North West Q2 2024 Earnings Call Transcript

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September 5, 2024

There are 6 speakers on the call.

Operator

Welcome to The North West Company, Inc. 2nd Quarter Results Conference Call.

Speaker 1

I would

Operator

like to turn the meeting over to Mr. Dan McConnell, President and Chief Executive Officer. Mr. McConnell, please go ahead.

Speaker 2

Thank you very much and good morning and welcome to The NorthWest Company's Q2 conference call. I'm joined here today by John King, our Chief Financial Officer and Alexis Cloutier, our VP of Legal and Corporate Secretary. I'm going to start the meeting by asking Alexis to read our disclosure statement.

Speaker 3

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 only as of the date they're 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.

Speaker 3

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

Speaker 1

Okay. Thanks, Alexis. I will begin by providing a brief overview of this quarter's results. I'll then provide some additional color on sales within our Canadian and international operations before making some comments on the key factors impacting our consolidated gross profit and expenses. Finally, I'll wrap up with a few comments on our outlook in Next 100 program before opening the call up for some questions.

Speaker 1

All right. So let's dive right in. Overall, we are very pleased with the results this quarter, especially considering the impact of some non comparable factors this year and the fact that we are up against a 17.5% increase in net earnings in the Q2 of last year. Our Q2 results this year were driven by strong top line growth with consolidated sales up 4.6% and gross profit up 7.5% for the quarter. However, the strong sales and gross profit results did not fully translate to the bottom line in the quarter and is primarily due to 3 factors.

Speaker 1

First, earnings from our investment in Transport Nanook, which is a Canadian shipping company serving the Arctic, were down $1,800,000 compared to last year due to higher vessel repairs, which also temporarily delayed the start of the sealift season in Canada. 2nd, a $1,800,000 net increase in expenses resulting from 2 non comparable expenses, which include higher share based compensation costs this year, partially offset by the loss of our store at Fox Lake, Alberta last year due to wildfire. And third, the implementation of the global minimum tax that resulted in a $1,000,000 increase in tax expense for the quarter. The net impact of these factors resulted in a 3% decrease in net earnings this year compared to the strong net earnings last year. That said, within this backdrop, we are very pleased with our results that delivered increases in adjusted EBITDA of 6.1% and adjusted net earnings of 1.6%.

Speaker 1

With that context provided, let me unpack the operational results. Sales in Canadian operations increased 5.6% for the quarter and were up 6.8% on a same store basis, led by strong food sales. Sales were positively impacted by increased consumer demand arising from First Nations drinking settlement payments to individuals. However, the volume of these payments in the 2nd quarter relative to the total settlement remains low. That said, we expect to see these payments continue throughout the remainder of this year and into 2025.

Speaker 1

We also experienced increased consumer demand in certain markets from First Nations' child and family services and the endurance principle, programs that help provide greater access to nutritious food. The positive impact of these factors was somewhat muted by higher sales in the Q2 last year, resulting from the impact of the government inflation relief payments, including the grocery rebate made to individuals to help mitigate the grocery rebate made to individuals to help mitigate higher cost of living. Underfitting these financial drivers is a good in stock position and improved execution at store level, particularly in fresh categories as we remain focused on operational excellence as part of our Next100 program. In contrast, our international operations had a more challenging economic environment, which contributed to a softer performance in the quarter. Sales in our international operations increased by 0.8% and were up 0.9% on a same store basis as the sales increase from new stores was partially offset by lower wholesale sales.

Speaker 1

Weaker economic conditions, particularly in tourism dependent markets in Alaska and the South Pacific and a slower start to the commercial efficiencies in Alaska reduced discretionary spending in certain markets. This shift in discretionary spending is evident in our sales mix with food sales up 1.1%, while general merchandise sales decreased by 2.5% compared to last year. Okay, let me transition here and talk about consolidated gross profit results. Our gross profit rate for this quarter increased by 91 basis points, largely as a result of 2 key factors. 1st, a shift in sales plan, which includes a decrease in sales in our lower margin wholesale business.

Speaker 1

And second, we also experienced an improvement in markdowns and shrink compared to the prior year and an increased focus on being in stock and execution in fresh departments. I will now briefly touch on the key factors that contributed to higher expenses in the quarter. During the quarter, expenses increased by 10.1 and were up 127 basis points as a percentage of sales. This increase was mainly driven by non comp expenses I noted at the beginning of the call, which included the higher impact of vessel repairs in Transport Nanook and the increase in share based compensation, partially offset by the $3,700,000 loss in our Fox Lake store destroyed by wildfires last year. In addition to these factors, inflationary headwinds and labor costs and increase in depreciation and the impact of foreign exchange the translation of international operation expenses also contributed to the increase in expense for the quarter.

