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Good day, and welcome to the North West Company first quarter results conference call. I would now like to turn the meeting over to Mr. Edward Kennedy, President and Chief Executive Officer. Mr. Kennedy, please go ahead.
Thank you, good afternoon. Welcome to our Q1 conference call. Joining today are John King, our Chief Financial Officer; and Amanda Sutton, who is our VP of Legal and Corporate Secretary. I want to ask Amanda to begin the call with our disclosure statement.
Thank you, Edward. Before we begin, I remind you that certain information presented today may constitute forward-looking statements. Such statements reflect North West'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. For additional information on these risks, please see North West's Annual Information Form and its MD&A under the heading, Risk Factors.
Thanks, Amanda. I'm going to start with putting aside some of the share-based comp and insurance puts and takes, I'll leave that out of my remarks. I hope they're clear in the results and otherwise, you can -- we'll address, of course, any questions you have, and John may step in on that. There are a couple other costs that were pulled out and highlighted by us that are somewhat nonoperating. One is the insurance that we're incurring. I mean it's operating, but it's been a big delta now. We gave guidance on where we're headed with that, $4 million in additional costs this year, on top of a pretty big increase last year. Our mitigation efforts, we're very pleased with our store protections for hurricanes and some of the fire mitigation things we've done in Northern Canada are largely in place or will be, for example, the hurricane Cat 5 protection will be in place prior to hurricane season. Beyond that, we're going to look at every available option to look at the way we structure our insurance because we recognize that the mitigation efforts we have today will help claims experience and rates down the road, but we're going to be heads down, and we'll talk more about that in the upcoming quarters on what we can do to look at the way we structure our insurance to tackle this cost. As I said at the beginning of the year, I think, in the Q4 call, we do expect to grow beyond that kind of cost and still drive our earnings. And largely, we're doing that, and that leads me now into our actual operating performance. And what's coming together and the way we had hoped and is a positive for us is our Northern Canadian retail business is well-positioned. We're seeing a lot of spending power that we're trying to trap in our stores. Some of that can affect gross margin rate because when we see more income, it shifts into big ticket sales that we're positioned to just to provide right goods, appliance and furniture and motorized. But generally, we're seeing a nice lift in sales in the North, solid comp sales, and we really expect that to continue. We're trying to double down wherever we can in community by community where we see mine activity, for example, in the Kivalliq rank and in Baker Lake specifically, some of the bath and island mining development, and then the public infrastructure that's going in the North. So you should expect there's room [ in our sales ] to counter. We're seeing the trend in that regard that the Northern Canadian business is robust this year. And I pointed out in my annual meeting remarks this morning that the CAGR for -- none of it -- GNP is between 5% and 8%, I know who you listen to, it's the strongest economy in Northern Canada -- in Canada actually, albeit a small one, but we're well-positioned there with 34 -- actually 38 stores and we're holding ourselves again to drive our numbers. NSA, to talk about that for a bit. It started a little slow out of the gates. We didn't have our 2 ATRs at the hours per month of flying that we had expected to. It's a long story that I think our investors know. The good news is that we've turned that corner, those planes are flying. We -- our in-house maintenance program is kicking into gear the way we had hoped in terms of quality and time lines of service and ultimately managing down our cost. So overall, we had a good contribution out of NSA, particularly in P2, P3, which would be March and April, and now into May as well. So we're basically on track from here on out. We'll make up any shortfall through the rest of the year. I consider the business to be stabilized with always room for improvement and many other key decisions lying ahead on how we grow that both of our own cargo and third-party business revenues. On the Canadian side, that means Giant Tiger. And this quarter, we did call out Giant Tiger in terms of breaking out sales, haven't done that for a while, if at all. And I think it may be obvious why we decided, and the divergence in sales performance on a comp store basis was quite significant. There's been a trend, a negative trend at Giant Tiger that's a top priority for us to address. We know our store people are working hard. We think we're working hard on this. We can't externalize it. That's not the point. But