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Good morning, and I'd like to welcome everyone at Alcanna Inc's Second Quarter 2018 Earnings Results Call. [Operator Instructions]A copy of the company's earnings press release and management's discussion and analysis is available on the website and includes cautionary language about forward-looking statements, risks and uncertainties which also applied to the discussion during today's conference call. All amounts discussed on today's call are quoted in Canadian dollars, with the exception of U.S. same-store sales, which are quoted in U.S. dollars.I will now turn this call over to Mr. James Burns, Alcanna's Chief Executive Officer. Please go ahead, sir.
Thank you, Paul, and welcome, everyone. Thank you for dialing in.We announced the name change of our company to Alcanna Inc. in May, but a lot more has changed than just the name. Liquor Stores N.A. was a company in a mature industry, one industry, with a couple of established banners, it held limited prospects for growth. The balance sheet was weak, and the company did not have the ability to take advantage of opportunities such as our Wine and Beyond brand for financial reasons. Alcanna has an exceptionally strong balance sheet and has embarked on an aggressive growth strategy to enter the retail cannabis industry as well as expand and grow Wine and Beyond large-format Liquor Stores and our successful new Deep Discount Liquor brand.Alcanna Inc. is a growth company, and we are investing heavily in capital expenditures, people, real estate and systems to fuel that growth. Our focus is on achieving rapid growth in both our industries over the next 2 to 3 years. We already have the balance sheet and the financial resources to do it.At the same time, as we invest in our new brands and renovate our existing Liquor Depot fleet, we've been aggressively regaining lost market share in our core liquor business, both through the Deep Discount Liquor brand and by strategic pricing in all our Liquor Depots.We've secured several more locations to build Wine and Beyond stores in Alberta and are actively finalizing more deals as well. These stores average at least 4x the revenue of a Liquor Depot and produce 5x and more the EBITDA. We believe these stores have the largest product selection in Canada and offer an unparalleled customer experience to that offered anywhere else in Alberta or anywhere else across the country for that matter.Obviously, we are extremely interested in Premier Ford's plans to allow for the private retailing of alcohol in Ontario and reports that the Ontario government may also turn to a private retail model for cannabis. We announced last week that we have reached an agreement with Aurora Cannabis to have the rights across Canada to be the exclusive owner and operator of Aurora-branded cannabis retail stores. The opportunity to partner with one of the world's leading cannabis companies in this way is truly exciting for us.In the event the Ontario government puts in place a regime under which we can provide our Wine and Beyond, Liquor Depot, Deep Discount Liquor and Aurora Cannabis brands, we believe we are best positioned of any private sector company in Canada to enter Ontario rapidly and aggressively and serve Ontario consumers as we have done so in Alberta. We've been preparing to do this since the Ontario election, and if the opportunity arises, are prepared to act swiftly.I'm here today with our CFO, David Gordey, and will now like to turn the call over to questions. Operator, Paul?
[Operator Instructions] The first question is from Derek Dley from Canaccord Genuity.
Just a couple of questions on the cannabis opportunity here, going forward. So you mentioned that you believe you'll have 37 stores up and running in Alberta, that's the 15% threshold for the initial licenses awarded. Do you expect to have those up and running by October 17, or is there going to be a ramp period? Have you already secured all of the real estate locations and licenses for those stores?
It would take half an hour to answer that comprehensively, but we will not have 37 on October 17, nobody will. It's -- there's a long approval process with -- every municipality has a different system and a different approach to this, and it's a matter of getting development permits in municipalities. And until you have a finished building, which is, development permit and a building permit and then an occupancy permit saying it's all done and ready to go and you're allowed to be open for business, you can't get a license from the province. So we don't have licenses, nobody else does, and we anticipate we'll probably have, hopefully, as many as 6, but we'll certainly be open for business on October 17 in a few locations, as many as possible. By the end of this year, we anticipate having, could be as many as 12 to 15, and we'll have our full maximum sometime in early part of 2019. We have secured all the real estate and then some. We have about 53 sites, of which we will choose our best 37 based on a variety of factors such as speed of operations and so on.
Okay. And of the -- with those sites that you've secured, can you comment on how many were conversions from existing -- your existing liquor store sites? And how many are new builds? And how is that conversation going with landlords, as it relates to the conversion as we do get closer to that rec market legalization date?
