Q1 2022 Sundial Growers Inc Earnings Call

Good morning, and welcome to Sundial Growers' first quarter 2022 financial results Conference call Yes.

Yesterday sundial issued a press release announcing their financial results for the first quarter ended on March 31 2022.

This press release, it's available on the company's website at F. N B 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 F. N B O group Dotcom website.

Sundial has also posted a supplemental investor presentation found on the S. N D. All 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 analyst questions.

I would now like to turn the call over this fact George.

Good morning, everyone and thank you for joining us on our first quarter 2022 earnings call. The first quarter of 2022 was both transformational and transitional for sundial.

Our acquisition of Alcan somehow is now Canada's largest private sector distributor liquor and cannabis with an industry, leading balance sheet and access to capital.

In terms of results, our net revenue was $17 $6 million, including.

Including one day of revenue from the acquisition of all Canada on March 31, which represents an increase of over 78% over the first quarter of 2021 and.

The acquisition of Alcan occurred on January one 2022 revenue would have increased by approximately $162 million a single day of contribution from Makena and <unk> in Q1 amounted to approximately $2 million in revenue.

One of the most powerful highlights of this quarter is the material improvement in gross margins than our cannabis operations. While we have a significant amount of work yet to do we have reduced costs and created a more balanced and diverse product mix.

<unk> is on higher margin higher quality candidates, our cultivation techniques and processes continue to be refined and we achieved our all time highest average THC potency results of approximately 24% in Q1 I am proud of our team at our facility in olds, Alberta, and I would now put the quality of our flower up against any of.

Our competitors.

The cannabis retail experience and infrastructure acquired through <unk> in 2021 have now been bolstered with the Alcan and Nova acquisition. The transaction has materially improved our talent density in these combined banners represent the largest cannabis retail network in Canada with average daily transactions North of 21000 during Q1 and more than <unk>.

900000, and average daily revenue.

Insights gained from this critical distribution infrastructure will be key to owning the customer relationship.

Across the broader retail value chain in cannabis and liquor Sunday will now have access to unique insights into tens of thousands of daily shopper transactions at over 350 retail stores. This will enable us to optimize offerings pricing and promotion and both liquor and cannabis locations to better serve customers the companies access.

Yes to a larger customer base also provides us with a strong foundation for e-commerce and direct to consumer strategies that will improve sundial competitiveness. Additionally.

Additionally, we will continue to assess private label opportunities and develop targeted merchandising strategies for our entire retail portfolio.

We remain committed to the development in support of the spirit leaf and value by banners. Following a two year break due to Covid. We are thrilled to welcome Austerely franchise partners to Calgary in June for our circle event, which will facilitate strategic discussions education and engagement with Canada's top lp's.

No. It was valuable banner has been highly disruptive in the Canadian industry has become an absolute velocity machine in Alberta with the current average annual run rate of around $3 million per store, which is more than twice as much as the average retail door in the province.

In less than two months, we have been able to increase branded product distribution by shipping products to value, but stores and have started to realize synergies against an integration plan that will be a focus for the balance of the year.

By the end of the first quarter of 2022 sundial has deployed capital on several candidates related investments, resulting in a total of $652 million, including about $453 million to the sunscreen Bancorp joint venture.

For the first quarter of 2022, the investment portfolio generated interest and fee revenue of $3 9 million equity pickup of $4 1 million from sunscreen and an investment loss of $17 7 million on marketable securities, which includes unrealized losses on previously publicly disclosed strategic investments and village farms international and the balance.

Company.

The current rising interest rate environment has caused us to make noncash accounting adjustments to our largely fixed rates on stream portfolio, resulting in muted adjusted EBITDA contribution for the quarter.

<unk> remains the largest Canadian funded credit portfolio in the industry.

Given rising interest rates and geopolitical turmoil as well as the cannabis industry being rife with challenges such as oversupply price compression and saturation in the retail market canvas equity valuations have been under extreme pressure.

As our investors are well aware somehow has not been immune to these market challenges.

While our shares have outperformed global and Canadian cannabis indices on a one year on year to date basis through May 13th we believe that we are undervalued and are committed to the relentless pursuit of shareholder value creation Sunday was debt free balance sheet and ample cash reserves place us in an enviable position as we witnessed a violent and swift recommend taking hold in the Canadian cannabis.

<unk>.

<unk> aggressive cash consumption by our peers reduced access to capital and waning investor risk appetite are likely to accelerate sector rationalization as the industry slowly moves towards the formation of an oligopoly.

While the Canadian sector is difficult and may be entering its darkest hours. The industry's rate of change is showing no signs of slowing down and we will likely look vastly different over the next 12 months to 24 months. We are keenly focused on the future state of our business and the industry as we focus on delighting consumers.

