Nova Cannabis Inc

TSX:NOVC

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, and welcome to the Nova Cannabis First Quarter 2023 Financial Results Conference Call. Yesterday, Nova Cannabis announced -- issued a press release announcing their financial results for the first quarter ended on March 31, 2023. This press release is available on the company's website at novacannabis.ca and filed on SEDAR as well. The webcast replay of the conference call will also be available on the Nova website.

Presenting on this morning's call, we have Marcie Kiziak, Chief Executive Officer; and Cam Sebastian, Chief Financial Officer. Before we start, I would like to remind investors that certain matters discussed on today's conference call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the company's financial reports and other public filings that are made available on SEDAR. Additionally, all financial figures are mentioned in Canadian dollars unless otherwise indicated. We will now make prepared remarks and then move to analyst questions. I would now like to turn the conference over to Marcie Kiziak.

[Marcie Kiziak, executive]

Good morning, everybody, and thank you for joining us today. Nova's success in today's challenging market landscape is a testament to our team's passion for the industry and our relentless pursuit of becoming one of Canada's largest and most sustainable cannabis retailers. We remain committed to serving diverse customer segments and building a platform that caters to the entire cannabis ecosystem.

While our strong operating foundation guides our ability to deliver on our customer promise, it is the dedication of our team that truly brings our retail experience to life. I am proud of the team's effort and determination through the first quarter as we start 2023 with strong momentum.

In the first quarter, we made steady progress in all key financial metrics such as revenue growth, gross margin improvements and growth in adjusted EBITDA. Nova posted revenue of $60.2 million, a 21% increase compared to the same period in the previous year. The company reported increased gross margin of $12.9 million or 21.4% of revenue in the first quarter of 2023, a significant jump of 37.4% from the $9.4 million reported in the same period for 2022.

Despite the expected dip in traditional retail sales during this period, we successfully maintained our gross margin in the previous quarter. As of May 10, 2023, Nova currently operates 92 stores, primarily under the Value Buds and Firesale Cannabis banners.

Our market share in January and February was 20.7% in Alberta at approximately 3.4% in Ontario based on management's estimates using the available industry data. Cam will provide additional details on our financial and operating results. But first, I'd like to delve deeper into our strategic growth initiatives.

We continue to test price elasticity of specific product categories while remaining highly competitive on our key value drivers. Our team remains focused on optimizing category management and we are carefully curating our product mix to align with purchasing behaviors, offering a good, better, best approach that caters to high value-oriented customers.

Value Bud's private label continues to bolster our total margin growth at the 28-gram cookies and kush and tropics and haze SKUs entered the Ontario market this past February. Both offerings are in the top 10 SKUs of their respective category and represent 10% of all 28-gram products sold in Ontario. Our 14-gram SKUs will arrive in Ontario in the third quarter.

To further enhance our category mix management and margin strategy, our data licensing program is driving notable margin growth and revenue with no significant associated cost of sales. In the first quarter, we optimized our data licensing program to increase mutually beneficial results for both our retail operations and licensed producers.

Leveraging value book volume and the company's access to high-quality analytics, we are well equipped to deliver successful outcomes for our partners. We plan to scale this program through the Nova Reorganization, adding an additional 32 stores to our network.

We believe this expansion will significantly increase margin and revenue opportunities, and we expect to realize accretive results on our data licensing revenue in the forthcoming quarters. With Value Buds retail volume and with a significant upside potential through Firesale Cannabis for licensed producers, we've positioned ourselves as an ideal partner within the industry and are continually focused on driving enhanced performance for both licensed producers and our retail operations.

To stay competitive in today's market, it is essential to be nimble and continually adapt our programming to meet the needs of our customer and the industry. Firesale Cannabis was introduced as a pilot concept subsequent to quarter end and aims to tackle the issue of mass cannabis oversupply.

This venture helps to capitalize on nonoperating leases, reduce return to vendors and recapture margin while offering unique customer experience for those looking for the ultra-value cannabis product. We understand that unconventional solutions are required to overcome the challenges facing the cannabis industry.

Our offerings are designed to be a tool that promotes a healthier industry while establishing ourselves as a trusted partner for both provincial boards and licensed producers. The Firesale Cannabis banner offers a solution to the issue of cannabis waste and oversupply in the industry by creating a marketplace for licensed producers and provincial boards to sell their access and slow-moving inventory at a discounted rate.

This enables license producers to recoup some of the costs associated with their excess inventory while also reducing the amount of cannabis waste. The reduction of oversupply can also help to stabilize prices and support a more sustainable cannabis market. Ultimately, we believe that these initiatives will help to create a stronger and more profitable cannabis sector in the long run.

Turning to our expansion opportunities. The Nova Reorganization will significantly enhance Nova's platform, which was approved at our AGM on May 5 is expected to close in June of this year. Upon the completion of the Nova Reorganization agreement, SNDL will transfer ownership of approximately 32 stores to Nova, with the majority operating under the Spiritleaf and Superette banner in the markets of Alberta, Saskatchewan, Manitoba, Ontario and British Columbia.

