High Tide Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 18, 2024

Key Takeaways

  • Record Q1 results with revenue of $128.1 M (+8% y/y), record adjusted EBITDA of $10.4 M (+90% y/y), breakeven net income and $3.6 M free cash flow generated.
  • Margin expansion: Adjusted EBITDA margin rose to 8.1% from 4.7% a year ago, aided by strict cost controls and a 4.4% G&A-to-revenue ratio.
  • Membership ecosystem strengthens with Cabana Club surpassing 1.32 M members and Elite memberships exceeding 32,000, supported by in-store Elite SKU allocation rising from <2% to 12%.
  • Acquired Queen O’Bud brand for $1 M to launch in-house cannabis offerings, leveraging vertical integration and targeting 5–7% higher gross margins on proprietary SKUs.
  • Growth outlook includes reaccelerating organic store openings with 20–30 new Ontario locations planned in 2024 and resuming selective M&A to expand footprint in Canada and enter the German market.
AI Generated. May Contain Errors.
Earnings Conference Call
High Tide Q1 2024
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good morning. My name is Drew, and I'll be your conference operator today. At this time, I would like to welcome everyone to High Tide Inc.

Operator

Q1 2024 Audited Financial and Operational Results Conference Call. I will now turn the call over to your host, Crystal Defoe.

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, Chief Financial Officer. On March 15, 2024, the company released unaudited highlights from its financial and operational results for the fiscal quarter ended January 31, 2024. Before we begin, please let me remind you that during the course of this conference call, High Tide's management may make statements including with respect to management's expectations or estimates of future performance. All such statements, other than statements of historical facts, constitute forward looking information or forward looking statements within the meaning of the applicable securities laws and are based on assumptions, expectations, estimates and projections as of the date hereof.

Speaker 1

Specific forward looking statements include, without limitation, all disclosures regarding future results of operations, economic conditions and anticipated courses of action. For more information on the company's risks and uncertainties related to forward looking statements, please refer to the company's press release dated January 29, 2024, our latest annual information form and our latest management discussion and analysis each filed with securities regulatory authority atsedarplus. Caoronedgaratwww.sec.gov or on the company's website at www.hightideinc.com and which are hereby incorporated by reference herein. Although these forward looking statements reflect management's current beliefs and reasonable assumptions based on the currently available information to management as of the date hereof. We cannot be certain that the actual results will be consistent with the forward looking statements in the future.

Speaker 1

There can be no assurance that actual outcomes will not differ materially from these results. Accordingly, we caution you not to place undue reliance on such forward looking results. For any reconciliation of non GAAP measures measured and discussed, please consult our latest management discussion and analysis filed on SEDAR Plus and EDGAR. Now it is my true pleasure to introduce Mr. Raj Grover, President and Chief Executive Officer of HiTive.

Speaker 1

Thank you, Mr. Grover. You may begin.

Speaker 2

Thank you, Crystal, and good morning, everyone. Welcome to High Tide Inc. Financial results conference call for the 1st fiscal quarter that ended January 31, 2024. I will begin with some big picture comments regarding the quarter and our strategy before Sergio and I dig deeper into the numbers. As you can see from the press release and financials filed on Friday, Q1 was another solid quarter for Hytide, marked by record revenue, record adjusted EBITDA and meaningful free cash flow generation.

Speaker 2

Income from operations was also a record and we broke even on net income, which is another huge milestone for our company and one that I'm especially proud of. We have never posted a quarter where revenue declined sequentially and adjusted EBITDA has now been positive for 16 consecutive quarters, including 6 straight quarters where it reached new highs. As investors are probably aware, our focus for the past year has been on generating positive free cash flow. This is an anomaly in the Canadian cannabis sector and our results are a source of pride. We generated $3,600,000 of free cash flow in Q1 and $13,300,000 during the last three quarters.

Speaker 2

In our view, this cash flow profile represents a tremendous feat considering we have been growing the business during this period. And as we have done effectively no M and A over the past year, this growth has been all organic. In calendar 2023, we purposefully slowed growth to reach our objective of becoming free cash flow positive as we only opened 13 stores during the year versus 30 to 40 in prior years. We expect growth to reaccelerate during this calendar year. We are optimistic that M and A will resume this year.

Speaker 2

However, it has been slower than we would like so far, largely due to a lack of companies for sale that are quality candidates. As we are anticipating to add more stores to a network over the course of the year, we are excited about the revenue growth potential it will help create. According to a recent report by ATB Financial, High Tide already has the 2nd largest non franchise cannabis retail footprint across North America at 165 locations. Our performance over the past few years has really been a standout within Canadian cannabis retail. The discount club model we launched a few years ago has grown and evolved and our innovation has helped create a personality of our own.

