Good morning. My name is Elliot, and I will be your conference operator today. At this time, I would like to welcome everyone to the High Tide Inc.'s Year End 2023 Audited Financial and Operational Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' 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 will now turn the call over to Krystal Dafoe.

Thank you, operator. Good morning, everyone. And welcome to the High Tide Inc.’s quarterly earnings call. Please note that all earnings discussed on this call are presented on an audited basis. Joining me today on the call are Mr. Raj Grover, President and Chief Executive Officer; and Mr. Sergio Patino, Chief Financial Officer. On January 29, 2024, the company released audited highlights from its financial and operational results for the fiscal year ended and fourth quarter ended October 31, 2023. 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, other than statements of historical facts that 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 January 29, 2024, our latest information form and our latest management discussion and analysis, each filed with the securities regulatory authorities at sedarplus.ca 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 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 SEDAR plus 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 now begin.

Thank you, Krystal, and good morning, everyone. Welcome to High Tide Inc's financial results conference call for the fiscal year end and fourth quarter that ended October 31, 2023. I will begin with some big picture comments regarding the quarter and our strategy before Sergio and I dig deeper into the numbers. Fiscal 2023 was a pivotal year for High Tide. During the three preceding years, we were in hyper growth mode, adding about 35 to 40 stores a year, focused on organic build outs in premier locations, supplemented by strategic and accretive M&A. A few months into calendar 2023, we assessed the state of the industry, our competitive positioning within it and capital market realities and therefore we decided to take a different path. Cash and solvency had become paramount matters for investors and we wanted to reassure them by showcasing the free cash flow potential of our enterprise. Fortunately, due to the moves we had made since 2018, we didn't need to add 40-50 stores in 2023 to reach the scale to generate positive financial outcomes. We already had it. Accordingly, we made the decision to meaningfully slow growth and prove to investors that our existing base of stores could generate free cash flow, and we set the goal to demonstrate this to the market by the end of calendar 2023. In our third quarter ended July, we generated $4.1 million of free cash flow, meeting our goal five months ahead of schedule. Today, we announced our fourth quarter ended October, which showed that our Q3 quarter results weren’t a fluke or one trick pony. In fact, free cash flow grew by a massive 40% sequentially to $5.7 million. Annualizing this figure results in a free cash flow yield of 11% of our enterprise value as at Friday's…

Thank you, Raj, and hello, everyone. Q4 was another fantastic quarter for High Tide, which highlighted record revenue, record adjusted EBITDA, record free cash flow generation and record cash on hand at the end of the quarter. We have proven that our system based stores is able to generate industry leading performance and meaningful free cash flow, which can be used for debt reduction and store expansion. Let's take a deeper dive into the numbers. As Raj mentioned, revenue for the quarter was $127.1 million, up 17% year-over-year and 2% sequentially. Our same store sales were up 13% year-over-year. Our consolidated gross margin profile remains stable as we ended the quarter at 26% in Q4. Gross margins for the year were 27% and have remained consistent over the last several quarters. Once again, our cost controls were very apparent this quarter. Excluding the impairment charges mentioned by Raj, our consolidated expenses were $32.9 million, representing the lowest level in fourth quarter despite the fact that revenue was once again at record level. Total operating expenses, excluding impairment loss, as a percentage of revenue decreased to 28% in the year ended October 31, 2023 compared to 35% in the prior fiscal year, again, due to the company's continued focus on implementing cost saving solutions that focus on efficiency without impacting quality. Looking at G&A and professional fees together. The total expense decreased by 7% to $8.2 million for the fourth quarter of 2023 as compared to the fourth quarter 2022 of $8.8 million and increased by 14% to $35.3 million for the year ended October 31, 2023 as compared to the prior year of $30.9 million. As a percentage of revenue combined, both G&A and professional fees have been reduced by 2% to 7% for the year ended October 31, 2023…

[Operator Instructions] First question today comes from Matt Bottomley with Canaccord Genuity.

