Yahoo Finance High Tide Inc. (NASDAQ:HITI) Q1 2024 Earnings Call Transcript
High Tide Inc. (NASDAQ:HITI) Q1 2024 Earnings Call Transcript March 18, 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 Drew, and I'll be your conference operator today. At this time, I would like to welcome everyone to High Tide Inc. Q1 2024 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 the time for you to queue up for the question-and-answer session. I will now turn the call over to your host, Krystal Dafoe.
Krystal Dafoe: Thank you, operator. Good morning, everyone, and welcome to High Tide Inc. quarterly earnings call. Please note that all earnings discussed on this call are presented on an unaudited basis. Joining me on the call today are mister Raj Grover, President and Chief Executive Officer; and Mr. Sergio Patino, Chief Financial Officer. On March 15, 2024, the company released unaudited highlights from its financial and operational results for the fiscal quarter ended January 31, 2024. 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.
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 annual information form and our latest management discussion and analysis each filed with securities regulatory authority 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 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 on 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. Now, it is my true pleasure to introduce Mr. Raj Grover, President and Chief Executive Officer of High Tide. Thank you. Mr. Grover, you may begin.
Raj Grover: Thank you, Krystal, and good morning, everyone. Welcome to High Tide Inc’s. financial results conference call for the first fiscal quarter that ended January 31, 2024. I will begin with some big picture comments regarding the quarter and our strategy before Sergio and I dig deeper into the numbers. As you can see from the press release and financials filed on Friday, Q1 was another solid quarter for High Tide, marked by record revenue, record adjusted EBITDA and meaningful free cash flow generation. Income from operations was also a record and we broke even on net income, which is another huge milestone for our company and one that I'm especially proud of. We have never posted a quarter where revenue declined sequentially and adjusted EBITDA has now been positive for 16 consecutive quarters, including six straight quarters where it reached new highs.
As investors are probably aware, our focus for the past year has been on generating positive free cash flow. This is an anomaly in the Canadian cannabis sector and our results are a source of pride. We generated $3.6 million of free cash flow in Q1 and $13.3 million during the last three quarters. In our view, this cash flow profile represents a tremendous feat considering we have been growing the business during this period. And as we have done effectively no M&A over the past year, this growth has been all organic. In calendar 2023, we purposefully slowed growth to reach our objective of becoming free cash flow positive as we only opened 13 stores during the year versus 30 to 40 in prior years. We expect growth to reaccelerate during this calendar year.
We are optimistic that M&A will resume this year, however, it has been slower than we would like so far, largely due to a lack of companies for sale that are quality candidates. As we are anticipating to add more stores to a network over the course of the year, we are excited about the revenue growth potential it'll help create. According to a recent report by ATB Financial, High Tide already has the second largest non-franchise cannabis retail footprint across North America at 165 locations. Our performance over the past few years has really been a standout within Canadian cannabis retail. The discount club model we launched a few years ago has grown and evolved, and our innovation has helped create a personality of our own. This revolutionary model tailored to our company's unique retail ecosystem has allowed us to exceed 10% market share in Q1 in the five provinces in which we operate, making us the largest retail player in the country.
Our market share in Alberta was over 19% during Q1, particularly given the increase in the store cap in Ontario from 75 to 150, we now see a clear path to 15% market share in the five provinces where we have stores in the long term. We are very pleased to see Cabana Club enrollment continuing to expand and it has now grown to over 1.32 million loyal members. ELITE onboarding has reached its fastest pace since initial launch with approximately 4,000 new members added since we reported Q4 as we reached a total of over 32,000 paid members. We have increased the ELITE offerings in our stores just as we said we would, as they now reflect 12% of in-store inventory geared towards our paid members versus less than 2% a year ago. Ongoing and in the long term, our goal is to have 20 to 30% of our SKU offerings targeting our ELITE members.
We expect ELITE to continue to grow as we onboard more ELITE products, which gives our base of Cabana Club members more reasons to upgrade to ELITE. With the start of a new fiscal year, we have provided enhanced segmented disclosure so investors can better appreciate the main drivers of our business and how they performed. We now explicitly breakout our bricks and mortar revenue and e-commerce revenue. While our consolidated revenue increased 8% year-over-year in Q1, investors can now see that our bricks and mortar revenue was up 16% during this period. Our bricks and mortar stores are the core focus of the company as they represent over 90% of our total revenue and are doing even better than what our headline consolidated revenue suggests.
