SNDL Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 13, 2023

There are 8 speakers on the call.

Operator

Good morning, and welcome to the SNDL's Third Quarter 2023 Financial Results Conference Call. This morning, SNDL issued a press release announcing their financial results for the Q3 ended on September 30, 2023. This press release is available on the company's website atsndl.com and filed on EDGAR and SEDAR 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.

Operator

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 All 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 SEDAR and EDGAR. Additionally, all financial figures mentioned are in Canadian dollars unless otherwise indicated.

Operator

We will now make prepared remarks And then we'll move on to analyst questions. I will now turn the call over to Zach George.

Speaker 1

Good morning, all, and thank you for joining us on our Q3 2023 financial and operational results conference call. I want to begin by acknowledging an important milestone for the SNDL team as this is the Q1 since inception that we have generated both positive net cash from operating This milestone is a testament to the dedication of our team in driving positive change and the resilience and adaptability of our business segments. We are building the foundation of an important regulated company with international potential that does not have a close peer in Canada. We are finding attractive opportunities compression driven by persistent oversupply and over licensing. Our goals are a far climb from where we stand today.

Speaker 1

We still have a lot of work to do, but we are making tremendous progress against the challenging macro backdrop. Although much of our regulated product business has shown recession resistance, we take nothing for granted given the likely duration of the current rate environment are aggressively seeking efficiencies to improve profitability. SNDL has equipped itself with the flexibility to navigate market uncertainties and preserve our growth trajectory. Our platform structure creates strategic optionality and our debt free balance sheet Tank will provide further color on the liquor retail segment, but I wanted to highlight some key initiatives that we have recently undertaken. We recently finalized the structure of our liquor retail data program and we expect to see results in the Q1 of 2024.

Speaker 1

Its launch is expected to strengthen our supplier partnerships, enhance revenue and contribute to margin expansion within our Liquor Retail segment. In the Q3 of 2023, SNDL's Cannabis Retail segment demonstrated substantial growth and operational progress. Net revenue saw 14% increase compared to Q3 2022, marking a record for the segment Since the company's diversification into cannabis retail in 2021. Enhancements to our proprietary data licensing program Significantly contributed to the success with revenues climbing to $4,000,000 in the 3rd quarter, a significant increase over the previous year's $1,400,000 and up 50% from the preceding quarter. We are committed to refining our cannabis retail operations, enhancing partnerships and delivering superior products to consumers.

Speaker 1

This strategy includes expansion into markets where our presence is currently limited to reinforce SNDL's position as a leading cannabis retailer in Canada. We've taken significant strides in our cannabis operations segment The rationalization of our facility footprint and procurement processes sets the stage for significant financial improvements As further demonstrates our commitment to operational excellence, our President, Tyler, will provide further details on our cannabis operations shortly. As of the end of Q3 2023, EssendL's financial position in Canadian dollars included $785,000,000 Our robust liquidity profile stands in contrast To our current market capitalization of approximately $500,000,000 a figure that we believe does not fully reflect the intrinsic value of our enterprise. Said another way, the market is currently ascribing a materially negative value to our expanding operating segments. These segments are positioned with the potential to yield more than $1,000,000,000 in annual revenue, underscoring our perspective that As of the close of Q3 2023, SNBL had deployed capital into credit investments with a carrying value of $583,200,000 The lion's share of this value, approximately $550,500,000 has been committed to the Sunstream Bancorp joint venture.

Speaker 1

Sunstream is a joint venture sponsored by certain Sunstream Controlled loans. This development is poised to create a dedicated U. S. Platform designed to attract independent third party investors, offering independent management and governance. Most importantly, the structure of Sunstream USA is set to undergo review by NASDAQ, aligning with all U.

Speaker 1

S. Compliance and governance standards. Since acquiring Valens in January of 2023, In 2023 alone, we achieved cost savings of approximately $18,000,000 These savings have largely been driven by reduction Looking ahead to 2024, we anticipate that run rate synergies will surpass $40,000,000 annually With expected proceeds from asset sales potentially contributing more than $9,000,000 in additional cash proceeds. Investors may not realize that as we start 2024, none of the assets that complete transformation of a business that continues to evolve and change. This is not the team to underestimate.