Speaker 1

As mentioned on previous calls, we have highlighted our efforts to control expenses at the store level through the next 100 initiatives. This includes reviewing store resources and launching initiatives to optimize labor scheduling to align with customer demand using a data driven approach. With that overview of our results, I will finalize by speaking briefly about our outlook for this year and provide a few remarks on the next one on our program. The macroeconomic term really looks uncertain, particularly in our international operations and tourism dependent markets and countries that do not have government income support programs for individuals. As it relates to water settlement payments in Canada, we would expect an increase in consumer demand, particularly towards the end of this fiscal year and on into 2025.

Speaker 1

Longer term, the impact of government and Canada transfer and settlement payments combined with higher infrastructure and services spending is expected to benefit indigenous peoples and the communities we serve. Through the Next100 program, our teams are driving operational excellence, expanding our capabilities and pursuing value for our customers, our employees and our shareholders. The outcome of this work in the Next 100 programs is expected to drive annualized incremental EBIT, which is anticipated to start later this year and continue to accelerate through 20252026 as these initiatives reach maturity. As we lay the groundwork for these improvements, we anticipate incurring some one time costs for professional fees and other expenses. These one time costs are expected to incur in the back half of this year and continue into 2025 as the next 100 initiatives are operationalized.

Speaker 1

Our expectation is that the incremental EBIT from these initiatives will more than offset the one time costs. However, there will be a timing difference as these one time costs will be incurred before the full annualized benefits are achieved. We'll provide further information on these one time costs in our quarterly reports as they are incurred. On that note, let me wrap up by highlighting that we are very proud to have received from the Canadian grocer an Impact Award in the Diversity, Equity and Inclusion category for our indigenous procurement strategy. Diversity, Equity and Inclusion are core principles of who we are as a company, And this award is reflective of our promise to indigenous peoples.

Speaker 1

With that, I will now open it up for any questions.

Operator

Thank you. We will now take questions from the telephone lines. We do have a question from Michael Van Aelst from TD Cowen. Please go ahead.

Speaker 4

Hi, thank you.

Speaker 5

A few questions for you. So just looking at the higher same store sales in Canada, particularly on the food side, it was quite strong. And you did highlight some areas where they had higher access to nutritional foods. So is this part of the $48,000,000,000 child welfare reform book or that's supposed to come over the next 10 years or is this something separate?

Speaker 2

Hi, Michael. It's Dan here obviously. So yes, it is I believe it is. It's more part of Jordan's principle, but it hasn't been necessarily identified as such. But I think it's just along the whole emphasis behind providing more healthy living options in Northern Canada.

Speaker 2

But I can't say particularly if it is part of the settlement, but it is definitely aligned with the Jordan's principle that has some other buckets that have been reached into.

Speaker 5

So I guess this is hard because they don't describe in detail where that $48,000,000,000 is going to be spent. And I don't think they give a lot of detail on how they're going to fund, how they're going to change their approach with Jordan's principle. But do you feel that the spending and the increased access to nutritious foods in certain communities is actually sustainable? Or do you think that this was something that might have been more one time in nature for some reason?

Speaker 2

I think it's sustainable because I think it's aligned with again the overall initiative of the Jordan's principle. I would almost venture to say that it hasn't really come into the overall benefit of the child benefit, the child welfare benefit. I would say that this is just part of the Jordan's principle. But as far as what bucket of money it's coming out of, Michael, I can't really I can't give you that information because it's not entirely clear.

Speaker 5

Okay. So maybe a better way to ask is, are you seeing this continue are you seeing the benefits of that continuing into the Q3?

Speaker 2

Yes. The direct answer to that would be yes.

Speaker 5

As far as your one time charges are concerned, how large should we expect these to be? And will you be backing these out of adjusted earnings?

Speaker 4

Like I said, we're going

Speaker 2

to they're going to come in as they come in, we'll be very directive as far as what they are. So that will give you an indication on the size. I mean really it's too early. We don't want to disclose that at this point Michael, but we will give a lot more information once they come in. And like I said in the call, we expect some to start coming in later half of this year, which I think will create a sequence if you will as to how we report it and how we expect you to interpret it.

Speaker 5

Okay. At this stage do you expect to remove it from adjusted earnings?

Speaker 2

Yes.

Speaker 4

Perfect.

Speaker 5

And then on the vessel repairs at T and I, you mentioned that it delayed the start to the sealift shipping season.

Speaker 2

Yes.

Speaker 5

I guess the question I have is I know how important is in getting your inventories up into the north at the lower cost. I was wondering if did it shorten the shipping season for you and did you get the inventory into the north that you wanted to?

