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spk01: 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 31st, 2023. 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 SNDLgroup.com website. SMDL 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 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, Chief Executive Officer.
spk05: Hello, everyone, and thank you for joining us on our first quarter 2023 earnings call. This past quarter was transformative for SMDL as we successfully closed the acquisition of Valens in January. This strategic move establishes SMDL as one of Canada's largest vertically integrated cannabis companies. With this capstone acquisition, SMDL 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 two years, our team has diversified SMDL'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 a 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 liquor retail segment 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 percent 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 one-time 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 balance acquisition, S&DL has implemented operational changes aimed at optimizing our cultivation activities. These changes have included a right-sizing 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, S&DL 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 six 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. S&DL has been 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 NovaShares as a dividend in kind in the next few weeks. Despite a volatile market, S&DL'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 full financial and operating results.
spk09: 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 Valence Company subsequent to the acquisition on January 17, 2023. The results for the comparative first quarter of 2022 include only one day of operations for Liquor Retail and Nova Cannabis Retail. subsequent to the acquisition of Elkana on March 31st, 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 four 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 Elkana, Valens, and Zenebis. 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 11th. As of May 12, 2023, we had $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 three 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, Spirit Leaf, and Superette banners. Subsequent to the quarter end, we expanded our retail offerings with the introduction of Fire Sale Cannabis. As of May 12, 2023, the Spirit Leaf store count is 99, including 22 corporate stores and 77 franchise stores. Superette includes 5 corporate stores, Fire Sale 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 was only one day of revenue from NOVA in Q1 2022, subsequent to the Elkana 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 ValuBuds private label products and sales representing approximately 8.1% of total 28 gram sales and 36.3% of 14 gram sales in Alberta ValuBuds stores for the three 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 your 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 one-time payments related to inventory seasonality and the balance 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 Valen's cash position 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 unrealized 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 three months ended March 31, 2023, we purchased and cancelled half a million common shares at a weighted average price of $2.78 Canadian or US$2.04 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.
spk02: Thank you, Jim. Good morning, everyone. S&L'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 three retail banners, Wine and Beyond, Liquor Depot, and Ace Liquor. SNBL's liquor banners market share in Alberta was approximately 17% in the first quarter of 2023. In Q1 2023, gross revenue for liquor retail across all three 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 remain 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 SMDL'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 our trusted 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 Depot 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 & Beyond store in Airdrie, Alberta, which is expected to open in 2024. The Dilworth Kelowna Wine & 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 proud 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.
spk08: Thank you, Tank, and hello, everyone. I'm pleased to report our first quarter results, which for the first time includes balanced contributions. This quarter highlights solid progress and sets 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 achieve 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 segments. We recently right-sized our cannabis operations in Olds, Alberta, and the facility was specialized in premium cannabis cultivation. Meanwhile, our Kelowna and Bolton Palmy's facilities will focus on processing and manufacturing cannabis biomass. The Assable facility will continue to be our conduit to international export. S&DL'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 category is off-limits, and we remain focused on our efforts to drive growth and profitability. As mentioned, innovation is a key focus for us in DL as we move forward. We have an exciting pipeline of products set to launch in the upcoming month, with a particular emphasis on expanding our cannabis-infused beverage category versus neon-rush-infused beverage, which launched in Q1 2023 earned a top 20 spot in the beverage category in British Columbia within the first two weeks of sale. 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 and edible line, and releasing new shattered diamond-infused pre-rolls in our top-leaf brand in Q2 2023. In the first quarter, we grew our B2B segment and established partnerships with most major Canadian licensed 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 this 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 exports. 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 products and services to our customers around the world. To conclude, we remain steadfast in our commitment to prioritize healthy growth 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 costs, is a key factor to achieving a more sustainable cannabis operation. Thank you. I will now pass it to Zach for closing remarks.
spk05: 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.
spk01: Thank you. We will now begin the analyst question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. The first question comes from Andrew Parfenew with Seaside GMP. Please go ahead.
spk04: Hi, thanks for taking my question. Maybe we could start off with some boilerplate stuff. Could you give an update on the pending asset sales? I think you discussed the $10 million number. Could you remind us which assets that encompasses and any color on timing that you can provide?
