High Tide Inc. (NASDAQ:HITI) Q3 2023 Earnings Call Transcript

High Tide Inc. (NASDAQ:HITI) Q3 2023 Earnings Call Transcript September 15, 2023

Operator: Good morning. My name is Carla, and I will be your conference operator today. At this time, I would like to welcome everyone to High Tide Inc.’s Third 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. 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 your host, Krystal Dafoe. Please go ahead, when you’re ready.

Krystal Dafoe: Very good. Thank you, operator. Good morning, everyone, and welcome to the 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 Mr. Raj Grover, President and Chief Executive Officer; and Mr. Sergio Patino, Chief Financial Officer. On September 14, 2023, the company released unaudited highlights from its financial and operational results for the third quarter that ended July 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 the statements of historical facts constitute forward-looking information or forward-looking statements within the meaning of all 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 September 14, 2023, our latest annual information form and our latest management discussion and analysis, each filed with securities regulatory authorities on sedar.com or on EDGAR at www.sec.gov or on the company’s website at www.hightideinc.com, which are hereby incorporated by reference herein. Although these forward-looking statements reflect management’s current beliefs and reasonable assumptions based on the current information currently available 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 statements and 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 third quarter ended July 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. Those of you who have tracked our company for some time have seen our execution. And that time and time again, we do what we say we are going to do. We have a long history of under-promising and over-delivering in a big way at High Tide. And it was no different this time. Specifically, early this year, we publicly stated our goal to be free cash flow positive by the end of the calendar year. Last night, we announced that we achieved this goal in a meaningful way with $4.1 million in free cash flow and with this being the July quarter, we reached this milestone five months ahead of schedule.

Not only is this a very impressive feat in its own right, but being free cash flow positive considerably insulates us from whatever the capital markets bring and it is rare for companies in this industry on both sides of the border to achieve this significant milestone. Over the past several years, we have proven that we know how to grow. We have put up strong same-store sales numbers above our peers organically built dozens of locations and entered into a lot of M&A along the way to building the largest business by revenue and market share in Canadian cannabis. This has been driven by our continuous innovative thinking, which led to the launch of our unique discount club model two years ago, our Elite Paid Membership tier almost a year ago and as announced yesterday, the unveiling of Cabanalytics consumer insights.

CCI is an extension of our highly successful Cabanalytics business and data insights platform, which subject to relevant provincial and federal regulations we expect will provide another high margin opportunity for our company through targeted ad revenue generation. This should also help further solidify our relationship and loyalty loop with our club members product innovators, brand manufacturers and licensed producers. We have never posted a sequential decrease in revenue while now generating 14 straight quarters of positive adjusted EBITDA. Last night’s results proved that our existing operation can also generate meaningful free cash. And now that we have clearly demonstrated this, we plan to shift a little further across the spectrum towards growth this quarter and into 2024.

We plan to remain free cash flow positive going forward. Although, the amount may fluctuate in any given quarter, as we pick along the spectrum of growth and cash flow generation as well as keeping working capital changes in mind amongst other considerations. We also made another promise to the market at the beginning of the year that our annual revenue run rate would exceed $0.5 billion by the end of the fiscal year. While we were almost there during Q3, our current run rate has us exceeding that threshold today, once again, ahead of our previously communicated time line. Our same-store sales have been very strong and continue to outpace our peers. With no acquisitions this quarter or last quarter, I highlight that these results were generated entirely from our organic operations.

Further, while the market added close to 100 locations since the end of April, we only added four stores, yet we maintained our national market share of 9.5%, excluding the province of Quebec in Q3. Putting it all together, our stores in Ontario, Canada’s largest cannabis market generated 3.4 times the revenue of our provincial peers in June. Nationally, our stores were on a run rate of $2.8 million in June compared to the national average of our peers, excluding Quebec of just $1.2 million. Our customer reach continues to expand as we now have over 1.1 million loyal Cabana Club members, which remains by far the largest bricks-and-mortar cannabis loyalty program in the country. Elite sign-ups have accelerated exactly as predicted as we continue to add more Elite focused in-store offerings and related inventory into our retail network.

We added 5,300, ELITE members since our Q2 call, totaling over 18,800 members today. Whereas on our Q2 call, we announced that we added 4,000 members and similarly 3,500 members on our Q1 call. As a reminder, not only does ELITE help further solidify customer loyalty, but it represents a high margin recurring revenue stream for shareholders. Our innovation does not stop at ELITE. Continued innovation is in our DNA. Yesterday morning, we announced that we have taken the core of our Cabanalytics business and data insights platform and launched Cabanalytics Consumer Insights, a digital monthly publication. CCI will consist of a magazine style extensive report, which highlights market trends, analyze multiple different ways, providing data-driven insights regarding what brands and products are trending in our international ecosystem by category, price point, potency, et cetera., as well as educational and block style features relevant to cannabis enthusiast and the canacuris alike, and this will be provided for free to our customers every month.

