Q4 2020 Sundial Growers Inc Earnings Call
[music].
Good morning, and welcome to sundial growers fourth quarter and fiscal year 2020 financial results Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation there'll be an opportunity to ask questions.
To join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star and zero. If you are participating online you can submit a question using the ask a question tab on your screen.
Yesterday afternoon, sundial issued a press release announcing their financial results for the year end and fourth quarter ended December 31st 2020.
This press release is available on the company's website at S. N D. L. G. R O U P dot com and filed with Edgar and SEDAR as well.
Presenting on this morning's call, we have Zach George Chief Executive Officer, Jim Keough, Chief Financial Officer, and Andrew starter, President and Chief operating Officer.
Before we start I would like to remind investors that certain matters discussed in today's conference call or answers that maybe 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 I'd also like to note that we are conducting the call today from our respective for moat locations as such there may be brief delays cross talk or minor technical issues. During this call. We thank you in advance for your patience and understanding we will now make prepared remarks.
And then we will move to a question and answer session I would now like to turn the call over to Zach George. Please go ahead.
Thank you everyone for joining us on our full year on fourth quarter 2020 earnings call.
As the COVID-19 pandemic continues to affect global markets and people around the world. We hope that everyone is staying safe. During this unprecedented time, our top priority remains the health and safety of our employees, we remain committed to stringent procedures to ensure the protection of our employees and consumers, while minimizing disruption to our operations too.
Date sundial has not experienced any material disruption to our operations related to COVID-19.
Sundial recently completed its first two years of commercial operations and I celebrated my first year as CEO in February.
As I joined the sundial team in early 2020, we faced a number of internal and external challenges, including operational difficulties excess leverage inadequate cost control a lack of focus on our core value proposition and rapidly evolving industry conditions.
During 2020, the Canadian market experienced rapid change consumers chase THC potency levels as a quality threshold, which resulted in an acceleration in price discounts along with an over saturation of low quality supply in the market.
This dynamic is force Canadian licensed producers, including sundial to pivot to meet evolving consumer demands the focus on value and a race to the bottom on pricing in several segments has impacted the path to profitability across the industry and sundial has not been immune to this dynamic.
As a result, we redefined our strategy and made material changes to position sundial for improved performance, we successfully restructured the entire organization by repaying all outstanding debt.
Proving our operating practices and targeting a sustainable cost structure with a simplified and focused business model.
The modular nature of our facility allows us to quickly readjust and deploy our capacity as market conditions dictate.
While our financial strength has improved materially we still have significant work to do on our core operations to achieve the goals that we've established for sundial and our shareholders.
Sundial as last two quarters have been negatively impacted by the complete repositioning of our cultivation practices as we focused on data driven best practices to drive quality and potency results that meet evolving consumer preferences.
While we are currently seeing many of our Canadian peers move away from cultivation, partially or entirely due to their inability to deliver consistent cultivation outcomes sundial has renewed its commitment to cultivation and our modular indoor facility. We view this core competency as an opportunity for differentiation.
Going forward we are.
We're excited to see progress and these changes have accelerated improvements in quality potency yield and cost.
During Q4, we saw the highest average potency interpreting profiles at harvest and sundial inception.
We also just pulled our highest ever potency harvest last month.
In short we believe that the dramatic changes that we've made to our cultivation practices are starting to show concrete results and we are determined to continue to improve to meet consumer demands with manufacturing like consistency.
We will continue to create strategic partnerships with retailers and increase points of distribution in key markets, including Ontario, British Columbia and Alberta.
Andrew will provide more details on this progress in these areas momentarily.
As a result of a number of recent capital focused initiatives sundial is currently debt free and has an unrestricted cash balance north of $700 million, we continue to explore strategic opportunities to deploy our capital with a focus on maximizing shareholder value.
A lot of you were wondering how we will use that capital we have identified and executed on a number of investments and continue to evaluate a robust pipeline of opportunities maximizing returns on deployed capital and corporate stewardship are key priorities for our board and management team.
Our investment program has yielded positive early results to date sundial invested $58 9 million late in the fourth quarter and a further $31 5 million subsequent to the end of 2020 and strategic cannabis related portfolio investments.
We have already generated tax efficient realized investment income and fees subsequent to year end of more than $9 million.
