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. First Quarter Result 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.

All right. Well, thank you very much, and good afternoon, and welcome everybody to the Northwest Company Fourth 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. So I'm going to start the meeting today 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 guarantees of 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 Annual Information Form and its MD&A under the heading Risk Factors. Dan?

All right. Thanks, Amanda. Let's start with an overview of our fourth quarter. As done in previous calls, we'll also provide a comparison on a two-year basis just to provide context to these results when it's relevant. So sales for the quarter increased 2.4% to $579 million, led by same-store sales and international. Excluding the foreign exchange impact, consolidated sales actually increased by 2.9%. Same-store sales were up 0.1% on top of a 16.8% increase in the fourth quarter last year. Our diluted earnings per share increased 12.7% in the quarter to 71 cents, and that's more than doubled the 33 cents from Q4 of 2019. Adjusted net earnings, which includes the impact of after-tax insurance-related gains and after-tax share-based compensation costs, increased 1.9 million, or 6.1%, compared to last year. During these last couple of years, our teams have really taken to heart and enterprising. During the quarter, government consumer income support funds continue to dwindle, particularly in northern Canada, and travel restrictions are less severe compared to what they were just last year. With a customer-driven focus, we have been able to retain and grow our market share in both our Canadian and international markets, in spite of this shift in tailwinds from COVID-19. We have focused on maintaining challenges. As an essential food service provider, our vendors do understand that we need to prioritize fill rates to guarantee food security in our communities. It hasn't been easy or smooth. We have felt This includes increasing our inventory levels compared to last year, as we take a more aggressive position in sea lift and winter road stores in Canada to navigate supply chain constraints and rising costs due to industry-wide inflation. In fact, we secured additional warehouse space, furthering our ability to move heavy products and optimize high-cube freight on the winter road network. All right, so having set the context, let's talk a little bit now about Canadian sales. In Q4, sales increased 1.5%. building on an exceptional sales gain of last year. Same Star sales were down 3% compared to a 21.2% increase last year. On a two-year basis, Same Star sales were up 17.7% compared to the fourth quarter of 2019. increased last year. That said, overall food and general merchandise same-store sales have remained strong over a two-year period, with increases of 15.7% and 25.1% respectfully compared to 2019. On the other hand, our international operations sales continue to have a healthy growth trajectory. In Q4, they increased 5.7% to $194 million and were up 16.4% compared to 2019. Same-store sales remained strong, increasing 5% on top of a 10.7% sales gain last year. Across the different international jurisdictions, a strong in-stock position also allowed us to capture sales. As I said before, this has not been smooth sailing. Supply chain challenges continue, but we've been able to be better in stock than our competition, which has allowed us to grow our market share. Higher SNAP payments and native corporation payments help drive sales in Alaska. And in our tourism-dependent markets, we are seeing a positive trend of revenge travel, although still well below pre-pandemic levels. Food sales in international were up 6.1%. sales basis. Similar to last quarter, supply chain issues and inflationary trends put some pressure on our gross profit, which actually decreased at 1.7% compared to last year due to a 134 basis point reduction as a rate to sales. The decrease in rate was primarily due to changes in product sales blend, particularly related to general merchandise sales and higher strength in markdowns compared Our gross profit rate in Q4 of 2020 was 266 basis points above 2019. Now, if we compare our 2021 GP rate to 2019, our fourth quarter rate of 31.9% is still 132 basis points better than 2019. So when we're considering all together, we believe this rate is within an acceptable range to deploy a more customer driven approach. That is what we're doing on certain key markets. with a balanced approach. to serve our customers. Excluding the insurance gain and share-based compensation costs, expenses decreased 0.1% compared to last year. All right, now let's shift gears and transition to talk about the performance of the airline. The passenger and charter-related business continues to recover compared to last year after the community travel restrictions experienced in 2020. However, this trend was somewhat impacted later in the quarter by new COVID travel partially mitigated the impact of the remote air carrier support program and Canada made emergency wave subsidy payments that we did receive last year. On the other hand the cargo business continues to perform well providing an edge against the competition to navigate the supply chain constraints as we use it to transport our own cargo to the stores. On top of that operations supported these results. Now, in terms of our short-term outlook, there are still uncertainties related to COVID-19 and macroeconomic implications as we continue to monitor the development of new variants, the lockdown situation in China, and the war in Ukraine. Forecasting in this current macro climate is difficult. than compared to pre-pandemic levels. On the near term, supply chain constraints will continue to challenge our operations. We expect that the current stock levels and in-stock focus of our teams will allow us to navigate this moving forward. We are encouraged with the positive trends of tourism and expect this to continue throughout the next year as tourism-dependent markets recover from record two-year lows on this front. Income support in our markets, particularly in northern Canadian and U.S. markets, will be lower We will also focus our efforts on continuing to capture market share. is built. I am confident that by aligning our business model to the value proposition we have for our people, customers, communities, and shareholders, we will be able to keep the great momentum that we have and position our Northwest company for success in the years to come. With that, I will now ask the operator to open up the call for any questions.

