SNDL Inc.

Good morning and welcome to FNDL's full year and fourth quarter 2022 financial results conference call. FNDL issued a press release yesterday morning announcing their financial results for the full year and fourth quarter ended on December 31st, 2022. This press release is available on the company's website at FNDL.com and filed on EDGAR and CDAR as well. A webcast replay of the conference call will also be available later today on the FNDL.com website. FNDL has also posted a supplemental investor presentation and shareholder letter found on the FNDL.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 Tyler Robson, President of 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 CDAR 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 to Zach George.

Good morning and thank you for joining us on our full year and fourth quarter 2022 earnings call. We achieved significant financial and operational milestones last year, driven by our strategic initiatives and the hard work of our dedicated teams, including record net revenue and net cash provided by operating activities in the fourth quarter of 2022. It is worth contextualizing the growth that the FNDL team has achieved this past year. We started 2022 with first quarter net revenue of 17 million and negative cash flow from operations of 26 million and exited the year achieving net revenue of 240 million with net cash from operations of 29 million in the fourth quarter. Our store footprint has grown to more than 365 liquor and cannabis retail locations, making us the largest private liquor and cannabis distributor in Canada. Through the acquisition of Valens, we significantly enhanced our cannabis operations value proposition to now include premium cultivation, low-cost biomass sourcing, processing, and manufacturing. Our cannabis retail and cannabis operations segments are key enablers in S&DL'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 strategically play in high-velocity product segments as well as white spaces in the industry to delight consumers. Through the combination of a diverse portfolio of brands, a coast-to-coast multibanner cannabis retail store network, and indoor cultivation and manufacturing facilities, S&DL has become one of the largest adult-use cannabis manufacturers and retailers in Canada. Although it's not something I typically address, I do discuss the undervaluation of our equity in my shareholder letter, which can be found on our website at SNDL.com. I also want to take this opportunity to address it here. Despite the positive milestones and the growth that we have achieved, SNDL shares are trading well below our book value, which is backstopped by cash and credit investments and trading materially less than one times our annual revenue. We believe the market has not yet recognized the intrinsic value that we have built We will expect that it should be appreciated in due time. We must continue to find ways to unlock value and be open to all options regarding the future of our business and operating segments. Our balance sheet, liquidity, and access to capital easily position us in the top decile of credit profiles in the regulated products industry. We are currently implementing cost reduction initiatives, and sustainability is a key priority. That means sustainably profitable operations, sustainable product quality, and sustainable environmental practices. I'd now like to turn to some key highlights of our different business segments. Our liquor retail segment brought material change and opportunity to SMDL in 2022. Our liquor segment strengthens SMDL's broader technology infrastructure, the ability to own the customer relationship, and shape the retail experience. I believe that we have a significant opportunity to generate material revenue for our segment through key initiatives, specifically monetizing data as a service. We have access to vast amounts of valuable data, which we are using to inform our own decision-making processes, and we believe there is untapped potential in monetizing this data as a service to other businesses. As more consumers shift their shopping habits online, there is a growing demand for convenient and efficient e-commerce solutions as well. By leveraging our existing infrastructure and expertise, we are also looking at creating platforms that meet the needs of modern consumers while generating revenue and cash flow for both liquor and cannabis segments. S&DL, which stands as Canada's largest private sector cannabis retailer, currently operates 197 locations under five retail banners, Value Buds, Spirit Leaf, Dupret, and our latest additions, Dutch Love and Firesteel Cannabis. The foundations of S&DL's cannabis retail strategy revolves around several factors such as prime store locations, extensive product range, and exclusive customer experiences. In the fourth quarter of 2022, Value Buds, Spirit Leaf, and Suprette's