Speaker 1

SNDL's performance metrics from the Q3 provide a clear affirmation of our strategy. Our confidence is increasing And we are building a culture focused on accountability and performance. Our commitment to the consistent delivery of well priced high quality products And superior retail experiences has never been stronger. We are excited to continue to update investors on our performance as we work to deliver strong fundamental unadjusted results. Once again, I thank you for your continued support of SMBL.

Speaker 1

I will pass the call to Alberto to provide further details on our financial results.

Speaker 2

Thank you, Zach. I want 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 GAAP and non IFRS measures. For definitions of these measures, Please refer to us in the Health Management Discussion and Analysis document. As we dive into our financials, It is great to report that for the first time in our history, we have reached positive free cash flow in the quarter.

Speaker 2

To be precise, in Q3 In 2023, we achieved BRL16,500,000 of positive free cash flow compared to negative BRL67,100,000 in Q3 2022. Our cash flow from operations grew $27,500,000 in Q3 2023, up from $8,600,000 in Q3 2022. Achieving this cash flow milestone is a clear indicator of our operational and reinforces the focus on our strategic initiatives as a path to deliver on much higher ambition in the future. Our restricted cash balance tells a similar story of growth from $185,500,000 at June 30, 2023 $202,000,000 at September 30, 2023. This increase speaks volumes above our targeted efforts to optimize operational efficiency, particularly working capital.

Speaker 2

Revenue growth remains steady, registering at 200 $37,600,000 for the quarter, a 3.1% increase from Q3 2022. Our reported gross margin reveals a slight decrease to $48,600,000 in Q3 2023, down 3.4% from the same period last year. While we're seeing operational improvements, the reported gross margin Impacted this last quarter by non cash inventory impairment charges to a large extent triggered by our efforts So, I'll start with the charges in Q3 2023 and Q3 2022. Our gross margin will have grown over 20% year on year. In terms of adjusted EBITDA, we achieved $16,100,000 for the quarter, slightly down from the Q3 2022 results of $18,300,000 As better gross profit in 2023 has been offset by higher sales and marketing and G and A expenses in 20 on higher investment segment income in 2022.

Speaker 2

I will let Tank and Tyler provide more details on the Q3, 2023 results For the Liquor Retail and Cannabis Operations segments, but I would like to comment about the results for our Cannabis Retail segment. Revenues for the segment have reached $75,500,000 which is 14.1% growth from Q3 2022. This record high revenue for the cannabis retail segment was supported by a healthy increase in same store sales of 3.9% year over year across all banners, as well as opening of new stores. Gross margin reached $20,000,000 in Q3 2023, a 38% growth versus the same period last year. As a percentage of net revenue, gross margin expanded from 21.9% in Q3 2022 to 26.5% in Q3 2023, An improvement of 4.6 percentage points driven by continuous efficiency improvements and expansion of our proprietary data licensing program.

Speaker 2

This data program delivered revenue for the Q3 of 2023 of $4,000,000 compared to $1,400,000 in the Q3 of 2022. This represents an increase of 54% versus the Q2 of 2023 showcasing the success of the programs optimization introduced earlier in the year. Finally, looking at our investments and equity positions in Q3 2023. At the end of the Q3 of 2023, the company has deployed capital into cannabis related credit investments with a carrying value of $583,000,000 Including $550,500,000 through the Sunstream joint venture. The revenue generated by our investment portfolio in the 3rd quarter stands at $10,000,000 This is mainly attributed to interest and fee revenues of $3,300,000 in addition to a $6,600,000 increase in the estimated Cash, marketable securities and investments, leading to a net book value of $1,300,000,000 It is also important to highlight that we SMDL's Board of Directors approved extending the company's share repurchase program to November 20, 2024.

