My name is [indiscernible], and I'll be your conference operator today. At this time, I would like to welcome everyone to High Tide Inc.'s fourth quarter of 2022 unaudited financial and operational results conference call. [Operator Instructions]. And I will now turn the call over to your host.

Thank you, operator. Good morning, everyone. I'm Krystal Dafoe, Director of Corporate Governance, and welcome to High Tide Inc.'s year-end earnings call. Please note that the earnings discussed on this call are presented on an audited basis. Joining me on the call today are Mr. Raj Grover, President and Chief Executive Officer; and Mr. Rahim Kanji, Chief Financial Officer. Last night, the company released audited highlights from its financial and operational results for the fourth quarter and year ended October 31st, 2022. Before we begin, please let me remind you that during the course of this conference call, High Tide's management may make statements, including with respect to management's expectations or estimates of future performance. All such statements and other than statements of a historical fact constitute forward-looking information and 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. The specific forward-looking statements include, without limitation, all disclosures regarding future results of operation, 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 January 30, 2023, released last night, our latest annual information form, and our latest management discussion and analysis each filed with securities regulatory authorities at sedar.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 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 mentioned and discussed, please consult our latest management discussion and analysis filed on SEDAR and EDGAR. It is now my pleasure to introduce Mr. Raj Grover, President and Chief Executive Officer of High Tide. Thank you. Mr. Grover, you may begin.

Thank you, Krystal, and good morning, everyone. Welcome to High Tide Inc.'s financial results conference call for the fourth quarter ended October 31st, 2022, and what a quarter it was. As disclosed in last night's press release, we generated record revenue, record adjusted EBITDA, and year-over-year same-store sales growth of 50% and 9% sequentially. I'll start this call by providing an overview of our results and other key developments in the fourth quarter. Rahim will discuss the financials in depth, and after that, we'd be pleased to answer any questions you may have. Before getting too deep into the quarterly numbers, let's take a step back and look at how this was yet another exceptional year for High Tide. We generated revenue of $356.9 million in fiscal 2022. This was up 97% versus fiscal 2021 and up 329% versus fiscal 2020. No matter what the short-term dynamics that the Canadian cannabis market has experienced from initial product shortages to COVID-related uncertainty to retail market saturation, the High Tide team has always found a way to grow our business through leaps and bounds. And this hasn't been just topline growth for growth's sake. It has also translated into handsome adjusted EBITDA increases. This fiscal year, we generated $14.6 million of adjusted EBITDA, up 17% versus fiscal 2021 and 83% versus fiscal 2020. Our business is currently on an annual revenue run rate of $450 million, further cementing our position as having the highest cannabis revenue of any Canadian operator. It's fair to say we expect the company to keep growing its top line, achieving its operational objectives, and continually generating value for shareholders. Now let's dig into the new information to the market, our Q4 results. Total revenue for the fourth quarter was $108.2 million. This was up 101% year over…

Thank you, Raj, and good morning, everyone. I'm very excited to share the meaningful progress we made as shown in our record-breaking Q4 and year-end results, so let's go over the numbers. In the fourth fiscal quarter ended October 31, 2022, the company recorded consolidated revenue of $108.2 million, representing an increase of 101% year over year and 14% sequentially. While we are very excited about the Q4 revenue figure, we know that revenue has continued to grow significantly after the quarter. Recall that we opened eight new stores in December alone and had a very strong holiday season. As a percentage of revenue, gross profit remained relatively constant versus the prior two quarters at 27%. Of primary importance, however, is that our four-wall gross margins earned from selling cannabis in Canada, which drives the vast majority of our revenue, was up a full percentage point in Q4 versus Q3 and has continued to tick higher so far through Q1. Our gross profit was $29.5 million in the fourth fiscal quarter of 2022. While gross margin as a percentage of revenue of 27% was down compared to 33% in Q4 2021, this was fully anticipated and communicated due to our shift in strategy with the launch of our innovative discount club model, which aim to increase gross margin dollars by generating more sales. And this has undoubtedly worked. For example, I highlight the gross margin dollars in the last two quarters of fiscal 2022 were $55.3 million, meaningfully higher than the $34.2 million generated in the last two quarters of fiscal 2021. The more important factor for me is seeing that gross margins in our cannabis stores have not only stayed stable, rather, they have moved higher over the past 12 months. And as ELITE cannabis seeds and our white-label…

[Operator Instructions]. Our first question today comes from Scott Fortune from ROTH Capital Partners. Your line is now open.

