SNDL Inc.

Good morning and welcome to SNDL's third quarter 2024 financial results conference call. This morning, SNDL issued a press release announcing their financial results for the 2024 third quarter ended on September 30, 2024. This press release is available on the company's website at sndl.com and filed on EDGAR and CDAR as well. 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 Paredero, 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 CDAR and EDGAR. Additionally, all financial figures mentioned are in Canadian dollars, unless otherwise indicated. We will now make prepared remarks, 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 FNDL's Q3 2024 Financial and Operational Results Conference Call. We are pleased to report robust revenue growth in our cannabis segments, a record-breaking gross margins, and positive free cash flow for the third quarter of 2024. Our cannabis segments continue to show strong momentum, achieving steady revenue gains for the 11th consecutive quarter. Despite weaker demand in our liquor segment, we delivered higher year-over-year margins and substantial growth in operating income for the segments. we achieved an all-time high gross margin of 26.6%, propelled by further margin expansion in liquor retail and significant improvement within our cannabis operations. Free cash flow was positive this quarter, supported by ongoing operational gains in gross margin and efficient working capital management. We remain on track to deliver positive free cash flow for the 2024 calendar year, meeting or even exceeding our guidance. This quarter, and in recent days, we launched several strategic initiatives that we expect to drive SMDL towards long-term sustainable profitability. These include a restructuring program aimed at reducing corporate overheads, enhancing organizational efficiency, and realizing annualized savings of more than $20 million. Additionally, we moved to privatize NOVA through the acquisition of the remaining outstanding minority equity interest, and just yesterday closed the acquisition of INDIVA, enabling us to emerge as the leader in the Canadian infused edibles category. Together, these actions are strengthening our foundation and expanding our potential for future growth. Our leadership team is working on a number of additional initiatives and investment opportunities that we are excited to share as they come to fruition in future periods. Our solid balance sheet serves as a beacon for future opportunities, enabling us to allocate capital thoughtfully across both organic and inorganic investments. In the third quarter, we increased our cash balances from $183 million on June 30th to $263 million on September 30th, 2024, and continue to have zero outstanding debt. We have not raised cash through the issuance of shares since 2021, and our share repurchase program became active subsequent to the end of the quarter.

I will now turn the call over to Alberto. 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 Q3 2024 financial highlights, we continue to see significant improvements in gross profit, gross margin, and free cash flow. Net revenue in the third quarter of 2024 reached $236.9 million, a marginal decline compared to the prior year. This decline was driven by our liquor retail segment, while our combined cannabis segments posted a healthy 8% growth. Growth profit of $63 million represents a 14.4 million increase, or 30% growth year over year, with a substantial 610 basis points improvement in growth margin. This translates into another quarter of record growth margin, reaching 26.6%. Despite the significant improvements in margin and continued optimization of operating expenses, adjusted operating income was negative $16.6 million, a slight decrease compared to the prior year. This was mainly driven by an unfavorable $13.4 million fair value adjustment from our equity-accounted investees in the quarter, compared to a $6.6 million revaluation in the same quarter of the prior year. It is important to note that we only adjust operating income for restructuring charges and intangible impairments, which in the third quarter were limited to a 1.9 million restructuring charge. If we were to exclude the volatility created by quarterly fair value adjustment to our equity accounted investees, the improvement in adjusted operating income compared to the same third quarter of the prior year would have been $19 million. Free cash flow was positive in the quarter at $9.2 million, bringing the year-to-date free cash flow to a negative $2.8 million. Warren pays to deliver positive free cash flow for the 2024 calendar year, in line with or ahead of guidance. Free cash flow in the quarter was lower than in the same period of prior year, driven by different management of phasing of retail inventory buildup throughout the year. as we will discuss in a few minutes. When examining the historical quarterly financial performance evolution, we clearly observe a few patterns. Net revenue in 2024 is relatively flat compared to 2023, as the strong growth in our cannabis segments is being offset by market softness in the larger legal segment. We also see a clear trend of profitability improvement, both in gross profit and adjusted operating income. The same applies to free cash flow, where there is a noticeable upward trend compared to previous years. Additionally, we observe a more muted seasonality effect, thanks to our disciplined approach to working capital management. 