Q3 2021 Sundial Growers Inc Earnings Call
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Okay.
Good morning, and welcome to sundial growers third quarter 2021 financial results conference call.
Yesterday <unk> issued a press release announcing their financial results for Q3 ended on September 32021. This press release is available on the Companys web site at S. N D. L group Dot Com and filed on Edgar and SEDAR as well the webcast replay of the conference call will also be available on the <unk>.
Gel group Dot Com website.
Presenting on this morning's call, we have Zach George Chief Executive Officer, Jim Keough, Chief Financial Officer, and Andrew <unk>, 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.
We will now make prepared remarks, and then we'll move on to a question and answer session I would now like to turn the call over to Zach George.
Good morning, everyone and thank you for joining us on our third quarter 2021 earnings call. We are excited to update investors on our progress and we'll answer many of the questions. We have received which are anchored around a few common recurring themes.
We are pleased to announce sunbelt's first ever quarter with positive results for both adjusted EBITDA and net earnings. These results reflect the initial impact of the business transformation led by sundial team over the last 10 months as we focused on the continued improvement of our cultivation practices and the accretive addition of the spirit leaf.
Retail network does.
The sustained challenges faced in Canadian industry participants, our financial position has never been stronger.
As mentioned on our last earnings call Sunday was restructured its operations into two segments cannabis and investments the acquisition of inner Spirit Holdings, which we referred to as spirit leaf has expanded the company's cannabis operations to include a retail component.
The October announcement of a definitive agreement to acquire all Cana is another important step in the development of our integrated business model.
We believe that we've hit a point of maximum retrenchment in our cultivation and production activities during the third quarter.
Our relentless focus on improvement in our cultivation activities, including the refinement of our processes as well as numerous cost reduction initiatives.
<unk>, an exciting improvements in product quality potency cost structure and gross margin.
At the beginning of the year, we have seen our results and potency yield intervenes improve month after month hitting all time best results for cultivation in the third quarter, we still have significant work to do but acknowledging the material progress. Our teams have made is important.
Sundar was the first Canadian license producer to launch Caviar Collins, a high potency premium infuse pre rolled product under our award winning top leaf brand.
We're seeing increases in our average selling prices and have improved our market share in the premium flower segment in important markets like Alberta and Ontario.
We remain focused on sustainable profitability and continued improvement in all aspects of our operations and we believe the premium segment will drive that profitability as the market matures.
In terms of our retail operations the spirit leaf acquisition demonstrates our commitment to owning the relationship with the consumer spirit has proven its ability to grow its brand from coast to coast and we plan to support this growth trajectory, while also enhancing operational efficiencies and supporting our franchise partners.
As we further develop and optimize our store network in Canada, We launched a multi store pilot program to improve the consumer experience through assortment price and engagement to meet the diverse needs of Canadian cannabis consumers. We also kicked off our spirit leave franchisee Advisory Council to further engage and support spirit Lee franchisee partners.
While also obtaining feedback and collaboration on strategic initiatives, which will drive the continued growth and success of the severely banner.
We are encouraged by our investment operations results as we continue to use our financial strength and liquidity position to invest strategically providing our investors with broad exposure to the rapidly growing global cannabis industry.
Since the beginning of 2021 sundial as investments in cannabis related credit facilities and the Sun stream joint venture totaled 489 million. These.
These investments generated realized interest and fee income of $19 2 million for the quarter and is tracking an annualized rate of return of close to 13%.
Our balance sheet remains strong and we remain debt free.
Sunday is uniquely positioned relative to its peers as we seek to delight consumers and become a trusted industry partner.
Through our two pillared strategy, we're looking to build a consistently profitable and scalable business delivering free cash flow within the 2022 calendar year.
As mentioned earlier I will also be answering investor questions and will do so after Jim and Andrew's comments. Thank you all.
Now I'll turn the call to Jim for commentary on our financial results.
Thanks, Jack and good morning, everyone.
