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Edited Transcript of SNDL.OQ earnings conference call or presentation 14-Aug-19 12:30pm GMT

Q2 2019 Sundial Growers Inc Earnings Call

Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Sundial Growers Inc earnings conference call or presentation Wednesday, August 14, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jayson Moss

Sundial Growers Inc. - IR

* Torsten Kuenzlen

Sundial Growers Inc. - CEO

* Jim Keough

Sundial Growers Inc. - CFO

* Andrew Stordeur

Sundial Growers Inc. - President of Canadian Operations

* Ryan Hellard

Sundial Growers Inc. - Chief Experience Officer

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Conference Call Participants

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* Vivien Azer

Cowen & Co. - Analyst

* Tamy Chen

BMO Capital Markets - Analyst

* Doug Miehm

RBC Capital Markets - Analyst

* Kate Grafstein

Barclays - Analyst

* Bill Papanastasiou

Canaccord Genuity - Analyst

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Sundial Growers Inc. second-quarter 2019 results conference call and webcast. (Operator Instructions)

I would now like to turn the conference over to Jayson Moss, Investor Relations at Sundial Growers. Please go ahead, Mr. Moss.

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Jayson Moss, Sundial Growers Inc. - IR [2]

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Good morning, everyone, and welcome to Sundial Growers's second-quarter 2019 financial results conference call. Earlier this morning we issued a press release announcing our financial results for the 3 and 6 months ended June 30, 2019. This press release is available on our website, www.sndlgroup.com, and was filed on EDGAR and SEDAR as well.

Presenting on this morning's call we have Torsten Kuenzlen, Chief Executive Officer of Sundial; and Jim Keough, Chief Financial Officer of Sundial. Also joining us on the call will be Andrew Stordeur, President of Canadian Operations; and Ryan Hellard, Chief Experience Officer.

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 -- including, but not limited to, information regarding the continued development and growth of the demand and markets for our products; our production capacity; growth strategies and capabilities; and licensing status 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. No fiscal period subsequent to the fiscal year ended December 31, 2018, has been audited. Following prepared remarks by Torsten and Jim, the Company will conduct a question-and-answer session. Now I would like to turn the call over to Torsten.

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Torsten Kuenzlen, Sundial Growers Inc. - CEO [3]

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Good morning, everyone, and thank you for joining us for our second quarter of 2019 financial results conference call. This is our inaugural quarterly earnings release as a public company following the listing of our shares on NASDAQ on August 1, 2019.

We are excited about our strong second-quarter financial results. Before we speak to these results, I'd like to first highlight several significant milestones achieved by Sundial. Most recently we successfully completed an initial public offering on NASDAQ in which we raised gross proceeds of USD143 million. This additional funding, combined with the previously announced other financings of over CAD250 million and a further debt financing being finalized as we speak, we are well-financed and positioned to be one of the leading global cannabis companies.

Our management team's deep consumer packaged goods experience, our focus on building consumer-centric, premium global brands, and our tailored supply chains all drive an operating model that strives to deliver profitable, sustainable growth. In Canada, building brands that consumers love starts with a superior product. Our modular, purpose-built, fully controlled indoor growing facilities; our highly capable growers; and our extensive library of premium cannabis strains enable small-batch cultivation focused on quality and consistency. We believe this crafted scale approach will enable us to produce noticeably better cannabis.

Our Canadian operations continued to progress remarkably well and quickly. We significantly scaled our production at our flagship facility in Olds Alberta and have now already completed more than 150 harvests, with the vast majority of those coming during the second quarter. Having completed that many harvests allowed us to learn very quickly and continue to fine-tune our cultivation rooms to improve yields, quality, and consistency. We believe that this will continue to improve quality and quantity of our harvests going forward.

The Sundial cannabis brand offers 5 product lines: Calm, Ease, Flow, Lift, and Spark. Each line is focused on meeting specific consumer needs with tailored product offerings that provide premium experiences. So far we have launched four products: Zen Berry under the Calm line, Daydream under the Flow line, and Citrus Punch as well as Lemon Riot in the Lift line.

