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Good morning. We would like to welcome everyone to Alcanna Inc.'s First Quarter 2020 Earnings Results Call. [Operator Instructions] 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 the call over to Mr. James Burns, Alcanna's Chief Executive Officer. Please go ahead, sir.
Thanks, operator. Good morning, everyone. Thank you for joining our call. Though we missed the one in March, which was the day that COVID started -- or the day after, the morning after. And so since that time, it's been a few months, and our company has been in, I guess, somewhat unusual position of not only not suffering from the pandemic, but doing extremely well. We had a continuing on an excellent start to the year in Q1, and granted that the COVID-inspired sales in the last couple of weeks of March certainly helped our Q1 results, by no means are they the only reason that Q1 was doing well. We were -- business was well on track to do exactly what we said that we were going to do long before the COVID hit and that just helped it out. As we have said in our MD&A and our release yesterday, Q2, which we're over 2/3 into now, is tracking exactly the same, exceptionally well. And so we're very confident that the path that we've set for the company is going to be met or exceeded for this year. 28% sales growth, 28% margin growth, so our sales are growing. Our market share continues to increase, and we are now making the money that we should be making to justify the investments that we've made over the last couple of years, both in capital and in margin to get us in the position that we're in today and we expect to continue to be in going forward. On our Alaska division, it's a transaction we have been considering for some time, and closed yesterday on a sign and close. The -- well, the future for that business is always good. It's a market leader there. The business did require us capital to keep its leadership role, and Alcanna felt that that capital was better deployed in a higher return for Alcanna down here in Canada at our home base. At the same time, the buyer of Brown Jug, Afognak Native Corporation, a very -- extremely well-capitalized organization and is looking forward to growing the brand and longer-term perspective that a public company has in terms of making those investments in Alaska. And we think they will be a great owner for the brand. So it really is a win-win deal, which you don't always find in business. But in this case, we think the Alaska transaction was excellent news for Alcanna and its shareholders and as well for the -- our team at Brown Jug and for Afognak there, the new owner, so we wish them all the best. And with that, I will just assume people have had a chance to read our materials, and we'll turn it over to questions. Please, operator.
[Operator Instructions] And the first question is from John Zamparo from CIBC.
Great. Congrats on the quarter. I wanted to ask about gross margins. There was a comment in the press release about these trending higher in Q2 versus Q1. Just wanted to get some additional color there. Just to clarify, is that just saying Q2 to date is higher than the entire number for Q1? Or is that referring to a year-over-year change? And then secondly, is there a formal goal, maybe it's a year out or 18 months out, on where you think liquor gross margins can get to given now the prevalence of your discount business?
So John, it's David. The comment was sequential, so looking at Q2 versus Q1 versus Q4. I know that there's a lot of noise when you look at year-over-year. At this time last year, we had -- we were in the middle of converting a number of the Liquor Depots to the Ace Discount banner. We were going aggressive on margin last year, but we had some other things going on. So the comment is just looking at sequentially over the last few quarters. In terms of where it goes from here, I think that our goal is still the same. Overall, as the overall liquor business blends out, if we can get in that -- comfortably into the 23.5% to 24.5% range, that's where we'd like to land. Will it be plus or minus from there? That depends on economic conditions, et cetera, but we're marching towards that, and nothing has stopped us so far.
Yes. Yes. We're actually a lot closer to that number, much, much closer right now than we ever thought we'd be at this time for a variety of factors. The COVID situation, I guess, first and foremost, with -- we had a major, major competitor taken over the market, which is the on-premise sales of alcohol. Bars, restaurants, lounges, sports arenas just disappeared overnight. So those people were still consuming alcohol, but they had to do it at home. And so our stores have seen tremendous volumes and continue to do so, particularly our high-volume Wine and Beyonds, John, are just unbelievable, how much -- because of space, people feel comfortable, even social distance, really easy. We've been getting 30%, 40% anecdotally, new customers that have never been before and like the pricing. But on margins, know this company back in its history in the industry itself could price margins at 28%, 30%, but those days are over. And I guess we're very pleased that -- in hindsight, that we made the decision 1.5 years ago to enter into and essentially become, by far, the largest discount operator in the market here, both our Ace brand as well as Wine and Beyond, though it's somewhat a misnomer that it's a luxury brand, it's really not. It's a brand that offers excellent prices. It has luxury products, but it also has best prices on everyday products. And it resonated with consumers here in a big way in Alberta and especially in the light of difficult economic times for the oil industry and our Alberta economy quite outside of COVID. We believe that we've positioned the company to be at the exact right part of the market at the right time.
