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Edited Transcript of LIQ.TO earnings conference call or presentation 9-May-19 4:00pm GMT

Q1 2019 Alcanna Inc Earnings Call

EDMONTON May 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Alcanna Inc earnings conference call or presentation Thursday, May 9, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Nathan Gordey

Alcanna Inc. - Executive VP of Corporate Services & CFO

* James Franklin Charles Burns

Alcanna Inc. - Vice Chair & CEO

* Paul Reid

Alcanna Inc. - President & COO of Liquor

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Conference Call Participants

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* Chris Amos

* George Doumet

Scotiabank Global Banking and Markets, Research Division - Analyst

* John Zamparo

CIBC Capital Markets, Research Division - Associate

* Sabahat Khan

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. I'd like to welcome everyone to Alcanna Inc. First Quarter 2019 Earnings Results Conference 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 with the exception of the U.S. same-store sales, which are quoted in U.S. dollars.

I will now turn the meeting over to Mr. James Burns, Alcanna's Chief Executive Officer. Please go ahead, sir.

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [2]

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Thank you, Ruth. Good morning, everyone. I'm joined here this morning by David Gordey, our EVP and CFO. Paul Reid, who -- our President, who normally is on these calls, is not available this morning as he is down at Lethbridge. And 3 minutes ago, our latest Wine and Beyond just opened for businesses, which we're very excited about. And Paul is there overseeing the opening.

We appreciate all of you calling in and your interest in our company. Our last analyst call was less than 2 months ago. So I'll open with an update on the 4 priorities I discussed in March and update Alcanna's progress against each of our growth objectives.

The first priority is to recapture and hold market share. The positive momentum established in Q4 continued at pace in Q1. Canadian same-store sales were up 6.2% versus Q1 last year, and Alaska 6.3%. Total sales rose 16.2% versus the first quarter of 2018, and this despite one of the coldest winters in Alberta in 100 years and continued economic headwinds in our main province.

While sales were very strong and continued strong, bottom line was less than we anticipated earlier in the year, but it was because we had decided to accelerate the pace of converting Liquor Depot stores to Ace in the Canadian Liquor Retailers Alliance and take the charges and the expenses in Q1. The benefits of that, obviously, will then be felt on the other side in Q2 and especially into Q3 and Q4.

Second was cannabis. The nationwide supply shortage continues throughout the first quarter, and in fact, worsened as the quarter went on. Our stores rarely have ever had saleable product on hand in inventory for the bulk of the week. The once-a-week delivery sold out often same day and almost always by the end of the weekend. Nonetheless, sales remained strong. Our 5 Nova stores recorded combined sales of $6.4 million in Q1.

On April 20, an Ontario resident who won one of the 5 lottery vaults for our cannabis license in the City of Toronto opened a Nova Cannabis store under license from Alcanna and with financial and operational support from Alcanna. I encourage Toronto-based investors to visit the store and compare it to others, see the difference between someone who brings experience in controlled-substance retail expertise to the table versus those new to retail. The contrast is stark. We remain very confident that retailers with experience, expertise, the ability to absorb new stores, and in particular, the sale -- scale and size to wait out supply shortages and license restrictions will be the leaders and the winners in cannabis retail in the long run. Alcanna believes we are one of the few and possibly the only company on the cannabis retail horizon that can meet those tests.

Third was enter the discount segment of the market. The Canadian Liquor Retailers Alliance now is by far the largest discount retailer in Alberta with almost all 63 stores now operating under the Ace banner and most largely renovated, as I mentioned.

The strong sales increases for the CLRA, I commented on in March, continue. And as you may have heard last week, the second largest Alberta discount retailer, Solo Liquor, went into receivership. Alcanna will, of course, be closely monitoring the receiving process as it unfolds.

Other liquor retailers have contracted the CLRA and Alcanna about possible becoming partners, which we would welcome.

Fourth was to open new Wine and Beyond locations. As I mentioned, our Wine and Beyond in Lethbridge, Alberta opened a few minutes ago, and we're very encouraged at the initial response from the community.

