Alcanna Inc.
Q3 2020 Earnings Call Transcript
Published:
- Operator:
- Good morning. We would like to welcome everyone to Alcanna, Inc. Third Quarter 2020 Earnings Results Call. At this time, all participants are in a listen-only mode. Following the prepared portion of the call, we will conduct a question-and-answer session 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.
- James Burns:
- Thanks, operator. Good morning, everyone. Thank you for dialing into our quarterly analysts call. As per recent tradition here, I will not be giving any prepared remarks. Just a very brief overview; we had an excellent quarter. As the results showed, and I assuming everyone on this call has read them. Gross margin dollars particularly are -- sales being extremely strong end margin dollars as strong or greater in terms of percentages. So that's really -- it's about making money and my company continues to make money. And we see no, as we said in our MD&A, nothing in the marketplace that dictates that this is going to change anytime soon and will stay this way for the foreseeable future. Province of Alberta just announced on Friday that restaurants were to stop serving alcohol at 10 pm and close for the night at 11 pm, so which greatly reduces interest in demand in on-premise. And article in the Globe this morning of BC restaurants that are allowed open but the customers are not coming. So we just see this is not a called a blip. This is a change in consumer patterns. So going forward and it bodes well for our business in many ways. And with that, I'll just turn it over to questions. Operator, please.
- Operator:
- We have a first question from Kyle McPhee from Cormark Securities.
- KyleMcPhee:
- Hi, guys. Just on your plans to add more Wine and Beyond locations in Western Canada. I see your official guidance calls for one that will be open next year. I'm wondering if there's a plan for more Wine and Beyond that. How many and when could we see that happen? And once that kind of to get them in here, in your official guidance? Are you still waiting on good locations and good leases? So any color on that would be appreciated? I am referring to Western Canada, not the potential opportunity in Ontario.
- JamesBurns:
- Right. Thanks, Kyle. We just I think, as we've sort of mentioned, maybe unless analysts call or that we're -- we would like to put two more in Calgary, tactically three certainly two. But we are waiting for landlords to accept the new reality that what the rents they thought they were entitled to before March, the 12th of this year are no longer market rents. And so if we need to wait for four or five empty big box retail shelves to be in the same center, before we run words get realistic, then we'll wait. So it's really a function of the landlord marketplace accepting the reality of the new situation here.
- KyleMcPhee:
- Got it. And assuming those rents move to where you want them; is there more in the cards beyond the two in Calgary you mentioned?
- JamesBurns:
- Well, as we continue to look for BC sites, it's very difficult, but it's because of the radius restrictions. And there's a lot -- there's very few areas in BC which don't have a liquor store of less than a kilometer or so from another liquor store. So you don't really have any gaps to fill in the market other than Greenfield sites of which there are some very interesting ones coming up as the especially throughout the lower mainland, the population in the residential building is exploding. So there are, there new centers coming that we're in talks with on a handful of there, those are a little further of those are more 2022, 2023 sites, and so we are to get some in the interim, we still looking but again, it's there -- it's different as a combination of landlords and having to deal with most likely having to deal with an existing liquor store operator and liquor stores are relatively high demand these days, even for a single store owner operators because of how healthy the business is during these times. So the prices of a single store are certainly gone up beyond what they used to be just for the raw license. So we're looking out, we're cautious and we'll get deals that we think have a good deal. But we're not chasing them just for the sake of making announcements.
- DavidGordey:
- Our Wine and Beyond brand continues to do spectacularly well here into Q4. And they've really become a traffic driver in all of the centers that they're in. And I know landlords are actively pursuing us to put them in their centers. So we feel we're in a good position to grow and we want to grow it.
