Alcanna Inc.

Good morning. We would like to welcome everyone to Alcanna, Inc.' 's second 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 for analysts. 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, Alcanis Chief Executive Officer. Please go ahead, sir.

Thanks, Laurie. Good morning, everyone. I appreciate your taking the time to listen in on our results in the middle of the summer. Needless to say, if we'd have known that the first, second quarter of this year we would actually be flat to the second quarter of last year, we would have been extremely surprised and never guessed that. So we're very encouraged by what's happened and continues to happen in the marketplace despite smoky weather and so on, sales have been robust. I think we've seen that even though lockdowns are over in Alberta, the fact that there's no lockdown doesn't mean that people are necessarily comfortable yet, and even if they are, of going out to the same degree as before. And even when they do become so, there'll be... Just the economics and lifestyle changes of eating at home and entertaining at home have become somewhat more entrenched than they were prior to March of 2020, which is all things that we see as very positive tailwinds for our business going forward. We're particularly pleased on being able to retain margins, even though it's now a competitive marketplace again where it has to institute marketing and promotional pricing on occasion. margins have largely stayed the same you know with it within range of where they were before so again that is that's encouraging companies on track as we have announced before to to build its for one and beyonds their ones just finishing construction they should all be open within a couple of months which will contribute significantly to 2022 EBITDA And with that, I will turn it over to you, Laurie, to check for questions, please.

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. You may cancel your question at any time by pressing star 2. Please press star 1 at this time if you have a question. There will be a brief pause as participants register for questions, and we thank you for your patience. And the first question is from John Zampero from CIBC. Please go ahead. Your line is now open.

Thank you. Good morning. I wanted to start on the liquor margins, please. These were flat on a continuing basis. You've made significant improvements on this metric over the past couple of years. I'm just wondering, is there still room to grow it meaningfully? If so, what would the drivers be that remain that would help you get more traction on that line item?

We have made a lot of progress over the last couple of years, John. It's been encouraging for what we've done, what the team has done to be able to bring the margins up to where they are and continue to keep the customer traffic in all of our stores. It's been a very positive sign that we've been able to accomplish over the last couple of years. Where they go from here, I think we're probably in a state where you won't see material growth from this point forward. There's continued improvements that we can always do with private label, which has been a good part of the increases that we've realized. and will continue to be part of the increases as we go forward. But you're not going to see a material jump from here at this point in time.

Yeah, we'll continue with – as private label continues to grow, that helps margins as LTO purchasing and taking advantage of one-time price reductions in the market and using our balance sheet and our warehouse to do that. We can always – It will still have room to go up a little bit, but incrementally now, not big prices. The prices may have to come up in the marketplace to the consumer, but that will be driven by costs. It's manufacturing prices, and the prices that we get charged, that the vendors charge, that their costs are going up, everything from shipping to glass to packaging, as we all know. But that's a little different.

Okay, that's helpful. Thanks. That leads to my next question was on inflation. Are you willing to share like a percent increase when you roll in all of those costs together? Or at the very least, how would you characterize it versus prior years? And do you think you can offset all of it with pricing?

It's early days for pricing. We haven't really seen it. It's just starting to come from the vendors right now, John, to be honest. You know, they are going through their own challenges. They had, even though retail liquor continues to be very high during this pandemic era, overall, a lot of them had declines in production as they lost their on-premise, and therefore their overall. So the increases are just starting now, so I don't think we'll know for six, nine months. And we'd anticipate that we would We'll pass them on to the customer as will the competition. We're not going to use it as an excuse to take margin when the prices are going up anyway, but most likely, as you say, it's inflation. It's system-wide, and we think it'll just inevitably be passed on, as is going to happen in groceries and food and almost every other product is well-documented.

Yeah, understood. Okay. And then one more for me, please. On the wine and beyonds, banner. Is it fair to say that results from that banner continue to outperform the overall network? And any other comments you can give on the performance within Wine and Beyond versus the discount space would be helpful.

