CA - Fire & Flower Holdings Corp. (FFLWF) Q1 2023 Earnings Call Transcript

2023-05-15 12:14:03 ET

Start Time: 08:30

End Time: 09:05

Fire & Flower Holdings Corp. (FFLWF)

Q1 2023 Earnings Conference Call

May 15, 2023, 08:30 AM ET

Company Participants

Stéphane Trudel - President and CEO

John Chou - CFO

Chris Bolivar - EVP, Commercial and Growth

Conference Call Participants

Frederico Gomes - ATB Capital Markets

Andrew Semple - Echelon Capital Partners

Presentation

Operator

Good morning and thank you for joining. I would like to welcome you all to the Fire & Flower First Quarter Fiscal 2023 Financial and Operational Results Call. My name is Brika, and I will be your operator for today's call. At this time, all participants are in a listen-only mode, and we will be facilitating a question-and-answer session towards the end of today's call. [Operator Instructions]. Thank you.

I would now like to turn the call over to the CEO, Stéphane Trudel. Stéphane, please go ahead when you're ready.

Stéphane Trudel

Thank you, operator, and welcome to Fire & Flower's first quarter and fiscal year 2023 financial and operational results conference call. I'm Stéphane Trudel, President and CEO, and joining me today is John Chou, our Chief Financial Officer; and Chris Bolivar, our Executive Vice President, Commercial and Growth.

Earlier today, the company published its financial and operational results for the first quarter ended March 31, 2023. The results are available on the company's Web site and on SEDAR. Prior to beginning our call, I will direct listeners to the cautionary statement regarding forward-looking information published on the news release issued this morning as well as the company's filings on SEDAR.

Today, we'll be providing commentary on the first quarter as well as an update on how we're positioning the company to thrive in a very competitive market, especially in Canada. We are focused on our goal of generating positive free cash flow by continually refining our business and using our Hifyre technology to reach more consumers and turn them into loyal customers. We will then conclude with a moderated Q&A period from equity research analysts that cover Fire & Flower.

I would like to remind you that the current quarter covers the calendar period from January 1 to March 31, 2023 while Q1 2022 represents the 13-week quarter ended April 30, 2022. As previously stated, all 2023 fiscal quarters will be three months quarters but will not be true comparisons to fiscal 2022 quarters because it will not cover the exact same periods, which may introduce variability because of the seasonal nature of our business.

During the first quarter, we continued accelerating the positive growth momentum of top line revenue and gross profit dollars that has been achieved in the last few quarters. I would like to thank the Fire & Flower team for keeping our customers and our partners at the heart of our decisions to ensure that we deliver these sustainable operational improvements.

Our core business is tech-enabled retail, and I'm thrilled to talk about our continued improvement across numerous metrics in that segment. Even in light of sustained pricing pressures, the Canadian market grew at a healthy 10% rate year-over-year in Q1. Fire & Flower significantly outperformed the market growth and generated a 17.2% year-over-year same-store sales increase, the second positive quarter in a row and a steady climb up since the launch of Spark Perks member pricing in May of last year.

John will get into detailed results, but I'm happy to highlight that our total consolidated revenue across the segments of digital, retailing and wholesale was $43.1 million for Q1 2023, supported by growth in our retail segment. Our digital business continued to build momentum as we return to our guidance of $3 million per quarter in revenue. As mentioned, same-store sales for stores that operated continuously during the quarter and the same quarter in 2022 increased by 17.2% year-over-year, beating the market.

Our performance in the current quarter continues on trend and it is a daily focus of our team to ensure that our pricing and assortment and our ability to engage with customers supports profitable growth. What's even more exciting is that our stores in all provinces are contributing to this positive same-store trend.

Gross margin is also a positive story, achieving a retail gross profit percentage of 25.9% for Q1, representing the third consecutive quarterly improvement. Our team leverages Hifyre as our competitive advantage with its database insights to focus our working capital on popular products and pricing that drives price credibility, as well as high demand products that enhance our ability to generate higher margin.

