Good morning. My name is Drew, and I'll be your conference operator today. At this time, I would like to welcome everyone to High Tide Inc. Q1 2024 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 the time for you to queue up for the question-and-answer session. I will now turn the call over to your host, Krystal Dafoe.

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 mister Raj Grover, President and Chief Executive Officer; and Mr. Sergio Patino, Chief Financial Officer. On March 15, 2024, the company released unaudited highlights from its financial and operational results for the fiscal quarter ended January 31, 2024. 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, 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 annual information form and our latest management discussion and analysis each filed with securities regulatory authority 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 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 on 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. Now, it is my true 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 first fiscal quarter that ended January 31, 2024. I will begin with some big picture comments regarding the quarter and our strategy before Sergio and I dig deeper into the numbers. As you can see from the press release and financials filed on Friday, Q1 was another solid quarter for High Tide, marked by record revenue, record adjusted EBITDA and meaningful free cash flow generation. Income from operations was also a record and we broke even on net income, which is another huge milestone for our company and one that I'm especially proud of. We have never posted a quarter where revenue declined sequentially and adjusted EBITDA has now been positive for 16 consecutive quarters, including six straight quarters where it reached new highs. As investors are probably aware, our focus for the past year has been on generating positive free cash flow. This is an anomaly in the Canadian cannabis sector and our results are a source of pride. We generated $3.6 million of free cash flow in Q1 and $13.3 million during the last three quarters. In our view, this cash flow profile represents a tremendous feat considering we have been growing the business during this period. And as we have done effectively no M&A over the past year, this growth has been all organic. In calendar 2023, we purposefully slowed growth to reach our objective of becoming free cash flow positive as we only opened 13 stores during the year versus 30 to 40 in prior years. We expect growth to reaccelerate during this calendar year. We are optimistic that M&A will resume this year, however, it has been slower than we would like so far, largely due to…

Thank you, Raj, and hello, everyone. I'm very proud to showcase how High Tide started off fiscal 2024 on the right foot, once again generating record revenue, record adjusted EBITDA, record income from operations, meaningful free cash flow and breakeven net income, which is a longer-term goal we have had for some time. Let's take a deeper dive into the numbers. As Raj mentioned, revenue for the quarter was $128.1 million, up 8% year-over-year and 1% sequentially. Growth was led by our Canadian brick-and-mortar business, which was up 16% year-over-year. In particular, accessories sales in our install doubled year-over-year in dollar terms and represented 4.1% of our 4-wall sales. This is the strongest proof we can show that our discount club model, which often leads with very large price drops on premium accessories for members is working and gaining its team. On a consolidated basis, our gross margins of 28% were just ahead of the 27% we generated in Q1 last year. Our brick-and-mortar segment posted gains led by pricing increases in our 4-walls, which offset the declines in e-commerce, where things continue to be weaker. Once again, our cost control was very apparent this quarter. Our consolidated expenses were $33.2 million, representing the lowest level in six quarters despite the fact that revenue was once again at a record level. In particular, I highlight that our G&A expenses were just $5.6 million in Q1, which was the lowest level in nine quarters. This really shows how successful we have been taking costs out of the system, particularly on the e-commerce side while being able to meaningfully grow revenue. I'm very proud of the team for this successful execution. This cost control combined with our record revenue and highest consolidated gross margin percentage in nine quarters, all combined to produce…

[Operator Instructions] Our first question today comes from Ty Collin from Eight Capital.

Maybe for my first one, I just wanted to dig into the gross margin a little bit. So it looked like a pretty nice step up even on a sequential basis for the 4-wall gross margin there. I'm just wondering if you could dig a little more into what was driving that, particularly given the comments last quarter that you were maybe taking a bit of a breather on going after additional margin and pricing. So how are you able to drive such strong performance?