Red Deer and the second Calgary location is expected to be in place over the coming months and a St. Albert location, which is a community just north of Edmonton, later this month. We expect more leases for 2020 openings in selected parts of Alberta, which we feel can support a Wine and Beyond as well as potentially our first in British Columbia. And Ontario government's appointment of an adviser in March to help create a system for private sector liquor retail in Ontario continues to give us positive expectations of growth potential for Alcanna in liquor as well as cannabis in Canada's largest province.

In addition, last week, Alcanna entered into a new senior secured $70 million asset-based revolving credit facility with CIBC as the sole lender. This new 3-year credit facility was designed to fit our company's needs as we execute on transforming Alcanna to a growth company from, let's say, utility. Using an asset-based loan structure provides maximum flexibility to invest in both capital and margin initiatives. Not being tied to cash flow covenants and other tests allows Alcanna to invest in areas, which will provide the best medium- to long-term return for shareholders versus having to accommodate the short-term targets.

I conclude by repeating what I said in March. Alcanna continues to execute on doing exactly what we said we would do. We have the management expertise, balance sheet and strategy to significantly enhance the value of our company over the medium term. That remains our one and only focus.

Thank you, Ruth. Turn it over to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from George Doumet from Scotiabank.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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So our strategy here of recalibrating prices seems to have worked really well, removing the #2 player. I'm just wondering when we plan on increasing prices again, if ever, I guess. And this -- our altered structure, I guess, is more of a mix towards discount. Does that ever kind of get in the way of us attaining those mid-24s to maybe 25% gross margins at some point this year?

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David Nathan Gordey, Alcanna Inc. - Executive VP of Corporate Services & CFO [3]

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Sure, George. We had always -- as we've said, we're going to make sure that lease for Q1 and Q2, we're going to ensure that we're focusing on getting customers and keeping margins at levels that brought customers into our stores. Given the situation and the competitive landscape has changed quite dramatically in our favor that we will absolutely be looking at adjusting that and turning those footsteps into margin as early as still maybe even in Q2, certainly in Q3 and Q4. As to the actual overall numbers, it's not a matter of just the prices. It has to do with preferred-label products and other initiatives to get gross margin dollars, which is the key, versus gross margin percentages. And we're trying to focus our company now on thinking about gross margin dollars, not on gross margin percentages because that's obviously at the end of day what really matters what actual dollars fall to the bottom line. In terms of having a discount banner, no, we don't feel that it impacts. We have carefully chosen our sites to make sure that there's not a lot of overlap and competition between that and the liquor depots to some degree -- the greatest degree possible. So it's different businesses, different types of selection, different customers. So we -- one should not affect the other going forward.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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Okay. Yes, that's helpful. Maybe just shifting gears over to cannabis, but staying on the topic of margins. Just wondering how you would expect the margin from today's level to evolve as we eventually overcome the inventory situation and ramp up those sales? And second part is, at what point, do we expect to maybe get a lift on the margins from mix, so the introduction of edibles, et cetera?

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [5]

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We would expect margins to stay the same for the foreseeable future until such time as the supply situation eases, which is by all indications and reports -- obviously, we're not an LP, we don't grow it. But from discussing with the LPs and reading publicly available material, maybe sometime towards the end of this year, the supply shortage will not only ease but become somewhat of a supply -- oversupply situation, which depending on how many new licenses are issued in the jurisdictions, which have currently restricted them, could actually result in lower margins if there's too much competition too fast with a lot of supply to some degree. But we believe and certainly for us, that will be mitigated, as per your question, George, by new products becoming available. We don't anticipate things like edibles and beverages to be big parts of the market for a while, only because they just won't be produced and available. However, things like vape pens, which are extremely popular in America in the states where it's legal, are really becoming the dominant force in cannabis consuming, equally flower, probably in the end of the day will surpass it. And those we anticipate could easily be ready in October or whenever that's made legal. And we anticipate the margins on those products being very, very healthy, which will certainly mitigate any pressure that a pending future oversupply will have. So we think it should pretty well stay where it is and will be moving up by a few points over the next 2 to 3 years per year.

