North West Company Inc. (The)

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

Thank you, Dan. Thank you. 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 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 Forum and its MD&A under the heading Risk Factors. Dan?

Thanks, Amanda. Let me start by outlining the key highlights of our call today. Consolidated sales in the quarter increased 6% similar to what we've noted over the previous quarters, we continue to cycle through the COVID-19 related tail winds from last year. The inflationary cost pressures this year combined with the COVID-19 related factors from last year resulted in lower earnings for the quarter. That said, our overall sales and earnings trends remain positive compared to the third quarter of 2019. Okay, let me provide some color in terms of the sales for the quarter. items within the food categories. Sales on the international side increased 4.1%, led by overall performance in Alaska, which was mitigated with mixed results in the Caribbean and Pacific. Particularly, it's worth highlighting that the tailwinds came from two factors. One, our new stores in Alaska, and two, for person this year, which was about $1,100 paid late in Q3 of last year. And although this quarter is typically slower in terms of tourism, the year-to-date pickup and travel has had a positive effect in local economies like the British Virgin Islands. On the flip side, in certain territories in the Pacific and the Caribbean, we continue to cycle through the impact of income support payments from the American Rescue Plan last year, while tourism numbers are still below pre-pandemic levels. What was a common thread across all of our markets is that our customers have been trying to adapt the best they can to lower income support and higher inflation. All right, let me expand on this for We buy products from suppliers for resale, and so we're dependent on the prices they determine for the products. Although we continue to closely monitor all these increases and work with our vendors to minimize them, the fact is that around the world, these costs are all escalating. Second and more importantly, freight costs are also increasing. When we factor in higher fuel and transportation costs, That said, other factors affected the performance of our gross profit rate included changes in our sales blend and increases in markdowns as well as a shrink. The shift in sales from general merchandise to food has affected categories like seasonal and apparel, where we've incurred markdowns to clear some of the slower-moving merchandise. I'll just take a minute to talk about inventory here. The increase in our inventory levels is largely due to the higher inflation in our supplier costs that I just referred to and the impact of foreign exchange, which saw an increase in the quarter compared to last year. Overall, the increase in the inventory levels was largely in center store grocery and categories like motorized products and home furnishings that were impacted by the supply chain disruptions. Our expenses have also Given high fuel costs, our operations, teams, and all around the company have been practicing and bearing down on some of the energy conservation routines and practices. And this is just to help mitigate the impacts. But at the end of the day, we're still subject to an inflation of fuel costs. Expenses related to our new stores and operations were also a factor. Okay, now I'll give a brief talk. charter work bumped up the utilization of Basler's and our ATRs. Increases from fuel surcharges on both cargo and passengers were also a factor on the revenue increases consistent with what other air carriers have been doing throughout this inflationary cycle. I think I'll leave it at that in terms of the recap of key factors that impacted our results for the quarter. point out as a reminder that we had a $6.2 million after-tax insurance-related gain in the fourth quarter last year as well. In terms of the fourth quarter this year, the outlook continues to be uncertain, as we expect inflationary pressures to continue in the short term. Considering all these factors, our net earnings in the fourth quarter are expected to be lower than last year, but above pre-pandemic levels. Beyond Q4, There are some analysts that expect a recession next year, especially after the measures taken by the central bank to reduce inflation. The impact of a recession is difficult to forecast. However, our focus on food and everyday products and services provides us downside protection. As noted in our report to shareholders, the median In all, we're excited for the future of our business. We continue to open store new stores. In Canada, we opened two new stores this quarter, one in Little Grand Rapids and another in Shoshitsi, Labrador. In Alaska, we also opened two stores, and we expect to open another one before the end of the fiscal year. Overall, we've been getting great feedback from new communities where we're operating in, and they are all very excited to have a Northwest Company store. better in the communities that we serve. Now with that, let me open it up if there's any questions. 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 have a question, please press star 1 on your device's keypad. You also may cancel your question at any time by pressing star two. 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 Elft from TD Securities. Please go ahead. Your line is open.

