Alcanna Inc.

This conference is being recorded. This conference is being recorded. All participants please stand by. Your meeting is ready to begin. Good morning. We would like to welcome everyone to LKANA, 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 -and-answer session. The questions and 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 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, LKANA's 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, LKANA 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, who's our 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. So, for LKANA'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 or some of the many transactions that we've done this 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 were 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 LKANA, 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 is just 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 going 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. I guess that's the thing I wanted to stress the most today. LKANA 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? I think you've seen all the transactions we've done over the last 12 months. We'll sell assets when the sale prices are creative, 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 of 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 achieve for those assets and to allocate that capital we felt was extremely beneficial to shareholders in 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 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 evicta. 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, Alcana is about capital allocation, not about growth for growth's sake. We paid back our convertible to ventures recently, $78 million. Company analysis 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 cashflow 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 canceled at about a 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 are 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. It's tremendous selection, but also tremendous value, as good a value as you'll find in an east discount. People came back and came back. The numbers for the 1 and 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 over the last 12 months, we 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 was spinning out our NOAA cannabis division into an RTO and using other capital with different investment horizon and timeframe to build that business versus using LKANTA's capital, given our business. We are extremely pleased with the job that Darren and his team have done in the very early going still with NOVA. Our LKANTA 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. 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 to provide you an update on our recent developments. It's been a busy and incredibly exciting time for NOVA since our Go public transaction just two months ago. As a reminder, NOVA's growth strategy is anchored in the value buds 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. Boring from LKANTA'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 value bud 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. I wouldn't 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 LKANTA's relationship with national landlords to identify store locations that represent sustainable value. During the first quarter, the team began executing on the value bud strategy, converting stores from either the NOVA Cannabis or Deep Discount Cannabis banner to ValueBuds. 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 ValueBuds. And while it's still early days after the conversion, the initial uplift in sales following the conversions has been very strong, with new ValueBuds 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 conversion. As we continue to increase the number of ValueBuds 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 SweetTree to ValueBuds 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.

Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star 1 on your device's keypad. If at any time you wish to cancel your question, please press star 2. Please press star 1 at this time. If you have a question, there will be a brief pause while participants register for questions. Thank you for your patience. And the first question is from Kyle McPhee from Cormark Securities. Please go ahead. Your line is now open.

Hi, everyone. Thanks for all the comments. Starting on the liquor side of the business, I'm just hoping for some color on what you're seeing with the -over-year sales trend in Q2 so far. You clearly had a big tailwind in Q1 from COVID and all the other market share moves that are still paying off. But in Q2, which is now comped against a full COVID quarter, are you still seeing any lift or are you kind of back to neutral for the divestment-adjusted business? Any color there would be helpful.

Sure, Kyle. Hi. You know, I guess we can't talk about exact numbers and so on. But, you know, I think you've in your notes, you pretty well got it. There's tailwinds still and nothing's really changed COVID-wise versus, you know, last year was a weird year. The first three weeks of March was huge panic buying where people thought liquor stores would be closed down. People were trying to score it up in the stockpile and so on. And then when liquor retail was declared pretty well worldwide as an essential service, through the month of April, sales were relatively low last year because people were essentially drinking up their stockpiles that they bought. And then it kind of got up to into May, later in May, finally, when that was done, it sort of started to just settle into a new normal of a pandemic, which we saw for the balance of last year. Given that there's really nothing much changed out in the external world from back then, you know, I think it would be a fair assumption to say that things are pretty much just the way they were. You know, how the actual quarter turns out because of the weird bumps in April, I don't know. But net day after day, week after week, we're very, very pleased with how things are going in Q2 still.

So far, Kyle, we haven't skipped a beat from where we were trending in Q1 in terms of just in the current year when you look at week over week, forget about over last year and our business is doing very well. And so if we keep on this trend, we're going to have a good quarter. How it'll shape up against last year, I don't know yet. And that's really going to come down to how do the long weekends perform. And that comes down to weather for the most part. How do these restrictions on social gatherings shake out over the next couple of months? I don't know. But we're very happy with how the business is doing today.

Got it. Thanks for all that color. And also on liquor, the Alberta liquor retail landscape, you guys were pretty disruptive in recent years. You know, you're now back to your normalized type margins, but wondering if the landscape, all the other peer retailers are staying pretty status quo with things like pricing and promotion or are there changes starting to emerge? Essentially, just wondering if it's still a pretty rational competitive environment out in Alberta.

