SNDL Inc

F:VY4

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, and welcome to SNDL's Full Year and Fourth Quarter 2020 Financial Results Conference Call. SNDL issued a press release yesterday morning, announcing their financial results for the full year and fourth quarter ended on December 31, 2022. This press release is available on the company's website at sndl.com and filed on EDGAR and SEDAR as well. A webcast replay of the conference call will also be available later today on the sndl.com website.

SNDL has also posted a supplemental investor presentation and shareholder letter found on the sndl.com website. Presenting on this morning's call, we have Zach George, Chief Executive Officer; Jim Keough, Chief Financial Officer; Tank Vander, President of Liquor Retail; and Tyler Robson, President of 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 to Zach George.

[Zachary George, executive]

Good morning, and thank you for joining us on our full year and fourth quarter 2022 earnings call. We achieved significant financial and operational milestones last year, driven by our strategic initiatives and the hard work of our dedicated teams, including record net revenue and net cash provided by operating activities in the fourth quarter of 2022.

It is worth contextualizing the growth that the SNDL team has achieved this past year. We started 2022 with first quarter net revenue of $17 million and negative cash flow from operations of $26 million and exited the year achieving net revenue of $240 million with net cash from operations of $29 million in the fourth quarter. Our store footprint has grown to more than 365 liquor and cannabis retail locations, making us the largest private liquor and cannabis distributor in Canada.

Through the acquisition of Valens, we significantly enhanced our cannabis operations value proposition to now include premium cultivation, low-cost biomass sourcing, processing and manufacturing. Our cannabis retail and cannabis operations segments are key enablers in SNDL's vertical integration strategy. With the scale of data and insights generated through our retail network, we are able to continuously tailor our innovation strategy to strategically play in high-velocity product segments as well as white spaces in the industry to delight consumers.

Through the combination of a diverse portfolio of brands, a coast-to-coast multi-banner cannabis retail store network and indoor cultivation and manufacturing facilities, SNDL has become one of the largest adult-use cannabis manufacturers and retailers in Canada. Although it's not something I typically address, I do discuss the undervaluation of our equity in my shareholder letter, which can be found on our website at sndl.com.

I also want to take this opportunity to address it here. Despite the positive milestones and the growth that we have achieved, SNDL shares are trading well below our book value, which is backstopped by cash and credit investments and trading materially less than 1x our annual revenue. We believe the market has not yet recognized the intrinsic value that we have built. We would expect that it should be appreciated in due time.

We must continue to find ways to unlock value and be open to all options regarding the future of our business and operating segments. Our balance sheet, liquidity and access to capital easily position us in the top decile credit profiles in the regulated products industry. We are currently implementing cost reduction initiatives and sustainability is a key priority. That means sustainable profitable operations, sustainable product quality and sustainable environmental practices.

I'd now like to turn to some key highlights of our different business segments. Our Liquor Retail segment brought material change and opportunity to SNDL in 2022. Our Liquor Segment strengthens SNDL's broader technology infrastructure, the ability to own the customer relationship and shape the retail experience. I believe that we have a significant opportunity to generate material revenue for our segment through key initiatives, specifically monetizing data-as-a-service.

We have access to vast amounts of valuable data which we are using to inform our own decision-making processes, and we believe there is untapped potential in monetizing this data-as-a-service to other businesses. As more consumers shift their shopping habits online, there is a growing demand for convenient and efficient e-commerce solutions as well.

By leveraging our existing infrastructure and expertise, we are also looking at creating platforms that meet the needs of modern consumers while generating revenue and cash flow for both liquor and cannabis segments.

SNDL, which stands as Canada's largest private sector cannabis retailer, currently operates 197 locations under 5 retail banners, Value Buds, Spiritleaf, Superette and our latest additions, Dutch Love and Firesale Cannabis. The foundations of SNDL's cannabis retail strategy revolves around several factors such as prime store locations, extensive product range and exclusive customer experiences.

In the fourth quarter of 2022, Value Buds, Spiritleaf and Superette's combined market share represents approximately 9.9% of provincial markets, solidifying our position as a leading national multi-banner cannabis retail operator in an increasingly competitive market.

In December of 2022, SNDL announced the proposed strategic partnership with Nova Cannabis, creating a well-capitalized cannabis retail platform through a vertical integration model, leveraging SNDL's upstream and midstream capabilities. The restructuring of Nova, if approved by Nova's minority shareholders, will enable SNDL to continue to evolve in a very mature sector by becoming a trusted partner and an essential part of the Canadian cannabis ecosystem.