Hi, good afternoon. Thank you. First question is on Canada. And looking at your same-store sales down 1.8, but then your revenues are up 2.7%, you said. How much of that is tied to the new stores? And how much of that is tied to NSA with the increased passenger business and the increased freight business, third-party freight?

Go ahead. Hi, Mike. It's John. Yeah, both of those were factors. We're not going to break out the individual components there, but they were both factors.

Okay. Can you say which one was more important?

At this point, it would have been North Star Air.

Yeah, I think the airline would have been the key, the bigger factor out of the two. Okay.

I pulled them over, Mike. Last quarter you talked about increasing competition, not allowing you to pass through some of the costs a little and fully at least at this point. Can you talk about how that competition has changed, if at all, from Q2 into Q3 and what you're seeing now?

Yes. As we're still taking a balanced approach, Mike, as I indicated, that said, the competitors are definitely increasing their pricing just with the environment as we're all kind of living and experiencing, and as I indicated, the significance of it in the north. If they weren't passing it on, I'm afraid they'd be out of business. So definitely there's more movement, and that's allowing, obviously, us to follow suit.

Okay, and so would you say that they're passing on a higher percentage of it now, or is it like... Because it seems like your costs have increased, your cost inflation seems to have increased from Q2 to Q3, particularly on the OPEX side. So are you seeing more, are you seeing like a similar amount of costs being absorbed, let's call it, from Q2 to Q3? Or did that decrease or increase?

I would say it decreases. There's been probably more pass-through. But what you are seeing, obviously, utilities were a major factor. So that's probably what you're seeing in some of that bump.

Okay. All right. And the utility increases and the other OPEX increases that we saw that propped up the OPEX expense this quarter, is there anything in there that is short-term in nature, or do you see all of this basically as the new the new norm and you've got to cycle through that?

I'd say it's probably the new norm that we'd have to cycle through. I don't know if you're not in Winnipeg, but it's minus 26 today, so heat is required.

All right. I'll leave it there. Thank you.

Thanks, Michael.

Thank you. Once again, please press star 1 on the device's keypad if you have a question. The next question is from Mark Petrie from CIBC. Please go ahead. Your line is open.

Yeah, thanks. Good afternoon. Just following up on that, the topic of cost versus being able to pass on price, just to be clear, this is still an issue, but it's not as significant as an issue as it was in Q2 or earlier in the year. Is that the right way to characterize it? Yes. Okay. So I guess sort of with regards to the sort of shifts in consumer behavior that you're seeing, and it sounds like that's accelerated based on your comments, I guess just confirm that that's true. And then curious if that's different in sort of the different markets that you operate in. And I guess, you know, that being sort of, you know, north and south and kind of, you know, remote versus just, you know, rural?

I'd say it'd be pretty consistent amongst all our markets. Everybody is looking for less expensive solutions in order to, you know, to feed their families or to sustain their well-being. So, yeah, I would say it's pretty, it's wide set. It's across all the stores.

Okay.

We're continuing to look at, you know, obviously solutions there. and the solutions would be lower cost product, whether it be some other branded items that we can pass on to sustain margin but then create a more effective solution for our customers. So that's work that's ongoing.

Yeah. That was sort of my next question, I guess, is just the status of private label within your assortment, the percentage penetration now. I'm sort of obviously specifically to food. The percentage penetration now, versus pre-pandemic and, you know, if there's sort of accelerated efforts to continue to grow that.

Yes, that is, well, as far as it is an opportunity that we're exploring because we do think it's, you know, it's, again, a considerable value prop to our customers. But as far as our ratios of penetration now versus prior, intuitively I would say it's, we got higher penetration now But as far as the quantum, I couldn't give you that.

Okay. And the margin within the general merchandise business, do you think that there's an expectation of a fluctuation within that based on the consumer behavior that you're seeing?

So I think there's a, sorry, could you repeat a fluctuation?

Yeah, I guess what I'm getting at is if people are shifting spending from discretionary to staples, does that affect your profitability of your general merchandise business or do you sort of, it affects sales and not so much margin?

Oh, it would affect the margin as well.

Yeah. Okay.

