High Tide Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
September 17, 2024

There are 10 speakers on the call.

Operator

Good morning. My name is Nadia, and I'll be your conference operator today. At this time, I would like to welcome everyone to High Tyke Inc. Q3 2024 Unaudited Financial and Operational Results Conference Call.

Operator

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Instructions will be provided at that time for you to queue up for the question and answer session. I will now turn the call over to your host, Crystal Dafoe. Please go ahead.

Speaker 1

Well, thank you, operator, and 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. Raj Grover, President and Chief Executive Officer and Mr.

Speaker 1

Mayank Mahajan, Chief Financial Officer. Yesterday, on September 16, 2024, the company released unaudited highlights from its financial and operational results for the 3rd fiscal quarter that ended October pardon me, April 30, 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 performances. 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.

Speaker 1

For more information on the company's risks and uncertainties related to forward looking statements, please refer to the company's press release dated September 16, 2024, our latest annual information form and our latest management discussion and analysis, each filed with securities regulatory authorities at sedarplus. Ca or on EDGAR at www.sec.gov or on the company's website at www.hytideinc.com, 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.

Speaker 1

For any reconciliation of non GAAP measures measured and discussed, please consult our latest management discussion and analysis filed on SEDAR Plus and EDGAR. It is now my pleasure to introduce Mr. Raj Grover, President and Chief Executive Officer of High Tide. Thank you, Mr. Grover.

Speaker 1

You may now begin.

Speaker 2

Thank you, Crystal, and good morning, everyone. Welcome to High Tide Inc. Financial results conference call for the 3rd fiscal quarter that ended July 31, 2024. I'll begin with some big picture comments regarding the quarter and our strategy before Mayank and I dig deeper into the numbers. We filed our press release and financials last night and once again I'm proud to report another record breaking quarter for High Tide.

Speaker 2

Growth resumed with revenue up 6% sequentially to an all time record of $131,700,000 You'll recall how we purposefully slowed growth in 2023. We saw the competitive dynamics and the market conditions and focused our efforts to be among the 1st cannabis companies to be free cash flow positive, thinking that those who weren't clearly on that path bore a meaningful risk of fading away. And that's exactly what's been happening. We have been free cash flow positive for 5 straight quarters now, while during this time a whole series of public and private cannabis retailers have gone under. After proving our ability to consistently generate free cash flow, we said we would resume growth And here we are with the highest ever level of quarterly revenue.

Speaker 2

While that is great to see, I know that we now have 183 stores across the country, which included us opening 11 new cabanas during the quarter using internal cash flow. We have now surpassed the lower end of our communicated range to add 20 to 30 new stores this calendar year and given the momentum we are seeing, we feel that we can now reach the higher end of this range. Investors will remember that a while ago, we were aspiring to reach a 10% market share. One of the biggest achievements this quarter and thanks to our team's efforts over the past couple of years, I'm exceptionally proud that we have already reached 12% market share and we are well on our way to reaching our current goal of holding a 15% market share in the provinces where we operate. The 12% share we had during May June 2024 was up from 10% a year ago, 8% during March June 2022 and 5% when the discount club model was launched in October 2021.

Speaker 2

And we achieved this while only having 5% of the total bricks and mortar store count in these markets, clearly showcasing the potency of our disruptive and innovative discount club model. With this market leadership and our differentiated model, we have found the perfect balance between growth and harvesting free cash flow, which was $3,100,000 in Q3. Over the trailing 4 quarters, free cash flow was $21,800,000 which represents a yield of over 9% versus our enterprise value. Our Cabana Club has always been the lifeblood of our company and I'm really excited to see it continue to expand at such a rapid pace. We are now at 1,550,000 members, up an impressive 8% sequentially and 41% year over year, equating to over 500% growth in memberships since we launched the discount club model in October 2021.

Speaker 2

For the 4th consecutive quarter, Elite, our paid membership tier has been growing at its fastest pace since inception, currently sitting at 57,000 members, up 30% sequentially and 203% from a year ago. These numbers are worthy of celebrating and add to our confidence about the success of our innovative retail model and the exciting growth trajectory that we are on. I'm also very pleased to announce that our net income continued its upward momentum from breakeven in Q1 to $200,000 in Q2 and now reaching $800,000 of net income in Q3. This is truly an anomaly in Canadian cannabis and one we are particularly very proud of. Our execution is so solid that not only are we back to revenue growth, we are at the point where we are able to grow organically by building stores with internally generated free cash flow.

Speaker 2

In fact, we had the highest CapEx spend during the past 11 quarters in Q3 building out stores. Despite this, we were still able to end the quarter with a cash balance of $35,300,000 which is the most we've ever had. Another point showing how well our model is performing is our same store sales growth. Since we launched our Innovative Discount Club near the end of October 2021 to the end of June 2024, our same store sales rose a cumulative 118%. In contrast, the average operator has experienced a revenue decline of 21% during this period.

Speaker 2

Our impressive performance month in month out has continued. In July, our same store sales rose another 5% versus June, resulting in a pace that was 129% ahead of where we were back in October 2021. We're especially pleased this quarter by the fact that despite adding 21 new stores in this calendar year and 11 stores during Q3, we have still been able to generate our best ever EBITDA level as well as continued free cash flow. Each new store we open takes anywhere from 6 to 12 months to reach maturity and payback periods based on an average are about 10 months. Thus, new stores initially represent a drag on consolidated results due to the ramp up that is required.

Speaker 2

Given our track record and the strength of our business model, even in this hypercompetitive landscape, we expect all these new stores to be additive to results within a few quarters. We recently began disclosing our annualized sales per square foot, another critical metric for retailers. In Q3, it totaled $16.58 which marked an improvement from $16.37 in Q2. We are extremely proud that we are ahead of many best in class blue chip retailers such as Lululemon, Target, Walmart and Canadian Tire on this metric. This comparative information was included in our revamped investor presentation last week.

