North West Company Inc. (The)

All participants, please stand by. Your meeting is ready to begin. Please be advised that this conference call is being recorded. Welcome to the Northwest Company, Inc. Third 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.

Thank you very much, and good afternoon, everybody, and welcome to the Northwest Company Third Quarter Conference Call. I'm joined here today by John King, our Chief Financial Officer, and Amanda Sutton. our VP of Legal and Corporate Secretary. I'm going to start the meeting off by asking Amanda to read our disclosure statement.

Thank you, Dan. Before we begin today, I remind you that certain information presented 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 statements. For additional information on these risks, please see Northwest's Annual Information Form and its MD&A under the heading Risk Factors. Dan?

All right. Thank you, Amanda. So I'm pleased to share with you the details for First of all, I wanted to highlight the positive sales momentum across the business. Third quarter consolidated sales increased 0.1% to 554 million. travel restrictions. I as well as a lot of the other team members and leaders have done a lot of travel throughout our health and safety at the top of their mind at this all at the same time is keeping a good in stock position while navigating the current global supply chain crisis our teams understand that the current supply chain environment has the potential of putting our ability to have the right merchandise for our customers at risk that's why all of our banners have been focusing on moving inventory swiftly across our network our teams have planned for months to avoid to leverage our relationships with our suppliers and make sure that they're prioritizing our orders. This is in order to keep us delivering on our promise to our communities, protecting their food security, and ultimately helping them live better. All right, now let me go and give you a little bit more color around region-specific sales performance. Canadian offerings specific road stores or road markets where customers are privy to out shopping. to entertainment media, toys, as well as some other hard lines. and bars to to get back open again in alaska our strong in stock position also allowed us to capture demand from a strong fishing season down in the coastal villages our coastal source here it is also important to highlight the impact of the timing of the pfd or the permanent fund dividend uh last year the dividend was paid was 992 dollars and it was issued earlier uh in fact it's a changes in product sales blend, particularly related to general merchandise sales in Canada. However, there were also an impact of inflation costs that were not fully passed on in certain markets, which I'll give you a little commentary just to explain. Unfortunately, in some of our markets, some of our local competitors are lagging when passing along cost increases to customers. Here, our focus has remained on keeping both our customers' trust, obviously, and at the same time, and grow it. So we are definitely very actively monitoring the market for price changes and we want to make sure we can be competitive while at the same time we're continuing to drive value for our shareholders. In terms of expenses, for the quarter there was a $7.4 million or 5.6% to refer to the performance of the airline. We have seen positive trends in the passenger business. Demand for scheduled passenger flights are picking up following a reduction in community travel restrictions, which have also had a positive impact on charter-type flying. On the flip side, we experienced unplanned repairs to our ATRs, which required us to have a higher usage of leased aircrafts. Both these factors have negative impacts on our gross profit rate for the quarter. Lastly, on the airline, the ATR LCD, which stands for the large cargo door, will start operating this month. This plane is equipped with an oversized panel door on the side that actually helps facilitating unloading of palletized cargo. We're using this plane as kind of third party as well as our own freight after all the above is considered the company's net earnings increased 3.2 million to 39.2 million compared to last year and on a two-year basis net earnings were up 14.3 million or 57.6 percent compared to the third quarter of 2019 that said the after-tax impact of share based compensation adjusted net earnings decreased from net earnings decreased by 4.4 of a new Omicron variant. Based on the strong in-stock position I referred to previously, we are cautiously optimistic about the holiday selling season. However, we acknowledge the fact that consumer income support in our markets, particularly in northern Canada, will be lower compared to last year. In our Caribbean and Pacific regions, we will continue to focus on improving our execution at the stores, our assortment, well below pre-pandemic levels. In Alaska, we expect to continue growing by expanding our footprint to new markets. We are confident that we'll hit the goal of three new stores in 2021. Two of them already open and one's on track to open prior to the fiscal year end. Heading into 2022, the expansion will continue in Alaska. In Canada, we are focused our efforts on price optimization strategy. We had paused this initiative for a while given the COVID-19 related volatility. by Q1 next year. In Northern Canada, we have also been focusing on improving our product flow, which includes initiatives that involve the airline. We continue to explore opportunities to improve our end-to-end supply chain and capitalize on the learnings and successes we've had so far navigating through this pandemic-related supply chain challenges. We are also doubling down in Canada on improving our assortment and execution at the store level. Quite difficult. All right. I just want to let me wrap it up with saying that we are very pleased with the financial results in this quarter. And we will once again like to thank all of our frontline staff and support teams for the passion and commitment shown every day to make people's lives better in the communities that we serve. With that, I will now ask the operator to open up the call for any questions. Thanks.

