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Good morning. We would like to welcome everyone to Alcanna's Inc.'s Third Quarter 2019 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 and 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 with the exception of U.S. same-store sales, which are quoted in U.S. dollars. I would now like to turn the call over to Mr. James Burns, Alcanna's Chief Executive Officer. Please go ahead, sir.
Thank you, operator. Good morning. Welcome and appreciate everyone's interest in our company. We released our third quarter results yesterday, and this will start to sound familiar to people who are regular tuners into our call, but the message continues as it's been for the last few quarters: we did what we said we would do. And we are growing sales, both same-store, even in spite of some atrocious weather in our core Alberta province all summer, coldest and wettest in decades. Nonetheless, we are still up 4.9%, almost 5% same-store sales. Total sales, 26.6%. Our BC market remains strong and Alaska equally so, with some great opportunities for the future. In cannabis, our same-store sales -- don't really have same-store since we're lapping 1 week over a year and nothing in the third quarter, obviously. But we're extremely pleased with how our -- the narrative, which we have been explaining to people for a year now that our strategy in cannabis was to open great locations and only great locations and only when there was product and supply to make sure those locations did well, and that has proven to be an excellent strategy and our stores have significantly higher average store sales than those disclosed by many of our competitors. We have actually 15 cannabis stores now in Alberta. We got another license between when this press release went yesterday and today. And the other 15 will be open -- licensed and -- by the end of this year or maybe a week or 2 late, depending on getting permits and final inspections over the holidays. But we are on track with great locations, even though there has been -- we have seen our competitive environment in Alberta in cannabis go from what was initially 17 stores to now well over 300. Our average sales per store have, in some cases, hardly dropped at all, in other cases, not very significantly, yet again, proving the great real estate wins. And opening a store for the sake of opening a store and pretending you have numbers is just folly. That has nothing to do with real retail and nothing to do with real business. We continue to focus on -- while we're growing sales, we continue in both our businesses to focus on margin enhancement, and we were successful in starting that program in Q3 in our liquor business in a careful, controlled way. We don't want to lose the market share that it's taken us this effort and investment to gain, and we've been able to do so and achieve that. And continuing in the fourth quarter on path with our projected margin increases and look forward to continuing that right through 2020, as we have said all along. And equally, in cannabis, we're keeping the margins as high as the market will allow. But within the context of being competitive and making sure we retain footsteps and customers when competition shows up, and we are very confident we will do that, including with our Queen Street West store. We -- on the cost side of our business, we have made some significant overhead reductions third quarter, and we -- and in this quarter and further expected in Q1 to get our overhead and management costs in line with the realities of our business. And lastly, I would just add, we have another new Wine and Beyond opening up a week from today -- a week from yesterday in Red Deer, Alberta, which we're very excited about. I think it will be greatly well received in that market, and we're looking forward to you joining our Wine and Beyond family. And with that, I will just -- for the last few calls, we won't read out what you've already read. So I'll just turn it over to questions. Thank you.
[Operator Instructions] Our first question is from John -- from Kyle McPhee from Cormark Securities.
First question for me, just on the same-store sales, I just wanted to dig in a bit on that, the same-store sales in Canada, so up 4.9% in Q3, wondering what that looks like for the different components of the store base? So maybe some color on the alliance stores versus the non-alliance.
Yes. Kyle, the alliance stores, the discount banner, obviously, because of the nature of that business, it has been an important driver of that same-store sales increase. But -- it's probably been the key driver, and also because we have so many more of those stores now than we ever had before, almost 100 under one of the discount banners. So that's the primary driver of it. But overall, we're pleased with how Depot and Wine and Beyond are going as well.
And that's -- so are those non-alliance stores also in positive territory? Maybe not to the extent of the alliance stores, but [indiscernible]?
No. The weather this summer really took a beating on them, and so they dipped down, but nothing concerning when we try to normalize for the weather. But it was a terrible summer out here, something that you guys experienced, I think, last summer. It was just rain and cold the whole time.