This strategic partnership will transition SNDL to the role of sponsor, franchisor and adviser in the cannabis retail market. Through a dividend of shares to SNDL's shareholders, we will reduce our ownership stake in Nova to less than 20% and manage brand standards via strategic agreements and contracts in exchange for receiving a licensing fee in return for the provision of services, including financial reporting, business technology and regulatory support.

Our focus will be on driving category management, menu optimization and brand building, while Nova Cannabis will manage operations across what we believe will become a dominant, pure-play, multi-banner cannabis retail platform that stands alone as a sustainable public company. This retail platform provides access to incredibly valuable point-of-sale data in real time, giving SNDL and other license producers insights into innovation and successes throughout the industry.

Our cannabis operations also grew with the closing of our acquisitions of the Valens Company in January of 2023. The combined entities create a low-cost, vertically integrated Canadian company with the potential to generate over $1 billion in annualized pro forma revenue. Our cultivation expansion not only boosts innovation and cost savings for our cannabis operations segment, but also solidifies our position as a trusted B2B industry partner and manufacturer.

Our unique advantage lies in our ability to not only manufacture high-quality products but also to distribute solutions to ensure that these products reach consumers effectively. In terms of our Investment segment, SNDL deployed capital to several cannabis-related investments with an IFRS fair value of $638 million, including $519 million to the SunStream Bancorp joint venture in 2022.

This joint venture has credit exposure to a handful of operators, including Jushi, Skymint, Ascend, Parallel, Columbia Care and AFC Gamma. And as publicly disclosed, we are in active negotiation of restructuring with both Skymint and Parallel. 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 SNDL to gain a meaningful operating footprint in a single or multistate format.

We do expect in 2023 that on a structured basis, SNDL may become a majority owner of one or more vertical operations in the U.S. While we anticipate achieving strong revenue results for our business segments, we must also acknowledge that our first quarter of 2023 will be impacted by certain onetime costs as well as seasonality in the retail segments. These costs will include severance expenses for departing employees and other onetime charges resulting from the Valens integration.

The integration of SNDL and Valens is anticipated to deliver substantial benefits in the form of cost rationalization, operational efficiencies and expanded opportunities. A detailed bottom-up analysis of available synergies is currently in progress, and the company is uncovering further cost savings. SNDL expects to realize more than $20 million in annual cost synergies as a result of this process, exceeding the $10 million that was announced in January of 2023.

Additionally, enhanced distribution of Valens products through the SNDL retail network is expected to generate incremental revenue, which is also being evaluated and realized. The company looks forward to providing updates on the progress of these synergies with reporting on the first quarter of 2023 and believes that this transaction will enhance SNDL's competitive position.

In conclusion, we are humbled to be approaching the ranks of approximately 150 publicly listed Canadian companies that generate over $1 billion in annual revenue as a result of our strategic growth through 2022. We are just getting started and continue to be laser focused on owning the consumer relationship, generating free cash flow and creating value for our shareholders despite the present headwinds and negative sentiment in the cannabis sector.

Our vertically integrated model, product portfolio, dedicated team, best-in-class balance sheet and scale, our competitive advantages, we have built with the express purpose of giving ourselves the flexibility to succeed under multiple economic and regulatory scenarios. And these are the advantages that will lead us in our next leg of growth. Thank you, all. I'll now turn the call over to Jim for commentary on our financial results.

[James Keough, executive]

Thank you, Zach and thank you all for joining today. I'd like to remind you that all amounts discussed today are denominated in Canadian dollars, unless otherwise stated. Liquor Retail includes operations for the period from March 31, 2022 to December 31, 2022, and Cannabis Retail includes the operations of Nova Cannabis retail stores for the same period.

Certain amounts that I will refer to on this call are non-IFRS GAAP measures. Please refer to SNDL's management discussion and analysis for the definition of these measures.

Before I go into greater detail about SNDL's financial results under each of our 4 operating segments, I'd like to confirm that all of our year-end filings have been completed in time to comply with U.S. reporting requirements. While Canadian securities regulations do not require compliance with SOX 404(b), the shorter Canadian reporting deadline was unfortunately not met this year.

The principal reasons for this were the significant amount of additional work and in-depth procedures that were required to be performed by SNDL and its first time external auditor under Section 404(b) of the Sarbanes-Oxley Act, commonly referred to as SOX. The requirement to be SOX 404 compliant at December 31, 2022, and the expansion of those requirements to a much larger scope was a function of the rapid growth and scale and level of corporate activity SNDL has achieved over the last 3 years.

SNDL's management team takes full responsibility for this outcome as our corporate activity levels have placed our finance and audit teams under significant stress. We are committed to the continued development of our finance and other functions to support the increasing scale and complexity of our business. SOX compliance requires heightened levels of corporate controls and processes that are benefiting SNDL's shareholders through best practices in internal control and risk management.

