North West Company Inc. (The)

Please be advised that this conference call is being recorded. 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.

Okay, thank you very much and good afternoon and welcome everybody to the Northwest Company Fourth Quarter Conference Call. John King, our financial officer, joins me here today, so I'm going to start the meeting by asking you, John, 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 guarantees of future performance and are subject to certain risks. which could cause performance and actual financial results in the future to vary materially from those contemplated in the forward-looking statements. Any forward-looking statements are current only as of the date they are made, and the company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future results, or otherwise, other than what's required by law. For additional information on these risks, please see Northwest Annual Information Forum, and it's in MD&A under the heading risk factors.

All right, thanks, John. Okay, let's dive right into it. For the quarter, consolidated sales were up 1.3%, and net earnings increased by 2.5%. As mentioned in our Q3 investor call, softer growth was expected and also last year. Canadian operations continue to drive results in the fourth quarter, with same-store sales gains and another solid quarter by North Star Air. These results offset softer performance in our international divisions, which through 2023 faced less favorable macroeconomic conditions compared to last year, particularly related to lower SNAP support and a lower permanent fund dividend benefit in Alaska. In spite of these mixed top-line results, we are happy with the overall torque we are getting when translating sales into gross profit, which increased 6.7% in the fourth quarter and 171 basis points as a rate to sales. The increase in gross profit rate results from several factors. First, a greater pass-through of cost inflation and retail prices compared to last year. It is important to note that our retail pricing philosophy has remained consistent. and we continue to monitor and adjust prices using a balanced approach. With our customers top of mind and striving to maintain margins and sales volumes, competition in our markets has started to react and we are actively optimizing our key value items to ensure we have the most compelling offering in terms of value and availability on everyday products and services. Second, an improvement in execution with a decrease in both markdowns and shrink. And third, a shift in sales blend, including higher airline revenue and lower warehouse club to cost you less sales as a result of a store closure earlier in the year. On the other hand, selling Alright, so let me unpack these starting with the Canadian operations. Sales in Canada were up 4% in total and 3.7% on a same-store basis. These results are mainly attributed to three factors. First, our improving in-stock position on our key items in our assortment, which has enabled us to capture additional sales. We have been relentless in our focus on operational efficiency with an active focus on maximizing output across our supply chain. costs and ensures our store is And third, food inflation continued to be a factor, but to a lesser degree than previous quarters. In addition to the results in our retail business, North Star Air has benefited from greater third-party cargo and passenger charter demand, which contributed to another solid quarter of top and bottom line results. These factors, combined with an increase in gross profit rate, contributed to the strong results in Canadian operations in the quarter. On the flip side, headwinds in well-managed expenses. International sales in the fourth quarter decreased 2.6% and were down 2% on a same-store basis. As I mentioned earlier, U.S. territories where we operate. As noted last quarter, there was also a 60% reduction in the Alaska permanent fund dividend payment this year from around $3,300 to $1,300 per resident. There were some lingering impacts in Q4 from that reduced payment, and our customers pulled back the discretionary spending, which was reflected in our general merchandise sales performance. Gross profit increased 0.7% compared to last year, and expenses were well-managed operations in the quarter. This is a good moment to transition and expand on our consolidated gross profit results. As previously noted gross profit rate increased by 171 basis points in the quarter. Across both Canadian and international operations inflationary cost pressures on the last year while keeping a balanced approach in line with our values of being customer driven. Changes in sales mix driven by higher third party cargo and passenger sales at North Star Air coupled with improved aircraft utilization rates also contributed to an increase in gross profit rate during the quarter. To optimize and control our margins, it is instrumental that we have sound inventory management, so let me speak briefly about that. product availability is a top priority for our organization. We have intentionally increased sealant inventory in Canadian operations to leverage lower freight costs as we refine our transport mix and find better ways to make our logistics costs more productive while improving our in-stock levels on most relevant assortment for our customers. We have also increased our teams continue to focus on controllables as much as possible without compromising customer and employees. Okay, I'll wrap up my remarks right now by providing a brief commentary on our strategic initiatives and our outlooks. Our goal is to drive productivity and efficiency gains for costs Our strong in-stock not expected to replicate given the moderating inflationary trends mentioned previously. On the other hand, our international operations in 2024, we expect to lap the decline And I will now open it up for any questions.

Thank you. So we will now take questions from the telephone lines. If you have a question, please press star 1 on your device keypad. If at any time you wish to answer the question, please press star 2. And the first question is from Michael Van Alest from TD Securities. Please go ahead.

