Alcanna Inc.

Stephen Bebis - President, Chief Executive Officer & Director David Gordey - Chief Financial Officer & Senior Vice President

Marc Robinson - Cormark Securities, Inc. Sabahat Khan - RBC Dominion Securities, Inc.

George Doumet - Scotia Capital, Inc. Trevor Johnson - National Bank Financial, Inc.

Matt Bank - CIBC World Markets, Inc.

Thank you, operator. Good morning to those on line, and thank you for joining us on the call today.

I'm here this morning with David Gordey, our Chief Financial Officer and Senior Vice President. Assuming you all have read our news release, we will keep our prepared remarks brief.

After our comments, we will be available for questions that you may have. When we spoke to you last, we discussed our Seven Point strategic plan, set, of course, for sustaining profitable growth of the company and help to mitigate the impact of the current economic headwinds that we face in some of our key markets.

We continue to reap the benefits of the execution of this plan, from the enhancements to our senior management team to continually bring us new innovative ideas, to compete in increasing competitive environments, and our investments and training to improve customer service within our private label program to differentiate ourselves from our competition and increase operating margins. As a result, we have delivered a strong first quarter, all things considered, with sound performance fundamentals.

We delivered growth in overall sales, same-store sales and adjusted operated margin. We closed the acquisition of Birchfield Ventures, who operate two high-volume stores in New Jersey and made significant contributions to our first quarter sales and operating margins.

I am also proud of our continued ability to innovate, even in challenging market conditions. In the first quarter, we launched our new partnership with Drizly, which is a program that brings home delivery of our products through their mobile platform within one hour of ordering.

The limited launch of the product has - this product has exceeded our expectations, and we are already looking forward to expanding the program from beyond the Edmonton into new markets. David will speak to our results in detail.

But our strong results, overall, speak to the effectiveness of our strategy and the success of our team in executing against it. We will continue to stay in the course with our Seven Point strategic plan.

It is working. And we will position us - it will position us for success in the current economic cycle and beyond.

We remain focused on being excellent stewards of our shareholders capital and are looking to deploy carefully and strategically this year on our renovations and new stores. And these will be most accretive to our shareholders.

I will provide some further details on these plans momentarily. But first, let me hand the call over to our Chief Financial Officer, David Gordey, who'll walk you through our first quarter financial performance.

David?

Thank you, Stephen. In the first quarter, Liquor Stores recorded sales of CAD 172 million, up CAD 24.6 million or 16.7% from the first quarter of 2015.

Our same-store sales were also up, benefiting from the shift in Easter into the first quarter this year and leap year, adding an extra day of sales, increasing by 1.1% in Canada and 0.9% in the U.S. Gross margin percentage was 25.4% compared to 25.8% for the first quarter 2015.

With the addition of Birchfield's high-volume discount stores this quarter, accounting for approximately half of the decrease in the gross margin percentage due to them being high-volume stores operating at discounted rates. Adjusted operating margin was CAD 3.3 million, an increase of CAD 700,000 from the same period last year.

In the first quarter, we saw a net loss of CAD 1.5 million or CAD 0.6 million - or CAD 0.6 per common share. This was an CAD 800,000 or 36% improvement from the same period last year, where we posted a net loss of CAD 2.3 million.

This was primarily due to our increase in operating margin this quarter, along with benefiting from a gain on translation of our U.S. dollar denominated debt, offsetting an increase in our amortization expense compared to the same quarter last year.

Excluding after tax adjusting items of CAD 900,000, which are summarized under the Non-IFRS Financial Measures section of our MD&A, adjusted net loss was CAD 570,000, an improvement of CAD 900,000 or 61% compared to the prior year. With that summary, I refer you to our news release and management discussion and analysis for further details on our first quarter financial and operating performance.

I'll now hand the call back to Stephen.

Thank you, David. And we are very pleased with our first quarter performance, in light of the economic headwinds we continue to face in Alberta and Alaska.

We are fiercely battling against these headwinds and our competitors every day for every additional dollar, and we will not take our foot off the gas. Like many of you, we have been closely monitoring the wild fires and evacuation of Fort McMurray.

