SNDL Inc.

on generating results that showcase the benefits of our diversified strategy, a series of acquisitions, and modest organic growth. Revenue growth in our liquor retail segment includes the expansion of our private label program and the initial launch of our commercial data offerings. In cannabis retail, we saw a strong cash flow in the quarter and recently announced further enhancements to our retail network with an expansion into British Columbia. In our cannabis operations segment, we posted record unadjusted results. In fact, we are pleased to report both positive gross profit and operating income in our cannabis operations segment for the first time since the company's inception. This result validates the acquisition of Valens and the decision to exit non-competitive cultivation exposure. The successful integration of Valens over the last 15 months has been crucial to our progress and we are just starting to see the benefits of increased capacity utilization driven by the optionality of our platform and our approach to capital allocation. We believe that the future of the cannabis industry in Canada includes stabilized profits for the strongest licensed producers and manufacturers of products. Looking ahead, we are well positioned to further expand our retail network and enhance product distribution across Canada. We anticipate continued market consolidation and we are prepared to capitalize on select opportunities to strengthen our market presence. SMDL is optimistic about the slow tide of global regulatory reforms that create distinct opportunities in emerging markets such as Germany and Florida, where we have cannabis enterprise exposure. They're even seeing rational regulatory reform in more mature saturated markets like Alberta, Canada. Last week's exciting disclosure that the U.S. Drug and Enforcement Agency will reschedule cannabis as a schedule three controlled substance promises to improve the credit profile and free cash flow potential of U.S. cannabis operators with a material improvement in permissible tax deductions. This change improves the risk profile of our entire Sunstream portfolio, which has been written down over time to approximately 560 million, including positions that will be equitized in a structured manner compliant with NASDAQ requirements. Two days after it was reported that the DEA would move to reclassify cannabis, S&DL announced the completion of NASDAQ's review of its Sunstream USA structure, marking a significant milestone. The completion of this review creates a pathway to equitize U.S. credits currently under restructuring, positioning S&DL to become a leading global cannabis company. Based on first quarter 2024 revenue, If S&DL were to exercise its conversion rights upon U.S. federal legalization, S&DL's North American operations on a Sunstream USA pro forma inclusive outlook would potentially rank S&DL as a top five MSO on a North American basis. S&DL remains steadfast in its commitment to driving long-term, stabilized profitability. Following our first ever consecutive quarters of positive free cash flow in 2023, Our goal for 2024 is clear. We aim to generate positive free cash flow for the aggregate calendar year. First quarter results exceeded our expectations despite seasonal weakness. This outcome is encouraging and we remain confident in our path to improvement this year. Our goals imply new all-time records for the SMDL team and success in our mission to bring people together through exceptional products and experiences. I will now pass the call to Alberto for a deeper dive into our financial results for Q1 2024.

