Alcanna Inc.

Thanks, operator. Good morning, welcome and appreciate everyone's interest in our company.

We released our third quarter results yesterday and this will start to sound familiar to people who are regular tuners into our call, but the message continues as its been for the last few quarters we did what we said we would do. And we are growing sales for the same-store even in spite of some tortuous weather in our core Alberta province all summer, coldest and wettest in decades.

Nonetheless, we're still up 4.9%, almost 5%. Same-store sales, total sales 26.6%.

Our BC market remain strong and Alaska equally so with some great opportunities for the future. In Cannabis our same-store sales don’t really have same-store since we're lapping one week over a year and nothing in the third quarter, obviously.

But we're extremely pleased with how our -- the narrative which we have been explained to people for a year now that our strategy in Cannabis was to open great locations and only great locations and only when there was product and supply to make sure those locations did well and that has proven to be an excellent strategy and our stores have significantly higher average total sales than those disclosed by many of our competitors. We have actually 15 Cannabis stores now in Alberta, we got another license between when this press release went out yesterday and today.

And the other 15 will be opened, licensed and by the end of this year or maybe a week or two late depending on getting permits and final inspections over the holidays. But we're on track with great locations even though there has been -- we have seen our competitive environment in Alberta and Cannabis go from what was initially 17 stores to now well over 300.

Our average sales per store have in some cases hardly dropped at all, in other cases not very significantly, yet again, proving the great real estate wins. Opening a store for the sake of opening a store and pretending you have numbers is just folly that has nothing to do with retail and nothing to do with real business.

We continue to focus on -- while we're growing sales we continue in both our businesses to focus on margin enhancement and we were successful in starting that program in Q3 in our liquor business in a careful controlled way. We don't want to lose the market share that it's taken us this effort and investment to gain.

And we've been able to do so and achieve that and continuing in the fourth quarter on path with our projected margin increases and look forward to continuing that rate through 2020, as we have said all along. And equally in Cannabis for keeping the margins as high as the market will allow, but within the context of being competitive and making sure we retain footsteps and customers when competition shows up and we're very confident we will do that including at our Queen Street West store.

We -- on the cost side of our business, we have made some significant overhead reductions. Third quarter and in this quarter and further expected in Q1 to get our overhead and management costs in line with the realities of our business.

And lastly, I would just add, we have another new Wine and Beyond opening up a week from today -- a week from yesterday in Red Deer, Alberta, which we're very excited about. I think it will be greatly well received in that market.

And we're looking forward to joining our Wine and Beyond family. And with that, I will just as per the last few calls won't read out what you've already read.

So I'll just turn it over to questions. Thank you.

Hi, everyone. First question for me just on the same-store sales, I just wanted to dig in a bit on that the same store sales in Canada.

So up 4.9% in Q3, wondering what that looks like for the different components of the store base. So maybe some color on the Alliance stores versus the non-Alliance?

Yes, hi, Kyle. The Alliance stores, the discount banner, obviously because of the nature of that business it is been important driver of that same-store sales increase, but -- probably the key driver.

And also because we have so many more of those stores now than we ever had before, almost 100 under at one of the discount banners. So that's the primary driver of it.

But overall, we're pleased with how Depot and Wine and Beyond are doing, as well.

And so are those non-Alliance stores also in positive territory maybe not to the extent of the alliance stores…

The weather this summer really took a beating on them and so they dip down, but nothing concerning when we try to normalize for the weather. But it was a terrible summer out here something that you guys experienced I think last summer, it was just raining cold the whole time.

Yes, I mean from gas station, convenience stores people were down just incredible numbers just because no one went out. But -- and that's not an excuse, but it's a reason.

But the Depots were essentially flat, which is fine. We are pleased with that given the conditions.

Okay. And then on liquor gross margins in Canada.

So your commentary suggests they're starting to normalize higher in Q4. I'm just wondering what that pace may look like?

Is it a multiple quarter path to get back to your target normalized gross margin, or will you be there exit this year at that normalized gross margin you're targeting?

No, no, it would be like I think we've said, before Kyle that it will be something that's careful and gradual. You always want to maintain good pricing in the marketplace, especially on the core items that people use to benchmark you against the competition.

So we will look to increase margin throughout 2020. By the end of 2020, we should be -- maybe even by Q3, we should be where we're at a stabilized level.

Got it. Okay.

And then, so you've started this process in Q4, and same-store sales still holding up. You're not going to losing any traffic as you move pricing higher.

Yes, absolutely. We started in Q3 actually.