I'm just wondering if we can start on the dynamic in the Canadian cannabis retail sector. Obviously, it slowed a little bit subsequent to your quarter. But in your quarter, I'm just wondering if we can get a little bit of more granularity on -- you had some sort of 2 times and 3 times performance on a per store basis relative to industry averages. Is that still holding up and sort of where was your growth profile sequentially versus what the sector saw?

So absolutely, our store portfolio is continuing to exceed our expectations. Matt, you may have seen the November numbers. November cannabis sales in Canada were 6% lower year-over-year, and we also felt a little bit of that pinch in November. But heading into November, we were very much holding the line, not much has changed since. And our stores continue to perform optimally at those levels as we disclosed that our average store in Alberta is doing $2.2 million in annualized run rates versus our peers at $1.1 million. And that is even more pronounced in Ontario where we are sitting at $3.6 million per average stores and where our peers are doing approximately $1.1 million in sales. So absolutely nothing has changed in that front, including, Matt, us entering into saturated markets, getting high quality real estate and even those stores ramping up relatively quickly than we were previously anticipating. And this is why, Matt, as you see, we've done almost no M&A. In fact, we did zero M&A in calendar 2024 and we have still organically grown our revenues despite the softness in our e-commerce portfolios and we generated a ton of cash, we generated close to $10 million in the last six months. So no, business is extremely healthy.

And then just one more for me, on the use of those cash proceeds. Obviously, it seems like we're at steady state here with your portfolio is and its ability to yield free cash flow, which is great. You pointed to Ontario in your outlook commentary a little bit. And I'm just wondering if you can kind of give us an indication of how to balance the fact that you're able to accelerate potentially now with an increased cap in Ontario your exposure in that market versus the overall competitive profile where I think many of us are expecting more store closures than openings. But clearly, those that are competing in that space have the ability to look for more locations as well?

Look, I couldn't be more excited about this Ontario opportunity. We literally have the opportunity to add an additional quarter billion dollars in the Ontario market, adding another 96 stores. We are known to get high quality real estate. Nothing has changed. We have excellent landlord relationships. And we just generated $5.7 million in cash. We don't need to raise equity. We don't need to tap that ATM, which we have not touched in months. So from that perspective, we are going to use our free cash flow, we have a very handsome generation of free cash flow happening in our company and we are going to use those dollars to continue expanding our footprint in Canada, focused on the Ontario market. We are up the ante on where we were not initially considering opening stores, because we wanted to be extremely selective in where those stores go. In terms of new markets, well, that is not the case right now. Instead of having six stores in Mississauga, we now intend to have eight to 10 stores in Mississauga, which is a game changer for us. So you are going to see a lot of that happen. Again, we are very, very selective on how we look at quality real estate and very selective in how we look at M&A opportunities. So we are not going to haste into it. And this is why we didn't do any M&A in 2024 and calendar 2024 and still had a stellar performance. We are going to use our cash very wisely for the Ontario market and you will see significant momentum in us opening stores in that market.

Our next question comes from Scott Fortune with ROTH MKM.

Raj, High Tide continue to execute on its priorities and operations, and 2022 is about growing the club membership the new store growth, which you did and exceeded expectations. '23, you prioritized store operational efficiencies, those cost initiatives, while slower store growth, but just kind of generating cash flow, which is great. But just kind of I guess sense for your -- a little more color and focus and priority for here to execute in '24. You mentioned store growth. But just kind of what's your execution operation priorities as you move forward into 2024 as you have done a great job on executing here?