Our digital segment revenue of $3 million for the quarter is a return to the anticipated run rate of the segment as guided in Q4 2022 and provides us with high margin revenue contributing to a high consolidated gross margin percentage. Our wholesale and logistics segment revenues for the quarter were $7.9 million, as we focused on profitability and started to onboard customers to our Manitoba cross-docking service that includes major Canadian licensed producers.

We are constantly looking to simplify our business to drive meaningful cost reductions. In addition to the overhead cuts that we had executed at the beginning of Q1 and announced in our last call, we have outsourced the Pineapple Express business-to-business operations while maintaining the Firebird delivery B2C service in limited markets. These cuts to our Pineapple Express cost structure were executed at the end of the quarter.

We anticipate seeing the positive impact of these changes in our wholesale and logistics segments starting in Q2 and further anticipate this segment to return to positive adjusted EBITDA. We still anticipate Fire & Flower achieving a run rate of consolidated positive adjusted EBITDA towards the end of the next quarter, supported by healthy metrics in our core retail business and our focus on cost control.

We continue to evaluate financing opportunities to drive consolidation in the industry as well as support the company on its path to positive free cash flow. Our focus has never been clearer, achieving positive free cash flow. The steps that we take to get there are structural and we will ensure that our company can leverage our efficient core to grow through acquisitions.

Innovation in our business has continued while we have driven cost control. Recently, we have launched the Spark Marketplace mobile app available on the App Store that allows customers to purchase cannabis from us directly through the app. The app leverages the Hifyre e-commerce platform and expands on our industry-leading e-commerce experiences on our Web site.

The app further delivers a tailored customer experience through our Hifyre-enabled innovative product recommendation engine that provides customers with recommended products based upon their shopping behaviors. Digitally-enabled sales through the Web site and the app continued to deliver higher units per transaction in basket sizes than non-digitally-enabled sales. The Spark Marketplace app provides a further opportunity for value creation as we look towards consolidation and acquisition opportunities.

As we've mentioned before, our growth will come through acquisitions and through the development of the franchising relationship with Circle K to get to 10% market share. We see consolidation as likely in the Canadian retail cannabis markets and believe that Fire & Flower will play a major role in that consolidation and can add significant value to the Hifyre platform and especially the Spark Perks loyalty program.

As we look towards M&A activity, we will continue to remain disciplined with transactions that present limited downside risk and accretion to our business on all fronts. On April 17, 2023, we announced the signing of the Master Licensing Agreement with Alimentation Couche-Tard to expand our retail franchise arrangement in Canada. Couche-Tard is now in the process of rebranding the five existing Circle K co-located licensed stores in Ontario to the Fire & Flower brand, and plans to add two more sites as part of this agreement that allows our two companies possess this concept to design the profitable and scalable model that could form the base of a global expansion.

Some stores are also nearing completion in Western Canada and we highly anticipate adding them to our co-location program. Most importantly, for global expansion, the Master Licensing Agreement gives us the exclusive right of first opportunity to negotiate entry in other markets where Circle K operates in the U.S. and Europe. Couche-Tard shares our view on consolidation and the growth of the retail cannabis market. And we remain in constant discussions with them as it relates to their various financing instruments with Fire & Flower.

I would now like to turn the call over to John to discuss our financials and provide a more detailed overview for the first quarter financial results. John?

John Chou

Thank you, Stéphane. Good morning, everyone. Thank you again for attending the call today. Before I begin, another quick note regarding the comparative figures in our financial statements, MD&A and news release for the quarter ended March 31, 2023. This is the first fiscal quarter the company's reporting under our new fiscal year end of December 31. The prior year comparative figures reflect the 13-week quarter ended April 30, 2022.