So -- and continue in Q4, and we've been able to -- there's absolutely no impact on sales at all on the growth. It's been fine.

We know how to do that. It's very careful and even in -- especially our -- the team at Ace and in the Alliance that run the discount stores are good at this in terms of having the lower prices on key banner items and you raise prices on the other shelf items, the basket filler items.

So the customers you do it in a way that's customer friendly and nobody minds it’s $0.10 here or $0.15 there. It's not a matter of just one big price increase that would -- we would give everything back that's taken us so much to win.

Okay. And then last one for me for now.

There has been some rumors out there that maybe Aurora is looking at selling their shares in Alcanna for one reason or another that I won't get into, but wondering if you have any color on that rumor or maybe just a general update on your relationship with the Aurora and how active they are in your business, et cetera?

Sure, obviously, I can't speak for them. So you have to ask them the direct question, but I can speak generally.

Our relationship with Aurora is excellent, they have excellent products and we move a lot of Aurora products out of our stores and now that supply is stabilized they’re excellent sellers are number one actually. Aurora continues to have representative on our board who was here yesterday at our board meeting and great positive relationships with them in terms of their holdings of our company Aurora and they have investments in other retailers.

I'll maybe make a generic comment, if you're an LP and you're trying to become a consumer packaged goods, build a brand, build recognition, get a customer brand image. Given the rules around cannabis, there is almost no way you can do that like a Procter and Gamble could.

You can’t advertise, you can't market, you can't do so much. The only real place that an LP can build a brand under these rules is in the walls of a retail store.

And so great relationships with the retail store is something that is very important to LPs. I also note that, as you say, I can't talk about Aurora’s business, but I did obviously read their results yesterday and some of the strong moves that Aurora has made to sure its balance sheet up I think just shows that they're on top of things and they're doing well and it's a relationship that we value very much, and I have no reason to believe that they don't value us well.

Every reason to believe they do.

Okay, I appreciate all that color. That's it for me for now.

Thanks, Kyle.

Thanks. Good morning.

Just I guess on the liquor business, as you kind of start to improve kind of the margins, can you talk about what you see as sort of the upside over the next kind of one to three years in terms of the margin profile. I know it's a work in progress, but sort of, is there a target you have in mind as you go through this transition?

One of the things to keep in mind for everyone on the call is that our mix has changed significantly. And by adding 100 discount stores just the rates blend out lower.

And so getting back to a margin rate where liquor depot ran previously and where this company ran previously is not going to happen just because of the greater percentage of sales coming from discounts. But from that baseline, there's no reason why we can't get another couple of hundred basis points in the next year, year and a half as we work through our margins, and pricing strategies.

And if we get in that range company has a much healthier bottom line, as we indicated is in our plan. Yes.

Go ahead, Sabahat. Sorry.

No, I think that David's exactly right. The old model of liquor retail in Alberta 5, 10 years ago, does not exist anymore.

There's probably half the market now that's selling at a what you would call a discount price, of which we’re by far the biggest of those our discount banner. That's just where the market has gone.

And it's difficult to see that it's going to go back, which is why we got out in front of it and wanted to be the major player and it is supposed to trying to fight it or pretend it go away. Yee can't beat them, join them.

So let alone can't beat them lead them, which is what we're doing.

Okay. And then just I guess on the SG&A side, you mentioned some more cost reduction over the next little while, I guess, beyond that you see your SG&A structure sort of sustainable given the new discount model that's in operation probably in Alberta?

Do you see if it does become even a bigger part do you more room on the SG&A side?

That's a great question, Sabahat. And yes, very much so, we were definitely have a target and we're acting on it have acted on it, will act on it and will continue to act on making sure that the infrastructure here is sensible in comparison to what our business is and what our stores can produce.

And to the extent that it's too high, which I guess, by definition, we considered that it was, which is why we've taken these -- it's never easy doing that sort of thing, but it has to be done and we will continue to do it. We're also looking at other means of streamlining and as you say, it's all -- it's a different business, that part of it and we're making sure that our structure of how we look after that fits that business.

And then, some of the online initiatives that you've taken -- undertaken over the past, I guess, how are those coming along? Is that still a focus for the company or I guess how does that fit into the broader discount retail environment, this online selling?

To be honest, we've actually put that on hold for now it was not -- down the road, it may or may not be and probably will as with ecommerce and retail and in other areas, but the rules are on liquor selling make it much more complicated and expensive to do that than delivering food. So for the time being, we’ve put that on a hiatus, while we focus on getting our business profitable and will resurrect it again in a year or two when we're more financially capable and able to do it and focus on it.

