SNDL Q4 2025 Earnings Call - Profitability Turnaround: First Positive Full-Year Adjusted Operating Income and CAD 18M Free Cash Flow

Conference Call Moderator/Operator, SNDL: Good morning, and welcome to SNDL’s fourth quarter 2025 financial results conference call. This morning, SNDL issued a press release announcing their financial results for the fourth quarter of 2025, ended on December 31, 2025. This press release is available on the company’s website at sndl.com and filed on EDGAR and SEDAR 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-Quiros, 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 filings that are made available on SEDAR 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.

Zach George, Chief Executive Officer, SNDL: Welcome to SNDL’s Q4 and full year 2025 financial and operational results conference call. 2025 marked another step forward in our performance, with multiple new records achieved throughout the year, including record full-year net revenue, gross profit, adjusted operating income, and free cash flow. Beginning with free cash flow, our most important KPI for assessing financial health, we are pleased to report that following our first year of positive annual free cash flow in 2024, we more than doubled this result in 2025, reaching CAD 18 million. This was achieved through continued operational improvements and disciplined working capital management. Our SunStream business continued to grow, expanding revenue year-over-year during the last 16 consecutive quarters.

While we have seen a market slowdown during the second half of 2025, both our retail and operations segments continued to gain market share, showcasing the strength of our vertical model. We would also like to highlight that for the first time in our history, we achieved positive full-year adjusted operating income, supported by a strong contribution in the fourth quarter. This result underscores our financial discipline and continued traction in delivering operational efficiencies and productivity initiatives, including synergies from the Indiva acquisition. As a reminder, the only adjustments to operating income in 2025 relate to restructuring costs associated with the integration of Indiva and the corporate restructuring program, which is currently in its third and final phase. Delivering consistent year-on-year financial progress remains a priority, alongside continuing to build a strong foundation for long-term profitable growth and shareholder returns.

Few companies in our industry are positioned to leverage a balance sheet of this strength with no debt and over CAD 250 million in unrestricted cash at the end of 2025, enabling disciplined capital deployment across both organic and inorganic opportunities. In this regard, in 2025, we increased capital expenditures by nearly 50% compared to 2024, with the majority of the investment directed towards new store openings across our SunStream and liquor retail segments. As announced in January, we also completed the first stage of the acquisition of Cost Cannabis retail stores from 1CM Inc., incorporating five locations in Alberta and Saskatchewan. We continue to maintain a strong pipeline of initiatives focused on simplification and strategic focus.

For example, we are days away from completing a full consolidation of our ERP systems, which is expected to unlock significant opportunities to further optimize our processes and enhance our analytical capabilities. We continue to leverage the share repurchase program approved by our board, and since the fourth quarter of 2024, we have repurchased a total of 15.1 million shares, including 4.3 million shares acquired over the last 90 days. We are also encouraged by the continued momentum toward U.S. SunStream rescheduling, as well as the progress toward completion of the restructurings of our Parallel and Skymint investments, with only a limited number of remaining requirements outstanding. Over now to Alberto for more insights on our fourth quarter and full-year financial performance.

Alberto Paredero-Quiros, Chief Financial Officer, SNDL: Thank you, Zach. I want to remind everyone that the amounts discussed today are denominated in Canadian dollars, unless otherwise stated. Certain figures referred to during this call are non-GAAP and non-IFRS measures. For definitions of these measures, please refer to SNDL’s management discussion and analysis document. Our fourth quarter financial results demonstrate a strong profitability improvements despite softness at the top line. Net revenue of CAD 252 million represents a 2% year-over-year decline, driven by market contractions in both liquor and cannabis retail, particularly liquor retail, partially offset by market share gains across both retail segments.