spk05: Thanks, Andrew. Appreciate the question and good afternoon to you. We're not going to give any guidance on timing. We do have a number of small facilities that we've acquired through credit bids in CCAA context, and that would have also come with the balance transaction. So as we look to get more efficient and smarter about our footprint, there are a number of small assets that are not material but will give a healthy dose of liquidity to our balance sheet as we monetize. So we look forward to providing more information on these transactions throughout the year.
spk04: Okay, thanks for that. And maybe a bigger picture question here. You mentioned you brought back half a million shares. You know, this doesn't include the 2.2 million shares that were cancelled in the valence transaction. the $10 million that you referenced in the asset sales, that brings you to about, you know, $200 million of unrestricted cash on the balance sheet. You've got no debt. CapEx seems to be minimal, and you're digesting M&A to reduce costs. So just thinking about use of capital and how we should think about this going forward, would it be fair to say you might be a little bit more aggressive on share buybacks if the stock continues to trend around here?
spk05: That's definitely a fair comment, Andrew. We do believe that at these levels, shares are very attractive. We're trying to balance a desire to be really aggressive in returning capital to shareholders with ensuring that we have real visibility in terms of the path to free cash flow generation, specifically in cannabis. And we have spent quite a bit of capital investments to improve the operating profile of these businesses. But as detailed in this release and through our commentary, we do have additional work to do. So when you look at that path, some additional noise in Q2, and then really the only other pocket of capital to think about is any support you would give to existing portfolio companies within Sunstream or beyond. So we want to be relatively conservative in terms of maintaining adequate liquidity and being able to certainly continue operations and continue to consolidate existing exposures and positions. And we're working with our board. We just had a blackout period that we've been in for most of this calendar year.
spk04: that now lifts and so we have the option to return capital through share purchases going forward for a brief window here appreciate that um if i may uh ask another question here about um the synergy target nice to see that ticking up um as you do more work on on on your acquisitions here um could you discuss, I'm not sure if you provide this, but is it possible to break that down between COGS and SG&A? I'm asking because if I just do some rough math on your cash-based cannabis operations SG&A, it could be around $7 million. So this $30 million number is Cognizant, it's not all SG&A there, but it does seem like a pretty big number that could bring you to positive EBITDA.
spk05: Yeah, Andrew, I think that's right. We can talk about, in broader terms, some of the buckets. We're not going to get into a tremendous amount of detail in every single category, but I would say if you look at the historic cost of goods sold, especially when it comes to flower products for standalone S&D health, and you think about the 2023 annual plan pre Valens that was sitting in around 30 million grams, you can imagine the opportunity that's in front of us to drop our costs even on a $1 a gram basis. So that's going to be a transition process that we go through. Tyler's been leading on a number of really critical fronts, including the rationalization of our SKU portfolios, as well as a very disciplined approach to monetizing inventory and biomass as we work to reduce our exposure to high-cost cultivation. And so we should see cash flow benefits. Certainly positive EBITDA is where we're headed, but we need to get beyond adjusted EBITDA altogether. And so we're putting in that hard work in the first half of this year and think those results, our earnings will become a little bit higher quality and clear, and we're looking forward to much better profitability into the end of the year.
spk04: Appreciate that. I'll step back in the queue.
spk01: The next question comes from Matt Bottomley with Canaccord Genuity. Please go ahead.
spk03: Good morning and afternoon, everyone. Just maybe going back to sort of the top line with your main operating segments here, I'm wondering if you can just give a little bit more color, you know, liquor versus cannabis on the seasonality of it. So the 27% reduction in liquor retail, how does that compare to, overall consumer trends, particularly in the geographies where you're indexed to. And then on the cannabis side of things, it seems like, you know, a lot of the US data that we see, you know, Q1 is down about more like 5% on a sequential basis. So obviously different consumption habits, but I'm just wondering if you can speak to that.
spk05: Yeah, I'll let Jim comment on revenue streams and his view of seasonality. I think the difference really is you've got a much more mature, you know, regulated product space in liquor. And you see a number of tailwinds in certain environments where you have increased use and adoption in certain markets on the cannabis side. So I don't think we really have a clear view yet, especially as many of these new markets are opening up or maybe are transferring from medical to adult use markets. I'm not sure we really have those trends dialed in and understand them well, but over to you, Jim.