Thank you very much for your question. So yes, look, I was very impressed with our gross margin this quarter. And we have been hovering around that between 26% and 28%, and it can get lumpy from one quarter to the other because just the way we run our discount club model, Ty, we use neighborhood-specific gross margin strategy. But the bigger impact that we had on this quarter on gross margin was related to Cabanalytics. As you can see, Cabanalytics went up from, I believe, $6.7 million last quarter to $7.3 million because we also added ad revenue to it. So now that is also starting to boost our gross margin profile, but we are actually holding the line on our 4-wall gross margin, especially because we have so many other efficiencies that we can generate, and we can help support our 4-wall brick and margin profile as our competitors are feeling financial distress and are practically on the verge of going out of business or that is happening all around us, we don't want to let loose on that profile. And I can tell you that it did not happen from a 4-wall increase, it happened more in the sense of a Cabanalytics data insights platform that got a bit of a boost. Quarter-to-quarter, this can shift. We added more stores, so that helped. But also add revenue. We've signed over six vendors on the consumption accessories and CBD front. And now we are starting to reap the benefits of that as well.

Okay. Great. That's really helpful color. And then for my follow-up, Raj, maybe just wondering if you could comment kind of bigger picture on the overall market softness that you were seeing towards the end of 2023, what was behind that? And have you started to see any recovery in recent weeks and months, maybe beyond what the existing data says?

Yes, absolutely. So look, after seeing consistent double-digit gains in retail sales, we've definitely seen things slow down a little bit in our fiscal Q1. And this is in line because overall, sales are down 6% nationally while we came consistent on our same-store sales level. So this is clear proof that our concept is absolutely working. Despite the softness, look, we're only a product of our environment. We are limited to what overall cannabis sales look like, but I couldn't be more happier with the quarter where we just saw 1% revenue increase, but still saw a 25% increase in adjusted EBITDA. And I believe the slowdown is in relation to just inflationary environment still prevailing and customers have to prioritize their spend. So the holiday season sales were not as robust as they usually are. So what we've done, Ty, is that we've been really focused on the things we can control such as our G&A, which was at a multi-quarter low in dollars and very low as a percentage of revenue. And this is why I’m super proud of our performance in Q1, where we held the line on same-store sales despite industry sales being down 6%.

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

First question is, Raj, you mentioned the Cabanalytics program and how you did well there and impact to margins. I'm curious if you could comment on the excise tax that we have in Canada right now. And there have been reports about more strict enforcements. I'm just curious how in strict enforcement for LPs going back to your business on the data analytics side. And similarly, how would a possible reform in excise taxes could also impact your business?

Absolutely, Fred. And thank you so much for your question. So look, we don't know the extent of how much the CRA’s new measures will affect the LPs and thus our Cabanalytics revenue portfolio. As a reminder, we've expanded our Camanalytics program to also generate ad revenue, which we are already starting to see some good momentum on. As I mentioned, we signed six new clients between our CBD and accessories portfolios who are altogether magazine that is starting to yield results, which will help offset -- which should help offset potential near-term pressure. But it's not a given how this thing is going to pan out. I'm hearing exactly the same that the CRA has upped the ante on collections of the excise taxes and the financial health of LPs is not great. That is the reality, right? So we keep seeing more and more CCAA filings among LPs. And the CR is getting more aggressive on taxes. But the good news is, like I mentioned, because of the All Together magazine, and the overall strength of our ecosystem and being the largest revenue-producing company in Canada, our data is very valuable. So we're not seeing a material shift downwards yet. In fact, we saw a very healthy shift upwards. I don't think we maintain this pace. I think we flatlined here a little bit between Q1 and Q4 levels. But all in all, I'm very pleased at where things stand, and we're keeping a very close eye in terms of what happens with this CRA amping up the motion on excise taxes.