Oh, well, everyone looks different given the municipality. And yes, we had some conversions for sure. We have one where we actually already have a development permit, one of our very first ones we got in -- here in Edmonton which -- I believe, the liquor store's closing in a week and ready to convert one, that one we hope to be open on October 17. Everyone was different, so there's no real general answer to that I'm afraid. Some of it different conversation, some are -- have no problem with it. It's -- how many eventually of the 37 will be conversions, I can't answer that because we've got 50-some-odd on play of which we'll pick 37 and I don't know which ones will be which, whole bunch of factors. Still very much up in the air and not things that we can control, they're things like municipal rules, given how people interpret things, radius restrictions. And so on that each municipality has decided to deal with, some appeals on things, all sorts of things and we don't really know until all that plays itself out. Which ones will be the ones that we choose for the first round and therefore, which -- how many of those will be conversions and how many new. Mostly new though, if I had to generalize.
Okay. Okay, that's helpful. And just one more, I'm going to switch gears here. Just on the liquor business, you're just -- you're about halfway through your store renovation target for the year. And I gathered, it is still early days, but can you just talk about the economics around those conversions, how have the sales trended post conversion? Are you seeing a nice uplift, like you'd expect or like you've seen in the past?
Yes, a lot of them came in the back half of Q2, Derek, at this point. So no strong numbers that we want to put out there, but no concerns at this point. We did back away from quoting a specific number in the MD&A for the balance of the year, but that was really just to keep our options open if Ontario should open up.
The next question is from John Zamparo from CIBC.
Wanted to ask about the liquor business for 2019. You've commented about a reduction in the gross margin for this year, but would you expect to see an increase next year as a result of the ERP rollout in the private label program?
Yes, we do and other factors as well. The -- we deliberately, as we've explained to the market, and to you guys, decided for '18 amongst other things, since renovating our fleet and growing the new brands, especially Deep Discount, to get our market share back to where we -- what it used to be, in the face of a market overall, it's not -- certainly not growing. Just overall, beverage alcohol consumption in Alberta is flat to slightly declining year-over-year so. But we believe what we know from our market sources, to be honest. Yet we are gaining significant market share from our competitors and we will consolidate that, make sure that, that traffic is comfortable coming and returning to our locations and we will be able to, as you say, use a private label program, which we have changed. It's focus and scope and that takes quite a few months to do in terms of the type of products that we sell and we've targeted it far, far more to the taste of the Alberta customer versus the East Coast American customer, which the previous management and board had bought for and targeted for. But those products, wine in particular, were not necessarily the ones that Albertans prefer. To -- old world wine versus new world wine, to put it simply. To change over and getting new additional suppliers from California, New Zealand, South America, Australia and so on, took a while. But it's done now. The shipment takes a few months. You can't make wine in about 10 minutes, it -- but it has been ordered and delivered and it's in our warehouses and getting into our stores as we speak. And so the preferred label program will be much stronger and healthier than it ever has been in the past, after a hiatus of this transition to products that our customers like more. So we have a lot of things we are very, very confident of, that margins can be put back to a more traditional level next year, without in any way giving up the market share that we have regained and we will continue to regain for the balance of this year.
Okay, that's helpful. And housekeeping one on the liquor side, saw you open 2 stores during the quarter. What banners were those? And when do you expect the Norwalk store to close?
The 2 that we opened up, John, were Liquor Depots. They were just normal kind of suburban growth and filling in for a convenience format store in neighborhoods that needed one. Jamie, talk to Norwalk?
Yes, Norwalk, it's been -- it's had some issues, and continue to have some with the landlord there. But we have a number of options and it's just a matter of working through them. We anticipate, hopefully, it will be off our books very, very shortly.
Okay, great. Maybe to move to cannabis. You mentioned the $4 million to $4.5 million of cost per quarter over the second half of the year. Is there anything we should be modeling for 2019 for either ongoing or onetime cannabis costs?
Well, I could've answered one way, but things we're hearing, that Premier Ford and his government may be making some announcements sooner versus later, and in which case, everything obviously changes, as you can imagine, so it's pretty hard to do until we know if it's just Alberta or if it's just -- if we're soon going to be into Ontario as well. So I'm afraid I can't really answer. I mean it's very -- I could give you an answer, but you can figure it out as well as I can -- but if that comes everything changes. And I think we're pretty sure that it could be very imminent.
Okay, understood. CapEx side, the dollar guidance stayed the same but as you're just focusing on Alberta now with the 37 stores. Should we interpret that as you're expecting a higher per store spend, maybe with more flagships or are you just trying to keep your options open there?
Just keeping our options open at this time, John. Again, we don't know the specific 37 sites. So until we know those we can't really drill the number down to be more specific.