Speaker 2

This revolutionary model tailored to our company's unique retail ecosystem has allowed us to exceed 10% market share in Q1 in the 5 provinces in which we operate, making us the largest retail player in the country. Our market share in Alberta was over 19% during Q1, Particularly given the increase in the store cap in Ontario from 75 to 150, we now see a clear path to 15% market share in the 5 provinces where we have stores in the long term. We are very pleased to see Cabana Club enrollment continuing to expand and it has now grown to over 1,320,000 loyal members. Elite onboarding has reached its fastest pace since initial launch with approximately 4,000 new members added since we reported Q4 as we reached a total of over 32,000 paid members. We have increased the Elite offerings in our stores just as we said we would, as they now reflect 12% of in store inventory geared towards our paid members versus less than 2% a year ago.

Speaker 2

Ongoing and in the long term, our goal is to have 20% to 30% of our SKU offerings targeting our Elite members. We expect Elite to continue to grow as we onboard more Elite products, which gives our base of Cabana Club members more reasons to upgrade to Elite. With the start of a new fiscal year, we have provided enhanced segmented disclosure so investors can better appreciate the main drivers of our business and how they performed. We now explicitly break out our bricks and mortar revenue and e commerce revenue. While our consolidated revenue increased 8% year over year in Q1, investors can now see that our bricks and mortar revenue was up 16% during this period.

Speaker 2

Our bricks and mortar stores are the core focus of the company as they represent over 90% of our total revenue and are doing even better than what our headline consolidated revenue suggests. Our e commerce businesses continues to lag as revenue here has declined, it weighs on our consolidated revenue growth. Being proactive, we have been aggressively taking costs out of the system in this segment and we have maintained positive EBITDA within our e commerce portfolio similar to a year ago. This is one reason why while consolidated revenue only grew 1% sequentially, our consolidated adjusted EBITDA rose 25%. I'm particularly proud of our consolidated adjusted EBITDA margin.

Speaker 2

It has been increasing at a significant pace growing from 4.7% in Q1 last year to 6.6% in Q4 2023 and now reaching 8.1% this quarter. This gives us comfort that we will reach double digit adjusted EBITDA margin in the long term, which has been our goal. I will now go over the highlights from the financials and Sergio will do a deeper dive. Revenue for Q1 was $128,100,000 representing an annual pace exceeding $510,000,000 and up 8% year over year and 1% sequentially. Our Bricks and Motor segment led the way up 16% year over year.

Speaker 2

In the month of December, our average store was on an annual revenue run rate of $2,700,000 which compares to average peer revenue of $1,200,000 in the provinces in which we operate. In Ontario, the largest market and the focus of our future expansion, our outperformance was even more pronounced with the average Canacabana being on $3,500,000 annual revenue run rate, which was 3.1 times that of our provincial peers at $1,200,000 Our same store sales were up 7% year over year in Q1. While our same store sales remained consistent sequentially, it was largely a symptom of a slower overall market in which we continue to outperform as our total sales in the 5 provinces in which we operate were down 6% sequentially as per Statistics Canada and Hi Fire Data. Consolidated gross margins were 28% in Q1, 2024, which compared to 27% throughout all of 2023 and 26% in Q4, 2023. Here again, our Bricks and Motor segment posted gains with a gross margin of 27% in Q1 2024, up from 23% in Q1 2023.

Speaker 2

We once again held the line on expenses and reaped the benefits of operating leverage this quarter. While revenue increased by $10,000,000 versus Q1 2023, our overhead expenses actually decreased by $2,900,000 In particular, our general and administration expenses fell by $1,900,000 and represented just 4.4% of revenue this quarter, down meaningfully from 6.3% in Q1 2023 and 5.3% in Q4 2023. I'm very happy to see this percentage continue to fall and believe it's exceptional within our industry. Adjusted EBITDA was a record $10,400,000 for the quarter, up 25% sequentially despite only 1% increase in revenue. We also saw meaningful improvements year over year as Q1 20 24's level was 90% higher than Q1 2023, which itself was up 86% versus Q1 2022.

Speaker 2

Again, we are very pleased with our adjusted EBITDA margin of 8.1% as it underscores the long term benefits of our innovative discount club model, the leverage from our scale and our strict cost controls. Finally, as much as we usually talk about adjusted EBITDA, I would like to highlight that we also generated very meaningful EBITDA prior to adjustments for items such as share based compensation and loss on reevaluation of debentures of $8,400,000 which was a 78% increase over last year's Q1. Similarly, we set a record high in our income from operations, which was positive $2,800,000 this quarter, marking a huge improvement from a loss of $3,900,000 in Q1 2023. In fact, we also broke even on net income. Our free cash flow was $3,600,000 during the quarter, which marked a large reversal from negative $847,000 a year ago.

