Q2 2022 SNDL Inc Earnings Call
[music].
Good morning, and welcome to the F N D L's second quarter 2022 financial results conference call.
Heidi afternoon August 12th S. N D. L issued a press release announcing their financial results for the second quarter ended on June 32022. This press release is available on the company's website at S. N D L Dot com and filed on Edgar and SEDAR as well the.
The webcast replay of the conference call will also be available on S. N D L Dot com website.
S. N deal has also posted a supplemental investor presentation found on the S. N D L Dot com website.
Renting on this morning's call, we have Zach George Chief Executive Officer, Jim Keough, Chief Financial Officer.
Tank vendor president of liquor retail and Andrew <unk>, President and Chief operating Officer.
Before we start I'd 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 risks.
Risk factors that could affect results are detailed in the company's financial reports and other public filings that are made.
<unk> available on SEDAR and Edgar.
Additionally, all financial figures mentioned are in Canadian dollars unless otherwise indicated.
We will now make prepared remarks, then we'll move on to analyst questions I would now like to turn the call over to Zach George.
Good morning, everyone and thank you for joining us on our second quarter 2022 earnings call Andrew.
Andrew and I are thrilled to be speaking to you from Apple build new Brunswick and Maritime Canada today.
Before we provide the details on our operations and second quarter results I want to discuss our company's rebrand.
Following our annual and special meeting of shareholders on July 25, 2022, Sundial Growers, Inc. Changed its legal name to <unk>, Inc. Our NASDAQ ticker symbol has remained unchanged.
The rapid and material changes, we have experienced over the past two years have led to our original sundial growers' identity, becoming less relevant as we expand and diversify our business operations as we reevaluated, our company's purpose and realigned our values. We believe the new <unk> brand acknowledges the evolution of our active.
These operations as a company and the undeniable impact that investor support has had on the business.
New F&B L brand embodies our commitment to excellence and a regulated product space as we focus on delighting consumers by providing unparalleled experiences coupled with our ability to curate and deliver a robust selection of offerings throughout the regulated retail market.
Along with a new logo and brand identity <unk> has launched a new investor relations website at Www Dot <unk> Dot com along with the rebrand video that gives a quick look on Hu <unk> has become.
As a reminder, with alcan a transaction having been completed on March 31 2022.
<unk> business is operated and reported in four segments liquor retail cannabis retail cannabis production in cultivation and investments.
In the second quarter, we made tremendous progress on our strategy and commitment towards becoming a leader in the Canadian regulated products industry.
F&D all delivered a 2344% increase in net revenue year over year.
With a record net revenue of $223 $7 million.
<unk> asset base and strong balance sheet position us well to develop unique competitive advantages that will lead to success in the Canadian market.
<unk> second quarter of 2022 gross margin grew to $43 1 million up 1627% from its second quarter 2021 loss of $2 8 million.
This result is a record since <unk> inception, which is especially meaningful given the sustained macroeconomic challenges we continue to navigate.
Despite material cost inflation rising interest rates continued candidates price compression and intense competition SDL continues to drive towards improved results.
Gail is mission critical to sundial success, the baseline cost of running a CPG oriented company with the NASDAQ listing outrageous D&O insurance rates internal and external Sox compliance costs and the commercial cost of best practices and CPG put many of our peers in a position where they are wholly and capable of delivering sustainable.
<unk> in excess of the cost of managing this infrastructure. This dynamic ensure to drive further industry consolidation.
As a result of the <unk> acquisition <unk> is now Canada's largest private sector liquor retailer operating 170 locations under its three retail banners widened beyond liquor depot and a slicker.
The liquor retail segment stable and growing cash flow profile, along with best in class retail operations expertise has accelerated SMB <unk> retail growth and vertical integration strategy.
As COVID-19 restrictions have largely dissipated we are seeing liquor retail sales revert to a more normalized run rate is on premise consumption returns enforce that said despite the fluctuation in sales due to market conditions and retail competition, we have stabilized our margins through pricing and mix initiatives and are working to position.
<unk> the business for greater future profitability.
Tank, who will provide more comments on our liquor segment shortly.
