repeating here, to invest in our brand. So expect that to continue. This is our plan, and this is what we want to execute.

Yeah, no, that makes sense. That's it from me. Thank you for taking my questions. I appreciate it. Thank you.

Thank you. Thanks. Our next question comes from John Zamparo with CIBC. Your question, please.

Thank you. Good morning. Good morning, John.

Hi, John.

I wanted to start on the distribution points, the increase to 23,700, I think it was. Can you talk about the cadence of that growth? I think you had said 21,000 in the last MD&A, and I'm trying to get a sense of how much of the increase was prior to the PepsiCo deal versus subsequent to it.

Now, subsequent to the PepsiCo deal is really the CNG increase, where the Canadian doors went from 10,000 to 12,700. And all of these doors pretty much since the PepsiCo deal are CNG, convenience and gas. So there's 2,700 new convenience and gas doors since the start of the PepsiCo agreement. Now, as we've discussed in the past, the grocery drug mass channel is a little bit more strict around their review period, which means even though we started on October 4th, the PepsiCo sales team and key account managers are meeting the retailers right now. They're having the discussion. The grocery drug mass retailers are really doing their research in the spring, and they're very strict about that. But this is why we mentioned in our call that we're going to be doing a full review of our door count in the spring once we have all the confirmations and we've aligned with the retailers on both when the product is going to be on the shelf and the marketing plan so we can give you an update. But obviously, very impressive growth in door count or weighted distribution since the start of the PepsiCo agreement. Very thought about.

Okay, that's helpful. My second question is a follow-up on the prior one about pricing, and I kind of wonder how you think about the strategy as you increase doors so much with PepsiCo as a partner and as you get the brand in front of consumers who maybe haven't seen it before. Do you view that as an opportunity to leverage promotions even more, or is margin protection a greater priority in the near term?

I'll jump into Angie on this. Um, you know, we haven't built, we haven't built this brand on price in the past and we will, our goal is not to have consumers pick Google or for a cheap price. We want consumers to pick Google because of better ingredients and a brand that better connects with their values. So, um, I, I, in some ways it, it, it answers your question. Now, we want to be competitive, right? Our strategy has always been to try and be at parity or close to parity with the market leader. That's not changing. So from a promotional environment, if most of the promotions are being run, let's say, at two for six instead of two for five, well, we will start running promotions at two for six instead of two for five, right? If the environment, and that's a significant increase just on promotions. Now, if there is opportunities on pricing, as Indy mentioned, we will take full single unit pricing as well. Um, so there's, there's really two ways and that's what the industry is discussing right now. This is what the reference was made to some of our competitors and their investor calls as well. They're looking at the promotional structures, but also the pricing to see what's the best way to take, to offset some of the, some of the costs that are, uh, inflation in the cogs. Does that answer your question, John? Nope.

That's helpful. Thank you. Um, and, uh, sticking with the, um, the monster call from last week, their data seemed to suggest that the convenience store channel was growing a little slower than the overall energy drinks market. Is that what you've seen in Canada as well, or do you think that's unique to the U.S.?

Overall, the industry is doing well. I don't know I can come back to you on the convenience stores versus the grocery stores in Canada specifically, but we're reading the same the same documentation as you guys. We're all getting the same information. So I'm assuming what you're reading is right. Convenience is still by far the leading channel for energy drinks. It's something around 75% for our consumers. Our consumers who are more white collar, more educated, sometimes grocery drug mass and natural channel is very important for us as well. So we view both channels as being very important for our future. Just as well as online. We haven't spoken about online, but online in a pandemic, in order to access the progressive, educated, white-collar consumers working in front of their computers is a great way to access consumers. So overall, the industry is going well. Consumers need energy, and they need healthy energy more than ever before. And I think it's the right time to reach the consumers, regardless of the channel.

Okay. Okay, understood. And one more, just a housekeeping question. You mentioned a partial offset to the sales growth was the return of products to the prior distributors. Can you share the approximate size of that return?

That would be more of a question for Angie.

Yeah, yeah, yeah. So, yeah, there were not significant major returns. We had a very good smooth transition, but there were still returns, right? Yeah. That's all I can say. Okay.

Fair enough. Thank you very much.

Thank you. Thanks, John. Thank you. And this concludes our Q&A session. I will turn the call back to Carl Goyette for his final remarks.

Thank you. I just want to say thanks to everyone for attending and stay safe, stay healthy. Have a great day.

Thank you, ladies and gentlemen. This concludes today's program, and you may now disconnect.