we have to look at some partnerships, specifically with Giant Tiger Stores Limited, our master franchise, and how that structure can drive the most value for both sides of the equation because we don't feel we're there right now with the way the agreement is going, but it's something that we sat down with Giant Tiger and we're working on together. We also have to look longer term and strategically and I spent lot of time today talking about our core competencies. And although Giant Tiger stores are very important in the food scale they bring in the business, we want to make sure that we clearly understand how they're going to drive value through our core capabilities to our, of course, our shareholders and the financial returns that we expect from that business. So we're heads down on that. I don't provide -- I'm not providing more details today. I will. You'll expect this to be a headline item with North West quarterly, probably not sooner, as we work through more specific details and disclose those. Moving to international. We're largely pleased with our results. Sales were strong on a comp basis. We came out of the gates strong like NSA, the fact that there were double snap payments that the supplemental nutrition allowance program. With the government shutdown risk, there were 2 payments made in January, so you can say, well, that helped Q4, but in Q1, we had a core piece of income that was missing in February. So we had to kind of ride that issue. And since then, we're okay with our sales performance. And bottom line, we're headed in the right direction. We have had some hiccups along the way. We're going to comp shortly the loss of a very large liquor store, and you think why is that material. Well, it was. That operation that isn't work -- isn't in business today. We're still working on the licensing to get back into that business in Bethel, Alaska, but we're not there today. So we had to deal with that. There were some urgent pressure in our Barbados business that mitigated otherwise what was a pretty decent quarter out of our international store.We also had -- I should talk about a couple more things, the restructuring of our business, that's going to be about CAD 4 million specific to the closing our Bellevue office and relocating, putting that office between Anchorage, Alaska and Boca Raton, Florida. This is something that is going to take time, cost wise, over -- largely with how the second quarter will be the balance of those costs, but some will delay into the third quarter as well regarding the relocation, hiring of the office for those 2 locations. It's going pretty good. We -- recruiting in Anchorage, Alaska is a little harder, of course, you might not be surprised, Boca Raton, Florida, but the payoff here is that we're putting people close to our customers in our markets. We're already seeing some of the advantage of that as we talk to -- in the South Florida market, some of the recruiting that we're doing and people we're talking to who already are part of retail system serving the Caribbean. We're getting the feel that we're in the right place to optimize that business as opposed to being up in Seattle, and we expect the same in Anchorage once we have our office in place and stabilize. So that was a cost that we had decided to go for and we are well underway with the -- with that. So that's some of the underlying factor to our international performance. Beyond, we have our key initiatives that we're plugging away at, no major course adjustments apart from the deeper issues that we're looking at with Giant Tiger. And we feel that, externally, if we look at our consumer environment whether it's continued construction, economy activity in the Caribbean, little slower in St. Maarten, they have not had the tourism bounce back or the infrastructure rebuilt that the BVI and USVI are. We've got 1 big store to get reopened in Q4, our St. Thomas store, on schedule for that, and otherwise executing our plan, which is to have a great value proposition in the Caribbean. Northern Canada has a strong pure retail focus which is simplifying the business, staying in stock and really improving our key role retention so that we can take advantage of the great potential we see in that market. And Alaska's kind of in between, it doesn't have quite the robustness of Northern Canada, but we've got a very stable, strong market position their overall. There's 1 cloud on the horizon, as we have a store in Barrow, Alaska that we're going to be exiting from and looking at a different arrangement in that community in terms of how we service it. So we'll give more information as we get closer to that in Q4. Otherwise, that's the overview of our performance, and I'd like to now turn the conference call to questions. Thank you.
[Operator Instructions] We'll go to our next caller -- our first question.
So just maybe 1 on the Giant Tiger, in terms of just performance and outlook, is it more the pressure in the food side that's somewhat concerning to you? Is it the general merchandise? Or is it mix of both as you look out over the next kind of 12 to 24 months?
