SNDL Inc.

Good morning and welcome to SNDL's second quarter 2024 financial results conference call. This morning, SNDL issued a press release announcing their financial results for the 2024 second quarter ended on June 30th, 2024. This press release is available on the company's website at SNDL.com and filed on Edgar and Cedar as well. This webcast's The webcast replay of the conference call will also be available on the SNDL.com website. SNDL has also posted a supplemental investor presentation. In addition to the conference call presentation, we will be reviewing today on its SNDL.com website. Presenting on this morning's call, we have Zach George, Chief Executive Officer, and Alberto Peredero, Chief Financial 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 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 CEDAR 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. Please go ahead.

Welcome to S&DL's Q2 2024 Financial and Operational Results Conference call. We are pleased to see that the second quarter confirms the increased profitability we reported in the first quarter and material progress on our path of continuous improvement. We maintain strong momentum in our cannabis segments, reporting consistent revenue improvement in cannabis over the last 10 quarters. While we noticed a slowdown in revenue from our liquor segment, we still posted greater margins and greater gross profit dollars on a year-over-year basis, and we have additional tools at our disposal to battle through this volatility. We are pleased to report an all-time record gross margin of 25.5% with all segments contributing to gross profit and gross margin growth compared to the same quarter of 2023. Our cannabis operations segment achieved positive gross profit for the second quarter in a row. Operating income also showcased a significant improvement, not only on a consolidated basis, but also supported by growth in all segments, driven by gross margin improvements and strong cost discipline in SG&A management. Importantly, none of these results include the benefit of the recently announced plan to reduce corporate overhead by more than $20 million, which we expect to begin to impact results in Q3. S&DL remains steadfast in its commitment to driving long-term profitable growth. We continue to grow our substantial retail platform are making significant strides towards manufacturing excellence and are involved in four different restructuring processes, two on each side of the border, that may result in accretive M&A or some other type of liquidity event. Our unique approach to the deployment of credit capital is also likely to result in the significant repatriation of cash. We currently expect approximately $130 million in principal repayments to occur in the second half of this year with about 90 million of that having been received in the last two weeks from both Ascend and Jushi. It is also worth noting that this quarter we have provided transparency and an update on our material credit exposures in Canada and the U.S. This information can be found in the investor presentation available on our website. I also want to provide some context for the delay in closing our U.S. restructuring efforts under Sunstream. It is clear from our dealings with local regulators across Canada and the US that the industry continues to face many regulatory obstacles, bureaucracy, and inefficiency. From the selective and inconsistent enforcement of excise taxes in Canada, which effectively penalizes participants who pay all of their excise obligations, to provincial regulatory officials leaking confidential information to competitors, or Florida state regulators recently delaying the parallel reorganization, being, quote, unable to locate parts of our documentation that were submitted months ago. There are multiple examples of the need for more efficient professional regulatory bodies. At SNDL, we have the skill, resources, and determination to overcome all of these challenges. We will persevere in our efforts, partnering with regulatory authorities to continue advancing this agenda and improving the regulatory framework. We expect to provide further updates on our U.S. restructuring in the next 90 days or sooner if and when we have clarity. I will now pass the call to Alberto for a deeper dive into our Q2 financial results.

