SNDL Inc. (NASDAQ:SNDL) Q1 2023 Earnings Call Transcript

SNDL Inc. (NASDAQ:SNDL) Q1 2023 Earnings Call Transcript May 15, 2023

SNDL Inc. misses on earnings expectations. Reported EPS is $-0.07 EPS, expectations were $-0.02.

Operator: Good morning, and welcome to SNDL’s First Quarter 2023 Financial Results Conference Call. This morning, SNDL issued a press release announcing their financial results for the first quarter ended on March 31, 2023. This press release is available on the company’s website at sndl.com and filed on EDGAR and SEDAR as well. The webcast replay of the conference call will also be available on sndlgroup.com website. SNDL has also posted a supplemental investor presentation on its website. Presenting on this morning’s call, we have Zach George, Chief Executive Officer; Jim Keough, Chief Financial Officer; Tank Vander, President, Liquor Retail; and Tyler Robson, President Cannabis. 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 and EDGAR. Additionally, all financial figures mentioned are in Canadian dollars unless otherwise indicated. We will now make prepared remarks, and then we’ll move on to analyst questions. I would now like to turn the call over back Zach George, Chief Executive Officer.

Zachary George: Hello, everyone, and thank you for joining us on our first quarter 2023 earnings call. This past quarter was transformative for SNDL, as we successfully closed the acquisition of Valens in January. This strategic move establishes SNDL as one of Canada’s largest vertically integrated cannabis companies. With this Capstone acquisition, SNDL now possesses robust capabilities in low-cost biomass sourcing premium indoor cultivation, innovative product development and efficient manufacturing facilities. We are confident that these capabilities will allow us to deliver high-quality products and services that meet the evolving needs of our customers and stakeholders. During the last 2 years, our team has diversified SNDL’s capital and operating base and transformed our business model through a series of strategic acquisitions, including both cannabis and liquor retail operations, as well as the credit portfolio that generates cash interest and creates optionality related to U.S. market exposure.

Our top priority is to maintain our focus on the consumer, while working to drive sustainable profitability by optimizing each of our operating segments and benefiting from new cash flow streams. We delivered seasonally moderated results in our and Liquor retail, and are pleased to report continued progression in our Cannabis Retail and Cannabis Operations segments. Net revenue for the first quarter of 2023 was $202.5 million compared to $17.6 million in the first quarter of 2022, representing an increase of more than 1,000% year-over-year. Our integration initiatives and cost reduction efforts are progressing well. And by 2024, run rate synergies are now expected to exceed $30 million annually at a onetime cost of just over $4 million, with additional proceeds of non-core assets that may exceed $10 million.

We expect these cost savings to positively impact margins and cash flows in the third and fourth quarters of 2023. In response to market price dynamics and the Valens acquisition, SNDL has implemented operational changes aimed at optimizing our cultivation activities. These changes have included a rightsizing of the Olds, Alberta facility to focus on premium products and brands and a relocation of all manufacturing operations to our Kelowna complex. These completed changes resulted in the elimination of approximately 200 employee roles, and will support the company’s efforts to increase efficiency and improve cash flows from our Cannabis Operations. This past quarter, SNDL also took proactive steps towards optimizing our proprietary data service programs in the Liquor and Cannabis Retail segments.

These programs are a key component of our growth strategy, which aims to create mutual benefit for our retail operations and supplier partners while also driving margin accretion. Leveraging the industry-leading volumes and rich point-of-sale data to better serve our suppliers with high-quality analytics, we are confident that we can deliver successful outcomes for our partners. By the end of Q1 2023, the company had deployed capital into a portfolio of cannabis-related investments of approximately $579.9 million, including $535.9 million for the SunStream joint venture. As we’ve previously mentioned, our portfolio consists of 6 investments. We continue to explore opportunities related to this portfolio and see significant optionality in the credit exposures.