Yes, and then kind of gas stations, convenience stores, people were down just incredible numbers from -- just because no one went out. But -- and that's not an excuse, but it's a reason. But yes, the depots are essentially flat, which is fine. We are pleased with that, given the conditions.
Okay. And then on liquor gross margins in Canada. So your commentary suggests they're starting to normalize higher in Q4. I'm just wondering what that pace may look like. Is this a multiple quarter path to get back to your target normalized gross margin? Or will you be in there kind of exit this year at that normalized gross margin you're targeting?
No. No. No. It would be like -- I think we've said before, Kyle, that it will be something that's careful and gradual. You always want to maintain good pricing in the marketplace, especially on the core items that people use to benchmark you against the competition. So we will look to increase margin throughout 2020. By the end of 2020, we should be -- and maybe even by Q3, we should be where we're at a stabilized level.
Got it. Okay. And then -- so you've started this process in Q4, and is the same-store sales still holding up? You're not losing any traffic as you move pricing higher?
Yes. Absolutely. We started in Q3, actually. So -- and continuing in Q4, and we've been able to absolutely no impact on sales -- on the growth. It's been fine. And we know how to do this. It's very careful and even -- and especially our -- the team at ACE and in the alliance that run the discount stores are good at this in terms of having the lower prices on key banner items. And you raise prices on the other shelf items that are the basket fill items. So the customers -- you do it in a way that's customer-friendly and nobody minds. I think it's $0.10 here, $0.15 there. It's not a matter of just 1 big price increase. That would -- would give everything back that's taken us so much to win.
Okay. And then last one for me, for now. There's been some rumors out there that maybe Aurora is looking at selling their shares in Alcanna, for one reason or another that I won't get into. But wondering if you have any color on that rumor or maybe just a general update on your relationship with Aurora and how active they are in your business, et cetera?
Sure. Obviously, I can't speak for them. So you'll have to ask them the direct question, but I can speak generally. Our relationship with Aurora is excellent. They have excellent products. And we move a lot of Aurora products out of our stores. And now that supply is stabilized, they're excellent sellers. They're our #1, actually. Aurora continues to have a representative on our Board who was here yesterday at our Board meeting. And we've great positive relationships with them in terms of their holdings of our company or -- and they have investments in other retailers. I'll maybe just make a generic comment. If you're an LP, and you're trying to become a consumer-packaged goods, build a brand, build recognition, get a customer brand image, given the rules that are on cannabis, there is almost no way you can do that like a Procter & Gamble could. You can't advertise. You can't market. You can't do so much. The only real place that an LP can build a brand under these rules is in the walls of a retail store. And so great relationships with the retail store is something that is very important to LPs. I also note that as you say -- can't talk about Aurora's business, but I did obviously read their results yesterday and some of the strong moves that Aurora has made to shore its balance sheet up, I think, just shows that they are on top of things, and they're doing well. And it's a relationship that we value very much. And I have no reason to believe that they don't value it as well, and reason to believe they do.
Our next question is from Sabahat Khan with RBC Capital Markets.
Just I guess on the liquor business. As you kind of start to improve kind of the margin, can you talk about what you see as sort of the upside over the next kind of 1 to 3 years in terms of the margin profile? I know it's a work in progress, but sort of is there a target you have in mind as you go through this transition?
One of the things to keep in mind for everyone on the call is that our mix has changed significantly. And by adding 100 discount stores, just the rates blend out lower. And so getting back to a margin rate where Liquor Depot ran previously and where this company ran previously is not going to happen just because of the greater percentage of sales coming from discount. But from that baseline, there's no reason why we can't get another couple hundred basis points in the next year, 1.5 years, as we work through our margins and pricing strategies. And if we get in that range, the company has a much healthier bottom line, as we indicated is in our plan.
Given the -- go ahead, Saba, sorry.
No, go ahead.
