High Tide Inc. (NASDAQ:HITI) Q2 2023 Earnings Call Transcript

High Tide Inc. (NASDAQ:HITI) Q2 2023 Earnings Call Transcript June 15, 2023

Operator: Good morning. My name is Nadia, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the High Tide Inc.’s Second Quarter of 2023 Unaudited 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. [Operator Instructions] I will now turn the call over to your host.

Ashley Wilde: Thank you, operator. Good morning, everyone, and welcome to High Tide Inc.’s 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 Mr. Raj Grover, President and Chief Executive Officer; and Mr. Sergio Patino, Interim Chief Financial Officer. On June 14, 2023, the Company released unaudited highlights from its financial and operational results for the second quarter that ended April 30, 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 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 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 June 14, 2023, our latest annual information form, and our latest management’s 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 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 current 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 measured and discussed, please consult our latest management’s 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, Ashley, and good morning, everyone. Welcome to High Tide Inc.’s financial results conference call for the second quarter ended April 30, 2023. I am so happy to share our results today. I believe they show that we are in a stronger position than ever before and cementing our leadership in Canadian cannabis retail. First and foremost, this was our third consecutive quarter of record revenue and adjusted EBITDA. Achieving this milestone is uniquely exciting as Q2 is historically a slower quarter having three fewer days than Q1, and this continued momentum was achieved organically. So let’s dive into the numbers. Our total revenue for the quarter was $118.1 million. This was up 46% year-over-year and largely consistent sequentially.

You’ll recall that during our Q1 call in March, we disclosed that given the three fewer days in Q2 compared to Q1, which is also a seasonally slower period and without much in the way of new store openings, we expected that Q2 topline would look very similar to Q1 and that’s what happened. Same-store sales in our stores were up a massive 30% year-over-year and 1% sequentially. However, taking into account that Q2 had three fewer days than Q1, average daily same-store sales were up 5% sequentially for the quarter or over 20% annualized making this the seventh consecutive quarter of sequential same-store sales increases. Our consolidated gross margin was 27% in Q2, which was consistent with the prior three quarters. I note that gross margins earned from selling cannabis in our bricks-and-mortar locations once again, ticked higher sequentially this quarter.

Our Canadian revenue represented 88% of total revenue, which being our core business driver is our main focus and continued to pose gains. Adjusted EBITDA for Q2 2023 was a record $6.6 million representing our 13 straight quarter of positive adjusted EBITDA. Our adjusted EBITDA was up 174% year-over-year and 20% sequentially maintaining its impressive upper trajectory. Over the past four quarters, we have now generated $21.4 million in adjusted EBITDA. This is up a tremendous 150% from the $8.5 million we generated during the four quarters ended Q2 2022. Fully diluted earnings per share represented a loss of $0.02 this quarter, which was significantly better versus a loss of $0.14 during the same quarter last year, and a loss of $0.05 in Q1 2023, representing major improvements of 86% and 60% respectively.

Regarding our balance sheet, we ended the quarter with $22.5 million of cash on hand and we continue to responsibly navigate this difficult macro environment. Supported by our ever increasing EBITDA, we are in advanced due diligence with ConnectFirst Credit Union to increase the $19 million debt facility we have with them at the same enviable rate of prime plus 2.5%. Cash flows from operations before changes in non-cash working capital were $5.5 million in Q2 2023. This was the seventh consecutive quarter where this figure was positive marking a 241% increase from $1.6 million in Q2 2022 and was 24% higher than the $4.4 million we generated in Q1 2023. Free cash flow was negative $2 million in Q2 2023 marking a significant 66% improvement from negative $5.8 million in Q2 2022.

Free cash flow was negative $846,000 in Q1 2023. Note that we meaningfully reduced accounts payable and accrued liabilities during this quarter by $6.8 million in total, which negatively impacted free cash flow. Investments in working capital can be lumpy from what any one given quarter to the next. We also note that we amended our definition of free cash flow to now represent cash flow from operations, less maintenance and sustaining CapEx and less our lease liability payments. We believe this metric provides better insight regarding the true cash generation from our existing business lines and paints a better picture regarding free cash available to fund the growth of new stores. On our Q1 call, we unveiled our new primary goal of becoming amongst the first companies in Canadian cannabis to be free cash flow positive, and that we plan to achieve this feed by the end of this calendar year.