I look forward to providing further details on our SunStream portfolio in the coming months. Cannabis industry headwinds, such as oversupply, price compression and retail market saturation, continue to place cannabis equity valuations under significant pressure. We continue to believe that we are undervalued and remain committed to creating value for our shareholders through improved operational results, a generation of free cash flow and prudent capital allocation. This capital allocation may include investments in existing assets or the return of capital to shareholders through share repurchases or dividends. SNDL was in a blackout period for several months and expects to evaluate the continued repurchase of shares when trading restrictions are lifted.

We also expect to update investors on the distribution of Nova shares as a dividend in kind in the next few weeks. Despite a volatile market, SNDL’s debt-free balance sheet and ample cash reserves position us well for the ongoing sector rationalization as the industry moves towards the formation of an oligopoly. We are confident in our ability to be successful in the Cannabis industry and remain focused on building a strong model that will help us emerge as winners. I will now pass the call to Jim to review our whole financial and operating results.

James Keough: Thank you, Zach. I’d like to remind you all that amounts discussed today are denominated in Canadian dollars, unless otherwise stated. The results for the first quarter of 2023 include the operating results of The Valens Company subsequent to the acquisition on January 17, 2023. The results for the comparative first quarter of 2022 include only 1 day of operations for Liquor Retail and Nova Cannabis retail subsequent to the acquisition of Alcanna on March 31, 2022. Please note that certain amounts referred to on this call are non-IFRS GAAP measures. And for the definitions of these measures, please refer to SNDL’s management’s discussion and analysis. As Zach mentioned, our intent is to maximize efficiency and profitability by optimizing and streamlining internal processes with the ultimate goal of generating sustainable free cash flow, a critical metric for our long-term financial success.

Before I go into greater detail on SNDL’s financial results under each of our 4 operating segments, I’ll begin with an overview of our consolidated first quarter 2023 financial and operational highlights. During the first quarter of 2023, our net revenue was $202 million compared to $240 million in the fourth quarter of 2022 and $17.6 million in the first quarter of 2022. This represents a year-over-year increase of over 1,000%, largely due to the acquisitions of Alcanna, Valens and Zenabis. However, our sequential quarterly net revenue decreased due to expected seasonality in the Liquor and Cannabis retail segments following the Q4 holiday period. We reported a net loss of $36 million for the first quarter of 2023 compared to $161 million net loss in the fourth quarter of 2022 and a $38 million net loss in Q1 of 2022.

The loss for the first quarter was impacted by the seasonal downturn in Liquor and Cannabis Retail sales as well as asset impairments of $10 million, primarily related to inventory impairment provisions. We achieved adjusted EBITDA of $7.4 million for the first quarter of 2023 compared to adjusted EBITDA losses of $7.5 million in the fourth quarter of 2022 and $0.7 million for the first quarter of 2022. Our gross margin was $32 million in Q1 2023 compared to $44 million in the fourth quarter of 2022 and up over 850% from the first quarter of 2022. Since the close of the Valens acquisition, SNDL has achieved more than $13 million in annualized cost savings and identified $5 million in additional annual cost savings to be achieved in 2023, exceeding management’s original $10 million total target.

Most of the cost savings have been realized through SG&A and public company costs while the remainder will be achieved through supply chain consolidation and reductions of COGS. At March 31, 2023, we had $793 million of unrestricted cash, marketable securities and investments and no outstanding debt. This contributed to a net book value per share of $5.26 as compared to our trading price of $2.20 per share on May 11. As of May 12, 2023, we added $190 million of unrestricted cash, and we have not raised cash through share offerings since June 2021. I’ll now review our Liquor segment, which includes results for our Wine and Beyond, Liquor Depot and Ace Liquor retail banners. Gross revenue for Liquor retail sales for the 3 banners combined was $116 million for the first quarter of 2023, which reflects a decrease of 27% compared to the fourth quarter of 2022.