CCI will also feature product innovation from LPs, the hottest consumption accessories and cannabinoid brands throughout each issue and eventually other aspects of the cannabis ecosystem such as cannabis seeds, growing equipment and hydroponics. Subject to regulatory approvals, we expect that we will be able to over time, charge these companies to advertise to reach this captive and targeted extremely relevant base of 1.1 million users and growing. Eventually, we plan to roll this out to our 4.6 million total customers worldwide, including 3 million customers in the U.S. As you can see, while most operators are trying to play catch-up, we are constantly innovating seeing how else we can leverage our strengths and points of differentiation and have it create more benefits for both our customers and our shareholders.

Another obvious point of differentiation is our — in our unique ecosystem is fast tender, which we will touch upon shortly. So big picture, you can see that we are doing great in Canada due to our model and the strength of our team. Now that there is the prospect of very real reform in the U.S., we are excited to one day, hopefully, soon, successfully export our innovative discount club model with all of these innovative and exciting features there as well. I will now go over the highlights from the financials and Sergio will do a deeper time. Revenue for the quarter was $124.4 million just shy of a $500 million annual run rate and up 30% year-over-year and 5% sequentially, led by our same-store sales, which were up 8% sequentially. Over the last seven quarters, our same-store sales are up a tremendous 114%.

Consolidated gross margins were 28% in Q3, whereas they were 27% in each of the preceding four quarters. Once again, it was the margins in our bricks-and-mortar cannabis business in Canada, which accounts for 90% of our total revenue that posted sequential gains again for the sixth straight quarter. You will recall that we highlighted the results of our meaningful cost controls during last quarter’s conference call. These efforts to constantly tighten our ship are ongoing. Our SG&A as a percentage of revenue has fallen in each of the past three consecutive quarters from 7% in Q4 2022 to just 5% in Q3 2023. At the same time, the investments we have made in deploying our proprietary fast tender technology are bearing fruit. Increasing adoption of fast tender has contributed towards reducing our salaries, wages and benefits as a percentage of revenue to just 11.1% this quarter, down from 12% a year ago and 11.8% sequentially.

All these percentage points add up as they flow down to a stronger EBITDA figure. Adjusted EBITDA for the quarter was a record $10.2 million. For context, we generated adjusted EBITDA $14.6 million during all of fiscal 2022. We are tremendously pleased with this figure and note that it is up 140% year-over-year and 55% from Q2, which was already a record level at that time. Note that this includes a one-time benefit from the elimination of the social responsibility fee in Manitoba of $2.4 million this quarter. Even without this figure, adjusted EBITDA would have been $7.8 million, still a record level. Finally, our loss from operations, which I note includes $8.5 million of non-cash depreciation and amortization was only $662,000 this quarter within striking distance of breakeven.

This was also a big improvement from $4.7 million in Q3 last year and $2.6 million in Q2 of this year. Competition continues to create struggles for many of our peers more of which are unfortunately going out of business. Accordingly, opportunities, large and small, keep coming our way, some of which have been quite high profile. We have shown over the past several years that whether companies are thriving just a live or in creditor protection. We know how to buy businesses intelligently on terms that best suit our needs. Making sure that we make moves that make sense for our shareholders and not chase and do whatever it takes to always be the highest bidder at any cost. With next month marking the fifth anniversary of cannabis legalization in Canada, we expect that such opportunities will only accelerate.

So we believe there will be ample M&A candidates out there, many of which are worth buying at attractive and accretive multiples. Accordingly, we expect to be more active in M&A in the coming months. Once again, we have proven that our existing business has the scale and strength to generate meaningful free cash flow. Looking ahead, it’s time to responsibly step a little harder on the gas towards organic growth while still remaining free cash flow positive. We have signed several high-quality leases, particularly in Ontario, including many in the new and exciting market of Mississauga, which we are currently building out, supported by this internal free cash generation. These quarterly results, which were best in our history and the robust outlook for our business could not have been achieved without the dedication of our strong team.

In particular, I would like to congratulate Sergio Patino who was recently appointed as our permanent Chief Financial Officer. I’m excited for what more we can do together. Sergio, over to you for your comments.

Sergio Patino: Thank you, Raj, and hello, everyone. Q3 was another fantastic quarter for High Tide. I’m thrilled to be part of the team that continues to execute so well on his objectives, including now meeting the critical goals of becoming free cash flow positive to the tune of $4.1 million, marking a significant improvement versus the prior two quarters. We kept growing the top line with industry-leading results, while highlighting that these revenues can flow to generate more and more cash to shareholders. Let’s take a deeper dive into the numbers. As Raj mentioned, revenue for the quarter was $124.4 million, up 3% year-over-year and 5% sequentially. The primary driver of this growth was the strength of our same-store sales which is the lifeblood of any retail business.

