High Tide Inc.

Thank you for your patience, everyone. The Q4 Hightide Inc. Q1 2023 earnings call will begin shortly. During the presentation, you'll have the opportunity to ask a question by pressing star followed by one on your telephone keypad. Thank you. Good morning, my name is Leo and I'll be your conference operator today. At this time, I'd like to welcome everyone to Hightide Inc's first quarter of 2023 unorbited financial and operational results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. Instructions will be provided at that time for you to queue up for the question and answer session. I'll now turn the call over to your host.

Thank you, operator. Good morning, everyone, and welcome to High Tide Inc. quarterly earnings call. Please note that all earnings discussed on this call are presented on an unaudited basis. Joining me on the call today are Mr. Raj Grover, President and Chief Executive Officer, and Mr. Sergio Patino, Interim Chief Financial Officer. On March 17, 2023, the company released unaudited highlights from its financial and operational results for the first quarter ended January 31st, 2023. Before we begin, please let me remind you that during the course of this conference call, High Tides Management may make statements including with respect to management's expectations or estimates of future performance. All such statements, other than statements of historical facts, constitute forward-looking information or forward-looking statements within the meaning of the applicable securities laws and are based on assumptions, expectations, estimates, and projections as the date hereof. Specific forward-looking statements include, without limitation, all disclosures regarding future results of operations, economic conditions, and anticipated courses of action. For more information on the company's risks and uncertainties related to forward-looking statements, please refer to the company's press release dated March 17, 2023. our latest annual information form, and our latest management discussion and analysis, each filed with the securities regulatory authorities at CDAR.com or on EDGAR at www.sec.gov or on the company's website at www.hightideinc.com and which are hereby incorporated by reference herein. Although these forward-looking statements reflect management's current beliefs and reasonable assumptions based on the current available information to management as of the date hereof, we cannot be certain that the actual results will be consistent with the forward-looking statements in the future. There can be no assurance that actual outcomes will not differ materially from these results. Accordingly, we caution you not to place undue reliance upon such forward-looking results. For any reconciliation of non-GAAP measures measured and discussed, please consult our latest management discussion and analysis filed on CDAR at EDGAR. It is now my pleasure to introduce Mr. Raj Grover, President and Chief Executive Officer of Hightide. Thank you. Mr. Grover, you may begin.

Thank you, Crystal. And good morning, everyone. Welcome to Hightide Inc's financial results conference call for the first quarter ended January 31st, 2023. As disclosed in Friday's press release, we generated record revenue and adjusted EBITDA for the second consecutive quarter, as well as a 64% improvement in free cash flow from our operations. Following this momentum on Friday, we made it clear that it is our objective to become free cash flow positive by the end of this calendar year. I'll start this call by providing an overview of our results and other key developments in the first quarter. Sergio will discuss the financials in depth, And after that, we'd be pleased to answer any questions you may have. Let's go over the highlights from our Q1 results. Total revenue for the quarter was $118.1 million. This was up 64% year-over-year and up 9% sequentially. Our consolidated gross margin was 27.3% in Q1, which is consistent with the prior three quarters. I note that gross margins earned from selling cannabis in our core bricks-and-mortar stores ticked sequentially higher this quarter. Our Canadian revenue represented 84% of total revenue and continued to post gains. Same-store sales in our stores were up a massive 52% year-over-year and 4% sequentially, making it the sixth consecutive quarter or sequential same-store sales increases. While the quarter over quarter same-store sales growth number has normalized over time from the supercharged pace we saw initially, we continue to outpace national same-store sales changes within the Canadian cannabis sector. If we can keep it up, 4% a quarter translates to a pace of 17% annualized, a rate I suspect most of our competitors would love to reach. Our national market share outside Quebec rose another percentage point during Q1 to 9%. which was the fifth consecutive quarter where we made a 1% increase. We continue to believe that we have the best retail cannabis concept in the country, and this is evidenced by the outperformance of our stores. Our average store in Alberta, where we have our largest footprint, generates twice the revenue as the provincial average, while our average store in Ontario, by far the largest cannabis market in Canada, generates more than triple the average revenue in that province. Adjusted EBITDA for Q1 2023 was a record $5.5 million, representing our 12th straight quarter of positive adjusted EBITDA. Our adjusted EBITDA was up 10% versus Q4 2022, which itself was a record high for our company, and was up 86% versus Q1 2022. Our results have never been stronger, and they are sustainable, as evidenced by the fact that we have now generated $17.2 million in adjusted EBITDA over the past four quarters, which is more than ever in the history of Hightide. Our balance