The seasonal impact of Q4 holiday sales compared to the traditionally slower first quarter is reflected in these results. I would also like to note that Liquor retail impacted our total cash used in operations this quarter due to inventory replenishment and rebuild following the robust liquor sales in the previous quarter. Tank will provide additional operational and financial metrics for our Liquor retail segment, including margin growth, and preferred label sales, which maintained solid performance throughout the first quarter. Now let’s turn our attention to our Cannabis retail segment, which includes a total of 197 retail locations operating under the Value Buds, Spiritleaf and Superette banners. Subsequent to the quarter end, we expanded our retail offerings with the introduction of Firesale Cannabis.

As of May 12, 2023, the spiritleaf store count is 99, including 22 corporate stores and 77 franchise stores. Superette includes 5 corporate stores, Firesale has 2 corporate stores and Value Buds has 91. With our multi-banner retail presence, we now represent approximately 10% of market share in privatized provincial markets. Gross revenue from the Cannabis retail segment for the first quarter of 2023 was $67 million compared to $68 million in the fourth quarter of 2022, showing a modest seasonal dip. Gross revenue from the Value Buds banner contributed $60 million of that revenue during the first quarter of 2023. The gross margin for the first quarter of 2023 was $15.8 million or 23% of sales, consistent with the gross margin in the fourth quarter of 2022.

There is only 1 day of revenue from Nova in Q1 2022 subsequent to the Alcanna acquisition. We continue to grow revenue and gross margin through enhanced focus on category management, a proprietary data licensing program, private label offerings and strategic assessment of price elasticity in markets where competitive pressures have eased. The company partnered with Nova for Value Buds’ private label products and sales representing approximately 8.1% of total 28-gram sales and 36.3% of 14-gram sales in Alberta Value Buds stores for the 3 months ended March 31, 2023. Private label margins are approximately 5% higher than margins on comparable competitor products. Now looking at our Cannabis Operations segment. Gross revenue from the Cannabis Operations segment for the first quarter of 2023 was $30 million, a 162% increase compared to the first quarter of 2022.

Gross margin for Q1 was negative $9.5 million compared to negative $9 million in the fourth quarter of 2022 and negative $0.2 million in the first quarter of 2022. The current quarter gross margin includes a $9.2 million inventory impairment provision which is a consequence of refocusing and reorganization of the segment with the Valens expansion. Tyler will provide additional details on our manufacturing and facility updates as well as our plans to increase margin and revenue in the coming quarters. Finally, looking to our liquidity and investments. During the first quarter of 2023, SNDL used $48.9 million in cash from operations, including onetime payments related to inventory seasonality and The Valens transaction. $13.5 million was allocated towards replenishing liquor inventory following the seasonal holiday draw in Q4 2022.

Additionally, $2.7 million was used to cover severance and restructuring costs, while $17.5 million was dedicated to stabilizing balance, cash and settling overdue accounts payable. This included addressing unpaid liabilities, including $4.9 million in excise tax, which had accumulated before the acquisition date. Lower gross profit in the Liquor segment during the slower first quarter also contributed to the use of cash during the quarter. As of the end of the first quarter of 2023, SNDL has deployed capital on a portfolio of cannabis-related investments with a carrying amount of $580 million. Of this amount, $536 million has been invested in the SunStream Bancorp, Inc. joint venture. During the first quarter of 2023, our investment portfolio generated interest and fee revenue of $4.2 million.

And in addition, our share of profit from equity-accounted investees generated from investments by SunStream was $9.5 million. However, we also experienced an underrealized investment loss of $5.2 million on marketable securities, including our publicly disclosed strategic investment in Village Farms International. As for our share repurchase program, during the 3 months ended March 31, 2023, we purchased and canceled 0.5 million common shares at a weighted average price of CAD 2.70 or USD 204 per common share with a total cost of $1.5 million under our share repurchase program. As of May 12, 2023, SNDL has a total of 260 million shares outstanding. Through a diligent and relentless focus on cost control, operational excellence and a commitment to continuous improvement, we expect to drive sustainable, profitable growth for our company and its shareholders.