I think it's pretty rational, given that the liquor retail industry is all winning as a whole. Unfortunately, on the back of the closures of the restaurants and the bars and the lounges and things going on out there, I think everybody in the industry is pretty rational, given that the rising tide floats all boats.

And we don't necessarily, I mean, you can never, competition is going to do what they're going to do. You don't spend a huge amount of time worrying about it in advance as you react. But we don't see at the moment anyone that looks like they may be kind of some kind of disruptive market share gains. I mean, our main competition are the grocery stores and Costco, and they build stores near their grocery stores for the most part and use them as part of an integrated business for their grocery business. So they're not just willy-nilly growing the liquor business, which is relatively insignificant in the grand scheme of their world. They have very big liquor businesses, but not compared to the size of Loblaws or Empire, Sobeys. So we're, the industry, I think, is in good shape, as David said, and everyone's interest to keep it that way. And the consumers are winning. We've got the prices are down at a really good margins for our vertical consumers to pay as cheap as retail alcohol prices anywhere in Canada. So it's win-win for everybody. The

one thing to think about for everybody looking at the comps for Q2 versus last year, we really cut back on promotions and marketing last year for the first three or four months of the pandemic. Customers were not paying attention to those kind of materials. And so we'll have a little bit incremental marketing spend this Q2, just normal promotional spend. So that should be factored in and normal promotions will lead to some promotional type pricing, which will play with the margins a bit. So again, we're happy with where the business is. It's normal. But look for that comp as you go through for Q2.

Thanks for that, Keller. And last one for me before I pass it off, just on the high level on the value buds disruptive strategy you guys are rolling out. Are you seeing any competitive responses yet from the other peer retailers and maybe even just give some color on where you think all this big sales that is coming from that 120 percent gained is this from the peer retailers or is this largely just from the illegal channel?

Well, I think we're thanks for the question, Kyle. We're seeing it from both, really. We've got some anecdotal evidence where we've had stores where we've got Nova stores and value bud stores in kind of close proximity to each other, wherein we've launched Nova or sorry, launched value buds and seen this incredible lift, but hasn't necessarily negatively impacted our some of our Nova locations too much. And then in other contexts we've seen, which just sort of speaks to the fact that we're seeing people coming in from the unregulated market to join us. They're not necessarily moving from one to the other across the board. In other contexts, we're very much hearing that we are taking from our competition that's out there and we're seeing some plays by others to try to respond to us. We're happening in Ontario a little bit and you're seeing some price matching efforts attempted underway in Alberta as well. But again, the key takeaway on that one is that we're making this move first. We're making it aggressively and we're expanding aggressively and we've got a lot of confidence that we're going to continue to see the growth that we've seen in a few short weeks since we've actually converted these stores over.

And that's a good point to highlight, Kyle. When Elkana did our pilot back in the fall with the first four stores, a ramp up period was really, really long. Like we had some really good results right off the bat, but ITZ has just continued to grow and grow and grow in most of those stores. Jamie and I were looking at one of those four stores we hadn't really paid attention to in the last couple of weeks and we were just almost fell off our chairs. And because we can't market in this industry, it takes consumers a while, word of mouth, coming and trying it once in a while to see what kind of value offering that we're offering in these stores. And so to be up 120 percent at this point in the short period of time in these 18 stores is quite exciting. The projectory that we're on I think is quite significant and hope to see some really good gains here in Q2, Q3, and then into Q4 still.

Got it. Maybe just a quick follow up. When you talk about sales continuing to accelerate beyond the 120, is that still at that 19 percent margin or have you started lowering that even more? You know, your filing is indicated maybe 12 to 15 percent is where you're taking it down to.

Yeah, we've become more aggressive, Kyle, with that and we are moving those margins down, which is going to translate to pricing on the shelf that customers are really responding to very well. Now, we started that process with a view again to only increasing the volume and the share capture strategy and to increase that trajectory in terms of growth on the top line across the board.

Got it. And just to confirm here, my math, like if you're getting a sales list of 120 percent plus, even down at gross margins of 12 to 15, you're still neutral or still adding gross margin dollars while you take this share, correct? So you're not having a negative contribution margin from the stores?