We have seven stores on this market. We have over 50 people employed in the market.

And we're happy - we are very happy today to report they are all safe and are being provided with support they require to make it through this difficult time. Our focus now very strongly in getting these stores reopened.

We know that all the stores are pretty much intact. I think we are sure five of them are; the other two, we haven't got any information, but we haven't got any bad information either.

So, we talked to our landlords, everything seems to be intact and ready to reopen when the market returns. It is uncertain when these stores will be open, but we're hoping maybe in two weeks to four weeks.

The great thing is our management's intact. And they're very excited to get back in the stores to start welcoming our customers back.

And all the workers will be coming into the city to restore and rebuild the city. And so, we're going to be in a great position.

Well, we went through this before in Slave Lake, where we had a store, and we understand that's what happens when the restoration comes in. And it's - it really helped drive our business in the Slave Lake market for a long time during that restoration process.

So, looking ahead, we remain committed to invest in our business, to protect and enhance our competitive position. We'll be very deliberate about how and where we invest the proceeds from our new capital allocation strategy.

We'll begin deploying that capital in the second quarter. We will continue to really scrutinize every penny, every cost in our business.

And we're very, very careful about that. We will continue to invest in store refurbishments, which we have demonstrated is an efficient use of capital, generating significant and rapid returns.

We are still expecting that we will renovate anywhere between 8 stores and 12 stores this year, but could adjust this higher or lower depending how economy continues for the rest of the year. We also expect that we can open about four new stores or seven new stores over the next two years at an estimated cost of around CAD 5 million to CAD 10 million, depending on whether the format is a destination or convenience-sized.

We are currently committed to open three new stores by the end of this year, which include our destination superstores in Calgary and Norwalk, Connecticut, and a convenience store format that we're building now in Lethbridge, Alberta. We're also planning to relocate an existing store in British Columbia to our superior grocery-anchored location.

The company will continue to monitor economic conditions and evaluate plans for the 2017 new store construction schedule very soon. Furthermore, we believe, we may have the opportunity to augment this growth by executing upon selective strategic acquisitions.

These acquisitions will provide us with access to new and growing markets, while diversifying our revenue base. We will continue to evaluate and assess potential strong acquisitions with our ability to add accretive cash flow and create shareholder value.

To summarize, as a result of the measures we have discussed today, Liquor Stores remains much more resilient to the challenging economic conditions in Alberta than ever before. We believe we have the right strategy, we have the right team, we have the right approach to capital allocation to continue to create value for our shareholders.

We have started 2016 off on the right foot with strong financial performance in the first quarter. And I look forward to continuing that momentum for the rest of the year.

I will now hand over the call to Melanie, our operator, for our Q&A period. Melanie?

Thanks. Good morning, guys.

Good morning.

Just a quick update, if you wouldn't mind, on the private label business. How's that going?

Anything you can offer there would be helpful.

Yeah. Of course, the private label business continues to exceed our expectations.

We're well along the way in wines. We've introduced about 155 wines, so far, in the program.

We have another 300 wines, 400 wines planned over the next couple of years. It's doing well, but currently, we have around 2,000 wines in our convenient model stores.

And someday, we'd like to be up to 1,000 wines. So, we've got ways to go.

What I can tell you is that our customers love the product. It's become branded in many of the markets we're in.

So, for example, the number one Pinot Grigio in Alberta is Fioretti, which is our brand. So, we have a great product development team.

We've added to that recently. We build that team up even stronger.

Now, we've entered into the private label program in spirits. We'll be introducing about 35 new spirits this year in the next 12 months.

So, building that program up. And that has helped our margins very much over the last few months.

So, we're doing well, Marc. We're doing well in that business.

Okay. Thanks.

Maybe a question for David here. I noticed there's a big working capital drawn in the quarter.

Just wondering - and I know it's a focus of the company to try and reduce working capital requirement, so any color you can provide there would be helpful. What exactly is going on as the function of the acquisition?

So, over to you.

Yeah. Just a few points there, Marc.

One Easter shifted on us from Q2 to Q1 this year. And so, the - by schedule when we - to our deep size shifted as well.