Turning to our cannabis retail segment, the retail landscape remains highly fragmented and ripe for consolidation as we have begun to see more retail closures on the back of unsustainable saturation in certain markets.
Our expanded retail networks solidifies SMB market share and its exposure to a broader consumer base.
This past quarter value buds and spirit leaves combined market share represented approximately 98 share prioritize provincial markets.
<unk> position as a leading national multi banner cannabis retail operator.
Market share for <unk> products in our retail network continued to increase highlighting the benefits of the companys vertical integration strategy.
We see an opportunity to build a publicly listed multi banner pure play retail cannabis business with the scale and infrastructure to best serve Canadian cannabis consumers with distinct retail experiences.
This will require the reorganization of our current retail license exposure into a single enterprise.
This strategy may see benefit from the small loans, we have made to Canadian retailers that could become acquisition candidates.
We expect to provide more detail on this opportunity in the coming months.
We are pleased with our cannabis brand sales in the second quarter in an environment that continues to be highly competitive.
This is the first quarter since inception that our cannabis operations have generated positive adjusted EBITDA.
We continue to be encouraged by our THC potency and yield results, which have hit new all time highs during the quarter.
And <unk> efforts and tailoring our product innovation strategy based on increased data analytics and access to a broader consumer base are starting to yield results.
By the end of the first quarter of 2022 sundial has deployed capital into several cannabis related investments within <unk> fair value of $561 $7 million, including $462 million to the Sunshine Bancorp joint venture.
This joint venture has credit exposure to a handful of operators, including Juicy Sky meant ascend.
Colella, Columbia care and AFC gamma.
We have adjusted to fair market value of our investment portfolio to reflect current market conditions in the cannabis industry and credit markets.
Downstream remains the largest Canadian funded credit portfolio in the industry.
While our goal is to generate attractive returns as a strategic capital partner for these borrowers in certain cases, we may see defaults or other restructurings create an opportunity for <unk> to gain a meaningful operating footprint and a single or multi state format.
The broader north American cannabis markets are experiencing price and margin compression, while facing a brutal mix of excess supply tax and regulatory regime challenges and a lack of access to capital.
At this point in the cycle, we are seeing very few new potential credit deployment opportunities that meet Sunshine strict underwriting standards and view the repurchase of shares is attractive on a relative basis, given <unk> current valuation, which implies a discount to the value of our cash and investments and a negative value for a liquor and cannabis.
<unk>, we have shown this math with a net asset value buildup in our new investor deck, which I invite you to review.
It's worth noting that we are.
One of the only Lps in Canada can largely considered the repurchase of shares and we do not need to dilute shareholders in the near term to solve balance sheet issues or to secure working capital.
Despite our encouraging results, we are well short of our corporate goals and know that our business still has room for both improvement and growth.
We expect to realize cost savings across all of our operating segments and our Canada integration work will continue into early 2023.
The reckoning that I've been talking about for the last two years is certainly here.
We are focused on demonstrating prudent capital allocation and proving the efficacy of our strategy and its benefit to shareholders.
<unk> is uniquely positioned with the potential to be a leader in the Canadian regulated product space.
We continue to explore significant opportunities to enhance our capabilities in a manner, that's complementary to our vertically integrated model.
We believe that our culture of continuous improvement with a focus on cost control and efficient operations will drive strong future results.
I am humbled to work with and serve our more than 2500 employees and thank them for their continued dedication to our mission.
Thank you and I'll pass the call to Jim for comments on our financial results.
Thank you Zach and good morning, everyone.
Like to remind you that all amounts that I discussed today are denominated in Canadian dollars unless otherwise stated.
Our results for the second quarter of 2021 comparative exclude the subsequent acquisitions of spirit leaf and Ocana, which closed on July 22021, and March 31, 2022, respectively. Certain amounts that we'll refer to on this call are non <unk> measures.
Please refer to <unk> management discussion and analysis for the definitions.
Yeah.
As we have previously discussed Snd I'll now reports its financial results under four segments liquor retail cannabis retail cannabis and investments.
