SNDL Inc.

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.

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.

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.