Thank you for your support as we work to create value for all of our stakeholders. I will now pass the call to Tank to provide an update on our Liquor retail results.

Taranvir Vander: Thank you, Jim. Good morning, everyone. SNDL’s Liquor retail operations remain a consistent source of stable cash flow. Our robust product offerings and tailored retail experiences have played an integral role in maintaining stable margins through the start of 2023. Looking at the first quarter highlights for the Liquor retail segment. We currently operate 170 locations predominantly in Alberta, under our 3 retail banners, Wine and Beyond, Liquor Depot and Ace Liquor. SNDL’s liquid banners, market share in Alberta was approximately 17% in the first quarter of 2023. In Q1 2023, gross revenue for Liquor retail across all 3 banners was $115.9 million. The Liquor retail segment has maintained a steady gross margin of $26.3 million in Q1 of 2023.

Our preferred label sales have contributed to stabilizing revenue and driving increased margins. Currently, preferred label sales account for 10% of our total sales compared to 8% in the previous year. In Q1 2023, our preferred label sales reached $11.2 million, a significant increase from $8.9 million in Q1 of 2022. Despite adding additional value-priced items to our preferred label offerings, revenue has grown and the margins remained strong. Preferred label margin continues to incrementally higher than our baseline margin and the current private label margin is $3.2 million or 29% of sales compared to $2.8 million in the previous year. Although the Wine and Beyond banner is the key driver of incremental margin and revenue growth, it is important to acknowledge the substantial contributions of our Liquor Depot and Ace liquor retail banners.

These banners remain our primary revenue streams for Liquor retail, accounting for 78% of our gross revenue in Q1 of 2023. We take pride in our ability to adapt to shifting consumer behaviors in response to current economic climate. Our wide range of value and convenience offerings are thoughtfully curated to cater to the diverse purchasing habits of our broad consumer base. We understand that each consumer is unique and strive to offer a variety of products and services to meet individual preferences. Now let’s shift our focus to SNDL’s strategic growth initiatives. We aim to exceed customer expectations while driving sustainable growth for our business by continuously seeking out new revenue streams. To achieve this, we explore innovative approaches, expand our product offerings and leverage technology.

Currently, we are exploring the most effective platforms and execution tactics for developing an e-commerce platform for our Wine and Beyond banner. We will continue to rely on Skip the Dishes as a third-party e-commerce vendor for our convenience banners, Ace Liquor and Liquor Depot. Their comprehensive suite of services is perfectly suited to the customer purchasing habits that define the Ace and Liquor retail experience. We are pleased to report that our store expansion initiatives are progressing. This quarter, we opened a new Ace Liquor discounter in Calgary, Alberta. And are also excited to confirm the development of a new Wine and Beyond store in Airdrie, Alberta, which is expected to open in 2024. The Dilworth, Kelowna Wine and Beyond, our first expansion outside of Alberta, achieved a 35% year-over-year growth, further demonstrating the strength of this matter.

We remain committed to expanding our presence in Western Canada through the upcoming expansion of Wine and Beyond in Saskatchewan. In closing, by focusing on our customers and delivering exceptional value and convenience, we will continue to build strong and lasting customer relationships that drive long-term success. I am of the team’s efforts and anticipate strong performance in the upcoming quarters with improved seasonality. Thank you. And now I would like to introduce Tyler Robson, President of Cannabis for an update on our Cannabis Operations segment.

Tyler Robson: Thank you, Tank, and hello, everyone. I’m pleased to report our first quarter results, which for the first time includes Valens contributions. This quarter highlights solid progress and set a strong foundation for our growth in the coming months. We’ve been focused on improved fundamentals for our cannabis operations, and I am confident that the structure we are building now will include greater success in the future. Gross revenue from Cannabis operations for Q1 2023 was $30 million, a 162% increase compared to the same quarter in 2022, a 58% increase from the previous quarter. Our gross margin was negative $9.5 million this past quarter, including a $9.2 million inventory impairment. We are actively working to improve this metric in the upcoming quarters.

