Alcanna Inc.

Stephen Bebis - President and CEO David Gordey - Senior Vice President and CFO

John Zamparo - CIBC World Markets George Doumet - Scotiabank with Scotiabank Marc Robinson - Cormark Securities Sabahat Khan - RBC Capital Markets Trevor Johnson - National Bank Financial

Thank you, Operator, and good morning, and thank you for joining us today. Joining me on today’s call is David Gordey, Senior Vice President and Chief Financial Officer, who will speak later.

Assuming you have all read our new release, we will keep our prepared remarks on our second quarter results brief. After our comments we will be available for any questions you may have.

Overall, we are very pleased with our second quarter results. We are -- I can’t say strong Q2 last year, yet, we increased total sales, we increased same-store sales, we increased gross margin rate, we increased operating margin and we increased net earnings.

Results are fascinating concerning the strengthening headwind that we are facing from the resource markets in Alberta and Alaska. As you can see by our results, we continue to deliver on our Seven Point Plan and we are doing so with our further investments and head office-related G&A expenses.

In the second quarter, we opened a new convenience-focused store in Canada and completed a small tuck-in acquisition of one 10,000 square foot store in Edmonton. On July 1st we opened two new large format stores in Kentucky, both of which are approximately 22,000 square feet each.

While we are encouraged by the results, thus far, these new stores and the excitement we are generating for our brand with our customers, we remained on track to open at least another 11 stores in the next 24 months in Canada and three in United States. Based on what we have seen so far we are confident that these stores will provide a superior experience to our customers, but we can’t wait to get them open.

With that, I will now turn the call over to David who will go through our second quarter results in more detail.

Thank you, Stephen. In the second quarter, we recorded sales of $190.6 million, gross margin of $48.9 million and adjusted operating margin of $12.8 million.

During the period we paid dividends of $0.27 per share. In the second quarter we realized an increase in sales of 7% over the second quarter of last year.

We continue to see strong sales contributions from our same-stores and benefited from the positive impact of foreign exchange on translation of U.S. dollar denominated sales to Canadian dollars.

Same-store sales in Canada increased by 2.6% from the comparative period, or we continue to benefit from the changes to our pricing and promotion strategies, and the refinements of in-store training programs. A portion of this increase in Canadian same-store sales was also the result of us raising our retail prices in Alberta to pass on the increase alcohol tax, which went up by approximately $0.22 per liter on March 27, 2015.

This tax primarily impacted beer prices and had a very minimal impact on wine and spirits. U.S.

same-store sales, excluding the impact of foreign exchange increased by 1%, this increase was the result of very strong growth in the same-store sales in Kentucky, but was offset by a decrease in Alaska same-store. Alaska market has been negatively impacted by a decline in oil and gas exploration activities.

However, changes that were need in the previous order to leadership team in the Alaska market, and changes that are being implemented at store level in the current quarter are starting to have a positive impact on our results in that market. Adjusted operating margin of $12.8 million for the second quarter was up $2.2 million compared to the prior year.

This increase was driven by a 9.3% or $4.2 million improvement in gross margin, which was a result of increase sales and a 60 basis point increase in our gross margin as a percentage of sales. Note that our head office administrative costs excluding certain adjusting items decreased by $0.2 million from the prior year.

As we committed to on Seven Point Plan, we made investments in administrative costs in 2014 that we are now leveraging in 2015 to grow our overall profitability. Net earnings for the second quarter were $4.6 million, up $1.2 million from the prior year.

Included in current period earnings was a one-time tax expense of $1.3 million related to the re-measurements of deferred tax liabilities due to the Alberta corporate income tax rate increase. On a go forward basis, we anticipate an increase will equate to an approximate 1.5% increase in our overall effective tax rate.

Our earnings per share was $0.16 per share for the second quarter compared to $0.14 per share in the prior year. Removing the impact to the adjusting items including the one-time tax re-measurement, our adjusted EPS for Q2 was $0.22.

On June 30th -- at June 30, 2015, net working capital excluding cash was $112.9 million, a $17.4 million increase from year end. This increase was primarily attributable to the change in foreign exchange on translation of U.S.

dollar denominated working capital to Canadian dollars and because of the ramping of our inventory buys as we headed into the summer selling season and to stock our two new large-format stores in Kentucky. Long-term debt was $124.7 million at June 30th, a $32.7 million increase from debt at year end.

The increase in long-term debt from year end was primarily related to the increase in working capital and finance capital expenditures related to the acquisition and construction of our new stores. With that, I encourage our listeners on today's call to read our earnings press release and our quarterly filings which were released on Friday for more information on our second quarter financial and operational performance.

I will now turn the call back to Stephen for closing remarks.

Thank you, David. In our MD&A, we have highlighted our goals for 2015.

Goals build off our existing seven-point plan and you’ll find that there has been no change in our strategy, just continued execution. We believe this is our fifth quarter we had in a row exceeding our KPIs and improving our KPIs.