Speaker 2

We have begun to include much more retailer specific information in an effort to try to broaden our shareholder base and better appeal to investors who buy consumer discretionary or staple stocks. Early feedback on this approach has been very positive. We aren't where we were a few years back when the cannabis industry consisted of companies making promises and projections, relying on hype and optimism to appeal to investors. Several years in, companies need to be real now. While many of those operators from years ago are defunct, we aren't just telling a story.

Speaker 2

It is backed by a track record, millions of retail transactions and strong cash flows. We have proven that we know how to run a tight ship. And on that subject, I'm extremely proud that while we have grown to set a new record revenue new revenue record in Q3, we are taking cost out of the system where we can at the same time. Our Q3 G and A expenses were only 3.7 percent of revenue. This level exceeded our internal expectations compares to 5.2% a year ago and was the lowest level in 4 years.

Speaker 2

In dollar terms, G and A was just $4,800,000 marking the lowest level in 11 quarters, even though our revenue has more than doubled during this period. I will now go over the highlights from the financials and Mayank will do a deeper dive. Revenue for Q3 was $131,700,000 an all time record, up 6% year over year and sequentially. Our Bricks and Motor segment led the way up 10% year over year and outperforming our expectations. In the month of June, our average store was an annual revenue run rate of $2,600,000 which compares to our average peer revenue of just $1,000,000 in the provinces where we operate.

Speaker 2

In Ontario, the largest market and the focus of our future expansion, our outperformance was even more pronounced. Excluding newer stores open 6 months or less, which are still ramping up, the average Canacabana store was in a $3,500,000 annual revenue run rate, whereas the average of our peers in Ontario was just $1,000,000 Our same store sales were up 1% year over year in Q3. While this is less than levels we have historically achieved, there is no doubt that the overall market has slowed considerably and in many cases has actually turned negative. For example, according to Statistics Canada, total industry sales in the 5 provinces where Catacabana has a presence actually experienced a 10% year over year decline during May June, making our 1% gain for the quarter a huge outlier to the upside. Sequentially, our 5% same store sales growth is even more encouraging.

Speaker 2

Even accounting for the extra days, our average daily same store sales posted a 3% sequential increase in Q3, which is a 13% annualized pace. In addition to the sales of merchandise in our stores, our Cab Analytics data and advertising platforms continue to expand. Given the increase in our footprint, our sales volumes and operational outperformance as well as the persistent struggles experienced by many of our competitors, more and more interest is pouring into our retail ecosystem. CabA Analytics business data and insights platform, advertising revenue and other revenue, which includes management fees, interest income and rental income was $9,000,000 in Q3, up 36% year over year and 1% sequentially. Consolidated gross margins were 27% in Q3 2024, which was a percent lower than the 28% we generated last quarter and in Q3 last year.

Speaker 2

We have been holding the line of gross margins in our stores, not raising them so to not encourage marginal players from staying in the race and renewing their leases as they come up. This strategy is working. We are outlasting our competitors as shown by our increasing market share. As this industry shakeout becomes more and more pronounced, there will be opportunities to raise gross margins down the road. Turning to expenses, salaries and wages increased in Q3 both in dollar terms as well as a percentage of revenue.

Speaker 2

This is entirely due to the rapid pace of store growth with 11 stores opened during the quarter. We have to hire a full team for each new location 4 to 6 weeks before a store opens. Good people can be hard to find, secured and trained so that they can provide Cabana level service to customers on day 1. And of course, stores aren't running at full speed on day 1 as it takes time to grow the regular customer base. Accordingly, we aren't too concerned with the salaries and wages increase this quarter as it's part of the normal growing pains of expanding the store network.

Speaker 2

In contrast, we were able to drive our G and A expenses much lower, both in dollar terms and as a percentage of revenue. One reason for this was our ability to react and take cost out of our e commerce segment as a result of revenue declines in what is a tough market, which is also impacted by inflationary pressures. In particular, we were able to reduce operating expenses in our e commerce segment by 45% year over year in Q3, which was greater than the 37% decline in gross profit dollars, which actually resulted in improving the segment's adjusted EBITDA to approximately $700,000 from $300,000 in Q3 2023. Adjusted EBITDA was $9,600,000 for the quarter. Excluding the impact of the removal of the one time social responsibility fee in Manitoba, adjusted EBITDA was up 24% year over year.

Speaker 2

Adjusted EBITDA was down 4% sequentially versus $10,000,000 in Q2. As I explained earlier, this was entirely due to the heightened pace of growth with 21 stores added this calendar year, 14 of which were open since the start of Q3. The expenses for new stores start before they even open up and it is taking longer for the stores to ramp up today than a year or 2 ago just due to heightened competition. That said, we aren't worried. Our new stores are in excellent locations and backed by the power of the discount club model, we are confident that they will ramp up and start adding to adjusted EBITDA a few quarters in, even though they result in a net cash burn initially.

Speaker 2

I note that if you look at EBITDA without the customary adjustments for items such as share based compensation, it was $8,900,000 in Q3, which was up 4% sequentially and its highest level ever. Our income from operations was $3,100,000 this quarter. This marked a reversal from a loss of $700,000 a year ago, an increase of 54% versus $2,000,000 in Q2 and a new record high for HiTie. This strength flowed all the way down to net income, which also improved to approximately $800,000 in Q3 from a profit of $200,000 in Q2 and a loss of $3,600,000 in Q3 last year. Fully diluted earnings per share was $0.01 this quarter versus breakeven in Q2 and a loss of $0.04 a year ago.