Thank you, Zach. I want to remind you all that amounts discussed today are denominated in Canadian dollars unless otherwise stated. Certain amounts referred to on this call are non-GAAP and non-IFRS measures. For definitions of these measures, please refer to SMDL's Management Discussion and Analysis document. Looking at our Q1 2024 financial highlights, there are good reflections of our three strategic priorities, growth, profitability, and people. Net revenue in the first quarter of 2024 reached 197.8 million, or 4% growth year-over-year. Growth was driven by our cannabis retail and operations segments, which posted a combined 9% growth, while liquor remained the same. Gross profit of $50.4 million represents a 55% growth year-over-year and an impressive 850 basis points of growth margin improvement, mainly driven by productivity improvements and other profitability initiatives that we'll be outlining later in this presentation. This growth margin improvement coupled with increases in our investment income and reduction in corporate overheads led to significant improvements in adjusted operating income and free cash flow. of 85% and 89% respective. These two metrics were close to break-even in the quarter, despite the anticipated seasonality. As you may have noticed, we have evolved the financial KPIs we're focusing on. We believe that focusing on operating income and free cash flow is a much better and more transparent way to monitor the financial performance of our business, in contrast with other metrics like adjusted EBITDA or adjusted free cash flow. For clarity, note that we only adjust operating income for restructuring, restructuring-related write-offs, and intangible asset impairments. Moving to the quarterly historical tracking of main financial KPIs, we see the improvement Q1 2024 represents, particularly in terms of profitability on free cash flow generation. When we look specifically at free cash flow, we can see clearly that the first half of the year tends to be lower than the second half, driven by revenue-facing and working capital building. In this context, it's encouraging to see that Q1 2024 is so close to breakeven and a significant improvement year over year. We will look at each segment in a few minutes, but it's good to see how each of them is contributing to our growth and profitability priorities. Starting with net revenue, its segment contributed to our growth, particularly our cannabis retail and cannabis operations segments. The small negative $0.6 million in the corporate segment is related to the revenue elimination for the cannabis operations sales into our home retail. As this amount is growing, so is the amount of revenue elimination. In terms of growth profits, all segments are contributing to growth. The cannabis operations segment is showing a significant $12.8 million improvement as a result of our productivity initiatives. This is clearly one of the key highlights in the quarter. I would also like to point out the gross profit growth from our retail segments, which are also seeing good improvement in margin as our profitability priority is embedded across the entire organization. Moving to adjusted operating income, we see how three-quarters of the improvements or $19.1 million, are driven by the cannabis operations segment. Liquor retail is also contributing with $4.1 million improvement, as well as our investment segment with $4.3 million improvement. In fact, our investment segment posted an operating income of $13.1 million in the quarter, mainly driven by improved valuations from our Sunstream asset. Cannabis retail, while delivering negative $1 million of operating income in the first quarter, is $1 million lower than Q1 2023, driven by a $2.5 million fixed asset impairment charge recorded in Q1 2024. Free cash flow also saw significant improvement in Q1 2024 versus the same period of 2023. As a result of our improvement in profitability, but also a more disciplined approach to working capital management. We believe it is important to understand the drivers of free cash flow in the first quarter. And in doing so, we need to put it in the context of our business seasonality. Coming out of positive reported free cash flow in the second half of 2023, the first quarter of 2024 shows a negative free cash flow of $6.4 million. We're encouraged by that result, which is ahead of our initial expectations for the quarter, as we know that it was impacted by both revenue and inventory seasonality. As you can see in the middle of the chart in the slide seven, the first quarter always has by far the lowest level of sales in the year, which obviously has an impact in the level of profitability for this quarter. At the same time, as we can see in the right-hand side of the page, we have historically seen retail inventory build up in the first half of the year, particularly in the first quarter, following a reduction in the second half. 2024 is no exception, although we have limited this inventory bill to only $5.8 million, a much smaller amount than in previous years. Within the pillar of profitability and financial discipline, one of our main goals for 2024 is to demonstrate our ability to deliver positive free cash for the year. The first quarter results gives us confidence we are on the right path to achieve this. Looking into the first quarter results for the three operating segments, I would like to start with liquor retail. Net revenue in the first quarter of 2024 was $116 million, stable versus the same period of 2023. This is a good result considering the headwinds the liquor industry is facing, with many of our competitors and manufacturers seeing revenue declines. I would like to highlight the profitability improvement of this segment. growth margin