Yes, and some of our better sites are in things called DC 1 zones, DC zone, direct control, which have a different process than the lotteries and things that municipalities have launched for the basic sites. Those ones you won't know whether you get them or not. For a while, a month, couple of more months. There's some where we have had a site that turned down, because of proximity to a park. For example, in a case where the definition of park, it's not a playground with children, it was a river valley where no one, it's just a green space and we were very close. So some of those will appeal to the [SGB], sort of the [Alberta] equivalent of the OMB for [indiscernible] Ontario. And until we see how those process play out, it's very difficult to pick the note.
Okay, got it. And last one for me. What comments can you make about the quality of locations you've nailed down so far, particularly in Calgary and Edmonton?
,AAA.
The next question is from Sabahat Khan from RBC Capital Markets.
If I could just start with the cannabis side. Obviously, there's stores that are going to be branded Aurora. How are you guys thinking about the product mix and offering from other producers? Would other producers be okay with offering their product under that brand? Kind of how you guys are thinking about that over the long run?
We definitely are a house of brands for sure. You sell the products that any good retailer would do, you sell product. You can't tell customers what to buy. They know what they want to buy. You can suggest, you can guide, you can help and we will offer in the demographic, the band of the market that we will be going after, all the products that are available, that the producers create and grow to serve those customers for sure. As to how producers -- other producers that aren't Aurora or in the Aurora family respond to that. I mean, one answer I could give you is that we don't buy from producers, we buy from the government. So the government chooses which producers are allowed to sell in Alberta, it buys the product and then you buy from the government as well. Any retailer does the same thing. So from that point of view, it's really not up to an LP to say whether they want to sell to us or not. They really have no say. I know anecdotally though that we've got tremendous interest and support from all the LPs, in coming to meet us and explaining their products to us and very anxious to give us the support, whatever support is permitted under the regulations that an LP can give to a retailer. They know we are -- we presumably will be one of the larger retailers and they are very anxious. And we've had no -- none -- no absolutely -- absolutely no pushback from LPs, quite the reverse.
Great, thanks. And then as you kind of go through the licensing process in Alberta, how is the -- what's your read on the competitive situation? Do you feel like it's more -- lots of mom and pop, one-offs retailers looking to get involved? Is it larger chains, such as yourself? How do you see the landscape evolving in the first, call it, 3 to 6 months in the licensing process?
Bit of both, kind of like liquor. There's lots of mom and pops, as you call them, and quite a few people where we've seen people that may put in 2 or 3 application sort of thing. So not just a single store, owner-operator, but a couple. And then there are other bigger players, like ourselves, that we can certainly see as well. So I think it'll be a combination in the mix, and that's more likely how it will stay, liquor is the same way. But half the market here is people with 1 or 2 stores in the liquor business of the 2,200. So there's no real reason -- different municipalities have had different rules, places like Grande Prairie for example, it's quite a big community here in Alberta. Very well-off oil and gas-based economy, doing very well actually, very well, the last little while. They -- you can only get one store in Grande Prairie. Anyone was only allowed one, that's just the way to [ settle ]. So we -- they had a lottery and we were successful in the lottery, we're pretty sure we'll get our 1, but -- so you can't grow big there. So everyone will be 1 in, so everywhere is different, you just -- every single municipality has -- almost literally has chosen a different path and a different set of regulations and rules as to how they will allocate development permits, they don't give licenses, they give development permits, but it's more of the same thing. You can't get a development permit for a cannabis retail, you can't open, license or no license so...
Okay. And then in terms of the, I guess, overall the few big markets. Your pursuing the opportunity in Alberta, Ontario is a bit of a wait and see. How are you guys viewing the BC market at this point based on the current visibility?
With caution, because at the moment BC is still only -- they have put some proposed rules and guidelines for how they're going to -- for how the private sector will be able to retail cannabis. Things like no one can have more than 8 stores, there is a proposal whether that LP owns 20% or more of the retailer, that retailer cannot sell the products of that LP. Obviously, Aurora, as you well know, owns more than 20% of us, so we would be opening not selling Aurora products. If this proposal becomes the regulation. So until that sorts itself out and BC comes with some lift definitive from regulatory regime, it's pretty hard to know. But we have -- we do business there, as you know, we've got great relationships, it's more or less the same landlord except for here for the most part. So we have -- we're confident of what we know, we can have locations if, in fact, the situation is such that it makes sense for us to open cannabis retail in BC. But until it's clear, we're just going to wait and see, our focus is on Alberta.