I'll begin with our consolidated financial highlights.
With this first full quarter subsequent to the acquisition of Alcan, we achieved net revenue in the second quarter of 2022 of $223 7 million.
Compared to $9 2 million in the second quarter of 2021, representing a more than 2000% increase our.
Our gross margin grew to $43 1 million in the second quarter of 2022, the highest since <unk> inception up over 600% from a loss of $2 8 million in Q2 2021.
Net loss for the three months ended June 32022 was $74 million compared to a net loss of $52 3 million for the three months ended June 32021.
<unk> recorded an adjusted EBITDA loss of $25 9 million for the second quarter of 2022 compared to an adjusted EBITDA loss of zero point $2 million in Q2 2021.
Excluding the investment segment, which was primarily impacted by fair value adjustments for Sun stream adjusted EBITDA would have been $9 6 million.
As of June 32022, Snd, all had $900 million of cash marketable securities and long term investments and no outstanding debt.
And as of August 11, 2022, <unk> had $362 6 million of unrestricted cash.
<unk> general and administrative expenses for the three months ended June 32022 were $40 3 million compared to $10 1 million for the three months ended June 32021.
This increase was mainly due to salaries wages and office and general expenses from the Alkannin ENSPIRIT lease acquisitions.
Effective July 25, 2022, <unk> common shares were consolidated on a one share for each 10 shares outstanding basis pursuant to shareholder approval at Sn Del's annual and special meeting of shareholders.
The company has now regained compliance with the NASDAQ minimum closing bid price requirement.
In the quarter <unk> repurchased 528000 shares at a cost of $2 million.
The company continues to see a significant dislocation in its valuation when compared to the underlying asset base.
Let's take a closer look at our retail liquor segment now the second quarter of 2022 is that <unk> first full quarter reporting liquor retail revenue subsequent to the acquisition on March 31 2022.
In the segments stable and growing cash flow profile, along with best in class retail operations expertise has significantly impacted <unk> growth.
Gross revenue for liquor retail sales for the three banners combined was $148 6 million for the second quarter of 2022.
Gross margin in the liquor retail segment was $33 5 million or 22, 6% of sales.
Despite fluctuations in sales due to market conditions and retail competition, we've stabilized margins through management of pricing and product mix.
Now, let's turn to cannabis retail with the acquisition of our interest in Nova Cannabis, Inc. Through the Alcan acquisition, our expanded retail network has significantly increased our retail share and exposure to a broader consumer base.
Gross revenue from the cannabis retail segment for the second quarter of 2022 was $63 5 million compared to $7 5 million for the first quarter of 2021, 746% increase.
Value Bud sales, where the material driver of the increase with $56 3 million for the second quarter of 2022.
System wide cannabis retail sales, including sales from our franchise partners was $92 8 million for the second quarter of 2022.
Gross margin for cannabis retail this quarter was $13 9 million or 21, 9% of sales.
Significantly increased from $3 3 million compared to Q1 2022.
Through our cannabis cultivation and processing operations, we remain committed to providing quality product offerings for our customers, while focusing on cost optimization and the most competitive and profitable strains and brands, our cannabis cultivation and production and financial results are as follows.
Gross revenue from the cannabis segment for the second quarter of 2022 was $15 4 million compared to $11 3 million in the first quarter of 2022, or 36% increase and a 21% sequential improvement from the first quarter of 2022.
Net loss for the cannabis cultivation and production segment was $8 million.
Adjusted EBITDA for Q2, 2022 was $3 5 million compared to negative $11 million in the same period of 2021.
This represents <unk> first positive adjusted EBITDA quarter in the cannabis segment, which can be attributed to higher sales volumes improved margin on an adjusted basis reductions to SM G&A and greater discipline over inventory management driving a reduction in price discounts for provincial board sales during the first half of 2022.
And lastly, I would like to review our investment segment.
Revenue from our investment segment for the second quarter of 2022.
It was a disappointing loss of $35 1 million compared to $2 4 million in the second quarter of 2021.
The decrease was primarily due to noncash fair value adjustments, reflecting an increase in the assumed risk free interest rate.