So, that resulted in loading up on inventory a little bit in the quarter for the Easter period. Two is private label.

We really started to land and bulk up a little bit, and we'll sell through that as we go through the year. The third focus is foreign exchange.

We did start to see two issues there. One, the product that we're bringing in from the U.S.

and Canada, just some inflationary cost that we've been able to pass on to our customers, but that started to hit us in Q1 of this year as the big vendors adjusted their prices. And the last one is foreign exchange, as we convert our U.S.

denominated inventory in the U.S. into Canadian dollars when we consolidated.

That had an impact on working capital. So, four areas there.

We're not concerned, but yes, it is a strong focus of ours to bring working capital down as we go through the year.

Okay. Just curious, of the, what, 254 stores, if capital were not an impediment, how many stores could you still renovate of that 254 total?

Well, certainly, currently, only 13% of our assets are renovated. We're getting such a good return on those renovations.

It's a really surprise with us, in fact, so - and we love to renovate. I think we have the ability with our current team in place to renovate 20, 25 a year.

Certainly, renovating 50 a year, you have to stack up for that. We have to capitalize our business with that, but...

Yeah. I think there's probably 75% of our assets that could be renovated and modernized at a minimum.

And so, that's maybe - probably at or around 225 older stores. And so, yeah, easily, 175 stores to 200 stores could be renovated.

Okay. And then finally here, what did M&A contribute to revenue in that quarter?

So, we had disclosed those sales when we announced the acquisition of being around CAD 47 million mark, Marc.

Yeah.

But - and their profile of sales looks fairly similar to ours, and we disclosed the seasonality in the MD&A. So, you could back into it from there.

And just as a note, we did consolidate 100% of that business into our sales and EBITDA.

Yeah.

Non-controlling interest comes out later in the P&L.

Yeah. Okay.

That's it for me. Thanks.

Hey. Thanks.

Just digging into the U.S. business a little bit, it looks like the trends in Kentucky and Alaska both are worse from the recent quarters.

Can you maybe talk about what caused the uptick in Alaska, and what were maybe some of the challenges you saw in Kentucky this quarter?

Yeah, sure. In Kentucky, we suffered from two basketball teams that are non-perform this year and performed pretty good last year.

If you know anything about Kentucky, the largest NCAA basketball state viewership in the country, United States. And we have two teams, the Louisville and University of Kentucky.

Neither of them made the Sweet 16 this year, they did last year. In fact, one made the final four.

Louisville wasn't in the tournament, because they're banned from the NCAA for a couple of years due to some violations - recruiting violations. This had an impact on our business in Kentucky.

Secondly, we had two huge snowstorms in Kentucky this year. Our stores were closed due to the severe weather, which is very unusual for Kentucky.

Anybody knows it, it's a pretty temperate climate. We got caught in that blizzard that hit Washington, D.C.

last year, if you'll recall, it's in the news. So, suffering from basketball issues.

And one thing I've learned in this business, I've been in it now over three years, how connected we are at sports. I mean, I was just telling our management team the other day, for God's sakes, if the Vancouver Canucks are winning again, the Calgary Flames, get these guys in the hockey playoffs, and we'll make our - we'll make the year.

So, we're suffering from lack of professional support here. So, whatever you can do, anyone on the call, anything you can do that make sure we get a better draft players out here will really help business.

But anyway, that's been the issue. Alaska is, again, suffered from the oil situation there.

And it's a weak market, not a very strong economic market. And so, we're doing okay, where our sales are up from last year.

And we're performing okay, considering we have a really good management team in place there and improving our business. We have ways to go, and still, I'm not 100% happy yet - 100% there, but we're making good progress there.

All right. Thanks.

And just on to the online business, can you maybe talk about what are some of the other markets or cities you're considering? And with online delivery of alcohol if there's any, I guess, on the regulatory side, what the restrictions might be in terms of doing it in Vancouver, West of Calgary anything on that?

Yeah. We like Vancouver, we like Calgary for that business.

So, we're - we haven't announced it yet, but we are looking at those two markets to further expand both e-commerce, which we are now in Edmonton and our Drizly program, which is a very cool program. You order - you've got an app on your phone, the mobile app.