I'd say it's -- over the medium time frame, it would be the general merchandise execution, how we're gapping to Giant Tiger East in terms of markdowns and execution of our open to buy. We track how they're doing versus us, and they had a cold spring, we had a cold spring, so there are some pretty ugly numbers. But you've got to look a lot beyond that. So I think, structurally, it's about the knowledge transfer and the right processes in our stores to optimize what is essentially a business system that's based on driving profit through largely this office, but also targets. So that's a softer factor in terms of skill and knowledge, but it involves real deep collaboration with Giant Tiger on making sure that we're getting full value from their knowledge, for example, and skill to pull this off because we can see comparable or like type stores, where in fact, there's better performance, they're not just the ones that we've been running lately. That's -- I think that answers your time frame, but immediately, because that is an issue today, but it's being compounded by the food performance. And I think we've -- some of this is being self-inflected, we've put a big push on into fresh. We reintroduced fresh meat into our stores and dialed up our fresh produce emphasis. We're not pulling the plug on that, but if I look at the way this turned out, and this is something that's quite short-term in terms of performance measurement, so try not to overreact, but in the last 3, 4 months since we've really gone full bore on these 2 programs, sales are up, great, well, meat [ with beef ] because it wasn't there at all before. It hadn't been there for years, so produce is up double digits. But in terms of the cost, whether it's shrink and damage, and even fresh meat, for example, theft because of the types of stores we have in the neighborhoods and some of the risk that go with certain exposure in areas where we have stores have very much underperformed, and we have not driven the basket growth that was the point of the whole initiative, namely that as you shop for fresh, you will fill out your basket and other parts of the food assortment and hopefully into the more profitable areas of the store. So we had to reassess that and we're doing that right now because it's worth trying and it comes back to execution, and I think part of it is putting too many balls in the air and trying to turn around something that will take more focus on a few key things and not 5 or 6. So in some ways, I think we made a situation that wasn't great, worse, in the first 3 months and we're now course correcting that and it's happening immediately because of -- for obvious reasons, and we think that the North West story has to be one of success for our investors and our customers, and generating free cash flow to grow a dividend to invest in complementary businesses. The North West -- the Giant Tiger story is not that story today, and we need to get there, so that's the way we see it.
And then as you kind of look out to the top markets initiative, you mentioned in your commentary, it's still a focus. Can you maybe talk about where you are on that initiative now that it's been underway for some time, are you largely through it? Is there a -- did you identify more opportunities in some of those top markets? I just want an update on how far along you've come and what you see still left on that?
When John gave it -- a talk today about our investments, I think, $480 million over 5 years, John?
Yes.
Yes. So I'll tell you that our couple of acquisitions which are growing and accretive, one came out of the gates gangbusters and BVI and now NSA is rounding into form. Into that caps was also some accelerated top markets tied just completely coincidently because the other implication would be illegal. They were fire and hurricane-damaged stores or destroyed stores were almost all top market stores, and that's just the way it turned out. So we actually accelerated our top market spending in dollars, but not in locations because the ones that were destroyed were large, with the Klawock warehouse fire, the largest store that we have; St. Thomas, probably our second largest store. So we had to kind of divert our CapEx, albeit funded by insurance with the back end cost increase that we're just maybe trying to reduce and mitigate. So the long answer is we have a lot of noise in this program since we started it. Going forward, we're at 22 stores of, I think, 37. We've got some more to do, but we're -- I also said today in my remarks that we're sticking to a disciplined CapEx equals a depreciation approach as a proxy for how much we want to spend on that program. We've gone back and we've looked at how the CapEx has driven results and on what pure growth capital that is a great incremental ROI. The challenge is that -- and part of this is just the factor of where the stores are and efficiency of really tearing them apart and getting the foundations literally done right when you go in to do a project. So they're big boxes, they're complicated with warehouses attached to them, and the maintenance CapEx was getting so large per project. I think people have heard this story before that we said we're going to slow this down because we're not getting the incremental ROI growing out whatever you want to call, EVA out of this. And unless we have a serious set of competitive entry where we need growth -- CapEx to grow the store within the 4 walls, we're going to slow the pace. So the go forward on this is to still prioritize what we call top markets and these are profitable stores. A bit of triaging in a sense that if there isn't a risk of not just imminent but likely competitive entry, if the store is sized appropriately to maximize sales over the medium term, then it gets pushed down the list. So that number that I referred to earlier is depreciation, approximately number of $65 million is what we worked back from, and we allocate that to our major SBUs, mainly international, Canada and the airline. And then they -- working with their executive teams, we're looking at the way they put the spend between bricks and mortar and technology, for example. Within the bricks and mortar, the overlay is that you need to take care of your top market stores. Long answer, I'm sorry, but the short one would be that this entire program will likely continue now for 4, 5, 6 years and probably would be something you could morph into saying North West is investing in their core equal depreciation, but all I know it's pretty straightforward, the DA goes right back to the engine and you take out the EBIT and the op margin. For the retail matters, they are prioritizing their top markets because that's where they can grow or protect the most. And beyond that, there's still money left over, they've got other programs in IT, staff housing. I mean that's strategic, it sounds like maintenance CapEx, I know, but it also enables us to improve our talent attraction and retention. So that's kind of the way it's going to run. And I think the number to watch is us getting to that $65 million number and being very clear, transparent and persuasive on -- that the money above that is truly driving growth.
Okay. And then just one last one for me, as you talk about capital allocation, I guess how you're looking at M&A now that NSA is starting to roll along? What are your thoughts on kind of anything medium to larger size at this point?
