North West Company Inc. (The)

Welcome to the Northwest Company, Inc. Fourth 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, everyone, and welcome to the Northwest Company First Quarter Conference Call. I'm being joined here today by John King, Chief Financial Officer, and Amanda Sutton, our VP Legal and Corporate Secretary. I'm going to start the meeting by asking Amanda to read our disclosure statements.

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 statements. For additional information on these risks, please see Northwest's Annual Information Form and its MSDNA under the heading Risk Factors. Dan?

Thanks, Amanda, and welcome again, everyone. I'm really pleased with our results this quarter and excited about the momentum we're building. I'll start by providing you an overview of the key highlights in the quarter. Consolidated sales in the quarter increased 9.7%, driven by inflation, foreign exchange, and the new stores. Consistent with previous quarters, we continue to cycle through pandemic-related sales increases from last year, although the impact was less than in previous quarters. Customer shopping behavior has been following the same trend we've seen over the past few quarters, with a shift in spending to food and essentials and a decrease in purchases of discretionary general merchandise. And this is all as a result of the impact of the higher cost inflation. in previous quarters. Overall, net earnings were down marginally in the quarter, but adjusted net earnings, which excludes the impact of a large insurance-related gain last year, were up 17.9% compared to last year. With that overview, I will now provide some more color on the results for the quarter. I'll start with Canadian operations. In Canada, sales and to earlier. The increase in same-store sales was also due to higher inflation and government inflation relief payments combined with a good in-stock position. The new stores we opened earlier in the year also contributed to the increase in sales. We added a new store in Shishachi in Newfoundland and two new quick-stop convenience stores in Coral Harbor, Nunavut, and Little Grand Rapids, Manitoba. Overall, and with the support from NSA, which contributed to the sales increases. Speaking of NSA, in addition to the support they provided our retail stores, they also had a very strong quarter, and it was driven by high craft utilization of both cargo and passenger, an increase in the third-party cargo, and an increase in passenger volumes that also played a factor. we made in a large cargo door ATR in the fourth quarter last year, and this enabled NSA to offer cargo services for larger items. All right, let me switch gears and briefly comment on international. Sales increased 4.5% with new stores in Alaska mitigating mixed results in the Caribbean and the Pacific regions, similar to what we reported last quarter. Same-store sales increased 1.4%. We continue to see a similar story to Canada here, where a 3.7% increase in same-store food sales offset a 14% decrease in general merchandise sales as customers continue to shift spending to food, given less disposable income resulting from a combination of higher inflation and lower government income support funds. tourism has improved after the pandemic. And similar to Canada, some U.S. markets in the Caribbean and Pacific continue to cycle through government income support funds that were present last year but are no longer available. Now, a few comments on gross profit and expenses. Our teams have prioritized operational excellence to help mitigate the impact of inflation. Merchandise cost inflation has continued increases being passed on by suppliers. So when we factor in higher fuel and transportation costs, the impact of inflation on the shelf prices is even greater in the north compared to southern retailers, given the remote nature of our markets. Similar to previous quarters, expenses increased 6% compared to last year due to cost inflation, including higher fuel-based utility expenses and stock costs. The impact of foreign exchange on the translation of international operations expenses and new export store expenses. In terms of inventory, our levels are higher than last year. I will wrap up by saying that I'm optimistic about our journey ahead. Our history has proven time and time again that we're resilient. Inflation and lingering potential of a global macroeconomic slowdown are headwinds that will affect our outlook. Our core competencies and the essentials Looking forward, there are some potential tailwinds, including government transfer payments and higher infrastructure spending in the communities we serve. I'm optimistic about the future. There is tremendous untapped potential that we can unleash to drive efficiencies and grow. Opening new stores and new markets in Alaska and Canada has demonstrated our capabilities to bring to remote markets essential products and services that the communities we serve appreciate and value. Our conviction to our and on and optimize on our core capabilities in merchandising, operations, and logistics, and this is one of our top priorities. We will also continue with modernizing our technology to enable greater efficiencies within our business and provide scale and capability for the future. With that, let me open up for any questions, and thank you.

Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset prior to making your selection. If you have a question, please press star 1 on your device's keypad. You may cancel your question at any time by pressing star 2. Please press star 1 at this time. If you have a question, there will be a brief pause while the participants register. Thank you for your patience. The first question is from Michael Van Elst with PD Securities. Please go ahead.

Hi, guys. It's Evan standing in for Mike. Congrats on a strong quarter. I just had a question on gross margins. So in Q3, we saw your gross margins contract about 80 basis points year over year. In this quarter, we saw them contract only about 20. I would have expected that the high inflation in Q4 would have pressured the margins more than what we saw. Can you walk through some of the factors that changed in Q4 versus Q3 that prevented gross margins from coming down as much as in Q3?

Sure. There's two factors. We did pass on more to the customers, as obviously needed to be done, and also NSA. NSA also increased as a result. I told you there was higher... higher performance there. And given some of the charges, the fuel charges that we talked about, we did pass those on as well. So that's what led to that impact.

Okay, great. Thanks. And is there any change in the competitive activity? Are competitors passing on more than they were in Q3 as well? And anything you could talk to about that?

Yeah, no, I think that's absolutely, that's one of the enablers to allowing us to pass on some of our costs is exactly right, because a lot of the competitors are obviously feeling the pinch, I would say, as much if not more than we are, and have definitely taken first stride in raising some of their prices.