Before I close I'd like to provide an update on the previously announced share repurchase program in light of some management views on the company's liquidity assets operations and the recent trading price of our equity we view the repurchase of shares is an accretive use of capital. In addition, the company recently sought approval from the Alberta and Ontario.

Securities commissions to enable sundial to sell put options to enhance this program.

Information, we remain optimistic about the future of regulated products in Canada.

<unk> remains focused on building long term shareholder value through vertical integration, including the expansion of our retail network further streamlining of the company's operating structure and enhanced offering of high quality brands to consumers.

Thank you and I'll pass the call to Jim for comments on our financial results.

Thank you Zach 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 <unk> GAAP measures. Please refer to sundial management discussion and analysis for the definitions of these measures.

On the last day of March 2022, Sandell acquired Alcan, Inc, and it's 63% owned subsidiary Nova Cannabis, Inc. And we are now reflecting a fourth operating segment liquor retail.

With the acquisition sundial is Canada's leading private regulated products retail platform.

Please note the deal cannot and nobody inclusions are comprised of just one day of operations. Following the acquisition on March 31 2022.

However, I will also discuss the estimated full first quarter 2022 results for these entities.

I'll begin with our consolidated results.

Net revenue for the first quarter of 2022 was $17 $6 million, including the one day of revenue on the acquisition of Alcan or an increase of 78% over the first quarter of 2021.

Had the acquisition of Alcan occurred on January one 2022 revenue would've been approximately $164 million and gross margin would have been approximately $36 million.

Our gross margin improved to $3 4 million for the first quarter of 2022 compared to a loss of $3 5 million in the first quarter of 2021 or.

200% improvement.

We reported at reduced net loss of $38 million for the first quarter of 2022 compared to a $134 million loss in the first quarter of 2021.

<unk> $96 million improvement in net loss is primarily due to a net revenue increase of $7 7 million.

Share of profit from Sun stream of $4 1 million in 2022, and a noncash change in fair value of derivative warrant liabilities of $122 million.

This is partially offset by a downward change in investment revenue of $31 million and higher general and administrative expenses of $3 6 million.

We had an adjusted EBITDA loss of 0.7 million for the first quarter of 2022 compared to adjusted EBITDA of $3 3 million in the first quarter of 2021.

The decrease was largely driven by fair value adjustments and central bank interest rate changes related to the Sun stream joint venture in 2022, as well as realized gains on disposition of marketable securities in 2021.

General and administrative expenses for the three months ended March 31, 2022 were $10 7 million compared to $7 1 million for the three months ended March 31 2021.

The increase of $3 6 million was mainly due to increases in salaries and wages office in general and professional fees due to the acquisition of inner Spirit Holdings in July 2021.

And to a lesser extent to one day of Alcan following the acquisition.

The increase in professional fees was largely due to the completion of our year end audit.

So no it had just over $1 billion of cash marketable securities and long term investments and no outstanding debt at March 31, 2022 and.

And we had $361 million of unrestricted cash at May 13th.

Now, let's turn to cannabis cultivation and production.

Gross margin for the first quarter of 2022 was negative zero point $2 million compared to negative $3 5 million for the three months ended March 31 2021.

The improvement demonstrates <unk> progress in supply chain and cost optimization, despite price compression and lower revenue Andrew.

Andrew will provide more details on the improvements we have achieved to date.

Gross revenue for the cultivation and production of cannabis was $11 3 million for the first quarter of 2020 to a small decrease of 3% compared to the first quarter of 2021.

This reflects a further shift to branded product sales compared to the first quarter of the prior year.

So until his terminated the service in sale agreement between Sundial and <unk> Holdings, Inc. For consideration of approximately $3 $1 million in cash and $2 $9 million of sundial shares.

<unk> has contracted the royalty and eliminated the annual royalty fee that Sunday was paying to Sun, eight which was $2 $6 million in 2021.

Our cannabis retail results, including one day of Nova are as follows.

Gross revenue for the three months ended March 31, 2022 was $7 $5 million, including zero point $7 million, representing one day of sales for Nova.

Gross margin for the first quarter of 2022 was $3 $3 million.

And system wide retail sales were $34 6 million for the first quarter of 2022, including that one day of Novo revenue.

The Nova retail store results for one day, where gross revenue of <unk> 7 million and gross margin of zero point $2 million.

And while Sunday does not account for the results of the Nova retail stores prior to the acquisition date.

The Nova results for the full quarter.

Gross revenue of $49 8 million and gross margin of $9 4 million or 18, 8% of sales.

