High Tide (HITI) - 2024 Q1 - Earnings Call Transcript

Financial Data and Key Metrics - Revenue for Q1 2024 was $128.1 million, up 8% year-over-year and 1% sequentially, with brick-and-mortar revenue leading the growth at 16% year-over-year [25][41] - Adjusted EBITDA reached a record$ 10.4 million, up 25% sequentially and 90% year-over-year, with a margin of 8.1%, up from 4.7% in Q1 2023 [17][20] - Free cash flow was $3.6 million in Q1, marking a significant improvement from negative$ 847,000 a year ago, with $13.3 million generated over the last three quarters [15][21][26] - Income from operations was positive$ 2.8 million, a significant improvement from a loss of $3.9 million in Q1 2023, and the company broke even on net income [21][24] Business Line Performance - The brick-and-mortar segment grew 16% year-over-year, contributing over 90% of total revenue, with same-store sales up 7% year-over-year [25][40][42] - E-commerce revenue declined, weighing on consolidated revenue growth, but the segment maintained positive EBITDA similar to a year ago [17] - ELITE membership grew to over 32,000 paid members, with ELITE offerings now representing 12% of in-store inventory, up from less than 2% a year ago [16] Market Performance - In Ontario, the largest market, the average Canna Cabana store achieved a$ 3.5 million annual revenue run rate, 3.1x higher than the provincial peer average of $1.2 million [18] - Total sales in the five provinces where the company operates were down 6% sequentially, but the company outperformed the market with consistent same-store sales [18] Strategy and Industry Competition - The company focuses on generating positive free cash flow and organic growth, with plans to reaccelerate store expansion, particularly in Ontario, targeting 20-30 new stores this year [15][38][66] - The acquisition of the Queen of Bud brand for$ 1 million is expected to enhance the company's product portfolio and margins, with plans to expand the brand internationally [22][79][80] - The company aims to increase ELITE membership offerings to 20-30% of in-store inventory, leveraging its discount club model to drive customer loyalty and higher margins [16][89] Management Commentary on Operating Environment and Future Outlook - Management highlighted the inflationary environment and slower holiday sales as factors impacting the overall market, but the company's discount club model continues to outperform [55] - The company is optimistic about M&A opportunities in 2024, though the pace has been slower due to a lack of quality acquisition targets [38][105] - Management expects to reach double-digit adjusted EBITDA margins in the long term, driven by cost controls, scale, and the discount club model [17][20] Other Important Information - General and administration expenses fell to $5.6 million, the lowest in nine quarters, representing 4.4% of revenue, down from 6.3% in Q1 2023 [19][51] - The company ended the quarter with$ 28.7 million in cash and total debt of $28.4 million, with a debt-to-EBITDA ratio of 0.7x [52] - The company was named to the TSX Venture 50 list for the second time in three years, reflecting its strong performance in the cannabis retail sector [49] Q&A Session Summary Question: Impact of potential excise tax reduction on the business [3] - The company is monitoring potential excise tax changes, which could benefit the industry by improving the financial health of licensed producers (LPs) [4][5] Question: Gross margin improvement drivers [54] - Gross margin improvement was driven by the Cabanalytics platform and ad revenue, with the company maintaining a neighborhood-specific gross margin strategy [54] Question: Market softness and recovery trends [55] - The company noted a slowdown in retail sales due to inflation but remains confident in its discount club model, which outperformed the market [55] Question: Excise tax enforcement and its impact on Cabanalytics [57] - The company is monitoring stricter excise tax enforcement but expects its data analytics platform to offset potential near-term pressures [57][58] Question: Brand strategy and Queen of Bud acquisition [59][79] - The acquisition of Queen of Bud is part of the company's strategy to expand its brand portfolio, with plans to leverage the brand internationally and improve margins [79][80] Question: Ontario store expansion and market saturation [66] - The company plans to add 20-30 stores in Ontario this year, focusing on high-quality locations despite market saturation [66][86] Question: ELITE membership and inventory management [88][90] - ELITE membership growth is accelerating, with inventory allocation increasing to 12%, and the company maintains tight inventory control with cannabis inventory days on hand at 16-17 days [88][90][91] Question: Free cash flow and M&A outlook [100][104] - Free cash flow is expected to be lumpy due to working capital requirements, but the company remains focused on maintaining positive free cash flow while pursuing selective M&A opportunities [100][104][105]