reached 25% in Q1, 2024, a 220 basis point improvement compared to Q1, 2023. It was achieved through multiple initiatives, including a 29% growth of our margin accreted private label, procurement productivity, and data sales monetization. As a result, this segment operating income delivered a positive 2.2 million, over 4 million improved members of the same quarter of 2023. Moving into cannabis retail, we saw net revenue in Q1 2024 of $71.3 million, which is a 6% increase versus Q1 2023, mainly driven by double-digit growth in Ontario, as well as the expansion of our data sales products. Data sales are the main factor contributing to the 230 basis points of gross margin improvement for this segment, enabling a 17% gross profit growth compared to Q1 2023. Operating income was negative $1 million, impacted by a $2.5 million fixed asset write-off, as previously mentioned. Finally, looking at our cannabis operations segment, this is where we see the largest and most noticeable improvements, both in terms of growth and profitability. In the first quarter of 2024, this segment delivered net revenues of $22.4 million, a 17% increase compared to Q1 2023. The highlight of this segment is clearly the improvement in profitability. Driven by an extensive productivity program, including the savings from the rationalization of our cultivation footprint, the segment posted positive gross profit of 3.2 million, an improvement of 12.7 million compared to Q1 2023. As a result, the gross margin of the segment improved from a negative 50% in Q1 2023 to a positive 14.4% in Q1 2024. And adjusted operating income was a positive $1.1 million compared to a loss of $18 million in the prior year. In summary, a very strong quarter with continuous revenue growth, record growth margin, and a significant improvement in profitability and free cash flow. We have an ambitious agenda in front of us to continue driving growth, improve profitability, and leverage what we believe is our biggest asset, our people. The first quarter of 2024 has been encouraging for our team, knowing we're in the right path. Let's also keep in mind that on March 31st, 2024, the company had $189 million of unrestricted cash, an additional $594 million in marketable securities and investments, and no outstanding debt. With this, I would like to pass the mic back to Zach to share a few more operational highlights for the quarter.

Thank you, Alberto. As we continue today's discussion, I want to reflect on the strategic priorities we set at the end of last year. We structured our approach around three core pillars, growth, profitability, and people. Each of these pillars is fundamental to our long-term success. As Alberto mentioned, we have clear, defined strategies within each to guide our actions and decisions. Starting with growth, our aim is to drive sustainable growth within our four market segments. In the first quarter of 2024, we've implemented several key strategies to enhance our market reach and deepen our operational capabilities. Through the first quarter, we opened a new spirit leaf store in the coveted resort community of Whistler, BC, and added a new wine and beyond store in Airdrie, one of the fastest growing communities in Alberta. As mentioned earlier, We also expect to expand our presence in the BC market through NOVA's acquisition of Dutch log retail locations. We grew our liquor private label program by adding new offerings, specifically in the value segment. And we continue to expand our innovations within our cannabis operations segment, and we'll be introducing approximately 30 new SKUs in the coming weeks. Moving on to profitability, our objective is clear. to achieve positive free cash flow for the aggregate 2024 calendar year. We have focused on optimizing our operations and reducing unnecessary expenditures and have established procurement efficiencies of approximately $10 million. We are currently in the midst of a strategic planning exercise that is expected to drive a further material reduction in corporate expenses. Through the closure of our facility in olds, we have achieved approximately $3 million in cost savings. We've also generated approximately $4 million in data licensing revenue this past quarter, both from our liquor and cannabis retail segments. We've made substantial progress in monitoring business performance and driving a culture of accountability. Looking forward, we are conducting a rigorous strategic planning exercise aimed at developing conviction around core competencies and capital priorities, as well as a further reduction of operating expenses. We believe these actions will significantly improve our financial performance in the second half of the year. Lastly, our people pillar is about fostering a performance culture and developing talent across our organization. This quarter, we launched several initiatives aimed at enhancing employee engagement and alignment. These include investment and retention and succession planning. We have rolled out our strategic priorities and core behaviors across the organization, ensuring unity. We've also launched a community engagement framework focused on mental and physical well-being. Our strategic priorities are not merely aspirations. They are actionable paths that we are pursuing with vigor. The progress we've made in the first quarter is a testament to our commitment to these goals. I am confident in our team's ability to maintain this momentum, and I look forward to sharing more about our achievements as the year progresses. We are excited about what lies ahead and are confident in our ability to deliver value to our investors and partners. Thank you for your continued support and belief in SMDL. I will now pass the call back to the operator for analyst questions.