High Tide Inc. (NASDAQ:HITI) Q4 2023 Earnings Call Transcript January 30, 2024
High Tide Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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.
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.
Raj Grover: 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 close. Capital markets now have even more evidence that our team has built a business that is focused on execution and growing our industry leading position, not how to find the funds to keep the lights on. While we were reaping the fruits from the decisions made in prior years, three of our public competitors in Canadian retail cannabis disappeared during 2023 and some others are currently on the brink. Looking ahead, our objective is to reaccelerate growth a few notches from our internally generated free cash flow, and we have already started doing so. We opened four stores in the first seven months of 2023 and eight stores in the last five months of the year, funded from our free cash flow.
Our expectation is to open 20 to 30 stores in calendar 2024 via a combination of organic builds and M&A while remaining free cash flow positive. We have generated just shy of $10 million in free cash flow in the last six months, which has allowed us to achieve a rare combination of ending the quarter with a record cash balance, increasing our store footprint as well as reducing debt. Yet our shares currently trade at an EB to last quarter annualized adjusted EBITDA multiple of just 6.2 times, a level we believe is quite attractive. I would like to remind investors that I led a round of Insider Buying in November 2023 as well as in March 2023. I remain the largest shareholder and I’ve never sold a share. Fiscal 2023 continued an established string of exceptional performance for High Tide.
Revenue for the year was $487.7 million, ending at a pace quickly approaching $510 million versus $31.3 million in fiscal 2019, our first fiscal year end as a public company. In fact, we have never reported a sequential decline in quarterly revenue during the five years since we have been public. We have now posted 15 straight quarters of positive adjusted EBITDA while setting new records in each of the past five quarters, excluding the impact of the removal of the SRF in Manitoba in Q3 2023. While it has been a string of very successful years, I firmly believe that the best is yet to come for High Tide. Most importantly, we were fully supportive of the transformational regulatory change in Ontario a month ago where the government raised the cap of the number of stores any one entity can own from 75 to 150 effective January 1, 2024.
While we ran a corporate store network, others were using a franchise model as a loophole to get around the cap and have more than 75 stores. Now, the playing field is clear and leveled for everybody and the total addressable market for us in the largest province has doubled. We ended fiscal 2023 with 52 stores in Ontario and have 54 today. With this key change, we now have the ability to add almost 100 stores, which should be a game changer for our operations and financial profile. Our average Ontario store generated $3.6 million of annualized revenue in October, which compares to $1.1 million of our peers in the province, and our market share was 9% in Ontario during the month. We look forward to continuing to profitably expand by adding 96 more stores in the province to our store network via both organic and acquisitive growth.
We have already identified about 20 sites we plan to build out, the majority of which are in Ontario. While we remain hungry for expansion into other international legal markets coming over the horizon, this positive development in Ontario should fuel years of meaningful growth ahead for High Tide right here in Canada. Innovation is the key to what we do at High Tide. Whether you’re talking about our discount club model, fast tendered technology or our altogether magazine circulated to over 1.28 million Cabana Club members helping to provide visibility and exposure to the latest and greatest trending cannabis brands, we are always on the cutting edge, trying new things to stay ahead of our competition and we are succeeding. With a full year behind us since launch, I’m very happy to report that ELITE continues to do very well and that uptick is accelerating.
We have breached the 28,000 ELITE member mark as of today, up 49% or 9,200 members since we reported this metric on September 14, 2023 with our Q3 results representing the fastest onboarding pace since we launched ELITE a year ago. I’m very pleased to report that our ELITE membership is up 367% over the past year. Our Cabana Club has also swelled to over 1.28 million members today, up 35% versus the prior year and 16% sequentially. We are 163 stores strong across the country today. In Alberta, our average store was in a $2.2 million run rate in October and held a 19% market share versus our peers, which averaged a $1.1 million run rate. We just opened our first store in Fort McMurray over the weekend. We are very excited about it and expect it to be one of our better performing stores in Alberta.
Our market share across the five provinces in which we have a presence was 10% for the quarter. Our long term goal is to have 15% market in the markets where we operate, although, that will be difficult to obtain in British Columbia where we are currently limited to the cap of eight stores until there is a regulatory change. I will now go over the highlights from the financials and Sergio will do a deeper dive. Revenue for Q4 was $127.1 million, representing an annual pace quickly approaching $510 million and up 17% year-over-year and 2% sequentially. Recall that we only opened three stores during the quarter, one of which was only open for nine days. Consolidated gross margins were 26% in Q4, which was fairly consistent versus 27% in the fourth fiscal quarter of 2022 and equal to the third fiscal quarter of 2023, excluding the impact from Manitoba’s SRF.
We’re very happy with some of the benefits scale and active cost control initiatives resulted in an improved financial profile in 2023 versus 2022 and how we held the line on expenses during Q4. For example, salaries, wages and benefits were 11.6% of revenue during 2023, representing a meaningful decline versus 12.3% in 2022. In Q4 2023, the percentage was 11.6%, representing a big improvement from 12.1% in Q4 2022 and equal to the full year average for 2023. Similarly, general and administration expenses represented 5.5% of revenue in 2023 versus 7.3% in 2022. And in Q4 2023 the figure was 5.3%, much better than 7.4% in Q4 2022 and lower than the full year average for 2023. Adjusted EBITDA for Q4 2023 was $8.4 million, which excluding the onetime benefit from the elimination of the social responsibility fee in Manitoba of $2.4 million in Q3 2023, was a record level and up 7% sequentially and up 67% year-over-year.