- JamesBurns:
- Yes. They've had spectacular sales increase week after week after week for the whole nine months. I mean it just it's done because we don't disclose the actual number. But it's really incredible way, way more than the whole company is skewing. And it's the big spaces in the people feel safe; they can spread out, the aisles are big with tons of rooms. So they're enjoying exceptional performance. So we will get them but we're not going to do it at the expense of time the company to an overly expensive 10 year lease. So, which is really a 20 year lease because you get a 10 year option, but leases never let you go down when you renegotiate they are always flat or up. So we're going to be careful and make sure the lease arrangements are appropriate for the conditions of the market.
- KyleMcPhee:
- Okay, thanks for all that color. Just also hoping to get a little color on how Q4 is playing out so far for the liquor business. So first, are you still seeing that same extent of same store sales lift for your liquor stores, which I suspect might be the case given how COVID is playing out maybe even accelerated? And then second, on the liquor is their gross margin still taking up? I know there's usually a season lift in Q4 from mix, should we also expect that that lift from you guys just normalizing in a higher still as in recent quarters?
- DavidGordey:
- Kyle, we're happy with the trend so far in Q4. We've had a couple of weather weeks, which is normal at this time of year. But no we're very happy with the trend and we'll see how things shake out over the next few months but happy is happy where we are. In terms of margin, you will see a bit of a seasonal lift for sure. But we're not pushing. We're not pushing through to the end of the year on making significant improvements in gross margin percentage. We're focused squarely on margin dollars. And we see this as a continued good opportunity to gain market share in Alberta specifically.
- KyleMcPhee:
- Got it. Okay. And last quick one for me on your inventorial flow. I know you changed your inventory buyer and practices a bit. So I'm wondering if we should still expect that huge Q4 release of cash from working capital.
- DavidGordey:
- Yes, you're going to see inventory come down quite dramatically. The investment in working capital was really just a decline in accounts payable and accrued liabilities from June till September; our inventory number stayed fairly flat, June to September. But yes, you will see the normal reduction of inventory as we go through to the end of the year. And that's plus or minus if we see some good opportunities from the vendors to pick up some limited time offers. But barring that, yes, you'll see the production.
- Operator:
- The next question is from John Zamparo, CIBC.
- JohnZamparo:
- Thanks. Good morning, guys. I wanted to follow up on the margins question. The year-over-year improvement you saw in Q3 accelerated. Are there any nuances that you can call outs in Q3 or maybe for Q4, about whether it's sales mix, or more or less promotional environment that you saw earlier this year, or maybe an impact from the desk stores, any commentary there would be helpful.
- DavidGordey:
- When you look at last year, we were very much in market share growth mode. And so we were being very aggressive in the marketplace. So we are laughing that you're going to see that strong increase over Q4 last year as well. And as a reminder, we implemented a very aggressive pricing strategy in Wine and Beyond last year, at this time, so again, will laugh that you'll see a nice lift in margin. We have changed our promotion strategy a bit primarily because of COVID. People just aren't looking at advertising and promotions the same way that they have in the past. And so we are riding that wave and saving frankly, saving a few dollars for the time being on marketing.
- JamesBurns:
- Yes, but we're never ever take our eye off the market share ball. So it's a very competitive business. And so far, the margins of that we've been able to achieve are holding, but if there's any competitive response to the contrary, we'll meet it. But so far, very stabilized industry.
- JohnZamparo:
- Got it. Thanks. On the Alberta cannabis front, the two to four stores that you plan to open, are those Greenfield sites? Are you seeing opportunities from competitors looking to sell?
- JamesBurns:
- No, they're new locations. We're not really looking for any new locations in Alberta. But we've had landlords come to us, or one landlord, which relatively big landlord in the province, which had never allowed cannabis on it sites before for its own personal reasons, reached out to us a little while ago and said, okay, and they were not opening up and they gave us first crack at the sites in question. So then stuff like that, John, as opposed to any competitors, the competitors call all the time. And but we're not really interested in acquiring those basis. Usually the ones that are calling or probably the locations are very good or businesses aren't really fit into this kind of thing that we're doing.
