North West Company Inc. (The)

Welcome to the Northwest Company, Inc. Second Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Dan McConnell, President and Chief Executive Officer. Mr. McConnell, please go ahead, sir.

Thank you very much, and good morning, everyone. And I just want to welcome everybody to our Second Quarter Conference Call. Joining me today from Northwest Company is John King, our Chief Financial Officer, and Amanda Sutton, our VP of Legal and Corporate Secretariat. I'm going to start the meeting actually by asking Amanda to read our disclosure statement.

Thank you, Dan. Before we begin, I remind you that certain information presented today may constitute forward-looking statements. Such statements reflect Northwest's current expectations, estimates, projections, and assumptions. These forward-looking statements are not guaranteed the future performance and are subject to certain risks which could cause actual performance and financial results in the future to vary materially from those contemplated in the forward-looking statement. For additional information on these risks, please see Northwest's Annual Information Form and its MCNA under the heading Risk Factors. Back to you, Dan.

Thanks, Amanda. I'll begin with a brief overview and then I'll open up the call for questions. Overall, the results in the quarter are better than they might appear at first glance. I want to highlight a couple of factors to explain this. First, we were up against an extraordinary same-store sales and earnings increase from the second quarter last year, which was pandemic-driven. Let's dive into the second quarter results. Sales in the quarter were down 12.9% compared to last year, largely due to the giant tire transaction, considering that on a same-store sales basis, sales were down only 4.8%. Also, just to keep this performance in perspective, Now let's talk about regional specific results. Canadian operations same store sales were down 8.7% compared to the 30% increase last year. That said, note that compared to 2019 sales were up very strong 24.6%. We continue to be positively impacted by COVID-19. One of its challenges in the quarter was the impact of forest fires in Manitoba and Ontario, which resulted in evacuations and store closures in eight of our communities. As a response to this crisis, though, our teams partnered with the Red Cross to deliver same-day supplies and food hampers to the evacuated public temporarily staying in Winnipeg. This really speaks volumes about how our teams continue to inspire us by taking to heart their role in the communities. Switching gears to international operations, we continue to over 115 communities. This was partially offset by the timing of the permanent fund dividend payment. Last year, a dividend payment of $992 was issued early and paid in the second quarter. The PFD dividend this year is expected to return to its regular calendar timing and be paid in the third quarter. Therefore, our general merchandise comparative sales performance for this quarter was negatively impacted. a higher blend of cost-less sales, and a lot more promotional activity in certain markets. Our selling, operating, and expenses were down 40 basis points as a percentage of sales, excluding non-comparable factors mainly related to the $24.7 million pre-tax gain on the Giant Tiger transaction in 2020. One of the factors contributing to lower expenses in the quarter was a $5.3 million 2019. Now I want to take a moment to briefly refer to the performance of the airline. North Star Air had another very strong quarter driven by higher third-party cargo revenues. A gradual increase in passenger travel in the quarter also contributed to improved earnings, especially when compared to the negative impact on passenger-related earnings in the second quarter last year due to the COVID travel restrictions. In aggregate, the impact of Okay, now I want to transition and make a few brief in loading and utilization. In addition, the wide door also creates opportunities for specialty payloads and greater third-party revenues. Also, speaking of share buyback, a pre-COVID basis. To finalize, let me just say that overall we are very pleased with our final results in the second quarter, particularly as we were up against the exceptional pandemic-driven results last year. I also want to, again, acknowledge the efforts of our frontline employees who continue to serve our customers within the challenges of this COVID-19 environment. So I am going to open up the call for questions here shortly, but before I do, With that, I'll ask the operator to open up the call and for any questions you might have. Thank you.

Thank you. We will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please lift your handset before making your selection. If you do have a question, please press star 1 on the device's keypad. You may cancel your question at any time by pressing star 2. So please press star one. At this time, if you have a question, there will be a brief pause while the participants register. We thank you for your patience. The first question is from Michael Van Elst from TD Securities. Please go ahead, your line is open.

Hi, good morning. I just wanted to start off with the price investments that you started a little while back, but paused for a while. So are you still planning on increasing your price investments? And if so, when would we expect to see those?

