High Tide Inc. (NASDAQ:HITI) Q1 2023 Earnings Call Transcript

High Tide Inc. (NASDAQ:HITI) Q1 2023 Earnings Call Transcript March 20, 2023

Operator: Good morning. My name is Leo, and I’ll be your conference operator today. At this time, I would like to welcome everyone to High Tide Inc.’s First Quarter of 2023 unaudited financial and operational results conference call. And 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 audited basis. Joining me on the call today are Mr. Raj Grover, President and Chief Executive Officer; and Mr. Sergio Patino, Interim Chief Financial Officer. On March 17, 2023, the company released unaudited highlights from its financial and operational results for the first quarter ended January 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 a historical fact 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.

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 March 17, 2023, our latest annual information form, and our latest management discussion and analysis each filed with the 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.

Raj Grover: Thank you, Krystal, and good morning, everyone. Welcome to High Tide, Inc.’s financial results conference call for the first quarter ended January 31, 2023. As disclosed in Friday’s press release, we generated record revenue and adjusted EBITDA for the second consecutive quarter as well as a 64% improvement in free cash flow from our operations. Following this momentum on Friday, we made it clear that it is our objective to become free cash flow positive by the end of this calendar year. I’ll start this call by providing an overview of our results and other key developments in the first quarter. Sergio will discuss the financials in-depth and after that we’d be pleased to answer any questions you may have. Let’s go over the highlights from our Q1 results.

Total revenue for the quarter was $118.1 million. This was up 64% year-over-year and up 9% sequentially. Our consolidated gross margin was 27.3% in Q1, which is consistent with the prior three quarters. I note that gross margins earned from selling cannabis in our core bricks-and-mortar stores, pick sequentially higher this quarter. Our Canadian revenue represented 84% of total revenue and continued to post gains. Same-store sales in our stores were up a massive 52% year-over-year and 4% sequentially, making it the sixth consecutive quarter or sequential same-store sales increases. While the quarter-over-quarter same-store sales growth number has normalized over time from the supercharge pace we saw initially, we continue to outpace national same-store sales changes within the Canadian cannabis sector.

If we can keep it up, 4.25% translates to a pace of 17% annualized, a rate I suspect most of our competitors would love to reach. Our national market share outside Québec rose another percentage point during Q1 to 9% which was the fifth consecutive quarter where we made a 1% increase. We continue to believe that we have the best retail cannabis concept in the country and this is evidenced by the outperformance of our stores. Our average store in Alberta where we have our largest footprint generates twice the revenue as the provincial average, while our average store in Ontario by far the largest cannabis market in Canada generates more than triple the average revenue in that province. Adjusted EBITDA for Q1 2023 was a record $5.5 million representing our 12th straight quarter of positive adjusted EBITDA.

Our adjusted EBITDA was up 10% versus Q4 2022, which itself was a record high for a company. And was up 86% versus Q1 2022. Our results have never been stronger and they are sustainable as evidenced by the fact that we have now generated $17.2 million in adjusted EBITDA over the past four quarters which is more than ever in the history of High Tide. Our balance sheet remains strong. We ended the quarter with $23.7 million of cash on hand. Our total debt currently stands at $40.3 million with no meaningful maturities until December 31, 2024. We continue to have a great relationship with Connect First Credit Union. Our $19 million facility with them carries an enviable rate of prime plus 2.5% and we are in discussions to increase our borrowing capacity with them.

During our last conference call, we outlined our objective to add another 40 to 50 Canna Cabana locations in 2023 via a fairly even mix of accretive M&A and organic store openings, which is what we achieved in 2022. Today, given the macro dynamics in the market, we are no longer aiming to grow that much this year. A quick look at our store count, revenue and EBITDA charts can tell you that we know how to grow at High Tide. We have built the largest revenue generating company in Canadian cannabis despite never having more than $30 million at the end of any quarter and we have improved profitability as we did so. However, we also know how to be nimble and adapt to the changing environment. About two years ago, it became clear to us that we needed to ship to a well-rounded value offering in our stores to be able to really outperform in the market.