As for our one day of liquor retail results.

Gross revenue was $1 3 million and gross margin was zero point $3 million.

Again, well Sunday does not account for the results of the liquor retail segment prior to the acquisition date the results of <unk> retail locations for Q1 were as follows.

Gross revenue for the Ace liquor wine and beyond and liquor depot banners was $115 million and gross margin was $27 million or 24, 1% of sales.

And finally I'd like to review our investment operations.

By the end of the first quarter of 2022, the company had deployed capital on cannabis related investments totaling $650 million, including $453 million to the <unk> Bancorp, Inc. Joint venture.

Revenue from investments and loans in the first quarter of 2022 was a negative $9 $8 million. This is comprised of $3 9 million of interest on credits held directly by sundial.

$4 1 million on share of profit from the Sun stream joint venture and unrealized losses of $17 8 million from investments and marketable securities which are mark to market.

Downward performance of share prices from our strategic equity portfolio of Canadian cannabis related investments resulted in these unrealized losses.

I would now like to invite Andrew to provide further remarks related to cannabis operations.

Thank you Jim.

I am pleased with our team's continued execution and commitment to cultivation excellence this past quarter.

Our cannabis operations are continuing to build momentum as we remain focused on driving to a sustainable profitable business.

The Canadian cannabis market remains volatile with too much low quality product and geographical pockets of high retail saturation.

Headwinds pose challenges.

But they are also forced our business to be opportunistic by differentiating through product pricing and a better understanding of the consumer and customer needs.

Our average net selling price in the first quarter of 2022 increased by 5% versus the first quarter of 2021.

And showed an 11% increase compared to the fourth quarter 2021.

This pricing and mix focus supported material improvements in our gross margin on a year over year basis with the first quarter of 2022 at negative <unk> 2 million compared to negative $3 5 million in the first quarter of 2021.

We are making progress with our gross margins in cannabis operations with more work required.

While our overall revenue increased our cannabis cultivation and production revenue decreased slightly by 3% compared to last year, mainly due to industry declines most notably in the province of Quebec as January and February industry sales in that province declined by about 3% as measured.

Stats, Canada.

From a quarter over quarter standpoint.

Had some onetime factors through a previously announced licensing service agreement that positively impacted Q4 2021 revenue that was not repeated in Q1 2022.

Accounting for this onetime factor our net revenue for cannabis operations are stable on a sequential basis and reflects the early progress and commitment to executing our retail vertical integration strategy across Western Canada and Ontario.

We have a strong plan that our team continues to execute against underpinned by the five key initiatives announced at our year end update.

Now.

Let me walk you through these initiatives and provide some additional context against each.

We continue to make progress with our cultivation excellence focus.

It has contributed to an improvement in our cultivation consistency with sundown highest average weight in potency results achieved in the first quarter of 2022.

Coming in at 23, 9% THC.

This represents a one 5% increase from the previous quarter.

Further.

Sundial average weighted yield per square foot broke a new record for sundial in March 2022, with a weighted average yield of 64 grams per square foot.

As we continue to focus on cost we have made significant progress in optimizing costs and pre roll packaging and processes.

From an operational standpoint, we continue to identify significant cost savings beyond our synergy initiatives.

The company has made material improvements in its cultivation and innovation pipeline.

Which is contributing to an enhanced product portfolio nationally.

In Q1 2022.

Priority SKU distribution increase nationally by 1389 points of distribution as measured by internal CRM reporting.

Further we continue to partner effectively with provincial board, securing 159, new inhalable product listings nationally year to date.

This innovation success rate represents at 92% strike rate versus the company's plan.

In an industry, where provinces and retailers continue to scrutinize and rationalize skus.

Western Canada represents the largest gain a new listings year to date.

With 104, Skus, followed by Ocs with 20 Skus.

<unk> with eight Skus in Atlantic, Canada with 27 Skus.

Our vertical integration strategy is proving fruitful and we expect to see better results in the coming quarters.

So I'll now continue to see brand share increases for its house brand sold in spirit leaf locations through the first quarter and we continue to see product penetration momentum in the second quarter of 2022.

Finally, our fifth initiative is analytics and insights.

With over 350 retail locations and thousands of daily shopper transactions.

Have a unique advantage as one of the largest vertically integrated players in Canadian cannabis.

The shopper insights are now being deployed with our franchise partners.

Other licensed producers and our retail customers nationally as well.

Let's take accountability for a healthier industry dynamic for all of our stakeholders.

We look forward to sharing some of these important capability building initiatives through advanced analytics and insights at our upcoming circle event next month.

