Q3 2024 SNDL Inc Earnings Call
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The New Year's Eve,
Speaker Change: Good morning and welcome to SNDL's third quarter 2024 financial results conference call.
This morning, S&DL issued a press release, announcing their financial results for the 2024-3rd quarter and did on September 30, 2024.
This press release is available on the company's website at sndl.com and filed on Edgar and Cedar as well.
Speaker Change: The Wavkass 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.
Speaker Change: Presenting on this morning's call, we have Zach George, Chief Executive Officer, and Alberto Paredero, Chief Financial Officer.
Speaker Change: 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.
Speaker Change: and Show 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 CDR and EDGAR.
Speaker Change: Additionally, all financial figures mentioned are in Canadian dollars, unless otherwise indicated. We will now make prepared remarks that will move on to analyst questions.
Speaker Change: I would now like to turn the call over to Zach George, please go ahead.
Speaker Change: i
Zach George: Welcome to F&DL's Q3 2024 Financial and Operational Results Conference Call.
Zach George: We are pleased to report Robas Revenue Growth in our cannabis segments, a record breaking gross margins and positive free cash flow for the third quarter of 2024.
Speaker Change: 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 over year margins and substantial growth in operating income from the segment.
Speaker Change: 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 games 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 S&B out towards long-term sustainable profitability.
Speaker Change: These include a restructuring program aimed at reducing corporate overheads, enhancing organizational efficiency, and realizing annualized savings of more than $20 million.
Zach George: Additionally, we moved to privatize Nova through the acquisition of the remaining outstanding minority equity interests and just yesterday closed the acquisition of Indiva, enabling us to emerge as the leader in the Canadian infused edibles category.
Zach George: 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.
Zach George: Our solid balance sheet serves as a beacon for future opportunities, enabling us to allocate capital softly across forth organic and inorganic investments.
Speaker Change: In the third quarter, we increased our cast balances from 183 million on June 30th to 263 million on September 30th, 2024. At continued to have zero outstanding debt.
Speaker Change: We have not raised cash through the issuance of shares since 2021 and our share-reportures program became active subsequent to the end of the quarter.
Alberto Paredero: I will now turn the call over to Alberto.
Alberto Paredero: Thank you, Zach. I want to remind you all that a month's guest today are the nominated in Canadian dollars and let's all the white estate it.
Alberto Paredero: Certain amounts referred to all on this call are non-gabbed and non-IFRS measures. For definitions of these measures, please refer to SNDL's management discussion and analysis document.
Speaker Change: Looking at our Q3-214 financial highlights, we continue to see significant improvements in gross profit, gross margin and free cash flow.
Speaker Change: Networking in the third quarter of 2024 waits 236.9 million. A margin on decline compared to the prior year.
Speaker Change: This decline was driven by our Leaker retail segment while our combined cannabis segments posted the healthy 8% growth.
Speaker Change: Girls Crofts of $6 to $3 million represents a $14.4 million increase or 30% girls gear over year. With a substantial 610 basis points in programming girls margin.
Speaker Change: This translates into another quarter of record growth margin, reaching 26.6%.
Speaker Change: Despite the significant improvements in margin and continued optimization of operating expenses, adjusted operating income was negative $6.6 million. A slight decrease compared to the prior year.
Speaker Change: This was mainly driven by an unfavorable 13.4 million fervalute adjustments from our equity accounting industries in the quarter. From per to a 6.6 million dollar revalliation in the same quarter of the prior year.
Speaker Change: It is important to note that we only had just operating income for restructuring charges and intangible impairments, which in the third quarter were limited to a 1.9 million restructuring charge.
Speaker Change: It will work to exclude the volatility created by quarterly, fair value adjustment to our equity accounting industries. The improvement in adjusted operating income compared to the same third quarter of the prior year will have been $19 million.
Speaker Change: Freecast Row was positive in the quarter at $9.2 million, bringing the year to date freecast row to a negative $2.8 million. Warren Pace still delivered positive freecast row for the 2024 calendar year, in line with the first time we've ever seen a couple of more of the year.
