High Tide Inc. (HITI) Earnings Call Transcript & Summary

Welcome to Cultivated Live for Friday, June 28. My name is Jay Rosenthal. I'm the co-founder of Cultivated Media and the host of this program, Cultivated Live. And since we launched, our goal of Cultivated has been to be cannabis industry first, providing with the most important insightful, useful and timely information. We do that through our daily newsletter, Cultivated Daily. We do that through this daily live stream at Cultivated Live, and we would love, love, love if you followed us on LinkedIn, subscribe to us on YouTube, and most importantly, get our newsletter to inbox every day, you can find that at cultivated.news. And because it is a coveted before a long weekend time slot, I'm here with my friend, Raj Grover. He is the Founder and CEO of High Tide. Raj, thanks for making time.

Jay, it's good to see you, man. You've been busy from business of cannabis to Cultivated News. So it's great to be here with you again.

I feel like I'm a fraction as busy as you, what I would say.

I think that's debatable. I think we're both entrepreneurs, and we're managing and doing what we got to do, but it's definitely great to see you again.

Well, we are doing, we have to do, and this is a busy day and a busy weekend, I would imagine, for the whole team at High Tide and Canna Cabana shops because it is a long weekend here in Canada. How much do you think about sort of the big upticks in long weekends as you sort of plan the operation? Like, is there a huge uptick around July 1?

Definitely huge upticks. We live for a long weekends. I wish every week was ended with a long weekend. That goes in for circles and you got to wait your turn, but the July 1 weekend, the Canada Day weekend is an amazing weekend here in Canada. And I can tell you this week is looking encouraging. So I'm happy with that. But yes, excited for what's coming our way.

Too. And as soon as we're done here, I'm going to go buy some weed for the weekend.

Anywhere you are buying it from. I don't have to repeat that, but we'll be saying the name of the best brand in Canada a few times on your show, but you're a smart man, so you know what to do.

I know where to find it. That's for sure. But it's not just this weekend that has been busy for you and the team there. Recently, your early -- quarterly reports came out, give us a little bit about where the company is now, I guess, where it's been, but also where it is right now and sort of how the company is doing.

Yes, absolutely. I would love to give you some highlights from our ER. So we've been having a good quarter, a great quarter all the time, so nothing new here. But nevertheless, it remains exciting. One of the biggest highlights from this particular quarter that we just announced, the Q2 quarter, was our free cash flow generation, which was $9.4 million for the quarter, up from $3.6 million in the previous quarter and negative $2 million the year before. So this implies a cash flow margin of 7.6%, Jay, I couldn't be more happier with that and a free cash flow yield of over 8% versus our company's enterprise value. So we're looking really, really good in terms of our free cash flow profile. I think total over the last 4 quarters, we've now generated $22.7 million, which also implies $5.7 million average per quarter. Again, I can put up 10 to 12 stores with this kind of free cash flow, and we are doing exactly that. And a couple of other highlights from the quarter include our revenue, which was $124.3 million for this quarter, which was up 5% year-over-year, and our trailing 12-month revenue has now exceeded $500 million for the first time, while many of our competitors continue to go bankrupt. So quite the contrast there. Our market share gains are rapidly increasing. We're rapidly making gains. Last year, we were at 9.9% of the total retail market in the 5 provinces where we operate. We are now up to 10.9%. Even on a quarter-over-quarter basis, we went up from 10.4% to 10.9%. So that was great. Two of our biggest markets in Canada, which is Alberta and Ontario, our market share is now up to 20% and 10%, respectively. ELITE was the other bright spot. I think you and I have spoken about our discount club model in detail, and you know about ELITE, which is our paid membership here. So ELITE has grown at its fastest pace since inception, again for 3 quarters in a row. This was the third straight quarter of that record. We've gone from 32,000 members to 44,000 members that are paying us $35 a year, and this ELITE rate is up 226% year-over-year and 38% sequentially. This was also the third straight quarter of record ELITE sign-ups. And our Cabana Club, in general, our big club has also grown from about 1 million members a year ago to 1.43 million members, which is a 38% year-over-year growth. And I can tell you a few more quickly. I could talk about the business forever, but this was our 17th straight quarter of positive adjusted EBITDA. Our EBITDA margin is up from 5.6% a year ago to 8.1%. I couldn't be more happy with those numbers. And then we hit a 9-quarter high on our gross margin profile as well, which came at 28.4%. Our same-store sales have been our bright spot. You know, Jay, there's been a lot of turmoil across the nation, stores shutting down. We're doing a lot of lease takeovers. I announced one yesterday, I believe. There's more coming. Stay tuned, what happens tomorrow, you'll see some more action. I don't know if this interview is going to be published before or not, but there will be more action coming up. And in the same regard of lease takeovers. And our same-store sales are up 111% over the last 10 quarters versus the average operator in the country is down 10%. Our retail sales per square foot, we are now generating over $1,500 sales per square foot through our retail network versus $400 is our peer average and even retail giants like Target and Walmart are doing $350 and $500, respectively. Cash on hand never been better at $34 million. I've said enough.