Look, we couldn't be more proud of where our club membership is sitting. We are almost at 1.3 million Canadian members of our Cabana Club, and store growth was not as powerful as over the last three years. As you mentioned, we were growing at 30 to 40 stores in the previous three years. In this [store], we only added 13, 14 stores. But the fact remains, Scott, that we really focused on organic growth this year. And we wanted to prove a point to the market that, look, our portfolio of stores can generate meaningful amounts of cash. We have the size and scale now. It's not like we are desperately looking to add another 50 locations. So that strategy has worked out really well. I sleep really well at night looking at the cash flow generation we have in our company. We have ended with a record cash balance and now we are back to growth strategy, albeit remaining cash flow positive that is imperative for us. I think that's the prudent approach in this very sensitive and shaky market, which is also playing to our advantage, Scott. So we have the double whammy now because we have really controlled our cost. The one thing I'm super proud of this quarter and the entire 2023 calendar year was our operating expenses. Our operating expenses, as Sergio mentioned, are at four quarter low. This is despite significantly increasing [Technical Difficulty] 37% Y-o-Y, and operating expenses in terms of dollars remaining flat or lower is a massive achievement. It's not easy to make money at 26%, 27% gross margins and to spit out the kind of cash flow that we are. So all of those boxes are checked now and we are back to growth. Growth always excites me. This is not our end game to generate $4 million, $5 million in free cash flow. And we are a dominant player in Canada. We want to retain our market leading position. So you're going to see us add 20 to 30 stores in calendar 2024. I don't think we'll have any problem doing so. And it will be more focused on an organic versus M&A mix. There will be some M&A there for sure but we are not going to act upon M&A just for the sake of it, we want to pick up locations at our own terms because we know what the portfolios in the country are worth, and there are not many worth even looking at quite honestly. And this is why we were shy to trigger on any M&A in calendar 2024. We have some that we're looking at but we are going to be focused on high quality real estate that has been our savior and that has been huge part of our strategy. So you'll see at least, I would say, at least 20, 25 locations come out of organic growth this year.

And just to add on the -- you asked about the priorities, Scott. So the only priority just looking at the balance sheet is restructuring the debt. As you can see, we are in a very unleveraged position where we have annualized EBITDA $31 million with debt today or less than $28 million or so. So a ratio less than one. So we're looking at that -- and the second position in the balance sheet is with less than $1 million right now, so we're looking at extending the maturity of the debt. And so we are actively looking at discussion with several different lenders and looking at different attractive term in it.

Real quick, focus on margins, more gross margins. Obviously, you're moving up, steady pickup in EBITDA margins, it's come from 3% to about 6% to 7%, you look long term 10% to 12%. But just a sense of the gross margin at the 26%, 27% level over the last six quarters. Are we going to start to see a little bit of inflection here as club membership, the leads kind of add on and just kind of talk about the white label products kind of expectation of margin expansion, or is it still just too competitive of store environment here and still challenging to really move up the gross margins from that level? Just more color on the gross margin side that would be great.

So Scott, our gross margins have remained stable for almost like eight quarters now, right. We've remained between that 26% to 28% range. Although, the 28% was only achieved with the Manitoba SRF. Generally, it's been around 27% so we're not too far off it at all. I said this last quarter, in my call last quarter that we have this dominating position in Canada. We're absolutely crushing it in terms of our bricks and mortar business. And we don't want to let loose on that. When you're generating $4 million a quarter prior and $5.7 million of free cash this quarter, I am not on a horse or in a hurry to raise our margins, which we clearly have an opportunity to do so. We want to really tighten up the margin, margin profile, keep it tight. So we can basically get rid of some of the noise, some of the marginal players in the country that are just there, but they really shouldn't be there, right? So that is our strategy. This is why we are holding on to the line on gross margins. We have also been pressured, to be honest, we've also been feeling the pressures from gross margin declines and sales declines in our e-commerce business, although they are all. We are still EBITDA positive in our e-commerce portfolio. There's a good strategic reasoning why we bought these assets and there's a good strategic reasoning why we are holding on to them. They're not bugging us. They're still EBITDA positive, right? A lot of our CBD competitors are no longer in business, a lot of the accessory players are no longer relevant. So we are holding the line in this tight inflationary environment, in this high inflationary environment. And we will have a chance to up the gross margin profile, not only in our brick and mortar business, basically at will when we want to do so, because we are the dominant chain in the country, but we want to get rid of a little bit of this noise in terms of marginal players that are still in the country in Canada, in the bricks and mortar business. And also be alive in our e-commerce business to play when the real inning start globally in terms of CBD and consumption accessories, and seeds, and cannabis dispensaries opening up in other countries, we will have additional gross margin opportunity. We're just being very careful on how we manage the strategy, although, it's not hurting us. We just produced $5.7 million in free cash flow.