Subsequent to the end of the second quarter, on July 2, we closed the acquisition of Bridge Farm Group, a leading UK-based producer of ornamental plants, flowers, and edible herbs. We're very pleased to bring the Bridge Farm team into the Sundial family.

Bridge Farm currently operates 3 growing facilities with approximately 1.5 million square feet and plans to expand to approximately 3.5 million square feet by early 2021. Bridge Farm's state-of-the-art facilities, experienced management team, and strong customer relationships are competitive advantages we are excited to leverage going forward.

Using a phased approach and subject to necessary regulatory approvals, we intend to initially cultivate hemp for the purpose of extracting CBD. Bridge Farm will serve as a hub for our global CBD business as we will leverage its competitive advantages to provide high-quality CBD products from a traceable supply chain that retailers and consumers trust. We are in discussions with many of Bridge Farm's existing retail partners to sell our branded CBD products throughout the UK, the rest of Europe, and beyond.

Another significant step in our growth strategy was secure and worldwide rights -- including copyrights and trademarks -- to a portfolio of brand names, designs, domain names, and other intellectual property associated with Top Leaf and BC Weed Co. Top Leaf and BC Weed Co. are recognized premium cannabis brands known for award-winning cultivars by loyal consumers. The Sweet J, previously called Sweet Jesus strain, won the Gold Sativa Flower Award at a recent High Times Cannabis Cup. Strawberry Cream, previously named Voodoo Child, won second place for Hybrid Flower at the same competition. We are delighted to bring these high profile brands into the Sundial portfolio and are confident they will serve premium cannabis consumers who are looking for exceptional quality.

The premium nature of Top Leaf and BC Weed Co. products will drive improved margins and profitability as we roll out increasing number of SKUs under these brands in the coming months. We expect to launch our first Top Leaf product at the end of this quarter. We then plan to produce and commercialize our BC Weed Co. products from our third Canadian facility in Merritt, British Columbia, upon completion of construction and licensing. We are currently scaling production of multiple new strains to commercial quantities and continue to cultivate new strains on an ongoing basis to continue to penetrate and capitalize on the growth in the Play recreational cannabis market.

Moving to medical cannabis, which we call Heal, we acquired a 50% interest in a company called Pathway Rx. Pathway Rx uses advanced technology and an extensive library of cannabis strains to identify and customize treatments for symptoms associated with a wide range of medical conditions. In the future we intend to leverage Pathway Rx's cannabis strains to develop cannabis-based pharmaceutical drugs. We're also leveraging partnerships with leading research institutions, including the University of Saskatchewan's Cannabinoid Research Initiative of Saskatchewan and the University of Calgary's Cumming School of Medicine to facilitate a research-informed approach to identify and develop cannabis strains for medical use.

Before I hand it over to our CFO, Jim, to discuss our financial Q2 results in greater detail, I am happy to highlight that we generated over CAD20 million of gross revenue and a narrow adjusted EBITDA loss of only approximately CAD500,000 for the second quarter. With that I would like to hand it over to Jim to walk you through our detailed financial results.

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Jim Keough, Sundial Growers Inc. - CFO [4]

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Thanks, Torsten. Good morning and thank you for joining us on our conference call this morning. We are very proud of our Q2 2019 financial results. Given that we only started selling our products during the first quarter of this year, I'll refer to the comparable period as Q1 2019 unless I indicate otherwise.

Our Q2 results demonstrate our ability to scale our production and successfully market our products while maintaining cost discipline. For the second quarter of 2019, we reported gross revenues of CAD20.3 million, representing a nearly twelve-fold increase from CAD1.7 million in gross revenues for the first quarter.

In total we harvested 9,551 kg of dry flower and trim in the second quarter, and we sold 4,741 kg of product. This represents a significant increase from the first quarter of 2019, during which we harvested 1,896 kg and sold 323 kg of product.

The majority of our sales were to other licensed producers in both the first and second quarters of 2019, as we just launched our Sundial-branded product Zen Berry into the market earlier this year. As we increase sales of our Sundial, Top Leaf, and BC Weed Co. brands into the adult use or Play market, we expect the percentage of our sales to other licensed producers to decrease through the remainder of 2019 and become a minority of our sales in the future.