- DavidGordey:
- The Alberta cannabis market hasn't started to rationalize yet. It's coming. But it hasn't started yet. People are calling with big numbers in their mind. They'll phone back in a few months or half a year with a bit lower numbers.
- JamesBurns:
- They forgot to change their calendar; it's not 2018 any more. Those days are over.
- JohnZamparo:
- Fair enough. On the Vancouver Island transaction, you reminded us in that press release that you are looking to exit lower volume stores in smaller communities. Are there other potential opportunities you could use to refine your network?
- JamesBurns:
- Yes, no, we've been actively working all year to reduce those low volume stores which are just not efficiently run by the company. But whereas they're quite attractive to mom and pop operator who does a lot of the labor themselves and can take home a really good income. Whereas and they're not restricted to 40 hours a week. There's all sort of things that big company has to do, which an owner operator business doesn't have to do. So we are being relatively successful, again, given how popular liquor stores are right now, as businesses jobs to, at getting off our books, the stores, which we don't want on our books, and these would be all stores have literally made nothing. So even if we sold them for a relatively small amount, and we're not, we're getting some decent prices, these aren't big dollars, John, but they -- we get our inventory back.
- JohnZamparo:
- Okay, that's helpful. Thanks. And then last one for me. On the capital allocation side, outside of the priorities you listed in the MD&A. One of the primary factors that you and the Board are thinking about as it relates to a dividend or potential buyback or maybe M&A for the coming year.
- JamesBurns:
- Our first priority is the convertible debentures which we can redeem at the end of January, a couple of months from now. And we have every confidence with some options that we're exploring seriously that we will be able to do so without even any need for equity raise at all. And that's not just going to happen, not required. Once that is resolved and see what how things stand, then I guess, John, obviously, is this that generate significant free cash flow and don't see immediate opportunities to redeploy that at proper rate of return for the -- to justify the investment. The two examples you mentioned are obviously things that we would be -- we'd seriously consider.
- Operator:
- The next question is from Brian Lee, Eight Capital. Please go ahead. Your line is open.
- BrianLee:
- Good morning. Thanks for taking my questions. The majority of my questions have been answered, so just got one for me, in terms of Cannabis 2.0; you mentioned that in the last conference call that there weren't a lot of supply for the pots that consumers really want has that changed in the quarter? I was wondering if you could talk about how much of that incremental margin upside with cannabis to clean up product could potentially offset the margin pressure coming from a competitive environment in the short to medium term.
- JamesBurns:
- 2.0 product continues to be very sporadic. It's available but in very limited quantities. So I think the average caseload, if my memory serves me correctly for what's available this week in Alberta, for example, the average case of any given product any given skew is 200 cases, something like that, and then there's 540 stores. So you're basically not even getting it, so even if you get some it's so miniscule, you can't build a brand; you can't build a program. There continues to be a shortage of things like gummies that people want and surplus of things like chocolate, which people aren't as interested in. So it's still nothing's really changed on terms of 2.0 availability at all I'm afraid. It will, it will for sure. It just it hasn't yet, it's going to take some time to roll it out.
- DavidGordey:
- And when it does come it will help enhance our margins going forward. But the question is best for the LPs is to when do they see supply firming up and being more consistent. But when it does gross margins will improve because of that, now that'll be offset by flower, we see margins probably coming down over the short to near medium term, just because of there's so much supply and demand.
- JamesBurns:
- Yes. The oversupply is just going to naturally push pressure on prices, which will then and again the oversupply, the over in Alberta, probably far more stores than there is demand in the market which is growing relatively slowly versus this store growth. So that is and as we've been giving our opinion that this is what's going to happen for a couple years now that just that kind of over store network will just has naturally no option but to reduce prices as people get desperate to pay staff and pay leases. So we're anticipating that will probably happen.
- Operator:
- Thank you. There are no further questions registered at this time. I will return the call back to Mr. Burns.
- James Burns:
- Thank you operator and appreciate everybody listening this morning. And we'll talk to you again in March. Thank you.
- Operator:
- Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.