Nova Cannabis Inc

TSX:NOVC

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, and welcome to the Nova Cannabis' First Quarter 2024 Financial Results Conference Call. Yesterday, Nova issued a press release announcing their financial results for the first quarter 2024. This press release is available on the company's website at novacannabis.ta 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 here today. During today's conference call, or answers that may be given to questions could constitute forward-looking statements. Actual results can differ materially from those anticipated. Risk factors that could affect the results are detailed on the company's financial reports and other public filings that are made available on SEDAR. Additionally, all financial figures mentioned are in Canadian dollars, unless otherwise indicated. We will now make prepared remarks, and then we'll move to analyst questions. I would now like to turn the call over to Marcie Kiziak. Please go ahead.

[Marcie Kiziak, executive]

Good morning, everyone, and thank you for joining Nova's First Quarter 2024 Conference Call. Following a strong fourth quarter, our team continues to make meaningful progress against all key financial metrics, driving growth and sustainability for our cannabis retail banners.

In addition to our earnings report, subsequent to quarter end, and subject to customary closing conditions, we are excited to announce our expansion into British Columbia through the Dutch Love transaction to own and operate 4 of the banner stores, 3 of which are located in D.C.

Our pursuit of expanding the Value Buds banner through high-quality real estate is significantly bolstered with this announcement. Before diving into our financial highlights and key levers for the quarter, I want to start, as I always do, and give thanks to the Nova team. The cannabis industry is highly fluid as with many retail environments. In this landscape, the remarkable retention rate of our Nova team stands out. We prioritize investing in our people as much as we do in our operational framework recognizing their pivotal role in our overall success and resonance with our customers.

Turning to our first quarter results. Revenue reached $64 million, a 7% increase from the first quarter of 2023, primarily driven by new locations, increased data licensing revenue and a continued focus on margin expansion initiatives. In the first quarter of 2024, we achieved a gross profit of $16 million or 25% of sales. This marks a significant 23% increase from the same period in 2023, where our gross profit stood at $13 million.

Our improved gross profit is attributed to several initiatives driving revenue growth in the quarter. Our data licensing revenue experienced notable year-over-year growth of nearly $2 million as a result of our optimization through 2023. Additionally, we witnessed an increase in same-store sales of 12% in Ontario, demonstrating the impact of our everyday low-price banner strategy in the province.

We've maintained a disciplined approach to growing our margins in this an evolving retail landscape. By adjusting prices on a per store basis throughout the different regions where we operate, we've tailored our sales strategy to better suit the unique needs of each community. This strategy initially implemented in Alberta has proven successful in strengthening margins in key categories while still offering our customers everyday best value. It is a strategic move aimed at maximizing profitability while maintaining our commitment to customer satisfaction.

As we've extensively outlined, our proprietary data licensing agreements continue to be a key contributor to overall revenue and margin growth. With the inclusion of our 4 Dutch Love stores, we're excited to expand this program into British Columbia, and we continue to seek enhancements to keep pace with market dynamics. This quarter, our emphasis on developing data licensing was primarily focused on compliance and working with regulators to ensure long-term scalability. Our continued enhancements led to the significant year-over-year data revenue growth of 120%.

Now looking forward to our growth and expansion plans. Our market share in Alberta remained strong at 19%, and we are growing in Ontario with market share reaching nearly 4%. However, we are exploring options for future store growth. We continue to review opportunities for M&A and expansion of the Value Buds footprint.

Upon closing, Nova's operation of the Dutch Love stores marked the expansion of the Value Buds brand into British Columbia. By establishing the Value Buds banner of BC, we aim to replicate this disruptive impact we saw in Alberta. This positions us to capitalize on our established footprint, offering high-quality cannabis at competitive prices and enhancing opportunities for future store expansion.