Speaker 2

In conclusion, Q3 was another excellent quarter for High Tide with no shortage of highlights, including reaching a 12% market share and a return to revenue growth. Our company has continued to strengthen since the end of the quarter, including the initial closing of our $15,000,000 debt facility, breaching the 1,500,000 Cabana Club member and 50,000 elite member milestones, as well as overhauling our Tana Cabana website and investor presentation for the better. This all happens because of the dedicated team we are blessed to have at High Tide for which I'm eternally grateful and remain optimistic for new heights to come. With that, I'll turn it over to Mayank for his comments and deeper dive into the numbers.

Speaker 3

Thank you, Raj, and hello, everyone. Q3 was my Q1 as part of the HiTai team and what a fantastic quarter it was. We set records on most key metrics including revenue, EBITDA, store count and cash balance. Let's take a deeper dive into the numbers. As Raj mentioned, revenue for the quarter was an all time record at $131,700,000 up 6% year over year and sequentially.

Speaker 3

Our Brakes and Motor segment, which drives the vast majority of our business at over 90% of revenue performed even better, up 10% year over year and 7% sequentially. On a consolidated basis, our gross margins of 27% were just below the 28% generated in Q3 last year and Q2 this year in line with our ongoing strategy to capture market share. As Raj highlighted, we have been able to simultaneously demonstrate revenue growth and cost cuts, which is truly remarkable. Over the past 12 months, our quarterly revenue has grown by $7,300,000 while our total expenses actually fell by $2,800,000 The main drivers for this were lower G and A expenses, primarily driven by taking costs out of the e commerce segment lower depreciation and amortization, primarily relating to intangible assets, particularly the license valued from the Meta acquisition back in 2020 as they are now fully amortized and lower share based compensation. Adjusted EBITDA margin was 7.3% in Q3.

Speaker 3

This was an improvement versus 6.3% in Q3 2023 excluding the one time impact of the removal of the SRF in Manitoba. However, it was below the 8.1% achieved in each of the prior two quarters. This was due to the unprecedented rate of expansion. We added 11 stores in Q3 alone versus 13 stores during all of calendar 2023. We are confident that the addition of these stores will over time yield meaningful returns for shareholders.

Speaker 3

Free cash flow was $3,100,000 in Q3. Cash flow from operations before changes in non cash working capital was $8,900,000 during the quarter, up 11% sequentially highlighting the increasing cash generation potential of our business. However, largely due to an unfavorable investment in working capital of negative $2,700,000 in Q3 versus a benefit of $4,800,000 in Q2, this quarter's free cash flow of $3,100,000 was less than the record $9,400,000 generated last quarter. It is for this reason that we focus on the longer longer term trends and I note that we have now generated $21,800,000 in free cash flow over the past year which represents over 9% of our enterprise value. Our balance sheet has never been in better shape.

Speaker 3

Despite all the growth in CapEx, building out new stores and paying off the remainder of our convertible debentures in cash, we ended the quarter with $35,300,000 of cash in the bank, which is more than we have ever had. Further, just after quarter end, we made a significant improvement to our debt schedule as we received the funds from the initial closing of our $15,000,000 debt facility, which will be used to pay off the $13,000,000 debt we have maturing at the end of this calendar year. Remember that we delayed the drawing of the second and final tranche of this new facility to November 2024 so that it lines up with the maturity of our debt with OCN in December, while not paying twice the interest until then. Meanwhile, the Bank of Canada has cut its key interest rate by 75 basis points in June, which will result in saving in the interest we pay our senior lender Connect First. In closing, Q3 was a milestone quarter for us, highlighted in particular by our 12% market share.

Speaker 3

We are now back to growing our revenue and increasing our store count which should set the stage for significant growth ahead. Our balance sheet has never been stronger which should provide us the ability to take advantage of the expansion opportunity we have particularly in Ontario which is a big contrast to the troubles so many other companies in our industry are experiencing. With that, I will now turn the call over to the operator to open the line for the question and answer session. Thank you.

Operator

Thank Our first question goes to Scott Fortune of Roth Capital Partners. Scott, please go ahead.

Speaker 4

Thanks for the opportunity and good morning and congrats as there are only a handful of cannabis companies reporting positive EBITDA and net income. Congrats on that. Just wanted to follow-up on stores providing you're tracking to hit the top end of your 24 store guidance here of 20 to 30. Do you see any changes or strategy regarding opening new stores into 2025 or still driven primarily organically versus more M and A opportunities out there? And then can you touch base on the new store economics as they become fully optimized, as you mentioned, after 2, 3 quarters regarding kind of average sales and margins compared to your existing profitable stores kind of obviously you're still seeing strong economics in the Ontario store ramps.

Speaker 4

Just a little bit color on your store kind of outlook as we move into 2025 here?

Speaker 2

Good morning, Scott. Thank you so much for your question. So on the topic of 20 to 30, I think you asked me how is organic store growing for the year. It has been going very, very well. We've already put up 21 stores at the end of Q3 and since then we continue to do our we are in construction mode.

Speaker 2

So we're very confident that we will reach the upper end of our guidance that we have provided between 2030. We'll be close to like 27, 28 stores, I think. And nothing will change going into next year, Scott. We found our secret mantra of growing organically. When we're building stores organically, I'd like to remind investors that we're spending just $260,000 to build out these locations and then loading them up with $100,000 or so in inventory and working capital.

Speaker 2

And then we're but then we just go back to ramping up these stores and you can get better, higher quality growth in amazing locations that you can cherry pick, than what we are doing currently. So we're going to kind of keep this approach exactly the same going into 2025, especially given we have 5 consecutive quarters of positive free cash flow. We've always said that quantum can significantly vary, but our intention is to remain free cash flow positive. Going into 2025, you talked about store economics a little bit. I had provided in my previous calls, I had noted that we may be able to raise margins towards the back half of this year.