Now let's turn our focus to business results. As Zach mentioned, SNDL reported record net revenue for 2022 of $712.2 million, an increase of almost 1,200% over the previous year. This increase includes 9 months of results from the Alcanna acquisition. Net revenue for the fourth quarter of 2022 was $240.4 million, an increase of 4% over the third quarter of 2022, with sequential growth in the Liquor Retail, Cannabis Retail and Cannabis Operations segments.

Net cash used in operating activities for 2022 was $6.7 million compared to $155.8 million in 2021, reflecting decreased cash deployed to our Investment Operations segment in 2022. Net cash provided by operating activities for the fourth quarter of 2022 was a record $28.6 million, an increase of 233% when compared to $8.6 million in the third quarter of 2022.

Gross margin grew to a record $140.4 million for 2022 compared to negative $9 million in the previous year, an increase of over 1600%. Our gross margin was $43.6 million for the fourth quarter of 2022 compared to $50.3 million in the third quarter of 2022 as a result of fourth quarter monetization of low-value inventory and inventory impairments.

SNDL reported a net loss of $372 million for 2022 compared to $227 million in the previous year. Noncash inventory and asset impairments were $203 million in 2022 compared to $77 million in 2021. The company's net loss for the fourth quarter of 2022 was $161.6 million compared to $98.8 million in the third quarter of 2022. The net loss for 2022 was largely driven by fourth quarter noncash charges including the impairment of goodwill related primarily to the Alcanna Inc. transaction, including Nova.

Despite improving fundamentals for Nova, the share price decline of 53% since the acquisition date led to an $88 million noncash impairment charge.

Our adjusted EBITDA loss was $15.8 million in 2022 compared to adjusted EBITDA of $30.4 million in the previous year. For the fourth quarter of 2022, SNDL's adjusted EBITDA loss was $7.5 million compared to adjusted EBITDA of $16.7 million in the third quarter of 2022. Excluding SNDL's equity pickup loss of $18.3 million, driven by noncash fair value adjustments from its investment in SunStream Bancorp, adjusted EBITDA would have been $10.8 million in the fourth quarter of 2022.

SNDL has $918 million of unrestricted cash, marketable securities and long-term investments and no outstanding debt at December 31, 2022, resulting in a net book value per share of $5.02 and has $207 million of unrestricted cash on hand at April 19, 2023. SNDL has not raised cash through debt or share offerings since June 2021.

I'll now review the results for our Liquor segment. SNDL currently operates 169 locations, predominantly in Alberta under its 3 retail banners; Wine and Beyond, Liquor Depot and Ace Liquor. As of March 28, 2023, the Ace Liquor store count is 137, the Liquor Depot store count is 20 and Wine and Beyond is 12.

Gross revenue for Liquor Retail sales for the 3 banners combined was $462 million in 2022 and $160 million in the fourth quarter of 2022, an increase of 4.8% compared to the third quarter of 2022. Gross margin for the Liquor Retail segment in 2022 was $106.3 million or 23% of sales for the period from March 31 to December 31, 2022. Gross margin for the Liquor Retail segment was $36.9 million or 23% of sales in the fourth quarter of 2022 compared to $35.6 million in the third quarter of 2022. The Liquor Retail business maintained its margin throughout the year through an effective pricing and product mix strategy.

Let's take a closer look at our Cannabis Retail results next. We currently own and/or operate 197 locations under 4 retail banners; Spiritleaf, Value Buds, Superette and Firesale Cannabis. Gross revenue from the Cannabis Retail segment was $206 million in 2022 compared to $16 million in 2021 and $68.4 million in the fourth quarter of '22 compared to $10 million in the fourth quarter of '21.

The Nova acquisition in 2022 and increased Value Buds banner sales were the material drivers of the increase with $61.4 million of revenue during the fourth quarter of 2022. Gross margin from the Cannabis Retail segment was $47.3 million in 2022 or 23% of sales compared to $6.5 million in 2021.

Gross margin for the Cannabis Retail segment was $15.7 million or 23% of sales in the fourth quarter of 2022 compared to $2.8 million in the fourth quarter of 2021. The increase is primarily due to Value Buds' new locations and discount pricing strategy.

As of April 19, 2023, the Value Buds' store count is 91 corporate stores. Spiritleaf is 99 comprised of 22 corporate stores and 77 franchise stores, the Superette store count is 5 corporate stores and Fire Sale is 2 corporate stores.

I will now turn to SNDL's Cannabis Operations results. Gross revenue from the Cannabis Operations segment in 2022 was $61.9 million compared to $51.2 million in 2021, a 21% increase year-over-year. Gross revenue for the fourth quarter of 2022 was $18.7 million compared to $15.7 million for the fourth quarter in 2021, representing a 19% increase.