In addition to store expansion, we're also maximizing our digital footprint to enhance the user experience. Our customers value the expertise of our in-store sales associates and we're committed to replicating that experience on the Value Buds' website. This entails better curation of product selection, showcasing exceptional deals and new products more effectively and creating a simpler path to purchase. I look forward to sharing more details on these enhancements in the upcoming quarters.

Finally, to provide an update on our Value Buds private label, we are excited to announce that we are building on the success of our previous large format offerings. We will be launching a new flavor, Diesel and Berries in various formats including 28 by 0.5-gram pre-rolls as well as our popular 14 and 28-gram options. These new products are set to hit the shelves in Alberta this May and are slated for release in Ontario early in the third quarter. Our private label approach isn't just about expanding our product line, is about creating higher-margin offerings, fostering customer loyalty and establishing our brands.

This quarter has been another strong building block in our total growth plan. Our emphasis on targeted growth continues to deliver our planned results, and we're excited to pursue additional avenues for continued expansion in the quarters ahead.

Thank you, and I'll now pass the call to Cam to cover our financial results.

[Cameron Sebastian, executive]

Thank you, Marcie, and good morning, everyone. Now let's discuss Nova's first quarter 2024 financial results. I want to remind you that all amounts discussed today are in Canadian dollars unless otherwise stated. Certain of the quarterly and the yearly comparisons that we would 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.

In the first quarter of 2024, as Marcie highlighted, sales increased 7% and gross profit increased 23% compared to the first quarter of 2023. Nova now operates 99 retail locations, an increase of 3 stores compared to the end of 2023. The gross profit as a percentage of sales was 25% in the first quarter of 2024 compared to 21% in the first quarter of 2023.

Sales revenues through the quarter include $3.3 million from proprietary data licensing sales, which have no direct associated costs and represents a 120% increase from 2023. This revenue added 1.3 percentage points to our gross margin percentage for the quarter.

Adjusted EBITDA declined as net loss before depreciation impairment, transaction, restructuring and other costs for the 3 months ended March 31, 2024, was $4.5 million compared to $3.2 million for the first quarter of 2023, an improvement of 40%. This increase is primarily a result of continuing increases in sales and improved gross margin.

For the first quarter of 2024, Nova reported a small net loss of $0.3 million. This resulted primarily from the impairment of 3 stores due to underperformance.

Now turning to liquidity and capital resources. For the first quarter ended March 31, 2024, cash provided by operating activities was $2.8 million compared to the use of cash for operating activities of $1.4 million in the comparative 2023 quarter. This demonstrates Nova's ongoing and sustainable profitability.

During the first 3 months of 2024, cash used in investing activities was $0.8 million, reflecting the new store openings during the quarter. In the first quarter of 2024 cash used by financing activities was $1.6 million, representing the principal portion of lease payments.

A nominal amount of $118,000 was also raised through the companies at the market equity program during the quarter. The maturity date of Nova's revolving credit facility was extended to March 31, 2026. The amount of the facility is currently at $15 million with $11 million drawn. In addition, Nova currently has approximately $7 million of cash on hand.

Balancing growth with greater profitability and cash flow generation remains a key priority for Nova in 2024, and we are extremely pleased to have achieved another strong quarter of financial results and continued margin expansion.

Now I would like to turn the call back to Marcie for closing remarks, and then we will open the call for analyst questions.

[Marcie Kiziak, executive]

Looking to the second quarter I'm confident we've positioned ourselves for continued success as we enter a key retail period. Our teams have worked diligently to ensure we are surgical about margin growth and operational excellence. And we are actively looking to grow our store footprint where the real estate valuation makes sense. I look forward to sharing our preliminary results in the BC market in the upcoming quarter and building the Value Buds that are coast to coast. Thank you. And we will now open the call to analyst questions.

[Operator]

[Operator Instructions] The next question comes from Ty Colin from Eight Capital.

