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Please be advised that this conference is being recorded. Welcome to the North West Company Inc. Third 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.
Thanks very much. And good afternoon, everybody, and welcome to The North West Company third quarter conference call. I'm joined here today by John King, our Chief Financial Officer; and Amanda Sutton, our VP of Legal and Corporate Secretary. I'm going to start the meeting off by asking Amanda to read our disclosure statement.
Thank you, Dan. Before we begin today, I remind you that certain information presented may constitute forward-looking statements. Such statements reflect 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. Dan?
All right. Thank you, Amanda. So I'm pleased to share with you the details for North West Company's performance for this third quarter. Let me start by giving you an overview of the results before I dive into specifics by region and banner. First of all, I wanted to highlight the positive sales momentum across the business. Third quarter consolidated sales increased 0.1% to $554 million. Excluding the impact of lower foreign exchange rate between Canada and the U.S., sales increased 2.1% compared to last year. This is really positive considering the exceptional COVID-19-related sales last year. On a same-store basis, sales remained strong with a decrease of only 0.1% compared to a 17.8% increase in the third quarter last year. Keep in mind that on a 2-year basis, same-store sales for the quarter were up 17.4% when compared to the third quarter of 2019. This performance definitely speaks to the efforts that we've been putting forward in servicing our customers, and it indicates that we have captured and retained market share and wallet share over this past 2-year period. This quarter, it is especially important to consider the consumer income support funds are lower than last year, particularly in Northern Canada, and the mobility restrictions are less stringent today than they were a year ago. Over the past couple of months in taking advantage of the reduced travel restrictions, I as well as a lot of the other team members and leaders have done a lot of travel throughout our markets. I believe the great news is that leadership sees a lot of opportunity for things that we can do better. And as a result, the new leadership team -- leadership team, sorry, is very, very encouraged and enthusiastic to do just that. That being said, the main takeaway I want to underline here is we're very pleased and optimistic after seeing firsthand the commitment, passion and energy of our associates across -- right across the network. They continue to be focused on our customer experience, pivoting and finding solutions in the middle of the pandemic while keeping health and safety at the top of their mind. And this all at the same time as keeping a good in-stock position while navigating the current global supply chain crisis. Our teams understand that the current supply chain environment has the potential of putting our ability to have the right merchandise for our customers at risk. That's why all of our banners have been focusing on moving inventory swiftly across our network. Our teams planned for months to adjust and avoid potential supply chain congestion by procuring inventory earlier to account for the extended lead times and be in a good stock position to capture the holiday sales. This includes actually normalizing inventory levels compared to last year while keeping up with demand and avoiding lost sales. And of course, we continue to leverage our relationships with our suppliers and make sure that they're prioritizing our orders. This in order to keep us delivering on our promise to our communities, protecting their food security and ultimately helping them live better. All right. Now let me go and give you a little bit more color around region-specific sales performance. Canadian operations sales increased 0.6% to $315 million. Same-store sales remained strong, only decreasing 3.2% compared to a 22.9% increase last year. On a 2-year basis, same-store sales were up 18.4% compared to the third quarter of 2019. These results were achieved even as income support programs dwindled and travel restrictions loosened compared to last year. Our in-stock position is contributing to keeping food sales strong, even on specific Road stores, our Road markets, where customers are privy to out shopping. As I previously mentioned, we took steps to be in this position by leveraging our supplier relationships and benefiting from owning an airline, which helped us mitigate some of the supply chain disruptions. Total food sales were relatively flat to last year and just 1.5% down on a same-store basis. Categories such as grocery, fruit and beverages continue to lead that performance. The impact of lower income support in the markets compared to last year had a much larger impact on general merchandise. Sales decreased 9.8% in total and 10.4% on a same-store basis. However, going back on that 2-year basis, general merchandise same-store sales were up 31% compared to 2019. This is definitely showing the positive sales trend driven by the business, and this was led by categories such as motorized entertainment and media, toys as well as