Speaker 2

As a reminder, our goal is to reaccelerate growth going forward while remaining free cash flow positive. However, the amount of free cash flow may fluctuate in any given quarter given the working capital requirements and the impact of getting new stores to maturity. For example, I highlight that in this quarter, accounts payable and accrued liabilities balance decreased by $5,400,000 which weighed meaningfully on our Q1 free cash flow. Nevertheless, over the past 3 quarters, we have generated over $13,000,000 in free cash flow, which when annualized translates to a 10% free cash flow yield on our enterprise value as at Friday's close. We have taken steps to continue to fortify our supply chain.

Speaker 2

Last month, our value and distribution subsidiary signed an agreement with the Manitoba Liquor and Lotteries Corporation to be a distributor of cannabis products to cannabis retailers in Manitoba. This is one more step in the direction of being as vertical as we can to make the most of our cannabis ecosystem. As well on Friday, we announced the acquisition of the Queen O'Bud brand and its well known selectively curated cannabis product portfolio. Queen O'Bud has an extensive customer base, particularly among women with unique offerings such as its roast petal blunts and crystal inspired SKUs. This is a solid brand addition to our international roster.

Speaker 2

With this acquisition, we can sell cannabis in Canada under the Queen O'Bud brand via white label agreements as opposed to having to make large CapEx investments and deal with the overhead and administration expenses with growing it. Also, Queen O'Bud has a wide range of ancillary products that we can sell internationally on our existing platforms. I'm very excited with the potential we have with this brand and in usual high type fashion, we made this acquisition for a very reasonable price of just $1,000,000 While it may not be obvious by looking at market caps, we continue to have the highest cannabis revenue of any Canadian company and our Q1 results once again demonstrated the strength of our brand and how we outperformed our peers. Our unique discount club concept has driven a total increase in same store sales of 103% in January 2024 compared to October 2021, whereas total retail sales across Canada, excluding Quebec, where there is no private sector cannabis retail were up only 21%. That's almost a 5 times outperformance.

Speaker 2

Incorporating the increase in our store counts during the period, the average operator experienced a 14% decline while we posted 103% gain. We see a stark disconnect between our fundamentals as shown by a string of record setting quarters and our current share valuation, which now reflects an EB to last quarter annualized EBITDA multiple of just 4.2x based on Friday's close. This is why during our fiscal Q1, many of the insiders led by me acquired more HiTide shares in the open market. We believe in what we are building here at HiTide, a global cannabis retail powerhouse. We have an immediate opportunity we plan to seize right here in Canada focused on Ontario where we plan to add over 90 more stores.

Speaker 2

Concurrently, we continue to monitor progress in Germany, which we believe will represent the next wave of growth for High Tide. Phase 1 of Germany's legalization plan has passed the German parliament. We look forward to Phase 2, which would allow for profit retail cannabis stores possibly by mid-twenty 25. We were honored to be named on the prestigious TSX Venture 50 list for the 2nd time in 3 years last month. Exciting things continue to happen at High Tide.

Speaker 2

I would like to thank our team for their dedication to getting us to where we have reached today and their diligent work to strive towards newer highs tomorrow. I will now turn it over to Sergio Patino, our Chief Financial Officer, for his comments and a deeper dive into the numbers.

Speaker 3

Thank you, Raj, and hello, everyone. I'm very proud to showcase how Hytide started off fiscal 2024 on the right foot, once again generating record revenue, record adjusted EBITDA, record income from operations, meaningful free cash flow and breakeven net income, which is a longer term goal we have had for some time. Let's take a deeper dive into the numbers. As Raj mentioned, revenue for the quarter was $128,100,000 up 8% year over year and 1% sequentially. Growth was led by our Canadian brick and mortar business, which was up 16% year over year.

Speaker 3

In particular, accessory sales in our installed doubled year over year in dollar terms and represented 4.1% of our 4 wall sales. This is the strongest proof we can show that our discount truck model, which often leads with very large price drops on premium accessories for members, is working and gaining steam. On a consolidated basis, our gross margins of 28% were just ahead of the 27% we generated in Q1 last year. Our brick and mortar segment posted gains led by pricing increases in our 4 walls, which offset the declines in e commerce where things continue to be weaker. Once again, our cost control was very apparent this quarter.

Speaker 3

Our consolidated expenses were $33,200,000 representing the lowest level in 6 quarters despite the fact that revenue was once again at a record level. In particular, I highlight that our G and A expenses were just $5,600,000 in Q1, which was the lowest level in 9 quarters. This really shows how successful we have been in taking costs out of the system, particularly on the e commerce side, while being able to meaningfully grow revenue. I'm very proud of the team for this successful execution. This cost control combined with our record revenue and highest consolidated gross margins percentage in 9 quarters, all combined to produce a record adjusted EBITDA margin of 8.1% and a record level of $10,400,000 As Raj mentioned, we had a very large decline in our accounts payable and accrued liability this quarter of $5,400,000 which weighted on cash flows.