Speaker 2

I don't see that happening. We're holding the line on margin. We may even go slight reduction in margin, given the illicit market resurgence that we are seeing a little bit. And you're clearly seeing a lot of competitors go out of business. Tokyo Smoke just went bankrupt.

Speaker 2

I believe that over 100 locations or they filed for CCAA proceedings. And we don't want to help the larger change, the smaller change, and the independents that are just hanging by the thread. So we're going to hold the line of gross margins because we already have amazing economics, as you pointed out. 1 quarter up or down on adjusted EBITDA is not going to change anything. When we're growing at the pace that we're growing and generating 12% market share, this clearly exceeded our expectations.

Speaker 2

We thought it would be around that 11%, 11.2% and that is a victory, but getting to 12% is an absolute win. So everything that we've been doing is working out for us and we're going to stick to our plan going into 2025, Scott.

Speaker 4

Perfect. Thank you for that detail. And then the follow-up, one follow-up, you recently launched Queen of Bud and kind of the branded white label products, you're offering in your 5 provinces. You've added BC has come on board now, which is great. But can you provide a little more timing of the delivery and expectations of the white label sales for kind of the rest of 2024 and kind of more your expectation of the ramp into 2025?

Speaker 4

And then does you recently announced that JV with positive intent events and more pop up opportunities kind of at events. Does that allow you to push your white label products there or how can you look at that strategically from that JV standpoint?

Speaker 2

Yes, absolutely, Scott. So look, we're very, very excited about our long term strategy. I always use the word long term for white label because you can't be blindfolded and just because you have a significant amount of stores, you don't look at what's happening in the market. So I've said these things 100,000,000,000 times that LPs still have a lot of weed. Now those weed levels are definitely coming down.

Speaker 2

We're seeing stability in wholesale prices and long term white label will account for 20% to 25% of everything that we sell in our stores will be our own brands. So currently we're sitting at just 2.5%, 3% in cannabis. On the accessory side, we have a lot more. On the cannabis, that's the smaller part of the equation. But on the cannabis front, we're sitting at, let's say, 2.5%, 3%.

Speaker 2

We're going to take this number up to 20% to 25% in the long term. And a brand like Queen O'Bud, which has existed in Canada for over 4, 5 years now and has produced 1,000,000 of dollars in sales prior, it's not going to be so hard for us to build it when we can pole position it in our stores, given that it's our own brand. So we're very, very excited about the trajectory of the Queen O'Bud brand of Cabana Cannabis Co and new brands, that we will eventually introduce. Going on your question on what was launched and what is getting launched in 2024 2025, We just on Friday, we actually launched the Queen of Bud, very, very beautiful and elegant candles in our stores. I'm very happy to report to you that we've sold 200 units in the 1st 2 days, 222 to be precise.

Speaker 2

I got the numbers prior to this call because we know those candles were amazing. We've never sold candles before, but they're crushing it. And now we're launching Zippo's in a couple of weeks. We're launching Queen O'Bud Zippo's. I'm also very happy to report that Zippo is including all of Queen O'Bud branded lighters.

Speaker 2

They're so excited about it themselves that they're including it in their spring catalog, which is going to get launched to 170 countries. And then we're launching 6 cannabis SKUs, a very differentiated, very female focused, differentiated cannabis SKUs, very elegant, very beautiful that are getting launched throughout October. Maybe they'll spill a little bit into November as well, but they will be launching across all four provinces. So Alberta, Manitoba, Saskatchewan and Ontario. The accessories are getting launched in BC as well.

Speaker 2

And then in 2025, we're just going to continue banking off this success and continue launching more cleaner butt SKUs, more Cabana cannabis SKUs and of course our accessories are getting bigger and bigger on the white label front. So having said that, we're going to it's a long term approach for us. We're not rushing to take the I always say, I don't like rushing into things just because we have this strategy overnight. We need to get to some point. We're absolutely enjoying how much cannabis is available in this country.

Speaker 2

And there's always an opposite reaction to something that you're experiencing right now. So right now when there's a lot of cannabis, it's working in our favor at shelf. We can choose to showcase some of the best varieties the customers ever seen. And when that levels off into going at the end of this year and into next year, when LPs are out of their troubles, which they soon will be and the market levels up, we will be able to introduce a lot more of our own SKUs than benefiting on the margin opportunity. So either way, we are winning, Scott.

Speaker 2

On your last question around the events and pop up, this was something that, the partner of ours, PIE, Positive Intent Events, worked very hard to get regulatory approvals on. I cannot take the credit for this, Scott. But we found the best in class partners, partner for this particular JV. And not only can we sell that, all the variety that's available to us to showcase in Alberta, we can absolutely sell our in house brands as well. And Queen of Bud will again take front and center position at these events.

Speaker 2

Now our first event, I believe, is still 15, 20 days away. I'm very, very excited for this opportunity, but I don't like to provide guidance on how we think this is going to go. We just think it's going to enhance our market share in terms of how much cannabis we can move in the province of Alberta. And then we are very, very hopeful that even BC and Ontario might follow this lead and open up the event space in cannabis.

Speaker 4

Thanks for the color. I'll jump back in the queue. Congrats again.

Speaker 5

The operator asleep. What's going on here?

Operator

Our next question goes to Matt Bottomley of Canaccord Genuity. Matt, please go ahead.

