Sundial Growers Inc. Common Shares 2026 Q3 Earnings Call

Please proceed. Welcome to SNDL's third quarter 2026 financial and operational results conference call.

During the third quarter, SNDL delivered improved underlying financial performance while continuing to deploy capital against our highest conviction strategic priorities. We generated record quarterly free cash flow of CAD 20 million and returned to positive adjusted operating income despite continued market pressure and significant challenges in Cannabis Operations. Cannabis Retail delivered record quarterly net revenue and gross margin, while Liquor Retail also achieved a new quarterly gross margin record. These results demonstrate the value of disciplined pricing, mix management, procurement productivity, and continued cost control across our retail platforms. At the same time, Cannabis Operations remain below our expectations. We took decisive action during the quarter to simplify the portfolio, exit the unprofitable domestic dried flower category, reduce costs, and concentrate resources on higher-value products.

We have also initiated a strategic review of the segment to assess a range of strategic and operational alternatives, including potential asset divestitures and broader productivity initiatives. We continued to allocate capital with discipline during the quarter. We repurchased 5.4 million shares and announced our intention to pursue a potential substantial issuer bid of up to CAD 50 million, subject to required approvals and documentation. We also made significant strategic investments in the U.S. Following the completion of Parallel's restructuring in July, our participation in its rights offering increased our indirect equity ownership from approximately 67% to approximately 92%. We also funded investments supporting a new cultivation facility in Gainesville, Florida, and the acquisition of an additional portion of Parallel's takeback debt at a material discount to its face value.

These actions reflect our priorities, improve operating performance, preserve financial flexibility, return capital when our shares represent an attractive investment, and selectively pursue opportunities that can create meaningful long-term value. Over now to Alberto for more detail on our third quarter financial performance.

Thank you, Zach. Before moving on, I would like to remind everyone that the amounts discussed today are denominated in CAD, unless otherwise stated. Certain figures referred to during this call are non-IFRS measures. For definitions of these measures and reconciliations where applicable, please refer to SNDL's management's discussion and analysis and the earnings press release issued today. Net revenue was CAD 238 million in the third quarter of 2026, representing a decrease of CAD 6.2 million or 2.5% compared with the same period of the prior year. Growth in Cannabis Retail and the impact of lower cannabis eliminations partially offset declines in Liquor Retail and Cannabis Operations. Gross profit was CAD 57.9 million, a decline of CAD 6.3 million or 9.8% year-over-year. Gross margin was 24.3%, down two percentage points as record margins in both retail segments were more than offset by a weak performance of Cannabis Operations.

Operating loss was CAD 48.3 million, reflecting a CAD 52 million non-cash goodwill impairment associated with the Cannabis Operations. Adjusted operating income, which excludes intangible impairment charges and restructuring costs, was positive CAD 5.2 million, an improvement of CAD 14.8 million compared with the same period last year. Change in cash and cash equivalents was negative CAD 50.7 million, primarily reflecting CAD 60.8 million of capital contributions to equity accounted investees and CAD 10 million of share repurchases. Free cash flow was a record CAD 20 million, up CAD 3.3 million or 19.5% year-over-year, including a CAD 10.6 million benefit from the initial unwinding of our captive insurance. Looking at our performance over the past several quarters, we are encouraged by the progress in adjusted operating income and free cash flow, despite continued headwinds in revenue and gross profit. This reflects the financial discipline we have brought to the business and our continued focus on improving underlying profitability and cash generation.

While there is still work to do, particularly in Cannabis Operations, we believe we are making meaningful progress towards a more profitable and cash generative business. Looking more closely at segment contributions, consolidated net revenue declined by CAD 6.2 million year-over-year. Liquor Retail declined by CAD 4.6 million, and Cannabis Operations declined by CAD 10.3 million. Cannabis Retail increased by CAD 0.6 million, while the change in cannabis eliminations provided an CAD 8.2 million offset. Gross profit declined by CAD 6.3 million, driven by Cannabis Operations, which accounted for a CAD 6.6 million decline. Liquor Retail declined by CAD 0.3 million, while Cannabis Retail increased by CAD 0.7 million. Adjusted operating income improved by CAD 14.8 million, from a loss of CAD 9.5 million in the prior year quarter, to income of CAD 5.2 million. A CAD 9.9 million improvement in corporate expenses and a CAD 6.6 million improvement from investments more than offset weaker results in Cannabis Operations and Liquor Retail.