Thank you. We will now take questions from the telephone lines. If you have a question, please press star 1 on your device's keypad. Thank you. The first question is from Michael Van Oost, TD Securities. Please go ahead.

Hi. Good afternoon. Good afternoon, Michael. A couple of other questions. So just to start off, your 2022 guidance where you say you expect your EBITDA to decline year over year, it's not – clear to me whether you're talking about adjusted EBITDA or just reported EBITDA because you do call out the insurance gains as a key reason for the drop.

Yeah, it would be reported, Michael, or reported EBITDA. And I don't think we said, did you say year after year? We said next year.

Year over year, yeah, so 2022 over 2021.

Yeah, yeah, that's right, yeah. Okay, and do you

Care to comment at all on adjusted EBITDA, since that's what people focus on more?

No, we typically don't comment on adjusted EBITDA.

All right. You mentioned that you're a little staticky there on your comments, but they're pretty thorough. You did mention gross margin of 31.9. Did you say that that's the better level going forward, given your balanced approach?

That's correct.

Yep. All right. Um, so I guess when you, when you look at the, um, you know, the in-market spending increase that you got during COVID, you know, some of that was forced upon consumers during COVID, but you know, some, how much of that do you think has turned more permanent considering your better pricing and your in-stock positions?

That is a, that's a big question. Obviously we're, uh, We're expecting to be more than less. I mean, we think we have some great momentum behind us, Michael, and we're going to continue to keep our customers' trust that we've gained over the last two years. But it's really hard to put a number to it, especially with all the volatility in the markets now with all the things that are happening. So it's really tough to quantify.

I guess as you... I've seen the travel restrictions come off at different times over the past couple of years, and I don't know if they're starting to ease in the north now, but are you starting to see any kind of leakage in your market share?

We are starting to see – yeah. Sorry, go ahead, Michael. I didn't let you finish.

Sorry, just – yeah, mostly back to destination shopping, I'm assuming?

Yeah, exactly. No, you're exactly right.

So you are starting to see it?

Yeah.

All right. All right, and just finally, before I get back in the queue, there was a comment on acquisition opportunities in your outlook in the annual report, and I'm just kind of curious what type of businesses you're looking for and what geographies are your focus?

The same type of markets that we operate in today, and they would be predominantly retail, if that's the nature of your question.

Okay, so just standard, like, food retail, general merchandise retail? You got it. Okay.

Yep.

Are you more interested in filling in some holes within your Caribbean, Koshuas-type markets, or more so in the north?

If you ask more interested, currently more in northern territories, simply because that's where we see the opportunities present themselves. So that would be in Alaska and in Canada. Perfect.

All right. Thank you.

Thanks.

Thank you. The next question is from Mark Petry, BIBC. Please go ahead.