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David Nathan Gordey, Alcanna Inc. - Executive VP of Corporate Services & CFO [6]

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And by where it is today, George, I think, think more around the gross margins we put up in Q4 versus the 23% you would see there in Q1. In Q1, we just aggressively moved out some inventory. We got a good sense after being in the business for 4 or 5 months as to what sells, what doesn't, and we just want to rightsize our inventory. So we're good to go. And we also experimented along the way with driving different promotions and education events. The margin for the remainder of the year will be much closer to what was in Q4.

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David Nathan Gordey, Alcanna Inc. - Executive VP of Corporate Services & CFO [7]

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Yes, 30s -- low 30s.

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [8]

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Yes.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [9]

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That's helpful, guys. Just one last one, if I may. On this IFRS 16, can we just assume this $9 million quarterly impact to EBITDA will remain constant for the remainder of the year?

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David Nathan Gordey, Alcanna Inc. - Executive VP of Corporate Services & CFO [10]

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Yes, that's -- it's going to approximate there plus or minus any changes if we add more leases or get rid of some leases, but that's a good estimate going forward.

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Operator [11]

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Our next question is from Saba Khan from RBC Capital Markets.

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Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [12]

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Just one on the new liquor discount partnership that you have. I know it's early days, but how are you thinking about the rest of your legacy liquor stores and banners? How would you decide if you think it'll be worth it to maybe convert more of those, now that there's a competitor, that's not going to be in the market perhaps in a meaningful way? What's kind of the decision process on whether you keep them to the legacy banner or convert them to a discount banner?

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Paul Reid, Alcanna Inc. - President & COO of Liquor [13]

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It's going to come down to retail fundamentals, Saba, what's the trade area, who's the customer base, what's the competition. When we selected the initial 50, we did a full market review of all of our stores and all of our trade areas and so a lot of thought went into what 50 were going in there in the beginning. Do we have a couple of more trade areas where we think any discount liquor would work? Yes. But we want to get the first 50 through the hopper. And so far it's been extremely successful, been exceeding our expectations as to how well it's gone. And that's one of the reasons we accelerated the convergence in the Q1 period. So we have a couple, but for the most part, I think we are in a good steady state in terms of where the banners are today.

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [14]

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Yes, we wouldn't anticipate too many, if any, of current liquor depots now will go into the Alliance. Obviously, as I mentioned in my opening remarks, there are opportunities from other operators who have been calling us and exploring becoming members of the Alliance. And again, obviously, with Solo and receivership, those assets at some point could be available, and obviously, we would be interested in having a look.

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Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [15]

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And then sort of thinking about your controlled-label products, can you maybe give us an update on how that's coming along across wines and spirits? And then how you're thinking about the rollout of those through these discount stores that you now have? I'm assuming they may be over-indexed there. Just an update on the rollout of the -- that entire strategy?

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David Nathan Gordey, Alcanna Inc. - Executive VP of Corporate Services & CFO [16]

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Yes. Maybe the second part first. Our private-label right now is well under-indexed in the discount stores. As we did the conversion, we were focused on driving traffic into those stores and making sure we capture as much market share as possible. And so we focused on national brands. That's what customers recognize, and they'll recognize a good price on those items. The opportunity in those stores now is as we capture that foot traffic and keep that foot traffic is to introduce them to our private-label items and improve them as a percentage of sales there. So we see great runway there as the summer and the fall come along. And in terms of the program overall, our buying team has been very focused over the last few months in sourcing new products. We did the big conversion in the program last year by delisting a lot of slow movers, the old world wines that weren't selling very well and bringing in a lot of new world wines. And we've continued that, and we're ramping up the program, looking to upwards of double the number of SKUs by the end of the year and into 2020, which will drive sales and more importantly margin dollars.