The Nova Reorganization will increase our store count by over 35%, growing our presence to 120 stores nationwide, expanding our reach in key markets such as British Columbia and Ontario. I look forward to providing additional details due to the closing of the transaction.

Additionally, I encourage you to visit our website, novacannabis.ca, for a comprehensive presentation outlining the benefits to both Nova and SNDL. I will now pass the call over to Cam to cover our full financials and operating results.

[Cameron Sebastian, executive]

Thank you, Marcie, and good morning, everyone. Now let's discuss Nova's first quarter 2023 financial results. I want to remind you that all amounts discussed today are in Canadian dollars unless otherwise noted. Certain of the quarterly and yearly comparisons I will be referencing are for the prior quarters or measured against the previous year. The sequential quarterly and yearly comparisons may provide additional context considering Nova's rapid growth and expansion over the past 2 years.

In the first quarter of 2023, as Marcie highlighted, sales increased 21% compared to the first quarter of 2022 to $60.2 million. Compared to the fourth quarter of 2022, sales declined slightly by 2%, highlighting the seasonality of our business. The year-over-year increase is primarily due to the 17 retail cannabis stores that were opened from the beginning of 2022 and through March 31, 2023, and the increased sales from stores that were rebranded to the Value Buds discount banner at various times throughout 2021 and 2022.

Nova now has a total of 92 retail locations operating compared to 74 at the start of 2022. Three of these locations have been opened in 2023. Same-store sales continue to be strong and improving. In Alberta, the average annualized sales from stores which have been open for at least 1 year are approaching $3 million per door.

In Ontario, we are also seeing significant ramp-up in sales per store as more recently opened stores become established and attract market share. Gross margin for the quarter was $12.9 million, up $3.5 million or 37% from $9.4 million in the first quarter of the prior year.

First quarter sales revenues include $1.5 million from proprietary data licensing sales which have no direct associated costs and represent a 31% increase from 2022. We expect continued expansion in the scope and scale of our data licensing programs.

The gross margin as a percentage of sales before the data licensing was 19.3% for the first quarter of 2023 compared to 16.8% in Q1 of 2022. Data licensing revenue increased the gross margin by approximately 2 percentage points in each quarter.

While we continue to experience price compression in markets we serve, we also continue to capitalize on select opportunities for accretive margin expansion in key trade areas. Our Value Buds private label offerings have also bolstered margins, adding approximately 5 percentage points compared to most of our other brands.

Overall, margin strategy and performance continues to reflect the brand strategy to sell good cannabis more affordably to our consumers. Adjusted EBITDA defined as operating profit before depreciation, impairment, transaction, restructuring and other costs, for the 3 months ended March 31, 2023, was $3.2 million compared to $1.4 million for the first quarter of 2022 and consistent with the prior quarter.

The increase over the 2022 quarter was primarily a result of the increase in sales and gross margin year-over-year. For the 3 months ended March 31, 2023, the company recorded a net loss of $544,000 compared to a $3.5 million net loss for the first quarter of 2022.

For the 3 months ended March 31, 2023, cash used in operating activities was $1.4 million compared to $5.9 million in the first quarter of the prior year. The change in year-over-year cash used reflects the continued success of our strategic path to sustainable profitability.

During the quarter, cash used in investing activities was $498,000, a $2.4 million decrease from the $2.6 million cash used in investing activities in the first quarter of 2022. This decrease resulted from a reduced level of construction related to new store openings year-over-year.

An additional 4 to 5 stores are expected to open in the second and third quarters in addition to the approximately 32 stores expected to be acquired through the Nova Reorganization. In the quarter, cash provided by financing activities was $794,000, reflecting cash provided from the company's revolving credit facility, partially offset by the principal portion of lease payments.

Nova has an uncommitted revolving credit facility with our partner, SNDL, with a commitment of up to $15 million. At March 31, 2023, $11 million was outstanding on the credit facility and on May 10, 2023, $11.8 million in principal and accrued but unpaid interest was outstanding on the credit facility. And the company has approximately $4 million of cash on hand.

The revolving credit facility's maturity date was extended to June 30, 2023, in order to align with the expected closing of the Nova Reorganization at which time Nova will receive an additional $10 million in liquidity from a replacement credit facility.

Marcie mentioned that the Nova shareholders approved the Nova Reorganization of the company's Annual General Meeting on May 5. In addition to increased credit capacity through the expansion of the credit facility, the Nova Reorganization will also provide Nova with a broadened portfolio of retail assets through the addition of approximately 32 additional stores and enhanced corporate services through a management service arrangement with SNDL.

The agreement enhances shareholder value through the return of shares by Sundial to Nova for cancellation and increased expected liquidity through the expansion of Nova's shareholder base via the distribution of certain Nova shares currently held by SNDL to SNDL shareholders.

In addition to the credit facility, on July 22, 2022, the company announced the establishment of an at-the-market equity offering program or the ATM program that allows Nova to issue up to $20 million of common shares from treasury to the public at the discretion of the company and subject to regulatory requirements.

