North West Q1 2024 Earnings Call Transcript

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June 5, 2024

There are 8 speakers on the call.

Operator

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.

Operator

Mr. McConnell, please go ahead.

Speaker 1

Okay. Thank you very much and good afternoon and welcome to The North West Company First Quarter Conference Call. John King, our Chief Financial Officer joins me today And I'm going to start off the meeting by asking John to read our disclosure statement.

Speaker 2

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 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 as of only the date they are made, and the company disclaims any intention or obligation to update or revise the forward statements, whether as a result of new information, future results or otherwise, other than what's required by law.

Speaker 2

For additional information on these risks, please see NorthWest's annual information form and its MD and A under the heading Risk Factors.

Speaker 3

All right. Thanks, John. I will begin by providing a brief overview of this quarter's results. And then we want to provide some color on sales, starting with the Canadian and then the international operations. Then I'm going to expand on consolidated gross profit and expenses.

Speaker 3

I'll wrap the call up with a few comments on our outlook before opening the call up for some questions. Okay. We had a solid start to the fiscal year. Consolidated sales for the quarter were up 4%, and net earnings increased by 22.3%. Same store sales gains in both Canadian operations and international operations drove our top line performance.

Speaker 3

Food same store sales increased in both Canada and international, while general merchandise sales in the quarter were mixed with strong same store sales in Canada more than offsetting softer same store sales in international. Top line growth in 117 basis point improvement in the gross profit rate to sales compared to last year drove a 7.9% increase in GP dollars. On the other hand, selling, operating and administrative expenses increased by 5.7%, largely driven by inflationary cost pressures. Overall, we are pleased with our results for the quarter, including a 17.9% increase in EBIT and a 22.3% increase in net earnings. Let's talk about sales in the Canadian operations.

Speaker 3

Sales in Canada were up 4% in the quarter and 4 point 7% on a same store basis. There are 3 key thermostats to highlight. First, our strong in stock position, particularly on key staples in our assortment. As I mentioned in my AGM remarks, we are laser focused on operational excellence and execution as we aim to ensure we are in stock on the key items that our customers are looking for. 2nd, we are seeing increased consumer demand driven by inflation relief payments and First Nations drinking water settlement payments issued to individuals.

Speaker 3

However, it is important to note that the volume of these settlement payments in the Q1 relative to the total settlement remains low. And while there continues to be uncertainty regarding the timing of the payments, we expect to see the payments spread throughout the year with a higher weighting in the back half of the year and on into 2025. And 3rd, food inflation continued to be a factor, but to a lesser degree than in previous years. In our international operations, sales results were driven by gains in same store food sales, which mitigated softer performance in general merchandise. International sales increased by 4.2% in total and by 2.5% on a same store basis, which is an overall improvement in trend compared to 2023.

Speaker 3

There are a few puts and takes in international operations, which are netting out to overall positive results. For example, a soft fishing season is negatively impacting certain Alaskan communities. On the upside, we have been observing better performance in certain Caribbean tourist economies such as BVI. From a more macro view, we are also seeing the ongoing impact of inflation, which has resulted in consumers continuing to shift their spending from general merchandise and over to food. This shift in spending was a key factor that contributed to a same store food sales increase of 0.1% and a decrease in general merchandise same store sales of 4.3%.

Speaker 3

Let's transition and talk about the consolidated gross profit results. As previously noted, our gross profit rate increased by 117 basis points in the quarter. This rate improvement is largely a result of 2 key factors. 1st, a greater pass through of cost inflation in retail prices compared to last year. Inflationary cost pressure has started to moderate, particularly when compared to the significant ramp up in prior years.

Speaker 3

This change in trend combined with competitive pricing actions has enabled a greater pass through of inflationary costs compared to last year. And although competitors in our markets are passing through more inflation, our local key value items are being actively monitored to ensure we have the most compelling offering for our customers. Our retail pricing philosophy has remained consistent. We continue to challenge cost increases from suppliers and when cost increases do occur, we need to take a balanced approach to passing through these supplier cost increases while keeping in mind the impact on our customers and providing the best value that we can. The second factor that impacted our gross profit rate is a shift in sales blend, including the impact of lower wholesale food sales.