Speaker 2

Yes, we did. We got the inventory into the north that we wanted to.

Speaker 5

Okay. So we shouldn't expect any additional impact from that event in the coming quarters?

Speaker 2

Correct.

Speaker 5

I think that's it. Other than it sounds quite positive in Canada given that sales are starting to pick up already even though we're not really seeing meaningful payments being made yet in other water or child reform, welfare reform. And I guess the first question is, does that before I get on to national is that would you agree with those statements?

Speaker 2

Yes, yes. We're optimistic about the outlook in our Canadian business for sure.

Speaker 5

And then on the international side, obviously more has been given the macroeconomic conditions. And are you seeing that deteriorate further because you're still able to grow their sales modestly, which is a positive given this in this environment. So are you still expecting to be able to grow or is there some bigger headwinds coming that you're seeing?

Speaker 2

No, our anticipation and our intent is to definitely is to grow.

Speaker 5

Yes, and that's on the international side, right?

Speaker 2

Correct.

Speaker 5

Okay, perfect. All right, I think that's it for now. Thanks very much. All right. Thanks, Michael.

Operator

Thank you. And the next question is from Mark Petrie from CIBC. Please go ahead.

Speaker 4

Yes. Hi there. Good morning. I just had a couple of follow-up questions to Mike's questions. First, just on the inventory levels, like I know it's flat on a dollar basis sort of year over year at the end of the quarter or flattish.

Speaker 4

How should we interpret that? Is some of that affected from the delay into the sealift season which you've caught up now in Q3 or how should we think about that?

Speaker 2

Well, we've had some it's flat off some pretty significant sales increases as you know last year. So it's I'd say it's optimism and it's realism in the point that we feel and we know we're in stock and ready for business. But it's an optimism for sure. Mark?

Speaker 4

Okay. So you would have expected it to be down if it weren't for the optimism and the build in your inventories around some of these sales opportunities?

Speaker 2

That's correct.

Speaker 1

Yes.

Speaker 4

Okay, okay. Fair enough. And I guess just on that, obviously, the food signature sales growth is excellent to see, but the merch lagged a little bit. Could you just talk about some of the dynamics there and how you expect those 2 to sort of move relatively speaking as the payments kind of flow through and accelerate?

Speaker 2

Yes, I think there's definitely a positive correlation between the general merchandise increase in sales and obviously with some of the settlement money coming into market. So the good news is that we're ready for business and we have strong relationships with our vendors to ensure that there's a demand cycle in place where if we don't have it in stock then we can definitely get it with some of the agreements that we've been putting in place recently with some of our vendors. Fortunately the rest of our businesses is doing well when some of the other customers of some of our major vendors are not having maybe the same increase as we are. So it's afforded us the right or the opportunity to kind of help out some of our vendors and some more creative negotiating or more creative deal structures.

Speaker 4

Yes, okay understood. And I guess just on my last question is just with regards to the competitive dynamics that you're observing in the Canadian market. Just given the flow through of some of these benefits and the expectations, have you observed any changes to how your competitors are approaching the market?

Speaker 2

No. I mean everybody is working with the same vigor and obviously as they always have and we're obviously through the next 100 really focusing on increasing and improving our capabilities to ensure that we get our share of the business as well. So we're really focused on operational excellence which would I'd say give us our fair percentage of the business that is coming into the markets.

Speaker 4

Yes, understood. Okay. Thanks for all the comments guys. All the best.

Speaker 2

Yes, thanks Mark. Good talking.

Operator

Thank you. There are no further questions registered at this time. I'd like to turn the call back over to Mr. McConnell.

Speaker 2

Okay, well thank you everybody who's tuned in and I look forward to speaking with you again in December for quarter 3.

Operator

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

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Key Takeaways

  • Consolidated sales rose 4.6% and gross profit increased 7.5%, but net earnings fell 3% due to non-comparable items including Transport Nanook vessel repairs, higher share-based compensation costs, and a $1 million global minimum tax charge.
  • Adjusted results remained resilient with EBITDA up 6.1% and adjusted net earnings up 1.6%, underscoring underlying operational strength despite headwinds.
  • Canadian same-store sales grew 6.8%, led by food, supported by First Nations drinking water settlement payments and nutritional access programs, with further consumer benefit expected through 2025.
  • International same-store sales edged up 0.9% amid tourism-dependent market softness and lower wholesale volumes, with food sales up 1.1% but general merchandise down 2.5%.
  • The Next100 program is set to deliver incremental annualized EBIT from late 2024 through 2026, though one-time implementation costs will be incurred in H2 2024 and into 2025 and excluded from adjusted earnings.
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Earnings Conference Call
North West Q2 2024
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