Speaker 2

The company's share repurchase program continues to be available to lower our outstanding share flow. Management will continue to assess opportunities to utilize the program to the extent we believe it is in the best interest of our shareholders. For the 3 months ended September 30, 2023, the company did not purchase common shares for cancellation. We also remain deeply committed to regulatory diligence and compliance. Our dedication to paying excise taxes on time reflects our strong focus Responsible Business Practices.

Speaker 2

So far this year, we have already paid $35,600,000 in excise taxes. Since the company's inception, we have paid a total of $80,000,000 Even though this high taxation levels create obvious challenges in the cannabis sector, we believe that meeting our In summary, our results this quarter represent another solid step towards the execution of our business strategy, our culture, our financial rigor and continuous Improvements as well as the relentless passion and dedication of our nearly 3,000 employees. While we're pleased with the progress we have made, we're setting our target on much bigger goals. As we're working on several initiatives to generate additional growth, Farnell solidified our operational efficiency and improved our financial rigor. I'm confident that through these initiatives I will now pass the call to Tank to provide an update on our liquor retail results.

Speaker 3

Thank you, Alberto. Our liquor retail results this quarter reflect our successful margin growth initiatives, which are not only delivering their intended results, but also guiding our strategy for future innovations and expansions. Our retail footprint remains stable with 170 locations primarily in Alberta and 1 store in British Columbia. Same store sales have remained steady year over year across all liquor banners. We are in the process We are finalizing a new Wine and Beyond store in Airdrie, Alberta, which is located in one of Alberta's fastest growing municipalities.

Speaker 3

This new store is projected to generate approximately $7,600,000 in annualized sales in the 1st year, Emphasizing the success of The Banners' destination shopping approach, it is scheduled to open in the Q1 of 2024. Despite economic headwinds, our quarterly revenues stood strong at $152,000,000 With stable basket value and customer count despite a downturn in national retail spending. In response to consumer spending trends and macroeconomic factors, we continue to optimize our operations to ensure We are meeting the needs of our customers by prioritizing value, quality and digital experiences. This approach has not only maintained our stability, but also driven growth in key metrics, which is reflected in our year over year and sequential margin growth. Our gross margin reached $37,300,000 representing 24.5 percent of our sales in Q3 2023.

Speaker 3

This is a meaningful improvement compared to Q3 2022, where gross margin was 35 It's mainly driven by procurement productivity, product mix management initiatives and the success of our private label program. Private label sales, a significant driver of gross margin growth, increased 33% compared to Q3 2022 Sales to 9.7% from the comparative period in the year prior, representing growth of over 3,500,000 To further capitalize on the success of our private label program, we are currently developing a private label for wine With plans to launch in the Q1 of 2024, our private label will feature various wine varietals from different regions, Showcasing notable winemakers at assessable prices. This initiative is designed to build on our margin growth strategies And continue to drive differentiation through SNDL's liquor retail banners. Looking to new initiatives, We are pleased to announce we have built out the framework for our proprietary data licensing program. We anticipate reporting initial revenue in Q1 2024 and scaling this program through the upcoming year.

Speaker 3

This will not only support all our stakeholders, but also boost our efforts to increase profits. In September, Essendial launched an e commerce platform for its liquor retail banner, Wine and Beyond. The company observed 121% increase in the average online basket spend compared to in store purchases during the initial 4 weeks post launch, highlighting the significant path and growth opportunity through e commerce. The current site supports click and collect. However, we are currently looking into different options to enhance customer conversion and accessibility.

Speaker 3

We anticipate strong results in the seasonally busy Q4 and look forward to observing how the e commerce platform further drives sales Our focus remains on expanding our customer reach and exceptional product offerings to ensure we created tailored in store and digital Thank you. And I will now turn the call over to Tyler to cover our cannabis operations segment.

Speaker 4

Thank you, Tank. In Q3, we have implemented significant strategic initiatives to strengthen our Cannabis segment. This included the centralization of all production, manufacturing, processing and testing activities to Kelowno. Following the quarter's end, we saw the These pivotal maneuvers solidify our position to drive top line growth and set us on the course to achieve profitability within cannabis operations segment. This quarter, our cannabis segment generated $21,000,000 in net revenue, marking a healthy 77% increase from the same period in 2022.

