Good morning, and welcome to SNDL's First Quarter 2023 Financial Results Conference Call. This morning, SNDL issued a press release announcing their financial results for the first quarter ended on March 31, 2023. This press release is available on the company's website at sndl.com and filed on EDGAR and SEDAR as well. The webcast replay of the conference call will also be available on sndlgroup.com website. SNDL has also posted a supplemental investor presentation on its website. Presenting on this morning's call, we have Zach George, Chief Executive Officer; Jim Keough, Chief Financial Officer; Tank Vander, President, Liquor Retail; and Tyler Robson, President Cannabis. Before we start, I would like to remind investors that certain matters discussed in today's conference call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the company's financial reports and other public filings that are made available on SEDAR and EDGAR. Additionally, all financial figures mentioned are in Canadian dollars unless otherwise indicated. We will now make prepared remarks, and then we'll move on to analyst questions. I would now like to turn the call over back Zach George, Chief Executive Officer.

Hello, everyone, and thank you for joining us on our first quarter 2023 earnings call. This past quarter was transformative for SNDL, as we successfully closed the acquisition of Valens in January. This strategic move establishes SNDL as one of Canada's largest vertically integrated cannabis companies. With this capstone acquisition, SNDL now possesses robust capabilities in low-cost biomass sourcing, premium indoor cultivation, innovative product development and efficient manufacturing facilities. We are confident that these capabilities will allow us to deliver high-quality products and services that meet the evolving needs of our customers and stakeholders. During the last 2 years, our team has diversified SNDL's capital and operating base and transformed our business model through a series of strategic acquisitions, including both cannabis and liquor retail operations, as well as the credit portfolio that generates cash interest and creates optionality related to U.S. market exposure. Our top priority is to maintain our focus on the consumer, while working to drive sustainable profitability by optimizing each of our operating segments and benefiting from new cash flow streams. We delivered seasonally moderated results in our and Liquor Retail segment, and are pleased to report continued progression in our Cannabis Retail and Cannabis Operations segments. Net revenue for the first quarter of 2023 was $202.5 million compared to $17.6 million in the first quarter of 2022, representing an increase of more than 1,000% year-over-year. Our integration initiatives and cost reduction efforts are progressing well. And by 2024, run rate synergies are now expected to exceed $30 million annually at a onetime cost of just over $4 million, with additional proceeds of non-core assets that may exceed $10 million. We expect these cost savings to positively impact margins and cash flows in the third and fourth quarters of 2023. In response to market price dynamics…

Thank you, Zach. I'd like to remind you all that amounts discussed today are denominated in Canadian dollars, unless otherwise stated. The results for the first quarter of 2023 include the operating results of The Valens Company subsequent to the acquisition on January 17, 2023. The results for the comparative first quarter of 2022 include only 1 day of operations for Liquor Retail and Nova Cannabis retail subsequent to the acquisition of Alcanna on March 31, 2022. Please note that certain amounts referred to on this call are non-IFRS GAAP measures. And for the definitions of these measures, please refer to SNDL's management's discussion and analysis. As Zach mentioned, our intent is to maximize efficiency and profitability by optimizing and streamlining internal processes with the ultimate goal of generating sustainable free cash flow, a critical metric for our long-term financial success. Before I go into greater detail on SNDL's financial results under each of our 4 operating segments, I'll begin with an overview of our consolidated first quarter 2023 financial and operational highlights. During the first quarter of 2023, our net revenue was $202 million compared to $240 million in the fourth quarter of 2022, and $17.6 million in the first quarter of 2022. This represents a year-over-year increase of over 1,000%, largely due to the acquisitions of Alcanna, Valens and Zenabis. However, our sequential quarterly net revenue decreased due to expected seasonality in the Liquor and Cannabis retail segments following the Q4 holiday period. We reported a net loss of $36 million for the first quarter of 2023 compared to $161 million net loss in the fourth quarter of 2022 and a $38 million net loss in Q1 of 2022. The loss for the first quarter was impacted by the seasonal downturn in Liquor and Cannabis Retail sales as…