sheet remains strong. We ended the quarter with $23.7 million of cash on hand. Our total debt currently stands at $40.3 million with no meaningful maturities until December 31st, 2024. We continue to have a great relationship with Connect First Credit Union. Our $19 million facility with them carries an enviable rate of prime plus 2.5%, and we are in discussions to increase our borrowing capacity with them. During our last conference call, we outlined our objective to add another 40 to 50 Kanakabana locations in 2023 via a fairly even mix of accretive M&A and organic store openings, which is what we achieved in 2022. Today, given the macro dynamics in the market, we are no longer aiming to grow that much this year. A quick look at our store count, revenue, and EBITDA charts can tell you that we know how to grow at high tide. We have built the largest revenue-generating company in Canadian cannabis despite never having more than $30 million at the end of any quarter, and we have improved profitability as we did so. However, we also know how to be nimble and adapt to the changing environments. About two years ago, it became clear to us that we needed to shift to a well-rounded value offering in our stores to be able to really outperform in the market. So we launched our innovative discount club concept, which has been a smashing success. Similarly, the past two years were the time to grow our footprint at an unmatchable pace, and we did exactly that. We have now cemented our standing as the clear leader in Canadian cannabis retail. We will continue to grow, but it's no longer the time to keep the gas pedal continuously slammed on the floor, and drive as fast as possible unless a compelling opportunity presents itself. Already having achieved the most scale, now is the time to tighten up our operations and focus on becoming among the first group of Canadian cannabis companies to be free cash flow positive. We have already made great strides on that front, which I will highlight in a moment, but it's time for a relative pause on the pace of expansion of our networks. On the organic side, there are still some leases we are building out, which are located in prime real estate plazas in thriving markets, and we have high hopes for these sites. However, this will be at a significantly reduced pace than in the past. Slowing down will help reduce our cash outlays to build out new locations, accelerating our goal of becoming free cash flow positive by the end of this calendar year. Further, we won't have to endure as much of a ramp-up period before new stores can reach maturity. While this ramp-up period is shorter now with a discount club model, newer stores still represent a drag on consolidated metrics in the short term as they advance towards maturity. For example, we opened eight stores organically in British Columbia, Ontario, and Manitoba since November. We are happy with the performance of these stores, and each one of them has posted sequential gains every month since opening, including February. However, because they are new, their revenue run rate is currently still well below Kanakabana's average in those provinces. In aggregate, onboarding fewer new stores throughout calendar 2023 will reduce these growing pains and pressure on the near-term cash flows. We continue to get the best real estate opportunities offered to us by major landlords so we can be very selective and opportunistically build them out over the course of the year. Similarly, the environment for consummating M&A transactions has become much tougher. Despite our proven leadership in the market, the consistently improving profile of our financials, and our strong balance sheet, our share price has nonetheless fallen to new lows, which we largely see as a guilt by association phenomenon across the cannabis sector. As a painful milestone of this disconnect, I note that we just reported about the same level of revenue for one quarter as our entire current market cap. This has made entering into M&A now significantly less attractive or accretive than in the past. Accordingly, we are doing the prudent thing and meaningfully slowing down acquisition activity. I remain Hightech's largest shareholder, having never sold any of my shares, and dilution is on my mind more than ever, especially given the current share price. If a transaction is strategic and the terms are too good to pass up, we can still engage, but we have raised the bar for what we will buy. and therefore we no longer expect to add 40 to 50 stores in this calendar year. Despite our market leadership position in a growth industry, our operational excellence and our strong balance sheet, our shares are currently trading at 0.3 times our current annual revenue run rate and just six times our just reported adjusted EBITDA annualized. This is not the time to issue more shares unless an opportunity is absolutely compelling. Again, we know how to grow, we know how to execute operationally, and we know how to adapt to changing circumstances. Our focus right now is on fine-tuning our existing operations, on improving how we manage working capital, becoming more efficient in our back office, and all with the goal of being in the first group of Canadian cannabis companies to achieve free cash flow profitability. So let's look at the strides we've already made in that regard. Cash flows from operations before changes in non-cash working capital were $4.4 million in Q1 2023. This was the sixth consecutive quarter where this figure was positive and was up meaningfully versus $1.7 million in Q1 2022. Over the past four quarters, cash flow from operations before changes in non-cash working capital have totaled $11.9 million. In Q1 2023, including the impact of changes in non-cash working capital, which excludes