Yes. That's great. That's helpful. And on the economic front, when you saw the shift in oil prices and granted, it's been bouncing around pretty materially, but have you seen a shift towards discount or an ongoing shift towards discount as oil prices decline? And does this look like -- or is it similar to in the past, whether it's 2014 or 2008, when oil prices declined as much?
There's a lot going on in the numbers right now. There's a lot of noise. But for sure, we've seen a shift to discount in the marketplace over the last few years. That's why the discount banners were winning against us, and that's why we strategically decided to get into it 1.5 years, 2 years ago. So we saw that trend coming and we got in front of it. And as Jamie said, we're now the largest discounter. And so we're well positioned to take advantage of that trend. How long that lasts, I don't know. But the goal of being in the discount market and that side of the sector is to try to control the pricing too and make sure that there's a floor under it, and we can run that division and be very profitable at it.
Okay. And then just one other liquor one before we move to cannabis. Can you remind us on the economics of Wine and Beyond versus the rest of your network?
Sure. In the new-build? Or just a store? Or...
Yes. New-build in terms of cost to set up, average volumes and in-store margins.
Yes. So our CapEx historically has been around that $2 million mark, to build out a 20,000 square foot store. We actually see some opportunities to lower that going forward, which is positive, so that will reduce our investment going forward. Our average inventory is around that $2 million mark as well. It depends on the size of the box we get, and the size of the box is always variable depending on the location we pick. And then sales have been in the double digits in terms of $10-plus million on average for these stores. The last couple that we launched here in November was Red Deer, and it's done tremendously well in exceeding our average. And then our EBITDA at the bottom line is a very healthy -- healthy margin. It's much healthier than what you see on the face of the financial statements or in the MD&A.
Yes. It's significantly tempered, yes. And we're very encouraged. Again, I don't want to make light of extremely difficult times for many, many companies and businesses. But I don't think it's stating too much to say we anticipate availability of real estate for Wine and Beyond should be greatly enhanced for us as some retailers are downsizing and consolidating locations, even going out of business as we read. And so that we have locations that both in terms of availability et al. as well as in terms of rent, we are a very attractive tenant now. We pay the bills, have never missed a rent payment, and we never will. We're pandemic-proof and recession-proof. So it's a very attractive tenant for its centers faced with difficulty collecting rents from many traditional retailers. So we think our opportunities to expand -- we still have some gaps in Alberta where we’d like to build Wine and Beyond, especially Calgary. And we think the opportunities in BC for Wine and Beyond are great. So we're looking forward to that.
Okay. Great. And then if we can move to the cannabis side. Obviously, lots of moving parts there as well. But I'd just like to get your perspective on where we are in terms of saturation in the Alberta market. Do you still think there's material growth coming from competitors? It does seem like it's a pretty crowded marketplace already, but I would like to get your thoughts on where that's heading.
Oh, yes. But this was totally predictable. I think we've been -- told everyone this is going to happen. It's going to happen in Ontario, too. All sorts of people are going to make a small fortune by putting a large portion into a cannabis store and losing it. So -- and that's what's happening here. There's way too many stores for the size of the market, which is growing very, very slowly. It's growing though. And it's only 20% of Canadians, give or take, whatever, depending on what stats you want to believe. Whereas liquor is in the 80s, but therein lies the opportunity. At some states, there's a huge amount of growth for cannabis as science and the products available become better and more popular and interesting to people who are not consumers of cannabis right now, but that's going to take some time. And certainly, not enough to support 400-and-whatever-there-are stores here. But most of them, John, are in terrible real estate, and they're not going to last. So they'll come and they'll go. Access to capital that was there widely available to a lot of them has been shut off completely. So it's just a matter of time before the market -- like markets always do, it will rationalize. And people with good real estate and the stronger ones will survive, great little single store operators will survive and probably develop their own customer base and a lot of the other ones won't be around very long. It'll sort itself out.