Sundial, its high quality cultivation processing and processing facility combined with our team's broad consumer packaged goods experience and strong financial position reinforce management's confidence in our path to sustainable profitability.
I will now pass the call to Jim for commentary on our financial results.
Thank you Zach and good morning to all who are listening in.
I'd like to remind everyone that all amounts that I mentioned this morning are denominated in Canadian dollars unless otherwise stated.
Let's start with a review of the improvements that we've achieved in our liquidity and capital structure.
In early 2020, we started the process of a complete financial restructuring, which was initially delayed by the impact of Covid.
In the second half for the year through a combination of a number of cash repayments asset dispositions equity and equity linked issuances and debt for equity conversions sundahl eliminated egret aggregate debt principal of $227 million and exited the year completely debt free.
For December 31, 2020, sundial had $64 million of unrestricted cash on hand at March 15th 2021 we had approximately $719 million of unrestricted cash on hand.
To summarize our capital transactions.
In the fourth quarter of 2020, we issued 712 million common shares for gross proceeds of $161 million under at the market equity programs and warrant exercises.
We also closed strategic cannabis related portfolio investments of $59 million.
And then subsequent to year end 2020, we've achieved the following we issued an.
An additional 741 million common shares for gross proceeds of $695 million under at the market equity programs registered direct offerings and warrant exercises.
We entered into additional strategic cannabis related portfolio investments of 31, and a half million dollars.
The portfolio investments generated approximately $9 $3 million in realized gains interest income and fees in the first quarter of 2021 to date.
We regained compliance with the NASDAQ minimum bid requirement based on closing bid price for our shares.
And this week, we entered into an exciting strategic capital partnership with the soft group focused on cannabis related opportunities and investments in Canada and internationally.
Our first mandate of the joint venture is a special opportunity fund with commitments from third Party limited partners and what's an admission initial commitment of $100 million by sundial.
Well the share issuances and conversions of debt into equity have resulted in dilution with $1 6 billion currently issued and outstanding common shares. It has seen the company transform from a precarious financial position to a position of financial stability and strength, including the ability to evaluate and execute on our robust pipeline of.
<unk> opportunities through deployment of our meaningful cash reserves.
Now, let's turn our focus to operating results starting with revenue for.
For full year 2020, our gross revenue increased by 10% when compared to 2019 to $73 $3 million.
In Q4 2020 net revenue for the three months ended December 31st increased to $13 $9 million, an 8% increase over the third quarter of 2020 net revenue of $12 9 million.
Branded net revenue increased by 15% from Q3 to Q4 to a total of $11.4 million.
Corresponding shift from unbranded sales resulted in lower wholesale net revenues, which were down 18% to $2 $4 million in Q4 2020.
<unk> net revenue represented 86% of total net revenue for the quarter.
Our inhalable products continue to be well received by the recreational cannabis consumer our dried flower and pre rolls, which comprised the majority of our recreational sales grew to $12 million for the quarter.
Gross revenue from Vape cartridge sales was $4 $3 million, representing a 19% increase over the previous quarter.
Average gross selling price per gram equivalent of branded products net of provisions was $4 14 per gram in the fourth quarter of 2020 compared to $5 53 per gram in the prior quarter.
This is reflective of price compression across the industry in response to supply conditions and consume consumer shifts to value segments.
Cost control has been an important focus for sundial in 'twenty, 'twenty, and we realized meaningful cost savings due to realignment and right sizing of our operating model, which is delivering substantial sustainable cost savings in.
In the fourth quarter cash used from operations decreased by 63% to $12 $2 million when compared to the previous quarter.
General and administrative expenses were $6 $5 million, 9% lower in the fourth quarter than the previous quarter.
For the full year 2020, we reduced our G&A expenses by 18% to $32 million compared to $38 9 million for the previous year.
The decrease of $6 9 million was mainly due to reductions in salaries wages and consulting fees from work force Optimist optimizations.
Well, we continued to focus on cost discipline throughout the year, we did ramp up investment in our brands.
Sales and marketing expenses for Q4 for $2 $3 million compared to $1 1 million in the previous quarter as we invested in our brand portfolio to meet consumer preferences sales.