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [17]

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And especially California wines, which are very popular here in the Western part of Canada. And logistically, it's so much easier to -- there's a lot of wine available in California right now, a lot of wine. So we have a lot of discussions with vineyards directly as well as some agents as well to really ramp up our California selection. And you put it on a truck and it's here in a few days as opposed to have to pull containers and shipping across oceans. So that we're very encouraged with. The other thing I'd just -- back to further to what David said on the discount banner, discount liquor stores even more than our liquor depots are very, very beer-focused. They have big, big coolers and beer is the real driver of their business, which isn't as good private-label market as it is in wine. We do have our private-label beer, which is -- tastes great actually, but it's not as big. Beer drinkers tend to be very national brand loyal. So it will be -- we will use as we have our Don't Forget the Wine promotion on liquor depots where anyone that buys beer, we give a discount on some select private-label wines, which are available at the counter. We sell from the counter. And that's been very, very successful. So it's people who are thinking they were only coming in to get a beer and get a case of beer, 6-pack, and then we give them a discount on wine right at the till. And we'll probably move a program like that into the discount banner because it sort of fits the market.

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Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [18]

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All right. And then just a follow-up there. I guess, the focus there on expanding, it's still, I guess, primarily on the wine side versus doing more in spirits? Or is that just the opportunity right now in front of you with regards to, I guess, the California wine that you referred to?

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [19]

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Yes, the biggest opportunity is wine, both in terms of percent of sales and margin opportunity. And so the team is very focused there. There's still a great upside on the spirits, but that will come. We already have a decently robust program. Filling it in and filling in the gaps and the price points and selection will come later once the wine program is well on its way to growing.

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Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [20]

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Okay. And then just on the cannabis side, you called out a bit of a drag on operating earnings for the remainder of the year, at least for the next couple of quarters. I guess, is that based on some sort of breakeven sales on? Are you able to just broadly share what level of sales you're thinking you need to hit to on the cannabis side to get that margin to be positive? And then just the second part of that is, how is the leasing environment looking like in Alberta? There's a bit of a downturn there. Were you able to secure some favorable rates as you look at flagship liquor stores or new cannabis stores?

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [21]

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So primarily, the -- I call out a drag on earnings of $1 million to $2 million per quarter. Primarily all of that is driven by the fact that we are sitting on some real estate that we signed up last year before the license freeze. The stores that we have today are profitable, decently profitable, and it's covering the overhead. But for the most part, that drag is just from the stores that we have not opened yet.

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David Nathan Gordey, Alcanna Inc. - Executive VP of Corporate Services & CFO [22]

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Yes. So it's really not so much of sales. The stores are doing very well. We sell everything we can get. We -- as I mentioned, we sell out. So it's not an issue of the stores. We have great locations. And the sites that we are continuing to hold and wait for our licenses to come, which is in turn waiting for supply to come, they are also great locations, which is one of our -- core strength as a business is our relationships with national landlords and our ability to get AAA sites and grocery-anchored malls as opposed to little one-off corner stores, which some of our so-called competitors have had to take. So it's worth the wait. And we could have tried to sublease or whatever. We did not pay crazy cannabis rents for the stuff we signed up, by the way. Again, that's just the nature of our company versus the other people who are attempting to get into the business.

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Operator [23]

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Our next question is from John Zamparo from CIBC.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [24]

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Maybe we start on the liquor side. With one of your competitors in creditor protection now, what do you expect to happen to these stores? Do you think there will be reduced square footage in the market? And do you expect competitive conditions to ease at all?

