Alcanna Inc.

This conference is being recorded. Cette conférence est enregistrée. All participants, please stand by. Your meeting is ready to begin. Good morning. We would like to welcome everyone to Elkana Inc. and Nova Cannabis Inc.' 's first quarter 2021 earnings results call. At this time, all participants are in listen-only mode. Following the prepared portion of the call, we'll conduct a question-and-answer session Instructions will be provided at that time for you to queue up for questions. A copy of the company's earnings press release and management's discussion and analysis is available on their website and includes cautionary language about forward-looking statements, risks, and uncertainties, which also apply to the discussion during today's conference call. All amounts discussed on today's call are quoted in Canadian dollars. I will now turn this call over to Mr. James Burns, Elkanah Chief Financial Alcanis Chief Executive Officer. Please go ahead, sir.

Thanks. Good morning, everybody. Thanks for your interest in both of our companies. Somewhat unusual call today with two businesses. And a departure from our norm here, but I think the statements, Alcanis statements certainly were so noisy that it probably takes a little bit of explanation. I think we'd like to give some overview and perspective on things before we go to questions. And Darren Karasuk, the CEO of Nova, will also give an introduction and an update on some of the mostly subsequent events that's happening at Nova since the statements really reflect a company that barely exists anymore from last quarter. From Alcanta's point of view, we were very pleased with the first quarter. The top line was great and the gross margin equally so, despite having to lap over the last three weeks of March of 2020 when the pandemic first hit and there was significant hoarding and stockpiling and sales like we've never seen before and probably never see again. The bottom line is a little noisy, but most of that is... Transaction costs are some of the many transactions that we've done over the last 12 months, and most of those expenses are non-recurring in our opinion. Operating costs at the store level are as tight as they've ever been, and equally at our head office administration level, we're equally tight and continue to make adjustments where we can find them. If we take all the non-recurring costs out, our bottom line for Q1 actually is about 50% better than it would have been last year. If we're going forward, the business continues to go well. No one knows what the impact of COVID is. Lockdowns continue in Alberta, our main market, obviously, for Alcanna. And as they were last year at this time, last year, Outdoor events and barbecues and backyard and so on was permitted. This year, not at the moment. But on the other hand, the playoffs are here soon, and the Oilers are in with a good chance of a decent run. So that always helps us out with our sales, especially in our northern Alberta-centric portfolio of stores. Regardless of the short term and things that are out of control, weather and so on, which just is what it is, We're very confident our business is strong and our market share continues to grow in the trade areas that we want to be in. When that's key, we're not just go for the sake of it. We don't just have stores for the sake of having stores or putting out press releases. We have stores and we allocate our capital in a manner that is most efficient for the shareholders. And I guess that's the thing I wanted to stress the most today. Canada is about capital allocation. That's what it's been for the last three years, and that's what it will continue to be. Efficiently allocating capital, shareholders' capital, in a way that maximizes the return on that capital. So what does that mean? And I think you've seen all the transactions we've done over the last 12 months. We'll sell assets when the sale price is accretive. and especially when those assets require capital investment just to basically continue where they were at, which was the case on Alaska and our first transaction on the north part of Vancouver Island. Or in the case of the lower mainland and interior stores in BC, the stores were in pretty good shape as a rule, but there's the risk on a convenience format store In just 12 months from now, the 20-year moratorium on new licenses expires, and no one knows yet what the BC government will choose to do to extend it, to renew it, to adjust it. The price we achieved for those assets and to allocate that capital we felt was extremely beneficial to shareholders and their investment. And lastly, and it goes somewhat unreported, but we've also exited 31 low-volume stores. over the last 12 to 15 months. Some people call them underperforming, but that's not really true. They're really just low-volume stores in areas which really never are going to get any better, and they don't really – it's not an efficient use of our capital to have $250,000 of inventory, give or take, in each one of those stores, as well as have to look after them, have the overhead to look after them, the area manager and the infrastructure to make minimal EBITDA. That's $7.5 million back on our books in capital that can be redeployed productively or returned to shareholders that wouldn't have been otherwise. Again, Alcanna is about capital allocation, not about growth for growth's sake. We paid back our convertible to ventures recently, $78 million. Company in now, this is a milestone for this company, which was riddled with debt and declining market share only a few years ago. We now have zero debt. zero on our balance sheet, and $100 million of inventory fully paid for. So we have tremendous firepower and dry powder if, in fact, the situation comes. We certainly have the financial capacity, a mix of cash flow from operations as well to weather any storms that may come. And this last year's shown the world anything. It's who knows what the future may bring, good or bad. At the end of the day, though, for Alcana, it's all about allocating capital efficiently, the shareholders' capital. We returned $30 million, or will tomorrow or Thursday, return $30 million of capital to the shareholders by way of our special issuer bid, which we will achieve. That's about 10% of our float today will be retired and cancelled at about 3% premium to yesterday's closing price. which, again, we think that was a good allocation of shareholder capital versus trying to make acquisitions or do things to force deals that aren't there. Going forward, we expect a very busy half of this year. We've got 4.1 and beyonds coming up, which we're excited about always. That brand, that banner has been spectacularly successful during the pandemic. As people introduce themselves to it, maybe it's because they're great big buildings and they could social distance easily. But once they got in there, they realized that it was not a luxury brand. It's actually a discount brand. And it's tremendous selection but also tremendous value, as good a value as you'll find in an East discount. So people came back and came back. And the numbers for the Wine & Beyond banner are staggeringly higher than even our other stores. We are focusing our growth on that banner. That's for 2021. We've got four more. We are also actively filling the pipeline right now for 2022 and 2023 with nine targeted sites in various stages of negotiation. Net-net, over the last 12 months, we've sold about $12 million of EBITDA for $137 million. We'll replace that EBITDA by 2023 at a capital investment of $25 million, plus another give or take same amount in inventory. In our opinion, that is allocating capital appropriately and on the benefit of the shareholders. The last and probably the most major initiative we did to allocate capital and to was spinning out our NOAA cannabis division into an RTO and using other capital with different investment horizon and time frame to build that business versus using Elcanis Capital, given our business. We're extremely pleased with the job that Darren and his team have done in the very early going still with Nova. Our Elcanis support and experience in executing a game plan exactly as Nova is planning, I think we're very confident that the early successes will continue to occur. And with that, I'll turn it over to Darren Karasuk to comment on NOVA more directly. Darren.