What I did with the -- if you get on the webcast and pull the slide, I showed the core and I defined that core, it's our Northern Canadian business and Alaska business, and we've been in those businesses from almost day 1, 32 years, 28 years, respectively. That idea that kind of, I guess, classic, whatever strategy frame, I tied in the adjacencies that we've extended our core into. So from a store standpoint, we went into, in our acquisitions at least, greenfield, about 45 Giant Tiger stores and then the Northmart, 37, I think, Northmarts and Qikiqtaaluk, so we took -- we expanded the northern store larger to Northmart and then smaller to a convenient store, and that was growth for us. And then, of course, we have 19 Cost-U-Less and RTW stores in the State of Caribbean. That was acquisition. So you're asking about the airline, I think the reality is we're likely to move into the retail space through acquisition, small and then some organic attached to that in the Caribbean. Somewhat contingent upon us being really rock solid with our competitive value offer, our value proposition. In Northern Canada, Alaska, it's likely not to be that. What I also showed were other adjacent spaces. I talked about product service extensions, 136 financial service counters, 300 ATMs, 64 post offices, 25 Tim Hortons. So there's some of that, that's not acquisition. Where the M&A kicks in will be in adjacent complementary businesses. They could back into the transportation space, they could be, if we're doing that kind of a scan right now, it's going to take a while, and other adjacent spaces that we think really leverage those core capabilities that we have, and those will likely be M&A. So the answer here is, we can go 3 ways, we can do tuck-in acquisitions in the Caribbean, probably that over the Pacific. We can do some tuck-ins, they won't be tuck-ins with Canada, they'll be extensions, the tuck-in would be through the airline, although we think we're set on organic path now. As we open for business, here's our -- put our shingle on the wall and we get third-party customers, we're going to add our own capacity, not necessary buy it. The tuck-ins that would be in the north, beyond that would be stores that are not within what we call our core retail format or that are not retail at all, operations that we think are core extensions, and I won't give more detail on that today except to say that we're digging in and investigating. And just like the airline, I think I had a heads up for a couple of years talking about how we have to look at this space and perhaps invest in it. It all depends because it's such a thin economy, whether you're in the Caribbean or you're in the north, there aren't a lot of players in these adjacent spaces and the timing has to be right for a willing buyer, a willing seller. We prefer something not too big so we can add value through organic growth, but not something that's so small that we've got to start from scratch if there's an incumbent who knows the business well and gives us a solid base to start from. So M&A will be part of the plan. It's not imminent, but when we look at where growth will come from, it will be this. I think the NSA model is kind of instructive. If we can get a base and grow from that base and really get knowledge out of our core capabilities, then that's the recipe for growth, beyond the retail stores themselves.
And we'll take our next question.
It's Matt Bank with CIBC. Okay. Just to continue on the Giant Tiger a little bit, can you talk about how much the competitive environment is having an impact here?
I think that there is -- again, I'll compare it to Eastern Canada, I think there's a phase to the amount of square footage that's been added to the West in discount that the East has behind them. There's not a lot of square footage we had in retail generally and in food retail as well anywhere, but there are conversions. So the Extra Foods to No-Frills and the Safeway, Sobeys to the FreshCo are a discount -- a conversion to discount, which is a conversion into our space. You cycle through that, again, there's not new incremental square footage, but I'd say that's the biggest irritant we have, but I'm also [ prepping up ] to say we have to get the hardness, softness right and not shoot ourselves in the foot, which I felt we did with the fresh strategies that we put in place in Q1. We're going to get through the -- like the FreshCo conversions, we'll see how many actually take place and at what pace. The No-Frills are largely done. And I think we're not that far away from a pretty stable food environment, at least square footage-wise in Western Canada.
Okay. And renegotiating with the franchise relationship, sounds like it could take a period of time. What was our -- what's the near term plan in terms of getting profitability turnaround?