[Ty Collin, analyst]

Marcie, Cam. My first one, I wanted to ask on the same-store sales growth numbers. You disclosed in the press release. I think it was 1.5% portfolio-wide and a really impressive 12% in Ontario. That does seem to imply maybe weaker or maybe even negative same-store sales growth in Alberta. Just wondering if you could comment on there and some of the different trends you're seeing in those markets.

[Marcie Kiziak, executive]

Sure. So there's a couple of things to think about here. So Ontario, we're really pleased with that number. We still think that there's opportunity for growth in Ontario. Alberta, as we've said in the past, was the first province to license widely and certainly has the most licenses. So growth is a little bit more challenging here. So I think we're going to continue to focus on Ontario and what the same-store sales look like there.

Alberta, we're really focused on a couple of different things that I think are going to move the dial for us looking forward. We are making -- have made significant changes to our website, which will change the efficiency of the shopping -- path to purchase for customers. And so we're looking forward to seeing what that does. Really going to allow us to be really, as we said, surgical and target price considerations for categories where we need to move the dial or we can move the dial most significantly. So looking forward to seeing what that does.

We also had a couple of things over the last quarter that were a bit challenging. We saw some significant weather events in Alberta that were considerable. Nearly 1/3 of the month was what was considered to be extreme weather events. So that certainly created some challenges for us as well. But we think that -- and obviously, in January, we tend to see a bit of seasonality in cannabis as well.

So really focused on the new website and the experience that, that will provide. We also think that, that's going to allow us -- or we know it's going to allow us to be really focused on geographic pricing and making sure that we're providing the best possible experience in every part of Alberta and Ontario as well, but you're highly focused on Alberta right now.

[Ty Collin, analyst]

That's really helpful context there. On to the Sundial transaction, I guess, first of all, are you expecting to take in any more stores from Sundial this year? And if so, maybe describe what that process looks like in terms of valuing those assets and then coming to terms on those kinds of deals given the close relationship you have with Sundial?

[Marcie Kiziak, executive]

So I'll let Cam start and then I'll fill in.

[Cameron Sebastian, executive]

I think the short answer, Ty, would be that we have a lot of inbound traffic both directly to Nova and through SNDL. So it's certainly possible that we would add stores. Still very selective on which ones that we would target. But the answer is yes. And we're not seeing metrics that would be terribly different from what we've experienced to date.

[Marcie Kiziak, executive]

Yes, from valuation perspective or from a valuation perspective, just continue to look at real estate location potential stores as we always did. But as Cam mentioned, we are continuing to look at all options to increase the portfolio.

[Ty Collin, analyst]

Okay. That's helpful. And maybe before I pass the line, just a bigger picture strategic question here. There's obviously been a lot of uncertainty in the business in the last year or so with the restructuring transaction with the maturity date on the credit facility coming up. Now that's kind of all behind you for the time being. You termed out the credit facility.

What does that mean in terms of the growth strategy going forward? Does that kind of put you in a mindset where you're more comfortable stepping on the gas from a growth perspective or an M&A standpoint. Just curious to get your thoughts on that, whether this is a bit of a turning point for Nova.

[Marcie Kiziak, executive]

Yes, it's a great question. The answer is yes. Certainly, hitting the gas and looking at increased opportunities and looking at things a little bit differently. As you know, every province operates differently from a regulatory framework perspective, and with us being able to move forward with a bit of a different perspective and with those things behind us, and we have the opportunity to not necessarily be as focused on that, but rather just continually focused on the business. The growth of the business.

And so that's why you're seeing things like the refreshed website and the refreshed path to purchase. Some of the in-store execution getting tighter and tighter because this has been -- we've been able to reframe and refocus our attention.

[Operator]

[Operator Instructions] The next question comes from Frederico Gomes from ATB Capital Markets.

[Unknown Analyst]

This is [ Eric Livshits ] on for Frederico. So I'm just wondering, with the addition of the Dutch Love stores, will they be following a similar strategy to Value Buds? And do you plan on keeping the Dutch Love-branded? And also, are there any more plans to add additional stores in [indiscernible] to reach the cap.

