High Tide Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
June 15, 2023

There are 9 speakers on the call.

Operator

Hello, everyone. The High Tide, Inc. 2nd Quarter of 2023 Unaudited Financial and Operational Results Conference Call will begin in 5 minutes' time to allow all participants to get connected. Your speakers for today's call are Raj Grover and Sergio Thank you for your patience. Good morning.

Operator

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. 2nd 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 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.

Speaker 1

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 Mr.

Speaker 1

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 Q2 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.

Speaker 1

Specific forward looking statements include, without limitation, All disclosures regarding future results of operations, economic conditions and anticipated courses of actions. 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 securities regulatory authorities@sedar.comoronedgar@w ww. Sec.govoronthecompany'swebsite@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 But 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.

Speaker 1

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.

Speaker 1

Thank you. Mr. Grover, you may begin.

Speaker 2

Thank you, Ashley, and good morning, everyone. Welcome to High Tide Inc. Financial results conference call for the Q2 ended April 30, 2023. I'm 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.

Speaker 2

1st and foremost, this was our 3rd consecutive quarter of record revenue and adjusted EBITDA. Achieving this milestone is uniquely exciting as Q2 is historically a slower quarter having 3 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 $118,100,000 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 3 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 top line would look very similar to Q1 and that's what happened.

Speaker 2

Same store sales in our stores were up a massive 30% year over year and 1% sequentially. However, Taking into account that Q2 had 3 fewer days than Q1, average daily same store sales were up 5% sequentially for the quarter or over 20% annualized, making this the 7th 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 continue to post gains.

Speaker 2

Adjusted EBITDA for Q2 2023 was a record 6 $600,000 representing our 13th straight quarter of positive adjusted EBITDA. Our adjusted EBITDA was up 174% year over year and 20% sequentially maintaining its impressive upward trajectory. Over the past 4 quarters, we have now generated $21,400,000 in adjusted EBITDA. This is up a tremendous 150% From the $8,500,000 we generated during the 4 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% 60% respectively.

Speaker 2

Regarding our balance sheet, we ended the quarter with $22,500,000 of cash on hand and we continue to responsibly navigate this typical macro environment. Supported by our ever increasing EBITDA, we are in advanced due diligence with Connect First Credit Union to increase the $19,000,000 debt facility we have At the same enviable rate of prime+2.5 percent. Cash flows from operations before Changes in non cash working capital were $5,500,000 in Q2 2023. This was the 7th consecutive quarter where this figure was positive, marking a 2 41% increase from $1,600,000 in Q2 2022 and was 24% higher than the $4,400,000 We generated in Q1 2023. Free cash flow was negative $2,000,000 in Q2 2023, Marking a significant 66% improvement from negative $5,800,000 in Q2 2022.

Speaker 2

Free cash flow was negative $846,000 in Q1 2023. Note that we meaningfully reduced Accounts payable and accrued liabilities during this quarter by $6,800,000 in total, which negatively impacted free cash flow. Investments in working capital can be lumpy from 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.

Speaker 2

On our Q1 call, we unveiled our new primary goal of becoming amongst the 1st companies in Canadian cannabis to be free cash flow positive And that we plan to achieve this feat 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 Q2, I'm quite pleased to report that the vast majority Of our $1,100,000 sequential increase in adjusted EBITDA came from our continued aggressive cost controls. Specifically, G and A expenses of $6,200,000 were reduced by $1,300,000 sequentially. Compared to Q222, G and A rose by less than $400,000 this quarter, while revenue increased by over $37,000,000 As a percentage of sales, our G and A expenses fell to 5% in Q2 2023, an improvement from 6% in Q1 2023 And 7% in Q2 2022.

Speaker 2

As mentioned last quarter, we will continue to look for operational efficiencies across all our business lines. We reached 1,000,000 Kibana 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 sign ups 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 Our product selection will be Elite only.