some other hardlines. With respect to sales in our international operations, the momentum continues to be strong as income support payments across the U.S. territory continues to fuel that demand. We are also seeing the positive impact of increased travel in some of the tourism-dependent markets, albeit still well below the COVID-19 -- pre-COVID-19 levels. Overall, international sales increased 4.7% over last year. On a same-store basis, sales remained very strong, increasing 4.4% to last year and increasing 15.9% on a 2-year basis. Our signature categories program continues to perform well in our Cost-U-Less banner, particularly on our fresh [ card ] categories like produce and meat. B2B sales is also delivering very strong results in categories such as grocery, food and beverages as lower COVID-19-related restrictions have given way for restaurants and bars to get back open again. In Alaska, our strong in-stock position also allowed us to capture demand from a strong fishing season down in the coastal villages -- or coastal stores. Here, it is also important to highlight the impact of the timing of the PFD or the permanent fund dividend. Last year, the dividend was paid -- was $992, and it was issued earlier, in fact, is the second quarter. This year, there was a slight increase to $1,114. And so it went back to its regular calendar timing, which was paid in the third quarter. On the flip side, the business has also experienced headwinds from supply chain issues and inflationary trends during the quarter. In particular, we filled some of these pressures on our gross profit, which decreased 2.3% compared to last year due to an 82-basis point reduction as rate of sales. The decrease in rate was primarily due to changes in product sales plan, particularly related to general merchandise sales in Canada. However, they were also an impact of inflation costs that were not fully passed on in certain markets, which I'll give you a little commentary just to explain. Unfortunately, in some of our markets, some of our local competitors are lagging when passing on cost increases to customers. Here, our focus has remained on keeping both our customers' trust, obviously, and at the same time, trying to keep up with the momentum of the market share -- we're trying to keep our market share and grow it. So we have -- we are definitely very actively monitoring the market for price changes, and we want to make sure we remain competitive, while at the same time, we're continuing to drive value for our shareholders. In terms of expenses in the quarter -- for the quarter, there was $7.4 million or 5.6% decrease compared to last year. This was mainly due to the decrease in share-based compensation costs related to mark-to-market adjustments from changes in our share price. Excluding the share-based compensation costs, expenses increased $900,000 and were up 12 basis points as a percentage of sales, inclusive of reductions on COVID-19-related costs and decreases in international expenses related to the impact of the foreign exchange. All right, here, I wanted to take a brief moment to refer to the performance of the airline. We have seen positive trends in the passenger business. Demand for scheduled passenger flights are picking up, following a reduction in community travel restrictions, which have also had a positive impact on charter-type flying. This has mitigated the impact of the $1 million payment received third quarter last year from the Canada Emergency Wage Subsidy, which we did not actually receive this year. The cargo business continues to be an asset for the company and has provided a competitive advantage to navigate the supply chain constraints and pent-up demand. On the flip side, we experienced unplanned repairs to our ATRs, which required us to have a higher usage of leased aircrafts. Both these factors have negative impacts on our gross profit rate for the quarter. Lastly, on the airline, the ATR LCD, which is stands for the large cargo door, will start operating this month. This plane is equipped with an oversized panel door on the side of -- that actually helps facilitate unloading of palletized cargo. We're using this plane as kind of a proof of concept to test reduction of aircraft turn times and [ then ] our requirements at these -- in markets for both our third party as well as our own freight. After all of the above is considered, the company's net earnings increased $3.2 million to $39.2 million compared to last year. And on a 2-year basis, net earnings were up $14.3 million or 57.6% compared to the third quarter of 2019. That said, the after-tax impact of share-based compensation, adjusted net earnings decreased from -- net earnings decreased by $4.4 million. However, on a 2-year basis, performance is up $14.1 million or 57.9% when compared to the third quarter of 2019. Looking ahead, the short term is still subject to the uncertainties of COVID-19, particularly as we see the development of a new Omicron variant. Based on the stronger stock position I referred to previously, we are cautiously optimistic about the holiday selling season. However, we acknowledge the fact that consumer income support in our markets, particularly in Northern Canada, will be lower compared to last year. In our Caribbean and Pacific regions, we will continue