Nova Cannabis Inc

TSX:NOVC

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by. My name is John, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Nova Q3 2023 Results Conference Call. [Operator Instructions]

I would now like to turn the call over to Marcie Kiziak, CEO. Please go ahead.

[Marcie Kiziak, executive]

Good afternoon, everyone. Thank you for joining us to review Nova's operational and financial results for the third quarter of 2023.

This quarter, once again, showcased Nova's dedication to delivering on our shareholder promise through sequential free cash flow, increased margins and continued growth in data revenue. Our continued achievements are not only a result of our operational diligence, but they can be largely attributed to the efforts of the Nova team and our partners at SNDL. Success in this industry cannot be achieved without humility and a willingness to embrace diversity. The team strives for continuous improvement, and I would like to extend my gratitude for their significant contribution.

I'd like to begin with an update on the SNDL-Nova transaction. As publicly announced on October 30, although all other provincial approvals have been received, the review by one provincial regulator has necessitated a further extension. We will continue to provide further information as it becomes available.

We will pursue all avenues that support Nova's growth and expansion in key provinces while creating a sustainable operating platform. Our approach prioritizes optionality, which is of critical importance given the evolving nature of the cannabis industry. At Nova, we take great pride in our reputation as innovators and industry disruptors, consistently pushing the boundaries to deliver exceptional value to our consumers and shareholders.

Amid a changing landscape where major retailers have exited the market, our resolve has never been stronger. Our goal is to safeguard our leadership status, ensuring that the value we create for our consumers and shareholders is not just sustained but continues to grow as industry benchmarks.

I'd now like to turn our attention to our results and key initiatives for the quarter. Cam will discuss our financial results in more detail, but I would like to highlight some key achievements.

I am proud to report our second sequential quarter of positive free cash flow, an immense achievement in Canada's current cannabis retail environment. This accomplishment emphasizes our enhanced procurement strategies, improving margins and prudent operational and financial management. Nova's revenue continues to grow with a 15% increase compared to Q3 2022. While our store count remained stable, our revenue growth can be attributed to the efficiency of our stores and same-store sales growth, which increased 4% year-over-year.

Another achievement is Nova's eighth consecutive quarter of gross margin growth, a testament to our strategic initiatives and a direct result of our focus on private label and increased data licensing revenue. Nova's proprietary data licensing program resulted in revenue for the third quarter of 2023 of $4 million, representing an increase of 179% from third quarter of 2022 and a 50% compared to the second quarter of 2023. Year-to-date, we've achieved $8 million in total data arrangement revenue, showcasing the rapid growth and development of the program this last quarter.

The second quarter primarily served as a ramp-up period for the improved data program. And in the third quarter of 2023, Nova achieved its initial target for both partner count and data revenue. Qualitatively, partner feedback has been very positive as we strive to create offerings that are mutually beneficial to all parties and drive meaningful bottom line growth.

We've created a platform that effectively balances high-performing, high-velocity SKUs while also ensuring we give a platform to smaller craft producers and new innovations. We prioritize the consumer in all of our choices to ensure we continue to deliver the retail experience that Nova has built its leadership on while also creating opportunities for significant revenue and margin growth.

Comparatively, Nova launched data later in our operations, but we've been very nimble with the program to ensure it resonates. Our late adoption was intentional to ensure this program is sustainable and agile, which is paying dividends.

We will continue to scale responsibly to ensure we drive value for shareholders, partners and customers.

Turning our attention to the private label program. We've maintained our commitment to delivering large-format, high-quality offerings carried exclusively for the Value Buds consumer. The strategic approach is aimed at not only differentiating our retail stores, but also creating opportunities for margin growth and enhanced customer value.

Building on the success of our 2 inaugural [ coffee ] bars, Cookies & Kush and Tropics & Haze, we extended our private label range in early September, introducing a new large-format vape product. We involved our Bud [ tenders ] in the process to leverage their consumer insights and ensure our offerings are attentively curated to the Value Buds consumer.

Our team's involvement in our private label expansion is no doubt an underlying factor in the success of this launch: the Hello My Name is Strawberry, a 1.2 gram vape cartridge with a true to flavor experience. Hello My Name is Strawberry has been introduced in Value Buds stores across Alberta and is the best-selling 1.2 gram vape cartridge in Alberta Value Buds stores since launch.

Our team's ability to connect with our guests, build customer confidence and deliver exceptional in-store experience is critical to the growth and development of our private label offerings. Our success would not be achievable if it wasn't for their passion and enthusiasm, though I would also like to commend the Nova team on this launch.