Our e-commerce businesses continues to lag as revenue here has declined, it weighs on our consolidated revenue growth. Being proactive, we have been aggressively taking costs out of the system in this segment, and we have maintained positive EBITDA within our e-commerce portfolio similar to a year ago. This is one reason why while consolidated revenue only grew 1% sequentially, our consolidated adjusted EBITDA rose 25%. I'm particularly proud of our consolidated adjusted EBITDA margin. It has been increasing at a significant pace, growing from 4.7% in Q1 last year to 6.6% in Q4 2023, and now reaching 8.1% this quarter. This gives us comfort that we will reach double digit adjusted EBITDA margin in the long term, which has been our goal. I will now go over the highlights from the financials and Sergio will do a deeper dive.
Revenue for Q1 was $128.1 million, representing an annual pace exceeding $510 million and up 8% year-over-year and 1% sequentially. Our bricks and mortar segment led the way up 16% year-over-year. In the month of December, our average store was on an annual revenue run rate of $2.7 million, which compares to average peer revenue of $1.2 million in the provinces in which we operate. In Ontario, the largest market and the focus of our future expansion, our outperformance was even more pronounced with the average Canna Cabana being on a $3.5 million annual revenue run rate, which was 3.1x that of our provincial peers at $1.2 million. Our same-store sales were up 7% year-over-year in Q1. While our same-store sales remained consistent sequentially, it was largely a symptom of a slower overall market in which we continue to outperform as our total sales in the five provinces in which we operate were down 6% sequentially as per Statistics Canada and Hifyre Data.
Consolidated gross margins were 28% in Q1 2024, which compared to 27% throughout all of 2023 and 26% in Q4 2023. Here again, our bricks and motor segment posted gains with a gross margin of 27% in Q1 2024, up from 23% in Q1 2023. We once again held the line on expenses and reaped the benefits of operating leverage this quarter. While revenue increased by $10 million versus Q1 2023, our overhead expenses actually decreased by $2.9 million. In particular, our general and administration expenses fell by $1.9 million and represented just 4.4% of revenue this quarter, down meaningfully from 6.3% in Q1 2023 and 5.3% in Q4 2023. I'm very happy to see this percentage continue to fall and believe it's exceptional within our industry. Adjusted EBITDA was a record $10.4 million for the quarter, up 25% sequentially despite only 1% increase in revenue.
We also saw meaningful improvements year-over-year as Q1 2024’s level was 90% higher than Q1 2023, which itself was up 86% versus Q1 2022. Again, we are very pleased with our adjusted EBITDA margin of 8.1% as it underscores the long-term benefits of our innovative discount club model, the leverage from our scale and our strict cost controls. Finally, as much as we usually talk about adjusted EBITDA, I would like to highlight that we also generated very meaningful EBITDA prior to adjustments for items such as share-based compensation and loss on revaluation of debentures of $8.4 million, which was a 78% increase over last year's Q1. Similarly, we set a record high in our income from operations, which was positive $2.8 million this quarter, marking a huge improvement from a loss of $3.9 million in Q1 2023.
In fact, we also broke even on net income. Our free cash flow was $3.6 million during the quarter, which marked a large reversal from negative $847,000 a year ago. As a reminder, our goal is to reaccelerate growth going forward while remaining free cash flow positive. However, the amount of free cash flow we may fluctuate in any given quarter given the working capital requirements and the impact of getting new stores to maturity. For example, I highlight that in this quarter, our accounts payable and accrued liabilities balance decreased by $5.4 million, which weighed meaningfully on our Q1 free cash flow. Nevertheless, over the past three quarters, we have generated over $13 million in free cash flow, which when annualized, translates to a 10% free cash flow yield on our enterprise value as at Friday’s close.
We have taken steps to continue to fortify our supply chain. Last month, our value and distribution subsidiary signed an agreement with the Manitoba Liquor & Lotteries Corporation to be a distributor of cannabis products to cannabis retailers in Manitoba. This is one more step in the direction of being as vertical as we can to make the most of our cannabis ecosystem. As well on Friday, we announced the acquisition of the Queen of Bud brand and its well-known selectively curated cannabis product portfolio. Queen of Bud has an extensive customer base, particularly among women with unique offerings such as its rose petal blunts and crystal inspired SKUs. This is a solid brand addition to our international roster. With this acquisition, we can sell cannabis in Canada under the Queen of Bud brand via white label agreements as opposed to having to make large CapEx investments and deal with the overhead and administration expenses with growing it.
