SNDL Inc.

Good morning and welcome to SNDL's second quarter 2023 financial results conference call. This morning, SNDL issued a press release announcing their financial results for the first quarter ended on June 30th, 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. SNDL has also posted a supplemental investor presentation on its website. Presenting on this morning's call, we have Zach George, Chief Executive Officer, Alberto Paradero, 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.

Hi, everyone. And thank you for joining us on our second quarter 2023 earnings call. S&DL's growth over the past two years is nothing short of incredible. Our journey from less than $10 million in net revenue and negative gross margin in Q2 2021 to a potential $1 billion in annual revenue with continued gross margin growth in 2023 serves as a testament to our commitment to becoming a leader in Canadian regulated products. We have achieved significant milestones and are witnessing the tangible results of our diversification strategy. We achieved an all-time high for net revenue for the second quarter of 2023 with $244.5 million, driven by our strategic initiatives and operational improvements. Our focused efforts to enhance gross margin are yielding significant results, with record gross margin of $52 million, representing a 20% year-over-year increase. Having navigated a virtual zero-profit environment in Canadian cannabis and even flirting with insolvency in 2020, we now believe that S&DL has the requisite scale and platform optionality to create shareholder value. While the hard work of our teams is beginning to yield improved operating results, we still have significant work ahead. We are internally focused on driving greater efficiencies and taking advantage of our competitive position in Canada with both upstream and downstream regulated product capabilities. We are simplifying operations across all business segments with an unwavering focus on reaching profitability in 2024. The deliberate diversification of our business was a strategic and essential move, driven by prevailing market realities. By diversifying our operations, we have fortified our position and reduced exposure to certain risks. allowing us to navigate the extreme uncertainty of the cannabis industry more effectively. This intentional approach has been instrumental in positioning SMDL for continued growth and success in an ever-evolving landscape that continues to lay waste to many of our competitors. In our liquor retail segment, we look forward to expanding our digital footprint by launching an e-commerce platform for our Wine and Beyond banner in the coming weeks. We believe that we can further optimize the profitability of our liquor retail segment and are focused on margin of creative opportunities, including the monetization of data. While results for the segment last year in 2022 were a function of sales moderation following the emergence of the post-COVID environment, where consumers were eager to get out of the house and return to on-premise consumption of alcoholic beverages, in 2023, we are seeing the impact of inflationary headwinds. pushing the consumer back to off-premise consumption, seeking greater value for their dollars. This dynamic is benefiting our convenience and discount-oriented banners and driving positive same-store sales for our broader liquor retail portfolio. The Canadian consumer faces very unique challenges, which include a residential mortgage market structure that is very different than the U.S. and a COVID-19 pandemic labor market recovery that has largely been driven by public sector and government jobs. Although much of our regulated products business is considered to be recession resistant, the duration of the current rate environment is certain to add more pressure to consumers, and we are closely monitoring risks and signs of health. In cannabis retail, our data licensing program has been instrumental in driving improved profitability and forging stronger supplier relationships. We are now looking to enhance consumer engagement by introducing a new loyalty program, further solidifying our market position. In July, we announced an extension of the outside date for the closing of the intended strategic transaction between SNDL and NOVA. While all other provincial approvals have been received, the continued review by one provincial regulator has resulted in a further delay. Unfortunately, we cannot control the timeliness or responsiveness of Canadian regulators. As publicly stated, we anticipate being able to close this transaction on or before August 25th of 2023 but this remains subject to the receipt of this last remaining provincial regulatory approval. Our goal remains to establish a dominant multibanner cannabis retailer with a national presence. We continue to explore