Thank you, Jamie. Very much appreciate it. And good morning. I'm happy to be on this call today and to provide you an update on our recent developments. It's been a busy and an incredibly exciting time for NOVA, since our GoPublic transaction just two months ago. As a reminder, NOVA's growth strategy is anchored in the ValueBuds banner and servicing the unmet needs of the high of the value-conscious cannabis consumer, a high-volume segment that makes up about 70% of the consumption volume in the market today. Borrowing from Elkana's success and lessons learned in the discount liquor retailing business, We're developing stores and offering products that resonate specifically with this value-focused consumer and offering a truly better alternative to the unregulated market. Our ValueBud stores are located where our customers live, work, and shop, and are designed for both ease of in-store navigation and to accommodate increased customer counts and sales volume. Geographically, our focus is on largely underserved areas of Ontario and, to a lesser degree, Alberta, where we already have a significant footprint. And this sets our strategy apart, and we believe it will bear fruit in our financial results in the years to come. As of today, we have 55 stores open and a further 30 in development for completion in 2021. This is exclusive of a much larger number of potential sites that we're evaluating. We continue to leave our Alkandas relationship with national landlords to identify store locations that represent sustainable value. During the first quarter, the team began executing on the Value Buds strategy, converting stores from either the Nova Cannabis or Deep Discount Cannabis banner to Value Buds. To date, 18 locations have been converted, primarily in Alberta. And we've also converted the original Nova store in Ontario on Queen Street West to Value Buds. And while it's still early days after the conversion, the initial uplift in sales following the conversions has been very strong, with new value bud stores seeing, on average, sales increases of 120% compared to the period before conversion. And these increases will realize that a gross margin as a percentage of sales of approximately 19% compared to approximately 32% in the period before conversions. As we continue to increase the number of value buds locations and introduce this banner to more customers, we anticipate our gross margins as a percentage of sales will be blended out to approximately 12% to 15% in the second half of 2021. Of course, we're still in the process of adjusting our pricing strategy at these new stores. As we start to implement the program in full, we believe it will continue to have a positive impact on our sales volumes and market share growth. Additional store conversions from Nova YSS and sweet tree to value buds banner will be substantially completed in Q3, 2021. And this in spite of both a worldwide microchip shortage, which results in longer than expected lead times for certain point of sale hardware, as well as the COVID related construction delays that all of us are dealing with. We have an aggressive growth plan this year, and with close to $38 million in cash at the end of Q1, we're well-funded to continue to execute on our plan. But I think it's important to underscore that although we're building one of Canada's largest retail cannabis footprints in Canada, we believe what really sets us apart is our strategic focus on the high-volume, value-conscious consumer and our ability to offer a truly better alternative to the unregulated market. Now with that, I'll turn it over to the moderator to open us up for questions.