Nova Cannabis Inc

TSX:NOVC

Earnings Call Analysis

Nova Cannabis Reports Strong Growth in 2023

In 2023, Nova Cannabis experienced significant financial growth, with a 15% increase in annual revenue to $260 million and a 34% rise in fourth-quarter revenue to $67 million. This performance was bolstered by a substantial 40% growth in gross profit over the year, amounting to $62 million, and a 137% increase in adjusted EBITDA to $21.8 million. The improvement was attributed to new store openings, enhanced same-store sales, and a strategic focus on operational efficiency and inventory control. Importantly, net earnings turned positive, recording $3 million, compared to the previous year's loss, while operating cash flow improved markedly to $11.7 million. Nova now manages a robust portfolio of 96 retail locations, with an emphasis on productive Value Buds stores, and a data licensing program that saw a 125% revenue increase year over year.

Strategic Focus and Growth

Nova Cannabis presented an assertive outlook during their Fourth Quarter and Full Year 2023 Financial Results Conference Call, emphasizing a strategic direction that underpins sustained growth within the Canadian cannabis retail sector. The company's leadership applauded their team's contribution to delivering top-tier retail experiences and operational best practices, which solidified both shareholder and customer value. While navigating market dynamics, they experienced revenue growth, margin expansion, and posted their third consecutive quarter of positive net earnings. With revenue climbing to $260 million, a 15% increase from the previous year, and a significant rise in cash from operating activities, Nova's financial maneuvers reflect a strong business model underpinned by new store openings, improved same-store sales productivity, and shrewd inventory control.

Operational Highlights and Margin Expansion

The company reported a robust increase in gross profit, which surged to $62 million in 2023, marking a 40% improvement over the prior year. This growth trajectory was attributed to strategic initiatives, including optimizing their data program that boasted a notable 125% revenue increase year-over-year. Adding to the margin growth, Nova expanded its private label portfolio into Ontario, showcasing strong sales performance with plans to introduce additional product categories such as pre-rolls and edibles.

National Footprint and Expansion Strategy

Nova's retail footprint now includes 96 locations, primarily in Alberta and Ontario. The company maintained a focus on accretive growth and the quality of real estate, emphasizing the importance of strategic store expansion over sheer volume. With sights set on key markets in Ontario and British Columbia, as well as potential growth in other provinces, Nova aims to extend its reach while ensuring operational efficiency and market stability.

Financial Performance

Adjusted EBITDA for 2023 stood at $21.8 million, reflecting a 137% uplift from 2022 which highlights the favorable impact of increased sales and improved gross margins. Notably, the net earnings recorded for 2023 reached $3 million, a considerable turnaround from the prior year's loss. Furthermore, cash provided by operating activities was also positively impacted, with $11.7 million reported for the year. The company has drawn fully on its revolving credit facility, at $15 million, and has about $11 million in available cash.

Strategic Priorities for 2024

Looking forward, Nova remains mindful of the need to balance growth objectives with enhanced profitability and cash flow generation. The incoming year is set to follow a pattern of measured growth that has been a hallmark of Nova's strategy. The management expressed satisfaction with the achieved accretive growth and is optimistic about continuing the positive trends in net earnings and margin expansion』22†source』23†source』.

Outlook Discussion and Analyst Questions

During the call, analysts inquired about the company's expected growth rate and the possibility of funding expansion through internal cash flow. Nova's executive team acknowledged ongoing discussions, particularly around aspects such as the revolving credit facility. Questions also touched on customer behavior and market trends, with a focus on the stabilization of the industry and price trends in Alberta and Ontario, suggesting a more level playing field and improvements to come.

Industry Outlook and Potential Challenges

Executives addressed questions on excise tax reform and the impact on Nova's business, emphasizing the goal of ensuring consistency and the program's accessibility to the entire industry. Additionally, the management discussed market stabilization as a natural progression, with attention to evolving consumer patterns and the legal market gaining traction over illicit channels. Data-driven strategies remain core to Nova's approach, aiming to position the company favorably in the market amidst changes and regulatory developments.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to Nova Cannabis' Fourth Quarter and Full Year 2023 Financial Results Conference Call. Yesterday, Nova issued a press release announcing their financial results for the fourth quarter and year ended on December 31, 2023. This press release is available on the company's website at novacannabis.ca and filed on SEDAR as well.