leases and capex, total cash flows from operations were positive 2.1 million, a huge swing versus negative 1.6 million in Q1 2022. Recall that we opened eight new stores organically in Q1 2023, and as we slow down the pace of new store builds going forward, we expect investments in working capital to represent less of a drag on our overall cash flows. CapEx was $1.7 million in Q1 2023, which was again down from $2.5 million in Q1 2022. So our cash flows from operations this quarter were more than enough to cover working capital investments and capital expenditures. Again, as we put up fewer new stores going forward, the drag on cash flows represented by CapEx should further lessen. Now due to IFRS standards, lease payments are shown as financing items on our cash flow statement and investors may want to consider the full free cash flow picture, including leases. Lease liability payments were $2.7 million in the first quarter of this year, while they were $2.2 million in Q1 2022. Putting it all together, our total cash flows from operations after CapEx and our leases were negative $2.3 million this quarter versus negative $6.3 million in Q1 2022, representing a 64% improvement. This is the number we are aiming to improve and swing to positive territory in the near future. Nine percent of their increase in revenue between Q1 2022 and Q1 2023 flowed down to free cash flow improvements. This was also helped by the strong cost controls we have been implementing. We note that SG&A was only 6% of revenue this quarter, down from 8% in Q1 2022 and 7% in Q4 2022. We are confident that by slowing down growth for now, focusing on maximizing our operations, and further tightening up our SG&A, we can achieve this goal. We will keep our eyes on macro conditions, and when the time is right, We will upshift and step back harder on the gas as we continue to capture market share in Canada and internationally in the coming years. We are closing in on the milestone of 1 million Kibana Club members, and this membership base will be key to us reaching our objectives. We are currently sitting at over 975,000 members today, representing 14% of cannabis users across the country, excluding Quebec, for Health Canada's 2022 Canadian Cannabis Survey. Elite sign-ups continue to grow, currently standing at approximately 9,500, representing a 58% increase since we last reported our financial results just over six weeks ago. Having paid $30 a year for Elite status, since the first year is half price, we expect these customers to be even more loyal to the Kanakabana banner. Recall that we only launched Elite in late November, and Elite-only SKUs represent approximately 2% of our in-store offerings today. Over the long term, we will be focusing our skew selection towards elite by having at least 25 to 30% of our in-store offerings be elite only. With the ramp up in our elite inventory and with more word of mouth, we anticipate elite signups to accelerate over the coming quarters. Given their higher gross margin profile and the fact that we collect annual membership fees all up front, this should further help improve our operational cash flows. In terms of what we are seeing in the competitive dynamics in Canadian cannabis retail, the margin landscape is starting to show positive signs and things are inching higher. Many operators can't keep up with this market and are closing stores. We expect this to continue as we approach the five-year anniversary of cannabis legalization this year, and we expect to receive a disproportionate amount of that revenue. I would like to offer a piece of insight regarding expectations for Q2 for two reasons, which are entirely calendar-based. First, our fiscal Q1 includes the holiday season, which always makes it a difficult comp for both our bricks and mortar stores and our online consumption accessories and CBD businesses. And second, Q2 has three fewer calendar days when compared to fiscal Q1. With no new stores having been opened so far through the quarter, it leaves same-store sales as the main driver of consolidated revenue growth. We have often compared our same-store sales gains to the total national picture including the impact of new stores. On that front, we made solid gains in daily same-store sales in February versus January. With the moving parts of daily average sales growth on one hand versus there being three fewer days, a tough comp, and not much in the way of new store openings, in aggregate, we expect Q2 to look very similar to Q1. These factors of having three fewer calendar days and comparing against the holiday season will disappear after Q2. Again, with tightening up our ship, focusing on optimizing cash flow from operations, slowing down new store expansion, and margin-enhancing initiatives, including FastTender, Elite, and a white-label program gaining momentum, we expect to once again increase our rate of Canadian store expansion once we have reached our objective of becoming free cash flow positive later this calendar year. Since Hightide's inception 14 years ago, we have built what is now the largest revenue generating Canadian cannabis company, which includes the largest non-franchise bricks and mortar retail portfolio in the country. We are now the clear retail leader in Canada, and we are taking steps to ensure we keep it that way. As Canada's cannabis revenue leader, even with timid assumptions, we anticipate passing half a billion dollars in annual revenue run rate by the end of our current fiscal year. I want to give a huge thanks to our team for helping deliver the best quarter yet in Hightight's history and for enthusiastically embracing the next chapter in our company. On that note, I would like to pass it over to Sergio Patino, our new interim chief financial officer, for his comments.