No. I think that David is exactly right. They are -- the old model of liquor retail in Alberta, 5, 10 years ago, it does not exist anymore. There's probably half the market now that's selling at a -- what you would call a discount price, of which we're by far the biggest of those, our discount banner. That's just where the market has gone, and it's difficult to see that it's going to go back, which is why we got out in front of it and wanted to be the major player in it as opposed to trying to fight it or pretend to go away, as you can't beat them, join them. So let alone can't beat them, lead them, which is what we're doing.
Okay. And then just, I guess, on the SG&A side, you mentioned some more cost reduction over the next little while. I guess, beyond that, do you see your SG&A structure sort of sustainable, given the new discount model that's in operation broadly in Alberta? Or do you see -- if it does become even a bigger part, do you see more room on the SG&A side?
That's a great question, Saba. And yes, very much so. We were -- definitely have a target and we're acting on it, have acted on it, will act on it, and will continue to act on making sure the infrastructure here is sensible in comparison to what our business is and what our stores can produce. And to the extent that it's too high, which I guess, by definition, we considered that it was, which is why we've taken these -- it's never easy doing that sort of thing, but it has to be done, and we will continue to do it. We're also looking at other means of streamlining. And as you say, it's all -- it's a different business, that part of it, and we are making sure that our structure, how we look after that fits that business.
And then some of the online initiatives that you've taken -- undertaken over the past, I guess, how are those coming along? Is that still a focus for the company? Or I guess, how does that fit into the broader discount retail environment, this online selling?
To be honest, we've actually put that on hold for now. It was not down the road, it may or may not be and probably will, as with e-commerce is in retail and in other areas. But the rules that are on liquor selling make it much more complicated and expensive to do that than delivering food. So for the time being, we put that on hiatus while we focus on getting our business profitable, and we'll resurrect it again in a year or 2 when we are more financially capable and able to do it and focus on it. Right now, I mean, our sole focus is on the stores. If it doesn't affect performance in stores, we don't need it. That's literally where our management focus and time and attention and money is right now, make money.
And then just one on the cannabis side. I guess, as you bring on more stores and as there's more competition in the space, I guess, how are you envisioning the scale-up of that business, more specifically in Alberta and also Ontario? Obviously, productivity might go down as more stores enter the market. But what are you looking for in terms of overall top line growth over the next 1 or 2 years as more stores come into the market?
So far in Alberta, all these competitors hasn't really affected us at all. We've got good sites. And our sites are in places where people go, near where they work, near where they shop, near where they live. In shopping, we pay more rent, we have better locations, you get what you pay for. And our sites are good and where these other competitors are popping out, their sites are not good as one could generalize. So we have had very little impact so far. And the rest of our -- we'll have 30 up and running here in a few weeks, and they're all in excellent locations. And we believe that they will be fine. Some of them are in islands that are in centers with restrictive covenants. So there just aren't any competition by virtue of the center we're in. So we're in little islands.
And any potential pullback should be offset by Cannabis 2.0 with the edibles and beverages, et cetera, that come online, and hopefully, new consumers start coming into the marketplace as well as those products land and as cannabis becomes a little bit more normalized to society.
Yes, absolutely. So I think we're comfortable with our 30. We've had -- we've been shown many, many acquisition opportunities of people who are realizing that this isn't as easy as they thought it was. And I won't name names, but -- and so far, we've passed on the mall because their real estate was terrible, just to be blunt. So -- but not to say that we wouldn't look at some down the road and always look for acquisition opportunities. But right now, growing through our own real estate expertise and landlord relationships has proven to be a far better strategy for our company. And it's what we will do in Ontario, too. I think it's widely -- every LP you read, every -- Ontario government's in their economic statement last week, I think, made as many as 3 or 4 references to cannabis opening up very soon, very soon, and we are poised to be a part of that. And in the same strategy that we took in Alberta, we'll make sure we get great sites, just like our Queen Street site in Toronto. And the competition really doesn't affect us, frankly.