Sales and marketing expenses for 2020 for $5 7 million for the year compared to $8 1 million for the previous year.
The decrease of $2 4 million was largely due to a pause in certain marketing initiatives during constrained cash circumstances early in the year.
In Q4, 'twenty 'twenty cash cultivation cost per Gram sold was reduced to $1 11, a decrease of 6% over the previous quarter, reflecting continuing cost reductions and efficiency improvements.
Yeah.
We recorded an adjusted EBITDA loss of $5 6 million for the three months ended December 31, 2020, compared to a loss of $4 4 million for the three months ended September 32020, due primarily to investment in sales and marketing expenses and foreign exchange changes offset by higher net revenue.
Adjusted EBITDA from cannabis operations was a loss of $26 1 million for full year of 2020 compared to a loss of $30 1 million for the previous year.
The decrease loss reflects reduced G&A expenses related to cost reduction initiatives during the year for.
We offset by lower net revenue and the impact of the production of higher cost product categories.
Adjusted gross margin before inventory impairment and fair value adjustments for the three months ended December 31, 2020 was $3 2 million compared to $2 6 million for the previous quarter as a result of higher revenue and improved margin mix.
Adjusted gross margin for the year ended December 31, 2020 was $9 2 million compared to $16 8 million for 2019.
This decrease in gross margin was mainly due to reduced pricing and a higher cost product mix.
<unk> continues to analyze and adjust its operations to optimize margins.
We fully completed construction of our cultivation facilities in Oleds in early 2020, and our processing facilities in the latter half of the year and had been limiting capital expenditures to essential expenditures and maintenance capital.
Total capital expenditures in 2020 were $3 million.
We have budgeted $5 $7 million in capital expenditures for 2021 related to processing automation minor facility improvements and maintenance.
Now I would like to invite Andrew stored or president and CFO of sundial to provide some further remarks related to operations.
Thank you Jim.
While the industry will continue to see volatility we remain committed to cultivation excellence sundial core competency.
Our continued focus on inhalable products provides the best opportunity for long term sustainable growth.
Let me update you on some of the progress sundial made in 2020 and the fourth quarter.
At the beginning of the year, we announced that we would change our sales mix strategy and focus on driving better market penetration with our branded product offering relative to the wholesale channel.
We made good progress on this area and increased our branded net cannabis sales to.
75% of total cannabis sales in 2020 from only 20% in the previous year.
A crucial change made in 2020 included the restructuring of our cultivation processes.
To deliver on our small batch at scale promise, we need to continue to develop capability and competency in cultivation.
Several of our competitors have recently divested from cultivation, because it's challenging to do it consistently and at the same time continuing to evolve our product offerings that the consumer wants.
Well, we've made significant progress improvements in cultivation over the past 12 months, we still have work to do.
I am proud of our team's accelerated improvements in quality potency yield and cost throughout 2020.
Since our cultivation restructuring efforts started quality metrics have consistently improved in.
On the first half of 2020, our average weighted potency was in the mid to upper teens.
As we adapted to consumer preferences in the last three months of the year, we achieved the company's highest weighted average potency in its history.
20% THC and we still continue to see increased results.
In order to consistently deliver on our top leaf brand promise, we made the decision to improve key quality processes, including hanged dried hand, manicured and only hand bottling or flower offerings.
We've also recently completed R&D on several new cultivars that we're excited to bring to the market in the second half 2021.
To ensure we continue to provide the highest quality products our quality assurance team has recently begun performing potency testing on our cannabis plants during their growing cycle.
We anticipate this will help identify the sweet spot for harvest, ensuring consumers get the freshest and highest quality products available.
We have also simplified our supply chain and rationalize our skus across all brands and formats give.
Given the current market dynamics, we took a proactive approach with customers to limit SKU proliferation, and maximize shelf space and rate of sale with an optimized portfolio approach.
We went for more than 100 skus at the beginning of 2020 to less than 40 skus at the beginning of this year.
The company continues to develop a robust innovation pipeline.
We continue to diversify our product mix and ramped up our pre roll formats.
Where we increased production by over 200% in the fourth quarter ended for 2021 to meet consumer demand.
We also added salt on list extracts in the fourth quarter 2020, with the launch of our top leaf bubble hash.