Good morning, afternoon, wherever you may be. And congrats on the quarter. Just want to reiterate, you provided good color on M&A and organic store growth targets, remaining in that 40 to 50 stores a year. Although on your press release, you said that might slow down on M&A side. But just wanted to see where the strong growth -- store growth coming from in the different provinces. As you see some of these provinces reach saturation, do you see more organic growth or M&A store growth plan going forward? Just a little more color on the store growth coming out here into 2023 here.

Good morning, and thank you, Scott. Absolutely. So Scott, as far as you know, this current year or this past calendar year, we added 45 stores to our portfolio. Most of that store growth came from Ontario, and we had a very even split between organic growth and accretive M&A that we executed on. And we believe 2023 calendar year will be no different. Our intention is to add 40 to 50 stores, pretty much an even split of organic growth and accretive M&A opportunities that we are seeing. We are constantly getting inbound opportunities that we are exploring. But we're going to be very opportunistic and only buy the ones that are most accretive and strategic. So we are the biggest players now, Scott, and we have been for some time, and we are practically setting the price for what these stores are worth. And we continue to get these opportunities, but we're going to be very strategic in terms of how we approach this. But I feel we can still add 40 to 50 locations this year. It's not going to be easy, like I said. We, in typical High Tide fashion, we needed the last day of the year to make it happen, but we did. Our amazing team always comes through. So we believe we can add another 40 to 50 locations this year.

Okay. I appreciate the color. And then, my follow-up would be: You're early in rolling out your white-label product stores, your own stores here, but can you provide a little more color on the offering, the number of SKUs you have, and the ramp of your own products in the store, and what percentage of your own products will be sold in your own stores? And obviously, I think for longer term. White label could represent about 20% plus of the revenue -- the revenue mix. Buton that white-label growth plans as you see '23 playing out here.

Sure. So, Scott, currently, we have 10 SKUs, a total of 10 SKUs in the market. Seven of them are Cabana Cannabis Co. products, and three of the SKUs are New Leaf natural products. And our average store in Ontario, let's say, for example, with all of these SKUs in the market, it's still only making 2% of our total inventory. So it's a very small percentage of sales, but that should grow over time as we have more offerings coming this year. We just added three additional SKUs and we continue to add more SKUs. So long term, Scott, we think we can get to 25% of all of our SKUs in our white-label products. And that's going to include Cabana Cannabis Co. That's going to include FAB CBD, New Leaf, and other brands that we continue to build. And we've already realized about 4% in additional gross margins from selling our current white-label SKUs. So it's -- all of this is going according to plan. We anticipate that the Alberta market might also open up to white label. There are considerations in Alberta regarding that. That will increase our market size even more. But we remain very excited about this margin-enhancing opportunity that we have for white label, and you're going to see constant rollout of more white-label offerings throughout the year from us.

Thanks. I appreciate the color, and I'll jump back in the queue.

Our first question today comes from Frederico Gomes from ATB Capital. Your line is now open.

Hi. Thank you. Good morning, Raj and Rahim. Congrats on a great quarter, and thanks for taking my questions. My first question is on the cash flow side. You obviously -- you had a good year. You generated positive cash from operations. And I think, Rahim, you mentioned this a little bit in terms of free cash flow. I know that you might be approaching that, but any more color on when you think that could happen? It's pretty clear that you are reducing your burn in your improvement of business. But any guidance you could provide us to when you think you can reach that? Thank you.

Thanks, Frederico. We've had a great momentum this year, moving towards a free cash flow position. Our Q4 cash flow from operations before working capital was $3.5 million, and our core -- Q4 cash flow from changes in working capital was $4.8 million. So Q4 total cash flow from operations, including working capital, we were able to generate $8.3 million. If you look at the whole -- if we look at the whole year of 2022, cash flow from operations before working capital was $9.1 million, better than 2021 of $7.1 million. And our cash flow from changes in working capital was negative $4.6 million, better than 2021 of $9.9 million. If you look at our total cash flow for the year from operations, including working capital, we ended the year with $4.5 million, better than 2021 of negative $2.8 million. Our free cash flow was $4.6 million negative in 2022, which is a huge improvement from negative $13.5 million in 2021. So things are definitely trending in the right direction.