Speaker 3

For context, the accounts payable and accrued liabilities represented a use of cash of $5,300,000 all year last year. Despite this large amount, we were still able to generate $3,600,000 in free cash flow in Q1, which we feel is a very strong level. Our balance sheet continues to strengthen on the back of this free cash flow generation. We ended the quarter with $28,700,000 of cash in the bank, down $1,400,000 from Q4 level, But this was after paying down $3,600,000 of principal from our debt, including $2,800,000 from our convertible debentures, which now has $1,000,000 balance. Our total debt sits at 28 $400,000 today, which is only 0.7 times our last reported adjusted EBITDA run rate.

Speaker 3

Given our under leverage, we believe we can add more debt to support our growth, particularly to ramp up our store Ontario store footprint to the new cap of 100 and 60 stores. And we are in discussions with both Connect First and other potential subordinated lenders to obtain more debt financing in the near term. We continue to have our ATM facility in place, but given our free cash flow profile, our low leverage level and a share price we feel is undervalued, we have induced it in months. In closing, Q1 was another solid quarter for Hytide. Our operating fundamentals continue to improve with each passing quarter and our competitive position continues to strengthen, while our leverage keeps improving.

Speaker 3

Since again to our customers, our own dedicated team for making this all happen. With that, I will now turn the call over to the operator to open the line for the questions and answer session.

Operator

Thank you. We will now start the Q and A portion of today's call. Our first

Speaker 4

question and congrats on the results here. Maybe for my first one, I just wanted to dig into the gross margin a little bit. So it looked like a pretty nice step up, even on a sequential basis for the 4 wall gross margin there. I'm just wondering if you could dig a little more into what was driving that, particularly given the comments last quarter that you were maybe taking a bit of a breather on going after additional margin and pricing. So how are you able to drive such strong performance?

Speaker 2

Good morning, Tay. Thank you very much for your questions. So, yes, look, I was very impressed with our gross margin this quarter. And we have been hovering around that between 26% 28% and it can get lumpy from 1 quarter to the other because just the way we run our discount club model tie, we use neighborhood specific gross margin strategy. But the bigger impact that we had on this quarter on gross margin was related to Cab Analytics.

Speaker 2

As you can see, Cab Analytics went up from I believe $6,700,000 last quarter to $7,300,000 because we've also added ad revenue to it. So now that is also starting to boost our gross margin profile. But we are actually holding the line on our 4 wall gross margin, especially because we have so many other efficiencies that we can generate and we can help support our 4 wall brick and margin profile as our competitors are feeling financial distress and are practically on the verge of going out of business or that is happening all around us, we don't want to let loose on that profile. And I can tell you that it did not happen from a 4 wall increase. It happened more in the sense of

Speaker 5

a cab

Speaker 2

analytics data insights platform that got a bit of a boost. Quarter to quarter this can shift. We added more stores, so that helped. But also add revenue, we've signed over 6 vendors on the consumption accessories and CBD front and now we are starting to reap the benefits of that as well.

Speaker 4

Okay, great. That's really helpful color. And then for my follow-up, Raj, maybe just wondering if you could comment kind of bigger picture on the overall market softness that you seeing towards the end of 2023? What was behind that? And have you started to see any recovery in recent weeks months maybe beyond what the existing data

Speaker 2

says? Yes, absolutely. So look, after seeing consistent double digit gains in retail sales, we've definitely seen things slow down a little bit in our fiscal Q1. And this is in line because overall sales are down 6% nationally, while we came consistent on our same store sales level. So this is clear proof that our concept is absolutely working despite the softness.

Speaker 2

Look, we are only a product of our environment. We are limited to what overall cannabis sales look like, but I couldn't be more happier with the quarter where we just saw 1% revenue increase, but still saw 25% increase in adjusted EBITDA. And I believe this slowdown is in relations to just inflationary environment still prevailing and customers have to prioritize their spend. So the holiday season sales were not as robust as they usually are. So what we've done, Tay, is that we've been really focused on the things we can control such as our G and A, which was at a multi quarter low in dollars and very low as a percentage of revenue.

Speaker 2

And this is why I'm super proud of our performance in Q1, where we held the line on same store sales despite industry sales being down 6%.

Speaker 4

Thanks, Raj. I'll pass the line.

Operator

Our next question comes from Federico Gomes from ATB Capital Markets. Your line is now open. Please go ahead.

Speaker 6

Thank you. Good morning. Thanks for taking my questions. Congrats on the quarter. First question is Raj, you mentioned the Cabin Analytics program and how you did well there and impact to margins.

Speaker 6

I'm curious if you could comment on the excise tax that we have in Canada right now. And there have been reports about the more strict enforcement. I'm just curious how strict enforcement for LPs could impact your business on the data analytics side. And similarly, how would a possible reform in excise taxes could also impact your business? Thank you.