The deterioration in overall cannabis credit market conditions during the quarter.
As of the end of the second quarter of 2022, Snd, all had cannabis credit and equity investments with a fair value of $562 million, including $462 million related to the Sun stream joint venture and $100 million and Canadian credit and equity holdings.
I would now like to invite tank vendor Sn deal president of liquor retail to provide further remarks on that segment.
Thank you Jim and good morning, everyone.
And the president of liquor retail for SM deal.
As you have heard some Zach and Jim we made some substantial progress this past quarter in the business.
<unk> segment strengthen <unk> ability to own the customer relationship and shifting industry dynamics.
In terms of lesser operations, we have a total of 170 stores and we operate under three banners.
One and beyond.
Western Canada's largest liquor store.
Our stores are known for their incredible selection unique product offerings.
Excellent product knowledge and customer service.
Listen to people is a convenience retail electric outlet with over 20 locations in all better.
Each listener discounter has more than 130 locations in Alberta, where youll find a great selection better prices and friendly knowledgeable staff.
We are targeting a broad range of customers with a diversified retail portfolio.
The COVID-19 pandemic significantly affected consumer behavior with respect to retail electric consumption.
The unusually high volume trend has normalized as consumers return to bar and restaurants.
As a result, we have experienced a slight decrease in electric sales compared to the past two years.
We believe that sales are starting to stabilize as customers start getting back into a more normal routine.
In terms of our financial highlights gross revenue for liquor retail sales for the three banners combined was $148 6 million for the second quarter of 2022.
Our adjusted EBITDA for the second quarter of 2022 was $15 5 million.
Gross margin in the liquor retail segment was $33 5 million.
Despite fluctuations in sales due to market conditions and retail competition with.
We stabilized our margin to our pricing and mix strategy.
<unk> is leveraging our scale store footprint and warehousing infrastructure to enable strategic buying decisions that drive margin and competitive pricing.
While customer count is down by 5% year to date, largely due to a return to on premise consumption in a post COVID-19 environment.
<unk> basket size is up 2%.
The company sees larger basket sizes.
Our widened beyond locations, where consumers come for the experiential destination shopping approach to liquor retail.
SMB Els liquor banner's market share in Alberta was 17, 6% in the second quarter of 2022.
Widened beyond representing two 9% with only 11 stores showcasing the continued.
Creasing popularity of the banner.
SMB is exploring opportunities to expand the wyman beyond store footprint in Alberta, British Columbia and Saskatchewan.
Moving forward the company will continue to optimize profitability and cash flow for the electric retail segment by focusing on cost discipline and margin accretive products.
It will leverage <unk> extensive inventory and retail footprint.
Enable leading e-commerce experiences and touch points.
We're also planning on growing our preferred label program to increase our competitive differentiation and optimize gross margin.
Thank you again for your time, this morning, and idled pass it onto Andrew.
Thank you Henk.
We made strong progress this past quarter and our cannabis operation segments, highlighting the early benefits of the company's vertical integration strategy.
I'm very proud of our team's effort.
Adjusted EBITDA was $3 5 million.
This represents <unk> first positive adjusted EBITDA quarter within its cannabis operations.
The significant improvement in Q2 adjusted EBITDA.
Can be attributed to higher sales volumes improved margin on an adjusted basis.
<unk> two sales marketing.
General and administrative costs and greater discipline over inventory management, which drove a reduction in price discounts.
<unk> sales during the first two quarters 2022.
Our topline grew year over year by 21%.
It showed a 36% sequential improvement from the first quarter of 2022.
While our business and the industry face many headwinds we've remained consistent with our execution against our planned launch this year to drive sustainable profitability within our cannabis operations segment.
Let me highlight some of our progress against this plan and how we're continuing to position our cannabis operations for the future.
I'll start with cultivation excellence.
Our cultivation outcomes through our indoor purpose built facility in olds, Alberta hit new high points in the second quarter of 2022 with average potency for the month of June achieving north of 25% THC.
Our average weighted yield continues to remain consistent at 57 grams per square foot.
Our second key pillar for 2022 is around cost optimization.
