SNDL Inc.

there will be a question and answer session. To participate, you will need to press star 11 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 11 again. Please be advised that today's conference is being recorded. Now it's my pleasure to turn the call over to Zach George. The floor is yours.

Good morning and welcome to S&DL's Q4 and full year 2024 financial and operational results conference call. 2024 has been a year of records for S&DL, and we are pleased to report record full year net revenue, gross profit, gross margin, as well as positive cash flow and free cash flow. Our cannabis segments continue to show strong momentum, achieving steady revenue gains for the 12th consecutive quarter, and we continue to grow well ahead of market averages. Our liquor segment revenue was impacted by a market slowdown, although we are proud of how our team managed to improve margins and cost efficiencies to deliver record profitability and cash flow growth. In fact, despite volume headwinds, our liquor segment has never performed better than under our stewardship. We achieved all-time high gross profit and gross margin for both the full year and the fourth quarter. driven by multiple productivity and cost optimization initiatives across all areas of the organization. It is worth mentioning the significant step up in margins and profitability from our cannabis operations segment that delivered four consecutive quarters of positive gross profit, ending the year delivering a fourth quarter gross margin of 27.2%. Free cash flow was positive this quarter, driving the company's first year of achieving positive free cash flow. We are pleased to have met our stated goal for the year, achieving a positive $9 million. This is the ultimate proof that our growth trajectory, coupled with operational and financial discipline, is a winning formula capable of delivering sustainable and improved value to our shareholders. During the last few months, we continued to announce additional strategic initiatives that we expect to drive SMDL towards long-term growth and incremental profitability. These include the privatization of NOVA through the acquisition of the remaining minority equity interest and the acquisition of INDIVA, which positions SNDL as the largest manufacturer of infused edibles in Canada. Additionally, we were happy to see the approval from the Florida Department of Health for the transfer of the parallel license, a key milestone to complete the restructuring process. We also acquired a 5.4% participation in high-tides equity, and reactivated our share repurchase program, retiring 10.8 million S&DL shares. And last but not least, we are announcing today our application for listing on the Canadian Stock Exchange, which will provide our shareholders additional flexibility and optionality as we continue to grow and evolve. Our balance sheet continues to be a key competitive advantage, enabling us to allocate capital thoughtfully across both organic and inorganic investments. We ended the year with $218 million in unrestricted cash and zero outstanding debt. Over to you, Alberto, to share more insights about our financial performance.

