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High Tide is the largest cannabis retailer in Canada (1:20). President and CEO Raj Grover joins us to discuss its recent move into Germany (3:15). Purecan acquisition – a beautiful business to buy (8:00). Tilray is complementary, not competition (14:00). No hurry to get into the US (18:00). Contextualizing valuation and revisions (20:35).
Transcript
Rena Sherbill: Raj Grover, President and CEO of High Tide (NASDAQ:HITI), a company that we have been hearing about, talking about, wanting to talk to for a long, long time, really excited to have you on the show, Raj. Thanks for joining us.
Raj Grover: Rena, it’s a pleasure to be here with you. Thank you so much for having me.
RS: Absolutely. It’s a long time coming, as I said.
And I think a great place to start – many people, many investors, many followers of the cannabis industry have no doubt about who High Tide is and what you do. But for those that don’t know, or may have just heard the name, can you share with listeners what your business model is?
RG: Yeah, absolutely. High Tide, through its Canna Cabana brand, Rena, is the largest cannabis retailer in Canada. We have 191 operating locations, or Canna Cabana stores across 5 Canadian provinces, which is Ontario, Manitoba, Saskatchewan, Alberta, and British Columbia.
We also have three of the top tier consumption accessory platforms in the United States, online only, and three of the top tier international CBD brands, two in the US, one in the UK that are also part of our Cabana Club.
We are a discount club model, both in our brick and motor stores and online with the lowest price guaranteed on a very large selection of cannabis and cannabis related products here in Canada. And we do the same thing as of December 2nd, Cyber Monday launch of our international Cabana Club through our consumption accessories and CBD platforms.
And very recently, just a couple of weeks ago, we announced our entry into the German medical cannabis market, which we are very, very excited about, through the majority acquisition into Purecan, which is a profitable pharmaceutical wholesaler and importer in Germany.
RS: You’re not the only one that’s excited about that move into Germany. A lot of investors are excited about it, in a landscape and in a time where there’s very little to be excited about when it comes to cannabis. Share with us, Germany has been a country that we’ve been talking about for a few years.
Share with listeners, where or why you’re so excited about Germany and what you have exactly going on, what kind of take on the marketplace you have and where you look to be going maybe beyond Germany or what your take is on that part of the world?
RG: Yeah, absolutely, Rena. So just to get started here, I don’t want to take anything away from our beautiful discount club model that we have going here in Canada. And one day I have big hopes to bring it to your country as well down the line.
But the excitement around Germany is very specific. You’re actually hearing it from multiple groups for the right reasons because of the tonnage that they’re already importing in Germany, but it’s very specific opportunity for High Tide, which I would love to walk you through.
RS: Yeah. Please do.
RG: And it would help your listeners understand how we are very nicely positioned to get a significant share of the German medical cannabis market. So Rena, as you know, our core business is brick and mortar retail, 94% of all of our revenues are derived from our retail stores here in Canada.
And so we were looking for entry into the German retail market, if and when that’s allowed. Our team has been very closely monitoring the developments out of Germany. And in April, when cannabis was legalized in Germany and home cultivation, home grow was allowed and social clubs were allowed, the government was also talking about a Pillar 2 approach in which through scientific pilot projects, companies would be allowed to set up stores similar to what you see in Switzerland today. And our team has been preparing for these pilot projects for good two years.
We partnered up with a very reputable academic institution in Germany and have onboarded researchers to finish our pilot project. So we were going all steam ahead on that concept. And in April, something very interesting happened with legalization of cannabis in Germany.
What happened there was, cannabis was taken out as a narcotic to just a regulated substance. And what that’s done is, it’s really given some ease to doctors in Germany to prescribe cannabis to patients for any conditions that they seem fit. And that’s absolutely exploded the German market in terms of medical cannabis sales.
To give you some numbers, since April of 2024 to the last quarter of 2024, German cannabis sales went up by 250%. We are talking about 20 tonnes in Q3, or I believe Q4 of 2024 alone. Now, if you take that a year back, this was just sitting at 8 tons.
So the market’s gone up by 250%. And guess what? Most of this cannabis that is being sold, medical cannabis that’s being sold in Germany is Canadian cannabis. It’s procured from Canada, over 50%. Now, if you take Portugal in the mix, that also grows its own and also transforms a lot of the GACP product coming out of Canada into EUGMP, ready for sale in Germany, if you add that, Canada would be well over 50%.