Thank you. We'll now take questions from the telephone lines. If you have a question and you're using your speakerphone, please lift your handset before making your selection. If you have a question, please press star 1 on your device keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star 1 at this time if you have a question. There will be a brief pause while the participants register, and thank you for your patience. Our first question is from Michael Van Elst from TD Securities. Please go ahead. Your line is open.

Hi, good afternoon. Good afternoon. First question is actually on the comments that you said where inflation was not fully passed on. And I know you said you wanted to try and protect your market share. Are others passing it on and you're just trying to gain a little bit more or is this the start of your Was that the start of your price investments or are you just waiting until Q1 next year for that?

Yeah, the price investment would start next year and it's really a price optimization. It's just looking at, we're building some different systems as to how we can optimize pricing. So it's lowering some where we can and there's others that we haven't had full transparency that we think we can kind of offset some of those. But that's not what I was referring to. What I was actually referring to is that in some of our markets, our competitors were slower to take the inflation or to increase their prices as it relates to inflation. So we didn't lead. So we waited until they realized, as you can say, that their prices were outweighing. And it's just due to some of the sophistication of some of our competitors. So we obviously want to drive that price perception. We don't want to give up market share. And so we often just make sure that it sometimes is laggard. Let me just say that. So it sometimes takes a little bit more time for the market to correct than some of the more remote markets.

Have you seen those price increases go through now?

I would say they are definitely more so. Yes, I would say a majority of them have because they're pretty compelling in some instances. So it's harder for people to miss.

Okay. And when you talk about your price optimization strategy for starting Q1 next year, how will you be measuring the investments? Because in the past you said if you don't get a return off it, then you're not going to necessarily continue with it. So do you look for the return immediately or do you expect a three or six month lag? How should we expect you to be looking at that?

That's a great question. It's really a test timeline. So for example, there's a lot of products that are out shopped that were not competitive enough to compel people to shop us locally. So it's a pretty, like it's as far as it catches on within the market. So we're making price investments in some of those other items. And with some of the, where we think we can make more gross profit dollars, but just lower our rate to sales. And then that's just comes down to us being more strategic in our pricing strategy. So that's effectively it. So it doesn't... we won't feel the impact over a long period of time. It's something that we would see some momentum gathering in fairly short order.

Okay. And is that something that'll be harder to measure because, you know, you're coming off some high in market or in community shopping levels, and now you're just trying, you're almost trying to maintain it rather than grow it, I'd assume.

Yeah, that's a great comment. Absolutely. Which is why we've talked about a full launch next year. So we will be We'll be testing it pretty vigorously. And we'll have pilot stores. We won't just roll it out to the entire banner. It will be done in pilot stores that we think are more normalized than others, depending on their situation.

Okay. So with Giant Tiger gone, a lot of the markdowns are probably behind you. But you said you did have some markdowns. So where would we have seen those within the business?

Well, there's some... So the markdowns would, well, no, you're right. A lot of the Giant Tigers markdowns are behind us. But there's definitely some other opportunities where we've just had some misbuys. And so we take this opportunity. There is some money in the market to mark those down and not hold them on for any extended period of time. So we've been definitely more aggressive on clearing out less saleable inventory.