Okay. Thanks for that. And in terms of your margins, your gross margins were pretty stable this quarter, even though you had a higher mix of sales from retail in Canada, which is a lower margin than . So could you comment on that dynamic? What should we expect in terms of gross margins for this year? And what is the opportunity that you see for potential margin increases in Canadian retail? Thank you.

Yes, sure. So our consolidated gross margins have stabilized over the last three quarters. Our CBD margins have come down given the environment. But more importantly, our brick-and-mortar gross margins have been ticking steadily higher, maintaining that balance. Looking ahead, we think we can increase margins by slowly increasing prices in certain markets, and other initiatives are gaining steam, such as our lead program, white label program, and introduction of seeds and implementing fast tender across all our locations.

Okay. I appreciate it, and I'll hop back in the queue. Thank you.

Thanks, Frederico.

Our first question today comes from Matt Bottomley from Canaccord Genuity. Your line is now open.

Hi there. This is for Matt Bottomley. Congrats on the quarter, and thanks for taking our question. So I just have a quick question regarding the Cabana ELITE program. I know it's only been two months since the program launched, but could you provide some color on how the program has been rolling out so far, and what kind of expectations you have for the program's ramp up in fiscal 2023, and what kind of drivers you have in place for -- to support the growth of the program over time? Thanks.

Yes, good morning, Johan, and thank you for your question. So, Johan, we have signed over 6,000 members already in Cabana ELITE with less than 2% of our inventory in actual ELITE products. So we mentioned in the press release and also on the script that we're very excited about this uptake because we practically just launched this program. Again, it's the first-of-its-kind initiative that I don't see any other company doing or innovating like us. But we're super excited about the ELITE future because we feel that we can get the ELITE product line to reflect 30% to 40% of our in-store offerings long term. So just look at the delta, we're currently sitting at 2, we're going to 30 to 40. So you can understand the uptake that we can have once we get to this long-term rollout of ELITE products. In fact, a good 55 to 75 SKUs, I believe -- we just worked out internally with our team -- are becoming this week, and I think that is going to have an impact alone, not only considering what we're looking at two to three years out, but we're going to start seeing a little bit better intake of ELITE rollout as we start to introduce these SKUs. We are very happy with the intake so far because we're going to continue to introduce new ELITE offerings every quarter. And this is a very high-margin recurring revenue stream for High Tide and should increase customer stickiness even further because if I'm paying for something as a customer, I want to come back to that store and shop more because I'm already a committed paying member. We already had very sticky members, as you know, -- we were over -- 90% of our daily transactions in stores are conducted by club members. And now, when we're turning these members into ELITE, we think this goes even further. The current economical return that we're yielding on ELITE is over 70% gross margins. And this is selling ELITE at half price at $2.50 a month, like I mentioned, or $30 a year. But this is going to go up to $60 a year or $5 a month when the price goes up next year. So we think we can yield north of 80% gross margins to ELITE.

Right. Thank you so much. I appreciate the color. I'll jump back into the queue.

Our first question today comes from Andrew Partheniou from Stifel. Your line is now open.

Thank you for taking my questions. Congrats on the cash generation this quarter. I wanted to just get a little bit of clarity on the language. In the press release, you discussed slowing down M&A activity. But in your outlook for new stores, it seems that you're guiding for roughly the same number of acquisitions as last year. So if you could just clarify what you meant by slowing down M&A activity in the press release, that would be helpful.