Provincial board revenue increased by $6.8 million in the fourth quarter of 2022 compared to the fourth quarter of 2021. This increase can be attributed to the successful implementation of a streamlined and targeted product mix strategy and notable improvements in product quality, along with SNDL's owned retail strategy.

Gross margin for Cannabis Operations was negative $13.3 million in 2022 compared to negative $15.5 million in 2021. Gross margin for the fourth quarter of 2022 was negative $9 million compared to negative $7.4 million in the fourth quarter of 2021.

Moving to our Investments segment. As of the end of the fourth quarter of 2022, the company had deployed capital to a portfolio of cannabis-related investments with a carrying value of $638 million, including $519 million to SunStream. For the fourth quarter of 2022, the investment portfolio generated interest and fee revenue of $6 million compared to $3.6 million in the fourth quarter of 2021.

Share of loss of equity accounted investees generated from investments by SunStream of $18.3 million compared to profit of $19.3 million in the fourth quarter of 2021 and a loss on portfolio investments of $6.9 million compared to a loss of $41.8 million in the fourth quarter of 2021 on marketable securities, which includes unrealized losses on publicly disclosed strategic investments in Village Farms International, Inc. and Valens.

SunStream's credit portfolio currently consists of 6 investments; Jushi Holdings, Skymint Brands, Ascend Wellness Holdings, Parallel Inc., Columbia Care Inc. and AFC Gamma Inc.

Finally, let's discuss our liquidity position. For the 12 months ended December 31, 2022, the company purchased and canceled 4.3 million common shares at a weighted average price of USD 2.33 per common share for a total cost of $13.3 million under its share repurchase program. In the 3 months ended December 31, 2022, the company purchased and canceled 2.6 million common shares at weighted average price of USD 2.06 per common share for a total cost of $7.2 million under the share repurchase program.

SNDL has 8.9 million shares remaining under its currently approved share repurchase program allowing the company to repurchase common shares from time to time at prevailing market prices, enabling SNDL to return value to shareholders as warranted by market conditions. The share repurchase program will expire on November 19, 2023 if it is not extended.

As Zach mentioned in his shareholder letter, we see noncompliant license holders continue to have unfettered access to excise stamps while refusing to pay tax obligations. This means that more than 60% of companies are now at least 90 days delinquent on excise tax payments. We estimate that industry-wide unpaid excise balances have reached north of $170 million. That said, SNDL has and continues to be compliant and pay all of its tax obligations on a timely basis. Thank you for joining us today.

Now I would like to introduce, Tank Vander, President of Liquor Retail, who will provide further details on our Liquor Retail segment.

[Taranvir Vander, executive]

Thank you, Jim, and thank you all for joining today. We have made noteworthy progress in our liquor operations, thanks to the successful integration with the SNDL team and the further expansion of our liquor retail footprint. We are pleased with the positive outcomes of this past year and are eager to continue building on this momentum in 2023.

As Zach mentioned, the addition of Liquor Retail to SNDL's operating segments bolsters our technology, infrastructure and presents valuable growth prospects by utilizing analytics to better understand the complete retail experience. The Liquor Retail segment generates stable cash flow and enhances category management, basket mix analysis and preferred label strategy through shared insight across the SNDL retail network.

The Alcanna transaction completed in March of 2022, aided in the total revenue growth for the SNDL network and provides a meaningful opportunity for further revenue stabilization through 2023. This past year, we actively drove financial growth by expanding our destination shopping brand, Wine and Beyond, from 9 to 12 stores. This expansion effectively introduced our immersive and differentiated shopping experience to a broader range of customers and generated positive revenue growth.

Subsequent to year-end, we announced that SNDL has obtained 2 liquor retail licenses in Regina and Saskatoon, through the Saskatchewan Liquor and Gaming Authority auction. The company will leverage these licenses to further expand its premium liquor banner, Wine and Beyond, into the final stage of the liquor retail transition to the private sector in Saskatchewan.

We expect the banners growing popularity and strong store performance will carry over into the Saskatchewan market. This expansion provides a significant opportunity for revenue growth as the province transitions to a private sector liquor retail model. Wine and Beyond's initial launch in the 2 largest Saskatchewan cities will help SNDL to evaluate further expansion opportunities in the province.

As of March 28, 2023, the Ace Liquor store count sits at 137, the Liquor Depot store count is 20, and the Wine and Beyond store count is 12. Through 2021 and 2022, our new store openings for the Wine and Beyond banner significantly contributed to our annualized revenue despite sales slowing through the return to on-premise liquor consumption in postpandemic era. We have maintained steady margins, customer count and total revenues in 2022 despite unprecedented sales highs through 2020 and 2021.