And then my second question is just on your, I guess, your brand strategy. So you recently bought Queen of Bud, so I'm curious about your strategy there in terms of white label products and the brands. Do you plan to acquire more brands? And do you see any opportunity or I guess, interest in licensing some of our brands in other markets, for example, in the West? And then just in terms of sales of your own brands or your stores, can you give us any color in terms of what's the mix right now? Is there a target mix and the margin differential there as well?

Yes. Absolutely, Fred. So look, very, very excited to announce the acquisition of Queen of Bud. It's a beautiful brand, and we got it for just $1 million. Look, in the discount world, Fred, every percentage point matters. And when you can own a brand which is highly popular in the country, and customers cannot price shop or price compare with other retailers, I can easily have a margin arbitrage of about 5% to 7% than on an average branded SKU in the country. It's not always easy to do because there's so much branded biomass in Canada, but because Queen of Bud is so different, like it's Cristal's inspired team. It's spiritually focused. It's geared towards the female cannabis cornerstone. We have a lot of brands that cater towards male, so we're balancing the equation a little bit. I think this is going to be a very, very healthy acquisition for us and a meaningful driver going forward. We are going to position Queen of Bud front and center in our 165 store portfolio and the founder, Ashley Newman, she's a very well-known personality in the cannabis industry and one of the most successful female founders in cannabis, she is joining our team as a global brand ambassador for Queen of Bud. So we're going to start here in our 165 stores and counting, but the opportunity for the brand will go across the borders, it will get into the U.S. through our ancillary cannabis portfolio. We're going to develop a full line of consumption accessories for the Queen of Bud, and we're going to do the same thing for Europe as well. And that there may be some cross-selling opportunities in the CBD world as well. So extremely happy with that acquisition. On our other brands, as you know, we have a bunch of in-house brands like Vodka, Dopezilla, Pop-up Pad, Evolution, Atomic, we have a ton of in-house brands where, again, customers cannot price compare, and that's where we win. And for full disclosure, Fred, some of our larger competitors are either fully vertically integrated, which they have to bear the cost of those facilities. So it's not the best equation. But however, they have their own brand. So now what we are doing is without adding that overhead, we're creating more and more of our own brands. We've got that in CBD through New Leaf Fab and Blessed. We've got in consumption accessories. We have over 10 to 15 of our own brands. And now we're venturing into the cannabis world through this acquisition of Queen of Bud. And you may hear more about it, but we're going to be extremely selective. We want brands like the Queen of Bud. Otherwise, we are very satisfied where we are sitting. But not only the differentiated brand is going to help our overall selection in SKU and variety, it’s also going to help us yield another 5% to 7% on gross margins because customers cannot price shop.

Next question comes from Matt Bottomley Canaccord.

Just wanted to stay on Queen of Bud. So obviously, it's relative to your size and scale and valuation, not a material investment in the overall purchase price. But brands have been something that I know have been frustrating for a lot of people following the sector for a while. If you go back to 5, 6, 7 years, most of the brands that were promoted don't exist now or have materially changed over. So obviously, you have the infrastructure and the retail exposure to lift that brand even further. But I'm just curious, is this something in terms of finding brands that might exist today? Is something that might be part of High Tide strategy from an M&A standpoint? Or is this kind of a test case knowing that you know the founder well and she'll be included and you can kind of use your platform to grow it. I guess the overall question is internally generated brands on your own versus looking in the M&A pipeline?