Thank you, Zach. I want to remind everyone that the amounts discussed today are denominated in Canadian dollars unless otherwise stated. Certain amounts referred to during this call are non-GAAP and non-IFRS measures. For definitions of these measures, please refer to SMDL's management discussion and analysis document. Reviewing our Q4 2024 financial highlights, we continue to see improvements in net revenue, gross profit, gross margin, and free cash flow. Net revenue in the fourth quarter of 2024 reached a record $257.7 million. a 3.7% increase compared to Q4 of last year. This was driven by a combined cannabis business growth of 16.5%, which included contributions from our recent India acquisition, partly upset by declines in our legal retail segment. Gross profit of $68.8 million reflects an $11.5 million increase, or 20% growth year-over-year, resulting in 360 basis point improvement in gross margin. This translates to another quarter of record gross margin reaching 26.7%. Adjusted operating income for the quarter was impacted by a $65.7 million non-cast negative fair value adjustment to our downstream investment, driven by increased market risk following the unfavorable Florida vote and lower operational performance from the invested companies. Excluding this impact, we would have delivered positive adjusted operating income for the first time in a quarter. highlighting our undeniable operational improvements. Free cash flow was positive for the quarter, reaching $11.6 million. This contributed to positive free cash flow for the full year, exceeding our guidance as mentioned by Zach. Our full year financial results show progress across all metrics year over year. Net revenue reached a record $920 million, representing 1.3% growth compared to the prior year. This was driven by our combined cannabis business growing a healthy 10.6%, partly upset by declines in our liquor segment. Gross profit reached 240 million, also a new record with a significant 26% growth compared to the prior year, resulting in a full year gross margin record of 26.1%, or 520 basis points improvement compared to 2023. Adjusted operating income, while positive when compared to 2023, shows the impact of the previously mentioned fourth quarter negative fair value adjustment. The biggest highlight is the positive $8.9 million free cash flow in 2024, exceeding our break-even guidance and representing a $70 million improvement compared to 2023. Our historical quarterly performance evolution shows a clear upward trend, indicative of our continuous focus on growth and efficiency improvements. The only anomaly is the Q4 2024 adjusted operating income. However, it is important to note that excluding the downstream fair value adjustment, the variable has turned positive for the quarter. Looking at the contributions from each segment to both Q4 and full year across our main financial KPIs, we can see how in both the fourth quarter and the full year, the net revenue decline in liquor is impacting the overall consolidated results. despite the strong performance from cannabis. The corporate segment is related to the revenue elimination for cannabis operation sales into our own retail. This revenue elimination increased as a result of our cannabis business growth. In terms of gross profit, liquor retail shows a marginal decline in the fourth quarter and positive growth in the full year, despite the larger revenue shortfall. Cannabis retail contributes with improvements in both the quarter and the year. Finally, cannabis operations drives most of the growth with an impressive $11 million improvement in Q4 and $42 million in the full year. All of these elements add up to a significant 20% and 26% growth in gross profit in Q4 and full year, respectively. When looking at adjusted operating income, we can see how liquor retail, cannabis retail, and particularly cannabis operations contribute to important improvements. while the investment segment is impacted by the Q4 fair value adjustment to our Sunstream assets. Free cash flow is positive at $11.6 million in the fourth quarter of 2024 and $8.9 million for the full year, both significant step-ups compared to 2023, driven primarily by improvements in the quality of earnings while working capital creates a year-over-year drag as we reported greater working capital reductions in 2023 than in 2024. As we examined the drivers of free cash flow in the fourth quarter of 2024 and the full year, we first noticed the negative Q4 net income of 67.2 million, primarily driven by the downstream fair value adjustment. Since this is a non-cash item in our P&L, it is offset by non-cash at-backs. Our inventory optimization initiatives enabled us to reduce inventory balances in the fourth quarter by 4.7 million, and by a total of 6 million for the full year, contributing to the positive free cash flow generation in both periods. The full year increase in other working capital is driven by reductions in accounts payable, as we have resolved some legacy liabilities strengthening our balance sheet position. Liquor retail net revenue in the fourth quarter was reaching the highest point in the year driven by seasonality, is still impacted by continuous market headwinds, resulting in a decline of 3.4% compared to the fourth quarter of 2023. Despite this revenue softness, gross margin expansion coupled with the store efficiency optimization initiatives contributed to a significant improvement in the bottom line, reaching nearly 22% in Q4 and 41% in the full year. In the case of the leaker segment, adjusted operating income and operating income are the same, as we did not have any intangible impairments or restructuring costs in the segment. Cannabis retail reported record financial performance in both top and bottom lines for the fourth quarter and the full year. Net revenue in Q4 2024 reached $83.2 million, representing a 10.7% increase compared to the prior year. This growth was mainly driven by same-store sales growth of 6.3%, new store openings, and incremental revenue from our Dutch love stores acquired earlier in the year. For the full year, net revenue reached $311.7 million. representing a 7.5% growth year-over-year and the same-store sales growth of 3.5%. In this segment, we're making strategic investments in promo activity. While impacting gross margin, particularly in the fourth quarter, these investments are enabling us to strengthen our market position and capture incremental market share. Adjusted operating income increased significantly in both the quarter and the full year. driven by gross profit growth and our focus on driving cost efficiencies. Additionally, we're lapping an unfavorable Q4 2023 fixed asset impairment. Our cannabis operations segment has seen a massive transformation during 2024, resulting in significant improvements and new records in financial performance across all lines. With net revenue reaching $37.1 million in the fourth quarter and $109.5 million for the full year, We're posting growth rates of 42% and 26% compared to the prior year, respectively. This includes a $7.5 million contribution from INDIVA in the last two months of the year. Gross profit has been transformed by the incremental revenue, and in particularly, by our productivity pipeline. This is allowing us to report positive gross margin for four consecutive quarters. exiting the year with 27.2% in the fourth quarter and achieving a 19.9% for the full year. Both operating income and adjusted operating income posted positive results in the fourth quarter and the full year, marking a significant milestone for the segment. In summary, we have achieved record numbers across multiple categories, showcasing dynamic growth in our cannabis business and significant improvements in profitability. We exceeded our guidance by delivering positive free cash flow for the year. while continuing to work on initiatives to further elevate our performance in 2025 and beyond. Now, over to Zach for additional highlights from the quarter within our strategic framework pillars.