Right. Okay. That's helpful. And then what do you view as a reasonable run rate on your -- on the top level or top line for your cannabis stores? Because obviously, same-store sales declined pretty materially, but, I mean, that's just due to the store count in general. So it seemed like it was about a $2.4 million run rate, I think, if you annualize this quarter, but presumably, that maybe is on the low end because you opened stores mid-quarter. So just would like to get a sense of what you think your Alberta cannabis stores can do on a run rate basis moving forward.
John, it's such a nascent industry, and it's so flying blind for everybody, and that -- be it the real answer, honest answer, I have no idea. Because it's different, every store is different. It's not just a store. They're -- every trade area is different. They have different mixes. We have stores where you can't give CBD away, and we have stores where we can't keep it in stock. And you don't know going in, you don't know enough about this product yet and who uses it and how and why and what areas. And since we're not allowed to transfer product between stores like you could do in liquor, if you -- one store was sold at a [indiscernible],another one has 2 extra skids in the back. You just drive it over. You can't do that in cannabis. So it's all of our learning experience and taking averages and taking store numbers and dividing and getting an average is almost a meaningless statistic just like same-store sales is. Last year, we had 5 stores in an environment where there was no other licenses being given in the third quarter. It was sort of us and nobody because we got in before the moratorium of those 5. It’s just not even compare, like we do not look at it. We look at sales by week is the way the metric you use in a cannabis store, it does X a week, it does Y a week, and we're all over the map. So our Queen Street West door until it got shut down by Ontario government into the COVID situation, would wildly skew. It was doing fantastically. And we've shared some numbers about that before. Before, it was hitting $500,000 a week last summer. That totally -- you just throw that into a pot and divide, it skews it up higher than it should be. We have stores in -- newly opened stores that are in excellent real estate normally, fashion, anchored, large big-box malls and centers which have not done that well since COVID because those centers are largely empty. The stores around us -- we’re still open, but the stores around us were closed. So our customers are the employees of those stores as well as the customers of those stores, and they just weren't there. So you just -- it's really almost not a number that we would ever use. Or you can do it and you can do it with our competitors or do it with us and you come up with something, but it almost doesn't matter. I mean we have so few. Like for us, 31 is few. We just know them all individually. And each one, we look at it on its own merit. So it's really hard. I know it's hard for you to build a model, John, on that answer, but reality that we don't have it either. You have to build it store by store.
Having said that, we're very comfortable with how we've positioned ourselves against the competitors. Our numbers, we look at them, we try to really study our competitors' numbers. We look at what the suppliers are saying. We're very comfortable that we're in a very good spot on our cannabis division. And we're very happy with the results that we've put up and the profits that it's already showing.
Yes. No, we did make -- I think we said right early on, John, we never expected this to be profitable for a couple of years, and we made money last year. And we'll make money this year. We've got good locations and good location’s always going to win. So yes, there's 400 competitors instead of 12 other ones that were in the first when there was only 17. And most of our early stores have not dropped that much, so we're in good spots. We have restrictive covenants. We've got trade areas protected by restrictive covenants with landlords, and we're going to be just fine. It's doing well.
Fair enough. That's great color. And then just one housekeeping one, if I can, or maybe it's a 2-parter. But on the Alaska divestments, I know you disclosed an EBIT number. Can you say what D&A was associated with those assets? And can you quantify, if any, change there is on administrative expenses by selling that?