Speaker 5

Hey, everyone. Thanks for the question. Raj, just wanted to follow-up with some of your commentary, when it goes back to, there being sort of a wash of cannabis out there. And I know that's certainly the case when it comes to sort of the biomass of it. But I'm just wondering

Speaker 2

as a purchaser, if

Speaker 5

you look at more of the CPG segments, the vape pens, the edibles, the beverages, are you ordering from the provinces, in any different patterns when it comes to consumers actually having brand awareness with some of these products? I know there's still 100, if not more, LPs out there. But I'm just wondering if the things that look a little more CPG friendly, are starting to change at all in the current environment with respect to where demand is coming from.

Speaker 2

Good morning, Matt. Thank you so much for your question. So look, you nailed it. There's 100 and 100 of LPs out there, Matt. And we've had the same situation for years years now.

Speaker 2

But we know that a lot of LPs are going out of business and new ones are not coming back into the game at the same pace. My estimates were that the Johnny Walkers and the Grey Goose's of the world that are built in alcohol will be built in cannabis, but I can tell you it's been proving extremely difficult. Although good businesses are good businesses, amazing LPs are amazing LPs. There are some that are doing a tremendous job, that we know we get customers asking for their brands, right? There are ton of brands that customers ask by name now, which is great.

Speaker 2

But what I also see Matt at the same time that for some reason, 3 to 6 to 9 months in, the product starts to fiddle away or fade away. But the one thing I've noticed what the producers are doing better is that they're keeping the brand. So even if it's at a SKU level, the interest is starting to fade away because there's just so much innovation in cannabis. The producers are doing a better job in terms of brand positioning. And of course, the ecosystem that we have in Canada, where we move so much cannabis, you know, we are also helping generate brand visibility just like we're helping take down the illicit market.

Speaker 2

We're also helping generate brand visibility for a lot of these producers. So yes, the brands are picking up, perhaps not at the pace, that the producers would be expecting where people come and ask through names. Now let me put another spin on this. We bought the Queen O'Bud having 183 locations, by the way, bought the Queen O'Bud brand for just $1,000,000 and having 183 locations and doing close to $500,000,000 in brick and mortar revenue with only 5% of the countries or the provinces where we operate the brick and mortar store count, we couldn't be more happier to position our own brand front and center to the millions of customers that we have or to the hundreds of thousands of customers that come visit our stores. So, we're in a good position, but to go back to your answer, certain producers are definitely doing a better job and brands are starting to pick up.

Speaker 5

Got it. Appreciate it. And just one more question for me. I know it's a very small percentage of your business, but the e commerce platform sales, it continues to decline as a percentage of your overall revenues. And I think that there's some strategy to that.

Speaker 5

I'm just wondering, similar to your comments that you gave with respect to maybe some brand rollout in 2024 and 2025 when it comes to your own white label, more in that segment of the business with e commerce, where do you sort of see that over the next 12 or 24 months? And is this something that you think will it reaccelerate down the line or sort of stay where it is from what we've seen in more recent quarters of contribution? Yes.

Speaker 2

So to just answer the question quickly on e commerce platforms, the sales have definitely declined. But the good news is it's only 6%, 7% as a percentage of total of our total revenue, Matt. Now we have a very exciting idea that we're working on for our e commerce platform, which ties into our Cabana Club becoming a global cannabis community. I will shed more light on this in the coming weeks. I promise it won't be months months, max maybe a couple of months.

Speaker 2

We're working on something significant, which will be very, very helpful, which also ties into what you're talking about white label. So the approach that we're going to take, white label is going to become front and center in terms of what we're about to do in e commerce. But we're absolutely will be selling branded products as well with more focus on white label products. But let me not say more, sometimes I give too much information that I should be giving and let me keep you guys all excited until we actually release what we're about to do with our e commerce platforms.

Speaker 5

Okay, got it. Thanks Raj.

Operator

Thank you. The next question goes to Mike Regan of Excelsior. Mike, please go ahead.

Speaker 6

Thanks everyone for the good quarter. In terms of what you said before about Tokyo Smoke going bankrupt, are those 100 stores actually still operating or are they closing? And sort of what are you seeing just on the competitive landscape of stores closing as their 5 year leases come up 5 years into adult use at this point?

Speaker 2

Good morning, Mike. Thank you so much for your question. So, I believe they have 101 stores, don't quote me on it, but that's my very good educated guess. They have announced that they're closing 29 stores, that they have already closed 29 stores. I can tell you that we are looking many of these closed locations.

Speaker 2

But again, let me remind everyone listening on this call that these companies are not going bankrupt because they've done a great job on-site selection criteria and the size of these units and the rental rates that they're paying. I look at a lot of these stores with our real estate team and I'm shocked sometimes to see a 3,000, 4, 5000 square feet store in Canada pop up. Who's going to take that at $100 a square foot, even if it's in the best location ever? The landlords are not going to take a haircut because it's a fully built store and they're trying to get pass on this store to some other business, to some other operator. That's not going to be us, Mike.

Speaker 2

We are disciplined. We like quality locations. We like square footages that we can live with and we like rental rates that can stand the test of time, which is an opportunity for the landlord and the tenant and not one directional. A lot of these leases were signed when legalization took place in 2018 or even prior in some cases. And those groups are licking their wounds.

Speaker 2

It's not a good place to be in. Fire and Flower, Kiaro, Trees, Tokyo Smoke, 420, I can keep going, Shiny Bud, there's endless companies that have gone bankrupt. And again, the reasons for them going bankrupt is just how they've looked at their real estate portfolio and how they've managed their operating expenses. So as much as we are in these portfolios, the opportunities are pinned because we don't want to get a 3,000, 4000 square feet store paying $80,000, $90 a square foot. It defeats the purpose of just making an announcement that we took over 10 Tokyo Smoke stores, but I'm not taking over that pain and bringing it over to High Tide.