to focus on improving our execution at the stores, our assortment and our product flow. We are also seeing positive trends of tourism coming back in some of our Caribbean markets, although still well below pre-pandemic levels. In Alaska, we expect to continue growing by expanding our footprint to new markets. We are confident that we will hit the goal of 3 new stores in 2021, 2 of them already open and 1 is on track to open prior to the fiscal year-end. Heading into 2022, the expansion will continue in Alaska. In Canada, we have focused our efforts on price optimization strategy. We have paused this initiative for a while given the COVID-19-related volatility. But we are currently recalibrating and doing tests before deploying it banner-wide. We anticipate this will be ready to roll out by Q1 next year. In Northern Canada, we have also been focusing on improving our product flow, which includes initiatives that involve the airline. We continue to explore opportunities to improve our end-to-end supply chain and capitalize on the learnings and success we've had so far navigating through this pandemic related to supply chain challenges. We are also doubling down in Canada on improving our assortment and execution at the store level. Company-wide, overall, we anticipate that the fourth quarter sales to be lower than last year but higher when compared to 2019. But as I mentioned previously, the uncertainties of COVID-19 makes sales forecasting quite difficult. All right. I just want to -- let me wrap it up by saying that we are very pleased with the financial results this quarter, and we will once again like to thank all of our frontline staff and support teams for the passion and commitment shown every day to make people's lives better in the communities that we serve. With that, I will now ask the operator to open up the call for any questions. Thanks.
[Operator Instructions] Our first question is from Michael Van Aelst from TD Securities.
First question is actually on the comment that you said where inflation was not fully passed on. And I know you said you wanted to try and protect your market share. Is -- are others passing it on and you're just trying to gain a little bit more? Or is this the start of your -- was that the start of your price investments? Or are you just waiting until Q1 next year for that?
No. The price investment would start next year, and it's really a price optimization. It's just looking at -- we're building some different systems as to how we can optimize pricing. So it's a lowering -- it's lowering some where we can. And there's others that we haven't had full transparency that we think that we can kind of offset some of those. But that's not what I was referring to. What I was actually referring to is that some -- in some of our markets, our competitors were slower to take the inflation or to lower their -- increase their prices as it relates to inflation. So we didn't lead. So we waited until they kind of -- until they realize, as you can say, that their prices were outweighing, and it's just due to some of the sophistication of some of our competitors. So we, obviously wanting to drive that price perception, we don't want to give up market share. And so we often just make sure that -- it sometimes is laggard, let me just say that. So sometimes takes a little bit more time for the market to correct in some of the more remote markets.
Okay. Have you seen those price increases go through now?
I would say they are definitely more so. Yes. I would say a majority of them have because that's pretty -- they're pretty compelling in some instances. So it's harder for people to miss.
Okay. And when you talk about your price optimization strategy for -- starting Q1 next year, how will you be measuring the investments? Because in the past, you said if you don't get a return off it, then you're not going to necessarily continue with it. So do you look for the return immediately? Or is there -- do you expect a 3- or 6-month lag? How should we expect you to be looking at that?
It's a great question. It's really -- it's a test time line. So for example, there's a lot of products that are out-shopped. They were not competitive enough to compel people to shop us locally. So it's a pretty -- like it's as far as it catches on within the market. So we're making price investments in some of those other items and with some of the -- where we think we can make more gross profit dollars but just lower our rate of sales. And then that just comes down to us being more strategic in our pricing strategy. So that's effectively it. So it doesn't -- we won't feel the impact over a long period of time. It's something that we would see some momentum gathering in fairly short order.
Okay. And is that something that will be harder to measure because you're coming off some high-end market or end community shopping levels and now you're just trying -- you're almost trying to maintain it rather than grow it, I would assume.
Yes. That's a great comment. Absolutely, which is why we've talked about a full launch next year. So we will be -- we'll be testing it pretty vigorously, and we'll have pilot stores. We won't just roll it out to the entire banner. It will be done in pilot stores that we think are more normalized than others, depending on their situation.