Gross profit of CAD 70.2 million marked a new absolute quarterly record, increasing by CAD 1.4 million or 2.1% year-over-year despite the decline in revenue. A strong margin expansion across both retail segments translating to a 110 basis point increase in gross margin, reaching a new quarterly record of 27.8%. This strong gross margin performance, combined with efficiency improvements across retail and corporate SG&A, resulted in a record quarterly adjusted operating income of CAD 12.8 million. An adjusted operating income of CAD 11.8 million also represents a new quarterly high. This performance reflects a significant improvement versus the prior year, driven not only by the absence of the CAD 65.7 million SunStream valuation adjustment recorded one year ago, but also by meaningful underlying operational margin improvements.

Free cash flow of over CAD 10 million in the quarter was another solid result, although slightly lower than the prior year due to differences in the timing of working capital build up for the holiday season, as well as increased capital expenditures and inventory investments to support new store openings. Our full year financial results demonstrate meaningful year-over-year progress on new records across all key metrics. Net revenue of CAD 946 million represents growth of 2.8%, supported by 11% growth from our combined cannabis segments, partially offset by a 2.8% decline in liquor. Importantly, all of our segments gained market share during the year. This revenue growth, combined with a 120 basis points increase in gross margin, translating to gross profit growth of 7.6% compared to the prior year.

Improved promotional execution, mix management, and productivity initiatives were the key drivers of this gross margin expansion. This continuous improvement mindset also enabled us to reduce G&A spending. As in-store efficiency gains and a well-executed corporate restructuring program more than offset cost inflation and the impact of new store openings. As a result, both adjusted and unadjusted operating income reached new highs, with full-year adjusted operating income achieving break-even for the first time in our history. We’re also pleased to report free cash flow of CAD 18 million for the year, more than doubling the result achieved in the prior year. Our historical quarterly performance demonstrates a clear upward trend in profitability and a strong multi-year compound annual growth rate.

While quarterly operating income and free cash flow will continue to be influenced by seasonality and volatility, we remain committed to sustaining the upward trajectory with a focus on long-term value creation. We have seen market declines across both the liquor and cannabis segments. While declines in liquor have been a multi-year trend, the slowdown observed in cannabis during the second half of 2025, which ultimately resulted in a market decline in the fourth quarter, represents a newer development. We intend to address these headwinds through disciplined execution and a balanced approach to both organic and inorganic investment. In particular, as the cannabis industry matures and growth rates moderate, less efficient operators are likely to face increased pressure, creating a favorable condition for industry consolidation. We believe we’re well-positioned to capitalize on these opportunities.

Looking more closely at segment-level contributions across our key financial KPIs, we can see these dynamics clearly unfolding. Net revenue reflects the market headwinds impacting both the Liquor and Cannabis segments, particularly in the fourth quarter. On a full-year basis, however, growth in the Cannabis Retail and Cannabis Operations more than offset the declines experienced in Liquor. Despite revenue pressure, our Liquor segment was able to offset declines through productivity improvements, allowing it to maintain or expand gross profit. At the same time, our Cannabis segments contributed to gross profit growth at a faster pace than net revenue, particularly over the full year. Adjusted operating income reflects solid contributions from our Cannabis Retail segment, while results from Liquor and Cannabis Operations were more muted. In the context of ongoing market declines, maintaining or expanding adjusted operating income in Liquor represents a strong performance.

Cannabis Operations was impacted by costs associated with the volume ramp-up at our Atholville cultivation facility undertaken to support international growth. The investment segment saw significant year-over-year improvement, primarily due to the absence of unfavorable valuation adjustments recorded in the prior year. The corporate segment also delivered strong contributions to bottom-line profitability, supported by the cost reductions from the restructuring program initiated in the second half of 2024. The CAD 7.5 million contribution in the fourth quarter reflects both the benefit of these cost reductions and a CAD 3.2 million dollar from share-based compensation as a decline in our share price during the fourth quarter partially offset the increase recorded in the third quarter. Once again, both our fourth quarter and full-year free cash flow results stand out as key highlights.