We entered into a license agreement with simply solve unless concentrates for processing and manufacturing suite assault on list cannabis concentrates.
We added edibles for our portfolio in the fourth quarter of 2020 for sales and distribution agreement with chocolate and Alberta based chocolate here.
Industry wide price compression remained a challenge headwind for our business in 2020.
We took the decision to monetize a portion of our inventory at lower prices in order to rightsize, the composition and mix of our portfolio of products.
We continue to focus on competing in the premium segment in.
And generate greater margins.
Maximize our product mix and deliver better value to the consumer we are going to be purposeful on how we engage in the rapid price compression that continues to challenge profitability in the industry.
This may lead to lower topline growth in 2021, but a stronger product mix supporting our beliefs that are higher quality products that deliver against our brand promise.
Will be preferred by consumers and customers in the long term.
Now in the first quarter of 2021, we are seeing a softening industry and key provinces.
This can be attributed to both retail sales and provincial boards, managing inventory and SKU rationalization efforts we.
We do anticipate this dynamic impact most of the Canadian industry license holders.
In the first half of 2020, we had to curtail our cultivation and harvesting activities to match market demand. While this decision certainly impacted our business results, we were able to increase our throughput while also reducing our costs.
We increased the number of cases delivered on a monthly basis from 12853 cases in January.
224847 cases in December of 2020.
Cultivation and production costs were reduced by 75% from $22 4 million in the fourth quarter of 2019 to $5 7 million in the fourth quarter of 2020.
Compared to a 48% reduction in grams harvested in the comparative quarters.
We continue to increase our investment in our portfolio brands through targeted sales and marketing initiatives.
As a key priority for us include increasing points of distribution to facilitate consumers' access to sundial products.
Currently in the process of scaling our own internal sales force for the majority of the provinces, while we ran a broker model in Quebec.
Given our management team's expertise in developing route to market capability, we are betting on our ability to drive sustainable ROI through breadth and depth of coverage.
Our in house sales expertise.
We are already seeing progress from this investment as we drive distribution, along with price and promotion learnings with key customers across the country.
We certainly had a transformative 2020 on foundational areas of our operations.
These changes improvements take time, and we are far from done on several fronts.
Challenging the expected and learning from doing supports a culture of continuous improvement at sundial.
While we understand we still have work to do on driving a sustainably profitable business.
Encourage on the progress made this past year.
With that I'd like to turn the call back to the <unk> closing remarks.
Okay.
Thanks, Andrew.
This past year was a remarkably difficult year and not just because of the pandemic.
On dial had to make many difficult decisions under new management in 2020 to ensure survival and greater stability.
We are now able to lift our heads up and think longer term and strategically versus last year. When we were largely force to play defense.
It's been a privilege to work alongside the sundial employees, whose dedication and commitment has never wavered.
Together, we've made tremendous progress.
Thank our team for their efforts I, thank our customers for their trust and I. Thank our shareholders for their continued support I believe that sundial is better positioned for success today than at any time since inception.
Thank you for joining us today and please stay safe.
I'll now turn it back over to the operator for the question period. Thank you.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you'll hear tone acknowledging your request.
If you were using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two if you are participating online you can submit a question using the ask a question tab on your screen, we will pause for a moment as callers join the queue.
Our first question comes from Tami Chen of BMO capital markets. Please go ahead.
Great. Thanks for the question I'm back I was wondering if you could elaborate a bit more on the.
Robust pipeline that you referenced when it comes to additional strategic investments, whether it type of businesses or structures of the agreements or geographies and markets.
You'll have in the pipeline and then broadly speaking just wondering why you know from.
Sundial kind of taking to.
Additional strategy from kind of embark on these additional investments now what is kind of the endgame more thoughtful on this strategy.
Sure. Thanks, Tammy Thanks for the question and good morning.
So we're not going to give a lot of in depth commentary on the specific transactions that we're working on today, but what I can tell you is that generally speaking the pipeline that we're looking at falls into two main categories one would be.
More vanilla M&A.
And the second would be <unk>.
Correct restructured investments and in terms of your question as to why we're deploying capital in this manner.
We view.
Cannabis sector, not just in Canada, but internationally as well as a sector.
For capital is in certain cases being significantly mispriced.