We have a couple of thousands SKUs available online. You go to that app, you order it with the click of your phone, download it to our store, and then we process the transaction in that store, and then we send that driver in our cars to your house.

And right now, we're delivering in Edmonton in 35 minutes or less. And it's a very interesting fun program for people who are having a party or don't want to go out.

I mean, it's kind of a Uber-type technology where you actually see on your phone the car on the way to your house. So, it's very interesting.

It's a lot of fun.

Okay. And then just one last one for me.

There's been some early indications of some court cases about potentially removing interprovincial beers on moving alcohol across borders. Is that something - I guess, it's probably early, but is that something that would benefit you, guys, or what could that mean for you as you operate across a couple of provinces?

Saba, I don't know if it could mean much to us. I guess, it could help us if we could ship to other provinces.

But on the other hand, it'd be also pretty powerful in the anchor ship as well. So, I don't know.

I'm focusing on Saskatchewan right now, Saba. I think that there's an opportunity for us to enter that market.

We're aggressive in that market today. We're really studying it.

We're working with the government. We're all hands on deck, Saskatchewan.

Look, it's not going to be a huge material difference in our business, but it's going to help. And, hopefully, we can open up a few stores in that market.

We think we have a great product for Saskatchewan with our Wine and Beyond stores, our superstores. Put a couple of those in Regina or in Saskatoon.

And so, we're focusing on Saskatchewan right now.

All right. Thank you.

Yeah. Good morning, gentlemen.

Hi, George.

Can you provide us with a bit of an overview on the competitive environment in Alberta? And maybe just a level of promotional response from some of the folks we're seeing out there?

Sure. The competitive environment still hasn't changed very much.

And so, nothing really different to speak of. We haven't seen any major drops by any of our competitors.

And no one's gotten crazy, let's put it that way. We haven't seen any crazy stuff.

We have seen more promotional activity, particularly, in the resource markets. So, you take a market like Fort McMurray or Medicine Hat or Grande Prairie, where you had population leaving.

So, I think Grande - I think, Fort McMurray had lost 40,000 residents in the last year. And so, now you've got the same amount of liquor stores competing for less business with less people, and so retailers get a little bit more promotional.

So, a lot of the games we've made in a lot of our private label programs, we had to spend a bit of it to keep market share. I'm kind of a market share guy.

I do believe that you still have to take care of your customers, because - in order to maintain their loyalty to your business, and you can't screw them. And so, we've been very careful of studying all our prices to make sure that we're competitive and we're priced right for them.

[Indiscernible]

That's all. But I noticed - just a little bit of our promotional, George, than in the past.

Yeah. Thanks.

Thanks a lot for that. Just one more, if I may.

I know it's early days, but just following the kind of scale back of the ERP that you've announced last quarter, is there any metrics or anything that we should be looking for in order to kind of - to give you confidence that we can restart that initiative, maybe...

[Indiscernible] a hell of a question. I'm sorry I interrupted, any more...

No. That's it.

Yeah. Thanks.

We are going to restart that SAP implementation very soon. Based on our current performance in our business, we're feeling more confident we can get it started again, but on a different scale, a little bit slower rollout and a little bit more measured, and more carefully done due to the - our sensitive situation here in Alberta.

And so, we just met with our board yesterday, and we got their support. Let's see if we can get that thing fired up and get it started again very soon.

What I love about that program is reducing our working capital. We now have a lot of cash tied up in inventory.

It's good inventory. I mean it's vodka, beer, scotch.

It's not fashion goods, it's not spoilable foods, but we can turn it better. We have a store that we own today that turns - that has actually no working capital.

They turn almost 12 times a year and right turning, maybe three to four times at best in Alberta, for example. So, if we can get that turns up, we can free up a lot of working capital to do a lot more renovations.

And so, it's important part - it's important thing for us to do is to get that thing started up again. Dave, you want to add any to that?

No. Again, I think it's early days, and we're cautious, but it's a focus of ours to find a way to get program together.

So, we wait for the next conference call and we'll see where we're at. I think by the next quarter, we should have more - next quarter conference call, we should have more details on that.

We're now looking at how to get that thing restarted cost-effectively.