Okay. And I'll ask one more, and then I'll get back into you. But the PFD in Alaska was paid late in the quarter, and I'm wondering if you feel that you felt the full impact or the full effect of that payment in Q3, or do you think some of it slipped into Q4?

I think there is going to be some trickle over into Q4, but we did get a nice portion of it in Q3 for sure. All right.

Thank you.

All right, thanks, Michael.

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

Yeah, good afternoon. I just, Michael touched on a bunch of my questions, but I just wanted to follow up on the price optimization. Can you give us a sense, what parts of your assortment is this going to be focused on? I mean, I'm assuming food, but if you can be more specific, and then also roughly what percentage of your SKUs would be affected by this.

You're right in your first comment. It is a lot to do. It's in food. But as far as percentage or products, I'll leave that as a TBD. Surprise you with everybody else.

Okay. All right. Looking forward to that. Just with regards to... Northstar being a drain on gross margin in the quarter. Is that going to continue into Q4 or next year, or do you feel like you've pretty much addressed that downtime issue?

Yeah, I think we've addressed it. We've been looking and the team is continuing to get more productive. There was kind of an unseen event, a maintenance issue this year that was kind of a freak accident, I would say, and so we don't expect that to be a continuance ongoing. Let me rephrase that, I'm not going to use the word accident. It was an M&R item that came up that was, yeah, I guess I have to watch my terminology when referring to the airline. It was an M&R issue that came up with one of the engines. A rock, in fact, was sucked into the engine that caused a pretty serious expense. So let me just clarify that, Mark.

Yeah. Okay. Helpful. Thank you. And then just coming back to the topic of the impact or potential impact of lower government support payments on your business, could you just sort of help us understand the relative sort of magnitude of that? How much of that do you think you felt in Q3 versus what we should be expecting from into next year, because I think the impact will potentially be greater and potentially larger in the U.S. business, I'm guessing, but would just appreciate your perspectives on that.

No, it's a great question, and obviously it's something we think about often, but I think the impact actually is going to be in both markets, both Canadian and American markets, because the American Rescue Plan is now starting to tire, and so I think that You know it's depending on what happens obviously new variant and what kind of impact that and other variants might have on the the economy and on the you know the size of which we live. i'd say that we're thinking things are going to get back to a more normalized state next year, but what is a normalized state today if. it's a it's kind of changed the landscape, as we know it, so I think, as we know everything we know about the funding that's been presented to date, it is going to be a significantly less than it was this year. to what extent, depending on what they introduce next year, I can't really predict at this point.

Yeah, sure, absolutely. And would you have felt any of that in Q3, I guess maybe a little bit in your Canadian business? I'm not sure exactly, but expectations with regards to the timing of this and when this sort of starts to flow through, again, assuming that programs are not renewed or reinstated?

So you're asking me if part of our performance this Q3 was as a result of some of the drag or the overflow of the stimulus program? Is that what you're asking?

Yeah, exactly. Or basically, when all of this flows off and you lap these programs in both Canada and the U.S.?

Well, we do think that there's still a trickle-on process we suspect going into Q4 of this year. Much beyond that, again, back to previously commented, it's unknown to us at this time. Yeah. Okay.

And then I guess one question I just have, you know, sort of more broadly, you know, when you are looking at the stores where there is some more sort of, you know, that are located in regions where out shopping is easier, I think you commented that you're pretty pleased with how much business you are retaining. I'm just curious, you know, when you look at those stores or markets, is there anything you can glean with regards to sort of the composition of baskets or customer spending patterns that sort of informs how you approach, you know, your business in 2022? Yeah, Mark, definitely.

Well, first of all, we've got strong in-stock, so that's helped. Grocery, food, and beverages have been strong, so we're keeping more of that kind of center store shop in market. And it's really just being in stock and being at the right price. And this is kind of a runoff of some of the pricing work that we've done, call it at the beginning or mid-COVID era. So we have received a good reception there, and that intel will definitely – kind of inform more about how we move forward some of the price optimization, I'll call it, planning in the near future.

