High Tide Inc. (NASDAQ:HITI) Q4 2022 Earnings Call Transcript

High Tide Inc. (NASDAQ:HITI) Q4 2022 Earnings Call Transcript January 31, 2023

Operator: My name is , and I’ll be your conference operator today. At this time, I would like to welcome everyone to High Tide Inc.’s fourth quarter of 2022 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. I’m Krystal Dafoe, Director of Corporate Governance, and welcome to High Tide Inc.’s year-end earnings call. Please note that the 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. Rahim Kanji, Chief Financial Officer. Last night, the company released audited highlights from its financial and operational results for the fourth quarter and year ended October 31st, 2022. 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 and other than statements of a historical fact constitute forward-looking information and 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 January 30, 2023, released last night, our latest annual information form, and our latest management discussion and analysis each filed with 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 fourth quarter ended October 31st, 2022, and what a quarter it was. As disclosed in last night’s press release, we generated record revenue, record adjusted EBITDA, and year-over-year same-store sales growth of 50% and 9% sequentially. I’ll start this call by providing an overview of our results and other key developments in the fourth quarter. Rahim will discuss the financials in depth, and after that, we’d be pleased to answer any questions you may have. Before getting too deep into the quarterly numbers, let’s take a step back and look at how this was yet another exceptional year for High Tide.

We generated revenue of $356.9 million in fiscal 2022. This was up 97% versus fiscal 2021 and up 329% versus fiscal 2020. No matter what the short-term dynamics that the Canadian cannabis market has experienced from initial product shortages to COVID-related uncertainty to retail market saturation, the High Tide team has always found a way to grow our business through leaps and bounds. And this hasn’t been just topline growth for growth’s sake. It has also translated into handsome adjusted EBITDA increases. This fiscal year, we generated $14.6 million of adjusted EBITDA, up 17% versus fiscal 2021 and 83% versus fiscal 2020. Our business is currently on an annual revenue run rate of $450 million, further cementing our position as having the highest cannabis revenue of any Canadian operator.

It’s fair to say we expect the company to keep growing its top line, achieving its operational objectives, and continually generating value for shareholders. Now let’s dig into the new information to the market, our Q4 results. Total revenue for the fourth quarter was $108.2 million. This was up 101% year over year and was up 14% sequentially. As it represents 87% of our revenue and with enviable same-store sales and new stores popping up regularly, it’s no surprise that sequential revenue gains were led by our core bricks-and-mortar cannabis business. I note that our consolidated gross margin profile remained stable at 27%, while gross margins from selling cannabis in our bricks-and-mortar stores ticked slightly higher. Adjusted EBITDA for Q4 2022 was a record $5 million, representing our 11th straight quarter of positive adjusted EBITDA, up 18% versus Q3 2022 and up 206% versus Q4 2021, and we are extremely pleased to have set this new record.

You will recall that in the second half of last year, we cautioned the market regarding two items: a new layer of costs relating to our NASDAQ listing and the initial impact of lower margins arising from our innovative discount club model. We advised shareholders that these two items would depress adjusted EBITDA in the short term. However, we said stick with us, and we will grow through it. And that’s exactly what happened. We set a new high in adjusted EBITDA, and we expect it to continue to grow looking forward. In Q4, we completed the first full year since we launched our innovative discount club concept in October 2021, and the results speak for themselves. Our same-store sales alone in Q4 were up a tremendous 50% versus Q4 2021. In contrast, total national sales across Canada outside Quebec were up just 14% year over year in our fiscal Q4, including the impact of new store growth.

Our customers continue to become more loyal to our Canna Cabana brand. Our average store in Alberta generates more than twice the revenue as the provincial average. While our average store in Ontario, the biggest price of all, generates almost triple the average revenue as the provincial average. In our view, we have the best retail concept in the country, which is significantly outperforming our peers, and we believe it will be well received in international markets such as Germany. Our same-store sales in Q4 rose 9% versus Q3, and with the increase in bricks-and-mortar gross margins previously mentioned, this is driving our improved profitability as shown by our consolidated gross margin dollars being up 15% sequentially. These very impressive same-store sales figures as well as rapidly opening new stores in high-quality locations has resulted in continued market share gains in Canada.

We estimate our national market share, excluding Quebec, to have been over 8% in Q4, up from 7% in Q3, 6% in Q2, and 5% in Q1. We expect the string of steady market share gains to continue in Q1 of fiscal 2023. Our balance sheet remains strong. We ended the fiscal year with $25.1 million of cash on hand. As at year end, we had drawn $16.4 million of the $19 million facility we closed with Connect First Credit Union at a very attractive rate of prime plus 2.5%. While the stock market has yet to reward our solid financial performance, fortunately, the Connect First has, and we believe there’s room to significantly deepen our relationship. Financial institutions tend to look at the last four quarters of adjusted EBITDA in assessing how much credit they can advance.

