North West Company Inc. (The)

This conference is being recorded. Cette conférence est enregistrée. All participants, please stand by. Your conference is ready to begin. Please be advised that this conference call is being recorded. Welcome to the Northwest Company, Inc. First 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 morning. Welcome to the Northwest Company's first quarter conference call. I'm joined here today with John King, our Chief Financial Officer, and Alexis Cloutier, our VP Legal and Corporate Secretary. I'm going to start the meeting by asking Alexis to read our disclosure statement.

Thank you, Dan. Before we begin today, I remind you that certain information presented may constitute poor-looking statements. Such statements reflect Northwest's current expectations, estimates, projections, and assumptions. These forward-looking statements are not guaranteed with 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. Any forward-looking statements are current only as of the date they're made, and the company disclaims any intention or obligation to update or revise any forward-looking statement, 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's annual information form and its MDMAs under the heading Risk Factors.

Brief overview of the results for the quarter, followed by some additional insights on our Canadian and international operations. Finally, I'll wrap up with a few comments. Okay, so let's dive right in. We've had a positive start to the fiscal year, especially considering that we're comparing to a very strong first quarter last year. The sales in the quarter were up 3.9%, and net earnings increased to 2.2%, which is on top of the 22.3% increase last year. These results were driven by savings from our sales gains and an increase in gross profit rate, largely due to changes in sales went and lower markdowns. largely related to an increase in share-based compensation, resulting from a higher share price and an X100 for ground costs. Let me briefly explain on the consolidated results. So both Canadian and international operations contributed to a strong top-line performance, which was driven by a solid same-store food sales gain of 4%. Gross profit dollars were up 0.2%.

data-driven promotions as a part of our Next 100 worth.

Expenses were up 8.7% for the work, or 120 basis points, as a rate of sales, primarily due to higher staff and technology costs to support the Next 100 worth. Combined with an increase in depreciation and the impact of foreign exchange on the translation of international expenses, this increase in expenses includes a $2.1 million in one-time costs These one-time costs were offset by the financial benefits from our Next 100 initiatives, including more effective promotions, a reduction in print media, and other cost savings initiatives. We are also seeing store labor productivity gains, which is lower in stores than the percentage of sales. The net impact of all these factors resulted in solid bottom-line results, with net earnings increasing 2.2% in the quarter, which is on top of a 22.3%, net earnings in the first quarter of last year. Adjusted net earnings, which exclude the impact of share-based compensation and Next 100-related one-time costs, increased 14.2% compared to last year. In that overview, I will unpack these results, beginning with our Canadian operations. Overall, we're pleased with the results in our Canadian operations, particularly with fact that we are comparing to very strong results in the first quarter of last year.

Top line perspective, total sales in Canada were up 2%, led by sales gains and the impact of the resource.