Our next question is from John Zamparo with CIBC.
Maybe we could start on the liquor side. You referenced the ongoing competition, both on the call and in the press release. I'm curious if you have any thoughts or expectations on overall square footage or unit count of the industry for 2020 or 2021? Is it kind of flat in your mind? Or do you expect to see a decline in competitors?
In liquor in Alberta, it stays about the same. Grows a little bit a year. It's almost like there's 16 -- 1,500, 1,600 sort of independent stores, another 600 off-license hotels, motels that are allowed to sell off-premise for off-premise consumption. It hasn't changed too much. It comes and goes. It doesn't shrink when people go out of business all the time and somebody tends to backfill. So there seems to be -- I think it would be unrealistic to say that a lot of people will fail and go out of business and -- but I don't see a lot of new people coming into the business either. So it will probably be pretty stable, would be our guess.
Okay. Great. On the Wine and Beyond stores, it sounds like you've been very pleased at the early performance of those. Is there reason to suggest you could accelerate the opening those and generally, have they been up to your expectations beyond early months? And are you getting the returns on the stores that you were hoping for?
Yes. And I will qualify that we are, and they have been well received in the market. So we've owned them. One is in St. Albert, which is a suburb of Edmonton. They wouldn't like us to call it that, but it's an independent city very close to Edmonton, I'll call it. Just to be nice to people in St. Albert. And the other one is in Lethbridge, which is a major center down in the southern part of the province. And when you open a big store like that, you have to be careful on pricing and just to make sure it gets established in the market. And there's some people have an image that it's too fancy or that it's a luxury brand because it's actually not. Wine and Beyond is extremely well-priced because it's a destination store like any big box. You have to be very, very competitive. It has incredible selection, and there are all sorts of right up the value chain of products. But at the end of the day, your basic offering has to be competitive, especially when you're starting off. So -- and that's what we're doing. So we're right on target with what we want those things do, and it will soon be -- they take a year or so until you really start to produce the bottom line returns. But the footsteps in the top line is where we'd like to be, and we expect Red Deer will be the same. In terms of expanding in Alberta. As of right now, we will -- we've got some on the books, which we may or may not proceed within the early part of next year because our eyes are on Ontario, both cannabis and liquor in terms of making sure we have all, a balance sheet and the dry powder, to be able to take advantage of Ontario expansion if or when that comes in both products.
Okay. That's helpful. You mentioned robberies and thefts, an increase of those in the press release. I'm just curious what may have brought that about? Does it impact same-store sales materially? And are there material costs that you have to incur to address those?
Yes, yes. It's a nationwide problem. In Ontario, the LCBOs had terrible problems with it. Manitoba, same thing. In Alberta, it is in the 2 big cities, particularly, it has been -- in certain neighborhoods, it's been really out of hand. It's actually organized crime doing this, robbing to order, robbing to resell online, robbing to sell to unscrupulous liquor stores or bars or night clubs. We are working extremely closely with the police to address it. We've had to incur some costs to ramp up our own internal security for employee safety and -- as well as, obviously, financial reasons. So it's material. It's a material impact on our bottom line in Q3. This has been going on for about a year now, getting ramped up and -- but we're on top of it, we're addressing it at meetings with the political figures and the police department, and we are getting -- as well as the regulator here and everyone's concerned and realizes that it's something that needs to be tackled on a much broader basis. Not one company can do it, and it is not just our company that's getting this. It's any liquor store in the province, especially in the big cities. So it's something that we're addressing, and it will affect our results to some extent for 1 quarter or 2 until we can get it under control. But we've got a plan, and we are confident that, at least, for our company, we can -- we'll get it under control in the next few months.
Okay. That's great. You referenced the -- you want the flexibility to be able to address Ontario liquor if that opens up. In an unfettered world, if you could take on Ontario liquor, Ontario cannabis, Alberta liquor, Alberta cannabis, can you list out what your priorities for capital would be in that? I know it's an unlikely scenario, but in that scenario?