So you touched on a lot of things, of course, but I want to talk about sort of the big picture trends in why you've been able to, I guess, buck them or at least head in a different direction. Is it team? Is it locations? Is it out last in the competition? Is it pricing? Is it all of those things? Is it operationally? Like if you had to point to, I don't know, 1, 2, 3, 4 of those things, like what is the differentiator between what you're doing versus sort of what you just referenced, like operators not doing great or many operators are not doing great here in Canada and the ability to take over leases certainly as a sign of that. But like where do you pinpoint the difference in the sort of -- in the trajectories of the companies?

The biggest one I would say is differentiated strategic thinking, Jay, right? We are not just following the herd. We've done things differently from the very, very beginning. Canna Cabana is a very different retail model. It's the first of its kind discount club model in North America. It's a membership-based concept. And we're clearly crushing it. Again, differentiated thinking would be, number one, operational progress, absolutely one particular thing I could point out is very, very operationally focused. It doesn't matter if it's $1 or if it's $10 million. We're looking at it with laser focus. We want to make sure we run our business tight. I'm a cricket follower. And in cricket, they always say, do the basic things right. And we've done a lot of basic things right. We focus on our operations, and we continue to win. And I want to say this. Thank you for asking me this. I 100% feel that we have the best team in the business of cannabis. It takes a team to build a company, to build an international company. That is what we are becoming, and I couldn't be more thankful for our amazing team members that are stood by me day after day after day, quarter after quarter, and we are laser-focused on continuing to win. And Jay, we are not stopping here. But all of these things combined differentiated thinking, operational progress, best teamwork leads to dream work.

And does it also -- as time goes on, you have more data sets to draw from in-store and outside of your store about how to even hone that even further, right? Like when you started, like there was 0 stores in Canada, they were just opening up. Now you have 1, 2, 3, 4, 5 years, store-over-store growth and all of those things. Like how much does that play into it where everybody sort of started with the blank slate, but the data compounds upon data in-store or pricing models, the loyalty programs, like is there a data team in High Tide that looks at all these things all the time. And does that also help because you have a bigger data set really than almost anyone.

Yes, fantastic question. Look, this is the age of big data. And we couldn't be blessed more to have the best data from our retail network. We have 174 locations operating across the country. We very quickly built 30 to 40 stores. This is going back 4, 5 years, and we realized that 70% of the Canadian customer cared deeply about price. We started doing pilots, started prepping for the discount club model went and acquired 6 e-commerce platforms with high ancillary cannabis margins and higher gross margins and higher EBITDA numbers and started the price for battle here in Canada very, very successfully. We knew we had to have something powerful in our hand, which we did and then successfully won the games here. But we did this by reading our data correctly. So yes, we have an internal data group. We have data scientists in our team. I'm a big part of reviewing that data and making decisions accordingly. But this is -- if you have all of this data and you don't make good use of it again, you are not operationally focused on reading your numbers correctly. So we've done that, and that's definitely a big part of our winning recipe.