Yes, good morning, Andrew, and thank you very much for your question. I understand where the confusion is. So let me clarify a bit. So, Andrew, if you if you go back to 2021, we acquired six e-commerce platforms in the United States and internationally, one in the UK. And what we meant by slowing down an M&A activity, and I've said this multiple times, given the opportunity that -- given our equity prices remaining so depressed, we don't even want to pay 5 or 6 times EBITDA. And we are now focusing on more smaller, highly accretive brick-and-mortar M&A that we did last year. As you know, 87% of our revenue is derived from our brick-and-mortar operations, and we have no impairment in those operations. Impairment is not a norm for a High Tide. And considering the dynamics out there, our other complementary business lines supporting our brick-and-mortar businesses, our e-commerce platforms catering to the consumption accessories business, which remain very healthy because we have one of the -- some of the most searchable websites in the world when it comes to consumption accessories. So what we were talking about here is we are going to slow down on larger M&A transactions such as we have conducted in 2021. We explored many opportunities in 2022 but did not press the trigger on it, considering what was happening in the macro markets and given inflationary times that we're all living in and how it's affecting the macro environment and how it's affecting CBD sales and other items because consumers have to prioritize their spending. So we're just moving down on that portion of the business. Our brick-and-mortar is going very strong. Our strategy is working. And like I said, we have a ton of inbound opportunities. These are not also -- we're not even soliciting 10 groups that we want to do M&A. But given the right opportunity, the right location -- locations are very critical to us. If we get the right anchor locations we are looking for, we know when we put our model in there, it's going to do twice as much better. Like I mentioned, our Alberta average sales are over 2 times the average unit sales in Alberta, provincial average, and almost 3 times Ontario average. So we're going to continue on that trajectory, build upon our 87% of our core brick-and-mortar business accretive M&A, and the rest to organic growth. But we are going to slow down on online opportunities unless we get a very good one that we cannot refuse at a very, very good multiple. So that's where we're at right now.

I appreciate that clarification. Thank you. And for my second question, just maybe following on something that you mentioned here. I'm talking about valuation multiples. I think, last year, you paid somewhere under one-time sales on average and between 4.5 to 5 times EBITDA for your stores. I'm wondering what are you seeing in terms of multiples now, and what your thresholds might be? And also attached to that is, how are you thinking about funding these? You just announced a credit agreement, and considering last year, I think only two had cash components -- two transactions

Correct. So Andrew, just for clarification, most of our deals last year were between 3.5 and 4 times EBITDA. Most of them were conducted in Ontario and Saskatchewan and also some in Alberta. But only the one deal that we did in British Columbia was over a 5 multiple. I believe it was 5.25, which is commanded in the BC market because it's a very limited-license opportunity market. So we're very disciplined in terms of what we paid for these stores, and we are going to remain very disciplined. And to answer your question on what I see the multiples being this year, if our own stock -- in our opinion, our stock is very undervalued at the moment. So -- and our stock is, I believe, currently trading at enterprise value to current annual run rate sales multiple of 0.4 times. And if you take our EBITDA multiples of less than 9 times last quarter, annualized, plus with the addition of Jimmy, so not even including our obvious growth ahead. So, Andrew, we are very mindful in terms of how we do M&A, and the multiples are going to be relevant to where our multiples have come down to. So we may even do better deals than what we've done last year, but it doesn't get a whole lot better at 3.5 times EBITDA. If you looked at any other mature industries, you look at restaurants, you look at retail stores, there's nothing available for less than 3.5, 4 times EBITDA. I think these are very reasonable multiples to pay, and we are a fair acquirer. So it will remain along those lines. And now, look, there's two ways of doing M&A, right? You either buy them with cash, or you buy them with your currency. And so, others have raised a ton of money. We have not done that. And we have -- our total CapEx spend last year was about $9 million. So this is why we're going to be disciplined again. This year, we're going to do half of it through organic growth, so we can manage our cash really well. And the other half is going through M&A with our currency that we've been using very well. So it's going to be an even split between the two.

Thanks for that, and I appreciate the correction. I'll get back in the queue.

[Operator Instructions]. Our first question today comes from Andrew Semple from Echelon. Your line is now open.

Hi there. Good morning, and congrats to the High Tide team on the very strong fourth quarter results. I'm glad to see the continuing momentum in retail in Canada. First question here, just wanted to go back to, I guess, some of the prepared remarks about the e-commerce sales, and I really appreciate the additional color there. Based on my math, it actually appears that the e-commerce revenues are actually beginning to show a bit more stability, maybe down low single digits quarter over quarter compared to the double-digit declines you saw in Q2 and Q3. Do you believe the segment could return to growth in the year ahead, or is it too early to tell on that?