In the fourth quarter, while we did not achieve a new record, free cash flow levels remained strong. Compared to the prior year, we benefited from higher earnings reflecting improved P&L performance. This was offset by inventory and capital expenditure investments in new store openings, as reflected in the working capital and other components of page 7, respectively. On a full-year basis, the benefits from improved earnings and a strong working capital management more than offset the investments made to support new store openings. On the following page, we can see the seasonality effects in our free cash flow generation. The first part of the year is typically impacted by lower revenue levels and working capital buildups, where the second half of the year benefits from the opposite dynamic.

In aggregate, and supported by a particularly strong second half, we more than double free cash flow compared to the prior year. When reviewing each commercial segment individually, starting with liquor, we can see that both the fourth quarter and the full year were impacted by market-driven headwinds affecting net revenues. These declines, approximately 3% in both periods on a rounded basis, were primarily driven by broader market conditions. In this context, our team was able to gain market share, supported by the strong performance of our Wine and Beyond banner and continued growth in our private label offerings, both of which deliver positive results.

Improvements in pricing, promotional execution, and mix management were the key drivers behind the gross margin expansion of 120 basis points in the fourth quarter and 70 basis points for the full year, reaching 26.0% and 25.9% respectively. Q4 gross profit of CAD 38.7 million and a full-year gross margin of 25.9% both represent new records for the segment. This margin expansion, together with additional efficiency improvements in in-store operations, translating to an increased CAD 1.7 million or 5% in full-year operating income. In the fourth quarter, operating income was close to flat year-over-year, reflecting the absorption of ramp-up costs associated with the 2 new Wine and Beyond stores that opened in November. Cannabis retail delivered strong results in 2025, despite the market slowdown experienced in the second half of the year.

Fourth quarter revenue was essentially flat year-over-year. However, supported by a 190 basis point improvement in gross margin and continued efficiency gains in the store operations, operating income reached CAD 8 million, representing a 33% increase compared to the same period last year. Full year results reflect a new revenue record of CAD 330 million, representing 6% growth, supported by 3.9% same-store sales growth and new store openings. Gross profit of CAD 86.1 million was also a new record, as was the gross margin of 26.1%, which expanded 80 basis points year-over-year. Similar to the liquor segment, cannabis retail benefits from improved promotional execution and mix management. Operating income of over CAD 30 million was driven by margin expansion and overhead optimization, more than doubling compared to 2024.

Following a material step-up in 2024, Cannabis Operations experienced greater volatility during 2025. As we began to lap the inclusion of the Indiva acquisition in the baseline starting in the fourth quarter of 2024, net revenue in the fourth quarter of 2025 was flat year-over-year. Gross profit, gross margin, and operating income declined compared to the prior year, reflecting ongoing stabilization efforts related to the volume ramp-up and infrastructure improvements at our Atholville cultivation facility. For the full year, the segment delivered record net revenue of CAD 144.7 million, representing growth of 32%, supported by the Indiva acquisition and continued growth in international sales. Gross profit of CAD 32.9 million and a gross margin of 22.8% were also new full-year records for the segment.

We continue to see opportunities to further expand margins through increased scale and additional productivity initiatives. Adjusted operating income of CAD 2.5 million declined modestly year-over-year, primarily due to under-absorbed overhead investments. While cannabis operations remain the smallest and most volatile of our three commercial segments, which has significant opportunities to enhance our capabilities and footprint, positioning the segment as an increasingly important driver of long-term value creation for SNDL. Over to you, Zach, for additional comments related to our strategic priorities.

Zach George, Chief Executive Officer, SNDL: Let’s now turn to the progress we have made recently against our three strategic priorities. Growth, profitability, and people. Starting with growth. Each of our SunStream and Liquor Retail segments gained 20 basis points of market share year-over-year. Cannabis Retail achieved this through strong execution, new store openings, and conversions to our successful Value Buds banner. Liquor Retail also demonstrated solid execution in a challenging environment, supported by private label growth and the resilience of our Wine and Beyond banner. As previously mentioned, we increased our capital expenditures and working capital investments to support the opening of 3 additional SunStream stores and 2 new Wine and Beyond locations in the fourth quarter. Our SunStream operations segment also contributed meaningfully, delivering 32% full-year revenue growth, driven primarily by our leadership in edibles following the acquisition of Indiva, as well as continued growth in international sales.