spk09: Yeah, thanks, Zach, and thanks for the question, Matt. I think Zach is right that in terms of cannabis retail, the change was less than 5%, certainly quarter over quarter, and that also is, as Zach mentioned, a maturing market. So we're only looking really at a single quarter, not looking at the long-term trends in the same way that we can look at them in liquor. And I think that the 27% reduction that we saw is going to be pretty typical of seasonality. And that's what's been proven over an extended period of time on the liquor retail side. And I think that the biggest components of that clearly is the holiday season with Christmas and New Year's results in significantly Higher sales in the month of December and then January sales correspondingly tend to trend downward.
spk03: Okay, got it. And then just one other question for me, I guess two parts to it on the U.S. side of things. So just the six investments that you have, I think $536 million of book value in the Sunstream part of it. If you can just speak to maybe any of the fundamentals of how those companies are tracking that. excuse me, I'm going to cough, just sort of boots on the ground. You know, how are they getting financed in the interim? Are you willing or able to put any more of your liquidity into some of those names that might be in better shape? And then in Q4, I think you had some commentary in the press release about the potential for the acquisition into a majority stake, into an MSO, even this year. And I'm just curious if there's any other, I know it's only about a month ago when you reported, but if there's any other updates on that front.
spk05: Absolutely. I appreciate the question. So we do expect in the next three to eight weeks to have significant commentary that will be available on the number of files. As we've explained publicly, the Sunstream portfolio is comprised of six investments. Two are in active stages of restructuring. I would definitely point to the need to shore up resources and continue to restructure a number of these businesses. Now, whether that capital comes from Sunstream's S&DL or not remains to be seen, but we could see a situation where we earmark anywhere from $25 to $40 million over the next year to allocate to additional U.S. exposures. Um, as you're aware, we are a NASDAQ listed company, so we will not be engaging in any direct plant touching activities. Um, so any exposure would have to be very well structured and we would not be exerting, uh, control in a strict sense. Um, but in cases where there is an over levered balance sheet and, um, default, uh, defaults that need to be worked through, uh, in, in restructuring setting that cannot avail itself of federal bankruptcy court in the U S. you will see either through private negotiations, foreclosures, or receiverships, those capital structures get cleaned up and changed. So we're sort of in the early stages of that in a few situations, and there is no current certainty as to outcome. But we do look forward to updating investors with some more finite details in the near future.
spk03: Okay, got it. Thanks for all that.
spk01: The next question comes from Frederico Gomez with ATB Capital Markets. Go ahead.
spk07: Hi, good afternoon. Thanks for taking my questions. Just on your liquor retail margins and your preferred label program, so you mentioned it made up, I think, about 10% of sales in Q1, but also that your overall margin for this segment in April was 34%. Can you talk a little bit more about that program? What, in fact, does it have in margins? And then just in terms of do you have any targets for the mix where it can get the preferred labor program to be as a percentage of your sales? Thank you.
spk06: Thanks, Brad. I'll ask Tank to share his thoughts.
spk02: So, two parts to this, Frederico. On Q1 margins, as Jim had mentioned earlier, there was some downward pressure from consumers leaning heavily towards promotional and everyday low pricing and value products. That's what affected the margin in Q1 a bit. On the preferred label side of things, We are at 10% of sales, which is a big increase from Q1 2022. We don't have real fixed targets on that, but we definitely are introducing more products into that segment, more value products, more local breweries and distilleries will be taking part in it to enhance that number. But definitely... can't disclose the target points at this point. Okay, thank you.
spk07: And then just still on liquor retail, about the seasonality, I understand that Q1 is the weakest quarter, but, you know, what should we expect in terms of revenue increasing Q2 and then in the second half of the year? Also, if you could comment on the seasonality in terms of your margins for this segment, as well as... what you expect for inventory build for the year. Thank you.
spk02: So just to be clear on the seasonality factor, as we mentioned that it's lower by over 25% from Q4. I want to shed some more light on this. Compared to Q1 2022, we were trending very close to it, if not a bit higher. So Q4 is always the strongest quarter due to the Christmas holidays and the seasonality with Christmas and New Year's falling six days apart. So there's nothing unusual there. From a margin perspective, we are making some adjustments on our end with better buying and more strategic private label products to improve margins in the coming few quarters. And you'll see an increase based on that in the Q2 results when you guys see them in a couple of months. And sorry, you had another question on inventory. Can you repeat that?
spk07: Yeah, it's just the same question about seasonality, but just on inventory, I know that you had a built-up this quarter following the seasonal holiday draw. So can you comment just for the reminder of the year, what you expect for inventory?