Okay. So with Giant Tiger gone, a lot of the markdowns are probably behind you, but you said you did have some markdowns. So where would we have seen those within the business?
Well, so the markdowns would -- well, no. You're right, a lot of the Giant Tiger markdowns are behind us, but there's definitely some other opportunities where we've just had some mis-buys. And so we take this opportunity. There is some money in the market to mark those down and not hold them on for any extended period of time. So we've been definitely more aggressive on clearing out, call it, less salable inventory.
Okay. And I'll ask one more, and then I'll get back in the queue. But the PFD in Alaska was paid late in the quarter. And I'm wondering if you feel that you felt the full impact or the full effect of that payment in Q3. Or do you think some of it slipped into Q4?
I think there is going to be some trickle over into Q4, but we did get a nice portion of it in Q3 for sure.
The next question is from Mark Petrie from CIBC.
I just -- Michael touched on a bunch of my questions, but I just want to follow up, on the price optimization, can you give us a sense what parts of your assortment is this going to be focused on? I mean I'm assuming food, but if you can be more specific. And then also, roughly, what percentage of your SKUs would be affected by this?
You're right. In your first comment, it is a lot to do -- it's in food. But as far as percentage or products, I'll leave that as a TBD, surprise you with everybody else.
Okay. All right. Looking forward to that. Just with regards to North Star, I mean, being a drain on gross margin in the quarter, what -- is that going to continue into Q4 or next year? Or do you feel like you've pretty much addressed that downtime issue?
Yes. I think we've addressed it. I mean we're going to -- we've been looking -- and the team is continuing to get more productive. There was kind of an unseen event, a maintenance issue this year that was kind of a freak accident, I would say. And so we don't expect that to be a continuance ongoing.
Okay. And then getting back...
Let me rephrase that and give you [ sort of an ] accident. It was an M&R item that came up that was -- yes, I guess I have to watch my terminology when referring to the airline. It was more -- it was an M&R issue that came up with one of the engines. A rock, in fact, was sucked into the engine that caused a pretty serious expense. So let me just clarify that, Mark.
Yes. Okay. Helpful. And then just coming back to the topic of the impact or potential impact of lower government support payments on your business. Could you just sort of help us understand the relative sort of magnitude of that? How much of that do you think you felt in Q3 versus what we should be expecting into next year? Because I think the impact will potentially be greater and potentially larger in the U.S. business, I'm guessing, but would just appreciate your perspectives on that.
No, it's a great question. And we're -- obviously, it's something we think about often. But I think the impact actually is going to be in both markets, both Canadian and American markets because the American Rescue Plan is now starting to tire. And so I don't -- I think that it's -- depending on what happens, obviously, a new variant and what kind of impact that and other variants might have on the economy and on the [ size ] of which we live, I'd say that we're thinking things are going to get back to a more normalized state next year, but what is a normalized state today if it's kind of changed the landscape as we know it? So I think as we know everything, we know about the funding that's been presented to date is going to be significantly less than it was this year. To what extent, depending on what they introduce next year, I can't really predict at this point.
Yes. Sure. Absolutely. And would you have felt any of that in Q3, I guess, maybe a little bit in your Canadian business? I'm not sure exactly, but expectations with regards to the timing of this and when this sort of starts to flow through, again, assuming that programs are not renewed or reinstated?
So you're asking me if I -- if we -- if part of our performance this Q3 was as a result of some of the drag -- the overflow of the stimulus program? Is that what you're asking?
Yes. Exactly. And then -- or basically, like when all of this flows off and you lap these programs in both Canada and the U.S.
Well, it is -- we -- I mean we do think that there's still a trickle on, we suspect, going into Q4 of this year. Much beyond that, again, back to the previously commented, it's unknown to us at this time.