We look forward to further scaling the private label program, and we are actively evaluating a full suite of products to bring to the market. We are prioritizing pre-rolls in the near market and have received OCS Board approval for their launch in the spring of 2024.

Thank you, and I will now pass the call to Cam to review our full financials for the quarter.

[Cameron Sebastian, executive]

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

We are excited to report that we are free cash flow-positive for the second quarter. In the third quarter of 2023, as Marcie highlighted, sales increased 15% compared to the third quarter of 2022 to $67.7 million. Compared to Q2 2023, sales increased 6%.

Total revenue growth highlights the expansion and growth in our business from 74 stores at January 1, 2022, to 92 currently. Same-store sales continued to improve with average annualized sales of $3 million from stores that have been opened for at least 1 year. In Ontario, same-store sales have reached $2.9 million per store. For locations operational throughout the third fiscal quarter of 2023 and 2022, same-store sales increased 3.9% year-over-year.

Gross margin for the quarter was $17 million, a 52.8% increase from $11.1 million for the third quarter of 2022 and a 16% increase from $14.6 million in the previous quarter.

Third quarter sales revenues include $4 million from proprietary data licensing sales, which have no direct associated costs, a 179% increase from Q3 2022 and a 50% increase from Q2 2023.

The gross margin as a percentage of sales before the data licensing revenue was 20.4% for Q3 2023 compared to 19.5% in Q2 2023 and 16.9% in Q3 2022. These margin increases highlight Nova's ongoing capitalization on select opportunities for accretive margin expansion in key trade areas. Overall, margin strategy and performance continues to reflect the brand's strategy to sell quality cannabis more affordably to its consumers.

Adjusted EBITDA, defined as operating profit before depreciation, impairment, transaction, restructuring and other costs in Q3 2023 was $6.8 million, a second consecutive record for the company and an increase of $4.3 million from $2.5 million in Q3 2022. This reflects the results of higher revenues at higher margins.

In Q3 2023, the company recorded net earnings of $2.1 million compared to a $1.5 million net loss in Q3 2022. Net earnings increased by $1.1 million or 102.4% from Q2 2023.

Now turning to liquidity and capital resources. In Q3 2023 cash provided by operating activities was $5.6 million compared to $2.6 million provided by operating activities in Q2 2023 and a $2.3 million increase from the $3.3 million cash provided by operating activities in Q3 2022. The increase in cash provided by operating activities reflects the continued success of our strategic path to sustainable profitability.

Nova has an uncommitted revolving credit facility with our partner, SNDL, with a commitment of up to $15 million. As of today, Nova has fully drawn the $15 million on the revolving credit facility. Currently, the company has approximately $9 million of cash on hand, adequate liquidity and is generating positive cash flow. The revolving credit facility's maturity date was extended to November 30, 2023.

We are very pleased with Nova's third quarter results, particularly the growth in revenue, adjusted EBITDA and earnings and our trajectory towards sustainable profitability.

Now I'd like to turn the call back to Marcie for closing remarks. Thank you.

[Marcie Kiziak, executive]

This quarter is another [ casual ] realization of the team's concerted efforts to deliver on our customer and shareholder promises. The continuous improvement in our results underscores our steady progress towards achieving sustainable profitability in an ever-evolving market.

Thank you. And I will now turn the call back to the operator for analyst questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Ty Collin with Eight Capital.

[Ty Collin, analyst]

My first question is on the data sales. Obviously, another really impressive step-up there in the Q3. But given that this kind of represents the majority of your EBITDA at this point, at least in the Q3, I'm just curious how you're thinking about the risk of this business coming under pressure, given some of the consolidation and distress at the LP level.

[Marcie Kiziak, executive]

Thanks for the question, Ty. So it's a great question. So as I said earlier, we're really thoughtful about how we built the program. It's important for us to be good stewards to the industry. And so when we built the program, we did it in the context of it being sustainable with long-term programming and options that are well thought out and strategically advanced.

And so we really thought through that. We've made the program -- designed the program in a way that it's inclusive. And so we really don't have all of our eggs in any particular basket when it comes to the program.

So good question, fair question. We've thought through it and make sure that we have place for everybody along the way and also are providing the best possible service and value to those who are in the program.

[Ty Collin, analyst]

Okay. Great. And then on the gross margin as well, another very impressive step-up there, even on a 4-wall basis kind of ex the step-up in data. It looks like you were able to take a little more pricing in Alberta, but also seems like your market share in Alberta slipped a little in the quarter.