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [25]

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Hard to predict the future, John. Don't have a crystal ball. We have certainly let the receiver know that we'd be interested, and we're -- kind of obvious, and they would have known any way that we'd be interested in looking at the -- quite a few of the Solo locations, many of which actually are in trade areas that we're not in as well as obviously the ones that were problematic for us prior to what happened last week. So it's hard to know. I would say -- I would doubt too many will go dark. Most of them somebody will buy. They have a large number of locations that we wouldn't touch with a 10-foot pole, which is one of the issues, I believe. None of my business, but how they got maybe into the situation they got into. So I think there were some 60-some-odd operating at one point late last year before they started to close some, another great many leases that they have signed. So -- but those probably won't end up being liquor stores. Just having a strong and now clearly what must have been -- not strong, but having a large and what clearly must have been increasingly desperate competitor no longer there, can't -- you would hope can't help but be a portend of better things to come and more rational pricing.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [26]

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Okay. Understood. Maybe a follow-up on the prior question about pricing and gross margin. Some of the strategy on discounts is to ratchet up pricing over time. Is there a few of the consumers either just refuse to pay any increases or that other discount players hold the line on irrationally low pricing? Or is the bigger driver to achieving a higher gross margin through mixed shift in private-label?

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [27]

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The latter is definitely going to help. As we improve private-label in there, that will allow us to be competitive on the national brands. But I do think that there's a desire in the marketplace to price a little bit more rationally going forward. I think all of our competitors see what happens when you price irrationally. You just can't drive enough business. So is the discount segment of the market going away? No. Is the discount segment at a mid- or a low-teen gross margin going away? I hope so. I hope people realize that you can't make money at that level.

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David Nathan Gordey, Alcanna Inc. - Executive VP of Corporate Services & CFO [28]

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Yes, well. And if it doesn't, because people don't understand economics, it will be -- and we've seen what happens to someone who didn't understand economics. It goes away because you can't pay rents and staff, [in those amounts] it's not sustainable. And it's now been proven.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [29]

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Okay. Understood. Last one on liquor. Are you able to say what the discount stores provided in terms of the Canadian same-store sales number versus, say, renovations or general pricing?

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [30]

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Yes, I think we called out, obviously, in order of importance as to what drove the same-store sales. A good chunk of it in from the conversion to the Ace discount banner. But I also note in there that Liquor Depot and Wine and Beyond had a good quarter as well, and that's with the Easter shift. Easter, we lost about 1.4% of same-store sales there. So they're performing decently well. And renos, we're very satisfied with where they're coming in right now.

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David Nathan Gordey, Alcanna Inc. - Executive VP of Corporate Services & CFO [31]

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Yes, the Alliance stores probably would have been even a greater contribution. But obviously, when you're renovating them and changing the banners, some of them are closed for only a few days, some of them are closed for up to a week, and then you've lost all that. But then -- but we got it all behind us, decided to get it all out of the way in Q1, take the hit and get them into the marketplace.

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [32]

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They will be a significant contributor to same-store sales growth in the next few quarters now that the vast majority of them are online for a full period of time.

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David Nathan Gordey, Alcanna Inc. - Executive VP of Corporate Services & CFO [33]

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Yes.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [34]

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Okay. That's helpful. Maybe you can shift to cannabis. Beyond the lease cost that you mentioned, David are there any other onetime items in cannabis that would be considered preopening costs or would you say you're overinvesting in labor at the moment just to ensure that you've got enough people to educate consumers? Or is the 4-wall EBITDA margin kind of where you'd expected to be at this point?

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David Nathan Gordey, Alcanna Inc. - Executive VP of Corporate Services & CFO [35]

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There's no onetime items in the quarter. And I would say that we're still slightly overinvesting in payroll, but not to the degree that we were in Q4. We rightsized our operating team here to reflect that there is only 5 stores and likely not that many more coming for a few months here. And so our 4-wall EBITDA coming out of the business is pretty good. No concerns there. It's really just the drag from the real estate that we're holding. And frankly, we see that as a good investment. We have much better sites than everybody else from what we can tell, and so willing to make that investment for the next couple of quarters.