To date, the company has not accessed the ATM in a material way due to market conditions and trading blackouts. However, it remains available as a source of capital if required. Balancing growth with increased profitability and cash flow generation is a key priority for Nova in 2023.

We are pleased with our progress in store count profitability and cash flow from operations compared to both the prior year and prior quarters. Now I would like to turn the call back to Marcie for closing remarks. Thank you.

[Marcie Kiziak, executive]

Thank you all for joining. Looking to the second quarter, we are excited about the opportunities that lie ahead, including the Nova Reorganization with our partners at SNDL. Our aim is to maintain our position for stability and growth through 2023 and further expand our retail banners to the market.

We believe that there are still significant opportunities for margin growth in the cannabis industry, particularly as the market continues to consolidate and pricing stabilizes. As our data licensing program progresses, I look forward to reporting on its success in future quarters. I will now pass the call back to the operator for analyst questions.

[Operator]

[Operator Instructions] Our first question is from Frederico Gomes with ATB Capital Markets.

[Frederico Yokota Gomes, analyst]

Congratulations on the quarter. My first question is on your gross margins. So obviously, they continue to improve, a very impressive expansion over the past year. And Marcie, you mentioned that you have a positive outlook there. So how much room do you view for gross margin expansion over this year and the next? And can you talk a little bit about the drivers for that expansion? How much additional margin you think you -- could come from just general price increases? And how much of it would come from changes in product mix or your data licensing strategy?

[Marcie Kiziak, executive]

Thanks for the question, Frederico. I'll kick it off and then if Cam has anything to add, certainly, we'll throw it to him. There's a few things that we continue to look at the margin in terms of -- if you look at the categories and the margin within each category really, really closely. And so for us, we really want to make sure that we're making the right decisions in terms of product mix as well as what that looks like from a margin perspective. We -- so a few things, we've got more private label products that we think we're going to hit the market or hit for us this year. So that's going to also be accretive for us. So that's good news there for us. And then we're also making some decisions in Ontario around how we're going to structure the margins in Ontario. That market has always been and continue to be -- continues to be a bit of a battleground for us. But we do think that there's an opportunity now to start looking at the margins, particularly in areas that are becoming a little less saturated. So you'll certainly see some movement there. And then really looking at the good, better, best categories beside the segments inside every category where we think we can also pull some margin out. We continue to overindex on big bag. That continues to be our strategy. So we'll always look at that category to see where we can make some movements. And continue to focus on what the customers are looking for. And then we're starting to see a little bit more movement around things like edibles, things like beverages, both of those categories continue to pick up, including -- and especially beverages, now that we've seen the change to change the regulations around how many beverages a person can buy. So we've got that in our back pocket as well. So I think we're going to see some changes in terms of product mix. We'll continue to focus on the -- how we structure those categories. And then Ontario taking a really good objective look on how we can move there. Cam, anything to include?

[Cameron Sebastian, executive]

I would just add the reference to the data program, it's proving to be very robust. And as you know, it has no costs associated with it. So it's entirely margin accretive, and we're quite excited about the way that's progressing.

[Frederico Yokota Gomes, analyst]

Okay. Just moving on to Firesale. So can you talk about the economics that you're seeing in those stores compared to a regular Value Buds store in terms of filter store margins? And are you planning to roll out that concept to traditional stores and provinces at all?

[Marcie Kiziak, executive]

It's a great question. Firesale really was something that was -- it's a trial right now. We've got the 2 stores in Alberta that we're working on. Truly, we really did want to pilot and see how the market would react to it as well as how LPs would react to it. Regulators really as well see some early success in those stores. The strategy there really is to work with LPs on lots. And so we're bringing things into those stores that we know have been quite transparent on the strategy. We're bringing things into those stores that we're trying to move through the cannabis ecosystem. And so we're seeing really good success. Consumers are responding to it very positively, and we're actually -- we're quite -- we're happy and a little surprised in terms of how the margins are continuing to progress in those stores. The customers are reacting to the liquidation type model, almost like a bit of a Treasure Hunt. And so going in to see what's new every week. And so really leveraging off the model that way. I think it's too early for us to tell, Frederico, in terms of what we think -- how we think it's going to continue to progress. But based on the modeling that we're doing, we do think it's going to be -- we're going to be similar, if not better margins than we were in the rest of the business.

[Frederico Yokota Gomes, analyst]

Yes, that's interesting. And then just a final question here on B.C. We've heard some talks about potential lift of the store cap there or expansion of the store cap in BC. How do you view the province just considering that with the reorganization, you would have a footprint there and how do you do the opportunity in BC?

[Marcie Kiziak, executive]

You got really excited with the prospect that we might see that cap be removed or changed or lifted. We will have 2 stores there as a part of this transaction. We've bought the stores -- the Dutch Love stores there. Really excited about those stores, really excited about the locations and the positioning. I'm really excited to see what happens as we move in there with different banners. So we're keeping on top of it, and we're watching that news really closely. But the change -- the lift or change to that cap is something that we're very excited about. It's a market that we really want to be in. And we think that, that market is ready for Value Buds.

[Operator]

[Operator Instructions] That's all the questions we have today. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.