Given the momentum in our business in Q2 and beyond, we remain optimistic that we will achieve this goal. With our revenue and gross margin dollars being largely flat sequentially in the second quarter, I’m quite pleased to report that the vast majority of our $1.1 million sequential increase in adjusted EBITDA came from our continued aggressive cost controls. Specifically, G&A expenses of $6.2 million were reduced by $1.3 million sequentially, compared to Q2 2022, G&A rose by less than $400,000 this quarter, while revenue increased by over $37 million. As a percentage of sales, our G&A expenses fell to 5% in Q2 2023 and improvement from 6% in Q1 2023 and 7% in Q2 2022. As mentioned last quarter, we will continue to look for operational efficiencies across all our business lines.

We reached 1 million Cabana Club members in the prior quarter and this membership base keeps growing despite no meaningful change in-store growth recently. Today, we stand at over 1,040,000 club members, which remains the largest Canadian cannabis bricks-and-mortar loyalty program by far and is still growing. ELITE signups continue to grow, currently standing at over 13,500 members representing a 42% increase since we last reported our financial results on March 17. We have been steadily ramping up our exclusive ELITE offerings and over the long-term, we aim to have 25% to 30% of our product selection be ELITE only. With the recent launch of ELITE weekly drops, we expect ELITE signups to gain momentum as these unbeatable exclusive weekly deals are only available to ELITE members.

As ELITE inventory ramps up and with more word-of-mouth getting out, we expect these signups will continue to climb over the coming quarters. I would like to take a minute now to address the competitive landscape for retail cannabis across the country. While there maybe certain micro markets out there, which represents pockets of growth such as Mississauga, we just opted into legal cannabis. We believe that store counts across Ontario and Alberta have largely crested and will likely subside from current levels over the coming months as we pass the pivotal five-year anniversary of cannabis legalization where many retailers will decide to walk away rather than renew expiring leases. Recent weeks have also demonstrated that even some large retail cannabis chains with business models different from ours are not immune to the current competitive and capital market realities facing the cannabis sector.

While this is unfortunate, we see it as a part of making the market healthier overall, and we expect that our same-store sales will continue to grow as a total number of stores declined while the total industry sales expand. As it is based on March data from Statistics Canada, our average store in Ontario, which is the largest market by far, does more than 3.5x the revenue of our provincial peers and our average store in Alberta where we have the widest footprint generates more than twice as much revenue as our peers in that province. Our discount club concept continues to dominate. Our national market share outside Quebec rose again to 9.5% in Q2 from 9% in Q1 marking the seventh consecutive quarter where we made gains and up from 6.4% just one year-ago.

Nationally, while our Canna Cabana stores represent 4.5% of the total number of stores excluding Quebec, our market share in dollars is approaching 10%. While 10% represents an aspirational long-term goal for some of our peers, we are already within striking distance of that today and we see room to move our share higher. We are optimistic that 15% is likely within our reach in the not too distant future. Balance sheets continue to be in the focus and the capital market has been unforgiving to companies which have shown uncertainty regarding their financing runway. We have made sure not to put ourselves in this position. Our total debt currently stands at approximately $38.5 million, which is less than 2x at trailing adjusted EBITDA of $21.4 million.

In our view, not only are we the biggest Canadian retail cannabis company by revenue and adjusted EBITDA, but we also remain the strongest option for investors in terms of our focus on free cash flow generation, our corporate governance, the fact that we are fully independent, featuring our very successful one brand strategy and discount club models. As mentioned, we are in advanced due diligence to increase our credit line with ConnectFirst, and we are working towards our goal to become free cash flow positive by the end of this calendar year. Achieving this would make us less reliant on the macro sentiment for capital for cannabis companies. Speaking of while we are not happy with our share price, we highlight that our equity has stood out on a relative basis.