During the first quarter of 2023, consolidated revenue totaled $43.1 million compared with $40.9 million in the first quarter last year, representing a 5.3% year-over-year increase. Consolidated revenue for the quarter consisted of retail revenue of $32.2 million, wholesale and logistics revenue of $7.9 million and digital revenue of $3 million.

Consolidated gross profit for the quarter was $12.5 million compared with $12.2 million for Q1 last year, representing a 2.4% year-over-year increase. Consolidated gross margin for this quarter was 28.9% compared with 29.7% last year. Both gross margin dollars and percentage for this quarter are the highest we have achieved in the last 12 months.

Consolidated SG&A expenses for Q1 2023 was $14.7 million compared with $15.2 million in Q1 last year, representing a year-over-year decrease of 3%. SG&A expense as a percentage of revenue also decreased year-over-year to 34% this quarter compared with 37% in Q1 last year. Since 2022, the company has implemented a series of cost reduction and business restructuring initiatives resulting in overall SG&A savings.

The year-over-year decrease was primarily driven by reductions in payroll costs and sales and marketing expenses. We did see a slight increase in facility-related costs contributed by higher than normal maintenance and security costs. During Q1 2023, we have undertaken additional steps to make further changes to our business, including continuing to aggressively reduce occupancy costs through sub leases, and as Stéphane mentioned, taking the decision to exit some parts of Pineapple Express. We will see effects from these activities in future quarters in 2023.

Consolidated adjusted EBITDA in Q1 2023 was negative 1.8 million compared with negative 2.3 million in Q1 last year, representing a 21% improvement year-over-year. Consolidated adjusted EBITDA improved in the first quarter as we continue to increase gross margin in the retail segment, while reducing SG&A expenses across the company.

Now I will provide further details on our three operating segments, starting with retail. Retail revenue for the current quarter was $32.2 million, which represents an increase of 2.6 million or 9% from Q1 2022. Retail revenue increased year-over-year as a result of the implementation of Spark Perks member pricing in mid '22 and our focus on improving product assortment, customer experience and overall store portfolio.

One of the most important metrics we monitor is same-store sales, which saw an increase of 17.2% this quarter compared to the same period last year for the stores that operated throughout the period. We continue to see our store performance improve, despite the lingering weakness in retail cannabis prices in Canada, with CPI of recreational cannabis products in Canada, decreasing by 2.4% for the 12-month period to March 2023. Our same-store sales have now improved for three consecutive quarters, and our Spark Perks member transactions now represent 77% of total retail transactions.

During Q1 2023, we achieved retail gross profit of $8.4 million, representing a 2% increase from $8.2 million in Q1 2022. We have also increased our gross margin again to 25.9%. Although still now back to the same level of 27.8% in Q1 last year, the 25.9% represents the highest gross margin we have achieved in the last 12 months.

Net income before tax for retail in Q1 '23 as reported was negative 1.6 million compared with 2.7 million in Q1 last year, representing a 41% improvement year-over-year. Compared to Q4 '22 on a prorated basis, this also represents a significant improvement of 41%. The improvements were contributed by higher gross profit and lower SG&A expenses attributable to the retail segment.

Overall, the company has now delivered sequential improvements on all the important metrics for our retail operations, including higher revenue, gross margin, and same-store sales. We are demonstrating positive results from the various initiatives that we started on last year to better bring consumer engagement, enhanced merchandising and optimization of our store portfolio.

At the same time, the company continues to innovate by leveraging our unique Hifyre technology platform, the latest example of which is the introduction of our Spark Marketplace mobile app on the Apple App Store, which was already seeing a lot of traction. We expect to see continued strength and improvement in our retail segment through the rest of 2023.

Now on to the wholesale and logistics segment. Wholesale and logistics revenue was $7.9 million for Q1 '23 compared with $8.5 million for Q1 last year, representing a 7% decrease year-over-year. Q1 '23 revenue was lower compared to 2022, primarily due to lower revenue generated from our logistics and delivery business Pineapple Express.