With better and more consistent cultivation outcomes, we've been able to attack our margin profile.
Further investments in process and automation remain a key focus for the second half of 2022, particularly around increasing our pre roll and bottling throughput on several new formats.
Well price compression continues to be an extended headwind for the industry, we've been able to increase our provincial board price per gram by 32% on a year over year basis.
We continue to believe that disciplined pricing strong revenue management capability is a key enabler to accelerating margin growth with key customers.
Further.
Our end to end supply chain improvements implemented over the past two years continue to drive discipline around cost optimization.
Which is helping partially offset higher power and inflation costs.
Moving to the second half of 2022, we do expect margin pressure on our portfolio given the challenging industry backdrop.
Monetizing sellable inventory through our National brand pack price and channel strategy is currently underway.
We've enhanced our product portfolio.
We continue to drive consumer value through a disciplined product innovation pipeline.
This is backed by access to a broad consumer base.
And intentional application of data analytics to meet the unique needs of the market.
Some notable highlights include.
One of the top leaf brand, we launched two limited edition confused <unk> offerings.
Very few pink platinum Hayes caviar codes.
As the first producer to bring in fees pre rolls.
Canadian recreational market.
We remain committed to this segment and view it as a significant opportunity to drive improved margin and better sales.
We plan to deliver an expanded infused lineup in the second half of 2022 with additional formats and formulations.
Our commitment to premium innovation and quality has enabled the top leaf brand to claim the number one spot for premium flower brands in the Quebec market and holds the number one spot for premium ounce offerings in Alberta.
Under our Palmetto brand, we have expanded our large format offerings in two key segments with a romulan and blueberry cultivars, both launching a new 28 gram formats.
We have also relaunched our portfolio with one gram distillate dates in for innovative new flavors.
Raspberry Cush.
Tim Hayes.
Super trough, the case and Dragon fruit cush.
Momentum will flower launched in the second quarter of 2022 and has received positive consumer reviews.
In British Columbia momentum no flower has exceeded shred and points of distribution with more growth expected.
Finally, we are excited to announce we have expanded our brand footprint into Newfoundland Labrador to drive increased national market share.
<unk> products are now available in all 10 provinces across Canada.
We remain committed to proving our vertical integration strategy within Canada.
We're also looking to be opportunistic internationally, given our indoor cultivation progress and flower demand.
We have received our international export permit and are on track to dispatch our first shipment to Israel in the third quarter of 2022.
To close we are.
On track with our plan and the results are starting to show early signs of progress I am extremely proud of our team's efforts to date.
I believe we have a clear path to further differentiate and shape, a very competitive and challenging industry.
I'll now turn back the call to Zach for closing remarks.
Thank you Andrew our goal is to deliver sustainable profits and returns to shareholders. We believe that we are setting <unk> up for success by focusing on fundamentals and building credibility as a trustworthy partner to industry stakeholders and a source of delight to consumers through.
Through a vertically integrated model and an unapologetic focus on the Canadian market <unk> continues to distinguish itself from the competition.
I will now pass the call 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. If you will your atone acknowledging your request.
Speakerphone, please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.
We will pause for a moment this callers join the queue.
The first question is from Frederico Gomez with ATB capital markets. Please go ahead.
Sure.
Hi, good morning, Thanks for taking my questions.
My first question is on your liquor retail segment. So you mentioned that <unk> and beyond is becoming more popular and that could be expanded to other provinces. So could you maybe talk a little bit more about any details you could share on the economics of the wine and beyond banner.
How it's different from other.
And the other managing our portfolio in terms of sales per store in our margins as well as the capex needed for opening new stores that Youre planning on thank you.
Sure. Thanks, Peter Federico I'll, let Ken jump in to answer this one.
Thanks, Doug.
So on the growth opportunities.
We are looking at.
British Columbia and Saskatchewan.
And.
Hopefully another two to three stores in the Alberta market.
To answer your question on.
What's different between wine unbalanced in other stores.
One beyond to attract a much larger.
<unk> segment.
Okay.
Offers.
The highest selection.
And the most competitive pricing.