Our new store openings are performing as expected and in many cases, exceeding our expectations. Wine and Beyond expanded into BC in 2021 and the Dilworth, Kelowna location continues to be one of our top-performing stores, further showcasing proof of concept for the Wine and Beyond retail experience. Gross revenue for Liquor Retail sales for the 3 banners combined was $575.6 million in 2022 and $159.7 million in the fourth quarter of 2022, an increase of 4.8% compared to the third quarter of 2022.

Gross margin in the Liquor Retail segment in 2022 was $133.1 million or 23.1% of sales. Gross margin for the Liquor Retail segment was $36.9 million in the fourth quarter of 2022 or 23.1% of sales compared to $35.6 million or 23.3% of sales in the third quarter of 2022. We saw meaningful basket size growth in the fourth quarter with a 9.6% increase compared to the third quarter of 2022.

Preferred label sales increased by approximately 8.6% to $44.3 million compared to the previous year, leading to increased revenue and a more effective margin strategy. Gross margin on preferred label in 2022 was 30.3% which is a substantial increase from our baseline margin. Preferred label sales currently make up almost 7.9% of sales across all banners.

As we return to normal customer shopping experiences in the post-pandemic era, we are excited to bring back in-store events. This year's highlights include the coveted annual spirits release and several celebrity events, including Gene Simmons MoneyBag Vodka launch. The annual spirits release receives immense positive customer response, backed by a sales increase of $256,000 and $87,000 in incremental margin growth in single day sales.

We see significant opportunity through these popular events which not only delight consumers, but have a significant impact on revenue generation. These larger events are in addition to our curated holiday events, various wine and spirits events and tastings throughout the year, which continue to enhance the customer experience while providing opportunities to increase basket mix and total revenue.

In close and to further Zach's initial point, looking to 2023, we see a significant opportunity to generate material revenue for our segment through key initiatives specifically monetizing data-as-a-service. We have access to vast amounts of valuable data, which we are using to inform our own decision-making processes and we believe there is untapped potential in monetizing this data-as-a-service to other businesses. I'm encouraged by our continued stable and positive results and look forward to exploring further expansion opportunities in 2023.

We have solidified proof of concept, and I'm excited to unlock additional revenue streams through the upcoming year. I will now pass the call to Tyler Robson for details on our Cannabis Operations segment. Thank you.

[Tyler Robson, executive]

Good morning, everyone, and thank you for joining us. I'm thrilled to join the leadership team at SNDL as President of Cannabis and contribute to the continued growth of the business. While I was not formally part of the company during the full year fourth quarter 2022, I'm excited to join SNDL. For those who don't know me, I was one of the founders of Valens in 2012. We built the company with a mission to drive positive societal change and revolutionize the way people view cannabis. I looked at the industry different.

We managed to differentiate ourselves by building one of the most versatile 2.0 cannabis platforms and created a distribution network with key players in the Canadian cannabis space. This solidified our position not only as one of the top license producers and manufacturers but a trusted partner in the Canadian cannabis space.

I'm excited to contribute my extensive experience in cannabis industry to SNDL spanning over 15 years in both the U.S. and Canada. Valens found the ideal partner at SNDL enabling us as a combined company to augment our platform and increase our capital, resources and capabilities. We are building a leading vertically integrated player with expertise in cultivation, procurement, manufacturing, retail and liquor distribution.

Our objective is to deliver on our purpose of bringing people together through exceptional products and experiences for generations to come. While moving forward, we have ambitious goals for our cannabis business segment. In February, we announced changes to our operations through a rightsizing of our cannabis cultivation in Olds, Alberta; and Atholville, New Brunswick in an effort to focus on the facility on premium products and brands.

The Valens transaction accelerated the need to optimize and rationalize SNDL's manufacturing and operational footprint to better address market saturation, oversupply and efficiency. We believe that our ongoing focus on high-quality cannabis and cultivation operations combined with Valens' low-cost biomass procurement capabilities will enhance SNDL's ability to offer a wide range of customized innovative products to meet the consumer demand and current market conditions.

Our strategy is centered around reducing our reliance on high-cost indoor cannabis growing and increasing our optionality on biomass. Do not underestimate the strategic implications of our combined ability to procure or grow the best quality product for different price points. As Zach mentioned, we are currently undergoing a comprehensive integration process and one of the most significant integration efforts in our portfolio rationalization.

We are currently analyzing everything; operations, brands, partners and markets. This exercise is a critical step towards streamlining our operations, enhancing our profitability and ensuring that we continue to offer high-quality innovation that meets the ever-evolving needs of the consumers.