Yeah, the Wine and Beyonds continue to do very well. A ton of customers have discovered that brand or rediscovered that brand through the pandemic, and they've stuck with us. And so we're seeing relatively good results in that banner. You know, the other banners are doing very well as well, but We're very encouraged with how the Wine and Beyonds are doing. The team has done a terrific job of servicing the customers out there and finding ways to make more and more money as we go through the last 18 months.

Okay, that's helpful. I'll pass it on. Thank you.

Thanks, Joe.

Thank you. The next question is from Graham Crindler from 8 Capital. Please go ahead. Your line is now open.

Hi, good afternoon, guys, and thanks for taking my questions here. I wanted to ask about some of the moving parts within the same store sales growth when we're looking at versus the prior year and two years ago. What does that look like in this quarter in terms of basket sizes and number of transactions? I know things held in flat lapping the peak pandemic, but has there been any marketable change there within those components? Thanks.

When you compare against 2020, Graham, there is significant changes. Last year at the beginning of the pandemic, as happened in grocery and other retail environments, the customer count dropped significantly in the early days, and the basket size increased substantially as people were looking to leave their house less frequently and stock up when they did go out. So when we go fast forward to 2021, what we've seen is very comparable customer flow and customer traffic to 2019, and comparable basket size, still elevated basket sizes compared to 2019. So people are back in the habit, out here in Alberta at least, with how frequently they visit retailers, and liquor in particular.

Okay, understood there. Thanks, David. Then as a follow-up, is there any commentary about how that same store sales growth trended through the quarter and what that looked like exiting June, just given how the landscape might have changed, COVID cases, and potentially some of the weather impacts?

Yeah, Alberta started lifting restrictions in June. And so up until June, we were seeing some small increases. And then when the restrictions lifted, we saw some small decreases. But nothing material, like a barbell,

either side of that spectrum no no and again you know and again it's it's very we're very cautious comparing to 2020 especially when you start to getting in time increment less than the whole quarter because 2020 was a roller coaster panic for the first two weeks panic buying and stocking Then everybody stayed home figuring this thing was going to last a month and went through everything they bought in the panic buy. So it's been almost on a weekly basis. You can just go back to whatever front page story there was a year ago in the week and either change or we had good sales or poor sales last year. So it just flips this year. It's much more of a normal thing. This late 18 or 19 for us is other than we're, you know, well, well up, almost 11% over what 19 was, which, you know, we take all day long. It's exceptional.

We're back to monitoring weather. You know, weather is what's driving our business or the smoke or what it's not. It's been happening in the province. Those are much bigger drivers these days. In summertime, yeah, yeah.

Understood there. That's actually a good segue to my last question. With respect to the weather there, you know, there'll be the typical weather patterns that impacts business. Can you comment on particularly the wildfires and the smoke, how that's had any impact so far or whether that's changing behavior or what that might look like in terms of Q3?

I think just anecdotally, just everyone knows from just the people around the office and our teams in the stores, people wonder when the index gets way up to 8 or 9 out of 10. People tend to not be out in the backyard so much or be out and about so much. It's just uncomfortable. You cough and eyes water. If we still own stores in British Columbia, we had a very, very big business in the interior of BC, which we no longer own. I think the situation would be pretty dire on many fronts, but for us in Alberta... It comes and goes and lasts for a few days in certain parts of the province and gets blown away again with the weather. So it probably has an impact. But on the other hand, we've had a very, very dry summer and very much hotter and sunnier than normal. So the weather has been very cooperative for us on that basis after last year was just last year. It's just its own little weird world. But after 18 and 19 where the summer was wet and cold here. So The weather's probably been, you know, between smoke on the one hand and nice, great, normal weather, if you want to call it that. On the other hand, it's kind of a wash for us here so far, which is good.

Okay, appreciate that, Collin. Thank you very much. That's it for me.

Okay, thank you.