Speaker 2

Yes, absolutely, Fred. Good morning and thank you so much for your questions. So look, we don't know the extent of how much the CRA's new measures will affect the LPs and that's our CABAnalytics revenue portfolio. As a reminder, we've expanded our CABAnalytics program to also generate ad revenue, which we are already starting to see some good momentum on. As I mentioned, we signed 6 new clients between our CBD and accessories portfolio through our Altogether Magazine that is starting to yield results, which will help offset which should help offset potential near term pressure.

Speaker 2

But it's not a given how this thing is going to pan out. I'm hearing exactly the same that the CRA has upped the ante on collections of the excise taxes and the financial health of LPs is not great. That is the reality, right? So we keep seeing more and more CCAA filings among LPs. And the CR is getting more aggressive on taxes.

Speaker 2

So but the good news is, like I mentioned, because of the Altogether Magazine and the overall strength of our ecosystem and being the largest revenue producing company in Canada, our data is very valuable. So we're not seeing a material shift downwards yet. In fact, we saw a very healthy shift upwards. I don't think we maintained this space. I think we flat lined here a little bit between Q1 and Q4 levels.

Speaker 2

But all in all, I'm very pleased at where things stand and we're keeping a very close eye in terms of what happens with this CRA amping up their motion on excise taxes.

Speaker 6

Thank you. And then my second question is just on your, I guess, your brand strategy. So you recently bought Queen of Bud. So I'm curious about your strategy here in terms of white label products and the brands. Do you plan to acquire more brands?

Speaker 6

And do you see any opportunity or I guess, interest in licensing some of your brands in other markets, for example, in the U. S? And then just in terms of sales of your own brands in more stores, can you give us any color in terms of what's the mix right now? Is there a target mix and the margin differential there as well? Thank you.

Speaker 2

Yes. Absolutely, Brad. So look, very, very excited to announce the acquisition of Queen of Bud. It's a beautiful brand and we got it for just $1,000,000 Look, in the discount world, Fred, every percentage point matters. And when you can own a brand, which is highly popular in the country and customers cannot price shop or price compare with other retailers, I can easily have a margin arbitrage of about 5% to 7% than on an average branded SKU in the country.

Speaker 2

It's not always easy to do because there's so much branded biomass in Canada, but because peanut butter is so different, like it's Crystal's inspired theme, it's spiritually focused, it's geared towards the female cannabis connoisseur. We have a lot of brands that cater towards males. So we're balancing the equation a little bit. I think this is going to be a very, very healthy acquisition for us and a meaningful driver going forward. We are going to position queen of blood front and center in our 165 store portfolio.

Speaker 2

And the founder, Ashley Newman, she's a very well known personality in the cannabis industry and one of the most successful female founders in cannabis, she's joining our team as a global brand ambassador for Real Bud. So we're going to start here in our 165 stores and counting, but the opportunity for the brand will go across the borders. Will get into the U. S. Through our ancillary cannabis portfolio.

Speaker 2

We're going to develop a full line of consumption accessories for the Queen O'Bud. We're going to do the same thing for Europe as well. And there may be some cross selling opportunities in the CBD world as well. So extremely happy with that acquisition. On our other brands, as you know, we have a bunch of in house brands like vodka, Dovkila, Puff Puff Pads, Evolution, Atomic.

Speaker 2

We have a ton of in house brands where again customers cannot price compare and that's where we win. And for full disclosure, Fred, some of our larger competitors are either fully vertically integrated, which they have to bear the cost of those facilities. So it's not the best equation. But however, they have their own brands. So now what we are doing is without adding that overhead, we're creating more and more of our own brands.

Speaker 2

We've got that in CBD through Nuuly Fab and Blessed. We've got in consumption accessories, we have over 10 to 15 of our own brands. And now we're venturing into the cannabis world through this acquisition of Queen of Bud. And you may hear more about it, but we're going to be extremely selective. We want brands like the Queen of Bud.

Speaker 2

Otherwise, we are very satisfied where we are sitting. But not only this differentiated brand is going to help our overall selection in SKU and variety. It's also going to help us yield another 5% to 7% on gross margins because customers cannot price shop.

Speaker 6

Thank you very much for the color, Raj. I'll hop back in the queue. Thanks.

Operator

Our next question comes from Matt Bougainly from Canaccord. Your line is now open. Please go ahead.

Speaker 7

Yes. Good morning. Afternoon, Raj and team. Just wanted to stay on Queen of Buds. So obviously, it's relative to your size and scale and valuation, not a material investment in the overall purchase price.

Speaker 7

But brands have been something that I know have been frustrating for a lot of people following the sector for a while. If you go back to 5, 6, 7 years, most of the brands that were promoted don't exist now or have materially changed over. So obviously, you have the infrastructure and the retail exposure to lift that brand even further. But I'm just curious, is this something in terms of finding brands that might exist today, Is something that might be part of Haitai's strategy from an M and A standpoint? Or is this kind of a test case knowing that you know the founder well and she'll be included and you can use your platform to grow it?