Speaker 2

So, we're looking at everything, Mike, but it's not a slam dunk by any means.

Speaker 6

Makes sense. You definitely don't want to take on there unprofitable leases in 2 large stores, especially if you can open 1 across the street at 1500 square feet or what have you. And I guess the second question is quickly, you mentioned seeing a resurgence of the listed market. Can you just provide a little more detail on sort of what you're seeing and what's driving that? And is there is that causing any pricing pressure overall in the market in general or what you meant by that?

Speaker 2

Yes, absolutely, Mike. So this quarter has revealed a lot to us. So right at the end of Q2, what we started noticing that there's been an influx of illicit brick and mortar stores popping up all over Canada and we've seen a huge concentration especially in the city of Regina. Now we're seeing that in Ottawa and we're also seeing it in Toronto. By early counts that I have, we are now hearing that there's 200 illicit stores that have popped up since the beginning of this year.

Speaker 2

Many of them are located just on the outskirts of the city in indigenous reserves, but many of them are right in the city, Bank Street in Ottawa and King Street in Toronto. And not only did we have legal competitors to deal with, which we are absolutely dealing with and accelerating and making our mark. Now we got to go back and deal with the illicit market on this brick and mortar, illicit stores popping up. But look, the Ontario government dedicated $31,000,000 to illicit market enforcement, and we are our GR team is continuously on the effort to communicate these issues to the various governments and the provinces where we operate that, we're the ones paying income taxes, sales taxes, providing jobs. It's the opposite with the illicit market.

Speaker 2

We are selling clean cannabis versus the other way around. 96% of illicit market substances are infested with pesticides that are not allowed. And all of this is a bit annoying, but it's part of the game. I did not expect illicit market resurgence at this point. And this is why we have to hold, not only hold the line on the listed market, I'll give you an example.

Speaker 2

We've had to drastically drop our margins in the city of Regina, by 5%, 7% in all of our stores because we have 3 or 4 illicit market dispensaries pop up all around us. And I'll tell you this, we're suffering a little bit of pain that 10% drop that I told you year over year, as the numbers came out of Statistics Canada and based on June numbers, the overall sales are down 12%. Our same store sales are still up 1% and we're beating revenue records. We're very happy with it, but I can tell you that the 12% sales that are down, one of the big factors contributing to legal sales going down at this stage of the game is illicit market resurgence. And the second part is, the cost of cannabis has come down quite a bit, the wholesale price of cannabis.

Speaker 2

So even if you apply the same margin, eventually the cost of goods coming down, you are going to see revenue per unit still decline. So those two factors are putting some pressures on revenue, but clearly I was so happy to see that we're still 1% ahead. This is a long term gain for us when you're an operator with 12% of the market and you're clearly heading lightning fast to your 15% goal, I don't think we have too many worries ahead of us. And the one opposite reaction of what's going to happen, because of this illicit market resurgence, it's going to instill even more pain on the independents and the weaker operators. Now I don't wish that for the independents.

Speaker 2

I don't wish that for the smaller regional chains. We're all in this together as a legal cannabis industry. But if we're feeling the pain, they got to really be feeling the pain. So that opportunity will level up because more will get out of the way. But we're absolutely hounding the government to take action in that sense this is unacceptable.

Speaker 2

5 years later, we're seeing illicit market resurgence.

Speaker 6

Hopefully, they put some of that $31,000,000 to work and listen to you and support the license industry actually paying taxes. Great. Thanks a lot.

Operator

Thank you. The next question goes to Andrew Semple of Ventum Financial. Andrew, please go ahead.

Speaker 7

Hi, there. Good morning, Raj and team and congrats on the fiscal Q3 results.

Speaker 2

Just as

Speaker 6

we get kind of near the

Speaker 7

end of the fiscal year here in 2024 and beginning to look in ahead and sharpen our estimates for 2025, Raj, just wondering if you have maybe any early thoughts on what High Tide would target for a store count and new stores opening next year and how that might mix might be between organic and acquisitions in terms of store growth?

Speaker 2

Good morning, Andrew. Thank you so much for your question. So, let me take this first question first, like what would 2025 store count look like? So Andrew, like I said, we're already at 21 stores opened this year, in August and we balanced the art of generating free cash flow really well while growing so aggressively and rapidly and we are still free cash flow positive. So think of 2025 mirroring 2024 plus some additional M and A.

Speaker 2

We've been very, very disciplined on M and A. As you know, I bought one location in cash and we paid just 1.5 times EBITDA. Now those are the type of deals I like to do. When we're trading at 5 times EBITDA, you can't justify paying 4 or 5 times EBITDA to a different operator and some operators still have high hopes. And some of our learning very fast that you join the big HiTek family, consolidate, which is the right thing to do at this point or face the risk of completely fading away.

Speaker 2

So 2025 will probably do the same thing Andrew to answer your question, 20 to 30 new stores added. Let's see where we end this year. I would like to end this year as close to 30 stores. We like to under promise and over deliver and then we'll put a new milestone out in December when we provide a corporate update. And on top of that, we hope to do additional M and A in 2025, which has been very, very lean in 2024 because we've been waiting for the right opportunity.

Speaker 2

But we're winning on net income, we're winning on free cash flow. We're absolutely crushing it on market share, which is my favorite bullet this quarter was 12% market share. How happy can you be if you already have 12% of the market in Canada? So we don't need to do anything out of the ordinary to derail our momentum. So think of 20 to 30 new stores in 2025 plus M and A.

Speaker 7

Great. That's helpful. And understand those are early comments and you expect to firm them up later this year. My second question just on store counts. Even as you've opened more stores, I noticed some of the lease payments this quarter were actually down quarter over quarter, even as you added 11 stores.