I believe Canada would be close to 65% to 70% of all sales happening in Germany. So, you know, when we put two and two together, we’re like, okay, our main game is retail. We’ve figured out a great concept. We’re the first to market with a discount club model, which is doing excellently well here in Canada.
And we have a great opportunity worldwide with our model. But thanks to this model and thanks to our $1.5 billion of cumulative cannabis sales since legalization here in Canada 6 years ago, and $500 million in annual cannabis sales run rate through our brick and mortar stores here in Canada, we know every licensed producer for obvious reasons in Canada already, Rena.
So we’re not a one-off German group that’s reaching out to licensed producers one-by-one and saying, hey, do you have any biomass to sell to us? Well, we have these relationships built over the last 6 years. And we’re not trying to shortchange any of our production partners on price. We’re giving them a fair price that they can procure in the open market.
But we are asking them to consider us to give us 10% to 15% of what they are growing here in Canada, to consider giving that to High Tide because we’re just developing upon our existing relationship. And I can tell you so far so good, every producer is very, very excited to work with us in Germany because there’s no big consolidated larger producer. We believe we are the big preeminent distributor in Germany for our products.
And so far so good. We are being offered direct distribution of some of Canada’s largest brands exclusively and nonexclusive as well, where they’re already committed. They’re still trying to get us to list these brands in our broad German cannabis, medical cannabis menu that we are developing. We are hoping to build a 200 strain plus menu and the conversations are going excellently well. So hence my excitement, Rena.
RS: Can you talk to us about the Purecan deal that you made in Germany? And also, can you share with investors what you’re looking to accrue on the bottom line with your investment in Germany and with your strategy over there?
RG: Yeah, absolutely. So Purecan was a beautiful business to buy in its own right. Purecan is already doing annualized revenue run rate of €15 million. I believe their gross margins are in the neighborhood of 40% and EBITDA margins are 29%.
So if you look at how we get to position our numbers here in Canada, they’re no way near in terms of the margin profile or EBITDA margin profile, one, given our discount club model. So from a strategic purpose, Rena, you can understand how much we are going to strengthen our bottom line by now starting to generate higher gross margins in this business, higher EBITDA margins, which will help to further fortify, further strengthen our already very strong model here in Canada, and then to take it internationally as well. So this opportunity really bodes well from that perspective.
And look, Purecan had only imported 200 kilograms of cannabis from Portugal prior to partnering with us. And we were able to secure this Purecan transaction at just 3 times last 6 months annualized adjusted EBITDA.
We got a stellar deal on this one. When we are trading at 9 times, so highly accretive for our shareholders, the reason is the sellers also saw that this opportunity is truly one-plus-one 11. Even if they go down to 49%, we take 51%, we can take this business from €15 million to north of €50 million in not too distant future, given our rolodex and contacts and relationships here. So they were very excited to do it.
We paid €4.8 million for 51% at the moment, out of which €2.4 million is paid in High Tide shares, €1.2 million is paid in cash, and €1.2 million is paid as a promissory note, paid over 2 years with 7% interest with no prepayment penalty. And we can also, from 18 months of the closing anniversary, from 18 months onwards, we can also trigger a call option through which we can acquire the remaining 49% at the same 3x multiples that we negotiated.
And sellers can do the same through a put option to keep it fair on both sides. But this is also going to keep both sides very, very motivated to quickly rack up that bottom line. And I think it’s going to make a significant difference in our bottom line and our top line going forward.
RS: What would you say are some of the risks that concern you or are worth being brought up when it comes to Germany in terms of the timeline, in terms of the investment?
And then also, I’m curious how you think about or if you think about different areas internationally and where your headspace is at with that?
RG: Right, great question. So Rena, there’s always risk when you’re entering any new business. This is not our core business. This is not something that we’ve done for the last 6 years. But this is something that perfectly fits in our chain. We know all the producers.
50% of all cannabis that is coming to Germany is coming through these producers. So we already have a relationship there.
The biggest risk I would say in this business is if you’re not procuring product from GMP manufacturers and it’s one level below from GACP, there’s a timeline involved to get this product converted into EUGMP from GACP. It can vary from 4 months to 8 months.
