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Excessive Tide is the biggest hashish retailer in Canada (1:20). President and CEO Raj Grover joins us to debate its current transfer into Germany (3:15). Purecan acquisition – a good looking enterprise to purchase (8:00). Tilray is complementary, not competitors (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 Excessive Tide (NASDAQ:HITI), an organization that we’ve been listening to about, speaking about, wanting to speak to for a protracted, very long time, actually excited to have you ever on the present, Raj. Thanks for becoming a member of us.
Raj Grover: Rena, it is a pleasure to be right here with you. Thanks a lot for having me.
RS: Completely. It is a very long time coming, as I mentioned.
And I believe a fantastic place to begin – many individuals, many buyers, many followers of the hashish business have little doubt about who Excessive Tide is and what you do. However for those who do not know, or might have simply heard the identify, are you able to share with listeners what your small business mannequin is?
RG: Yeah, completely. Excessive Tide, by way of its Canna Cabana model, Rena, is the biggest hashish retailer in Canada. We now have 191 working places, or Canna Cabana shops throughout 5 Canadian provinces, which is Ontario, Manitoba, Saskatchewan, Alberta, and British Columbia.
We even have three of the highest tier consumption accent platforms in america, on-line solely, and three of the highest tier worldwide CBD manufacturers, two within the US, one within the UK which might be additionally a part of our Cabana Membership.
We’re a reduction membership mannequin, each in our brick and motor shops and on-line with the bottom worth assured on a really giant choice of hashish and hashish associated merchandise right here in Canada. And we do the identical factor as of December 2nd, Cyber Monday launch of our worldwide Cabana Membership by way of our consumption equipment and CBD platforms.
And really just lately, simply a few weeks in the past, we introduced our entry into the German medical hashish market, which we’re very, very enthusiastic about, by way of the bulk acquisition into Purecan, which is a worthwhile pharmaceutical wholesaler and importer in Germany.
RS: You are not the one one which’s enthusiastic about that transfer into Germany. A number of buyers are enthusiastic about it, in a panorama and in a time the place there’s little or no to be enthusiastic about on the subject of hashish. Share with us, Germany has been a rustic that we have been speaking about for just a few years.
Share with listeners, the place or why you are so enthusiastic about Germany and what you may have precisely happening, what sort of tackle {the marketplace} you may have and the place you look to be going perhaps past Germany or what your take is on that a part of the world?
RG: Yeah, completely, Rena. So simply to get began right here, I do not wish to take something away from our stunning low cost membership mannequin that we’ve going right here in Canada. And sooner or later I’ve large hopes to convey it to your nation as nicely down the road.
However the pleasure round Germany could be very particular. You are really listening to it from a number of teams for the best causes due to the tonnage that they are already importing in Germany, however it’s very particular alternative for Excessive Tide, which I’d like to stroll you thru.
RS: Yeah. Please do.
RG: And it will assist your listeners perceive how we’re very properly positioned to get a major share of the German medical hashish market. So Rena, as you recognize, our core enterprise is brick and mortar retail, 94% of all of our revenues are derived from our retail shops right here in Canada.
And so we have been searching for entry into the German retail market, if and when that is allowed. Our workforce has been very intently monitoring the developments out of Germany. And in April, when hashish was legalized in Germany and residential cultivation, dwelling develop was allowed and social golf equipment have been allowed, the federal government was additionally speaking a few Pillar 2 strategy through which by way of scientific pilot initiatives, firms can be allowed to arrange shops just like what you see in Switzerland in the present day. And our workforce has been making ready for these pilot initiatives for good two years.
We partnered up with a really respected educational establishment in Germany and have onboarded researchers to complete our pilot undertaking. So we have been going all steam forward on that idea. And in April, one thing very attention-grabbing occurred with legalization of hashish in Germany.