We are optimistic about our prospects particularly after the successful transition of all production and manufacturing to our Kelowna facility. This move allows us to reduce our reliance on high-cost cultivation and increase efficiency in our operations by utilizing our low-cost biomass procurement capabilities. We have optimized our coast-to-coast facility footprint and continue to refine our cannabis operations segment. We recently rightsized our Cannabis Operations in Olds, Alberta and the facility was specialized in premium cannabis cultivation. Meanwhile, our Kelowna and Bolton farms facilities will focus on processing and manufacturing cannabis biomass. The [indiscernible] facility will continue to be our conduit to international exports.

SNDL’s portfolio represents 11 recreational cannabis brands across 10 provinces featuring premium and value products, including inhalables and a full suite of 2.0 products. We are committed to continuously improving our portfolio and optimizing our resources. We are taking a strategic approach to our SKU portfolio focusing on high-margin products while prioritizing consumer-driven innovation. We are analyzing every aspect of our Cannabis Operations, from individual SKUs to entire product categories and brands, to ensure we are making the best decisions for our companies and our customers. We are committed to prioritizing profitable brands and products that support our financial sustainability and are targeted to meet the industry and consumer demand.

No brand or product categories off limits, and we remain focused on our efforts to drive growth and profitability. As mentioned, innovation is a key focus for SNDL as we move forward. We have an exciting pipeline of products set to launch in the upcoming months, with a particular emphasis on expanding our cannabis-infused beverage category, versus Neon Russian Fuse beverage, which launched in Q1 2023 in the top 20 spot in the beverage category in British Columbia within the first 2 weeks of sales. With the increasing popularity of cannabis-infused beverages during the warmer months, we look forward to introducing several new offerings in our portfolio. We are also expanding our Palmetto brand and launching a beverage in edible line and releasing new shattered diamonds pre-rolls in our top leaf brands in Q2 2023.

In the first quarter, we grew our B2B segment and established partnerships with most major Canadian license producers. While there may be potential headwinds in Q2 2023 due to increased price compression and competitors liquidating inventory, we remain confident in our ability to drive revenue growth in the segment by leveraging our robust production and distribution capabilities. While we continue to focus on the Canadian market, we recognize the potential of international markets and are actively exploring opportunities to expand our business through export. To achieve this goal, we are revamping our international B2B program and investing in process improvements and testing capabilities to meet the high standards of our global partners. In addition, we have acquired new strains that better fit the evolving demand.

We are excited about the potential for growth in this segment and are committed to delivering high quality product and services to our customers around the world. To conclude, we remain steadfast in our commitment to prioritize healthy gross margins to achieve sustainable growth. Our vertical integration and extensive pipeline to the largest retail store network will allow us to curate a superior product mix and increase market share across various product segments. This, along with reduced Cannabis Operations cost is a key factor to achieving a more sustainable Cannabis Operation. Thank you. I will now pass it to Zach for closing remarks.

Zachary George: Overall, we remain committed to managing our cash flow responsibly, achieving free cash flow and unlocking value for our shareholders. We thank you for your continued support and look forward to updating you on our progress in the future. I will now turn the call back to the operator for analyst questions.

Q&A Session

Operator: [Operator Instructions]. The first question comes from Andrew Partheniou with Stifel GMP.

Operator: The next question comes from Matt Bottomley with Canaccord Genuity.

Operator: And the next question comes from Frederico Gomes with ATB Capital Markets.

Operator: [Operator Instructions]. The next question comes from Sahil Dhingra from RBC.

Operator: The next question comes from Andrew Partheniou with Stifel GMP.

Operator: This conclude the question-and-answer session. I would like to turn the conference back over to Zach George for any closing remarks.

Zachary George: Thank you. We appreciate you all joining us today, and we look forward to updating you in the near future. Thanks very much. Have a great day.

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