Yes. Okay. And then, I guess, one question I just have sort of more broadly. When you are looking at the stores where there is some more sort of -- that are located in regions where out-shopping is easier, I think you commented that you're pretty pleased with how much business you are retaining. I'm just curious, when you look at those stores or markets, is there anything you can glean with regards to sort of the composition of baskets or customer spending patterns that sort of informs how you approach your business in 2022?
Yes, Mark. Definitely. Well, we -- first of all, we've got strong in-stocks, so that's helped. Grocery, food and beverages have been strong. So we're keeping more of that kind of center store shop in market. And it's really just being in stock and being at the right price. And this is kind of a runoff of some of the pricing work that we've done, call it, at the beginning or mid-COVID era. So we have got -- we have received some -- a good reception there, and that will -- that intel will definitely kind of inform more about how we move forward some of the price optimization, I'll call it, planning in the near future.
Okay. And then just my last one, I guess, just related to your comments with regards to in-stock. I mean you spoke pretty positively about your ability to navigate some of the supply chain challenges, but have you had situations where you've had disruptions that have potentially compromised your in-stock position and potentially your sales? Or do you feel like you've navigated this without any sort of material issues?
No. We've definitely been impacted, but I've got to say that there's been a lot of substituting -- there's been a lot of pivoting, some call it athletic buying as far as looking for new sources, new suppliers. And that's part of the benefit even of having the many different regions that we operate in. I mean we have a lot of -- we have a long web -- or a big web that we're able to kind of source from. And the key is we're proving to be much stronger than the competition in all the markets that we're currently operating in. So that's been one of the big benefits for sure.
The next question is from Neil Linsdell from IA Capital Markets.
Just to expand on that supply chain question. So across all your regions, you're performing better, I guess, than any of your competitors for supply chain, and you're leveraging that into the rest of your network, I assume. Is that opening up any opportunities for supplying your nontraditional markets for other customers, I'm thinking, that don't have access to those types of supply chains or distribution?
Good question. Yes, I would say that there's been some opportunities in our B2B business that we've been able to capitalize on our supply chain. So that's definitely been a source of some of our incremental business and joining and building new relationships with other groups that we expect to extend on beyond COVID. So yes, the answer is yes, predominantly in some of the Southern markets.
Southern markets. And you think that might be sticky after all these things are resolved?
We hope so. That's the intent for sure. I mean you find out who your strong partners are in times of need, and it's the best time to build a relationship because they know they can count on us. So I hope that they do. It's easier where it's -- to remain sticky and that we can kind of build that for the future.
Okay. And if we look at some of these remote communities, I mean, obviously, like travel restrictions work to your benefit, right, at the beginning of the pandemic. How much has that completely really opened up and customers are willing to travel further to shop? Or do you think people are still sticking closer? I'm trying to figure out, you haven't really dropped off as much as I would have thought in some of your sales. So it's sticky. You're benefiting from it. But how much of it could still be lost as more restrictions are lifted?
That's the question. The key is now that we're trying to enlighten the customer experience with everybody when we have them in our store. So trying to take advantage of that and build that relationship. I would say a lot of the markets have been open, and people have been mobile but not nearly as they -- as much as they have, call it, pre-pandemic. So I think it's really about while we have the attention, just really building the relationship and the customer experience with the community members. So that's really what we're focusing on. As far as what the quantum is, it's just not something I really can share right now because it's not really known.
Okay. Fair enough. And if I can just finish off on the standard question. Labor availability, restrictions, capacity in different regions and if it's changing, depending on which region we're talking about.
Yes. I mean we have, as far as the Southern markets, we have some stability. I mean Northern markets, it's definitely always been a challenge, let's say and it's always been something we put a lot of attention to. We -- it's always been a focus, but I'd say that we're focusing now more than ever, simply because I think it's going to be -- there's a battle for talent on for now, and there will be, I foresee forever. So we've actually put a lot more focus into developing our customer -- our employee experience. Just recently hired a Chief People Officer to do just that. Their role is the, first and foremost, to make the experience for all of our employees as delightful and fulfillment -- or fulfilling as we can. And it's also looking to make sure we can understand exactly what makes a great Nor'Wester, if you will, and just really trying to get our story out there. So people that are looking for the experience that we can offer them through our stores can find us. So it's something, I guess, Neil, in summary, it's something that we're very cognizant of. We're putting a lot of resource and time to it. And I like our chances. I think we have a great and very unique kind of story to tell. And it's just about getting it out there and ensuring we can, not only attract, but maintain top people to kind of -- to follow on our vision and our mission.