So we launched our innovative discount club concept which has been a smashing success. Similarly, the past two years, with the time to grow our footprint at an unmatchable pace and we did exactly that. We have now cemented our standing as the clear leader in Canadian cannabis retail. We will continue to grow, but it’s no longer the time to keep the gas pedal continuously slammed on the floor and drive as fast as possible unless a compelling opportunity presents itself. Already having achieved more scale, now is the time to tighten up our operations and focus on becoming among the first group of Canadian cannabis companies to be free-cash flow positive. We have already made great strides on that front, which. I will highlight in a moment, but it’s time for a relative pause on the pace of expansion of our network.

On the organic side, there are still some leases we are building out which are located in prime real-estate plazas in thriving markets and we have high hopes for these sites. However, this will be at a significantly reduced space than in the past. Slowing down will help reduce our cash outlays to build-out new locations, accelerating our goal of becoming free-cash flow positive by the end of this calendar year. Further, we won’t have to endure as much of a ramp-up period before new stores can reach maturity. While this ramp-up period is shorter now with our discount club model, newer stores still represent a drag on consolidated metrics in the short-term as they advance towards maturity. For example, we opened eight stores organically in British Columbia, Ontario and Manitoba since November.

We are happy with the performance of these stores and each one of them has posted sequential gains every month since opening including February. However, because they are new, the revenue run-rate is currently still well below Canna Cabana’s average in those provinces. In aggregate on-boarding fewer new stores throughout calendar 2023 will reduce these growing pains and pressure on the near-term cash flows. We continue to get the best real-estate opportunities offered to us by major landlords, so we can be very selective and opportunistically build them out over the course of the year. Similarly, the environment for consummating M&A transactions has become much tougher. Despite of proven leadership in the market, the consistently improving profile of our financials and a strong balance sheet, our share price has nonetheless fallen to new lows, which we largely see as a guilt by association phenomena across the cannabis sector.

As a painful milestone of this disconnect, I note that we just reported, about the same level of revenue for one quarter as entire current market cap. This has made entering into M&A now significantly less attractive or accretive than in the past. Accordingly, we are doing the prudent thing and meaningfully slowing down acquisition activity. I remain High Tide largest shareholder, having never sold any of my shares and dilution is on my mind more than ever, especially given the current share price. If a transaction is strategic and the terms are too good to pass up, we can still engaged. But we have raised the bar for what we will buy. And therefore, we no longer expect to add 40 to 50 stores in this calendar year. Despite our market leadership position in a growth industry, our operational excellence and our strong balance sheet, our shares are currently trading at 0.3x our current annual revenue run-rate and just 6x our just reported adjusted EBITDA annualized.

This is not the time to issue more shares unless an opportunity is absolutely compelling. Again, we know how to grow, we know how to execute operationally and we know how to adapt to changing circumstances. Our focus right now is on fine-tuning our existing operations on improving how we manage working capital, becoming more efficient in our back-office and all with the goal of being in the first group of Canadian cannabis companies to achieve free-cash flow profitability. So let’s look at the strides we’ve already made in that regard. Cash flows from operations before changes in non-cash working capital were $4.4 million in Q1 2023. This was the 6th consecutive quarter where this figure was positive and was up meaningfully versus $1.7 million in Q1 2022.

Over the past four quarters, cash-flow from operations before changes in non-cash working capital have totaled $11.9 million. In Q1 2023, including the impact of changes in noncash working capital, which excludes leases and CapEx, total cash flows from operations were positive $2.1 million, a huge swing versus negative $1.6 million in Q1 2022. Recall that we opened eight new stores organically in Q1 2023 and as we slow down the pace of new-store builds going-forward, we expect investments in working capital to represent less of a drag on our overall cash flows. CapEx was $1.7 million in Q1 2023, which was again down from $2.5 million in Q1 2022. So our cash flows from operations this quarter were more than enough to cover working capital investments and capital expenditures.