We think it is important to highlight several strategic priorities during the fourth quarter as we continue to build the foundation to enable long-term success. Starting with growth, our cannabis retail segment is winning in the market with another 40 basis points of share gains. Key drivers include quality execution, new store openings, and conversions to value buds, and the expansion into British Columbia earlier in the year. We completed the acquisition of INDIVA, positioning S&DL as the largest manufacturer of infused edibles in Canada. We are also very well advanced in the integration of INDIVA into the rest of the S&DL infrastructure, which will enable us to deliver incremental synergies during 2025. In liquor retail, Despite the market contraction in 2024, our private label offerings are growing to meet consumer demand for quality and affordability while driving margin accretion. Our exposure to U.S. product is minimal and we do not expect material supply disruptions from dueling tariff actions between the U.S. and Canada. And our cannabis operations segment added 78 new distribution points in the fourth quarter, achieving 11% growth in distribution points for the full year. Shifting to profitability, We are pleased to see continued strong momentum, leading to the $12 million positive free cash flow in the quarter. That contributed to positive free cash flow for the full year. Productivity improvements totaled $8 million in Q4, largely from our cannabis operations segment through procurement, manufacturing, and cultivation efficiencies. Data licensing in our cannabis and liquor retail segments reached $4.5 million in Q4, contributing materially to gross profit accretion. We also achieved $5 million in overhead savings in Q4, driven by efficiency gains across all segments, as well as restructuring actions that were initiated in July. We are once more highlighting the contributions from the restructuring program announced last July that delivered $5 million of savings during 2024, equivalent to an annualized run rate of about $15 million, or 75% of our planned target. Finally, we know that our people are and will be our biggest competitive advantage and a key pillar to our long-term success. In this regard, the strategic talent development process kicked off in 2024 is helping us to drive a performance-based culture across the organization as well as identifying opportunities to invest in personal development to improve capabilities or succession plans. During the fourth quarter, we completed our inaugural employee engagement survey which provided valuable feedback from our team, establishing a baseline to continue to improve our employee value proposition. Our employee recognition program continues to gain traction with over 600 nominations and 160 awards being presented across our organization to date, celebrating amazing contributions from our team members. Last but not least, we continued the development of a total reward structure that aligns our compensation philosophy with both individual and company performance. I cannot be more proud of what my colleagues have achieved in 2024. This team continues to find ways to deal with the different challenges from our external environment and loves to smash records, only to quickly move towards higher goals. I am convinced more than ever of our potential and we are determined to unlock value for our shareholders. Records are meant to be broken and we know we will continue to do so in the future. We are convinced of our ability to unlock S&DL's significant potential, and this is why we are committed to continue growing and deliver $100 million in annualized free cash flow within the next three years. Once more, I would like to thank our entire team for their contributions and our shareholders for their continued trust. I will now pass the call back to the operator for analyst Q&A.

Thank you so much. And we'll begin our analyst questions and answer session. And to join the queue, as a reminder, press star 11 on your telephone keypad. You will hear a message acknowledging your request. If you are using a speakerphone, please pick up the handset before pressing any keys. To withdraw your question, please press star 11 again. We will pause for a moment as callers join the queue. And our first question comes from Federico Gomez with ATB Capital Markets. Please proceed.

Hi, good morning. Congrats on the great quarter and the quick cash flow there. Thanks for getting my questions up. First question, on liquor retail, you've been reporting improving margins in the segment, but same-store sales have been fairly weak. I know that you talked a little bit about the headwinds there, but could you talk about your outlook for the segment? You know, what exactly is impacting that same-star sales performance and whether we could, you know, see that reverting back to same-star sales growth anytime soon?

Good morning, Fred, and thank you for your question. This is Alberto. Yeah, obviously what we're seeing across North America and actually on a global basis throughout 2024 was a slowdown in liquor sales. So it's impacting pretty much the entire market. For 2025, we're anticipating revenue to be about flat. There are obviously different views from different manufacturers, different players in the industry, some of them thinking that it could be a couple of points positive, some others a couple of points negative. We're taking the middle of the road estimate and anticipating that it would be close to 0% growth. On the longer term basis, all our analysis are pointing to there is an underlying growth rate in the industry of about 1% to 1.5%. We may be having one or two years where there is some favorability to that average, some others that is below that average. But that's what we think that it's going to be the sustainable value growth. From a volume perspective, we're still anticipating a certain decline on low single digits, although that would be theoretically on the long term compensated through pricing.

So that's a little bit how we're seeing the overall outlook for the industry in the future.

Great. Thanks for that, Alberto.

A question on your U.S. investments. In your release, you mentioned the worsening performance of those investments operationally, given the challenging competitive environment in the U.S. cannabis market. Can you talk a bit more about that, the operating environment that these companies are facing, and specifically whether these investments might need additional capital to continue operating? Thanks.