The webcast replay for 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 in 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 mentioned are in Canadian dollars unless otherwise indicated. We will now make prepared remarks, and then we will move on 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 Year-end and Fourth Quarter 2023 Conference Call. Our results further solidify our strategic direction and underscore Nova's sustained growth within the Canadian cannabis retail sector.

Our focus on fundamentals is central as we navigate market dynamics and reinforce Nova's standing. With over 25 years of experience in regulated product retail, our dedication to the best-in-class and responsible retail experiences remains resolute. We are committed to implementing top-tier retail and operational best practices that continue to solidify both our shareholder and customer promise.

This expertise comes entirely from our team, from those consistently delivering exceptional experiences in our stores to those in our corporate office who tirelessly enhance and innovate to advance our strategy. Our stability in a dynamic industry stems from their agility and resilience. Reflecting on this past year's achievements, I'd like to extend my sincere and genuine gratitude the Nova team for being the cornerstone of our success.

Looking at our full year and fourth quarter results, we've seen continued improvements in revenue growth, adjusted EBITDA and margin expansion and have achieved our third consecutive quarter of positive net earnings. Revenue for 2023 grew to $260 million, an increase of $33 million or 15% from $226 million in 2022.

In the fourth quarter, we achieved revenue of $67 million, marking a 10% increase from the same quarter in the year prior. Cam will cover the financial results in full but I'd like to highlight our achievements in cash provided by operating activities and sustained gross profit growth.

Cash from operating activities improved to $12 million in 2023 compared to a negative $0.1 million in 2022. This increase is driven by Nova's new stores, same-store sales productivity and practical financial management and inventory control. Our gross profit has also seen substantial growth reaching $62 million in 2023, marking a 40% increase compared to the preceding year. In Q4 2023, we experienced a notable 34% increase from $13 million in Q4 2022. This improvement in gross profit was driven by several key factors, including the stabilization of prices in the Alberta market, our strategic focus on private label initiatives and the growth of our proprietary data licensing agreements.

These efforts have contributed to a streak of 9 consecutive quarters of gross profit enhancement, underscoring the effectiveness of our initiatives and our commitment to delivering shareholder value. In 2023, our margin expansion and increased cash flow from operations was significantly influenced by the revitalization and optimization of our data program, which yielded a 125% increase in the revenue year-over-year.

Leveraging Value Buds volume and the company's access to high-quality analytics, we are well equipped to drive sustained growth in incremental value to our program partners, while supporting top line revenue. Our data licensing program is proving to be 1 of the most sustainable in the market due to our scaled approach, focusing on range and accessibility to ensure collective long-term success.

Our data program is designed to be agile, ensuring accessibility for all partner levels. This inherent flexibility sustains our growth amid market fluctuations, securing the sustainability of our data program. Adding to our margin growth initiatives in 2023, we extended our private label offerings into the Ontario market, introducing large-format flower SKUs into the first half of the year.

Our flower SKUs have maintained strong sales performance in December '23. Value Buds Cookies & Kush 28-gram flower was the #2 SKU in our stores nationwide. We expanded our product portfolio again towards the end of Q3 with the launch of our large-format vape. The foundation of the Value Buds private label strategy is our consumer.

From flavor to format, our offerings directly tied to their purchasing behaviors and ensure that the products are additive and aligned with the Value Buds experience. Our private label portfolio remains a significant differentiator, and we intend to enhance our SKU lineup for 2024 with pre-rolls and edibles.

Looking at our national store footprint, while we have developed stability in today's market, we continue to take a measured approach on store growth. Nova currently operates 96 retail locations primarily in Alberta and Ontario. As we look to expansion opportunities, our focus remains on accretive growth, returns and the quality of real estate to ensure our productivity. We will continue to prioritize quality over total store growth.

