High Tide Inc.

My name is Nadia and I'll be your conference operator today. At this time, I would like to welcome everyone to Hightight Inc's Q3 2024 Unaudited Financial and Operational Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers and marks, there'll 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 will now turn the call over to your host, Crystal Defoe. Please go ahead.

Well, thank you, operator, and good morning, everyone, and welcome to High Tidings 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. Mayank Mahajan, Chief Financial Officer. Yesterday, on September 16, 2024, the company released unaudited highlights from its financial and operational results. for the third fiscal quarter that ended April 30, 2024. 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 performances. 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 of 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 September 16, 2024. Our latest annual information form and our latest management discussion and analysis, each filed with securities regulatory authorities at cedarplus.ca or on EDGAR at www.sec.gov or on the company's website at www.hightideinc.com, which are hereby incorporated by reference herein. Although these forward-looking statements reflect management's current beliefs and reasonable assumptions based on the currently 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 Plus and EDVER. It is now my pleasure to introduce Mr. Raj Grover, President and Chief Executive Officer of Hightide. Thank you, Mr. Grover. You may now begin.

Thank you, Crystal. And good morning, everyone. Welcome to Hightide Inc's financial results conference call for the third fiscal quarter that ended July 31, 2024. I'll begin with some big picture comments regarding the quarter and our strategy before Mayank and I dig deeper into the numbers. We filed our press release and financials last night, and once again, I'm proud to report another record-breaking quarter for Hightide. Growth resumed with revenue up 6% sequentially to an all-time record of $131.7 million. You'll recall how we purposefully slowed growth in 2023. We saw the competitive dynamics and the market conditions and focused our efforts to be among the first cannabis companies to be free cash flow positive, thinking that those who weren't clearly on that path bore a meaningful risk of fading away. And that's exactly what's been happening. We have been free cash flow positive for five straight quarters now, while during this time, a whole series of public and private cannabis retailers have gone under. After proving our ability to consistently generate free cash flow, we said we would resume growth. And here we are with the highest ever level of quarterly revenue. While that is great to see, I know that we now have 183 stores across the country, which included us opening 11 new cabanas during the quarter using internal cash flow. We have now surpassed the lower end of our communicated range to add 20 to 30 new stores this calendar year. And given the momentum we are seeing, we feel that we can now reach the higher end of this range. Investors will remember that a while ago, we were aspiring to reach a 10% market share. One of the biggest achievements this quarter, and thanks to our team's efforts over the past couple of years, I'm exceptionally proud that we have already reached 12% market share, and we are well on our way to reaching our current goal of holding a 15% market share in the provinces where we operate. The 12% share we had during May and June 2024 was up from 10% a year ago, 8% during March and June 2022, and 5% when the discount club model was launched in October 2021. And we achieved this while only having 5% of the total bricks and mortar store count in these markets. clearly showcasing the potency of our disruptive and innovative discount club model. With this market leadership and a differentiated model, we have found the perfect balance between growth and harvesting free cash flow, which was $3.1 million in Q3. Over the trailing four quarters, free cash flow was $21.8 million, which represents a yield of over 9% versus our enterprise value. Our Cabana Club has always been the lifeblood of our company. And I'm really excited to see it continue to expand at such a rapid pace. We are now at 1.55 million members, up an impressive 8% sequentially and 41% year over year, equating to over 500% growth in memberships since we launched the discount club model in October 2021. For the fourth consecutive quarter, Elite, our paid membership tier, has been growing at its fastest pace since inception. currently sitting at 57,000 members, up 30% sequentially and 203% from a year ago. These numbers are worthy of celebrating and add to our confidence about the success of our innovative retail model and the exciting growth trajectory that we are on. I'm also very pleased to announce that our net income continued its upward momentum from breakeven in Q1 to $200,000 in Q2 and now reaching $800,000 of net income in Q3. This is truly an anomaly in Canadian cannabis and one we are particularly very proud of. Our execution is so solid that not only are we back to revenue growth, we are at the point where we are able to grow organically by building stores with internally generated free cash flow. In fact, we had the highest capex spend during the past 11 quarters in Q3 building out stores. Despite this, we were still able to end the quarter with a cash balance of $35.3 million, which is the most we've ever had. Another point showing how well our model is performing is our same-store sales growth. Since we launched our innovative discount club near the end of October 2021 to the end of June 2024, our same-store sales rose a cumulative 118%. In contrast, the average operator has experienced a revenue decline of 21% during this period. Our impressive performance month in and month out has continued. In July, our same store sales rose another 5% versus June, resulting in a pace that was 129% ahead of where we were back in October 2021. We're especially pleased this quarter by the fact that despite adding 21 new stores in this calendar year and 11 stores during Q3, we have still been able to generate our best-ever EBITDA level as well as continued free cash flow. Each new store we open takes anywhere from 6 to 12 months to reach maturity, and payback periods based on an average are about 10 months. Thus, new stores initially represent a drag on consolidated results due to the ramp-up that is required. Given our track record and the strength of our business model, even in this hypercompetitive landscape, we expect all these new stores to be additive to results within a few quarters. We recently began disclosing our annualized sales per square foot, another critical metric for retailers. In Q3, it totaled $1,658, which marked an improvement from $1,637 in Q2. We are extremely proud that we are ahead of many best-in-class blue-chip retailers such as Lululemon, Target, Walmart, and Canadian Tire on this metric. This comparative information was included in our revamped investor presentation last week. We have begun to include much more retailer-specific information in an effort to try to broaden our shareholder base