Well, first, I'll say that the discussions with Giant Tiger are ongoing. They're not starting because we had a bad quarter. It's a relationship that's 18 years old and a master franchise that's 18 years old and one that's being revised and amended once, but I don't think I would say that's a long-term discussion. We're having them now and we'll get value from them or we won't, it's not really something that lingers on the way we see it. The food situation in fresh can be fixed quite quickly. And by that I mean, within a quarter, we should see a turnaround. The margin pressures that I talked about are tied to these more hard discount competition is a little trickier. And I would say that's -- we could be facing that for another year. But it's not -- the one that really -- that I'll report on, and it ties back to the Giant Tiger relationship, and so I just said that about both things that can happen quickly or we can fix some things quickly. The skill transfer and knowledge about optimizing the hard goods, soft goods is not a light switch, but we're going to be looking to some signs from Giant Tiger stores that there's things we can do there that would make a difference. Because we know they can make a difference for them because they have. So some of the missing ingredients whether it's more time in Giant Tiger East stores and model stores, stores that are paired together that we can say that's the same kind of market, we should have a pretty similar approach to the business. Is that store that's doing so well in this other community getting more people that are deep in these areas than perhaps we have on -- in our stores, not so much in the stores but maybe in our support areas, there's more specialists in the Giant Tiger side of things, given that they're focused only on Giant Tiger stores. So there's a cross-pollination that we need to see that we think will make the difference.Certainly, if we felt that the whole format and approach was just a losing proposition, that would be another story, but we are aware, we know, and we're seeing some indication and information what GT East is doing, and we think there definitely is a better path forward, so we just try to get on that. Ultimately, these are great locations, and we see them as that. These -- where these stores and boxes are located is very, very good. We have first mover advantage in [ most of there as well as ] Saskatchewan, the sites are fantastic, they've done well in the past, they should drive better sales results, and they are now. So we haven't lost confidence in that factor, it's now what's really stopping us from making it work. And I don't have that answer today, but as I said, putting -- the way I'm putting myself on the hot seat to be -- like we started this quarter with more segmented and allay disclosure about that business and it's going to continue that way. So you clearly know at least what's going on, and whether you're happy or not with the pace or the answers I'm giving you now, that's just where we sit today with that business.
Okay. Just clarify a bit on the financial side of that, like, in the quarter, it sounds like there was a lot of good things that happened, and the biggest offset that kept earnings down was Giant Tiger. As you think about Q2 and Q3 when North Star is fully contributing, how should we think about that balance and how much of an offset GT should be to all of the other good things going on?
It shouldn't drag the EBITDA into a negative like it did, but we need to do some -- we need some heavy lifting here in the next -- like right now, this month, we're working on some changes. NSA, you're right, will be a bigger positive factor. And given that it wasn't for every period in Q1, it's going to be magnified on the positive side. As I say that, we've got another 1.5 months to go, but that would be the expectation. Total company, we'll still have good results from Northern Canada. We'll absorb the insurance cost. And then on the international side, as I say, we're going to take another hit on the restructuring cost. So the GT effect should be more muted in the quarter but there's some things we need to do now that we're working on that tend to ensure that. But I guess the point is, the other parts of the business are going to get more positive, not less positive. GT, we expect won't get more negative, but I'll tell you right now, May was a difficult month. We were up against 15% comps in our apparel business last year. We had a very cold month. So the apparel business was a disaster. And so there's -- that's that. But I don't really care as much as -- I think the real point of your question, although you're talking about quarters, I'm talking about the underlying strength of the other businesses, and I think when you take away some of the onetime things like the restructuring, and even the insurance when you think okay, well that's there, and work on some bigger ideas on that, we should see some pretty strong contributions from the other Canadian businesses, specifically NSA and NCR, then we'll see where that -- how that shakes out on the bottom line.
And we'll go to our next caller.
It's James Allison from Barclays. So just on Giant Tiger. So just looking at your outlook, it appears the wording that you're now targeting 1 new store this year, down from 6 in your Q4 release. I was just...
No. I'm sorry for interrupting you, I think that we made a mistake. That should be plural, and we're not down to 1 store. I don't know, John, if we haven't issued correctly.
No, what it says is the investments include a planned GT new store, opening a remodel program that...
But there's more than 1 store.
Yes.
And we're still opening stores.
So how many [ store then are there ]?
Well, in that range, I say that our expectation is in that range but we've -- I think we might have got -- I don't know what the -- by changing the wording and taking out the plural on stores, it's not down to 1 store, it may not be 6, but it's -- we still are moving forward with our store opening program.
Okay. And just switching over to the international segment, can you walk us through perhaps what you -- if you saw any acceleration in the international segment from Q4 into Q1 on the -- particularly on the food business. Just a bit surprised to see such a strong same-store sales growth given the shift of the February food stamp into Q4. I would've thought the growth would have tapered quite a bit more. Is it perhaps related to the St. Maarten store ramping up or is there a broader theme?