The liquor retail segment in Alberta.
Right.
On Capex.
One beyond usually costs build out on the line and beyond us.
Anywhere between one 5% to $1 8 million.
This current.
Pricing in the market.
It might fluctuate a bit with the.
Current conditions due to <unk>.
Increase in materials and whatnot, but it's.
The last few we have done or have come under $2 million.
Yeah.
Okay.
Yes, yes, no that's really helpful.
Thank you and then maybe moving onto your.
Canada retail segment, so it seems like the number of stores.
In this spirit leaf network has remained relatively flat recently and most of the revenue you have in that segment is coming from Novo candidates.
It's performing really well so could you maybe talk about.
How you see the different performance.
Vendors are having right now and do you have any specific plans to improve the performance of our spirit leaf.
<unk>, our corporate owned stores as well as our franchise network.
Yes, sure absolutely so.
The thing to remember, Puerto Rico is that the spear leak model is a blend.
Corporately owned locations along with franchise exposure.
It's not really an easy apples to apples comparison, when you look at Nova.
The target shopper is also very different so the discount brokers with Novo has turned those doors into highly competitive velocity machines.
And you can see a line of sight based on greater scale to profitability, which hasnt.
It hasnt hit on a sustained basis yet.
But the margin profiles are very different than what I would say that we're seeing in the market on my comments are in line with what we've been saying for the last several quarters in that we're really looking to optimize performance at retail and not looking to blindly open.
Large quantity of new doors into an already over saturated market, we don't think that Thats, a smart strategy and we're seeing now.
Virtually.
Most retail in the country on a private basis.
Coming up for sale or looking for some type of strategic solution. This is a business model that requires scale its very hard to operate successfully in <unk>.
Profitability at a small scale.
So independent operators and even some small change youre, having some significant problems and what we're seeing is at this point the build versus buy equation. When you think about relative to capex obligations has.
In some cases inverted so we're carefully watching for instances, where we may selectively open new doors versus acquiring.
Other banners, we do believe that there are different and distinct target shoppers that exist in the retail cannabis space.
Canada and we also believe in the benefits of multi banner retail and so I think the steps we take to grow that platform well will reflect that going forward.
Okay. Thanks for that.
It alone.
As a reminder, if you wish to ask a question any analysts to have a question. Please press Star then one.
The next question is from Sean <unk> with Canaccord Genuity. Please go ahead.
Hey, good morning, and thank you for taking my question.
Just the first one here so in the release.
The company exported its first product into Israel in Q3.
So congratulations on that I, just wanted to get some more color on your international strategy spin.
Specifically are there any other international markets of interest to you that someday, we would look to enter in the next 12 months or so.
And it's a.
Is there any commentary that you could provide.
On where the company is at in the regulatory process for tapping those new markets.
Hey, Sean it's Andrew here. Thanks for the question I appreciate it.
In regards to expert just one bit of correction, we have not executed that transfer yet our first one day is real that is pending in the quarter here for Q3, but we are on track.
And I'll touch a little bit around kind of our view in regards to domestic versus international.
I think one thing we've been pretty consistent on is it focusing on Canada, We do believe Canada's worth fighting for and we certainly have a good position and good strategy moving forward here to prove that.
So focus remains on candidate would be the first thing I'd say.
When it comes to looking at International I think what we're doing is.
We needed to get our cultivation and we need to get our operations on the ground here done and set up to a position where we felt that.
We could look and have some optionality for exporting out of the country and I think thats where were at right now.
We feel really confident on where our product quality is.
We have demand for that product quality outside of Canada.
We're starting unions are all we have a nice contract that we signed.
That we're going to be deploying a gates here for the back half of 2022 and potentially into 2023, so we're going to start there.
And we're going to be opportunistic as we think about where those other opportunities look like.
Other parts outside Canada and.
We're in Israel now focus, but we're certainly looking at other markets.
Germany is interesting obviously it has a lot of attention being there with regards to what that regulatory framework is going to look like in future.
There's opportunities in places like Australia.
So we're going to be.