Free cash flow increased from CAD 16.7 million in the third quarter of 2025 to a record CAD 20 million this quarter. Compared with the prior year quarter, lower cash earnings reduced free cash flow by CAD 1.1 million, and year-over-year working capital change reduced by CAD 11.8 million. Working capital optimization contributed CAD 2.5 million in the third quarter of 2026, but this benefit was lower than in the prior year quarter due to differences in the timing of working capital movements. These impacts were more than offset by CAD 16.2 million of other items, including a CAD 10.6 million benefit from the initial unwind of the captive insurance arrangement. While the captive insurance contribution to Q3 free cash flow is a one-time item, we expect a second and final CAD 8 million cash inflow in the fourth quarter as we complete the unwinding of the captive structure.

Turning to the commercial segments, I will begin with Liquor Retail. As a reminder, beginning in 2026, applicable direct and indirect overhead costs are allocated from corporate to its operating segment within general and administrative expenses, and comparative periods have been recast. Liquor Retail net revenue was CAD 134.8 million, a decline of CAD 4.6 million or 3.3% year-over-year. Persistent softness in market demand continued to affect same-store sales, which declined 6%. Growth from the three new Wine and Beyond store opens during the last 12 months, together with continued momentum in private label sales, which outperformed national brands by 8.5 percentage points in the quarter, helped partially offset the same-store sales decline. Gross profit was CAD 36.4 million, down CAD 0.3 million, while gross margin expanded 70 basis points to a record 27.0%. The margin improvement was driven by pricing, product mix management, and procurement productivity.

Adjusted operating income was CAD 6 million, down CAD 0.6 million year-over-year, as the benefit from gross margin expansion was more than offset by lower revenue and higher SG&A expenses associated with the recent store openings. Cannabis Retail net revenue returned to growth and reached a new quarterly record of CAD 85.6 million, an increase of CAD 0.6 million or 0.7% year-over-year. New store openings and Value Buds conversions more than offset a 3.8% decline in same-store sales caused by market contraction in Alberta and Ontario. Gross profit increased by CAD 0.7 million to CAD 23.1 million, while gross margin expanded by 60 basis points to a record 27.0%. The improvement was supported by promotional and product mix efficiencies and increased data revenue.

Adjusted operating income was CAD 5.3 million, an increase of CAD 0.2 million or 4.7%, as promotional and product mix efficiencies and increased data revenue more than offset the impact of higher asset impairment reversals in the prior year period. Cannabis Operations net revenue was CAD 27.0 million, a decline of CAD 10.3 million or 27.7% year-over-year. The decline was primarily attributable to our exit from the unprofitable domestic dried flower category as we reshaped the segment to focus on higher value product categories. Gross profit was negative CAD 1.6 million, with a gross margin of negative 6%. These results were primarily driven by inventory adjustments associated with our exit from dried flower, as well as the greater cost variances. Adjusted operating income loss was CAD 11.4 million, compared with a loss of CAD 10.2 million in the prior year.

While the segment results remained below our expectations, we took decisive action during the quarter to reduce manufacturing cost and other operating expenses, particularly at our Kelowna facility. These actions include a workforce reduction of more than 30% at that site. We expect the P&L benefits of these actions to begin contributing in the fourth quarter. Given the segment's continued underperformance, we have also initiated a strategic review to evaluate alternatives to improve its financial performance and reduce its impact on our consolidated results. The review will consider a range of alternatives, including potential asset divestitures and broader productivity initiatives. Over to you, Zach, for additional comments on capital allocation and our strategic milestones.