That's easy. We'll build as many Wine and Beyonds in Ontario as we're -- we can build -- there'll be build months. Just -- that's a really easy one, yes, for sure. And then from there, Alberta cannabis and Alberta liquor, we're pretty well -- we're just rounding out the edges of our portfolio on both of those. We're happy where we are. And we'll add as populations grow in new neighborhoods and so on. So Ontario cannabis would be next. Those would be the 2 priorities for sure, by a long shot. Ontario cannabis, which is almost certainly coming. Well, it's in the look. It's just a matter of when and how they phase it in. And that decision has already been made. It's just a matter of timing. The liquor has not been made. They're going to have reform. They just haven't landed on exactly the regime they're going to put in place. And once we hear that and if it's such that our Wine and Beyond stores, and we would do big box in Ontario, and we would not get into the convenience format that we do here. Straight line in deals.
All right. That's helpful. And just a couple more on the cannabis side. Is there an expectation on your end for when you might be able to participate in some sort of merit-based assessment of Ontario cannabis stores? Is this likely first half of '20? Do you have it in your mind the second half of '20? I know it's still lots up in the air, but just anything you've heard on that, that you could share?
Everything we hear says it's first half of '20.
Okay. Great. And then lastly...
Even in Q1. And they may even announce it very early on with -- the phase open stuff I believe is the issue they're working on, how they're going to handle the distribution is I think what's being discussed and contemplated versus the retail itself. They already know it. Just if you're going to build a store, build a store, which is what they always intended until the supply shortage came, everything in last year. So we're -- we've just heard everywhere that it will be very soon. So we're getting ready for that. We had our people in the field looking for sites. I mean we're expecting it to come fast.
Interesting. Okay. That's helpful. And then last one, margins on derivative products or 2.0. It sounds like you do expect some expansion. There seems to be a disagreement among sources I talked to about how much of an expansion. So can you just give us a sense of the magnitude of margin improvement on the cannabis side when we do see these products roll out?
It's hard to know because we don't really know the pricing yet from what the LPs are going to sell it to the government buyers if the government stays in the business, which they or they may not. So we don't really know. But we're anticipating that it will be certainly a 30 where more or less the standard margin is now in cannabis. Our margins will show less than that in cannabis because we -- as I mentioned, I think, in either the press release or the MD&A, that as our company, we do not hold -- we're retailers. If you have inventory that's not moving, you lower the price and get out. I know some of our competitors are sitting on inventory, they are afraid to sell it because they don't want to show the market that the margins are down. But that's just kidding yourself. It's just kicking the problem down the road and making it worse. So on 2.0 products, it will probably start in the mid-30s would be our guess but we'll see. We're going to be cautious on it, John, because we don't know yet. From America, we've been down. So look at stores there, see what sells. That's the only real comparison that you can do. In terms of -- everyone assumed vape pens were going to be the hot seller. And they still probably will be, but with all the health issues surrounding it, they'll -- blooms up, that rose a little bit, probably not a lot. So because -- I think the products causing the health issues were unlicensed, black market products, not ones that are inspected and done by -- Aurora has some great family of products they've shown us that are coming. I think they're going to be wonderful sellers. So we're really looking forward to getting those, but we'll be cautious and not over-order too much right away and sort of watch what the customers are asking for and introduce it slowly. And we anticipate that it's going to be made available to us slowly, just like 1.0 in terms of it's going to take a while for people to -- LPs and manufacturers to get their facilities up and running and get the stuff out into the marketplace. So I think we'll be careful. I don't think it will -- I would be shocked if it had much impact on Q1 at all. But by Q2 or Q3, then we'll know a lot of what -- the questions that you're asking, we'll have some sense of what those answers are going to be. Right now, it's a guess.
Our next question is from Jenny Wang with Eight Capital.