Our focus is on the key markets of Ontario and British Columbia as well as further expansion in the [indiscernible] provinces in the near term. Nova will continue to prioritize fundamentals over tactics that fails to impact key financial metrics. We remain measured in our approach to ensure we navigate the current market landscape in an agile way that preserves the momentum we built this year.

I will now pass the call to Cam to further cover Nova's full year 2023 and fourth quarter results.

[Cameron Sebastian, executive]

Thank you, Marcie, and good morning, everyone. Let's discuss Nova's Fourth Quarter and Year-end 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 year-to-date comparisons I will be referencing for the prior quarters are measured against the previous year. The sequential quarterly and yearly comparisons may provide additional context considering Nova's rapid growth and expansion.

In the fourth quarter of 2023, as Marcie highlighted, sales increased 10% compared to the fourth quarter of 2022 to $67.4 million. Year-over-year revenues have increased by $32.9 million or 15%, resulting in total revenue of $259.3 million for the year ended 2023.

Nova now operates 96 retail locations, an increase of 8 stores through 2023. Value Buds stores are among the most productive in the country, resulting in 2023 annual revenue of approximately $2.7 million per average number of doors open in the year further validating our business model and strategy.

Gross profit was $17.1 million in the fourth quarter of 2023, a 34% increase from $12.8 million in the fourth quarter of 2022. Gross profit for the year was $61.6 million, up 40% from $43.9 million in the prior year. Gross margin in the fourth quarter of 2023 was 25%, up from the fourth quarter of 2022, where gross margin was 21%. Gross margin as a percentage of sales was 24% for the year ended 2023 compared to 19% in 2022.

Sales revenues for 2023 include $12.4 million from data licensing sales, which have no direct associated costs and represent a 125% increase from 2022. Adjusted EBITDA, defined as earnings before depreciation, impairment, transaction, restructuring and other costs for the 3 months ended December 31, 2023, was $6.4 million compared to $3.2 million for the fourth quarter of 2022, resulting in an improvement of 100%.

Adjusted EBITDA for 2023 was $21.8 million compared to $9.2 million in 2022, an improvement of 137%. These increases are primarily a result of the increase in sales and improved gross margin for the quarter and year ended December 31, 2023. For the fourth quarter, net earnings increased by $5.2 million to $400,000 from the fourth quarter of 2022.

For the year ended 2023, the company recorded net earnings of $3 million compared to a loss of $11.2 million in the prior year. Now turning to liquidity and capital resources. Cash provided by operating activities in the fourth quarter of 2023 was $5 million compared to $2.8 million in the fourth quarter of 2022. For the year ended December 31, 2023, cash provided by operating activities was $11.7 million compared to cash used in operating activities of $100,000 in 2022. The change in the year-over-year cash used in quarter over cash provided from operating activities reflects the success of our strategic plan to sustainable profitability.

During the year, cash used in investing activities was $2.3 million, a $6.1 million decrease from $8.4 million used in investing activities in the prior year. This decrease resulted from a reduced level of construction related to new store openings year-over-year. Nova's revolving credit facility is currently fully drawn at $15 million. The revolving credit facility matures on March 31, 2024.

Nova currently has approximately $11 million of available cash. Discussions are ongoing with the company's lender with respect to extension of the credit facility. In the full year of 2023, cash used in financing activities was $600,000, reflecting cash provided for the revolving credit facility, offset by the principal portion of lease payments.

Balancing growth with greater profitability and cash flow generation remains a key priority for Nova in 2024 and we're extremely pleased to have achieved another year and quarter of accretive growth, including positive net earnings and continued margin expansion.

Now I'd like to turn the call back to Marcie for closing remarks, and then we will open the floor for analyst questions. Thank you.

[Marcie Kiziak, executive]

In closing, Nova's results for the period emphasize our focused approach to ensure continued revenue growth and increasingly key financial metrics. We continue to focus on retail best practices to drive long-term growth, customer engagement and optimize processes. Our approach is simple, but tactical, tailored to the customer journey and delivery of sustained shareholder value.