Right now, I mean, our sole focus is on the stores, if it doesn't affect performance in stores we don't need it. That's literally where our management focus and time and attention and money is right now to make money.

And then just one on the Cannabis side, I guess, as you bring on more stores and as there's more competition in the space, I guess, how are you envisioning the scale up of that business more specifically in Alberta and also in Ontario? Obviously, productivity might go down as more stores enter the market, but what are you looking for in terms of overall top line growth over the next one or two years, as more stores come into the market?

So far in Alberta, all these competitors hasn't really affected us at all. We've got great sites and we -- our sites are in places where people go near where they work, near where they shop, near where they live.

In shopping, we pay more rent, we have better locations, you get what you pay for, and our sites are good and where these other competitors are popping their sites are not good, as to generalize. So we have had very little impact so far.

And the rest of our -- we’ll have 30 up and running here in a few weeks and they're all in excellent locations. And we believe that they will be fine some of the ran islands that are in centers with restrictive covenants.

So there just aren't any competition by virtue of the center we're in. So we're in little islands.

And any potential pullback should be offset by Cannabis 2.0 with the edibles and beverages et cetera that come online and hopefully, new consumers start coming into the marketplace as well as those products land and as cannabis becomes a little bit more normalized in society?

Yes, absolutely. So I think we're comfortable with our 30.

We've had -- we've been shown many, many acquisition opportunities of people who are realizing that this isn't as easy as they thought it was. I won't name names but so far, we've passed on the mall because their real estate was terrible, just to be blunt.

So -- but not to say that we wouldn't look at some down the road and always look for acquisition opportunities, but right now growing through our own real estate expertise and landlord relationships has proven to be a far better strategy for our company and its what we will do in Ontario too. I think it's widely every LP read, every -- Ontario governments in their economic statement last week, I think made as many three or four references to cannabis opening up very soon, very soon.

And we are poised to be a part of that and in the same strategy that we took in Alberta we’ll make sure we get great sites just like our Queen Street site in Toronto. And the competition really doesn't affect us, frankly.

Great, thank you.

Thanks, Sabahat.

Hey, thanks. Good morning, guys.

Hi, John.

Maybe to start with the liquor side, you referenced the ongoing competition, both on the call and the press release. I'm curious if you have any thoughts or expectations on overall square footage or unit count of the industry for 2020 or 2021?

Is it kind of flat in your mind or do you expect to see a decline in competitors?

Liquor in Alberta, it stays about the same goes a little bit a year. It's like there's 1,500, 1,600 sort of independent stores another 600 off license hotels that are allowed to sell off premise for off premise consumption.

It doesn't change too much. It comes and goes, it doesn't shrink, when people go out of business all the time and somebody tends to backfill.

So there seems to be -- I think it would be unrealistic to say that a lot of people will fail and go out of business. But I don't see a lot of new people coming into the business either.

So it'll probably be pretty stable would be our guess.

Okay, great. On the Wine and Beyond stores, it sounds like you've been very pleased that the early performance of those and is the reason to suggest you could accelerate the opening of those and generally have these in up to your expectations to beyond the early months and are you getting the returns in those stores that you were hoping for?

Yes, and I will qualify that we are and they have been well received in the market. So, we've opened them, one is in St.

Albert, which is suburb of Edmonton they wouldn't like us to call it that, but it's an independent city very close to Edmonton I’ll call it, just to be nice to people in St. Albert.

And the other one is in Lethbridge, which is a major center down in the southern part of the province. And when you open a big store like that you have to be careful on pricing and just to make sure it gets established in the market there's some people have an image that it's too fancy or that it's a luxury brand because it's actually not Wine and Beyond is extremely well priced because it's a destination store like any big box.

So you have to be very, very competitive. It has incredible selection and there are all sorts of right up the value chain of products, but at the end of the day your basic offering has to be competitive especially when you're starting off.

So -- and that's what we're doing. So we're right on target with what we want those things to do and they will soon be -- they take a year or so to really start to produce the bottom-line returns.

But the footsteps in the top-line is -- where we'd like to be, when we expect revenue will be the same. In terms of expanding in Alberta, as of right now, we will -- we've got some on the books, which we may or may not proceed with in early part of next year, because our eyes are on Ontario, both cannabis and liquor in terms of making sure we have all balance sheet and the dry powder to be able to take advantage of Ontario expansion if or when that comes on -- in both products.

Okay, that's helpful. You mentioned robberies and thefts and an increase of those in the press release.