All right. And then just on the liquor side, you're obviously pursuing a few Wine and Beyond locations. I guess, as those approvals or you secure the locations, how are you going to balance opening some of those larger stores versus opening more cannabis stores? Obviously, the capital is there. Just in terms of, I guess, management capacity or, I guess, just running a lot of things at the same time, how are you thinking about balancing the liquor store development versus the kind of cannabis development?
Yes, as you say, the capital is there. So that's not an issue, which was always the company's constraint in the past. So the -- it's just management time and resources and we're able to handle it quite fine, we've staffed up and beefed up our resources to be able to handle this growth and [on all fronts], as you might imagine, as we discussed with quite some detail in the MD&A and we've got fantastic long-term relationships with some great contractors here in Alberta and know them very, very well and we're a big customer. So we get priority, as you might expect. We can promise contractors a large number of projects and that lets them staff up in order to be able to handle our business. And so it's we're -- we will have no trouble frankly and then it's a lot of work and people are working long hours, but that's life in the big city, we can do it.
All right. And then just a last one for me on, just in terms of the strategy on the liquor side. Obviously, the discount banner is being rolled out, you're opening more of these Wine and Beyond. How are you thinking about balancing that business in terms of the banners over the long run? Would you continue to expand kind of both, with a high-low strategy? How are you thinking about positioning that business, call it, over the next 2 to 4 years?
I think you pretty well answered the question, if I asked you that. You're exactly right, there would -- that's exactly what we're doing. We found Deep Discount, we had a specific purpose for it, a strategic tactical purpose. And but as we developed it, it's becoming a, in our view, a very viable business. And it doesn't -- we have not seen any impact on our other banners to date. And so where we see them almost as separate things. So when -- we're very encouraged by the growth prospects for both of them, especially Wine and Beyond and Deep Discount. Liquor Depot, where 175 or 170 in Alberta already, there's not a lot of room. We grow organically, as David said, with neighborhoods and suburbs, we got another one coming up this year still and a new part of it. But we're -- we would just naturally grow organically with communities and we'll continue to do that. But there -- the profitability growth as well as our revenue growth will come, we believe, in the high and in the low.
[Operator Instructions] Next question is from Bob Gibson from PI Financial.
You've got a number of banners on the liquor side, just wondering if you've given any thought to having more than one banner on the cannabis side?
Not at this stage, no. We're very proud that Aurora has shown the confidence in us to really be the -- to have their name and their brand in our -- under our responsibility and we think that's a tremendous advantage for us and we're honored to do it. So as long as Aurora has confidence in us and we execute, and have a license agreement with them, that's something we will be very, very protective of.
Okay, great. The Wine and Beyond locations, what's your thinking as far as square footage for the ones you've announced and one's going forward?
That's a good question because we talk about that a lot. As in any real estate and this would apply to cannabis too. At the end of the day, you get -- we don't own the buildings, you get what the landlord gives you. So and you want -- it's location, location, location, and you want the locations, you want the AAA sites, the best places. In those places the landlords know what they have and you may want a 2,000 square foot -- 2,500 square foot cannabis store, but if he's got a 4,000 he'll -- it's take it or leave it and if you don't take it someone else will. So you never have a say, Wine and Beyond is exactly the same. Our traditional -- the first few Wine and Beyonds were give or take 20,000 square feet, extremely profitable. We did one, which has been opened just less than a year, about 11 months now in Edmonton, was a conversion of an old Liquor Depot and it was only 13,000 square feet and it's been extremely successful, which has opened our minds to the possibility of a lot more around that size, maybe even 10,000 to 13,000 square feet. 8,000 is a lot more real state available of that size than the 20,000. But having said that, if we've got a great location and we actually just did one, I can't say where it is yet, but we'll announce it relatively soon, which is -- it's even bigger than 20,000 because that was a location, that was available, that was a prime spot in the community that we're -- signed it in and we'll make do with 25,000, it's what that's one is and we have other uses, we're not just going to build the shelves up with inventory, we don't need it. Well we'll find other uses for the "Extra space." So we'll -- we're trying to be flexible, much lower than 12,000 to 10,000 it wouldn't work, it wouldn't have the same magic that the stores have now, the same experience. But around that level, absolutely.
I would now like to turn the meeting back over to Mr. Burns.
Well, I appreciate everybody's interest in our growing and changing and transforming company and as always, David and I are available for discussions if anyone have extra questions now or down the road as things -- we're moving very fast and every 3 months -- a lot can happen around here in 3 months. So indeed too we'll be down in Toronto in September and we'll see all of you in person as well. Have a good rest of summer. Thank you very much, operator.
Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.