Speaker Change: Frecastling the quarter was lower than the same period prior year, driven by different management of facing of retail inventory buildup throughout the year.
Speaker Change: As we will discuss in a few minutes.
Speaker Change: When examining the historical quarter-defined national performance evolution, we clearly observe a few patterns.
Speaker Change: Net revenue in 2024 is relatively flat compared to 2022. As the song growth in our cannabis segments has been upset by market softness in the larger liquid segment.
Speaker Change: We also see a clear trend of profitability improvement, both in growth profit and adjusted the operating income.
Speaker Change: The same applies to free castle, where there is a noticeable abort trend compared to previous years. Additionally, we are serve a more muted, seasonality effect, sense to our discipline approach to working capital management.
Speaker Change: As we look at the contributions from each segment, we can see how the net revenue decline in the current is impacting the overall consolidated results, despite the strong performance from cannabis.
Speaker Change: When we have 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 cells into our own retail.
Speaker Change: We're a rife at the total of 6.5 million or 8% growth in canals.
Speaker Change: In terms of growth profit, Lico retail shows a small decline of $0.3 million, despite the larger revenue shortfall.
Speaker Change: 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.
Speaker Change: The aggregates of all the segment adds up to $14.4 million or 30% gross profit.
Speaker Change: When look at the gastropreying income, we can clearly see the significant step of the profitability in driven by our operating segments, offset by the volatility of the fur value adjustment in our investment segment.
Speaker Change: Our corporate segment sources, small and favorable variants of $1.4 million, driven by inflation and the different facing of one-time expenses, partly upset by refracting into the TV savings.
Speaker Change: Precast role is positive at 9.2 million in the third quarter of 2024. Although it is a reduction in comparison to think, or in the previous year.
Speaker Change: This reduction is driven by a different phase in of inventory build on between the quarters.
Speaker Change: We can see this more clearly on the next page.
Speaker Change: As we examine the drivers of Freed Castle in the third quarter of 2024, we first noticed the negative 19.3 million in net income, primarily driven by the fur-bally adjustment in our investment segment.
Speaker Change: Since this is a non-cast item in our PML, it is offset by non-cast ad-banks.
Speaker Change: with a high in the third quarter compared to the previous two quarters for this reason.
Speaker Change: A benefit we saw in the third quarter was a collection of $10.7 million of accrued interest related to the repayment of the maturity of Ascent and Juicy Lones from Sunshine.
Speaker Change: This interest was previously recorded in our P&L, a part of the Net Asset Value of the Investment
Speaker Change: As the interest was collected, we see a positive impact on Freak Aswell. The repayment of the principal violence associated with these two loans, while reported as an increasing cash, is excluded from Freak Aswell calculation.
Speaker Change: The net change in inventory and other working capital is a slightly positive, a $0.9 million in the third quarter of 2024. With relatively a small fruit-to-ation between quarters.
Speaker Change: which we can see in the bar chart on the right of 877. In 2024 we have significantly less volatility in terms of inventory sustainability buildup.
Speaker Change: In previous years, we had a large increase in the first quarter, a moderate increase in the second, a reduction in the second half of the year. In 224, the buildup in the first half was much smaller, and as a result, the reduction in the second half will also be smaller.
Speaker Change: Let's now look at each of the three operating segments, starting with Leco Rito.
Speaker Change: Nazareth Nendol, 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.
Speaker Change: While there's a client, this is more 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 in the
Speaker Change: We continue to believe this is not a concern in terms of long-term growth potential for this segment.
Speaker Change: i
Speaker Change: Despite this macro headwinds, we continue to span Gross Martin, reaching 25.6% in the third quarter, and improvement of a 100 basis points compared to last year.
Speaker Change: As a result of this margin expansion, an efficiency in the management of operating expenses, this maximum operating income delivers significant growth of 3.5 million dollars, or 42.5% compared to the same quarter of 2020.
Speaker Change: Moving to Canada's retail, we saw met revenue in 23, 22, 24 of 81.1 million, a 7.4% increase compared to 23 of 22.3
Speaker Change: This growth was mainly driven by since store sales growth of 2.3% New store openings and incremental revenue from our that-slav stores acquired earlier in the year.
