SNDL Inc.

Good morning and welcome to the SNDL's second quarter 2022 financial results conference call. Friday afternoon, August 12th, SNDL issued a press release announcing their financial results for the second quarter ended on June 30, 2022. This press release is available on the company's website at sndl.com and filed on EDGAR and CDAR as well. The webcast replay of the conference call will also be available on the sndl.com website. SNDL has also posted a supplemental investor presentation found on the SNDL.com website. Presenting on this morning's call, we have Zach George, Chief Executive Officer, Jim Keogh, Chief Financial Officer, Tang Vander, President of Liquor Retail, and Andrew Storter, President and Chief Operating Officer. Before we start, I'd 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 CDAR and EDGAR. Additionally, all financial figures mentioned are in Canadian dollars unless otherwise indicated. We will now make prepared remarks, then we'll move on to analyst questions. I would now like to turn the call over to Zach George.

Good morning, everyone, and thank you for joining us on our second quarter 2022 earnings call. Andrew and I are thrilled to be speaking to you from Appleville, New Brunswick, in Maritime Canada today. Before we provide the details on our operations and second quarter results, I want to discuss our company's rebrand. Following our annual and special meeting of shareholders on July 25, 2022, Sundial Growers, Inc. changed its legal name to S&DL, Inc., our NASDAQ ticker symbol has remained unchanged. The rapid and material changes we have experienced over the past two years have led to our original Sundial Growers identity becoming less relevant as we expand and diversify our business operations. As we re-evaluated our company's purpose and realigned our values, we believe the new SNDL brand acknowledges the evolution of our activities and operations as a company and the undeniable impact that investor support has had on the business. The new SMDL brand embodies our commitment to excellence in the regulated product space as we focus on delighting consumers by providing unparalleled experiences, coupled with our ability to curate and deliver a robust selection of offerings throughout the regulated retail market. Along with a new logo and brand identity, SMDL has launched a new investor relations website at www.sndl.com, along with a rebrand video that gives a quick look on who SNDL has become. As a reminder, with the Alcanna transaction having been completed on March 31st, 2022, SNDL's business is operated and reported in four segments, liquor retail, cannabis retail, cannabis production and cultivation, and investments. In the second quarter, we made tremendous progress on our strategy and commitment towards becoming a leader in the Canadian regulated products industry. SNDL delivered a 2,344% increase in net revenue year over year, with a record net revenue of $223.7 million. SNDL's asset base and strong balance sheet position us well to develop unique competitive advantages that will lead to success in the Canadian market. S&DL's second quarter of 2022 gross margin grew to $43.1 million, up 1,627% from its second quarter 2021 loss of $2.8 million. This result is a record since S&DL's inception, which is especially meaningful given the sustained macroeconomic challenges we continue to navigate. Despite material cost inflation, rising interest rates, continued cannabis price compression, and intense competition, S&DL continues to drive towards improved results. Scale is mission critical to Sundial's success. The baseline costs of running a CPG-oriented company with a NASDAQ listing, outrageous D&O insurance rates, internal and external SOX compliance costs, and the commercial costs of best practices and CPG put many of our peers in a position where they are wholly incapable of delivering sustainable profits in excess of the costs of managing this infrastructure. This dynamic is sure to drive further industry consolidation. As a result of the Alcanna acquisition, S&DL is now Canada's largest private sector liquor retailer, operating 170 locations under its three retail banners, Wine & Beyond, Liquor Depot, and Ace Liquor. The liquor retail segment's stable and growing cash flow profile, along with best-in-class retail operations expertise, has accelerated S&DL's retail growth and vertical integration strategy. As COVID-19 restrictions have largely dissipated, we are seeing liquor retail sales revert to a more normalized run rate as on-premise consumption returns in force. That said, despite the fluctuation in sales due to market conditions and retail competition, we have stabilized our margins through pricing and mix initiatives