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [36]

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Yes. And when we open new stores, like the one in Toronto, we overinvest in for the first month or so. We'll overinvest in people to make sure transaction flow is fast, which it is. We don't have lineups, not because we don't have customers, because we're -- that store is so incredibly efficient at processing transactions and great service, but still getting people in and out. Our average transaction time there is 3 minutes and 30 seconds, which is excellent from the start of the order till paid and out the door. So that store was designed for speed and to handle high volumes, which obviously it will enjoy until their competitive situation changes. So -- and we have 3 new licenses coming on that we got on this latest opening up here in Alberta, which we will -- we probably could open next week, but we're going to wait a few weeks just to build inventory up. Orders each week are so small that to open in a new community and be run out in a day or 2, we just don't think that's a proper way to introduce our brand to a market. So we will build the inventories up for a few weeks until we finally have enough, so we can at least stay open for a week -- or not stay open, to have probably always stay open, but to have product for sale for a week or 2. And then we'll go back to what everybody else does is you get what you get every week and hope to last as long as you can.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [37]

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Fair enough. Last one from me still on cannabis. I think you said 7 to -- sorry, 10 to 15 additional cannabis locations in Alberta by the end of this year. You mentioned you don't have a crystal ball. But is it fair to assume that the majority of those are coming in Q4?

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [38]

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No.

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David Nathan Gordey, Alcanna Inc. - Executive VP of Corporate Services & CFO [39]

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Yes, we don't have a crystal ball. [SPLPs] when are they going to get product in here. Yes, but we definitely are going to build out some of our better sites that we know are higher in the queue than lower. And so that's where the 10 to 15 come out. They are just sites that will always do very well for us. And so if we can slowly build them out at decent prices, that's what we are going to do between now and the back half of the year. How many licenses we get for those stores? I don't know. I sure hope it's in that number. We'll see.

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [40]

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Yes.

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Operator [41]

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Our next question is from [Joe Rubbo from Kiwi].

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Unidentified Analyst, [42]

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My first question is how much does it cost on average to build a cannabis store?

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [43]

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The current ones we're building now in Toronto was about $400,000, $450,000 and then depends. The liquor store -- investment in a new liquor store is the build-out cost and the inventory. And in cannabis store, unfortunately, you never know what the inventory is going to be. We wish we could invest more, but we can't. So it's probably maybe $500,000 all-in depending.

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Unidentified Analyst, [44]

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Okay. Can you add some color to this agreement with lottery winners? Is it something you see happening more and how does it work?

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [45]

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Well, it's really a question, I guess, for the Ontario government at one level depending on how they want to maintain. It's their rules. So we followed them. We have an arrangement where the lottery winner, and in our case, is someone named Heather Conlon. She is the owner of the store and licenses our name, and we provide her with financing and operational support and expertise because she and her husband are successful businesspeople that were actually suppliers of ours in our liquor business. They have a company, which makes safes and security systems. But they did have no retail experience, so -- which we have in spades. So it's really just an advisory and we help. And then we have an arrangement with her that if and when rules change, including as early as December when these lottery winners are allowed to transfer their licenses to others, which they're not right now, we'll have arrangements that we can take it over fully if we choose or if she chooses to exit at that time. So everyone's, I'm sure, is a little different. We only know the one we did. But it's -- whether we would do others -- we've been -- we get calls almost every day from someone who has won one of them and is -- hasn't built out yet and is looking for support and partnership and from people who are next in line on the waiting list and the almost lottery winners. But I don't think the government has even announced whether that's who the next group will be or whether they're going to start again. Or it's just too uncertain. We don't know. Until the government says what they -- how they're going to choose to do the next batch and when, there's -- we will just operate the one we have.

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Unidentified Analyst, [46]

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All right. Sounds -- did they ever do this kind of thing in the States, these lotteries? Or is this Canadian?

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [47]

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No, no. It's all made in Canada. I'll be quiet so I don't get in trouble.

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Unidentified Analyst, [48]

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Okay, great. Next, my last question here is -- and I know maybe you don't know the exact answer. But why do you think the LPs can't fly enough cannabis? Like, I'm really surprised that with the small amount of stores, there's still a huge, huge supply issue? Like are they having trouble growing the plants, getting quality out? I see inventories building up in their companies, obviously, for maybe for extraction. But what are your personal thoughts here on that?