I'd like to remind you that all amounts discussed today are denominated in Canadian dollars unless otherwise stated.
Certain amounts that I will refer to on this call are non I F. R. S. GAAP measures. Please refer to sundial as management discussion and analysis for the definitions of these measures.
As we mentioned in our last conference call Sunday, all determined that beginning in Q1 2021, we had two operating segments being cannabis and investments.
The acquisition of Inner Spirit Holdings limited has expanded Sandoz operations to include a third retail segment.
For the three and nine months ended September 32020, there was only one reportable segment and therefore, no comparative segment information.
I will start with our consolidated results and adjusted EBITDA.
We are pleased that for the third quarter of 2021, adjusted EBITDA from continuing operations was $10 $5 million compared to a loss of $4 $4 million for the third quarter of 2020.
The increase in adjusted EBITDA was due primarily to the following factors sundial as investment operations yielded an adjusted EBITDA contribution of $19 $2 million.
And we have included the results of spirit leaf from the date of acquisition on July 20th 2021.
Net earnings for the three months ended September 32021 was the <unk>.
$11 $3 million compared to a net loss of $71 $4 million in the previous year.
General and administrative expenses were about 33% higher at $9 $6 million compared to $7 2 million in the previous year. The increase was mainly due to the inclusion of spirit leaf results subsequent to acquisition.
In Q3, 2021 sales and marketing expenses, including spirit leaf subsequent to the date of acquisition increased slightly compared to the previous year from $1 $1 million to $1 $3 million.
Sundial continues to focus on cost discipline, specifically when it comes to brand development and promotional expenses targeting sales and marketing investments on priority strains and formats in select markets.
Now, let's turn to cannabis cultivation and production.
Gross margin before fair value adjustments from cannabis cultivation and production operations for the three months ended September 32021 was negative $4 $9 million compared to negative $17 3 million for the three months ended September 32020.
The increase of $12 $4 million was a result of our ongoing focus on cost optimization reduction of harvest inventory subject to potential impairment and offering the most competitive and profitable strains and brands to our customers.
Net revenue from cultivation and production operations in the third quarter of 2021 was $8 2 million compared to $12 9 million in the third quarter of 2020, reflecting consumer demand shifting to value segments, continuing industry wide price compression and the company's focus on margin accretive.
<unk> sales over unprofitable share acquisition and wholesale revenue.
As for our retail operations results.
Sunday hours retail gross revenue from the spirit leaf network for the period from July 20th 2021 to September 30th was $6 $1 million.
Retail revenue was comprised of $3 9 million of revenue on sales to consumers from corporate owned stores and $2 2 million of royalty revenue and franchise fees from franchise partner stores.
System wide retail sales were $33 5 million from July 20th to September 32021.
And $41 7 million for the full third quarter setting New records for the spirit leaf retail network.
Gross margin for retail operations subsequent to acquisition was $3 7 million.
Now, let's turn our focus to investment operations as mentioned earlier <unk> investment income is reported as income from operations of sundial intends to continue to invest a significant share of our available capital targeting a portfolio of attractive risk return opportunities in the cannabis industry and debt equity.
<unk> and hybrid instruments.
To summarize the deployment of capital in our investment segment to date.
During the nine months ended September 32021, the company invested $489 million, including $323 million through the Sunscreen Bancorp, Inc. Joint venture.
In the third quarter.
Third and $81 million was directed to these investments, including $135 million through Sun stream.
Investment operations generated $19 $2 million in investment income in the third quarter, including interest fees and realized gains on marketable securities that excluding unrealized gains and losses.
Excluding unrealized gains and losses on marketable securities revenue from investment operations in the third quarter of 2021 was negative $4 8 million due primarily to fluctuations in marketable securities closing prices, which are mark to market.
In the third quarter Sunday hours portfolio of credit related investments generated an annualized rate of return of 13% in.
In November 9th 2021, we had an unrestricted cash balance of $571 million and remained debt free.