Speaker 4

This substantial growth is primarily attributed to the acquisition of Allen. Gross margin for the quarter was negative 8,700,000 Compared to $200,000 in the Q3 of 2022, largely due to inventory impairment associated with the company's strategic changes at home. This quarter's outcome reflects the impact of our facility footprint reorganization causing material constraints in our adult recreation segment. This was a transitional phase essential for operational and financial efficiency. These vital steps lay the groundwork to achieve positive cash flow and expand margins in the Cannabis segment.

Speaker 4

I'm happy to report the majority of these constraints are now behind us. SNDL expects by optimizing its facility footprint to result in over $10,000,000 Moving our cultivation to Appaville has cut our production cost per gram by nearly 80% compared to the old facility, which will materially increase our margin moving forward. The team at Opdivo has also made immense improvements in both yield and average THC, which we expect to continue those improvements through 2024. With our facility reorganization in place, We are prepared to scale capacity and drive stability in key categories to increase total revenue in forthcoming quarters. Following this heavy lift, we can better focus on product growth.

Speaker 4

Looking to product innovation, in Q3, SNBL optimized brand portfolio by Key consumer categories in meeting market innovations, focusing on depth versus breadth. The primary goal of the portfolio rationalization is to enhance revenue and margin growth, Elevating the profitability of cannabis operations segment and capturing increased market share. Through a rigorous tightening of our demand planning processes and a The substantial increase in production capacity in the coming quarters, we are well positioned to fully leverage our vertical integration platform. Finally, to provide an update on our international and B2B opportunities. Our B2B segment is healthy.

Speaker 4

We are already exceeding our targets for Q4. We are focused on a fewer, bigger, better approach for our B2B partnerships to ensure we deliver exceptional and consistent quality to our partners. This refined focus empowers us to scale with our most reliable partners while not compromising total. We are committed to expanding in our assets, looking to emerging markets like the UK and Germany, where we see growth opportunities potentially matching or exceeding our domestic B2B opportunities. We are confident that the decisive strategic measures we have implemented will firmly establish our cannabis segment for growth and sustain profitability in the quarters ahead.

Speaker 4

Our streamlined operations in tandem with our robust production capabilities, deep consumer insights and cost effective operating platform

Speaker 1

Reflecting on the past quarter, I want to acknowledge the dedication and effort of my colleagues that has been essential to our progress. We know that considerable work lies ahead as we strive towards realizing sustainable free cash flow and increased shareholder value. Our strong balance sheet and improved operations set us apart in a competitive market, enabling SNDL to focus on long term I want to thank our team for their commitment and our shareholders for their trust and support. Thank you.

Operator

We will now begin the analyst question and answer session. Our first question comes from Federico Gomez of ATB Capital Markets. Please go ahead.

Speaker 5

Hi, good morning. Thank you for taking my questions. Congrats on the free cash flow generation this quarter. My first question is on your liquor retail segment. So obviously very strong margins In the segment this quarter and you mentioned sales mix, procurement, the private label program.

Speaker 5

I'm curious, you think you have a lot of material, I guess, efficiency to be achieved from those three areas Going forward, that could support even higher margins? And then to that point as well, on the data licensing program that you're launching next Here, what impact could that have in those margins going forward? Just taking as a base your cannabis retail segment And that seems very substantial. So just curious on the magnitude of that data licensing program for Lika Retail? Thank you.

Speaker 1

Good morning, Fred, and thanks for the question. We are really heads down right now in

Speaker 2

the midst of

Speaker 1

our 2024 budgeting process. So we're not going to give too much detail on guidance for individual programs. But I would say that when it comes to Liquor segment, We are seeking margin improvement north of 100 basis points, and we'll be able to get more granular on that as we finalize our process and

Speaker 5

Looking at your, I guess, your U. S. Investments and exposure and just thinking about how have that news about So just curious how does that impact your strategy in that market? Does it change your thesis and your willingness to allocate more capital there?