So any sector, where you have the banking community either on the sidelines or not participating and inefficiencies within the credit markets you tend to see.
Very interesting and attractive risk adjusted return opportunities.
And we have.
We are very attracted to those opportunities and started to execute.
And capital deployment in that direction.
Understood, Okay and my second question is I'm.
The other thing this quarter. It also has some inventory write down that's been occurring to debt in the past year. So I'm just wondering.
Why the ongoing write downs what are they a result as if they are just ongoing market pricing changes and resulting in you taking continued write down.
Yes. So first of all let me just say that our team is working aggressively to bring greater efficiency to our cultivation processes and outcomes and so number one we see this this historic performance as unacceptable.
But we have been operating against the backdrop, where for example, if you look if you rewind from the beginning of 2020.
Flower with potency in the mid teens.
Would move in the marketplace on was quite liquid and with the changing consumer preferences on this.
Potency chasing behavior that we've witnessed by the end of the year.
Product that.
Even at 20% potency.
Would be less liquid and it'd be very difficult to move through retail so we've been making aggressive changes to improve outcomes and.
Ensure that we're delivering.
And delighting consumers.
And that has led to.
US having certain certain product that needed to be impaired from an accounting perspective.
For the extent that our Turkey profiles and potency on average harvest increase as they have.
Those write downs should should diminish substantially and its a key focus for the team going forward you also have pricing impacting.
That dynamic is a lever and as you well know the value segment is is really on its way to effectively sort of blocking out the sun in the space North of 50% of the industry in Canada is in the value segment, and we continue on a weekly basis to see.
Prices dropping and so for example.
We saw prices over the last year.
For the 28 Gram value packs for example in certain instances dropped by 50% over the course of 12 months. So that's been a dynamic Thats also force us to take.
Another look at our inventory valuation.
Got it thank you.
Our next question comes from Vivien <unk> of Cowen. Please go ahead.
Thank you good morning, I wanted to follow up on first on the pricing question. Please so clearly price deflation in values sounds like there's even price softening at a 20%.
On the level is there any part of the C level, where we're pricing is holding up.
Andrew do you want take that.
Yes, hi, good morning, Vivien Thanks for the question.
Yes look I think it's moved very quickly.
Zachman mid teens sort of year I think youre seeing.
20%.
Midway through last year, and then as you get into back half of 2000 2023, 24%.
Net premium segment.
It really where the market's going so.
I think the question that we're trying to answer right now too is what is the unconstrained demand. When you think about potency and you think about the premium segment.
<unk> has moved so quickly it's such a large part of the mix right now by retailers by boards.
It's hard to get a grasp on looking at that premium segment.
On a pro forma basis, but we do look at other industries are there.
You know more established markets in the U S and we're seeing that potency will obviously start to level off at some level.
And we will see premiums start to play its role than we forecasted to be 30% to 35% of the of the industry segment over time certainly in the in the areas, we play in and on <unk>, but.
Potencies, moving fast anything $23 20 for right now and above is doing very very well and I don't see that stopping anytime soon.
Okay understood and you know given the restructuring which is obviously very appropriate.
He your cultivation practices.
A sense for when we might see.
Our revenue base it looks a little bit more like you were doing you know call. It two queue of 'twenty, obviously, the mix being very different.
How much longer do you need to continue to kind of debt your cultivation practices dial in that data driven approach to actually really scale your revenue. Thanks.
Yes look I'll take that.
I think you said a key point there right I think on mix and I think.
We've been pretty consistent on that our focus in 2020 was to make that transition to branded sales versus wholesale and we did this we.
75% of our of our total revenue mix was in branded versus just 20% for 2019, so when you're looking at year over year comparisons.
Not all revenue is created equally.
I think that the key one moving if I was to kind of pointing in a direction around how we're thinking about it is our branded product sales grew exponentially actually by 410%. When you think about 2019 versus 2020.
That's solid.
We're we're seeing the benefits of that from penetrating the market.
And we're also mindful of the fact that as I stated not all revenue is created equally so it got to be really mindful of not getting into that route race. When it comes to price compression in contributing to the consistent price deflation that we're seeing.
So we're we're going to continue to stay focused on the premium segment. The core segment, we see value in that over time, certainly cultivation and potency is going to help drive that we have also significantly invested in our in health sales.