So even though we are enthused about our results so far this year, we are not going to be resting on our laurels. We know we have headwinds with the economic slowdown in Alberta, Alaska and so therefore we are focused on keeping up the momentum.

That said, we believe in our plan and we will continue to execute over the back half of the year and not lose our focus. With that, I would like to open the call to a question-and-answer session.

Operator, please provide instructions to the listeners. Thank you.

Thanks. Good morning.

You guys mentioned in the press release on regulatory reform in BC as having an impact. I was just wondering if you could elaborate on this.

Is it the operating hours of the store that’s the big issue or is there more to this that we don’t know about?

Yeah. It’s the operating hours, John.

We’ve been affected, Sunday openings have and few of our stores have affected our business there. And so those stores, our sales are down in few of those stores where the BC stores across the stores has never opened on Sunday since for recently.

So we’re evaluating that impacting right now and then dealing with it from a comparative standpoint. That’s about -- that's about it.

Okay. Thanks.

You commented on the resource-based companies in Alberta. I’m wondering how the same-store sales are performing both traffic and basket in your Calgary and Edmonton markets.

Yeah. I would say we are still -- I’d say our sales and traffic are to be expected for our business plan for Calgary and Edmonton so far.

Edmonton is a stronger market for us than Calgary at this point. But I think the biggest slippage so far in our sales has been in the Fort McMurray area, Grande Prairie, those have been highly good areas.

Still we feel we are performing to plan or close to plan in those markets because we plan for this. But it’s definitely outfield battle in the resort markets.

Okay. That’s helpful.

Last one for me here. Your sales to licensee customers, I know that has been up nicely for the past two quarters.

Can you talk a little about this? Do you see it or is a one-off thing, or is this potentially a meaningful driver of long-term sales growth?

Yeah. It’s a meaningful driver.

We’ve staffed up for that business. We’ve put quite a lot of resources and recollected that business for about three to four years.

About a year ago, we decided to go after that business by supporting it. And cross functionally with support of marketing with added staff, we bought a new team in to build that business and we got great success.

Okay. Thank you.

Hey. Good morning, guys.

Good morning.

Just follows-up on the Canadian comps. Can you give us a sense of how much the growth was customer count versus basket size and generally, how much inflation did we see in the system for the quarter?

Sure. George.

We are not -- not a big charge transaction count because you can play with transaction count anytime. You can run at market below cost and increase transaction count.

So, we focus a lot on average basket and our average baskets improving. And so we are getting more juice out of our each transaction.

And that’s been our success for the last five quarters. In our business, it’s very easy to drive transactions, just lower your price on Budweiser and you increase transactions.

And so that’s why you’ve seen an increase in our margins. We’ve increased our average basket.

That’s what we focus on as a management team. We look at transaction with the KPI.

We don’t focus on it to drive our results. And what’s your second question, George?

In terms of inflation, can you maybe quantify that in the quarter?

Yeah. We haven’t had inflation.

It was formal stuff. We had price increase from the government, tax increase that we passed on to our customers.

It was less than, I think 1%.

Less than 1%.

Less than 1%. Yeah.

Not very material.

It was on a per liter basis, George and so when you think about your wine and spirits, it’s pretty small percentage.

Appreciate that. And just trying to get a sense of the evolution of comps in the quarter here?

Do you we exit around the mid-twos or was it worse, was it better? Just kind of give a sense of where things maybe going?

Say that again?

I was getting a sense of the comp trend in Canada, so the 2.6 or so, was it fairly in all three months of the quarter, was it worse exiting the quarter, just trying to get a sense of the comps or the evolution of that?

It was about the same. Easter shifted on us year-over-year.

Easter was later in April last year versus this year, was earlier and so we started April a little slow just because of last year. Earlier Easter is, the lower sales generally are because of weather but overall it was pretty well steady.

Great. Just one last one if I may.

On the gross margins, obviously, we see some solid private label penetration there. Can you maybe comment on the expectations for promotions to drive traffic?

Are we going to see some of that -- is that going to tick up, or is that going to stay stable, just moving into the back half of the year?

Yes. I would say that anytime that you see the economy weakening in any environment that I have been into my past, backing off our marketing sourcing you can do.

And so, we are going to continue to invest heavily in marketing. And if necessary, you ramp it up.

So yes, we believe in marketing, it’s been aggressive from a marketing standpoint.

Okay. I appreciate that.

That’s it for me. Thank you.

Thanks. Good morning.

I noticed the vast majority of the EBITDA contribution, substantially all of that comes from the Canadian operations, and US operations are actually declining from an EBITDA perspective notwithstanding the same-store sales growth improvements. Can you just give a little bit more clarity on what exactly is happening there?

And maybe just some more commentary on Alaska in particular, what are you doing to improve things?

So if you were to isolate the few regions, Kentucky is up on every metric. Just like Canada, it’s all driving at Alaska, Marc.

