SNDL Inc.

Good morning and welcome to SNDL's third quarter 2022 financial results conference call. SNDL issued a press release this morning announcing their financial results for the third quarter ended on September 30th, 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 later today 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 Keough, Chief Financial Officer, Tank Vander, President of Liquor Retail, and Andrew Storter, President and Chief Operating 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 CDAR and EDGAR. Additionally, all financial figures mentioned are in Canadian dollars unless otherwise indicated. We will now make prepared remarks, and then we will move to analyst questions. I would now like to turn the call over to Zach George.

Good morning, everyone, and welcome to SNDL's third quarter 2022 conference call. Q3 proved to be another encouraging quarter for our company. Our focus on operational execution and sustainable profitability has enabled us to deliver record revenue and operating cash flow this past quarter. I've spent almost three years openly discussing the challenges facing our company and the cannabis industry. And for the first time, I see contrary indicators suggesting that the Canadian industry is nearing a trough, warranting a more bullish stance. Despite the imperfect rollout of the Canadian legal cannabis market, a massive oversupply of licenses and products, and continued pricing erosion, there are reasons for optimism at S&BL. In a sense, Things in the Canadian cannabis industry are so bad that they're good. We are seeing an unrelenting oversupply of flower inventories and an acceleration of bankruptcy filings amongst peers. Our team continues to work hard every day to turn industry headwinds into tailwinds for our consumers and investors as we drive toward improved results. Our liquor retail business continues to reach a normalized run rate following the return of on-premise consumption post-COVID and we expect seasonally strong results in Q4. This segment has provided operating cash flow that has had a stabilizing effect on our consolidated results, and we are pursuing new initiatives that we believe will drive further accretion. Notably, we are in the early stages of developing a cross-segment loyalty program and intend to offer point-of-sale analytics as a service in both cannabis and liquor in 2023. Our strong business technology team is a differentiating factor for SMDL, And we were excited to unlock the team's capabilities. Scale is mission critical to our success. The baseline costs of running a CPG-oriented company with the NASDAQ listing, high director and officer 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're incapable of delivering sustainable profits above the costs associated with managing this infrastructure. This dynamic will drive further industry consolidation, and we believe our vertically integrated cannabis business gives us the advantages required to be a strong member of a future oligopoly in Canada. It is worth contextualizing the growth that the SNDL team has built this past year. We have grown our revenue at a staggering rate of more than 1,500% on a year-over-year basis. We now manage more than 350 liquor and cannabis stores making us the largest private market liquor and cannabis distributor in Canada. S&DL's retail strategy is predicated on its quality store locations, wide range of products, and differentiated retail experiences. We also own and operate Canada's largest indoor purpose-built cannabis cultivation and processing facility with a diverse brand portfolio ranging from value to premium. Our cannabis retail and cannabis operations are key enablers in SMDL's vertical integration strategy. With the scale of data and insights generated through our retail network, we are able to continuously tailor our innovation strategy to play in high-velocity product segments as well as white spaces in the industry in order to delight consumers. Our integration work and cost control initiatives will continue into 2023 as we remain focused on opportunities related to Alcanna, and the recently acquired assets of Zenebis, and expect to close the proposed acquisition of Valens in January of 2023. With Valens, S&DL aims to be a leading Canadian manufacturer with broad cannabis product capabilities, strong optionality related to low-cost procurement, and best-in-class innovation potential. The acquisition enhances our positioning by combining a diverse brand portfolio, an extensive retail footprint, low-cost biomass sourcing, premium indoor cultivation, and manufacturing facilities. As one of the largest purchasers of biomass in the country, we expect the pro forma company to take advantage of the current market oversupply, which will enhance margins and provide desperately needed working capital to certain industry participants. S&DL is well on its way to becoming one of Canada's largest adult-use cannabis manufacturers and retailers, and with our retail insights and financial strength, S&DL should be able to adapt quickly to emerging and evolving consumer trends. At the company's inception, prior leadership prudently focused on inhalables formats that have made up more than 80% of sales in the industry. That said, market dynamics change quickly in cannabis, and Valens provides increased capabilities with a full suite of cannabis products, including ingestibles and beverages. S&DL will also have the highest pro forma Canadian cannabis revenue, on a last fiscal quarter annualized basis once we complete this acquisition. We do not intend to participate in the knife fight that is ongoing between Canadian cannabis companies. We seek to be a partner to the industry, promoting best practices, responsible consumption, and sustainability. In terms of our investment segment, through the third quarter of 2022, S&DL had deployed capital to several cannabis-related investments with an IFRS fair market value of approximately $678 million, including $527 million to the Sunstream Bancorp joint venture. This JV has credit exposure to a handful of operators, including Jushi, SkyMint, Ascend, Parallel, ColumbiaCare, and AFC Gamma. In the next few weeks, we expect to provide investors and stakeholders with more clarity about our Sunstream portfolio activities. 