Thank you, Jim. Good morning, everyone. SNDL's Liquor retail operations remain a consistent source of stable cash flow. Our robust product offerings and tailored retail experiences have played an integral role in maintaining stable margins through the start of 2023. Looking at the first quarter highlights for the Liquor retail segment. We currently operate 170 locations predominantly in Alberta, under our 3 retail banners, Wine and Beyond, Liquor Depot and Ace Liquor. SNDL's liquid banners, market share in Alberta was approximately 17% in the first quarter of 2023. In Q1 2023, gross revenue for Liquor retail across all 3 banners was $115.9 million. The Liquor retail segment has maintained a steady gross margin of $26.3 million in Q1 of 2023. Our preferred label sales have contributed to stabilizing revenue and driving increased margins. Currently, preferred label sales account for 10% of our total sales compared to 8% in the previous year. In Q1 2023, our preferred label sales reached $11.2 million, a significant increase from $8.9 million in Q1 of 2022. Despite adding additional value-priced items to our preferred label offerings, revenue has grown and the margins remained strong. Preferred label margin continues to incrementally higher than our baseline margin and the current private label margin is $3.2 million or 29% of sales compared to $2.8 million in the previous year. Although the Wine and Beyond banner is the key driver of incremental margin and revenue growth, it is important to acknowledge the substantial contributions of our Liquor Depot and Ace liquor retail banners. These banners remain our primary revenue streams for Liquor retail, accounting for 78% of our gross revenue in Q1 of 2023. We take pride in our ability to adapt to shifting consumer behaviors in response to current economic climate. Our wide range of value and convenience…

Thank you, Tank, and hello, everyone. I'm pleased to report our first quarter results, which for the first time includes Valens contributions. This quarter highlights solid progress and set a strong foundation for our growth in the coming months. We've been focused on improved fundamentals for our cannabis operations, and I am confident that the structure we are building now will include greater success in the future. Gross revenue from Cannabis operations for Q1 2023 was $30 million, a 162% increase compared to the same quarter in 2022, a 58% increase from the previous quarter. Our gross margin was negative $9.5 million this past quarter, including a $9.2 million inventory impairment. We are actively working to improve this metric in the upcoming quarters. We are optimistic about our prospects particularly after the successful transition of all production and manufacturing to our Kelowna facility. This move allows us to reduce our reliance on high-cost cultivation and increase efficiency in our operations by utilizing our low-cost biomass procurement capabilities. We have optimized our coast-to-coast facility footprint and continue to refine our cannabis operations segment. We recently rightsized our Cannabis Operations in Olds, Alberta and the facility was specialized in premium cannabis cultivation. Meanwhile, our Kelowna and Bolton farms facilities will focus on processing and manufacturing cannabis biomass. The [indiscernible] facility will continue to be our conduit to international exports. SNDL's portfolio represents 11 recreational cannabis brands across 10 provinces featuring premium and value products, including inhalables and a full suite of 2.0 products. We are committed to continuously improving our portfolio and optimizing our resources. We are taking a strategic approach to our SKU portfolio focusing on high-margin products while prioritizing consumer-driven innovation. We are analyzing every aspect of our Cannabis Operations, from individual SKUs to entire product categories and brands, to…

Overall, we remain committed to managing our cash flow responsibly, achieving free cash flow and unlocking value for our shareholders. We thank you for your continued support and look forward to updating you on our progress in the future. I will now turn the call back to the operator for analyst questions.

[Operator Instructions]. The first question comes from Andrew Partheniou with Stifel GMP.

Maybe we could start off with some boilerplate stuff. Could you give an update on the pending asset sales? I think you discussed a $10 million number. Could you remind us which assets that encompasses? And any color on timing that you can provide?

Thanks, Andrew. Appreciate the question, and good afternoon to you. We're not going to give any guidance on timing. We do have a number of small facilities that we've acquired through credit bids, [indiscernible] context, and that would have also come with the Valens transaction. So as we look to get more efficient and smarter about our footprint there are a number of small assets that are not material but will give a healthy dose of liquidity to our balance sheet as we monetize. So we look forward to providing more information on these transactions throughout the year.