Gross profit for wholesale and logistics segment this quarter was $1.2 million compared with $1.3 million in Q1 last year, representing 15.8% gross margin this quarter versus 15.5%. The slight decrease in gross profit primarily reflects lower revenue this quarter offset by lower cost of goods sold, thereby achieving a higher gross margin percentage.

Income before tax for wholesale and logistics increased to 0.4 million this quarter from a loss of 0.1 million in Q1 last year. The year-over-year improvement for the segment, despite the decreasing revenue, was contributed by reductions in SG&A expenses attributable to wholesale and logistics.

As we explained earlier, during the quarter, the company has exited certain components of the Pineapple Express business as part of our strategy to simplify our operations and focus on our core business. As we look to the rest of 2023, we expect to maintain the Open Fields wholesale business at its steady run rate while improving overall profitability in the segment as we reduce costs related to the Pineapple Express operations.

Now to the digital segment. Digital segment revenue was $3 million this quarter versus $2.9 million for Q1 last year, representing an increase of 2%. Digital revenue this quarter also represents an improvement from Q4 2022 on a prorated basis by approximately 20%, returning to the approximately $3 million level per quarter as we had indicated previously.

Gross profit for digital segment was $1.2 million or 96% gross margin, a year-over-year increase from $2.6 million or 90% gross margin in Q1 last year. Income before tax for digital was 1.2 million compared to 1.7 million in Q1 last year, a decrease of 29%.

Lower income for the segment was contributed by higher gross profit, offset by increases in expenses related to product development. Looking forward, a reminder that digital revenue may be subject to timing of data subscription and other renewals, but we continue to expect similar run rate to this quarter going forward.

Free cash flow on a consolidated basis in the first quarter 2023 was negative $5.2 million compared with negative $8.7 million in Q1 last year. Improvement in free cash flow this quarter was contributed by significantly lower cash used in operating activities before working capital and lower lease liability payments. The company has also reduced its capital expenditures by focusing CapEx spend on the most essential items.

At the end of Q1 '23, the company had $13.9 million of debt on its balance sheet compared with $13.5 million on December 31, 2022, with the change representing accrued interest. Total debt at the end of this quarter includes $2.4 million of convertible debentures and $11 million of senior secured loans plus accrued interest. We have been in close discussion with several parties on our overall financing requirements to drive consolidation and support a path to positive free cash flow.

Now, to summarize our financial results for the quarter, we are very encouraged by the positive results that we have started the new year with. For several quarters now, we have demonstrated the soundness of our strategy to improve top line, to better engaging our customers and our employees while delivering higher profit through cost reductions and focusing on our core businesses. The results are showing through higher revenues, improved gross margin and reduced SG&A expenses. We are still executing on these as well as other steps to continue to deliver sustainable long-term returns to our investors.

Now, I will return it back to Stéphane.

Stéphane Trudel

Thank you, John. Some concluding remarks before we move on to questions from research analysts covering Fire & Flower. Our team is proud of the last few quarters' momentum and is poised to shift into high gear as we simplify our business and keep our customers at the center of all we do.

We have made so much progress in the last year and have delivered very meaningful results in a competitive market. Our vision is to expand global access for legal cannabis for customers by advancing our tech forward platform and partnerships. 2023 is a stepping stone to that vision, and we look forward to sharing our progress with investors in the coming months.

In closing, I would again like to thank our team at Fire & Flower for its engagement and focus delivering on these results. I would also like to thank our loyal shareholders for being supportive of our shared objective.

I will now like to turn it over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. The first question we have comes from Frederico Gomes of ATB Capital Markets.

Frederico Gomes

Hi. Good morning. Thank you for taking my questions. My first question is on your retail gross margins, again, very impressive expansion over the past year. Based on what you're seeing in the industry among retailers, what should we expect in terms of continued expansion in your retail gross margins? And what would be the drivers of that, the price improving or other stores exiting the market or just a change in mix? What can you share with us? Thank you.