Speaker 3

In order to maintain our margins, it is instrumental that we have strong inventory management. Let me expand on this briefly. As mentioned during previous calls, product availability is a top priority for our organization. This is a challenge for all retailers, but even more so for us given the remoteness of our stores and our role as a provider of essential food and general merchandise. In order to improve product availability, we have revisited our transport mix to find better ways to make our logistics costs more productive.

Speaker 3

As a result, we have increased sealift and winter road inventory to leverage lower freight costs in order to improve our in stock levels on the most relevant assortment for our customers. We have also increased our inventory position on key items such as snow machines, ATVs, boats and motors and home furnishings in anticipation of increased consumer demand for water settlement payments. Given the durability and relevance of these items in the communities we serve, we expect good sell through of this merchandise. All right, let's take a moment here and just focus on controllables as much as possible without compromising customer and employee experience. During the quarter, expenses increased 5.7% and were up 41 basis points as a percentage of sales.

Speaker 3

This increase was mainly driven by inflationary headwinds and labor costs, new store expenses and the increase in depreciation. These factors were partially offset by lower share based compensation costs due to changes in the company's share price. We have been very intentional with our efforts to control expenses at the store level, making sure they are tied to productivity. For example, we are reviewing our store resources and launching initiatives to optimize labor scheduling using a data driven approach, making sure that it is aligned with customer demand. As a result, the net impact of these factors is helping to offset the inflationary cost pressures that I referred to.

Speaker 3

Okay, to wrap up, I'd like to briefly mention 2 macro trends that are relevant for our outlook this year before speaking about our Next 100 program. First, we expect that merchandise and freight inflation will continue to moderate for the remainder of 2024. And second, we expect an increase in consumer demand arising from the First Nations drinking water settlement payments in Canada. However, it is very important to note that the number and amount of settlement payments received by claimants in the Q1 is low compared to the overall amount of the settlement. The period filing claims was extended to March of 2024, and we do expect water settlement payments to be issued throughout 'twenty four and on into 'twenty five 2025.

Speaker 3

Looking forward, these are exciting times for our company and we continue to focus on driving operational excellence, expanding our capabilities and relentlessly pursuing value for our customers, our employees and our shareholders. In my GM remarks, I noted that collectively we have framed this as the Next 100. The Next 100 program aims to drive annualized incremental EBIT over the next 3 years while ensuring sustainable investment back into our core operations. The benefits are expected to begin ramping up later this year and continue to accelerate through 20252026 as our initiatives reach maturity. As we lay the groundwork for these improvements, we anticipate incurring some one time costs and making investments in technology, and we'll share more details on these impacts in future updates.

Speaker 3

The scope of the X100 is comprehensive and touches every aspect of our business. We are refining what we sell to ensure our product assortment meets the evolving needs of our customers and enables us to offer even more value. We are building on our logistics operations and enhancing our forecasting and replenishment capabilities to reduce costs while improving product availability and freshness for our customers. And we're improving processes and employing new technologies to streamline operations across all of our teams. This is more than just a traditional business project that is focused on reducing costs.

Speaker 3

The X100 is a tangible program to improve the value that we offer to the communities we serve and setting a foundation for sustained growth growth, sorry, that benefits all of our stakeholders, including customers, employees and shareholders. The whole organization is energized and excited about this journey and I look forward to updating you on our progress. Thank you And I will now open it up for any questions.

Operator

Thank lines. First question is from Michael Van Aelst from TD Cowen. Your line is open.

Speaker 4

Hi, good afternoon. Thank you. First off, I was wondering if you could give me a sense as to what percentage of sales these 30 communities account for that it will be impacted or benefit from the water infrastructure settlement payments?

Speaker 1

No, we wouldn't disclose that level of information, Michael. Sorry.