Have you had to do any appreciable salary increases in any specific regions or had to reduce store hours to accommodate? Or has it basically been minor tweaks and just employee morale and training and support?
Well, we are -- we haven't had to close stores. When I say tweaks, I mean, we're always ensuring that we're competitive with our compensation packages. So that's just the regular practice that we continue to continue to roll with. And we -- I would say that no, we haven't -- like we're open to it. We're -- in fact, we're under -- we've done -- as of recent, we've been doing some market studies to ensure that we're on track. And I'm happy to say that we are. And we have a pretty unique value offer, obviously, depending on where the stores are. There's a lot of ways that we can make it attractive for people to come and join the team.
[Operator Instructions] And the next question is from Michael Van Aelst from TD Securities.
A few follow-ups. So your CapEx is going up a reasonable amount next year. Can you give us some color as to what you're spending on differently this year or next year versus this year?
Well, there's obviously -- I mean with COVID last year, there's some catch up. So a lot of it is getting some of the work done that we weren't able to do last year. There's also -- we have some exciting projects that we're working on that are kind of overdue and that we think are going to be great projects for us to kind of drive the business, continue to sustain the business moving forward. We got Alaska. Obviously, we have our new stores that we're working on, and that was 3 this year, as you recall. And we're going to aim to do at least that next year. And we're just about to open -- we're just in the midst of building our third store, concluding the build, and that will be open before the end of this fiscal year. So yes. No, it's -- I'm very happy if that's a question. I'm very happy with the capital projects that we are underway. A lot of it is -- some of it is catch-up, and other projects or that, that we're able to conclude or come to some good -- some strong agreements with some of our partners. And it's kind of worked a lot of its work that's been, let's call it, long overdue. So it's all good quality work that we're looking to pursue.
How much would be maintenance versus growth projects?
I'm trying to think off the top of my head, John.
I would say there's always a bit of growth even, Michael, in the type of projects we do. Like, our major store renovations would always have a bit of growth in there. So it makes it a little bit tougher to...
We call it the halo effect.
We call it the halo effect, yes. But a good chunk of that will be sustaining, if you want to look at it that way. Dan talked about the new store growth in Alaska. That's certainly a driver that's predominantly sustaining.
With the growth factor, though.
Yes. As I said, there's always a part of that as opposed to a pure new store growth.
Okay. Yes. I think you have -- you talked about a $24.7 million deferred tax liability. How much is still to be paid in the next 6 months?
Good question, Michael. It's come down substantially. I think off the top of my head here. Probably our current run rate of taxes paid will continue into the fourth quarter, and that start to decrease in Q1 next year. I expect it to normalize. 2020 was exceptionally low for the reasons that we previously talked about. So that's the guidance I'll give at this point.
Okay. And then just finally, the NCIB, do you expect to be any more active on it this year than last or over the next 12 months, let's say?
I think we'll take a look at that. I mean we implemented it last year. It was our first year in. We've been, I guess, active in the market regularly, but on a modest basis. And I think that's -- we look at that. We look at that -- our investment in the NCIB relative to other capital requirements in the business, opportunities for acquisitions and dividend payments. So it really is a balancing act, Michael. So I wouldn't -- I'd say from your perspective and from shareholders' perspective, continuing on more of the same. Yes.
[Operator Instructions] And there are no further questions. I'd like to turn the meeting back over to Mr. McConnell.
Okay. Well, thank you very much, everybody, for attending. Much appreciated. I do appreciate the questions, and same goes for us. We'd like to wish you guys a happy holidays and all the best in the new year. And I'm sure we will be speaking to you and look forward -- we look forward to it. So thank you.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.