Okay. And maybe a bigger picture question here. You mentioned you bought back 0.5 million shares. This doesn't include the 2.2 million shares that were canceled in The Valens transaction. You've got the $10 million that you referenced in the asset sales that brings you to about $200 million of unrestricted cash on the balance sheet. You've got no debt. CapEx seems to be minimal and you're digesting M&A to reduce costs. So just thinking about use of capital and how we should think about this going forward, would it be fair to say that you might be a little bit more aggressive on share buybacks if the stock continues to trend around here?

That's definitely a fair comment, Andrew. We do believe that at these levels, shares are very attractive. We're trying to balance a desire to be really aggressive in returning capital to shareholders, with ensuring that we have real visibility in terms of the path to free cash flow generation, specifically in cannabis. And we have spent quite a bit of capital investments to improve the operating profile of these businesses. But as detailed in this release and through our commentary, we do have additional work to do. So when you look at that path, some additional noise in Q2 and then really the only other pocket of capital to think about is any support you would give to existing portfolio companies within SunStream or beyond. So we want to be relatively conservative in terms of maintaining adequate liquidity and being able to certainly continue operations and continue to consolidate existing exposures and positions. And we're working with our Board. We've just had a blackout period that we've been in for most of this calendar year that now lifts. And so we have the option to return capital through share repurchases going forward for a brief window here.

Appreciate that. if I may ask another question here about the synergy target. Nice to see that ticking up as you do more work on your acquisitions here. Could you discuss, I'm not sure if you provide this, but is it possible to break that down between COGS and SG&A? I'm asking because if I just do some rough math, on your cash-based cannabis operations, SG&A could be around $7 million. So this $30 million number, cognizant, it's not all SG&A there, but it does seem like a pretty big number that could bring you to positive EBITDA.

Yes, Andrew, I think that's right. We can talk about in broader terms, some of the buckets. We're not going to get into a tremendous amount of detail in every single category. But I would say, if you look at the historic cost of goods sold, especially when it comes to flower products for stand-alone SNDL. And you think about a 2023 annual plan pre-Valens that was sitting in around 30 million grams you can imagine the opportunity that's in front of us to drop our costs even on a $1 a gram basis. So that's going to be a transition process that we go through. Tyler has been leading on a number of really critical fronts, including the rationalization of our SKU portfolios as well as a very disciplined approach to monetizing inventory in biomass as we work to reduce our exposure to high-cost cultivation. And so we should see cash flow benefit, certainly positive EBITDA is where we're headed, but we need to get beyond adjusted EBITDA altogether. And so we're putting on that hard work in the first half of this year and think of it will -- those results, our earnings will become a little bit higher quality and clear, and we're looking forward to much better profitability at the end of the year.

The next question comes from Matt Bottomley with Canaccord Genuity.

Just maybe on the -- going back to sort of the top line with your main operating segments here. I'm wondering if you can just give a little bit more color Liquor versus Cannabis on the seasonality of it. So the 27% reduction in Liquor retail, how does that compare to overall consumer trends, particularly in the geographies where you're indexed to? And then on the Cannabis side of things, it seems like a lot of the U.S. data that we see, Q1 is down about more like 5% on a sequential basis. So obviously, different consumption habits, but I'm just wondering if you can speak to that.

Yes. I'll let Jim comment on revenue streams and his view of seasonality. I think the difference really is you've got a much more mature regulated product space in Liquor. And you see a number of tailwinds in certain environments where you have increased use and adoption in certain markets on the Cannabis side. So I don't think we really have a clear view yet, especially as many of these new markets are opening up or maybe are transferring from medical to adult-use markets. I'm not sure we really have those trends dialed in and understand them well, but over to you, Jim.