Hey guys, it's Evan in for Mike. I just had a few questions. So in Canada, you called out changes in sales blend as one of the factors driving a higher gross profit rate. Can you explain what that favorable blend was? Was it just lower wholesale sales or was there something else?

Yeah, lower wholesale sales is overall what one of the major impacts of. There's also North Star Air and general merchandise sales.

Okay. So I guess staying on the topic of North Star Air, is there still room for it to contribute more, or are you getting close to maxing out your third-party cargo and passenger capacity?

It's run pretty efficiently. We don't expect considerable growth out of that banner over the next couple of quarters, no. We think it's, yeah.

Okay, great. And so in terms of the drinking water settlement, I know it's difficult for you guys to know, as you mentioned in the outlook statement and on the call. But I think you mentioned on the call that you expect payments to continue to trickle in throughout 24. But can you give us any senses when the expectation is for those to ramp up or to accelerate? Is it in the second half of this year or is it in 2025?

I'd say late 2024 wouldn't surprise me and into 2025, but it's something that we don't have a scientific answer for you, unfortunately, or an exact kind of projection as to when that might be. But I would say later 2024 and even trickling into 2025 is kind of where our heads are at right now.

Is there any update that you can give us on the expected timing of the payments from the child settlement?

Not at all. We don't have any insights that we can share on that at this point. In fact, it's anybody's guess at this point. We expect probably to hear more as time goes on, but right now we don't have any more information that we've offered.

Okay, and maybe one for John. As for the potential minimum tax legislation, can you maybe give us a range or a ballpark estimate of the percentage of sales or earnings from operations that account for international from those three areas, so the Cayman, Barbados, and BVI combined?

Evan, I think I'm going to hold off on giving you an estimate on that for now. We did put some disclosure in our outlook and in our financial statements, but it's more directional on saying, listen, the global minimum tax pillar 2 is out there. There will be an impact. We don't expect... It's hard to tell right now when that's going to come into play, and as the rules and things get firmed up, then we'll provide some more guidance on the impact. But I guess I would summarize that by saying as well, we've identified the three markets, so they're an important part of our business, as all stores are, but in the whole context of Northwest, You have to take that in with the materiality of the size of the company.

Okay, great.

Okay, thanks.

Thank you very much.

Thank you. And the next question is from Mr. Stephen McLeod, BMO Capital Markets. Please go ahead.

Thank you. Good afternoon, guys. Good afternoon. Just a couple more. Good afternoon. Good afternoon. Just a couple of follow-up questions here. Just maybe starting with the gross margin. I mean, we saw gross margin kind of come back nicely as expected in the quarter. And it sounds like from your outlook commentary, you know, like a lot of those prices have been – a lot of that inflation has been past year. So I was just wondering if you could give a little bit of a color around sort of where you think or where you see gross margin kind of settling in as we work through the year.

Yeah, so – I wouldn't say that we've passed it all on, but definitely we've passed on more than we had in the past. I would say that I wouldn't expect it to be at the Q4 levels, but more on the annualized, more in line with what we have if you were to annualize our margin for the year.

Okay. Okay, that's helpful. And then just understanding the uncertainty around the water settlement payments. You mentioned that volumes are low. I'm just curious if you can give a little bit of color of what you're seeing in markets where you have seen the settlement payments coming through. If there's any sort of color you can provide around what impact it's had in some of those markets.

I'm not sure if this is going to be much help, but I can tell you that we're pleased with the capture that we've been able to obtain in the markets that has received funding as far as we understand the funding at this point. Hopefully that helps you.

Right, yeah. That's helpful. Not much different than we would expect, but that's certainly helpful. And then I know with last quarter, With the Q3 results, you kind of gave some directional guidance for Q4. I know that was sort of one time in nature, and you didn't provide any Q1 commentary, but just wondering if it's something you're able to give a little bit of color around on that one-quarter look-ahead type basis.

No, I don't. But I did that last quarter only because I was just trying to caution the market that we had such a strong third quarter and typically our fourth quarter was his stronger than the third quarter, but I just wanted to caution the market that that might not be the case given the strength of the third quarter. So if it was an anomaly, that's why I tried to give a bit of a heads up, but it's not something that we're looking to do on a forward-going basis.

Yeah, no, okay, that makes sense. That's kind of how I figured it. Okay, that's great. Thanks, Dan. Thanks, John. Appreciate it.

All right, thank you. Have a great day.

Thank you. So there are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Danny McCormick. Please go ahead.

Okay. Well, thank you, operator. And, yeah, thank you for all those that have joined us this afternoon. And we will look forward to speaking with you again for our Q1 call.

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