Testing also has to comply with each other. Canadians producers can’t say cannabis is 28%, THC, and it gets to Germany, and the Germans say it’s only 23%. That would not fly. No cannabis that leaves Canada is going to ever come back to Canada.
So we have to be very, very mindful on how we do this and how we structure our agreements. But having done enough business and having running a company that’s now generating over $500 million in revenue annually, I don’t think that is a big concern on our side.
It’s more exciting than concerning, I can tell you that. We are going to go slow before we start running. But the world is reaching out to us. Canada is reaching out to us in terms of the biomass that’s already available today.
So the hope is to quickly get going in Germany. And we also have a lot of GMP product that is available to us. But few of the challenges or few of the initial challenges that we have to deal with or just initial timeframe to get going, it can take us up to 4 weeks to 8 weeks, even up to 12 weeks to get going. We have to get all of the strains that we are interested in moving from Canada to Germany registered on our license with each license producers cultivation license.
So there’s a bit of legwork in terms of just setting it up properly. But once that that’s out of the way, it should be smooth sailing. And then after Germany, there’s so much opportunity in Europe right now. I’m very happy for our licensed producer friends that have suffered here for years and years, whether that’s because of an extensive excise tax regime, or it’s the illicit market price compression issues that we are dealing with, or too much supply.
Well, all of our supply is now getting eaten up in Europe, which is going to make our producer friends healthy as well, which I very much look forward to. A healthy industry is good for everyone. So we feel, given all of these connections and relationships, Germany would be a stepping stone into markets like Czech Republic, like the UK, like Poland, and also eventually Australia.
RS: I’m curious, as an observer, it seems to me that probably your biggest competitor is Tilray (TLRY) in terms of the Canadian emphasis, in terms of the international emphasis. Is that how you feel? Who do you think of as your biggest competition?
RG: Look, Tilray is a great partner to us here in Canada. And just for the record and for clarity purposes, I don’t see them as a competitor at all. I see them completely complementary to us, Rena. And I’ll explain why.
We don’t grow any cannabis at all. Unlike many of the multi-state operators that you know of in the US or licensed producers here in Canada, we don’t grow any cannabis at all. We play in the downstream markets in cannabis. And now with this approach, we’re somewhat midstream, but we still don’t process. We simply procure and we retail or we wholesale.
So we’re still playing along that value chain. We are not competing with Tilray or others that grow because we’re not going to get into that side of the business until it’s absolutely mandatory and necessary in certain markets where we operate.
I’ve made these intentions very clear, so just want to reiterate that. In fact, Tilray and High Tide have very, very good relationship here in Canada, and both companies are looking to expand this relationship abroad as well by just leveraging Tilray’s existing portfolio of products as well.
We want to bring forward all of the best Canadian cannabis that’s available and these brands that have been built with a lot of hard work, sweat and tears over the last 6 years. We want to position these brands in the best light possible in Germany. So we are acting as a complementary partner to all of the producers here in this country.
RS: So do you think, I mean, I know this is kind of a layup question to ask you, but do you think of yourselves as standing alone in the marketplace, that you’re not necessarily competing with anybody as opposed to, or I would say more so than competing against your own selves in terms of just doing the best you can as the timeline unfolds?
RG: Yeah, look, we’re definitely not competing with ourselves because it’s a brand new market for us. We have zero sales in Germany. So to go from 0 to any number, it’s awesome.
And then we’re not competing with our production partners because they’re producing, they have a different profit profile on that side of the production. In fact, when we are ready to bring our own white label SKUs to the market.
So think about this, we’re thinking about a big and broad menu of medical cannabis strains, which will showcase some of the best strains from Canada that we as Canadians have come accustomed to and used to, and we see them in our Cana Cabana stores and elsewhere in this country. So we are going to be showcasing exclusively and non-exclusively some of these largest brands from Canada.
Then the second tier is going to be the running strains of the biomass that is available to be sold into EU. So we’re going to have a running profile of strains as well. And the third line item is going to be our white label items, which again, we will be giving this business to our partners that grow cannabis, even though that brand will be under our umbrella, aka The Queen of Bud.
For example, if you ever wanted to launch dry flower products under that brand, that is also going to go to partners like Tilray that would have the opportunity to bid on that project.
