Alcanna Inc.

Stephen Bebis - President & CEO Matthew Rudd - SVP & CFO

Operator, thank you so much. Good morning to those on the line, and thank you for joining us on the call today.

I'm here this morning with Matthew Rudd, 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 any questions you may have. Overall, I was pleased with the level of profitability delivered by the team this quarter, we continue to battle through a soft economy and unusually radiant cold weather in Alberta, where we had about 70% of our stores.

We also faced ongoing competitive pressure in Kentucky which negatively affected -- impacted our same-store sales this quarter in the U.S. That said, we were able to increase our operating margin and operating margin as a percent of sales compared to last year, to careful management of our gross margins, optimization of our retail pricing, and promotional and careful planning of our promotional activities.

We also continued to grow and invest in our preferred private label programs involved wine and spirits. We also tightly managed our operating and administrative expenses and worked hard to reduce our working capital investment, to improve our inventory turns this quarter.

I was also pleased with our -- that total sales continue to increase as a company; we continue to be a growing enterprise. This was the result of a new store sales growth and the re-opening of our Fort McMurray store after the evacuation of that city last quarter and sales from the two new stores acquired in New Jersey in the first quarter.

I am also very excited to report that we officially opened our first liquor market location in Norwalk, Connecticut on October 20. This marks both our entrance to the Connecticut market and a very -- which is going to be a very strong market for us in the future; and the launch of our Liquor market brand.

We are very excited about this brand; it is one that focuses on an experience that will inspire our customers to discover and unmatched selection of beer, wine and spirits to celebrate any occasion. The new liquor market spelled L-Q-R-M-K-T brand will be used for our future new store openings in the northeast of the United States.

We are encouraged by the early results of our first liquor market location. I will now handover the call to our Chief Financial Officer, Matthew Rudd, who will walk you through the third quarter financial performance and then I'll be back with you after Matthew's presentation.

Thank you, Steven. In the third quarter Liquor Stores recorded sales of CAD208.8 million, that's up CAD14.6 million or 7.5% from the third quarter of 2015.

Our same-store sale in Canada was down 2.1% this quarter. In B.C.

we were up but in Alberta that's where our miss was derived from, where we were battling through a soft economy and weather over the summer was unusually rainy and cold, that impacted our beer sales and overall customer count in the province. Or same-store sales in the U.S.

was down 1.2%; Alaska's same-store sales were roughly flat, and like Alberta they are dealing with economic pressure from lower oil prices as well. In Kentucky, our same-store sales declined for the same period last year and that market is dealing with increasing competitive pressure and we're also negatively impacted by a county that moved from dry to wet, which reduced the customer count at one of our larger retail locations in that state.

Gross margin percentage was 25.3% as compared to 25.7% for the third quarter of 2015. The negative impact on our gross margin percentage was the addition of Birchfield's high volume discount stores this year.

With Birchfield removed, our gross margin percentage actually had a moderate increase and that was due to a shift in mix away from beer sales which attract the lower gross margin rate than our other categories. We have been also carefully studying and adjusting our retail and promotional pricing strategies in markets like Alberta, Alaska and Kentucky, have become more competitive with pricing.

Our operating margin was CAD12.6 million, that's an increase of CAD1.7 million from the same period last year, and our operating margin as a percentage of sales increased to 6% compared to 5.9% a year earlier. The increase in our operating margin was as a result of our focus on optimizing gross margin percentage, careful control of our operating and administrative expenses, and the incremental operating margin picked up from the two New Jersey stores we acquired in the first quarter.

In the third quarter we recorded net earnings of CAD4.6 million or $0.16 per common share, that was an increase of $400,000 compared to the same period last year or roughly a $0.01 per share. With that summary, I refer you to our news release and management discussion and analysis for further details on our third quarter operating and financial performance.

I'll now hand the call back over to Steven.

Thank you, Matthew. You know we can't control oil and gas prices but we can't control what we can't control, and we can't control the cold weather that we had in Alberta which was historic -- I think 50 years historical, the worst summer in history.

But we can't control expense, we can do our best to control margins and our promotional activity and it paid off in the third quarter. So kudos to our team who were -- who did a great job of delivering the results in spite of the headwinds that we had in the third quarter in our business.

So our focus now is this fourth quarter, very important quarter for our business, and with all hands on deck and hopefully to have a successful holiday season. Also our focus now shifts to completing our remaining store renovations.