Speaker 2

With the recent launch of Elite weekly drops, we expect Elite sign ups to gain momentum as these unbeatable Weekly deals are only available to Elite members. As Elite inventory ramps up and with more word-of-mouth getting out, We expect these sign ups 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 may be certain micro markets out there, which represents pockets of growth such as Mississauga, which 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 5 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.

Speaker 2

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 the total number of stores decline 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, that's more than 3.5 times 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 7th Consecutive quarter where we made gains and up from 6.4% just 1 year ago.

Speaker 2

Nationally, while our Canaccabana 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.

Speaker 2

Our total debt currently stands at approximately $38,500,000 Which is less than 2 times the trailing adjusted EBITDA of $21,400,000 In our view, not only are we the biggest Canadian retail cannabis 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 Connect First and we are working towards a 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.

Speaker 2

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 in 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 $30,000,000 at the end of any one quarter. We are confident that we can take things to the next level in the subsequent bull market.

Speaker 2

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 quarter 1000000 more shares in HiTide in the open market, highlighting our collective belief in what we are building together. I will note once again that I remain Hytite's largest single shareholder and have never sold any shares.

Speaker 2

We've been the 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 treasured 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.

Speaker 3

Thank you, Raj, and hello, everyone. As Raj mentioned, Q2 was another excellent quarter for Haitai in What continues to be a challenging market environment. Nonetheless, the company continues to experience solid organic growth We sustained margins while cutting costs, particularly in our core Canadian brick and mortar business. In the 2nd fiscal quarter that ended April 30, 2023, the company recorded consolidated revenue of $118,100,000 Representing an increase of 46% year over year and consistent with Q1 2023. Despite having 3 fewer days in this period and a seasonally slower quarter.

Speaker 3

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 truck 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 stores gross margins Earned from selling cannabis in Canada over the past 5 quarters. This drives the vast majority of our revenue and was up sequentially once again In Q2. Our consolidated gross profit was $31,600,000 in the Q2 of 2023, up 39% year over year and down 2% sequentially as there were 3% fewer days this quarter.

Speaker 3

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 fast tender. Regarding Elite, we believe we can continue to grow our Elite only SKU town. And as word-of-mouth spreads, our elite customer base will continue to rise. Our wide level sales are steadily growing And we generate approximately 5% higher gross margin selling our house branded cannabis and new leaf natural products Compared to selling other SKUs, we are up to 13 of our own SKUs available today and we have several more under development.

Speaker 3

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 Fas Tender, 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.

Speaker 3

Operators looking to license our technology. We would like to study it for a while first, Really assess and quantify how fast tender 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 offering to U. S. Operators And generate another compliant high margin revenue stream for our shareholders.

Speaker 3

We hit a new high in our adjusted EBITDA at 6 $600,000 in Q2 2023, up 174% versus Q2 2022 and up 20% sequentially. While gross margins dollar were down 2% sequentially given the 3 fewer days, effectively all of the EBITDA increase came from our cost controls. Specifically, G and A went down by over $1,300,000 sequentially from $7,500,000 in Q1 2023 To $6,200,000 in Q2 2023. There were some nonrecurring items in the Q1 figure. However, we also found efficiencies in both retail and e commerce businesses.

Speaker 3

In general, we expect the G and A cost base Stay stable around the current level going forward. G and A represents 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 4th quarters As we have taken continued measures to support our frontline and head office staff during these 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 $5,500,000 in Q2, up 241 percent year over year and 24% sequentially.

Speaker 3

Working capital can be lumpy And we did take meaningful strides to reduce our current liabilities in Q2. All told, Our free cash flow was negative $2,000,000 in Q2 2023, which was a 66 improvement versus the prior year negative $5,800,000 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 $22,500,000 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 dilutive capital, we are currently in advanced discussions to increase How much we can borrow with Connect First at the same rate of time class 2.5%. In closing, Q2 was another great quarter for High Tide.

Speaker 3

Our company is the clear leader in Canadian cannabis and is the largest revenue generating cannabis company in Canada according to data published With that, I will now turn the call over to the operator to open the lines for the question and answer session.