Yes. Thanks, Zach, and thanks for the question, Matt. I think Zach is right that in terms of Cannabis retail, the change was less than 5%, certainly quarter-over-quarter. And that also is, as Zach mentioned, a maturing market. So we're only looking really at a single quarter, not looking at the long-term trends in the same way that we can look at them in Liquor. And I think that the 27% reduction that we saw is going to be pretty typical of seasonality, and that's what's been proven over an extended period of time on the Liquor Retail side. And I think the biggest component of that clearly is the holiday season with Christmas and New Year's results in significantly higher sales in the month of December and then January sales correspondingly tend to trend downward.

Okay. Got it. And then just one other question for me, I guess 2 parts to it on the U.S. side of things. So just the 6 investments that you have, I think $536 million of book value in the SunStream part of it. If you can just speak to maybe any of the fundamentals of how those companies are tracking, just sort of boots on the ground. How are they getting financed in the interim? Are you willing or able to put any more of your liquidity into some of those names that might be in better shape? And then in Q4, I think you had some commentary in the press release about the potential for the acquisition into a majority stake into an MSO even this year. And I'm just curious if there's any other -- I know it's only about a month ago when you report it, but if there's any other updates on that front?

Absolutely. I appreciate the question. So we do expect in the next 3 to 8 weeks to have significant commentary that will be available on a number of files. As we've explained publicly. The SunStream portfolio is comprised of 6 investments, 2 are in active stages of restructuring. I would definitely point to the need to shore up resources and continue to restructure a number of these businesses. Now whether that capital comes from SunStream, SNDL or not, remains to be seen. But we could see a situation where we earmark anywhere of $25 million to $40 million over the next year to allocate to additional U.S. exposures. As you're aware, we are a NASDAQ-listed company, so we will not be engaging in any direct plant-touching activities. So any exposure would have to be very well structured, and we would not be exerting control in a strict sense. But in cases where there is an over-levered balance sheet and defaults that need to be worked through in restructuring setting that cannot avail itself of federal bankruptcy court in the U.S., you will see either through private negotiations, foreclosures or receiverships, those capital structures get cleaned up and changed. So we're sort of in the early stages of that in a few situations, and there is no current certainty as to outcome. But we do look forward to updating investors with some more details in the near future.

And the next question comes from Frederico Gomes with ATB Capital Markets.

Just on your Liquor Retail margins, in your preferred label program. So you mentioned it made up, I think, about 10% of sales in Q1, but also that your overall margin for the segment in April was 34%. So can you talk a little bit more about that program? What impact does it have on margins? And then just in terms of the -- do you have any target for the mix, where you can get the preferred label program to be as a percentage of your sales?

Thanks, Frederico. I'll ask Tank to share his thoughts.

So two parts to this, Frederico. On Q1 margins, as Jim had mentioned earlier, there was some downward pressure from consumers leaning heavily towards promotional and everyday low pricing and value products. That's what affected the margin in Q1 a bit. On the preferred label side of things, we are at 10% of sales, which is a big increase from Q1 2022. We don't have real fixed targets on that, but we definitely are introducing more products into that segment more value products, more local breweries and distilleries will be taking part in it to enhance that number. But definitely can't disclose the target points at this point.

Okay. And then just still on Liquor retail about the seasonality. I understand that Q1 is the weakest quarter, but what should we expect in terms of revenue increase in Q2? And then in the second half of the year? Also, if you could comment on the seasonality in terms of your margins for the segment as well as what you expect for inventory builds for the year?

So just to be clear on the seasonality factor, as you mentioned that it's lower by 25% from Q4. I want to shed some more light on this. Compared to Q1 2022, we were trending very close to it, if not a bit higher. So it's -- Q4 is always the strongest quarter due to the Christmas holidays and the seasonality with Christmas and New Year's fall 6 days apart. So there's nothing unusual there. From a margin perspective, we are making some adjustments on our end with better buying and more strategic private label products to improve margins in the coming few quarters. And you'll see an increase based on that in the Q2 results when you guys see them in a couple of months. And sorry, you had another question on inventory. Can you repeat that?