Specifically, while our share price is down 15% since the end of our last fiscal year of October 31, 2022, we have meaningfully outperformed our Canadian retailer peers and broad baskets of both LPs and MSOs, which are down approximately 50% during this period. So while it has been a frustrating time, our operational outperformance, upward financial momentum, strong balance sheet, superior market positioning and our goal to move towards positive free cash flow are being somewhat appreciated and what is unfortunately an extended bear market. While these are trying times, they won’t last forever, and when things turn, we expect to outperform. As you know, we have built Canada’s largest cannabis business by revenue, never having more than $30 million at the end of any one quarter.

We are confident that we can take things to the next level in the subsequent bull market. Until then, we will continue improving the strength of our operations and keep highlighting the opportunity to investors as forcefully as we can. To those who have stuck with us, thank you. We appreciate your vote of confidence and we are with you. Shortly after we reported our Q1 results in March, several officers, directors, and consultants, myself included collectively bought over a 0.25 million more shares in High Tide in the open market highlighting our collective belief in what we are building together. I will note once again that I remain High Tide’s largest single shareholder and have never sold any shares. We’ve been a leader in Canadian cannabis, we’ve done it responsibly, and we plan to keep solidifying our position.

This has all been possible because of the hard work of our best-in-class team, our Treasure Club members, and our investors who continue to believe in us. My gratitude to you all is immeasurable. Now, I would like to pass it over to Sergio Patino, our Interim Chief Financial Officer for his comments.

Sergio Patino: Thank you, Raj, and hello, everyone. As Raj mentioned, Q2 was another excellent quarter for High Tide in what continues to be a challenging market environment. Nonetheless, the company continued to experience solid organic growth with sustained margins by cutting costs, particularly in our core Canadian brick-and-mortar business. In the second fiscal quarter that ended April 30, 2023, the company recorded consolidated revenue of $118.1 million, representing an increase of 46% year-over-year, and consistent with Q1 2023 despite having three fewer days in this period and a seasonally slower quarter. As a percentage of revenue, gross profit remained consistent versus the prior three quarters at 27% and down just a touch versus 28% in Q2 2022.

This reduction was intentional. Given the new discount club model we launched in October, 2021. This model, without a doubt has worked, and now that we have tremendously increased sales volumes, we have been able to consistently increase our retail store gross margins earned from selling cannabis in Canada over the past five quarters. This drives the vast majority of our revenue and was up sequentially once again in Q2. Our consolidated gross profit was $31.6 million in the second quarter of 2023, up 39% year-over-year, and down 2% sequentially as there were 3% fewer days this quarter. In addition to slightly raising prices, we have other tools we can pull over the coming quarter to help boost margins. These are ELITE, white-label and Fastendr.

Regarding ELITE, we believe we can continue to grow our ELITE-only SKU talent. And as word-of-mouth spreads, our ELITE customer base will continue to rise. Our white-label sales are steadily growing, and we generate approximately 5% higher gross margins selling our house-branded Cabana Cannabis and NuLeaf Naturals products compared to selling other SKUs. We are up to [indiscernible] that own SKUs available today, and we have several more under development. Our long-term goal is to get to 25% of what we sell, representing our own products. Alberta potentially allowing white-label, which is something that we are engaged with the province on, will be a big part of that. As for Fastendr, it is already being deployed in the vast majority of our stores and we are looking to roll it out in the remainder in the coming months.

We already have meaningful inbounds from U.S. operators looking to license our technology. We would like to start it for our [indiscernible] really assess and quantify how Fastendr is helping our stores, improving basket size, decreasing transaction times, optimizing labor costs, and enhancing customer satisfaction. All of this will help our brick-and-mortar margins further and then place us in a position with real data in hand to be able to properly price the offerings to U.S. operators and generate another compliant high margin revenue stream for our shareholders. We hit at new height in our adjusted EBITDA at $6.6 million in Q2 2023 up 174% versus Q2 2022 and up 20% sequentially while gross margins dollar were down 2% sequentially, given the three fewer days effectively, all of the EBITDA increase came from our cost controls.