We performed our annual impairment testing during Q4, driven primarily by a global post pandemic slowdown in e-commerce sales to which our e-commerce assets have not been immune. Unfortunately, we had to incur noncash impairment charges, primarily relating to brands and goodwill of $34.3 million. While we are not happy with this development, I stress that this has to do solely with e-commerce assets and does not relate at all to our core bricks and mortar business in Canada, which represents over 91% of our revenue and frankly continues to get stronger with each passing quarter. Specifically, I note that our income from operations, excluding these non-cash charges turned positive in Q4. Now, let’s look at the competitive nature of the industry.
Our model continues to stand out as the clear winner. In the two years since we introduced our innovative discount club concept, our same store sales have risen a remarkable 110%. In contrast, total retail sales across Canada, excluding Quebec where there is no private sector cannabis retail, were up only 28%. During the two year period, the industry store count has risen 38%, suggesting that while our same store sales were up 110%, the average operator in the country has witnessed a 7% decline. We are definitely seeing the impact of competition in the market and our superior positioning. We are regularly going into more saturated areas, and provided we can get top tier real estate, which usually isn’t a problem, given our strong financial covenant and existing landlord relationships, we find that even in these competitive markets the value proposition offered by the Cabana Club model is making these new stores winners relatively quickly.
At the same time, we are seeing store closures and no shortage of opportunities from operators hoping we will simply take the keys of their money losing stores, which of course is not our model. We only act on high quality real estate opening up newer pockets of customers for us and featuring a healthy financial profile. There are still many cities where we don’t have a Canna Cabana. 2024 will be a year where we look to take action on such opportunities. In conclusion, Q4 was another quarter of solid execution and growth for High Tide, which of course could not have been achieved without the dedication of our strong team. The outlook of our future remains very bright featuring years of expansion ahead in Ontario likely followed by international markets, such as Germany and the US opening up.
We were the top performing Canadian cannabis stock in 2023 and I remain excited about our prospects for 2024 and beyond. I would now like to turn it over to Sergio Patino, our Chief Financial Officer, for his comments and a deeper dive into the numbers.
Sergio Patino: 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 as compared to 9% in the prior fiscal year. In particular, I would like to highlight that advertising and promotion was at a [four] quarter low in Q4 ’23. It went from 1.3% as a percentage of revenue in Q1 ’23 to 0.5% in Q4 ’23, reflecting a drop of 60% over the past four quarters, while significantly growing the business. Adjusted EBITDA in Q4 was a record of $8.4 million, excluding the impact of the 1 time benefit of $2.4 million received in the previous quarter through the elimination of Manitoba’s social responsibility fee. Our adjusted EBITDA margin for the quarter was 6.6%, representing a large upward move versus 4.6% in Q4 ’22 and above the $6.3 million generated in Q3 ’23 without the Manitoba’s SRF credit.
Operating cash flows were a record of $9.6 million in the quarter, up 17% year-over-year and 28% sequentially. Cash flows in any given quarter can be bumpy so it is important to look at our longer term trends. To that point, total operating cash flow was $20.7 million in fiscal year ‘23 versus $4.5 million in fiscal year ’22, an increase of an incredible 360%. Free cash flow was a record of $5.7 million for Q4 versus $4.1 million in Q3, up a tremendous 40% sequentially. This brings accumulated free cash flow for the last six months to almost $10 million. Our cash balance grew to a record of $30.1 million from $25.7 million in the previous quarter, driven by the strength of our operation, which continue to generate meaningful amounts of cash.
With some restructuring and a cash pay down of our convertible debt since the fiscal year end, our total debt now stands at just $28.8 million, which is only 0.9 times to $33.4 million of Q4 annualized adjusted EBITDA. Therefore, we feel that we are under delivered and are currently exploring opportunities to obtain more debt financing on acceptable terms, which in conjunction with our clearly demonstrated free cash flow generation can help finance the stronger growth we see ahead. In the five Canadian provinces where we operate our brick and mortar store network we have achieved 10% of market share in Q4. Our innovative discount model continues to lead our peer group and as our average stock was on a $2.7 million run rate in the month of October, which was 2.3 times the pace of our peers.
We are also pleased to see that ELITE, our recurring high margin revenue stream, has grown at its fastest pace since inception in November of ’22 to over 28,000 members today. Further, our Cabanalytics business and data insights platform, including ad revenues grew by 3% sequentially in Q4. Despite the decline in sales that we are experiencing in our e-commerce businesses in line with global trends, the team has made diligent effort to cut costs and thus, cushion their overall financial impact, which has resulted in continued record adjusted EBITDA and free cash flow generation. I would like to remind investors that High Tide remains the highest revenue generating cannabis company in Canada, and has been recognized as one of Canada’s top growing companies by the Global Mail’s report on Business Magazine for three consecutive years.
We look forward to our growth ahead in Canada, focusing Ontario over the next few years having an opportunity to almost double our existing store count of 163 stores to approximately 300 locations. In closing, Q4 was another great quarter for High Tide. Our operating fundamentals continue to improve with each passing quarter and our competitive position continues to strengthen while our balance sheet also keeps getting stronger. I’m excited for what fiscal year 2024 will bring. 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
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Operator: [Operator Instructions] First question today comes from Matt Bottomley with Canaccord Genuity.
Matt Bottomley: 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?
Raj Grover: 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.
Matt Bottomley: 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?
Raj Grover: 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.
Operator: Our next question comes from Scott Fortune with ROTH MKM.
Scott Fortune: 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?
Raj Grover: 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.