Yes, it's just the same question about seasonality. But just on inventory, I know that you had built up this quarter following the seasonal holiday draw. So can you comment just for the reminder of the year, what do you expect for inventory?

Our inventory level right now is fairly optimized, and we don't see a huge uptick or a drop in inventories. With the summer season coming up usually, the beer sales go up and overall beer is a bit cheaper to buy than alcohol. So it kind of levels off and then, obviously, the spikes will again be in end of Q3 for preparing for Q4.

[Operator Instructions]. The next question comes from Sahil Dhingra from RBC.

This is Sahil for Doug Meem. My first question is on the Liquor retail segment. So I know there's only 1 day in the prior year, but if you could provide us with on a pro forma basis, what was the same-store revenue growth? And then are you seeing any impact on-premise consumption in terms of your growth on a Y-o-Y basis?

So your -- if we look at the first quarter, we -- as I had mentioned earlier, we were about 2% higher than the first quarter of 2022. With on-premise returning after the relaxation of COVID and all the bars and restaurants and everything else opening up, we haven't really seen any significant decline in liquor purchases at our stores, mainly due to the fact that most consumers have changed some of their habits and also with the playoff around happening, we did see a bit of a seasonal increase there. But we don't see a significant drop in our sales because of on-premise consumption so far.

Okay. And you wouldn't -- so on a go-forward basis, would you expect a 2% same-store revenue growth for the segment? And also related to this is, is there any difference between the volume and pricing mix? Because I think you earlier alluded to some downward pressure in Q1, like customers purchasing lower pricing. So is there because of economic uncertainty or other factors that should we keep that in mind. Maybe the volume is not being impacted as much as the pricing of the basket per se?

So definitely, volume hasn't been impacted in Q1. Margins definitely were impacted a little bit. Our centralized procurement team is making a judge accordingly and buying more when it's on a limited time offer to Bridge buy. And with us having a warehouse, we can utilize that to purchase for exceed periods of time, and that would help in making up for the margins that we are losing from the lower customer spend that's happening.

Great. My next question is on the SunStream JV. I know you have addressed it a bit, but if you could throw some more color on the regulatory compliance structure given your NASDAQ listing? And if you do an acquisition of one of the MSOs. And have you spoken to the regulators and how that structure might look like?

Thank you, Sahil. It's a great question. So as you've seen in the marketplace, there's a few things going on right now when it pertains to U.S.-based client touching businesses and their approach to getting listings. So on the one hand, you're seeing a number of U.S. players to the TSX to potentially uplift. And you'll note that we also have a relationship with a TSX-listed company. In addition, you've seen quite a bit of work done on USA-based structures that takeaway voting control in a structured manner and can be held on a compliant basis by a New York Stock Exchange or NASDAQ entity. So with the work you've seen in public announcements from the likes of Canopy and TerrAscend, there has been -- the trail here has been marked already. And so you would likely see any restructuring that would result in conversion of our credit exposure in the SunStream portfolio to equity to have similar marks in terms of the required structuring to remain compliant with first and foremost, our NASDAQ listing. And we maintain strong and active dialogues with a number of regulators, and we take our compliance obligations very seriously. But there is certainly a path to compliant exposure here regardless of the form that these investments take over time.

The next question comes from Andrew Partheniou with Stifel GMP.

Just wanted to see if you could provide a small update on the data service program across Cannabis and Liquor? And how you see that trending forward, especially on the impact to cash flow?

Thanks, Andrew. It's a great question. We're just -- we've just revamped our programs both for Cannabis and Liquor retail. So we're really excited about the progress in early days. We really need to demonstrate a clean run rate to talk specifically about the impact. But we do see a material and meaningful opportunity to increase cash flow and these programs generate margin-rich cash flow at that. And it's worth noting that this type of program really has not been available or used on a widespread basis in Liquor. So it's a new initiative there. But we expect to have these benefits accrue to both the second quarter and beyond. And are excited to share kind of those new run rates and the impact on margins with you.

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

Thank you. We appreciate you all joining us today, and we look forward to updating you in the near future. Thanks very much. Have a great day.

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