Profitability is a strategic priority where we made substantial progress not only throughout full year 2025, but also in the fourth quarter, as demonstrated by nearly CAD 13 million in adjusted operating income and CAD 10 million in free cash flow delivered in Q4. The previously highlighted improvements in gross margin were a key driver of this performance, alongside our continued focus on G&A optimization. In this regard, our retail segments delivered full-year combined efficiency improvements of CAD 7.1 million in G&A reductions, and our corporate restructuring program has already surpassed the committed CAD 20 million in annualized savings, even ahead of the implementation of the third and final phase of the initiative. Last but not least, under our people strategic priority, we initiated our annual performance to pay process in the fourth quarter, designed to reward employee performance based on both overall business results and individual contributions.

We also delivered merit increases ahead of the holiday season across our facilities and retail teams, ensuring market competitiveness and reinforcing a consistent and transparent compensation approach. In addition, we completed our second annual employee engagement survey, gathering valuable insights from across the organization to further enhance our employee value proposition. Building on these insights, we expanded our employee engagement initiatives to include mental and physical well-being as well as diversity, equity, and inclusion, reinforcing our commitment to a safe, inclusive, and supportive workplace. Before concluding this presentation, we would like to share how we monitor our performance relative to our peer group as we remain focused on delivering superior performance and shareholder returns.

Looking at the most recent trailing four quarters reported by this group and normalizing for equivalent definitions, we can see that SNDL has climbed the ranks and has positioned itself firmly within the top tier in terms of profitability on an absolute basis. We believe that this progress, combined with the many opportunities ahead of us and our best-in-class balance sheet with a significant cash position, creates a compelling investment case. Once again, I would like to thank our entire team for their contributions and our shareholders for their continued trust and support. I am proud of what our team accomplished in 2025, and I’m confident in our ability to unlock additional value in the years ahead. With that, I will now turn the call back to the operator for the analyst Q&A session.

Conference Call Moderator/Operator, SNDL: Thank you. We will now begin the analyst question-and-answer session. To join the question queue, you may press Star, then one one on your telephone keypad and wait for your name to be announced. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press Star then one one again. One moment for questions. Our first question comes from Frederico Gomes with ATB Capital Markets. You may proceed.

Frederico Gomes, Analyst, ATB Capital Markets: Good morning. Thanks for taking my questions. First question on the SNDL retail segment and the same-store sales decline that we saw this quarter, and your comment about the market slowdown in second half. Can you talk more about what’s behind that slowdown? You know, is it related to, you know, competitive pressures at retail, just, you know, overall macro conditions or maybe, just the natural state of the Canadian market becoming more mature at this point? Thank you.

Alberto Paredero-Quiros, Chief Financial Officer, SNDL: Hi, Frederico. Good morning. Thank you for your question. Yeah. We have noticed, particularly in the last two months of the quarter, so the month of November and December, absolute declines in the market. We attribute that to multiple factors. Certainly, there is an element of saturation in retail doors across most provinces, particularly where we have the biggest footprint, like Alberta. But in Ontario as well, we’re starting to see that dynamic playing out. There are different dynamics as well in terms of what we’re lapping and what the industry is lapping from a heavy, aggressive promotional period in the prior year. At the end of 2024, beginning of 2025, we’re seeing pretty healthy growth rates based on more aggressive price competition.

Obviously as we’re lapping that, and we believe that not only ourselves, but many other retailers in the industry, they are focusing a little bit more on profitability and mix improvements. We see margin expansions, but we’re seeing as well some reduction in traffic and top line. There is as well a certain dynamic of some doors starting to shut down. We’re getting to a dynamic where a lot of independents or some of independents they are reaching their five-year rent commitments, and they are realizing that this is a competitive, tough and competitive marketplace. Some of the larger operators, they’re starting to build that scale and it is difficult to compete against those.