Okay, and then just my last one, I guess just related to your comments with regards to in-stock. I mean, you spoke pretty positively about your ability to navigate some of the supply chain challenges, but have you had situations where you've had disruptions that have potentially compromised supply? your in-stock position and potentially your sales, or do you feel like you've navigated this without any sort of material issues?

No, we've definitely been impacted, but I've got to say that there's been a lot of substituting. There's been a lot of pivoting, some called athletic buying, as far as looking for new sources, new suppliers. And that's part of the benefit even of having the many different regions that we operate in. I mean, we have a long web or a big web that we're able to kind of source from And the key is we're proving to be much stronger than the competition in all the markets that we're currently operating in. So that's been one of the big benefits for sure.

All right. Understood. All the best into the holidays, guys.

Hey, thanks a lot, Mark.

Thank you. The next question is from Neil Linsdale from IA Capital Markets. Please go ahead.

Yeah. Hi. Thanks, guys. Just to expand on that supply chain question, so across all your regions, you're performing better, I guess, than any of your competitors for our supply chain, and you're leveraging that into the rest of your network, I assume. Is that opening up any opportunities for supplying your nontraditional markets for other customers, I'm thinking, that don't have access to those types of supply chains or distribution?

Good question. Yes, I would say that there's been some opportunities in our B2B business that we've been able to capitalize on our supply chain. So that's definitely been a source of some of our incremental business and just joining and building new relationships with other groups that we expect to extend on beyond COVID. So yeah, the answer is yes, predominantly in some of the southern markets.

Southern markets. And you think that might be sticky after all these things are resolved?

We hope so. That's the intent for sure. I mean, you find out who your strong partners are in times of need, and it's the best time to build a relationship because they know they can count on us. So I hope that they do, to use your words, remain sticky and that we can kind of build that for the future.

Okay. And if we look at some of these remote communities, I mean, obviously like travel restrictions were to your benefit right at the beginning of the pandemic. How much has that completely really opened up and customers are willing to travel further to shop or do you think people are still sticking closer? I'm trying to figure out, you haven't really dropped off as much as I would have thought in some of your sales. So it's sticky, you're benefiting from it, but how much of it could still be lost as more restrictions are lifted?

Neil, that's the question. The key is now that we're trying to enlighten the customer experience with everybody when we have them in our store. So trying to take advantage of that and build that relationship. I would say a lot of the markets have been open and people have been mobile, but not nearly as much as they have called pre-pandemic. So I think it's really about while we have the attention, just really building the relationship and the customer experience with the community members. So that's really what we're focusing on. As far as what the quantum is, it's just not something I really can share right now because it's not really known.

Okay, fair enough. And if I can just finish off on the standard question. Labor, availability, restrictions, capacity in different regions, and if it's changing depending on which region we're talking about.

Yeah, I mean, you know, we have, let's talk about the southern markets, we have some stability. I mean, northern markets, it's definitely always been a challenge, let's say, and it's always been something we put a lot of attention to. We've It's always been a focus, but I'd say that we're focusing now more than ever, simply because I think it's going to be, you know, there's a battle for talent on for now, and there will be, I foresee, forever. So we've actually put a lot more focus into developing our employee experience. Just recently hired a chief people officer to do just that. Their role is to, first and foremost, to make the experience for all of our employees as delightful and fulfilling as we can. and it's also looking to make sure we can understand exactly what makes a great Norwester, if you will, and just really trying to get our story out there so people that are looking for the experience that we can offer them through our stores can find us. So it's something, I guess, Neil, in summary, it's something that we're very cognizant of. We're putting a lot of resource and time to it, and I like our chances. I think we have a great and very unique kind of story to tell, and it's just about getting it out there and ensuring we can not only attract but maintain top people to follow on our vision and our mission.