Speaker 1

It's a great question. In terms of the impact of rescheduling, It will have a material impact on the free cash flow being generated by those entities. But in terms of our willingness to deploy more capital, we've got a lot on our plate right now and we're really focused on ensuring that we're bringing Efficiencies and optimizing current operations. We're also cognizant of the cash on our balance sheet. So I would never say never, But we have a lot of work to do in terms of what's on our plate today.

Speaker 5

Thank you. And then Finally, just the last one for me. The SunTrust USA structure, is that already Being under review by the NASDAQ or how long do you think that process could take? And then meanwhile, while that's not complete, Does that have any impact on your day to day operations of the Parallel and SkyLink assets?

Speaker 1

So all of my comments here are going to be subject to review and support by Nasdaq. We've stated publicly that we expect both of these transactions. While the restructuring terms have been completed, there are still a few minor conditions precedent and Both license transfer and exchange approvals that are required. So we believe that we'll be able to bring this to resolution sometime in Q1 and we don't expect that process to have any material negative impact in terms of day to day operations. Both businesses are being transformed currently and a lot of progress has been made to improve their operations.

Speaker 5

Thank you very much. I'll hop back in the queue. Thanks.

Operator

Our next question comes from Yewon Kang of Canaccord Genuity. Please go ahead.

Speaker 6

Hi, good morning. Thanks for the question. This is Yolong King on behalf of Matt Bottomley. I wanted to ask about the $11,000,000 charge under corporate Operations under consolidated net revenues. Could you provide more color or granularity behind what was in relation to that $11,000,000 charge in terms of which business operations it was related to and what specific events happened throughout the quarter that led to this?

Speaker 6

Thanks. Alberto, do you want to take this one?

Speaker 2

Yes, absolutely. Thank you for the question, Dale. So actually, the charge is related to the revenue That we have in our cannabis operations and our cannabis retail where there is an overlap between the 2 of them, we just noticed as we were Stepping into the Q3, the size of those revenues being produced in cannabis operations that End up being as well sold in our retail business after they go through the provincial boards Was gaining size as we're expanding our business. And as we reached a certain level of materiality, We decided to start eliminating that intercompany, we could call it intercompany double count of revenue. So this is the Q1 that we're doing that entry.

Speaker 2

We'll continue doing it going forward. And we have provided as well in our financial A table that shows by how much would be the amounts that we have adjusted as well for Q1 and Q2 of this year. And as I said, it's purely related to the volumes and the revenue that goes through our cannabis operations segment That ends up being as well sold through our cannabis retail segment after they go through the boards.

Speaker 6

Got it. Thank you. And just to add on to that, same under Cannabis Operations segment, And specifically related to the asset raising initiatives and other operational efficiency initiatives that you guys have

Speaker 1

Yes. So you're still seeing the impact of biomass Revaluations and with the rationalization of our cultivation and processing footprint, We're expecting to be in a position to have those reduced materially, if not eliminated in 2024. And so, we'll still likely see some noise impacts our Q4 results, but we're trying to leave as much of that noise behind in

Operator

Our next question comes from Pablo Zunich of Zunich and Associates. Please go ahead.

Speaker 7

Thank you. Good morning, everyone. Just first on the liquor segment, Zach, when you look at some of your Canadian LP peers, One of them has been very acquisitive in the U. S, right, in terms of buying beer brands and liquor assets. As you continue to build the liquor business, I understand right now it's retail, but now you're going to start position your own wines, it seems you're buying, I suppose, for the private label.

Speaker 7

Would Would buying beer brands outside or wine brands outside of Canada or in Canada be part of the strategy as you grow that business?

Speaker 1

Good morning, Pablo, and thanks for the question. Look, it's a possibility if we were outside of Canada, given TideHouse and other Regulations that would restrict us from doing so inside of Canada, but we're very focused on owning the consumer and creating Strong retail experiences. And so there's nothing on our plate today that would suggest that we're Taking a hard look at acquiring liquor brands in the U. S. Or abroad.

Speaker 7

Okay. Thank you. And then just moving on to cannabis operations, right? You're talking about becoming a major player. Obviously, you have the balance sheet to do so.