combined market share represents approximately 9.9% of provincial markets, solidifying our position as a leading national multibanner cannabis retail operator in an increasingly competitive market. In December of 2022, S&DL announced a proposed strategic partnership with Nova Cannabis, creating a well-capitalized cannabis retail platform through a vertical integration model, leveraging S&DL's upstream and midstream capabilities. The restructuring of Nova, if approved by Nova's minority shareholders, will enable S&DL to continue to evolve in a very immature sector by becoming a trusted partner and an essential part of the Canadian cannabis ecosystem. This strategic partnership will transition S&DL to the role of sponsor, franchisor, and advisor in the cannabis retail market. Through a dividend of shares to S&DL shareholders, we will reduce our ownership stake in NOVA to less than 20% and manage brand standards via strategic agreements and contracts in exchange for receiving a licensing fee in return for the provision of services including financial reporting, business technology, and regulatory support. Our focus will be on driving category management, menu optimization, and brand building, while NOVA Cannabis will manage operations across what we believe will become a dominant, pure play, multi-banner cannabis retail platform that stands alone as a sustainable public company. This retail platform provides access to incredibly valuable point of sale data in real time, giving us in the L and other licensed producers insights into innovation and successes throughout the industry. Our cannabis operations also grew with the closing of our acquisitions of the Valens company in January of 2023. The combined entities create a low-cost, vertically integrated Canadian company with the potential to generate over a billion dollars in annualized pro forma revenue. Our cultivation expansion not only boosts innovation and cost savings for our cannabis operations segment, but also solidifies our position as a trusted B2B industry partner and manufacturer. Our unique advantage lies in our ability to not only manufacture high-quality products, but also to distribute solutions to ensure that these products reach consumers effectively. In terms of our investment segment, S&DL deployed capital to several cannabis-related investments with an IFRS fair value of $638 million, including $519 million to the Sunstream Bancorp joint venture in 2022. This joint venture has credit exposure to a handful of operators, including Jushi, SkyMint, Ascend, Parallel, ColumbiaCare, and AFC Gamma, and has publicly disclosed we are in active negotiation of restructuring with both SkyMint and Parallel. 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 S&DL to gain a meaningful operating footprint in a single or multi-state format. We do expect in 2023 that on a structured basis, S&DL may become a majority owner of one or more vertical operations in the U.S., While we anticipate achieving strong revenue results for our business segments, we must also acknowledge that our first quarter of 2023 will be impacted by certain one-time costs, as well as seasonality in the retail segments. These costs will include severance expenses for departing employees and other one-time charges resulting from the Valens integration. The integration of the S&DL and Valens is anticipated to deliver substantial benefits in the form of cost rationalization operational efficiencies, and expanded opportunities. A detailed bottom-up analysis of available synergies is currently in progress, and the company is uncovering further cost savings. S&DL expects to realize more than $20 million in annual cost synergies as a result of this process, exceeding the $10 million that was announced in January of 2023. Additionally, enhanced distribution of Valens products through the S&DL retail network is expected to generate incremental revenue, which is also being evaluated and realized. The company looks forward to providing updates on the progress of these synergies with reporting on the first quarter of 2023 and believes that this transaction will enhance S&DL's competitive position. In conclusion, we are humbled to be approaching the ranks of approximately 150 publicly listed Canadian companies that generate over $1 billion in annual revenue as a result of our strategic growth through 2022. We are just getting started and continue to be laser-focused on owning the consumer relationship generating free cash flow, and creating value for our shareholders despite the present headwinds and negative sentiment in the cannabis sector. Our vertically integrated model, product portfolio, dedicated team, best-in-class balance sheet, and scale are competitive advantages we have built with 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 all. I'll now turn the call over to Jim for commentary on our financial results.