What occurred there was, hashish was taken out as a narcotic to only a regulated substance. And what that is finished is, it is actually given some ease to docs in Germany to prescribe hashish to sufferers for any situations that they appear match. And that is completely exploded the German market when it comes to medical hashish gross sales.
To present you some numbers, since April of 2024 to the final quarter of 2024, German hashish gross sales went up by 250%. We’re speaking about 20 tonnes in Q3, or I consider This fall of 2024 alone. Now, should you take {that a} 12 months again, this was simply sitting at 8 tons.
So the market’s gone up by 250%. And guess what? Most of this hashish that’s being bought, medical hashish that is being bought in Germany is Canadian hashish. It is procured from Canada, over 50%. Now, should you take Portugal within the combine, that additionally grows its personal and likewise transforms a whole lot of the GACP product popping out of Canada into EUGMP, prepared on the market in Germany, should you add that, Canada can be nicely over 50%.
I consider Canada can be near 65% to 70% of all gross sales taking place in Germany. So, you recognize, once we put two and two collectively, we’re like, okay, our predominant sport is retail. We have discovered a fantastic idea. We are the first to market with a reduction membership mannequin, which is doing excellently nicely right here in Canada.
And we’ve a fantastic alternative worldwide with our mannequin. However due to this mannequin and because of our $1.5 billion of cumulative hashish gross sales since legalization right here in Canada 6 years in the past, and $500 million in annual hashish gross sales run price by way of our brick and mortar shops right here in Canada, we all know each licensed producer for apparent causes in Canada already, Rena.
So we’re not a one-off German group that is reaching out to licensed producers one-by-one and saying, hey, do you may have any biomass to promote to us? Properly, we’ve these relationships constructed during the last 6 years. And we’re not attempting to shortchange any of our manufacturing companions on worth. We’re giving them a good worth that they will procure within the open market.
However we’re asking them to contemplate us to present us 10% to fifteen% of what they’re rising right here in Canada, to contemplate giving that to Excessive Tide as a result of we’re simply growing upon our current relationship. And I can let you know to this point so good, each producer could be very, very excited to work with us in Germany as a result of there is no large consolidated bigger producer. We consider we’re the large preeminent distributor in Germany for our merchandise.
And to this point so good. We’re being supplied direct distribution of a few of Canada’s largest manufacturers completely and nonexclusive as nicely, the place they’re already dedicated. They’re nonetheless attempting to get us to listing these manufacturers in our broad German hashish, medical hashish menu that we’re growing. We hope to construct a 200 pressure plus menu and the conversations are going excellently nicely. So therefore my pleasure, Rena.
RS: Are you able to speak to us in regards to the Purecan deal that you just made in Germany? And in addition, are you able to share with buyers what you are seeking to accrue on the underside line together with your funding in Germany and together with your technique over there?
RG: Yeah, completely. So Purecan was a good looking enterprise to purchase in its personal proper. Purecan is already doing annualized income run price of €15 million. I consider their gross margins are within the neighborhood of 40% and EBITDA margins are 29%.
So should you have a look at how we get to place our numbers right here in Canada, they’re no method close to when it comes to the margin profile or EBITDA margin profile, one, given our low cost membership mannequin. So from a strategic function, Rena, you may perceive how a lot we’re going to strengthen our backside line by now beginning to generate increased gross margins on this enterprise, increased EBITDA margins, which is able to assist to additional fortify, additional strengthen our already very robust mannequin right here in Canada, after which to take it internationally as nicely. So this chance actually bodes nicely from that perspective.
And look, Purecan had solely imported 200 kilograms of hashish from Portugal previous to partnering with us. And we have been in a position to safe this Purecan transaction at simply 3 instances final 6 months annualized adjusted EBITDA.
We obtained a stellar deal on this one. After we are buying and selling at 9 instances, so extremely accretive for our shareholders, the reason being the sellers additionally noticed that this chance is really one-plus-one 11. Even when they go right down to 49%, we take 51%, we will take this enterprise from €15 million to north of €50 million in not too distant future, given our rolodex and contacts and relationships right here. In order that they have been very excited to do it.