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. Our transformation is far from complete, but with an improving portfolio, cost discipline, and continued organic and acquisitive growth, we are well positioned to reach our objectives, including the generation of sustainable free cash flow and long-term shareholder value. I am privileged to serve passionate professionals, including more than 2,500 employees who continuously work to transform our business and delight consumers daily. A vertically integrated model, dedicated team, best-in-class balance sheet, and scale are competitive advantages we've built for the express purpose of giving ourselves the flexibility to succeed under multiple economic and regulatory scenarios. And these are the advantages that will lead us in our next leg of growth. Thank you, and I will 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 discussed today are denominated in Canadian dollars unless otherwise stated. All comparative results for the third quarter of 2021 exclude the subsequent acquisition of Alcanna Inc., which closed on March 31, 2022. Certain amounts that I will refer to on this call are non-IFRS GAAP measures. Please refer to SMDL's management discussion and analysis for the definitions of these measures. Before I go into greater detail of SMDL's financial results under each of our four operating segments, being liquor retail, cannabis retail, cannabis operations, and investments, I will begin with our consolidated financial highlights. It's a pleasure to announce that SNDL achieved record net revenue for the third quarter of 2022 of $230 million compared to $223 million in the second quarter of 2022 and $14 million in the third quarter of 2021. This represents a 3% increase sequentially and an increase of over 1500% year over year. SNDL also achieved an adjusted EBITDA of $18 million for Q3 2022. up 169% from Q2 2022 and up 74% from Q3 2021. Our cash flow provided by operating activities was $8.6 million in the third quarter of 2022 compared to cash used in operating activities of $17.9 million in the second quarter of 2022 and cash used in operating activities of $56 million in the third quarter of 2021. Our gross margin grew to $50 million in Q3 2022, a record since SNDL's inception, up 17% from Q2 2022 and an increase of over 2,700% from Q3 2021. General and administrative expenses for the three months ended September 30, 2022 were $45 million compared to $9 million for the three months ended September 30, 2021. The increase of $35 million was primarily because of increases in salaries and wages as well as office and general expenses from the Alcanna and Interspirit acquisitions, with SNDL now employing more than 2,500 personnel across all segments. Net loss for the three months ended September 30, 2022 was $98.8 million compared to net income of $16.7 million for the three months ended September 30, 2021. This increase in net loss of $115 million was largely due to higher G&A expenses, about $35 million, depreciation and amortization, $7 million, asset impairment of intangibles and goodwill from the inter-spirit acquisition, $86 million, finance costs of $8.3 million, and change in fair value of derivative warrants of $32 million, all partially offset by an increase in gross margin of $48 million, lower investment losses of $12.5 million, and transaction costs of $4.9 million. As of September 30, 2022, SNDL has $988 million of cash, marketable securities, and long-term investments, and no outstanding debt. I'll now review the results for our liquor retail segment. SNDL currently operates 169 locations, predominantly in Alberta, under its three retail banners, Wine & Beyond, Liquor Depot, and Ace Liquor. Gross revenue for liquor retail sales for the three banners combined was $152 million for the third quarter of 2022, an increase of 4% compared to the third quarter of 2021, despite Alberta's off-premise liquor retail volume sales being down this past quarter compared to the same period last year. Gross margin was $35 million, or 23% of sales in Q3 2022, compared to $33 million in Q3 2021, We continue to maintain the margin year over year through a pricing and product mix strategy in Q3 2022. Let's take a closer look at our cannabis retail results next. We currently own and or operate 183 locations under two retail banners, Spirit Leaf and Value Buds. Gross revenue for the two banners combined in the third quarter of 2022 was $66 million compared to $6.1 million in the third quarter of 2021, a 985% increase. Value Bud sales were the material driver of the increase, with $58 million of revenue during Q3 2022. Our gross margin for Q3 2022 was $14.5 million, or 22% of sales, compared to $3.7 million in Q3 of 2021, and is primarily due to Value Bud's new locations and aggressive pricing strategy. I'll now turn to SNDL's cannabis operations results. Gross revenue from the cannabis operation segment for the third quarter of 2022 was 16.5 million compared to 15.4 million, a 7% increase over the second quarter of 2022, and compared to 11 million in the third quarter of 2021, a 49% year-over-year increase. We're pleased to announce we achieved a record gross margin in the third quarter of 2022 of 0.2 million compared to negative 1.9 million for the three months ended September 30th, 2021, and negative 4.3 million for the prior quarter. The significant improvement was mainly a result of a 2.3 million reversal of inventory impairment in Q3 2022, which demonstrates SNDL's progress in implementing supply chain excellence. Next, I'll review our investment operations. As of the end of Q3 2022, SNDL's cannabis-related investments had a carrying value of $677 million, including $526 million in the Sunstream Bancorp Inc. joint venture. For Q3 2022, the investment portfolio generated interest and fee revenue of $4.3 million compared to $3.3 million in Q3 2021. Our share of profit of equity-accounted investees generated from investments by Sunstream was $9.2 million, compared to $9.9 million in Q3 2021. That investment loss of $5.5 million is compared to a loss of $18 million in Q3 2021 on marketable securities, which includes unrealized losses on publicly disclosed strategic investments in Village Farms International Inc. and the Valance Company Inc. Finally, let's discuss activities that affected SNDL shares. Effective July 25, 2022, SNDL's common shares were consolidated on a one share for each 10 shares outstanding basis. As at September 30, 2022, and November 11, 2022, SNDL had an unrestricted cash balance of $291 million and $361 million, respectively, and a total of $236 million post-consolidation shares outstanding as at November 11, 2022. For the nine months ended September 30, 2022, SNDL purchased and cancelled 1.7 million common shares at a weighted average price of $3.61 Canadian or $2.75 US per common share for a total cost of $6.1 million. The share repurchase program was scheduled to expire on November 19, 2022. On November 11, 2022, the SNDL Board approved extension of this program by an additional year. I would now like to invite Tank Vander, President of Liquor Retail, to provide further remarks on our Liquor Retail segment.