Well, as you know, we did hold that. Thanks for the question, Michael. But we did hold that this last quarter. There's a lot of volatility in the market currently. So we are working on a price investment and it's with the same objective to increase our sales our value to our customer, our gross profit dollars. But given the volatility in the market right now, we really thought that we have to, or we are working on recalibrating some of the metrics on how we go to market with it. So yes, we will. We're currently in kind of a test stage, but we expect it will probably be fourth quarter or first quarter next year is when we would have more surety as to when we could roll it out.

Okay. All right. And then are you able to give us what the impact of the fire-related closures were on same-store sales?

I won't disclose the total, but I could say that it was relatively light, but I actually am not going to give the number out, Michael, at this point.

All right, and then COVID costs were running, I think going into the quarter, you were talking about a million a month, and you only did $1.2 million in the quarter. Is that a good gauge for going forward?

Yeah, I would say so, Michael. It's a good sign so far. We've been focusing, as you know, on our safety and really keeping people safe. The vaccination rates in a lot of our markets has been – been high, so that's helped out a lot. And as well as the participation, a lot of our store managers, most of our store managers are vaccinated as we're encouraging them heavily to do that. And it's definitely worked out in our favor.

Okay. And then the fourth ATR that you picked up, I think originally you had said late Q3, and now you're saying late Q4 by the sounds of it. So Is that just a delay in receiving the aircraft and retrofitting it?

It's the retrofit. That's correct. It's the retrofit. Just receiving some of the parts in today's environment, it has pushed it out, but we're quite confident that it's going to come out in Q4. Okay.

I understand. And then finally, on the PFD, the last I saw was it seemed like there was a holdup or there was a I guess hold up in signing off on it and it was going to get pushed beyond October. Is there written other developments that you believe that it's going to get paid during Q3?

No, but our best guess right now for what we know is that we do believe it will be paid in Q3.

And what are you hearing for the size?

We've heard a range. We've gone from 500 back up to 1,000, so I would say they're probably somewhere within that range. Okay.

Thank you.

Thank you.

Thank you. The next question is from Mark Petrie from CIBC. Please go ahead. Your line is open.

Good morning. I wanted to just ask about inventory levels. I was up Pretty nicely, obviously, though, a lot of different pieces in your business, including FX. And I know you were trying to build inventory, at least selectively. So can you just give us an update on sort of where you're at with regards to inventory levels across your business and specifically non-food?

Yeah, absolutely. In fact, we saw that, obviously, early on, there was a lot of escalation in inflation. So we went out and we procured as much as we could on the front end, obviously with our CELIF program. That's something that we took full advantage of, as well as our electronics throughout all banners, actually, getting ready for our third and fourth quarter selling events. So I would say that we're in a strong position as it relates to our inventory levels, and we're absolutely ready to meet our customers' need coming here into the third and fourth quarter.

Okay, perfect. And you mentioned the Farm Box, the Farmer's Food Box program in Alaska. What's the status of that program and do you expect it to be a factor in your ability to grow that part of your business?

We've learned a lot from it, Mark. We're not participating in the USDA Food Box program currently, but what we have done is we've cascaded it into a sales opportunity and we've We're still doing that type of service, but it's not being paid for by the USDA. So it's something that we're just working with different communities and offering this service, much of what we learned when we were providing this service for the USDA. So no, it's not being compensated for by the USDA, but it has cascaded into a solid business opportunity for us to provide those types of products to the number of the communities that we're not in today, as well as obviously the ones we are.

And how material was that? Like, does that subsidy going away, like, is that a material impact on your business? I mean, I understand you're saying it's, you know, you've learned things and now, in some respects, presents an incremental opportunity, but it not being subsidized, does that matter to sales growth as you lap it, I guess?

Yeah, yeah, it's definitely impactful. It's not going to be, it's not a program that they're offering currently. There was 900,000 pounds, as I indicated, that were put through this program. So it's not huge, but it's not invisible either. Okay. Mark, thank you. Yeah, it's all right. You get a quantum.