Yes. We actually disclosed all of the Alaska division in our 2017 financial statements in the segment note, John, so you can get a pretty good read on what the EBITDA under pre-IFRS 16 was by going there and taking kind of an average of '17 and '16 there. And then we had a couple of hundred thousand dollars here at the head office that was directly attributable to the Alaska division that, in time, will -- those people switch will into other jobs and whatnot as vacancies become available, so there'll be some savings there going forward. And then structurally, as we continue to lower our overhead costs, we'll make some changes as the year goes on.
The next question is from George Doumet from Scotiabank.
Congrats on the transaction. Maybe on that topic, a pretty sizable chunk of cash you've got now on the balance sheet. I think you guys called out some more kind of the stores in Ontario and Alberta. But anything else that's on the wish list? Would you guys, at this point, consider M&A? Or is it just -- are we just kind of happy doing this sort of greenfield?
Well, we always consider anything, George. Thanks for the congrats. But we're not actively looking at it for sure in either of our businesses. We're well positioned, we believe, in both. In Alberta and Ontario is very much a question mark for cannabis in terms of their ability to approve those licenses in any kind of timely manner. So we're being very cautious. Our big greenfield focus, George, is Wine and Beyond, especially now with the way that our customers have responded to that brand during the pandemic and the whole new way of looking at new world and being out in the world when you do leave home and British Columbia is, especially. We have our first one scheduled. There's a chance we could open it in Q4, most likely it will be Q1 of next year. Just you don't want to do it right in the middle of Christmas. If we can't have it open by early November, then we'll wait and do it late November. And then the first quarter traditionally is slow in any retail, in art as well, so we probably wouldn't open until March. But we think that will do really well in that environment, and obviously, the Lower Mainland. And again, real estate was very difficult to come across. Not that we haven't been looking, but it was just almost impossible to find or to afford, and all that's changed. So the real estate is going to be available to us. There are multiple landlords. And given the strength that our business has in this economic and business environment, and will continue to have, we'll be able to get -- both be attractive to landlords and to have our pick of locations that fit Wine and Beyond at rents that are reasonable. So it's very positive for us. That's really where we are. Ontario cannabis, once it solidifies and we get some sense if they can process the licenses properly, and that's always an option to invest in. But in terms of just a big M&A or something, we're not looking for it, but we always answer the phone.
For sure. And George, we've had a couple really heavy CapEx. There's lots of investment over the last couple of years. And our strategy has always been turn that into cash flow, and that's what we're really focused on is slow down the spend, only spend where you really need to, for the moment, and let's start making some money.
Yes. And we're also -- again, we've been speaking positively about our business, and it's been very positive. And we expect that to continue, but nobody knows. So we're being careful and conserving cash and making sure we have -- cash is king, always is king, especially in tough times. So what the economy is going to do, second waves of COVID, all these kinds of things, which are not necessarily bad for our company, but we're just going to be very careful, and we'll invest when we think there’s a good return for shareholders with that breadth of looking, yeah.
Okay. And on the kind of the cannabis business, some pretty good gross margins there for the quarter. Should we consider those to be run-ratable for the remainder of 2020? And I've also noticed that our sales -- our accessories are only 3% of sales in that division. Is there an intention or a focus to increase that over the next little bit?
We’ll answer the second part first. No. Accessories just don't move, and they're less and less popular now. It's more the traditional cannabis consumer. With the advent of vapes, the need for elaborate accessories is a lot diminished than it even was a year or so ago, so no. I mean that's great high-margin products, you'd love to sell more, but the market really isn't there. Plus you're competing against dollars, lots of head shops and cannabis shops that don't sell cannabis, at least not over-the-counter that sell that as well, whereas the product no. So in terms of margins, I would think, yes, we definitely think that's a run rate or a sustainable run rate. And it will probably inch up a bit, George, because dried flower margins will start to get squeezed a bit as the LPs move in response to customer demand, which is very much to a discount value product in cannabis and dried flower. But the higher-margin items like the 2.0 that evolves, beverages are still not very available. The stuff that's really in demand like gummy bears, for example, is hugely popular, and we just can't get enough. It's like the whole '18 again. So once that stuff becomes more available, those are higher-margin products for us. And if we have them, we'd sell them, but we just can't get them. But the LPs will catch up, they're doing fine like they always do. I think there's too heavy an expectation put on LPs a lot of times. I mean they're doing what they can, and I think they're all going to get there. And there'll be more and more. Like this week, we had much more than we've ever had in terms of 2.0 products that we were able to order for our stores. So as that continues, that trend continues, the margins will go actually even higher.