On average, net selling price in the second quarter was CAD4.07 per gram as compared to CAD4.64 program in the prior quarter. This included bulk sales of trim at a lower price point. We continue to strive to optimize our revenue and gross profit mix. The addition of new provincial boards, including the Ontario agreement which Torsten mentioned earlier, will diversify and add flexibility to our portfolio.

Cost of sales during the second quarter totaled CAD10.4 million or CAD2.20 per gram. This compares to CAD0.8 million or CAD2.41 per gram in the first quarter of 2019. Cost of sales per gram decreased through efficiency gains and economies of scale as production capacity increased. We expect this trend to continue as we increase production capacity and continue to focus on cost optimization and control.

For the second quarter, gross margin before fair value adjustments was CAD8.9 million, representing 46% of net sales. This compares to gross margin before fair value adjustments of CAD0.7 million or 48% of net sales for the first quarter of this year.

Adjusted EBITDA for the second quarter of 2019 was effectively at a breakeven level, coming in at a modest loss of less than CAD0.5 million. On a comparable basis we reported an adjusted EBITDA loss of CAD5.5 million in the first quarter. We continue to move towards sustainable profitability.

I would like to point out that, as Torsten spoke to in his remarks, we added be Top Leaf and BC Weed Co. brands to our portfolio through the Sun 8 transaction in the second quarter. Research and development costs associated with this transaction amounted to a one-time CAD1.5 million expenditure during the quarter, which is included in our adjusted EBITDA. It is important to note that without this charge, our adjusted EBITDA would have been over CAD1 million. We expect our research and development costs to be lower than this on a quarterly go-forward basis.

From a capital spending point of view, we continued the buildout of our flagship Olds facility. Additions to property, plant, and equipment in the second quarter amounted to CAD33 million as compared to CAD30 million in the first quarter of 2019. For the second quarter, the bulk of the expenditures were directed toward the construction of pods 4 and 5 at our Olds facility. We continue to expect pod 4 to be built and licensed by the end of 2019 and pod 5 by the end of Q1 2020.

In addition, we expect to complete the construction of our people, processing, and packaging facility in the fourth quarter of this year. The initial phase of the construction of the Merritt facility in British Columbia has also begun.

Turning to our liquidity and capital resources, our balance sheet strengthened considerably during the quarter. We completed two financings during the quarter and our IPO subsequent to June 30. Let me start with our initial public offering. On August 6, 2019, we successfully closed our IPO of 11 million shares at a price of USD13 per common share, raising gross proceeds of USD143 million. This equated to approximately CAD170 million of net proceeds. These proceeds will be used for the construction, expansion, and transition of our cultivation and processing facilities in addition to ongoing capital expenditure requirements to maintain and grow our business and for acquisitions and general corporate purposes.

Additionally, in May 2019 we closed a private placement offering of 8% convertible notes, raising approximately CAD93 million of gross proceeds. We also entered into a term debt facility of just under CAD160 million on June 27, 2019. The first tranche of the facility, CAD115 million, was used to fund the acquisition of Bridge Farm Group and repay their outstanding debt. The second tranche of approximately CAD45 million remains available to the Company upon satisfaction of certain conditions precedent. At quarter end and prior to the proceeds from the IPO, we have unrestricted cash and cash equivalents of approximately CAD38 million; and our net debt position stood at approximately CAD130 million.

Overall the combination of these financings has strengthened our balance sheet and positioned the Company to capitalize on organic growth opportunities as well as accretive acquisitions. We have achieved a lot over the first half of 2019. As always, we remain diligent in allocating capital to our highest value-adding priorities and are focused on cost discipline and growing sustainable profitability for the long term. Now I invite Torsten to provide some closing remarks.

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Torsten Kuenzlen, Sundial Growers Inc. - CEO [5]

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In conclusion, I'm proud of what we have achieved to date here at Sundial. We believe we are at the forefront of an industry where we can create significant value over time. We will continue to take a prudent approach to deploying capital, and therefore we will be allocating capital to initiatives that offer the best risk-adjusted returns for our shareholders.