Our next question comes from Frederico Gomes with ATB Capital Markets.

I guess, my first question is, you mentioned the strength of your balance sheet, how you are under levered at this point and how your plan is to remain cash flow positive while growing. So I guess my question is given where your valuation is, and you also have decided buying as you mentioned, Raj. So how do you look at capital allocation at a potential share buyback at these levels?

So Fred, like I said, we're still in growth mode. We anticipate opening another 20 to 30 stores this year and we intend to do that from our free cash flow generation. I think it will be a little immature for a company our size that is growing at such a rapid pace. I mean, we've been growing at exponential rates over the last three, four years with Canada's top growing companies as per Global Mail over the last three years, same thing with Financial Times. North America, we, in fact, all of America topped growing retailer in 2022 as per the Financial Times. So Fred, where we want our dollars to go is store growth not in share buyback yet. We are not there. Of course, we want that time to eventually come and it will come. Right now, we are very focused on growth and managing our business extremely well and generating huge amounts of cash that can actually go back in growth. We have good two to three years of runway ahead, maybe even more than three years in Canada alone. Then we're talking about the German opportunity. We're then going to be talking about the US opportunity. So we're going to need all the cash that we have. Although, I think we will be every quarter -- the quantum of free cash flow may vary, but we absolutely intend to remain free cash flow positive as we ramp up growth here in Canada.

And then my second question is on your cost structure. So I guess a while ago, you mentioned you were reviewing cost structure and trying to find efficiencies and you have been doing that in your results. So how much of that work has already been done and how much more do you think you have left here to find additional cost reductions?

I'm going to pass this to Sergio, because I can talk forever, Fred. I want him to answer a couple of questions here. Sergio, go ahead.

So I will say you can see that in our P&L that there has been significant reduction in professional fees, G&A and even in the marketing aspect. I will say where are we in the journey is probably half of the journey. We still expect a significant improvement on the e-commerce side, on the international side of things on the operating expenses. But yes, in the last four quarters that has been the focus and it will continue to be in the next two to four quarters. We are actually implementing company wide internal controls, ERP implementation, new systems. So there are a few more initiatives that are on the go that will help us to continue to reduce that in the future, the D&A and professional fees in particular.

Our next question comes from Ty Collin with Eight Capital.

Raj, for my first one, I just wanted you to maybe expand on your comments earlier in the call about M&A, that you are not seeing many attractive opportunities out there. Is that due to where sellers' valuation expectations are at or are you guys kind of just being very choosy on the real estate piece, and maybe we should be thinking about M&A as being a smaller part of the growth story going forward compared to what it's been in the past?