Speaker Change: The growth margin of 25.5% represented a reduction of 100 basis points compared to the same period of the last year. Due to several strategic price and decisions aimed at the increase in the stored traffic.
Speaker Change: A Jacket operating income increased by $1 million or 28.1% compared to the prior year, driven by the gross profit improvement.
Speaker Change: Finally, our cannabis operation segment is once again showing the largest improvement, both in terms of growth and profitability.
Speaker Change: In the third quarter of 2024, the second delivered net-waring a growth of 19% over a year, reaching $25 million.
Speaker Change: All of his growth is organics and driven by increased provincial board and B2V distribution.
Speaker Change: by accelerating growth margin improvements through several productivity initiatives. The segment rates a new record of 21.2% translated to 5.3 million in growth profit.
Speaker Change: This is a significant step up compared to last year on previous quarters.
Speaker Change: A Jacero Training Comb was negative $0.6 million, marketing and improvement of close to 14 million from the same period last year.
Speaker Change: In summary, our cannabis business experience in strong growth, our driving significant improvements in profitability and class flow generation.
Speaker Change: were on pace to the river award guidance of positive free castler for the full year. Marking an important step in contributing to raise the bar and realize our full potential.
Alberto Paredero: I would now like to pass the call back to Zach to share a few more operational highlights for the quarter.
Zach George: Thank you, Alberto.
Zach George: The Under Financial Performance, I would also like to highlight our core priorities, growth, profitability and people.
Speaker Change: As each are fundamental to our long-term success.
Zach George: Starting with growth, our cannabis segments have led with a combined net revenue increase of 7.4% year over year in Q3 and an impressive 90 basis point share gain in Canadian retail.
Zach George: C. drivers include quality execution, stabilization from 2023 store openings, and the recent expansion into British Columbia.
Speaker Change: are cannabis operation segment showed dynamic growth of 19% driven by quality and innovation. With 71 distribution points added this quarter and 491 year to date.
Speaker Change: Through M&A, we strengthen our portfolio with two very recent acquisitions. In Diva, making us a leader in Canadian Edibles, and the privatization of Nova, allowing F&DL shareholders to fully benefit from retail segment growth.
Speaker Change: In Licka Retail, despite this year's market contraction, our private label offerings are growing to meet consumer demand for quality and affordability while driving margin accretion.
Speaker Change: Just think of profitability. We are pleased to continue strong momentum.
Speaker Change: leading to the record gross margin and $9 million of positive free cash loan in the quarter. A positive free cash flow was enabled by efficiency improvements and interest income and not impacted by the non-cash fair value adjustment of our investment portfolio.
Speaker Change: Productivity improvements total $15 million in key three largely from our cannabis operation segment through procurement, manufacturing and cultivation efficiencies.
Speaker Change: Data licensing in our cannabis and liquor retail segments reached $4 million in quarter. A 6% increase from the second quarter.
Speaker Change: We also achieved $5 million in overhead savings.
Speaker Change: More than offsetting inflation and growth investments driven by efficiency gains across all segments.
Speaker Change: as well as restructuring actions initiated in July.
Speaker Change: As you can see on the following page summarizing the restructuring program progress, this program delivered more than $2 million in savings in the quarter, equivalent to an annualized run rate of $10 million or about 50% of our plan target.
Speaker Change: Finally, we remain committed to our people as a top strategic priority.
Speaker Change: In the second quarter, we launched a strategic tower review to identify key roles as well as development and succession plans.
Speaker Change: We continued deploying several community engagement initiatives offering all of our team members the possibility to participate in sessions around mental and physical wellbeing.
Speaker Change: and also rolled out an employee recognition program with over 40 awards being presented across our organization, celebrating the amazing contributions from our team members.
Speaker Change: Last but not least, we continue the development of a total reward structure that aligns our compensation philosophy with both individual and company performance.
Speaker Change: My conviction and confidence in our team that is setting new records with each quarter or at all time highs.
Speaker Change: are dedicated leaders have the expertise and drives to unlock S&DL Significant Potential.