RS: And in terms of the US, I’m curious how you’re articulating your thoughts on the US with the investing community. Obviously there’s a lot of talk of tariffs in Canada and the US. I’m not sure that that pertains to cannabis, but how are you thinking about the protracted timeline of legalization in the US?
RG: Look, I mean, I’m counting my blessings right now, to be honest. Thank God I’m talking about export import, but it’s not in the relation of Canada and US. I’m talking Europe and Canada, our new best friends.
I still love the US market very much. This is something that I’ve publicly spoken about for good two years since we’ve gathered size and scale here, since we’ve tested and, you know, trialed and rehearsed and perfected the strength of our discount club model. I think that’ll be a very potent model that we bring to the United States if and when allowed.
We are in no hurry whatsoever to jump to the US today. If that happens tomorrow morning, we will be ready. We’ve got relationships. You know, I’m one of the oldest cannabis operators or cannabis or ancillary merchandise related operator in the cannabis space. I’ve been doing this for over 16 years, even prior to High Tide, through High Tide’s predecessor companies.
And I believe the opportunity will be multi-fold when we bring our model, even in some of your most saturated states in the US. We feel that our model does good everywhere, no matter where we go.
I’m starting to hear MSOs are starting to face price declines in even states like Ohio that is happening soon. I think Ohio went rec legal 2 or 3 years ago. So it’s happening at an expeditious pace. And our model works tremendously well in these types of situations.
And it seems like that’s where US is headed. Exactly how we predicted will happen in the US as it’s been happening in Canada for quite some time. Although since 24, 25 states in the US remain medical, I think you guys are still a little ways away from that.
Like I said, I’m in no hurry to come to the US. We’ve just carved ourselves a beautiful opportunity into Europe and the rest of the world. We’re busy in Canada already. We have 191 stores doing half a billion dollars in sales.
We think we can take this number close to $900 million in Canada alone, which is going to keep me and my team very busy for the next 2 to 3 years here in Canada. But at the same time, now we got Germany, and Germany is a stepping stone to other European markets.
US is amazing. We will come into the US, but I think that has to be a federally legal opportunity for us since we’re on the NASDAQ stock exchange.
RS: Looking at the cannabis landscape, it’s a very depressing picture. So it makes a lot of sense that you’re counting your blessings and also have been very savvy in terms of where you’re allocating resources and capital and strategic investment.
There was a Seeking Alpha commentator that commented on an article that was analyzing High Tide and it said, it’s the best house on a lousy street – I really like that metaphor for encapsulating where High Tide sits.
And we also have on Seeking Alpha ratings for each metric for a company. And High Tide, much like your recent earnings, is across the board doing great. I would say the one poor grade that High Tide suffers from is revisions. And honestly, it’s surprising that it only suffers from one poor grade when the landscape is looking so bad, which speaks to the strength of High Tide.
But I’m curious how you think about, how you articulate for investors in terms of earnings revisions or how analysts are looking at the company or how investors, especially retail investors, which is our bread and butter, how we should be contextualizing valuation going forward. How do you think about that?
RG: Look, we have been like a hockey stick, right? We’ve come up from $8 million in revenue in 2019, or 2018. I get confused between these 2 years because we were just taking up a company public then to over $500 million today in just the last 5, 6 years.
And whether it’s our revenue, whether it’s our adjusted EBITDA, whether it’s a free cashflow, whether it’s a net income, it’s all only been growing in one line upwards, right? And these revisions that analysts may have done on a mild side, we’ve been beating analysts’ consensus estimates for I think 10, 12, 13 quarters in a row. You can look that up. I’m not kidding.
We also have great coverage from the analyst community. We have like 6, 7 analysts that covers us. Given our market cap, it’s a significant amount of coverage we are getting because one, we’re differentiated, and second, we keep on executing. There’s no shortage of execution on our side.
Even this quarter, the last quarter that we reported, Q4 was $5.9 million in free cashflow, and that’s yielded us $22 million in positive free cash flow in the trailing 4 quarters. So the analysts may have revised estimates slightly, but that’s only because of our strategic guidance.