Speaker 7

I guess the overall question is internally generated brands on your own versus looking in the M and A pipeline?

Speaker 2

Hi, Matt. Thanks for your question. So to your point, Matt, we already have the infrastructure. We have a massive footprint generating close to $500,000,000 on a brick and mortar level or over $400,000,000 CAD450,000,000 on a brick and mortar level. So as we already have our accessory brands, we already have our CBD brands, this is a natural step in the direction to start building our own cannabis brands.

Speaker 2

Like I was just talking to Fred about it, when we have our competitors that are vertically integrated and they're launching their own brand, the one advantage that they have is again, we can own those brands or sell those brands in our stores, which gives them a competitive advantage on margin. So as we build queen of bud in our stores and maybe even more forthcoming cannabis brands, we're going to have that margin arbitrage that does not exist for us today. So for that particular reason, you can call this a trial case, but I would say it's not because we already have experience with accessory brands. What we are doing with accessories, we are leading the country in accessories. Our competitors typically do about 1%, 1.5% of accessory sales.

Speaker 2

Ours are close to 4% to 5% of accessory sales and 90% of those sales are coming from our own brand. Now if we could do the same thing in cannabis, long term we want to have 25% to 40% of all of our sales come from our own brands and that's without adding the cost and the overhead of these growing facilities. We Ashley already had the contracts established. She knows all of the players in Canada. We also know all the players in Canada.

Speaker 2

So we're just going to leverage that with our size and scale. And because the brand is so differentiated, I think it's going to add very meaningful value for shareholders.

Speaker 7

Got it. And then just another question for me, something that you mentioned in your prepared remarks that

Speaker 8

I was just looking to expand on

Speaker 7

a bit. So the Ontario license cap, excuse me, that is doubling. I know you spoke a bit about this last quarter. But just given the dynamics, a bit of softness in the industry from a macro level and still a lot of stores in Ontario, do you need to see the market retrace a little bit with respect to the number of doors before you would accelerate that? I know your guide for this year is a lot less than the 90 you could open.

Speaker 7

But I'm just curious how much of those 90 stores might make sense at the end of the day to open, in the current environment in Ontario?

Speaker 2

Great question, Matt. So look, historically, we've always done some M and A to support our organic growth. I don't think that is going to change our mindset for the Ontario market. We're going to be doing exactly that. We can still add 90 more stores in Ontario.

Speaker 2

I already have close to 15 leases still despite opening about 7 in Q1, 7 stores. We still have 15 leases in our hand. These are high quality leases. We're patient in terms of the locations we get. They're anchored locations, as I always talk about.

Speaker 2

They're Costco, LCBO, big grocery anchors. And as we are securing these high quality locations, despite the fact that there's existing competition in that area or there may be because we have a location that trumps everybody else's and given our model, we start generating sales very, very quickly. So I am not worried about the fact that Ontario is hitting saturation levels. It is an absolute problem in multiple areas of urban neighborhoods in Toronto and other places in Ontario. But given our location selection criteria, as these locations come up, we are selectively taking these locations and we feel that we can easily add 20 to 30 stores this calendar year, again focused on the Ontario market.

Speaker 2

So you could see roughly 20 of them opened in Ontario. And then if we get our hands on a good M and A transaction, that can go up even higher from that. But under promise over deliver, the goal is to do 20 to 30 in Ontario, and I don't see any problem for us to get there.

Speaker 5

Great. Thanks, Raj.

Operator

Our next question comes from Andrew Semple from Equion Capital Markets. Your line is now open. Please go ahead.

Speaker 8

Hi there. Good morning. Thanks for taking my questions and congrats on the strong quarter. Also just want to call out the new segment disclosures are helpful, so appreciate that update. First question would be, looks like the business is making a more intensive push for Elite membership, taking up inventory allotted to Elite members from 2% to 12%.

Speaker 8

I guess I just want to understand how consumers are responding to this. Obviously, the Elite lineups have been accelerating, so that's great to see. But what's happening in stores? Is that inventory allotment driving increased number of Elite sign ups?

Speaker 2

Good morning, Andrew. Thank you for your question. So look, we've been so methodical with Elite. When we launched Elite, we didn't sweep the rug off our customer's feet and go straight to 12% of inventory. When we launched Elite, less than 2% of our in store inventory reflected Elite.

Speaker 2

But we message this very clearly to the market that long term we want 20% to 30% of all of our in store inventory reflect Elite. And I'm extremely happy to see that within a year and a half or close to a year and a half of launch, we've already ramped up our inventory to 12% and that is having a ripple effect. As you can see, last quarter, which was last quarter, so Q4, we grew at the fastest pace for Elite since inception. This quarter sequentially from January 29th when we last reported to today, we have upped that pace even more. So customers are absolutely enjoying the robust Elite selection that we have now both on cannabis accessories and cannabis itself.