Thank you, Zach, and thank you all for joining today. I'd like to remind you that all amounts discussed today are denominated in Canadian dollars unless otherwise stated. Liquor retail includes operations for the period from March 31, 2022 to December 31, 2022, and cannabis retail includes the operations of Nova Cannabis retail stores for the same period. Certain amounts that I will refer to on this call are non-IFRS GAAP measures. Please refer to SNDL's management discussion and analysis for the definition of these measures. Before I go into greater detail about SNDL's financial results under each of our four operating segments, I'd like to confirm that all of our year-end filings have been completed in time to comply with U.S. reporting requirements. While Canadian securities regulations do not require compliance with SOX 404B, the shorter Canadian reporting deadline was unfortunately not met this year. The principal reasons for this were the significant amount of additional work and in-depth procedures that were required to be performed by SNDL and its first-time external auditor under Section 404B of the Sarbanes-Oxley Act, commonly referred to as SOX. The requirement to be SOX 404 compliant at December 31, 2022 and the expansion of those requirements to a much larger scope was a function of the rapid growth in scale and level of corporate activity SNDL has achieved over the last three years. SNDL's management team takes full responsibility for this outcome as our corporate activity levels have placed our finance and audit teams under significant stress. We are committed to the continued development of our finance and other functions to support the increasing scale and complexity of our business. SOX compliance requires heightened levels of corporate controls and processes that are benefiting SNDL shareholders through best practices in internal control and risk management. Now let's turn our focus to business results. As Zach mentioned, SNDL reported record net revenue for 2022 of $712.2 million, an increase of almost 1200% over the previous year. This increase includes nine months of results from the Alcanna acquisition. Net revenue for the fourth quarter of 2022 was $240.4 million, an increase of 4% over the third quarter of 2022, with sequential growth in the liquor retail, cannabis retail, and cannabis operations segments. Net cash used in operating activities for 2022 was 6.7 million compared to 155.8 million in 2021, reflecting decreased cash deployed to our investment operations segment in 2022. Net cash provided by operating activities for the fourth quarter of 2022 was a record 28.6 million, an increase of 233% when compared to 8.6 million in the third quarter of 2022. gross margin grew to a record 140.4 million for 2022 compared to negative 9 million in the previous year an increase of over 1600%. Our gross margin was 43.6 million for the fourth quarter of 2022 compared to 50.3 million in the third quarter of 2022 as a result of fourth quarter monetization of low value inventory and inventory impairments. SNDL reported a net loss of $372 million for 2022 compared to $227 million in the previous year. Non-cash inventory and asset impairments were $203 million in 2022 compared to $77 million in 2021. The company's net loss for the fourth quarter of 2022 was $161.6 million compared to $98.8 million in the third quarter of 2022. The net loss for 2022 was largely driven by fourth quarter non-cash charges, including the impairment of goodwill related primarily to the Elkana Inc. transaction, including NOVA. Despite improving fundamentals for NOVA, the share price decline of 53% since the acquisition date led to an $88 million non-cash impairment charge. Our adjusted EBITDA loss was $15.8 million in 2022 compared to adjusted EBITDA of $30.4 million in the previous year. For the fourth quarter of 2022, SNDL's adjusted EBITDA loss was $7.5 million compared to adjusted EBITDA of $16.7 million in the third quarter of 2022. Excluding SNDL's equity pickup loss of $18.3 million, driven by non-cash fair value adjustments from its investment in Sunstream Bank Corp., adjusted EBITDA would have been $10.8 million in the fourth quarter of 2022. SNDL has $918 million of unrestricted cash, marketable securities, and long-term investments, and no outstanding debt at December 31, 2022, resulting in a net book value per share of $5.02. and has $207 million of unrestricted cash on hand at April 19, 2023. SNDL has not raised cash through debt or share offerings since June 2021. I'll now review the results for our liquor segment. SNDL currently operates 169 locations, predominantly in Alberta, under its three retail banners, Wine & Beyond, Liquor Depot, and Ace Liquor. As of March 28, 2023, The Ace Liquor store count is 137, the Liquor Depot store count is 20, and Wine and Beyond is 12. Gross revenue for liquor retail sales for the three banners combined was $462 million in 2022 and $160 million in the fourth quarter of 2022, an increase of 4.8% compared to the third quarter