[SNDL Q&A] Will the lack of profitability be a problem for SNDL?

This article is a script from the Q&A session of Sundial Growers's earnings call on March 18. In order to facilitate reading, we have made appropriate cuts. If you want to know more details, you can click the link provided below to re-watch the earnings call.

Q: Why the ongoing writedowns, what are they a result of? Is it just ongoing market pricing changes and resulting in you taking continued writedowns?
A: First, we see this historic performance as unacceptable. And with the change in consumer preferences and this potency-chasing behavior that we've witnessed, by the end of the year, a product that even at 20% potency would be less liquid and be very difficult to move through retail. So we've been making aggressive changes to improve outcomes and ensure that we're delivering and delighting consumers. And that has led to us having certain product that needed to be impaired from an accounting perspective to the extent that our terpene profiles and potency on-average harvest increase as they have, those writedowns should diminish substantially. You also have pricing impacting that dynamic as a lever. And as you well know, the value segment is really on its way to effectively sort of blocking out the sun in the space, north of 50% of the industry in Canada is in the buy segment. And we continue on a weekly basis to see prices dropping.

Q: How much longer do you need to continue to kind of -- that your cultivation practices dial in that data-driven approach to actually really scale your revenues?
A: Our focus in 2020 was to make that transition to branded sales versus wholesale. We -- 75% of our total revenue mix was in branded versus just 20% in 2019. Not all revenue is created equally. If I was to kind of point you in a direction around how we're thinking about it, is our branded product sales grew exponentially, actually by 410% when you think about 2019 versus 2020. That's solid. And we're seeing the benefits of that from penetrating the market. Not all revenue is created equally. So we've got to be really mindful of not getting into that rat race when it comes to price compression and contributing to the consistent price deflation that we're seeing. So we're going to continue to stay focused on the premium segment, the core segment. We've also significantly invested in our in-house sales breadth of coverage. Foundational to that is cultivation excellence, and we feel pretty confident about that.

Q: Do you expect for the next quarter, is this a similar revenue mix here. Or do you expect, for example, vapes to increase share or decrease for that matter?
A: You're right to say, from a mix standpoint, it is accretive for us. Again, vape is like any other segments we're in. It's facing a lot of new industry players and they're differentiating by price. And I think that's going to create a bit of a headwind for us in regards to how we continue to compete at the prices and the value equation for the consumer. We do have some very exciting innovation that we're looking to launch in 2021 in the vape segments. That will be line primarily with Top Leaf and Sundial, and we're currently in two formats of extraction on that vape, which is ethanol and CO2. Certainly on the hydrocarbon side to provide further differentiation, which should drive better value for consumers and obviously be accretive to our margin mix.