Yes, so the snap compression into January was really felt in Alaska and in Guam, the Alaska business and the Guam market where we have 3 Cost-U-Less stores. Caribbean, it seemed to be -- it didn't show up as much. There's a strong wage economy right now in St. Croix. And that's why we wish we had a St. Thomas store open with the construction economy. And then BVI is not a snap market. And then you're right about St. Maarten. I mean it's -- some of these numbers, like the comp sales in Alaska, because the liquor store was a side door to a convenience store, it's -- we didn't call it a comp store on the way up. And on St. Maarten, we didn't call a comp store on the way down. Like we only had the store partially open. It was open, right? So it getting a bit of a -- the comp store was getting a bit of a lift and they've been hit unfairly the other way on the liquor store and they're being given a lift in the Caribbean by the St. Maarten full reopening. So AC's comp sales are much stronger, Caribbeans are a little lower, but RTW and I guess, the [ eye ] business is going really well. St. Croix is going very strong. Cayman is going strong. So -- and Cayman is got a snap market either. So the snap comments I made did in fact call in the Pacific and was a factor in AC in Alaska.
Okay. And then just finally on the PFD. Could you share with us your outlook for what that could be this year? Just seems that there's some added uncertainty since we last spoke about it a couple of quarters ago.
Don't have an update on that. Probably should. We're getting really close, and we expect it to be up but we don't know how much. And so I can't say anything more. Sorry.
And we'll go to our next caller in queue.
I'm going to stick to Giant Tiger for now. Can you just give us a little bit more clarity on the margin side, the shrink issue, was it both a sell-through issue and a theft issue or is one bigger than the other?
So in produce, we've really doubled down on that business. And if you saw the department before and after, it's night and day, it looks fantastic. The sales are way up. Shrink is up because we filled all the shelves. We're trying to create a completely different impression with our shoppers that we're more than just a filled in shopping. For people who live in the neighborhood, we want more destination shopping to take place, and we think produce is the way to go. Now I think we've been optimistic. I guess we certainly have driven a ton of produce, it's like they're up 25 points, and the fact that our GT food business was actually on the positive side. So there's a lot of seasonal GM shortfall behind those numbers as well. But the margin cost in shrink and waste to put that program in place was high. And we get inside a meeting at North West, you're looking at that, they're okay, once they're going to click in, I'm looking at the basket conversion, and I don't see people buying produce and then going and buying a lot of the things that we can make more money on. So it's something we're not going to go ditch-to-ditch on, but the cost of it was not planned the way it turned out and it's a big number. Now just as big as the meat side. So the meat pieces -- again, to get insight with our [ piece ], and I apologize if it's too granular, is again tied to if you got that customer coming in, you're going to -- you have a much stronger opportunity to build a full food basket and ultimately more time in the store and sell the hard goods, soft goods side. It's a tough business. I mean we're a discount business. We are switching suppliers. We didn't have the best supply arrangement, but we felt compelled to get into the business to get back into it. The percentage of customers that have meat in their basket is fairly small, fresh meat. It creates image in the store, which is great, but it's one that -- much more so than just produce, it's one that we have to deal with 2 things, shrink in terms of waste and shrink in terms of theft. Because it tends to be a higher ticket item, it stands out a bit like a sore thumb because of everything else we sell in the store, which is a pretty low price point, and it's the first thing that we see show up when it comes to shrink. Overlaid on that is we have a lot of stores in Winnipeg, it's a big part of our business, I think it's probably 1/4 of our stores, we're in neighborhoods that serve typically middle to lower middle income shoppers. Winnipeg has got a serious issue and challenge with meth addiction. And if you cruised for -- or just Google the liquor stores or theft in stores in Winnipeg, it's a very, very big problem. And what's going on with the retailers like us is mitigation of any kind. If you walk into Shoppers Drug Mart down the road from a couple of our stores in North Winnipeg, you'll see that they've taken off the shelf pretty much just razor blades but [ tight pauses ], anything that can be fenced on Facebook or GT. So we haven't gone that far, but the meat is just like a red cape in front of a bull. And that's just a factor that's coming into play here, like we're finding it harder to recalibrate programs. And in some respects, those are not ones that GT East would have those programs, but probably not pushed in as much as we have, and we have to come back and look at whether are those the right buttons to press because we didn't expect to have that kind of hit as a result, and we didn't need it given that it's a seasonal part of the business, already very soft. It just poured sort of bad margin news on us in Giant Tiger. So we can stomach a lot, our investors are reasonably patient, but we can't stomach taking those kinds of costs or hits out of a business that we don't think should be like that. And so we're just -- again, we're carefully looking, but also decisively making choices. And one thing I haven't brought up is on the expense side, we think there's room to take costs out and still be completely within and true to the franchise model that we're working under in the system. So we've got 3-pronged attack here, one is to look at self-inflicted margin cost, where do we take out variable costs, and then, working with Giant Tiger, how do we get the maximum value for the royalties we're paying and the relationship that really -- again, it goes both ways there, it's in their complete interest that we're doing well with these stores.