Now I would like to invite Andrew <unk>, President and C. O O of sundial to provide further remarks related to cannabis operations.
Thank you Jim.
We continue to make progress on our old facility transformation, focusing on cultivation consistency and operational improvements.
As Canadian consumer preferences continue to evolve we remain steadfast in our view by growing high quality cannabis consistently with appropriate Cogs is a sustainable advantage.
I am proud of our team's progress on material average potency increases with corresponding quality improvements good crop yield and a higher percentage of sellable product over the past year.
We are reducing operational costs and have several initiatives implemented to support our efforts on accelerating sustainable profitability with our cannabis operations.
Continuous improvement of all aspects of cultivation and processing production together with a strong focus innovation pipeline.
Will enable our national own salesforce, and retail footprint to better meet customer and consumer needs.
We are encouraged by the results achieved in third quarter with further opportunity is being realized as we double down on improvements across all facets of our business.
Let me walk you through the highlights of cannabis operations for the third quarter 2021.
Our average weighted potency achieved on flower lots fully tested in olds set a record in Q3 at 21, 7%.
This represents the highest potency average since <unk> inception, and an increase of over 200 basis points versus the third quarter last year.
Our cultivation team has increased our percentage of harvests with greater than 24% THC wont see in three consecutive quarters now and over 40% of total harvest tested in Q3 came in greater than 22% on potency.
<unk> ongoing investments in innovation and cultivation practices generated continued crop yield stability in the third quarter with results of <unk> 51 grams per square foot versus 49 grams per square foot in Q3 2020.
We also launched our caviar cones under the top leaf brand.
This launch the first of its kind in Canada reinforces sundial focus innovation pipeline around premium inhalable, <unk> and the Canadian cannabis market.
In the first four weeks after launch.
Top leaf forbidden Lemon caviar cone was the top selling skus in all secure at least stores in Alberta, Saskatchewan and Manitoba.
So now its premium portfolio remains well positioned to focus on the higher margin Inhalable segment in.
In Q3, 2021, sundial and top leaf brand increased its market share within the premium flower segment in several key markets, including Alberta, where market share increased by one 7% in the quarter.
We successfully completed a significant R&D initiatives inside our old facility by harvesting 12, new genetics in the third quarter, many of which are exclusive to somehow.
Several genetics have achieved the THC quality specs required for our brand portfolio and we remain on track to release and select provinces by year end with full commercialization commencing in the first half 2022.
I'm excited to announce that we will be onboarding, a new head of supply chain. This model.
With new leadership role will be tasked with the continued optimization of our seed to sale supply chain transformation.
Ensuring sundial branded products are readily available and at the appropriate inventory levels across the country will be a key part is critical leadership role.
Further to our supply chain transformation initiatives. The recent announcements by the AGL fee to allow e-commerce in our home province for retailers in the first half of 2022 is encouraging.
Given our significant retail footprint in the province sundial has begun work to build a strong capability and a differentiated consumer experience to this important and growing DTC channel.
And finally I'd like to provide a brief update on the progress. Our team has made on our retail integration efforts subsequent to the close of spirit lease acquisition.
We have recently completed several pilots within our store network.
Which further improve our understanding of and experimentation with products and services that best work at the retail level to benefit consumers customers and other retailers.
We're excited to begin sharing in implementing these category growth drivers with our partner stores across the country as we look to optimize all aspects of retail operations.
We have made substantial progress with the availability of our sundial portfolio brands at store level.
Market share for our proprietary brands that <unk> stores across the country continue to build momentum.
As at the end of September our sundial branded share has grown in both corporate and franchise partner locations with corporate stores, leading the growth at $13, 63% market share for sundial products versus five 8% at the end of June 2021.
With that I'd like to turn the call back to Zach for closing remarks.
Thanks again for joining us today.
This is an exciting time for sundial and we're looking forward to the year ahead of US we remain focused on our plan as we continue to make progress in a rapidly evolving cannabis environment.