Speaker 2

And it's a bit of a chicken and egg story. You can't overnight change all of your inventory and run the risk of customers not converting into Elite because it's an inflationary environment. So we've paced it out. We methodically planned it And 12% of inventory is yielding results. And I can tell you that we are going even higher.

Speaker 2

Our confidence is also going up as we're seeing the customers block into our ecosystem and sign up for Elite. We've actually raised the price on Elite membership, which is another great data point to mention here on the call. When we launched Elite, we were $30 a year, per Elite membership. We've raised that to $35 a year now. Long term, the plan is to take Elite over $50, $60 So we can already see the benefits of that and customers have not shied away from signing up because they're seeing more and more of in store inventory reflect Elite.

Speaker 2

So you're going to be a lot more you're going to see a lot more sign ups. You're going to see the sustained pace going forward, and we're going to continue updating the market in terms of where we sit in terms of in store inventory reflecting Elite.

Speaker 8

Thanks. That's helpful, Raj. And a good point too that sign ups are increasing even as the price rises. Next question would just be on inventory, which continued to trend downwards in this quarter. You've taken a lot of inventory out of the business over the past year, even as you add more stores.

Speaker 8

I'm just wondering what's been driving that? Have you just been getting more efficient at the store level? Has there been some inventory reductions in e commerce? And maybe if you could comment whether you can hold similar levels of, let's say, days of inventory or inventory turns or inventory per store, whatever your preferred metric is, as you continue to grow this year?

Speaker 2

Yes, absolutely, Andrew. One thing we've always been very, very proud of is how we manage days on hand, for our inventory, both on the e commerce side, on the CBD side, accessories and very, very importantly on the cannabis side. Cannabis is a perishable commodity. So you've got to be careful with that. And there's so much weed in the country that if you get excited and overload your stores very quickly that SKU gets dated and something else takes over and now you have to sell it below cost.

Speaker 2

So we've been very, very mindful and this is why you're seeing massive jumps in our adjusted EBITDA margin from 4.7 to 8.1. One big reason is that we've managed our inventory extremely well. We've done the same thing in the CBD world. We've consolidated our vendors. Even when we are feeling revenue pressures on the CBD side and accessory side, what we continue to do is leverage more drop ship for the accessories business and leverage our vendors to buy all of the CBD companies, the raw materials together and to get them manufactured through New Leaf.

Speaker 2

So this very focused inventory management, we have a great team that continues to be focused on inventory management. And I personally review these numbers every single week and we keep on top of it. And that is one of the bigger drivers. And this is not going to change, Andrew. You're going to see that we run our show really tight.

Speaker 2

When it comes to inventory, our cannabis inventory days on hand is roughly 16, 17 days, which is I believe probably one of the lowest turns most efficient turns in the industry.

Speaker 8

That's great. And congrats again on this strong quarter. I'll get back into queue.

Operator

Our next question comes from Scott Fortune from Roth MKM. Your line is now open. Please go ahead.

Speaker 5

Yes, good morning. This is Nick on for Scott. And congrats on the quarter and congrats on the free cash flow print while reducing accounts payable. Just wondering if you could provide some color around that $3,600,000 you generated and just how you see your free cash flow evolving throughout the year here? Is breaking even maybe the baseline moving forward?

Speaker 5

Are you expecting maybe some lumpiness as new stores come online? Just your sense of the free cash flow would be helpful.

Speaker 2

Hi, Nick. Thanks for the question. Look, I'm very happy that this is the 3rd consecutive quarter of free cash flow generation. Net income is another milestone, but I believe free cash flow is the most important metric we can judge ourselves with and which the market is going to judge us with. Because in this environment, if you don't have to depend on external funding and we can continue to build our store portfolio and generate free cash and we're super excited to see that we broke even on net income.

Speaker 2

I don't know how much more efficiently we can run our business. So it was very, very heartening to see that we generated another $3,600,000 over the last three quarters. We've generated $13,300,000 in positive free cash flow. That is not going to change going forward. But I do want to highlight one thing, Nick.

Speaker 2

When we are opening up these stores, remember that when we're opening up these stores, you have this ramp up maturity period like it takes 6 to 8 to 9 months for them to ramp up to maturity. And there is a free cash flow burn at that time and there's an adjusted EBITDA burn at that time. So it's a really delicate balance on how quickly we want to grow or we can afford to grow because most important metric for us to remain is to remain free cash flow positive. So the free cash flow is going to jump quarter over quarter, jump up or down. It's going to be lumpy given the working capital requirements like we plan to open a lot of stores in the remainder of March, April and also May.

Speaker 2

So, and we're being very calculative about that we can make sure that we remain free cash flow positive. But I think our pace is very healthy. The $3,300,000 that was generated, that was despite the $5,400,000 that we made for accounts payable and accrued liability. So we brought it down a lot. If we wouldn't have done that, we would have probably beaten a record of free cash flow from the last quarter.