Hi, good afternoon. This is Camille Fillion from Mark. Thanks for taking our question.

No problem. I was going to say that doesn't sound like Mark.

No. So given the various elements of your company, could you talk about the impact of higher oil prices on your business? So you'll have higher freight costs impacting the airline, but then a boom to the Alaska economy. So can you share with us how you're thinking about that through the course of 2022?

Okay, it's good. Obviously, we do, and as I indicated in my discussion just earlier, we do and have tried to pre-purchase a lot of our product to the extent that we could, just given our concentration on Winter Road that was just, I guess, coming to an end now. So a lot of that product has been accounted for. As far as the – it's going to be, you know, obviously the same impacts of it in the inflation in the oil that we see right throughout the entire market. But when I look at the Alaska example, typically the higher price of oil has a positive correlation to the economy and the market in Alaska. So that could be an opportunity for us, obviously. And we don't know what the PFD, for example, is going to be. But we think that it could be a positive gain for Alaska as far as their economy is concerned. And everywhere else, we think it's going to be a bit of a drain on the business. So there's a bit of a hedge. We get a checkmark in Alaska, and we obviously in some of the other markets, it's something that we're going to have to work through. As we've had some hedge just by nature of our business of pre-fining our product before, The increases came through, but then later on in the year, it's something that we're going to have to mitigate.

Okay, great. That's helpful. And then as a follow-up, can you comment on the price optimization initiative and how they've been progressing? And also, what has the customer response been so far, given the previous question about more drainage from in-market shoppings?

It's too early to really raise our arms, but I can say that obviously, as I indicated, it's going to be something that we test. We've had some wins, but we are by no means at a place where we think it's a blanket rollout that's going to have, as of today, it won't have a significant benefit, but it's definitely our outlook and our expectation is that it will have a significant benefit as we continue to build that competency through the latter half of 2022.

Okay, great. That's helpful. Thanks very much. All right. Thank you.

Thank you. Once again, please press star 1 on your device's keypad if you have any questions. And the next question is from John Vincent, RBC Capital Markets. Please go ahead.

Hi there. Good afternoon. Congrats on the quarter. I just had a quick question on capital allocation. On the $120 million of CapEx for next year, Should we expect to see that go entirely to store new builds? Where do you see that going next year?

Well, there's a mix of different projects in there. Some of it is through the acquisitions that we talked about in Alaska Commercial Company. Some of it is some new store rebuilds, and a lot of it is actually to renovating existing under, I guess you can call it, plants or facilities that are in need of investment. So it's kind of a really good kind of hedge or mix of all those things.

Okay, got it. And then just on inflation more generally for the business, I understand the sort of ongoing pricing optimization efforts. I'm just wondering if there are any other levers in the business that you see as a good way to deal with inflation, maybe on the cost structure you mentioned? There were some winds of sort of costs being down a little bit year over year, but just wondering if you have any thoughts on that going forward.

You know what, obviously our cost optimization is something that we think about regularly. We do have some initiatives that we're well into to try and reduce some of the drainage costs on our business, such as our shrink, increase our turns, and obviously through some of the programs we develop in our labor to make our labor much more efficient and effective. So I would say amongst those triggers, we're hoping that we can offset, I wouldn't say entirely for sure, but take a chunk out of it and just create that thrift throughout the entire chain as everybody feels the inflation. This isn't something that's just exclusive to industry, obviously. People are feeling it individually in their homes, so it's no surprise to anybody. So yes, we do have initiatives that we've coincidentally started. and are well underway to be able to optimize some of our expense reduction.

Got it. And then maybe just one more for me, since you mentioned labor, just wondering, um, you've heard from some other retailers that, you know, they're having trouble, uh, attracting, uh, attracting talent and retaining, uh, you know, labor within their stores. Just wondering if you're seeing any of those impacts or has that kind of been a non-issue for you so far?