Yeah, there might be in the early weeks, Kyle, but no, we're quite confident and that's why we're moving them down even further. There's more market share to be captured and generate at least the same amount of gross margin dollars. But we think, as we saw in the liquor trial or the liquor phase of our discount entrance into the market, that we can then move it back up and make substantial dollars on the bottom line in time.

Yeah, but move it up doesn't mean move the prices back up and mess with the consumer. It means increased margin in cannabis, unlike liquor. We have a decent private label business in liquor, but it's very different. You're competing against massive national iconic world brands. Cannabis, there's nothing like that. So, I mean, Darren's much better to comment on this, but he will. But the private label opportunity in cannabis is immense to build our own brand and capture some of manufacturers' margin as well as our own, so normal retail margin. So that will be a huge source of margin enhancement for a major player with a lot of volume that can participate in a proper white label program. Darren, you want to add some more in terms of where you're at?

Well, you know, as we said at the when we launched this, that was going to be a significant part of it. And Jamie is quite right, Kyle, the fact that brand loyalty, I mean, even brand awareness still doesn't largely exist in the cannabis space in this country. And given the regulations and the restrictions in place, the place to build brand awareness and build brand loyalty is within the four walls of retail. We recognize that we know we can communicate with the customers that are there and do so effectively. So with our private label plan, which, again, we've communicated that we intend to get out in the second half of this year, we believe that that's going to actually only augment what we're doing in terms of, you know, we'll call them the national brands or the LP brands that are there, which will only further entrench our position in the minds of the consumer as the destination to come for the product, the quality that the consumer wants at a price point that's going to be unbeatable in the marketplace.

OK, thanks for all the color. I'll pass it off now.

Thank you. The next question is from Graham Kindler. Please go ahead. Your line is now open.

Hi, and thank you for taking my questions. I wanted to start out on the liquor side of things. On the last earnings call, you called out some of the consumer trends you saw with a bit of trade down exhibited by customers in the holiday period, probably driven by the fact that they weren't spending it with any large groups. When we consider the commentary you gave at the top of the call about, you know, things trending very well in stores in terms of volumes and customer behaviors, I was wondering if there's any specific trends on the purchasing behavior that might affect the comp a bit, whether we're starting to see customers trade back up or if that trade down phenomenon still persists, since the Q2 would appreciate any color there. Thank you very much.

Thanks, Graham. The trade down that we saw in the fourth quarter really was around the holiday events. People weren't entertaining as much. They weren't having people over, so they weren't buying the top shelf type stuff for those parties. They were just drinking their regular stuff for the most part. That's generalization. In Q1, early Q2, other than Easter, which is a less significant holiday, you don't have those same comps to worry about. And so I think people were just in a normal habit of drinking their normal stuff, and we didn't really see any trading around from Q1 2020 to Q1 2021.

Understood. Thank you very much for the color there. Then switching over onto the NOVA side, with respect to the eight retail authorizations out of the total 19 planned stores in Ontario right now, is the expectation that those would be able to open immediately after the emergency order is lifted in the province, or have there been any further delays or construction delays on those authorized stores because of COVID, or is it basically waiting for the green light from the province here? Thanks.

Thanks, Graham. I appreciate that. In terms of Ontario, it's a little bit of both. We've got a number of stores that were ready to open. In fact, just yesterday, we opened a new store at Bloor and Lansdowne, and we've got a Queen West store, which is scheduled to open this week as well. But in terms of the timing on those specific ones, the individual RSA dates are a little bit further out. So we'll be looking at those again, opening up towards the back half of this quarter and the beginning of the next quarter, when we'll be seeing most of those stores actually opening up in Ontario.

Yeah, but to further to your point, Graham, the construction is not slow and it's halted. We have not been able to touch these stores for a very long time, other than like it was about a very brief period there for a week or two where it opened up and it got shut down again. So unfortunately, it's just it's nothing to do with us since it's like in the time of COVID. Many stores which we would have hoped to have had built out and ready for both an RSA or lifting lockdown are not going to be because we're not allowed to do construction. So as soon as that lifts, we've got our teams, we've got our construction crews, our contract, everybody's ready. It's just got to wait for being permitted. So, you know, and your guess is as good as mine when that'll be. At the moment, I think it's early June at the earliest. And I guess depending on the situation at the time, the Ontario government will decide whether we can get back in back to business of construction or not.