Breaking this down further, food sales increased 1.9% Today, in the context of our outlook, general merchandise and other sales increased 2.2% compared to last year, as higher pharmacy and retail fuel sales more than offset softer general merchandise and same-store sales. Payments to individuals from the First Nations Drinking Water Center continued in the quarter, which is largely comparable to last year. In terms of gross profit dollars, Canadian operations increased 5.1%, Similar to Q4 last year, the change in sales blend also included higher sales from food service and our crush departments. The improvements in markdowns and keeping more effective data driven promotional activity as part of our Next 100 initiatives were also factors. The impact of these sales gains and increasing gross profit rates were more than offset by higher expenses due to the Next 100 and share based compensation costs and other factors that I mentioned. The net impact of these factors was a 6.2% decrease in Canadian operations EBIT for the quarter, compared to a 20.9% increase for the first quarter of last year. That said, adjusted EBITDA, which excludes the impact of the one-time next 100 costs and survey compensation expenses, increased 5.8%, which is on top of an 11.3% increase in the first quarter of last year. Moving on to our international operations, our international operations delivered very strong results with both sales and earnings gains. Same-store sales increased 2.8% in coal-driven by same-store sales gains of 2.6% in food and 5.2% in general merchandise. Favorable economic conditions in certain Korean markets driven by improved tourism season more than offset headwinds. markets. Gross profit increased 5.4% due to higher sales and an increase in gross profit rate, mainly related to the change in sales when, including the impact of lower wholesale sales in Alaska, and higher market-driven gross profit rates in certain Caribbean locations aligned with improved economic conditions. The impact of higher sales and an increase in gross That overview of our first court results, I'll now briefly talk about the outlook, provide a few comments on the Next 100 program, and then we'll finish off with some commentary around the wildfire situation in Irvington County. We provided commentary on key factors that we expect to impact our outlook in the first report circles, so I'll briefly highlight only a few of the items. With respect to tariffs, we have started to see and there continues to be uncertainty. As we noted in our outlook, on March 21, 2025, the Government of Canada announced that it would extend the funding for the Inuit Child First Initiative until March 31, 2026, to support continuation of the program. Both Canada and Inuit partners work together on the development of a long-term approach child-specific claims. This change is expected to result in a reduction in the distribution of funding to individuals compared to the ICFI food voucher program in 2024, which provided much broader access to nutritious food for inner children. It is uncertain currently regarding how long this change in distribution of funding to individuals will last or if the ICFI food voucher program that was built in 2024 will resume. As noted in our report to shareholders, we continue to focus on driving operational excellence and cost efficiency across our business and deliver further value for our customers, our employees, and our shareholders through our Next 100 program. As part of the Next 100, we continue to refine our product assortment and have begun rolling out an expanded private label offering in our Canadian operations. We also continue to implement as well as enhanced labor optimization processes that are resulting in cost savings and improved efficiencies. We are pleased with the progress to date on the operational improvements for our business and the financial results for our Next 100 program. However, there is still a lot of work to do as we embedded operational excellence in every aspect of our business. as we have done in the past. These one-time costs are expected to be fully offset by the annualized incremental EBIT from the initiatives. Before I open the call for questions, I would like to comment on the wildfires that are having a devastating impact on Northern Canada. Our thoughts are with all those who are impacted, and I want to take a moment to thank the firefighters, community leaders, and all those working tirelessly to protect residents of our company. That operator would now like 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. 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 participants register for questions. We thank you for your patience. Our first question is from Michael Van Ilst from Phoebe Cohen. Please go ahead.

Yes, hi, good morning. I have a few questions for you. First of all, regarding the wildfires, you noted, you know, four communities have been evacuated, ten semi-evacuated. How many communities does Northwest operate in northern Canada or in Canada in general?

About 140, Michael. 140, okay. So this is roughly affecting 10% of your sites? Yep. Okay.

And should we just assume that sales at these locations are next to zero for the short term?

Minimized for sure, but, you know, obviously the 10 stores that are open, are servicing some of the emergency workers and the few people that are still in community. So I would say, yes, it would be significantly reduced, but then also keeping in mind that a lot of the people that are in community go over to adjacent communities or other communities within a certain radius, and those stores would be positively impacted. But at the most part, it's definitely got a negative impact on our sales, and it would be significantly less.

than what would be the normal case. Okay.

And then with respect to the water settlement payments, I just want to clarify the way you've termed it or worded it. So are the payments to individuals less in 2025 than in 2024, or is the growth rate you're seeing from those payments less?

Correct, the growth rate. So I'd say it's about on par, but we anticipate if you were to model it out for the year, that it would be probably, we anticipate it would be slightly less than last year.

The growth rate or the revenues? The revenues.

Okay, so the actual payments to individuals is down year over year when it comes to this water settlement. anticipating that for the remainder of the year like when you once you analyze uh annualize it you actually expect it to be less than it was last year the revenue of the payments okay so when you take into consideration you know the water cell payments being lower um the the food measure program somewhat on pause or or limited for now um and um and some of these wildfires. The comps look like they get easier the next few quarters, but do they actually, given these year-over-year changes?

Well, you've raised a good point because there's a number of unknowns there. However, we continue to remain optimistic, and the things that we can control, we're definitely building momentum on. But, you know, particularly towards the ICFI payments, I know there's a lot of talk and a lot of escalations from the energy community that are unsatisfied with the way that things are sitting currently. So as it's not, you know, they believe and we would agree that it's not reaching and having the impact that I think they would like it to have. So we're hopeful that that will work its way out to be – more similar to 2024 than where it's at currently. As far as the wildfires, it's anybody's guess as to what's going to happen there. We'll just continue to stay on guard and hope for the best. But the things that are within our control are moving in the right direction. And, yeah, so we're remaining optimistic.

Given the amount of variables that are out there right now, is it Can you comment on what you're seeing quarter to date in Q2 so far in terms of your sales, same-store sales, and whether they've remained positive or in Canada?