Congratulations on the quarter. So just first question, in terms of the cannabis stores in Alberta, if I were to adjust for the Queen location, could you give us an idea of what the revenues per cannabis store there is, annualized?
Annualized? Jeez. For Alberta alone, $80,000 -- I believe, it's $4 million.
Yes, it's around $4 million.
$4 million a store because a big part of the average -- there's none in the store isn't a store. It just depends where it is. We go from like $50,000 a week to $150,000 a week, $200,000 a week.
But $4 million is a good number. The question is, what the new ones look like? And if we do anywhere north of $3 million, we will be happy.
Yes. $3 million to $4 million. $4 million, I think we're expecting [indiscernible] in it, and that -- we should stay there because these are great locations without competition because that's how we pick them.
Understood. And maybe in terms of the newer 14 licenses that you're expecting to -- you're expecting to get, are those similar -- going to be in similar locations, maybe similar revenue run rates?
We're expecting that. Yes. Yes. They're all -- these are -- a lot of them are major landlords in great centers, Calgary. I think we have an 8th coming in Calgary, and they're all in good centers in little islands where, by nature of our restricted covenant and then the city to city blocking, there just won't be competitors around. They're in places where people shop. So that's how you win in retail.
And our pricing is better than most of our competition. So customers will come check us out, and we'll literally get them on convenience and price.
Exactly.
Okay. In terms of moving on to Ontario. I know there's talk or speculation that potentially Ontario moving towards more open market. Are there a number for the number of stores that you're aiming to have in Ontario, maybe in 2020? Is that something that you're giving kind of a little bit of color on that?
Yes. Yes. Let's just assume that it's -- let's say, they open it all up and you can start maybe start of Q3, just to pick it out of the blue when it's announced and rolled out, and the distribution is sorted out. We would -- and again, Jenny, we'll do the same thing we did in Alberta. We're not just going to go run around opening stores for the sake of it and issuing a press release every 15 minutes that we opened another store. We're going to get great locations, good landlords and open real businesses that are going to sustain themselves for the 10-year term of the lease because we actually have money to pay the lease, which others don't or will soon. So if we could open 12 to 15 the back half of next year with permits, getting the leases signed and all that stuff, we'd be happy. And we'd obviously eventually be targeting the minimum -- maximum 75, so we'd be targeting to get 74 more. But that won't happen in a year. And we're not going to rush. We're going to make sure it's done right. And they are real businesses run properly. There's no first mover. That's a myth. There's no first mover in cannabis. We all sell same stuff. It's retail. It's about location, location, location. And then about making sure your value proposition is competitive. And then your service level is what the customers are expecting for that value proposition. It's not hard. First mover means nothing, it's irrelevant.
Maybe one last one on Solo liquor. Could you just give us a little bit of color in terms of integrating that? And maybe how many quarters do you think it will take for that to get to maybe the '17 revenue and EBITDA run rates that are used to perform?
It's been most -- I would say, half the stores are on track where we thought they were, about half are slower. And for the most part, we will be changing the Solo stores and making them ACE under one brand name. Save on marketing and save -- it's a lot simpler and more cost-effective to do that. In some locations -- there's a few that we'll just leave as Solo. But in most locations, the brand was so badly broken by the difficulties the former owners had that it's -- it will be easier to get customers back into those locations under the ACE Banner than it will be to try to get them to return to Solo. We've switched half a dozen already. I think it is -- and that is like one moves up 125%. It has made a huge difference we put the ACE banner on. So we'll accelerate that. In terms of how long it will take those former Solo stores to get back up to a normal level, I would say by Q2 this should be up and running. So a year after we got them, we should be well established back in the marketplace.
There are no further questions registered at this time. I would like to turn the meeting back over to you, Mr. Burns.
Thanks, nothing from us. Appreciate everyone's interest in our company, and we look forward to speaking with everyone in March with a Q4 which we anticipate is going to be the same message that what we said we're going to do and that's where we'll spend the next 4 months doing. Thank you.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.