As transparency is a core value at sundial, we thought it was important to invite investors to directly send their questions to and for us to answer on this call.
We received close to 100 different emails from investors, we have read each and everyone and we thank our investors for their support and engagement. We are inspired by the level of diligence strategic thinking and creativity expressed by many of our investors.
85% of the questions we received centered around four main themes.
We decided to address these topics head on.
Once we are done answering the questions, we will turn the call over the operator for analysts to provide their questions are.
First I want to address NASDAQ compliance and the possibility of a reverse share split or share consolidation.
We are acutely aware that some of our investors are spending an enormous amount of time and energy obsessing over our NASDAQ compliance and the potential for a reverse split.
We are compelled to address this head on to stop the spread of misinformation and hope to use a flawed logic.
First Sunday <unk> management and board are unanimously committed to retaining our NASDAQ listing.
And we will proactively take all necessary steps to remain compliant with NASDAQ rules period.
So the NASDAQ has discretion to provide an additional extension beyond the February 7th deadline. Therefore, it is not a foregone conclusion that sundial will need to reverse split its shares prior to February seven even if our shares continued to trade below a dollar.
Given the nature of the questions. We have received I think it is important to level set and make sure. We all understand exactly what a reverse split is.
Going to do this once and I plan to never address it again.
A simple example of a reverse split would be to think of it in terms of another currency. Besides shares in the context of U S dollars a reverse split if comparable to you, giving me four quarters and me, giving you back a $1 Bill. The result is that you will still have a dollar value to spend this.
This is the same outcome when a company reverse splits of shares implied market cap or total equity value of the company does not change, but the share count declines and the implied book or other value per share increases in the same proportion.
Second.
<unk> is being used to spread fear among our investors.
This flawed logic is related to the causal relationship between all manner of share split.
And the price action of Securities following such an event.
The logic goes something like this when a reverse split occurs the shares almost always than trade down following the split.
This somehow suggest that the reverse split is the cause of the share price decline, which is a false premise. The reality is that many companies who shares fall to a level that require a reverse split have deteriorating fundamentals and financial performance.
If this trend continues it makes perfect sense that the share prices and equity values would continue to also decline.
But please note that in those cases, it's usually the fundamentals of the business that drive the poor performance of shares not the reverse split event itself.
I can make a strong case for some improved performance.
I would prefer to point to our unique attributes and track record and let investors make up their own mind.
A small percentage of firms who defaulted on their debt and get managed by the special loans groups within the banks ever make it out alive, but somehow did exactly that in 2020 over the last 10 months Sunbelt business model has been materially repositioned and we have one of the best balance sheets in the industry.
We have built a growing cash flow stream that has helped us to deliver record adjusted EBITDA in Q3.
And have more than $5 billion in unrestricted cash to deploy in a disciplined manner. In fact, the third quarter EBITDA reported yesterday is greater than what the analysts. According to Bloomberg have projected us generating and the entire 2022 calendar year I.
I want to say that one more time, the third quarter EBITDA reported yesterday is greater than what the analysts. According to Bloomberg have projected us to generate in the entire 2022 calendar year. If sundial can continue to deliver improvement in its results and create equity value in a demonstrable way, we believe that the long term share price performance will take care.
Our of itself I urge our investors to focus on the business and industry fundamentals in making investment decisions.
By all means stay focused and stay concerned but lets please stop obsessing over a reverse split for the wrong reasons.
The second theme I wanted to discuss.
Out of our repurchase of shares.
This is a theme that came through in many investor questions.
And there was a strong suggestion that sundial repurchase a portion of its shares.
Given the recent downturn in our share price and the fact that we last raised capital approximately five months ago in June at above a dollar a share our board of directors is supportive of earmarking $100 million Canadian to repurchase shares at levels that will be accretive to net asset value per share given the company's view of the trading price of sundial share.
Ours may not fully reflect the value of our assets going forward.