OK, understood. Thanks for that. Then my last question here is with the additional 30 locations you called out in the press release in Ontario that are under negotiation, can you can you give us any colour on what the mix looks like there? Are these existing operating stores? Are these leases on just retail locations at this point in time? And, you know, quite a substantial amount with 30 locations under negotiation. What does that mean relative to the valuation environment? You know, I know I know it's looking at the time value of scarcity in Ontario with the increase in the ramp of retail authorizations. Is the market getting better or more conducive to making some some nice deals here as the year goes on? Thanks.

Sure. Thanks, Graham. The stores that we're talking about there, those are net new that we're looking at developing, which we've got a nice mix, but it's consistent with our overall strategy as we've as we've articulated for some time now, Graham, which is trying to move away and definitely moving away from from the areas which are perhaps oversaturated for the downtown cores. And again, looking at locations where our core consumers live, work and shop the broader 905 strategy with smaller communities throughout southwestern Ontario. But those 30 stores that we're talking about there are ones that we are looking at in terms of we'll call them organic for the most part, which is to say ones that we've identified as fitting our model that we levered the Alcana real estate team to help get us leases that are favorable to us. And we started to work towards those ones in terms of your other question, which was if I'm understanding it correctly, trying to understand about what's happening in the Ontario market. You know, listen, Graham, it's no surprise that a lot more RSAs are being issued and been in process for some time. And we will continue to monitor that. And as we look forward to our acquisition strategy, we're only going to do those acquisitions if they make sense to us. Right. The market is going to continue to, I'll say, compress. There's going to be increased competition and valuations are going to continue to fall, we believe, for those opportunities that are out there in the market. So we're going to look for those that fit within our broader strategy and only do those that make sense, obviously, economically to us. We're, again, well capitalized. We've got a strong strategy and we want to be vigilant in that going forward.

OK, understood. Thank you very much for that.

Thank you. And the last question is from John Zempero from CIBC. Please go ahead. Your line is now open.

Thank you very much. Good morning. I want to start on the liquor side of the business. And if we look at its history, this segment had achieved gross margins, I think, north of 25%. And obviously, there's a lot of changes since then. And the heavy discount component would suggest a lower ceiling. But how should we think about what level these gross margins can settle at once you've extracted gains from private label and some of the other initiatives you're working on? Is there a long-term target that you do have in mind?

Oh, hey, John. Yeah. Again, just given the history, as you say, where it's been in the Alberta marketplace, and especially in the last few years, largely as a result of our own doing, we would, in terms of the ability to raise prices for the consumer that they see, there's probably not too much room left to go. You can always play here and there, but not a lot. Our ability to raise margins will be based on, you know, we continue to maximize our buying power and using limited-time offers to make sure we get a couple of points. And, you know, it's a business of really small margins now, and it's detail, detail, detail. Every little bit helps. We have a warehouse in Edmonton. We will soon have a warehouse in Calgary, which is a back part of a new one. And beyond, we're opening with, we have a large extra space, so we're going to use that as another warehouse to be able to hold LTO, given the cost of capital generally being so low, it's very advantageous for us to make large buys when the vendors put products, especially the hot-selling products, which you don't make a lot of margin on anyway, the Smirnoffs and Captain Morgan's of the world, to buy those in bulk when you can to save a few, even a few basis points is huge to us, given the volumes that we process. So that will be things like that. Again, we continue to hone and enhance our private label program, which continues to do extremely well, especially just interestingly enough, it's, wine is always the cornerstone to that, but we've been introducing some private label spirits made right here in Alberta, which have been extremely successful over the last 18 months, and those are great margin products for us, as well as great for the vendor here in Alberta and for our province. So with those sort of things, you can always kind of hope you can get maybe another 100, another 150 or over time, but just raising prices, not so much. We don't want to go down that trap again. I mean, you could do it for a year and then you'd be back to where you were again. It does not logical to us. That's short-term thinking.

Understood. That's very helpful. Thank you. Moving to the balance sheet, even after the SIV, it's still a very well-capitalized business in terms of access to liquidity. So any update on what you plan to do with the free cash flow that the business is likely to generate in 2021 and 2022? And if it's M&A, what would you potentially be looking for?

