Alcanna Inc.
Q2 2021 Earnings Call Transcript
Published:
- Operator:
- 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, Alcanna's Chief Executive Officer. Please go ahead, sir.
- James Burns:
- Thanks Laurie. Good morning, everybody. Appreciate you 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 it's -- 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, or, and even if they are 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 and even though it's now a competitive marketplace again, where we're best institute marketing and promotional pricing. On occasion margins have largely stayed the same, but within range of where they were before. So again, that is -- that's encouraging. The company is on track, as we have announced before to build its They're one's 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.
- Operator:
- Thank you. We will now take questions from the telephone lines. And the first question is from John Zamparo from CIBC. Please go ahead. Your line is now open.
- John Zamparo:
- Thank you. Good morning. I wanted to start on the liquor margins please. You were flat on a continuing basis and you've made significant improvements on this metric over the past couple of years. I am just wondering, is there still room to grow meaningfully? And if so, what would the drivers be that remain that would help you get more traction on that line item?
- James Burns:
- 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. We will continue with as private label continues to grow, that helps margins as LTO purchasing and taking advantage of a one-time price reductions in the market and using our balance sheet and our warehouse to that. We can always, it will still have a room to go up a little bit, but incrementally, no, not, big -- that big prices. The prices may have to come up in the marketplace where to the consumer, but that will be driven by costs as manufacturing prices and the prices that we get charged that the vendors charge because their costs are going up, everything from shipping to glass to packaging, as we all know. So, but that's a little different.
- John Zamparo:
- Okay. That's helpful. Thanks for that. 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
- James Burns:
- It's early days for pricing? We haven't really seen, it's just starting to come from the vendors right now, John, to be honest. They are going through their own challenges. They had even though retail liquor was -- continues to be very high during this pandemic era. Overall, a lot of them had declines in production as they lost their own 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 I believe, we'd anticipate that we would -- we will 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 will just inevitably be passed on as is going to happen in groceries and food and almost every other product is well-documented.
- John Zamparo:
- Yeah. Understood. Okay. And then one more for me please on the Wine and Beyond 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 the Wine and Beyond versus the discount space would be helpful?
- James Burns:
- Yeah, the Wine and Beyond continued 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. The other banners are doing very well as well, but we're very encouraged with how the Wine and Beyond 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.
- John Zamparo:
- Okay. That's helpful. I'll pass it on. Thank you.
- Operator:
- Thank you. The next question is from Graeme Kreindler from Eight Capital. Please go ahead. Your line is now open.
- Graeme Kreindler:
- 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 markable change there within those components? Thanks
- James Burns:
- When you compare against 2020 Graeme, there is significant changes. Last year at the beginning of endemic is happening grocery and other 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 far 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 what, how frequently they visit retailers and liquor in particular.
- Graeme Kreindler:
- Understood there. Thanks David. And 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've changed, COVID cases and potentially some of the weather impacts?
- James Burns:
- 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 on either side of that spectrum. No, no. And again, it's very -- we're very cautious comparing to 2020, especially when you start to getting in time increments less than the whole quarter, because 2020 was a rollercoaster panic for the first two weeks, panic buying and stocking. And then everybody stayed home, figuring this thing was going to last a month and went through everything they bought in the panic buy and so sales… So it's been almost on a weekly basis. You can just go back to whatever front page story. There was a year ago on the week and either changed or we had good sales or poor sales last year. So, and it just flips this year. It's much more of a normal just like '18 or '19 for us is other than we're well, well up almost 11% over what '19 was, which, we'd take all day long. It's exceptional. We're, back to monitoring weather. Weather is what's driving our business or the smoke or what not, it's been happening in the province. Those are much bigger drivers these days in summertime.
- Graeme Kreindler:
- Understood that. That's actually a good segue to my last question, with respect to the weather there, there'll be the typical weather patterns that impacts business. Can you comment on particular, the wildfires and the snow cow, how that's had any impact so far, whether that's changing behavior or what that might look like in terms of Q3?
- James Burns:
- I think just anecdotally, just, everyone knows from just the people around the office and our teams in the stores, people want to win the index gets way up to eight or nine out of 10. People tend to not build in the backyard so much, it'd be out and about so much. It's just, it's uncomfortable. You cough and ice water. And if we still own the stores in British Columbia, we had a very, very big business in the interior of BC, which we no longer own. I think 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 it 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 has probably been between smoke on the one hand and nice, great normal weather, if you want to call it that on the other hand is kind of a wash for us here so far, which is good.
- Graeme Kreindler:
- Okay. Appreciate that color. Thank you very much. That's it for me?
- Operator:
- The next question is from -- sorry, the next question is from Kyle McPhee from Cormark Securities. Please go ahead. Your line is now open.
- Kyle McPhee:
- Hi guys. Maybe just to start I'll follow up on the wine and beyond. So you gave the color of what we can expect growth pains throughout this year. Can you remind us on plans and targets for the next couple of years?
- James Burns:
- Well, we anticipate we're trying to do four or five per next year. We're 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 two at the landlord negotiation stage. And I think as we've mentioned before, Kyle and we've discussed since COVID kind of decimated the retail environment for -- not for us, but for a lot of other retailers are the deals we're able to get from landlords and landlord's willingness to work with us on de-risked rent structures for new sites it's just night and day difference than prior. So leases are a little more complicated negotiate, because we're not just have to take whatever user's rent they want to charge us, but we can negotiate and have been successful in negotiating, more participation rents where it de-risks the capital investment on an Canada's part which we're very pleased to do. So, 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 or month after month, it doesn't do much good. But again, as this thing turns to its next phase pandemic, hopefully that will start to mitigate the backlogs that are there and we'll 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 a four to five locations. That's more theoretical right now. We know the general trade areas we would go in geographies, but early days for those yet. So we're really concentrating on finishing up for next year this year.