We paid €4.8 million for 51% in the meanwhile, out of which €2.4 million is paid in Excessive Tide shares, €1.2 million is paid in money, and €1.2 million is paid as a promissory observe, paid over 2 years with 7% curiosity with no prepayment penalty. And we will additionally, from 18 months of the closing anniversary, from 18 months onwards, we will additionally set off a name possibility by way of which we will purchase the remaining 49% on the identical 3x multiples that we negotiated.
And sellers can do the identical by way of a put choice to maintain it honest on either side. However that is additionally going to maintain either side very, very motivated to rapidly rack up that backside line. And I believe it should make a major distinction in our backside line and our prime line going ahead.
RS: What would you say are among the dangers that concern you or are price being introduced up on the subject of Germany when it comes to the timeline, when it comes to the funding?
After which additionally, I am curious how you concentrate on or if you concentrate on completely different areas internationally and the place your headspace is at with that?
RG: Proper, nice query. So Rena, there’s at all times danger once you’re coming into any new enterprise. This isn’t our core enterprise. This isn’t one thing that we have finished for the final 6 years. However that is one thing that completely suits in our chain. We all know all of the producers.
50% of all hashish that’s coming to Germany is coming by way of these producers. So we have already got a relationship there.
The largest danger I’d say on this enterprise is should you’re not procuring product from GMP producers and it is one degree beneath from GACP, there is a timeline concerned to get this product transformed into EUGMP from GACP. It may well fluctuate from 4 months to eight months.
Testing additionally has to adjust to one another. Canadians producers cannot say hashish is 28%, THC, and it will get to Germany, and the Germans say it is solely 23%. That may not fly. No hashish that leaves Canada goes to ever come again to Canada.
So we’ve to be very, very conscious on how we do that and the way we construction our agreements. However having finished sufficient enterprise and having operating an organization that is now producing over $500 million in income yearly, I do not assume that may be a large concern on our facet.
It is extra thrilling than regarding, I can let you know that. We’re going to go gradual earlier than we begin operating. However the world is reaching out to us. Canada is reaching out to us when it comes to the biomass that is already out there in the present day.
So the hope is to rapidly get getting into Germany. And we even have a whole lot of GMP product that’s out there to us. However few of the challenges or few of the preliminary challenges that we’ve to take care of or simply preliminary timeframe to get going, it may take us as much as 4 weeks to eight weeks, even as much as 12 weeks to get going. We now have to get the entire strains that we’re keen on shifting from Canada to Germany registered on our license with every license producers cultivation license.
So there is a little bit of legwork when it comes to simply setting it up correctly. However as soon as that that is out of the best way, it must be easy crusing. After which after Germany, there’s a lot alternative in Europe proper now. I am very completely happy for our licensed producer associates which have suffered right here for years and years, whether or not that is due to an intensive excise tax regime, or it is the illicit market worth compression points that we’re coping with, or an excessive amount of provide.
Properly, all of our provide is now getting eaten up in Europe, which goes to make our producer associates wholesome as nicely, which I very a lot sit up for. A wholesome business is sweet for everybody. So we really feel, given all of those connections and relationships, Germany can be a stepping stone into markets like Czech Republic, just like the UK, like Poland, and likewise finally Australia.
RS: I am curious, as an observer, it appears to me that most likely your greatest competitor is Tilray (TLRY) when it comes to the Canadian emphasis, when it comes to the worldwide emphasis. Is that how you are feeling? Who do you consider as your greatest competitors?
RG: Look, Tilray is a good accomplice to us right here in Canada. And only for the document and for readability functions, I do not see them as a competitor in any respect. I see them fully complementary to us, Rena. And I am going to clarify why.