Same-store sales were up 19% year-over-year and 8% sequentially, even taking into account a higher number of days this quarter versus Q2. Our average daily sales were up 5% sequentially, representing an annualized rate exceeding 20%. As mentioned, consolidated gross margins ticked higher this quarter to 28% versus 27% in each of the past four quarters. Putting it all together, consolidated gross margins dollars rose by 10% sequentially to $34.6 million, double the 5% revenue growth and amplifying our overall profitability. Once again, our cost control were very apparent this quarter. While gross margins increased by $3 million sequentially or $600,000, excluding the benefit from the Manitoba SRF change one-time impact. Total expenses, excluding fixed and non-cash costs such as depreciation, amortization and share-based compensation went down by $600,000.

In particular, professional fees sale by $893,000 sequentially. As we did more work in-house and didn’t enter into any M&A this quarter. Operational efficiency as well as increasing adoption of fast tender by our customers resulting in salaries and wages and benefits also fell in by $110,000 sequentially. Despite the higher revenue and three more days in the quarter. Salaries, wages and benefits also fell to 11.1% of revenue in Q3 as a percentage of revenue, down from 12% in Q3 ’22, and from 11.8% sequentially. G&A expenses as a percentage of revenue has been on a declining trend over the past several quarters that represents 5.2% of revenue in Q3 equal to Q2 levels and down from 6.6% in Q3 last year. Adjusted EBITDA in Q3, which include a one-time benefit of $2.4 million from the elimination of the Social Responsibility Fee in Manitoba was $10.2 million this quarter.

This was up 140% year-over-year and 55% sequentially. Cash flow from operations before the impact of non-cash working capital was a record $8.4 million, up 258% year-over-year and 53% sequentially. Investments in non-cash working capital were just $850,000 this quarter, which was lower than our usual average versus an investment of $4.1 million in the prior quarter, which was higher than our typical level. Without receiving external funding, our overall cash balance grew by $3.2 million over the course of Q3. Ending the quarter at $25.7 million, which is the most we have had at the end of the quarter in two years. Our total debt stands at $37.7 million, which is just 1.4 times, the $27.3 million in adjusted EBITDA, we generated over the last — over the past four quarters.

You will note that we recently refreshed our shelf prospectus after our all one had spire (ph). This includes a $3 million ATM supplement, I stress that this doesn’t mean that we plan to raise all these funds immediately. This is a good facility to have set up as it allow us to obtain financing when and as needed. Investors will recall how we were very disciplined last time with our old ATM program and having expired after 25 months with about three quarters of it being unused. In closing, Q3 was in — was not only another record, but also the best quality in High Tide history. The future looks bright, both regarding our core Canadian bricks-and-mortar business as well as regarding prospects to take our winning model into the U.S. down the road.

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] We will take our first question from Matt Bottomley from Canaccord Genuity. Matt, your line is now open. Please go ahead.

Matt Bottomley: Good morning. Thanks for taking the time for some questions. Yeah. I just wanted to get maybe a little more granular if you have any insights on when you say putting your pedal to the metal on some of the store opening, some of the opportunities that may happen on M&A. So you have a high level goal of reaching about 250 locations. It’s about 60% higher than today. So just any commentary on the cadence of that, maybe what we should expect in calendar Q4 for the potential and the mix of M&A versus maybe organic lease openings?

Raj Grover: Good morning, Matt. Thank you for your question. So Matt, so far this calendar year in eight months, we’ve opened six stores, which is very much not like typical high type what we’ve done previously. But we’ve remained very disciplined, Matt, as you know, because our focus has completely been on free cash flow generation. And now that we’ve proven that our stores can generate meaningful cash, we’re going to go back to growth, but in a very disciplined and responsible way. But we’re coming pretty close to the end of the year here and getting building premises, I like to work at a lightning fast speed some time, but it doesn’t always happen that way. Sometimes it can take one to two, to three months to just get building permits.

So we feel we can get another four to six locations organically by the end of this calendar year. And going forward next year, we’re definitely going to up the ante (ph) on the pace of the stores organically. I can tell you that we have secured over 14 to 16 leases, high quality leases, about five of them in Mississauga actually six of them in Mississauga now already in our hands, but we’re going to pace out this development because when you open up these stores, they don’t start generating EBITDA right away. And you have a bit of an EBITDA burn for the first three to four to six months. And again, we want to be responsible about free cash flow generation. So we’re going to pace out this growth. But as our cash grows and as the environmental macro environment, overall gets healthy, we can totally increase the pace a lot more.