Operator

Thank Please note we will take one question and one follow-up per person. Please rejoin the queue if you wish to ask another question. Our first question today goes to Scott Fortune of Roth MKM. Scott, please go ahead. Your line is open.

Speaker 4

Yes. Good morning and thank you for the questions here. I appreciate the color on the competitive But just wanted to get a sense with a large competitor recently going under here. Can you provide a little bit more? Your comment Saying we're going to see continuing consolidation next 12 months, but now we have heightened level of opportunity.

Speaker 4

But just want to get a sense strategically and Selectively adding potential accretive M and A. With that said, obviously, with a large Competitor going out of business, just kind of put that in context and the 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 Tony now with the new developments here going forward, that would be great.

Speaker 2

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 and 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.

Speaker 2

And at the same time, I am suspecting or our team is suspecting that Several of Pine Flowers store locations will simply end up closing in the proceedings, which will help boost our sales and other stores that are around Pine Flowers stores In those surrounding areas. But the bottom line is, Scott, this puts us even a better position, although this is unfortunate for the industry And for Fire and 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're not running your business well, if you don't understand your operations well and you're not operationally focused, Then everything is off the table and which is clearly becoming the norm in the industry. So We remain focused on our business fundamentals.

Speaker 2

As you can see, we've 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 and A approach now and going forward.

Speaker 4

Got it. I appreciate that color. And maybe you can provide a little bit, you mentioned in your comments too, new store growth Coming on board kind of second half, any color on the potential kind of adds? I mean, you slow down the pace or just waiting Get to free cash flow positive, but just kind of weighing your efforts and kind of great progress and gaining 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?

Speaker 2

Yes. Thanks, Scott. Yes. So we are definitely going to put up more stores in the second half of the year than the first half that we did as communicated to the market. But our supreme focus remains on free cash flow generation.

Speaker 2

And as you can clearly see, Scott, we made major improvements To our loss from operations, our net losses were practically breakeven. If we stop growing aggressively, which we have, you can see That we are breakeven and then into positive territory. So we are remaining focused on that goal. Mississauga market in Ontario presents a very good opportunity for us. So we are going to go after that market relatively quickly and that would be another 4 to 6 stores that we will add.

Speaker 2

We will add Another store in British Columbia that will be our 8th store. We have a very, very good opportunity in BC that we have been working on For quite some time and we're about to realize it. But other than that, we are going to remain focused on our free cash flow generation goal. And fortunately for High Tide, Our same store sales growth, even though it's naturally slowing down now after 7 straight quarters of meaningful gains, It's still growing. As calculated daily, we still grew 5% or 20% annualized in our same store sales growth, which I was very, very happy with.

Speaker 2

So the focus is going to continue to remain on same store sales growth, tighten our operations and add another 6 to 8 locations by in the second half of this year.

Speaker 4

Thank you. I'll jump back in the queue.

Operator

Thank you. The next question goes to Andrew Parthenough of Stifel. Andrew, please go ahead. Your line is open.

Speaker 5

Hi, thanks. Good morning. Thanks for taking my question. I wanted to maybe start off with your cost savings initiatives that Seems to have driven most of your EBITDA gains here, which was nice to see. On the G and A side, Seems like advertising has also come steadily down over the past year.

Speaker 5

But it's a 2 part question. So first, Last quarter, you talked about synergies that could help with bringing down G and A. Could you Give us an update on where you are with that. Is that what drove a lot of the cost savings this quarter And how much is left? And the second part is just on the advertising.

Speaker 5

Just trying to understand how What kind of decision factors do you take into account when determining advertising spend? Are you just seeing opportunities to spend less money and get a better bang for your buck or trying to understand that a little bit better?

Speaker 2

Thank you for your question, Andrew. I'm going to pass the first question over to Sergio, and then I will answer the second Part of the question on the advertising spend. So Sergio, over to you. Yes. Thank you, guys.