Matt, thanks for your question. So to your point, Matt, we already have the infrastructure. We have a massive footprint generating close to $500 million on a brick-and-mortar level, or over $450 million Canadian on a brick-and-mortar level. So as we already have our accessory brands, we already have our CBD brands, this is a natural step in the direction to start building our own cannabis brands. Like I was just talking to Fred about it when we have our competitors that are vertically integrated and they're launching their own brands, the one advantage that they have is, again, we can't own those brands or sell those brands in our stores, which gives them a competitive advantage on margin. So as we build Queen of Bud in our stores and maybe even more forthcoming cannabis brands, we're going to have that margin arbitrage that does not exist for us today. So for that particular reason, you can call this a trial case, but I would say it's not because we already have experience with accessory brands. What we are doing with accessories, we are leading the country in accessories. Our competitors typically do about 1%, 1.5% of accessory sales are close to 4% to 5% of accessory sales and 90% of those sales are coming from our own brands. Now if we could do the same thing in cannabis, long term, we want to have 25% to 40% of all of our sales come from our own brands, and that's without adding the cost and the overhead of these growing facilities. Ashley already had the contracts established. She knows all of the players in Canada. We also know all the players in Canada. So we're just going to leverage that with our size and scale. And because the brand is so differentiated, I think it's going to add very meaningful value for shareholders.

Got it. And then just another question for me, something that you mentioned in your prepared remarks that I was just looking to expand on a bit. So the Ontario License cap is doubling. I know you spoke a bit about this last quarter. But just given the dynamics, a bit of softness in the industry, from a macro level and there's still a lot of stores in Ontario. Do you need to see the market retrace a little bit with respect to the number of doors before you would accelerate that? I know your guide for this year is a lot less than the 90 you could open. But I'm just curious how much of those 90 stores might make sense at the end of the day to open in the current environment in Ontario?

Great question, Matt. So look, historically, we've always done some M&A to support our organic growth. I don't think that is going to change in our mindset for the Ontario market. We're going to be doing exactly that. We can still add 90 more stores in Ontario. I already have close to 15 leases still despite opening about seven in Q1, seven stores, we still have 15 leases in our hands. These are high-quality leases. We're patient in terms of the locations we get. There are anchored locations, as I always talk about, their Costco, LCBO, Big Grocery Anchors. And as we are securing these high-quality locations, despite the fact that there is existing competition in that area or there may be because we have a location that trumps everybody else is, and given our model, we start generating sales very, very quickly. So I'm not worried about the fact that Ontario is hitting saturation levels. It is an absolute problem in multiple areas of urban neighborhoods in Toronto and other places in Ontario. But given our location selection criteria as these locations come up, we are selectively taking these locations, and we feel that we can easily add 20 to 30 stores this calendar year, again, focused on the Ontario market. So you could see roughly 20 of them opened in Ontario. And then if we get our hands on a good M&A transaction, that can go up even higher from that. But underpromise overdeliver, the goal is to do 20 to 30 in Ontario, and I don’t see any problem for us to get there.

Our next question comes from Andrew Semple from Echelon Capital Markets.

I also just want to call out the new segment disclosures are helpful. So appreciate that update. First question would be, it looks like the business is making a more intensive push for ELITE membership taking up inventory allotted to lease members from 2% to 12%. I guess I just want to understand how consumers are responding to this? Obviously, the ELITE lineups have been accelerating, so that's great to see. But what's happening in stores? Is that inventory allotment driving increased number of ELITE sign-ups.

Andrew, thank you for your question. So look, we've been so methodical with ELITE. When we launched ELITE, we didn't sweep the rug off our customers' fleet and go straight to 12% of inventory. When we launched ELITE, less than 2% of our in-store inventory reflected ELITE, but we messaged this very clearly to the market that long term, we want 20% to 30% of all of our in-store inventory reflect ELITE. And I'm extremely happy to see that within 1.5 years or close to 1.5 years of launch, we've already ramped up our inventory to 12%, and that is having a ripple effect. As you can see, last quarter, which was last quarter, Q4, we grew at the fastest pace for ELITE since inception. This quarter, sequentially from January 2019, when we last reported to today, we have upped that pace even more. So customers are absolutely enjoying the robust ELITE selection that we have now both on cannabis accessories and cannabis itself. And it's a bit of a chicken and egg story. You can't overnight change all of your inventory and run the risk of customers not converting into Elite because it's an inflationary environment. So we paced it out. We methodically planned it and 12% of inventory is yielding results, and I can tell you that we are going even higher. Our confidence is also going up as we're seeing the customers block into our ecosystem and sign up for Elite. We've actually raised the price on Elite membership, which is another great data point to mention here on the call. When we launched Elite, we were $30 a year per Elite membership we've raised that to $35 a year now. Long term, the plan is to take Elite over $50, $60. So we can already see the benefits of that, and customers have not shied away from signing up because they're seeing more and more of in-store inventory reflectively. So you're going to be a lot more -- you're going to see a lot more sign-ups. You're going to see the sustained pace going forward, and we're going to continue updating the market in terms of where we sit in terms of in-store inventory reflecting Elite.