So to just wrap this question up, four to six stores by the end of this calendar year. And then going forward, organically, we think we can build another close to 15 to 20 next year. And we are back on to M&A. We have a very exciting location coming up in B.C. We think it’s going to be our number one location in British Columbia. We know that BC might open up the market further from eight stores to 12 to 16 stores. So we are going to start getting active on M&A because, as you know, fire and flower opportunity was one with a lot of stores, but there’s many of the operators that are facing hardships and we have some really good opportunities to pick up these stores at attractive and accretive multiples.

Matt Bottomley: Got it. Appreciate that. And then just one more for me on the margin profile. So some of your outlook commentary suggesting that the cost savings initiatives and some of the other things you’ve done in store, like with the kiosks are expected to help continue incremental margin improvement. Just maybe it’s more housekeeping, but the $2.4 million that came in from Manitoba this quarter, if you kind of normalize for that, because I assume it’s not happening again. It seems like EBITDA — and I’m assuming everything flows down to adjusted EBITDA. I’m assuming it’s 100% margin for that refund. If you normalize for that, I calculate you guys did about a 6% to 6.5% EBITDA margin. Do you think that is sustainable going forward as a new base or would you expect some volatility on that metric?

Raj Grover: It’s great question, Matt. Let me tell you that I’m super excited about our EBITDA margin trajectory. So if you go back five quarters, our EBITDA margin was just sitting at about 3%. And again, that was — we’re dealing with NASDAQ related expenses and Canadian market is tight when it comes to gross margins in general and then our innovative discount club model, were a value-focused operator. So margins have — we have to very tightly control our margins, but I’m very excited about the fact that we’ve gone up from just 3% in EBITDA margins to — if you take the normalized margins after the $2.4 million SRF fee that we got included this quarter, our EBITDA margins have risen to 6.3%. And if you include that fee, our EBITDA margins have gone up to 8.2%.

So we’re on an exciting trajectory for EBITDA margins. We think we can take this to 10% to 12% long term at least that is our goal. We’ve announced CCI, which will be a high margin opportunity in time. Fast tenders will also contribute once we can start licensing that. And I would like, Sergio to touch a little bit on our gross margin trajectory. Sergio, do you want to talk about the gross margins a little bit?

Sergio Patino: Yes. So I guess from a production point of view, it’s somewhere around 26, 27 going forward would be a good guideline. And as you probably mentioned, the adjusted gross margin this quarter was about 26%, removing the Manitoba SRF, which is slightly lower than the prior two quarters, which were more on the mid 26%. So a 26% to 27% will be a good trajectory going forward. I should also mention that the new — the couple of new components that were highlighted in the remarks that CCI, the consumer insights have fast tender licensing becomes as those two products becomes a reality, we expect margins to start ticking up onwards steadily and help us to get to that 27 points.

Matt Bottomley: All right. Thanks both for all the color. I appreciate.

Operator: Thanks, Matt. We will now take our next question from Andrew Partheniou from Stifel. Andrew, your line is open. Please go ahead.

Andrew Partheniou: Hi. Thanks for taking my questions and congrats on the great quarter here. Just wanted to talk a little bit about the competitive environment. You talked about other operators having some challenges. I’m wondering, have you started to see any store closures around your existing store locations yet? And if so, how do you think that’s benefiting your same-store sales growth, how do you see that going forward, would it be fair to assume that we’re really in the early innings here and it could continue?

Raj Grover: Hi, Andrew. Thank you for your question. So Andrew, our same-store sales trajectory has been on rapid, rapid growth over the last seven quarters or so. As I highlighted in my prepared remarks, we’ve grown our same-store sales by 114% over the last seven quarters. And you’re absolutely correct with the five-year legalization anniversary coming up, a lot of these leases are coming up for renewal and operators are deciding not to do so. And suddenly find out that one of our locations that start operating more optimally, and we look and there’s an independent that shut down or a smaller operator that is not in business anymore or even these days, major change like fine flower that are not meaningfully around anymore and ownerships are changing.

So I think that is going to continue, Andrew, good gauge is that we grew our same-store sales at a rate of 5% when calculated daily. It was exactly the same thing this quarter. Sequentially, we grew our same-store sales by 8%. When calculated daily, we grew by 5%, compounded it’s still 20% annual growth. So any retailers – if is any retailers dream come true if this continues, I will be happy if I was growing at half that rate. It is still very positive growth. But again, we know that more opportunities are coming in this regard, but I would be — I can’t be very certain to put an exact number in front of you. But like I said, we go down to 2%, 2.5% same-store sales growth, that is still a victory in [Technical Difficulty] since we’ve already grown 114% over the last seven quarters.