Speaker 2

So let's just start with the G and A. So the G

Speaker 3

and A G and A went down by over $1,300,000 sequentially from the $7,500,000 in Q1 to $6,200,000 in Q2 2023. So there were some nonrecurring items in the Q1 figure. However, we found efficiencies in both retail and e commerce business. And these decisions are across the board from store suppliers, the way that we manage all the different Software licenses in the e commerce business, and we just started in that area. The consolidation of the business there All the multiple platforms that we have looking at the spends of the software from a consolidated basis rather than The 6 different product lines.

Speaker 3

So those spend, we believe we will continue To see a similar cost base you see

Speaker 2

in the P and L

Speaker 3

in Q2. That's from the G and A side of In the marketing, just one comment before I pass it back to Raj, you did see a significant drop there quarter over quarter and that's With the it's mainly driven by the commerce business. But again, it's because we're taking the approach of consolidating how we do the marketing in all the different platforms. Is it going to be continue going down? I don't believe so.

Speaker 3

But that's mainly the optimization of the spend in that in the commerce side of this in the marketing

Speaker 2

Thank you, Sergio. And Andrew, I'll answer the second part of the question. So yes, we're excited that advertising and marketing spend has Relatively gone down a little bit, but this is very much in line with what's happening in our e commerce business. We have two sides to the story. Luckily for us, 88% of our business, which is Canadian Bricks and Motor, continues to march ahead, all guns blazing.

Speaker 2

But our e commerce sales, which is ancillary cannabis businesses of CBD and consumption accessories, they're definitely feeling those inflationary pressures. During these inflationary times, consumers are still prioritizing cannabis over pipes and bongs and CBD products that they Replaced with turmeric and other nice supplements. So as our e commerce sales have slowed down, we've also meaningfully slowed down our advertising Spend, which I believe was down by over $1,000,000 quarter over quarter and we are being very, very carefully watching this number Because again, our entire focus is making sure our business is operationally sound. If one side of the business is slowing down, we want to make sure our expenses are slowing down accordingly. And that is why you're seeing that big marketing and advertising drop.

Speaker 2

Now as e commerce picks up going forward, you may start seeing increases in advertising and marketing spend.

Speaker 5

Thanks for that color. And just switching gears here and looking at your balance sheet, I think I see here, dollars 17,000,000 in short term loans and $6,000,000 in short term convertibles On the balance sheet, could you talk about when those mature and how do you plan to address those maturities?

Speaker 3

Yes. So let's talk about the $17,600,000 interest bearing loans. That's the 10 loans with Konec First. The maturity of those the 2 tranches, the maturity of both tranches Are longer they are not current. The maturity It's 2, 3 years, I believe.

Speaker 3

I'm sorry, it's 4 years. 5 years. 5 years. The maturity is in 5 years. However, due to the loans are on demand, So they can call it at any given time because of the word, that's the reason why we need to put it in current liabilities.

Speaker 3

But they don't have any intention That's why we don't have any so we're putting liquidity just because of the structure of the contract, but the Conestar doesn't have an intention to collect it at the moment. The second part of the question was related to the current portion, the convertible debenture. This is Bet with a private investors and we are currently negotiating the terms and conditions of the contract.

Speaker 5

Do you know when we should expect any kind of Resolution to the convertibles, so we can watch out for that?

Speaker 2

Andrew, we would have to look this up. I don't think it's anything. It's a burning and pressing Urgent issue on our balance sheet related to our balance sheet, but we would have to look up the exact time line on the convertibles and Sergio can get back to you.

Speaker 5

Thanks for that. I'll get back in the queue.

Operator

Thank you. The next question goes to Matt Bottomley of Canaccord. Matt, please go ahead. Your line is open.