Speaker 7

I don't know if you want to give an update in the need to scale up there via M and A. I couldn't tell from the filings where you still own the stake in Village Farms. But outside of VFF, I mean, it just seems to me that you need to scale up, especially if you're talking about trying to become a relevant player in international. Any comments on that?

Speaker 1

Yes, it's a great question. I think the long Term requirements for SNDL in terms of ownership or contracting to acquire quality Reasonably priced biomass is still somewhat up in the air. You see a lot of volatility in the Canadian market. Price compression has made procurement a very We're certainly committed to eliminating any exposure to high cost cultivation and may look at other opportunities. We have disclosed that we've exited all of our material equity investments, But we will continue to look at strong low cost high quality producers for potential opportunities in the future.

Speaker 7

Got it. Thank you. And then just one last one in terms of Sandstream USA. If I hear right, I think you mentioned That SandStream is sponsored by SNDL, but I mean, obviously, SNDL still owns 50% of SandStream, right? So the question would be, I guess, of the $550,500,000 how many are in assets that you're taking ownership of, right?

Speaker 7

It's But not all of the portfolio you are equitizing, I suppose. And If you can give some color there, that would be helpful in terms of 550.5%. But more important than that, if in the end, when we look at how Canopy Growth has gone back and forth in terms of their own plans to for Canopy USA? If in the end, you hit a wall

Speaker 1

Thanks, Pablo. Obviously, We're all working through an environment that is not a seller's market, okay? So let's just start with that, regardless of the scenario. But in this case, we are highly confident we have very reputable counsel that has worked on these issues with NASDAQ and sought and received I just want to remind you and the audience that Our Sunstream joint venture is structured such that SNDL as required does not engage in any plant touching activities in the United States And we are a non control participant in Sunstream. So think of it as a conventional sort of GPLP General partner, limited partner arrangement where both SaaF and SNDL are owners of the general partnership, but SNDL is the sole LP in that scenario.

Speaker 1

And so we report based on a structure that would be similar to any alternative Credit portfolio that you would see in the marketplace. And for that reason, we haven't broken out A ton of detail on individual positions. If you look at the filings that are available in the U. S, you'll see that Of that total balance, which again has also been adjusted for the fair market value where we have written it down, Over half of that balance would be dedicated to positions that are going through acquisition processes. And as you aptly point out, we will likely see resolution in the other cases where we have large Principal balances that should be coming back to us over the next 24 months.

Speaker 1

Some of these things are amortizing principal back to us today. So that will be a source of cash for us in the future. And we don't see a scenario where we aren't able to Get this done. I would just point to some of the differences between your reference to Canopy, the types of businesses that Canopy is acquiring is very different than The exposure that we have, right. So if you take Skymin and Parallel, for example, these are 2, one's in SSO, So, 1 is in MSO, both started their lives as vertically integrated operators.

Speaker 1

So, not the same as tackling a product brand or producer in vapor edible categories, which has been a focus for Canopy as well. So The path is one that has been well trodden and we believe that we will have all the requisite Support and consents from regulators and that would include Our Exchange, Nasdaq. So again, look forward to wrapping this up and closing in Q1, but we still have some wood to chop and a few more steps to take to

Speaker 7

If I may, I may ask add one on in terms of Nova. I mean, the outside date keeps on being extended, but obviously, that's more a regulatory issue. I mean, the parties have agreed The deal, right? But is this more about you being Plant Touching in Canada and now owning a retail chain? Is that the issue?

Speaker 7

And how do you want to deal with that? That's the last one. Thank you.

Speaker 1

Pablo, it's a great question. Look, in terms of both parties, our tolerance for further delays It's reaching its limits. Anyone who studies this industry or operates within it understands just how frustrating the state by And province by province sort of regulatory ground game can be. So we're not going to make additional comments at this time, but we are looking forward

Operator

This concludes the question and answer session. I would like to turn the conference back over to Zack George for any closing remarks.

Speaker 1

Thanks to all for attending our Q3 conference call. Look forward to updating you in the future. Thanks.

Operator

This concludes today's conference call. You may disconnect your lines.

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