Given our go-to-market strategy and our strengthened balance sheet, we believe we will execute on our organic growth opportunities and participate in the consolidation of this fast-growing global industry. I am proud of our Sundial employees for their continued support and the results they are helping us achieve. With that, I would like to turn it over to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Vivien Azer, Cowen.

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Vivien Azer, Cowen & Co. - Analyst [2]

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So my first question is around your price realization in the quarter, please. So -- a little bit surprising to see the sequential decline in your average selling price program. Fully understand the negative mix that you're getting from trim. Could you guys just elaborate on the pricing you are getting between the Sundial brand at wholesale versus trim, so that we can think about how to model your ASPs appropriately going forward? Thanks.

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Jim Keough, Sundial Growers Inc. - CFO [3]

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The average price that we have for provincial boards -- the gross price for the 3 months ended June 30 was about CAD6.52. We also sold LP to LP for about CAD4.50, and then we had some trim that was sold at about CAD2.25.

The decrease in the price is really related to the mix that we had over the first quarter and compared to the second quarter. In the first quarter we had a larger relative percentage of provincial board sales and no trim sales. So really the entire shift is related to mix. But the provincial board price remains strong, and our future supplies to provincial boards will remain strong and improve.

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Vivien Azer, Cowen & Co. - Analyst [4]

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That's very helpful, yes. CAD6.50 is a much better number. Will you guys be disclosing your mix between trim LP to LP and then provincial wholesale so we can think about how to model that out?

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Jim Keough, Sundial Growers Inc. - CFO [5]

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We certainly can go through that discussion in detail. I think that it's -- I mean, clearly it's -- we're going to continue to have a majority of our sales in the next quarter LP to LP, and then we will continue to build into the provincial board channel.

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Vivien Azer, Cowen & Co. - Analyst [6]

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And then what point do you think that that tapers off? You noted in your prepared remarks that ultimately that goes away. Over what time horizon should we think about that?

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Jim Keough, Sundial Growers Inc. - CFO [7]

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We will continue through 2019 to have majority of sales LP to LP, and then it will begin to taper off next year.

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Vivien Azer, Cowen & Co. - Analyst [8]

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Okay, that's great. And in your press release and prepared remarks, you noted new products hitting the market in the coming weeks and months. How should we think about the timing for Top Leaf and BC Weed Co. specifically? Thanks.

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Unidentified Company Representative [9]

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So we've already begun to cultivate brands for -- or products for Top Leaf. We expect that the first ones will come in the second half of 2019, hit the market, but we've begun cultivating multiple strains for the Top Leaf brand. The BC Weed Co. brand will come to market as soon as we receive license for our BC facility in Merritt.

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Vivien Azer, Cowen & Co. - Analyst [10]

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Terrific. Just on Top Leaf, one last one: have you already had discussions with the provincial boards in terms of getting shelf space for those offerings? And if so, what kind of pricing should we expect? Thanks.

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Jim Keough, Sundial Growers Inc. - CFO [11]

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Yes, we have had lots of conversations with our provincial board partners. I can tell you the feedback has been extremely optimistic about it. Pricing is certainly going to be more accretive than Sundial, which is great.

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Vivien Azer, Cowen & Co. - Analyst [12]

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Terrific.

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Operator [13]

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Tamy Chen, BMO Capital Markets.

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Tamy Chen, BMO Capital Markets - Analyst [14]

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Good morning. My first question is -- I just wanted to make sure I heard this right, that for pod 5, that you are anticipating it to be built and licensed -- did you say the end of 2020? I just wanted to make sure I heard that.

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Torsten Kuenzlen, Sundial Growers Inc. - CEO [15]

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No, so that's end of 2019. So both pod 4 and 5, each with 20 additional grow rooms, will be -- are expected to be ready with construction and license, and starting to grow this year.

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Tamy Chen, BMO Capital Markets - Analyst [16]

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Okay, thanks. I'm glad I checked that.