Have you had to do any appreciable salary increases in any specific regions or had to reduce store hours to accommodate or has it basically been minor tweaks and just employee morale and training and support?

We haven't had to close stores. When I say tweaks, I mean we're always ensuring that we're competitive with our compensation packages. So that's just a regular practice that we continue to roll with. And I would say that, no, we haven't, like we're open to it. In fact, we've done as of recent, we've been doing some market studies to ensure that we're on track. And I'm happy to say that we are. And we have a pretty unique value offer, obviously, so depending on where the stores are, there's a lot of ways that we can make it attractive for people to come and join the team.

Okay, thanks.

Thanks, Neil.

Thank you. Once again, please press star 1 for any questions. And the next question is from Michael Van Elst from TD Securities. Please go ahead.

Thanks. A few follow-ups. So your CapEx is going up. a reasonable amount next year. Can you give us some color as to what you're spending on differently this year or next year, the purses this year?

Well, there's obviously, I mean, with COVID last year, there's some catch-up. So a lot of it is getting some of the work done that we weren't able to do last year. There's also, you know, we have some exciting projects that we're working on that are kind of overdue and that we think are going to be great projects for us to kind of... drive the business, continue to sustain the business moving forward. We've got Alaska, obviously, we have our new stores that we're working on, and that was three this year, as you recall, and we're going to aim to do at least that next year. And we're just about to open, we're just in the midst of building our third store, concluding the build, and that'll be open before the end of this fiscal year. So, yeah, no, I'm very happy, if that's a question, I'm very happy with the capital projects that we are underway. A lot of it is – some of it is catch-up, and other projects are that, that we're able to conclude or, you know, come to some good – some strong agreements with some of our partners. And it's kind of worked a lot of its work that's been – let's call it long overdue. So it's all good quality work that we're looking to pursue.

How much would be maintenance versus growth projects?

Hmm. I'm trying to think off the top of my head, John.

I would say there's always a bit of growth, even, Michael, in the type of projects we do. Like our major store renovations would always have a bit of growth in there, so it makes it a little bit tougher to break out. We call it the halo effect. Yeah. But a good chunk of that will be... you know, sustaining, if you want to look at it that way. Dan talked about the new store growth in Alaska. That's certainly a driver. But a lot of this is predominantly sustaining. With the growth factor, though. Yeah, yeah. As I said, there's always a part of that. As opposed to pure new store, you know, growth.

Okay. Yeah. Yeah. You talked about a $24.7 million deferred tax liability. How much is still to be paid in the next six months?

Good question, Michael. It's come down substantially. I think off the top of my head here, probably our current run rate of taxes paid will continue into the fourth quarter. and then start to decrease in Q1 next year. I expect it to normalize. 2020 was exceptionally low for the reasons that we previously talked about. So that's the guidance I'll give at this point.

Okay. And then just finally, the NCIB, do you expect to be any more active on it this year than last or over the next 12 months, let's say?

I think we'll take a look at that. I mean, we implemented it last year. It was our first year in. You know, we've been, I guess, active in the market regularly, but on a modest basis. And I think that's, you know, we look at that. We look at that, our investment in the NCIB relative to other capital markets. requirements in the business, opportunities for acquisition, and dividend payments. So it really is a balancing act, Michael. So I wouldn't, I'd say, you know, from your perspective and from shareholders' perspective, continuing on more of the same. Yeah. All right.

Thank you. Have a great holiday.

Thanks. You too.

Thank you. Once again, please press star 1 for any questions. And there are no further questions. I'd like to turn the meeting back over to you, Mr. McConnell.

Okay. Well, thank you very much, everybody, for attending. Much appreciated. I do appreciate the questions. And same goes for us. We'd like to wish you guys a happy holidays and all the best in the new year. And I'm sure we will be speaking to you, and we look forward to it. So thank you.

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