Breadth of coverage, which I mentioned in my opening remarks, so we're putting the elements in place.
Foundational to that is cultivation excellence and we feel pretty confident about that but I. Just I think that mixed piece that you mentioned is super critical to understand the transformation. We've made from from 19 to 20, and we're going to continue to do that.
Great.
Try to squeeze in one more on because you mentioned the sales force. So I appreciate your confidence in management competencies around being able to run it in for new sales function. We have seen from your competitors actually moving the opposite direction.
Is there are there kpis that you are monitoring answer there are.
That would perhaps inform a move away from that because it tends to be certainly more SG&A intensive too on your own sales operations. Thank you.
Yes, great. Great question look we pretty much went through 2020 with a fairly light retail approach across the country.
We are running a hybrid model. So we do run a broker model in the province of Quebec, We feel thats appropriate and we've seen good progress in that region.
And then we decided for balance of Kennedy English candidates runner in house and look you know by far the number one metric for looking at us is distribution.
Looking at.
How do we cover the retail expansion happening in key markets like Ontario.
So we've got tremendous experience in house on ability to drive World class field sales management, and we have every intention to doing that and we view it as an investment not cost.
And that investment needs to payout, but put in perspective over the last probably for weeks here, we've increased our breadth of coverage across the country and our in house sales force by close to 50% so.
We're anticipating we're going be able to add value to retailers over time here that we just have not had a chance to get to.
Last year. So we're excited about that we're optimistic and we are seeing some very good.
Initiatives with regards to distribution in the early part of 2021 here.
Understood. Thank you very much.
Thank you.
Our next question comes from David <unk> of ATB capital markets. Please go ahead.
Hi, good morning, Thanks for taking my questions and congrats on the quarter I want to go back to the the strategy here.
Considering sundial as the licensed producer and also think some of the pretty impressive deals you're striking right. Now. We're considering this is also an investment vehicle which is arguably.
On a big part of the reason with the disconnect between valuation and stock price. So I'm wondering Zach and team. If you can maybe just.
What's stopping short of giving guidance can you give some goalposts.
As for how do we look at this because in our opinion. The street is just not taking your investment vehicle side of the business.
Into account to attribute value. So if you have any color you can give I think could help us how we understand how youre moving forward with that strategy.
[laughter].
Yeah. Thanks, David look we will do our best to answer the question I would just say that.
As you are well aware there is no shortage of.
Bold claims and promotional statements that have been made in this industry historically and we're working really hard to quickly get to profitability.
And let the results in fundamentals speak for themselves I can tell you that we expect to be able to update you on the rest of the market on some of our initiatives.
In the coming months.
And even within the next 30 to 60 days, so we have quite a bit going on at sundial.
When you point to valuation I would just make two simple points.
No clearly there is a lot of interest in the growth of the sector in.
In Canada.
So.
It's certainly impacting equity valuations across the board not just for sundial and then Additionally, when you think about our capital resources on cash balances.
I would make the statement that if you look across the space.
And you look at where financings both both debt and equity are being struck today you.
You can quickly reach the conclusion that a dollar of cash in this industry is actually work more than a dollar of cash. So I think those two factors and some combination are impacting.
On the broader market and investors views of sundial.
But don't want to comment beyond that.
Understood. Thanks for the color and then maybe I can just ask a question as well about one of the Prs you made this week with the JV and yesterday outgroup as well what specifically on the spec strategy here.
Given that some of their capital and the press release indicated that some of it will go towards the stock I'm wondering.
Which sector with our Subsectors say within candidates are you looking at this wrong.
Revenue for specific geography and is this just one of many.
If your stock strategies that we can expect thanks.
Sure David So just to clarify.
Working in reverse order.
No.
We.
We're not going to comment on this back until.
We have appropriate filings made so we've referenced it as a potential opportunity and were very.
Clear about that in our public statements and you should think about that as very separate and distinct as an opportunity.
From the opportunity fund, which we.
Our launching currently so what you have is a joint venture where the operating experience of sundial on its principles of partnered.
With very deep.
And seasoned private equity experience at the Fab group to tackle a number of initiatives in this space and we look forward to updating you on those initiatives with much greater detail.
Going forward, but in terms of this opportunity fund we will be.