Speaker 6

Yes, good afternoon. Raj, just wondering if you could expand a little more on your outlook with respect to just the retail landscape. I understand The element of potential closures on some of these 5 year leases coming up, but maybe just on the top part of that Assessment in terms of just the overall ability for the market TAM regardless of how it's allocated between stores, its ability to continue to grow. It seems like It's growing still, but sort of stuck in the $4,000,000,000 to $5,000,000,000 opportunity set for a while now. And I imagine there needs to be a lot of rate changes From the federal government first and foremost, but just curious on where you see the overall TAM going in the next year or so and what needs to change in order to reaccelerate that?

Speaker 2

Hi, Matt. Thank you for your question. So, Matt, you're absolutely right that a lot of the brick and mortar landscape here Has been shaking up. And many of these leases that are coming at this 5 year anniversary, because most of these were Signed upon legalization, they may not be renewed. We are hoping that many of these are not going to be renewed And some of these foregone sales will disproportionately come back to us, because we have the best brand in the country, we continue to increase our same store sales growth.

Speaker 2

And a lot of the reasoning behind the increase in our same store sales growth is a lot of the neighboring stores around us, they just cannot keep up with us in terms of competing with us And a lot of these dollars are already flowing back to us. So now when you have the double whammy of these leases not getting renewed, I think our same store sales growth will continue to increase. Now mind you, our same store sales growth is naturally slowing down After 7 straight quarters of meaningful gains, but we anticipate continued same store sales growth, although not in double digits anymore. And also the second point that I'd like to highlight that the market still remains strong in Canada. March data from Statistics Canada showed total retail sales in Canada, Excluding Quebec was up 12% year over year and our goal is to have our same store sales growth consistently exceed industry growth over the long term.

Speaker 6

Appreciate that. And more on the maybe on the macro front. So if we look at, call it, dollars 4,500,000,000 to $5,000,000,000 You said now what is it that needs to change, whether it's regulations or otherwise in order to get to what historically some of the estimates might have been $7,000,000,000 to $9,000,000,000 of an overall Cannabis opportunity 6, 7 years out from legalization and we're not there yet, but we're sort of inching along. And I'm just curious if there's anything you think Is meaningful in order to see the overall TAM expand further from where it is today?

Speaker 2

Yes. So look, Matt, it's no secret that illicit market in Canada has remained strong, although fortunately it has been coming down At a rapid pace, but it's still quite a big chunk of the market. I would still put it at around 20% to 25% Of all retail sales going to the illicit market, now that's a massive number. You take $5,000,000,000 where we currently stand today, You could potentially go to $6,000,000,000 $6,500,000,000 if we could get that share back from the illicit market. Now it's happening.

Speaker 2

It's not happening fast enough for my liking and I believe other operators in the industry, but it's heading in the right direction. So I am positive Over the next 2 to 3 years, the industry sales will continue to expand. We also definitely need some burning and pressing urgent changes on the And our team along with a lot of other operators in the country and the industry are engaged with Health Canada Make changes to the Federal Cannabis Act, which is under review currently. So given the review that is going on with the Federal Cannabis Act And the support that we are anticipating from the government, plus the continued takedown of the illicit market should result in our sales and industry sales expanding over the long term.

Speaker 6

Great. Much appreciated. Thanks Raj.

Operator

Thank you. The next question goes to Andrew Semple of Echelon Capital Markets. Andrew, please go ahead. Your line is open.

Speaker 7

Great. Thank you. Good morning and congrats on the solid Q2 results to the Hi Tec team. First question here would just be on the margins. If I have my calculations right, it appears that gross margins on brick and mortar Retail sales saw a meaningful step up in the current quarter and you pointed to further opportunities to expand this ahead.

Speaker 7

I guess my question would be whether you have a sense of what level you would like to see gross margins for brick and mortar settle at in the long term Once you've got all the moving pieces, such as white label products, once those have all fully played out and are widely available, You're kind of running at more of a normalized rate. Where do you see the gross margin levels trending?

Speaker 2

Good morning, Andrew, and thank you for your question. Brick and motor gross margins will likely keep ticking higher as they have over the past 5 quarters, Having increased about 1% a quarter, this is better than my expectations, Andrew. We didn't expect to be able to increase our margins So rapidly every single quarter, which we've done over the last 5 quarters. And the good news on this front is that we feel that this is going to continue going up. I believe and currently our gross margins from our 4 wall gross margins are sitting at around 20%.