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 Q2 2024 financial highlights, we continue to see significant improvements in operating income and free cash flow, as in the first quarter, despite the revenue headwinds impacting our liquor sector. Net revenue in the second quarter of 2024 reached $228.1 million, a 3.8 million or 1.6% decline year-on-year. This decline was driven by our liquor retail segment, as our combined cannabis business posted a healthy 9.2% growth. Gross profits of 58.2 million represent a 6.2 million increase or 12% growth year-on-year, and a material 310 basis points of gross margin improvement, with positive contributions from all segments. This translates into another quarter of record gross margin reaching 25.5%. As in the first quarter, the second quarter gross margin increased. Income contributions from our investment segment and discipline management of corporate overhead led to significant year-on-year improvements in adjusted operating income and free cash flow of 82% and 70% respectively. These two metrics were yet again close to breakeven in the quarter. As mentioned last quarter, we only adjust operating income for restructuring, restructuring-related write-offs, and intangible asset impairments. Specifically, in the second quarter of 2024, we adjusted operating income by removing $0.2 million expenses related to restructuring charges. While in the same quarter of 2023, there was an adjustment to remove a $4 million restructuring expense. When looking at the quarterly historical tracking of main financial KPIs, we noticed a quarter-on-quarter improvement in net revenue, a 15% growth between the second and the first quarters of 2024, to be precise, although still declining compared to the same quarter of 2023. Where we're seeing significant improvements both quarter-on-quarter and compared to the previous years is in gross profits. where the second quarter represents a 15% quarter-on-quarter increase and a 12% growth compared to the same quarter of 2023. Both adjusted operating income and free cash flow are very close to break-even, at very similar levels when compared to the first quarter of 2024. Clearly, the first half of 2024 represents a significant improvement compared to the same half in previous years, and the second quarter is a confirmation of the profitability improvement we posted in the previous quarter. As we look at the contributions from each segment, we can see how the net revenue decline in liquor is impacting the overall consolidated results, despite the good performance from cannabis. When we add the $4.2 million net revenue growth from cannabis retail, the $4 million from cannabis operations, and the small negative of $0.9 million in the corporate segment related to the revenue elimination for the cannabis operations sales into our own retail, we come to a total of 7.3 million or 9.2% growth in cannabis. In terms of gross profit, all segments are contributing to growth. Even liquor retail shows positive gross profit in the quarter, despite the softness in revenue and the cannabis operation segments is showing a strong 4.4 million improvement as a result of our productivity initiatives. Altogether, adding up to 6.3 million or 12% growth in gross profits. On the next page, we're seeing a material improvement in adjusted operating income driven by cannabis operations, as well as our investment segment. The $10 million contribution from our investment segment is a combination of $3.2 million in investment income and a $5.2 million improvement in asset valuation from our downstream portfolio in the second quarter of 2024, compared to $1.5 million losses in the same period of 2023. Free cash flow also shows a significant improvement in Q2 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, partly offset by lapping one-time cash proceeds in the second quarter of 2023 related to asset divestments. As we did last quarter, we would like to share some insights into the drivers of free cash flow in the second quarter. Both quarters were similar in terms of actual reported free cash flow, with a small improvement from negative 6.4 million in Q1 to negative 5.6 million in Q2. There are, however, some differences in the composition of these numbers. Net income, non-cash outbacks, and capex, at least payments, are very similar in both quarters. The differences are in the working capital components. In the first quarter of 2024, we reported an inventory increase of 5.8 million, while in the second quarter, we reported a reduction of 2.3 million. This is in contrast with the material historical increases in inventory during the first semester of previous years, as illustrated in the right-hand side graph of page 7. Clear evidence of the progress made by our operational teams in optimizing inventory levels. At the same time, we're seeing the opposite dynamic in the other working capital changes that were impacted in the second quarter of 2024 by the annual payments of our management incentive and insurance premiums. These two annual elements account for cash outflows of $10 million in the second quarter. We're encouraged by these results in the second quarter as it keeps us on track to demonstrate our ability to deliver a positive free cash flow for the full year of 2024. So into each one of the three operating segments, let's start with liquor breakdown. Net revenue in the second quarter of 2024 for this segment was $114.6 million, a decline of $11 million or 7% compared to the prior year. This decline was driven by a 15-inch eastern timing between March and April when compared to 2023, but mostly due to market slowdown as you're probably seeing being reported by most liquor manufacturers in North America. We believe this is not indicative of the structural challenges in the industry, but due to short-term consumption dynamics. Despite these macro headwinds, we continue to expand gross margin, reaching 25.4% in the second quarter, an improvement of 210 basis points compared to last year. This was achieved through multiple initiatives, including a 10% growth of our margin accretive private label, procurement productivity, and data sales monetization. As a result of this margin expansion, this segment's gross profit and operating income deliver low single-digit growth versus the same quarter of 2023. Moving to cannabis retail, we saw net revenue in Q2 2024 of 76.1 million, which is a 6% increase versus Q2 2023, mainly driven by same-store sales growth of 2.4%, supported by double-digit growth in Ontario, as well as the expansion of our data sales program and new store openings. Data sales are the main factor contributing to the 60 basis points of gross margin improvement for this segment, enabling an 8.3% gross profit growth compared to Q2 2023. Adjusted operating income increased by 1.6 million, or 67% growth compared to the prior year, driven by the gross profit improvements. Finally, looking at our cannabis operations segment, this is where we see once more the largest improvement, both in terms of growth and profitability. In the second quarter of 2024, the segment delivered net revenue of $25 million, a 19% increase year-over-year. All of this growth is organic and driven by provision board and business-to-business distribution increases. As already reported in the first quarter, the biggest improvement from this segment is in profitability, driven by a holistic productivity program. In the second quarter of 2024, the segment posted positive gross profit of 3.2 million, an improvement of 4.4 million compared to Q2 2023. As a result, the gross margin of the segment improved from a negative 5.8 in Q2 2023 to a positive 12.7% in Q2 2024. Adjusted operating income was negative by $1.9 million, compared to a loss of $11 million in the prior year. The slightly negative number is mainly driven by a $1.3 million fixed asset impairment related to Senavis Legacy Facility. In summary, a solid quarter with record gross margin and a significant improvement in profitability and free cash flow compared to the previous year, and broadly in line with the improvements reported in the first quarter. Let's also keep in mind that at June 30, 2024, the company had $183 million of unrestricted cash, an additional $601 million in marketable securities and investments, and no outstanding debt. By thanking all our team members at SMDL for their passion and contributions to these results, I would like to pass the call back to Zach to share a few more operational highlights for the quarter.