and are working to position the business for greater future profitability. Tank will provide more comments on our liquor segment shortly. Turning to our cannabis retail segment, the retail landscape remains highly fragmented and ripe for consolidation as we have begun to see more retail closures on the back of unsustainable saturation in certain markets. Our expanded retail network solidifies S&DL's market share and its exposure to a broader consumer base. This past quarter, Value Buds and Spirit Leafs combined market share represented approximately 9.8 share in the privatized provincial markets. solidifying S&DL's position as a leading national multibanner cannabis retail operator. Market share for S&DL's products in our retail network continue to increase, highlighting the benefits of the company's vertical integration strategy. We see an opportunity to build a publicly listed, multibanner, pure play retail cannabis business with the scale and infrastructure to best serve Canadian cannabis consumers with distinct retail experiences. This will require the reorganization of our current retail license exposure into a single enterprise. This strategy may see benefit from the small loans we have made to Canadian retailers that could become acquisition candidates. We expect to provide more detail on this opportunity in the coming months. We are pleased with our cannabis brand sales in the second quarter in an environment that continues to be highly competitive. This is the first quarter since inception that our cannabis operations have generated positive adjusted EBITDA. We continue to be encouraged by our THC potency and yield results, which have hit new all-time highs during the quarter. And S&DL's efforts in tailoring our product innovation strategy based on increased data analytics and access to a broader consumer base are starting to yield results. By the end of the first quarter of 2022, Sundial had deployed capital into several cannabis-related investments with an IFRS fair value of $561.7 million, including $462 million to the Sunstream Bancorp joint venture. This joint venture has credit exposure to a handful of operators, including Jushi, SkyMent, Ascend, Parallel, ColumbiaCare, and AFC Gamma. We have adjusted the fair market value of our investment portfolio to reflect current market conditions in the cannabis industry and credit markets. Sunstream remains the largest Canadian-funded credit portfolio in the industry. While our goal is to generate attractive returns as a strategic capital partner for these borrowers, in certain cases, we may see defaults or other restructurings create an opportunity for SMDL to gain a meaningful operating footprint in a single or multi-state format. The broader North American cannabis markets are experiencing price and margin compression while facing a brutal mix of excess supply tax and regulatory regime challenges, and a lack of access to capital. At this point in the cycle, we are seeing very few new potential credit deployment opportunities that meet Sunstream's strict underwriting standards and view the repurchase of shares as attractive on a relative basis given S&DL's current valuation, which implies a discount to the value of our cash and investments and a negative value for our liquor and cannabis operations. We have shown this math with a net asset value buildup in our new investor deck, which I invite you to review. It's worth noting that we are one of the only LPs in Canada that can logically consider the repurchase of shares, and we do not need to dilute shareholders in the near term to solve balance sheet issues or to secure working capital. Despite our encouraging results, we are well short of our corporate goals and know that our business still has room for both improvement and growth. We expect to realize cost savings across all of our operating segments and our account integration work will continue into early 2023. The reckoning that I've been talking about for the last two years is certainly here. We are focused on demonstrating prudent capital allocation and proving the efficacy of our strategy and its benefit to shareholders. S&DL is uniquely positioned with the potential to be a leader in the Canadian regulated product space. We continue to explore significant opportunities to enhance our capabilities in a manner that's complimentary to our vertically integrated model. We believe that our culture of continuous improvement with a focus on cost control and efficient operations will drive strong future results. I am humbled to work with and serve our more than 2,500 employees and thank them for their continued dedication to our mission. Thank you. and I'll pass the call to Jim for comments on our financial results.