My next question is -- I just wanted to get a better understanding of how we should think about your product rollouts in Ontario and some of the other provinces outside of Alberta the rest of this year. Is it just a function of you are increasing not only the cultivation, but your processing throughput and packaging? Or are you also making some sort of volume allocation decisions at this point because you're trying to build extract inventory heading into the new form factors as well?

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Torsten Kuenzlen, Sundial Growers Inc. - CEO [17]

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It's a combination of different factors. As you know, what we have ensured is continuity of supply of our existing SKUs to our existing provincial boards and retailers in those provinces. As we build up our capacity and we increase the growth of the new strains for the Top Leaf brand, we will sequentially roll out those SKUs to the additional provincial boards. We believe we will have enough product for the new form factors to continue to expand across the country to provinces as well as roll out additional SKUs under the Sundial brand and then under the Top Leaf brand.

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Tamy Chen, BMO Capital Markets - Analyst [18]

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Okay, thanks. And if I may, just one more. Just wanted to get a bit of color on OpEx side. I noticed that in Q1, I think sales and marketing was more in the CAD5 million range, while G&A was more in the CAD1.2 million range. But the quantities of those two line items seem to have done a reverse in Q2, if I'm looking at it right, so I just wanted to understand what was going on there.

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Jim Keough, Sundial Growers Inc. - CFO [19]

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We are seeing continued ramp of costs for G&A and for sales and admin. I think we are starting to plateau now as we're building out our head office and starting to see the G&A costs come to a stabilized level. But we will, as we roll out to the other boards, begin to ramp up more on the SG&A side as we move forward.

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Tamy Chen, BMO Capital Markets - Analyst [20]

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Okay, and sorry, I've got just one more quickly. On the Bridge Farm side, I know there's a couple of licenses you're waiting for before you can start really converting and growing hemp at Bridge Farm's facilities. I know there was also discussion or plans to have, in the interim, sourcing third-party CBD isolates. Can you give an update on that? Have you identified a source for that?

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Torsten Kuenzlen, Sundial Growers Inc. - CEO [21]

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We are working with a UK team. Actually, I'm going to fly over there today on the details of that. Initially the plan was to use our own -- produce CBD right from the beginning. In our conversations with the retail partners, they are very keen to come to market early, as we are looking through all alternatives of accelerating that, including potentially sourcing trusted CBD in the beginning and producing with that brought-in CBD until our own production is fully up and running. Those plans are advancing well, and we are in conversations with the retailers on the product formats and the timing for those introductions.

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Tamy Chen, BMO Capital Markets - Analyst [22]

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Okay, thanks. That's it for me.

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Operator [23]

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Doug Miehm, RBC Capital Markets.

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Doug Miehm, RBC Capital Markets - Analyst [24]

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Good morning. First question has to do with the number of kilograms that you're able to harvest. It looks like it's grown from around 63 kg per harvest to 102 in the most recent quarter. My first question has to do with the number of rooms, the average number of rooms in each of those quarters that you had running. What were they?

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Torsten Kuenzlen, Sundial Growers Inc. - CEO [25]

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Right now as we sit here, we have 77 revenue-generating flowering rooms. There are other rooms in which we have our clones and we have our [veg] plants, we do all our R&D. But the revenue-generating rooms that flower for sale are 77.

Three of those are in our Rocky View facility, which is mostly R&D, and that's where we scale up our clones. 74 of those rooms are in our flagship facility in Olds. As you recall, the 74 rooms are spread over four so-called pods. Each of our pods has 20 identical grow rooms. So three of those pods have 20 rooms, and we have one smaller pod with 14 rooms. So that's the 74.

And you will have seen the press release recently where we announced that we got those additional 34 rooms, and that's what's driving the increased harvest numbers. Obviously, that is multiplied by the yield that we are getting per square foot. That's where our Olds facility is really beginning to show its strength. So the yields are continuing to increase, and we're very encouraged by the numbers we are seeing.

As we dial in the rooms, as we use them for a second, third, and fourth time, those room conditions get even better for the strains, and therefore the harvests improve even more. So it's the number of rooms times the increased yields that's driving the additional grammage, which in turn drives the revenue.