Again, as we put up fewer new stores going-forward, the drag on cash flows represented by CapEx should further lesson. Now due to IFRS standards, lease payments are shown as financing items in our cash-flow statement and investors may want to consider the full free-cash flow picture including leases. Lease liability payments were $2.7 million in the first-quarter of this year while they were $2.2 million in Q1 2022. Putting it all together, our total cash flows from operations after CapEx and our leases were negative $2.3 million this quarter versus negative $6.3 million in Q1 2022, representing a 64% improvement. This is the number we are aiming to improve and shrink to positive territory in the near-future. 9% of their increase in revenue between Q1 2022 and Q1 2023 flow down to free-cash flow improvements.

This was also helped by the strong cost controls we have been implementing. We note that SG&A was only 6% of revenue this quarter, down from 8% in Q1 2022 and 7% in Q4 2022. We are confident that by slowing down growth for now, focusing on maximizing our operations and further tightening up our SG&A we can achieve this goal. We will keep our eyes on macro conditions and when the time is right, we will up shift and step-back harder on the gas as we continue to capture market-share in Canada and internationally in the coming years. We are closing in on the milestone of 1 million Cabana Club members and this membership base will be key to us reaching our objectives. We are currently sitting at over 975,000 members today representing 14% of cannabis users across the country excluding Quebec by Health Canada’s 2022 Canadian cannabis survey.

ELITE signups continued to grow, currently standing at approximately 9,500 representing a 58% increase since we last reported our financial results just over six weeks ago. Having paid $30 a year for ELITE status since the first year, at half price, we expect these customers to be even more loyal to the Canna Cabana banner. Recall that we only launched ELITE in late November and ELITE-only SKUs represent approximately 2% of our in-store offerings today. Over the long term, we will be focusing our SKU selection towards ELITE by having at least 25% to 30% of our in-store offerings be ELITE-only. With the ramp-up in our ELITE inventory and with more word of mouth, we anticipate ELITE sign-ups to accelerate over the coming quarters. Given the higher gross margin profile and the fact that we collect annual membership fees all upfront, this shift further help improve our operational cash flows.

In terms of what we are seeing in the competitive dynamics in Canadian cannabis retail, the margin landscape is starting to show positive signs and things are inching higher. Many operators can’t keep up with this market and are closing stores. We expect this to continue as we approach the five year anniversary of cannabis legalization this year, and we expect to receive a disproportionate amount of that revenue. I would like to offer a piece of insight regarding expectations for Q2 for two reasons, which are entirely calendar based. First, our fiscal Q1 includes the holiday season, which always makes it a difficult comp for both our bricks-and-mortar stores and our online consumption accessories in CBD businesses. And second, Q2 has three fewer calendar days when compared to fiscal Q1.

With no new stores having been opened so-far through the quarter, it leaves same-store sales as the main driver of consolidated revenue growth. We have often compared our same-store sales gains to the total national picture, including the impact of new stores. On that front, we made solid gains in daily same-store sales in February versus January, with the moving parts of daily average sales growth on one-hand versus there being three fewer days a tough comp and not much in the way of new store openings in aggregate, we expect Q2 to look very similar to Q1. These factors of having three fewer calendar days and comparing against the holiday season will disappear after Q2. Again, we’re tightening up our shift, focusing on optimizing cash flow from operations, slowing down new store expansion and margin enhancing initiatives including Fastendr, ELITE and our white-label program gaining momentum, we expect to once again increase our rate of Canadian store expansion once we have reached our objective of becoming free cash flow positive later this calendar year.

Since High Tide’s inception 14 years ago, we have built what is now the largest revenue-generating Canadian cannabis company, which includes the largest non-franchise bricks-and-mortar retail portfolio in the country. We are now the clear retail leader in Canada and we are taking steps to ensure we keep it that way. As Canada’s cannabis revenue leader even with timid assumptions, we anticipate passing $0.5 billion in annual revenue run rate by the end of our current fiscal year. I want to give a huge thanks to our team for helping deliver the best quarter yet in High Tide’s history and for enthusiastically embracing the next chapter in our company. On that note, I would like to pass it over to Sergio Patino, our new Interim Chief Financial Officer for his comments.