With Q4 2021 now having rolled off this calculation and replaced with Q4 2022, our trailing adjusted EBITDA has increased by 30% from $11.2 million to $14.6 million. Accordingly, we expect upward movement in our borrowing capacity with our partner in the near term. In the first half of 2022, we communicated to the market that we wanted to reach 150 stores by the end of the calendar year. In typical High Tide fashion, it came right down to the wire, and we needed every day up to New Year’s Eve to make it happen. But our hard-working team did it. We added 45 stores during 2022, reaching our target. Looking ahead, we plan on adding another 40 to 50 Canna Cabana locations in 2023, similar to last year. We expect this to come from a fairly even split between accretive M&A and organic store openings.

While much of the capital markets was focused on what may or may not happen in Washington, we had our heads down plowing our business forward. Our Cabana club membership currently stands at approximately 950,000 members versus 379,000 when we announced our Q4 2021 results a year ago. Per Health Canada’s 2022 Canadian cannabis service findings, we calculate that over 13% of cannabis users outside Quebec are members of our loyalty plan, a true achievement and by far, the largest such program in Canada. Not only does our base of loyal customers keep increasing, but the total addressable market, which we can draw from, keeps expanding as well. We note that Health Canada’s 2022 survey found that the number of cannabis users, excluding Quebec, had increased by over the 2021 survey.

That’s over 900,000 new Canadians using cannabis, and we are disproportionately attracting them to our discount club model. In late November, subject to individual provincial regulations, we launched the first-of-its-kind paid membership program in cannabis called ELITE, where we begin monetizing our existing Cabana club membership base. For $60 a year or $5 a month, ELITE membership offers our customers access to exclusively ELITE flash sales, limited edition and exclusive ELITE branded products, discounts on delivery, and discounts across High Tide’s global e-commerce accessories portfolio among other benefits at non-cannabis retailers and restaurant partners across Canada. And it offers our shareholders a base of recurring, high-margin revenue.

Given these inflationary times, we wanted to be there for our customers. So for the first year, we are offering ELITE at half price, so just $2.50 a month. While it is still brand new, we have already signed up over 6,000 members, which we feel is a very good start. Over the long term, we will be gearing our SKU selection towards ELITE by having over 25% to 30% of our in-store offerings be ELITE only versus less than 2% today. And we expect to show a steady increase in members, which we have made the move — this is why we have made the move to be elite. Accordingly, we will start seeing the benefit of ELITE over the coming quarters, which will further enhance profitability. As indicated before, our CBD e-commerce businesses have been softer over the past few quarters, driven by two main factors.

Global inflation at multi-decade highs has crimped consumers’ wallets. And compared to THC products, CBD purchases are simply easier to cut back on during inflationary times than other consumer staples. Also, the end of COVID restrictions has resulted the realization and pent-up demand for in-store restrictions for in-store shopping, which has impacted e-commerce sales across all retail sectors, including CBD. As a result of these factors, we had to take the unusual step of a $49 million impairment, which was primarily related to our e-commerce CBD businesses. This phenomena is in line with what several other major US CBD companies are experiencing. We note that this is a non-cash charge and in particular, a credit union has indicated that in no way impacts how they view the strength of our company.

While we are not pleased with this charge, we note that it is not reflective of the strength of our ongoing operations. We continue to believe in the long-term outlook of our internationally leading CBD brands that have global potential as new markets open up. They provide higher gross margins and round out our overall ecosystem and value proposition. However, recall that 87% of our revenue is driven by our Canadian bricks-and-mortar business, which continues to motor ahead. And our online CBD platforms represented just 6% of High Tide’s consolidated revenue. Despite the short to medium-term softness we are experiencing in our CBD business, we were able to deliver a record revenue and record adjusted EBITDA quarter for our shareholders. As promised during our last conference call, we entered a new vertical in late 2022 selling cannabis seeds online in the US initially on our Grasscity and Smokecartel online platforms and more recently on our Dailyhighclub and Dankstop e-commerce sites.

The initial uptake has been going well, which we feel will only get better over time as we continue to add some of the most sought-after genetics in cannabis seeds from breeders in the US. This is a strategic move, which we believe is a first of its kind by a publicly traded cannabis company, which gets us one degree even closer to the US cannabis consumer without jeopardizing our NASDAQ listing and provides another high-margin revenue business line, all created organically. We continue to roll out fast and attack across our bricks-and-mortar portfolio. During our last quarterly conference call, on September 14, we had 28 locations equipped with this technology, and we ended calendar 2022 with a total of 120 locations outfitted with fast tender.