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 strong performance from cannabis. When we add the $5.6 million net revenue growth from cannabis retail, the $4.1 million from cannabis operations, and the negative $3.1 million in the corporate segment related to the revenue elimination from cannabis operations sales into our own retail, we arrive at a total of $6.5 million, or 8% growth in cannabis. In terms of gross profit, liquor retail shows a small decline of $0.3 million despite the larger revenue shortfall. Cannabis retail contributes to an improvement of $0.7 million, while cannabis operations is driving most of the growth, with an impressive $14 million improvement. The aggregate of all the segments adds up to $14.4 million, or 30% growth in gross profit. When looking at adjusted operating income, we can clearly see the significant step up in profitability driven by our operating segments. upset by the volatility of the fair value adjustment in our investment segment. Our corporate segment shows a small unfavorable variance of $1.4 million, driven by inflation and the different facing of one-time expenses, partly upset by restructuring productivity savings. Great cash flow is positive at $9.2 million in the third quarter of 2024. Although it is a reduction compared to the same quarter in the previous year, This reduction is driven by a different facing of inventory build-on between the quarters. We can see this more clearly on the next page. As we examine the drivers of free cash flow in the third quarter of 2024, we first notice the negative 19.3 million in net income, primarily driven by the fair value adjustment in our investment segment. Since this is a non-cash item in our P&L, it is offset by non-cash add-backs. which are higher in the third quarter compared to the previous two quarters for this reason. A benefit we saw in the third quarter was the collection of $10.7 million of accrued interest related to the repayment of the majority of asset and UC loans from such . This interest was previously recorded in our P&L as part of the net asset value of the investment segment. As the interest was collected, we see a positive impact on free cash flow. The repayment of the principal balance associated with these two loans while reported as an increase in cash is excluded from free cash flow calculation. The net change in inventory and other working capital is slightly positive at $0.9 million in the third quarter of 2024, with relatively small fluctuations between quarters. As we can see in the bar chart on the right of page seven, in 2024, we have significantly less volatility in terms of inventory seasonality buildup. In previous years, we had a large increase in the first quarter, a moderate increase in the second, and reductions in the second half of the year. In 2024, the buildup in the first half was much smaller, and as a result, the reduction in the second half will also be smaller. Let's now look at each of the three operating segments, starting with legal retail. Net revenue in the third quarter of 2024 for this segment was $144.6 million, a decline of $7.2 million, or 4.8% compared to the prior year. While the decline is smaller than what we saw in the second quarter, and revenue is growing quarter over quarter by $4 million, what is still impacted by the softness seen across North America. We continue to believe this is not a concern in terms of long-term growth potential for this segment. Despite this macro headwinds, we continue to expand growth margin, reaching 25.6% in the third quarter, an improvement of 100 basis points compared to last year. As a result of this margin expansion and efficiencies in the management of operating expenses, this segment's operating income delivered significant growth of $3.5 million, or 42.5% compared to the same quarter of 2023. Moving into cannabis retail, we saw net revenue in Q3 2024 of $81.1 million, a 7.4% increase compared to Q3 of 2023. This growth was mainly driven by SEM store sales growth of 2.3%, new store openings, and incremental revenue from our Dutch Love stores acquired earlier in the year. The growth margin of 25.5% represented a reduction of 100 basis points compared to the same period of last year, due to several strategic pricing decisions aimed at increasing the store traffic. Adapted operating income increased by $1 million, or 28.1%, compared to the prior year, driven by the gross profit improvement. Finally, our cannabis operations segment is once again showing the largest improvement, both in terms of growth and profitability. In the third quarter of 2024, this segment delivered net revenue growth of 19% year-over-year, reaching $25 million. All of this growth is organic and driven by increased provincial board and B2B distribution. By accelerating gross margin improvements through several productivity initiatives, the segment reached a new record of 21.2%, translated to $5.3 million in gross profit. This is a significant step up compared to last year and previous quarters. Adjusted operating income was negative $0.6 million, marking an improvement of close to $14 million compared to the same period last year. In summary, our cannabis business is experiencing strong growth, and we're driving significant improvements in profitability and class flow generation. We're on pace to deliver our guidance of positive free cash flow for the full year, marking an important step in contributing to raise the bar and realize our full potential. I would now like to pass the call back to Zach to share a few more operational highlights for the quarter.