We do not develop any hashish in any respect. In contrast to lots of the multi-state operators that you recognize of within the US or licensed producers right here in Canada, we do not develop any hashish in any respect. We play within the downstream markets in hashish. And now with this strategy, we’re considerably midstream, however we nonetheless do not course of. We merely procure and we retail or we wholesale.
So we’re nonetheless taking part in alongside that worth chain. We aren’t competing with Tilray or others that develop as a result of we’re not going to get into that facet of the enterprise till it is completely necessary and crucial in sure markets the place we function.
I’ve made these intentions very clear, so simply wish to reiterate that. The truth is, Tilray and Excessive Tide have very, superb relationship right here in Canada, and each firms wish to develop this relationship overseas as nicely by simply leveraging Tilray’s current portfolio of merchandise as nicely.
We wish to convey ahead the entire greatest Canadian hashish that is out there and these manufacturers which were constructed with a whole lot of onerous work, sweat and tears during the last 6 years. We wish to place these manufacturers in the most effective mild potential in Germany. So we’re performing as a complementary accomplice to the entire producers right here on this nation.
RS: So do you assume, I imply, I do know that is form of a layup query to ask you, however do you consider yourselves as standing alone within the market, that you just’re not essentially competing with anyone versus, or I’d say extra so than competing in opposition to your personal selves when it comes to simply doing the most effective you may because the timeline unfolds?
RG: Yeah, look, we’re undoubtedly not competing with ourselves as a result of it is a model new marketplace for us. We now have zero gross sales in Germany. So to go from 0 to any quantity, it is superior.
After which we’re not competing with our manufacturing companions as a result of they’re producing, they’ve a unique revenue profile on that facet of the manufacturing. The truth is, once we are able to convey our personal white label SKUs to the market.
So take into consideration this, we’re fascinated with a giant and broad menu of medical hashish strains, which is able to showcase among the greatest strains from Canada that we as Canadians have come accustomed to and used to, and we see them in our Cana Cabana shops and elsewhere on this nation. So we’re going to be showcasing completely and non-exclusively a few of these largest manufacturers from Canada.
Then the second tier goes to be the operating strains of the biomass that’s out there to be bought into EU. So we will have a operating profile of strains as nicely. And the third line merchandise goes to be our white label objects, which once more, we might be giving this enterprise to our companions that develop hashish, although that model might be below our umbrella, aka The Queen of Bud.
For instance, should you ever needed to launch dry flower merchandise below that model, that can be going to go to companions like Tilray that might have the chance to bid on that undertaking.
RS: And when it comes to the US, I am curious the way you’re articulating your ideas on the US with the investing group. Clearly there’s a whole lot of speak of tariffs in Canada and the US. I am unsure that that pertains to hashish, however how are you fascinated with the protracted timeline of legalization within the US?
RG: Look, I imply, I am counting my blessings proper now, to be sincere. Thank God I am speaking about export import, however it’s not within the relation of Canada and US. I am speaking Europe and Canada, our new greatest associates.
I nonetheless love the US market very a lot. That is one thing that I’ve publicly spoken about for good two years since we have gathered dimension and scale right here, since we have examined and, you recognize, trialed and rehearsed and perfected the power of our low cost membership mannequin. I believe that’ll be a really potent mannequin that we convey to america if and when allowed.
We’re in no hurry by any means to leap to the US in the present day. If that occurs tomorrow morning, we might be prepared. We have relationships. , I am one of many oldest hashish operators or hashish or ancillary merchandise associated operator within the hashish house. I have been doing this for over 16 years, even previous to Excessive Tide, by way of Excessive Tide’s predecessor firms.
And I consider the chance might be multi-fold once we convey our mannequin, even in a few of your most saturated states within the US. We really feel that our mannequin does good in all places, regardless of the place we go.
I am beginning to hear MSOs are beginning to face worth declines in even states like Ohio that’s taking place quickly. I believe Ohio went rec authorized 2 or 3 years in the past. So it is taking place at an expeditious tempo. And our mannequin works tremendously nicely in most of these conditions.