And I'm just curious what may have brought that about, does it impact same-store sales materially and are there a material costs that you have to incur to address those?

Yes, it's a nationwide problem in Ontario the LCBLs [ph] had terrible problems with it, Manitoba, the same thing. And Alberta it is in the two big cities, particularly, it has been -- in certain neighborhoods, it's been really out of hand, it's actually organized crime.

Doing this robbing to order, robbing to resell online, robbing to sell to unscrupulous liquor stores or bars or nightclubs. We are working extremely closely with the police to address it.

We've had to incur some costs to ramp up our own internal security for employee safety and as well as obviously financial reasons. So it's a material impact on our bottom line in Q3.

This has been going on for about a year now getting ramped up and -- but we're on top of it, and we're addressing it, I had meetings with political figures and police department and we are getting -- as well as the regulator here and everyone's concerned and realizes that it's something that needs to be tackled on a much broader basis. Not one company can do it.

And it's not just our company that's getting this it's any liquor store in the province, especially in the big city. So it's something that we're addressing and it will affect our results to some extent, for a quarter or two until liquor get it under control.

But we've got a plan and we're confident that, at least for our company we will get it under control in the next few months.

Okay, that's great. You referenced the -- you want the flexibility to be able to address Ontario liquor if that opens up.

In an unfettered world, if you could take on Ontario liquor, Ontario cannabis, Alberta liquor, Alberta cannabis, do you list out what your priorities for capital would be in that -- I know it's an unlikely scenario, but in that scenario?

That's easy. We'll build as many Wine and Beyonds in Ontario as we can build they will be gold mines.

Just that's -- that's a really easy one. Yes, for sure.

And then from there, Alberta cannabis and Alberta liquor, we're pretty well -- we're just rounding out the edges of our portfolio on both of those. We're happy where we are.

We'll add as populations grow in new neighborhoods and so on. So Ontario cannabis would be next.

Those would be the two priorities for sure by a long shoot. Ontario cannabis, which is almost certainly coming, well it is, it's in the law.

It's just a matter of when and how they phase it in that decision has already been made. It's just a matter of timing.

The liquor has not been made, they're going to have reform, they just haven't landed on exactly the regime they're going to put in place. And, once we hear that, and if it's such that our Wine and Beyond stores and we would do big bucks in Ontario.

We would not get into the convenience format that we do here straight to Wine and Beyond.

Right, that's helpful. Thanks.

And just a couple more on the cannabis side, is there an expectation on your end for when you might be able to participate in some sort of merit-based assessment of Ontario cannabis stores? Is this likely first half of 2020?

Do you have in your mind a second half of 2020 I know it's still out up in the air but it's anything you've heard on that that you could share?

Everything we hear says it’s first half of 2020.

Okay, great. And then lastly…

Even Q1 and they even announced it very early on with -- the phase out and stuff I believe is the issue they're working on. How they're going to handle the distribution is I think what's being discussed and contemplated versus the retail itself they already know it.

It's just they want to build a store build store, which is what they always intended until a supply shortage came. Everything is less used.

So we went -- we've just heard everywhere that it will be very soon. So we're getting ready for that.

We have our people in the field looking for sites. I mean we’re expecting it to come fast.

Interesting. Okay, that's helpful.

Thanks. And then last one, margins on derivative products are 2.0 it sounds like you do expect some expansion.

There seems to be disagreement among as far as I talk to about how much of an expansion. So can you give us a sense of the magnitude of margin improvement on the cannabis side when we do see these products roll out?

It's hard to know because we don't really know the pricing yet and with the LPs are going to sell it to the government buyers. If the government stays in the business, which they may or may not.

So we don't really know. But we're anticipating it'll be certainly 30 where more or less the standard margin is now in cannabis Our margins will show less than that in cannabis because we, as I mentioned, I think in either the press release and the MD&A, that as our company, we do not hold, we're retailers.

If you have inventory that's not moving, you lower the price and get it out. I know some of our competitors are sitting on inventory, they're afraid to sell it because they don't want to show the market that their margins are down.

But that's just kidding yourself that's just kicking the problem down the world and making it worse. So on 2.0 products, it'll probably start in the mid-30s would be our guests.

But, we'll see. We're going to be cautious on it, John, because we don't know yet.

From America we've announced look at stores there, sees what sells that's the only real comparison that you can do. In terms of everyone assumed vape pens were going to be the hot seller and they still probably will be, but with all the health issues surrounding it, that blooms off that rose a little bit, but probably not a lot.