Okay. All right. And then with -- you talked about the meat and the challenges you're having there, looks like there's a lot of inflation coming as we get into July and August in meat. I'm wondering how you're positioning yourself to handle that when you're already struggling on the meat side.
It's a concern. I mean we're a price taker, indexed to Walmart. So we're not unaware of that. But we've actually got bigger issues to deal with just on the way we've assorted the categories, there are some meats -- some cuts and primals are -- will leave the case because we just -- we don't think they carry their weight, and the good thing is that with or without the meat, we actually have a pretty good food business. Others, if they were in this room, might disagree, who are -- who really lobbied hard to put the meat back in, and we're going to carefully look at where -- what stores it should stay in and what exact meat should stay in the store. So that's kind of our focus. But you're right, inflation of it is going to get picked up and carried by our main competitor. Walmart would be concern for us.
Okay. Just on Alaska, can you just give us the exact timing of when the liquor store closed and when you're -- I think you said Barrow store closed?
The liquor store closed in May. The Barrow store will close at the end of November.
Okay. And then on the cost side, on the -- in the international division, I think it was up 9%, if I remember correctly, on the SG&A side in local currency. I know you've got a higher insurance cost, but you also called the higher utilities again, but you didn't put a number on that one. Is that anywhere near the same magnitude?
Not the same magnitude, Mike, as the insurance. But both were up significantly. I think in total, our insurance costs were up $1.4 million in the quarter, not just international but across the business. And I don't have the actual growth rate on the utilities but we've seen that continue to rise on both sides, by the way, in Northern Canada and in our international operations.
And we'll go to our next caller in queue.
It's Stephen MacLeod from BMO. I just had 2 quick follow-up questions. When we went through the Q1 numbers, Ed, you highlighted sort of a lot of these onetime impacts that impacted the quarter, ranging from higher inventory, freight coverage, impact from planes being grounded. You just called out insurance costs this quarter, is it safe to assume that those other incremental costs have all kind of fallen away between then and now?
Well, the insurance costs are called at the beginning of the year, I said we cover it, and the year is not over. So we've got to make up $4 million on the insurance. So I think we have the banner strength to do it, not counting Giant Tiger. The NSA has fallen away. Kind of when you refer to NSA, you meant -- like my comments on NSA, there were several factors at the NSA, plane utilization and maintenance costs being the 2 biggest, so that has fallen away in terms of stabilized EBIT contribution from that business. The third one you mentioned, I'm sorry but I drifted away from it, what was it?
The third one was when you talk about freight business, some of the things in Q1, freight coverage.
Oh, the breakups. Oh, yes, yes. So that was a onetime nature cost and then a recalibration in the way we price product to cover off those -- the risk of a extended breakup or freeze up and using helicopters longer than trucks on winter road, so we've rechanged our pricing to level that, and so that risk, we shouldn't see that happen again, certainly not in 2019.
Okay. That's helpful. And then in terms of NSA, just wanted to get a sense of, you talked about the utilization and maintenance costs, it seems like they've both disappeared, so is it fair to assume that you would still expect that to be in the free cash flow range of kind of $8 million to $10 million that you've highlighted in the past?
Yes.
Okay. That's great. And then, finally, maybe just one for John. Could you just sort of tell us how much IFRS 16 impacted EBITDA on the quarter?
Sure. It was roughly about $7 million, Stephen, and -- but I'll point you to the table. So on IFRS, we did implement this standard by restating our prior period. So in the MD&A, there's actually a table that will break that out for you, we've provided the EBITDA metric and the impact on EBIT. The overall impact on net earnings is actually pretty small in the quarter and for the year, but a lot more movement as you would expect in EBITDA and earnings from operations. The other thing is, with that, we've also provided about 8 pages of financial statement notes that walk through all of the different adjustments.
Okay. That's great. Yes, I saw that. That's very helpful. I just wasn't sure what the Q1 '19 impact, I hadn't seen it in the table, so maybe I'll just take another look, but it's roughly $7 million you were saying for Q1 '19?