And it looks as if that is the place US is headed. Precisely how we predicted will occur within the US as it has been taking place in Canada for fairly a while. Though since 24, 25 states within the US stay medical, I believe you guys are nonetheless somewhat methods away from that.
Like I mentioned, I am in no hurry to return to the US. We have simply carved ourselves a good looking alternative into Europe and the remainder of the world. We’re busy in Canada already. We now have 191 shops doing half a billion {dollars} in gross sales.
We predict we will take this quantity near $900 million in Canada alone, which goes to maintain me and my workforce very busy for the subsequent 2 to three years right here in Canada. However on the identical time, now we obtained Germany, and Germany is a stepping stone to different European markets.
US is wonderful. We are going to come into the US, however I believe that needs to be a federally authorized alternative for us since we’re on the NASDAQ inventory alternate.
RS: Trying on the hashish panorama, it’s a really miserable image. So it makes a whole lot of sense that you just’re counting your blessings and still have been very savvy when it comes to the place you are allocating sources and capital and strategic funding.
There was a In search of Alpha commentator that commented on an article that was analyzing Excessive Tide and it mentioned, it is the most effective home on a awful road – I actually like that metaphor for encapsulating the place Excessive Tide sits.
And we even have on In search of Alpha rankings for every metric for a corporation. And Excessive Tide, very like your current earnings, is throughout the board doing nice. I’d say the one poor grade that Excessive Tide suffers from is revisions. And actually, it is shocking that it solely suffers from one poor grade when the panorama is wanting so unhealthy, which speaks to the power of Excessive Tide.
However I am curious how you concentrate on, the way you articulate for buyers when it comes to earnings revisions or how analysts are wanting on the firm or how buyers, particularly retail buyers, which is our bread and butter, how we must be contextualizing valuation going ahead. How do you concentrate on that?
RG: Look, we’ve been like a hockey stick, proper? We have come up from $8 million in income in 2019, or 2018. I get confused between these 2 years as a result of we have been simply taking over an organization public then to over $500 million in the present day in simply the final 5, 6 years.
And whether or not it is our income, whether or not it is our adjusted EBITDA, whether or not it is a free cashflow, whether or not it is a internet earnings, it is all solely been rising in a single line upwards, proper? And these revisions that analysts might have finished on a light facet, we have been beating analysts’ consensus estimates for I believe 10, 12, 13 quarters in a row. You may look that up. I am not kidding.
We even have nice protection from the analyst group. We now have like 6, 7 analysts that covers us. Given our market cap, it is a important quantity of protection we’re getting as a result of one, we’re differentiated, and second, we carry on executing. There isn’t any scarcity of execution on our facet.
Even this quarter, the final quarter that we reported, This fall was $5.9 million in free cashflow, and that is yielded us $22 million in constructive free money movement within the trailing 4 quarters. So the analysts might have revised estimates barely, however that is solely due to our strategic steerage.
While you’re growing Germany, there’s going to be some preliminary bills. While you’re growing the worldwide Cabana Membership strategy, the three-tier pricing that we arrange, it should have an EBITDA burn for the subsequent 12 months. It may have a income burn for the subsequent 6 months, however then we all know what is going on to occur, proper?
And the proof is within the pudding, and the proof is within the monitor document. And we have put our monitor document out, we’re very, very pleased with how we managed our enterprise. And these revisions that you just’re speaking about, I believe certainly one of them was the market share, which we’re fully depending on StratCann numbers. We have been 12% in Q3 and we’re 11% in This fall, however that is the revision from StratCann. It is simply the market share numbers that obtained revised.
And something to do with EBITDA estimates or free money movement estimates is just two quarters of transitionary administration. As a result of once more, we’re a really strategic firm. Such as you mentioned, strikes should be strategic once we are plotting these strikes. And we have finished precisely that. And that’s the reason there is a transitionary cooling off interval after which we begin taking off once more.