Okay. Sorry, no, go ahead. I was just going to say, as I indicated, like we have had to take some write downs on some of the inventory and, But there's others of which, you know, that it's planned, as we talked about before, particularly a big ticket. It's opportune time now. So we're ready and we're inventoried and ready for selling season.

Yeah, understood. Okay. Appreciate the comments. Thanks.

All right, Mark. Thanks.

Thank you. The next question is from Stephen McLeod from BMO Capital and Markets. Please go ahead. Your line is open.

Thank you. Good afternoon, guys.

Hello.

I just wanted to, just with respect to your commentary around acquisitions and new stores and things like that, just curious through the economic weakness that we've been seeing, and you cited as well in response to one of the questions about if people aren't putting through price, they're going out of business. Just curious if any potential acquisition opportunities have come up or accelerated over the last couple of quarters in any of your markets?

Yeah. No major acquisitions, Stephen, but there's definitely a lot of tuck-ins. We qualify that. There's definitely been some tuck-ins that I indicated to you earlier that we've taken advantage of, and we see there to be a few more that we'll be looking at over the next number of quarters. And our eyes are open, and we're definitely, we've looked at a lot of things, but we'll make sure that it's a strong, it aligns with our core competencies and our capabilities to ensure that we can add value or derive value from whatever acquisition we venture into. But I would say that there's no major acquisitions in the immediate future.

Okay, that's great. And then just with respect to the PFD in Alaska, do you think you realize the entire benefit from that in the quarter or is there some that may trickle into the next quarter?

We did drive a strong benefit in this quarter and typically it does trickle on into the next quarter. So I would say I would expect that we're going to still see some benefit from that in the fourth quarter ramping up for some of the holiday season selling events.

Okay, that's great. Thank you. And then maybe just finally with respect to general merchandise and your assortment, given the consumer spending shifts that you're seeing, I would assume that holiday is a big general merchandise period for you. So just curious on any changes you've made to your assortment planning for Q4.

Okay, that's Q4. Yeah, well, no way. Repeat the end of the question. Sorry, Stephen, if you could.

Yeah, no problem. So I was just wondering if you had any changes to your general merchandise assortment planning for the holiday period, given the shifts we're seeing in the consumer spending away from GM towards food.

No, I wouldn't say that I've seen any shifts currently. Purchases, we did scale down, as you recall, but we're expecting a the same trajectory on our general merchandise sales throughout Q4. That's probably the best way to phrase it.

Yeah, okay. No, that's helpful. Okay, that's great. Thanks, guys. Appreciate it.

All right, thank you.

Thank you. The next question from Michael Van Elst from TD Securities. Please go ahead. Your line is open.

Thank you. Just a follow-up on Q4. In the international business, can you tell us what the gross margin change was there?

No, I probably wouldn't. I wouldn't disclose that. I'll leave that for you to kind of take a look and hypothesize. You're usually pretty accurate.

The 84 basis points that you told us before, was that Canada or was that overall?

That was overall.

Yeah, that was overall. Okay. And then if you look at the change, the drop in the EBITDA margin in Canada versus what we're seeing in the international markets, can you kind of compare and contrast the main factors behind the margin contraction in each?

Well, I've identified kind of globally what the contraction items are for each. And I would say that the benefits, as I indicated, in the international were related to the PFD to the Alaska stronger performance. I think it's probably, that's the answer really. I mean, I outlined why we were stronger in our performances in Alaska and what the overall drags were on the operations. And I'd say you could attribute all those draws to not only some of the international markets that we had suffered in that regard, but also into Canada. The fuel surcharges we talked about Obviously, that would be considerable to draw the inflation, some of the higher, the inflation, some of the expenses. You can appreciate that fuel has this considerable impact, not only from the heating, but from the distribution and freight. So, I think that gives you.

And is fuel more of an impact in the north or in international?

North. Okay. Great. Thank you very much. The planes are less efficient than the ships.

Thank you. Thank you. There are no further questions registered at this time. We'll return the call back to Mr. McConnell.

Okay. Well, thank you. I appreciate the questions, and I hope everybody has a great holiday season, and we'll be busy focusing on driving sales. So have a great rest of the day. Thank you.

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