And in Alaska, what we’re doing is even though same-store sales are down and gross margin range is holding its own, we are investing heavily in labor up there. We’re turning all of our store managers up there and really improving the quality of them at stores and we are quite excited about that.

That’s going to take a little bit of time for you to see positive impact from financial results. It’s really in labor up in Alaska.

Attacking on labor’s comment, labor is right on in terms of that. Also, we are improving our marketing in that market.

So our markets, we’re fine-tuning that, so that’s important. And last but not least, we are going to be -- we are investing in our store, our assets in that market.

We haven’t really done any major remodels and our stores are really tired, but those stores six, seven years ago, a lot of those -- the originally stores from Liquor in 90s. And we’ve had a little management team up there and our directors up there recently.

And we believe in the Alaska market. We love being there.

And we’re going to continue to -- we got to invest to improve our assets in that market. We just finished market research there.

We just did our complete market research analysis and our customers love us. We have a dominant brand in that market.

We have good market, excellent market share, dominant market share. So we’re very happy about how customers think about us.

We just need to invest a little bit on our assets.

We are taking a longer-term view for the market. So we are making the right investments instead of immediate reactions, Marc.

Okay. That’s it for me.

Thanks very much.

Hi. Thanks.

Can you talk about the progress of the private label that you mentioned that it is doing well and you’re adding some more products? So if you can talk about how many SKUs you have?

And how the wine versus beer stuff performance?

Yes. We don’t talk a lot about that, Sabahat, that’s just kind of a secret, but the Coca Cola formula.

We are doing really well in that business. We are very excited about that, very enthused.

And I don’t want to share the details of that, because I don’t want competition to know it. But I can tell you that we doubled our SKU count in the last six months.

If you walk into our stores, you can easily see what we’re doing. Customers love our product.

We are getting better at it. It’s becoming a more important part of our business.

And we are investing heavily both in resources, timing effort and training at the store level. We just announced a new Bourbon called Longboard, Silverboard, plus Blackboard also one of those.

Blackboard with a nine year Bourbon that has a fabulous bottle, fabulous bottle comes from Sazerac, beautiful bottle, beautiful Bourbon. And so that’s one of our -- I think distilled third or fourth spirit, that’s the preferred label that we’re launching.

So now we’re going down to the preferred side, like beer, we’re very happy with our River Valley. Our preferred label beers, so that’s a PPR price point, they are doing very well.

So we continue to invest time and effort in that business.

All right. Great.

And can you maybe update us on how the implementation of the enterprise user was planning, software is coming along, and are you still kind of on track to complete that by the end of next year?

Yes. We’re on track.

Okay. And one last one, how much of the comps in Q2 were related to that extra bit of sales tax in Alberta if you can quantify that?

The tax increase happened on March 27. We didn’t pass it all on to the customer right away.

We took a staged approach just to manage their expectations around a few things. It turned out to be less than 1%.

Okay. Thank you.

Hey, good morning, gentlemen. Just wondering if you can provide any update on the potential rezoning challenge that might materialize at Edmonton?

There had been some chat with them in media not too long ago.

We have an organization that works in Alberta, it’s called ALSA, the Alberta Liquor Store Association and they’re addressing this issue with city council. Anything else you want to add, David?

I think one thing is the media reports that have been out there over the last couple of months have been primarily inaccurate. This isn’t challenging the 500 meter rule throughout the city.

This is looking at very specific, primarily suburban developments, large scale developments where maybe they’re getting block by a liquor store. So there is very -- there is only a handful of these sites right now.

So, we’re not overly concerned but we’re following it closely and working through ALSA to ensure our interests are projected but overall not overly concerned at this moment.

Great. And in terms of your last management changes, you said there is going to be a gradual process.

Can you just talk about the talent pool there and your ability to find people that you think are good fit for your brand and your franchise?

Sure. We have a great General Manager we put in place.

District Manager, she is doing great, came to us from Starbucks. She has been with us, she is from Anchorage.

She is from Alaska and knows the market well. There’s a street name in Anchorage named after her family name.

She is very, very engraved in that market. Still with us now for how many?

Six months?

Six months.

We will start to shifting it back, improvement in our store team. We were there last week for three, four days.

I was there in that market. I’ve never seen our stores look better.

Our managements team a lot better than it’s ever been. And so, we’re seeing improvement in our business little by little, but we are very enthused about the future.

We’re focusing on improving our business in that market. Look, we took that approach in Kentucky.

We went in there and we focused on it for as about a year and now you can see the results there. They are beating every KPI from the past.

We’ve turned that business around that and now we are focused on Alaska. It’s far away, so it’s like a flight from here to Seattle, which is like a two hour flight that I get on a flight for another four and a half hours and I can be in Tel Aviv but it’s a long way to wait.

So, we’ve got to bring that market closer to us that we kind of collected over the years because it’s so far away, but now we’re focused on it and we’re improving our performance there.

Great. Very good.

Thanks, guys.

Yeah. Well, thank you Operator and thank you to all listeners participating in our call.

Have a great day. Cheers.