Speaker 2

We feel long term we can take this to 24% to 25% and kind of keep that pace of roughly 0.5% to 1% a quarter going forward Because we continue to increase our margins, our same store sales continue to grow up, our membership base continues to increase. So we see absolutely no problems there. Now speaking about the all rounded consolidated gross margins, we are feeling a bit of a weakness in our e commerce platforms, which is kind of offsetting everything we are increasing on the brick and mortar side. But we are quite comfortable On the brick and mortar side, but we are quite comfortable in communicating that we can remain consistent at the 27% mark as we've done over the last 3, 4 quarters. That will continue.

Speaker 2

But nevertheless, we do have a good opportunity to increase our gross margins of at least 0.5% to 1% a quarter on the brick and mortar level, Which is 88% of our business portfolio.

Speaker 7

Great. Good color and Good to point out the different revenue mix having an impact on the consolidated level, but also good to see the progress on the segment level. My follow-up question here would be on free cash flow. And when I look at the current quarter, barring the relatively outsized net working capital build, which Which utilized $4,000,000 of cash in

Speaker 5

the current

Speaker 7

quarter. If we exclude that or move that maybe to a more normalized level, It appears that you would have been around free cash flow positive or free cash flow breakeven in the current quarter. So it appears you're well down the path to achieving your target there. So I'd like to get your thoughts on once that free cash flow positive figure is firmly in hand, Do you think there's an opportunity here to accelerate M and A, given you would be free cash flow positive and you've got A good chunk of cash on the balance sheet today.

Speaker 2

Thanks for the question, Andrew. I see Sergio is excited to answer this one. So I'm going to pass it over to him.

Speaker 3

Thank you, Andrew, for the question. I do appreciate your comment that if we excluded the significant Changes in working capital one time items there, they catch up with the AP, we will have been cash flow positive This quarter, definitely, you could see the big increase in working capital requirement between Q2 and Q1. I think it was close to the incremental was $4,000,000 So now the question also will be more about The free cash flow guidance. And so a couple of things that I want to highlight. The reason why we want to keep it, we want to calculate the free cash flow only using The sustaining CapEx is to be able to provide to the investors the CapEx required to keep Delight on the current operations.

Speaker 3

You could see there now that is not significant and that will Just from the current operations and removing the growth will allow us to really clear see what is the free cash flow available for growth opportunities. We continue to be have the outlook to be free cash flow positive towards the end of the year, at the end of the year calendar year, And that will be driven by, again, margins, EBITDA margin, focus on the retail, brick and mortar gross margin And expenses, cytotene, the SG and A cytotene, professional fees expenses. And also, obviously, working capital And that's looking at all the different levers that we have there with the AR, AP and inventory management. So That's our guidance for the free cash flow.

Speaker 7

Great. That's helpful. Thanks for taking my questions. We'll get back into queue.

Operator

Thank you. Our next question goes to Frederico Gomez of ATB Capital Markets. Frederico, please go ahead. Your line is open.

Speaker 8

Good morning. Congrats on a great quarter. Thank you for taking my questions. First, just on your e commerce side, as you mentioned, Raj, you're facing some challenging Conditions on Cebedia and Accessories. I know that you don't disclose just EBITDA per segment, but at this point, Can you maybe shed some color on the adjusted EBITDA that you're seeing from your e commerce platforms?

Speaker 8

No. Are they becoming dilutive from an adjusted EBITDA margin standpoint? And Given those challenging conditions, what are your plans for those segments?

Speaker 2

Good morning, Fred. Thank you for the question. So, as I mentioned, e commerce sales have definitely slowed down a little bit, But it's not slowed down to the point where they're not generating adjusted EBITDA. We still have EBITDA generation happening From our e commerce business and the spread for you to think about, I think the spread that you can think about is roughly eightytwenty. 80% is coming from brick and mortar, don't quote me on this, But roughly eighty-twenty.