That's helpful, Raj. And a good point too, that sign-ups are increasing even as the price rises. Next question would just be on inventory, which continued to trend downwards in this quarter. You've taken a lot of inventory out of the business over the past year even as you add more stores. I’m just wondering what's been driving that? Have you just been getting more efficient at the store level? Has there been some inventory reductions in e-commerce? And maybe if you could comment whether you can hold similar levels of, let’s say, days of inventory or inventory turns or inventory per store, whatever your preferred metric is as you continue to grow this year?

Yes, absolutely, Andrew. One thing we've always been very, very proud of is how we manage days on hand for our inventory, both on the e-commerce side, on the CBD side, accessories and very, very importantly, on the cannabis side. Cannabis is a perishable commodity. So you've got to be careful with that. And there's so much read in the country that if you get excited and overload your stores, very quickly that SKU gets dated and something else takes over and now you have to sell it below cost. So we've been very, very mindful, and this is why you're seeing massive jumps in our adjusted EBITDA margin from 4.7% to 8.1%. One big reason is that we've managed our inventory extremely well. We've done the same thing in the CBD world. We've consolidated our vendors. Even when we are feeling revenue pressures on the CBD side and accessory side, what we continue to do is leverage more drop ship for the accessories business and leverage our vendors to buy all of the CBD companies, the raw materials together and to get them manufactured through New Leaf. So this very focused inventory management. We have a great team that continues to be focused on inventory management, and I personally review these numbers every single week, and we keep on top of it. And that is one of the bigger drivers. And this is not going to change, Andrew. You're going to see that we run our show really tight. When it comes to inventory, our cannabis inventory days on hand is roughly 16, 17 days, which is, I believe, probably one of the lowest turns -- most efficient turns in the industry.

Our next question comes from Scott Fortune from Roth MKM.

This is Nick on for Scott. Congrats on the quarter and also congrats on the free cash flow front, while reducing accounts payable. Just wondering if you could provide some color around that $3.6 million you generated and just how you see your free cash flow evolving throughout the year here? Is breaking even maybe the baseline moving forward? Are you expecting maybe some lumpiness as new stores come online? Just your sense of the free cash flow would be helpful.

Nick, thanks for the question. Look, I'm very happy that this is the third consecutive quarter of free cash flow generation. Net income is another milestone, but I believe free cash flow is the most important metric we can judge ourselves with and which the market is going to judge us with because in this environment, if you don't have to depend on external funding, and we can continue to build our store portfolio and generate free cash. And we're super excited to see that we broke even on net income. I don't know how much more efficiently we can run our business. So it was very, very heartening to see that we generated another $3.6 million over the last three quarters. We generated $13.3 million in positive free cash flow. That is not going to change going forward, but I do want to highlight one thing, Nick, when we are opening up the stores, remember that -- when we're opening up these stores, you have this ramp-up maturity period, like it takes 6 to 8 to 9 months for them to ramp up to maturity. And there is a free cash flow burn at that time. And there's an adjusted EBITDA burn at that time. So it's a really delicate balance on how quickly we want to grow or we can afford to grow because most important metric for us to remain is to remain free cash flow positive. So the free cash flow is going to jump quarter-over-quarter, jump up or down. It's going to be lumpy given the working capital requirements, like we plan to open a lot of stores in the remainder of March, April and also May. And we're being very calculated about that we can make sure that we remain free cash flow positive. But I think our pace is very healthy. The $3.3 million that was generated, that was despite the $5.4 million that we made for accounts payable and accrued liability. So we brought it down a lot. If we wouldn't have done that, we would have probably beaten our record of free cash flow from the last quarter. But we very clearly provided this disclosure that it's going to be lumpy from one quarter to another, working capital requirements and this is going to go up and down, but things are looking pretty good right now.