I'm incredibly proud of the results this team has delivered this past year, and we have set the stage for continued growth in 2024. Thank you. And I'll now pass the call back for analyst questions.

[Operator]

[Operator Instructions] Our first question comes from Ty Collin of Eight Capital.

[Ty Collin, analyst]

Marcie and Cam, congrats on capping off a great year here. Just my first one. In your outlook, you mentioned that you're expecting another year of more measured growth. Just to put a finer point on that, does that imply a new store cadence similar to what you did in 2023, about 8 new units? And do you expect that your growth plans can be fully funded through internal cash flow?

[Marcie Kiziak, executive]

Ty, thanks for the question. I'll take the first half of that question. So we -- same message that you often hear from us is that we expect to continue to grow. But again, expansion for us can't come at the risk of good operational efficiency and good retail. So we continue to look at the right opportunities for us to grow. We do -- we completely appreciate and agree that growth has been important for us -- is important for us.

We will continue to see growth -- we continue to look at other markets look to see where there's potential opportunity, provinces where we're not quite operating yet or not operating at scale yet. So we'll continue to focus on growth there. Cam, go ahead.

[Ty Collin, analyst]

Okay. That's fine. I can just -- I can move on to the next question there. Yes. So just wanted to follow up on Cam's remarks on the credit facility, maybe looking for a little more detail around the conversations you're having with Sundial on that, given that it is due next week, and then it sounds like you don't quite have enough cash on hand to pay that down.

Are you expecting that, that will get extended again? Or is there maybe some other financial arrangement you're seeking to bridge the gap there? Just any more color you can give around the facility and the dialogue around that.

[Marcie Kiziak, executive]

Sure. I mean really, the response is the same as we've noted in the docs that we were in continued discussions. We do look forward to updating as soon as we can, but look forward to an additional communication from us on that.

[Ty Collin, analyst]

Okay. And if I sneak in 1 more. I'm just wondering if I could maybe get your view, Marcie, on excise tax reform given some of the recommendations we've seen in recent days coming out of the Cannabis Act review and the federal budget. How do you see that impacting your business? And how are you handicapping the likelihood of that actually going through this year?

[Marcie Kiziak, executive]

Yes. I mean certainly a question probably more relevant for the LPs, but I'd say we're looking forward -- we're looking forward to some more consistency. I mean there's a couple of things that we think are going to be helpful that will -- that may happen. First is being supportability throughout provinces. And so depending on how [indiscernible] moving forward. If we're able to move products or products are able to move more freely throughout provinces. So that's 1 thing that we're looking at and can certainly be quite helpful with the organization. Hello? [indiscernible].

[Ty Collin, analyst]

No, I'm still on the line. I heard that as well.

[Marcie Kiziak, executive]

So there's something happening with our line, Ty, sorry about that. We're kind of coming in -- so first of all, it's portability of the product which is going to be helpful. And then secondarily, it will be in terms of what happens from a wholesale price perspective. And if we see some increases there as we start to see the LPs be able to -- being able to offer some lower wholesale prices, do we see that translate to the store level, we certainly hope so. But that's how we see [indiscernible].

[Operator]

Our next question comes from Frederico Gomes of ATB Capital Markets.

[Frederico Yokota Gomes, analyst]

First question is just on -- I think industry growth has slowed down a bit recently, and that's sort of reflecting our same-store sales growth as well, roughly 2% this year. So -- could you comment on that? Is this somewhat related to macro pressures, just the overall economic environment? Or is it just a result of the industry maturing and your stores reaching a more mature phase. And I guess just going forward for this year from a same-store sales growth standpoint, what are your expectations?

[Marcie Kiziak, executive]

Sure. I mean we're seeing the industry stabilize for sure. And so when we talk about growth slowing down or even staying level, I think what we're really seeing here is we're seeing stabilization in the market. And we're starting to see trade areas make -- start to make more sense. We're starting to see stores show up in the right areas and not necessarily in the wrong areas.