Speaker 7

So maybe just a couple of comments there. Are you seeing more attractive lease rates, 1st of all, as you're kind of gravitating towards smaller format locations? Secondly, as we're kind of 5 years since the past of adult use sales, are you able to get some of your lease renewals done at more favorable rates than perhaps you were initially signed

Speaker 2

Yes, absolutely Andrew. All of the above is true. Everything you said is exactly what is happening. So as 5 years are coming up, the cannabis rents like I was talking about the Tokyo Smokes and the Pine Flowers of the world that they had signed on to, that is no longer a thing in cannabis. Now it may be a thing for some landlords, but the industry is smartened up and we're not shelling out these kinds of rents.

Speaker 2

We never were, HiTide never was, but we are in a much better position now paying maybe a 5% premium on rent on cannabis, mostly not, getting our fixturing periods, getting our free rent periods, negotiating lower rents. We've learned the art of managing our stores in a 1500 square foot footprint. All of these things are better lease negotiations. All of these things are leading to lower lease payments. And again, all of these things, when you're building a business, you have to keep your eyes on absolutely everything.

Speaker 2

The real estate criteria, everything has to check. We have an anchored real estate strategy that just keeps on giving us. And we get the red carpet welcome from the larger landlords in this country, which I've mentioned several quarters in a row now. So while we have all of these opportunities, we just need to remain disciplined on how we are doing these negotiations and the square footage is that we are targeting and this is exactly what I was telling Mike, Yes, there's 29 stores to look at from Tokyo Smoke or they were 92 to look at from Fire and Flower. But when we look under the hood, things were not so interesting from my perspective in terms of square footages and the rents that were signed on.

Speaker 2

We still are getting some of these locations, but we're only getting the best where we can renegotiate prices with the landlords. And like I said, because these stores are built, the landlords like to get full value. They're getting a built store and they're passing the store back. So sometimes it's the art of the deal and what you have to juggle to save your $300,000 or $260,000 for construction cost and maybe pay a 10% premium on rent or a 15% premium on rent or slight square footage increase because you're still going to be in the green and be ahead, if you had to build your stores and ramp up the store organically, which has also gone up now, in many cases, over 12 months, it's taking for stores to ramp up. So some of these built out stores and having existing customer bases are very, very good for us and we're doing that, but we're remaining very disciplined when we're looking at all of these leases.

Speaker 7

That's very helpful. Appreciate you taking my questions, and I'll get back into queue. Thank you.

Operator

Thank you. The next question goes to Doug Cooper of Beacon Securities. Doug, please go ahead.

Speaker 8

Hi, good morning guys. Terrific work on the quarter. Just a I just want to dive down to a little bit of the net income. I think you nailed it, Raj. I think it's an important milestone for the company.

Speaker 8

Now part of the driving of the positive net income, it looks to me like amortization was down almost, I guess, dollars 2,000,000 sequentially and interest expense was down $1,500,000 sequentially. Can you just sort of talk about what's driving those 2 down so much sequentially?

Speaker 2

Absolutely, Doug. Good morning and thank you for your question. So look, we were not the net beneficiaries of our net income when we had high depreciations and amortization working against us. But this is all part of doing business. If we wouldn't have acquired Meta in 2020 and doubled our footprint and got ahead of Fire and Flower and become the number 1 in the country, none of this was possible.

Speaker 2

But then we had 5 years of dealing with this depreciation and amortization of the assets that we had purchased and now we are leveling out, 5 years are in and now we are the net beneficiaries of this situation. Same thing with interest income as well when we sorry, interest payments. When we started Connect First payments, I believe the loan was $19,000,000 That's down to like $13,500,000 We've already paid off the debenture, convertible debentures that we've had. Now we've got some more debt to replace the OCN debt that's coming up in December and that's just going to wash each other out at a slightly higher rate of interest in this market. People can't even get this kind of funding and we were able to achieve a $50,000,000 debt facility with a $10,000,000 accordion.

Speaker 2

So we'll take it. But like I said, going back to your original question, Doug, it's just the nature of doing business. Sometimes it works against you like we bought all these assets and they're depreciating, totally normal course of doing business, but it affects net income. Despite breaking even on net income the quarter before and despite producing net income, I would still remind investors focus on our market share, focus on our revenue growth, focus on our EBITDA, focus on our G and A, focus on our free cash flow. When you're looking at these metrics, we are clearly accelerating.

Speaker 2

Net income can be down 1 quarter, can be up 1 quarter when you are in as a growth stage company. But how do you replace 12% market share? I bet you any one of my competitors would be would bend over backwards to be at this position. We're already here. So our focus is not net income.

Speaker 2

It's very, very nice to see that the way we run our show, which is a very, very tight ship, we're able to generate net income even in this environment.

Speaker 8

And just the last one for me, data sales. So it went from $7,300,000 in Q1, jumped up to almost $9,000,000 in Q2 and down $400,000 or $300,000 odd versus Q2 $8,600,000 Any can you just talk a little bit about that? What do you expect for that this quarter or next year?

Speaker 2

Yes, sure, Doug. So our data sales are purely a result of our store growth, right? Because if you don't have the store, we don't have any data to sell from that store. And I've been very conservative giving out these projections because a lot of our customers that are producers have been unfortunately going out of business and we've had to write off some of these balances. But that's fine because overall our ecosystem is so strong, we are still seeing new customers come and join us and the only customers that ever leave us are the ones unfortunately that are going bankrupt.

Speaker 2

Currently, Doug, we are sitting at the highest number of customers we've ever had because our ecosystem is so powerful. The data we generate is so meaningful and so revolutionary. The producers need to meet this data to guide their manufacturing priorities and be in our stores and they're happily joining our data program. And I just want to remind investors, there's a few items in other revenue line you can refer back to the press release, which are included in it such as rental income, sublease revenue. We've acquired a bunch of dark leases from Meta.