Great. I appreciate that color. And then just second one for me. I wanted to build on the M&A side. Just wondering how you're evaluating the environment going forward, considering the strength of your balance sheet and that free cash flow you mentioned. You have your 300 store target out there in Canada. There's regulatory progress in the U.S. Germany potentially coming on board here. Just your sense on how you're looking at the M&A opportunity and kind of weighing all these options.

Look, Nick, historically, we've been the largest acquirers in Canada. We've built our portfolio very carefully, very selectively. Organically, we've added maybe about 60% of our locations and roughly about 40% through M&A. That is kind of the future trajectory as well on how we see this. When an M&A opportunity comes, it comes very quickly. But the two main reasons we've been very slow on M&A. One, we were very, very focused. We are very focused on free cash flow generation. And we didn't want to get distracted by again, adding locations. We wanted to tighten up our stores, tighten up our cost, as you can see through our G&A print. We came at 4.4%, lowest in dollar terms in many, many quarters, I couldn't be more happier. So we wanted to tighten up the operations here. The issues that we see on rapid M&A is a couple of things. One, we need quality companies to acquire. When our national revenue run rate is $2.7 million, and our peer run rate is only $1.2 million, you can see that it's not an easy trajectory for us to get out there and then acquire a whole bunch of stores and get them to our level. Otherwise, our average per store starts dropping. The other problem is redundancy because we're so big and we're in so many towns and so many cities, and we have multiple stores, we love to do big block M&A. But in that big block M&A, we can't waste shareholder money. We can't just spend shareholder dollars just for the sake of doing M&A. So we don't want redundancy and most operators don't want to just sell their winning stores. They want to sell their entire portfolio, which has a lot of losing stores. And when we…

[Operator Instructions] Our next question comes from Mike Regan from Excelsior Equities.

I was just wondering if you could comment on the potential for the standing finance committee and the House of Commons just recommended lowering the LP excise tax from the $1 a gram, which is about 30% to 40% of value to 10% of value. I was just wondering if you could share any thoughts you have on how this could impact your business or sort of any insights into the process or timing or what have you?

Mike, thank you for your question. So Mike, although we are not LPs, we're keeping a very close eye on everything that's going on in terms of excise taxes. We do know that Health Canada’s expert panel is reviewing Bill C-45 and is expected to make some recommendations in April. And these recommendations are not binding and the government will take their time to decide which ones to implement or not. So we don't really know what will happen, but let's say if the excise tax gets better, to the extent the LPs become healthier as a result, this is also going to be good for us and the whole industry. We believe we have always had the guilt by association problem where the poor financial performance of larger LPs have cascaded into weaker investment sentiment for the sector overall, notwithstanding our continued excellent performance showed again this quarter. So we're really hoping that any positive momentum for LPs is good for us as well. And we feel that, that can absolutely happen. There's a lot of conversations and the government is not blind. 50% of all cannabis that happened last year where cannabis -- 50% of all bankruptcies that took place in Canada last year were cannabis bankruptcies. So there’s a lot of conversation around making the landscape healthy, and this can absolutely happen.

Our next question comes from Chris Damas from -- apologies, the question has been withdrawn. So I'd now like to turn the session back over to High Tide Chief Executive Officer, Raj Grover, for any 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 the road ahead. With that, I will ask the operator to close the line. Have a great day, everyone.

That concludes today's High Tide call. You may now disconnect your lines.