Thank you, Zach, and good morning, everyone. I'd like to remind you that all amounts that I discussed today are denominated in Canadian dollars unless otherwise stated. All results for the second quarter of 2021 comparatives exclude the subsequent acquisitions of Spirit Leaf and Alcanna, which closed on July 20, 2021, and March 31, 2022, respectively. Certain amounts that I will refer to on this call are non-IFRS measures. please refer to SNDL's Management Discussion and Analysis for the definitions. As we have previously discussed, SNDL now reports its financial results under four segments, Liquor Retail, Cannabis Retail, Cannabis, and Investments. I'll begin with our consolidated financial highlights. With this first full quarter subsequent to the acquisition of Elkana, we achieved net revenue in the second quarter of 2022 of $223.7 million, compared to $9.2 million in the second quarter of 2021, representing a more than 2,000% increase. Our gross margin grew to $43.1 million in the second quarter of 2022, the highest since SNDL's inception, up over 1,600% from a loss of $2.8 million in Q2 2021. Net loss for the three months ended June 30, 2022, was $74 million, compared to a net loss of $52.3 million for the three months ended June 30th, 2021. SNDL recorded an adjusted EBITDA loss of 25.9 million for the second quarter of 2022, compared to an adjusted EBITDA loss of 0.2 million in Q2 2021. Excluding the investment segment, which was primarily impacted by fair value adjustments for Sunstream, adjusted EBITDA would have been $9.6 million. As of June 30, 2022, SNDL had $900 million of cash, marketable securities, and long-term investments, and no outstanding debt. And as of August 11, 2022, SNDL had $362.6 million of unrestricted cash. SNDL's general and administrative expenses for the three months ended June 30, 2022, were $40.3 million compared to $10.1 million for the three months ended June 30th, 2021. This increase was mainly due to salaries, wages, and office and general expenses from the Alcanna and Spirit Leaf acquisitions. Effective July 25th, 2022, SNDL's common shares were consolidated on a one share for each 10 shares outstanding basis pursuant to shareholder approval at SNDL's annual and special meeting of shareholders. The company has now regained compliance with the NASDAQ minimum closing bid price requirements. In the quarter, SNDL repurchased 528,000 shares at a cost of $2 million. The company continues to see a significant dislocation in its valuation when compared to the underlying asset base. Let's take a closer look at our retail liquor segment now. The second quarter of 2022 is SNDL's first full quarter reporting liquor retail revenue subsequent to the acquisition on March 31, 2022. And the segment's stable and growing cash flow profile, along with best-in-class retail operations expertise, has significantly impacted SNDL's growth. Gross revenue for liquor retail sales for the three banners combined was $148.6 million for the second quarter of 2022. Gross margin in the liquor retail segment was $33.5 million, or 22.6% of sales. Despite fluctuations in sales due to market conditions and retail competition, we've stabilized margins through management of pricing and product mix. Now let's turn to cannabis retail. With the acquisition of our interest in Nova Cannabis Inc. through the Alcanna acquisition, our expanded retail network has significantly increased our retail share and exposure to a broader consumer base. Gross revenue from the cannabis retail segment for the second quarter of 2022 was $63.5 million compared to $7.5 million for the first quarter of 2021, a 746% increase. Value bud sales were the material driver of the increase, with $56.3 million for the second quarter of 2022. System-wide cannabis retail sales, including sales from our franchise partners, was $92.8 million for the second quarter of 2022. Gross margin for cannabis retail this quarter was $13.9 million, or 21.9% of sales, significantly increased from $3.3 million compared to Q1 2022. Through our cannabis cultivation and processing operations, we remain committed to providing quality product offerings for our customers while focusing on cost optimization and the most competitive and profitable strains and brands. Our cannabis cultivation and production financial results are as follows. Gross revenue from the cannabis segment for the second quarter of 2022 was 15.4 million compared to 11.3 million in the first quarter of 2022, a 36% increase and a 21% sequential improvement from the first quarter of 2022. Net loss for the cannabis cultivation and production segment was 8 million. Adjusted EBITDA for Q2 2022 was 3.5 million compared to negative 11 million in the same period of 2021. This represents SNDL's first positive adjusted EBITDA quarter in the cannabis segment, which can be attributed to higher sales volumes, improved margin on an adjusted basis, reductions to SMG&A, and greater discipline over inventory management, driving a reduction in price discounts for provincial board sales during the first half of 2022. And lastly, I'd like to review our investment segment. Revenue from our investment segment for the second quarter of 2022 was a disappointing loss of $35.1 million compared to $2.4 million in the second quarter of 2021. The decrease was primarily due to non-cash fair value adjustments reflecting an increase in the assumed risk-free interest rate and the deterioration in overall cannabis credit market conditions during the quarter. As of the end of the second quarter of 2022, SNDL had cannabis credit and equity investments with a fair value of $562 million, including $462 million related to the Sunstream joint venture and $100 million in Canadian credit and equity holdings. I would now like to invite Tank Vander, SNDL President of Liquor Retail, to provide further remarks on that segment.