opportunities for organic growth while considering mergers and acquisitions to further strengthen our position in the market. NOVA's Q2 results announced last week included positive earnings per share and free cash flow, a true rarity in Canadian cannabis. This further reinforces our conviction that we can achieve long-term success by focusing on value and convenience. In our cannabis operations, we have implemented aggressive cost cutting measures, streamlined manufacturing operations, and reduced our reliance on high cost cultivation. Throughout this process, we have successfully maintained cannabis sales momentum and are actively exploring B2B and international opportunities paving the way for future growth. The impressive 80% increase in year-over-year revenue in our cannabis operations segment validates our strategic decision to acquire Valens. The acquisition has proven instrumental to the growth of our cannabis business by leveraging its manufacturing capabilities, low-cost procurement strategies, and capitalizing on cannabis 2.0 product opportunities. We have also streamlined our investment portfolio by divesting from equity securities and certain credit exposures. At the end of Q2 2023, SMDL held $754 million in unrestricted cash, marketable securities, and long-term investments. This value compares to a current market cap of approximately 560 million Canadian, and this is before any consideration for the value of our growing operating segments that we believe have the potential to generate more than $1 billion in annual revenue. At the end of the second quarter of 2023, Sunstream's credit portfolio comprised six investments with a carrying value of approximately $533 million, including Jushi Holdings, SkyMint Brands, Ascend Wellness Holdings, Parallel, ColumbiaCare, and AFC Gamma. The AFC Gamma investment was monetized above carrying value in July of 2023. Sunstream is actively implementing a stock exchange compliance structure to facilitate participation in U.S. cannabis companies. In connection, Sunstream is exploring the restructuring and transfer of certain credit interests in SkyMint and parallel to a new U.S. holding entity called Sunstream USA. The Sunstream USA structure is expected to allow S&DL to participate in Sunstream assets while complying with all U.S. and federal state laws. This Sunstream USA structure is anticipated to include the issuance of securities upon the equitization of specific credit instruments held by Sunstream. In turn, it would hold non-voting shares in Sunstream USA with the right to exchange such shares into common shares in the future if certain conditions are met. As such, the Sunstream USA structure is expected to allow S&DL to participate in Sunstream assets through a revamped capital structure. The proposed Sunstream USA structure will be reviewed by NASDAQ as the relevant listing authority for S&DL prior to its execution. S&DL anticipates providing further details on progress with the SkyMint and parallel restructuring initiatives in the third quarter of 2023. Looking at our integration initiatives, we have achieved $18.2 million in annualized cost savings. since the balance acquisition in January of 2023, surpassing our original $10 million cost savings target. These savings are largely attributed to SG&A and public company costs, supply chain consolidation, and operational efficiencies. With this progress, we are confidently moving towards exceeding $30 million in annualized cost savings by 2024. The second quarter results included several cost items related to our cannabis integration projects. Our work continues as our leaders take necessary actions to ensure a lean and agile organizational structure, positioning S&DL for future success. We anticipate that our Canadian retail network will grow at a modest pace, while our internal efforts on optimization are already yielding significant tangible results. These results are encouraging as we focus on delivering improved performance in the second half of 2023 and maximizing value for shareholders. Before we dive into our financial results in more depth, I'm excited to introduce you to our new Chief Financial Officer, Alberto Herradero. Alberto brings a wealth of experience and a strong track record in corporate finance, with more than 25 years of management experience in the consumer goods and pharmaceutical industries. He has held senior management roles for companies such as Mondelez International, Novartis, Newell Brands, and Procter & Gamble, bringing extensive experience in public company reporting, mergers and acquisitions, internal controls, and general financial and operational management. We are confident that his expertise and strategic vision will continue to drive our company's growth and success. I'll now pass the call to Alberto for a review of our Q2 2023 financial results.