Stéphane Trudel

Good morning, Frederico, and thank you for the question and attending the call. So yes, very impressive, very happy with the growth we've seen in the last quarter since we've launched member pricing. I'll take advantage of having Chris on the line to let him give you more color on margin.

Chris Bolivar

All right, yes. Thanks very much, Fred. Good morning. Yes, so we're pretty happy I think with where we've seen the retail gross margin lands, so 25.9% for the quarter. I think our view on the spread in terms of what's driven this is this has been a mix really of price credibility with the consumer. That's been through our member pricing program of the top 50 SKUs in Canada. But what we're seeing expanding that and expanding the margin percentage is really consumers migrating over to flex products, high demand products where we're able to pick up some additional margin opportunities. So really we see the retail gross profit profile increasing, really driven by our assortment strategy, ensuring that we have the best products for our customers really priced right based upon how they're shopping. In terms of where we see that going, I think that there's some macro factors at play here. We have to look at in the next 12 to 18 months what the overall supply profile of cannabis is going to be in Canada. We do expect to see customers continue to shop on these new and interesting products, as well as take advantage of them, the time offers that we have. And we continue to monitor prices in the market to ensure that where we're pricing the price credibility items, they're really the top performers, the 28-gram options that we're price competitive on those but also getting consumers some options that they might not see on other chains. So I hope that answers your question.

Frederico Gomes

Yes, thank you. That's great color. My second question here is just on your footprint. So you finished the quarter with 92 corporate stores, I believe, and seven licensed stores. Considering the new agreement that you have with Couche-Tard for Ontario, can you remind us about how you expect your footprint to evolve over the next quarter and for the remainder of the year? And in terms of the mix that you think you're going to have for your new store openings in terms of corporate and franchised stores? Thank you.

Stéphane Trudel

Yes. So we've been looking -- taking a hard look at our store footprint. As you know in the last 12 months, we've opened stores, we've shut down stores. So we've remained pretty constant after the drop of 10 stores. So if you look back at the first quarter of last year, we had over 100 stores. So to see the growth that we've been able to extract from less stores I think just shows that the discipline that we've taken and making sure we keep the best stores, we high grade our network, it's paying off because we are able to generate more from fewer stores. So we'll continue doing that. So we're expecting to open two more corporate stores this year as part of our plans. And also on the co-located stores from the licensing agreement with Circle K, they are currently -- they are going to rebrand. So the five stores that they have operating in Ontario will be rebranded to Fire & Flower. So those stores will join the Fire & Flower family and have full access to every e-commerce tools that we have, including the new Spark Marketplace app. The stores will be fully transparent. As part of the network, people will not know if they're corporate. So we're not presenting the stores as anything different. They will be Fire & Flower stores so that five in Ontario, they also have a commitment to build two more in Ontario in the next year. So they'll make up the number of seven stores in Ontario. And then we've got our licensing agreement in Western Canada. We've got two stores right now pretty close to opening and more to come during the year. So in addition to our 92 corporate stores, you should expect between 5 and 10 co-located stores with Circle K and a couple of more corporate stores during the next 12 months. But while we're doing this, we're continuing to look at existing stores and making sure we invest our money in our working capital and productive stores.

Frederico Gomes

Okay. Thanks for that. And then you mentioned consolidation opportunities in your press release. How far along are you in that process? Should we expect anything to happen anytime soon this year? And then what size of a potential acquisition are you looking to make?