However our core enterprise stays extraordinarily robust. With this German development now, I believe it is about to get even stronger.
RS: What metric would you say that you just’re most centered on as of late?
RG: I’d say most centered on as of late can be, you recognize, I am again to development somewhat bit, Rena, however final six quarters, we really stopped rising a 12 months and a half in the past.
In 2023, January, we mentioned we will cease rising. We’ll show to our buyers that we might be the primary Canadian hashish firm to turn out to be free money movement constructive. And in January of 2023, we mentioned we’ll do this by December of 2023. And positive sufficient, in Excessive Tide fashion, typical Excessive Tide fashion, we did that by July of 2023. And we turned the primary Canadian hashish firm to turn out to be free cashflow constructive.
We carried that streak or we proceed to hold that streak. It was not a one trick pony. We proceed to hold that streak for six quarters in a row. We have simply provide you with one other $6 million, $5.9 million in constructive free money movement quarter. So whereas we’re rising so quickly, we added 30 places in fiscal 2024, 29 places in calendar 2024.
So you may think about Rena, whereas rising, including places we’re producing constructive free money movement, that is form of our purpose. It may well fluctuate in any given quarter, however for the 12 months, we’re undoubtedly going to stay free money movement constructive whereas rising at a speedy price of 20 to 30 places organically. And any M&A might be incremental to that.
RS: As we wind down the dialog, for which I am extraordinarily grateful, so thanks for taking the time and going deep and going large. I respect this very a lot, Raj.
As we wind down, I am curious the way you’re fascinated with the subsequent 12 months, 2 years, 3 years for Excessive Tide. And in addition I am curious the way you envision the panorama evolving as these years develop.
Clearly, all of our crystal balls are damaged, however I am curious the way you see it growing. In different phrases, do you see it as one, two main gamers, after which there’s going to be a whole lot of acquisitions? Or, how do you see it evolving?
RG: Yeah, luckily for Excessive Tide, we’ve a really simple highway forward, however nothing in hashish is easy, Rena, as you simply identified. It is a very, very difficult hashish panorama on the market.
And though I used to be jealous somewhat little bit of our MSO associates, that jealousy has become, I am feeling somewhat bit sympathy for them. Like they don’t seem to be going anyplace. It is giving us extra time to get into the US, which is an effective factor for Excessive Tide.
However typically, our 2 to three 12 months plan is meet that 300 retailer goal that we have given to our buyers. We have been very vocal about it. We have been those that advocated to the Ontario authorities on behalf of the business to extend the shop cap from 75 to 150. We did that efficiently.
Now we’ve room so as to add one other 75 places in Ontario alone, and we’ve room so as to add one other 110, 120 places throughout Canada, probably much more, that ought to convey us north of a 15% nationwide market share in Canada. And we will be doing this whereas we’re producing even increased gross margins and higher backside line in our European operations, beginning with Germany.
So a number of pleasure in our firm proper now. There’s a whole lot of onerous work forward of us. However we’re by no means shy of onerous work. And I really feel by the point we get our footing in a very robust method in Europe, and by the point we get nearer to our long-term purpose in Canada, I believe the American market might be ripe for us with probably de-scheduling or a full federal legalization alternative on the horizon at the moment.
RS: Thanks, Raj. I respect the dialog. If you wish to share with listeners the place they will discover out extra about Excessive Tide or how greatest they will become involved, completely happy so that you can share that now. And the rest you wish to share, completely happy so that you can have the final phrase.
RG: Thanks a lot. So hightideinc.com has a whole lot of good info. I’d encourage your listeners or buyers to go obtain our investor deck, which we refresh and replace each single month. It is obtained some very, superb insights.
And yeah, keep tuned with our progress. We’re an thrilling firm. We’re not messing round. We’re right here to show a degree. So keep tuned on what we do subsequent.