This year we have it done by the end of this month. We approximately invested about $2.5 million of renovations even despite the headwinds and we continue to see strong sales growth after finishing the renovations, between 15% to 20%, for example, we just finished-- re-opened one of our stores here in Alberta -- a store that's been around for 20 -- maybe 15 years.

And we had a 30% increase in the first two to three weeks same-store sales. So I look forward to completing even more renovations next year because they work financially, and they provide a strong return on capital employed.

More importantly, these renovations give us an edge to protect our competitive position in markets where competition continues to increase. We're going to try to spend more money on renovations next year than we have in the last couple years, we know it works.

We will continue to fulfill our commitment to be excellent stores of our shareholders capital; we are here to deliver short and long-term shareholder value. We remain positioned to deliver on our strategy of measured growth in the near-term, while also continue to evaluate and assess potential acquisition opportunities to augment this growth and create additional shareholder value.

So I'll now hand this call over to the operator for our Q&A period. Operator?

Hi, this is David [ph] filling on behalf of Sabahat Khan, on how are you. Therefore, on a same store basis and at the corporate level we saw some cost reduction that helps you this quarter, is there more run rate for cost reduction initiatives in these areas over the coming quarters.

Yes, it is something we continue to focus on and how focused on all year, we have been pretty aggressive in and targeting out vendors and landowners to partner. And everyone realizes economic situation we've been in here in Alberta and we found that our key vendors in my handlers are receptive to that and in some cases have given us temporary relief on our pricing, others we've renegotiated long term contracts.

And that is endeavor that will continue to attack and make progress as the year unfolds into next year. And that still a bit of room and still an area of focus for the national team.

Yes, and I would add to that we do have increased pressure for minimum wage, we're going to be facing soon about the NBC and Alberta, so that we're working on finding ways to be more productive from an operational standpoint at our store, they will absorb some of those other wage increases. So we are working very hard on productivity and our operating team is very engaged from our trash pick up to brakes armory picked up, to finding ways to do more things efficiently at the store level.

So we can pay for these wage increases, obviously eventually hope that retail pricing will move up to accommodate these wage increases, but it is going to be a gap I think in that timeframe. Also, we're finding ways to schedule our associates more efficiently, so we are working very hard on scheduling and payroll management.

And that's an ongoing exercise.

Okay, that's great, thanks for the color there. And then just looking at British Columbia, regarding the regulatory change that took place there sometime back, that allowed grocery stores carry alcohol.

Have you seen a higher level of competition there because of that and what's your outlook for how that could impact you in the region going forward?

Sure. It had no impact on us yet; it's only six grocery stores that have VQA [ph] wine only.

So that BC VQA wine, so it it's a misnomer that all grocery stores carry wine and beer. And it's only six likely to have been granted that a very difficult process to get those licenses in BC then government -- the provincial governments in favor of allowing grocery stores to carry the VQA wines, but the municipalities have the control and they have not been granting licenses, that they feel they have enough alcohol distribution in those jurisdictions.

So it's been an uphill battle; more they're added, more VQA wines will be added. And so you know there will be some pressure for us but the economy there is no good.

And it really haven't seen an impact, our numbers look good in BC and continue to do well and we see more growth is in BC next year as well. The only impact we've had negatively, I would say would be some of our beer sales because the government's stores now consult cold beer.

Which they never had before so we had as a private retailer we had we were the only guy who could carry cold beer now they are allowed to carry cold beer. So obviously our sales sometimes softer, in some in some stores but overall, we are very pleased with our business in British Columbia, and we like to continuing invest in British Columbia we're looking for ways to do so.

Great, thank you, that's all for me.

Hello guys, this is Ben I am on the call for Derek. First off, just regarding the situation in Kentucky; do you have any expectations for counties moving to wet status, that are directly surrounding Jefferson and Fay [ph] counties.

We don't see any changes that the big change that we went from wet to dry without a bald green. And so -- I see there's a big trend in America to getting rid of these dry counties and going wet, the municipality are finding that it's a great way to collect taxes.

And so, by keeping the district in their town, it creates jobs and creates tax slow, I don't see it getting any better I see more counties going wet like I live in Massachusetts and I live in a town that you dry towns been a dry town for over 100 years and it just went wet, just a few months ago. So I don't see any relief from that wet dry issue.