When you’re developing Germany, there’s going to be some initial expenses. When you’re developing the global Cabana Club approach, the three-tier pricing that we set up, it’s going to have an EBITDA burn for the next 12 months. It’s going to have a revenue burn for the next 6 months, but then we know what’s going to happen, right?
And the proof is in the pudding, and the proof is in the track record. And we’ve put our track record out, we’re very, very proud of how we managed our business. And these revisions that you’re talking about, I think one of them was the market share, which we are completely dependent on StratCann numbers. We were 12% in Q3 and we’re 11% in Q4, but that’s the revision from StratCann. It’s just the market share numbers that got revised.
And anything to do with EBITDA estimates or free cash flow estimates is only two quarters of transitionary management. Because again, we’re a very strategic company. Like you said, moves have to be strategic when we are plotting these moves. And we’ve done exactly that. And that is why there’s a transitionary cooling off period and then we start taking off again.
But our core business remains extremely strong. With this German advancement now, I think it’s about to get even stronger.
RS: What metric would you say that you’re most focused on these days?
RG: I would say most focused on these days would be, you know, I’m back to growth a little bit, Rena, but last six quarters, we actually stopped growing a year and a half ago.
In 2023, January, we said we’re going to stop growing. We’re going to prove to our investors that we can be the first Canadian cannabis company to become free cash flow positive. And in January of 2023, we said we’ll do that by December of 2023. And sure enough, in High Tide style, typical High Tide style, we did that by July of 2023. And we became the first Canadian cannabis company to become free cashflow positive.
We carried that streak or we continue to carry that streak. It was not a one trick pony. We continue to carry that streak for 6 quarters in a row. We’ve just come up with another $6 million, $5.9 million in positive free cash flow quarter. So while we are growing so rapidly, we added 30 locations in fiscal 2024, 29 locations in calendar 2024.
So you can imagine Rena, while growing, adding locations we’re generating positive free cash flow, that’s sort of our goal. It can vary in any given quarter, but for the year, we are definitely going to remain free cash flow positive while growing at a rapid rate of 20 to 30 locations organically. And any M&A will be incremental to that.
RS: As we wind down the conversation, for which I’m extremely grateful, so thanks for taking the time and going deep and going wide. I appreciate this very much, Raj.
As we wind down, I’m curious how you’re thinking about the next year, 2 years, 3 years for High Tide. And also I’m curious how you envision the landscape evolving as these years develop.
Obviously, all of our crystal balls are broken, but I’m curious how you see it developing. In other words, do you see it as one, two major players, and then there’s going to be a lot of acquisitions? Or, how do you see it evolving?
RG: Yeah, fortunately for High Tide, we have a very straightforward road ahead, but nothing in cannabis is straightforward, Rena, as you just pointed out. It’s a very, very tricky cannabis landscape out there.
And although I was jealous a little bit of our MSO friends, that jealousy has turned into, I’m feeling a little bit sympathy for them. Like they’re not going anywhere. It’s giving us more time to get into the US, which is a good thing for High Tide.
But in general, our 2 to 3 year plan is meet that 300 store target that we’ve given to our investors. We’ve been very vocal about it. We were the ones that advocated to the Ontario government on behalf of the industry to increase the store cap from 75 to 150. We did that successfully.
Now we have room to add another 75 locations in Ontario alone, and we have room to add another 110, 120 locations across Canada, potentially even more, that should bring us north of a 15% national market share in Canada. And we’re going to be doing this while we’re generating even higher gross margins and better bottom line in our European operations, starting with Germany.
So lots of excitement in our company right now. There’s a lot of hard work ahead of us. But we’re never shy of hard work. And I feel by the time we get our footing in a really strong way in Europe, and by the time we get closer to our long-term goal in Canada, I think the American market will be ripe for us with potentially de-scheduling or a full federal legalization opportunity on the horizon at that time.
RS: Thank you, Raj. I appreciate the conversation. If you want to share with listeners where they can find out more about High Tide or how best they can get involved, happy for you to share that now. And anything else you want to share, happy for you to have the last word.
RG: Thank you so much. So hightideinc.com has a lot of good information. I would encourage your listeners or investors to go download our investor deck, which we refresh and update every single month. It’s got some very, very good insights.
And yeah, stay tuned with our progress. We’re an exciting company. We’re not messing around. We’re here to prove a point. So stay tuned on what we do next.