I'm sure the data is not perfect there and maybe I'm reading into it too much, but does that reflect any sort of deliberate decision-making around trading off market share for margin? Or do you maybe need to take a pause on pricing as you see that trend continue?

[Marcie Kiziak, executive]

I mean, I don't think we'll take a pause on pricing. I think we're continuing to lean into innovation, continue to focus on our mix, making sure that we're focusing on consumer delight, really thinking about what the mix needs to look like.

I'm not concerned about the slight slip in market share. I think we'll see that come back. So not terribly concerned about that.

But I do think that we continue to be hyper-focused on our margin strategy. And part of it is making sure that as we see continued innovation in the space, that we're properly reflecting what we've got in stores and making sure that we're pricing in a way that makes sense.

We still think our biggest competition and really focused on making sure that we're bringing people in from the illicit market and encouraging people to purchase in the legal rec market.

So marrying all those things together, that's where some of those decisions came from or continue to come from. I wasn't worried about the market share slip and I think we'll see it come back.

[Ty Collin, analyst]

Okay. Great. Appreciate that. Then my final question before I pass the line, I appreciate your comments at the top of the call, Marcie, on the restructuring transaction. But can you maybe just provide a little more detail on what's behind the delays there and whether there is any sort of backup plan in place to work around the issues in that one province that's holding things up?

[Marcie Kiziak, executive]

Yes. Fair question, Ty. I certainly wish we could give you better context. Unfortunately, we've shared about as much as we can and much as we know. We'll continue to share information as we get it.

In terms of a backup plan, I mean, I think we've always demonstrated that we're very strategic and as thoughtful as an organization, so -- along with SNDL. And so we have thought through many different iterations of what this might look like. But right now, we're still focused on [ Apollo ] and its communicated in press release for.

[Operator]

Your final question comes from the line of Frederic Gomes with ATB Capital Markets.

[Frederico Yokota Gomes, analyst]

Congrats on the quarter. Great results. My question is just on your -- I guess, your free cash flow and your capital allocation plans for the amount of free cash flow you're generating now, I think when you look at your balance sheet, you have a comfortable cash balance.

So just wondering you plan to accelerate growth or how do you plan to deploy that capital?

[Marcie Kiziak, executive]

Cam, do you want to start and then I'll fill in some of the store growth?

[Cameron Sebastian, executive]

I guess the first comment I would have on that is we're currently seeing that we expect that, that free cash flow profile to continue. Our strategy with respect to deploying the capital that we have is still very focused and selective on opportunities that are individually or collectively significant to us.

And so we're not, in plain terms, accelerating our capital expansion plans. We're still sticking to our focus on quality real estate and quality locations that fit with our operating profile. And so I think that it would be measured at this point as to what the expansion plans are. There is a lot of opportunities available to us and we want to select the right ones at this point in time.

[Marcie Kiziak, executive]

Thanks for that, Cam. We -- yes, we opened 1 store today, Frederico, which we're really excited about in Ontario. We've got a couple more coming before the end of the year.

And so -- but as Cam said, we're being really careful about making sure that we're making good measured decisions. Real estate, you hear me say it every quarter, is our growth strategy. So continuing to focus on markets that we think are underserved where there's opportunity.

[Frederico Yokota Gomes, analyst]

So you mentioned some new stores you're opening. Is there any sort of, I guess, in addition to the SNDL transaction, which would bring some more stores to the footprint, but is there any -- in terms of organic growth here for next year, any color you can give us for your plans?

[Marcie Kiziak, executive]

Sure. So we'll see 4 more open organically before -- between now and the end of the year. Organically, we'll see a handful open in Q1. And then as we previously announced, the stores that were acquired, the previous Dutch Love stores that were acquired, we'll see those come online.

But again, looking every day at M&A activity and growth and looking at expanding our real estate strategy. So back to looking at areas where we think that are underserved in Ontario and Alberta predominantly and then also taking a much more focused look at the [indiscernible].

[Operator]

I will now turn the call over back to Marcie Kiziak for closing remarks.

[Marcie Kiziak, executive]

Thank you. Again, I'd just like to thank everybody for your time and attendance today. Appreciate everybody's support and support we've received on the quarter. And as always, a huge thank you to the Nova team, the staff, support services and everybody who keeps the business operating.

[Operator]

Ladies and gentlemen, that concludes today's call. Thank you for participating. You may now disconnect.