Speaker 2

80% is coming from brick and mortar, 20% is still coming from our e commerce businesses. And to further clarify, Fred, We are not feeling a very big impact on our accessories business because we are the clear leader in consumption accessories. We have some of the top performing E commerce consumption accessory platforms in the world, some of the highest ranked and the most searchable e commerce platforms in the world in Grass City and Smoke Cartel, which we feel We'll be very meaningful platforms once federal legalization takes place in the United States. We have some really good ideas on what we can do with these accessory platforms As well as our very large international customer base, which is now exceeding 4,500,000 customers, including our Cabana Club members. So we are still in a good spot with our e commerce platforms.

Speaker 2

I would like EBITDA generation to be a lot higher out of our e commerce platforms. But As Sergio mentioned, we are offsetting the sales decline with SG and A decline. We are very, very focused To continue to monitor expenses very carefully and while we are dealing with these turbulent times and these high inflationary times, Once the tide turns, we will be on the receiving end of it, outperforming the sector even on the e commerce front because we have very, very good platform. So The only weakness in our business right now is our CBD business, which is roughly about 5%, 6% of our total business. So not a big deal, but nevertheless, we don't give up and the hope is that we are going to get this in order once we get that positive momentum back As the macro market fixes itself.

Speaker 8

Thank you. That's great color. And then just maybe following up on a previous question about the free cash flow guidance, It does seem that you're pretty much very close to reaching that. If you back out working capital changes, you're already there. So I'm just curious now once you reach that goal, which is very close apparently, what is the capital allocation plan here?

Speaker 8

Once you reach Positive free cash flow, are you planning planning to maybe accelerate growth in brick and mortar organically or through M and A or What other options would you consider deploying that additional capital from your operations? Thank you.

Speaker 2

Thanks for your question, Fred. So our main goal right now is to Reach free cash flow generation very clearly and prove it to our investors that look, we know how to grow. We've grown from $8,500,000 of revenue 4 years ago to close to a $500,000,000 of sales run rate. There's no doubt Hightide knows how to grow. Now we're taking a bit of a pause to make sure we can prove to our investors, we also know how to become free cash flow positive and start generating net profits, Which is not easy to do in this hyper, very hyper competitive industry.

Speaker 2

So what we want to do Fred, Achieve that goal and then get back to accelerating our store counts, which we still feel that we can add at least 100 more stores in Canada And you know, have 15% of market share in the long term. We're already sitting at close to 10% market share in Canada, which is, you know, if you compare it, Compare us to our peers, most of them are nowhere near it. So we've got a great thing brewing here. We're going to focus on free cash flow generation. And we have a lot of heightened level of opportunities coming to the market.

Speaker 2

As I mentioned, the fine flower portfolio is 1, but there's many other opportunities in the market that exist. And but we will strike at the right time at the right price for the right price and we're not going to rush into this. So We are keeping a very close eye on the opportunities that are coming. I'm a sucker for good leases and I don't like passing on high quality location, So we continue to accumulate a few of those leases as well. So as soon as we reach our target, we are back to building our organic portfolio.

Speaker 2

So you're going to see some more organic growth come out in the later half of the year. And then if a compelling M and A opportunity When an asset portfolio comes through, we are definitely going to take a very serious look at it.

Speaker 8

Thank you. And I'll pass it along.

Operator

Thank you. We have no further questions. I'd now like Turn the session back over to HiTai's Chief Executive Officer, Raj Grober, for final comments.

Speaker 2

Thank you, operator, And thank you to everyone for your interest and continued support of Hytai. We are very proud of what we've achieved this quarter and remain excited about the road ahead. With that, I will ask the operator to close the line. Have a great day, everyone.

Operator

Thank you. This now concludes today's call. Thank you all for joining.

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Earnings Conference Call
High Tide Q2 2023
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