spk02: Thank you. Our inventory level right now is fairly optimized, and we don't see a huge uptick or a drop in inventories. With the summer season coming up, usually the beer sales go up and overall beer is a bit cheaper to buy than alcohol. So it kind of levels off and then obviously the spikes will again be in end of Q3 for preparing for Q4.
spk07: Thank you. I'll pass it along.
spk01: Thanks, Fred. Once again, if you have a question, please press star, then 1. The next question comes from Sahil Dhingra with RPC. Go ahead.
spk00: Hi, this is Sahil for DarkMean. Thank you for taking our questions. My first question is on the liquor retail segment. So I know there's only one day in the prior year, but if you could provide us with, on a pro forma basis, what was the same store revenue growth? And then are you seeing any impact on on-premise consumption in terms of your growth on a YOY basis?
spk02: So if we look at the first quarter, as I mentioned earlier, we were about 2% higher than the first quarter of 2022. With on-premise returning after the relaxation of COVID and all the bars and restaurants and everything else opening up, We haven't really seen any significant decline in liquor purchases at our stores, mainly due to the fact that most consumers have changed some of their habits and also with the playoff run happening, we did see a bit of a seasonal increase here. It's a We don't see a significant drop in our sales because of on-premise consumption so far.
spk00: Okay, and you wouldn't, on a go-forward basis, would you expect a 2% same-store revenue growth for the segment? And also related to this is, is there any difference between the volume and pricing mix? Because I think you earlier alluded to some downward pressure in Q1, like customers purchasing lower pricing. So is there... because of economic uncertainty or other factors, like should we keep that in mind? Maybe the volume is not being impacted as much as the pricing of the basket per se.
spk02: So definitely volume has been impacted in Q1. Margins definitely were impacted a little bit. centralized procurement team is making adjustments accordingly and buying more when it's on a limited time offer to bridge by and with us having a warehouse we can utilize that to purchase for certain periods of time and that would help in making up for the margins that we're losing from the lower customer spend that's happening
spk00: Great. Thank you. My next question is on the Sunstream JV. I know you have addressed it a bit, but if you could throw some more color on the regulatory compliance structure, given your NASRAC listing, and if you do an acquisition of one of the MSOs, and have you spoken to the regulators and how that structure might look like?
spk05: Thank you, Sahil. It's a great question. So as you've seen in the marketplace, there's a few things going on right now when it pertains to US-based plant touching businesses and their approach to getting listings. So on the one hand, you're seeing a number of US players look to the TSX to potentially uplist. And you'll note that we also have a relationship with a TSX listed company. Um, in addition, you've seen quite a bit of work done on, um, uh, USA based structures that, um, take away voting control in a structured manner and can be, um, held, uh, on a compliant basis by a New York stock exchange or NASDAQ listed entity. So, um, with, with the work you've seen in public announcements from the likes of canopy and terrorism, um, there has been, uh, the, the, the trail here has been, um, you know, marked already, and so you would likely see any restructurings that would result in conversion of our credit exposure in the Sunstream portfolio to equity to have similar marks in terms of the required structuring to remain compliant with, first and foremost, our NASDAQ listing. And we maintain strong and active dialogues with a number of regulators, and we take our compliance obligations very seriously. But there is certainly a path to compliant exposure here, regardless of the form that these investments take over time.
spk00: Okay. Thank you so much for taking our questions.
spk01: The next question comes from Andrew Parsone with Steeple GMP. Please go ahead.
spk04: Hi. Thanks for taking my follow-up. Just wanted to see if you could provide a small update on the data service program across cannabis and liquor and how you see that trending forward, especially on the impact to cash flow.
spk05: Thank you, Andrew. It's a great question. We've just revamped our programs both for cannabis and liquor retail. So we're really excited about the progress in early days. We really need to demonstrate a clean run rate to talk specifically about the impact. But we do see a material and meaningful opportunity to increase cash flow. And these programs generate margin-rich cash flow at that. And it's worth noting that This type of program really has not been available or used on a widespread basis in liquor. So it's a new initiative there. But we expect to have these benefits accrue to both the second quarter and beyond and are excited to share kind of those new run rates and the impact on margins with you.
spk04: Thanks for that.
spk01: This concludes the question and answer session. I would love to turn the conference back over to Zach George for any closing remarks.
spk05: 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.
spk01: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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