Good morning, Andrew, and thank you for your question. So, Andrew, our e-commerce step was definitely stable quarter over quarter. And I want to highlight the fact that our accessories business because we have -- like I mentioned, GrassCity and Smoke Cartel are the two most searchable online accessories platforms in the whole world. And because of that searchability and being number one in the whole universe, they didn't really get too affected. And the rest of the platforms are smaller anyway. Really, where we felt the impact was strictly our CBD businesses, and it was across the board. It was in the United States, and it was for Blessed in the UK. And like I mentioned over the last earnings call, when people are prioritizing essentials, food, and gas, they're a little shy of buying a $100 bottle of CBD. That doesn't mean that our brands are not performing, or our brands are not there to take market share as more of these global markets open up. But I always like to under promise and over deliver and not talk about fluff that is not real. So we are stable, quarter over quarter. We've had a good holiday season, like we mentioned in our script and the earnings press release. But after the holiday season, sales always slow down, whether it's cannabis, whether it's CBD, whether it's consumption accessories. It's the same thing we saw with the ELITE as well. In the holiday season, people had money in their wallets. But as the spending finishes, and then you get into the next season, spending goes down a little bit. So we feel that our e-commerce platforms will remain stable. They're not like tanking by any measure, you're absolutely correct. But like I said, we like to be cautious about things. Our core business -- 87% of our business is brick and mortar anyway. The remaining 6%, 7% of our online accessories business is still thriving, given our searchability factor that we have on Google. And our CBD businesses, these are the brands that we're going to build into the future. I am very excited about them. As these new markets open up, many markets in Asia, including Japan, is now talking about a medical cannabis legalization, which means they're going to get more and more friendly towards CBD products as well. I'm having conversations in the Middle East as well. So we're not concerned about the long-term nature of our CBD business. It's just currently that we want to under promise, over deliver as usual, and just being cautious on that front.

That additional color was very helpful. Thank you, Raj. Moving to another topic, I just wanted to touch on the German market. As you look to enter that potential market opportunity, do you have any views on how the German market may regulate adult-use cannabis retail distribution as of yet? Have those rules been made clear, and do you have any thoughts on timing? I know you said it's early as this spring, but as we go back to our models, how should we be thinking about timing after this potential opportunity?

Sure. So, Andrew, this is all speculation at this point, but educated speculation, I will call it. So we're hearing that Germany will introduce legislation this spring. A draft legislation will come out, and retail sales could commence as early as first -- calendar first quarter in Germany next year in 2024. And we're keeping a very good eye on this, on all of the developments that are coming out of Germany. And this is why, we are very excited about this strategic partnership we are forming with Sanity. We wanted a solid partner on the ground to execute our game plan, and I think Sanity fits that bill perfectly. They are a leader in their home country in Germany, and our business lines are very complementary in nature. So we're a retail-focused company, and they're a producer and distributor of cannabis brands. And we wanted to put this out because we wanted our investors to understand that we're not just talking about things. We're very serious about entering the German market. And if you look at Sanity, they've been doing some incredible things in Germany already. They can assist us with high-quality M&A targets in Germany and other EU markets as well as -- for winning retail licenses organically. And also, both companies can also work together now in government outreach efforts, which we've already begun. And then, we will also assist Sanity on multiple things, helping them position and build their brands, obviously subject to provincial and federal regulations in Germany, as we have tons of experience in Canada as we have, by the minute, information on what these -- what kind of products are moving in Canada, and what is the cannabis consumer looking for? So it's a great partnership. We're very excited about the German market. We think it will open up first quarter -- first calendar quarter 2024, and we are going to be ready when that happens.

Great. Understood. Thank you very much, and congrats again on the solid results.

That concludes today's Q&A portion of the call. I'd now like to turn the session back over to High Tide's Chief Executive Officer, Raj Grover, for final comments.

Thank you, operator, and thank you to everyone for your interest and continued support for High Tide. We're very proud of what we achieved this quarter and remain excited about our growth trajectory. With that, I will ask the operator to close the line. Have a great day, everyone.

That concludes today's High Tide Inc. year-end 2022 earnings call. You may now disconnect your line.