Speaker 4

Okay. So I guess, is it do you consider it a meaningful portion of that $2,000,000,000 is going to be spent in your like is that is the majority of that going to be spent in your communities?

Speaker 1

No, I wouldn't say no.

Speaker 4

Okay. So when I look at the inventory that you've built up and ATBs and snow machines, some of these are pretty high priced items. I'm wondering if you're not in those areas, if you're not getting a good chunk of those payments and when you look at the payments for individual, do they really have enough money to pay for an ATV or a snowmobile and things like that?

Speaker 1

Yes, absolutely. And we've I mean this isn't our first rodeo with these types of settlement payments. If you remember the residential school and the payment was another one. The thing is the payments that are coming on us now are actually bigger than what they have been in the past. And so I can tell you that we've aligned the information and the knowledge that we've gained over the last number of years and through the different events that we've had to align our inventory levels to our sales expectations.

Speaker 1

So we're very comfortable that the inventory will meet the demands of our customers once they receive those settlement payments.

Speaker 4

Okay. And what are your what are the risks about like the age

Speaker 5

of this

Speaker 4

inventory? You've been holding this inventory for a little while now and if they only get the money payments in late this year and sometime next year, Is there a risk that what you have in stock is old models and they want the new models

Speaker 1

and you have to discount? Sorry, Michael, I didn't mean to interrupt you. No, there's not a risk there. I mean, we the technology in these machines, particularly over the last number of years, the last 1 or 2 years has not changed that significantly if at all. And that's not something that we're concerned about.

Speaker 4

Okay. All right. And then on the water sorry, on the First Nations trial compensation settlement, do you know if those payments that are that you're saying are likely to come late 2025 or 2026. Do you know if these are one time payments, if they're going to be spread out over a number of years? That's a heck of a lot of money being paid out if they're one time payments.

Speaker 1

It is. Some of it will be one time payments but there's also infrastructure money in there. There's Jacob's principal money and this has got more of a long tail effect to it because if you can appreciate they're building infrastructure, they're building programs within communities. So that will create more of a stimulus for their local economies which is also beneficial for us.

Speaker 4

Right, but the individual payments to individuals is $23,000,000,000 and then the payments to the communities is $20,000,000,000 is that correct?

Speaker 1

You got it.

Speaker 4

So those payments to individuals you believe are going to be lump sums?

Speaker 1

That's the way I understand it today, yes.

Speaker 4

Okay, that's great. And then So

Speaker 1

the heads, we'll be ready.

Speaker 4

And then finally on Northstar here, you mentioned lower sales there. Is that in passenger or in freight?

Speaker 1

It was a little bit of both actually.

Speaker 4

So are we at a point where there's you're kind of near full capacity on 3rd party freight and we're just going to see a bounce around plus or minus?

Speaker 1

Yes, I would say so.

Speaker 4

Okay, great. Thanks very much. Let me just ask a follow-up on that then. Sure. Are you considering another plane?

Speaker 1

That's a good question because some of our metal is that like our capacity is there. We don't think it's a lack of demand. It's just more about some of the usage of our planes, obviously, with the C checks and some of the maintenance calls that have been in. We didn't have the capacity to fulfill the demand. If we thought the demand got to a place and there is a security there and a wise investment to make an investment in other plane, then we would do that.

Speaker 1

But currently, we think there's opportunity just getting some of our metal healthy. That was again scheduled maintenance calls this year in the Q1.

Operator

Thank you. Next question is from Mark Petrie from CIBC. Your line is open. Go ahead.

Speaker 6

Yes, thanks and good afternoon. I wanted to just follow-up on the inventory first And is the right way to think about it, just the entire increase from last year is sort of positioning for the payments flowing through and the increased demand do you expect or are there other moving parts in that inventory that we should be aware of?

Speaker 1

There's some inflation in the inventory as well. So I'd say there's some inflation, but it's a lot of it is. It's the get ready for business as this lot of these large sums of money are just around the corner. Like I said, we have a trickle now we expect it to be flowing I'd say any day now because of the extended dates that I mentioned in my call of being March 2024 for their ability to do the application. We do anticipate though that this mark will flow into the beginning half of twenty twenty five.