Thank you. Once again, please press star 1 on your device's keypad if you have a question or comment. The next question is from... Oops. Sorry, the next question is from Kyle McPhee from Cormark Securities. Please go ahead. Your line is now open.

Hi, guys. Maybe just to start, I'll follow up on the wine and beyond. So you gave good color on what we can expect for openings the rest of this year. Can you remind us on plans and targets for the next couple of years?

uh yeah we anticipate um we're trying to do four or five for next year we're looking looking at sites right now and you don't want to jump into it willy-nilly but we've got the targets identified i'd say we have one finished uh two at the landlord negotiation stage and i think as we've mentioned before kyle and we've discussed uh since covid um kind of decimated the retail environment for, not for us, but for a lot of other retailers, the deals we're able to get from landlords and landlords' willingness to work with us on de-risked rent structures for new sites, it's just a night and day difference than prior. So leases are a little more complicated to negotiate because we not just have to take whatever userless rent they want to charge us. But we can negotiate and have been successful negotiating more participation rents where it de-risks the capital investment on El Canada's part, which we're very pleased to do. So, you know, we're looking at that. Hopefully, we'll have the four for next year. And hopefully, city halls across this country will... get back to work and start processing building permits in anything like normal time again. It's all very well to have leases and sites, but if your building permit is sitting on an empty desk for month after month, it doesn't do you much good. But again, as this thing turns to its next phase, pandemic, hopefully that will start to mitigate. The backlogs that are there will get caught up and we'll be able to get our permits on time. And then for the year after, for 2023, again, we're looking at four to five locations. That's more theoretical right now. We know the general trade areas we would go and geographies, but early days for those yet. So we're really concentrating on finishing up for next year. This year, though.

Got it. Thanks for that, Collier. And then in terms of the ones opening up this year, can you – I mean, how long does it take to typically ramp up a wine and beyond when it opens? Or in other words, how long does it take to get to that mature sales target per store that you'd be wanting to get to?

By the end of the first year, we're probably 85%, 90% of the way there. Customers love these stores. We love these stores. And so they flock to them pretty quickly after a strong marketing launch campaign. And then it takes, you know, they have good growth, much higher than inflationary growth for a couple of years thereafter.

Yeah, no, we launch aggressively and make sure people come. You use pricing to launch for a few months. So they will not contribute materially to EBITDA for 2021, nor would we want them to. We want to get market share, introduce them to customers. We'll have three more for Calgary that only has one now and one in the extreme north of the city. I mean, extreme north. So a lot of people have maybe visited it once or never. So there's a lot of trial and error and people coming out, and we will price and market accordingly to get people to really make it worth their while to come and see. Once we get them in those doors, I think we've got them, as we've shown during the pandemic with increases up – I guess we haven't really been announcing it, but staggering percentages from the year before, same store, and staying that way. So we anticipate these were great locations. We've been working on some of them for a very long time and weren't able to get rents that made sense until now, as I mentioned just a little earlier. So we're very excited about that. One in Kelowna. It was supposed to open right around now, which I guess I'm kind of, in hindsight, it sort of dodged a bullet that it didn't because things are not doing very well there right now with the smoke and so on in Kelowna. But it'll be opening later in September. Hopefully the fire issues, some rains and cooler weather, calm that down by then. And we're expecting that one to do extremely, extremely well. That could probably contribute this year. I mean, I think that's going to be a home run. That's our view.

Okay. Appreciate that color. Shifting gears a bit. I just wanted to dig in a bit more on the COVID tailwind, you know, driving that consumer behavior change that's benefiting you at least temporarily. So on this, you've mentioned your same store sales are up 10.6% versus that normalized world back in Q2 of 19. Do you think that entire 10.6% is the COVID lift or is some of that coming from market share gains as you you know, shifted your store mix more towards the discount model since then. So curious what your thoughts are there, given, you know, the portion that may be from market share gain, you know, is that?