Which brings us to sort of the future. We're talking today about sort of the past quarter and quarters, but talk about sort of the future. And if you don't want to get too specific about sort of what the operation might look like in Canada. Talk a little bit about where you see opportunities maybe outside of Canada. I know obviously, we've heard news about what's happening in Germany and a little bit of news about the rest of what's happening in Europe. But also, there's always news about what's happening in the U.S. Like how do you take in, digest that news and then apply it to sort of the High Tide model where you may think about going next? Is that -- obviously, it factors into your future plans? But like how does that news come to you? And what do you think about that?

Look, we're very tuned in with what's happening in cannabis in general in Canada, in the United States and also globally, right? We are very fortunate to be in a G7 country that has legalized cannabis. And of course, Canada could have done many, many things right. But we've still got a $5 billion-plus market. And we can bring a lot of this learning to other countries like Germany, how companies can operate in legal framework, right? So we are very tuned in, in what's happening in the German market. We have a perfected model, tried, tested and perfected model, I'd like to say that we've already rehearsed really well in Canada. We want to take, we want to pick up this winning model, cut, copy paste, wins and repeat in the markets that we enter. Germany is a very exciting market for us. It's becoming real and real every day. We are hopeful that the regs for Pillar 2 in Germany will be announced by the end of this year. It was going to be next year, but they're expediting that process, at least that is what we are hearing. On the U.S. side, I think we're going to have a great second movers advantage, Jay, the only reason we don't have dispensaries in the United States right now is because we are on the big exchange, we're on the Nasdaq Stock Exchange. But things will change eventually, everything does. Federal legalization will become real one day, it could get descheduled. There's many other elements that can take place, such as some safe harbor language accompanying the Schedule III announcement, the Schedule III when it actually happens and NASDAQ changing its tune. But if that never happens, we're still doing great in Canada. And we have tons of growth ahead in Canada and then Germany and rest of Europe. And we'll get our fair share in chance in the U.S. But I think coming from -- coming as a second mover in the United States is going to be a bigger advantage. We don't have to sacrifice on the quality of locations. We won big in Canada because we focused on high-quality locations. If you look at our MSO friends, they're located in industrial zones. They have 4,000, 5,000 square feet because they were -- because California was only issuing x licenses in one municipality, all of that will change. It happened in Canada. It's going to happen in other jurisdictions. It will happen in the United States, too. We'll get to cherry pick the best locations. We'll get to come with a differentiated plan like we've executed in Canada. And if we can fight here and win at a 28% gross margin profile, which by the way is a 9-quarter high, what are we going to do when we play with margins with 50% and 60% that our peers are playing with. They can enjoy those high gross margins. We're not even -- I don't want to give it too much in terms of how we're going to enter the U.S. exactly, when is that going to happen. The when will come when it will come. We're not going to go against Nasdaq wishes or try a funky structure to make things happen where we cannot consolidate our financials. What's the point of that? I can't realize any of the numbers. So we're going to wait our turn, but we've got a ton of good strategies to play in the U.S. I'm just so excited about that market. But right now, it's just focus, focus, focus, be the best in Canada. Long-term plan in Canada here is 15%, we think we'll reach that number.

Well, that is a good place, I think, to end it as we head into a Canada Day long weekend. But I super appreciate you making time, spending time, as always, very generous with your time to share sort of how the company is going, but also your perspective about what is happening, certainly here in Canada as we head into Canada Day long weekend, but also around the world. So thank you so much for your time today, and I'm going to read you out. Is that okay?

Fantastic.

Great. Thank you, Raj, for being here today. That is it for this week's Cultivated Live. Again, my name is Jay Rosenthal. We will be back here not on Monday because that's a holiday here in Canada. But on Tuesday, we'll be back with a regular schedule program with the United States of Cannabis on Tuesday, with my co-founder, Jeremy Berke on Wednesday, with [indiscernible] on Thursday. Thanks, everybody. Have a good and safe weekend. If you're here in Canada, have a good and safe long weekend.