In summary, we remain focused and consistent in our approach with our cannabis operations Division.

While the industry continues to evolve we believe our differentiated strategy is on target and beginning to show proof points of sustainable progress moving forward.

I'll now turn the call back to Zach for closing remarks.

Thank you Andrew our goal is to deliver sustainable profits and returns to shareholders through 2022 and beyond by focusing on fundamentals and executing a contrarian strategy relative to our peers. We believe that we are in the process of selling some now up for success. We have significant work ahead to reach our goals and the path forward is.

Likely to be a straight line.

Through a vertically integrated model and an unapologetic focus on the Canadian market sundial is on a differentiated path towards consumer delight and the creation of shareholder value.

I'll pass the call 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.

We're here at Cowen acknowledging your request.

If you are using a speakerphone please pick up your handset before pressing any keys.

To withdraw your question. Please press Star then two.

The first question is from Frederico Gomez with <unk> capital markets.

Please go ahead.

Hi, good morning, guys.

Thanks for taking my questions. My first one is on your buyback program and discipline are selling puts against your own stock.

Mattrick or match fits that theyre looking at it to buy back stock is it going to be based on book value per share our NAV tangible book value.

Some other matters like that that we should be looking at thank you.

Thanks for the Rico exact yes, we're not going to give out specific metrics on the buyback.

We'll have significant transparency as any purchases or transactions require filing.

In line with Securities regulations, so there'll be the market will be well aware of the transactions and where they are but don't want to get into trading strategies on a public call at this time. Thanks.

Okay I understood.

The second question is just looking at your.

<unk> investments are in Canada.

Our stake in village farms in balance.

How are you looking at those investments right now just given the decline in the stock prices. If you look at the balance for example.

<unk> down 9% over the last year so.

All digit Dave for any state.

Now potentially as that market price of the company and also I'm just curious on how you are looking at those investments right now.

Seems like the market is offering.

Some great prices there so just.

Going forward. Thank you.

Sure. So certainly the mark to market impact across the space, but with those two I'm just curious specifically.

Has been painful as of late but it also creates an opportunity, especially if youre thinking about potential industry consolidation or M&A I'm always all else being equal if you were looking at these companies as potential.

Acquisition targets, you would welcome the decline in prices.

So specifically, we see some very interesting capabilities with both village in balance.

Balance is a very unique.

<unk> has a unique manufacturing and processing capabilities in terms of.

Two point products and village farms is a.

A very well run upstream cultivator with extremely attractive.

Cash cost of cultivation.

British Columbia based operation. So again, we do expect further consolidation in the industry.

The timing is sometimes difficult to plan and there is theres. Many reasons why otherwise good transactions can stumble or not get done.

But we think that youre going to see further M&A in the space and don't think that the alcan.

Canada transaction is necessarily the last acquisition that somehow engages in.

Thank you that's really helpful and maybe just if I could.

One more question here on your sensing portfolio.

Mentioned that it's mostly at fixed rates.

Can you give us a sense on the weighted average fixed rate of that portfolio and could you comment on the potential.

Our risk to your real rate of return there.

Given inflation and rising interest rates. Thank you.

Sure Jim do you want to comment on average yields in the investment portfolio.

Sure. Thanks Zack.

Our weighted average return on the portfolio is around 13% and I think we disclosed in the in the press release that the impact of the of the fixed rate changes was a little over $6 million in Q.

States are starting to go through their own cycles and as.

As some degree of oversupply and saturation impact these markets there are.

Pricing and margin pressures out there that being said, we're quite pleased to be.

For the most part of the Signor senior point in the capital structure for these companies.

R.

Our strong partner to help them work through.

Consolidation and other <unk>.

This improvement efforts that they have on the go.

And we've previously announced the commitment that our board has made to the something one of the partnership fund strategy and there is no intention to update or increase that at this time.

Still working on the existing portfolio.

Building out the previous allocation.

Okay. Thank you for that and then for a follow up question.

Realize that the company now has four verticals, but would you consider entering the candidates and our fintech space in a large way.

Our sole focus right now is really the integration of this transformational alcan a transaction. So we do see a number of potential business opportunities in other lines, but really trying to stay focused on our knitting right now in terms of proper integration.

And getting our feet underneath us.

And really showing the market and our investors the benefits of this vertically integrated model.

And thereafter, as we get to a more stabilized.

Radio profitability will be able to lift our heads up and talk about other opportunities but.

Not looking too.

Get outside of the four segments, we are working on currently.

Thank you.

Once again, if you have a question. Please press Star then one.

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

Thank you and thanks to all for your support and joining our call. We look forward to updating you on our progress in the near future have a great day.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

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