As a result of that, as I said, the market in certain areas is starting to shrink or some doors are starting to shut down. The industry is consolidating as well, that is another element, not necessarily impacting the market, but clearly the dynamics in the industry. In general, we think that it’s, as I said, saturation in the market and price points.

Frederico Gomes, Analyst, ATB Capital Markets: Thank you very much for that. Second question, still on the SunStream retail segment, specifically on M&A. So first, when do you expect that acquisition of the 1CM Inc. stores in Ontario to close? In regards to your comment about, you know, maybe the industry consolidating, do you expect your growth in SunStream retail to be mainly driven by, you know, organic new store openings, or are you more focused on the M&A side and acquiring some of these struggling players? Thank you.

Zach George, Chief Executive Officer, SNDL: Good morning, Frederico. It’s Zach George. Thanks for the question. This dovetails nicely from your prior question as well. Just in terms of the 1CM acquisition, remaining stores in Ontario, we’re just finalizing our review with the AGCO. We expect to, at the latest, report back to shareholders in Q2 on that timing, but should be resolved shortly. Yeah, just in line with the deceleration of same-store sales growth that we’re seeing across the space with almost every, you know, major player, if you think about this cyclically, this is exactly the time when operators start to lift their heads up and look for other ways to create value.

We do expect an intense focus on consolidation in the space, and I think that would apply to, you know, performing independents that may want to, you know, monetize their positions, but would also apply to both medium and even the largest portfolios in the Canadian marketplace.

Frederico Gomes, Analyst, ATB Capital Markets: Thank you very much.

Zach George, Chief Executive Officer, SNDL: In terms of organic growth, we have a pretty active pipeline, you know, double-digit count of assets that are under review in multiple provinces. We have a very attractive standup cost for the opening of new doors. We’re looking at this from multiple perspectives and not relying on, you know, M&A outcomes to drive future growth.

Frederico Gomes, Analyst, ATB Capital Markets: Thank you. I appreciate that. If I could just ask one final question. Could you just remind us about the status of your EU GMP certification and maybe comment about the international growth outlook for this year compared to 2025 as you expand that capacity? Thank you.

Zach George, Chief Executive Officer, SNDL: Yeah. We’re waiting for last visit to our site. It has been a long process that has required some patience, but we expect at this point to have the certification complete sometime over the summer. There has been some change in the administration in Germany that’s impacted us as well. In terms of our international business, we saw decent growth off a very small base in terms of 2025 versus 2024. We are, you know, in the process of developing relationships and building strong partnerships, but it’s still early days. We do expect material growth. Again, it’s a very small part of the business today that is a top three priority in terms of future capital deployment as well.

Frederico Gomes, Analyst, ATB Capital Markets: Thank you. I’ll hop back in the queue.

Conference Call Moderator/Operator, SNDL: Thank you. Our next question comes from Aaron Grey with Alliance Global Partners. You may proceed.

Aaron Grey, Analyst, Alliance Global Partners: Hi. Thanks for the questions. Yeah, maybe touching on retail, but in terms of liquor here, obviously, you still have, you know, some structural, you know, challenges within the broader category outside of yourselves. You know, some highlights for you guys. You guys did have one quarter, you know, during the fiscal year of some year-over-year growth, you know, return to declines over the past two. You guys are continuing to open up stores as well. Maybe just, given your outlook, given you’re still making investments in liquor, there are some structural challenges. You know, as you look into 2026, you know, how are you seeing, you know, the broader, you know, liquor retail? Do you think it’s in position for start to stabilize, you know, on a year-over-year basis? Thank you.