All right. Second, are you guys still of the view that you're planning on bidding for opportunities in Saskatchewan?

Yes, Saskatchewan is a wonderful -- would be a wonderful addition to our business, so we're very engaged there. We have filed all the RP documents on time and in depth.

And we think we could -- we like to open anywhere from a minimum of two to eight stores in that market. And we think it would be a really good market to add to our portfolio, but we will wait and see here but we're will wait to hear back from the government have announced, any final winners of the ERPs so we're just waiting to hear from them.

I know that behind its just natural way behind in terms of getting that t out. And they're overwhelmed lots of lots of applications.

So as they get through I'm sure they'll let us know when they're ready hopefully soon.

All right. And just a further on that, when they do make that announcement what do you think the timeframe is for executing it.

So for Saskatchewan, I think of the ERP said we need to be opening next year I believe 2017 I believe. On the first phase, I think we committed to open next year, so we have our sites selected.

We've made the lease arrangements with our land loaners, are ready to go. So all we need is the license.

All right, thank you.

Good morning. Can you give me a little more color on your private label program, new names or anything new that's happening on that front.

Private labeling in line continues to outperform our expectations. We are way into the double digits in terms of our percent of wine business.

We started at nothing just three years ago, three and half years ago. And we have some stores that are up to 40% of their businesses and our private label line.

So it's doing well for us it's really helped us manage our business during this downturn. And deliver possible sales.

So I'm very happy with the performance of our team. And putting those great lines together.

In fact last night out we tasted 70 wines from France that we just brought in beautiful Bordeaux [ph], that is delicious for CAD24.95 [ph]. I mean you think you're drinking a $75 French wine.

And so we continue to roll that out and hopefully customers enjoy the wines. And they're telling us with their -- with their footsteps and the dollars that they like them to come back to buy more.

Our private label beer; a river valley has been a great success for us, continues to be accepted by our customers here in Alberta. Our spirits -- spirits started with less than 1% of our business in private label in spirit and it is growing now that middle single digits, we have a terrific spirits private label team we put together.

And that continue to deliver great product to us. So we're very excited that our investment in private label continue to invest our resources in that space.

Okay, great. You alluded to future store openings in the northeast U.S.

any color on that?

Well, we have a site Massachusetts that we have an open Jack and that they were trying to decide what the timing on that, and so we're still looking at that, you want to get Norwalk on drop belt and we've done that. We like Connecticut and would like to continue investing in that state, so we're all hands on deck with our real estate team in that market.

And we're actively looking on the fact that I will be there a couple of weeks myself looking at some potential locations and existing retailers, we like the Connecticut market a lot for us and the wangled [ph].

Great, thanks very much.

Hi, good morning. I just want to talk a bit about the U.S.

EBITDA margin progression this quarter, obviously loading you cited some operational factors that would have impacted the top line I'm just wondering if you could speak a little bit more to the margins per ratio should expect going forward there.

Yes, you are talking about the margin pressure in U.S. is that we're talking about.

Yes, the first couple quarter of the year obviously with the addition of Burchfield you're saying you know really strong growth that did sort of dial back that this quarter, I just wanted a little more color there.

Burchfield that which is the Joe Canales acquisition. Has historically been running to 300 basis points less that our average in the U.S.

there more of a discount operation, they did very well there, sales line per store the highest in our portfolio, we are very excited about their business and their operation. Though we got to do such high volumes and lower margins which worked for them.

It lowered our average margins in the U.S and so as of rate as a percentage it have an impact. Also we got a little more competitive.

And Kentucky and Alaska to maintain market share. And so we're trying to find the right balance between margin and sales in those markets and I think what they are now and so our pricing optimization very important there, and we will be managing our market very carefully going into the fourth quarter.

Okay, just on western Canada obviously you've got one large grocery competitor [indiscernible] who are under some pressure and with food inflation slowing it's impacting the broader grocers. I'm just wondering how you're seeing or how you expect to see the main line grocery to participate in the market how they're going to treat that business going forward, as like a little bit more difficult for them to.

While up everybody in Alberta here is under competitive pressure obviously, and I think the grocers are pretty professional managers. And they are very careful to control their margins and so it become more competitive for sure.

I really can't speak for them, I don't know what their strategy is in liquor and this province. But I can tell you we get up every day as CEO of this business, I get up every day and I think about liquor retailing every single day, that it's my job as CEO.