That's really helpful. Thank you.

Good morning, gentlemen.

Hi, Trevor.

When you look at the seven Fort Mc stores, is it safe to assume that the average revenue for a store would be, at least, in line somewhat with the existing community and portfolio? Or [indiscernible] in terms of either store size or store magnitude in those market?

Yeah. No, Trevor, these stores are all convenience-sized format stores, small stores, typical 2,000 feet to 5,000 feet.

I think we have a 1,500 square foot, small store there that does huge volumes, it's incredible. But - yeah, there is.

And we have two of these stores out of that seven, so - and we modeled a store there recently. So, we're very happy with our stores in that market.

But yeah, Trevor, they are reflective of the Canadian average roughly.

Okay. Great.

I know it's early stage, but with the Birchfield acquisition, any kind of learning points, or - I gather that you're pleased with the to-date performance, and it looks like that with your Q1 results, but just any talking points around that acquisition you can share?

Yeah, sure. We had two board meetings with them already.

We managed - we're working very closely with their management team. We're very excited about their management team.

We think they're entrepreneurial, they're engaged with the business. Stores continue to do well there.

And we're looking - we've instituted our private label program and, of course, a lot of people at first suspect about the - why do you want to give us some give us some private label. Try it out, check it out.

So, we sent the wine buyers down in Kentucky. Our wine buyers went to New Jersey, where they worked together, and they bought in the line of 200 cases to 300 cases of private label wine and sold out in two weeks.

And so, now, they're saying, you can't get us enough, how much more can you get us? When can we get more?

So, one of the great things about our acquisitions that will enable - supporting our private label development program into these retails and raise their margins and increase customer loyalty, because you can only get it from our store. So, they're very excited about our preferred label program.

And you like the partnership model, where you're buying the majority interest and so leaving the entrepreneur with obviously a sizable piece of skin in the game. Is that the kind of the MO going forward, when you look acquisitions that's been structured in that way?

Yeah. I'd like it, because - there's two things I like about it.

Number one, we get a management team that's engaged and excited about continuing to grow the business. They know their stores really well.

And they have skin in the game, which I like. And we're focused on Alberta, in Kentucky, in Alaska, in BC.

And now, I've got management team in place for New Jersey that works very nicely. So, I'm very - I like the majority interest.

I like that. But I also like keeping the team in place if we can.

Yeah. And then just last one for me.

You mentioned that you're spending some time looking at the Saskatchewan market. Can you just give us just maybe a few quick points with regards to what that entails going through the process, to actually get clearance to open up some stores and your desired markets?

Yeah, Trevor. It's a political - it's in the politicians' court right now.

But they're - they want to grant some licenses. They have four private stores there now that are doing really well, and customers like them.

There are challenges. The government there only carries 3,000 SKUs in their warehouse.

In our superstores, we carry well over 10,000 different items. So, the selection is difficult.

Staying in stock is difficult. The lead times are anywhere from four weeks to eight weeks currently there for the full private retailers that are there.

So, it's difficult to get product. So, the government is working with stakeholders like ourselves and other customers, who are interested in that market.

It's how to get that distribution and supply chain system right in order to introduce more private retailers into that market. So, that's the challenge right now.

And how do you price the goods, and how do you buy the goods, and then how do they build infrastructure to support private retailers? The same issues we had in Alberta back in the early 1990s.

It took Alberta and the independents here a few years to figure it out. And it's a journey, right?

You're not going to do it from day one, but we'd like to be there. And so, we're trying to help him out.

It's the same type except where the province would be that the court, like the regional buyer for all the stores in that province similar to what you have in the other provinces?

Yeah. I think we put a regional buyer in place in Saskatchewan to get started.

Yeah, I would think so to get helped out. But you know, it's not that far from here.

I mean, it's just adjacent province. And health and medicine have the other day.

And it's amazing in medicine how we do so much business out of Saskatchewan. It's amazing.

It's just only about an hour over the border. And so, it's just a lot of - and we have Lloydminster, which is also on the border.

We have a lot of Saskatoonites, I guess, what they call them, I don't know, shopping our stores in Alberta already. So, a lot of people know us there already.