Alberto Paredero-Quiros, Chief Financial Officer, SNDL: Thank you, Aaron, for the question. Yeah, actually, throughout the year, as you saw in the first quarter, we have reported growth in 2025. That was driven primarily by the shift of Easter compared to the prior year. On a normalized basis, we have seen a pretty consistent around 3% revenue decline and about 4%-5% market decline in the category. It’s very hard to predict where that is gonna go. The first part or the first couple of months of 2026, we’re seeing similar declines in the market. At the same time, there are a couple of areas within our portfolio that are showing very good strength, and this is where we’re focusing our investments.

Particularly if you look at our Wine and Beyond banner, despite the market declines, mid-single digits, we’re seeing that banner growing healthy. It is a very different business model compared to the rest of the independent network, just main convenience business. Ours is a larger scale format, significantly different type of offerings, much broader portfolio base. That resonates very well with consumers, and that’s why as a result of that, clear differentiation and unique offering that we have, we’re seeing positive growth. It’s still in the low single digit, but it’s growth rates in the market.

As I said, we see a competitive advantage in that front, and that’s where we’re deploying the capital, both from a CapEx perspective, opening the doors, but as well the inventory associated with those store openings. We have as well our private label. One clear dynamic that we’re starting to observe as well is the loss in purchasing power. It’s making consumers more price conscious, and they’re looking for products that offer very good price points with good qualities as well. We have been expanding our private label offerings. That continue to gain penetration. It’s been already several years of increases in market share from our private label offerings.

That is an area where we’re still building additional relationships with producers, and we’re expecting to continue making investments and expanding our portfolio on that front because, as I said, that’s what is right now resonating with the consumers, and we’re seeing the stronger demand. That part of the portfolio as well is growing in relative terms to the rest of the business and in absolute terms as well. That’s where we’re focusing. We believe that we still have opportunities to manage elements of growth within our portfolio, despite the fact that the market we’re still anticipating it to decline in the low- to mid-single digits for the next several quarters.

Aaron Grey, Analyst, Alliance Global Partners: Okay, great. Appreciate that color. That’s helpful. Second question for me, just on some of your U.S. exposure, particularly with SunStream. Just if you could provide us, you know, an update in terms of, you know, some potential outcomes, you know, as we hopefully come to some resolutions, either with Parallel or Skymint, you know, here in 2026. I know in the past you’ve talked about, you know, potential changes you might need to be made to best optimize, you know, some of the U.S. assets. In terms of how you’re looking at SunStream, the U.S. assets and how to best optimize those in 2026 as hopefully we come to some resolutions there. Thanks.

Zach George, Chief Executive Officer, SNDL: Absolutely, Aaron. Thank you for the question. The portfolio has been simplified quite significantly. It’s really three positions. In the case of SunStream, I think you’ve been following the liquidation of that portfolio. We’ve seen a return of capital recently, as that position gets monetized, and capital repatriated. The two larger positions of interest would be in Parallel and Skymint. Parallel is going through a foreclosure process in the state of Florida, and Skymint is in receivership in Michigan. For almost the entirety of 2025, the foreclosure process related to Parallel was delayed because of a litigation that was in place.

There was a key settlement to that litigation in December, and we think there is now a path to resolve that foreclosure, and we’ll likely see it sometime in Q2 or just after. We are finally heading towards a resolution here after a multi-year process. The reason behind these delays and the inefficiencies is really, it really comes down to the lack of access to the federal bankruptcy courts in the United States. Once you’re relegated to these other insolvency proceedings at the state level, they’re much less predictable and the adjudication can provide unique outcomes. We’re pleased that we will actually land this plane, so to speak, in 2026. It’s been a frustrating process, and we’re eager to have it wrapped up.

Aaron Grey, Analyst, Alliance Global Partners: Okay, great. Appreciate the color, then I’ll go ahead and jump back to the queue.

Conference Call Moderator/Operator, SNDL: Thank you. This concludes the question and answer session. I would now like to turn the conference back over to Zach George for any closing remarks.

Zach George, Chief Executive Officer, SNDL: Thank you, and thanks for joining our call today. We look forward to updating you in the near future. Have a great.

Conference Call Moderator/Operator, SNDL: Thank you. This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.