Um, I wouldn't say it's, uh, This is always a big struggle that we have, so it's something that we put a lot of time and attention to. We have a pretty unique offering, so we try to cater our applications and the people that fit the experience that we have to offer. So yes, we do definitely, we are preparing for it. We have felt it, not too much more than we do typically, but we have some pretty significant plans through our people strategy that we're trying to... Combat, just churn as it is. We're trying to keep more people, increase the value proposition for our employees, getting more creative as to how we offer that. And so it's a high focus for us. But as of right now, it's been no more than, not significantly more than it has been in previous years, keeping in mind that it always is a challenge for us.

Well, congrats on the quarter once again. Thanks very much.

Hey, I appreciate it. Thanks.

Thank you. The next question is from Michael Daniels, TD Securities. Please go ahead.

I just want to follow up on some of the cost comments that you made, because I think a number of them were tied to offsetting some of the cost of goods sold inflation. But your SG&A was flat year over year, excluding the stock-based comp and the insurance gains, and that's pretty impressive. you said you decreased your incentive plan costs, but you added a higher store count. So can you kind of discuss the underlying inflationary pressures that you're seeing in OpEx and how you're offsetting them? And then how could this outcome differ, if at all, in 2022?

Okay, so there's a couple of questions there. So your first question is, how we were able to offset costs. There was a lot of COVID-related costs. There was not as much, obviously, in 2020, but we did kind of rein that in a little bit in 2021, despite the incremental payment that we gave our frontline staff. But otherwise, there wasn't nearly the expense, obviously, there was the 20 and 20. As far as how we're mitigating costs, inflationary costs moving forward. I think it's the same as everybody. We're trying to, on one part, we're being very selective on what we pass through, obviously not trying to keep gross profit dollars strong, but obviously at some point to the extent of the rate. As far as really offsetting some of the other inflationary pressures, it's trying to look at different mix. We have some different programs. We have different programs on the type of product that we're selling. We're creating more solutions, less expensive solutions, whether it be private label or other such items that we might be looking at to try and create some choices for our customers. We do have initiatives that are controlling labor. Our labor optimization has been a big one, as I mentioned to the last question. So that's probably one of the bigger cost-effective measures that we're looking at this year, I'd say, in labor, and then creating trying to avoid some of the inflationary pressures by finding solutions for our customers in the private label kind of sector and lower cost alternatives.

Okay. And then on NSA, you talked about the large cargo door, ATR. And in your annual report, you also mentioned that it's kind of a being used as a proof of concept. What are you looking at in terms of metrics to determine if it's successful? And if it is successful, what would that mean for either future fleet expansion or upgrades to what you have now, like swapping out, things like that?

Okay, there's two perspectives there. There's a premium because of its uniqueness and the lack of supply for this type of equipment. So for construction materials, other larger size cargo, this is an option for that. So you'd get a significantly better margin. And there's also an efficiency play when dealing with northwest freight. In fact, it's kind of along that same line that I was speaking about earlier with the labor optimization. There's significant labor savings in the side door on how it interacts with our supply chain and with offloading. into our stores. So those are the efficiencies and the KPIs are correlated to basically identifying the outcomes of those two hypotheses, if you will. So really cargo utilization efficiencies and just market value for having such an asset.

If it continues to be successful, would you be thinking of swapping some of your existing ATRs into these large cargo door units, or would you be just adding more planes?

No. Well, no. It would be the prior. It would be a conversion of some of our ATRs into optimizing with a larger side door. I mean, unless – hey, look, if demand – spiked to a point that there was more demand that I forecast, then we wouldn't be adverse to getting another plane to satisfy that demand, but I don't see that happening. That's not our current thinking.

Thanks very much, and good quarter, good year.

Hey, thank you.

Thank you. We have no further questions at this time. I would now like to turn it back to Mr. McConnell. Please go ahead.

No, I think that's all I have, operator. So thank you, everybody, very much for attending. And if there's any further questions, obviously everybody knows where we can be reached. So please give us a shout.