of 2022. Gross margin for the liquor retail segment in 2022 was $106.3 million or 23% of sales for the period from March 31 to December 31, 2022. Gross margin for the liquor retail segment was $36.9 million or 23% of sales in the fourth quarter of 2022 compared to $35.6 million in the third quarter of 2022. The liquor retail business maintained its margin throughout the year through an effective pricing and product mix strategy. Let's take a closer look at our cannabis retail results next. We currently own and or operate 197 locations under four retail banners, Spirit Leaf, Value Buds, Superette, and Fire Sale Cannabis. Gross revenue from the cannabis retail segment was $206 million in 2022 compared to $16 million in 2021, and $68.4 million in the fourth quarter of 2022 compared to $10 million in the fourth quarter of 2021. The NOVA acquisition in 2022 and increased Value Buds banner sales were the material drivers of the increase, with $61.4 million of revenue during the fourth quarter of 2022. Gross margin from the cannabis retail segment was $47.3 million in 2022, or 23% of sales, compared to $6.5 million in 2021. Gross margin for the cannabis retail segment was $15.7 million, or 23% of sales, in the fourth quarter of 2022, compared to $2.8 million in the fourth quarter of 2021. The increase is primarily due to ValueBud's new locations and discount pricing strategy. As of April 19, 2023, the ValuBud store count is 91 corporate stores. Spiritleaf is 99, comprised of 22 corporate stores and 77 franchise stores. The Superette store count is 5 corporate stores and Firesale is 2 corporate stores. I will now turn to SNDL's cannabis operations results. Gross revenue from the cannabis operations segment in 2022 was $61.9 million compared to $51.2 million in 2021, a 21% increase year-over-year. Gross revenue for the fourth quarter of 2022 was $18.7 million compared to $15.7 million for the fourth quarter in 2021, representing a 19% increase. provincial board revenue increased by 6.8 million in the fourth quarter of 2022 compared to the fourth quarter of 2021. This increase can be attributed to the successful implementation of a streamlined and targeted product mix strategy and notable improvements in product quality, along with SNDL's owned retail strategy. Gross margin for cannabis operations was negative 13.3 million in 2022 compared to negative 15.5 million in 2021. Gross margin for the fourth quarter of 2022 was negative 9 million compared to negative 7.4 million in the fourth quarter of 2021. Moving to our investment segment. As of the end of the fourth quarter of 2022, The company had deployed capital to a portfolio of cannabis related investments with a carrying value of $638 million, including $519 million to Sunstream. For the fourth quarter of 2022, the investment portfolio generated interest and fee revenue of $6 million compared to $3.6 million in the fourth quarter of 2021. Share of loss of equity accounted investees generated from investments by Sunstream of $18.3 million compared to profit of $19.3 million in the fourth quarter of 2021, and a loss on portfolio investments of $6.9 million, compared to a loss of $41.8 million in the fourth quarter of 2021 on marketable securities, which includes unrealized losses on publicly disclosed strategic investments in Village Farms International Inc. and Valence. Sunstream's credit portfolio currently consists of six investments, Jushi Holdings, SkyMint Brands, Ascend Wellness Holdings, Parallel Inc., Columbia Care Inc., and AFC Gamma Inc. Finally, let's discuss our liquidity position. For the 12 months ended December 31, 2022, the company purchased and counseled 4.3 million common shares at a weighted average price of US $2.33 per common share for a total cost of $13.3 million under its share repurchase program. In the three months ended December 31st, 2022, the company purchased and canceled 2.6 million common shares at a weighted average price of US 2.06 per common share for a total cost of 7.2 million under the share repurchase program. SNDL has 8.9 million shares remaining under its currently approved share repurchase program, allowing the company to repurchase common shares from time to time at prevailing market prices. enabling Sundial to return value to shareholders as warranted by market conditions. The share repurchase program will expire on November 19th, 2023 if it is not extended. As Zach mentioned in his shareholder letter, we see non-compliant license holders continue to have unfettered access to excise stamps while refusing to pay tax obligations. This means that more than 60% of companies are now at least 90 days delinquent on excise tax payments. We estimate that industry-wide unpaid excise balances have reached north of $170 million. That said, SNDL has and continues to be compliant and pay all of its tax obligations on a timely basis. Thank you for joining us today. Now, I would like to introduce Tank Vander, President of Liquor Retail, who will provide further details on our Liquor Retail segment.