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Doug Miehm, RBC Capital Markets - Analyst [26]

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Yes, yes. So I was just trying to figure out how many rooms were in operation in Q1 and Q2.

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Torsten Kuenzlen, Sundial Growers Inc. - CEO [27]

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We need to look at the specifics. So we had 40 rooms in operation in quarter 2, and 74 of them in operations for Q2 -- not for all of quarter 2. So the timing within the quarter, then, depends; and obviously we need about 60 days to get a grow through -- start to finish. So there's a bit of timing that lags there.

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Doug Miehm, RBC Capital Markets - Analyst [28]

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Okay, perfect. Can you talk about seasonality in the Bridge Farm business? What has it looked like historically, and what are the implications of that?

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Torsten Kuenzlen, Sundial Growers Inc. - CEO [29]

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Yes, so the Bridge Farm business traditionally had a bit of seasonality -- in particular, quarter 2. So as they sold their budding plants to consumers in the spring, that's where their peak was.

And one of the reasons for actually getting into the cannabis business and growing hemp is that in the shorter seasons, so in the other quarters where demand is a little bit lower, gives them an opportunity to fully leverage the capacity during those times to create CBD. So it really overall increases the capacity utilization of the facility.

If you look at the rest of the quarters there, they are somewhat even. Quarter 3 may be a little bit lower than the others, even this bit of an uptick in quarter 4 at the end, with the Christmas flower poinsettias that are grown there. So probably Q2 is stronger than Q1 and Q4, and Q3 probably the one that has the lowest seasonality. You will see us use that capacity, then, to grow CBD hemp in those facilities during those times.

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Doug Miehm, RBC Capital Markets - Analyst [30]

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Okay, perfect. And last question just has to do with this, I guess, one-time R&D charge, the CAD1.5 million. Can you tell me how that qualifies as R&D, and why it is one time, and that sort of stuff? Because that does make your numbers look a little bit better, relative to the CAD0.5 million, of course.

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Jim Keough, Sundial Growers Inc. - CFO [31]

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Sure, Doug. So that was part of an acquisition of Pathway Rx that we -- a company that we acquired 50% interest of during the quarter. And under that agreement, we were required to incur CAD1.5 million of -- roughly CAD1.5 million of expenditures for consulting services that they did for us related to R&D.

So when we made this acquisition with Sun 8, when we did that acquisition, it's really a one-time kind of expenditure. We will incur R&D on an ongoing basis, but it will never arise in that manner where it comes through an acquisition. So that's why we refer to that Sun 8 -- those Sun 8 costs as sort of a one-time cost, and why I tried to emphasize that in terms of looking at our adjusted EBITDA, that if those had not been included, that we would have been positive.

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Doug Miehm, RBC Capital Markets - Analyst [32]

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Okay, thanks very much.

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Operator [33]

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Kate Grafstein, Barclays.

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Kate Grafstein, Barclays - Analyst [34]

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I was hoping if maybe you could touch a little bit on your rationale for entering the Europe CBD market first before maybe entering the US, and just more broadly what role you expect M&A to play in your international expansion plans. Thank you.

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Torsten Kuenzlen, Sundial Growers Inc. - CEO [35]

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So when we mapped out the future of our cannabis market globally, the Euromonitor data that some of you might have seen, which indicated that by 2025, Europe actually is projected to have the highest cannabis sales of any continent. As we looked at the United States, obviously there's a lot of fragmentation there, and we saw a terrific opportunity to jump on the bandwagon and get first-mover advantage in the UK.

The Bridge Farm acquisition in particular was attractive in terms of the quality of the product, the trusted customer supply chain. Some of the retailers that operate in the UK also operate in the United States. So as we bring our CBD products, including our Sundial Natural Brands, to Canada and to the UK, that obviously sets us up well to test those products, confirm the validity, and then make a strong point for US retailers ultimately to also bring those to the US. That's why we will prioritize the UK or Europe in the first instance here.

In terms of M&A, we are very keen to continue to align our strategic complexity with our capability to execute. So you will see us do a smaller number and then a decisive number of larger M&A, if and when the opportunity is right. Right now we are very focused on continuing to drive our Canadian business and get the share here across the country that we intend.