Thank you, Zach. I'm thrilled to be part of the SMDL team, as I see huge potential to drive growth and create shareholder value. The team is passionate and united by a common goal of achieving positive free cash flow in 2024. SMDL is in a strong financial position, which gives us room to plan long-term and seek out opportunities to grow sustainably. I believe we're in a great position to make a big impact in the industry and create lasting value for everybody involved. Since I joined in July 2023, I've noticed a few areas which will enhance our efficiency and ability to achieve long-term profitability. Here are a couple of things we have been focusing on. Firstly, our primary focus will be in simplifying and improving processes that are often manual and fragmented. By doing so, we should be able to work more efficiently and create time and resources to focus on accelerating our growth. We are determined to strengthen our financial debt by sharpening our capital allocation strategies. This will help us improve both the quality and the speed of decision making, and with that, our ability to create value for our shareholders. Now, moving on to our Q2 2023 results, I would like to remind you all that amounts discussed today are denominated in Canadian dollars unless otherwise stated. Please note that certain amounts referred to on this call are non-IFRS measures. For the definitions of these measures, please refer to SMDL's Management and Discussion Analysis document. Let's start by going over our key financials and operational highlights for the second quarter of 2023. We achieved a record net revenue of $245 million, which is a 9% increase compared to the same period in 2022. This shows how our strategic plans and operational improvements are paying off, driving both financial and operational improvements. Our growth margin hit an all-time high of $52 million for the quarter. This increase is driven by several factors, mainly our revenue growth, product mix improvements, data fees, and productivity improvements. Our adjusted EBITDA reached a positive $2.2 million, in the quarter, which is a strong improvement compared to the $26 million losses in the second quarter of 2022. All our operating segments are contributing to this improvement, as well as the synergies realized through the company's vertical integration strategies. We've been running our operations more efficiently, with $8.8 million in cash used in our operating activities. This marks a 51% improvement compared to the same quarter of last year. We have a strong financial position with $754 million in cash, marketable securities, and long-term investments. As of August 11, 2023, we have $202 million in unrestricted cash. I would also like to note that we haven't raised cash through share offerings since June 2021, which reflects our careful approach to managing our finances. We're also focused on streamlining our investments and capital deployment strategies. SMDL financial achievements and sensible approach to cash management reflects our dedication to sustainable growth and delivering long-term value to our shareholders. I will let Tank and Tyler provide more details on the Q2 2023 results for the liquor retail and cannabis operations segments, but I would like to turn all our attention to the results for our cannabis retail segments. Net revenue for this segment reached $72 million in the quarter, representing a 13% increase year-over-year, and setting a record since S&DL diversified into cannabis retail. We have demonstrated our dedication to continuing margin expansion initiatives, with gross margin reaching nearly $18 million, or 24.7% of sales, a strong 28% increase compared to Q2 2022. In the first half of 2023, SMDL proactively optimized its proprietary data licensing program for the cannabis retail segment. This margin expansion opportunity generated revenue of $2.7 million in this quarter compared to the $1.3 million in Q2 of 2022, or 80% growth compared to Q1 of 2023. Leveraging the volume of NOVA's retail location and our access to high-quality analytics, were in a good position to deliver continued successful outcomes for our partners while driving top-line and margin growth. Finally, looking at our investments and equity results in Q2 2023. SMDL invested capital in a portfolio of cannabis-related ventures with a current value of $569 million. Out of this, $532.8 million was invested through the Sunstream joint venture. The investment portfolio resulted in a net loss of $1.5 million, primarily driven by an investment loss on marketable securities of $3.8 million, more than upsetting our interest rate. In fact, as part of our efforts to streamline business operations, during the second quarter, SMDL made a strategic decision to divest certain cannabis-related investments, leading to the realization of these losses. We're carefully considering our options for the shared repurchase program. We see ourselves as responsible stewards of capital, aiming to make the best decisions for our shareholders and the long-term success of our organization. Our top priority is guiding the company towards profitability while protecting our capital. We will provide further details on the shared repurchase program in the coming weeks. We're deeply committed to regulatory diligence and compliance. Our dedication to pay and excise taxes on time reflects our strong focus on responsible business practices. As of 2023, we have already paid $23.4 million in excise taxes, and since the company's inception, we have paid a total of $67.8 million. Even though excise taxes pose challenges in the cannabis sector, we believe that meeting our financial obligations is essential for responsible business conduct and positive impact in the communities we're part of. Our steady dedication to cost control, operational excellence, and continuous improvement will continue to fuel a lasting and profitable growth for our company and the shareholders. I truly believe that SMDL has what it takes to come out on top, and I'm very excited to be part of this team and contribute to its success. I will now pass the call to Tang to provide an update on the liquor retail results.