Once we are finished with the rollout across our organization, we intend to license this exciting technology to cannabis retail outlets across the US, representing another high-margin, recurring, and NASDAQ-compliant revenue stream for us. We have already had inbounds from the US operators, but we need to outfit our own stores first. Another big announcement we made yesterday was our LOI with Sanity Group, a Berlin-based health and life science company. Investors will note that we don’t typically announce LOI. However, in this case, given the long-term and strategic nature of our potential German expansion and frankly, how excited we are about it, we felt that our shareholders should have a good sense of our concrete plans as cannabis legislation in Germany is possible as early as this spring.

Sanity Group has a well-established track record in Germany with respect to medical cannabis, finished pharmaceuticals, and cannabinoid-based consumer goods. They will help us with identifying and evaluating quality M&A opportunities in Germany as well as sourcing high-quality real estate for our Canna Cabana bricks-and-mortar stores. Sanity Group will also assist High Tide in navigating German regulatory compliance as well as a retail licensing process. In addition, High Tide and Sanity Group agreed to take a coordinated approach to German government relations activities. Sanity will also provide us with a right of first refusal to pursue similar arrangements as new market opportunities develop across Europe. In turn, High Tide will provide Sanity Group with expertise in building its retail cannabis brand strategy based on our decade-long experience serving cannabis consumers in Canada, the United States, and Europe.

This way, both companies can help each other succeed by leveraging each other’s complementary strengths. With 3.2 million customers across the country and now the ability to sell cannabis seeds online, we haven’t taken our eye off the ball regarding the US opportunity. We continue to have many acquisition candidates in the US THC sector across many states in our pipeline, and we are keeping them warm with regular updates. We are monitoring company-specific and macro developments, and we will pull the trigger when we feel the time is right and not before. So far, especially with the drama in Washington in December, our decision to not hastily enter into an options deal has proven to be the right one Despite the turbulent environment both for cannabis operationally and the capital markets overall, 2022 was another monumental year for High Tide.

We grew our revenue to be the first place in Canada amongst all Canadian cannabis companies, all while making sure this translated to record adjusted EBITDA and improved cash flows. Our reach with our customers has never been broader, and we are going deeper with the launch of ELITE. Despite all these achievements, we see room for much more growth ahead. We plan to open many more stores by cherry picking the best organic locations and engaging in accretive M&A. Further, fast tender, cannabis seeds, ELITE, and our white-label program are all margin-enhancing initiatives, which germinated in 2022 and should begin bearing fruit in 2023 and beyond. Our incredible team continues to deliver on our objectives and will be there cementing our leadership in the Canadian cannabis market while laying the groundwork for German expansion.

Our team’s tireless work and dedication is what allows us to outperform our peers, both operationally and financially every day. I want to give a huge shout out to our team for everything that they do for High Tide. Since Omar Khan joined High Tide two years ago, we have led the industry in many government relations initiatives, and we have had many incremental wins that add up over time. I’m very proud to note that earlier this month, we promoted Omar to the position of Chief Communications and Public Affairs Officer. Congrats, Omar. Well deserved. With that, I will now turn the call over to Rahim Kanji, our Chief Financial Officer, to discuss our financial results.

Rahim Kanji: Thank you, Raj, and good morning, everyone. I’m very excited to share the meaningful progress we made as shown in our record-breaking Q4 and year-end results, so let’s go over the numbers. In the fourth fiscal quarter ended October 31, 2022, the company recorded consolidated revenue of $108.2 million, representing an increase of 101% year over year and 14% sequentially. While we are very excited about the Q4 revenue figure, we know that revenue has continued to grow significantly after the quarter. Recall that we opened eight new stores in December alone and had a very strong holiday season. As a percentage of revenue, gross profit remained relatively constant versus the prior two quarters at 27%. Of primary importance, however, is that our four-wall gross margins earned from selling cannabis in Canada, which drives the vast majority of our revenue, was up a full percentage point in Q4 versus Q3 and has continued to tick higher so far through Q1.

Our gross profit was $29.5 million in the fourth fiscal quarter of 2022. While gross margin as a percentage of revenue of 27% was down compared to 33% in Q4 2021, this was fully anticipated and communicated due to our shift in strategy with the launch of our innovative discount club model, which aim to increase gross margin dollars by generating more sales. And this has undoubtedly worked. For example, I highlight the gross margin dollars in the last two quarters of fiscal 2022 were $55.3 million, meaningfully higher than the $34.2 million generated in the last two quarters of fiscal 2021. The more important factor for me is seeing that gross margins in our cannabis stores have not only stayed stable, rather, they have moved higher over the past 12 months.

And as ELITE cannabis seeds and our white-label initiatives start to become more meaningful over time, they should each have a positive impact on our consolidated gross margins in the future. We hit new high in our adjusted EBITDA at $5 million in Q4, up 206% versus Q4 2021 and up 18% sequentially. On the costs side, we held our salary, wages, and benefits constant at 12% of revenue, which is among the lowest in the industry. Similarly, our SG&A was only 6.6% of revenue, which is a testament to our strong cost controls. One area we are particularly proud of and want to highlight for our investors is how our revenue growth has translated to improved cash flows. Our cash flows from operations before changes in non-cash working capital were positive in each quarter of fiscal 2022 totaling $9.1 million for the year and $3.5 million for Q4.