We're going to build one and beyond. That's what we're going to do, John. And also some smaller format convenience, discounted liquors, largely those ones in new areas, new neighborhoods of Calgary and Edmonton particularly that are growing just as cities grow. So we're pretty well – our free cash flow is pretty well fully spoken for. The four one and beyonds this year and the other five we've targeted for next year and four for the year after. Right now, with hoping to get more, we have a financial capacity to build as many as proper – I stress proper – properly allocated capital sites we can find. We're not going to build them just for the sake of it, but we're going to build them where we think they're successful and where the overall even of the company will be enhanced to justify the capital invested. So yes, we'll be providing free cash flow, but as you know, we also have the capacity to consider future return of capital to shareholders. And there's the usual mechanisms. We've used one. I mean, we can always use that one again, but there's NCIB dividends. The usual suspects are always available and we do have the ability and the capacity to do all of the above if we choose and shareholders who contact us quite a bit and give us their views as to what they think we should do with the company that they own part of, which we always welcome. It's their company after all, ours, although we are big shareholders personally. We'll see what the future brings. We're also very cautious generally by nature, so we don't – COVID is just so uncertain. Things are so uncertain. Alberta economy right now is really picking up again as the oil patch starts to reinvigorate itself after a very long dry spell. If oil prices continue to stay at the levels that we're seeing, a lot of people are back at work that haven't been working for 18 months and so on. So anecdotally, things are looking positive for us. If our results keep continuing like this, yeah. M&A, again, anything that's a creative and it's proper allocation of capital, we'll certainly look at, but we're not trying to find one. We'd rather give the capital back to the shareholders than we'd go do some cowboy acquisition just to feel better.

Understood. Okay. A question for Darren. I want to better understand the sales increases you see when you transition these stores to value buds. And I think it was 120 increase you saw from the recent conversions. It's remarkable, but it is a step down from the 240% or so you saw from the initial conversions. So is it that these stores that you're converting now, are they behaving any differently or is it that the earlier test stores started at a lower level similar to what you're seeing now and then they jumped up? Is there an element of competitive response that's impacting that? Just would like to understand the cadence of increase on the recent conversions versus the initial ones. Is there anything to help reconcile the difference between those two numbers?

Yeah, I appreciate it, John. Appreciate the call or the question rather. You know, these stores that we're talking about here, we really kicked this process off, you know, middle of this last quarter. And what we've seen has been early days in terms of the lift. When we talk about sort of what we saw with the original experiment last year, that was over a longer period of time. It was a different marketplace, to be sure. But this is still early days. And we've got confidence that these stores and the trend lines associated with them will continue, particularly as we get even more aggressive in the margin profiles. And really what matters is the price that the consumer is going to be seeing on show. So when you take a look at it across the board, this is very much in alignment with what we've seen previously with the experience just at a broader scale. There's absolutely, you know, increased price competition from folks out there as they recognize that this is really where the core of the market is. And they really also come to recognize that this is where the core consumer base is. We just happen to have identified it sooner than anyone else.

And, John, just to put a fine point on that, for the same period as those four stores that we piloted last fall versus these 18, the 18 are on the same projectory as those four were at this very same point in time. And so, and maybe even a little bit better. I might be being conservative in that comment. So we're very happy with where these stores are today. Are they going to get to 240? I don't know. That would be a home run. But anything north of where we are today, we're in really, really good shape.

Okay, that's very helpful. Thank you. And then one last one for me, more of a housekeeping question. I wanted to ask about administrative costs and what to expect here. You called out the, I think it was 2.1 million transaction costs in the quarter. If we back that out, we get to a bit over 6.5 million. I think last quarter we suggested maybe the Q2 or Q3 number from last year was probably what you'd see moving forward. And that was around 5.5 or 6 million. So was there anything else one time in nature that you can call out or is Q1 the right way to think about administrative expenses moving forward?

No, and I guess we weren't maybe as clear as possible that we said transaction costs and other non recurring amounts. And so, yes, Q2, Q3 is a much better projectory for going forward.

Got it. Okay, that's all for me. Thank you very much.

Thank you. That concludes the question and answer session. I'll turn the meeting back over to Mr. Burns.

Thanks, Lori. Appreciate everybody's interest as usual and we've got to get back to work. Thanks very much. Till next, till August.

Thank you. The conference is now ended. Please disconnect your lines at this time and we thank you for your participation.