Speaker 6

And how should we expect your inventories to grow in the coming quarters from a working capital perspective?

Speaker 1

From a working capital, I don't expect them to grow. I think they'll grow in regular trajectory with like with our cycles of buying over the next call it 3 months similar to that of last 3 months. But also with the next 100 we are looking at doing rationalization and that is something we'll be able to give you more direction as we kind of land on the proper level of inventories that we think we need in order to maximize our business. So being more efficient with the right inventory at the right time in order to basically increase our GM ROI and bring down our overall inventory carry. But that's something that's a work in progress.

Speaker 1

But it's definitely on our radar and we'll as soon as I can give you more information on that Mark I will.

Speaker 6

Yes, understood. Okay, thank you. And I'm just curious, like when you think about sort of the demand that you expect to see, Is this demand that you need to have inventory on hand for? Or is some of it demand that you think someone will come in and

Speaker 4

be like I want to

Speaker 6

place an order for this and then you can sort of flow that through your supply chain, so not necessarily reflected in the inventory like how would you balance those two opportunities?

Speaker 1

Well I think what you are asking is it necessary for us to hold all this inventory or could we set up some type of a solution whereby people put in an order we don't hold the inventory and it's kind of factory to customer, am I right?

Speaker 6

Yes, essentially. Or if you think that even if think that opportunity exists?

Speaker 1

You know what, we've learned in the past that it really helps to be in stock with the right products at the right time. People, you know, they often when they get the money, they want the product right away. So that's why we've gone the route where we have. We don't want to miss any sales opportunities. So we think it's really important to have the inventory to the best of our forecast there for them to touch it, feel it and it enhances, increases the probability of them buying it.

Speaker 1

Yes,

Speaker 6

understood. Okay. And how are you communicating with your customers around this sort of in stock position and this opportunity in general. Have you adjusted your marketing at all, your in market marketing?

Speaker 1

Well, definitely. I mean the products are in most of the markets the products are visible. And it's not a matter of if the money comes, let's just say that the anticipation is when it comes is a nice, I'd say, quick pace to the store to make sure that they're getting the products that they want before anybody else can get them.

Speaker 6

Yes, for sure. Okay. And I see you acquired a power sports dealership in Alaska. I know these types of deals are very opportunistic. But is the right way to think about it that it's just sort of a one off?

Speaker 6

Or how would you characterize your perspective on those types of deals today versus a few years ago or pre pandemic? Are you more open to them? Are you less open to them? What's your sort of thinking?

Speaker 1

Well, we're more open to them as you see and as I talked to you about our inventory levels and what comprises of some of those increases in inventory. Big ticket motorized is something that we don't just kind of move around the perimeter like we're well into it. So it's more of a hub and spoke model. Not every community is big enough to house. It's for motorized, like motorized shop.

Speaker 1

But the ones that we do think can kind of do a hub and spoke and deliver service to the community within and the surrounding areas, that's where we're strategically looking at placing these types of operations. But I don't see it as I don't think that we're going to do 30 or 40 or even 20, but they're strategically placed and it's to be able to add some service to the existing community and surrounding community and just carry more inventory and be more on top of what the customers need.

Speaker 3

Okay.

Speaker 6

But it's a lifestyle

Speaker 1

in these communities. So it's definitely been a strong business for us.

Speaker 6

Yes, okay, I got that. But this one was in Alaska. So this is separate from sort of the inventory investment in Canada. This is holistically you want to be in this business?

Speaker 1

Yes, absolutely.

Speaker 6

Yes. Okay. Understood. And sorry, just to clarify, I just didn't catch it. But when you're referring to the next 100, is that sort of a specific financial target or what is that?

Speaker 6

What is the context of that specifically? Is that an EBIT number over the next 3 years or what is that?