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [49]

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Well, it's really not our place to comment. That's somebody else's business. You'll have to ask them. There's lots of rumors, lots of theories of what's -- and I'm sure like most things in life, it's no one thing. There'll be all sorts of little -- all the rumors and the theories are probably partially true or true to for some -- to some extent. It's also -- it's early days. This is all brand new. Plants are plants, and they're difficult to grow on huge scale. And trying to get their strains right and balancing the needs of their overseas commitments, domestic commitments, medical businesses, there's just a lot for them to do. And I think they're -- hopefully they're -- especially with some rules and better cooperation from government, especially the federal government, to streamline and help boost our domestic Canadian-based LPs would be great to build a business here -- a world-scale business and keep the lead that we in Canada have maintained. But as to the details of why every week we get so little cannabis, I wish I knew the answer and could tell somebody because we don't.

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Operator [50]

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Our next question is from Chris Amos from BCM Research.

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Chris Amos, [51]

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My question was on the 3 stores in Alberta that have been opened. So that was answered. Now I'm just curious how you can be pessimistic on potential supply of weed dried -- bud given that your 25% shareholders are going to start a big greenhouse, 800,000 square feet should be operational, you're guiding 25,000 kilos in Q2. Could you comment?

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [52]

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Sorry, I'm not sure you just want to know -- maybe just -- could you just ask that again a little bit? -- I've just been -- not sure -- want to make sure I know exactly what's your interested in?

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Chris Amos, [53]

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Okay. Well, Aurora, which still owns around 9 million shares.

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David Nathan Gordey, Alcanna Inc. - Executive VP of Corporate Services & CFO [54]

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Yes, they're 25% of our shares, that's correct, yes.

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Chris Amos, [55]

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Yes. So they are on the news. They are publicly saying Aurora Sky will be operational. They are guiding for profitability in Q2 based on and producing 25,000 kilos a quarter. So given most of the retail market in Alberta is dried flower, the same as in most other provinces. Wouldn't you be a little more optimistic that you'll be able to fill these 8 stores you have in Alberta?

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [56]

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Well, whatever is available is available. We don't buy from Aurora or anybody else. We buy from the government, like all retailers do. And the government only has to offer us whatever it is that the LPs ship to them, being the government of Alberta is the one you're referring to. How the LPs determine what they ship to the Alberta government versus the Ontario government, versus Quebec, versus anywhere else, versus Germany, versus the medical system, that's -- you have to ask the LPs. That's not our business. We have no control over that. And Aurora does own 25% of us. That does not give us any access to their product. They are only allowed to sell it to the government, and we can only buy it from the government.

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David Nathan Gordey, Alcanna Inc. - Executive VP of Corporate Services & CFO [57]

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And we are optimistic about supply as the months and quarters go on. It's -- our view of the world is it is today, which is the lack of supply.

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [58]

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Yes. As I mentioned, we anticipate oversupply -- significant oversupply probably as early as right around a year from now.

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Chris Amos, [59]

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Absolutely. I've been talking about that for 2 years. But this whole shortage thing is in the media, it's not well understood. There's several pinch points between the grower, the processor, the provincial DC, the stores. Obviously, there's not enough stores, there's not enough processed bottled product. But we expect a lot of dried cannabis. A lot of extraction-grade perhaps should be hitting the market in the next 3 to 6 months. Do you agree?

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [60]

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That's -- we're -- it's not our business. We're retailers.

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Chris Amos, [61]

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It's always good to have 20/20 vision all around your head. So...

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [62]

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Yes. I hope you're right.

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Operator [63]

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Thank you. This concludes today's question-and-answer session. I will now turn the meeting over to Mr. Burns.

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James Franklin Charles Burns, Alcanna Inc. - Vice Chair & CEO [64]

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Thank you, operator, and appreciate everyone who dialed in and your interest in our business. And we will speak to you again in August. Thank you.

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Operator [65]

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Thank you. This conference call has now ended. Please disconnect your lines at this time, and we thank you for your participation.