So we're starting to see it all stabilized. We're starting to see stabilization and a little more consistency in terms of what customers are purchasing and what customer patterns look like, which is, again, giving us continued ability to be able to look at stores, look at geography, look at categories and make really good decisions in terms of how we're managing -- how we're managing our price files and also where we're putting stores and what we're doing with different locations, different sizes, different core assortments.

So I'd say really it's a matter of just -- this is fairly expected and fairly normal. We do continue to see more and more people shopping in the legal market rather than the illicit market. So -- we're seeing a change in terms of categories and we're seeing a change in terms of how people are purchasing and what they're purchasing. But really, this is what stability looks like.

[Frederico Yokota Gomes, analyst]

And I guess you mentioned price stabilization in Alberta as 1 of the drivers there for the gross margin. But I wonder if you're seeing the same sort of trend in Ontario in terms of prices stabilizing as well and maybe potentially improving.

[Marcie Kiziak, executive]

In Ontario, it's certainly not as different as it used to be. And you used to hear us talk over the last couple of years about how there was a considerable difference between the 2 provinces. We're starting to see a lot more leveling out in terms of product supply, in terms of the assortment and also a bit -- better data around what customers are purchasing.

And so I think we are going to continue to see that improve. I think we're continuing to use a very focused and data-driven approach to watch and monitor how people are buying and trying to get ahead of some of the trends with innovation and how we're planning our categories. So I do think that we're going to see it -- Ontario was always a little bit behind Alberta simply just due to how the markets are growing and stabilizing, but I do think that we're absolutely going to see improvement in Ontario.

[Frederico Yokota Gomes, analyst]

Perfect. And then just last question, just on excise taxes, but maybe from a different perspective. We recently saw reports about CRA getting turfer on the LPs in terms of their unpaid excise tax balance. So -- do you think that could impact your data licensing program and how the revenue is progressing from that data licensing fees?

[Marcie Kiziak, executive]

It's a great question. The answer quite honestly, is not really as no. We've built a program that we believe is built on the same principles in which we've always built Nova, which is really sustainability and shareholder value and a strong foundation for all parties involved. So we've built a program that we think is accessible to the entire industry.

And so there's many opportunities for people for different LPs to join it depending on who is currently in play. And so no, I don't see a [indiscernible] program as a result of the excise tax issue.

[Frederico Yokota Gomes, analyst]

Perfect. Congrats on the quarter again.

[Operator]

Our next question comes from Ty Collin of Eight Capital.

[Ty Collin, analyst]

Thanks for entertaining a couple more questions. More so just some housekeeping items here. Could you comment on the timing of the 4 new store openings that happened during the quarter? Just trying to calibrate my model.

[Marcie Kiziak, executive]

Yes, they were all actually fairly close to the end of the year, which we don't normally do. But they were all in December. I can send notes, [indiscernible] happy to do it.

[Ty Collin, analyst]

Okay. No, no. That's really helpful. And then on the SG&A margin, it looks like that did tick up a little bit over the last couple of quarters. Are there any trends or onetime items to call out there? Is that more so just quarter-to-quarter gyrations.

[Cameron Sebastian, executive]

I would...

[Marcie Kiziak, executive]

I've got some thoughts. Cam, go head. Go ahead, Cam.

[Cameron Sebastian, executive]

I would call it more quarter-to-quarter tend to be weighted towards third quarter and fourth quarter as year-end approaches and some of the administrative things around that. So mostly, it's related to that item.

[Ty Collin, analyst]

Okay. Great. And then, Cam, since it sounds like you're back on the call here. I just wanted to circle back on my earlier question about whether you are expecting your internal growth -- your organic growth plans rather to be funded through internal cash flow this year?

[Cameron Sebastian, executive]

Yes, entirely. We -- if you look at our current cash position and the fact that we're actually generating positive cash every month, and I think we've talked before about what the cost of a new store is, and so we can fund that from organic cash flow.

[Operator]

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

[Marcie Kiziak, executive]

Perfect. Just a quick thank you to everybody for your time today. And we look forward to talking to you all again after Q1.

[Operator]

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