We are committed to ensuring that our portfolio is optimized for long-term success, and we have already made great progress. At SNDL, we recognize the importance of the B2B segment and remain committed to developing and enhancing the critical area of our business. Leveraging our extraction and innovation capabilities and manufacturing expertise, we are proud to currently serve 4 of the top 5 Canadian licensed producers with our products.

Our goal is to remain the industry's preferred partner offering exceptional quality consistently and service to our B2B partners.

In Q3 2022, SNDL made its first international shipment to Israel, marking a significant milestone for the company. We are eager to continue expanding our international presence with Israel and Australia, thereby unlocking new revenue streams for the company. We believe the international market presents an attractive opportunity for SNDL and we are committed to building a strong foothold there. Our team is actively exploring additional international opportunities and partnerships to further bolster our business and drive sustainable growth for the company.

My primary objective is to make our cannabis operations profitable on a sustainable basis by the end of 2023. We have the right strategic assets to be one of the most profitable cannabis companies in Canada and with the initiatives that have already been executed on and ones planned to come. We expect to reap the reward in the back half of the year.

Achieving this goal is critical to our long-term success and will require a concerted effort across the organization. We are committed to streamlining our operations, optimizing our portfolio and driving revenue growth through strategic partnerships, expansion in the new markets and continued investment in our core capabilities. I look forward to showing the market what we have in store in the quarters to come. I will pass it back to Zach for closing remarks.

[Zachary George, executive]

I am proud of our team's performance and progress in 2022. I am encouraged by the way our team is executing with purpose, confidence and resilience. Our work is far from complete, but SNDL has a tremendous opportunity to continue to challenge the expected in the regulated products industry. The team is committed to building a world-class business and we are excited about the possibilities ahead.

I would like to thank our SNDL colleagues for their tremendous efforts, our customers for their trust and you, our shareholders, for your continued support. We look forward to another exceptional year.

[Operator]

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

[Andrew Partheniou, analyst]

I wanted to maybe take a step back first and think about things from a high level. On the cannabis operations, you've made a lot of movements here. You acquired Valens and Zenabis which come with several production and manufacturing assets. You have an equity position in Village Farms. At the same time, you announced the rightsizing of your operations and doubling cost synergy goals to over $20 million.

So is it possible to talk about what an optimized footprint looks like physically and strategically? Which assets will be used for what purpose? I believe you already mentioned you wanted to sell the Zenabis facility in Nova Scotia. Could we see any other asset sales, repurposing or maybe leasing out a new space and what kind of consideration is a reasonable expectation in this environment, maybe a range or a floor value could be useful?

[Zachary George, executive]

Thanks for the question, Andrew. We can speak at a high level to answer your questions, but there's a number of data points and decisions that have yet to be made. When you look at the rapid growth by acquisition that SNDL has experienced over the last 24 months, certainly, there is room for rationalization, and we are focused internally today on optimizing our footprint and driving efficiencies through every segment of the business.

So when you look at our office footprint for personnel and our facility footprint, there's no question that we are going to reduce that exposure over time. I would say that, which I think was what you're getting at, cultivation is probably the last big strategic question that the company is endeavoring to answer. And the path that we're on, we are aiming to be the low-cost, high-quality producer in every segment in which we participate.

And when you look at some of the vagaries in different markets in Canada, whether that be the cost of labor, volatility in terms of power prices, the rapid adjustment and improvement in SOPs and the impact of genetics in hybrid glasshouse, there's a lot to consider. So we are doing some very careful analysis right now and preparing to make those bigger decisions in the quarter to come.

Different assets will have different levels of liquidity. You absolutely point out that clearly, the cannabis industry is being starved with capital. We have some good fortune in the sense that a number of our facilities actually do have alternative use. In fact, some are actually highly desired industrial facilities, and industrial, as you're probably aware, is still a very strong market despite the rate environment we're in.

So that's really the high-level answer, and we are going to be excited to report some of the results of our decisions and actions to be taken this year and beyond in the coming quarters.

[Andrew Partheniou, analyst]

Okay. I appreciate that. My second question, maybe thinking about SunStream Bancorp. You talked about potentially becoming a majority owner in at least one MSO this year. An assumption could be made that these assets are likely burning cash. And it seems like there's not a ton of cash in the JV right now. Could you talk a little bit about the regulatory compliant options you have to finance these businesses, assuming you do take control? Should we expect SNDL to inject another cash infusion here? And what are you thinking in terms of order of magnitude, if so? Could a cash infusion also look to increase the number of borrowers given the challenging capital raising environment currently?