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Sergio Patino: Thank you, Raj, and hello everyone. I’m very excited to be part of the High Tide team and share these great results and the road ahead. In the first quarter ended January 31, 2023, the company recorded consolidated revenue of $118.1 million, representing an increase of 64% year-over-year and 9% sequentially. As a percentage of revenue, gross profit remained consistent versus the prior three quarters at 27.3%, but down from 32% in Q1 2022. This reduction was intentional, given the new discount club model, we launched almost a year and a half ago. The primary importance however is that our retail stores gross margins earned from selling cannabis in Canada, which drive the vast majority of our revenue was up sequentially in Q1.

Our consolidated gross profit was a record $32.2 million in the first quarter of 2023, up 40% year-over-year and matching the 9% revenue growth sequentially. Gross margins in our cannabis stores have not only stayed stable, rather they have moved higher over the past 12 months. And as ELITE membership and our white-label initiatives start to become more meaningful over time, as well as a Fastendr which is the retail kiosks technology continues to rollout, which will each have a positive impact on our consolidated gross margins in the future. We hit a new high in our adjusted EBITDA at $5.5 million in Q1, up 86% versus Q1 ’22 and up 10% sequentially. On the cost side, we have our salaries, wages and benefits at 12% of revenue, consistent with the last three quarters, but much lower than 14% in Q1 2002.

Similarly, our G&A was only 6% of revenue, representing an improvement from 8% in Q1 ’22 and 7% in Q4 2002. This is a testament to our strong cost-control, which we are looking to further tighten as well as a demonstration of the tangible benefit or the scale for shareholders. As highlighted by Raj, our cash flow situation improved significantly in Q1. Our operations generate enough cash to cover working capital investment and topics these . And we are within a striking distance of also covering our lease payments. It is tough to predict exactly when this will happen, but with continued improvement in our operations, optimizing the back-office and higher margin initiatives kicking, we don’t believe that, that day is far off. Meanwhile, we are in good shape for cash.

We ended the quarter with $23.7 million in cash and we have no meaningful debt maturities until December 2024. In terms of our ability to access more non-dilutive capital, I note that in a market with so many cannabis seeds are going to CCAA protection given our execution, we are currently in talks to meaningfully increase how much we can borrow with Connect First. At the same rate the prime plus 2.5%. In closing, Q1 was another great quarter for High Tide. Our company is a clear leader in Canadian cannabis and is the largest revenue generating cannabis company in Canada, reported in Canadian dollars. Our new objective to generate free cash flow by the end of this calendar year, will ensure that we will not only survive, but continue to grow in the future.

With that, I will now turn the call over to the operator to open the lines for the question-and-answer session.

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Q&A Session

Operator: So our first question is from Scott Fortune from ROTH MKM. Scott, please go ahead.

Scott Fortune: Yes, good morning and congratulations on the quarter. Just wanted to provide a little color if you could on the current retail market in Canada and the strategy deposit step back and target, you were targeting 200 stores in the timeline. Are you seeing consolidation occur, there’s been some over saturation. How do you look at that kind of store opportunity for you from a maturing marketplace from that standpoint? And then can you provide color where the different provinces, where you still have some focus or opportunities to grow that as you look at kind of the opportunity overall for 2023 for your store opportunity from that standpoint? Just kind of steps in strategy, as you look going forward and what will need to change to kind of start to really accelerate from that store growth?

Raj Grover: Sure. Good morning, Scott. Thank you so much for your question. So just first of all, just answering your overall question about the situation of retail market in Canada, So obviously, we are still experiencing and I think we will continue to experience hyper competition overall in the Canadian cannabis landscape, retail landscape. But for the last five months, if you look at Alberta, which is our largest store footprint, it has actually shown negative store growth which is healthy for this environment that not more stores are not opening up and operators that are currently existing can improve their economics in these markets. And if you look at Ontario, which is the largest market in Canada, Ontario new store growth has also drastically slowed down.