Again opportunistic where we go we're certainly well positioned to do that now and how would you say that our focus remains Canada.
In the short medium term and we're looking at those opportunities as they come down in certain capitalize it makes sense for our business.
Okay. Thank you for the color there.
And then my next question just on the retail side.
So I've read a couple of recent media reports that show that the ocs as the shutdown delivery services, just due to a cyber attack on its logistics network.
I know many retailers I've spoken to in the past rely on weekly deliveries to keep their shelf stock. So I just wanted to get a sense for how.
Or do you think.
This will have an impact on your two retail line.
If there's any steps that youre, taking or any any protocol in place thats, helping you mitigate the potential impact here.
Sure look it's a great question and it's going to be a bit of a macro answer Jon. So we don't expect any material disruptions.
Our retail business from the.
Some of the technology or cyber attack cyber security issues that have occurred with the Ocs what I would point out is that we are seeing movement in terms of the regulatory overlay at.
Many different levels across the country and so for example, you saw that.
The.
Britta Board the AGL C has changed its stance on window coverings, which is becoming a significant security issue and making.
Making.
The environment convenient for would be thieves, who has put some of our staff members at risk over time. So we think that those robberies will.
Decrease is a result of the change in regs and we're seeing some some common sense regulatory reform.
Coming to the discussions across many different provinces.
Ontario has had its own growing pains and is trying to sort out the appropriate role government in this.
This industry and I would expect that to change over time, but certainly the cyber attack on a lot of attention. We don't actually expect it to oppose any material disruption to our business.
Thank you I'll pass it on.
The next question comes from Pablo <unk> with Cantor Fitzgerald. Please go ahead.
Good morning, just a question regarding the Sun stream. So if you can expand please on the asset write down I mean, it was ccs related to one specific.
Or was it just hi.
Joseph for the portfolio as a whole if you can give.
Quarter over there.
I don't know if you disclosed this but can you talk in more detail about the book I know you mentioned some of the companies that everybody sees it as a portfolio very concentrated on parallel.
So thats one question and then the second one I think you mentioned that.
Some of these companies default you may be able to take over the assets will take gig within the company.
Just remind me are all going to get liquidity side of things. If you do that right because you don't Sunday Ollie's NASDAQ listed.
Stream actually own U S planned touching assets. Thanks.
Sure So Pablo because a number of these borrowers are private and we have confidentially obligations, we haven't given the broad detail on the individual loans themselves.
We've prepared.
No names revenue.
Waterfall.
Investor presentations, we'll be happy to walk you through that.
In terms of the.
<unk> fair value assessment, that's something that we apply to all assets, including these credit assets every quarter.
Let me try to take the most conservative approach possible certainly we've seen a an increase in the risk free rate, which feeds into the discount rate for all of our assets and there have been some positive changes, which would actually improve value plus you have the contribution of.
Interest income.
That's against any any write downs. So this is not something that we expect to continue in this magnitude.
Yeah.
Sequentially or indefinitely.
Sure.
But with something that was prudent that we need to do and this will be similar to any investments or exposure that most of your coverage universe has in Canada would have been subject to fair value adjustments over the last several quarters.
Youre seeing that with sundial as well in terms of the second question don't want to get too deep into this but I know that you are well aware structural means of actually having capital exposure to U.
U S single state, a multistate operators without engaging directly implant touching.
Behavior activities, and so I am sure that should an opportunity like that.
Ryzen become concrete.
We will certainly be forthcoming with the structural details of how when you such transaction would work.
Alright, but just point I mean, if I may follow up.
Given the.
The tough conditions of the markets over there right.
The difficult can you put a lot of these companies to get access to capital.
This will be an opportunity for you guys to be more aggressive on the equity side of things more of that on the debt side.
Or am I missing something there.
Meaning sure people that don't want to get diluted that we'd rather borrow from you, but you are saying what the expanded book because of it.
The quality of there but.
So if those companies had capital I don't want I don't want to suddenly consolidated of ultra fine here, but this will be an opportunity for you to take it with your stakes not necessarily converted the debt into equity, we're just putting new money what did that wouldn't make sense.