Sure. Fred, thanks for the question and good morning to you. A few things are going on here, but I would say the most important thing to keep in mind is that given our structure today, we are not able to engage in plant touching activities. So we actually, from afar, see quite a bit of low-hanging fruit and opportunity to dramatically improve performance. This package has a large exposure to the Florida market where Parallel and Sorterra are top players. Obviously, the The failure of the A3 vote sort of pushes out some expectations on growth to the right. But we otherwise believe in these positions and the long-term potential. To your question on whether investments will be made in the future, I would say that our two top priorities, which we've discussed at some length in terms of capital deployment, will be continued build-out of our infrastructure in Canada. And a close second behind that would be opportunities in core markets in the U.S. So we are just getting close to the finalization of these restructuring processes. And once complete, I think you'll see running room for some real change and improvement of performance, and we're looking forward to that. Perfect. Thanks for that.

And I guess last question for me. Just on your TSC listing application, Could you maybe talk a little bit more about the rationale behind that? And specifically, you know, could that have anything to do with plans to, you know, potentially engage directly in plant touching activities in the U.S. in the future, given that, you know, all the MSOs are pretty much listed on the TFC? Thanks.

Yeah, thanks so much for the question. I'm going to disappoint on this without giving too much color. Again, our compliance culture is really critical to us and our current structure and capital deployment means that we're not able to engage in plant touching activities. We are looking at means of growing not only in the US and internationally. And so having this second listing does create a lot of optionality. There are potential scenarios that would go down a path that you're describing. But we're not in a position today to discuss that, and no corporate decision has been made.

Perfect. Thanks for that. I'll hold that to the queue. Thanks.

Thank you. Our next question comes from Yong Kang with Cannacore Genuity. Please proceed.

Hi. Good morning. Thank you for the question. Just my first question is on the cannabis operations revenues. It seems without the $7.5 million of INDIVA contributions this quarter and also netting of the intercompany sales, it seems like you guys have seen a pretty healthy growth there in terms of sequentially. And so I just wanted to ask if there's any kind of product that really stands out in fulfilling these B2B orders or any of the provincial boards that you're seeing, if it's base or any kind of special products that you guys have rolled out in the past. Thank you.

Yes. Hello, Jiwon. Thank you for the question. Good morning. So actually, we're seeing good growth across the board. Even if we were to take that contribution from Indriva, we'll see a strong double digit growth in the segment. It's mainly driven by increased distribution across pretty much all of our product categories. So we particularly have a strong performance with our pre-rolls, our babes, our edibles, which are the portions of the market that first are growing the biggest. But as well, we benefit from the pull through that we have through our own retail and third party retail. As well as we're improving quality in our products, that is allowing us to increase distribution points as well. So overall, I wouldn't highlight one specific brand or one specific product. I think we're having good performance across. As well, we are seeing some good momentum. It's obviously early days and the numbers are relatively small, but they are starting to add up to a few million on a quarterly basis.

We're seeing good momentum with our international sales and our B2B business. So the momentum is across the entire segment.

Great. Thank you. And just on my second question, regarding cannabis retail, and obviously I think over time we've seen a lot of the other banners such as, you know, Supred and Spirit Leaf kind of turned into more value buds focused. And so I just wanted to ask, you know, given the continued, you know, focus on discount retail across the Canadian cannabis retail landscape, are you guys still seeing the importance of employing several different banners under your cannabis retail umbrella? Or do you foresee that, you know, you guys are going to have to convert more of those doors into value buds to fit with the consumer preference towards just a discount retail banners?

Thank you. That's a great question, Zach, here. Both things can be true. I think it's the right way to look at that. Where we see great opportunities to improve returns with minimal investment, we have been converting banners. Some of that work will continue. But we also have a flexible model where our back-of-house management enables us to acquire additional banners if the opportunity were to arise. So we do believe in consolidation. We will be looking at opportunities. We do have a pipeline when it comes to retail development, both organic and inorganic. So you could see us potentially both add new banners in the future and continue to consolidate and convert our existing portfolio as the ValueBuds banner increases in presence in the market.

Thank you for the caller. I'll hop back into the queue.

Thank you. And as a reminder, if you have a question, please press star 1-1. All right. This concludes the Q&A session. I would like to turn the conference back to Zach George for any closing remarks.

Thank you, Carmen, and thanks, everyone, for joining our call today. We look forward to updating you in the near future. Thank you.

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