And we've just got the keys and partnered with our new Bridge Farm colleagues here to really get on top of the UK business, continue to drive the legacy plant business, develop the plans to bring the products to market on the CBD front here next year. And from there I think the next focus will indeed be on the United States for us. There's opportunities, of course, in parts of Asia as well, Latin America, that we will look at. And M&A will be a part of the expansion strategy in Canada. We might look at some complementary M&A in the UK. And then ultimately we'll look at the US and internationally as well and use M&A as a component of our growth, together with some organic growth that we think we can generate internally.

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Operator [36]

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Bill Papanastasiou, Canaccord Genuity.

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Bill Papanastasiou, Canaccord Genuity - Analyst [37]

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Good morning. I just wanted to ask a quick question on the Company's strategy for cannabis 2.0. It seems like you guys have CAD17.5 million in inventory. I'm wondering how you guys are stockpiling this in anticipation of the derivatives market. And perhaps you can shed some color in terms of what products you guys will be targeting and whether you will be able to bring these to market right when the derivatives market opens. Thanks.

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Ryan Hellard, Sundial Growers Inc. - Chief Experience Officer [38]

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It is Ryan Hellard, Chief Experience Officer. We have begun to use parts of that inventory to begin to develop inventory for phase 2. So we've begun the extraction and the production of the base oils, which will then transfer into the future products such as topicals and vape cartridges. So we have already begun to move through that inventory as we begin to prepare finished good inventory for the release of those phase 2 products. And we will continue to do that moving through the lower value flower products, including shake, over the next two quarters.

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Bill Papanastasiou, Canaccord Genuity - Analyst [39]

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Okay, great. Thanks. One last question. So with the acquisition of Bridge Farm, the Company has entered Europe, and you have plans to go to be selling CBD. Per your MD&A, it says that the Homestead facility may be converted so that you can also be growing high THC cannabis. I was wondering if you can speak to your strategy for entering international medical marijuana markets.

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Torsten Kuenzlen, Sundial Growers Inc. - CEO [40]

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Indeed. So we will be able -- with the right licenses in place, obviously, and all the permits -- to grow medical cannabis in that facility as well as in our facility here over time. We think about the vectors of growth for us that we call Heal, Help, and Play, Heal being medical cannabis. Obviously we have plans to be a significant player in that market. Our Pathway Rx acquisition very much supports that, together with the research initiatives in the clinical trials that we've started here. So we are very much looking forward to leveraging both of our facilities to produce high-quality medical cannabis and be a significant player in that market as well.

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Bill Papanastasiou, Canaccord Genuity - Analyst [41]

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Okay, great. Sorry, I just have one more question. With having shipped your first batch to the OCS, perhaps you can speak to your experiences of maneuvering the provincial channels. Have you faced a lot of difficulty? Just trying to gain some color on that. Thanks.

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Andrew Stordeur, Sundial Growers Inc. - President of Canadian Operations [42]

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Hi, it is Andrew Stordeur here, President in Canada. I think the provincial boards have been really receptive of where we've positioned Sundial, as we launched that brand first. I think it speaks to the consumer needs face that we are going after. And certainly Top Leaf has been well received as well.

So I think for the most part, you will see us expand into all the Western provinces, and we certainly have aspirations to move across -- in 2020 across Canada. So overall well received, and we anticipate the momentum continuing.

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Bill Papanastasiou, Canaccord Genuity - Analyst [43]

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Okay, thanks very much, guys.

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Operator [44]

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This concludes the question-and-answer session. I would like to turn the conference back over to Torsten Kuenzlen for closing remarks.

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Torsten Kuenzlen, Sundial Growers Inc. - CEO [45]

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Thank you, everyone, for joining us here for our inaugural earnings call. Excited to be partnering with you here as we move forward. Look forward to sharing the exciting progress we're expecting in quarter 3, and look forward to the dialogue with all of you.

Appreciate your time and interest -- for many of you it is early in the morning -- and look forward to our next interactions. Thank you. Bye-bye.

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Operator [46]

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