and better appeal to investors who buy consumer discretionary or staple stocks. Early feedback on this approach has been very positive. We aren't where we were a few years back when the cannabis industry consisted of companies making promises and projections, relying on hype and optimism to appeal to investors. Several years in, companies need to be real now. While many of those operators from years ago are defunct, we aren't just telling a story. It is backed by a track record, millions of retail transactions, and strong cash flows. We have proven that we know how to run a tight ship. And on that subject, I'm extremely proud that while we have grown to set a new record revenue, new revenue record in Q3, we are taking cost out of the system where we can at the same time. Our Q3 GNA expenses were only 3.7% of revenue. This level exceeded our internal expectations, compares to 5.2% a year ago, and was the lowest level in four years. In dollar terms, GNA was just $4.8 million, marking the lowest level in 11 quarters even though our revenue has more than doubled during this period. I will now go over the highlights from the financials, and Mayank will do a deeper dive. Revenue for Q3 was $131.7 million, an all-time record, up 6% year-over-year and sequentially. Our bricks and mortar segment led the way up 10% year-over-year and outperforming our expectations. In the month of June, our average store was an annual revenue run rate of $2.6 million, which compares to our average peer revenue of just $1 million in the provinces where we operate. In Ontario, the largest market and the focus of our future expansion, our outperformance was even more pronounced. Excluding newer stores open six months or less, which are still ramping up, the average Kanakabana store was in a $3.5 million annual revenue run rate, whereas the average of our peers in Ontario was just $1 million. Our same-store sales were up 1% year-over-year in Q3. While this is less than levels we have historically achieved, there's no doubt that the overall market has slowed considerably and in many cases has actually turned negative. For example, According to Statistics Canada, total industry sales in the five provinces where Kanakabana has a presence actually experienced a 10% year-over-year decline during May and June, making our 1% gain for the quarter a huge outlier to the upside. Sequentially, our 5% same-store sales growth is even more encouraging. Even accounting for the extra days, our average daily same-store sales posted a 3% sequential increase in Q3, which is a 13% annualized pace. In addition to the sales of merchandise in our stores, our Kabanalytics data and advertising platforms continue to expand. Given the increase in our footprint, our sales volumes and operational outperformance, as well as the persistent struggles experienced by many of our competitors, more and more interest is pouring into our retail ecosystem. Kabanalytics business data and insights platform advertising revenue and other revenue, which includes management fees, interest income and rental income was $9 million in Q3, up 36% year over year and 1% sequentially. Consolidated gross margins were 27% in Q3 2024, which was a percent lower than the 28% we generated last quarter and in Q3 last year. We have been holding the line on gross margins in our stores, not raising them so to not encourage marginal players from staying in the race and renewing their leases as they come up. The strategy is working. We are outlasting our competitors as shown by our increasing market share. As this industry shakeout becomes more and more pronounced, there will be opportunities to raise gross margins down the road. Turning to expenses, salaries and wages increased in Q3 both in dollar terms as well as a percentage of revenue. This is entirely due to the rapid pace of store growth with 11 stores open during the quarter. We have to hire a full team for each new location four to six weeks before a store opens. Good people can be hard to find, secured, and trained so that they can provide cabana-level service to customers on day one. And of course, stores aren't running at full speed on day one, as it takes time to grow the regular customer base. Accordingly, we aren't too concerned with the salaries and wages increase this quarter, as it's part of the normal growing pains of expanding the store network. In contrast, we were able to drive our GMA expenses much lower, both in dollar terms and as a percentage of revenue. One reason for this was our ability to react and take cost out of an e-commerce segment as a result of revenue declines in what is a tough market, which is also impacted by inflationary pressures. In particular, we were able to reduce operating expenses in our e-commerce segment by 45% year-over-year in Q3, which was greater than the 37% decline in gross profit dollars, which actually resulted in improving the segments adjusted EBITDA to approximately $700,000 from $300,000 in Q3 2023. Adjusted EBITDA was $9.6 million for the quarter, excluding the impact of the removal of the one-time social responsibility fee in Manitoba. Adjusted EBITDA was up 24% year over year. Adjusted EBITDA was down 4% sequentially versus $10 million in Q2. As I explained earlier, this was entirely due to the heightened pace of growth with 21 stores added this calendar year, 14 of which were open since the start of Q3. The expenses for new stores start before they even open up, and it is taking longer for the stores to ramp up today than a year or two ago, just due to heightened competition. That said, we aren't worried. Our new stores are in excellent locations, and backed by the power of the discount club model, we are confident that they will ramp up and start adding to adjusted EBITDA a few quarters in, even though they result in a net cash burn initially. I know that if you look at EBITDA without the customary adjustments for items such as share-based compensation, it was $8.9 million in Q3, which was up 4% sequentially and its highest level ever. Our income from operations was $3.1 million this quarter. This marked a reversal from a loss of $0.7 million a year ago, an increase of 54% versus $2 million in Q2 and a new record high for high tides. The strength flowed all the way down to net income, which also improved to approximately $800,000 in Q3 from a profit of $200,000 in Q2 and a loss of $3.6 million in Q3 last year. Fully diluted earnings per share was $0.01 this quarter versus break-even in Q2 and a loss of $0.04 a year ago. In conclusion, Q3 was another excellent quarter for Hightide with no shortage of highlights. including reaching a 12% market share and a return to revenue growth. Our company has continued to strengthen since the end of the quarter, including the initial closing of our $15 million debt facility, breaching the 1.5 million Cabana Club member and 50,000 elite member milestones, as well as overhauling our Canna Cabana website and investor presentation for the better. This all happens because of the dedicated team we are blessed to have at Hightide, for which I'm eternally grateful and remain optimistic for new heights to come. With that, I'll turn it over to Mayank for his comments and deeper dive into the numbers.