Also, Queen of Bud has a wide range of ancillary products that we can sell internationally on our existing platforms. I'm very excited with the potential we have with this brand. And in usual High Tide fashion, we made this acquisition for a very reasonable price of just $1 million. While it may not be obvious by looking at market caps, we continue to have the highest cannabis revenue of any Canadian company and our Q1 results once again demonstrated the strength of our brand and how we outperformed our peers. Our unique discount club concept has driven a total increase in same-store sales of 103% in January 2024 compared to October 2021, whereas total retail sales across Canada, excluding Quebec, where there is no private sector cannabis retail were up only 21%.
That's almost a 5x outperformance. Incorporating the increase in our store count during the period, the average operator experienced a 14% decline while we posted a 103% gain. We see a stark disconnect between our fundamentals as shown by our string of record-setting quarters and our current share valuation, which now reflects an EV to last quarter annualized EBITDA multiple of just 4.2x based on Friday's close. This is why during our fiscal Q1, many of the insiders led by me, acquired more High Tide shares in the open market. We believe in what we are building here at High Tide, a global cannabis retail powerhouse. We have an immediate opportunity we plan to seize right here in Canada focused on Ontario, where we plan to add over 90 more stores.
Concurrently, we continue to monitor progress in Germany, which we believe will represent the next wave of growth for High Tide. Phase 1 of Germany's legalization plan has passed the German parliament. We look forward to Phase 2, which would allow for profit retail cannabis stores possibly by mid-2025. We were honored to be named on the prestigious TSX Venture 50 list for the second time in three years last month. Exciting things continue to happen at High Tide. I would like to thank our team for their dedication to getting us to where we have reached today and their diligent work to strive towards newer heights tomorrow. I will now 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. I'm very proud to showcase how High Tide started off fiscal 2024 on the right foot, once again generating record revenue, record adjusted EBITDA, record income from operations, meaningful free cash flow and breakeven net income, which is a longer-term goal we have had for some time. Let's take a deeper dive into the numbers. As Raj mentioned, revenue for the quarter was $128.1 million, up 8% year-over-year and 1% sequentially. Growth was led by our Canadian brick-and-mortar business, which was up 16% year-over-year. In particular, accessories sales in our install doubled year-over-year in dollar terms and represented 4.1% of our 4-wall sales. This is the strongest proof we can show that our discount club model, which often leads with very large price drops on premium accessories for members is working and gaining its team.
On a consolidated basis, our gross margins of 28% were just ahead of the 27% we generated in Q1 last year. Our brick-and-mortar segment posted gains led by pricing increases in our 4-walls, which offset the declines in e-commerce, where things continue to be weaker. Once again, our cost control was very apparent this quarter. Our consolidated expenses were $33.2 million, representing the lowest level in six quarters despite the fact that revenue was once again at a record level. In particular, I highlight that our G&A expenses were just $5.6 million in Q1, which was the lowest level in nine quarters. This really shows how successful we have been taking costs out of the system, particularly on the e-commerce side while being able to meaningfully grow revenue.
I'm very proud of the team for this successful execution. This cost control combined with our record revenue and highest consolidated gross margin percentage in nine quarters, all combined to produce a record adjusted EBITDA margin of 8.1% and a record level of $10.4 million. As Raj mentioned, we had a very large decline in our accounts payable and accrued liability this quarter of $5.4 million, which weighted on cash flows. For context, the accounts payable and accrued liabilities represented a use of cash of $5.3 million all year last year. Despite this large amount, we were still able to generate $3.6 million in free cash flow in Q1, which we feel is a very strong level. Our balance sheet continues to strengthen on the back of this free cash flow generation.
We ended the quarter with $28.7 million of cash in the bank, down $1.4 million from Q4 level. But this was after paying down $3.6 million of principal from our debt, including $2.8 million from our convertible debentures, which now has $1 million balance. Our total debt sits at $28.4 million today, which is only 0.7x our last reported adjusted EBITDA run rate. Given our underleverage, we believe we can add more debt to support our growth, particularly to ramp up our Ontario store footprint to the new cap of 150 stores. And we are in discussions with both Connect First and other potential subordinated lenders to obtain more debt financing in the near term. We continue to have our ATM facility in place, but given our free cash flow profile, our low leverage level and a share price we feel is under value, we haven’t used it in months.
In closing, Q1 was another solid quarter for High Tide. Our operating fundamentals continue to improve with each passing quarter, and our competitive position continues to strengthen while our leverage keeps improving. Thanks again to our customers, our own dedicated team for making this all happen. With that, I will now turn the call over to the operator to open the line for the question-and-answer session.
Operator: [Operator Instructions] Our first question today comes from Ty Collin from Eight Capital.
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