Can you give us a sense, maybe just again, kind of a very general question, but can you give us a sense of the margin lift from 2.0 products versus, I guess, the flower?
Oh, it could be as much as 5. As flower trends down into the high 20s and the 2.0 products get 34, 35, it could be even a little bigger. It's different product by product, of course, George. But yes, it's nice and healthy.
Okay. Great. And just one last one, if I may, Jamie on the -- just a follow-up on gross margins for the liquor business. Just wondering if you guys are seeing any higher inflation or higher prices from the suppliers, maybe because of COVID or maybe because of FX, the weaker CAD. And if we are, to what extent do you think we can push it through the consumer?
So far, we're not seeing a lot of inflation, and this business has been low inflation for a long time. I wish I had some help from that side because I think we could push it across to the consumers, given the marketplace, I think all the -- our competitors would push it on. But we just haven't seen a lot of inflation there for a while.
Supply has been excellent. They’ve had no interruption in supply at all. There was an issue with the largest beer distributor, which is the only place to buy alcohol outside of the government in Alberta, the government warehouse called BDL, which is Labatt's and Molson's, had an outage of about 4 weeks. They got computer hacked, sort of held for hostage or whatever, I don't know what happened. So that had a little bit of a hiccup in terms of stores getting beer for a few weeks, but that wasn't anything to do with COVID. It was an extraneous event. So otherwise, the supply has been excellent, and pricing has been just like normal. We're using our balance sheet, and we can increasingly do that now to buy product that's available on limited time offerings, LTOs, and be able to -- which is a great margin enhancer. And we're -- we'll continue to do that and those LTOs continue to be available. So it's pretty well business as usual in our business.
The next question is from Jenny Wang from Eight Capital.
Congrats on the quarter. First question on the Wine and Beyond and Nova Cannabis stores that you're -- kind of you're thinking of rolling out. Do you have a targeted timing to roll out these stores? Do you think it’ll be more in Q4 2020 or moving kind of later into 2021? You've mentioned you're pausing your CapEx spend, so I'm just wondering in terms of timing of these stores.
So on the Alberta cannabis stores that we have, we noted that we have one that we think will open later this quarter, maybe even early Q3, and then we have a couple that will open late Q3 or early Q4. In terms of Ontario, we'll start the building of the ones where we have leases for the 5 leases that we have now, now. So the CapEx spend will start here late in the quarter and then into Q3 primarily. In terms of do we do more than that on the cannabis side in Ontario, that's going to be dependent on how we see the licensing unfold in that province. Just not a lot of visibility yet as to how fast they're going to roll stores out there and how that process is going to go. And in terms of Wine and Beyond, as Jamie was noting earlier, the one in British Columbia will be, at best, late this year. I suspect it's going to be mostly Q1 next year.
We're looking actively, Jenny, for where we want to be on sites. But having said that, we're also not in a huge hurry because there still is a bit of denial in landlord land about the difference between what a building is and who a good tenant is today versus what it was in the early part of March. So -- and until there's some more availability, and we'll have 2 or 3 picked from in any given trade area versus 1 that we have to beg for, there's no hurry pulling the trigger. So we'll bide our time. If we can get a couple of spots maybe in the fall and have them open in 2021 in Calgary, that would be ideal. But we're going to wait for the right spot and make sure the lease is good and we have the right situation.
Okay. That's helpful. And maybe in terms of -- you mentioned that liquor sales is -- it's kind of recession-proof. Are you finding cannabis sales to be behaving similar to alcohol and that it’s so far also doing well in what's kind of an economic downturn? Any color you're seeing there?