[Zachary George, executive]

Thanks for the question. So the way I come at this, we're not going to talk about specific numbers or contributions. I would not make any assumptions around cash burn rates for these vehicles. And I would not start with a flatly negative assumption on performance. We've seen a number of opportunities across the U.S. landscape where operating discipline has been lacking, cost discipline and capital discipline has been lacking.

So there's a lot of low-hanging fruit across a number of these companies that we think can really move the needle in terms of near-term performance. When you think about liquidity, if you're asking the question of would we allocate more capital to existing portfolio companies to shore up resources and make sure that they can survive, the answer is yes, but on the flip side, we also have a number of credits that are of -- where there is strong third-party interest in either acquiring the businesses or the paper itself, the credit investment, because it's strategic to other parties as well.

So we are looking at unlocking value and freeing up capital through the monetization of a number of assets. We have both fixed assets and financial instruments that do hold value that whether it is interest from third parties. And so there's sources and uses equation there that should put us in a position where we have no issues when it comes to liquidity.

And between our debt-free balance sheet and our trading liquidity, we have access to both credit and equity capital, which we are -- we have no near-term plans to access but puts us in a good position where we can focus on improving the business and generating free cash flow today.

[Operator]

The next question comes from Matt Bottomley with Canaccord Genuity.

[Matt Bottomley, analyst]

Appreciate all the color in the prepared remarks so far. I just wanted to flip back to the Canadian wholesale B2B cultivation operations? And a lot of good comments in the prepared remarks. But just given if you kind of look at the adjusted EBITDA rec over the last 4, 5 quarters, it certainly is something that has been on the decline within that reconciliation, given it's sort of 5% of your business today, but a good chunk, I think $4 million or $5 million of adjusted EBITDA loss every quarter.

I'm just curious how Valens sort of fits into that on the closing in January? And how much of this is actually in your control, whether it's through streamlining and rightsizing versus just an overall for lack of a better term, mess, that the Canadian pricing model seems to be in right now?

[Zachary George, executive]

Yes. I would say that we're extremely excited about Tyler and the Valens team joining us. I'll let him speak to the current state of play on B2B and the broader pricing environment in wholesale in Canada, but I would say that this merger ends up solving problems for both legacy businesses in a way that we think is going to be very, very powerful.

And we're headed down right in the middle of our integration work. That work began prior to close, and we're making a lot of very tough decisions right now. And we're very excited about reporting more detail on this in the near future. But let me just open the floor to Tyler to comment on the current state of the market in Canada.

[Tyler Robson, executive]

Yes. Thanks, Zach. I don't think it's a surprise to anybody that the Canadian market is a mess. And with this integration/acquisition of Valens, I think we can slowly move away from high-end indoor and be opportunistic on what the B2B market holds. So Matt, going back to your question, is it in full control? I'd say the majority of it is in our control. And then we'll just be, I would say, strategically aggressive as we continue to move through the ecosystem, what we call Canadian cannabis, but I am extremely excited. Obviously, I can't comment on what happened in the last 12 months at SNDL, but on the go forward, I'm definitely optimistic on what we can do collectively.

[Matt Bottomley, analyst]

Got it. Appreciate that. And then just my second question is just where you guys view the company from a sustainability perspective, as is? I know there's other growth initiatives and strategic stuff that was outlined on the call, but cash flow from operations of $29 million in Q4. Can you just break down what might have been a big swing, maybe it's working capital or something else over the last period?

Maybe in relation to, I think you said your adjusted EBITDA, if you got rid of those noncash investment reductions, would have been close to $10 million, so just bridge that gap and sort of where you think you are from a sustainability standpoint from your cash flow from ops?

[Zachary George, executive]

Jim, do you want to take that? That's fine. I can take it. So Matt, it's important to remember that with the largest contributor on the liability side of the balance sheet is really our lease exposure. And it's really important that investors and analysts look at pre and post IFRS 16 analysis for this. That's a big driver for the delta.

And you'll note that cash flow from operations does not include lease expenses that are found in cash flow from financing against this regime. So we can work through the reconciliation, which is all publicly available through the filings, but happy to walk through it with you offline.

[Matt Bottomley, analyst]

Yes. No problem. Just I guess just the one question on that is, do you think sort of an overall number above 0 is sustainable from where we're at today? Or do you expect there to be volatility just given how many moving pieces there's been as of late in terms of the overall growth of the company?

[Zachary George, executive]

SNDL was started with leverage to the largest pure indoor modular cultivation and processing facility in the country. It also happened to be built and was inherited by this current team in Alberta. Alberta has seen wild fluctuations in power prices that have, in the trailing 12 months, hit levels that are as much as 3x what you would see in markets that are levered to available hydropower, markets like Quebec and British Columbia.