Yeah, I don't know if we could probably quantify it, but there's this, yeah, that's, I agree, Kyle. There's a significant amount comes from continued conversions from Liquor Depot ACE. The ACE banner is really resonating out here and it's by far our majority banner right now. And wine and beyond, even though there's only a handful of stores, I mean, the volumes are so high, and especially compared to what they were even in 19, I mean, close to double in some of them, that it will materially affect our overall company results, even if it may be six or seven stores. So we're really – and that trend continues as we open more wine and beyonds, which take market share – across the board and as we continue some conversions from Liquor Depot to Ace in selected stores.

Got it. Okay. So, you can't quantify it, but it sounds like some is market share gain. So, all these same-store sales that we've seen through COVID shouldn't 100% be reversing.

We would certainly be surprised. You never know. But who can predict anything anymore? Anyone that says they can is crazy. But all things equal, no. We think a lot of it is just how the business has been restructured and repositioned. It fits the times very well. So we're confident that the first half of the year is far better than we would have had the hopes to get for it in the last year. so positions is very well for the last half of the year and especially q4 we were always um we always sort of expected that that would of all the quarters that would be the one that we might be able to to even match last year um never expecting q2 it would uh just because there was the hard lockdown in alberta for most of q4 and certain no family gatherings no meeting in houses so there was no no Christmas events, that whole fourth quarter sales month we get in our industry just was not there at all. No Thanksgiving, no nothing. So today that's obviously now all over with. Um, and I can't really foresee even if restrictions are put back on here in Alberta, that it would go that far again. So, you know, Q4 is always good for us. And then, you know, Q2 coming in so well, we're very optimistic for the year.

Okay. Uh, Appreciate that color. Um, I just wanted to check in on, on the theft issues that you had before COVID, um, you know, with food service channels now reopening, which I think was the end market for, for the stolen product. Is the theft issue coming back for you at all?

Yeah. Yeah. None of the restaurants and the bars are opening again. Uh, they're ordering stolen liquor. Uh, it's unconscionable and, you know, there's things I can't talk about, but we're working very closely with the police and, uh, to, uh, try to get to the root of the main bad actors here. But, you know, the measures we've taken at Alcanna, patron scan and the high, like a controlled access ID in high theft stores and so on, both for our staff protection and as well as obviously just the product loss is making a difference. And, you know, in some ways we have a lot of extra private security that we've put on in stores and Um, I suppose it's just chasing the problem to some other stores, but I, you know, that that's kind of, we just have to look after our own team and our own, our own stores. And we've, uh, mitigated it to as great a degree as you possibly can. More to do though.

Got it. Okay. And then I guess a related follow-up on your, on your corporate OpEx, um, or I guess even your store OpEx, is there anything abnormal in there or are we at a pretty normalized run rate. And I guess it relates to the theft issue, and maybe you have to start spending more on that.

Yeah, definitely in the store OpEx, our selling and distribution is elevated with all of the private security, as Jamie mentioned. You know, it's on an annual run rate. It's not an insignificant amount of money for us. On the corporate side, we're getting back to more normalized levels after being elevated there in Q1. But there's still, you know, we've been busy. So there's still transaction costs, et cetera, that flowed through into that number here in Q2 again.

Yeah, we should apologize again. We should do this every quarter for these statements are almost incomprehensible. But, you know, we don't make the accounting rules. So they are the way the rules tell them we have to present them. Like, you know, they're pretty meaningless.

Yeah. Okay. David, just a quick follow-up on the Thoroff X. So the theft spending would have been in the Q2 numbers, though. Is that correct?

Absolutely. Yep.

Yep.

So it's just elevated for that issue. Yep.

Okay. Okay. That's it for me. Thanks a lot, guys.

Thanks, Kyle.

Thank you. There are no further questions registered at this time. I'll turn the meeting back over to Mr. Burns.

Thanks, Larry. I appreciate everyone. Have a great rest of your summer, and we'll talk to you again in November. Thank you.

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