Other than those first couple of weeks after the pandemic was declared in March when cannabis sales spiked, like everything, panic buying, stockpiling, people thinking that stores will be closed, cannabis sales are -- like our stores are -- a store that was doing 70 a week is now doing 70 a week. I mean it's just -- it's back to normal because liquor, we lost as this huge competitor called on-premise just disappeared overnight. And cannabis, that didn't occur. Cannabis' competitor is the black market, which is driving as good as ever, better now in Ontario, thanks to the forced shutdown so -- for a period, which is now over. So cannabis is more or less just where it was. It didn't go up, didn't go down. It wasn't really affected.
Okay. And maybe just in terms of the -- your current portfolio of stores. Are you finding stores that maybe are not your best performers and that maybe you would consider selling in the future in order to optimize your portfolio? I'm thinking more like Alberta cannabis, where the market is pretty saturated. And are there any locations that you kind of would maybe move around or consider optimizing? Any color on that?
Not really. I mean some of their stores have only been open a few months and a few strange months. So you can't really assess, as I was mentioning to John, I guess, earlier. The stores that we opened in excellent centers, like really top-quality centers, Calgary, in particular, there's 2, those centers have been vacant for months now. So you can't really assess the performance of the cannabis store until that center gets back to some kind of normal or new normal, to use an overused phrase lately, and then we'll see how it's doing. But you always look at getting in on it. Someone's willing to pay you more than you think it's worth, you sell it and vice versa. But right now, we're not looking to get out of any, no. We've got 3 or 4 more that were on leases that were delayed for various reasons. One was a -- we had to take an appeal to get approval on Red Deer, which we did. So it took longer than the other ones where we could just open. So we'll probably end up with 34, 35 in Alberta the time we're done this year, and that's good. We'll have all the trade areas covered that we want to be in. And we probably don't need any more, we don't probably need any less. But you never know, Jenny, you never know.
Well and again, we took a number of stores that we were looking out 5 years out in terms of performance in those stores. And so are they underperforming compared to some of our other stores? Sure. But we knew that, that was going to happen. We thought it was the appropriate thing to do for the company to take a balanced approach to the real estate. And so do we have some that are overperforming right now? Sure. And we have some that are longer-term prospects…
Yes. That's a great...
That I think are going to do very well. Yes.
You’re signing a 10-year lease, where the cannabis sector, Jenny, tends to want to look at everything next week in very -- even more hurried fashion than public markets usually look at companies. And you’re signing a lease for 10 years, we're a big company. We're going to have to pay the lease, whether the site does well or not, so we're careful. We’ve got sites in great locations. And maybe those locations are not where the current 20% of the public go. But once cannabis usage is much more mainstream, and let's say it gets to 40%, which is still only half of liquor, that's where those people are going. So we're very confident in the long-term future. And as David says, we have sites which are probably overperforming right now and that will maybe not go down, but as other ones grow up, they may just stay flat because given the neighborhood. So it's a mixed bag.
Okay. And just last one for me. On SG&A, it's a lot lower this quarter. Is this kind of the level that we should expect going forward?
Yes. And I think you'll still see some trimming go on as we go along, but it's not going to go higher.
Thank you. There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Burns.
Thanks, operator. So I appreciate everybody's time and interest, and looking forward to continued good results for the balance of Q2 and going right through into Q3. As you'll recall, we had a historically bad summer in Alberta last year of cold and rain just weekend after weekend, especially the long weekends were terrible. So it would be statistically difficult to see that, that weather pattern could be anything but a lot better this year. Certainly, it has started out and whether we do -- we are related to weather. Now that social distancing has been -- is still in place, but the restrictions on family gatherings, outdoor camping are largely off now in our province as having done quite well in the COVID pandemic maybe relative to some other jurisdictions. We're seeing that reflected in our sales, and we think that will continue throughout the summer. So we're looking forward to that. And with that, thanks, everybody, and have a great day. Stay safe.
Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.