Okay, great, thanks. Looking at sales in Canada, you had mentioned government inflation relief payments as a contributor. Can you talk about when this started and when it's expected to finish and what level, what amount we're talking about?

Sure, Evan. Hi, it's John. What we're talking about there is the federal and provincial governments had issued various inflation relief payments is what we've called them. There was an extra GST. that vehicle was used. Several of the provinces and territories had additional payments. So those all added up to have an impact in the quarter.

Great, thanks. I'll get back into queue.

Thank you. Once again, please press star 1 at this time if you have a question. The next question is from Kunal Gidwani with CIBC. Please go ahead.

hi thanks for taking my question um so i wanted to know if you could talk about um out shopping and where does that stand right now versus a year ago and then pre-pandemic levels okay so as far as do i have i seen a significant increase in out shopping i uh i don't okay i don't think so and the reason being is because uh as i indicated a lot more uh

of people's money is going towards essential items. So I'd say that people's disposable that went towards more general merchandise, which is typically more out shopped, is prevalent. But if you're talking about previously, there is no restrictions in travel. So people that are traveling out of markets are definitely procuring out of market. It also aligns to the fact that it's, I guess you're probably in Toronto, but the season is a little longer right now as far as the winter road. So there's more out shopping than there would have been last year. So I'd say things are probably at a normal level as far as our out shopping, so a little bit more than last year for the reasons I mentioned. The winter roads are open a little longer, and I think people are definitely getting on a market more.

Okay, great. That's helpful. Thank you. And then my second question is on transportation. just kind of gross margins for the year. Given you're going to be lasting some pretty unfavorable gross margin compression, do you think just with the pricing that you're passing through in the market right now that we could probably see gross margin expansion as the year progresses, all else being equal?

I mean, that's... That's the hope. I mean, as you can see, we've definitely come around. We don't have a crystal ball, really, as some of the economic economies are so difficult as to understand what the inflation rate is going to be next year. We don't think it's going to drop as significantly as we would all like, particularly in the first half of 2023. But our intention and our hope is that we would see a gross margin or gross profit improvement on into the latter half of next year or this year.

Okay, perfect. And then my last question is, in the past, you talked about making selective price investments. And just given that you're passing more price through right now, how does that thinking in this inflationary environment impact that?

How did the thinking, sorry, just to follow up on your question, if you clarify. So how does the thinking of our past price investment impact impact the passing on of some of the cost increases today? Is that what your point is? Yeah, yeah. Okay, I would say that, the price investment is something that we do on a regular basis. So that's what I've explained I think over the last couple of quarters. It's simply, it's just a fact of regular retail operations. So we're always trying to work and negotiate on behalf of our customers. better pricing. It's been obviously more difficult over the last couple of years. We've tried to hold back on passing through all of the price increases, obviously, just given the fact that we work hard on behalf of our communities. But we are taking a more, we're optimizing, I would argue, a little bit more balanced approach. But in the future, we have a number of initiatives that we're going to be exploring to try and bring more value to our customers. And so this is kind of the work that I indicated near the end of my discussion that we're focusing on because obviously it's been a last couple of years. It's been about just procuring, getting, sustaining stock, managing, trying to keep employees obviously ambitious and optimistic about the future. But now that we think that the climate outside of COVID is somewhat normalized, despite the inflation and some of the macroeconomic measures that are coming our way, we think it's a great opportunity for us to look internally within our company and really put a lot more focus into the back office to try and optimize some more efficiencies and create some value that we can pass on to the customers and the shareholders, frankly, in this upcoming year.

Okay, that's perfect. Thank you very much.

Thanks.

Thank you. The next question is a follow-up from the line of Michael Van Elst with TD Securities. Please go ahead.

Hey guys, it's Evan again. So just a few more questions. So if you're looking at SG&A and excluding depreciation, you mentioned higher fuel-based utility costs and staffing costs. Are you seeing further increases so far this quarter in Q1 in that line?

Yeah, hi, Evan. We're seeing, like, for communities in northern Canada that, you know, pre-bought their fuel and was sent in, that that price is stable. But certainly other communities, we continue to see pressure on the fuel-related utility costs. You know, other costs that are in the business, you know, things like insurance costs. I don't recall whether we specifically called that out, but, you know, those costs are up as well. There is a general, I would say, inflationary impact that permeates through that SG&A, but those would be two items.

Okay, and how much of an impact was the lower incentive plan costs over here in the fourth quarter?

We didn't quantify that. They were down from last year, but that's just part of the factor.

Okay, great. Just from a seasonality basis, in a normal year, is it fair to say that Q4 is weaker than Q3?

Go ahead, John.

That's hard to say, Evan.

It depends on the transfer payments. It depends on the PFDs. It depends on the amount of money that is in market. You know, it's It's tough to say really conclusively. But it's definitely a strong market for us, for sure. Our strong quarter.

Okay, great. And then I guess just one last question. Can you talk a little bit about your decision to close the Curacao store and the relative size of that store versus other cost-less stores? And if there's similar... dynamics that are in play in other islands that may affect your decisions in those markets?

Yeah, not at all. In fact, it's a smaller store. It's always been a store that we had some concerns over. And so we were at a point where we didn't think that the way, you know, the optics looking at the market, the market conditions, we didn't think that it was the right place for us to be spending more resources, whereas we think there's other better opportunities for us to allocate our resources.

Okay, great. Thank you.

Thank you. There are no further questions registered at this time, so I will turn the meeting back over to Ms. McConnell.

Okay, well, thank you very much for the time today, and I appreciate it, and we'll see you next quarter.

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