This may be done through the use of derivatives and the cash purchase of shares.
Investors should temper any expectations that we will recklessly chase shares higher to benefit short term investors as this will not happen.
As fiduciaries, we are tasked with managing sundial for the benefit of all shareholders not just those focus on short term trading strategies.
The third theme that was addressed by our investors focused on entry into the U S. I wanted to be very clear on this point.
No interest in making large scale CBD or other U S acquisitions for the sake of our press release.
As a Canadian company listed on NASDAQ, we are prohibited from engaging in any plan touching activity south of the border yes. The U S represents a large important addressable market. It also represents a fragmented and competitive market that is seeing the emergence of cyclical downturns in select regions, driven by oversupply and price compression.
Our son stream joint venture with SaaS has deployed more than $300 million into U S credit opportunities and expects to be active into the end of the year. Our limited partnership commitment to the sunscreen joint venture provides sundial with attractive exposure to U S markets and cash returns without the use of options on equity, which can materially delayed.
Joining of synergies and profit.
The last topic to cover dilution.
As we've explained in 2020, we brought sundial back from the brink of desk.
More than a few pundits have spent time dropping our obituary prematurely.
The out of court restructuring and subsequent raise of more than $1 billion drove material dilution represented a hard reset for the business.
We have sufficient capital to weather the storm the Canadian cannabis industry for years, but our goals go well beyond survival. We are focused on the accretive deployment of cash in a disciplined manner and have not raised any cash via our ATM or other equity issuance and almost five months and have no imminent need to do so we view the issuance of <unk>.
<unk> for the <unk> transaction is both accretive and strategic and look forward to sharing the results of our capital deployments in 2022.
Again, we want to thank everyone for sending in their questions. We view, our investor base as a critical driver for our future success without your support we would not have the luxury of contemplating the rich opportunity set that lies in front of us.
I will now turn the call back over to the operator for analyst questions.
Thank you we will now begin the analyst question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request if youre 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 his comments joined the queue.
The first question is from Pablos Atlantic from Cantor Fitzgerald. Please go ahead.
Thank you I want to ask two questions first one on the retail side. If you can talk about how you are going to integrate the two very different chains right I understand one is specifically for franchisee model. The other one is more of a discount model.
What are they going to remain separate but just talk about that particularly in light of other retailers. So they are talking about price compression and competition on moving them wanting to at least one model. So if you can touch on that.
And then two in terms of.
Capital deployment, yes, you would deploy more than $300 million sunscreen Bancorp, but just remind us.
As you look forward do you have a sense Jim von Corp, more money going there.
He went into a Canadian operations or more money going into share buybacks share.
Share buybacks, how do you handicap that thank you.
Thanks, Pablo Zack on the first question, we're going to have to delay a response. So as you know we've announced a definitive agreement to acquire Ocana, we expect the circular to be filed and available for review shortly.
We're not going to talk about integration on a transaction we have not closed yet. So we're excited to share more of the strategic path with you come to new year.
In terms of pace of deployment, it's quite possible that we could end up deploying another $1 million to $200 million.
U S that is.
To select.
Secured and structured credit opportunities into the end of the year.
Alright, thank you.
The next question is from Sean <unk> from Canaccord Genuity. Please go ahead.
Hey, good morning, and congrats on the quarter.
My first question touching.
Touching on on <unk> first question, but focusing more on the spirit leaf chain.
So we saw really strong margins from spirit leaf in the quarter at around 60%.
But given the prominence of <unk>.
Value buds, and you know a lot of the retail offerings going towards discount model just wanted to see.
If you've seen any headwinds to the spirit leaf margins in recent weeks or if theres any thoughts around adjusting pricing at all.
Given the premium focus there.
Sure. Thanks for the question I appreciate it.
No question that the entire cannabis retail space in Canada is under significant pressure.
<unk> been talking publicly about peak retail in Canada for almost six months now.