And our management team is very engaged, our margin optimization here in Alberta. And we do that to special LTO bridge buying special buys, private label, improving our staffing in our stores.

It's the one thing I can say we have an edge over on all our competitors in Alberta. We have the best sales team and the best staff in our markets.

I'll put our customers and our employees against any competitors in Alberta or in any of our markets, so I think that gives us an edge as well.

Okay. And then just longer term, obviously the company has been built through a series of acquisitions over time and there has been some trimming of the store base here and there.

I'm wondering, given the economic outlook there, there will be more consideration to what you think potential for rationalization of the footprint going forward?

It's something we'll continually assess, how both in real time and we're in the middle of long-term leases. But then certainly as leases come up, we're always looking for opportunities to either consolidate the store fleet which is an example we have done in one of our new stores we opened in 2014, where we had three stores within fairly close proximity closed down, moved one of the licenses over, built a new 12,000-square foot store that does more top line than all three of them combined used to do with a much smaller cost base.

Looking for creative opportunities like that, looking at stores that are not achieving performance in-line with our expectations, we always will look at rationalizing the size of the fleet to make decisions store by store and it's something we continually monitor and refresh all the time-- both our renewal opportunities and in middle of leases. We'll continue to look at that, Al [ph], but be careful not to overreact.

We're in the midst of a significant recession in Alberta. We're looking at long-term potential of new sites and stores as well.

And I think, Matt, we covered most of our docs, over the last few years?

We've been actively closing stores over the last couple of years-- stores that went through without a recession, just weren't performing up to our expectations and weren't to good use of company resources and operating. We've been able to redeploy, reposition and we're happy with where we are, but it's something we'll continually look at.

All right. Thanks for your time, gentlemen.

Steven, I wonder if you can give us your vision of the stock the next three to five years. Are we going to have a high-yielding dividend stock, or are you going to use the cash flow to grow in the States?

What can we look for in the next three to five years with your vision of the stock? What do you want to look like in the marketplace?

Wow. I'm a major shareholder.

I'm a shareholder myself and my long-term incentive program is tied into the shares and I'm very much aligned with our shareholders. Our compensation program is also tied in to these other share price outlook.

I can't predict what the share price is going to be. All I can try to do is deliver shareholder value by making decisions on behalf of our shareholders to increase the value of our company.

And the higher the share price goes, the more money I make, the more money the management makes, the more our shareholders make. What would be helpful-- and I don't know if you could help me with this-- is get oil and gas prices up.

If you look at our stock price, you can see a direct correlation between the graft of oil prices and our stock price. And so I can guarantee, if you can get oil up to $50, $60, $70, you'll see how our stock price pop.

Sorry, Stephen. I'm not so concerned about the stock price like the direction.

Are we going to take cash flow and direct it to dividends? Are we going to take cash flow and direct it to growth?

We're going to take cash flow and direct it to growth and investment in our business. We cut the dividend by 67% earlier this year.

I think it was a bold move by the board and the board freed up that cash flow for us to remodel stores. The board was really scrutinized at that dividend and agonized over it before they made that change, but it gave us the capital.

They saw that we're using the capital effectively and we'll get an excellent return on that capital. That's where we stand today, but I think it's a 3% yield at this point.

Yes. It would be in the mid to high 3%.

The one thing I'd be careful about is when you're looking at our cash flow position today. We've talked on length about the economic conditions in Alberta which certainly won't be permanent.

They'll rebound and as more cash flow comes available, we plan on reinvesting that cash flow and growth both in near term and long term creation of shareholder value. It's something we'll not be shy about doing because the way we've deployed that capital it's been working, we've had great real leads on that use of capital.

So we'll continue to invest, continue to grow. It's not something we've shied away from in this recession.

We've been careful in not over-leveraging in this environment. The ones we see the economies and our key markets turning, you'll see that investment wrap up.

I think, Matt, our capital structure now is put together to look like a growth company-- more of a growth environment as opposed to we had over 100% payout ratio in the past. I think we're better-positioned now than ever from a capital structure to continue to invest in those stores.

Okay, thank you.

Thank you.

Thank you very much for being on the call today. We'll continue to do our best to deliver shareholder value and we look forward to talking to you after the holiday season.

Have a great holiday season. Thank you.

Cheers.