Speaker 2

But we very clearly provided this disclosure that it's going to be lumpy from 1 quarter to another working capital requirements and this is going to go up and down, but things are looking pretty good right now.

Speaker 5

Great. I appreciate that color. And then just second one for me, wanted to build on the M and A side. Just wondering how you're evaluating the environment going forward here considering the strength of your balance sheet and that free cash flow you mentioned. You have your 300 store target out there in Canada.

Speaker 5

There's regulatory progress in the U. S, Germany potentially coming on board here. Just your sense on how you're looking at the M and A opportunity and kind of weighing all these options?

Speaker 2

Look, Nick, historically, we've been the largest acquirers in Canada. We've built our portfolio very carefully, very selectively. Organically, we've added maybe about 60% of our locations and roughly about 40% through M and A. That is kind of the future trajectory as well on how we see this. When an M and A opportunity comes, it comes very quickly.

Speaker 2

But the two main reasons, we've been very slow on M and A. 1, we were very, very focused. We are very focused on free cash flow generation. And we didn't want to get distracted by again adding locations. We wanted to tighten up our stores, tighten up our costs as you can see through our G and A print.

Speaker 2

We came at 4.4% lowest in dollar terms in many, many quarters. I couldn't be more happier. So we wanted to tighten up the operations here. Issues that we see on rapid M and A is a couple of things. 1, we need quality companies to acquire.

Speaker 2

When our national revenue run rate is $2,700,000 and our peer run rate is only $1,200,000 you can see that it's not an easy trajectory for us to get out there and then acquire a whole bunch of stores and get them to our level. Otherwise, our average per store starts dropping. The other problem is redundancy because we're so big and we're in so many towns and so many cities and we have multiple stores. We love to do big block M and A, but in that big block M and A, I don't we can't waste shareholder money. We can't just spend shareholder dollars just for the sake of doing M and A.

Speaker 2

So we don't want redundancy and most operators don't want to just sell their winning stores. They want to sell their entire portfolio, which has a lot of losing stores. And when we are trading at 4.2, 4.5 times annualized last quarter, EBIT to EBITDA multiple, it just doesn't make sense to give whatever someone is asking for. So we don't like overpaying. There are some groups in the country that have been driving these prices up.

Speaker 2

But the reason Hi Tec is successful is we've been very, very disciplined on these things from day 1. We don't chase anything. We look for high quality locations. We're not going to pay for redundancy and we're not going to overpay for things. And we've got a ton of runway ahead even through organic growth.

Speaker 2

So M and A will pick up. M and A is in our DNA. It's not going anywhere. It's also going to happen for the German market, for the American market eventually growing organically in healthy locations. We have good M and A opportunities that we're capitalizing on and we're not overpaying for this opportunity.

Speaker 2

I do want to mention there are competitors out there that are driving these prices up just for the sake of it or maybe to keep up with us, but that is not our team.

Speaker 5

Great. That's it for me.

Speaker 2

I appreciate the color. I'll pass it on.

Operator

Our next question comes from Mike Ragan from Excelsior Exteas. Your line is now open. Please go ahead.

Speaker 9

Everyone, thanks. I was just wondering if you could comment on the potential for the standing finance committee in the House

Speaker 5

of Commons just recommended lowering the LP excise tax from the dollar a gram, which is about 30% to 40% of value to 10%

Speaker 2

of value. I was just

Speaker 5

wondering if you could share any thoughts you have on how this could impact your business or sort of any insights into the process or timing or what have you? Thanks.

Speaker 2

Good morning, Mike. Thank you for your questions. So, Mike, although we are not LPs, we're keeping a very close eye on everything that's going on in terms of excise taxes. We do know that Health Canada's expert panel is reviewing Bill C-forty 5 and is expected to make some recommendations in April. And these recommendations are not binding and the government will take their time to decide which ones to implement or not.

Speaker 2

So we don't really know what will happen. But let's say if the excise tax gets better to the extent the LPs become healthier as a result, this is also going to be good for us and the whole industry. We believe we have always had the guilt by association problem where the poor financial performance of larger LPs has cascaded into weaker investment sentiment for the sector overall, notwithstanding our continued excellent performance has showed again this quarter. So we're really hoping that any positive momentum for LPs is good for us as well. And we feel that that can absolutely happen.

Speaker 2

There's a lot of conversations and the government is not blind. 50% of all cannabis that happened last year were cannabis 50% of all bankruptcies that took place in Canada last year were cannabis bankruptcies. So there's a lot of conversation around making the landscape healthy and this can absolutely happen.

Speaker 5

Great. Thanks a lot and great quarter.

Operator

Our next question comes from Chris Damas from apologies, the question has been withdrawn. So I'd now like to turn the session back over to High Tide's Chief Executive Officer, Raj Grover, for any final comments.

Speaker 2

Thank you, operator, and thank you to everyone for your interest and continued support for Hytide. We're very proud of 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.

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