It's all good. It's all good. Okay, and then I guess just my last question is sort of a broader one. And I just wanted to ask about your... sort of various health initiatives in the north. And I know this is a business that you guys have participated in for a long time, but you've gone through various sort of evolutions of it. And I know it's somewhere that you've launched new businesses, I think last quarter, the wellness health business, if I have that right. So can you just sort of in a broader context, talk about where you're at kind of with regards to your offering. And if you think that will be a material opportunity, you know, in call up the next 24 months.

Well, we're continuing to evolve it, Mark. And as you're aware, we just opened up our store Astro Hill in Iqaluit. It's a healthy for you. So we are, you know, we're in optical services there and that we've been, I mean, it's still early on, but it's been shown to be a, a valuable service to our consumers. So it's really just a continue on. It checks a lot of boxes. It's obviously a great service to our community, and it's definitely a void in northern Canada today. And we feel with our competitive advantages, we think we can continue to offer better service in that regard. So it's really a continued evolution is probably the best way I can put it.

Okay. Appreciate all the comments and all the books. Thanks.

Thanks, Mark.

Thank you. Once again, please press star 1 on the device's keypad if you have a question. The next question is from Stephen McLeod from BMO Capital Markets. Please go ahead. Your line is open.

Thank you. Good morning, Dan. Good morning, John. I just wanted to ask a quick question about just what you're seeing in terms of your northern Canadian communities with respect to trends in out shopping, just with restrictions having been relaxed. Are you beginning to see more

um more of your community residents uh increasing the proportion of out shopping which obviously you know in shopping was a big was a big benefit to you through covid you know what not as much in northern canada very marginal uh ac or in alaska or alaska operations there was uh there was some more out shopping but really it's been in northern canada it's been very marginal i mean for the the comparison we say is that the higher the vaccination rates uh uh you know the more people are to stay at home currently and because of because of the the lower vaccination rates outside of the community so it has kind of led to you know stronger business results obviously people staying in market uh so it we haven't seen that open up that we might have anticipated earlier on but we expect that later on in the uh in the year it'll probably open up a little bit more as vaccinations start to match those of some of the communities and surrounding areas

Right. Okay. Okay. That's, that's helpful. And then are you able to, last quarter, I think you had mentioned that exiting COVID or maybe once things normalize, you sort of expect to return to kind of a mid single digit growth rate in terms of same store sales growth. Is there anything that would, would have changed your view or is that still kind of what you're expecting once, once things settle out?

Nope. We're still on, we're still under that same expectation. Yeah. Okay. Great.

And then the increased dividend was a surprise. Obviously, you announced a nice increase just two quarters ago. So can you talk a little bit about what your priorities are for excess cash flow as you sort of move through the next 12 to 24 months?

Well, obviously, we've announced our AC strategy, I believe it was two quarters ago now. And so that's some of our priority. We've got three new stores that we're going to be opening this year. We just opened Astro Hill. We had a store earlier in the quarter in... Sorry, it was last quarter in Rankin Inlet. So we are following suit with our AC strategy. We have other opportunities, kind of tuck-in acquisitions that we're actively pursuing in Alaska as well as Canada. So there's nothing major, but that's really what... we're looking at continuing to pursue in the near term. There's also the e-commerce strategy that we're starting to roll out in Alaska, so that's another initiative that we're putting a lot of focus to. But other than that, it's really just sticking to the game plan. I mean, obviously, now I've been in the role for four weeks and really starting to take a look and see what the opportunities might be with a new leader coming in for Canada. I expect a lot more focus, and we're going to be looking even harder than we already are for new acquisitions and opportunities just to further our footprint and continue to service the customers that we know we can bring a value to.

Right. Okay, that's great. And then are you still sort of focused on, when you think about acquisition opportunities, are you still focused largely on health and other complementary areas? businesses that would tuck in nicely to the retail store base?

Yes, that's correct.

Yeah, great. Okay, well, thank you. That's it for me.

Thanks, Theo.

Thank you. If there are no further questions registered at this time, I'll return the call back to Dan McConnell.

Okay, well, thank you very much, and I appreciate you joining me here for my first conference call, and I look forward to speaking with you next quarter. Thank you.

Thank you. The conference is now ended. Please disconnect your lines at this time, and we thank you for your participation.