Lead Investor, we will help manage the general partnership and we expect to see fee paying third party.
Capital and limited partner for them join us in that fund for those initiatives.
Understood. Okay. Thanks for the color and if I can just squeeze one more quick one on here just back to your revenue mix for the quarter or looking at the numbers here about 25% of overall revenue was from <unk>, obviously higher margin than our than dried flower, which was at about 70% product mix just wondering.
Do you expect for for the next quarter is this a similar.
Our revenue mix here or do you expect for example base to increase share or decrease for that matter.
Thanks, David Good question.
It's Andrew here I'll just address the debate question look in.
<unk>, obviously is a key part of the strategy, we've been pretty clear on that.
We were early to the game.
In 2019 with kind of phase two came out.
And we came out with a really great offering on.
Under our top leaf and sundial brands.
So we're really happy with.
The first part of that launch and.
We saw good traction in the mix there.
On a rate from a mixed simple it is accretive for us.
That said, there's been a tremendous amount of competition coming into the space again.
Vape is like any other segments. We're in it's facing a lot of new industry players.
And there they are differentiating by by price and I think that's going to create a bit of a headwind for us in regards to how we continue to compete at the prices and the value equation for the consumer that we're looking to obtain.
And I don't see that stopping because we're seeing again more entrants come into that space.
Here's here's the point I would make as we think about.
The next evolution of vape.
We do have some very exciting innovation that we're looking to launch in 2021.
In the beef segment and we've done we've done what we need to deal with regards to you know.
Competing in value with one gram beef, but it's certainly not a key focus that will be lying primarily with top leaf sundial.
And we're currently into <unk>.
Formats of extraction on that base, which is ethanol and as you know.
There is certainly more opportunities there certainly on the hydrocarbon side to provide further differentiation and we intend to do that which should drive better value for consumers and obviously be accretive to our margin mix for excited about that offering but certainly competitive early part of 2021, we're seeing that on the numbers.
Okay. Thanks for taking my questions and again congrats on the quarter.
Thanks, Ed.
Once again, if you have a question. Please press Star then one.
Our next question comes from Doug Lane of RBC capital markets. Please go ahead.
Yeah. Thanks.
Couple of questions. When you think about investing capital between.
The two areas, let's say between M&A to build the business and then well.
Guess, what you call your investment side of the business what do you expect the mix to be there.
Yes, Doug Thats a great question, we're working on actually on a number of live M&A files, there are elements of timing and.
And a lack of certainty on execution, which could cause.
A swing in that answer by by one hundreds of millions of dollars. So.
This is not something that we have.
Set in stone or.
Budgeted out we are we are.
Underwriting and chasing opportunities that we think are highly strategic for sundial and <unk>.
The timing and quantum ultimately is something that we're not going to give guidance for today.
Okay.
When you think about.
What youre growing today in your ability to get to that 23 to maybe 25%.
Potency can you tell me what percentage of the crop that you are growing is getting to those levels because one of the things that I.
I think we should all be concerned about is are we going to see regular write off that actually should be included in your cost of goods. If you can't meet the 22 or 23%.
Yes, I'll take that so so you're right you're right.
It's a key a key focus for us.
With our with our core operations and as we've said we've made tremendous progress in terms of.
On the potency of our average harvest, particularly.
Starting in the fourth quarter.
We've also brought in some new genetics that we're.
That are showing very very promising results.
But we are working to avoid some.
Some of the poor cultivation outcomes that.
Plagued the company earlier on and it's absolutely essential to getting our cost down and ensuring that we.
We are not.
Wasting capital when it comes to our cultivation activities.
It is a key focus and Thats a great question.
Yes.
Can you give an idea like us.
Awesome.
Both not meeting the sort of hurdle or is it a lot lower than that.
Yeah.
Yes, I would say in rough magnitude at our worst in early 2020.
And you can see this through through the impairment analysis.
Yes, roughly half at our worst.
No it was not suitable not meeting the objectives that our consumers have.
In terms of in terms of product potency.
But that number has been reduced and continues to be reduced.
Quite materially.
We're going to be able to talk more about that in the coming quarters, but given the fact that we just revamped all of our cultivation practices in the back half of 2020.
That number is still improving and is not static.