Yeah. Thanks for the color, guys.

Thanks, Trevor.

Hey, guys. First, on BC, can you talk about the competitive pressures you're facing there?

And also, could we get an update on the regulatory environment in that province? Thanks.

Yeah, Matt. Thanks.

BC is - there's supposed to be, I guess, the way we were positioned is going to be a level playing field. The government was trying to level the playing field of private stores via government stores.

And there's been some improvements, no question, things have helped us since in so many ways. We can now add private label a bit quicker.

We had very difficult time having private label in the province. Now, we can add it.

We had - propagating external warehousing, we now have the ability to do that. But there's - but also, on the other hand, the government has added the cold beer to some of their stores.

They're now open on holidays and Sundays, which has hurt our business. And that market has not helped our business.

And third, there are still some operational issues that we've asked for. For example, we cannot transfer between stores, which is - doesn't make sense to me.

It's an old law. It goes way, way back.

Province is aware of it, They're trying to get that right for us. So, there's still work to do, working with the government.

But, the government is very interested to work with us. They support the private industry, and they're very receptive in trying to help us get through with the bureaucrats to get these things done.

So, that's where we are with the government. In terms of supermarkets, I think there's only been one grocery store so far that has been granted a license to sell VQA wines or BC wines only.

And so, we haven't seen a proliferation of grocery stores carrying wine - BC wine, which is the only thing they're allowed to do. A lot of them have applied for permits and have been turned down by their cities and municipalities.

Under the new rules, municipalities have the right to turn down any licenses that are available to be put in grocery stores. So, the city of Vancouver has not allowed any yet.

And I don't - we don't expect that to happen soon. They think there's enough liquor stores and wine available today.

And so, we haven't seen a proliferation of those. The province has granted, I believe, 22 licenses available to grocery stores to carry BC wine only.

We've only seen one so far. Actually, we have it.

It's a store - maybe there's another one out there. I don't know.

And don't forget, there were 1,200 grocery stores and - well over 1,200 grocery stores in British Columbia. And so, they're a very small portion, if it does happen.

And it's only BC wine at this point.

Okay. And then moving to operating expenses, you made good progress on cost cutting in the quarter.

I'm just wondering how should we think about that for the balance of the year and with Q1 sort of a run rate.

Yeah. I think if you use Q1 as a run rate for the rest of the year that would be a good proxy.

We did take - undertake a number of efforts, as we noted on our press release to reduce cost in light of the Alberta economic situation. And we see ourselves just kind of in a holding pattern for the rest of the year on the cost side.

Okay. On Birchfield, so you touched on this in your comments that they have a lower gross margin.

Is that something structural that we still expect to see in every quarter? And then how do they compare in terms of EBITDA margins for the rest of your business?

On a gross margin front, yes, that is something that we'll continue to blend out and lower our rates for the rest of the year by about 20 basis points or so. They just run high-volume discount-format stores.

And, generally, in our other stores, we're running a higher mix of convenience-format stores, where we charge a bit more for the convenience factor. And their EBITDA margins are running slightly lower than ours, overall, just because of high top line but still a healthy bottom line, but high top line drives a lower margin percentage.

But certainly private label is going to help them over the long term improve their margins.

Okay. And then just one last one from me, if that's all right.

Can you talk about how Easter impacted the gross margin percentage?

Around the Easter, typically, you're selling a lot more wine than you otherwise would be, and so, Easter does pull up the margin slightly, but, again, it's really just one week out of the 12-week quarter, so - and it's only one part of your category sales. So, the Easter is a good holiday for our business but not like Thanksgiving or Christmas [indiscernible], typically just a few days before.

It's a good holiday for our business but not a massive one like some other markets like July 1 or Civic Day. Those are bigger holidays for us.

Thanks. And actually just one more follow-on, I just thought.

How big are the Fort Mc stores?

They average anywhere from 1,500 square feet up to, I think ,our largest is 5,000 square feet.

Okay. Thank you very much.

Fairly - they're small stores.

Yeah. Yeah.

Well, thank you everybody for joining the call. And we look forward to continue to deliver shareholder value.

Thank you so much.