Specifically, G&A went down by over $1.3 million sequentially from $7.5 million in Q1 2023 to $6.2 million in Q2 2023. There were some non-recurring items in the Q1 figure, however, we also found efficiencies in both retail and e-commerce businesses. In general, we expect the G&A cost base to stay stable around the current level going forward. G&A represent just 5% of revenue in Q2 2023 versus 6% in Q1 2023 and 7% in Q2 2022. Salaries, wages, and benefits were 12% of revenue, which was consistent with the prior four quarters as we have taken continued measures to support our frontline and head office staff during this inflationary times. As highlighted by Raj, our cash flow situation improved significantly in Q2 2023. Operating cash flows before changes in non-cash working capital were $5.5 million in Q2, up 241% year-over-year and 24% sequential.

Working capital can be lumpy per quarter, and we did take meaningful strides to reduce our current liabilities in Q2. All told, our free cash flow was negative $2 million in Q2 2023, which was a 66% improvement versus the prior year of negative $5.8 million. Note that this quarter and going forward, we have only incorporated the sustaining and maintenance CapEx component in our definition of free cash flow to better represent the cash flow generation of our existing businesses versus what is being spent on growth. We are making good strides toward becoming free cash flow positive by the end of this calendar year. We ended the quarter with $22.5 million of cash in our accounts and are always looking for ways to strengthen our balance sheet. In terms of our ability to access more non-diluted capital, we are currently in advanced discussions to increase how much we can borrow with ConnectFirst at the same rate of prime plus 2.5%.

In closing, Q2 was another great quarter for High Tide. Our company is the clear leader in Canadian cannabis and is the largest revenue generating cannabis company in Canada according to data published by new cannabis bench. 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: Thank you. [Operator Instructions] Our first question today goes to Scott Fortune of ROTH MKM. Scott, please go ahead. Your line is open.

Scott Fortune: Yes. Good morning, and thank you for the questions here. I appreciate the color on the competitive landscape, but just wanted to get sense with a large competitor recently going under here. Can you provide a little bit more your comments saying, we’re going to see continuing consolidation in the next 12 months, but now we have heightened level of opportunity. But just wanted to get a sense strategically and selectively adding potential accretive M&A. With that said, obviously with a large competitor [indiscernible] business. Just kind of put that in context and then opportunities there to really expand the retail lead that you have and move up to your 15% market share. Just kind of get a sense of how you’re weighing the opportunity now with the new developments here going forward, that’d be great.

Raj Grover: Hi, Scott. Thank you for your question. So Scott, you’re absolutely right. There’s a lot of things moving and shaking the cannabis industry here in Canada and it’s never healthy for an already challenged industry when a major chain like Fire & Flower files for CCAA protection. But to your point, there could be opportunities for companies like High Tide and some others to bid on some really high quality assets without having to acquire that, more than – less than desirable assets that they have on their portfolio. And at the same time, I am suspecting and our team is suspecting that several of Fire & Flower store locations will simply end up closing in the proceedings, which will help boost our sales in other stores that are around Fire & Flower stores in those surrounding areas.

But the bottom line is, Scott, this puts us even in a better position, although this is unfortunate for the industry and for Fire & Flower. But this is not a new phenomena that’s taking place. It’s a little bit surprising that it’s happened to such a large chain. But it’s clear now that no one is safe. If you are not running your business well, if you don’t understand your operations well and you’re not operationally focused, then everything’s off the table and which is clearly becoming the norm in the industry. So we remain focused on our business fundamentals. As you can see, we increased our adjusted EBITDA sequentially by 20%. There’s a heightened level of opportunities coming to market right now, but we are remaining very, very focused on our business to only act upon the opportunities that are absolutely relative to us right now.

So we are going to remain very prudent and very disciplined in our M&A approach now and going forward.

Scott Fortune: Got it. I appreciate that color. And maybe you can provide a little bit – you mentioned in your comments two new store growth coming onboard kind of second half. Any color on the potential kind of ads. I mean, you slowed down the pace or just waiting to get to free cash flow positive. But just kind of weighing your efforts and kind of great progress and getting cash flow generation there. But with adding new stores in the second half, how can we kind of look at that cadence towards the second half here?