So we think we're very well positioned with staying power and capital to weather, what we think will be a pretty.
Pretty violent storm and a reckoning thats going to occur in 2022.
And so we're certainly not immune from pricing pressures and from consumers who are highly sensitive to price.
We're continuing to maintain price above some of the deep discounted rates that youre seeing in the space and we're working on merchandising and pricing strategies to address that in store with <unk> going forward.
Thank you and then just staying on spirit on the leaf transaction.
That now closed.
I wanted to touch on the integration efforts a bit and maybe some takeaways you're seeing thus far.
In the press release I think you noted that the caviar cons are the top selling pre rolls and the spirit leaf chain today, but.
But maybe you could help detail some of the broader innovation activities that the company has implemented or is in the process of implementing.
Particularly as it relates to increasing the sell through of the branded sundial products through the spirit Lake paint and I'll leave it there. Thanks.
Sure so.
Great question, obviously, we don't have the full quarter performance given the July close of the transaction, but we have in the months following our close.
<unk> greater pull through of sundial product and we've had some great success with recent SKU launches.
And we're starting to finally hit our stride on cultivation to live up to the brand promises we've laid out with consumers. So certainly a work in progress and believe it will be on a more steady state in terms of that pull through an integration.
In the first half of 2022.
Perfect. Thank you for taking my questions I'll pass it on.
Once again, if you have a question. Please press Star then one.
The next question is from Federico Gomez from <unk> capital markets. Please go ahead.
Hi, Good morning, guys. Thanks for taking my questions Congrats on the quarter.
Just wanted to touch on your credit.
Investment portfolio, you guys set a 13% return there pretty good but can you comment on how you see the credit market evolving candidates. There is some talk about cost of capital are gradually declining the states and also the potential up leasing off you're asking is sold and easier access to capital. So how should we think of.
The impact that could have in your opportunity set there and your ability to generate alpha.
Sure.
Yes. Thanks.
Question, one do we spent a lot of time thinking about I would say that we do believe that over time as the industry matures you are going to see the cost of equity and debt.
Come down across the space.
You have some significant issues in Canada, right now and the cost of debt and equity is extremely high in the U S. Do you have a real lack of institutional and <unk>.
Banking support which is really the driver for the elevated cost of capital.
The space Youre, starting to see a bit of a cottage industry emerge of different groups using various structures to supply the industry with capital.
And we have seen in certain markets, like Florida, and California quite a bit of volatility.
And the emergence of cycles, where.
You are seeing price competition, and oversupply really start to buy in terms of.
Company individual company results. So we look we believe that this window of opportunity is going to remain open over.
Over the intermediate term, perhaps several years and we will continue to evolve the model to adapt to any roll down in <unk>.
Rates going forward. So we continue.
To take advantage of that but don't really see anything in the near term that will derail.
The type of transaction and profiled returns we're seeing in the pipeline today.
Okay. No. Thanks, that's helpful. And then on your share buyback program I know I know that you mentioned that NAV per share would be.
Among natural to look for there to drive our decision sensor side.
Just thinking about the value of the business itself outside of NAV and maybe just.
The free cash flow that you expect to generate in the business and any metrics that we can look for that.
We'll indicate a good opportunity for you guys to start buying back shares.
Yeah.
Yes, another great question and respect the ask we're not going to give guidance in terms of the parameters that have been approved by our board for the repurchase of shares. We spent a lot of time focused on net asset value focused on the.
<unk> future cash flow generation that our aggregate business is capable of and we're really excited for a time when investors and analysts start to move away from this robotic and wrote revenue based analysis, which we think is completely inappropriate when assessing companies in the space.
Thanks, and I'll hop back in the queue. Thanks.
This concludes the question and answer session I would like to turn the conference back over to Zac for any closing remarks.
Thank you operator, and thanks to everyone for joining us really appreciate the engagement and the questions.
Look forward to updating you on our progress in the future. Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Okay.
Yes.
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