Now overall on our goal, Scott, 200 stores was our goal almost to reach in 2023 or early to mid-2024. But we are now focusing on free cash flow generation ahead of broadening our store network. Scott, if you look at our track record, we have clearly delivered growth market ask for growth, cannabis was in early innings. And if you look just four years ago, our total revenue was $8 million. Now we’re exceeding the run rate — current run rate is $472 million. So you can see the exponential growth there. We have clearly proven that we can grow. So I’m not concerned about how quickly we reach to 200 stores anymore. The good news is being the market leader already in Canada, you know, it’s up to us we can practically dictate terms on slowing down and picking up stores when we need or ramping up organic growth like I said in my prepared remarks, we’re getting a lot of high quality real estate sites offered to us by some major landlords in the country.

And, you know, I’m a sucker for good locations, so it’s really hard to deny those excellent locations, but we are still going to be very picky and we’re going to pace out the build out of these stores. So the focus remains on free cash flow generation. But any given time, the market improves, the macro improves. Right now, we have a lot of challenges in the cannabis capital markets. Of course, the macro is very challenging. As these dynamics improve, we can always shift back to store growth again and meet our long term goals of 200 stores in the next year and a half. And in the next two to three years, our overall long term goal of hitting 250 stores in Canada. That’s totally possible. But I think the most responsible thing to do right now while the market right sizes itself, it’s just to focus on our operations.

As you can clearly see, we’ve done a great job on our SG&A. We are going to continue to do that, Scott. And eventually reach our long term goal of 200 stores.

Scott Fortune: I appreciate that color. And then one follow-up for me is kind of the cadence of the Cabana club members is now flowing obviously, you’ve done great job to meet your original expectations with 975,000 there. But what do you see you have to – are you targeting members? Are you having to add more incentives, more marketing for them, the continued spend? What do you think on the current spend, average spend for those members in the stores? And just a little bit color on the cadence of the lead number growth. You kind of say it’s more of a gradual growth throughout the year, but kind of little more color on the ELITE member side of things, that’d be great.

Raj Grover: Sure. So, Scott, I’m extremely happy. And I’m actually very pleasantly surprised how rapidly we’ve grown our Cabana club. As you remember about 15, 16 months ago, Scott, when we launched the discount club model, we were sitting at 245,000 members to be precise. And we’ve exceeded 975,000 members in just 15 months. I mean, if we were close to 800,000 members right now, I would have been very happy. But, you know, we’ve clearly surpassed that growth and it’s been at a extremely rapid pace over the last year and a half since the launch of our discount club model. We cannot be expected to continue growing at such explosive growth. It’s physically not possible. Because a lot of our locations are starting to now hit maturity.

But I’m very, very pleased that where we sit today, like I said, we have currently about 14% of Canadian cannabis marijuana smoking population in our ecosystem outside the province of Quebec. I think that’s a pretty large number. So very happy with Cabana clubs sign-ups where they’re currently sitting. Like I said, we still have the opportunity long term to add 80 to 100 stores to get to our 250 store number. That would also be in new markets, as well as existing markets. So we think that that growth will start to ramp up again. But I think we are going to go through a more reserved time in the Cabana club sign-up growth because we are not focused on opening new stores and our existing stores are getting close to maturity now. On your question on ELITE, so we grew 58% in the last 45 days, which was adding another 3500 members in ELITE, which I’m very, very happy with because you think about it, Scott, we are the first paid concept in cannabis and we’ve started this from scratch.

And our current store inventory only represents 2% in ELITE items. When the customers come in, they need to see more inventory that represents ELITE for them to be sold in this market that, yes, this is the direction we want to go. So having signed up another 58% of our members in just 45 days, a growth by 58% I’m very, very happy with it. I want to see a steady increase every quarter and we are confident that we can make it happen as long term we think we can add 25% to 30% of all of our in store offerings represent ELITE inventory. So I think as the SKU offerings go up, our ELITE number will continue to climb sustainably.

Scott Fortune: I appreciate that. Thanks for the color, and I’ll jump back to queue.