[Marcie Kiziak, executive]

So the Dutch Love stores will be operating as -- or those assets will be operating as Value Buds. And they'll be -- the conversion will happen very quickly. And we'll be following a similar strategy. BC is a little bit different in terms of product offerings and that type of thing. So very, very similar. Value Buds has a very defined, very clear strategy. We know who we are, and we will continue to maintain that strategy with just some additional and different product offerings and that type of thing.

We're very excited about the real estate, and we're very excited about entering that market. Certainly, this would be Dutch Love -- or sorry, Value Buds' first entrance into BC market, and we're looking forward to bringing that the focus in BC. And sorry, remind me the second half of your question?

[Unknown Analyst]

Just if there are any plans to add more stores in British Columbia.

[Marcie Kiziak, executive]

Yes. I mean that really is dependent on the cap and what happens there. We are hopeful that there's some regulatory changes that open up the cap and allow more room and more movement. We also as we've announced just recently that there are some municipalities in BC opening up that hadn't previously been open to cannabis. We're definitely taking a good hard look to see what makes sense there. But we're going to start with these 3 and be really focused on getting them right and proper placement in the market and then look at expansion from there.

[Operator]

The next question comes from Ty Collin from Eight Capital.

[Ty Collin, analyst]

Just a couple. I wanted to ask about the data licensing side of things, a bit of a sequential step down there. I'm sure a little bit of quarter-to-quarter fluctuation is to be expected naturally. But is there any bigger trend to call out there? Are you seeing the LPs tighten up on spending? Or is this really kind of just a quarter-to-quarter fluctuation, maybe a bit of a softer market overall in the Q1?

[Marcie Kiziak, executive]

Sure. So I think we talked about it a little bit last quarter, but I think you're seeing that kind of come to life as we changed the program to be as sustainable as possible. And what I mean by that is that we wanted to have a really good program that made sense and had longevity for both us and for our LP partners. And so we made some significant changes to the program as a result of that. And so what you're seeing is leveling out.

And so we decided, and as we often do is we decided that it was more important for us to have a program that made sense for LPs, made sense for us that wasn't -- where we weren't going to see fluctuations in terms of partners coming in and out. And so by doing that, we're going to see just a little bit of leveling, but continue -- we're excited about what's going to come with the program. And as we continue to develop and add additional parts of the program that continue to make sense for everybody.

[Ty Collin, analyst]

Okay. Great. Yes, that's really helpful. And then maybe more of a housekeeping item. Cam, I think in your remarks, you mentioned that you currently got about $7 million of cash on hand. I'm assuming that's as of today. Can you maybe just help me understand the bridge between what you reported as of March 31, which was, I believe, $14 million and the $7 million you're at today?

[Cameron Sebastian, executive]

A couple of things on that, Ty. Nova did make a repayment of a portion of its credit facility. And so that drew down a part of that difference. We also have somewhat, I would call it, lumpiness in inventory purchases and periodically large inventory purchases occur and that happened simultaneously. And so a number of factors came together. I would say that our stabilized cash balances is closer to $10 million or $12 million and the $7 million that I referred to.

[Ty Collin, analyst]

Okay. Great. That's really helpful context. And then last 1 for me. With the extension of the credit facility, do you anticipate being able to get rid of the going concern language in the financials moving forward? Given you've got the additional term on that debt and given where your earnings and cash flow are and how they've been trending, is that something we can expect to see go away?

[Cameron Sebastian, executive]

That's our expectation. The one thing we'll need to demonstrate is sustained positive cash flows and earnings and we expect that. And therefore, we expect that to going concern language will also go away.

[Operator]

That's all the questions we have for today. I would like to turn the conference back over to Marcie Kiziak for any closing remarks.

[Marcie Kiziak, executive]

Thank you. And thank you to all of you today for your time and continued interest in Nova. We look forward to speaking to you all again after Q2.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.