Yes look thats exact Pablo that's exactly the.
The question that would be on the table, but I would put it in the following terms. So if you think about equity performance across North American candidates.
Nothing short of terrific you have most equity is down 70%, 90% over the last year.
And thats almost without exception. So if you think about the modest noncash impairments that we've put up on credit.
They really pale in comparison to the broader broader equity performance. When you have a situation where any given hypothetical credit goes into a restructuring.
In may default and not be able to satisfy its obligations and you would you would potentially take the <unk> of that credit.
There is a live question as to what form new capital investment should take and it.
It may it may as you suggest the equity.
But suggesting that somehow we're not being aggressive we're proactive.
Just on the decision as to whether it was going to be credit a preferred or some other instrument I don't.
That's the right measure I think that we have sufficient capital in a market that is sure capital in a very distinct.
And so to the extent that that that becomes a.
A prudent opportunity for us to enter the U S market, we will we will.
Execute on it but I don't think that the.
Brightline measure on sort of our level of aggressiveness.
Our interests.
We will be reflected in the decision as to whether.
The next dollar of investment is done in the form of equity or debt.
Okay, and just to follow up so regarding the $463 million you've called me the Canadian of course.
Just remind us so you've contributed money to Sun stream and that is the bulk of Sun stream. So, but then your share of the proceeds on the fees and the interest with the SaaS could open. So I'm just trying to understand what does <unk> bring to the table here why are they taking apparently such a disproportionate to the earnings when they are pretty much putting don't know copy the loan.
Yes. Good question Pablo I've answered this question two or three different times. So we are a co manager non.
Non control co manager of the portfolio with SaaS and the SaaS is a top alternative investment firm based in Western Canada and in partnering with them, we gain access to analytic and back office expertise that we would otherwise have to build.
Pretty substantial team that would involve significant cost organically. So in terms of your comment around disproportionate share of returns that's simply not true.
We are the other half of the co management team and so we received basically a rebate on what it is.
A very market based.
Management fee.
And.
I know there has been potentially some confusion about who.
Who has.
Actual LP capital base is attributed to but that would be something out there is no sharing of the actual capital base with.
With a co manager of the fund.
I mean, I don't want to be cryptic on I mean, it is opened.
Open forum, but I just find that theres other people that have taken the <unk> can put money down in the industry, whether it's the.
It reads or somewhere in your IPO as we've seen.
Or bdcs.
They didn't need to help one another partner for these analytics I'm just.
And I wanted to again not trying to be negative here, but I'm just trying to understand you have all these billions of dollars on the balance sheet you have the 463.
Putting here.
But you still need the help from someone else and whether there's been a lot of other companies that have been able to lease from their own on our part.
Entry with similar or even better results.
Yes, so Pablo I think the when you look at the Ipos that have occurred and the other financing vehicles in the space.
Number one I would just remind you that we have the largest Canadian funded credit portfolio in the cannabis space number two a number of those ipos, which.
Came out they're now trading in the BDC realm and elsewhere, we're trading at a meaningful discount to book, which means that their access to capital is meaningfully restricted.
So.
We're also.
Keenly aware of the.
The quality of credit and where we are in the cycle when it comes to U S opportunities.
I think youll see those results.
From those those.
Those financing vehicles really start to show in the coming quarters.
And but not getting into that I'm, just I'm just I'm not sure why.
We're having a partner is somehow a reason for criticism, but clearly that's the that's the.
Your line of questioning that Youre on so happy too.
Get into the track record of our partners and the benefits we see here were offline.
That's fine. Thank you and one last one if I may just on the $100 million Canadian portfolio for Canada.
You break that down how much is that heavily retail or is it mostly producers just some more color there. Thank you.
Yes, so that credit exposure would include.
The.
Both zenovich a number of other small credits that we have out to select retailers.
The small equity exposure, we have in Canada as well.
Thank you.
This concludes the question and answer session I would like to turn the conference back over to Zach George for any closing remarks.
Thanks, operator, and thanks to everyone for joining US today, we really look forward to updating you on our progress in the near future.
Yes.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Okay.
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Sure.
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