- Kyle McPhee:
- Got it. Thanks. Thanks for that color. And then in terms of the ones opening up this year, can you -- 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
- James Burns:
- 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 -- they have good growth, much higher than inflationary growth for a couple of years thereafter. Yeah, no, we launch aggressively and make sure you -- 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 wanted to get market share, introduce them to -- we'll have such three more for Calgary than 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 in market accordingly to get people to really make it worth their while to come and see you once we get them in those doors. I think we bought them as we've shown during the pandemic with the increases up, I guess we haven't really been announcing it, but I mean, staggering percentages from the year before same store and staying that way. So we anticipate these were great locations. We didn't work on some of them for a very long time and weren't able to get rents that made sense until now with the, as I mentioned just a little earlier. So we're very excited about that one in Colona. It was supposed to open right around now which I guess I'm kind of in hindsight is sort of dodged a bullet that it didn't because it's -- things are not doing very well there right now with the smoking and so on and Columbia, but it'll be opening later in September. Hopefully the fires issues is some rains and clear weather calm that down by then? And we're expecting that one to do extremely, extremely well that could probably contribute this year. I think that's going to be a whole that sort of risk.
- Kyle McPhee:
- Okay. Appreciate that color. Shifting gears a bit, I just wanted to dig in a bit more on the COVID tailwind, driving that consumer behavior change that's benefiting you at least temporarily. So on this you've mentioned your same store shelves are up 10.6% for 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 shifted your store mix more towards the discount model since then. So curious what your thoughts are there given the portion that may be from market share gain…
- James Burns:
- I don’t if we can quantify it, but there's this. Yeah. I agree, Kyle there's, there's a significant amount comes from a continued conversion some liquor Depot ASA stays banner is really resonating out here and it's by far our majority banner right now. And then one and beyond, even though there's only a handful of stores, the volumes are so high and especially compared to what they were, and even in '19, 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 one and beyonds which take market share across the board. And as we continue some conversions from liquor Depot to ACE in selected stores.
- Kyle McPhee:
- Got it. Okay. And so you can't quantify it, but it sounds like some is market share gains. So all these same store sales that we've seen through COVID shouldn't 100% be reverting.
- James Burns:
- We would certainly be surprised. You never know, but, who can predict anything anywhere and anyone that says they can is crazy, but all things equal; no, we think it's 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 it's -- we're -- we have the first half of the year is far better than we would have had the hopes to guess for at the end of last year. So it positions us very well for the last half of the year and especially Q4, we were always -- we always sort of expected that that would have all the quarters, that would be the one that we might be able to even match last year. Never expecting Q2 it would, 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 Christmas events that whole fourth quarter sales bump we get in our industry just was not there at all. No Thanksgiving, no nothing. So today that's obviously now all over with and I can't really foresee, even if restrictions are put back on here in Alberta, that it would go that far again. So Q4 has always looked good for us. And then, is Q2 coming in so well, we're very optimistic for the year.
- Kyle McPhee:
- Okay. Appreciate that color. I just wanted to check in on the theft issues that you had before COVID, with food service channels now reopening, which I think was the end market for the stolen product. It is a theft issue coming back for you at all?
- James Burns:
- Yeah. None of the restaurants and the bars are opening again, they're ordering stolen liquor. It's unconscionable, there's things that can't talk about that we're working very closely with the police and to try to get to the root of the main bad actors here. But with the measures we've taken at Del Cana patron scan in the high like a controlled access ID in high theft stores and so on, both for our staff protection in there as well as obviously just the product loss is making a difference. And, in some ways we have a lot of extra private security that we can put on in stores. And I suppose it's just chasing the problems to some other stores but that's kind of, we just have to look after our own team and our own pro stores. We've mitigated it to as great a degree as you possibly can more to do though.
- Kyle McPhee:
- Got it. Okay. And then I guess, a related follow-up on your corporate OpEx or I guess, keeping your store up, is there anything abnormal in there or are we at a pretty normalized run rate and I guess it relates to the theft issue, or maybe you have to start spending more on that?
- Darren Karasiuk:
- Yeah, definitely in the store, OpEx are selling and distribution has elevated with all of the private security, as Jamie mentioned, you know, 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, we've been busy. So there's still transaction costs etcetera, that float through into that number during Q2 again.
- James Burns:
- Yeah. We should apologize again, if you do this every quarter for these statements are almost incomprehensible, but we don't make the accounting rules. So they are the way they -- the rules tell them we have to present them. Like we know they're pretty meaningless.
- Kyle McPhee:
- Okay. And David, just a quick follow-up on the store OpEx. So the theft spending would have been in the Q2 numbers though. Is that correct?
- Darren Karasiuk:
- Absolutely. Yes. So it's just elevated for that issue.
- Kyle McPhee:
- Okay. That's it for me. Thanks a lot, guys.
- Operator:
- Thank you. There are no further questions registered at this time. I'll turn the meeting back over to Mr. Burns.
- James Burns:
- Thanks Laurie. Appreciate everyone. Have a great rest of your summer and we'll talk to you again in November. Thank you.
- Operator:
- Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.