Speaker 2

We've got rid of that. We've subleased a lot of stores. We're dividing stores and subleasing them. And we have advertising revenue now coming from the Altogether Magazine that's going really, really well in the accessories and the CBD industry. So accessories and the CBD industry.

Speaker 2

So and I think I heard you say that we went down $9,000,000 to $9,000,000 this quarter. I think we are up $500,000 to $200,000

Speaker 8

I got $8,900,000 last quarter, dollars 8,600,000 this quarter.

Speaker 2

I think that may be a mistake on how you're looking at it. It's 9.7000000. Mayank, can you please look at that number and tell me? I believe it's 9.1000000, 9.2 in data sales versus the 9,000,000 that we did. It's 9,046, this quarter.

Speaker 2

Mayank is just pulling that up Doug, but you should be able to get that. But this was a 1% sequential growth for us.

Speaker 8

Okay. Let me I'll double check that.

Speaker 2

Okay. Yes. No problem.

Speaker 8

That's great.

Speaker 2

So I have that number, Doug. If you want that number, I have that number. It's 8,977 versus 9,046, giving us a 1% sequential increase.

Speaker 8

Okay, perfect. Thanks,

Operator

man. Thank you. The next question goes to Frederico Gomez of ATB Capital Markets. Frederico, please go ahead.

Speaker 9

Hi. This is Brenna on for Frederico. Thanks for taking our questions and congrats on the quarter. On the retail front, we just have to get some commentary on consumer trends across your retail footprint, specifically the extent of product trade downs that you're seeing now versus, say, 3 to 6 months ago and how the traction of the Cabana Club has played into this?

Speaker 2

Hi, Brenna. Good morning. Thank you for your question. So consumer trends on products, so dry flower remains to be the absolute dominant category still. In that very dominant category you have pre rolls that I believe are 29% of all dry flower sales and in that pre roll category you have infused pre rolls that are still taking off and continue to take off.

Speaker 2

A new category that has emerged and is doing extremely well is also the all in one vape disposable vape category. Vape is also rising quite a bit and in our stores, we sell the best rig for the best price. But we definitely have a lot of value focused consumers coming to our stores and focusing on ounce bags, which is 28 grams, also the 14 gram formats, which are very, very popular. Edibles still remain at that maybe about it's come up a little bit, which is nice, but not up to our standards and liking. Edibles are sitting at around 5.5% in our stores.

Speaker 2

Long term when this course corrects to the 10 milligrams THC issue that we've been dealing with, the limits that Health Canada is enforced per package. When that goes away, we think it can go up to 10% to 12% of our sales, which may be additive in nature because a lot of the consumers that are taking edibles are not necessarily looking for smokeable formats. So this may be additive to sales. At the moment, edibles are only 5.5%, 6% of our total sales. Dry flower, like I said, is the most dominant category at around 60%.

Speaker 2

Pre rolls and then infused pre rolls in the pre roll category would be the biggest.

Speaker 9

Okay. Perfect. And then secondly, how is the company viewing international opportunities right now? Could we get an update on Germany? And then more locally on opportunities, is there any update on BC potentially raising the store cap?

Speaker 2

BC, so let me talk about international opportunities first. We are absolutely monitoring the progress in Germany. Like you know or you may know legislation passed in April that gave the Agriculture and Food Agency authority to set up regulatory regime for commercial cannabis pilot projects. And the proposed federal budget that just came out in Germany includes funding to support this. So once this passes, we anticipate seeing draft regulations this fall and winter.

Speaker 2

We are monitoring the situation in Germany very, very closely. And we intend to open up stores as early as mid-twenty 25 or maybe even sooner than that. We intend to be one of the first companies, international companies to apply for licensing in Germany and we are very, very tuned in, in what's happening in that market. United States long term remains the biggest opportunity for HiTide, but we have so much opportunity here alone. Brenna, as you know, we're sitting at 183 stores.

Speaker 2

We can go to 300 stores in Canada alone. We have a very, very good plan to get there. We feel that we can achieve this in the next couple of years. So that's a lot of growth. We're sitting at $525,000,000 in annualized revenue as per this reported quarter.

Speaker 2

And we believe we can go to roughly $800,000,000 $900,000,000 in Canada alone. Then there will be the German opportunity, which is looking very, very good at this point, but we can't say anything until it's real, then the American opportunity, we know eventually we will be federally legal in America or the exchanges like NASDAQ will warm up to the idea. Schedule 3 is both Harris and Trump are in favor of the Safe Banking Act. They're both in favor of rescheduling. So cannabis has some good momentum in the United States as well.

Speaker 2

Now that's on an international level. Coming back to your point on BC, in BC, currently we are only allowed to have 8 stores per entity. This can change and I believe this will change and this can go up to 16 stores in the short term and then even go up higher from that. As you know, or you may know, BC has some of the highest illicit rates in the country. In opposite of Alberta, where we have some of the lowest illicit rates in the country, where there's no cap to cannabis, legal cannabis stores.

Speaker 2

So we do believe that BC will eventually go in that direction, maybe not all out cap removed, but I think 16 locations are likely in BC in the next 6 to 12 months.

Speaker 9

Perfect. Thank you for that commentary. I'll jump back in the queue.

Operator

Thank you. Thank you. It appears we have no further questions. I'd like to turn the session back over to High Tide's Chief Executive Officer, Raj Grover for final comments.

Speaker 2

Thank you, operator, and thank you to everyone for your interest and continued support for Hytai. We're very proud of what we 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. You may now disconnect your lines.

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Earnings Conference Call
High Tide Q3 2024
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