You know, we don't typically do that, but I will say that obviously, you know, as per your first question, the wildfires are having a negative impact on sales, particularly in Manitoba. It's impacting, you know, up to 10% of our stores. Excluding that, you know, it's still fairly early in the quarter. But like I said, we're continuing to drive forward. We'll remain optimistic until the end of the report, obviously more as we know it. If anything material happens, then we would obviously report that as well.

Okay. I'll pass on to someone else. Thank you. Thank you.

Thank you. The following question is from Stephen McLeod from Diablo Capital Markets. Please go ahead.

Thank you. Good morning, guys. Good morning. Good morning again. I had some questions along the same lines as Michael had, but just wanted to ask about the Inuit Childbirth Initiative. So, If I understand it correctly, is it meaningfully paring back the programs that provide access to nutritious foods? And, you know, are there any kind of stopgap measures in the interim?

I mean, how should we think about the impact of that to, you know, food central sales growth, which is quite strong in the quarter?

No, nothing currently. But, yes, it has. slowed down and it's, uh, it's taking a significant turn than where it was last year. Uh, however, uh, like I said earlier, you know, I know there is a lot of, uh, there's a lot of energy that's being put towards getting it more back to a state that has the impact that it has in the past. As they see, there's a significant gap in the, uh, in the availability of it for people that need it. So, really, that's all that we really know right now, but it's, uh, There's nothing that we're aware of that we could report really other than that. And I wish I had more for you, Stephen. You can appreciate that our ears are closed to it and obviously we think it's the right thing to do. But it's just not something that we've been able to get any more insights on other than what we shared with you. Yeah. Apparently.

Okay. Okay. No, that's fair and understandable. Okay.

Just with respect to the larger First Nations Child and Family Services program payments or program that's coming through, you mentioned in the press release that you expect payments to be distributed into Q1 of 26. Previously, the wording was kind of late 2025. Do you have... very good visibility into that? Is there something changed with the program or the application process just to give you insight into those payments beginning to flow through early 2026?

No, other than the fact that we think it seems to be executed a lot better than the drinking water settlement. There's a lot more visibility. There's a lot more commercials, for example. I think there's a lot more structure and transparency to it and I don't think it's quite as complicated as the drinking water settlement payments so I think we're still on the same track as far as when we think it's going to hit the markets but we don't have any other insights to tell us that it will be any sooner but from what we see we don't think it should be delayed any further based on what we see but as you know these government programs are not always as transparent as we'd like but however Everything we've seen so far looks like they're doing things right.

Yeah. Okay. Okay, that's helpful. Thanks, Dan. And then maybe just finally, just in terms of North Star Air, I was just wondering if you could give a little bit of commentary on the performance of the airline in the quarter, and then, you know, are routes being impacted by the wildfires as well?

No. In fact, yeah, North Star Air has had a You know, a good quarter. It was on expectation. And, yeah, we don't – there's been no negative impacts as a result of the fires so far. If anything, it's allowed us a little more flexibility to help people and communities out, given the flexibility, given, you know, obviously the fact that we control the metal that is under North Star Air. So, no, nothing – As I say, the status quo is delivering what we anticipated and expect.

Yeah. Okay. That's great. Thanks, Dan. Appreciate it. No problem.

Thank you. Following question. Once again, please press star 1 at this time if you have a question. Our following question is from Nishant Ratti from CRBC. Please go ahead.

Hi. Good morning. This is Nishant on behalf of Tech Orleans. Thank you for taking my question. Ma, I'm very sorry to hear about the communities affected by the wildfire and we hope that everyone is staying safe. I just wanted to check back on the wildfire because I wanted to ask if you've seen any other financial impacts on the wildfire, such as physical damage to the store or inventory as a result of the fire.

Thank you. Great question. I think I've heard you properly said that there are other financial impacts as a result of the stores through asset damage or inventory. I'd say slightly we absolutely, you know, obviously we, the stores that were evacuated, we donated a lot of the product, all the product that was perishable to ensure that people had food and nutrition at this point in time. Thankfully, there's been no damage to any of our assets at this point in time so we're staying again optimistic on that and really there's been no major impact on any of the assets financially or other financial implications other than the loss of sales obviously and some of the inventories that we had to donate.

Got it. My next question is regarding, you mentioned that you are seeing better promotional tactics under the Next 100 strategy as one of the prime observers of margin improvement this quarter. Could you provide a little more detail on some of the changes that were made? And is there still more room for improvement from a promotion perspective?