So because I think the products causing the health issues were unlicensed black market products, not ones that are inspected and done by -- Aurora has some great family of products they've shown us that are coming, I think they're going to be wonderful sellers. So we're really looking forward to getting those.

But we'll be cautious and not over order too much right away and sort of watch what the customers are asking for and introduce it slowly. And we anticipate that it's going to be made available to us slowly, just like the 1.0 in terms of it's going to take a while for people to -- LPs and manufacturers to get their facilities up and running and get the stuff out into the marketplace.

So we’ll be careful. I don't think it'll -- I would be shocked if it had much impact on Q1 at all.

But by Q2 or Q3 then we will know a lot of what the questions that you're asking will have some sense of what those answers are going to be, right now it's a guess.

Okay, appreciate the call. That's all, thank you.

Thanks, John.

Good morning. Congratulations on the quarter.

So just first question, in terms of cannabis stores in Alberta, if I were to adjust for the Queen location, could you give us an idea of what the revenues per campus store there is annualized?

Annualized for Alberta alone $4 million. Yes it’s around $4 million a store probably average there's no -- the store is in the store it just depends where it is, we go for like 50 grand a week to 150 grand a week, 200 grand a week.

But $4 million is good number, the question is what the new ones look like, if we do anywhere north of $3 million we will be happy.

Yes, $3 million to $4 million. $4 million I think we're expecting where we will in it.

We should stay there because these are great locations without competition because that's how we pick them.

Understood. And maybe in terms of the newer 14 licenses are you expecting to get -- are those similar -- going to be in similar locations, maybe similar revenue run rate?

We're expecting, yes, they're all -- these are -- a lot of them are major landlords in great centers, Calgary I think we have an eight coming in Calgary and they're all in good centers and little islands where by nature of our restrictive covenant, and then the city blocking there just won't be competitors around they’re in places where people shop. So that's how you win in retail.

And our pricing is better than most of our competition. So customers will come check us out and will literally get them on convenience and price.

Exactly.

Okay. In terms of moving on to Ontario, I know there's a talk or speculation that potentially Ontario moving towards more open market, are there a number for the number of stores that you're aiming to have in Ontario maybe in 2020?

Is that something that you're giving kind of a little bit color on that or?

Yes, let's just assume that it's -- let's say they open it all up and you can start maybe start a Q3 just to pick it up out of the blue I'm it's announced and rolled out and the distribution is sorted out. We would -- and again, Jenny, we’ll do the same thing we did in Alberta.

We're not just going to go run around opening stores for the sake of an issuing a press release every 15 minutes that we opened another store. We're going to get great locations with good landlords and open real businesses that are going to sustain themselves for the 10 year term of the lease, because we actually have money to pay the lease, which others don’t or won’t soon.

So if we could open 12 to 15 the back half of next year with permits, getting the leases signed and all that stuff, we'd be happy. And we'd obviously eventually be targeting the minimum -- maximum 75.

So we'd be targeting to get 74 more. But that won’t happen in a year and we're not going to rush, we're going to make sure it's done right.

And they're real businesses run properly. There's no first mover that's a myth.

There's no first mover in cannabis. We all sell the same stuff.

It's retail, it's about location, location, location, and then about making sure your value proposition is competitive. And then your service level is what the customers are expecting for that value proposition.

It's not hard.

Maybe one last one on solo liquor, could you just give us a little bit of color in terms of integrating that and maybe how many quarters do you think it'll take for that to get to maybe the 2017 revenue and EBITDA run rate that it used to perform at?

It's been most -- I would say half of the stores are on track where we thought they were about half are slower and for the most part, we will be changing the solo stores and making them ace under one brand name, it will save on marketing and save, just it's a lot simpler and more cost effective to do that. In some locations there's a few that we’ll just leave as solo, but in most locations, the brand was so badly broken by the difficulties, the former owners had that it's -- it will be easier to get customers back into those locations under the Ace banner than it will be to try to get them to return to solo.

We've switched half a dozen already I think it is -- and that is like one moves up 125% it does made a huge difference when you put the Ace banner on, so we’ll accelerate that. In terms of how long it will take those former stores to get back up to a normal level, I would say by Q2, they should be up and running.

So a year after we got them they should be the well-established back in the marketplace.

Okay, thank you so much. Congrats on the quarter, again.

Thanks, Jenny.

Thanks, nothing up from us appreciate everyone's interest in our company. And we look forward to speaking with everyone in March with our Q4, which we anticipate is going to be the same message that what we said we're going to do.

And that's what we spend the next four months doing. Thank you.