This shows that our existing base of stores is generating cash. Cash flows generated from working capital were $4.8 million in Q4. Quarter-to-quarter cash flows will change based on how many stores we open in a quarter, which require working capital investment and the overall management of payables and receivables in any given period. However, with Q4 results now available, we can look at it on an annual basis and see that non-cash working capital changes represented a use of cash of $4.6 million in fiscal 2022, just less than half the drag compared to fiscal 2021, where it was $9.9 million. So total cash flows from operations, including the impact of working capital, were positive $4.5 million this year, a big swing from negative $2.8 million last year.

Considering that total CapEx for the year, including intangibles was quite manageable at $9.1 million, you can see that we are not too far off from becoming free cash flow positive, a telling phenomenon for a company growing so quickly. We made significant improvements to our balance sheet during the quarter with the closing of the Connect First facility. Not only do we see meaningful near-term upside to the size of the facility, but with it place and other debt paid down, we now have no meaningful debt maturities until December 31, 2024, exactly 23 months from today. For context, I know that our adjusted EBITDA has almost doubled in the past two years from $8 million in fiscal 2020 to $14.6 million in fiscal 2022, and merely annualizing our last quarter puts us at $20 million run rate.

Our total debt currently is at $38.7 million, less than two times this run rate. In closing, Q4 was another record-breaking quarter for High Tide. And based on what we have seen for Q1, we are at a $450 million annual revenue run rate today, cementing us as a market leader in Canadian cannabis. With that, I 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: . Our first question today comes from Scott Fortune from ROTH Capital Partners. Your line is now open.

Scott Fortune: Good morning, afternoon, wherever you may be. And congrats on the quarter. Just want to reiterate, you provided good color on M&A and organic store growth targets, remaining in that 40 to 50 stores a year. Although on your press release, you said that might slow down on M&A side. But just wanted to see where the strong growth — store growth coming from in the different provinces. As you see some of these provinces reach saturation, do you see more organic growth or M&A store growth plan going forward? Just a little more color on the store growth coming out here into 2023 here.

Raj Grover: Good morning, and thank you, Scott. Absolutely. So Scott, as far as you know, this current year or this past calendar year, we added 45 stores to our portfolio. Most of that store growth came from Ontario, and we had a very even split between organic growth and accretive M&A that we executed on. And we believe 2023 calendar year will be no different. Our intention is to add 40 to 50 stores, pretty much an even split of organic growth and accretive M&A opportunities that we are seeing. We are constantly getting inbound opportunities that we are exploring. But we’re going to be very opportunistic and only buy the ones that are most accretive and strategic. So we are the biggest players now, Scott, and we have been for some time, and we are practically setting the price for what these stores are worth.

And we continue to get these opportunities, but we’re going to be very strategic in terms of how we approach this. But I feel we can still add 40 to 50 locations this year. It’s not going to be easy, like I said. We, in typical High Tide fashion, we needed the last day of the year to make it happen, but we did. Our amazing team always comes through. So we believe we can add another 40 to 50 locations this year.

Scott Fortune: Okay. I appreciate the color. And then, my follow-up would be: You’re early in rolling out your white-label product stores, your own stores here, but can you provide a little more color on the offering, the number of SKUs you have, and the ramp of your own products in the store, and what percentage of your own products will be sold in your own stores? And obviously, I think for longer term. White label could represent about 20% plus of the revenue — the revenue mix. Buton that white-label growth plans as you see ’23 playing out here.

Raj Grover: Sure. So, Scott, currently, we have 10 SKUs, a total of 10 SKUs in the market. Seven of them are Cabana Cannabis Co. products, and three of the SKUs are New Leaf natural products. And our average store in Ontario, let’s say, for example, with all of these SKUs in the market, it’s still only making 2% of our total inventory. So it’s a very small percentage of sales, but that should grow over time as we have more offerings coming this year. We just added three additional SKUs and we continue to add more SKUs. So long term, Scott, we think we can get to 25% of all of our SKUs in our white-label products. And that’s going to include Cabana Cannabis Co. That’s going to include FAB CBD, New Leaf, and other brands that we continue to build.

And we’ve already realized about 4% in additional gross margins from selling our current white-label SKUs. So it’s — all of this is going according to plan. We anticipate that the Alberta market might also open up to white label. There are considerations in Alberta regarding that. That will increase our market size even more. But we remain very excited about this margin-enhancing opportunity that we have for white label, and you’re going to see constant rollout of more white-label offerings throughout the year from us.