Yeah, absolutely. We've adjusted the guardrails as far as how we value the promotions, taking a different, more of a financial lens to say, are these promotions, are the customers finding them beneficial? So in other words, are they moving the needle? So we've done a lot of analytics to understand what people like, what makes a positive impact, obviously, for our customers, and what fills the baskets as a result of some of these promotions. So we've done away with promotions that are maybe not sizable and that don't have a financial upside for Northwest. And just playing around with different algorithms, we've been able to kind of come into a more productive manner where we have more green promotions than red. And obviously, once we identify the red ones, we're discontinuing them. And it's really just about how we, you know, how the amount of investment and the amount of response from the customers and just having the insights to analyze that and then replicate the good behaviors and basically terminate the bad. I know that's pretty high level, but it gives you a bit of insight as to how we're viewing the business and how we're drawing conclusions as to what is a good promotion and bad and how we're repeating good behavior and stopping bad behavior.

Got it. Thank you. And another question I wanted to ask was regarding the general merchandise. They look like general merchandise sales in Canada are still raised compared to the quarter. So what drove that change, and is there anything to call out there in terms of consumer behavior?

Yeah, sorry, could you repeat that question?

Sorry, I just wanted to know.

No, that's okay. There's a bit of an echo in my room. That's the only reason why. Say that again, sorry?

Yes.

I think you said, what is the reason for the general merchandise swing from last year, this quarter, to this year? Is that right?

Yes. Anything particular to call about that in terms of consumer behavior? Anything to call on those two things? Thank you.

Okay. No problem. In fact, yeah, like I said, there was a considerable pickup in the perishable programs, like our food service and our fresh, which is actually... because it's where we put a lot of focus, especially with our labor programs, with reallocating labor to more areas of just being smarter. When I talk about our kind of data-driven approaches, it's really understanding where our efforts are within the store and how we can reallocate dollars to the more productive areas. And so that's been great because it's allowed us to drive a lot more fresh and perishable product. Obviously, it requires... more direct labor, and we've been able to kind of capture some of those activities that have allowed us to drive that business. On the GM side, you're right, it was not as strong, obviously, as last year. Last year, we had a pretty sizable pickup, and we think it's probably a result of a shift of dollars with the food drawing in more, maybe not having some of the other money in the market that we anticipated or that was there last year potentially, that that probably has an impact. We don't see this concerning, though, and it could just be a shift within the season. People have stocked up. We had some strong general merchandise sales in the previous quarter, so we don't think it's anything material. It's just a matter of consumer choices and seasonality, the weather.

Got it. Thank you so much. That's all from me. I'll leave it for someone else.

Thank you. Our following question is from Michael Van Elst from TD Cohen. Please go ahead.

Hey, just one follow-up question. On your next 100 program, I'm curious how we should expect to see the benefits of that program ramp up and when we start to see a full run rate.

2026 is where we think the maturity of the program is going to be. John, I'm looking at the plan. Is it 75% there? Yeah, so 2026 should be where we can be a lot more clear on what that run rate is. So I'd say 2026 we'll be able to. kind of give you direction on, okay, this is the trend, this is the trajectory, we're on track, and this is what we can expect on a forward-looking basis.

Sorry, are you saying that as we enter 2026, you'll be able to give us an idea of how significant or how material the incremental savings can be, or you think that by the time we enter 2026, you'll be at that run rate and you can point to it?

The prior. I mean, they'll be both, but I think the prior. We'll be a lot smarter. We're running a number of pilots. We have 70 stores, for example, right now under a certain pilot. And as well as a number of other tests that we're doing and we're seeing and experiencing some benefits. But I'd say by, yeah, 2026, we'll be able to give a lot more. Later at the end of 2026, we'll be able to give more definitive results I was lucky as far as how this program has matured.

So do you expect to see, like you saw some benefits in this quarter from the next 100. Do you see that ramping up steadily through the year and then also at some point as you go through 2026 until you get to your peak run rate? Yes. Yes. Okay.

All right. Thank you.

Thank you. Once again, please press star 1 at this time for any questions or comments. And we have no further questions at this time. I would now like to turn the meeting back over to Mr. McConnell.

Okay. Yeah.

Before I close up, actually, I just wanted to remind the shareholders of our virtual annual general meeting, and that's going to be later this morning. So I'd love for you to attend that. You'll get to see a little bit more real-time or real exposure to some of the impacts of the Next 100 on employees. Other than that, I appreciate your attending today, and I hope you have a great summer, and we'll speak to you again in September. Thank you very much, Alfred.

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