Okay excellent that's it for me thank you.
Okay.
Our next question comes from Sean <unk> of Canaccord Genuity. Please go ahead.
Hi, there and thanks for taking my questions. The first one I've got here is just on the market share. So its declining again for a second straight quarter to two 7% in the quarter.
That's down from above.
About 5% two quarters ago so on.
You are showing strong sales momentum on the vape side.
And from prior commentary, it's pretty obvious that the market shift in value is the key driver here.
And so keeping in mind Andrew's commentary that.
Focus will be on the on the premium segment going forward I was wondering if you could provide any commentary on how you see that market share shaping up.
On the short term over 2021, and when internally do you expected to start ramping back.
Yeah.
Thanks, John Thanks for the questions Andrea I'll take that so maybe I'll start with a bit of the industry kind of view here and then I'll kind of filter it down into how we're looking at that for market share for sundial branded products. So.
Look I think when you look at the industry.
When you look at an annual compound growth that continues to move on the right direction of this country and that's good.
But it's like any other CPG business.
There is seasonality and there is other hit with a tailwind that is going to impact industry and rightly so impact the.
The ability for some producers to penetrate the market.
When I look at Q1.
It's soft across most provinces, Ontario, just on the phone this week with the onshore leadership team and their performance is minus 17 on industry versus December and February March are showing a slight growth rolling 90, but coming off a very small base and they have been obviously, having stores closed since November of last year.
You see showing preliminary industry numbers at about minus seven decline in February March or jewelry January February in Alberta is double digit decline on the industry and I would tell you that because I think it's important to understand that you can still grow market share.
In a declining industry.
And in some other markets, we're playing in certain some of the key markets, we want to win in.
We're seeing some prelim results that would tell us we're moving in the right direction there.
But.
I think it's going to continue to be.
Very very.
Competitive I think we're at.
A point in the industry right now where.
Youre, having seven to nine new license holders being issued by Health, Canada. A week you have got 100 Lps sitting in the province of Ontario, You've got you know.
A number of 200 coming in this year at some point that they are stating so it's going to continue to be a big challenge to grow market share, but I'm really confident in our ability to now that we're investing on our sales and marketing.
We are focused on our commitment to cultivation, we have some great brands, we have some great relationships with retailers and I'd also be mindful of when we're looking at these datasets, whether their headset or whether there are some proprietary retail platform that that a retailer is putting out there that you guys are looking at.
Other factors that are impacting what Lps are doing well on those retailers so from a holistic side.
Confident that we can grow market share we're seeing good signs of that there is certainly going to be high levels of competition.
But it's a focus for the group and we're making the right investments into how we want to do that.
We will see that momentum continue in 2012.
Okay.
Thanks for the color there and then the second one was just on a brief update on what's happening with the chocolate arrangement.
So have any products hit the market there and if theres any commentary on how they've been received and also just considering all the moving parts that are that are in the story now can you speak to any pipeline or desire for adding on any other contract manufacturing partner.
Yes, Sean it's Andrew I'll take that again.
So yes last year, we ended up signing two contract manufacturing partnerships. One as you mentioned with chocolate, whose local Alberta, Chuck appear mixed phenomenal product and we've seen consumer off take on that in the province of Alberta.
Do really well, we launched that late last year by the GLC.
And we're getting ready to put that into other markets.
This year and we're excited about that.
So we'll continue to see.
Good products being released under that partnership there's some very cool innovation coming along those lines as well.
That chocolate is working on and we're excited to be.
Working with them to bring those to Canadian consumers across the country.
We also signed a licensing arrangement with a company called simply solving this out of a rocky view facility.
And that's very much focused on concentrates they.
Specialized in that and we're going to we're going to look at.
Plainfield, obviously, the India of investments that we made as well.
In the early part of this year and so we're going to continue to kind of look at the.
The country around opportunities.
But I would mentioned our core competency will still remain largely in that inhalable focus and we're we're very dedicated to cultivation being the foundational piece of that and we will look at those opportunities that come up and there is certainly going to be more.
Now moving forward.
Okay.
Thanks for that for all my questions.
This concludes the question and answer session I would like to turn the conference back over to Zach George for any closing remarks.
Thank you and thanks to everyone for joining our call today.
Take care and stay safe.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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