Speaker Change: I'd like to thank our entire team for their contributions and our shareholders for their continued trust.
Speaker Change: and I will now pass the call back to the operator for analyst Q&A. Thank you.
Speaker Change: Thank you. We will now begin the analyst question and answer session.
Speaker Change: To join the question queue, you may press star then one-one on your telephone keypad.
Speaker Change: You will hear a tone acknowledging your request. If you are using a speaker phone, please pick up your handset before pressing any keys.
Speaker Change: To withdraw your question, please press star, then one one.
Speaker Change: The first question comes from the line of Fred Perdedico Gomez from ATV Capital Market.
Speaker Change: Thanks for predicting my questions. First question, only no of a position. Can you talk about it, I mean why?
Speaker Change: You decided to acquire that remaining stake and strategically against just what sort of advantage you see in owning self-full-earning, no vegetables to a majority stake. Thanks.
Speaker Change: Good morning, Fred Riko. Thank you very much for the question. So as you know this is a very competitive space with access taxation and reasonably low margins.
Speaker Change: So the acquisition of that minority stake in Nova is going to ensure that S&DL shareholders can get the full benefit of the cash flow and earnings potential of that retail business.
Speaker Change: Thank you. On your cannabis operations, quiet.
Speaker Change: Significant Provinning Margins there. Can you talk a little bit about the key drivers behind that margin improvement and in terms of your expectations going forward, you expect, you know, to continue to see margin expanding and it's so where's that going to come from?
Speaker Change: Hello, Fred, this is Alberto. So, yes, actually most of the or all of the improvements are driven by an into-end policy productivity program that the management team of the segment has put in place already in the end of last year.
Speaker Change: As you remember in the fourth quarter, 2023, we decided to exit or close the old facilities that create already a bump.
Speaker Change: in the Gross Margin and the profitability of the segment in the first couple of quarters. Since then we have been driving a pieces in labor and automation in our manufacturing facilities. We were seen around part of our cultivation assets as well.
Speaker Change: So, as we were already anticipating in the previous quarter, we were expecting to be over 20% by the end of this year. So, we're happy to see that already happening in the third quarter.
Speaker Change: And we have a long list of additional initiatives, including the additional capacity utilization from the growth that the business has seen, and more automation and efficiency improvements that will continue to push that cross-margin further up.
Speaker Change: Yeah, Frederico, you've been following our story for quite some time, and you're well aware that in the earlier days, several years ago, you know, Olds was sitting with exposure to a power jurisdiction that really challenged its competitiveness.
Speaker Change: and so that was a meaningful first step that's been showing up through the numbers in the last year.
Speaker Change: and our President of Cannabis, Todd Robson, has been leading for
Speaker Change: a number of initiatives that are being very impactful in today's environment, including managing mix, skew creep, automation, and so there's a number of efficiencies that are still in play.
Speaker Change: And we were very confident in the team being a position where they actually understand the drivers here and can action against.
Speaker Change: Unknown Executive, Tyler Robson, Alberto Paredero,
Speaker Change: Transcription by CastingWords
Speaker Change: Perfect. Thank you. And then just one more for me.
Speaker Change: Regards to capital location.
Speaker Change: I know that you mentioned a bit of this, but how are you looking at, I guess, different
Speaker Change: Growth Options and Investments in Canada, the U.S. or other geographies internationally.
Speaker Change: and the second part of the question also in regards to your buyback.
Speaker Change: you obviously repurchased some shares recently. So can you comment on those repurchases? You know, is it something that...
Speaker Change: Unknown Speaker
Speaker Change: In terms of the valuation here, you bought it at $1.90. So
Speaker Change: How do you view your population right now over 2020? Thanks.
Speaker Change: For more information, visit www.FEMA.gov
Speaker Change: So there's a few questions in there. I'm just starting with capital allocation. It's going to be a very similar answer consistent with what we spoke about last quarter, Federico. So two real key priorities in terms of capital allocation are going to be continued growth in Canadian retail and also investment in, you know, potential investment in assets in the U.S. Both of those pillars are part of our core multi-year strategic plan.