Yes.
And we'll go to our next question.
It's Neil Linsdell, IA Securities. Just wanted to go back to the Giant Tiger one more time. If memory serves, correct me if I'm wrong, but a couple of years ago, you went to Giant Tiger and you renegotiated some things where you were getting a lot more material you were going to be able to source into your other banners. Was that right?
No, that's not right, Neil. We did change some things but that wasn't part of the agreement. It is a potential win to have that under the right terms in place. And we've had discussions with Giant Tiger about them. We've had some sourcing in the past. But the -- what I call the NSA master franchise amendment agreement then specifically obligate them to do that, and I will say that on the table for our Northern business is to plug in to do a better supply relationship with different noncompeting retailers. Doesn't have to be Giant Tiger. But no, that's not the deal with them.
Okay. I was just trying to remember as the relationship has evolved over the years, you seem to have gone -- every few years, you go back and you've got some new changes that you want them...
Okay.
Make to the agreement, I was trying to go through...
Yes, yes, yes. Well, I think the real only legal change was the one in the amendments agreement is we did -- that's the one you're referring to. The relationship and how you actually bring these agreements to life, in a relationship where the -- both parties aren't those who do this for a living. Now I think we kind of do it more for a living because we're open-architected to plug into [ more -- ] to plug into whoever as long as there's a good fit on the plug in. The -- on their side, they fit like a glove in the parent franchisee models. That's the model and they might suggest that's the secret sauce. But that's not our deal. We're a master franchise running corporate stores. And then we start to say, okay, now how do we adapt, we being us and GTSL. And that's a two-way street. And there are legal obligations going both ways that try to back that up, but it's about really being committed to this because you have to work really close together, you can't take a single franchisee approach, that won't work, and we have to also acknowledge that -- what does work for Giant Tiger, we know how much can we move in that direction to get the financial results that we expect from these stores, and that I don't think another agreement necessarily is the answer there, but there's going to have to be some understandings about the way we work that are just different than today.
Okay. That's fair enough. And on the cost side, I know that you did have some extra lease costs on the aircraft going into this quarter, and you've broken out a lot of the excess cost or onetime costs and onetime adjustments for this quarter. Can you kind of just walk through in total or summarize the onetime costs and onetime adjustments that we saw with all those, the extra aircraft leasing cost and such in this quarter and then additionally [ what we'll see ] Q2, Q3, Q4.
Well, specific to NSA, I'd say that the run rate, to answer your question of what we should see on an annualized basis on EBIT, we didn't get there in the quarter, we fell a little short because of mostly P1 overutilization of leased aircraft, underutilization of own aircraft. A couple more things that took longer to come into place. But I would say it's not material enough going forward to even break out because if GT was still lagging and -- pardon, not GT, if NSA was still lagging in terms of performance, then that would be more material because we have 2, 3 more periods of these drags, but that drag has largely gone away. So I don't think that's an adjustment worth commenting on. And then the other ones, I think you were nonspecific about, there really is nothing else tied to NSA. The maintenance ramp up is relevant, but now we're replacing the external maintenance cost with the ramp up. So even that one, it's not switch on and off, but we've transitioned to the point where the maintenance drag, if you will, is not doing that, it's paying for itself like it's supposed to by doing the maintenance for the planes. The mechanics are working and are doing what they're supposed to do. So the fact, that's a good news story that we transitioned from what were acceptable, but there were explanations that I gave on why NSA underperformed, but we've now covered them off. And when I look at this, I'm confident, but I'm also looking at more periods and it's just I think a natural thing to do to say I want to see more periods under our belt, and hopefully, I will sound even more confident when we're talking in September.
Okay. So to summarize, I think from the insurance adjustment and the stock-based compensation adjustment, there was no other material onetime charges that we should take into account?
Well, I think the office restructuring was borderline at $1.3 million and with the forecast of $4 million for the year.
And you picked up the game in there as well, right, Neil, for us. Is it?
Yes, the insurance game you're complementing.
Yes.
And we have no further questions at this time.
Okay. Just waiting to make sure. If that's the case, thanks very much, everyone, for your time and your questions today. Please reach out to John or myself if you have any follow-up. We look forward to have you on our call in September. We'll be up in Thompson, Manitoba with our board and we'll talk to you then. Thanks very much.
And that does conclude today's conference call. Thank you, everyone, for your participation. You may now disconnect.