So Ty, it's mostly related to the quality of the retail portfolios that are out there, right? Like we did mention that, we are 3.4 times our peer average in Ontario, we're 2.2 times our peer average in Alberta. So we have high standards. Our average stores do a lot more and we don't generally consider stores that are doing less than $1.8 million or $2 million annual run rate. So it doesn't make sense for us to look at B-graded portfolios. And there is a ton of that that is what I meant by marginal players still existing and a lot of the noise that still exists that won't be around for too long. And we are not on a horse to act on any of those opportunities. In fact, we don't need to, Ty. And because of our existing landlord relationships in the country, we are tied up with some of the largest landlords that have prioritized their real estate over to us, because of our financial covenant and because of our solid execution that we can get good real estate at will. And there is no better growth than organic growth for any company. So we spent about a $250,000 or $300,000 to build the store, we add another $100,000 in working capital and we got a great store to go. We don't have to even pay a million dollars for a store that's doing somewhat to our expectations. So really the reason is finding the right deals. I don't think we are that far apart from expectations of what people want, although the multiples have come down. We are not even offering 3.5 times at this point when we can put up stores for $350,000. Although we are nice guys and we always check if there is competitors that are doing well, maybe there is an opportunity for them to take an exit and next join the wave with us, join the High Tide family. And if not, we are patient to just wait for some really good high quality real estate in these areas and then we get our opportunity we go in. So that is really the reason behind it, not really that the valuations are too high in Canada.

And then for my follow-up, obviously, you touched on the news out of Ontario with increase in the store cap. Obviously, very important moment for you guys and for the industry. I'm just wondering if we could call out what are some of the next regulatory changes that you are looking forward to and some that we might hope to see this year?

Sp the biggest one was this Ontario change, Ty. This change alone is going to keep High Tide very, very busy over the next two to three years. And I have learned from our GR team, especially from Omar that, Raj, it's all about small incremental wins. And I'm coming to understand that fully now. And there is a lot of positive changes that have happened. You are going to hear about some more coming right here in Alberta that will be announced shortly. And thanks to the leadership and the government here in Alberta and AGLC taking the lead in the country with really making some proactive and common sense changes. So there's a whole bunch of small changes that are happening, especially in relation to white label that we've been asking the government for quite some time. It's the norm in every single industry and why aren't we allowed to do white label in Alberta. There was a consultation about it and we feel that that change will go through. There's also an existing consultation about prohibited relationships here in Alberta between producers and retailers again, which is the norm in any industry. Producers have a ton of cannabis in their vaults that they should be allowed to, they should be given all kinds of momentum to be able to move that cannabis. And it's the same thing to fight the illicit market as well and keep that money in the legal fold. I think the government is listening and there's a ton of positive initiatives that we see are brewing across the provinces. There's too many to mention but we're keeping a close eye, but stay tuned on what comes out of Alberta in the near term.

[Operator Instructions] We now turn to Andrew Semple with Echelon Wealth Partners.

Just want to ask on the increase in the Ontario store cap and more of a strategic question. That increase does open up the possibility of a larger scale, maybe platform sized acquisition that would be larger in magnitude than what we've seen in recent years. Is this something you would consider or do you think you're getting better value doing it more on a tuck-in and more numerous with smaller acquisitions?

So Andrew, my philosophy is, don't fix something that is not broken, right. I mean we have become really well known in terms of our tuck-in acquisitions. We've been doing it over the last five years with a lot of success and we've been building a ton of nice organic real estate in super high quality locations. So that strategy is really working for us, Andrew. And I was just mentioning just a few minutes ago that there's not a lot of good portfolios out there for us to consider. I would love to do a 20 or a 30, or a 40 store deal. But they need to make sense when you're buying 30 stores and then you have to shut down eight out of them, it just doesn't make sense. And there's also a lot of redundancy, Andrew. We’re the country's largest chain, if non-franchise chain, at 163 stores. So you can imagine, we are present in quite a few markets. And we have to wait our turn on high quality real estate. Otherwise, we're just going to add redundancy to our portfolio. But we have our eyes open. If a good opportunity comes through at a good valuation, we'll do it. We need to make sure that it's a strategic and accretive acquisition for our shareholders. So we're definitely open to it. But tuck-in acquisitions is our specialty, keep building organic stores, keep tuck-in enough fuel and you end up the year with 20, 30 stores, that's how we do it.