Speaker Change: And when you think about the repurchase of shares, we absolutely want to take advantage of repurchasing shares at levels that we think reflect
Speaker Change: Discount Evaluation.
Speaker Change: The transactions that you referenced were part of a non-discretionary trading plan which we were able to execute through a blackout period.
Speaker Change: and this is something that will be regularly reviewed by our board in terms of scale and levels at which to purchase.
Speaker Change: So we expect to be in a position to acquire shares on an ongoing basis. I think there's a misconception out there that somehow a share purchase plan is best used to prop up a security.
Speaker Change: and that's just something we will never do. It's really for the benefit of long-term holders as we're inflecting really strongly in deposit-free cash flow and ultimately net income.
Speaker Change: Great. Thank you very much for the call. I'll call back in a few.
Speaker Change: Unknown Speaker, Unknown Speaker,
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Ye Wang Kang from Canaccord Genuity.
Speaker Change: Hi, good morning and thank you for the question.
Speaker Change: So my first question is regarding the recently completed Indigo acquisition.
Speaker Change: through that transaction S&D obtained a facility in London and my understanding is now that the company has two edibles focused facility including the LYF facility in Kelowna. I just wanted to ask about if you guys have any plans to consolidate these facilities in the future and I know it's only been a few weeks since the acquisition closed but could you guys give us a color on the upside you're seeing from integrating Indiva brands onto your distribution channel? Thanks.
Speaker Change: to our broader business. You will see.
Speaker Change: And impacted to four from almost two months worth of performance there and given the margin profile That's available in the animals category We see that this this acquisition being large and accretive
Speaker Change: to our upstream manufacturing portfolio, so something we're very excited about.
Speaker Change: I would answer the question on real estate more broadly. There are a number of opportunities we have for
Speaker Change: Facility Consolidation that will result in non-core real estate being available for monetization, which should further bolster cash balances and enable us to recycle capital into accretive opportunities.
Speaker Change: We're going to be working on a longer term prudent and thoughtful integration plan within DIVA and we'll be able to provide more details on that in the coming months.
Speaker Change: Yeah, just to add, both our teams, the existing team of SNDL and the team from Indiva are now joining our family. They are already collaborating and exploring the different synergy opportunities that we have.
Speaker Change: across revenue, supply chain, and operating expenses.
Speaker Change: We do have a long list of ideas that are being analyzed to make sure we make the right choices and the right decisions, but certainly we do see a lot of synergies. We'll be able to share where those opportunities are as we complete the analysis in the next several weeks.
Speaker Change: And just a second question on the retail environment for cannabis dispensaries.
Speaker Change: So a couple of your peers have called out some of the pressures that they're seeing in Ontario specifically in relation to the illicit stores popping up all around the province. Just wanted to ask if you have been seeing similar pressures on your retail stores as a result of
Speaker Change: Unknown Executive, Tyler Robson, Alberto Paredero, Unknown Executive, Tyler Robson, Unknown Executive,
Speaker Change: It's a great question. It's also a very difficult question. The impact of the illicit market in the Canadian
Speaker Change: What we do know is that there is some degree of enforcement happening, and we've seen pockets
Speaker Change: stamp out the illicit market. We still need broader regulatory change to help support that. And we believe that you're going to see additional rational reform come through in 2025, even something as small as changing the limits on edibles from 10 milligrams to 100.
Speaker Change: would have a material impact on illicit market trade.
Speaker Change: Again, no one's coming to save us here. So what we do know is that convenience and value are winning with the consumer at the end of the day.
Speaker Change: Thank you. I'll hop back into the queue.
Speaker Change: Unknown Speaker
Speaker Change: Thank you. As a reminder, if you have a question, please press star 11.
Speaker Change: Unknown Speaker 05. 05.
Speaker Change: This concludes the question and answer session. I would like to turn the conference back over to Zach George for any closing remarks.
Zach George: Thank you, operator, and thank you to everyone for joining us for the call. We look forward to updating you in the coming months.
Speaker Change: Have a great day.
Speaker Change: Opening theme
Speaker Change: For more information visit www.FEMA.gov
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