Stéphane Trudel

Yes. So we've been very active. So as much as we've looked at our own network, yes, we've been very active with numerous parties. And what we're looking for is a great fit, a great cultural fit, a great network fit, aligning ourselves with better stores and talent as well we can bring into our company. So we’re progressing well with several parties. So the size that we'd be looking at would be 5 to 10 stores, maybe a bit bigger. And so our goal is for these stores to really be immediately accretive to our network. So we're going to be very focused on the market that we are going to look at. We're not necessarily looking at expanding in new markets. We're definitely looking at existing markets, so we can leverage all the facilities that we have. And also by expanding our tools to these acquired networks, we believe we can increase their sales, increased profitability. These stores will immediately be part of our family. We'll welcome our Spark Perks members and we'll be equipped with Hifyre from day one. So we really believe that we'll be able to make these accretive transactions in the next few months and contribute to the growth and the consolidation of the industry.

Frederico Gomes

Thank you. I'll pass it along. Thanks.

Stéphane Trudel

Thanks, Frederico.

Operator

[Operator Instructions]. And we now have Andrew Semple with Echelon Capital Partners.

Andrew Semple

Hi there. Good morning. Thanks for taking my questions. First one here would just be on the timing for turning adjusted EBITDA positive. I think in prior press releases, you had called out the first half of 2023. And I didn't see that language used in the current press release. Just wondering if there's been any change in the timing there, or does that prior guidance still hold?

Stéphane Trudel

Good morning, Andrew. Thanks for the question. So our view is still that during the second quarter, towards the end of the second quarter, we'll start to be on the run rate to be positive adjusted EBITDA. So we're -- as you see the improvements in Q1, Q2 also from a sales perspective continues on the positive trends, seeing our metrics continue to improve. And while we're looking at the top line improvements, we're also, as you heard, making changes -- made changes at the beginning of Q1, at the end of Q1 to our cost structure and we continue to look for ways to be more efficient. And that is how we will get at this run rate towards the end of the second quarter here.

Andrew Semple

Great. I appreciate you taking that. And then, in addition on maybe more of the organic growth pipeline and store opening plans for the remainder of the year, I think you've been a little bit more disciplined and cautious in opening new locations. And I'm just wondering if you're seeing opportunities to add new stores locations in the balance of the year, and whether you've begun to make those investments to lay the groundwork for that to happen?

Stéphane Trudel

Thanks. So really our growth will be through opening the co-located stores, opening a couple of corporate stores of our own for properties that we already secured in great locations. But the growth will also be coupled with adding stores through acquisitions. We truly believe that adding new stores in already very competitive markets will not be dissolution, we believe that finding the right partners to partner with in acquiring better stores that has already a proven track record and then can be improved with our ability on the e-commerce side and our product relationships to be even more profitable is the way to go for our growth. So obviously, we can't guide on acquisitions. But we're very active with several parties here. And that's really how our growth will be done will be through a combination of M&A and new source.

Andrew Semple

Great, that's helpful. Maybe the last one, if I may, just on the Couche-Tard Series C warrants, we're approaching the maturity date for that. Do you have any indications from your strategic partner on their plans for those warrants, anything that you'd be able to share?

Stéphane Trudel

No, we can't share anything on their position on the exercise of warrants. Obviously, they expire at the end of June of this year. So they'll have to make a decision. But they share our view on consolidation and also our view on the growth and the potential of the retail cannabis market. So we remain in constant discussions with them as it relates to all the financing instruments that we have with -- that they have with us including the warrants as well as operationally on the development of the co-located stores and the Master License Agreement, so happy to be working with them to rebrand these stores and to open new ones. So really the conversation continues, but we can't comment more on the warrants.

Andrew Semple

Got you, understood, and that's helpful. Thank you very much. I'll get back in the queue.

Stéphane Trudel

Thank you, Andrew.

Operator

Thank you. [Operator Instructions]. I can confirm we have no further questions.

Stéphane Trudel

Thank you. Well, thank you for your interest in Fire & Flower and for joining our call this morning. We look forward to sharing our progress towards positive adjusted EBITDA with you next quarter. Have a great day, and thank you. Thank you, operator. You can now end the call.

Operator

Thank you. This does conclude today's call. Please have a lovely day.

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