And then Raj, early on the call you're touching on the gross margin outlook on brick and retail for 2024. I just maybe want to flush out that discussion a little bit. What do you expect to be the trend for brick and mortar retail margins in this year? Do you think that can continue to expand just at a slower pace or do you think that current margin levels are what we should expect for 2024?

Andrew, the trend is that our bricks and motor margins are not going down and yes, they can expand, albeit at a slower pace. Like I explained, it's a strategic decision. We are the dominant chain in the country. And when you're generating the amounts of cash flow over the last six months, we put up $10 million, we don't really need to up the ante too quickly. If we do that, then the marginal players have a larger chance to just hang around, but it will just be adding to their own misery. And I think by just holding the line here and running a good business, we are going to expand that market opportunity for us. But 2025 and beyond, I'm sure in our mature stores and more mature markets, we are going to start expanding our gross margin profile. In fact, even in the second half of 2024, I remain quite confident that we'll be able to push the margin slightly higher. We're just holding the line on them, because again, we're managing our cost and our expenses really well. We are going to have our new store growth ramp up again. So we're just being mindful on how we manage our mix.

Our next question comes from Doug Cooper with Beacon Securities.

I just want to circle back on Ontario and more particularly to Mississauga. So I think that's just Virgin Real Estate. How many of the stores do you think that you're planning would be in Mississauga? And what do you think the rush to open stores there will be from the competition and quite frankly, it probably doesn't have a lot of capital to open such stores?

So look, we already have one store open in Mississauga. We had acquired these sites in September, all of them, believe it or not, we have six leases that we've signed in Mississauga, very high quality leases. But we're waiting for building permits. We just got two additional permits, so they are already in construction. We intend to have six sites in Mississauga as of present but we're looking for more real estate now since Ontario's announcement. And we think at the end of the day, we can have eight to 10 locations in Mississauga. And the one store that we opened in Mississauga is doing incredibly well. And that was anticipated, that was expected. It's growing at the fastest pace I have seen for any new store, which is absolutely amazing. So we're going to take another six months or so to build out the Mississauga portfolio and we're going to continue looking for a few more. We've seen some operators that have set up shops in Mississauga. But despite not being able to build, Doug, in Mississauga, because of the building permit restrictions, we’re a bigger operator, we got to do things by the rules. I noticed that since we announced these locations that this is where the locations are coming up, no one really bothered to open up their stores besides us. You could see the AGCO application profile and we have quite the area to ourselves. So whenever these stores open up, two are coming up in the next couple of months, we should have some really good revenue being generated out of these stores.

So can you share with us, maybe from a strategic perspective, if you've got 95 stores, give or take, to open in Ontario to hit the cap, you just mentioned eight to 10 is sort of in the immediate term in Mississauga, and I'm assuming some still in Toronto. Where else would you be targeting?

There's a lot of locations. Doug, I get excited when I think about the Ontario market. So there's North Bay, there's Kingston, there's St. Catharines. There's a whole bunch of locations, Pickering, more in Oshawa. We're still building in all of these places and more in Toronto, of course, people call Toronto extremely saturated. That is true. But there's not a Canna Cabana everywhere, right? So we want to make sure that we find the best locations even in the City of Toronto, whether that's through organic bills or through M&A and be able to serve more customers in the City of Toronto. So we have a wide scale strategy for Ontario. It's not limited to one market. We have two stores in Brampton now. We are looking for more real estate in Brampton. Brampton is a great market for us. There is lots of markets that we don't even have a presence yet, like St. Catharine's, like Kingston, like North Bay, some of the other markets in Ontario. So there’s tons and tons of opportunity there for us. And I'm sure we will be able to put up these 96 stores in the next three to four years. But we are going to just make sure that we are selecting the highest quality real estate or doing the right type of M&A deal that is strategic and accretive to our shareholders.

Now I'd 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 are very proud of what we’ve achieved this quarter and remain excited about the road ahead. With that, I'll ask the operator to close the line. Have a great day, everyone.

Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.