Speaker 1

No, I'll be more directed with you in the future Mark. It's really just about getting the teams to enjoy, to be proud of the legacy of the company and just think about setting it up and looking more into the future so we get more strategic, build more capability to definitely generate stronger returns over the next number of years. So it's kind of a play. It's just, again, living off we're fortunate that we can live off of a pretty long number of centuries legacy. So it's just about identifying with the employees and letting them know they're

Speaker 3

part of something special in the future.

Speaker 6

Yes.

Operator

The next question is from Sean Regan.

Speaker 5

Hi, Naira with Worta. Done a lot of looking into your the benefits of the settlement here. Obviously, with the water settlements, pretty good confidence that we'll get a large catch of that given the location to the claims and the location to your stores. But when you look at the FNCFS settlements, it's a bit more vague who's going to be receiving those claims. Do you imagine you'll get a similar chunk of the pie out of that $23,000,000,000 as you will from the $8,000,000,000

Speaker 1

No. Like there's going to be more spread like so we talked about 30 communities being involved in the settlement, just 30 of our communities. So with the other with the childcare benefit, that will probably be in all of our communities, all of the First Nation communities,

Speaker 3

so much greater number of stores.

Speaker 4

Thanks for the question.

Operator

Thank you. Next question is from Stephen MacLeod from BMO Capital Markets. Your line is open.

Speaker 6

Thank you. Good afternoon, guys.

Speaker 1

Good afternoon.

Speaker 7

Mike, hi. Lots of great color so far. But I just wanted to follow-up on a couple of things. Just with respect to the water settlement, I mean, you've emphasized a number of times that Q1 is represents a sort of small proportion of the actual volume of claims. And you saw gross general merchandise same store sales up nicely in Canada in Q1.

Speaker 7

So I'm just curious, I mean, is there a way to think about how that general merchandise growth could evolve through the back half of the year and into fiscal 2025 that you'd be able to share?

Speaker 4

Well, it's tough, Steve.

Speaker 1

And the reason being, as you know, we thought we would have thought that this money would have dropped a lot sooner. So it's really tough to forecast when this money is going to fall. I think we're pretty I would think we're pretty safe in the projections we gave you saying latter half of 'twenty four and early parts of 'twenty five. But as far as how that quantum would impact sales, I think I would just say you've seen the inventory levels that we have and we anticipate a pretty strong sell through on that inventory once the money

Speaker 3

comes through.

Speaker 7

Yes. Okay. That's helpful. And then just with respect to like if you think about the child welfare settlement and moving beyond the individual payments, do you have visibility into because I wasn't able to find it myself, but I don't know what's been communicated, but do you have visibility into sort of when the investments come through to the communities?

Speaker 4

We will before they happen.

Speaker 1

Sorry, did I cut you off, sorry Steve.

Speaker 4

No, no Steve.

Speaker 1

I think we will before they happen, but we don't have it right now. I mean it's there's a couple of those programs that come out and I'd say we're pretty our area is pretty close to the market in that respect. But no, I don't know the full script of what the scheduled investments will be by market at this point.

Speaker 7

Yes. Okay. That's great. And then just following up on the Next 100 program. Is this like in previous quarters, you've had these strategic priorities listed, but is

Speaker 6

the next 100 entirely new when you turn

Speaker 7

the page to fiscal 2024?

Speaker 1

No, no. This has been Just assign a

Speaker 6

name to it.

Speaker 1

Yes. Like it's been a pretty strict program. Again, we've been working on it over the last number of months, number of quarters. We've had the number, the next 100. It's basically we've made it public.

Speaker 1

We put a name to it, but it's just to show you the vigor, The discipline is not to be undersold I would say because it's something that we're very engaged in because we think it's worth it for again the customers and for our shareholders for sure.

Speaker 7

Right. Okay, perfect. That's great. Thanks, Dan. Appreciate it.

Speaker 1

All right. Thank you. Have

Operator

There are no further questions registered at this time. I would like now to turn the meeting back over to Mr. Daniel McConnell.

Speaker 1

Okay. Well, thank you operator and I appreciate everybody attending our Q1 call and we look forward to chatting with you next quarter.

Operator

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

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North West Q1 2024
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