And one of the things that the Valens transaction -- the opportunities the Valens transaction affords us, is to move away from a high-cost production, which is really only suitable and can only generate economic margin in premium markets. And the premium market in Canada is a very narrow fairway to hit, less than 10% of the market, as you're aware.

And so we have the opportunity today to take better advantage of the headwinds in the space, the oversupply in the market and to be a strong partner to cultivators and other parties of all sizes that are in desperate need of working capital that we can strike commercial deals with.

So there's going to be a lot of noise in Q1, potentially Q2 as we work through this integration, and we're going to do our best to tease apart the various impacts and show the clear path to operational improvements. And the first step will come in a matter of weeks with this delay. We have Q1 coming up very, very quickly here. So we'll do our best to show those results on a clean basis, but I would expect some degree of noise as we're continuing this integration work in the first half of the year.

[Operator]

The next question comes from Frederico Gomes with ATB Capital Markets.

[Frederico Yokota Gomes, analyst]

My first question is on your Liquor Retail segment. So you've managed to keep your margins at about 23% flat in this environment. But you also mentioned some opportunities for margin expansion this coming year. And one of those opportunities referred to maybe monetizing data as a service, so how soon do you think that could have an impact on your margins in that segment? How far along are you in implementing that strategy?

[Zachary George, executive]

Tank, you want to talk about the current operating environment in liquor.

[Taranvir Vander, executive]

Yes, for sure. I'll provide some context on the operating environment. So Fred, we have definitely managed to hold our margins steady, even with some decline from the pandemic years. We are definitely looking at some margin improvements from various different things, data monetization is one of them. We are working actively to have that done in the next quarter, but nothing is definitive on that at this point. I can't really put any numbers in front of you at this point, but there will be margin improvements with data monetization and also some more focus on more value-based private label products in the market.

[Frederico Yokota Gomes, analyst]

Okay. And then just looking at your cannabis inventory. When you acquired Zenabis, you had approximately 22 million grams of inventory there that you mentioned. How much of that have you been able to monetize so far? And what sort of impact has that had in your margins for the Cannabis Operations segment?

[Zachary George, executive]

Fred, it's a great question. We're not going to talk about specific numbers, but we can have certainly Tyler talk about the aggressive approach we're taking on inventory. Some of this, as we move forward, you will see some noise on a margin basis, but as we reported, we effectively acquired the equivalent of over 20 million grams in the successful credit bid for Zenabis. And we're working really diligently in monetizing inventory across the entire business, not just in Atholville, so to speak. But I'll turn it over to Tyler to talk a little bit about some of the team's efforts.

[Tyler Robson, executive]

Yes, thanks, Zach. I would say just knowing the platform that SNDL and Valens now offer together; obviously, Valens is the largest purchaser of biomass. We have the ability to move through inventory like no one else in the Canadian space. So not worried about moving through the inventory. And like Zach said, I don't think we're going to give specifics at this time. But the one thing that this platform gives us is optionality so we can maximize overall revenue out of that inventory. So whether it's going into hydrocarbon pre-rolls, we'll monetize it effectively to put our best foot forward.

[Operator]

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

[Andrew Partheniou, analyst]

I apologize, I didn't hear the answers to the last questions. I got disconnected on my side. I believe you had a pretty nice decrease on your inventory position, you did acquire 22 million grams from the Zenabis transaction. Could you provide a little bit more detail on the inventory line item on your balance sheet now? What's the ideal level for you? And could you talk a little bit about how much left of that Zenabis inventory is left to monetize. What kind of demand are you looking -- are you looking at in this current environment for that?

[Zachary George, executive]

Thanks, Andrew, and we're thrilled that you're back online and thrilled to have you on the call. That was actually the last question that was asked. So great minds, I guess. And so we're not going to talk about specific numbers, but we do have a very aggressive plan. You're likely to see most of the cash flow attributed with the monetization of that inventory hit our P&L in Q2 and Q3 predominantly.

But we're not going to talk about rate of change or pricing at this point. Happy to get into it after the fact. And Tyler had explained as well that we have a tremendous amount of optionality with the combined platform and with Valens position as effectively the largest purchaser of biomass in Canada, they've demonstrated the ability to move through inventory at a very rapid clip. And whether that's for different product and pricing segments or feedstock for extraction, there's a ton of optionality there.

So no concerns on that. And Tyler and his team have been very, very aggressive in moving through inventory across all pockets in the company, not just Zenabis in Atholville. So we will provide updates on that later and getting more efficient with our use of capital and inventory levels is a key part of the efficiency opportunity that we're working on right now.

[Operator]

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

[Zachary George, executive]

Thank you, and thank you all for joining us this morning. We look forward to updating you on our progress and results in just a few short weeks, and we wish you all a great day. Thank you.

[Operator]

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